** **

**FORM 10-Q**

 

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

| **ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)  OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|----------------------------------------------------------------------------------------------------------|
|                                                                                                     |
| **For the quarterly period ended JUNE 30, 2003**                                                         |
|                                                                                                     |
| **OR**                                                                                                   |
|                                                                                                     |
| **o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)  OF  THE SECURITIES EXCHANGE ACT OF 1934**     |
|                                                                                                     |
| **Commission File Number: 0-24920**                                                                      |
|                                                                                                     |
| **ERP OPERATING LIMITED PARTNERSHIP**                                                                    |
| (Exact Name of Registrant as Specified in  its Charter)                                                  |

 

| **Illinois**                                                    |   | **36-3894853**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or  Other Jurisdiction of Incorporation or Organization) |   | (I.R.S.  Employer Identification No.) |
|                                                            |
| **Two North Riverside Plaza, Chicago, Illinois**                |   | **60606**                             |
| (Address of Principal Executive Offices)                        |   | (Zip Code)                            |
|                                                            |
| **(312) 474-1300**                                              |
| (Registrant’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 reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.  Yes  ý  No  o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes  ý  No  o

 

 

----

 

**ERPOPERATING LIMITED PARTNERSHIP**

**CONSOLIDATEDBALANCE SHEETS**

**(Amountsin thousands)**

**(Unaudited)**

 
|                                                        |   | **June 30,  2003** |           | **December  31,  2002** |       |
|-------------------------------------------------------------|--------|--------------------|----------------|-------------------------|------------|
| **ASSETS**                                                  |   |               |           |                    |       |
| Investment in real estate                                   |   |               |           |                    |       |
| Land                                                        |   | $                  | 1,815,685      |                    | $          | 1,803,577 |   |
| Depreciable property                                        |   | 11,178,596         |           | 11,240,245              |       |
| Construction in progress                                    |   | 2,502              |           | 2,441                   |       |
|                                                        |   | 12,996,783         |           | 13,046,263              |       |
| Accumulated depreciation                                    |   | (2,247,136         | )              | (2,112,017              | )          |
| Investment in real estate, net of  accumulated depreciation |   | 10,749,647         |           | 10,934,246              |       |
|                                                        |   |               |           |                    |       |
| Cash and cash equivalents                                   |   | 243,838            |           | 29,875                  |       |
| Investments in unconsolidated entities                      |   | 509,937            |           | 509,789                 |       |
| Rents receivable                                            |   | 2,119              |           | 2,926                   |       |
| Deposits – restricted                                  |   | 280,935            |           | 141,278                 |       |
| Escrow deposits – mortgage                             |   | 44,831             |           | 50,565                  |       |
| Deferred financing costs, net                               |   | 32,321             |           | 32,144                  |       |
| Goodwill, net                                               |   | 30,000             |           | 30,000                  |       |
| Other assets                                                |   | 150,064            |           | 80,094                  |       |
| **Total assets**                                            |   | **$**              | **12,043,692** | ** **              | **$**      | **11,810,917** | ** ** |
|                                                        |   |               |           |                    |       |
| **LIABILITIES AND PARTNERS’ CAPITAL**                  |   |               |           |                    |       |
| Liabilities:                                                |   |               |           |                    |       |
| Mortgage notes payable                                      |   | $                  | 2,850,493      |                    | $          | 2,927,614 |   |
| Notes, net                                                  |   | 2,854,198          |           | 2,456,085               |       |
| Line of credit                                              |   | —             |           | 140,000                 |       |
| Accounts payable and accrued expenses                       |   | 71,746             |           | 64,369                  |       |
| Accrued interest payable                                    |   | 64,374             |           | 63,151                  |       |
| Rents received in advance and other  liabilities            |   | 165,244            |           | 165,095                 |       |
| Security deposits                                           |   | 44,965             |           | 45,333                  |       |
| Distributions payable                                       |   | 142,004            |           | 140,844                 |       |
| **Total liabilities**                                       |   | **6,193,024**      | ** **     | **6,002,491**           | ** ** |
|                                                        |   |               |           |                    |       |
| ***Commitments  and contingencies***                        |   |               |           |                    |       |
| **Minority Interests  – Partially Owned Properties**   |   | **8,622**          | ** **     | **9,811**               | ** ** |
|                                                        |   |               |           |                    |       |
| Partners’ capital:                                     |   |               |           |                    |       |
|                                                        |   |               |           |                    |       |
| Preference Units                                            |   | 995,591            |           | 946,157                 |       |
| Preference Interests                                        |   | 246,000            |           | 246,000                 |       |
| Junior Preference Units                                     |   | 5,846              |           | 5,846                   |       |
| General Partner                                             |   | 4,292,999          |           | 4,306,873               |       |
| Limited Partners                                            |   | 347,598            |           | 349,646                 |       |
| Deferred compensation                                       |   | (7,538             | )              | (12,118                 | )          |
| Accumulated other comprehensive loss                        |   | (38,450            | )              | (43,789                 | )          |
|                                                        |   |               |           |                    |       |
| **Total partners’  capital**                           |   | **5,842,046**      | ** **     | **5,798,615**           | ** ** |
|                                                        |   |               |           |                    |       |
| **Total liabilities  and partners’ capital**           |   | **$**              | **12,043,692** | ** **              | **$**      | **11,810,917** | ** ** |

 

**See accompanying notes**

 

2

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**ERPOPERATING LIMITED PARTNERSHIP**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
|                                                                                                                                                                                       |   | **Six Months Ended June 30,** |    | **Quarter Ended June 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|---------|----------------------------|--------|
|                                                                                                                                                                                       |   | **2003**                      |    | **2002**                   |   | **2003** |   | **2002** |   |
| **REVENUES**                                                                                                                                                                               |   |                          |    |                       |   |   |   |   |   |
| Rental income                                                                                                                                                                              |   | $                             | 943,529 |                       | $      | 950,540 |   | $ | 473,967 |   | $ | 476,418 |   |
| Fee and asset management                                                                                                                                                                   |   | 7,878                         |    | 4,310                      |   | 5,390 |   | 2,592 |   |
| Interest and other income                                                                                                                                                                  |   | 7,128                         |    | 9,304                      |   | 3,787 |   | 5,206 |   |
|                                                                                                                                                                                       |   |                          |    |                       |   |   |   |   |   |
| Total revenues                                                                                                                                                                             |   | 958,535                       |    | 964,154                    |   | 483,144 |   | 484,216 |   |
|                                                                                                                                                                                       |   |                          |    |                       |   |   |   |   |   |
| **EXPENSES**                                                                                                                                                                               |   |                          |    |                       |   |   |   |   |   |
| Property and maintenance                                                                                                                                                                   |   | 258,017                       |    | 239,744                    |   | 129,269 |   | 120,338 |   |
| Real estate taxes and insurance                                                                                                                                                            |   | 101,780                       |    | 96,872                     |   | 50,455 |   | 48,267 |   |
| Property management                                                                                                                                                                        |   | 32,194                        |    | 37,663                     |   | 16,343 |   | 18,213 |   |
| Fee and asset management                                                                                                                                                                   |   | 3,607                         |    | 3,620                      |   | 1,837 |   | 1,758 |   |
| Depreciation                                                                                                                                                                               |   | 231,582                       |    | 218,684                    |   | 116,555 |   | 110,464 |   |
| Interest:                                                                                                                                                                                  |   |                          |    |                       |   |   |   |   |   |
| Expense incurred, net                                                                                                                                                                      |   | 164,532                       |    | 170,528                    |   | 84,103 |   | 86,573 |   |
| Amortization of deferred financing costs                                                                                                                                                   |   | 3,104                         |    | 2,962                      |   | 1,701 |   | 1,584 |   |
| General and administrative                                                                                                                                                                 |   | 20,146                        |    | 22,327                     |   | 8,970 |   | 11,527 |   |
| Impairment on technology investments                                                                                                                                                       |   | 581                           |    | 581                        |   | 290 |   | 290 |   |
|                                                                                                                                                                                       |   |                          |    |                       |   |   |   |   |   |
| Total expenses                                                                                                                                                                             |   | 815,543                       |    | 792,981                    |   | 409,523 |   | 399,014 |   |
|                                                                                                                                                                                       |   |                          |    |                       |   |   |   |   |   |
| Income before allocation to Minority Interests,  income (loss)from investments in unconsolidated entities, net gain (loss)on  sales of unconsolidated entities and discontinued operations |   | 142,992                       |    | 171,173                    |   | 73,621 |   | 85,202 |   |
| Allocation to Minority Interests –  Partially Owned Properties                                                                                                                        |   | (243                          | )       | (1,325                     | )      | (128 | ) | (519 | ) |
| Income (loss) from investments in  unconsolidated entities                                                                                                                                 |   | (1,744                        | )       | 233                        |   | (1,851 | ) | 7 |   |
| Net gain (loss) on sales of unconsolidated  entities                                                                                                                                       |   | 4,675                         |    | 5,246                      |   | 3,463 |   | (411 | ) |
| Income from continuing operations                                                                                                                                                          |   | 145,680                       |    | 175,327                    |   | 75,105 |   | 84,279 |   |
| Net gain on sales of discontinued  operations                                                                                                                                              |   | 140,992                       |    | 28,446                     |   | 70,320 |   | 25,630 |   |
| Discontinued operations, net                                                                                                                                                               |   | 3,347                         |    | 24,186                     |   | 137 |   | 10,731 |   |
| Net income                                                                                                                                                                                 |   | $                             | 290,019 |                       | $      | 227,959 |   | $ | 145,562 |   | $ | 120,640 |   |
|                                                                                                                                                                                       |   |                          |    |                       |   |   |   |   |   |
| **ALLOCATION OF NET INCOME:**                                                                                                                                                              |   |                          |    |                       |   |   |   |   |   |
| Preference Units                                                                                                                                                                           |   | $                             | 38,149  |                       | $      | 38,513 |   | $ | 19,103 |   | $ | 19,122 |   |
| Preference Interests                                                                                                                                                                       |   | $                             | 10,106  |                       | $      | 10,106 |   | $ | 5,053 |   | $ | 5,053 |   |
| Junior Preference Units                                                                                                                                                                    |   | $                             | 162     |                       | $      | 162 |   | $ | 81 |   | $ | 81 |   |
|                                                                                                                                                                                       |   |                          |    |                       |   |   |   |   |   |
| General Partner                                                                                                                                                                            |   | $                             | 223,321 |                       | $      | 165,394 |   | $ | 112,154 |   | $ | 89,041 |   |
| Limited Partners                                                                                                                                                                           |   | 18,281                        |    | 13,784                     |   | 9,171 |   | 7,343 |   |
|                                                                                                                                                                                       |   |                          |    |                       |   |   |   |   |   |
| Net income available to OP Units                                                                                                                                                           |   | $                             | 241,602 |                       | $      | 179,178 |   | $ | 121,325 |   | $ | 96,384 |   |
|                                                                                                                                                                                       |   |                          |    |                       |   |   |   |   |   |
| Net income per OP Unit – basic                                                                                                                                                        |   | $                             | 0.82    |                       | $      | 0.61 |   | $ | 0.41 |   | $ | 0.33 |   |
|                                                                                                                                                                                       |   |                          |    |                       |   |   |   |   |   |
| Net income per OP Unit – diluted                                                                                                                                                      |   | $                             | 0.82    |                       | $      | 0.60 |   | $ | 0.41 |   | $ | 0.32 |   |
|                                                                                                                                                                                       |   |                          |    |                       |   |   |   |   |   |
| Weighted average OP Units outstanding –  basic                                                                                                                                        |   | 293,325                       |    | 294,957                    |   | 293,696 |   | 295,799 |   |
|                                                                                                                                                                                       |   |                          |    |                       |   |   |   |   |   |
| Weighted average OP Units outstanding –  diluted                                                                                                                                      |   | 298,405                       |    | 298,422                    |   | 299,217 |   | 299,494 |   |
|                                                                                                                                                                                       |   |                          |    |                       |   |   |   |   |   |
| Distributions declared per OP Unit  outstanding                                                                                                                                            |   | $                             | 0.865   |                       | $      | 0.865 |   | $ | 0.4325 |   | $ | 0.4325 |   |

 

Seeaccompanying notes

 

3

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**ERPOPERATING LIMITED PARTNERSHIP**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS (Continued)**

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

**(Unaudited)**

 
|                                                                                                  |   | **Six Months Ended June 30,** |    | **Quarter Ended June 30,** |   |
|-------------------------------------------------------------------------------------------------------|--------|-------------------------------|---------|----------------------------|--------|
|                                                                                                  |   | **2003**                      |    | **2002**                   |   | **2003** |   | **2002** |   |
| Comprehensive income:                                                                                 |   |                          |    |                       |   |   |   |   |   |
|                                                                                                  |   |                          |    |                       |   |   |   |   |   |
| Net income                                                                                            |   | $                             | 290,019 |                       | $      | 227,959 |   | $ | 145,562 |   | $ | 120,640 |   |
| Other comprehensive income (losses) –  derivative and other instruments:                         |   |                          |    |                       |   |   |   |   |   |
| Unrealized holding gains (losses) arising  during the period                                          |   | 1,879                         |    | 1,085                      |   | 1,742 |   | (3,091 | ) |
| Equity in unrealized holding gains (losses)  arising during the period – unconsolidated entities |   | 2,759                         |    | 905                        |   | 1,565 |   | (2,128 | ) |
| Losses reclassified into earnings from  other comprehensive income                                    |   | 701                           |    | 385                        |   | 471 |   | 217 |   |
| Comprehensive income                                                                                  |   | $                             | 295,358 |                       | $      | 230,334 |   | $ | 149,340 |   | $ | 115,638 |   |

 

Seeaccompanying notes

 

4

----

 

