**FORM 10-Q**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

| **ý****QUARTERLY REPORT PURSUANT  TO SECTION 13 OR 15 (d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|----------------------------------------------------------------------------------------------------------|
|                                                                                                     |
| **For the Quarterly Period Ended  MARCH 31, 2003**                                                       |
|                                                                                                     |
| **OR**                                                                                                   |
|                                                                                                     |
| **o****TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF  THE SECURITIES EXCHANGE ACT OF 1934**     |
|                                                                                                     |
| **Commission File Number: 0-24920**                                                                      |

 

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  ý  No  o

 

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

 

 

----

 

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

 
|                                                        |   | **March 31,  2003** |           | **December  31,  2002** |       |
|-------------------------------------------------------------|--------|---------------------|----------------|-------------------------|------------|
| **ASSETS**                                                  |   |                |           |                    |       |
| Investment  in real estate                                  |   |                |           |                    |       |
| Land                                                        |   | $                   | 1,807,226      |                    | $          | 1,803,577 |   |
| Depreciable  property                                       |   | 11,227,980          |           | 11,240,245              |       |
| Construction  in progress                                   |   | 2,428               |           | 2,441                   |       |
|                                                        |   | 13,037,634          |           | 13,046,263              |       |
| Accumulated  depreciation                                   |   | (2,194,190          | )              | (2,112,017              | )          |
| Investment  in real estate, net of accumulated depreciation |   | 10,843,444          |           | 10,934,246              |       |
|                                                        |   |                |           |                    |       |
| Cash  and cash equivalents                                  |   | 310,309             |           | 29,875                  |       |
| Investments  in unconsolidated entities                     |   | 515,741             |           | 509,789                 |       |
| Rents  receivable                                           |   | 1,410               |           | 2,926                   |       |
| Deposits  – restricted                                 |   | 173,121             |           | 141,278                 |       |
| Escrow  deposits – mortgage                            |   | 44,688              |           | 50,565                  |       |
| Deferred  financing costs, net                              |   | 33,780              |           | 32,144                  |       |
| Goodwill,  net                                              |   | 30,000              |           | 30,000                  |       |
| Other  assets                                               |   | 78,277              |           | 80,094                  |       |
| **Total  assets**                                           |   | **$**               | **12,030,770** | ** **              | **$**      | **11,810,917** | ** ** |
|                                                        |   |                |           |                    |       |
| **LIABILITIES  AND PARTNERS’ CAPITAL**                 |   |                |           |                    |       |
| Liabilities:                                                |   |                |           |                    |       |
| Mortgage  notes payable                                     |   | $                   | 2,901,117      |                    | $          | 2,927,614 |   |
| Notes,  net                                                 |   | 2,854,319           |           | 2,456,085               |       |
| Line  of credit                                             |   | —              |           | 140,000                 |       |
| Accounts  payable and accrued expenses                      |   | 66,234              |           | 64,369                  |       |
| Accrued  interest payable                                   |   | 64,987              |           | 63,151                  |       |
| Rents  received in advance and other liabilities            |   | 167,641             |           | 165,095                 |       |
| Security  deposits                                          |   | 45,192              |           | 45,333                  |       |
| Distributions  payable                                      |   | 141,413             |           | 140,844                 |       |
| **Total  liabilities**                                      |   | **6,240,903**       | ** **     | **6,002,491**           | ** ** |
|                                                        |   |                |           |                    |       |
| ***Commitments and contingencies***                         |   |                |           |                    |       |
| **Minority Interests – Partially Owned Properties**    |   | **9,395**           | ** **     | **9,811**               | ** ** |
|                                                        |   |                |           |                    |       |
| Partners’  capital:                                    |   |                |           |                    |       |
| Preference  Units                                           |   | 946,076             |           | 946,157                 |       |
| Preference  Interests                                       |   | 246,000             |           | 246,000                 |       |
| Junior Preference Units                                     |   | 5,846               |           | 5,846                   |       |
| General  Partner                                            |   | 4,288,627           |           | 4,306,873               |       |
| Limited  Partners                                           |   | 345,983             |           | 349,646                 |       |
| Deferred  compensation                                      |   | (9,832              | )              | (12,118                 | )          |
| Accumulated  other comprehensive loss                       |   | (42,228             | )              | (43,789                 | )          |
| **Total  partners’ capital**                           |   | **5,780,472**       | ** **     | **5,798,615**           | ** ** |
| **Total  liabilities and partners’ capital**           |   | **$**               | **12,030,770** | ** **              | **$**      | **11,810,917** | ** ** |

 

**Seeaccompanying notes**

 

2

----

 

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

 
|                                                                                                                                                                            |   | **Quarter  Ended March 31,** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                                                                                                            |   | **2003**                     |       | **2002** |   |
| **REVENUES**                                                                                                                                                                    |   |                         | ** ** |   | ** ** |
| Rental  income                                                                                                                                                                  |   | $                            | 480,219    |   | $ | 485,144 |   |
| Fee  and asset management                                                                                                                                                       |   | 2,488                        |       | 1,718 |   |
| Interest  and other income                                                                                                                                                      |   | 3,343                        |       | 4,100 |   |
| Total  revenues                                                                                                                                                                 |   | 486,050                      |       | 490,962 |   |
|                                                                                                                                                                            |   |                         |       |   |   |
| **EXPENSES**                                                                                                                                                                    |   |                         |       |   |   |
| Property  and maintenance                                                                                                                                                       |   | 132,281                      |       | 122,578 |   |
| Real  estate taxes and insurance                                                                                                                                                |   | 52,433                       |       | 49,771 |   |
| Property  management                                                                                                                                                            |   | 15,901                       |       | 19,490 |   |
| Fee  and asset management                                                                                                                                                       |   | 1,770                        |       | 1,862 |   |
| Depreciation                                                                                                                                                                    |   | 117,816                      |       | 110,992 |   |
| Interest:                                                                                                                                                                       |   |                         |       |   |   |
| Expense  incurred, net                                                                                                                                                          |   | 80,809                       |       | 84,331 |   |
| Amortization  of deferred financing costs                                                                                                                                       |   | 1,408                        |       | 1,385 |   |
| General  and administrative                                                                                                                                                     |   | 11,176                       |       | 10,800 |   |
| Impairment  on technology investments                                                                                                                                           |   | 291                          |       | 291 |   |
| Total  expenses                                                                                                                                                                 |   | 413,885                      |       | 401,500 |   |
|                                                                                                                                                                            |   |                         |       |   |   |
| Income  before allocation to Minority Interests, income from investments in  unconsolidated entities, net gain on sales of unconsolidated entities and  discontinued operations |   | 72,165                       |       | 89,462 |   |
| Allocation  to Minority Interests – Partially Owned Properties                                                                                                             |   | (115                         | )          | (806 | ) |
| Income  from investments in unconsolidated entities                                                                                                                             |   | 107                          |       | 226 |   |
| Net  gain on sales of unconsolidated entities                                                                                                                                   |   | 1,212                        |       | 5,657 |   |
| Income  before discontinued operations                                                                                                                                          |   | 73,369                       |       | 94,539 |   |
| Net  gain on sales of discontinued operations                                                                                                                                   |   | 70,672                       |       | 2,816 |   |
| Discontinued  operations, net                                                                                                                                                   |   | 416                          |       | 9,964 |   |
| Net  income                                                                                                                                                                     |   | $                            | 144,457    |   | $ | 107,319 |   |
|                                                                                                                                                                            |   |                         |       |   |   |
| **ALLOCATION  OF NET INCOME:**                                                                                                                                                  |   |                         |       |   |   |
| Preference  Units                                                                                                                                                               |   | $                            | 19,046     |   | $ | 19,391 |   |
| Preference  Interests                                                                                                                                                           |   | $                            | 5,053      |   | $ | 5,053 |   |
| Junior  Preference Units                                                                                                                                                        |   | $                            | 81         |   | $ | 81 |   |
|                                                                                                                                                                            |   |                         |       |   |   |   |   |
| General  Partner                                                                                                                                                                |   | $                            | 111,167    |   | $ | 76,353 |   |
| Limited  Partners                                                                                                                                                               |   | 9,110                        |       | 6,441 |   |
| Net  income available to OP Units                                                                                                                                               |   | $                            | 120,277    |   | $ | 82,794 |   |
| Net  income per OP Unit – basic                                                                                                                                            |   | $                            | 0.41       |   | $ | 0.28 |   |
| Net  income per OP Unit – diluted                                                                                                                                          |   | $                            | 0.41       |   | $ | 0.28 |   |
| Weighted  average OP Units outstanding – basic                                                                                                                             |   | 292,949                      |       | 294,106 |   |
| Weighted  average OP Units outstanding – diluted                                                                                                                           |   | 297,646                      |       | 297,229 |   |
| Distributions  declared per OP Unit outstanding                                                                                                                                 |   | $                            | 0.4325     |   | $ | 0.4325 |   |
|                                                                                                                                                                                 |        |                              |            |  |  |  |  |  |

** **

**Seeaccompanying notes**

 

3

----

 

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

 

 
|                                                                                          |   | **Quarter Ended March 31,** |    |
|-----------------------------------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                                          |   | **2003**                    |    | **2002** |   |
|                                                                                          |   |                        |    |   |   |
| Comprehensive  income:                                                                        |   |                        |    |   |   |
| Net  income                                                                                   |   | $                           | 144,457 |   | $ | 107,319 |   |
| Other  comprehensive income – derivative instruments:                                    |   |                        |    |   |   |
| Unrealized  holding gains arising during the period                                           |   | 137                         |    | 4,176 |   |
| Equity  in unrealized holding gains arising during the period – unconsolidated  entities |   | 1,194                       |    | 3,033 |   |
| Losses  reclassified into earnings from other comprehensive income                            |   | 230                         |    | 168 |   |
| Comprehensive  income                                                                         |   | $                           | 146,018 |   | $ | 114,696 |   |

 

**Seeaccompanying notes**

 

4

----

 

