**FORM 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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

 

For the quarterly period ended **JUNE 30, 2005**

 

**OR**

 

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

 

**Commission File Number: 0-24920**

 

**ERP OPERATING LIMITED PARTNERSHIP**

(Exact Name of Registrant as Specified in 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)      |

 

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

 

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

 

 

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**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED BALANCE SHEETS**

**(Amounts in thousands)**

**(Unaudited)**

 
| ** **                                                | ** ** | **June 30,  2005** | ** **     | **December 31,  2004** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|----------------|-----------------------------|------------|
| **ASSETS**                                                | ** ** | ** **              | ** **     | ** **                  | ** ** |
| Investment in real estate                                 |       |                    |           |                        |       |
| Land                                                      |       | $                       | 2,222,255      |                        | $          | 2,183,818 |   |
| Depreciable property                                      |       | 12,565,622              |           | 12,350,900                  |       |
| Construction in progress (including land)                 |       | 403,068                 |           | 317,903                     |       |
| Investment in real estate                                 |       | 15,190,945              |           | 14,852,621                  |       |
| Accumulated depreciation                                  |       | (2,765,550              | )              | (2,599,827                  | )          |
| Investment in real estate, net                            |       | 12,425,395              |           | 12,252,794                  |       |
|                                                      |       |                    |           |                        |       |
| Cash and cash equivalents                                 |       | 102,752                 |           | 83,505                      |       |
| Investments in unconsolidated entities                    |       | 10,658                  |           | 11,461                      |       |
| Rents receivable                                          |       | 942                     |           | 1,681                       |       |
| Deposits – restricted                                |       | 172,106                 |           | 82,194                      |       |
| Escrow deposits – mortgage                           |       | 34,586                  |           | 35,800                      |       |
| Deferred financing costs, net                             |       | 38,242                  |           | 34,986                      |       |
| Goodwill, net                                             |       | 30,000                  |           | 30,000                      |       |
| Other assets                                              |       | 93,355                  |           | 112,854                     |       |
| **Total assets**                                          | ** ** | **$**                   | **12,908,036** | ** **                  | **$**      | **12,645,275** | ** ** |
|                                                      |       |                    |           |                        |       |
| **LIABILITIES AND PARTNERS’ CAPITAL**                |       |                    |           |                        |       |
| Liabilities:                                              |       |                    |           |                        |       |
| Mortgage notes payable                                    |       | $                       | 3,203,644      |                        | $          | 3,166,739 |   |
| Notes, net                                                |       | 3,021,015               |           | 3,143,067                   |       |
| Line of credit                                            |       | 428,000                 |           | 150,000                     |       |
| Accounts payable and accrued expenses                     |       | 104,751                 |           | 87,422                      |       |
| Accrued interest payable                                  |       | 71,251                  |           | 70,411                      |       |
| Rents received in advance and other  liabilities          |       | 272,284                 |           | 227,588                     |       |
| Security deposits                                         |       | 49,995                  |           | 49,501                      |       |
| Distributions payable                                     |       | 143,296                 |           | 142,437                     |       |
| **Total liabilities**                                     | ** ** | **7,294,236**           | ** **     | **7,037,165**               | ** ** |
|                                                      |       |                    |           |                        |       |
| *Commitments and contingencies*                           |       |                    |           |                        |       |
| **Minority Interests – Partially Owned  Properties** | ** ** | **7,189**               | ** **     | **9,557**                   | ** ** |
|                                                      |       |                    |           |                        |       |
| Partners’  capital:                                  |       |                    |           |                        |       |
| Preference Units                                          |       | 632,893                 |           | 636,216                     |       |
| Preference Interests                                      |       | 60,000                  |           | 206,000                     |       |
| Junior Preference Units                                   |       | 184                     |           | 184                         |       |
| General Partner                                           |       | 4,611,865               |           | 4,457,700                   |       |
| Limited Partners                                          |       | 333,545                 |           | 319,841                     |       |
| Deferred compensation                                     |       | —                  |           | (18                         | )          |
| Accumulated other comprehensive loss                      |       | (31,876                 | )              | (21,370                     | )          |
| **Total partners’ capital**                          | ** ** | **5,606,611**           | ** **     | **5,598,553**               | ** ** |
| **Total liabilities and partners’ capital**          | ** ** | **$**                   | **12,908,036** | ** **                  | **$**      | **12,645,275** | ** ** |

 

**See accompanying notes**

 

2

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**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
| ** **                                                                                                                                                                   | ** ** | **Six Months Ended June 30,** | ** ** | **Quarter Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                   | ** ** | **2005**                           | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| **REVENUES**                                                                                                                                                                 |       |                               |       |                            |       |   |   |   |   |
| Rental income                                                                                                                                                                |       | $                                  | 975,593    |                            | $          | 885,339 |   | $ | 496,249 |   | $ | 456,489 |   |
| Fee and asset management                                                                                                                                                     |       | 5,826                              |       | 6,860                           |       | 3,254 |   | 3,703 |   |
|                                                                                                                                                                         |       |                               |       |                            |       |   |   |   |   |
| Total revenues                                                                                                                                                               |       | 981,419                            |       | 892,199                         |       | 499,503 |   | 460,192 |   |
| ** **                                                                                                                                                                   |       |                               |       |                            |       |   |   |   |   |
| **EXPENSES**                                                                                                                                                                 |       |                               |       |                            |       |   |   |   |   |
| Property and maintenance                                                                                                                                                     |       | 273,341                            |       | 240,866                         |       | 139,646 |   | 124,728 |   |
| Real estate taxes and insurance                                                                                                                                              |       | 105,589                            |       | 99,538                          |       | 52,822 |   | 50,612 |   |
| Property management                                                                                                                                                          |       | 41,457                             |       | 38,294                          |       | 20,482 |   | 20,517 |   |
| Fee and asset management                                                                                                                                                     |       | 4,930                              |       | 4,383                           |       | 2,411 |   | 2,333 |   |
| Depreciation                                                                                                                                                                 |       | 254,450                            |       | 223,927                         |       | 128,957 |   | 115,876 |   |
| General and administrative                                                                                                                                                   |       | 31,271                             |       | 22,546                          |       | 14,211 |   | 12,876 |   |
|                                                                                                                                                                         |       |                               |       |                            |       |   |   |   |   |
| Total expenses                                                                                                                                                               |       | 711,038                            |       | 629,554                         |       | 358,529 |   | 326,942 |   |
|                                                                                                                                                                         |       |                               |       |                            |       |   |   |   |   |
| Operating income                                                                                                                                                             |       | 270,381                            |       | 262,645                         |       | 140,974 |   | 133,250 |   |
|                                                                                                                                                                         |       |                               |       |                            |       |   |   |   |   |
| Interest and other income                                                                                                                                                    |       | 62,625                             |       | 4,159                           |       | 3,151 |   | 2,512 |   |
| Interest:                                                                                                                                                                    |       |                               |       |                            |       |   |   |   |   |
| Expense incurred, net                                                                                                                                                        |       | (184,322                           | )          | (161,224                        | )          | (94,627 | ) | (82,893 | ) |
| Amortization of deferred financing costs                                                                                                                                     |       | (3,294                             | )          | (2,872                          | )          | (1,597 | ) | (1,586 | ) |
|                                                                                                                                                                         |       |                               |       |                            |       |   |   |   |   |
| Income before allocation to Minority  Interests, loss from investments in unconsolidated entities, net gain on  sales of unconsolidated entities and discontinued operations |       | 145,390                            |       | 102,708                         |       | 47,901 |   | 51,283 |   |
| Allocation to Minority Interests –  Partially Owned Properties                                                                                                          |       | 2,296                              |       | 296                             |       | 819 |   | 443 |   |
| Loss from investments in unconsolidated  entities                                                                                                                            |       | (215                               | )          | (7,797                          | )          | (157 | ) | (391 | ) |
|                                                                                                                                                                         |       |                               |       |                            |       |   |   |   |   |
| Net gain on sales of unconsolidated  entities                                                                                                                                |       | 124                                |       | 4,405                           |       | — |   | 1,971 |   |
| Income from continuing operations                                                                                                                                            |       | 147,595                            |       | 99,612                          |       | 48,563 |   | 53,306 |   |
| Net gain on sales of discontinued  operations                                                                                                                                |       | 259,824                            |       | 149,259                         |       | 108,559 |   | 77,760 |   |
| Discontinued operations, net                                                                                                                                                 |       | (4,663                             | )          | 11,222                          |       | (2,646 | ) | 4,322 |   |
| Net income                                                                                                                                                                   |       | $                                  | 402,756    |                            | $          | 260,093 |   | $ | 154,476 |   | $ | 135,388 |   |
| ** **                                                                                                                                                                   |       |                               |       |                            |       |   |   |   |   |
| **ALLOCATION OF NET INCOME:**                                                                                                                                                |       |                               |       |                            |       |   |   |   |   |
| Preference Units                                                                                                                                                             |       | $                                  | 26,043     |                            | $          | 27,325 |   | $ | 13,018 |   | $ | 13,653 |   |
| Preference Interests                                                                                                                                                         |       | $                                  | 5,272      |                            | $          | 10,106 |   | $ | 1,388 |   | $ | 5,053 |   |
| Junior Preference Units                                                                                                                                                      |       | $                                  | 7          |                            | $          | 62 |   | $ | 3 |   | $ | 31 |   |
| Premium on redemption of Preference  Interests                                                                                                                               |       | $                                  | 4,112      |                            | $          | — |   | $ | 2,384 |   | $ | — |   |
| General Partner                                                                                                                                                              |       | $                                  | 342,340    |                            | $          | 206,862 |   | $ | 128,326 |   | $ | 108,553 |   |
| Limited Partners                                                                                                                                                             |       | 24,982                             |       | 15,738                          |       | 9,357 |   | 8,098 |   |
| Net income available to OP Units                                                                                                                                             |       | $                                  | 367,322    |                            | $          | 222,600 |   | $ | 137,683 |   | $ | 116,651 |   |
|                                                                                                                                                                         |       |                               |       |                            |       |   |   |   |   |
| **Earnings per OP Unit – basic:**                                                                                                                                       |       |                               |       |                            |       |   |   |   |   |
| Income from continuing operations available  to OP Units                                                                                                                     |       | $                                  | 0.37       |                            | $          | 0.21 |   | $ | 0.10 |   | $ | 0.12 |   |
| Net income available to OP Units                                                                                                                                             |       | $                                  | 1.20       |                            | $          | 0.74 |   | $ | 0.45 |   | $ | 0.39 |   |
| Weighted average OP Units outstanding                                                                                                                                        |       | 305,793                            |       | 299,438                         |       | 306,190 |   | 299,847 |   |
|                                                                                                                                                                         |       |                               |       |                            |       |   |   |   |   |
| **Earnings per OP Unit – diluted:**                                                                                                                                     |       |                               |       |                            |       |   |   |   |   |
| Income from continuing operations available  to OP Units                                                                                                                     |       | $                                  | 0.36       |                            | $          | 0.21 |   | $ | 0.10 |   | $ | 0.11 |   |
| Net income available to OP Units                                                                                                                                             |       | $                                  | 1.19       |                            | $          | 0.74 |   | $ | 0.44 |   | $ | 0.39 |   |
| Weighted average OP Units outstanding                                                                                                                                        |       | 309,362                            |       | 302,017                         |       | 309,979 |   | 302,201 |   |
|                                                                                                                                                                         |       |                               |       |                            |       |   |   |   |   |   |   |   |   |
| Distributions declared per  OP Unit outstanding                                                                                                                              |       | $                                  | 0.8650     |                            | $          | 0.8650 |   | $ | 0.4325 |   | $ | 0.4325 |   |

 

**See accompanying notes**

 

3

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**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF OPERATIONS (continued)**

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

**(Unaudited)**

 
| ** **                                                                                  | ** ** | **Six Months Ended June 30,** | ** ** | **Quarter Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                  | ** ** | **2005**                           | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                        |       |                               |       |                            |       |   |   |   |   |
| Comprehensive income:                                                                       |       |                               |       |                            |       |   |   |   |   |
|                                                                                        |       |                               |       |                            |       |   |   |   |   |
| Net income                                                                                  |       | $                                  | 402,756    |                            | $          | 260,093 |   | $ | 154,476 |   | $ | 135,388 |   |
| Other comprehensive income (loss) –  derivative and other instruments:                 |       |                               |       |                            |       |   |   |   |   |
| Unrealized holding gains (losses) arising  during the period                                |       | (11,674                            | )          | 5,736                           |       | (14,842 | ) | 15,890 |   |
| Equity in unrealized holding gains arising  during the period –unconsolidated entities |       | —                             |       | 3,667                           |       | — |   | — |   |
| Losses reclassified into earnings from  other comprehensive income                          |       | 1,168                              |       | 970                             |       | 586 |   | 488 |   |
| Comprehensive income                                                                        |       | $                                  | 392,250    |                            | $          | 270,466 |   | $ | 140,220 |   | $ | 151,766 |   |

 

**See accompanying notes**

 

4

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**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Amounts in thousands)**