**ERPOPERATING LIMITED PARTNERSHIP**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Amountsin thousands)**

**(Unaudited)**

 
|                                                                                 |   | **Six Months  Ended June 30,** |    |
|--------------------------------------------------------------------------------------|--------|--------------------------------|---------|
|                                                                                 |   | **2003**                       |    | **2002** |   |
| **CASH FLOWS FROM  OPERATING ACTIVITIES:**                                           |   |                           |    |   |   |
| Net income                                                                           |   | $                              | 290,019 |   | $ | 227,959 |   |
| *Adjustments to reconcile net income to net cash provided by operating  activities:* |   |                           |    |   |   |
| Allocation  to Minority Interests – Partially Owned Properties                  |   | 243                            |    | 1,325 |   |
| Depreciation                                                                         |   | 237,392                        |    | 234,846 |   |
| Amortization  of deferred financing costs                                            |   | 3,110                          |    | 2,988 |   |
| Amortization  of discounts and premiums on debt                                      |   | (451                           | )       | (424 | ) |
| Amortization  of deferred settlements on derivative instruments                      |   | 104                            |    | (176 | ) |
| Impairment  on technology investments                                                |   | 581                            |    | 581 |   |
| Loss (income) from investments in  unconsolidated entities                           |   | 1,744                          |    | (233 | ) |
| Net gain on sales of discontinued  operations                                        |   | (140,992                       | )       | (28,446 | ) |
| Net gain on  sales of unconsolidated entities                                        |   | (4,675                         | )       | (5,246 | ) |
| Loss on  debt extinguishments                                                        |   | 380                            |    | 468 |   |
| Unrealized  (gain) loss on derivative instruments                                    |   | (83                            | )       | 483 |   |
| Compensation  paid with Company Common Shares                                        |   | 8,082                          |    | 10,061 |   |
|                                                                                 |   |                           |    |   |   |
| *Changes in assets and liabilities:*                                                 |   |                           |    |   |   |
| Decrease (increase) in rents receivable                                              |   | 512                            |    | (227 | ) |
| (Increase) decrease in deposits –  restricted                                   |   | (404                           | )       | 12,108 |   |
| (Increase) decrease in other assets                                                  |   | (21,912                        | )       | 3,898 |   |
| Increase in accounts payable and accrued  expenses                                   |   | 7,420                          |    | 9,026 |   |
| Increase in accrued interest payable                                                 |   | 1,238                          |    | 316 |   |
| (Decrease) in rents received in advance and  other liabilities                       |   | (10,792                        | )       | (9,972 | ) |
| (Decrease) in security deposits                                                      |   | (686                           | )       | (189 | ) |
|                                                                                 |   |                           |    |   |   |
| Net cash provided by operating activities                                            |   | 370,830                        |    | 459,146 |   |
|                                                                                 |   |                           |    |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                            |   |                           |    |   |   |
| Investment in real estate – acquisitions                                        |   | (243,004                       | )       | (153,034 | ) |
| Investment in real estate –  development/other                                  |   | (4,676                         | )       | (57,066 | ) |
| Improvements to real estate                                                          |   | (76,821                        | )       | (66,509 | ) |
| Additions to non-real estate property                                                |   | (1,552                         | )       | (4,602 | ) |
| Interest capitalized for real estate under  development                              |   | —                         |    | (4,369 | ) |
| Interest capitalized for unconsolidated  entities under development                  |   | (10,923                        | )       | (7,954 | ) |
| Proceeds from disposition of real estate,  net                                       |   | 473,186                        |    | 183,494 |   |
| Proceeds from disposition of furniture  rental business                              |   | —                         |    | 28,741 |   |
| Proceeds  from disposition of unconsolidated entities                                |   | 8,595                          |    | 11,317 |   |
| Investments  in unconsolidated entities                                              |   | (5,671                         | )       | (42,441 | ) |
| Distributions  from unconsolidated entities                                          |   | 14,557                         |    | 21,483 |   |
| (Increase)  decrease in deposits on real estate acquisitions, net                    |   | (139,261                       | )       | 56,305 |   |
| Decrease in mortgage deposits                                                        |   | 5,848                          |    | 14,651 |   |
| Business combinations, net of cash acquired                                          |   | (485                           | )       | (461 | ) |
| Consolidation of previously Unconsolidated  Properties                               |   | (697                           | )       | — |   |
| Other investing activities, net                                                      |   | (45,912                        | )       | 192 |   |
| Net cash (used for) investing activities                                             |   | (26,816                        | )       | (20,253 | ) |
|                                                                                      |        |                                |         |  |  |  |  |

** **

**See accompanying notes**

 

5

----

 

**ERPOPERATING LIMITED PARTNERSHIP**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Continued)**

**(Amountsin thousands)**

**(Unaudited)**
|                                                      |   | **Six Months  Ended June 30,** |       |
|-----------------------------------------------------------|--------|--------------------------------|------------|
|                                                      |   | **2003**                       |       | **2002** |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                 |   |                           |       |   |   |
| Loan and bond acquisition costs                           |   | $                              | (3,616     | ) | $ | (9,124 | ) |
| *Mortgage notes payable:*                                 |   |                           |       |   |   |
| Proceeds                                                  |   | 48,680                         |       | 47,213 |   |
| Lump sum payoffs                                          |   | (161,914                       | )          | (119,386 | ) |
| Scheduled principal repayments                            |   | (16,187                        | )          | (16,322 | ) |
| Prepayment premiums/fees                                  |   | (472                           | )          | (468 | ) |
| *Notes, net:*                                             |   |                           |       |   |   |
| Proceeds                                                  |   | 398,816                        |       | 397,064 |   |
| Lump sum payoffs                                          |   | —                         |       | (225,000 | ) |
| Scheduled principal repayments                            |   | (195                           | )          | (253 | ) |
| *Line of credit:*                                         |   |                           |       |   |   |
| Proceeds                                                  |   | 172,000                        |       | 292,000 |   |
| Repayments                                                |   | (312,000                       | )          | (487,000 | ) |
| (Payments  on) settlement of derivative instruments       |   | (12,999                        | )          | (1,533 | ) |
| Proceeds from sale of OP Units                            |   | 4,247                          |       | 6,354 |   |
| Proceeds from exercise of EQR options                     |   | 13,626                         |       | 27,030 |   |
| Proceeds from sale of Preference Units                    |   | 150,000                        |       | — |   |
| Payment of offering/redemption costs                      |   | (5,099                         | )          | (158 | ) |
| Redemption of Preference Units                            |   | (100,000                       | )          | — |   |
| *Distributions:*                                          |   |                           |       |   |   |
| OP Units – General Partner                           |   | (235,081                       | )          | (235,548 | ) |
| Preference Units                                          |   | (37,861                        | )          | (35,832 | ) |
| Preference Interests                                      |   | (10,106                        | )          | (10,132 | ) |
| Junior Preference Units                                   |   | (162                           | )          | (162 | ) |
| OP Units – Limited Partners                          |   | (19,270                        | )          | (20,095 | ) |
| Minority Interests – Partially Owned  Properties     |   | (2,458                         | )          | (10,375 | ) |
| Principal receipts on employee notes, net                 |   | —                         |       | 173 |   |
| Net cash (used for) financing activities                  |   | (130,051                       | )          | (401,554 | ) |
| Net increase in cash and cash equivalents                 |   | 213,963                        |       | 37,339 |   |
| Cash and cash equivalents, beginning of  period           |   | 29,875                         |       | 51,603 |   |
| Cash and cash equivalents, end of period                  |   | $                              | 243,838    |   | $ | 88,942 |   |
|                                                      |   |                           |       |   |   |
| **SUPPLEMENTAL INFORMATION:**                             |   |                           | ** ** |   | ** ** |
| Cash paid during the period for interest                  |   | $                              | 175,009    |   | $ | 184,216 |   |
|                                                      |   |                           |       |   |   |
| *Real estate  acquisitions/dispositions:*                 |   |                           |       |   |   |
| Mortgage loans assumed                                    |   | $                              | 34,968     |   | $ | 14,000 |   |
|                                                      |   |                           |       |   |   |
| Valuation of OP Units issued                              |   | $                              | 105        |   | $ | — |   |
|                                                      |   |                           |       |   |   |
| Mortgage loans (assumed) by purchaser                     |   | $                              | (9,075     | ) | $ | (1,680 | ) |
|                                                      |   |                           |       |   |   |
| *Consolidation of  previously Unconsolidated Properties:* |   |                           |       |   |   |
| Mortgage loans assumed                                    |   | $                              | 26,500     |   | $ | — |   |
|                                                      |   |                           |       |   |   |
| Valuation of OP Units issued                              |   | $                              | 4,231      |   | $ | — |   |
|                                                      |   |                           |       |   |   |
| Net (assets) liabilities recorded                         |   | $                              | 1,633      |   | $ | — |   |

** **

Seeaccompanying notes

 

6

----

 

**ERPOPERATING LIMITED PARTNERSHIP**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.****                                      Business of the Company**

 

ERP Operating LimitedPartnership (“ERPOP”), an Illinois limited partnership, was formed in May 1993to conduct the multifamily residential property business of Equity Residential(“EQR”).  EQR is a Maryland real estateinvestment trust (“REIT”) formed in March 1993 and is a fully integrated realestate company engaged in the acquisition, ownership, management and operationof multifamily properties.

 

EQR is the general partner of, and as of June30, 2003 owned an approximate 92.4% ownership interest in ERPOP.  ERPOP is, directly or indirectly, a partner,member or shareholder of numerous partnerships, limited liability companies andcorporations which have been established primarily to own fee simple title tomultifamily properties or to conduct property management activities and otherbusinesses related to the ownership and operation of multifamily residentialreal estate.  As used herein, the term“Operating Partnership” includes ERPOP and those entities owned or controlledby it.  As used herein, the term“Company” means EQR and the Operating Partnership.

 

As of June 30, 2003, theOperating Partnership owned or had investments in 1,005****properties in 35 statesconsisting of 216,644 units.  Anownership breakdown includes:

 

|                                       |   | **Number of  Properties** |   | **Number of  Units** |   |
|--------------------------------------------|--------|---------------------------|--------|----------------------|--------|
| Wholly  Owned Properties                   |   | 884                       |   | 187,043              |   |
| Partially  Owned Properties (Consolidated) |   | 36                        |   | 6,931                |   |
| Unconsolidated  Properties                 |   | 85                        |   | 22,670               |   |
| Total  Properties                          |   | 1,005                     |   | 216,644              |   |

 

**2.****                                     ****Summary ofSignificant Accounting Policies**

 

*Basis of Presentation*

 

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial information and with the instructions to Form 10-Q and Article 10 ofRegulation S-X.  Accordingly, they donot include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals) andcertain reclassifications considered necessary for a fair presentation havebeen included.  Certainreclassifications have been made to the prior period financial statements inorder to conform to the current year presentation.  Operating results for the six months ended June 30, 2003 are notnecessarily indicative of the results that may be expected for the year endingDecember 31, 2003.

 

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

 

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

 

*Other*

 

In April 2002, the FASB issued SFAS No. 145, *Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASBStatement No. 13, and Technical Corrections*.  SFAS No. 145, among other items, 

 

7

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rescinds the automatic classification of costs incurred on debtextinguishment as extraordinary charges. Instead, gains and losses from debt extinguishment should only beclassified as extraordinary if they meet the “unusual and infrequentlyoccurring” criteria outlined in APB No. 30. SFAS No. 145 is effective for fiscal years beginning after May 15,2002.  The Operating Partnership adoptedthe standard effective January 1, 2003.

 

In January 2003, the FASB issued Interpretation (“FIN”) No. 46, *Consolidation of Variable Interest Entities*.  FIN No. 46 requires a variable interestentity to be consolidated if a company is subject to a majority of the risk ofloss from the variable interest entity’s activities or entitled to receive amajority of the entity’s residual returns or both.  The Operating Partnership will adopt FIN No. 46 in the thirdquarter of 2003 prospectively using carryover basis.  The Operating Partnership has preliminarily determined itsinvestment in real estate will increase approximately $1.3 billion, investmentin unconsolidated entities will decrease approximately $494.5 million andmortgage notes payable will increase $833.5 million as a result of theconsolidation of its previously unconsolidated stabilized development projectsand projects under development (see Note 7). The Operating Partnership does not anticipate that the adoption of FINNo. 46 will have any effect on net income.

 

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

 

## ***The following table presents the changes in the OperatingPartnership’s issued and outstanding units of limited partnership interest (“OPUnits”) for the six months ended June 30, 2003:***

 

|                                                               |   | **2003**        |       |
|--------------------------------------------------------------------|--------|-----------------|------------|
|                                                               |   |            |       |
| Operating  Partnership’s OP Units outstanding at January 1,   |   | 293,396,124     |       |
|                                                               |   |            |       |
| *Issued to General Partner:*                                       |   |            |       |
| Conversion of  Series E Preference Units                           |   | 25,198          |       |
| Employee Share  Purchase Plan                                      |   | 203,498         |       |
| Exercise of  EQR options                                           |   | 732,724         |       |
| Restricted EQR  share grants, net                                  |   | 955,658         |       |
|                                                               |   |            |       |
| *Issued to Limited Partners:*                                      |   |            |       |
| Issuance  through acquisitions                                     |   | 159,427         |       |
|                                                               |   |            |       |
| **Operating  Partnership’s OP Units outstanding at June 30,** |   | **295,472,629** | ** ** |

 

The limited partners of the OperatingPartnership as of June 30, 2003 include various individuals and entities thatcontributed their properties to the Operating Partnership in exchange for OPUnits (the “Limited Partners”) and own an approximate 7.6% ownership interestin ERPOP.  Subject to applicablesecurities law restrictions, the Limited Partners may exchange their OP Unitsfor EQR Common Shares on a one-for-one basis.

 

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

 

During the six months ended June 30, 2003,the Operating Partnership issued 159,427 OP Units to various limited partnersat an average price of $27.48 per unit.