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

 
|                                                                                 |   | **Quarter  Ended March 31,** |       |
|--------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                 |   | **2003**                     |       | **2002** |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                           |   |                         | ** ** |   | ** ** |
| Net  income                                                                          |   | $                            | 144,457    |   | $ | 107,319 |   |
| *Adjustments  to reconcile net income to net cash provided by operating activities:* |   |                         |       |   |   |
| Allocation to Minority  Interests – Partially Owned Properties                  |   | 115                          |       | 806 |   |
| Depreciation                                                                         |   | 118,918                      |       | 116,768 |   |
| Amortization of  deferred financing costs                                            |   | 1,408                        |       | 1,391 |   |
| Amortization of  discounts and premiums on debt                                      |   | (239                         | )          | (327 | ) |
| Amortization of  deferred settlements on interest rate protection agreements         |   | (68                          | )          | (101 | ) |
| Impairment on  technology investments                                                |   | 291                          |       | 291 |   |
| (Income) from investments  in unconsolidated entities                                |   | (107                         | )          | (226 | ) |
| Net (gain) on sales of  discontinued operations                                      |   | (70,672                      | )          | (2,816 | ) |
| Net (gain) on sales of  unconsolidated entities                                      |   | (1,212                       | )          | (5,657 | ) |
| Debt extinguishments –  prepayment premiums/fees                                |   | 183                          |       | 97 |   |
| Unrealized (gain) on  interest rate protection agreements                            |   | (44                          | )          | (62 | ) |
| Compensation paid with  Company Common Shares                                        |   | 4,445                        |       | 4,964 |   |
|                                                                                 |   |                         |       |   |   |
| *Changes  in assets and liabilities:*                                                |   |                         |       |   |   |
| Decrease in rents  receivable                                                        |   | 1,516                        |       | 1,045 |   |
| (Increase) decrease in  deposits – restricted                                   |   | (2,283                       | )          | 14,133 |   |
| Decrease in other  assets                                                            |   | 322                          |       | 18,446 |   |
| Increase (decrease) in  accounts payable and accrued expenses                        |   | 1,865                        |       | (7,498 | ) |
| Increase in accrued  interest payable                                                |   | 1,836                        |       | 9,963 |   |
| (Decrease) increase in  rents received in advance and other liabilities              |   | (6,770                       | )          | 4,566 |   |
| (Decrease) increase in  security deposits                                            |   | (141                         | )          | 287 |   |
| Net cash provided by  operating activities                                           |   | 193,820                      |       | 263,389 |   |
|                                                                                 |   |                         |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                           |   |                         |       |   |   |
| Investment in real  estate – acquisitions                                       |   | (76,692                      | )          | (26,100 | ) |
| Investment in real  estate – development/other                                  |   | (2,057                       | )          | (24,338 | ) |
| Improvements to real  estate                                                         |   | (33,602                      | )          | (27,697 | ) |
| Additions to non-real  estate property                                               |   | (908                         | )          | (3,004 | ) |
| Interest capitalized  for real estate under development                              |   | —                       |       | (2,068 | ) |
| Interest capitalized  for unconsolidated entities under development                  |   | (5,437                       | )          | (3,816 | ) |
| Proceeds from  disposition of real estate, net                                       |   | 190,906                      |       | 31,722 |   |
| Proceeds from  disposition of furniture rental business                              |   | —                       |       | 28,741 |   |
| Proceeds from disposition  of unconsolidated entities                                |   | 1,213                        |       | 11,317 |   |
| Investments in  unconsolidated entities                                              |   | (4,227                       | )          | (12,099 | ) |
| Distributions from  unconsolidated entities                                          |   | 6,041                        |       | 14,765 |   |
| (Increase) in deposits  on real estate acquisitions, net                             |   | (29,560                      | )          | (6,288 | ) |
| Decrease in mortgage  deposits                                                       |   | 5,877                        |       | 4,105 |   |
| Business combinations,  net of cash acquired                                         |   | (18                          | )          | (207 | ) |
| Other investing  activities, net                                                     |   | —                       |       | 193 |   |
| Net cash provided by  (used for) investing activities                                |   | 51,536                       |       | (14,774 | ) |
|                                                                                      |        |                              |            |  |  |  |  |

 

**Seeaccompanying notes**

 

5

----

 

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

 

 
|                                                                                              |   | **Quarter  Ended March 31,** |       |
|---------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                              |   | **2003**                     |       | **2002** |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                        |   |                         |       |   |   |
| Loan and bond acquisition costs                                                                   |   | $                            | (3,153     | ) | $ | (3,040 | ) |
| *Mortgage notes payable:*                                                                         |   |                         |       |   |   |
| Proceeds                                                                                          |   | 48,680                       |       | 20,772 |   |
| Lump  sum payoffs                                                                                 |   | (101,793                     | )          | (18,267 | ) |
| Scheduled  principal repayments                                                                   |   | (8,285                       | )          | (8,469 | ) |
| Prepayment  premiums/fees                                                                         |   | (183                         | )          | (97 | ) |
| *Notes,  net:*                                                                                    |   |                         |       |   |   |
| Proceeds                                                                                          |   | 398,816                      |       | 397,064 |   |
| Lump  sum payoffs                                                                                 |   | —                       |       | (100,000 | ) |
| Scheduled  principal repayments                                                                   |   | (192                         | )          | — |   |
| *Line  of credit:*                                                                                |   |                         |       |   |   |
| Proceeds                                                                                          |   | 172,000                      |       | 245,000 |   |
| Repayments                                                                                        |   | (312,000                     | )          | (440,000 | ) |
| (Payments on) proceeds from settlement of interest  rate protection agreements                    |   | (12,999                      | )          | 835 |   |
| Proceeds  from sale of OP Units                                                                   |   | 2,606                        |       | 4,236 |   |
| Proceeds  from exercise of EQR options                                                            |   | 4,270                        |       | 9,777 |   |
| Payment  of offering costs                                                                        |   | (71                          | )          | (141 | ) |
| *Distributions:*                                                                                  |   |                         |       |   |   |
| OP  Units – General Partner                                                                  |   | (117,242                     | )          | (117,338 | ) |
| Preference  Units                                                                                 |   | (19,048                      | )          | (16,441 | ) |
| Preference  Interests                                                                             |   | (5,053                       | )          | (5,080 | ) |
| Junior  Preference Units                                                                          |   | (81                          | )          | (81 | ) |
| OP  Units – Limited Partners                                                                 |   | (9,645                       | )          | (10,151 | ) |
| Minority  Interests – Partially Owned Properties                                             |   | (1,549                       | )          | (9,120 | ) |
| Principal  receipts on employee notes, net                                                        |   | —                       |       | 85 |   |
| Net  cash provided by (used for) financing activities                                             |   | 35,078                       |       | (50,456 | ) |
|                                                                                              |   |                         |       |   |   |
| Net  increase in cash and cash equivalents                                                        |   | 280,434                      |       | 198,159 |   |
| Cash  and cash equivalents, beginning of period                                                   |   | 29,875                       |       | 51,603 |   |
| Cash  and cash equivalents, end of period                                                         |   | $                            | 310,309    |   | $ | 249,762 |   |
|                                                                                              |   |                         |       |   |   |
| **SUPPLEMENTAL  INFORMATION:**                                                                    |   |                         | ** ** |   | ** ** |
|                                                                                              |   |                         | ** ** |   | ** ** |
| Cash  paid during the period for interest                                                         |   | $                            | 83,579     |   | $ | 81,566 |   |
|                                                                                              |   |                         |       |   |   |
| Mortgage  loans assumed through real estate acquisitions                                          |   | $                            | 34,968     |   | $ | — |   |
|                                                                                              |   |                         |       |   |   |
| Mortgage  loans (assumed) by purchaser in real estate and furniture rental business  dispositions |   | $                            | —     |   | $ | (1,680 | ) |
|                                                                                              |   |                         |       |   |   |
| Transfers  to real estate held for disposition                                                    |   | $                            | —     |   | $ | 3,505 |   |

 

**Seeaccompanying notes**

 

6

----

 

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

 

**1.****                                      Businessof the Company**

 

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

 

EQR is the general partner of, and as of March 31, 2003, owned anapproximate 92.4% ownershipinterest in ERPOP.  ERPOP is, directlyor indirectly, a partner, member or shareholder of numerous partnerships,limited liability companies and corporations which have been establishedprimarily to own fee simple title to multifamily properties or to conductproperty management activities and other businesses related to the ownershipand operation of multifamily residential real estate.  As used herein, the term “Operating Partnership” includes ERPOPand those entities owned or controlled by it. As used herein, the term “Company” means EQR and the OperatingPartnership.

 

As of March 31, 2003, the Operating Partnership owned or hadinvestments in 1,027****properties in 36 states consisting of221,249 units.  An ownership breakdownincludes:

 
|                                           |   | **Number of  Properties** |       | **Number of  Units** |       |
|------------------------------------------------|--------|---------------------------|------------|----------------------|------------|
| **Wholly  Owned Properties**                   |   | **906**                   | ** ** | **191,875**          | ** ** |
| **Partially  Owned Properties (Consolidated)** |   | **36**                    | ** ** | **6,931**            | ** ** |
| **Unconsolidated  Properties**                 |   | **85**                    | ** ** | **22,443**           | ** ** |
| **Total  Properties**                          |   | **1,027**                 | ** ** | **221,249**          | ** ** |

 

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

 

*Basis of Presentation*

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  In the opinion of management, alladjustments (consisting of normal recurring accruals) and certainreclassifications considered necessary for a fair presentation have beenincluded.  Certain reclassificationshave been made to the prior period financial statements in order to conform tothe current year presentation. Operating results for the three months ended March 31, 2003 are notnecessarily indicative of the results that may be expected for the year endingDecember 31, 2003.

 

The balance sheet at December 31, 2002 has been derived from theaudited financial statements at that date but does not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.

 

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

 

*Other*

 

In April 2002, the FASB issued SFAS No. 145, *Rescission of FASB Statements No. 4, 44 and 64,*

 

7

----

 

*Amendment of FASB Statement No. 13,and Technical Corrections*. SFAS No. 145, among other items, rescinds the automatic classificationof costs incurred on debt extinguishment as extraordinary charges.  Instead, gains and losses from debtextinguishment should only be classified as extraordinary if they meet the“unusual and infrequently occurring” criteria outlined in APB No. 30.  SFAS No. 145 is effective for fiscal yearsbeginning after May 15, 2002.  TheOperating Partnership adopted the standard effective January 1, 2003.

 

In January 2003, the FASB issued Interpretation (“FIN”) No. 46, *Consolidation of Variable Interest Entities*.  FIN No. 46 requires a variable interestentity to be consolidated by a company if that company is subject to a majorityof the risk of loss from the variable interest entity’s activities or entitledto receive a majority of the entity’s residual returns or both.  The consolidation requirements of FIN No. 46apply immediately to variable interest entities created after January 31, 2003and apply to older entities in the first fiscal year or interim periodbeginning after June 15, 2003.  TheOperating Partnership will adopt FIN No. 46 in the third quarter of 2003 buthas not yet determined the effect that adoption will have on its consolidatedfinancial position and results of operations.

 

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

 

The following table presents the changes in the Operating Partnership’sissued and outstanding units of limited partnership interest (“OP Units”) forthe quarter ended March 31, 2003:

 
|                                                               |   | **2003**        |       |
|--------------------------------------------------------------------|--------|-----------------|------------|
| Operating Partnership’s OP Units outstanding at  January 1,   |   | 293,396,124     |       |
|                                                               |   |            |       |
| *Issued to General Partner:*                                       |   |            |       |
| Conversion of Series E Preference Units                            |   | 3,613           |       |
| Employee Share Purchase Plan                                       |   | 126,273         |       |
| Exercise of EQR options                                            |   | 218,980         |       |
| Restricted EQR share grants, net                                   |   | 996,815         |       |
| **Operating Partnership’s OP Units outstanding at March 31,** |   | **294,741,805** | ** ** |

 

The limited partners of the Operating Partnership as of March 31, 2003include various individuals and entities that contributed their properties tothe Operating Partnership in exchange for OP Units (the “Limited Partners”) andown an approximate 7.6% ownership interest in ERPOP.  Subject to applicable securities law restrictions, the LimitedPartners may exchange their OP Units for EQR Common Shares on a one-for-onebasis.