**(Unaudited)**

 
| ** **                                                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                            | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Net income                                                                           |       | $                                  | 402,756    |   | $ | 260,093 |   |
| *Adjustments to reconcile net income to net  cash provided by operating activities:* |       |                               |       |   |   |
| Allocation to Minority Interests –  Partially Owned Properties                  |       | (2,296                             | )          | (296 | ) |
| Depreciation                                                                         |       | 259,268                            |       | 241,761 |   |
| Amortization of deferred financing costs                                             |       | 3,503                              |       | 3,352 |   |
| Amortization of discounts and premiums on  debt                                      |       | (813                               | )          | (367 | ) |
| Amortization of deferred settlements on  derivative instruments                      |       | 478                                |       | 590 |   |
| Loss from investments in unconsolidated  entities                                    |       | 215                                |       | 7,797 |   |
| Income from technology  investments                                                  |       | (57,054                            | )          | — |   |
| Net (gain) on sales of  unconsolidated entities                                      |       | (124                               | )          | (4,405 | ) |
| Net (gain) on sales of discontinued  operations                                      |       | (259,824                           | )          | (149,259 | ) |
| Debt extinguishments                                                                 |       | 5,307                              |       | 108 |   |
| Unrealized loss on derivative instruments                                            |       | 3                                  |       | 73 |   |
| Compensation paid with Company  Common Shares                                        |       | 18,069                             |       | 8,741 |   |
| Other operating activities, net                                                      |       | 1                                  |       | 10 |   |
|                                                                                 |       |                               |       |   |   |
| *Changes in assets and liabilities:*                                                 |       |                               |       |   |   |
| Decrease (increase) in rents receivable                                              |       | 760                                |       | (949 | ) |
| (Increase) in deposits – restricted                                             |       | (1,094                             | )          | (1,548 | ) |
| (Increase) in other assets                                                           |       | (3,923                             | )          | (6,900 | ) |
| Increase in accounts payable and accrued  expenses                                   |       | 8,192                              |       | 11,883 |   |
| Increase in accrued interest payable                                                 |       | 828                                |       | 1,075 |   |
| (Decrease) in rents received in advance and  other liabilities                       |       | (8,958                             | )          | (7,702 | ) |
| Increase in security deposits                                                        |       | 469                                |       | 943 |   |
| Net cash provided by operating activities                                            |       | 365,763                            |       | 365,000 |   |
|                                                                                 |       |                               |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                            |       |                               |       |   |   |
| Investment in real estate – acquisitions                                        |       | (642,332                           | )          | (398,084 | ) |
| Investment in real estate – development/other                                   |       | (91,140                            | )          | (36,458 | ) |
| Improvements to real estate                                                          |       | (93,431                            | )          | (89,289 | ) |
| Additions to non-real estate property                                                |       | (4,109                             | )          | (2,234 | ) |
| Interest capitalized for real estate under  development                              |       | (5,761                             | )          | (4,568 | ) |
| Interest capitalized for unconsolidated  entities under development                  |       | —                             |       | (2,282 | ) |
| Proceeds from disposition of real estate,  net                                       |       | 835,703                            |       | 506,614 |   |
| Proceeds from disposition of unconsolidated  entities                                |       | 124                                |       | 7,451 |   |
| Proceeds from technology and other  investments                                      |       | 82,054                             |       | — |   |
| Investments in unconsolidated entities                                               |       | (410                               | )          | (406,297 | ) |
| Distributions from unconsolidated entities                                           |       | 330                                |       | 23,416 |   |
| (Increase) decrease in deposits on real  estate acquisitions, net                    |       | (88,818                            | )          | 51,432 |   |
| Decrease in mortgage deposits                                                        |       | 1,238                              |       | 3,045 |   |
| *Consolidation of previously Unconsolidated  Properties:*                            |       |                               |       |   |   |
| Via acquisition (net of cash acquired)                                               |       | (65                                | )          | (49,178 | ) |
| Via FIN 46 (cash consolidated)                                                       |       | —                             |       | 3,628 |   |
| Acquisition of Minority Interests –  Partially Owned Properties                 |       | (1,143                             | )          | (72 | ) |
| Other investing activities, net                                                      |       | —                             |       | (950 | ) |
| Net cash (used for) investing activities                                             |       | (7,760                             | )          | (393,826 | ) |
|                                                                                      |            |                                    |            |  |  |  |  |

 

**See accompanying notes**

 

5

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**ERP OPERATING LIMITED PARTNERSHIP**

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

**(Amounts in thousands)**

**(Unaudited)**

 
| ** **                                                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                 | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                 |       |                               |       |   |   |
| Loan and bond acquisition costs                                            |       | $                                  | (6,759     | ) | $ | (3,651 | ) |
| *Mortgage notes payable:*                                                  |       |                               |       |   |   |
| Proceeds                                                                   |       | 149,129                            |       | 264,495 |   |
| Lump sum payoffs                                                           |       | (197,886                           | )          | (168,911 | ) |
| Scheduled principal repayments                                             |       | (14,392                            | )          | (12,425 | ) |
| Prepayment premiums/fees                                                   |       | (5,307                             | )          | (445 | ) |
| *Notes, net:*                                                              |       |                               |       |   |   |
| Proceeds                                                                   |       | —                             |       | 298,629 |   |
| Lump sum payoffs                                                           |       | (120,000                           | )          | (375,000 | ) |
| *Line of credit:*                                                          |       |                               |       |   |   |
| Proceeds                                                                   |       | 2,037,800                          |       | 1,067,000 |   |
| Repayments                                                                 |       | (1,759,800                         | )          | (662,000 | ) |
| (Payments on) settlement of derivative  instruments                        |       | —                             |       | (3,837 | ) |
| Proceeds from sale of OP Units                                             |       | 6,155                              |       | 5,017 |   |
| Proceeds from exercise of EQR options                                      |       | 20,781                             |       | 25,679 |   |
| Redemption of Preference Interests                                         |       | (146,000                           | )          | — |   |
| Premium on redemption of Preference  Interests                             |       | (300                               | )          | — |   |
| Payment of offering costs                                                  |       | (26                                | )          | (24 | ) |
| Contributions – Minority Interests –  Partially Owned Properties |       | 1,756                              |       | — |   |
| *Distributions:*                                                           |       |                               |       |   |   |
| OP Units – General Partner                                            |       | (247,193                           | )          | (240,894 | ) |
| Preference Units                                                           |       | (26,101                            | )          | (27,354 | ) |
| Preference Interests                                                       |       | (5,444                             | )          | (10,106 | ) |
| Junior Preference Units                                                    |       | (7                                 | )          | (113 | ) |
| OP Units – Limited Partners                                           |       | (17,897                            | )          | (18,499 | ) |
| Minority Interests – Partially Owned  Properties                      |       | (7,265                             | )          | (15,062 | ) |
| Net cash (used for) provided by financing  activities                      |       | (338,756                           | )          | 122,499 |   |
| Net increase in cash and cash equivalents                                  |       | 19,247                             |       | 93,673 |   |
| Cash and cash equivalents, beginning of  period                            |       | 83,505                             |       | 49,579 |   |
| Cash and cash equivalents, end of period                                   |       | $                                  | 102,752    |   | $ | 143,252 |   |

 

**See accompanying notes**

 

6

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**ERP OPERATING LIMITED PARTNERSHIP**

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

**(Amounts in thousands)**

**(Unaudited)**

 
| ** **                                                                       | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|                                                                             |       |                               |       |   |   |
| **SUPPLEMENTAL INFORMATION:**                                                    | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Cash paid during the period for interest                                         |       | $                                  | 192,691    |   | $ | 171,912 |   |
| Valuation of OP Units issued – Other  transactions                          |       | $                                  | 18,190     |   | $ | — |   |
|                                                                             |       |                               |       |   |   |
| *Real estate acquisitions/dispositions:*                                         |       |                               |       |   |   |
| Mortgage loans assumed                                                           |       | $                                  | 122,267    |   | $ | 50,942 |   |
|                                                                             |       |                               |       |   |   |
| Valuation of OP Units issued                                                     |       | $                                  | 1,800      |   | $ | — |   |
|                                                                             |       |                               |       |   |   |
| Mortgage loans (assumed) by purchaser                                            |       | $                                  | 24,999     |   | $ | (1,338 | ) |
|                                                                             |       |                               |       |   |   |
| *Consolidation of previously Unconsolidated  Properties – Via acquisition:* |       |                               |       |   |   |
| Investment in real estate                                                        |       | $                                  | (2,892     | ) | $ | (958,606 | ) |
|                                                                             |       |                               |       |   |   |
| Mortgage loans assumed                                                           |       | $                                  | 2,012      |   | $ | 273,467 |   |
|                                                                             |       |                               |       |   |   |
| Minority Interests – Partially Owned  Properties                            |       | $                                  | 59         |   | $ | 432 |   |
|                                                                             |       |                               |       |   |   |
| Investments in unconsolidated entities                                           |       | $                                  | 668        |   | $ | 608,333 |   |
|                                                                             |       |                               |       |   |   |
| Net other liabilities recorded                                                   |       | $                                  | 88         |   | $ | 27,196 |   |
|                                                                             |       |                               |       |   |   |
| *Consolidation of previously Unconsolidated  Properties – Via FIN 46:*      |       |                               |       |   |   |
| Investment in real estate                                                        |       | $                                  | —     |   | $ | (548,342 | ) |
|                                                                             |       |                               |       |   |   |
| Mortgage loans consolidated                                                      |       | $                                  | —     |   | $ | 294,722 |   |
|                                                                             |       |                               |       |   |   |
| Minority Interests – Partially Owned Properties                             |       | $                                  | —     |   | $ | 3,074 |   |
|                                                                             |       |                               |       |   |   |
| Investments in unconsolidated entities                                           |       | $                                  | —     |   | $ | 234,984 |   |
|                                                                             |       |                               |       |   |   |
| Net other liabilities recorded                                                   |       | $                                  | —     |   | $ | 19,190 |   |

 

**See accompanying notes**

 

7

----

 

**ERP OPERATING LIMITED PARTNERSHIP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.             Business**

 

ERP OperatingLimited Partnership (“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 integratedreal estate company engaged in the acquisition, development, ownership,management and operation of multifamily properties.

 

EQR is thegeneral partner of, and as of June 30, 2005 owned an approximate 93.2%ownership interest in ERPOP.  EQR isstructured as an umbrella partnership REIT (“UPREIT”), under which all propertyownership and business operations are conducted through ERPOP and its subsidiaries.  As used herein, the term “OperatingPartnership” includes ERPOP and those entities owned or controlled by it.  As used herein, the term “Company” means EQRand the Operating Partnership.

 

As of June 30,2005, the Operating Partnership, directly or indirectly through investments intitle holding entities, owned all or a portion of 933****propertiesin 32 states and the District of Columbia consisting of 198,420 units.  The ownership breakdown includes:

 
| ** **                                | ** ** | **Properties** | ** ** | **Units** | ** ** |
|-------------------------------------------|------------|----------------|------------|-----------|------------|
| Wholly Owned Properties                   |       | 837            |       | 175,498   |       |
| Partially Owned Properties (Consolidated) |       | 39             |       | 6,805     |       |
| Unconsolidated Properties                 |       | 57             |       | 16,117    |       |
|                                      |       | 933            |       | 198,420   |       |

 

**2.             Summary ofSignificant Accounting Policies**

** **

*Basis of Presentation*

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements.  In theopinion of management, all adjustments (consisting of normal recurringaccruals) and certain reclassifications considered necessary for a fairpresentation have been included.  Certainreclassifications have been made to the prior period financial statements inorder to conform to the current year presentation.  Operating results for the six months ended June 30,2005 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2005.

 

The balancesheet at December 31, 2004 has been derived from the audited financialstatements at that date but does not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates for complete financial statements.

 

For furtherinformation, including definition of capitalized terms not defined herein,refer to the consolidated financial statements and footnotes thereto includedin the Operating Partnership’s annual report on Form 10-K for the yearended December 31, 2004.

 

*Stock-Based Compensation*

 

The Company elected to account for its stock-based compensation inaccordance with SFAS No. 123 and its amendment (SFAS No. 148), *Accounting for Stock Based Compensation*,effective in the first

 

8

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quarter of 2003, which resultedin compensation expense being recorded based on the fair value of the stockcompensation granted.

 

The Company elected the “Prospective Method” which requires expensingof employee awards granted or modified after January 1, 2003.  Compensation expense under all of the Company’splans is generally recognized over periods ranging from three months to fiveyears.

 

Any Common Shares issued pursuant to EQR’s incentive equitycompensation and employee share purchase plans will result in the OperatingPartnership issuing units of limited partnership interest (“OP Units”) to EQRon a one-for-one basis, with the Operating Partnership receiving the net cashproceeds of such issuances.

 

The Company will adopt SFAS No. 123(R), Share-Based Payment, asrequired effective January 1, 2006. SFAS No. 123(R) will require all companies to expense stock-basedcompensation (such as stock options), as well as making other more minorrevisions to SFAS No. 123.  As theCompany began expensing all stock-based compensation effective January 1,2003, it does not anticipate that the adoption of SFAS No. 123(R) willhave a material effect on its consolidated statements of operations orfinancial position.

 

The cost related to stock-based employee compensation included in thedetermination of net income for the six months and quarter ended June 30,2005 is equal to that which would have been recognized if the fair value basedmethod had been applied to all awards since the original effective date of SFASNo. 123.  The cost related tostock-based employee compensation included in the determination of net incomefor the six months and quarter ended June 30, 2004 is less than that whichwould have been recognized if the fair value based method had been applied toall awards since the original effective date of SFAS No. 123.  The following table illustrates the effect onnet income and earnings per OP Unit if the fair value based method had beenapplied to all outstanding and unvested awards for the six months and quarterended June 30, 2004 (amounts in thousands except per OP Unit amounts):

 
| ** **                                                                                                  | ** ** | **Six Months  Ended**  | ** ** | **Quarter Ended**      | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                  | ** ** | **June 30, 2004** | ** ** | **June 30, 2004** | ** ** |
| Net income available to OP Units – as  reported                                                        |       | $                      | 222,600    |                   | $          | 116,651 |   |
| Add: Stock-based employee compensation  expense included in reported net income:                            |       |                   |       |                   |       |
| EQR’s restricted/performance shares                                                                    |       | 6,256                  |       | 3,374                  |       |
| EQR’s share options                                                                                    |       | 1,547                  |       | 758                    |       |
| EQR’s ESPP discount                                                                                    |       | 938                    |       | 274                    |       |
| Deduct: Stock-based employee compensation  expense determined under fair value based method for all awards: |       |                   |       |                   |       |
| EQR’s restricted/performance shares                                                                    |       | (6,256                 | )          | (3,374                 | )          |
| EQR’s share options                                                                                    |       | (3,006                 | )          | (1,448                 | )          |
| EQR’s ESPP discount                                                                                    |       | (938                   | )          | (274                   | )          |
| Net income available to OP Units – pro  forma                                                          |       | $                      | 221,141    |                   | $          | 115,961 |   |
| Earnings per OP Unit:                                                                                       |       |                   |       |                   |       |
| Basic – as reported                                                                                    |       | $                      | 0.74       |                   | $          | 0.39 |   |
| Basic – pro forma                                                                                      |       | $                      | 0.74       |                   | $          | 0.39 |   |
| Diluted – as reported                                                                                  |       | $                      | 0.74       |                   | $          | 0.39 |   |
| Diluted – pro forma                                                                                    |       | $                      | 0.73       |                   | $          | 0.38 |   |

 

9

----

 

*Other*

 

The Operating Partnership adopted FASB Interpretation (“FIN”)No. 46, *Consolidation of VariableInterest Entities,*as required, effective March 31, 2004.  The adoption required the consolidation ofall previously unconsolidated development projects.  FIN No. 46 requires the OperatingPartnership to consolidate the assets, liabilities and results of operations ofthe activities of a variable interest entity, which for the OperatingPartnership includes only its development partnerships, if the OperatingPartnership is entitled to receive a majority of the entity’s residual returnsand/or is subject to a majority of the risk of loss from such entity’sactivities.  Due to the March 31,2004 effective date, the Operating Partnership has only consolidated theresults of operations beginning April 1, 2004.  The adoption of FIN No. 46 did not haveany effect on net income as the aggregate results of operations of thesedevelopment properties were previously included in loss from investments inunconsolidated entities.