 

The following table presents the OperatingPartnership’s issued and outstanding “Preference Units” as of June 30, 2003 andDecember 31, 2002:

 

8

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|                                                                  |   | **Annual   Dividend   Rate per   Unit (1)** |                 | **Amounts in thousands** |                     |
|-----------------------------------------------------------------------|--------|---------------------------------------------|----------------------|--------------------------|--------------------------|
|                                                                  |   |                                        | **June****30, 2003** |                     | **December****31, 2002** |   |
| Preference Units:                                                     |   |                                        |                 |                     |                     |   |   |
|                                                                  |   |                                        |                 |                     |                     |   |   |
| 9 1/8% Series B Cumulative Redeemable  Preference Units; liquidation  |   |                                        |                 |                     |                     |   |   |
| value $250 per unit; 500,000 units issued  and outstanding            |   |                                        |                 |                     |                     |   |   |
| at June 30, 2003 and December 31, 2002                                |   | $                                           | 22.81252             |                     | $                        | 125,000 |   | $ | 125,000 |   |
|                                                                  |   |                                        |                 |                     |                     |   |   |
| 9 1/8% Series C Cumulative Redeemable  Preference Units; liquidation  |   |                                        |                 |                     |                     |   |   |
| value $250 per unit; 460,000 units issued  and outstanding            |   |                                        |                 |                     |                     |   |   |
| at June 30, 2003 and December 31, 2002                                |   | $                                           | 22.81252             |                     | 115,000                  |   | 115,000 |   |
|                                                                  |   |                                        |                 |                     |                     |   |   |
| 8.60% Series D Cumulative Redeemable  Preference Units; liquidation   |   |                                        |                 |                     |                     |   |   |
| value $250 per unit; 700,000 units issued  and outstanding            |   |                                        |                 |                     |                     |   |   |
| at June 30, 2003 and December 31, 2002                                |   | $                                           | 21.50                |                     | 175,000                  |   | 175,000 |   |
|                                                                  |   |                                        |                 |                     |                     |   |   |
| 7.00% Series E Cumulative Convertible  Preference Units; liquidation  |   |                                        |                 |                     |                     |   |   |
| value $25 per unit; 2,525,464 and 2,548,114  units issued and         |   |                                        |                 |                     |                     |   |   |
| outstanding at June 30, 2003 and December  31, 2002, respectively     |   | $                                           | 1.75                 |                     | 63,137                   |   | 63,703 |   |
|                                                                  |   |                                        |                 |                     |                     |   |   |
| 7 1/4% Series G Convertible Cumulative  Preference Units; liquidation |   |                                        |                 |                     |                     |   |   |
| value $250 per unit; 1,264,692 units issued  and outstanding          |   |                                        |                 |                     |                     |   |   |
| at June 30, 2003 and December 31, 2002                                |   | $                                           | 18.125               |                     | 316,173                  |   | 316,173 |   |
|                                                                  |   |                                        |                 |                     |                     |   |   |
| 7.00% Series H Cumulative Convertible  Preference Units; liquidation  |   |                                        |                 |                     |                     |   |   |
| value $25 per unit; 51,228 units issued and  outstanding at           |   |                                        |                 |                     |                     |   |   |
| June 30, 2003 and December 31, 2002                                   |   | $                                           | 1.75                 |                     | 1,281                    |   | 1,281 |   |
|                                                                  |   |                                        |                 |                     |                     |   |   |
| 8.29% Series K Cumulative Redeemable Preference  Units; liquidation   |   |                                        |                 |                     |                     |   |   |
| value $50 per unit; 1,000,000 units issued  and outstanding           |   |                                        |                 |                     |                     |   |   |
| at June 30, 2003 and December 31, 2002                                |   | $                                           | 4.145                |                     | 50,000                   |   | 50,000 |   |
|                                                                  |   |                                        |                 |                     |                     |   |   |
| 7.625% Series L Cumulative Redeemable  Preference Units; liquidation  |   |                                        |                 |                     |                     |   |   |
| value $25 per unit; 0 and 4,000,000 units  issued and                 |   |                                        |                 |                     |                     |   |   |
| outstanding at June 30, 2003 and December  31, 2002, respectively     |   | (2                                          | )                    | **—**               |                     | 100,000 |   |
|                                                                  |   |                                        |                 |                     |                     |   |   |
| 6.48% Series N Cumulative Redeemable  Preference Units; liquidation   |   |                                        |                 |                     |                     |   |   |
| value $250 per unit; 600,000 and 0 units  issued and                  |   |                                        |                 |                     |                     |   |   |
| outstanding at June 30, 2003 and December  31, 2002, respectively (3) |   | $                                           | 16.20                |                     | 150,000                  | ** ** | **—** | ** ** |
|                                                                  |   |                                        |                 | $                        | 995,591                  |   | $ | 946,157 |   |

 

----

(1)          Dividends on all series of Preference Unitsare payable quarterly at various pay dates. Dividend rates listed for Series B, C, D, G and N are Preference Unitrates and the equivalent depositary unit annual dividend rates are $2.281252,$2.281252, $2.15, $1.8125 and $1.62, respectively.

 

(2)          On June 19, 2003, the Operating Partnershipredeemed all of its outstanding Series L Cumulative Redeemable Preference Unitsat its liquidation value for total cash consideration of $100.0 million inconjunction with the concurrent redemption of the corresponding PreferredShares of EQR.

 

(3)          On June 19, 2003, EQR sold 600,000 of its6.48% Series N Cumulative Redeemable Preferred Shares in a publicoffering.  The Company received $145.3million in net proceeds from this offering after payment of the underwriters’fee.  These net proceeds were contributedby EQR to the Operating Partnership in exchange for 600,000 of the OperatingPartnership’s 6.48% Cumulative Redeemable Preference Units.

 

9

----

 

The following table presents the issued andoutstanding “Preference Interests” as of June 30, 2003 and December 31, 2002:

** **
|                                                                                                                                                                               |   | **Annual  Dividend  Rate per  Unit (1)** |   | **Amounts in thousands** |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|--------------------------|---------|
| **June  30, 2003**                                                                                                                                                                 |   | **December  31, 2002**                   |
| Preference  Interests:                                                                                                                                                             |   |                                     |   |                     |    |   |   |
|                                                                                                                                                                               |   |                                     |   |                     |    |   |   |
| 8.00%  Series A Cumulative Redeemable Preference Interests; liquidation value $50  per unit; 800,000 units issued and outstanding at June 30,2003 and December  31, 2002           |   | $                                        | 4.00   |                     | $       | 40,000 |   | $ | 40,000 |   |
|                                                                                                                                                                               |   |                                     |   |                     |    |   |   |
| 8.50%  Series B Cumulative Redeemable Preference Units; liquidation value $50 per  unit; 1,100,000 units issued and outstanding at June 30, 2003 and December  31, 2002            |   | $                                        | 4.25   |                     | 55,000  |   | 55,000 |   |
|                                                                                                                                                                               |   |                                     |   |                     |    |   |   |
| 8.50%  Series C Cumulative Redeemable Preference Units; liquidation value $50 per  unit; 220,000 units issued and outstanding at June 30, 2003 and December 31,  2002              |   | $                                        | 4.25   |                     | 11,000  |   | 11,000 |   |
|                                                                                                                                                                               |   |                                     |   |                     |    |   |   |
| 8.375%  Series D Cumulative Redeemable Preference Units; liquidation value $50 per  unit; 420,000 units issued and outstanding at June 30, 2003 and December 31,  2002             |   | $                                        | 4.1875 |                     | 21,000  |   | 21,000 |   |
|                                                                                                                                                                               |   |                                     |   |                     |    |   |   |
| 8.50%  Series E Cumulative Redeemable Preference Units; liquidation value $50 per  unit; 1,000,000 units issued and outstanding at June 30, 2003 and December  31, 2002            |   | $                                        | 4.25   |                     | 50,000  |   | 50,000 |   |
|                                                                                                                                                                               |   |                                     |   |                     |    |   |   |
| 8.375%  Series F Cumulative Redeemable Preference Units; liquidation value $50 per  unit; 180,000 units issued and outstanding at June 30, 2003 and December 31,  2002             |   | $                                        | 4.1875 |                     | 9,000   |   | 9,000 |   |
|                                                                                                                                                                               |   |                                     |   |                     |    |   |   |
| 7.875%  Series G Cumulative Redeemable Preference Units; liquidation value $50 per  unit; 510,000 units issued and outstanding at June 30, 2003 and December 31,  2002             |   | $                                        | 3.9375 |                     | 25,500  |   | 25,500 |   |
|                                                                                                                                                                               |   |                                     |   |                     |    |   |   |
| 7.625%  Series H Cumulative Convertible Redeemable Preference Units; liquidation  value $50 per unit; 190,000 units issued and outstanding at June 30, 2003 and  December 31, 2002 |   | $                                        | 3.8125 |                     | 9,500   |   | 9,500 |   |
|                                                                                                                                                                               |   |                                     |   |                     |    |   |   |
| 7.625%  Series I Cumulative Convertible Redeemable Preference Units; liquidation  value $50 per unit; 270,000 units issued and outstanding at June 30, 2003 and  December 31, 2002 |   | $                                        | 3.8125 |                     | 13,500  |   | 13,500 |   |
|                                                                                                                                                                               |   |                                     |   |                     |    |   |   |
| 7.625%  Series J Cumulative Convertible Redeemable Preference Units; liquidation  value $50 per unit; 230,000 units issued and outstanding at June 30, 2003 and  December 31, 2002 |   | $                                        | 3.8125 |                     | 11,500  |   | 11,500 |   |
|                                                                                                                                                                               |   |                                     |   |                     |    |   |   |
|                                                                                                                                                                               |   |                                     |   | $                        | 246,000 |   | $ | 246,000 |   |

 

----

(1)          Dividends on all seriesof Preference Interests are payable quarterly on March 25th, June 25th,September 25th,and December 25th of eachyear.

 

The following table presents the Operating Partnership’s issued andoutstanding Junior Convertible Preference Units (the “Junior Preference Units”)as of June 30, 2003 and December 31, 2002:

 

10

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

 

----

(1)          Dividendson both series of Junior Preference Units are payable quarterly at various paydates.

 

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

 

During the six months ended June30, 2003, the Operating Partnership acquired the entire equity interest in thesix properties listed below from unaffiliated parties, and two additional unitsat an existing property, for a total purchase price of $277.7 million.

** **
| **Date  Acquired** |   | **Property**                       |   | **Location**   |   | **Number  of Units** |   | **Acquisition Price  (in thousands)** |    |
|--------------------|--------|------------------------------------|--------|----------------|--------|----------------------|--------|---------------------------------------|---------|
| 01/30/03           |   | The Reserve @ Eisenhower           |   | Alexandria, VA |   | 226                  |   | $                                     | 41,000  |   |
| 02/14/03           |   | Artisan Square                     |   | Northridge, CA |   | 140                  |   | 27,466                                |    |
| 03/05/03           |   | LaSalle (1)                        |   | Beaverton, OR  |   | 554                  |   | 43,000                                |    |
| 05/01/03           |   | Gateway at Malden  Center (2) |   | Malden, MA     |   | 203                  |   | 34,900                                |    |
| 06/17/03           |   | Mill Creek                         |   | Milpitas, CA   |   | 516                  |   | 70,000                                |    |
| 06/30/03           |   | Carlyle Mill                       |   | Alexandria, VA |   | 317                  |   | 61,200                                |    |
| Various            |   | Rivers Bend (Condo Units)          |   | Windsor, CT    |   | 2                    |   | 125                                   |    |
|               |   |                               |   |           |   | 1,958                |   | $                                     | 277,691 |   |

 

----

(1)          Includes 8,167 square feet of retail space.

(2)          Includes 36,326 square feet of office spaceand a 324-space parking garage.

 

On May 8, 2003, the Operating Partnership acquired the remaining thirdparty equity interests it did not previously own in Liberty Park, a 202-unitproperty located in Braintree, Massachusetts. This property was accounted for under the equity method of accountingand subsequent to the purchase was consolidated.  The Operating Partnership recorded $33.0 million in investment inreal estate at carryover basis and the following:

 

•                    Assumed $26.5million in mortgage debt;

•                    Issued 153,851OP Units having a value of $4.2 million;

•                    Paid cash of$0.7 million; and

•                    Assumed $1.6million of other liabilities net of other assets acquired.

 

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

 

During the six months ended June 30, 2003,the Operating Partnership disposed of the forty-four properties listed below tounaffiliated parties.  The OperatingPartnership recognized a net gain on sales of discontinued operations ofapproximately $141.0 million anda net gain on sales of unconsolidated entities of approximately $4.7 million.

 

11

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| **Date  Disposed** |   | **Property**                  |   | **Location**       |   | **Number  of Units** |   | **Disposition  Price  (in thousands)** |    |
|--------------------|--------|-------------------------------|--------|--------------------|--------|----------------------|--------|----------------------------------------|---------|
| 01/14/03           |   | Strawberry Place              |   | Plant City, FL     |   | 55                   |   | $                                      | 1,400   |   |
| 01/14/03           |   | Smoketree Polo Club           |   | Indio, CA          |   | 288                  |   | 18,900                                 |    |
| 01/29/03           |   | Amberwood I                   |   | Lake City, FL      |   | 50                   |   | 1,175                                  |    |
| 01/30/03           |   | Emerald Place                 |   | Bermuda Dunes, CA  |   | 240                  |   | 20,125                                 |    |
| 01/30/03           |   | Rolido Parque                 |   | Houston, TX        |   | 369                  |   | 14,660                                 |    |
| 02/27/03           |   | Fox Hill Commons              |   | Vernon, CT         |   | 74                   |   | 4,700                                  |    |
| 02/27/03           |   | The Landings                  |   | Winter Haven, FL   |   | 60                   |   | 1,475                                  |    |
| 02/27/03           |   | Morningside                   |   | Titusville, FL     |   | 183                  |   | 3,980                                  |    |
| 03/04/03           |   | Colony Woods                  |   | Birmingham, AL     |   | 414                  |   | 25,000                                 |    |
| 03/04/03           |   | Hearthstone                   |   | San Antonio, TX    |   | 252                  |   | 7,700                                  |    |
| 03/04/03           |   | Northgate Village             |   | San Antonio, TX    |   | 264                  |   | 10,150                                 |    |
| 03/19/03           |   | Lincoln Green I, II & III |   | San Antonio, TX    |   | 680                  |   | 24,900                                 |    |
| 03/20/03           |   | Meadows on the Lake           |   | Birmingham, AL     |   | 200                  |   | 10,900                                 |    |
| 03/20/03           |   | Meadows in the Park           |   | Birmingham, AL     |   | 200                  |   | 10,900                                 |    |
| 03/20/03           |   | Shoal Run                     |   | Birmingham, AL     |   | 276                  |   | 14,350                                 |    |
| 03/31/03           |   | Colony Place                  |   | Fort Myers, FL     |   | 300                  |   | 20,600                                 |    |
| 04/08/03           |   | Mallgate (1)                  |   | Louisville, KY     |   | 540                  |   | 15,500                                 |    |
| 04/15/03           |   | Summit Chase                  |   | Coral Springs, FL  |   | 140                  |   | 8,875                                  |    |
| 04/16/03           |   | Bayside                       |   | Sebring, FL        |   | 59                   |   | 885                                    |    |
| 04/30/03           |   | Essex Place II (Vacant Land)  |   | Tampa, FL          |   | —               |   | 575                                    |    |
| 05/08/03           |   | Pueblo Villas                 |   | Albuquerque, NM    |   | 232                  |   | 9,250                                  |    |
| 05/14/03           |   | Emerald Bay                   |   | Winter Park, FL    |   | 432                  |   | 17,200                                 |    |
| 05/16/03           |   | Meadowood                     |   | Flatwoods, KY      |   | 52                   |   | 975                                    |    |
| 05/29/03           |   | Spicewood Springs             |   | Jacksonville, FL   |   | 512                  |   | 28,000                                 |    |
| 05/30/03           |   | Princeton Square              |   | Jacksonville, FL   |   | 288                  |   | 16,750                                 |    |
| 05/30/03           |   | Boulder Creek                 |   | Wilsonville, OR    |   | 296                  |   | 16,700                                 |    |
| 05/30/03           |   | Bridge Creek                  |   | Wilsonville, OR    |   | 315                  |   | 18,100                                 |    |
| 05/30/03           |   | Settlers Point/Brookfield     |   | Salt Lake City, UT |   | 416                  |   | 21,500                                 |    |
| 05/30/03           |   | Ridgewood                     |   | Russellville, KY   |   | 52                   |   | —                                 |    |
| 06/04/03           |   | Lake Point                    |   | Charlotte, NC      |   | 296                  |   | 12,401                                 |    |
| 06/05/03           |   | Clearlake Pines II            |   | Cocoa, FL          |   | 52                   |   | 1,392                                  |    |
| 06/05/03           |   | Sky Pines I & II          |   | Orlando, FL        |   | 140                  |   | 3,694                                  |    |
| 06/05/03           |   | Brandywine East               |   | Winter Haven, FL   |   | 38                   |   | 884                                    |    |
| 06/05/03           |   | Woodland I & II           |   | Orlando, FL        |   | 169                  |   | 5,175                                  |    |
| 06/12/03           |   | Parkville                     |   | Parkersburg, WV    |   | 49                   |   | 1,063                                  |    |
| 06/12/03           |   | Cedarwood I                   |   | Belpre, OH         |   | 44                   |   | 889                                    |    |
| 06/24/03           |   | Greenwood Village             |   | Tempe, AZ          |   | 270                  |   | 14,600                                 |    |
| 06/25/03           |   | Woodbine                      |   | Portsmouth, OH     |   | 41                   |   | 660                                    |    |
| 06/26/03           |   | Laurel Gardens                |   | Coral Springs, FL  |   | 384                  |   | 34,550                                 |    |
| 06/27/03           |   | Crystal Creek                 |   | Phoenix, AZ        |   | 273                  |   | 12,775                                 |    |
| 06/30/03           |   | Harbor Pointe                 |   | Milwaukee, WI      |   | 595                  |   | 27,800                                 |    |
| 06/30/03           |   | Calais                        |   | Arlington, TX      |   | 264                  |   | 12,500                                 |    |
| Various            |   | Four Lakes Condo Units        |   | Lisle, IL          |   | 75                   |   | 9,168                                  |    |
| Various            |   | Pointe East Condo Units       |   | Redmond, WA        |   | 17                   |   | 3,177                                  |    |
| Various            |   | Squaw Peak Condo Units        |   | Phoenix, AZ        |   | 39                   |   | 4,125                                  |    |
|               |   | Wholly Owned Properties       |   |               |   | 9,985                |   | 490,078                                |    |
| 02/28/03           |   | Kings Crossing I (2)          |   | Jacksonville, FL   |   | 69                   |   | 963                                    |    |
| 05/14/03           |   | Culbreath Key (2)             |   | Tampa, FL          |   | 254                  |   | 7,382                                  |    |
|               |   | Unconsolidated Properties     |   |               |   | 323                  |   | 8,345                                  |    |
| Total              |   |                          |   |               |   | 10,308               |   | $                                      | 498,423 |   |