 

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

 

The following table presents the Operating Partnership’s issued andoutstanding “Preference Units” as of March 31, 2003 and December 31, 2002:

 

8

----

 
|                                                                                                                                                                                                  |   | **Annual  Dividend  Rate per  Unit(1)** |     |   |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|----------|--------|---------|
| **Amounts in thousands**                                                                                                                                                                              |
| **March  31, 2003**                                                                                                                                                                                   |   | **December  31, 2002**                  |
| Preference  Units:                                                                                                                                                                                    |   |                                    |     |   |    |   |   |
|                                                                                                                                                                                                  |   |                                    |     |   |    |   |   |
| 9  1/8% Series B Cumulative Redeemable Preference Units; liquidation value $250  per unit; 500,000 units issued and outstanding at March 31, 2003 and December  31, 2002                              |   | $                                       | 22.81252 |   | $       | 125,000 |   | $ | 125,000 |   |
|                                                                                                                                                                                                  |   |                                    |     |   |    |   |   |
| 9  1/8% Series C Cumulative Redeemable Preference Units; liquidation value $250  per unit; 460,000 units issued and outstanding at March 31, 2003 and December  31, 2002                              |   | $                                       | 22.81252 |   | 115,000 |   | 115,000 |   |
|                                                                                                                                                                                                  |   |                                    |     |   |    |   |   |
| 8.60%  Series D Cumulative Redeemable Preference Units; liquidation value $250 per  unit; 700,000 units issued and outstanding at March 31, 2003 and December 31,  2002                               |   | $                                       | 21.50000 |   | 175,000 |   | 175,000 |   |
|                                                                                                                                                                                                  |   |                                    |     |   |    |   |   |
| 7.00%  Series E Cumulative Convertible Preference Units; liquidation value $25 per  unit; 2,544,864 and 2,548,114 units issued and outstanding at March 31, 2003  and December 31, 2002, respectively |   | $                                       | 1.75000  |   | 63,622  |   | 63,703 |   |
|                                                                                                                                                                                                  |   |                                    |     |   |    |   |   |
| 7 1⁄4%  Series G Convertible Cumulative Preference Units; liquidation value $250 per  unit; 1,264,692 units issued and outstanding at March 31, 2003 and December  31, 2002                        |   | $                                       | 18.12500 |   | 316,173 |   | 316,173 |   |
|                                                                                                                                                                                                  |   |                                    |     |   |    |   |   |
| 7.00%  Series H Cumulative Convertible Preference Units; liquidation value $25 per  unit; 51,228 units issued and outstanding at March 31, 2003 and December 31,  2002                                |   | $                                       | 1.75000  |   | 1,281   |   | 1,281 |   |
|                                                                                                                                                                                                  |   |                                    |     |   |    |   |   |
| 8.29%  Series K Cumulative Redeemable Preference Units; liquidation value $50 per  unit; 1,000,000 units issued and outstanding at March 31, 2003 and December  31, 2002                              |   | $                                       | 4.14500  |   | 50,000  |   | 50,000 |   |
|                                                                                                                                                                                                  |   |                                    |     |   |    |   |   |
| 7.625%  Series L Cumulative Redeemable Preference Units; liquidation value $25 per  unit; 4,000,000 units issued and outstanding at March 31, 2003 and December  31, 2002                             |   | $                                       | 1.90625  |   | 100,000 |   | 100,000 |   |
|                                                                                                                                                                                                  |   |                                    |     |   |    |   |   |
|                                                                                                                                                                                                  |   |                                    |     | $      | 946,076 |   | $ | 946,157 |   |

 

----

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

 

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

 

9

----

 
|                                                                                                                                                                                |   | **Annual  Dividend  Rate per  Unit(1)** |   |   |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|--------|---------|
| **Amounts in thousands**                                                                                                                                                            |
| **March  31, 2003**                                                                                                                                                                 |   | **December  31, 2002**                  |
| Preference Interests:                                                                                                                                                               |   |                                    |   |   |    |   |   |
|                                                                                                                                                                                |   |                                    |   |   |    |   |   |
| 8.00% Series A Cumulative Redeemable Preference  Interests; liquidation value $50 per unit; 800,000 units issued and  outstanding at March 31, 2003 and December 31, 2002           |   | $                                       | 4.0000 |   | $       | 40,000 |   | $ | 40,000 |   |
|                                                                                                                                                                                |   |                                    |   |   |    |   |   |
| 8.50% Series B Cumulative Redeemable Preference  Units; liquidation value $50 per unit; 1,100,000 units issued and outstanding  at March 31, 2003 and December 31, 2002             |   | $                                       | 4.2500 |   | 55,000  |   | 55,000 |   |
|                                                                                                                                                                                |   |                                    |   |   |    |   |   |
| 8.50% Series C Cumulative Redeemable Preference  Units; liquidation value $50 per unit; 220,000 units issued and outstanding  at March 31, 2003 and December 31, 2002               |   | $                                       | 4.2500 |   | 11,000  |   | 11,000 |   |
|                                                                                                                                                                                |   |                                    |   |   |    |   |   |
| 8.375% Series D Cumulative Redeemable Preference  Units; liquidation value $50 per unit; 420,000 units issued and outstanding  at March 31, 2003 and December 31, 2002              |   | $                                       | 4.1875 |   | 21,000  |   | 21,000 |   |
|                                                                                                                                                                                |   |                                    |   |   |    |   |   |
| 8.50% Series E Cumulative Redeemable Preference  Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding  at March 31, 2003 and December 31, 2002             |   | $                                       | 4.2500 |   | 50,000  |   | 50,000 |   |
|                                                                                                                                                                                |   |                                    |   |   |    |   |   |
| 8.375% Series F Cumulative Redeemable Preference  Units; liquidation value $50 per unit; 180,000 units issued and outstanding  at March 31, 2003 and December 31, 2002              |   | $                                       | 4.1875 |   | 9,000   |   | 9,000 |   |
|                                                                                                                                                                                |   |                                    |   |   |    |   |   |
| 7.875% Series G Cumulative Redeemable Preference  Units; liquidation value $50 per unit; 510,000 units issued and outstanding  at March 31, 2003 and December 31, 2002              |   | $                                       | 3.9375 |   | 25,500  |   | 25,500 |   |
|                                                                                                                                                                                |   |                                    |   |   |    |   |   |
| 7.625% Series H Cumulative Convertible Redeemable  Preference Units; liquidation value $50 per unit; 190,000 units issued and  outstanding at March 31, 2003 and December 31, 2002  |   | $                                       | 3.8125 |   | 9,500   |   | 9,500 |   |
|                                                                                                                                                                                |   |                                    |   |   |    |   |   |
| 7.625% Series I Cumulative Convertible Redeemable  Preference Units; liquidation value $50 per unit; 270,000 units issued and  outstanding at March 31, 2003 and December 31, 2002  |   | $                                       | 3.8125 |   | 13,500  |   | 13,500 |   |
|                                                                                                                                                                                |   |                                    |   |   |    |   |   |
| 7.625% Series J Cumulative Convertible Redeemable  Preference Units; liquidation value $50 per unit; 230,000 units issued and  outstanding at March 31, 2003 and December  31, 2002 |   | $                                       | 3.8125 |   | 11,500  |   | 11,500 |   |
|                                                                                                                                                                                |   |                                    |   |   |    |   |   |
|                                                                                                                                                                                |   |                                    |   | $      | 246,000 |   | $ | 246,000 |   |

 

----

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

 

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

 

10

----

 
|                                                                                                                                                         |   | **Annual  Dividend  Rate per  Unit(1)** |    |   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|---------|--------|--------|
| **Amounts in thousands**                                                                                                                                     |
| **March  31, 2003**                                                                                                                                          |   | **December  31, 2002**                  |
| Junior  Preference Units:                                                                                                                                    |   |                                    |    |   |   |   |   |
|                                                                                                                                                         |   |                                    |    |   |   |   |   |
| Series A Junior Convertible Preference Units;  liquidation value $100 per unit; 56,616 units issued and outstanding  at March 31, 2003 and December 31, 2002 |   | $                                       | 5.46934 |   | $      | 5,662 |   | $ | 5,662 |   |
|                                                                                                                                                         |   |                                    |    |   |   |   |   |
| Series B Junior Convertible Preference Units;  liquidation value $25 per unit; 7,367 units issued and outstanding at  March 31, 2003 and December 31, 2002   |   | $                                       | 2.00000 |   | 184    |   | 184 |   |
|                                                                                                                                                         |   |                                    |    |   |   |   |   |
|                                                                                                                                                         |   |                                    |    | $      | 5,846  |   | $ | 5,846 |   |

 

----

(1)          Dividends on both seriesof Junior Preference Units are payable quarterly at various pay dates.

 

**4.****                                      RealEstate**

 

During the quarter ended March 31, 2003, the Operating Partnershipacquired the entire equity interest in the three properties listed below fromunaffiliated parties for a total purchase price of $111.5 million.

 
| **Date  Acquired** |   | **Property**                  |       | **Location**        |       | **Number of  Units** |       | **Acquisition Price  (in thousands)** |        |
|--------------------|--------|-------------------------------|------------|---------------------|------------|----------------------|------------|---------------------------------------|-------------|
| **01/30/03**       |   | **The  Reserve @ Eisenhower** | ** ** | **Alexandria,  VA** | ** ** | **226**              | ** ** | **$**                                 | **41,000**  | ** ** |
| **02/14/03**       |   | **Artisan  Square**           | ** ** | **Northridge,  CA** | ** ** | **140**              | ** ** | **27,466**                            | ** **  |
| **03/05/03**       |   | **LaSalle**                   | ** ** | **Beaverton,  OR**  | ** ** | **554**              | ** ** | **43,000**                            | ** **  |
|               |   |                          |       |                |       | **920**              |       | **$**                                 | **111,466** | ** ** |

 

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

 

During the quarter ended March 31, 2003, the Operating Partnershipdisposed of the seventeen properties listed below to unaffiliated parties.  The Operating Partnership recognized a netgain on sales of discontinued operations of approximately $70.7 million and anet gain on sales of unconsolidated entities of approximately $1.2 million.

 
| **Date  Disposed** |   | **Property**                  |   | **Location**      |   | **Number Of  Units** |   | **Disposition  Price  (in thousands)** |    |
|--------------------|--------|-------------------------------|--------|-------------------|--------|----------------------|--------|----------------------------------------|---------|
| 01/14/03           |   | Strawberry Place              |   | Plant City, FL    |   | 55                   |   | $                                      | 1,400   |   |
| 01/14/03           |   | Smoketree Polo Club           |   | Indio, CA         |   | 288                  |   | 18,900                                 |    |
| 01/29/03           |   | Amberwood I                   |   | Lake City, FL     |   | 50                   |   | 1,175                                  |    |
| 01/30/03           |   | Emerald Place                 |   | Bermuda Dunes, CA |   | 240                  |   | 20,125                                 |    |
| 01/30/03           |   | Rolido Parque                 |   | Houston, TX       |   | 369                  |   | 14,660                                 |    |
| 02/27/03           |   | Fox Hill Commons              |   | Vernon, CT        |   | 74                   |   | 4,700                                  |    |
| 02/27/03           |   | The Landings                  |   | Winter Haven, FL  |   | 60                   |   | 1,475                                  |    |
| 02/27/03           |   | Morningside                   |   | Titusville, FL    |   | 183                  |   | 3,980                                  |    |
| 03/04/03           |   | Colony Woods                  |   | Birmingham, AL    |   | 414                  |   | 25,000                                 |    |
| 03/04/03           |   | Hearthstone                   |   | San Antonio, TX   |   | 252                  |   | 7,700                                  |    |
| 03/04/03           |   | Northgate Village             |   | San Antonio, TX   |   | 264                  |   | 10,150                                 |    |
| 03/19/03           |   | Lincoln Green I, II & III |   | San Antonio, TX   |   | 680                  |   | 24,900                                 |    |
| 03/20/03           |   | Meadows on the Lake           |   | Birmingham, AL    |   | 200                  |   | 10,900                                 |    |
| 03/20/03           |   | Meadows in the Park           |   | Birmingham, AL    |   | 200                  |   | 10,900                                 |    |
| 03/20/03           |   | Shoal Run                     |   | Birmingham, AL    |   | 276                  |   |                                   | 14,350  |   |
| 03/31/03           |   | Colony Place                  |   | Fort Myers, FL    |   | 300                  |   | 20,600                                 |    |
| Various            |   | Four Lakes Condo Units        |   | Lisle, IL         |   | 26                   |   | 3,161                                  |    |
|               |   | Wholly Owned Properties       |   |              |   | 3,931                |   | 194,076                                |    |
| 02/28/03           |   | Kings Crossing I*             |   | Jacksonville, FL  |   | 69                   |   | 963                                    |    |
|               |   | Unconsolidated Properties     |   |              |   | 69                   |   | 963                                    |    |
| Total              |   |                          |   |              |   | 4,000                |   | $                                      | 195,039 |   |

 

11

----

 

----

* Represents theOperating Partnership’s share of the net disposition proceeds.