 

The OperatingPartnership adopted the disclosure provisions of SFAS No. 150 and FSP No. FAS150-3, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity,* effective December 31,2003.  SFAS No. 150 and FSP No. FAS150-3 require the Operating Partnership to make certain disclosures regardingnoncontrolling interests that are classified as equity in the financialstatements of a subsidiary but would be classified as a liability in the parent’sfinancial statements under SFAS No. 150 (e.g., minority interests inconsolidated limited-life subsidiaries). The Operating partnership is presently the controlling partner invarious consolidated partnerships consisting of 39 properties and 6,805 unitshaving a minority interest book value of $7.2 million at June 30,2005.  Some of these partnerships containprovisions that require the partnerships to be liquidated through the sale ofits assets upon reaching a date specified in each respective partnershipagreement.  The Operating Partnership, ascontrolling partner, has an obligation to cause the property owningpartnerships to distribute proceeds of liquidation to the Minority Interests inthese Partially Owned Properties only to the extent that the net proceedsreceived by the partnerships from the sale of its assets warrant a distributionbased on the partnership agreements.  Asof June 30, 2005, the Operating Partnership estimates the value ofMinority Interest distributions would have been approximately $70.2 million (“SettlementValue”) had the partnerships been liquidated. This Settlement Value is based on estimated third party considerationrealized by the partnerships upon disposition of the Partially Owned Propertiesand is net of all other assets and liabilities, including yield maintenance onthe mortgages encumbering the properties, that would have been due on June 30,2005 had those mortgages been prepaid. Due to, among other things, the inherent uncertainty in the sale of realestate assets, the amount of any potential distribution to the MinorityInterests in the Operating Partnership’s Partially Owned Properties is subjectto change.  To the extent that thepartnerships’ underlying assets are worth less than the underlying liabilities,the Operating Partnership has no obligation to remit any consideration to theMinority Interests in Partially Owned Properties.

 

In June 2005,the FASB ratified the consensus in EITF Issue No. 04-5, *Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights* (“Issue 04-5”), which provides guidancein determining whether a general partner controls a limited partnership.  Issue 04-5 states that the general partner ina limited partnership is presumed to control that limited partnership.  The presumption may be overcome if thelimited partners have either (1) the substantive ability to dissolve thelimited partnership or otherwise remove the general partner without cause or (2) substantiveparticipating rights, which provide the limited partners with the ability toeffectively participate in significant decisions that would be expected to bemade in the ordinary course of the limited partnership’s business and therebypreclude the general partner from exercising unilateral control over thepartnership.  If the criteria in Issue 04-5are met, the Operating Partnership could be required to consolidate certain ofits existing Unconsolidated Properties. The adoption of Issue 04-5 by the Operating Partnership for new ormodified limited partnership arrangements effective June 30, 2005 and existinglimited partnership arrangements effective January 1, 2006 is not expectedto have any effect on net income as the aggregate results of operations of anyUnconsolidated Properties required to be consolidated are already included inloss from investments in unconsolidated entities.

 

10

----

 

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

## *** ***

## ***The following table presents the changes in the OperatingPartnership’s issued and outstanding OP Units and the limited partners’ OPUnits for the six months ended June 30, 2005:***

## *** ***

 
| ** **                                    | ** ** | **2005**    | ** ** |
|-----------------------------------------------|------------|-------------|------------|
| OP Units outstanding at January 1,       |       | 305,629,855 |       |
|                                          |       |        |       |
| Issued to General Partner:                    |       |        |       |
| Conversion of Series E Preference  Units |       | 146,132     |       |
| Conversion of Series H Preference  Units |       | 2,314       |       |
| Employee Share Purchase Plan                  |       | 220,272     |       |
| Exercise of EQR options                       |       | 923,196     |       |
| Restricted EQR share grants, net              |       | 534,356     |       |
|                                          |       |        |       |
| Issued to Limited Partners:                   |       |        |       |
| Issuance – Other transactions            |       | 544,732     |       |
| Issuance – Acquisitions                  |       | 55,197      |       |
|                                          |       |        |       |
| OP Units outstanding at June 30,         |       | 308,056,054 |       |

 
| ** **                                                            | ** ** | **2005**   | ** **   |
|-----------------------------------------------------------------------|------------|------------|--------------|
| Limited Partner OP Units outstanding at  January 1,              |       | 20,552,940 |         |
|                                                                  |       |       |         |
| Limited Partner OP Units Issued:                                      |       |       |         |
| Other transactions                                                    |       | 544,732    |         |
| Acquisitions                                                          |       | 55,197     |         |
| Conversion of Limited Partner OP Units to  EQR Common Shares          |       | (241,148   | )            |
| Limited Partner OP Units Outstanding at  June 30,                |       | 20,911,721 |         |
| Limited Partner OP Units Ownership Interest  in Operating Partnership |       | 6.8        | %            |
|                                                                  |       |       |         |
| Limited Partner OP Units Issued:                                      |       |       |         |
| Other transactions – per unit                                    |       | $          | 33.39        |   |
| Other transactions – valuation                                   |       | $          | 18.2 million |   |
| Acquisitions – per unit                                          |       | $          | 32.61        |   |
| Acquisitions – valuation                                         |       | $          | 1.8 million  |   |

** **

**The limitedpartners of the Operating Partnership as of June 30, 2005 include variousindividuals and entities that contributed their properties to the OperatingPartnership in exchange for OP Units. Subject to certain restrictions, the Limited Partners may exchange theirOP Units for EQR Common Shares on a one-for-one basis.**

** **

**EQR contributes all net proceeds from  its various equity offerings (includingproceeds from exercise of options for EQR Common Shares) to the OperatingPartnership.  In return for thosecontributions, EQR receives a number of OP Units in ERPOP equal to the numberof Common Shares it has issued in the equity offering (or in the case of apreferred equity offering, a number of preference units in ERPOP equal innumber and having the same terms as the preferred shares issued in the equityoffering).**

** **

The followingtable presents the Operating Partnership’s issued and outstanding PreferenceUnits as of June 30, 2005 and December 31, 2004:

 

11

----

 
| ** **                                                                                                                                                                                                      | ** ** | ** **                        | ** ** | ** **               | ** ** | **Annual**                       | ** ** | **Amounts in thousands** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|--------------------------|------------|----------------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                                                                      | ** ** | **Redemption  Date (1) (2)** | ** ** | **Conversion  Rate (2)** | ** ** | **Dividend  Rate per  Unit (3)** | ** ** | **June  30, 2005**       | ** ** | **December  31, 2004** | ** ** |
| 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, 2005 and December 31, 2004 (4)                       |       | 10/15/05                          |       | N/A                      |       | $                                | 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, 2005 and December 31, 2004 (4)                       |       | 9/9/06                            |       | N/A                      |       | $                                | 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, 2005 and December 31, 2004 (4)                        |       | 7/15/07                           |       | N/A                      |       | $                                | 21.50      |                     | 175,000    |   | 175,000 |   |
|                                                                                                                                                                                                            |       |                              |       |                     |       |                             |       |                     |       |   |   |
| 7.00% Series E Cumulative Convertible  Preference Units; liquidation value $25 per unit; 680,396 and 811,724 units  issued and outstanding at June 30, 2005 and December 31, 2004,  respectively |       | 11/1/98                           |       | 1.1128                   |       | $                                | 1.75       |                     | 17,010     |   | 20,293 |   |
|                                                                                                                                                                                                            |       |                              |       |                     |       |                             |       |                     |       |   |   |
| 7.00% Series H Cumulative Convertible  Preference Units; liquidation value $25 per unit; 35,334 and 36,934 units  issued and outstanding at June 30, 2005 and December 31, 2004,  respectively   |       | 6/30/98                           |       | 1.4480                   |       | $                                | 1.75       |                     | 883        |   | 923 |   |
|                                                                                                                                                                                                            |       |                              |       |                     |       |                             |       |                     |       |   |   |
| 8.29% Series K Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 1,000,000 units issued and  outstanding at June 30, 2005 and December 31, 2004                           |       | 12/10/26                          |       | N/A                      |       | $                                | 4.145      |                     | 50,000     |   | 50,000 |   |
|                                                                                                                                                                                                            |       |                              |       |                     |       |                             |       |                     |       |   |   |
| 6.48% Series N Cumulative Redeemable  Preference Units; liquidation value $250 per unit; 600,000 units issued and  outstanding at June 30, 2005 and December 31, 2004 (4)                        |       | 6/19/08                           |       | N/A                      |       | $                                | 16.20      |                     | 150,000    |   | 150,000 |   |
|                                                                                                                                                                                                            |       |                              |       |                     |       |                             |       | $                        | 632,893    |   | $ | 636,216 |   |

 

----

(1)          On or after the redemption date, redeemablepreference units (Series B, C, D, K and N) may be redeemed for cash at theoption of the Operating Partnership, in whole or in part, at a redemption priceequal to the liquidation price per unit, plus accrued and unpaid distributions,if any, in conjunction with the concurrent redemption of the corresponding EQRPreferred Shares.

 

(2)          On or after the redemption date, convertiblepreference units (Series E & H) may be redeemed under certaincircumstances at the option of the Operating Partnership for cash or OP Units,in whole or in part, at various redemption prices per unit based upon thecontractual rate, plus accrued and unpaid distributions, if any, in conjunctionwith the concurrent redemption/conversion of the corresponding EQR Preferred Shares.

 

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

 

(4)          Series B, C, D and N Preference Unitseach have a corresponding depositary unit that consists of ten times the numberof units and one-tenth the liquidation value and dividend rate per unit.

 

The followingtable presents the issued and outstanding Preference Interests as of June 30,2005 and December 31, 2004:

 

12

----

 
| ** **                                                                                                                                                                                                 | ** ** | **Redemption  Date (1) (2)** | ** ** | **Conversion  Rate (2)** | ** ** | **Annual  Dividend  Rate per  Unit (3)** | ** ** | **Amounts in thousands** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|--------------------------|------------|------------------------------------------|------------|--------------------------|------------|
| **June  30, 2005**                                                                                                                                                                                         | ** ** | **December  31, 2004**            |
| Preference Interests:                                                                                                                                                                                      |       |                              |       |                     |       |                                     |       |                     |       |   |   |
|                                                                                                                                                                                                       |       |                              |       |                     |       |                                     |       |                     |       |   |   |
| 8.50% Series B Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 0 and 1,100,000 units  issued and outstanding at June 30, 2005 and December 31, 2004,  respectively |       | 03/03/05                          |       | N/A                      |       |                                     | (4)        | $                        | —     |   | $ | 55,000 |   |
|                                                                                                                                                                                                       |       |                              |       |                     |       |                                     |       |                     |       |   |   |
| 8.50% Series C Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 0 and 220,000 units issued  and outstanding at June 30, 2005 and December 31, 2004, respectively    |       | 03/23/05                          |       | N/A                      |       |                                     | (4)        | —                   |       | 11,000 |   |
|                                                                                                                                                                                                       |       |                              |       |                     |       |                                     |       |                     |       |   |   |
| 8.375% Series D Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 0 and 420,000 units issued  and outstanding at June 30, 2005 and December 31, 2004,  respectively  |       | 05/01/05                          |       | N/A                      |       |                                     | (4)        |                     |       | 21,000 |   |
|                                                                                                                                                                                                       |       |                              |       |                     |       |                                     |       |                     |       |   |   |
| 8.50% Series E Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 0 and 1,000,000 units  issued and outstanding at June 30, 2005 and December 31, 2004,  respectively |       | 08/11/05                          |       | N/A                      |       |                                     | (4)        | —                   |       | 50,000 |   |
|                                                                                                                                                                                                       |       |                              |       |                     |       |                                     |       |                     |       |   |   |
| 8.375% Series F Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 0 and 180,000 units issued  and outstanding at June 30, 2005 and December 31, 2004,  respectively  |       | 05/01/05                          |       | N/A                      |       |                                     | (4)        | —                   |       | 9,000 |   |
|                                                                                                                                                                                                       |       |                              |       |                     |       |                                     |       |                     |       |   |   |
| 7.875% Series G Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 510,000 units issued and  outstanding at June 30, 2005 and December 31, 2004                       |       | 03/21/06                          |       | N/A                      |       | $                                        | 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, 2005 and December 31, 2004           |       | 03/23/06                          |       | 1.5108                   |       | $                                        | 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 atJune 30, 2005 and December 31, 2004            |       | 06/22/06                          |       | 1.4542                   |       | $                                        | 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, 2005 and December 31, 2004           |       | 12/14/06                          |       | 1.4108                   |       | $                                        | 3.8125     |                     | 11,500     |   | 11,500 |   |
|                                                                                                                                                                                                       |       |                              |       |                     |       |                                     |       | $                        | 60,000     |   | $ | 206,000 |   |

 

----

(1)          On or after the fifth anniversary of the respective issuance (the “RedemptionDate”), all of the Preference Interests may be redeemed for cash at the optionof the Operating Partnership, in whole or in part, at any time or from time totime, at a redemption price equal to the liquidation preference of $50.00 perunit plus the cumulative amount of accrued and unpaid distributions, if any.

 

(2)          On or after the tenth anniversary of the respective issuance (the “ConversionDate”), all of the Preference Interests are exchangeable at the option of theholder (in whole but not in part) on a one-for-one basis for a respectivereserved series of EQR Preferred Shares. In addition, on or after the Conversion Date, the convertible PreferenceInterests (Series H, I & J) may be converted under certaincircumstances at the option of the holder (in whole but not in part) to CommonShares based upon the contractual conversion rate, plus accrued and unpaiddistributions, if any.

 

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

 

(4)          During the six months ended June 30, 2005, the Operating Partnershipredeemed or repurchased for cash all of its Series B through F PreferenceInterests with a liquidation value of $146.0 million. The Operating Partnershiprecorded approximately $4.1 million as premiums on redemption of Preference

 

13

----

 

Interests in the accompanyingconsolidated statements of operations, which included $3.8 million in originalinsurance costs and $0.3 million in cash redemption charges.

 

The followingtable presents the Operating Partnership’s issued and outstanding JuniorConvertible Preference Units (the “Junior Preference Units”) as of June 30,2005 and December 31, 2004:

 
| ** **                                                                                                                                                               | ** ** | **Redemption  Date**   | ** ** | **Conversion  Rate** | ** ** | **Annual  Dividend  Rate per  Unit (1)** | ** ** | **Amounts in thousands** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|------------------------------------------|------------|--------------------------|------------|
| **June  30, 2005**                                                                                                                                                       | ** ** | **December  31, 2004** |
| Junior Preference Units:                                                                                                                                                 |       |                   |       |                 |       |                                     |       |                     |       |   |   |
|                                                                                                                                                                     |       |                   |       |                 |       |                                     |       |                     |       |   |   |
| Series B Junior Convertible Preference  Units; liquidation value $25 per unit; 7,367 units issued and outstanding at  June 30, 2005 and December 31, 2004 |       |                   | (2)        |                 | (2)        | $                                        | 2.00       |                     | $          | 184 |   | $ | 184 |   |
|                                                                                                                                                                     |       |                   |       |                 |       |                                     |       | $                        | 184        |   | $ | 184 |   |
|                                                                                                                                                                          |            |                        |            |                      |            |                                          |            |                          |            |  |  |  |  |  |

 

----

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

 

(2)          Onor after the tenth anniversary of the issuance (the “Redemption Date”), the Series BJunior Preference Units may be converted into OP Units at the option of theOperating Partnership based on the contractual conversion rate.  Prior to the Redemption Date, the holders mayelect to convert the Series B Junior Preference Units to OP Units undercertain circumstances based on the contractual conversion rate.  The contractual rate is based upon a ratiodependent upon the closing price of EQR’s Common Shares.