 

12

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----

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

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

 

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

 

As of June 30, 2003, in additionto the property that was subsequently acquired as discussed in Note 19, theOperating Partnership had entered into separate agreements to acquire fourmultifamily properties containing 1,205 units from unaffiliated parties.  The Operating Partnership expects a combinedpurchase price of approximately $195.4 million, including the assumption of mortgagedebt of approximately $54.8 million.

 

As of June 30, 2003, in additionto the properties that were subsequently disposed of as discussed in Note 19,the Operating Partnership had entered into separate agreements to dispose oftwenty-three multifamily properties containing 6,426 units to unaffiliatedparties.  The Operating Partnershipexpects a combined disposition price of approximately $341.8 million.

 

The closings of these pending transactionsare subject to certain contingencies and conditions, therefore, there can be noassurance that these transactions will be consummated or that the final termsthereof will not differ in material respects from those summarized in thepreceding paragraphs.

 

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

 

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

 
|                                                               |   | **Institutional  Joint  Ventures** |    | **Stabilized  Development  Projects (1)** |   | **Projects  Under  Development** |   | **Lexford/  Other** |    | **Totals** |   |
|--------------------------------------------------------------------|--------|------------------------------------|---------|-------------------------------------------|--------|----------------------------------|--------|---------------------|---------|------------|--------|
|                                                               |   |                               |    |                                      |   |                             |   |                |    |       |   |
| Total projects                                                     |   | 45                                 |    | 10                                        |   | 18                               |   | 22                  |    | 95         | (2)    |
|                                                               |   |                               |    |                                      |   |                             |   |                |    |       |   |
| Total units                                                        |   | 10,846                             |    | 3,349                                     |   | 4,799                            |   | 2,704               |    | 21,698     | (2)    |
|                                                               |   |                               |    |                                      |   |                             |   |                |    |       |   |
| Operating Partnership’s percentage share of  outstanding debt |   | 25.0                               | %       | 100.0                                     | %      | 100.0                            | %      | 11.1                | %       |       |   |
|                                                               |   |                               |    |                                      |   |                             |   |                |    |       |   |
| Operating Partnership’s share of  outstanding debt (4)        |   | $                                  | 121,200 |                                      | $      | 252,101                          |   | $                   | 581,422 | (3)        | $      | 5,361 |   | $ | 960,084 |   |
|                                                                    |        |                                    |         |                                           |        |                                  |        |                     |         |            |        |  |  |  |  |  |

 

----

(1)          TheOperating Partnership determines a project to be stabilized once it hasmaintained an average physical occupancy of 90% or more for a three-monthperiod.

 

(2)          Includeseleven projects under development containing 2,827 units, which are notincluded in the Operating Partnership’s property/unit counts at June 30,2003.  Totals exclude Fort LewisMilitary Housing consisting of one property and 3,799 units, which is notaccounted for under the equity method of accounting.  The Fort Lewis Military Housing is included in the Operating Partnership’sproperty/unit counts at June 30, 2003.

 

(3)          A totalof $790.5 million is available for funding under this construction debt, ofwhich $581.4 million 

13

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was funded and outstanding at June 30, 2003.

 

(4)          As ofAugust 8, 2003, the Operating Partnership has funded $51.0 million asadditional collateral on selected debt (see Note 8).  All remaining debt is non-recourse to EQR and the OperatingPartnership.

 

Investments in unconsolidatedentities include the Unconsolidated Properties as well as various developmentproperties under construction or pending construction.  These investments are accounted forutilizing the equity method of accounting. Under the equity method of accounting, the net equity investment of theOperating Partnership is reflected on the consolidated balance sheets and afterthe project is completed, the consolidated statements of operations include theOperating Partnership’s share of net income or loss from the unconsolidated entity.  Prior to the project being completed, theOperating Partnership capitalizes interest on its equity contribution inaccordance with the provisions of SFAS No. 58, *Capitalizationof Interest Cost in Financial Statements That Include Investments Accounted forby the Equity Method.*  Duringthe six months ended June 30, 2003 and 2002, the Operating Partnershipcapitalized $10.9 million and $8.0 million, respectively, in interest costrelated to its unconsolidated development projects (which reduced interestexpense incurred in the consolidated statements of operations).

 

The Operating Partnershipgenerally contributes between 25% and 35% of the project cost of theunconsolidated projects under development, with the remaining cost financedthrough third-party construction mortgages.

 

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

 

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

 

As of June 30, 2003,deposits-restricted totaled $280.9 million and primarily included thefollowing:

 

•                    Depositsin the amount of $51.0 million held in third party escrow accounts to providecollateral for third party construction financing in connection withunconsolidated development projects;

•                    Approximately$163.1 million in tax-deferred (1031) exchange proceeds; and

•                    Approximately$66.8 million for resident security, utility, and other deposits.

 

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

 

As of June 30, 2003, theOperating Partnership had outstanding mortgage indebtedness of approximately$2.9 billion.

 

During the six months endedJune 30, 2003, the Operating Partnership:

 

•                    Repaid$178.1 million of mortgage loans;

•                    Assumed$61.5 million of mortgage debt on certain properties in connection with theiracquisitions and/or consolidation;

•                    Obtained$48.7 million of mortgage loans on certain properties; and

•                    Relinquished$9.1 million of mortgage debt assumed by the purchaser in connection with thedisposition of certain properties.

 

As of June 30, 2003, scheduled maturities for the OperatingPartnership’s outstanding mortgage indebtedness were at various dates throughOctober 1, 2033.  At June 30, 2003, theinterest rate range on the Operating Partnership’s mortgage debt was 0.90% to12.465%.  During the six months endedJune 30, 2003, the weighted average interest rate on the OperatingPartnership’s mortgage debt was 5.96%.

 

14

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**10.****                               Notes**

 

As of June 30, 2003, the OperatingPartnership had outstanding unsecured notes of approximately $2.9 billion netof a $6.8 million discount and including a $7.9****million premium.

 

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

 

Duringthe six months ended June 30, 2003, the Operating Partnership:

 

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

 

As of June 30, 2003, scheduled maturities for the Operating Partnership’s outstanding noteswere at various dates through 2029.  AtJune 30, 2003, the interest rate range on the Operating Partnership’s notes was4.75% to 7.75%. During the six months ended June 30, 2003, the weighted averageinterest rate on the Operating Partnership’s notes was 6.52%.

 

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

 

The Operating Partnership has a revolvingcredit facility with potential borrowings of up to $700.0 million.  As of June 30, 2003, no amounts wereoutstanding and $50.2 million was restricted (dedicated to support letters ofcredit and not available for borrowing) on the line of credit.  During the six months ended June 30, 2003,the weighted average interest rate was 1.85%. EQR has guaranteed the Operating Partnership’s line of credit up to themaximum amount and for the full term of the facility.

 

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

 

Thefollowing table summarizes the consolidated derivative instruments at June 30,2003 (dollar amounts are in thousands):

 
|                                   |   | **Cash Flow  Hedges** |    | **Fair Value  Hedges** |   | **Forward  Starting  Swaps** |   | **Interest  Rate Caps** |    | **Offsetting  Receive  Floating  Swaps/Caps** |   | **Offsetting  Pay  Floating  Swaps/Caps** |   |
|----------------------------------------|--------|-----------------------|---------|------------------------|--------|------------------------------|--------|-------------------------|---------|-----------------------------------------------|--------|-------------------------------------------|--------|
| Current Notional Balance               |   | $                     | 400,000 |                   | $      | 120,000                      |   | $                       | 150,000 |                                          | $      | 37,000                                    |   | $ | 255,120 |   | $ | 255,120 |   |
| Lowest Possible Notional               |   | $                     | 400,000 |                   | $      | 120,000                      |   | $                       | 150,000 |                                          | $      | 37,000                                    |   | $ | 251,410 |   | $ | 251,410 |   |
| Highest Possible Notional              |   | $                     | 400,000 |                   | $      | 120,000                      |   | $                       | 150,000 |                                          | $      | 37,000                                    |   | $ | 431,444 |   | $ | 431,444 |   |
| Lowest Interest Rate                   |   | 3.65                  | %       | 7.25                   | %      | 4.34                         | %      | 6.50                    | %       | 4.53                                          | %      | 4.46                                      | %      |
| Highest Interest Rate                  |   | 5.81                  | %       | 7.25                   | %      | 4.48                         | %      | 6.50                    | %       | 6.00                                          | %      | 6.00                                      | %      |
| Earliest Maturity Date                 |   | 2003                  |    | 2005                   |   | 2014                         |   | 2004                    |    | 2003                                          |   | 2003                                      |   |
| Latest Maturity Date                   |   | 2005                  |    | 2005                   |   | 2014                         |   | 2004                    |    | 2007                                          |   | 2007                                      |   |
| Estimated Asset (Liability) Fair Value |   | $                     | (9,771  | )                      | $      | 8,877                        |   | $                       | (2,413  | )                                             | $      | —                                    |   | $ | (1,136 | ) | $ | 1,096 |   |

 

During the six months ended June 30, 2003, the Operating Partnershippaid approximately $13.0 million to terminate eight forward starting interestrate swaps in conjunction with the issuance of $400.0 million of ten-yearunsecured notes.  The $13.0 millionpayment has been deferred and will be recognized as additional interest expenseover the ten-year life of the unsecured notes.

 

At June 30, 2003, certain unconsolidated development partnerships inwhich the Operating Partnership invested had entered into swaps to hedge theinterest rate risk exposure on unconsolidated floating rate constructionmortgage loans.  The OperatingPartnership has recorded its proportionate share of these hedges on itsconsolidated balance sheets.  Theseswaps have been designated as cash flow

 

15

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hedges with a current aggregatenotional amount of $338.2****million(notional amounts range from $77.1****millionto $391.2****million over the termsof the swaps) at interest rates ranging from 1.78% to 6.94% maturing at various dates ranging from 2003 to 2005 with a net liability fair value of $10.4****million. During the six months ended June 30, 2003, the Operating Partnershiprecognized an unrealized gain of $0.8 million due to ineffectiveness of certainof these unconsolidated development derivatives (included in income frominvestments in unconsolidated entities).

 

On June 30, 2003, the net derivativeinstruments were reported at their fair value as other liabilities ofapproximately $3.3 million and as a reduction to investments in unconsolidatedentities of approximately $10.4 million. As of June 30, 2003, there were approximately $39.0 million in deferredlosses, net, included in accumulated other comprehensive loss.  Based on the estimated fair values of thenet derivative instruments at June 30, 2003, the Operating Partnership mayrecognize an estimated $14.8 million of accumulated other comprehensive loss asadditional interest expense during the twelve months ending June 30, 2004, ofwhich $7.3 million is related to the unconsolidated development partnerships.