 

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

 

As of March 31, 2003, the Operating Partnership had entered intoseparate agreements to acquire two multifamily properties containing 719 unitsfrom unaffiliated parties.  TheOperating Partnership expects a combined purchase price of approximately $114.5million. 

 

As of March 31, 2003, in addition to the properties that weresubsequently disposed of as discussed in Note 19, the Operating Partnership hadentered into separate agreements to dispose of twenty-four multifamilyproperties containing 4,079 units to unaffiliated parties.  The Operating Partnership expects a combineddisposition price of approximately $186.2 million. 

 

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

 

**7.****                                      Investmentsin Unconsolidated Entities**

 

The Operating Partnership has co-invested in various properties withunrelated third parties.  The followingtable summarizes the Operating Partnership’s investments in unconsolidatedentities as of March 31, 2003 (amounts in thousands except for project and unitamounts):

 
|                                                                   |   | **Institutional  Joint  Ventures** |    | **Stabilized  Development  Projects(1)** |   | **Projects  Under  Development** |   | **Lexford/  Other** |    | **Totals** |   |
|------------------------------------------------------------------------|--------|------------------------------------|---------|------------------------------------------|--------|----------------------------------|--------|---------------------|---------|------------|--------|
|                                                                   |   |                               |    |                                     |   |                             |   |                |    |       |   |
| Total  projects                                                        |   | 45                                 |    | 12                                       |   | 17                               |   | 22                  |    | 96         | (2)    |
|                                                                   |   |                               |    |                                     |   |                             |   |                |    |       |   |
| Total  units                                                           |   | 10,846                             |    | 3,805                                    |   | 4,659                            |   | 2,704               |    | 22,014     | (2)    |
|                                                                   |   |                               |    |                                     |   |                             |   |                |    |       |   |
| Operating  Partnership’s percentage ownership of outstanding debt |   | 25.0                               | %       | 100.0                                    | %      | 100.0                            | %      | 11.1                | %       |       |   |
|                                                                   |   |                               |    |                                     |   |                             |   |                |    |       |   |
| Operating  Partnership’s share of outstanding debt(4)             |   | $                                  | 121,200 |                                     | $      | 295,103                          |   | $                   | 505,587 | (3)        | $      | 5,386 |   | $ | 927,276 |   |
|                                                                        |        |                                    |         |                                          |        |                                  |        |                     |         |            |        |  |  |  |  |  |

 

----

(1)          The OperatingPartnership determines a project to be stabilized once it has maintained anaverage physical occupancy of 90% or more for a three-month period.

 

(2)          Includes twelve projectsunder development containing 3,223 units, which are not included in the

 

12

----

 

Operating Partnership’s property/unit counts at March31, 2003.  Totals exclude Fort LewisMilitary Housing consisting of one property and 3,652 units, which is notaccounted for under the equity method of accounting.  The Fort Lewis Military Housing is included in the OperatingPartnership’s property/unit counts at March 31, 2003.

 

(3)          A total of $763.5million is available for funding under this construction debt, of which $505.6million was funded and outstanding at March 31, 2003.

 

(4)          As of April 30, 2003,the Operating Partnership has funded $51.0 million as additional collateral onselected debt (see Note 8).  Allremaining debt is non-recourse to EQR and the Operating Partnership.

 

Investments in unconsolidated entities include the UnconsolidatedProperties as well as various development properties under construction orpending construction.  The OperatingPartnership does not consolidate these entities as it does not have solecontrol of the major decisions (such as sale and/orfinancing/refinancing).  The OperatingPartnership’s common equity ownership interests in these entities range from4.5% to 50.0% at March 31, 2003.

 

These investments are accounted for utilizing the equity method ofaccounting.  Under the equity method ofaccounting, the net equity investment of the Operating Partnership is reflectedon the consolidated balance sheets and after the project is completed, theconsolidated statements of operations include the Operating Partnership’s shareof net income or loss from the unconsolidated entity.  Prior to the project being completed, the Operating Partnershipcapitalizes interest on its equity contribution in accordance with theprovisions of SFAS No. 58, *Capitalization ofInterest Cost in Financial Statements That Include Investments Accounted for bythe Equity Method.*  Duringthe quarters ended March 31, 2003 and 2002, the Operating Partnershipcapitalized $5.4 million and $3.8 million, respectively, in interest costrelated to its unconsolidated development projects (which reduced interestexpense incurred in the consolidated statements of operations).

 

The Operating Partnership generally contributes between 25% and 35% ofthe project cost of the unconsolidated projects under development, with theremaining cost financed through third-party construction mortgages.

 

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

 

As of March 31, 2003, deposits-restricted totaled $173.1 million andprimarily included the following:

 

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

•                  Approximately $55.0 million in tax-deferred(1031) exchange proceeds; and

•                  Approximately $67.1 million for residentsecurity, utility, and other deposits.

 

**9.****                                      MortgageNotes Payable**

 

As of March 31, 2003, the Operating Partnership had outstandingmortgage indebtedness of approximately $2.9 billion.

 

During the quarter ended March 31, 2003, the Operating Partnership:

 

•                  Repaid $110.1 million of mortgage loans; 

•                  Assumed $35.0 million of mortgage debt on certainproperties in connection with their acquisitions; and

•                  Obtained $48.7 million of mortgage loans oncertain properties.

 

As of March 31, 2003, scheduled maturities for the OperatingPartnership’s outstanding mortgage

 

13

----

 

indebtedness were at various dates through October 1, 2033.  At March 31, 2003, the interest rate rangeon the Operating Partnership’s mortgage debt was 1.09% to 12.465%.  During the quarter ended March 31, 2003, theweighted average interest rate on the Operating Partnership’s mortgage debt was6.02%.

 

**10.****                               Notes**

 

As of March 31, 2003, the Operating Partnership had outstandingunsecured notes of approximately $2.9 billion net of a $7.0 million discountand including an $8.3 million premium.

 

During the quarter ended March 31, 2003, the Operating Partnership: 

 

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

 

As of March 31, 2003, scheduled maturities for the OperatingPartnership’s outstanding notes were at various dates through 2029.  At March 31, 2003, the interest rate rangeon the Operating Partnership’s notes was 4.75% to 7.75%.  During the quarter ended March 31, 2003, theweighted average interest rate on the Operating Partnership’s notes was 5.73%.

 

**11.****                               Lineof Credit**

 

The Operating Partnership has a revolving credit facility withpotential borrowings of up to $700.0 million. As of March 31, 2003, no amounts were outstanding and $53.3 million wasrestricted (dedicated to support letters of credit and not available forborrowing) on the line of credit. During the quarter ended March 31, 2003, the weighted average interestrate was 1.85%.  EQR has guaranteed theOperating Partnership’s line of credit up to the maximum amount and for thefull term of the facility.

 

**12.****                               DerivativeInstruments**

 

The following table summarizes the consolidated derivative instrumentsat March 31, 2003 (dollar amounts are in thousands):

 
|                                    |   | **Cash Flow  Hedges** |    | **Fair Value  Hedges** |   | **Interest  Rate  Caps** |   | **Offsetting  Receive  Floating  Swaps/Caps** |   | **Offsetting  Pay  Floating  Swaps/Caps** |   |
|-----------------------------------------|--------|-----------------------|---------|------------------------|--------|--------------------------|--------|-----------------------------------------------|--------|-------------------------------------------|--------|
| Current  Notional Balance               |   | $                     | 400,000 |                   | $      | 120,000                  |   | $                                             | 37,000 |                                      | $      | 255,119 |   | $ | 255,119 |   |
| Lowest  Possible Notional               |   | $                     | 400,000 |                   | $      | 120,000                  |   | $                                             | 37,000 |                                      | $      | 251,410 |   | $ | 251,410 |   |
| Highest  Possible Notional              |   | $                     | 400,000 |                   | $      | 120,000                  |   | $                                             | 37,000 |                                      | $      | 431,444 |   | $ | 431,444 |   |
| Lowest  Interest Rate                   |   | 3.65125               | %       | 7.25000                | %      | 6.5                      | %      | 4.52800                                       | %      | 4.45800                                   | %      |
| Highest  Interest Rate                  |   | 5.81000               | %       | 7.25000                | %      | 6.5                      | %      | 6.00000                                       | %      | 6.00000                                   | %      |
| Earliest  Maturity Date                 |   | 2003                  |    | 2005                   |   | 2004                     |   | 2003                                          |   | 2003                                      |   |
| Latest  Maturity Date                   |   | 2005                  |    | 2005                   |   | 2004                     |   | 2007                                          |   | 2007                                      |   |
| Estimated  Asset (Liability) Fair Value |   | $                     | (12,123 | )                      | $      | 8,851                    |   | $                                             | — |                                      | $      | (2,261 | ) | $ | 2,184 |   |

 

During the quarter ended March 31, 2003, the Company paid approximately$13.0 million to terminate eight forward starting interest rate swaps inconjunction with the issuance of $400.0 million of ten-year unsecurednotes.  The $13.0 million payment willbe deferred and recognized as additional interest expense over the ten-yearlife of the unsecured notes.

 

At March 31, 2003, certain unconsolidated development partnerships inwhich the Operating Partnership invested had entered into swaps to hedge theinterest rate risk exposure on unconsolidated floating rate constructionmortgage loans.  The OperatingPartnership has recorded its proportionate share of these hedges on itsconsolidated balance sheets.  Theseswaps have been designated as cash flow

 

14

----

 

hedges with a current aggregate notional amount of $363.2****million (notional amounts range from$142.1****million to $456.2****million over the terms of the swaps) atinterest rates ranging from 1.78%to 6.94% maturing at variousdates ranging from 2003 to 2005 with a net liability fair valueof $12.1****million.  During the quarter ended March 31, 2003, theOperating Partnership recognized an unrealized gain of $0.7 million due toineffectiveness of certain of these unconsolidated development derivatives(included in income from investments in unconsolidated entities).

 

On March 31, 2003, the net derivative instruments were reported attheir fair value as other liabilities of approximately $3.3 million and as areduction to investments in unconsolidated entities of approximately $12.1million.  As of March 31, 2003, therewere approximately $40.9 million in deferred losses, net, included inaccumulated other comprehensive loss. Based on the estimated fair values of the net derivative instruments atMarch 31, 2003, the Operating Partnership may recognize an estimated $17.4million of accumulated other comprehensive loss as additional interest expenseduring the twelve months ending March 31, 2004, of which $8.1 million isrelated to the unconsolidated development partnerships.