 

**4.**                                      Real Estate

** **

**During the six months ended June 30,2005, the Operating Partnership acquired the entire equity interest in twenty**properties containing 4,874 units andtwo land parcels from unaffiliated parties for a total purchase price of $775.1million.

** **

**During the six months ended June 30,2005, the Operating Partnership acquired additional ownership interests ineleven Partially Owned Properties, all of which remain partially owned.  The acquisition was funded using $18.2million in cash and through the issuance of 544,732 OP Units valued at $18.2million, with $35.3 million recorded as additional building basis and $1.1million recorded as a reduction of Minority Interests – Partially OwnedProperties.  The Operating Partnershipalso acquired the majority of the remaining third party equity interests it didnot previously own in two properties, consisting of 120 units. The propertieswere previously accounted for under the equity method of accounting andsubsequent to the purchase were consolidated.**

** **

During the sixmonths ended June 30, 2005, the Operating Partnership disposed of thefollowing to unaffiliated parties (including two land parcels and variousindividual condominium units) (sales price in thousands):

 
| ** **                                | ** ** | **Properties** | ** ** | **Units** | ** ** | **Sales Price** | ** ** |
|-------------------------------------------|------------|----------------|------------|-----------|------------|-----------------|------------|
| Wholly Owned Properties                   |       | 25             |       | 6,088     |       | $               | 713.4      |   |
| Partially Owned Properties (Consolidated) |       | 2              |       | 678       |       | 165.2           |       |
|                                      |       | 27             |       | 6,766     |       | $               | 878.6      |   |

** **

**The Operating Partnership recognized anet gain on sales of discontinued operations of approximately $259.8 million onthe above sales.**

 

14

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

 

**As of July 27, 2005, the OperatingPartnership had entered into separate agreements to acquire five multifamilyproperties containing 3,021 units and two land parcels from unaffiliatedparties.  The Operating Partnershipexpects a combined purchase price of approximately $1.1 billion.**

** **

**As of July 27, 2005, in addition tothe properties that were subsequently disposed of as discussed in Note 16, theOperating Partnership had entered into separate agreements to dispose of twelvemultifamily properties containing 3,357**units and one land parcel to unaffiliated parties.  The Operating Partnership expects a combineddisposition price of approximately $357.9 million.

** **

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

 

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

 

The OperatingPartnership has co-invested in various properties with unrelated third partieswhich are accounted for under the equity method of accounting.  The following table summarizes the OperatingPartnership’s investments in unconsolidated entities as of June 30, 2005(amounts in thousands except for project and unit amounts):

 
| ** **                                                             | ** ** | **Institutional  Joint  Ventures** | ** ** | **Other** | ** ** | **Totals** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------|------------|-----------|------------|------------|------------|
|                                                                   |       |                               |       |      |       |       |       |
| Total projects                                                         |       | 45                                 |       | 11        |       | 56         | (1)        |
|                                                                   |       |                               |       |      |       |       |       |
| Total units                                                            |       | 10,846                             |       | 1,451     |       | 12,297     | (1)        |
|                                                                   |       |                               |       |      |       |       |       |
| Operating Partnership’s ownership  percentage of outstanding debt |       | 25.0                               | %          | 10.7      | %          |       |       |
|                                                                   |       |                               |       |      |       |       |       |
| Operating Partnership’s share of outstanding  debt (2)            |       | $                                  | 121,200    |      | $          | 2,861      |       | $ | 124,061 |   |
|                                                                        |            |                                    |            |           |            |            |            |  |  |  |

 

----

(1)                Totalsexclude Fort Lewis Military Housing consisting of one property and 3,820 units,which is not accounted for under the equity method of accounting but isincluded in the Operating Partnership’s property/unit counts as of June 30,2005.

 

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

 

**7.****                                      Deposits– Restricted**

 

The followingtable presents the deposits – restricted as of June 30, 2005 and December 31,2004 (amounts in thousands):

 
| ** **                                                    | ** ** | **June  30, 2005** | ** ** | **December  31, 2004** | ** ** |
|---------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
|                                                          |       |               |       |                   |       |
| Collateral enhancement for partially owned  development loans |       | $                  | 12,000     |                   | $          | 12,000 |   |
| Tax-deferred (1031) exchange proceeds                         |       | 61,062             |       | —                 |       |
| Earnest money on pending acquisitions                         |       | 31,023             |       | 3,267                  |       |
| Resident security, utility and other                          |       | 68,021             |       | 66,927                 |       |
| Totals                                                        |       | $                  | 172,106    |                   | $          | 82,194 |   |

 

15

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

 

As of June 30,2005, the Operating Partnership had outstanding mortgage indebtedness ofapproximately $3.2 billion.

 

During the sixmonths ended June 30, 2005, the Operating Partnership:

 

•                  Repaid $212.3million of mortgage loans;

•                  Assumed/consolidated$124.3 million of mortgage debt on certain properties in connection with theiracquisitions and/or consolidations;

•                  Obtained $149.1million of new mortgage loans on certain properties; and

•                  Was releasedfrom $25.0 million of mortgage debt assumed by the purchaser on disposedproperties.

 

As of June 30,2005, scheduled maturities for theOperating Partnership’s outstanding mortgage indebtedness were at various datesthrough December 1, 2034.  At June 30,2005, the interest rate range on the Operating Partnership’s mortgage debt was2.14% to 12.465%.  During the six monthsended June 30, 2005, the weighted average interest rate on the OperatingPartnership’s mortgage debt was 5.71%.

 

**9.****                                      Notes**

 

As of June 30,2005, the Operating Partnership had outstanding unsecured notes ofapproximately $3.0 billion.

 

During the sixmonths ended June 30, 2005, the Operating Partnership repaid $120.0million of fixed rate public notes at maturity.

 

As of June 30,2005, scheduled maturities for the Operating Partnership’s outstanding noteswere at various dates through 2029.  At June 30,2005, the interest rate range on the Operating Partnership’s notes was 4.75% to7.75%.  During the six months ended June 30,2005, the weighted average interest rate on the Operating Partnership’s noteswas 6.18%.

 

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

 

On April 1,2005, the Operating Partnership obtained a new three-year $1.0 billionunsecured revolving credit facility maturing on May 29, 2008, andterminated the $700.0 million credit facility that was scheduled to expire in May 2005.  The Operating Partnership has the ability toincrease available borrowings up to $500.0 million under certaincircumstances.  Advances under the newcredit facility bear interest at variable rates based upon LIBOR at variousinterest periods plus a spread dependent upon the Operating Partnership’scredit rating or based on bids received from the lending group.  EQR has guaranteed the Operating Partnership’scredit facility up to the maximum amount and for the full term of the facility.

 

As of June 30,2005, $428.0 million was outstanding and $52.2 million was restricted(dedicated to support letters of credit and not available for borrowing) on therevolving credit facility.  During thesix months ended June 30, 2005, the weighted average interest rate underthe credit facility was 3.11%.

 

**11.****                               DerivativeInstruments**

 

The following table summarizes the consolidated derivative instrumentsat June 30, 2005 (dollar amounts are in thousands):

 

16

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| ** **                             | ** ** | **Cash Flow  Hedges (1)** | ** ** | **Fair Value  Hedges (2)** | ** ** | **Forward  Starting  Swaps (3)** | ** ** | **Offsetting  Receive  Floating  Swaps/Caps** | ** ** | **Offsetting  Pay  Floating  Swaps/Caps** | ** ** | **Development  Cash Flow  Hedges (1)** | ** ** |
|----------------------------------------|------------|---------------------------|------------|----------------------------|------------|----------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|----------------------------------------|------------|
| Current Notional Balance               |       | $                         | 150,000    |                       | $          | 370,000                          |       | $                                             | 400,000    |                                      | $          | 255,069                                |       | $ | 255,069 |   | $ | 24,175 |   |
| Lowest Possible Notional               |       | $                         | 150,000    |                       | $          | 370,000                          |       | $                                             | 400,000    |                                      | $          | 91,052                                 |       | $ | 91,052 |   | $ | 6,700 |   |
| Highest Possible Notional              |       | $                         | 150,000    |                       | $          | 370,000                          |       | $                                             | 400,000    |                                      | $          | 255,069                                |       | $ | 255,069 |   | $ | 34,625 |   |
| Lowest Interest Rate                   |       | 3.683                     | %          | 3.245                      | %          | 4.435                            | %          | 6.000                                         | %          | 6.000                                     | %          | 3.310                                  | %          |
| Highest Interest Rate                  |       | 3.683                     | %          | 3.787                      | %          | 5.179                            | %          | 6.000                                         | %          | 6.000                                     | %          | 3.500                                  | %          |
| Earliest Maturity Date                 |       | 2005                      |       | 2009                       |       | 2015                             |       | 2007                                          |       | 2007                                      |       | 2005                                   |       |
| Latest Maturity Date                   |       | 2005                      |       | 2009                       |       | 2016                             |       | 2007                                          |       | 2007                                      |       | 2006                                   |       |
| Estimated Asset (Liability) Fair Value |       | $                         | (301       | )                          | $          | (8,072                           | )          | $                                             | (13,767    | )                                         | $          | 4                                      |       | $ | (4 | ) | $ | 34 |   |

 

----

(1)  Cash Flow Hedges and DevelopmentCash Flow Hedges – Converts outstanding floating rate debt to a fixed interestrate.

(2)  Fair Value Hedges – Convertsoutstanding fixed rate debt to a floating interest rate.

(3)  Forward StartingSwaps – Designed to partially fix the interest rate in advance of a planneddebt issuance.

 

**On June 30, 2005, the netderivative instruments were reported at their fair value as other assets ofapproximately $34,000 and as other liabilities of approximately $22.1million.  As of June 30, 2005, therewere approximately $32.1 million in deferred losses, net, included inaccumulated other comprehensive loss. Based on the estimated fair values of the net derivative instruments at June 30,2005, the Operating Partnership may recognize an estimated $4.1 million ofaccumulated other comprehensive loss as additional interest expense during thetwelve months ending June 30, 2006.**

 

**12.**                               Earnings Per OP Unit

 

The followingtables set forth the computation of net income per OP Unit – basic and netincome per OP Unit – diluted (amounts in thousands except per OP Unit amounts):

 
| ** **                                                   | ** ** | **Six Months Ended June 30,** | ** ** | **Quarter Ended June 30,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------|------------|
| ** **                                                   | ** ** | **2005**                           | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Numerator for net income per OP Unit –  basic:**      |       |                               |       |                            |       |   |   |   |   |
| Income from continuing operations                            |       | $                                  | 147,595    |                            | $          | 99,612 |   | $ | 48,563 |   | $ | 53,306 |   |
| Allocation to Preference Units                               |       | (26,043                            | )          | (27,325                         | )          | (13,018 | ) | (13,653 | ) |
| Allocation to Preference Interests                           |       | (5,272                             | )          | (10,106                         | )          | (1,388 | ) | (5,053 | ) |
| Allocation to Junior Preference Units                        |       | (7                                 | )          | (62                             | )          | (3 | ) | (31 | ) |
| Allocation to premium on redemption of  Preference Interests |       | (4,112                             | )          | —                          |       | (2,384 | ) | — |   |
|                                                         |       |                               |       |                            |       |   |   |   |   |
| Income from continuing operations available  to OP Units     |       | 112,161                            |       | 62,119                          |       | 31,770 |   | 34,569 |   |
| Net gain on sales of discontinued  operations                |       | 259,824                            |       | 149,259                         |       | 108,559 |   | 77,760 |   |
| Discontinued operations, net                                 |       | (4,663                             | )          | 11,222                          |       | (2,646 | ) | 4,322 |   |
| Numerator for net income per OP Unit –  basic           |       | $                                  | 367,322    |                            | $          | 222,600 |   | $ | 137,683 |   | $ | 116,651 |   |
|                                                         |       |                               |       |                            |       |   |   |   |   |
| **Numerator for net income per OP Unit –  diluted:**    |       |                               |       |                            |       |   |   |   |   |
| Income from continuing operations                            |       | $                                  | 147,595    |                            | $          | 99,612 |   | $ | 48,563 |   | $ | 53,306 |   |
| Allocation to Preference Units                               |       | (26,043                            | )          | (27,325                         | )          | (13,018 | ) | (13,653 | ) |
| Allocation to Preference Interests                           |       | (5,272                             | )          | (10,106                         | )          | (1,388 | ) | (5,053 | ) |
| Allocation to Junior Preference Units                        |       | (7                                 | )          | (62                             | )          | (3 | ) | (31 | ) |
| Allocation to premium on redemption of  Preference Interests |       | (4,112                             | )          | —                          |       | (2,384 | ) | — |   |
|                                                         |       |                               |       |                            |       |   |   |   |   |
| Income from continuing operations available  to OP Units     |       | 112,161                            |       | 62,119                          |       | 31,770 |   | 34,569 |   |
| Net gain on sales of discontinued  operations                |       | 259,824                            |       | 149,259                         |       | 108,559 |   | 77,760 |   |
| Discontinued operations, net                                 |       | (4,663                             | )          | 11,222                          |       | (2,646 | ) | 4,322 |   |
| Numerator for net income per OP Unit –  diluted         |       | $                                  | 367,322    |                            | $          | 222,600 |   | $ | 137,683 |   | $ | 116,651 |   |

 