 

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

 

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

 
|                                                                                                                                                                                                                                                |   | **Six Months  Ended June 30,**                         |    | **Quarter  Ended June 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|---------|-----------------------------|--------|
|                                                                                                                                                                                                                                                |   | **2003**                                               |    | **2002**                    |   | **2003** |   | **2002** |   |
|                                                                                                                                                                                                                                                |   | **(Amounts  in thousands except per OP Unit amounts)** |    |
| **Numerator**:                                                                                                                                                                                                                                      |   |                                                   |    |                        |   |   |   |   |   |
| Income before allocation to Minority  Interests, income (loss) from investments in unconsolidated entities, net  gain (loss) on sales of unconsolidated entities, discontinued operations and  allocation to preference unit/interest distributions |   | $                                                      | 142,992 |                        | $      | 171,173 |   | $ | 73,621 |   | $ | 85,202 |   |
|                                                                                                                                                                                                                                                |   |                                                   |    |                        |   |   |   |   |   |
| Allocation to Minority Interests –  Partially Owned Properties                                                                                                                                                                                 |   | (243                                                   | )       | (1,325                      | )      | (128 | ) | (519 | ) |
| Income (loss) from investments in  unconsolidated entities                                                                                                                                                                                          |   | (1,744                                                 | )       | 233                         |   | (1,851 | ) | 7 |   |
| Net gain (loss) on sales of unconsolidated  entities                                                                                                                                                                                                |   | 4,675                                                  |    | 5,246                       |   | 3,463 |   | (411 | ) |
| Allocation to Preference Units                                                                                                                                                                                                                      |   | (38,149                                                | )       | (38,513                     | )      | (19,103 | ) | (19,122 | ) |
| Allocation to Preference Interests                                                                                                                                                                                                                  |   | (10,106                                                | )       | (10,106                     | )      | (5,053 | ) | (5,053 | ) |
| Allocation to Junior Preference Units                                                                                                                                                                                                               |   | (162                                                   | )       | (162                        | )      | (81 | ) | (81 | ) |
| Income from continuing operations available  to OP Units                                                                                                                                                                                            |   | 97,263                                                 |    | 126,546                     |   | 50,868 |   | 60,023 |   |
|                                                                                                                                                                                                                                                |   |                                                   |    |                        |   |   |   |   |   |
| Net gain on sales of discontinued  operations                                                                                                                                                                                                       |   | 140,992                                                |    | 28,446                      |   | 70,320 |   | 25,630 |   |
| Discontinued operations, net                                                                                                                                                                                                                        |   | 3,347                                                  |    | 24,186                      |   | 137 |   | 10,731 |   |
| Numerator for net income per OP Unit –  basic                                                                                                                                                                                                  |   | 241,602                                                |    | 179,178                     |   | 121,325 |   | 96,384 |   |
|                                                                                                                                                                                                                                                |   |                                                   |    |                        |   |   |   |   |   |
| Effect of dilutive securities:                                                                                                                                                                                                                      |   |                                                   |    |                        |   |   |   |   |   |
| Distributions on convertible preference  units/interests                                                                                                                                                                                            |   | 2,425                                                  |    | —                      |   | 1,211 |   | 22 |   |
| Numerator for net income per OP Unit –  diluted                                                                                                                                                                                                |   | $                                                      | 244,027 |                        | $      | 179,178 |   | $ | 122,536 |   | $ | 96,406 |   |
|                                                                                                                                                                                                                                                |   |                                                   |    |                        |   |   |   |   |   |
| **Denominator:**                                                                                                                                                                                                                                    |   |                                                   |    |                        |   |   |   |   |   |
| Denominator for net income per OP Unit –  basic                                                                                                                                                                                                |   | 293,325                                                |    | 294,957                     |   | 293,696 |   | 295,799 |   |
|                                                                                                                                                                                                                                                |   |                                                   |    |                        |   |   |   |   |   |
| Effect of dilutive securities:                                                                                                                                                                                                                      |   |                                                   |    |                        |   |   |   |   |   |
| Convertible preference units/interests                                                                                                                                                                                                              |   | 3,136                                                  |    | —                      |   | 3,133 |   | 75 |   |
| Dilution for OP Units issuable upon assumed  exercise/vesting of EQR’s share options/restricted shares                                                                                                                                         |   | 1,944                                                  |    | 3,465                       |   | 2,388 |   | 3,620 |   |
| Denominator for net income per OP Unit –  diluted                                                                                                                                                                                              |   | 298,405                                                |    | 298,422                     |   | 299,217 |   | 299,494 |   |
| Net income per OP Unit – basic                                                                                                                                                                                                                 |   | $                                                      | 0.82    |                        | $      | 0.61 |   | $ | 0.41 |   | $ | 0.33 |   |
| Net income per OP Unit – diluted                                                                                                                                                                                                               |   | $                                                      | 0.82    |                        | $      | 0.60 |   | $ | 0.41 |   | $ | 0.32 |   |

 

16

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|                                                     |   | **Six Months  Ended June 30,**                         |   | **Quarter  Ended June 30,** |   |
|----------------------------------------------------------|--------|--------------------------------------------------------|--------|-----------------------------|--------|
|                                                     |   | **2003**                                               |   | **2002**                    |   | **2003** |   | **2002** |   |
|                                                     |   | **(Amounts  in thousands except per OP Unit amounts)** |   |
| **Net income per OP  Unit – basic:**                |   |                                                   |   |                        |   |   |   |   |   |
| Income from continuing operations available  to OP Units |   | $                                                      | 0.33   |                        | $      | 0.43 |   | $ | 0.17 |   | $ | 0.20 |   |
| Net gain on sales of discontinued  operations            |   | 0.48                                                   |   | 0.10                        |   | 0.24 |   | 0.09 |   |
| Discontinued operations, net                             |   | 0.01                                                   |   | 0.08                        |   | — |   | 0.04 |   |
| Net income per OP Unit – basic                      |   | $                                                      | 0.82   |                        | $      | 0.61 |   | $ | 0.41 |   | $ | 0.33 |   |
|                                                     |   |                                                   |   |                        |   |   |   |   |   |
| **Net income per OP  Unit – diluted:**              |   |                                                   |   |                        |   |   |   |   |   |
| Income from continuing operations available  to OP Units |   | $                                                      | 0.34   |                        | $      | 0.43 |   | $ | 0.17 |   | $ | 0.20 |   |
| Net gain on sales of discontinued  operations            |   | 0.47                                                   |   | 0.09                        |   | 0.24 |   | 0.08 |   |
| Discontinued operations, net                             |   | 0.01                                                   |   | 0.08                        |   | — |   | 0.04 |   |
| Net income per OP Unit – diluted                    |   | $                                                      | 0.82   |                        | $      | 0.60 |   | $ | 0.41 |   | $ | 0.32 |   |

* *

*Convertible preference units/interests thatcould be converted into 11,807,095 and 15,648,034 weighted average CommonShares (which would be contributed to the Operating Partnership in exchange forOP Units) for the six months ended June 30, 2003 and 2002, respectively, and11,807,095 and 15,369,255 weighted average Common Shares for the quarters endedJune 30, 2003 and 2002, respectively, were outstanding but were not included in the computationof diluted earnings per OP Unit because the effects would be anti-dilutive.*

 

**14.****                               DiscontinuedOperations**

 

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

 

Thecomponents of discontinued operations are outlined below and include theresults of operations for the respective periods that the Operating Partnershipowned such assets during the six months and quarters ended June 30, 2003 and2002, including the following:

 

•                    The Wholly OwnedProperties sold during 2003 (see Note 5); and

•                    The Wholly OwnedProperties and the furniture rental business sold during 2002.

 

17

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|                                     |   | **Six Months  Ended June 30,** |   | **Quarter  Ended June 30,** |   |
|------------------------------------------|--------|--------------------------------|--------|-----------------------------|--------|
|                                     |   | **2003**                       |   | **2002**                    |   | **2003** |   | **2002** |   |
|                                     |   | **(Amounts  in thousands)**    |   |
| **REVENUES**                             |   |                           |   |                        |   |   |   |   |   |
| Rental income                            |   | $                              | 23,112 |                        | $      | 70,045 |   | $ | 7,429 |   | $ | 33,125 |   |
| Interest and other income                |   | 122                            |   | 17                          |   | 109 |   | 5 |   |
| Furniture income                         |   | —                         |   | 1,361                       |   | — |   | (4 | ) |
| Total revenues                           |   | 23,234                         |   | 71,423                      |   | 7,538 |   | 33,126 |   |
|                                     |   |                           |   |                        |   |   |   |   |   |
| **EXPENSES (1)**                         |   |                           |   |                        |   |   |   |   |   |
| Property and maintenance                 |   | 10,643                         |   | 20,270                      |   | 4,239 |   | 10,289 |   |
| Real estate taxes and insurance          |   | 2,631                          |   | 7,424                       |   | 936 |   | 3,409 |   |
| Property management                      |   | 112                            |   | 83                          |   | 62 |   | 43 |   |
| Depreciation                             |   | 5,810                          |   | 16,162                      |   | 1,919 |   | 7,614 |   |
| Interest:                                |   |                           |   |                        |   |   |   |   |   |
| Expense incurred, net                    |   | 685                            |   | 1,969                       |   | 244 |   | 1,027 |   |
| Amortization of deferred financing costs |   | 6                              |   | 26                          |   | 1 |   | 13 |   |
| Furniture expenses                       |   | —                         |   | 1,303                       |   | — |   | — |   |
| Total expenses                           |   | 19,887                         |   | 47,237                      |   | 7,401 |   | 22,395 |   |
|                                     |   |                           |   |                        |   |   |   |   |   |
| Discontinued operations, net             |   | $                              | 3,347  |                        | $      | 24,186 |   | $ | 137 |   | $ | 10,731 |   |

 

----

*(1)**             Includes expenses paid in the current period forWholly Owned Properties sold in prior periods related to the OperatingPartnership’s period of ownership.*

 

**15.****                               Stock-Based Compensation**

 

Prior to 2003, the Company had chosen to account for itsstock-based compensation in accordance with APB No. 25, *Accounting for Stock Issued to Employees*,**which resulted in no compensation expensefor options issued with an exercise price equal to or exceeding the marketvalue of EQR’s Common Shares on the date of grant (intrinsic method).  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 or modified.  AnyCommon Shares issued pursuant to EQR’s share option/restricted share/ESPP planswill result in the Operating Partnership issuing OP Units to EQR on aone-for-one basis.

 

SFAS No. 148 provides three transitionmethods for entities that adopt the fair value recognition provisions ofSFAS No. 123.  The Company haschosen to use the “Prospective Method”. This method requires that companies apply the recognition provisions ofSFAS No. 123 to only employee awards granted or modified after the beginning ofthe fiscal year in which the recognition provisions are first applied, orJanuary 1, 2003.  Compensation expenseunder all of the Company’s plans is generally recognized over periods rangingfrom three months to five years. Therefore, the cost related to stock-based employee compensationincluded in the determination of net income for the six months and quarterended June 30, 2003 is less than that which would have been recognized if thefair value based method had been applied to all awards since the originaleffective 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:

 

18

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|                                                                                                              |   | **Six Months Ended June 30,**                          |    | **Quarter Ended June 30,** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|---------|----------------------------|--------|
|                                                                                                              |   | **2003**                                               |    | **2002**                   |   | **2003** |   | **2002** |   |
|                                                                                                              |   | **(Amounts in thousands except  per OP Unit amounts)** |    |
|                                                                                                              |   |                                                   |    |                       |   |   |   |   |   |
| Net income  available to OP Units – as reported                                                              |   | $                                                      | 241,602 |                       | $      | 179,178 |   | $ | 121,325 |   | $ | 96,384 |   |
| Add:  Stock-based employee compensation expense  included in reported net income:                            |   |                                                   |    |                       |   |   |   |   |   |
| EQR’s  restricted/performance shares                                                                         |   | 5,246                                                  |    | 9,912                      |   | 2,912 |   | 4,828 |   |
| EQR’s share  options (1)                                                                                     |   | 2,014                                                  |    | —                     |   | 307 |   | — |   |
| EQR’s ESPP  discount                                                                                         |   | 805                                                    |    | —                     |   | 315 |   | — |   |
| Deduct:  Stock-based employee compensation expense  determined under fair value based method for all awards: |   |                                                   |    |                       |   |   |   |   |   |
| EQR’s  restricted/performance shares                                                                         |   | (5,246                                                 | )       | (9,912                     | )      | (2,912 | ) | (4,828 | ) |
| EQR’s share  options (1)                                                                                     |   | (4,165                                                 | )       | (3,051                     | )      | (1,266 | ) | (1,524 | ) |
| EQR’s ESPP  discount                                                                                         |   | (805                                                   | )       | (925                       | )      | (315 | ) | (267 | ) |
|                                                                                                              |   |                                                   |    |                       |   |   |   |   |   |
| Net income  available to OP Units – pro forma                                                                |   | $                                                      | 239,451 |                       | $      | 175,202 |   | $ | 120,366 |   | $ | 94,593 |   |
|                                                                                                              |   |                                                   |    |                       |   |   |   |   |   |   |   |   |   |
| Earnings per  OP Unit:                                                                                            |   |                                                   |    |                       |   |   |   |   |   |
|                                                                                                              |   |                                                   |    |                       |   |   |   |   |   |
| Basic – as  reported                                                                                         |   | $                                                      | 0.82    |                       | $      | 0.61 |   | $ | 0.41 |   | $ | 0.33 |   |
| Basic – pro  forma                                                                                           |   | $                                                      | 0.82    |                       | $      | 0.59 |   | $ | 0.41 |   | $ | 0.32 |   |
|                                                                                                              |   |                                                   |    |                       |   |   |   |   |   |
| Diluted – as  reported                                                                                       |   | $                                                      | 0.82    |                       | $      | 0.60 |   | $ | 0.41 |   | $ | 0.32 |   |
| Diluted – pro  forma                                                                                         |   | $                                                      | 0.81    |                       | $      | 0.59 |   | $ | 0.41 |   | $ | 0.32 |   |

 

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*(1)**             Share options for the six months ended June 30,2003 included $1.4 million of expense recognition related to options granted inthe first quarter of 2003 to EQR’s former chief executive officer.  These options vested immediately upon grant.*

 

**16.****                               Commitments and Contingencies**

 

The Operating Partnership, as an owner ofreal estate, is subject to various Federal, state and local environmentallaws.  Compliance by the OperatingPartnership with existing laws has not had a material adverse effect on theOperating Partnership’s financial condition and results of operations.  However, the Operating Partnership cannotpredict the impact of new or changed laws or regulations on its currentproperties or on properties that it may acquire in the future.

 

The Operating Partnership does not believethere is any litigation pending or threatened against the Operating Partnershipother than routine litigation arising out of the ordinary course of business,some of which is expected to be covered by liability insurance, none of whichis expected to have a material adverse effect on the consolidated financialstatements of the Operating Partnership.

 

As of June30, 2003, the Operating Partnership has 18 projects in various stages ofdevelopment with estimated completion dates ranging through December 31,2004.  The Operating Partnership expectsto fund approximately $5.6 million in connection with these properties duringthe remainder of 2003 and in 2004.  Thethree development agreements currently in place have the following key terms:

 

•                    The first development partner has the right, at any time followingcompletion of a project, to stipulate a value for such project and offer tosell its interest in the project to the Operating Partnership based on suchvalue.  If the Operating Partnershipchooses not to purchase the interest, it must agree to a sale of the project toan unrelated third party at such value. The Operating Partnership’s partner must exercise this right as to allprojects within five years after the receipt of the final certificate of occupancyon the last developed property.  The Operating Partnership has an obligation tofund up to an additional $13.0 million to guarantee third party constructionfinancing,

 

19

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if required.

 

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

 

•                    The thirddevelopment partner has the exclusive right for six months followingstabilization (generally defined as having achieved 90% occupancy for threeconsecutive months following the substantial completion of a project) to marketa project for sale.  Thereafter, eitherthe Operating Partnership or its development partner may market a project forsale.  If the Operating Partnership’sdevelopment partner proposes the sale, the Operating Partnership may elect topurchase the project at the price proposed by its partner or defer the saleuntil two independent appraisers appraise the project.  If the two appraised values vary by morethan 5%, a third appraiser will be chosen to determine the fair market value ofthe property.  Once a value has beendetermined, the Operating Partnership may elect to purchase the property orauthorize its development partner to sell the project at the agreed-upon value.