 

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

 

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

 
|                                                                                                                                                                                                                                   |   | **Quarter  Ended March 31,**                            |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|---------|
|                                                                                                                                                                                                                                   |   | **2003**                                                |    | **2002** |   |
|                                                                                                                                                                                                                                   |   | **(Amounts  in thousands except per  OP Unit amounts)** |    |
| **Numerator:**                                                                                                                                                                                                                         |   |                                                    |    |   |   |
| Income  before allocation to Minority Interests, income from investments in  unconsolidated entities, net gain on sales of unconsolidated entities,  discontinued operations and allocation to preference unit/interest  distributions |   | $                                                       | 72,165  |   | $ | 89,462 |   |
|                                                                                                                                                                                                                                   |   |                                                    |    |   |   |
| Allocation  to Minority Interests – Partially Owned Properties                                                                                                                                                                    |   | (115                                                    | )       | (806 | ) |
| Income  from investments in unconsolidated entities                                                                                                                                                                                    |   | 107                                                     |    | 226 |   |
| Allocation  to Preference Units                                                                                                                                                                                                        |   | (19,046                                                 | )       | (19,391 | ) |
| Allocation  to Preference Interests                                                                                                                                                                                                    |   | (5,053                                                  | )       | (5,053 | ) |
| Allocation  to Junior Preference Units                                                                                                                                                                                                 |   | (81                                                     | )       | (81 | ) |
|                                                                                                                                                                                                                                   |   |                                                    |    |   |   |
| Income  before net gain on sales of unconsolidated entities and discontinued  operations                                                                                                                                               |   | 47,977                                                  |    | 64,357 |   |
| Net  gain on sales of unconsolidated entities                                                                                                                                                                                          |   | 1,212                                                   |    | 5,657 |   |
| Net  gain on sales of discontinued operations                                                                                                                                                                                          |   | 70,672                                                  |    | 2,816 |   |
| Discontinued  operations, net                                                                                                                                                                                                          |   | 416                                                     |    | 9,964 |   |
|                                                                                                                                                                                                                                   |   |                                                    |    |   |   |
| Numerator  for net income per OP Unit – basic                                                                                                                                                                                     |   | 120,277                                                 |    | 82,794 |   |
| Effect  of dilutive securities:                                                                                                                                                                                                        |   |                                                    |    |   |   |
| Distributions  on convertible preference units/interests                                                                                                                                                                               |   | 1,214                                                   |    | — |   |
|                                                                                                                                                                                                                                   |   |                                                    |    |   |   |
| Numerator  for net income per OP Unit – diluted                                                                                                                                                                                   |   | $                                                       | 121,491 |   | $ | 82,794 |   |
|                                                                                                                                                                                                                                   |   |                                                    |    |   |   |
| **Denominator:**                                                                                                                                                                                                                       |   |                                                    |    |   |   |
| Denominator  for net income per OP Unit – basic                                                                                                                                                                                   |   | 292,949                                                 |    | 294,106 |   |
|                                                                                                                                                                                                                                   |   |                                                    |    |   |   |
| Effect  of dilutive securities:                                                                                                                                                                                                        |   |                                                    |    |   |   |
| Convertible  preference units/interests                                                                                                                                                                                                |   | 3,139                                                   |    | — |   |
| Dilution  for OP Units issuable upon assumed exercise/vesting of EQR’s share  options/restricted shares                                                                                                                           |   | 1,558                                                   |    | 3,123 |   |
| Denominator  for net income per OP Unit – diluted                                                                                                                                                                                 |   | 297,646                                                 |    | 297,229 |   |
|                                                                                                                                                                                                                                   |   |                                                    |    |   |   |   |   |
| Net  income per OP Unit – basic                                                                                                                                                                                                   |   | $                                                       | 0.41    |   | $ | 0.28 |   |
|                                                                                                                                                                                                                                   |   |                                                    |    |   |   |   |   |
| Net  income per OP Unit – diluted                                                                                                                                                                                                 |   | $                                                       | 0.41    |   | $ | 0.28 |   |

 

15

----

 
|                                                                                                                |   | **Quarter  Ended March 31,**                            |   |
|---------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                                                                                |   | **2003**                                                |   | **2002** |   |
|                                                                                                                |   | **(Amounts  in thousands except per  OP Unit amounts)** |   |
| **Net  income per OP Unit – basic:**                                                                           |   |                                                    |   |   |   |
| Income  before net gain on sales of unconsolidated entities and discontinued  operations per OP Unit – basic   |   | $                                                       | 0.17   |   | $ | 0.22 |   |
| Net  gain on sales of unconsolidated entities                                                                       |   | —                                                  |   | 0.02 |   |
| Net  gain on sales of discontinued operations                                                                       |   | 0.24                                                    |   | 0.01 |   |
| Discontinued  operations, net                                                                                       |   | —                                                  |   | 0.03 |   |
| Net  income per OP Unit – basic                                                                                |   | $                                                       | 0.41   |   | $ | 0.28 |   |
|                                                                                                                |   |                                                    |   |   |   |
| **Net  income per OP Unit – diluted:**                                                                         |   |                                                    |   |   |   |
| Income  before net gain on sales of unconsolidated entities and discontinued  operations per OP Unit – diluted |   | $                                                       | 0.17   |   | $ | 0.22 |   |
| Net  gain on sales of unconsolidated entities                                                                       |   | —                                                  |   | 0.02 |   |
| Net  gain on sales of discontinued operations                                                                       |   | 0.24                                                    |   | 0.01 |   |
| Discontinued  operations, net                                                                                       |   | —                                                  |   | 0.03 |   |
|                                                                                                                |   |                                                    |   |   |   |
| Net  income per OP Unit – diluted                                                                              |   | $                                                       | 0.41   |   | $ | 0.28 |   |

 

*Convertiblepreference units/interests that could be converted into 11,807,095 and15,853,687 weighted average Common Shares (which would be contributed to theOperating Partnership in exchange for OP Units) for the quarters ended March31, 2003 and 2002, respectively, were outstanding but were not included in thecomputation of diluted earnings per OP Unit because the effects would beanti-dilutive.*

 

**14.****                               DiscontinuedOperations**

 

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

 

The components of discontinued operations are outlined below andinclude the results of operations for the respective periods that the OperatingPartnership owned such assets during each of the quarters ended March 31, 2003and 2002, including the following:

 

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

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

 

16

----

 
|                                      |   | **Quarter  Ended March 31,** |       |
|-------------------------------------------|--------|------------------------------|------------|
|                                      |   | **2003**                     |       | **2002** |   |
|                                      |   | **(Amounts  in thousands)**  |       |
| **REVENUES**                              |   |                         | ** ** |   | ** ** |
| Rental  income                            |   | $                            | 5,026      |   | $ | 25,898 |   |
| Interest  and other income                |   | 11                           |       | 10 |   |
| Furniture  income                         |   | —                       |       | 1,365 |   |
| Total  revenues                           |   | 5,037                        |       | 27,273 |   |
|                                      |   |                         |       |   |   |
| **EXPENSES(1)**                           |   |                         |       |   |   |
| Property  and maintenance                 |   | 2,871                        |       | 6,809 |   |
| Real  estate taxes and insurance          |   | 587                          |       | 2,849 |   |
| Depreciation                              |   | 1,102                        |       | 5,776 |   |
| Interest  expense incurred, net           |   | 61                           |       | 566 |   |
| Amortization  of deferred financing costs |   | —                       |       | 6 |   |
| Furniture  expenses                       |   | —                       |       | 1,303 |   |
| Total  expenses                           |   | 4,621                        |       | 17,309 |   |
|                                      |   |                         |       |   |   |
| Discontinued  operations, net             |   | $                            | 416        |   | $ | 9,964 |   |

 

----

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

 

**15.****                               Stock-BasedCompensation**

 

Prior to 2003, the Company had chosen toaccount for its stock-based compensation in accordance with APB No. 25, *Accounting for Stock Issued to Employees*,**which resulted in no compensation expensefor options issued with an exercise price equal to or exceeding the marketvalue of EQR’s Common Shares on the date of grant (intrinsic method).  The Company has elected to expense itsstock-based compensation in accordance with SFAS No. 123 and its amendment(SFAS No. 148), *Accounting for Stock BasedCompensation*, effective in the first quarter of 2003, which resultedin compensation expense being recorded based on the fair value of the stockcompensation granted or modified.  AnyCommon Shares issued pursuant to EQR’s share option/restricted share/ESPP planswill result in the Operating Partnership issuing OP Units to EQR on aone-for-one basis.

 

SFAS No. 148 provides three transition methods for entities that adoptthe fair value recognition provisions of SFAS No. 123.  The Company has chosen to use the“Prospective Method”.  This methodrequires that companies apply the recognition provisions of SFAS No. 123 toonly employee awards granted or modified after the beginning of the fiscal yearin which the recognition provisions are first applied, or January 1, 2003.  Compensation expense under all of theCompany’s plans is generally recognized over periods ranging from three monthsto five years.  Therefore, the costrelated to stock-based employee compensation included in the determination ofnet income for the quarter ended March 31, 2003 is less than that which wouldhave been recognized if the fair value based method had been applied to allawards since the original effective date of SFAS No. 123.

 

The following table illustrates the effect on net income and earningsper OP Unit if the fair value based method had been applied to all outstandingand unvested awards in each period presented:

 

17

----

 
|                                                                                                                     |   | **Quarter Ended March 31,**                             |    |
|--------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|---------|
|                                                                                                                     |   | **2003**                                                |    | **2002** |   |
|                                                                                                                     |   | **(Amounts in thousands  except per OP Unit  amounts)** |    |
| Net income available to OP Units, as reported                                                                            |   | $                                                       | 120,277 |   | $ | 82,794 |   |
| Add:   Stock-based employee compensation expense included in reported net  income:                                  |   |                                                    |    |   |   |
| EQR’s restricted/performance shares                                                                                 |   | 2,334                                                   |    | 5,084 |   |
| EQR’s share options(1)                                                                                              |   | 1,707                                                   |    | — |   |
| EQR’s ESPP discount                                                                                                 |   | 490                                                     |    | — |   |
| Deduct:  Total  stock-based employee compensation expense determined under fair value based  method for all awards: |   |                                                    |    |   |   |
| EQR’s restricted/performance shares                                                                                 |   | (2,334                                                  | )       | (5,084 | ) |
| EQR’s share options(1)                                                                                              |   | (2,899                                                  | )       | (1,527 | ) |
| EQR’s ESPP discount                                                                                                 |   | (490                                                    | )       | (658 | ) |
| Pro forma net income available to OP Units                                                                               |   | $                                                       | 119,085 |   | $ | 80,609 |   |
| Earnings per OP Unit:                                                                                                    |   |                                                    |    |   |   |
| Basic – as reported                                                                                                 |   | $                                                       | 0.41    |   | $ | 0.28 |   |
| Basic – pro forma                                                                                                   |   | $                                                       | 0.41    |   | $ | 0.27 |   |
| Diluted – as reported                                                                                               |   | $                                                       | 0.41    |   | $ | 0.28 |   |
| Diluted – pro forma                                                                                                 |   | $                                                       | 0.40    |   | $ | 0.27 |   |

 

----

*(1)**        Share options for thequarter ended March 31, 2003 included $1.4 million of expenserecognition related to options granted in the first quarter of 2003 to EQR'sformer chief executive officer. These options vested immediately upon grant.*

 

**16.****                               Commitmentsand Contingencies**

 

The Operating Partnership, as an owner of real estate, is subject tovarious Federal, state and local environmental laws.  Compliance by the Operating Partnership with existing laws hasnot had a material adverse effect on the Operating Partnership’s financialcondition and results of operations. However, the Operating Partnership cannot predict the impact of new orchanged laws or regulations on its current properties or on properties that itmay acquire in the future.

 

The Operating Partnership does not believe there is any litigationpending or threatened against the Operating Partnership other than routinelitigation arising out of the ordinary course of business, some of which isexpected to be covered by liability insurance, none of which is expected tohave a material adverse effect on the consolidated financial statements of theOperating Partnership.

 

As of March 31, 2003, the Operating Partnershiphas 17 projects in various stages of development with estimated completiondates ranging through June 30, 2004. The Operating Partnership funded a net total of $1.7 million during the quarter endedMarch 31, 2003 for the development of multifamily properties pursuant to itsagreements with developers.  TheOperating Partnership expects to fund approximately $5.0 million in connectionwith these properties during the remainder of 2003 and in 2004.  The three development agreements currentlyin place have the following key terms:

 

•                  The firstdevelopment partner has the right, at any time following completion of aproject, to stipulate a value for such project and offer to sell its interestin the project to the Operating

 

18

----

 

Partnership based on such value.  If the Operating Partnership chooses not topurchase the interest, it must agree to a sale of the project to an unrelatedthird party at such value.  TheOperating Partnership’s partner must exercise this right as to all projectswithin five years after the receipt of the final certificate of occupancy onthe last developed property.  The Operating Partnership has an obligation tofund up to an additional $13.0 million to guarantee third party constructionfinancing, if required.