17

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| ** **                                                                                                  | ** ** | **Six Months Ended June 30,** | ** ** | **Quarter Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                  | ** ** | **2005**                           | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                        |       |                               |       |                            |       |   |   |   |   |
| **Denominator for net income per OP Unit –  basic and diluted:**                                       |       |                               |       |                            |       |   |   |   |   |
| Denominator for net income per OP Unit –  basic                                                        |       | 305,793                            |       | 299,438                         |       | 306,190 |   | 299,847 |   |
| Effect of dilutive securities:                                                                              |       |                               |       |                            |       |   |   |   |   |
| Dilution for OP Units issuable upon assumed  exercise/vesting of EQR’s share options/restricted shares |       | 3,569                              |       | 2,579                           |       | 3,789 |   | 2,354 |   |
|                                                                                                        |       |                               |       |                            |       |   |   |   |   |
| Denominator for net income per OP Unit –  diluted                                                      |       | 309,362                            |       | 302,017                         |       | 309,979 |   | 302,201 |   |
|                                                                                                        |       |                               |       |                            |       |   |   |   |   |
| Net income per OP Unit – basic                                                                         |       | $                                  | 1.20       |                            | $          | 0.74 |   | $ | 0.45 |   | $ | 0.39 |   |
|                                                                                                        |       |                               |       |                            |       |   |   |   |   |
| Net income per OP Unit – diluted                                                                       |       | $                                  | 1.19       |                            | $          | 0.74 |   | $ | 0.44 |   | $ | 0.39 |   |
|                                                                                                        |       |                               |       |                            |       |   |   |   |   |
| **Net income per OP Unit – basic:**                                                                    |       |                               |       |                            |       |   |   |   |   |
| Income from continuing operations available  to OP Units                                                    |       | $                                  | 0.367      |                            | $          | 0.207 |   | $ | 0.104 |   | $ | 0.115 |   |
| Net gain on sales of discontinued  operations                                                               |       | 0.850                              |       | 0.499                           |       | 0.355 |   | 0.260 |   |
| Discontinued operations, net                                                                                |       | (0.015                             | )          | 0.037                           |       | (0.009 | ) | 0.014 |   |
|                                                                                                        |       |                               |       |                            |       |   |   |   |   |
| Net income per OP Unit – basic                                                                         |       | $                                  | 1.202      |                            | $          | 0.743 |   | $ | 0.450 |   | $ | 0.389 |   |
|                                                                                                        |       |                               |       |                            |       |   |   |   |   |
| **Net income per OP Unit – diluted:**                                                                  |       |                               |       |                            |       |   |   |   |   |
| Income from continuing operations available  to OP Units                                                    |       | $                                  | 0.363      |                            | $          | 0.206 |   | $ | 0.103 |   | $ | 0.114 |   |
| Net gain on sales of discontinued  operations                                                               |       | 0.840                              |       | 0.494                           |       | 0.350 |   | 0.258 |   |
| Discontinued operations, net                                                                                |       | (0.015                             | )          | 0.037                           |       | (0.009 | ) | 0.014 |   |
|                                                                                                        |       |                               |       |                            |       |   |   |   |   |
| Net income per OP Unit – diluted                                                                       |       | $                                  | 1.188      |                            | $          | 0.737 |   | $ | 0.444 |   | $ | 0.386 |   |

 

*Convertiblepreference interests/units that could be converted into 1,851,982 and 3,544,867weighted average Common Shares (which would be contributed to the OperatingPartnership in exchange for OP Units) for the six months ended June 30,2005 and 2004, respectively, and 1,832,986 and 3,535,758 weighted averageCommon Shares for the quarters ended June 30, 2005 and 2004, respectively,were outstanding but were not included in the computation of diluted earningsper OP Unit because the effects would be anti-dilutive.*

 

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

 

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

 

The components of discontinued operations are outlined below andinclude the results of operations for the respective periods that the OperatingPartnership owned such assets during the six months and quarters ended June 30,2005 and 2004 (amounts in thousands).

 

18

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** **
| ** **                               | ** ** | **Six Months Ended June 30,** | ** ** | **Quarter Ended June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                               | ** ** | **2005**                      | ** ** | **2004**                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **REVENUES**                             |       |                          |       |                       |       |   |   |   |   |
| Rental income                            |       | $                             | 23,866     |                       | $          | 69,466 |   | $ | 8,029 |   | $ | 32,860 |   |
| Total revenues                           |       | 23,866                        |       | 69,466                     |       | 8,029 |   | 32,860 |   |
|                                     |       |                          |       |                       |       |   |   |   |   |
| **EXPENSES (1)**                         |       |                          |       |                       |       |   |   |   |   |
| Property and maintenance                 |       | 11,679                        |       | 25,979                     |       | 5,114 |   | 11,799 |   |
| Real estate taxes and insurance          |       | 4,693                         |       | 8,248                      |       | 1,143 |   | 4,099 |   |
| Property management                      |       | 137                           |       | 126                        |       | 55 |   | 126 |   |
| Depreciation                             |       | 4,818                         |       | 17,834                     |       | 1,243 |   | 8,700 |   |
| Total expenses                           |       | 21,327                        |       | 52,187                     |       | 7,555 |   | 24,724 |   |
|                                     |       |                          |       |                       |       |   |   |   |   |
| Discontinued operating income            |       | 2,539                         |       | 17,279                     |       | 474 |   | 8,136 |   |
|                                     |       |                          |       |                       |       |   |   |   |   |
| Interest and other income                |       | 114                           |       | 98                         |       | 78 |   | 55 |   |
| Interest (2):                            |       |                          |       |                       |       |   |   |   |   |
| Expense incurred, net                    |       | (7,107                        | )          | (5,675                     | )          | (3,104 | ) | (3,693 | ) |
| Amortization of deferred financing costs |       | (209                          | )          | (480                       | )          | (94 | ) | (176 | ) |
|                                     |       |                          |       |                       |       |   |   |   |   |
| Discontinued operations, net             |       | $                             | (4,663     | )                          | $          | 11,222 |   | $ | (2,646 | ) | $ | 4,322 |   |

 

----

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

*(2)**             Interest includes only specific amounts fromeach property sold.*

 

For the properties sold during the six months ended June 30, 2005(excluding condominium conversion properties), the investment in real estate,net, and the mortgage notes payable balances at December 31, 2004 were $437.7million and $72.7 million, respectively.

 

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

 

The Operating Partnership, as an owner of real estate, is subject tovarious Federal, state and local environmental laws. Compliance by theOperating Partnership with existing laws has not had a material adverse effecton the Operating Partnership. However, the Operating Partnership cannot predictthe impact of new or changed laws or regulations on its current properties oron properties that it may acquire in the future.

 

In August 2004, the Operating Partnership tried a class action lawsuitin Palm Beach County, Florida regarding certain charges made to residents whoterminated their leases early or failed to provide sufficient notice of intentto vacate. In December 2004, the Court issued a Findings of Fact andConclusions of Law holding those fees legally uncollectible under Florida law. Inrecognition of the Findings of Fact and Conclusions of Law, which awardeddamages and interest to the class in the amount of approximately $1.6 million,the Operating Partnership established a reserve of approximately $1.6 millionand correspondingly recorded this as a general and administrative expense inDecember 2004. Due to pending appeals, the award is neither final norenforceable. Accordingly, it is not possible to determine or predict theultimate outcome of the case. While no assurances can be given, the OperatingPartnership does not believe that this lawsuit, if the ultimate outcome isunfavorable, will have a material adverse effect on the Operating Partnership.

 

The Operating Partnership does not believe there is any otherlitigation pending or threatened against the Operating Partnership which,individually or in the aggregate, reasonably may be expected to have a materialadverse effect on the Operating Partnership.

 

During the year ended December 31, 2004, the Operating Partnershipestablished a reserve and

 

19

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recorded a correspondingexpense of $15.2 million for estimated uninsured property damage at certain ofits properties primarily located in Florida caused by Hurricanes Charley,Frances, Ivan and Jeanne. Of this amount, approximately $15.0 million had beenspent for hurricane related repairs through June 30, 2005. The $0.2 millionremaining reserve is included in rents received in advance and otherliabilities on the consolidated balance sheets.

 

**As of June 30, 2005, the OperatingPartnership has four projects totaling 1,165 units in various stages ofdevelopment with estimated completion dates ranging through December 31, 2006. Thethree development agreements currently in place have the following key terms:**

** **

**•**                  The first development partner hasthe right, at any time following completion of a project subject to theagreement, to stipulate a value for such project and offer to sell its interestin the project to the Operating Partnership based on such value. If theOperating Partnership chooses not to purchase the interest, it must agree to asale of the project to an unrelated third party at such value. The OperatingPartnership’s partner must exercise this right as to all projects subject tothe agreement within five years after the receipt of the final certificate ofoccupancy on the last developed property. In connection with this development agreement, the Operating Partnership has an obligation to provide up to $40.0 millionin credit enhancements to guarantee a portion of the third party constructionfinancing. As of July 27, 2005, the Operating Partnership had set-aside $5.0million towards this credit enhancement. The Operating Partnership would berequired to perform under this agreement only if there was a material defaultunder a third party construction mortgage agreement. This agreement expires nolater than December 31, 2018. Notwithstanding the termination of the agreement,the Operating Partnership shall have recourse against its development partnerfor any losses incurred.

** **

**•**                        The seconddevelopment partner has the right, at any time following completion of aproject subject to the agreement, to require the Operating Partnership topurchase the partners’ interest in that project at a mutually agreeable price. Ifthe Operating Partnership and the partner are unable to agree on a price, bothparties will obtain appraisals. If the appraised values vary by more than 10%,both the Operating Partnership and its partner will agree on a third appraiserto determine which original appraisal is closest to its determination of value.The Operating Partnership may elect at that time not to purchase the propertyand instead, authorize its partner to sell the project at or above theagreed-upon value to an unrelated third party. Fiveyears following the receipt of the final certificate of occupancy on the lastdeveloped property, the Operating Partnership must purchase, at the agreed-uponprice, any projects remaining unsold.

** **

•                  The thirddevelopment partner has the exclusive right for six months followingstabilization, as defined, to market a subject project for sale. Thereafter,either the Operating Partnership or its development partner may market asubject project for sale. If the Operating Partnership’s development partnerproposes the sale, the Operating Partnership may elect to purchase the projectat the price proposed by its partner or defer the sale until two independentappraisers appraise the project. If the two appraised values vary by more than5%, a third appraiser will be chosen to determine the fair market value of theproperty. Once a value has been determined, the Operating Partnership may electto purchase the property or authorize its development partner to sell theproject at the agreed-upon value.

 

**T**he Operating Partnership’s guaranty of a credit enhancementagreement with respect to certain tax-exempt bonds issued to finance certainpublic improvements at a multifamily development project was terminatedeffective May 2, 2005 as the tax-exempt bonds were redeemed in full and the associatedletter of credit was cancelled.

** **

**15.****                               ReportableSegments**

 

Operating segments are defined as componentsof an enterprise about which separate financial

 

20

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informationis available that is evaluated regularly by senior management. Seniormanagement decides how resources are allocated and assesses performance on amonthly basis.

 

The Operating Partnership’s primary businessis owning, managing, and operating multifamily residential properties, which includesthe generation of rental and other related income through the leasing ofapartment units to residents and includes Equity Corporate Housing (“ECH”). Seniormanagement evaluates the performance of each of our apartment communities on anindividual basis; however, each of our apartment communities has similareconomic characteristics, residents, and products and services so they havebeen aggregated into one reportable segment. The Operating Partnership’s rentalreal estate segment comprises approximately 99.4% and 99.2% of total revenuesfor the six months ended June 30, 2005 and 2004, respectively, andapproximately 99.3% and 99.2% of total revenues for the quarters ended June 30,2005 and 2004, respectively. The Operating Partnership’s rental real estatesegment comprises approximately 99.8% of total assets at both June 30, 2005 andDecember 31, 2004.

 

The primary financial measure for theOperating Partnership’s rental real estate segment is net operating income (“NOI”),which represents rental income less: 1) property and maintenance expense; 2)real estate taxes and insurance expense; and 3) property management expense(all as reflected in the accompanying consolidated statements of operations). TheOperating 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 yearNOI and current year budgeted NOI as a measure of financial performance. Thefollowing table presents the NOI from our rental real estate from continuingoperations for the six months and quarters ended June 30, 2005 and 2004(amounts in thousands):

 
| ** **                              | ** ** | **Six Months Ended June 30,** | ** ** | **Quarter Ended June 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **2005**                      | ** ** | **2004**                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Rental income                           |       | $                             | 975,593    |                       | $          | 885,339 |   | $ | 496,249 |   | $ | 456,489 |   |
| Property and maintenance expense        |       | (273,341                      | )          | (240,866                   | )          | (139,646 | ) | (124,728 | ) |
| Real estate taxes and insurance expense |       | (105,589                      | )          | (99,538                    | )          | (52,822 | ) | (50,612 | ) |
| Property management expense             |       | (41,457                       | )          | (38,294                    | )          | (20,482 | ) | (20,517 | ) |
|                                    |       |                          |       |                       |       |   |   |   |   |
| Net operating income                    |       | $                             | 555,206    |                       | $          | 506,641 |   | $ | 283,299 |   | $ | 260,632 |   |

 

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

 

All revenues are from external customers andthere is no customer who contributed 10% or more of the Operating Partnership’stotal revenues during the six months ended June 30, 2005 or 2004.

 

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

 

Subsequent to June 30, 2005 and through July 27, 2005, the OperatingPartnership:

 

•                  Disposed ofthree properties consisting of 700 units (excluding condominium units) forapproximately $98.3 million; and

•                  Was releasedfrom $10.0 million of mortgage debt assumed by the purchaser on disposedproperties.

 

During the six months ended June 30, 2005, the Operating Partnershipreceived proceeds of $82.1 million from the following investments:

 

•                  $25.0 million infull redemption of its 1,000,000 shares of 8.25% Convertible Trust PreferredSecurities; and

 

21

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•                  $57.1 millionfor its ownership interest in Rent.com in connection with the acquisition ofRent.com by eBay, Inc. The $57.1 million was recorded as interest and otherincome in the accompanying consolidated statements of operations.

 

On March 28, 2005, the Company and Bruce W. Duncan, the Company’s ChiefExecutive Officer (“CEO”), entered into an Amended and Restated EmploymentAgreement (as further amended effective June 30, 2005, the “Amendment”) toreflect changes required in view of Mr. Duncan’s planned retirement as CEO andtrustee to be effective December 31, 2005. The Amendment also amended Mr.Duncan’s Deferred Compensation Agreement entered into in January 2003. TheCompany recorded approximately $5.2 million of additional general andadministrative expense during the six months ended June 30, 2005, and expectsto record approximately $4.7 million during the remainder of 2005, primarilyrelated to accelerated vesting of share options and restricted/performanceshares.

 

Effective February 28, 2005, the Company and Edward Geraghty, thePresident of the Company’s Eastern Division, entered into a SeparationAgreement and General Release reflecting Mr. Geraghty’s resignation effectiveFebruary 28, 2005. The Company recorded approximately $3.3 million of severanceas additional general and administrative expense during the quarter ended March31, 2005.

 

22

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

** **

**Overview**

** **

For further information including definitions for capitalized terms notdefined herein, refer to the consolidated financial statements and footnotesthereto included in the Operating Partnership’s annual report on Form 10-K forthe year ended December 31, 2004.