 

In connection with one of its mergers, theOperating Partnership provided a credit enhancement with respect to certaintax-exempt bonds issued to finance certain public improvements at a multifamilydevelopment project.  As of June 30,2003, this enhancement was still in effect at a commitment amount of $12.7million.

 

**17.****                               AssetImpairment**

 

For both the six months ended June 30, 2003 and 2002, the OperatingPartnership recorded approximately $0.6 million of asset impairment chargesrelated to its technology investments. These charges were the result of a review of the existing investmentsreflected on the consolidated balance sheet. These impairment losses are reflected on the consolidated statements ofoperations in total expenses and include the write-down of assets classified asother assets.

 

**18.****                               Reportable Segments**

 

Operatingsegments are defined as components of an enterprise about which separatefinancial information is available that is evaluated regularly by seniormanagement.  Senior management decideshow resources are allocated and assesses performance on a monthly basis.

 

TheOperating Partnership’s primary business is owning, managing, and operatingmultifamily residential properties, which includes the generation of rental andother related income through the leasing of apartment units to residents andincludes Equity Corporate Housing (“ECH”). Senior management evaluates the performance of each of our apartmentcommunities on an individual basis, however, each of our apartment communitieshas similar economic characteristics, residents, and products and services sothey have been aggregated into one reportable segment.  The Operating Partnership’s rental realestate segment comprises approximately 98.4% and 98.6% of total revenues forthe six months ended June 30, 2003 and 2002, respectively, and approximately98.1% and 98.4% of total revenues for the quarters ended June 30, 2003 and2002, respectively.  The OperatingPartnership’s rental real estate segment comprises approximately 99.8% and99.7% of total assets at June 30, 2003 and December 31, 2002, respectively.

 

20

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Theprimary financial measure for the Operating Partnership’s rental real estatesegment is net operating income (“NOI”), which represents rental income less:1) property and maintenance expense; 2) real estate taxes and insuranceexpense; and 3) property management expense (all as reflected in theaccompanying statements of operations). The Operating Partnership believes that NOI is helpful to investors as asupplemental measure of the operating performance of a real estate companybecause it is a direct measure of the actual operating results of the OperatingPartnership’s apartment communities. Current year NOI is compared to prior year NOI and current year budgetedNOI as a measure of financial performance. NOI from our rental real estate totaled approximately $551.5****million and $576.3 million for the six months ended June 30, 2003 and2002, respectively, and approximately $277.9 million and $289.6 million for thequarters ended June 30, 2003 and 2002, respectively.

 

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

 

TheOperating Partnership’s fee and asset management activity is immaterial anddoes not meet the threshold requirements of a reportable segment as providedfor in SFAS No. 131.

 

All revenuesare from external customers and there is no customer who contributed 10% ormore of the Operating Partnership’s total revenues during the six months endedJune 30, 2003 or 2002.

 

**19.****                               Subsequent Events/Other**

 

Subsequent to June 30, 2003 and throughAugust 8, 2003, the Operating Partnership:

 

•                    Acquired oneproperty consisting of 200 units for approximately $27.0 million;

•                    Disposed ofthree properties and various individual condominium units consisting of 592units for approximately $43.7 million;

•                    Assumed $0.8million of mortgage debt on one property in connection with its consolidation;

•                    Repaid $10.9 million of mortgagedebt at/or prior to maturity; and

•                    Relinquished $15.7 million ofmortgage debt assumed by the purchaser in connection with the disposition ofcertain properties.

 

21

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**Item2.  Management’s Discussion and Analysisof Financial 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, 2002.

 

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

 

•                    The total number of developmentunits, cost of development and completion dates as well as anticipated capitalexpenditures for replacements and building improvements all reflect theOperating Partnership’s best estimates and are subject to uncertainties arisingfrom changing economic conditions (such as the cost of labor and constructionmaterials), competition and local government regulation;

•                    Alternative sources of capital tothe Operating Partnership or labor and materials required for maintenance,repair, capital expenditure or development are more expensive than anticipated;

•                    Occupancy levels and market rentsmay be adversely affected by national and local economic and market conditionsincluding, without limitation, new construction of multifamily housing,continuing decline in employment, availability of low interest mortgages forsingle-family home buyers and the potential for geopolitical instability, allof which are beyond the Operating Partnership’s control; and

•                    Additional factors as discussed inPart I of the Annual Report on Form 10-K, particularly those under “RiskFactors”.

 

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 Note 6 to the Notes to ConsolidatedFinancial Statements in this report.

 

**Resultsof Operations**

 

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

 

22

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|                                  |   | **Properties** |       | **Units**   |   | **Purchase /  Sale Price  $ Millions** |   |
|---------------------------------------|--------|----------------|------------|-------------|--------|----------------------------------------|--------|
| **At December 31,  2001**             |   | **1,076**      | ** ** | **224,801** |   |                                   |   |
| Q1/Q2 2002 Acquisitions               |   | 7              |       | 1,983       |   | $                                      | 166.5  |   |
| Ft. Lewis Joint Venture               |   | 1              |       | 3,652       |   |                                   |   |
| Q1/Q2 2002 Dispositions               |   | (23            | )          | (3,654      | )      | $                                      | 197.2  |   |
| Q1/Q2 2002 Completed Developments     |   | 4              |       | 1,181       |   |                                   |   |
| **At June 30, 2002**                  |   | **1,065**      | ** ** | **227,963** |   |                                   |   |
| Q3/Q4 2002 Acquisitions               |   | 5              |       | 1,651       |   | $                                      | 123.4  |   |
| Q3/Q4 2002 Dispositions               |   | (35            | )          | (7,059      | )      | $                                      | 349.0  |   |
| Q3/Q4 2002 Completed Developments     |   | 4              |       | 1,020       |   |                                   |   |
| Q3/Q4 2002 Unit Configuration Changes |   | —         |       | 16          |   |                                   |   |
| **At December 31,  2002**             |   | **1,039**      | ** ** | **223,591** |   |                                   |   |
| Q1/Q2 2003 Acquisitions               |   | 6              |       | 1,958       |   | $                                      | 277.7  |   |
| Q1/Q2 2003 Dispositions               |   | (44            | )          | (10,308     | )      | $                                      | 498.4  |   |
| Q1/Q2 2003 Completed Developments     |   | 4              |       | 1,274       |   |                                   |   |
| Q1/Q2 2003 Unit Configuration Changes |   | —         |       | 129         |   |                                   |   |
| **At June 30, 2003**                  |   | **1,005**      | ** ** | **216,644** |   |                                   |   |

 

Significant changes in revenues between the six months and quarterspresented have resulted primarily from reduced rental income through increasedconcessions or reduced apartment rents and occupancy at many of our properties.  Significant changes in expenses haveresulted from increases in property and maintenance expenses including payroll,maintenance, building, utilities and leasing and advertising as well as realestate taxes, partially offset by decreases in property managementexpenses.  In addition, the OperatingPartnership’s acquisition, disposition and completed development activity hasimpacted overall results of operations for the six months and quarters endedJune 30, 2003 and 2002.  These changesare discussed in greater detail in the following paragraphs.

 

Properties that the Operating Partnership owned for the entire sixmonth periods ended June 30, 2003 as well as June 30, 2002 (the “Six-Month 2003Same Store Properties”), which represented 185,329 units and properties thatthe Operating Partnership owned for all of both the quarters ended June 30,2003 and June 30, 2002 (the “Second Quarter 2003 Same Store Properties”), whichrepresented 185,697 units, also impacted the Operating Partnership’s results ofoperations.  Both the Six-Month 2003Same Store Properties and Second Quarter 2003 Same Store Properties arediscussed in the following paragraphs.

 

### ***Comparison of the six months ended June 30,2003 to the six months ended June 30, 2002***

 

For the six months ended June 30,2003, income before allocation to Minority Interests, income (loss) frominvestments in unconsolidated entities, net gain (loss) on sales ofunconsolidated entities and discontinued operations decreased by approximately$28.2 million when compared to the six months ended June 30, 2002.

 

Revenues from the Six-Month 2003Same Store Properties decreased primarily as a result of lower overall physicaloccupancy, increased concessions and lower rental rates charged to both new andrenewal residents.  Property operatingexpenses from the Six-Month 2003 Same Store Properties increased mainly due tohigher payroll, maintenance, utility and building costs.  The following tables provide comparativerevenue, expense, net operating income (“NOI”) and weighted average occupancyfor the Six-Month 2003 Same Store Properties (NOI represents rental incomeless: 1) property and maintenance expense; 2) real estate taxes and insuranceexpense; and 3) property management expense):

 

23

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June YTD2003 vs. June YTD 2002

YTD over YTDSame-Store Results

 

$ inMillions – 185,329 Same-Store Units

 

| **Description** |   | **Revenues** |   | **Expenses** |   | **NOI** |   |
|-----------------|--------|--------------|--------|--------------|--------|---------|--------|
|            |   |         |   |         |   |    |   |
| YTD 2003        |   | $            | 874.9  |         | $      | 344.6   |   | $ | 530.3 |   |
| YTD 2002        |   | $            | 904.2  |         | $      | 324.2   |   | $ | 580.0 |   |
| Change          |   | $            | (29.3  | )            | $      | 20.4    |   | $ | (49.7 | ) |
| Change          |   | (3.2         | )%     | 6.3          | %      | (8.6    | )%     |

 

Same-StoreOccupancy Statistics

 

| YTD 2003 |   | 92.8 | %  |
|----------|--------|------|----|
| YTD 2002 |   | 94.1 | %  |
| Change   |   | (1.3 | )% |

 

The Operating Partnership’sprimary financial measure for evaluating each of its apartment communities is NOI.  The Operating Partnership believes that NOIis helpful to investors as a supplemental measure of the operating performanceof a real estate company because it is a direct measure of the actual operatingresults of the Operating Partnership’s apartment communities.

 

Forproperties that the Operating Partnership acquired prior to January 1, 2002 andexpects to continue to own through December 31, 2003, the Operating Partnershipanticipates the following operating results for the full year ending December31, 2003:

 

2003 Same-Store Operating Assumptions

 

| Physical  Occupancy | 93.0%            |
|---------------------|------------------|
| Revenue Change      | (3.5%) to (1.2%) |
| Expense Change      | 2.8% to 5.2 %    |
| NOI Change          | (9.2%) to (3.7%) |
| Dispositions        | $700.0 million   |

 

These 2003 operating assumptionsare based on current expectations and are forward-looking.

 

Rental income from propertiesother than Six-Month 2003 Same Store Properties increased by approximately$22.3 million primarily as a result of revenue from properties acquired in 2002and 2003 and additional Partially Owned Properties consolidated in the fourthquarter of 2002.

 

Interest and other incomedecreased by approximately $2.2 million, primarily as a result of lowerinterest rates being earned on short-term investment accounts along with lowerbalances on deposit in escrow related accounts.

 

Property management expensesinclude off-site expenses associated with the self-management of the OperatingPartnership’s properties as well as management fees paid to third partymanagement companies.  These expensesdecreased by approximately $5.5 million or 14.5%.  This decrease is primarily attributable to a reversal of a profitsharing accrual in the first quarter of 2003 related to the 2002 calendar yearas the Operating Partnership didn’t achieve its stated goals and managementelected not to make a discretionary contribution to the plan.  In addition, the Company recorded lowerexpense in connection with granting less restricted shares and the anticipated401(k) match to its employees during the first six months of 2003 and noaccrued expense related to 2003 profit sharing.

 

24

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Fee and asset managementrevenues, net of fee and asset management expenses, increased by $3.6 millionprimarily as a result of additional income allocated from Ft. Lewis for 2002activity and received in May 2003.   Asof June 30, 2003 and 2002, the Operating Partnership managed 19,011****units and 20,142 units, respectively, forthird parties and unconsolidated entities.

 

Interest expense, includingamortization of deferred financing costs, decreased approximately $5.9****million primarily due to lower variableinterest rates.  During the six monthsended June 30, 2003, the Operating Partnership capitalized interest costs ofapproximately $10.9 million as compared to $12.3 million for the six monthsended June 30, 2002.  Thiscapitalization of interest primarily related to equity investments inunconsolidated entities engaged in development activities.  The effective interest cost on allindebtedness for the six months ended June 30, 2003 was 6.40% as compared to6.63% for the six months ended June 30, 2002.

 

General and administrative expenses, whichinclude corporate operating expenses, decreased approximately $2.2 millionbetween the periods under comparison. This decrease was primarily due to lower expenses recorded in connectionwith granting less restricted shares to employees during the first six monthsof 2003 offset by approximately a $2.1 million increase related to theOperating Partnership’s decision to expense its stock-based compensation inaccordance with SFAS No. 123 and its amendment (SFAS No. 148).  In addition, lower state income andfranchise taxes also contributed to this decrease.

 

The Operating Partnershiprecorded impairment charges on its technology investments of approximately $0.6million for both the six months ended June 30, 2003 and 2002.  See Note 17 in the Notes to ConsolidatedFinancial Statements for further discussion.

 

Income (loss) from investments inunconsolidated entities decreased approximately $2.0 million between theperiods under comparison.  This decreaseis primarily the result of increased operating losses from equity investmentspartially offset by unrealized gains on derivative instruments.

 

Net gain on sales ofdiscontinued operations increased approximately $112.5 million between theperiods under comparison.  This increaseis primarily the result of a greater number of properties sold during the sixmonths ended June 30, 2003, as well as the fact that several properties weremore fully depreciated.

 

Discontinued operations, net,decreased approximately $20.8 million between the periods undercomparison.  See Note 14 in the Notes toConsolidated Financial Statements for further discussion.

 

***Comparison of the quarter ended June 30, 2003to the quarter ended June 30, 2002***

 

For the quarter ended June 30,2003, income before allocation to Minority Interests, income (loss) frominvestments in unconsolidated entities, net gain (loss) on sales ofunconsolidated entities and discontinued operations decreased by approximately$11.6 million when compared to the quarter ended June 30, 2002.