 

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

 

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

 

In connection with one of its mergers, theOperating Partnership provided a credit enhancement with respect to certaintax-exempt bonds issued to finance certain public improvements at a multifamilydevelopment project.  As of March 31,2003, this enhancement was still in effect at a commitment amount of $12.7million.

 

**17.****                               AssetImpairment**

 

For both the quarters ended March 31, 2003 and 2002, the OperatingPartnership recorded approximately $0.3 million of asset impairment chargesrelated to its technology investments. These charges were the result of a review of the existing investmentsreflected on the consolidated balance sheet. These impairment losses are reflected on the consolidated statements ofoperations in total expenses and include the write-down of assets classified asother assets.

 

**18.****                               ReportableSegments**

 

Operating segments are defined as components of an enterprise aboutwhich separate financial information is available that is evaluated regularlyby senior management.  Senior managementdecides how resources are allocated and assesses performance on a monthlybasis.

 

The Operating Partnership’s primary business is owning, managing, andoperating multifamily residential properties, which includes the generation ofrental and other related income through the leasing of apartment units toresidents and includes 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 rental real estate segment comprisesapproximately 98.8%

 

19

----

 

of total revenues forboth the quarters ended March 31, 2003 and 2002.  The Operating Partnership’s rental real estate segment comprisesapproximately 99.8% and 99.7% of total assets at March 31, 2003 and December31, 2002, respectively.

 

Theprimary financial measure for the Operating Partnership’s rental real estatesegment is net operating income (“NOI”), which represents rental income less:1) property and maintenance expense; 2) real estate taxes and insuranceexpense; and 3) property management expense (all as reflected in theaccompanying statements of operations). Current year NOI is compared to prior year NOI and current year budgetedNOI as a measure of financial performance. NOI from our rental real estate totaled approximately $279.6****million and $293.3 million for the quarters ended March 31, 2003 and2002, respectively.

 

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

 

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

 

Allrevenues are from external customers and there is no customer who contributed10% or more of the Operating Partnership’s total revenues during the quartersended March 31, 2003 or 2002.

 

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

 

Subsequentto March 31, 2003 and through April 30, 2003, the Operating Partnership:

 

•                  Disposedof three properties consisting of 761 units for approximately $28.5 million;and

•                  Repaid $12.9million of mortgage debt at/or prior to maturity.

 

 

20

----

 

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

 

**Overview**

 

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

 

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

 

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

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

•                  Occupancylevels and market rents may be adversely affected by national and localeconomic and market conditions including, without limitation, new constructionof multifamily housing, continuing decline in employment, availability of lowinterest mortgages for single-family home buyers and the potential forgeopolitical instability, all of which are beyond the Operating Partnership’scontrol; and

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

 

Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date hereof.  The Operating Partnership undertakes noobligation to publicly release any revisions to these forward-lookingstatements, which may be made to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.  Forward-looking statements and relateduncertainties are also included in Note 6 to the Notes to ConsolidatedFinancial Statements in this report.

 

**Results of Operations**

 

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

 

21

----

 

 
|                                     |   | **Properties** |       | **Units**   |   | **Purchase /  Sale Price  $ Millions** |   |
|------------------------------------------|--------|----------------|------------|-------------|--------|----------------------------------------|--------|
| **At December 31, 2001**                 |   | **1,076**      | ** ** | **224,801** |   |                                   |   |
| Q1  2002 Acquisitions                    |   | 1              |       | 368         |   | $                                      | 26.0   |   |
| Q1  2002 Dispositions                    |   | (5             | )          | (757        | )      | $                                      | 43.7   |   |
| Q1  2002 Completed Developments          |   | 1              |       | 588         |   |                                   |   |
| **At  March 31, 2002**                   |   | **1,073**      | ** ** | **225,000** |   |                                   |   |
| Q2/Q3/Q4  2002 Acquisitions              |   | 11             |       | 3,266       |   | $                                      | 263.9  |   |
| Ft.  Lewis Joint Venture                 |   | 1              |       | 3,652       |   |                                   |   |
| Q2/Q3/Q4 2002 Dispositions               |   | (53            | )          | (9,956      | )      | $                                      | 502.5  |   |
| Q2/Q3/Q4 2002 Completed Developments     |   | 7              |       | 1,613       |   |                                   |   |
| Q2/Q3/Q4 2002 Unit Configuration Changes |   | —         |       | 16          |   |                                   |   |
| **At  December 31, 2002**                |   | **1,039**      | ** ** | **223,591** |   |                                   |   |
| Q1 2003 Acquisitions                     |   | 3              |       | 920         |   | $                                      | 111.5  |   |
| Q1 2003 Dispositions                     |   | (17            | )          | (4,000      | )      | $                                      | 195.0  |   |
| Q1 2003 Completed Developments           |   | 2              |       | 738         |   |                                   |   |
| **At March 31, 2003**                    |   | **1,027**      | ** ** | **221,249** |   |                                   |   |

 

Significant changes in revenues between the quarterspresented have resulted primarily from reduced rental income through increasedconcessions or reduced apartment rents and occupancy at many of ourproperties.  Significant changes inexpenses have resulted from increases in property and maintenance expensesincluding payroll, maintenance, building, utilities and leasing and advertisingas well as real estate taxes.  Inaddition, the Operating Partnership’s acquisition, disposition and completeddevelopment activity has impacted overall results of operations for thequarters ended March 31, 2003 and 2002. These changes are discussed in greater detail in the followingparagraphs.

 

Properties that the Operating Partnership owned forboth of the quarters ended March 31, 2003 and March 31, 2002 (the “FirstQuarter 2003 Same Store Properties”), which represented 191,278 units, alsoimpacted the Operating Partnership’s results of operations and are discussed aswell in the following paragraphs.

 

***Comparison of the quarter ended March 31, 2003 to thequarter ended March 31, 2002***

 

For the quarter ended March 31,2003, income before allocation to Minority Interests, income from investmentsin unconsolidated entities, net gain on sales of unconsolidated entities anddiscontinued operations decreased by approximately $17.3 million when comparedto the quarter ended March 31, 2002.

 

**Revenuesfrom the First Quarter 2003 Same Store Properties decreased primarily as aresult of lower overall physical occupancy, increased concessions and lowerrental rates charged to both new and renewal residents.  Property operating expenses from the FirstQuarter 2003 Same Store Properties increased mainly due to higher utility,maintenance, building and payroll costs. The following tables provide comparative revenue, expense, net operatingincome (“NOI”) and weighted average occupancy for the First Quarter 2003 SameStore Properties (NOI represents rental income less: 1) property andmaintenance expense; 2) real estate taxes and insurance expense; and 3)property management expense):**

 

22

----

 

 

First Quarter 2003 vs.First Quarter 2002Quarter over Quarter Same-Store Results

 

$ in Millions – 191,278Same-Store Units

 
| **Description** |   | **Revenues** |       | **Expenses** |       | **NOI**   |       |
|-----------------|--------|--------------|------------|--------------|------------|-----------|------------|
|            |   |         | ** ** |         | ** ** |      | ** ** |
| **Q1 2003**     |   | **$**        | **448.1**  | ** **   | **$**      | **176.8** | ** ** | **$** | **271.3** | ** ** |
| **Q1 2002**     |   | **$**        | **464.3**  | ** **   | **$**      | **164.2** | ** ** | **$** | **300.1** | ** ** |
| **Change**      |   | **$**        | **(16.2**  | **)**        | **$**      | **12.6**  | ** ** | **$** | **(28.8** | **)** |
| **Change**      |   | **(3.5**     | **)%**     | **7.7**      | **%**      | **(9.6**  | **)%**     |

 

Same-Store OccupancyStatistics

 

| **Q1 2003** |   | **92.5** | **%**  |
|-------------|--------|----------|--------|
| **Q1 2002** |   | **94.0** | **%**  |
| **Change**  |   | **(1.5** | **)%** |

 

The Operating Partnership’s primary financial measure for evaluatingeach of its apartment communities is NOI. The Operating Partnership believes that NOI is helpful to investors as asupplemental measure of the operating performance of a real estate companybecause it is a direct measure of the actual operating results of the OperatingPartnership’s apartment communities.

 

For properties that the Operating Partnership acquired prior to January1, 2002 and expects to continue to own through December 31, 2003, the OperatingPartnership anticipates the following operating results for the full yearending December 31, 2003:

** **

**2003Same-Store Operating Assumptions**

** **
| **Physical Occupancy** |   | **93.0%**            |       |
|------------------------|--------|----------------------|------------|
| **Revenue Change**     |   | **(3.5%) to (1.2%)** |       |
| **Expense Change**     |   | **2.8%) to 5.2%**    |       |
| **NOI Change**         |   | **(9.2%) to (3.7%)** |       |
| **Dispositions**       |   | **$ 700 million**    | ** ** |

 

These 2003 operating assumptions are based on current expectations andare forward-looking.

 

Rental income from properties other than First Quarter 2003 Same StoreProperties increased by approximately $11.3 million primarily as a result ofrevenue from properties acquired in 2002 and 2003 and additional PartiallyOwned Properties consolidated in the fourth quarter of 2002.

 

Interest and other income decreased by approximately $0.8 million,primarily as a result of lower interest rates being earned on short-terminvestment accounts along with lower balances on deposit in tax-deferredexchange accounts.

 

Property management expenses include off-site expenses associated withthe self-management of the Operating Partnership’s properties.  These expenses decreased by approximately$3.6 million or 18.4%.  This decrease isprimarily attributable to a reversal of a profit sharing accrual in the firstquarter of 2003 related to the 2002 calendar year as the Operating Partnershipdidn’t achieve its stated goals and management elected not to make adiscretionary contribution to the plan. In addition, the Company recorded lower expense in connection withgranting less restricted shares to its employees in the first quarter of 2003.

 

Fee and asset managementrevenues, net of fee and asset management expenses, increased by $0.9 millionas a result of managing additional units at Fort Lewis, Washington starting inApril 2002.  As of

 

23

----

 

March 31, 2003 and 2002, the Operating Partnership managed 18,896****units and 16,539 units, respectively, forthird parties and unconsolidated entities.

 

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

 

Interest expense, includingamortization of deferred financing costs, decreased approximately $3.5 millionprimarily due to lower variable interest rates.  During the quarter ended March 31, 2003, the OperatingPartnership capitalized interest costs of approximately $5.4 million ascompared to $5.9 million for the quarter ended March 31, 2002.  This capitalization of interest primarilyrelated to equity investments in unconsolidated entities engaged in developmentactivities.  The effective interest coston all indebtedness for the quarter ended March 31, 2003 was 6.39% as compared to6.51% for the quarter ended March 31, 2002.

 

General and administrative expenses, which includecorporate operating expenses, increased approximately $0.4 million between theperiods under comparison.  This increasewas primarily due to the Company’s election to begin expensing stock-based compensationeffective January 1, 2003 (see Note 15 in the Notes to Consolidated FinancialStatements) partially offset by lower expenses recorded in connection withgranting less restricted shares to employees in the first quarter of 2003.

 

Income from investments in unconsolidated entitiesdecreased approximately $0.1 million between the periods under comparison.  This decrease is primarily the result ofincreased equity losses partially offset by unrealized gains on derivativeinstruments.

 

Net gain on sales ofdiscontinued operations increased approximately $67.9 million between theperiods under comparison.  This increaseis primarily the result of a greater number of properties sold during thequarter ended March 31, 2003, including two California properties, as well asthe fact that many such sold properties were more fully depreciated.

 

Discontinuedoperations, net, decreased approximately $9.5 million between the periods undercomparison.  See Note 14 in the Notes toConsolidated Financial Statements for further discussion.