 

Forward-looking statements in this report are intended to be made pursuantto the safe harbor provisions of the Private Securities Litigation Reform Actof 1995. The words “believes”, “estimates”, “expects” and “anticipates” andother similar expressions that are predictions of or indicate future events andtrends and which do not relate solely to historical matters identifyforward-looking statements. Such forward-looking statements are subject torisks and uncertainties, which could cause actual results, performance, orachievements of the Operating Partnership to differ materially from anticipatedfuture results, performance or achievements expressed or implied by suchforward-looking statements. Factors that might cause such differences include,but are not limited to, the following:

 

•                  We intend toactively acquire and develop multifamily properties for rental operationsand/or conversion into condominiums, as well as upgrade and sell existingproperties as individual condominiums. We may underestimate the costs necessaryto bring an acquired or condominium conversion property up to standardsestablished for its intended market position or to otherwise develop aproperty. Additionally, we expect that other major real estate investors withsignificant capital will compete with us for attractive investmentopportunities or may also develop properties in markets where we focus ourdevelopment efforts. This competition may increase prices for multifamilyproperties or decrease the price at which we expect to sell individualcondominiums. We may not be in a position or have the opportunity in the futureto make suitable property acquisitions on favorable terms. We also plan todevelop more properties ourselves over the next few years in addition toco-investing with our development partners for either the rental or condominiummarket, depending on opportunities in each sub-market. This may increase theoverall level of risk associated with our developments. The total number ofdevelopment units, cost of development and estimated completion dates aresubject to uncertainties arising from changing economic conditions (such as thecost of labor and construction materials), competition and local governmentregulation.

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

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

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

 

Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date hereof. TheOperating Partnership undertakes no obligation to publicly release anyrevisions to these forward-looking statements, which may be made to reflectevents or circumstances after the date hereof or to reflect the occurrence ofunanticipated events. Forward-looking statements and related uncertainties arealso included in Notes 5, 11 and 16 to the Notes to Consolidated FinancialStatements in this report.

 

23

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**Results of Operations**

 

In conjunction with our businessobjectives and operating strategy, the Operating Partnership has continued toinvest or recycle its capital investment in apartment communities located instrategically targeted markets during the six months ended June 30, 2005. Insummary, during the six months ended June 30, 2005, we acquired twentyproperties, consisting of 4,874 units, for an aggregate purchase price of$729.8 million and two land parcels for $45.3 million, all of which we deem tobe in high barrier to entry markets. The Operating Partnership sold 24properties, consisting of 5,994 units, for an aggregate sales price of $644.0million, 772 condominium units (and three properties) for $198.3 million andtwo land parcels for $36.3 million during the six months ended June 30, 2005.

 

The Operating Partnership’s primary financialmeasure for evaluating each of its apartment communities is net operatingincome (“NOI”). The Operating Partnership believes that NOI is helpful toinvestors as a supplemental measure of the operating performance of a realestate company because it is a direct measure of the actual operating resultsof the Operating Partnership’s apartment communities. The Operating Partnershipdefines NOI as rental income less: 1) property and maintenance expense; 2) realestate taxes and insurance expense; and 3) property management expense.

 

Properties that the Operating Partnership owned for all of both the sixmonth periods ended June 30, 2005 and 2004 (the “Six-Month 2005 Same StoreProperties”), which represented 162,598 units and properties that the OperatingPartnership owned for all of both the quarters ended June 30, 2005 and 2004(the “Second Quarter 2005 Same Store Properties”), which represented 168,385units, also impacted the Operating Partnership’s results of operations. Boththe Six-Month 2005 Same Store Properties and Second Quarter 2005 Same StoreProperties are discussed in the following paragraphs.

 

The Operating Partnership’s acquisition, disposition, completeddevelopment and consolidation of previously unconsolidated property activitiesalso impacted overall results of operations for the six months and quartersended June 30, 2005 and 2004. The impacts of these activities are alsodiscussed in greater detail in the following paragraphs.

 

***Comparison of the six months ended June 30, 2005 to the sixmonths ended June 30, 2004***

** **

For the six months ended June 30, 2005,income before allocation to Minority Interests, loss from investments inunconsolidated entities, net gain on sales of unconsolidated entities anddiscontinued operations increased by approximately $42.7 million when comparedto the six months ended June 30, 2004.

 

**Six-Month 2005 Same Store Propertiesrevenues increased primarily as a result of higher rental rates charged toresidents, increased occupancy and lower concessions. Six-Month 2005 Same StoreProperties expenses increased primarily due to higher payroll, utility costs,maintenance costs and real estate taxes. The following tables providecomparative revenue, expense, NOI and weighted average occupancy for theSix-Month 2005 Same Store Properties:**

** **

| YTD June 2005 vs. YTD June 2004                    |       |
|----------------------------------------------------|------------|
| YTD over YTD Same-Store Results                    |       |
| $ in Millions – 162,598 Same-Store Units |       |
| ** **                                         |       |
| **Description**                                    | ** ** | ** ** | **Revenues** | ** ** | **Expenses** | ** ** | **NOI** | ** ** |
|                                               |       |   |   |   |   |   |   |   |
| YTD 2005                                           |       |   | $ | 849.2 |   | $ | 348.0 |   | $ | 501.2 |   |
| YTD 2004                                           |       |   | $ | 826.9 |   | $ | 332.0 |   | $ | 494.9 |   |
| Change                                             |       |   | $ | 22.3 |   | $ | 16.0 |   | $ | 6.3 |   |
| Change                                             |       |   | 2.7 | % | 4.8 | % | 1.3 | % |

** **

**24**

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** **

| Same Store Occupancy Statistics |
|---------------------------------|
|                            |   |   |   |
| YTD 2005                        |   | 93.8% |   |
| YTD 2004                        |   | 93.3% |   |
| Change                          |   | 0.5% |   |

** **

**The following table presentsa reconciliation of operating income per the consolidated statements ofoperations to NOI for the Six-Month 2005 Same Store Properties:**

** **

| ** **                       | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------|------------|-------------------------------|------------|
| ** **                       | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                       | ** ** | **(Amounts in millions)**     | ** ** |
| ** **                       | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Operating income                 |       | $                             | 270.4      |   | $ | 262.6 |   |
| Adjustments:                     |       |                          |       |   |   |
| Non-same store operating results |       | (54.1                         | )          | (11.6 | ) |
| Fee and asset management revenue |       | (5.8                          | )          | (6.9 | ) |
| Fee and asset management expense |       | 4.9                           |       | 4.4 |   |
| Depreciation                     |       | 254.5                         |       | 223.9 |   |
| General and administrative       |       | 31.3                          |       | 22.5 |   |
|                             |       |                          |       |   |   |
| Same store NOI                   |       | $                             | 501.2      |   | $ | 494.9 |   |

** **

**For properties that the Operating Partnership acquired prior to January1, 2004 and expects to continue to own through December 31, 2005, the OperatingPartnership anticipates the following same store results for the full yearending December 31, 2005:**

** **

| **2005 Same Store Assumptions** |
|---------------------------------|
| ** **                      | ** ** | ** ** | ** ** |
| **Physical Occupancy**          | ** ** | **94.0%** | ** ** |
| **Revenue Change**              | ** ** | **2.00% to 3.25%** | ** ** |
| **Expense Change**              | ** ** | **3.6% to 5.0%** | ** ** |
| **NOI Change**                  | ** ** | **0.0% to 3.0%** | ** ** |
| **Acquisitions**                | ** ** | **$2.0 billion** | ** ** |
| **Dispositions**                | ** ** | **$1.4 billion** | ** ** |

** **

**These 2005 assumptions are based on current expectations and areforward-looking.**

** **

**Rental income from properties other than Six-Month 2005 Same StoreProperties increased by approximately $68.0**million primarily as a result of newproperties acquired/consolidated in 2004 and the first six months of 2005.

** **

Fee and asset management revenues, net of feeand asset management expenses, decreased by $1.6 million primarily as a resultof lower income earned from Ft. Lewis. As of June 30, 2005 and 2004, theOperating Partnership managed 17,539 units and 17,798 units, respectively, forthird parties and unconsolidated entities.

 

**Property management expenses include off-site expenses associated withthe self-management of the Operating Partnership’s properties as well asmanagement fees paid to third party management companies. These expensesincreased by approximately $3.2 million. This increase is primarilyattributable to higher payroll costs, including bonus and long-termcompensation costs, during 2005.**

 

25

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Depreciation expense, which includesdepreciation on non-real estate assets, increased $30.5 million primarily as aresult of additional depreciation expense on newly acquired properties andcapital expenditures for all properties owned.

 

General and administrative expenses, whichinclude corporate operating expenses, increased approximately $8.7 millionbetween the periods under comparison. This increase is primarily attributableto higher executive compensation expense due to the previously announced December2005 planned retirement of Bruce W. Duncan, EQR’s Chief Executive Officer, andthe March 2005 resignation of Edward Geraghty, EQR’s former Eastern DivisionPresident, and additional accruals for certain management incentive programs asa result of the Rent.com gain (see discussion below). The Operating Partnershipanticipates that general and administrative expenses will approximate $63.0million for the year ending December 31, 2005. This above assumption is basedon current expectations and is forward-looking.

 

**Interest and other incomeincreased by approximately $58.5**million, primarily as a result of the $57.1 million in cash received forthe Operating Partnership’s ownership interest in Rent.com, which was acquiredby eBay, Inc.

** **

Interest expense, including amortization ofdeferred financing costs, increased approximately $23.5****million primarily as a result of higheroverall debt balances as well as higher variable interest rates. During the sixmonths ended June 30, 2005, the Operating Partnership capitalized interestcosts of approximately $5.8 million as compared to $6.9 million for the sixmonths ended June 30, 2004. This capitalization of interest relatedspecifically to our consolidated projects under development. The effectiveinterest cost on all indebtedness for the six months ended June 30, 2005 was 6.18% as compared to 5.95% for the sixmonths ended June 30, 2004.

 

Loss from investments in unconsolidatedentities decreased approximately $7.6 million between the periods undercomparison. This decrease is primarily the result of the consolidation ofproperties that were previously unconsolidated in the first quarter of 2004.

 

Net gain on sales of discontinued operationsincreased approximately $110.6 million between the periods under comparisonprimarily due to the sale of Water Terrace, a 450-unit high rise luxuryapartment building in Marina del Rey, California.

 

Discontinued operations, net, decreasedapproximately $15.9 million between the periods under comparison. The decreasein revenues and expenses between periods results from the timing, size andnumber of properties sold. Any property sold after June 30, 2004 will include afull period’s results in the six months of 2004 but minimal to no results inthe six months of 2005. See Note 13 in the Notes to Consolidated FinancialStatements for further discussion.

 

***Comparison of the quarter ended June 30, 2005to the quarter ended June 30, 2004***

 

For the quarter ended June 30, 2005, incomebefore allocation to Minority Interests, loss from investments inunconsolidated entities, net gain on sales of unconsolidated entities anddiscontinued operations decreased by approximately $3.4 million when comparedto the quarter ended June 30, 2004.

 

Second Quarter 2005 Same Store Propertiesrevenues increased primarily as a result of higher rental rates charged toresidents, increased occupancy and lower concessions provided residents. SecondQuarter 2005 Same Store Properties expenses increased primarily due to higherutilities, maintenance, payroll, and real estate tax costs. The followingtables provide comparative revenue, expense, NOI and weighted average occupancyfor the Second Quarter 2005 Same Store Properties:

 

26

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| Second Quarter 2005 vs. Second Quarter 2004        |
|----------------------------------------------------|
| Quarter over Quarter Same-Store Results            |
| $ in Millions – 168,385 Same-Store Units |
|                                               |
| **Description**                                    | ** ** | ** ** | **Revenues** | ** ** | **Expenses** | ** ** | **NOI** | ** ** |
|                                               |   |   |   |   |   |   |   |   |
| Q2 2005                                            |   |   | $ | 448.8 |   | $ | 182.6 |   | $ | 266.2 |   |
| Q2 2004                                            |   |   | $ | 435.5 |   | $ | 174.2 |   | $ | 261.3 |   |
| Change                                             |   |   | $ | 13.3 |   | $ | 8.4 |   | $ | 4.9 |   |
| Change                                             |   |   | 3.0 | % | 4.9 | % | 1.8 | % |

 

| Same Store Occupancy Statistics |
|---------------------------------|
|                            |   |   |   |
| Q2 2005                         |   |   | 94.1 | % |
| Q2 2004                         |   |   | 93.7 | % |
| Change                          |   |   | 0.4 | % |

** **

**The following table presents a reconciliation of operating income per theconsolidated statements of operations to NOI for the Second Quarter 2005 SameStore Properties:**

** **

| ** **                       | ** ** | **Quarter Ended June 30,** | ** ** |
|----------------------------------|------------|----------------------------|------------|
| ** **                       | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                       | ** ** | **(Amounts in millions)**  | ** ** |
| ** **                       | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Operating income                 |       | $                          | 141.0      |   | $ | 133.3 |   |
| Adjustments:                     |       |                       |       |   |   |
| Non-same store operating results |       | (17.1                      | )          | 0.6 |   |
| Fee and asset management revenue |       | (3.3                       | )          | (3.7 | ) |
| Fee and asset management expense |       | 2.4                        |       | 2.3 |   |
| Depreciation                     |       | 129.0                      |       | 115.9 |   |
| General and administrative       |       | 14.2                       |       | 12.9 |   |
|                             |       |                       |       |   |   |
| Same store NOI                   |       | $                          | 266.2      |   | $ | 261.3 |   |

 

**Rental income from properties other than Second Quarter 2005 Same StoreProperties increased by approximately $26.4**million primarily as a result of newproperties acquired/consolidated in 2004 and the first six months of 2005.

** **

Fee and asset management revenues, net of feeand asset management expenses, decreased by $0.5 million primarily as a resultof lower income earned from Ft. Lewis and managing fewer properties for thirdparties and unconsolidated entities.

 

**Property management expenses include off-site expenses associated withthe self-management of the Operating Partnership’s properties as well asmanagement fees paid to third party management companies. These expenses werecomparable for the periods presented.**

** **

Depreciation expense, which includesdepreciation on non-real estate assets, increased $13.1 million primarily as aresult of additional depreciation expense on newly acquired properties andcapital expenditures for all properties owned.

 

General and administrative expenses, whichinclude corporate operating expenses, increased approximately $1.3 million betweenthe periods under comparison. This increase is primarily attributable to higherexecutive compensation expense due to the previously announced December 2005planned retirement of Bruce W. Duncan, EQR’s Chief Executive Officer, andadditional accruals for certain

 

27

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managementincentive programs as a result of the Rent.com gain (see discussion above),offset by reduced consulting services incurred in the second quarter of 2005.

 

**Interest and other incomeincreased by approximately $0.6**million, primarily as a result of higher balances available forinvestments including deposits in tax deferred exchange accounts.

** **

Interest expense, including amortization ofdeferred financing costs, increased approximately $11.7****million primarily as a result of higheroverall debt balances as well as higher variable interest rates. During thequarter ended June 30, 2005, the Operating Partnership capitalized interestcosts of approximately $2.9 million as compared to $4.2 million for the quarterended June 30, 2004. This capitalization of interest related specifically toour consolidated projects under development. The effective interest cost on allindebtedness for the quarter ended June 30, 2005 was 6.20% as compared to 5.80% for the quarter ended June 30, 2004.

 

Loss from investments in unconsolidatedentities decreased approximately $0.2 million between the periods undercomparison. This decrease is primarily the result of improved operations at therespective unconsolidated properties.