 

Revenues from the Second Quarter2003 Same Store Properties decreased primarily as a result of lower overallphysical occupancy, increased concessions and lower rental rates charged toboth new and renewal residents. Property operating expenses from the Second Quarter 2003 Same StoreProperties increased mainly due to higher payroll, maintenance, utility,building and leasing and advertising costs. The following tables provide comparative revenue, expense, NOI andweighted average occupancy for the Second Quarter 2003 Same Store Properties:

 

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**Second Quarter 2003 vs. Second Quarter 2002**

**Quarter over Quarter Same-Store Results**

** **

**$ in Millions – 185,697 Same-Store Units**

 

| **Description** |   | **Revenues** |       | **Expenses** |       | **NOI** |       |
|-----------------|--------|--------------|------------|--------------|------------|---------|------------|
|            |   |         | ** ** |         | ** ** |    | ** ** |
| Q2 2003         |   | $            | 438.4      |         | $          | 173.5   |       | $ | 264.9 |   |
| Q2 2002         |   | $            | 451.9      |         | $          | 164.8   |       | $ | 287.1 |   |
| Change          |   | $            | (13.5      | )            | $          | 8.7     |       | $ | (22.2 | ) |
| Change          |   | (3.0         | )%         | 5.3          | %          | (7.70   | )%         |

** **

Same-Store Occupancy Statistics

 

| Q2 2003 |   | 93.0 | %  |
|---------|--------|------|----|
| Q2 2002 |   | 94.1 | %  |
| Change  |   | (1.1 | )% |

 

Rental income from propertiesother than Second Quarter 2003 Same Store Properties increased by approximately$11.1 million primarily as a result of revenue from properties acquired in 2002and 2003 and additional Partially Owned Properties consolidated in the fourthquarter of 2002.

 

Interest and other income decreased byapproximately $1.4 million, primarily as a result of a $0.7 million one-timefinancing fee related to the Fort Lewis loan closing in the second quarter of2002.  In addition, lower interest ratesbeing earned on short-term investment accounts along with lower balances ondeposit in escrow related accounts also contributed to this decrease.

 

Property management expenses include off-siteexpenses associated with the self-management of the Operating Partnership’sproperties as well as management fees paid to third party managementcompanies.  These expenses decreased byapproximately $1.9 million or 10.3%. The Operating Partnership recorded lower expense in connection withgranting less restricted shares and the anticipated 401(k) match to itsemployees during the first six months of 2003 and no accrued expense related to2003 profit sharing.

 

Fee and asset managementrevenues, net of fee and asset management expenses, increased by $2.7 millionprimarily as a result of additional income allocated from Ft. Lewis for 2002activity and received in May 2003.   Asof June 30, 2003 and 2002, the Operating Partnership managed 19,011****units and 20,142 units, respectively, forthird parties and unconsolidated entities.

 

Interest expense, includingamortization of deferred financing costs, decreased approximately $2.4 millionprimarily due to lower variable interest rates.  During the quarter ended June 30, 2003, the Operating Partnershipcapitalized interest costs of approximately $5.5 million as compared to $6.4million for the quarter ended June 30, 2002. This capitalization of interest primarily related to equity investmentsin unconsolidated entities engaged in development activities.  The effective interest cost on allindebtedness for the quarter ended June 30, 2003 was 6.40% as compared to 6.75%for the quarter ended June 30, 2002.

 

General and administrative expenses, whichinclude corporate operating expenses, decreased approximately $2.6 millionbetween the periods under comparison. This decrease was primarily due to lower expenses recorded in connectionwith granting less restricted shares to employees and lower accrued expensesrelated to deferred compensation during the quarter ended June 30, 2003 offsetby a $0.3 million increase related to the Operating Partnership’s decision toexpense its stock based compensation.  In addition, lower state income and franchise taxes also contributed tothis decrease.

 

The Operating Partnershiprecorded impairment charges on its technology investments of approximately $0.3million for both quarters presented. See Note 17 in the Notes to Consolidated Financial

 

26

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Statements for further discussion.

 

Income (loss) from investments inunconsolidated entities decreased approximately $1.9 million between theperiods under comparison.  This decreaseis primarily the result of increased operating losses on equity investments.

 

Net gain on sales ofdiscontinued operations increased approximately $44.7 million between theperiods under comparison.  This increaseis primarily the result of a greater number of properties sold during thequarter ended June 30, 2003, as well as the fact that several properties weremore fully depreciated.

 

Discontinued operations, net,decreased approximately $10.6 million between the periods undercomparison.  See Note 14 in the Notes toConsolidated Financial Statements for further discussion.

 

**Liquidityand Capital Resources**

 

As of January 1,2003, the Operating Partnership had approximately $29.9 million of cash andcash equivalents and $499.2 million available under its line of credit (net of$60.8 million which was restricted/dedicated to support letters of credit andnot available for borrowing).  Aftertaking into effect the various transactions discussed in the followingparagraphs and the net cash provided by operating activities, the OperatingPartnership’s cash and cash equivalents balance at June 30, 2003 wasapproximately $243.8 million and the amount available on the OperatingPartnership’s line of credit was $649.8 million (net of $50.2 million which wasrestricted/dedicated to support letters of credit and not available forborrowing).

 

Part of the Operating Partnership’sacquisition and development funding strategy and the funding of investments invarious unconsolidated entities is to utilize its line of credit and tosubsequently repay the line of credit from the disposition of properties,retained cash flows or the issuance of additional equity or debtsecurities.  Continuing to utilize thisstrategy during the six months ended June 30, 2003, the Operating Partnership:

 

•                    Disposed of forty-four properties(including two Unconsolidated Properties) and received net proceeds ofapproximately $481.8 million;

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

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

•                    Obtained $48.7 million in newmortgage financing; and

•                    Issued approximately 0.9 million OPUnits and received net proceeds of $17.9 million.

 

All of these proceeds were primarily utilized to:

 

•                    Purchase additional properties;

•                    Repay mortgage indebtedness onselected properties;

•                    Repay the line of credit; and

•                    Redeem the Series L PreferenceUnits;

 

During the six months ended June 30, 2003,the Operating Partnership:

 

•                    Acquired six properties, and twoadditional units at an existing property, utilizing cash of $243.0 million;

•                    Repaid $178.1 million of mortgageloans;

•                    Repaid $140.0 million on its lineof credit; and

•                    Redeemed $100.0 million of 7.625%Series L Cumulative Redeemable Preference Units at its

 

27

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liquidation value.

 

Depending on its analysis of market prices, economic conditions, andother opportunities for the investment of available capital, the Company mayrepurchase up to an additional $85.0 million of its Common Shares pursuant toits existing share buyback program authorized by the Board of Trustees.    The Operating Partnership, in turn, wouldrepurchase $85.0 million of its OP Units held by EQR.  The Company did not repurchase any of its Common Shares duringthe six months ended June 30, 2003.

 

The Operating Partnership’stotal debt summary and debt maturity schedule as of June 30, 2003, are asfollows:

 

Debt Summary

** **

|                                 |   | **As of 6/30/03  $ Millions*** |   | **For the Six  Months Ended  6/30/03  Weighted  Average Rate*** |   |
|--------------------------------------|--------|--------------------------------|--------|-----------------------------------------------------------------|--------|
| Secured                              |   | $                              | 2,851  |                                                            | 5.96   | % |
| Unsecured                            |   | 2,854                          |   | 6.38                                                            | %      |
| Total                                |   | $                              | 5,705  |                                                            | 6.17   | % |
|                                 |   |                           |   |                                                            |   |
| Fixed Rate                           |   | $                              | 5,073  |                                                            | 6.67   | % |
| Floating  Rate                       |   | 632                            |   | 2.66                                                            | %      |
| Total                                |   | $                              | 5,705  |                                                            | 6.17   | % |
|                                 |   |                           |   |                                                            |   |
| Above Totals  Include:               |   |                           |   |                                                            |   |
| Tax Exempt:                          |   |                           |   |                                                            |   |
| Fixed                                |   | $                              | 533    |                                                            | 4.28   | % |
| Floating                             |   | 439                            |   | 2.13                                                            | %      |
| Total                                |   | $                              | 972    |                                                            | 3.31   | % |
|                                 |   |                           |   |                                                            |   |
| Unsecured  Revolving Credit Facility |   | $                              | — |                                                            | 1.85   | % |

 

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* Net of the effect of any derivative instruments.

** **

Debt Maturity Schedule as of June30, 2003

** **

| **Year** |   | **$ Millions** |   | **% of Total** |   |
|----------|--------|----------------|--------|----------------|--------|
| 2003     |   | $              | 250    |           | 4.4    | % |
| 2004     |   | 654            |   | 11.5           | %      |
| 2005*    |   | 606            |   | 10.6           | %      |
| 2006     |   | 490            |   | 8.6            | %      |
| 2007     |   | 298            |   | 5.2            | %      |
| 2008     |   | 503            |   | 8.8            | %      |
| 2009     |   | 248            |   | 4.3            | %      |
| 2010     |   | 198            |   | 3.5            | %      |
| 2011     |   | 691            |   | 12.1           | %      |
| 2012+    |   | 1,767          |   | 31.0           | %      |
| Total    |   | $              | 5,705  |           | 100.0  | % |

** **

----

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

 

28

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

 

The Operating Partnership’s “ConsolidatedDebt-to-Total Market Capitalization Ratio” as of June 30, 2003 is presented inthe following table.  The OperatingPartnership calculates the equity component of its market capitalization as thesum of (i) the total outstanding OP Units at the equivalent market value of theclosing price of EQR’s Common Shares on the New York Stock Exchange; (ii) the“OP Unit Equivalent” of all convertible preference interests/units; and (iii)the liquidation value of all perpetual preference interests/units outstanding**.**

** **

Capitalization as of June30, 2003

 

| Total Debt                                        |   |        |        | $             |  5,704,691,089  |   |
|---------------------------------------------------|--------|-------------|-------------|---------------|----------------------|--------|
|                                              |   |        |        |          |                 |
| OP Units                                          |   | 295,472,629 |        |          |                 |
| OP Unit Equivalents (see below)                   |   | 14,922,693  |        |          |                 |
| Total Outstanding at quarter-end                  |   | 310,395,322 |        |          |                 |
| EQR Common Share Price at June 30, 2003           |   | $           |  25.95 |          |                 |   |
|                                              |   |        |        | 8,054,758,606 |                 |
| Perpetual Preference Units Liquidation  Value     |   |        |        | 615,000,000   |                 |
| Perpetual Preference Interests Liquidation  Value |   |        |        | 211,500,000   |                 |
| Total Market Capitalization                       |   |        |        | $             |  14,585,949,695 |   |
|                                              |   |        |        |          |                 |
| Debt/Total Market Capitalization                  |   |        |        | 39            | %                    |
|                                                   |        |             |             |               |                      |        |  |

 

Convertible Preference Units, PreferenceInterestsand Junior Preference Unitsas of June 30, 2003

 

|                     |   | **Units** |   | **Conversion  Ratio** |   | **OP Unit  Equivalents** |   |
|--------------------------|--------|-----------|--------|-----------------------|--------|--------------------------|--------|
| Preference Units:        |   |      |   |                  |   |                     |   |
| Series E                 |   | 2,525,464 |   | 1.1128                |   | 2,810,336                |   |
| Series G                 |   | 1,264,692 |   | 8.5360                |   | 10,795,408               |   |
| Series H                 |   | 51,228    |   | 1.4480                |   | 74,178                   |   |
| Preference Interests:    |   |      |   |                  |   |                     |   |
| Series H                 |   | 190,000   |   | 1.5108                |   | 287,052                  |   |
| Series I                 |   | 270,000   |   | 1.4542                |   | 392,634                  |   |
| Series J                 |   | 230,000   |   | 1.4108                |   | 324,484                  |   |
| Junior Preference Units: |   |      |   |                  |   |                     |   |
| Series A                 |   | 56,616    |   | 4.081600              |   | 231,084                  |   |
| Series B                 |   | 7,367     |   | 1.020408              |   | 7,517                    |   |
|                     |   |      |   |                  |   |                     |   |
| Total                    |   |      |   |                  |   | 14,922,693               |   |

 

The Operating Partnership’s policy is to maintain a ratio ofconsolidated debt-to-total market capitalization of less than 50%.

 

From July 1, 2003 through August 8, 2003, the Operating Partnership:

 

•                    Acquired oneproperty consisting of 200 units for approximately $27.0 million;

 

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•                    Disposed ofthree properties and various individual condominium units consisting of 592units for approximately $43.7 million;

•                    Assumed $0.8million of mortgage debt on one property in connection with its consolidation;

•                    Repaid $10.9million of mortgage debt at/or prior to maturity; and

•                    Relinquished$15.7 million of mortgage debt assumed by the purchaser in connection with thedisposition of certain properties.

 

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

 

As of June 30, 2003, the Operating Partnership has 18 projects invarious stages of development with estimated completion dates ranging throughDecember 31, 2004.  The three developmentagreements currently in place have the following key terms:

 

•                    The firstdevelopment partner has the right, at any time following completion of aproject, to stipulate a value for such project and offer to sell its interestin the project to the Operating Partnership based on such value.  If the Operating Partnership chooses not topurchase the interest, it must agree to a sale of the project to an unrelatedthird party at such value.  TheOperating Partnership’s partner must exercise this right as to all projectswithin five years after the receipt of the final certificate of occupancy onthe last developed property.  TheOperating Partnership has an obligation to fund up to an additional $13.0million to guarantee third party construction financing, if required.

 

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

 

•                          Thethird development partner has the exclusive right for six months followingstabilization (generally defined as having achieved 90% occupancy for threeconsecutive months following the substantial completion of a project) to marketa project for sale.  Thereafter, eitherthe Operating Partnership or its development partner may market a project forsale.  If the Operating Partnership’sdevelopment partner proposes the sale, the Operating Partnership may elect topurchase the project at the price proposed by its partner or defer the saleuntil two independent appraisers appraise the project.  If the two appraised values vary by morethan 5%, a third appraiser will be chosen to determine the fair market value ofthe property.  Once a value has been determined,the Operating Partnership may elect to purchase the property or authorize itsdevelopment partner to sell the project at the agreed-upon value.

 

In connection with one of its mergers, the Operating Partnershipprovided a credit enhancement with respect to certain tax-exempt bonds issuedto finance certain public improvements at a multifamily developmentproject.  As of August 8, 2003, thisenhancement was still in effect at a commitment amount of $12.7 million.

 

As of August 8, 2003, the OperatingPartnership has a commitment to fund $5.9 million to Constellation Real Technologies,LLC, a real estate technology company.

 

See also Note 2 and Note 7 and the thirdparagraph of Note 16 in the Notes to Consolidated Financial Statements foradditional discussion regarding the Operating Partnership’s investments in

 

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unconsolidated entities.

 

***Capitalization ofFixed Assets and Improvements to Real Estate***

 

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

 

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

•                carpets andhardwood floors;

•                appliances;

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

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

•                flooring such asvinyl, linoleum or tile; and

•                blinds/shades.

 

We typically capitalize for established properties approximately $260to $290 per unit annually for inside the unit replacements.  All replacements are depreciated over afive-year estimated useful life.  Weexpense as incurred all maintenance and turnover costs such as cleaning,interior painting of individual units and the repair of any replacement itemnoted above.