 

**Liquidity and Capital Resources**

 

As of January 1, 2003,the Operating Partnership had approximately $29.9 million of cash and cashequivalents and $499.2 million available under its line of credit (net of $60.8million which was restricted/dedicated to support letters of credit and notavailable for borrowing).  After takinginto effect the various transactions discussed in the following paragraphs andthe net cash provided by operating activities, the Operating Partnership’s cashand cash equivalents balance at March 31, 2003 was approximately $310.3 millionand the amount available on the Operating Partnership’s line of credit was$646.7 million (net of $53.3 million which was restricted/dedicated to supportletters of credit and not available for borrowing).

 

Part of the OperatingPartnership’s acquisition and development funding strategy and the funding ofinvestments in various unconsolidated entities is to utilize its line of creditand to subsequently repay the line of credit from the disposition ofproperties, retained cash flows or the issuance of additional equity or debtsecurities.  Continuing to utilize thisstrategy during the quarter ended March 31, 2003, the Operating Partnership:

 

•                  Disposed ofseventeen properties (including one Unconsolidated Property) and received netproceeds of approximately $192.1 million;

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

 

24

----

 

•                  Issuedapproximately 0.3 million OP Units and received net proceeds of $6.9 million;and

•                  Obtained $48.7million in new mortgage financing.

 

All of these proceedswere utilized to:

 

•                  Purchase additional properties;

•                  Repay the line of credit;

•                  Repay mortgage indebtedness onselected properties;

•                  Invest in unconsolidated developmentprojects; and

•                  Invest in unconsolidated entities.

 

During the quarter ended March 31, 2003, the Operating Partnership:

 

•                  Acquired three properties utilizingcash of $76.7 million;

•                  Repaid $140.0 million on its line ofcredit;

•                  Repaid $110.1 million of mortgageloans; and

•                  Funded a net of $1.7 million underits development agreements.

 

Depending on its analysis of market prices, economic conditions, andother opportunities for the investment of available capital, the Company mayrepurchase up to an additional $85.0 million of its Common Shares pursuant toits existing share buyback program authorized by the Board of Trustees.  The Operating Partnership, in turn, wouldrepurchase $85.0 million of its OP Units held by EQR.  The Company did not repurchase any of its Common Shares duringthe quarter ended March 31, 2003.

 

The Operating Partnership’s total debt summary and debt maturityschedule as of March 31, 2003, are as follows:

 

DebtSummary as of March 31, 2003

 

|                                |   | **$ Millions** |   | **Weighted  Average Rate** |   |
|-------------------------------------|--------|----------------|--------|----------------------------|--------|
| Secured                             |   | $              | 2,901  |                       | 6.05   | % |
| Unsecured                           |   | 2,854          |   | 6.36                       | %      |
| Total                               |   | $              | 5,755  |                       | 6.20   | % |
|                                |   |           |   |                       |   |
| Fixed Rate*                         |   | $              | 5,122  |                       | 6.70   | % |
| Floating Rate*                      |   | 633            |   | 2.23                       | %      |
| Total*                              |   | $              | 5,755  |                       | 6.20   | % |
|                                |   |           |   |                       |   |
| Above Totals Include:               |   |           |   |                       |   |
| Total Tax Exempt                    |   | $              | 973    |                       | 3.63   | % |
| Unsecured Revolving Credit Facility |   | $              | — |                       | — |   |

 

----

* Net of the effect of any interest rate protection agreements.

 

25

----

 

DebtMaturity Schedule as of March 31, 2003

 

| **Year**  |   | **$  Millions** |       | **%  of Total** |      |
|-----------|--------|-----------------|------------|-----------------|-----------|
| **2003**  |   | **$**           | **294**    | ** **      | **5.1**   | **%** |
| **2004**  |   | **656**         | ** ** | **11.4**        | **%**     |
| **2005*** |   | **617**         | ** ** | **10.7**        | **%**     |
| **2006**  |   | **490**         | ** ** | **8.5**         | **%**     |
| **2007**  |   | **300**         | ** ** | **5.2**         | **%**     |
| **2008**  |   | **489**         | ** ** | **8.5**         | **%**     |
| **2009**  |   | **258**         | ** ** | **4.5**         | **%**     |
| **2010**  |   | **199**         | ** ** | **3.5**         | **%**     |
| **2011**  |   | **691**         | ** ** | **12.0**        | **%**     |
| **2012+** |   | **1,761**       | ** ** | **30.6**        | **%**     |
| **Total** |   | **$**           | **5,755**  | ** **      | **100.0** | **%** |

 

----

**Includes $300 million with a final maturity of 2015 that is putable/callable in2005.*

 

The Operating Partnership’s “Consolidated Debt-to-Total MarketCapitalization Ratio” as of March 31, 2003 is presented in the following table.  The Operating Partnership calculates theequity component of its market capitalization as the sum of (i) the totaloutstanding OP Units at the equivalent market value of the closing price ofEQR’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.

 

Capitalization as ofMarch 31, 2003

 

| Total Debt                                            |   |            |       | $                 | 5,755,435,646      |   |
|-------------------------------------------------------|--------|-----------------|------------|-------------------|--------------------|--------|
|                                                  |   |            |       |              |               |
| **OP  Units**                                         |   | **294,741,805** | ** ** |              |               |
| **OP Unit  Equivalents (see below)**                  |   | **14,944,282**  | ** ** |              |               |
| **Total  Outstanding at quarter-end**                 |   | **309,686,087** | ** ** |              |               |
| **EQR  Common Share Price at March 31, 2003**         |   | **$**           | **24.07**  | ** **        |               |   |
|                                                  |   |            | ** ** | **7,454,144,114** |               |
| **Perpetual  Preference Units Liquidation Value**     |   |            | ** ** | **565,000,000**   |               |
| **Perpetual  Preference Interests Liquidation Value** |   |            | ** ** | **211,500,000**   |               |
| **Total  Market Capitalization**                      |   |            | ** ** | **$**             | **13,986,079,760** |   |
|                                                  |   |            | ** ** |              |               |
| **Debt/Total  Market Capitalization**                 |   |            |       | **41.15**         | **%**              |
|                                                       |        |                 |            |                   |                    |        |  |

 

26

----

 

Convertible PreferenceUnits, Preference Interests and Junior Preference Unitsas of March 31, 2003

 
|                      |   | **Units** |   | **Conversion  Ratio** |   | **OP Unit  Equivalents** |   |
|---------------------------|--------|-----------|--------|-----------------------|--------|--------------------------|--------|
| Preference  Units:        |   |      |   |                  |   |                     |   |
| Series  E                 |   | 2,544,864 |   | 1.1128                |   | 2,831,925                |   |
| Series  G                 |   | 1,264,692 |   | 8.5360                |   | 10,795,408               |   |
| Series  H                 |   | 51,228    |   | 1.4480                |   | 74,178                   |   |
| Preference  Interests:    |   |      |   |                  |   |                     |   |
| Series  H                 |   | 190,000   |   | 1.5108                |   | 287,052                  |   |
| Series  I                 |   | 270,000   |   | 1.4542                |   | 392,634                  |   |
| Series  J                 |   | 230,000   |   | 1.4108                |   | 324,484                  |   |
| Junior  Preference Units: |   |      |   |                  |   |                     |   |
| Series  A                 |   | 56,616    |   | 4.081600              |   | 231,084                  |   |
| Series  B                 |   | 7,367     |   | 1.020408              |   | 7,517                    |   |
|                      |   |      |   |                  |   |                     |   |
| Total                     |   |      |   |                  |   | 14,944,282               |   |

 

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

 

From April 1, 2003 through April 30, 2003, theOperating Partnership:

 

•                  Disposedof three properties consisting of 761 units for approximately $28.5 million;and

•                  Repaid$12.9 million of mortgage debt at/or prior to maturity.

 

***Off-Balance SheetArrangements and Contractual Obligations***

 

As of March 31, 2003, the Operating Partnership has 17 projects invarious stages of development with estimated completion dates ranging throughJune 30, 2004.  The three developmentagreements currently in place have the following key terms:

 

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

 

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

 

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

 

27

----

 

(generally defined ashaving achieved 90% occupancy for three consecutive months following thesubstantial completion of a project) to market a project for sale.  Thereafter, either the Operating Partnershipor its development partner may market a project for sale.  If the Operating Partnership’s developmentpartner proposes the sale, the Operating Partnership may elect to purchase theproject at the price proposed by its partner or defer the sale until twoindependent appraisers appraise the project. If the two appraised values vary by more than 5%, a third appraiser willbe chosen to determine the fair market value of the property.  Once a value has been determined, theOperating Partnership may elect to purchase the property or authorize itsdevelopment partner to sell the project at the agreed-upon value.

 

In connection with one of its mergers, the Operating Partnershipprovided a credit enhancement with respect to certain tax-exempt bonds issuedto finance certain public improvements at a multifamily developmentproject.  As of April 30, 2003, thisenhancement was still in effect at a commitment amount of $12.7 million.

 

As of April 30, 2003, the Operating Partnership has a commitment tofund $6.1 million to Constellation Real Technologies, LLC, a real estatetechnology company.

 

See also Note 7 and the third paragraph of Note 16 in the Notes toConsolidated Financial Statements for additional discussion regarding theOperating Partnership’s investments in unconsolidated entities.

 

***Capitalizationof Fixed Assets and Improvements to Real Estate***

 

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 two major categories andseveral subcategories:

** **
| **•** | **Replacements*(inside the unit)*.  These include:** |
|------------|-----------------------------------------------------------|
|       | **•**                                                | **carpets  and hardwood floors;** |
|       | **•**                                                | **appliances;** |
|       | **•**                                                | **mechanical  equipment such as individual furnace/air units, hot water heaters, etc;** |
|       | **•**                                                | **furniture  and fixtures such as kitchen/bath cabinets, light fixtures, ceiling fans,  sinks, tubs, toilets, mirrors, countertops, etc;** |
|       | **•**                                                | **flooring  such as vinyl, linoleum or tile; and** |
|       | **•**                                                | **blinds/shades** |

** **

** **

**Wetypically capitalize for established properties approximately $260 to $290 perunit annually for inside the unit replacements.  All replacements are depreciated over a five-year estimateduseful life.  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 parking lots, 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 equipment systems;** |
|       | **•**                                                            | **interior  and exterior structural repair and exterior painting and siding;** |
|       | **•**                                                            | **major  landscaping and grounds improvement; and** |
|       | **•**                                                            | **vehicles  and office and maintenance equipment.** |

** **

**Wetypically capitalize for established properties approximately $380 to $390 perunit annually for outside the unit building improvements.  All building improvements are depreciatedover a five to ten-year**

** **

**28**

----

** **

estimated useful life.  Weexpense as incurred all recurring expenditures that do not improve the value ofthe asset or extend its useful life.

 

For the quarter ended March 31, 2003, our actual improvements to realestate totaled approximately $33.6 million. This includes the following detail (amounts in thousands except for unitand per unit amounts):

 

**Capitalized Improvements to Real EstateFor the Three Months Ended March 31, 2003**

 
|                           |   | **Total  Units  (1)** | ****   | **Replacements** |   | **Avg.****Per  Unit** |   | **Building  Improvements** |   | **Avg.****Per  Unit** |   | **Total** |   | **Avg.****Per  Unit** |   |
|--------------------------------|--------|-----------------------|--------|------------------|--------|-----------------------|--------|----------------------------|--------|-----------------------|--------|-----------|--------|-----------------------|--------|
| Established  Properties(2)     |   | 181,447               |   | $                | 12,693 |                  | $      | 70                         |   | $                     | 15,276 |      | $      | 84                    |   | $ | 27,969 |   | $ | 154 |   |
| New  Acquisition Properties(3) |   | 9,443                 |   | 432              |   | 48                    |   | 1,567                      |   | 176                   |   | 1,999     |   | 224                   |   |
| Other(4)                       |   | 7,916                 |   | 1,466            |   |                  |   | 2,168                      |   |                  |   | 3,634     |   |                  |   |
| Total                          |   | 198,806               |   | $                | 14,591 |                  |   |                       | $      | 19,011                |   |      |   | $                     | 33,602 |   |   |   |
|                                |        |                       |        |                  |        |                       |        |                            |        |                       |        |           |        |                       |        |  |  |  |  |  |  |

 

----

(1)                      Total units exclude 22,443 unconsolidated units.