 

Net gain on sales of discontinued operationsincreased approximately $30.8 million between the periods under comparison. Thisincrease is primarily the result of higher per unit sales prices and lower realestate net book values for properties sold during the quarter ended June 30,2005 as compared to the same period in 2004.

 

Discontinued operations, net, decreasedapproximately $7.0 million between the periods under comparison. The decreasein revenues and expenses between periods results from the timing, size andnumber of properties sold. Any property sold after June 30, 2004 will include afull quarter’s results in the second quarter of 2004 but minimal to no resultsin the second quarter of 2005. See Note 13 in the Notes to ConsolidatedFinancial Statements for further discussion.

 

**Liquidity and Capital Resources**

 

As of January 1, 2005, the OperatingPartnership had approximately $83.5 million of cash and cash equivalents and$484.6 million available under its revolving credit facility (net of $65.4million which was restricted/dedicated to support letters of credit and notavailable for borrowing). After taking into effect the various transactionsdiscussed in the following paragraphs and the net cash provided by operatingactivities, the Operating Partnership’s cash and cash equivalents balance atJune 30, 2005 was approximately $102.8 million and the amount available on theOperating Partnership’s revolving credit facility was $519.8 million (net of$52.2 million which was restricted/dedicated to support letters of credit andnot available for borrowing).

 

During the six months ended June 30, 2005,the Operating Partnership generated and/or obtained cash from varioustransactions, which included the following:

 

•                  Disposed of 27properties, two land parcels and various individual condominium units receivingnet proceeds of approximately $835.8 million;

•                  Increasedborrowings by the net amount of $278.0 million on its revolving creditfacility;

•                  Obtained $149.1million in new mortgage financing;

•                  Obtained $57.1million for its ownership interest in Rent.com;

•                  Received $25.0million in full redemption of its 1,000,000 shares of 8.25% Convertible TrustPreferred Securities; and

•                  Issuedapproximately 1.1 million OP Units and received net proceeds of $26.9 million.

 

**During the six months ended June 30, 2005, the aboveproceeds were primarily utilized to:**

** **

•                  Invest $91.1million primarily in development projects;

 

28

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•      Acquire20 properties and two land parcels, utilizing cash of $642.3 million;

•      Repay$120.0 million of fixed rate public notes at maturity;

•      Repay$212.3 million of mortgage loans; and

•     Redeemor repurchase the Series B through F Preference Interests at a liquidationvalue of $146.0 million.

 

**Depending on its analysis of market prices, economicconditions, and other opportunities for the investment of available capital,the Company may repurchase up to an additional $85.0 million of its CommonShares pursuant to its existing share buyback program authorized by the Boardof Trustees.  The Operating Partnershipin turn would repurchase $85.0 million of its OP Units held by EQR.  EQR did not repurchase any of its CommonShares during the six months ended June 30, 2005.**

 

**The Operating Partnership’s total debt summary and debtmaturity schedule as of June 30, 2005, are as follows:**

** **
| Debt Summary                        |
|-------------------------------------|
|                                |
| ** **                          | ** ** | **$ Millions (1)** | ** ** | **Weighted Average  Rate (1)** | ** ** |
| Secured                             |   | $ | 3,204 |   | 5.71 | % |
| Unsecured                           |   | 3,449 |   | 5.96 | % |
| Total                               |   | $ | 6,653 |   | 5.84 | % |
|                                |   |   |   |   |   |
| Fixed Rate                          |   | $ | 5,215 |   | 6.46 | % |
| Floating Rate                       |   | 1,438 |   | 3.59 | % |
| Total                               |   | $ | 6,653 |   | 5.84 | % |
|                                |   |   |   |   |   |
| Above Totals Include:               |   |   |   |   |   |
| Tax Exempt:                         |   |   |   |   |   |
| Fixed                               |   | $ | 285 |   | 3.58 | % |
| Floating                            |   | 466 |   | 2.91 | % |
| Total                               |   | $ | 751 |   | 3.15 | % |
|                                |   |   |   |   |   |
| Unsecured Revolving Credit Facility |   | $ | 428 |   | 3.11 | % |

 

----

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

 

29

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| Debt Maturity Schedule as of June 30, 2005 |
|------------------------------------------------------|
| ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Year**                                             | ** ** | **$ Millions** | ** ** | **% of Total** | ** ** |
| 2005                                                 |   | $ | 199 |   | 3.0 | % |
| 2006 (1)                                             |   | 579 |   | 8.7 | % |
| 2007                                                 |   | 397 |   | 6.0 | % |
| 2008 (2)                                             |   | 1,036 |   | 15.6 | % |
| 2009                                                 |   | 839 |   | 12.6 | % |
| 2010                                                 |   | 216 |   | 3.2 | % |
| 2011                                                 |   | 717 |   | 10.8 | % |
| 2012                                                 |   | 519 |   | 7.8 | % |
| 2013                                                 |   | 451 |   | 6.8 | % |
| 2014+ (3)                                            |   | 1,700 |   | 25.5 | % |
| Total                                                |   | $ | 6,653 |   | 100.0 | % |

 

----

*(1)  Includes $150 million of unsecured debt with a final maturityof 2026 that is putable in 2006.*

* *

*(2) Includes $428 million outstanding on the OperatingPartnership’s unsecured revolving credit facility. The Operating Partnershipentered into a new credit facility on April 1, 2005 that matures onMay 29, 2008.*

* *

*(3)  Includes $300 million of unsecured debt with a final maturityof 2015 that was putable/callable on April 13, 2005. Debt was remarketedand remains outstanding until April 13, 2015.*

** **

**As of the date of this filing, $1.48 billion in debt securities remainsavailable for issuance by the Operating Partnership under a registrationstatement the SEC declared effective in June 2003 and $956.5 million inequity securities remains available for issuance by the Company under aregistration statement the SEC declared effective in February 1998.  Per the terms of ERPOP’s partnershipagreement, EQR contributes the net proceeds of all equity offerings to thecapital of the Operating Partnership in exchange for additional OP Units (on aone-for-one Common Share per OP Unit basis) or preference units (on aone-for-one preferred share per preference unit basis.)**

** **

**The Operating Partnership’s “Consolidated Debt-to-Total MarketCapitalization Ratio” as of June 30, 2005 is presented in the followingtable.  The Operating Partnershipcalculates the equity component of its market capitalization as the sum of (i) thetotal outstanding OP Units at the equivalent market value of the closing priceof EQR’s Common Shares on the New York Stock Exchange; (ii) the “OP UnitEquivalent” of all convertible preference interests/units; and (iii) theliquidation value of all perpetual preference interests/units outstanding.**

 

30

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** **

| Market Capitalization as  of June 30, 2005        |
|---------------------------------------------------|
|                                              |   |   |   |   |   |
| Total Debt                                        |   |   |   | $ | 6,652,659,406 |   |
|                                              |   |   |   |   |   |
| OP Units                                          |   | 308,056,054 |   |   |   |
| OP Unit Equivalents (see below)                   |   | 1,819,996 |   |   |   |
| Total outstanding at quarter-end                  |   | 309,876,050 |   |   |   |
| EQR Common Share Price at June 30, 2005           |   | $ | 36.82 |   |   |   |
|                                              |   |   |   | 11,409,636,161 |   |
| Perpetual Preference Units Liquidation  Value     |   |   |   | 615,000,000 |   |
| Perpetual Preference Interests Liquidation  Value |   |   |   | 25,500,000 |   |
| Total Market Capitalization                       |   |   |   | $ | 18,702,795,567 |   |
|                                              |   |   |   |   |   |
| Total Debt/Total Market Capitalization            |   |   |   | 36 | % |
|                                                   |  |  |  |  |  |  |  |

 

| Convertible Preference Units, Preference Interests  and Junior Preference Units  as of June 30, 2005 |
|------------------------------------------------------------------------------------------------------|
|                                                                                                 |
| ** **                                                                                           | ** ** | **Units** | ** ** | **Conversion Ratio** | ** ** | **OP Unit Equivalents** | ** ** |
| Preference Units:                                                                                    |   |   |   |   |   |   |   |
| Series E                                                                                             |   | 680,396 |   | 1.1128 |   | 757,145 |   |
| Series H                                                                                             |   | 35,334 |   | 1.4480 |   | 51,164 |   |
| Preference Interests:                                                                                |   |   |   |   |   |   |   |
| Series H                                                                                             |   | 190,000 |   | 1.5108 |   | 287,052 |   |
| Series I                                                                                             |   | 270,000 |   | 1.4542 |   | 392,634 |   |
| Series J                                                                                             |   | 230,000 |   | 1.4108 |   | 324,484 |   |
| Junior Preference Units:                                                                             |   |   |   |   |   |   |   |
| Series B                                                                                             |   | 7,367 |   | 1.020408 |   | 7,517 |   |
| Total                                                                                                |   |   |   |   |   | 1,819,996 |   |

 

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

** **

See Note 16 inthe Notes to Consolidated Financial Statements for discussion of the eventswhich occurred subsequent to June 30, 2005.

 

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

** **

**Our policy with respect to capital expenditures is generally tocapitalize expenditures that improve the value of the property or extend theuseful life of the component asset of the property.  We track improvements to real estate in twomajor categories and several subcategories:**

** **

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

**•**      carpets and hardwood floors;

**•**      appliances;

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

**•**      furniture and fixtures such askitchen/bath cabinets, light fixtures, ceiling fans, sinks, tubs, toilets,mirrors, countertops, etc;

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

**•**      blinds/shades.

 

31

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**All replacements are depreciated over a five-year estimated usefullife.  We expense as incurred allmaintenance and turnover costs such as cleaning, interior painting ofindividual units and the repair of any replacement item noted above.**

** **

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

**•**      roof replacement and major repairs;

**•**      paving or major resurfacing of parkinglots, curbs and sidewalks;

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

**•**      major building mechanical equipmentsystems;

**•**      interior and exterior structural repairand exterior painting and siding;

**•**      majorlandscaping and grounds improvement; and

**•**      vehicles and office and maintenanceequipment.

** **

**All building improvements aredepreciated over a five to ten-year estimated useful life.  We expense as incurred all recurringexpenditures that do not improve the value of the asset or extend its usefullife.**

** **

**For the six months ended June 30, 2005, our actual improvements to realestate totaled approximately $93.4 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, 2005 |
|---------------------------------------------------------------------------------|
|                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                                                                      | ** ** | **Total Units  (1)** | ** ** | **Replacements** | ** ** | **Avg. Per  Unit** | ** ** | **Building  Improvements** | ** ** | **Avg. Per  Unit** | ** ** | **Total** | ** ** | **Avg. Per  Unit** | ** ** |
|                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Established Properties (2)                                                      |   | 151,934 |   | $ | 26,532 |   | $ | 175 |   | $ | 33,635 |   | $ | 221 |   | $ | 60,167 |   | $ | 396 |   |
|                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| New Acquisition Properties (3)                                                  |   | 21,282 |   | 2,168 |   | 115 |   | 7,046 |   | 374 |   | 9,214 |   | 489 |   |
|                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other (4)                                                                       |   | 9,087 |   | 10,035 |   |   |   | 14,015 |   |   |   | 24,050 |   |   |   |
|                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                                                           |   | 182,303 |   | $ | 38,735 |   |   |   | $ | 54,696 |   |   |   | $ | 93,431 |   |   |   |
|                                                                                 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)   Total units exclude 16,117 unconsolidated units.

 

(2)   Wholly Owned Properties acquired prior to January 1, 2003.

 

(3)   Wholly Owned Properties acquired during 2003, 2004 and 2005.  Per unit amounts are based on a weightedaverage of 18,823 units.

 

(4)   Includes properties either Partially Owned or sold during theperiod, commercial space, condominium conversions and $2.8 million included inbuilding improvements spent on six specific assets related to major renovationsand repositioning of these assets.

 

**The Operating Partnership expects to fund approximately $67.0**million for capital expenditures forreplacements and building improvements for all consolidated properties,exclusive of condominium conversion properties, for the remainder of 2005.

** **

**During the six months ended June 30, 2005, 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,were approximately $4.1**million.  The Operating Partnership expects to fundapproximately $13.7 million in total additions to non-real estate property forthe remainder of 2005, the majority of which includes software licenses andhardware related to the Operating Partnership’s pricing and procurementinitiatives.

** **

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

 

32

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***DerivativeInstruments***

** **

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

 

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

 

See Note 11 in the Notes to Consolidated Financial Statements foradditional discussion of derivative instruments at June 30, 2005.

 

***Other***

** **

**Total distributions paid in July 2005 amounted to $145.2 million(excluding distributions on Partially Owned Properties), which included certaindistributions declared during the second quarter ended June 30, 2005.**

** **

**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 revolving credit facility.  The Operating Partnership considers its cashprovided by operating activities to be adequate to meet operating requirementsand payments of distributions.  TheOperating Partnership also expects to meet its long-term liquidityrequirements, such as scheduled unsecured note and mortgage debt maturities,property acquisitions, financing of construction and development activities andcapital improvements through the issuance of unsecured notes and equitysecurities, including additional OP Units, and proceeds received from thedisposition of certain properties.  Inaddition, the Operating Partnership has significant unencumbered propertiesavailable to secure additional mortgage borrowings in the event that the publiccapital markets are unavailable or the cost of alternative sources of capitalis too high.  The fair value of and cashflow from these unencumbered properties are in excess of the requirements theOperating Partnership must maintain in order to comply with covenants under itsunsecured notes and revolving credit facility. Of t**he$15.2 billion in investment in real estate on the Operating Partnership’sbalance sheet at June 30, 2005, $9.7 billion or 63.7%, was unencumbered.

** **

The OperatingPartnership has a revolving credit facility with potential borrowings of up to$1.0 billion.  This facility matures inMay 2008 and may, among other potential uses, be used to fund propertyacquisitions, costs for certain properties under development and short termliquidity requirements.  As of July 27,2005, $449.0 million wasoutstanding under this facility (and $47.0 million was restricted and dedicatedto support letters of credit).

 

**Off-Balance Sheet Arrangements andContractual Obligations**

 

TheOperating Partnership has co-invested in various properties that areunconsolidated and accounted for under the equity method of accounting.  Management does not believe these investmentshave a materially different impact upon the Operating Partnership’s liquidity,capital resources, credit or market risk than its property management andownership activities.  The nature andbusiness purpose of these ventures are as follows:

 

**•**      Institutional Ventures – During 2000 and 2001, theOperating Partnership entered into ventures with an unaffiliated partner.   At the respective closing dates, theOperating Partnership sold and/or contributed 45 properties containing 10,846units to these ventures and retained a 25% ownership

 

33

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**interest in the ventures.  TheOperating Partnership’s joint venture partner contributed cash equal to 75% ofthe agreed-upon equity value of the properties comprising the ventures, whichwas then distributed to the Operating Partnership.  The Operating Partnership’s strategy withrespect to these ventures was to reduce its concentration of properties in avariety of markets.**

** **

**•**      Other – As of June 30, 2005, the OperatingPartnership has ownership interests in eleven properties containing 1,451 unitsacquired in a prior merger.  The currentweighted average ownership percentage is 10.7%. The Operating Partnership’s strategy with respect to these interests iseither to acquire a majority ownership or sell the Operating Partnership’sinterest.