 

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

**•**              roof replacement andmajor repairs;

•                paving or major resurfacingof parking lots, curbs and sidewalks;

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

•                major buildingmechanical equipment systems;

•                interior andexterior structural repair and exterior painting and siding;

•                major landscapingand grounds improvement; and

•                vehicles andoffice and maintenance equipment.

 

We typically capitalize for established properties approximately $380to $390 per unit annually for outside the unit building improvements.  All building improvements are depreciatedover a five to ten-year estimated useful life. We expense as incurred all recurring expenditures that do not improvethe value of the asset or extend its useful life.

 

For the six months ended June 30, 2003, our actual improvements to realestate totaled approximately $76.8 million. This includes the following detail (amounts in thousands except for unitand per unit amounts):

** **

Capitalized Improvements to Real Estate

For the Six Months Ended June 30, 2003

 
|                           |   | **Total  Units  (1)** |   | **Replacements** |   | **Avg.  Per  Unit** |   | **Building  Improvements** |   | **Avg.  Per  Unit** |   | **Total** |   | **Avg.  Per  Unit** |   |
|--------------------------------|--------|-----------------------|--------|------------------|--------|---------------------|--------|----------------------------|--------|---------------------|--------|-----------|--------|---------------------|--------|
|                           |   |                  |   |             |   |                |   |                       |   |                |   |      |   |                |   |
| Established Properties (2)     |   | 175,480               |   | $                | 27,299 |                | $      | 156                        |   | $                   | 35,401 |      | $      | 201                 |   | $ | 62,700 |   | $ | 357 |   |
| New Acquisition Properties (3) |   | 10,683                |   | 979              |   | 105                 |   | 2,564                      |   | 274                 |   | 3,543     |   | 379                 |   |
| Other (4)                      |   | 7,811                 |   | 4,299            |   |                |   | 6,279                      |   |                |   | 10,578    |   |                |   |
| Total                          |   | 193,974               |   | $                | 32,577 |                |   |                       | $      | 44,244              |   |      |   |                | $      | 76,821 |   |   |   |
|                                |        |                       |        |                  |        |                     |        |                            |        |                     |        |           |        |                     |        |  |  |  |  |  |  |

 

 

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(1)          Total units exclude 22,670 unconsolidated units.

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

(3)          Wholly Owned Properties acquired during 2001, 2002 and 2003.  Per unit amounts are based on a weightedaverage of 9,351 units.

(4)          Includes properties either Partially Owned or sold during the period,commercial space and condominium conversions.

 

We anticipate capitalizing annually an average of approximately $640 to$680 per unit for replacements and building improvements to our establishedproperties.  The Operating Partnershipexpects to fund approximately $60.0 million for capital expenditures forreplacements and building improvements for all consolidated properties for theremainder of 2003.

 

During the six months ended June 30, 2003, the Operating Partnership’stotal non-real estate capital additions, such as computer software, computerequipment, and furniture and fixtures and leasehold improvements to theOperating Partnership’s property management offices and its corporate offices,was approximately $1.6 million.  TheOperating Partnership expects to fund approximately $2.4 million in totaladditions to non-real estate property for the remainder of 2003.

 

Improvements to real estate and additions to non-real estate propertywere funded from net cash provided by operating activities.

 

***DerivativeInstruments***

 

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

 

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

 

SeeNote 12 in the Notes to Consolidated Financial Statements for additionaldiscussion of derivative instruments at June 30, 2003.

 

***Other***

 

Total distributions paid in July 2003 amounted to $143.9 million(excluding distributions on Partially Owned Properties), which included certaindistributions declared during the second quarter ended June 30, 2003.

 

The Operating Partnership expects to meet its short-term liquidityrequirements, including capital expenditures related to maintaining itsexisting properties and certain scheduled unsecured note and mortgage noterepayments, generally through its working capital, net cash provided byoperating activities and borrowings under its line of credit.  The Operating Partnership considers its cashprovided by operating activities to be adequate to meet operating requirementsand payments of distributions.  TheOperating Partnership also expects to meet its long-term liquidityrequirements, such as scheduled unsecured note and mortgage debt maturities,property acquisitions, financing of construction and development activities andcapital improvements through the issuance of unsecured notes and equitysecurities, including additional OP Units, and proceeds received from thedisposition of certain properties.  Inaddition, the Operating Partnership has certain unencumbered propertiesavailable to secure additional mortgage borrowings in the event that the publiccapital markets are unavailable or the cost of alternative sources of capitalis too high.  The fair value of and cashflows from these unencumbered properties are in excess of the requirements theOperating Partnership must maintain in order to comply with covenants under itsunsecured notes and line

 

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of credit.

 

The Operating Partnership has arevolving credit facility with potential borrowings of up to $700.0million.  This facility maturesin May 2005 and will be used to fund property acquisitions, costs for certainproperties under development and short term liquidity requirements.  As of August 8, 2003, no****amounts were outstanding under thisfacility.

 

**Critical AccountingPolicies and Estimates**

 

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

 

*Impairment ofLong-Lived Assets, Including Goodwill*

 

The Operating Partnership periodicallyevaluates its long-lived assets, including its investments in real estate and goodwill,for impairment indicators.  Thejudgments regarding the existence of impairment indicators are based on factorssuch as operational performance, market conditions, expected holding period ofeach asset and legal and environmental concerns.  Future events could occur which would cause the OperatingPartnership to conclude that impairment indicators exist and an impairment lossis warranted.

 

*Depreciation ofInvestment in Real Estate*

 

The Operating Partnership depreciates thebuilding component of its investment in real estate over a 30-year estimateduseful life, building improvements over a 5-year to 10-year estimated usefullife and both the furniture, fixtures and equipment and replacements componentsover a 5-year estimated useful life, all of which are judgmentaldeterminations.

 

*CostCapitalization*

 

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

 

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

 

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intendeduse.

 

*Fair Value ofFinancial Instruments, Including Derivative Instruments*

 

The valuation of financial instruments underSFAS No. 107 and SFAS No. 133 and its amendments (SFAS Nos. 137/138/149)requires the Operating Partnership to make estimates and judgments that affectthe fair value of the instruments.  TheOperating Partnership, where possible, bases the fair values of its financialinstruments, including its derivative instruments, on listed market prices andthird party quotes. Where these are not available, the Operating Partnershipbases its estimates on other factors relevant to the financial instruments.

 

*RevenueRecognition*

 

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

 

*Stock-BasedCompensation*

 

Prior to 2003, the Company had chosen to account for itsstock-based compensation in accordance with APB No. 25, *Accounting for Stock Issued to Employees*,**which resulted in no compensation expensefor options issued with an exercise price equal to or exceeding the marketvalue of EQR’s Common Shares on the date of grant (intrinsic method).  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 or modified.   AnyCommon Shares issued pursuant to EQR’s share option/restricted share/ESPP planswill result in the Operating Partnership issuing OP Units to EQR on aone-for-one basis.

 

SFAS No. 148 provides three transitionmethods for entities that adopt the fair value recognition provisions of SFASNo. 123.  The Company has chosen to usethe “Prospective Method”.  This methodrequires that companies apply the recognition provisions of SFAS No. 123 to onlyemployee awards granted or modified after the beginning of the fiscal year in whichthe recognition provisions are first applied, or January 1, 2003.  Compensation expense under all of theCompany’s plans is generally recognized over periods ranging from three monthsto five years.  Therefore, the costrelated to stock-based employee compensation included in the determination ofnet income for the six months and quarter ended June 30, 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.  See Note 15 in the Notes to ConsolidatedFinancial Statements for further discussion and comparative informationregarding application of the fair value method to all outstanding employeeawards.

 

**Funds From Operations**

 

For the six months ended June 30, 2003, FundsFrom Operations (“FFO”) available to OP Units decreased $44.1 million, or11.6%, as compared to the six months ended June 30, 2002.

 

For the quarter ended June 30, 2003, FFOavailable to OP Units decreased $20.7 million, or 10.9%, as compared to thequarter ended June 30, 2002.

 

The following is a reconciliation of netincome available to OP Units to FFO available to OP Units for the six monthsand quarters ended June 30, 2003 and 2002:

 

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**Funds From Operations**

*(Amounts in thousands)*

*(Unaudited)*

 
|                                                 |   | **Six Months Ended June 30,** |    | **Quarter Ended June 30,** |   |
|------------------------------------------------------|--------|-------------------------------|---------|----------------------------|--------|
|                                                 |   | **2003**                      |    | **2002**                   |   | **2003** |   | **2002** | ** ** |
| Net income available to OP Units                     |   | $                             | 241,602 |                       | $      | 179,178 |   | $ | 121,325 |   | $ | 96,384 |   |
| Adjustments:                                         |   |                          |    |                       |   |   |   |   |   |
| Depreciation                                         |   | 231,582                       |    | 218,684                    |   | 116,555 |   | 110,464 |   |
| Depreciation – Non-real estate  additions       |   | (4,598                        | )       | (4,573                     | )      | (2,323 | ) | (2,596 | ) |
| Depreciation – Partially Owned  Properties      |   | (4,116                        | )       | (3,751                     | )      | (2,077 | ) | (1,880 | ) |
| Depreciation – Unconsolidated  Properties       |   | 10,150                        |    | 8,905                      |   | 4,955 |   | 4,415 |   |
| Net (gain) loss on sales of  unconsolidated entities |   | (4,675                        | )       | (5,246                     | )      | (3,463 | ) | 411 |   |
| Discontinued Operations:                             |   |                          |    |                       |   |   |   |   |   |
| Depreciation                                         |   | 5,810                         |    | 16,162                     |   | 1,919 |   | 7,614 |   |
| Net gain on sales of depreciable property            |   | (138,105                      | )       | (27,576                    | )      | (67,876 | ) | (25,099 | ) |
|                                                 |   |                          |    |                       |   |   |   |   |   |
| FFO available to OP Units – basic (1)(2)        |   | $                             | 337,650 |                       | $      | 381,783 |   | $ | 169,015 |   | $ | 189,713 |   |

 

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*(1)**           The National Association of Real EstateInvestment Trusts (“NAREIT”) defines funds from operations (“FFO”) (April 2002White Paper) as net income (computed in accordance with accounting principlesgenerally accepted in the United States), excluding gains (or losses) fromsales of property, plus depreciation and amortization, and after adjustmentsfor unconsolidated partnerships and joint ventures.  Adjustments for unconsolidated partnerships and joint ventureswill be calculated to reflect funds from operations on the same basis.  The April 2002 White Paper states that gainor loss on sales of property is excluded from FFO for previously depreciatedoperating properties only.  Once theOperating Partnership commences the conversion of units to condominiums, itsimultaneously discontinues depreciation of such property.  Accordingly, the Operating Partnershipincluded in FFO its incremental gains or losses from the sale of condominiumunits to third parties, which represented net gains of $2,887 and $870 for thesix months ended June 30, 2003 and 2002, respectively, and $2,444 and $531 forthe quarters ended June 30, 2003 and 2002, respectively.*

 

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

 

**Item 3. Quantitative and QualitativeDisclosures About Market Risk**

 

The Operating Partnership’s market risk hasnot changed materially from the amounts and information reported in Item 7A, *Quantitative and Qualitative Disclosures About MarketRisk*, to the Operating Partnership’s Form 10-K for the year endedDecember 31, 2002.  See also Note 12 tothe Notes to Consolidated Financial Statements for additional discussion ofderivative instruments.

 

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**Item 4. Disclosure Controls and Procedures**

 

Effective as of June 30, 2003, the OperatingPartnership carried out an evaluation, under the supervision and with theparticipation of the Operating Partnership’s management, including the ChiefExecutive Officer and Chief Financial Officer of EQR, of the effectiveness ofthe design and operation of the Operating Partnership’s disclosure controls andprocedures pursuant to Exchange Act Rules 13a-15 and 15d-15.  Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the disclosurecontrols and procedures are effective in timely alerting them to materialinformation.  During the fiscal quarterended June 30, 2003, there were no changes to the internal controls overfinancial reporting of the Operating Partnership identified in connection withthe Operating Partnership’s evaluation or otherwise that has materiallyaffected, or is reasonably likely to materially affect, the OperatingPartnership’s internal controls over financial reporting.

 

**PART II.****                        OTHERINFORMATION**

 

**Item 1.****           Legal Proceedings**

 

There have been no new orsignificant developments related to the legal proceedings that were discussedin Part I, Item III of the Operating Partnership’s Form 10-K for the year endedDecember 31, 2002.

 

**Item 2. Changes in Securities and Use of Proceeds**

 

*OP Units Issued in 2003*

 

The Operating Partnership issued:

 

•                                          153,851 OPUnits on May 8, 2003 having a value of $4.2 million; and

•                                          3,828 OPUnits on June 17, 2003 having a value of $0.1 million.

 

These OP Units were issued in exchange for direct or indirect interestsin multifamily Properties in private placement transactions under section 4(2)of the Securities Act of 1933, as amended (the "Securities Act"). OPUnits are generally exchangeable into Common Shares of EQR on a one-for-onebasis or, at the option of EQR, the cash equivalent thereof at any time one yearafter the date of issuance.

 

On April 30, 2003, the Operating Partnershipissued 1,748 OP Units to former partners ofGlen Meadow Associates, L.P.  Thisissuance was made in connection with certain contingent “earnout” rightsgranted to such former partners upon Grove’s acquisition of the Glen Meadowproperty in 1998.  The OperatingPartnership succeeded to Grove’s earnout obligations as a result of the Grovemerger in 2000.  No separateconsideration was payable upon issuance of these OP Units.  The Operating Partnership relied uponcertifications from each such former partner’s status as an “accreditedinvestor” within the meaning of SEC Rule 501 to claim an exemption fromregistration under Securities Act section 4(2).

 

**Item 6.****           Exhibits and Reports onForm 8-K**

 

(A)                              Exhibits:

 

12                                    Computationof Ratio of Earnings to Combined Fixed Charges.

 

31.1                           Certificationof Bruce W. Duncan, Chief Executive Officer of EQR.

 

31.2                           Certificationof David J. Neithercut, Chief Financial Officer of EQR.

 

32.1                           Certificationpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the

 

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Sarbanes-Oxley Act of 2002, of Bruce W.Duncan, Chief Executive Officer of Registrant’s General Partner.

 

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

 

(B)                                Reportson Form 8-K:

 

None.

 

37

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**SIGNATURES**

 

Pursuant to the requirements ofthe Section 13 or 15(d) of the Securities Exchange Act of 1934, the registranthas duly caused this report to be signed on behalf by the undersigned thereuntoduly authorized.

 

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

 

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##### **EXHIBIT INDEX**

 

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

 

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