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

(3)                      Wholly Owned Properties acquired during 2001, 2002 and 2003.  Per unit amounts are based on a weightedaverage of 8,914 units.

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

 

We anticipate capitalizing annually an average of approximately $640 to$680 per unit for inside and outside the unit capital expenditures to ourestablished properties.  The OperatingPartnership expects to fund approximately $110.0 million for capitalexpenditures for replacements and building improvements for all consolidatedproperties for the remainder of 2003.

 

During the quarter ended March 31, 2003, the Operating Partnership’stotal non-real estate capital additions, such as computer software, computerequipment, and furniture and fixtures and leasehold improvements to theOperating Partnership’s property management offices and its corporate offices,was approximately $0.9 million.  TheOperating Partnership expects to fund approximately $4.0 million in totaladditions to non-real estate property for the remainder of 2003.

 

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

 

***Derivative Instruments***

 

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

 

The Operating Partnershiphas a policy of only entering into contracts with major financial institutionsbased upon their credit ratings and other factors.  When viewed in conjunction with the underlying and offsetting exposurethat the derivatives are designed to hedge, the Operating Partnership has notsustained a material loss from those instruments nor does it anticipate anymaterial adverse effect on its net income or financial position in the futurefrom the use of derivatives.

 

SeeNote 12 in the Notes to Consolidated Financial Statements for additionaldiscussion of derivative instruments at March 31, 2003.

 

29

----

 

***Other***

 

Total distributions paid in April 2003 amounted to $143.6 million(excluding distributions on Partially Owned Properties), which included certaindistributions declared in the first quarter of 2003.

 

The Operating Partnership expects to meet its short-term liquidityrequirements, including capital expenditures related to maintaining itsexisting properties and certain scheduled unsecured note and mortgage noterepayments, generally through its working capital, net cash provided byoperating activities and borrowings under its line of credit.  The Operating Partnership considers its cashprovided by operating activities to be adequate to meet operating requirementsand payments of distributions.  TheOperating Partnership also expects to meet its long-term liquidity requirements,such as scheduled unsecured note and mortgage debt maturities, propertyacquisitions, financing of construction and development activities and capitalimprovements through the issuance of unsecured notes and equity securities,including additional OP Units, and proceeds received from the disposition ofcertain properties.  In addition, theOperating Partnership has certain unencumbered properties available to secureadditional mortgage borrowings in the event that the public capital markets areunavailable or the cost of alternative sources of capital is too high.  The fair value of these unencumberedproperties are in excess of the required value the Operating Partnership mustmaintain in order to comply with covenants under its unsecured notes and lineof credit.

 

The Operating Partnership has arevolving credit facility with potential borrowings of up to $700.0million.  This facility maturesin May 2005 and will be used to fund property acquisitions, costs for certainproperties under development and short term liquidity requirements.  As of April 30, 2003, no amounts wereoutstanding under this facility.

 

**CriticalAccounting Policies and Estimates**

 

The Operating Partnership has identified six significant accountingpolicies as critical accounting policies. These critical accounting policies are those that have the most impacton the reporting of our financial condition and those requiring significantjudgments and estimates.  With respectto these critical accounting policies, management believes that the applicationof judgments and assessments is consistently applied and produces financialinformation that fairly presents the results of operations for all periodspresented.  The six critical accountingpolicies are:

 

*Impairment of Long-LivedAssets, Including Goodwill*

 

The Operating Partnershipperiodically evaluates its long-lived assets, including its investments in realestate and goodwill, for impairment indicators.  The judgments regarding the existence of impairment indicatorsare based on factors such as operational performance, market conditions,expected holding period of each asset and legal and environmentalconcerns.  Future events could occurwhich would cause the Operating Partnership to conclude that impairmentindicators exist and an impairment loss is warranted.

 

*Depreciation of Investmentin Real Estate*

 

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

 

*Cost Capitalization*

 

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

 

30

----

 

addition, the Operating Partnership capitalizes the payroll andassociated costs of employees directly responsible for and who spend all oftheir time on the supervision of major capital projects.  These costs are reflected on the balancesheet as an increase to depreciable property.

 

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

 

*Fair Value of FinancialInstruments, Including Derivative Instruments*

 

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

 

*Revenue Recognition*

 

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

 

*Stock-Based Compensation*

 

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

 

SFAS No. 148 provides three transitionmethods for entities that adopt the fair value recognition provisions of SFASNo. 123.  The Company has chosen to usethe “Prospective Method”.  This methodrequires that companies apply the recognition provisions of SFAS No. 123 toonly employee awards granted or modified after the beginning of the fiscal yearin which the recognition provisions are first applied, or January 1, 2003.  Compensation expense under all of the Company’splans is generally recognized over periods ranging from three months to fiveyears.  Therefore, the cost related tostock-based

 

31

----

 

employee compensation included in the determination of net income forthe quarter ended March 31, 2003 is less than that which would have beenrecognized if the fair value based method had been applied to all awards sincethe original effective date of SFAS No. 123. See Note 15 in the Notes to Consolidated Financial Statements forfurther discussion.

 

**Funds From Operations**

 

**For the quarter ended March 31,2003, Funds From Operations (“FFO”) available to OP Units decreased $23.4million, or 12.2%, as compared to the quarter ended March 31, 2002.**

 

The following is a reconciliation of net incomeavailable to OP Units to FFO available to OP Units for the quarters ended March31, 2003 and 2002:

 

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

 
|                                           |   | **Quarter  Ended March 31,** |    |
|------------------------------------------------|--------|------------------------------|---------|
|                                           |   | **2003**                     |    | **2002** |   |
| Net income available to OP Units               |   | $                            | 120,277 |   | $ | 82,794 |   |
| Adjustments:                                   |   |                         |    |   |   |
| Depreciation                                   |   | 117,816                      |    | 110,992 |   |
| Depreciation – Non-real estate additions  |   | (2,275                       | )       | (1,977 | ) |
| Depreciation – Partially Owned Properties |   | (2,039                       | )       | (1,871 | ) |
| Depreciation – Unconsolidated Properties  |   | 5,195                        |    | 4,490 |   |
| Net gain on sales of unconsolidated entities   |   | (1,212                       | )       | (5,657 | ) |
| Discontinued operations:                       |   |                         |    |   |   |
| Depreciation                                   |   | 1,102                        |    | 5,776 |   |
| Net gain on sales of depreciable property      |   | (70,229                      | )       | (2,477 | ) |
| FFO available to OP Units – basic(1)(2)   |   | $                            | 168,635 |   | $ | 192,070 |   |

 

----

***(1)****      **The NationalAssociation of Real Estate Investment Trusts (“NAREIT”) defines funds fromoperations (“FFO”) (April 2002 White Paper) as net income (computed inaccordance with accounting principles generally accepted in the United States),excluding gains (or losses) from sales of property, plus depreciation andamortization, and after adjustments for unconsolidated partnerships and jointventures.  Adjustments forunconsolidated partnerships and joint ventures will be calculated to reflectfunds from operations on the same basis. The April 2002 White Paper states that gain or loss on sales of propertyis excluded from FFO for previously depreciated operating properties only.  Once the Operating Partnership commences theconversion of units to condominiums, it simultaneously discontinuesdepreciation of such property. Accordingly, the Operating Partnership included in FFO its incrementalgains or losses from the sale of condominium units to third parties, whichrepresented net gains of $443 and $339 for the quarters ended March 31, 2003and 2002, respectively.*

** **

***(2)****      **The OperatingPartnership believes that FFO is helpful to investors as a supplemental measureof the operating performance of a real estate company because, along with cashflows from operating activities, financing activities and investing activities,it provides investors an understanding of the ability of the OperatingPartnership to incur and service debt and to make capital expenditures.  FFO in and of itself does not represent cashgenerated from operating activities in accordance with GAAP and thereforeshould not be considered an alternative to net income as an indication of theOperating Partnership’s performance or to net cash flows from operatingactivities as determined by GAAP as a measure of liquidity and is notnecessarily indicative of cash available to fund cash needs.  The Operating Partnership’s calculation ofFFO may differ from other real estate companies due to variations among theOperating Partnership’s and other real estate companies’ accounting policiesfor replacement type items and, accordingly,*

 

32

----

 

***maynot be comparable to such other real estate companies.***

 

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

 

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

 

**Item 4. DisclosureControls and Procedures**

 

Within 90 days prior to the filing date of this quarterly report onForm 10-Q, the Operating Partnership carried out an evaluation, under thesupervision and with the participation of the Operating Partnership’smanagement including the Chief Executive Officer and Chief Financial Officer ofEQR, of the effectiveness of the design and operation of the disclosure controlsand procedures pursuant to Exchange Act Rules 13a-14 and 15d-14.  Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the disclosurecontrols and procedures are effective in timely alerting them to materialinformation.  There have been nosignificant changes to the internal controls of the Operating Partnership or inother factors that could significantly affect the internal controls subsequentto the completion of this evaluation.

 

**PART II.**                        OTHER INFORMATION

 

**Item1.**           LegalProceedings

 

There have been no new or significant developments related to the legalproceedings that were discussed in Part I, Item III of the OperatingPartnership’s Form 10-K for the year ended December 31, 2002.

 

**Item6.**           Exhibits andReports on Form 8-K

 

**(A)**                              Exhibits:

 

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

 

**99.1**                           Certification pursuant to 18 U.S.C. Section 1350, asadopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Bruce W.Duncan, Chief Executive Officer of Registrant’s General Partner.

 

**99.2**                           Certification pursuant to 18 U.S.C. Section 1350, asadopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of David J.Neithercut, Chief Financial Officer of Registrant’s General Partner.

 

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

 

**A report on Form 8-K dated March 19, 2003 containingadditional information on the prospectus supplement for the OperatingPartnership’s $400.0 million unsecured note offering.**

 

33

----

 

**SIGNATURES**

 

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

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

 

34

----

 

**CERTIFICATIONS**

 

I, Bruce W. Duncan, Chief Executive Officer of Equity Residential,general partner of ERP Operating Limited Partnership, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of ERP Operating Limited Partnership;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              Designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              Presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             Any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

Date:  May 13, 2003

 
|   |   |   | /s/ Bruce W. Duncan                             |   |
|--------|--------|--------|-------------------------------------------------|--------|
|   |   |   | Bruce W. Duncan                                 |   |
|   |   |   | Chief Executive  Officer  of Equity Residential |   |

** **

**35**

----

** **

**CERTIFICATIONS**

 

I, David J. Neithercut, Chief Financial Officer of Equity Residential,general partner of ERP Operating Limited Partnership, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of ERP Operating Limited Partnership;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              Designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              Presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             Any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

Date:  May 13, 2003

 
|   |   |   |   | /s/ David J. Neithercut                         |   |
|--------|--------|--------|--------|-------------------------------------------------|--------|
|   |   |   |   | David J.  Neithercut                            |   |
|   |   |   |   | Chief Financial  Officer  of Equity Residential |   |

 

36

----

 

##### **EXHIBIT INDEX**

 
| **Exhibit** |   | **Document**                                                                                                                                                                                                      |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                              |
| 12          |   | Computation of Ratio of  Earnings to Combined Fixed Charges.                                                                                                                                                      |
|        |   |                                                                                                                                                                                                              |
| 99.1        |   | 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.     |
|        |   |                                                                                                                                                                                                              |
| 99.2        |   | Certification pursuant to 18  U.S.C. Section 1350, as adopted, pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of David J. Neithercut, Chief Financial Officer  of Registrant’s General Partner. |

 

----