** **

**As of June 30, 2005, the Operating Partnership has four projects totaling1,165 units in various stages of development with estimated completion datesranging through December 31, 2006.  Thethree development agreements currently in place are discussed in detail in Note14 of the Operating Partnership’s Consolidated Financial Statements.**

** **

**See also Notes 2 and 6 in theNotes to Consolidated Financial Statements for additional discussion regardingthe Operating Partnership’s investments in unconsolidated entities.**

** **

**The Operating Partnership’s guaranty of acredit enhancement agreement with respect to certain tax-exempt bonds issued tofinance certain public improvements at a multifamily development project wasterminated effective May 2, 2005 as the tax-exempt bonds were redeemed in fulland the associated letter of credit was cancelled.**

** **

**The Operating Partnership’s contractual obligations for thenext five years and thereafter have not changed materially from the amounts anddisclosures included in its annual report on Form 10-K, other than as itrelates to scheduled debt maturities. See the updated debt maturity schedule included in Liquidity and CapitalResources for further discussion.**

** **

**Critical Accounting Policies and Estimates**

** **

**The Operating Partnership has identified six significantaccounting 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 periodically evaluates its long-lived assets,including its investments in real estate and goodwill, for indicators ofpermanent impairment.  The judgmentsregarding the existence of impairment indicators are based on factors such asoperational performance, market conditions, expected holding period of eachasset and legal and environmental concerns. Future events could occur which would cause the Operating Partnership toconclude that impairment indicators exist and an impairment loss is warranted.

 

*Depreciation ofInvestment in Real Estate*

 

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

 

34

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*Cost Capitalization*

 

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

 

The Operating Partnership follows the guidance in SFAS No. 67, *Accounting for Costs and Initial Rental Operations ofReal Estate Projects*, for all development projects and uses itsprofessional judgment in determining whether such costs meet the criteria forcapitalization or must be expensed as incurred. The Operating Partnership capitalizes interest, real estate taxes andinsurance and payroll and associated costs for those individuals directlyresponsible for and who spend all of their time on development activities, withcapitalization ceasing no later than 90 days following issuance of thecertificate of occupancy.  These costsare reflected on the balance sheet as construction in progress for eachspecific property.  The OperatingPartnership expenses as incurred all payroll costs of on-site employees workingdirectly at our properties, except as noted above on our development propertiesprior to certificate of occupancy issuance and on specific major renovation atselected properties when additional incremental employees are hired.

 

*Fair Value ofFinancial Instruments, Including Derivative Instruments*

 

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

 

*Revenue Recognition*

 

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

 

*Stock-BasedCompensation*

 

The Company elected to account for its stock-based compensation inaccordance with SFAS No. 123 and its amendment (SFAS No. 148), *Accounting for Stock Based Compensation*,effective in the first quarter of 2003, which resulted in compensation expensebeing recorded based on the fair value of the stock compensation granted.

 

The Company elected the “Prospective Method” which requires expensingof employee awards granted or modified after January 1, 2003.  Compensation expense under all of the Company’splans is generally recognized over periods ranging from three months to fiveyears.  See Note 2 in the Notes toConsolidated Financial Statements for further discussion and comparativeinformation regarding application of the fair value method to all outstandingemployee awards.

 

Any Common Shares issued pursuant to EQR’s incentive equitycompensation and employee share purchase plans will result in the OperatingPartnership issuing OP Units to EQR on a one-for-one basis, with the OperatingPartnership receiving the net cash proceeds of such issuances.

 

35

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**Funds From Operations**

 

**For the six months ended June 30, 2005, Funds From Operations (“FFO”)available to OP Units increased $77.6 million, or 23.8%, as compared to the sixmonths ended June 30, 2004.**

** **

**For the quarter ended June 30, 2005, FFO available to OP Units increased$3.9 million, or 2.3%, as compared to the quarter ended June 30, 2004.**

** **

The followingis a reconciliation of net income to FFO available to OP Units for the sixmonths and quarters ended June 30, 2005 and 2004:

 
| **Funds From Operations***(Amounts  in thousands)  (Unaudited)* |
|-----------------------------------------------------------------|
| ** **                                                      |
| ** **                                                      | ** ** | **Six Months Ended June 30,** | ** ** | **Quarter Ended June 30,** | ** ** |
| ** **                                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                            |   |   |   |   |   |   |   |   |   |
| Net income                                                      |   | $ | 402,756 |   | $ | 260,093 |   | $ | 154,476 |   | $ | 135,388 |   |
| Adjustments:                                                    |   |   |   |   |   |   |   |   |   |
| Depreciation                                                    |   | 254,450 |   | 223,927 |   | 128,957 |   | 115,876 |   |
| Depreciation – Non-real estate additions                   |   | (2,685 | ) | (2,717 | ) | (1,391 | ) | (1,417 | ) |
| Depreciation – Partially Owned Properties                  |   | (2,685 | ) | (4,171 | ) | (1,362 | ) | (2,075 | ) |
| Depreciation – Unconsolidated Properties                   |   | 2,047 |   | 7,879 |   | 975 |   | 1,116 |   |
| Net (gain) on sales of unconsolidated  entities                 |   | (124 | ) | (4,405 | ) | — |   | (1,971 | ) |
| Discontinued operations:                                        |   |   |   |   |   |   |   |   |   |
| Depreciation                                                    |   | 4,818 |   | 17,834 |   | 1,243 |   | 8,700 |   |
| Net (gain) on sales of discontinued  operations                 |   | (259,824 | ) | (149,259 | ) | (108,559 | ) | (77,760 | ) |
| Net incremental gain on sales of  condominium units             |   | 29,619 |   | 8,470 |   | 15,944 |   | 4,946 |   |
| Net gain on sales of vacant land                                |   | 10,366 |   | 5,536 |   | (2 | ) | 5,521 |   |
|                                                            |   |   |   |   |   |   |   |   |   |
| FFO (1)(2)                                                      |   | 438,738 |   | 363,187 |   | 190,281 |   | 188,324 |   |
| Preferred distributions                                         |   | (31,322 | ) | (37,493 | ) | (14,409 | ) | (18,737 | ) |
| Premium on redemption of Preference  Interests                  |   | (4,112 | ) | — |   | (2,384 | ) | — |   |
|                                                            |   |   |   |   |   |   |   |   |   |
| FFO available to OP Units                                       |   | $ | 403,304 |   | $ | 325,694 |   | $ | 173,488 |   | $ | 169,587 |   |

** **

----

***(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 (“GAAP”)), excluding gains (or losses)from sales of depreciable property, plus depreciation and amortization, andafter adjustments for unconsolidated partnerships and joint ventures.  Adjustments for unconsolidated partnershipsand joint ventures will be calculated to reflect funds from operations on thesame basis.  The April 2002 White Paperstates that gain or loss on sales of property is excluded from FFO forpreviously depreciated operating properties only.  Once the Operating Partnership commences theconversion of units to condominiums, it simultaneously discontinues depreciationof such property.***

** **

***(2)  The Operating Partnership believes that FFO ishelpful to investors as a supplemental measure of the operating performance ofa real estate company, because it is a recognized measure of performance by thereal estate industry and by excluding gains or losses related to dispositionsof depreciable property and excluding real estate depreciation (which can varyamong owners of identical assets in similar condition based on historical costaccounting and useful life estimates), FFO can help compare the operatingperformance of a company’s real estate between periods or as compared todifferent companies.  FFO in and ofitself does not represent net income or net cash flows from operatingactivities in accordance with***

 

36

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***GAAP.  Therefore, FFO should not be exclusivelyconsidered as an alternative to net income or to net cash flows from operatingactivities in accordance with GAAP.  TheOperating Partnership’s calculation of FFO may differ from other real estatecompanies due to, among other items, variations in cost capitalization policiesfor capital expenditures and, accordingly, may not be comparable to such otherreal estate companies.***

 

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

** **

**The Operating Partnership’smarket risk has not changed materially from the amounts and informationreported in Item 7A, *Quantitative andQualitative Disclosures About Market Risk*, to the OperatingPartnership’s Form 10-K for the year ended December 31, 2004.  See also Note 11 in the Notes to ConsolidatedFinancial Statements for additional discussion of derivative instruments.**

** **

**Item 4. Controls and Procedures**

** **

**Effective as of June 30, 2005, the Operating Partnershipcarried out an evaluation, under the supervision and with the participation ofthe Operating Partnership’s management, including the Chief Executive Officerand Chief Financial Officer of EQR, of the effectiveness of the OperatingPartnership’s disclosure controls and procedures pursuant to Exchange Act Rules13a-15 and 15d-15.  Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the disclosure controls and procedures are effective in timely alertingthem to material information.  During thefiscal quarter ended June 30, 2005, there were no changes to the internalcontrols over financial reporting of the Operating Partnership identified inconnection with the Operating Partnership’s evaluation or otherwise that hasmaterially affected, or is reasonably likely to materially affect, theOperating Partnership’s internal controls over financial reporting.**

** **

**PART II.                OTHER INFORMATION**

** **

**Item 1. Legal Proceedings**

** **

In August2004, the Operating Partnership tried a class action lawsuit in Palm BeachCounty, Florida regarding certain charges made to residents who terminatedtheir leases early or failed to provide sufficient notice of intent tovacate.  In December 2004, the Courtissued a Findings of Fact and Conclusions of Law holding those fees legallyuncollectible under Florida law.  Inrecognition of the Findings of Fact and Conclusions of Law, which awardeddamages and interest to the class in the amount of approximately $1.6 million,the Operating Partnership established a reserve of approximately $1.6 millionand correspondingly recorded this as a general and administrative expense inDecember 2004.  Due to pending appeals,the award is neither final nor enforceable. Accordingly, it is not possible to determine or predict the ultimateoutcome of the case.  While no assurancescan be given, the Operating Partnership does not believe that this lawsuit, ifthe ultimate outcome is unfavorable, will have a material adverse effect on theOperating Partnership.

 

**There have been no new or significantdevelopments related to the legal proceedings that were discussed in Part I,Item III of the Operating Partnership’s Form 10-K for the year ended December31, 2004.**

** **

**Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds**

** **

***OP Units Issued in the Quarter Ended June 30, 2005***

** **

**The Operating Partnership issued 55,197OP Units having a value of $1.8 million during the second quarter of 2005.**

** **

**These OP Units were issued in exchangefor direct or indirect interests in multifamily properties in private placementtransactions under section 4(2) of the Securities Act of 1933, as amended (the “SecuritesAct”).  OP Units are generallyexchangeable into Common Shares of EQR on a one-for-one basis or, at the**

** **

**37**

----

** **

**option of EQRand the Operating Partnership, the cash equivalent thereof at any time one yearafter the date of issuance.**

** **

**Item 6. Exhibits**

** **
| **10.1***   | ** ** | **First Amendment to Amended and Restated Employment  Agreement between Equity Residential and Bruce W. Duncan, dated June 30,  2005.**                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **10.2****  | ** ** | **Revolving Credit Agreement dated as of April 1, 2005  among ERP Operating Limited Partnership, Bank of America, N.A., as  administrative agent, JPMorgan Chase Bank, N.A., as syndication agent, J.P.  Morgan Securities Inc. and Banc of America Securities LLC, as joint lead  arrangers and joint book runners, Commerzbank AG, New York and Grand Cayman  Branches, Wachovia Bank, National Association, Wells Fargo Bank, N.A.,  Suntrust Bank, and US Bank National Association, as co-documentation agents,  and a syndicate of other banks (the “Credit Agreement”).** |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **10.3****  | ** ** | **Guaranty of Payment made as of April 1, 2005 between  Equity Residential and Bank of America, N.A., as administrative agent for the  banks party to the Credit Agreement.**                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **10.4***** | ** ** | **Third Amendment to Equity Residential 2002 Share  Incentive Plan.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **10.5***** | ** ** | **Second Amendment to Amended and Restated Compensation  Agreement between Equity Residential and Samuel Zell dated April 25, 2005.**                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **31.1**    | ** ** | **Certification of Bruce W. Duncan, Chief Executive Officer  of Registrant’s General Partner.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **31.2**    | ** ** | **Certification of Donna Brandin, Chief Financial Officer  of Registrant’s General Partner.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **32.1**    | ** ** | **Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Bruce  W. Duncan, Chief Executive Officer of Registrant’s General Partner.**                                                                                                                                                                                                                                                                                                                                                                            |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **32.2**    | ** ** | **Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Donna  Brandin, Chief Financial Officer of Registrant’s General Partner.**                                                                                                                                                                                                                                                                                                                                                                              |

** **

----

***              Includedas an exhibit to EQR’s Form 10-Q for the quarterly period ended June 30, 2005.**

****           Includedas an exhibit to EQR’s Form 8-K dated April 1, 2005, filed on April 4, 2005.**

*****         Includedas an exhibit to EQR’s Form 10-Q for the quarterly period ended March 31, 2005.**

** **

**38**

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** **

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon behalf by the undersigned thereunto duly authorized.

 

 
|   | ERP OPERATING LIMITED PARTNERSHIP |
|--------|-----------------------------------|
|   | BY: EQUITY RESIDENTIAL            |   |
|   | ITS GENERAL PARTNER               |   |
|   |                              |   |
|   |                              |
| Date:  | August 8, 2005                    |   | By: | /s/ | Donna Brandin |   |
|   |                              |   | Donna Brandin |
|   |                              |   | Executive Vice President and |
|   |                              |   | Chief Financial Officer |
|   |                              |   |
| Date:  | August 8, 2005                    |   | By: | /s/ | Mark L. Wetzel |   |
|   |                              |   |  Mark L. Wetzel |
|   |                              |   | Senior Vice President and |
|   |                              |   | Chief Accounting Officer |
|        |                                   |  |  |  |  |  |  |  |  |  |  |  |

 

39

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##### **EXHIBIT INDEX**

#####  

| **Exhibit** | ** ** | **Document**                                                                                                                                                                                                    |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                            |
| **31.1**    | ** ** | **Certification of Bruce W. Duncan, Chief Executive Officer  of Registrant’s General Partner.**                                                                                                            |
| ** **  | ** ** | ** **                                                                                                                                                                                                      |
| **31.2**    | ** ** | **Certification of Donna Brandin, Chief Financial Officer  of Registrant’s General Partner.**                                                                                                              |
| ** **  | ** ** | ** **                                                                                                                                                                                                      |
| **32.1**    | ** ** | **Certification pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Bruce W.  Duncan, Chief Executive Officer of Registrant’s General Partner.** |
| ** **  | ** ** | ** **                                                                                                                                                                                                      |
| **32.2**    | ** ** | **Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Donna  Brandin, Chief Financial Officer of Registrant’s General Partner.**   |

 

 

----