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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

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

For the quarterly period ended JUNE 30, 2002Quarterly Period Ended MARCH 31, 2003

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

Commission File Number: 1-12252

EQUITY RESIDENTIAL

(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)Charter)

EQUITY RESIDENTIAL PROPERTIES TRUST
(Former name of registrant, if changed since last report)

Maryland

13-3675988

(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)

(312) 474-1300
(Registrant's telephone number, including area code)

http://www.equityapartments.com
(Registrant's web site)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý   Noo

 

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

The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding on July 31, 2002April 30, 2003 was 275,538,420.272,540,045.



EQUITY RESIDENTIAL

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

thousands except for share amounts)

(Unaudited)

 
 June 30,
2002
 December 31,
2001
 
ASSETS       
Investment in real estate       
 Land $1,857,497 $1,840,170 
 Depreciable property  11,205,307  11,096,847 
 Construction in progress  94,292  79,166 
  
 
 
   13,157,096  13,016,183 
 Accumulated depreciation  (1,929,115) (1,718,845)
  
 
 
Investment in real estate, net of accumulated depreciation  11,227,981  11,297,338 

Real estate held for disposition
 
 
—
 
 
3,371
 
Cash and cash equivalents  88,942  51,603 
Investments in unconsolidated entities  423,529  397,237 
Rents receivable  2,627  2,400 
Deposits—restricted  149,927  218,557 
Escrow deposits—mortgage  62,049  76,700 
Deferred financing costs, net  32,964  27,011 
Rental furniture, net  —  20,168 
Property and equipment, net  —  3,063 
Goodwill, net  47,122  47,291 
Other assets  76,659  90,886 
  
 
 
  Total assets $12,111,800 $12,235,625 
  
 
 

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
Liabilities:       
 Mortgage notes payable $3,210,510 $3,286,814 
 Notes, net  2,438,974  2,260,944 
 Line of credit  —  195,000 
 Accounts payable and accrued expenses  116,192  108,254 
 Accrued interest payable  62,676  62,360 
 Rents received in advance and other liabilities  65,226  83,005 
 Security deposits  47,098  47,644 
 Distributions payable  145,880  141,832 
  
 
 
  Total liabilities  6,086,556  6,185,853 
  
 
 

Commitments and contingencies
 
 
 
 
 
 
 
Minority Interests:       
 Operating Partnership  364,233  379,898 
 Preference Interests  246,000  246,000 
 Junior Preference Units  5,846  5,846 
 Partially Owned Properties  11,503  4,078 
  
 
 
  Total Minority Interests  627,582  635,822 
  
 
 

Shareholders' equity:
 
 
 
 
 
 
 
 Preferred Shares of beneficial interest, $.01 par value; 100,000,000 shares authorized; 10,691,940 shares issued and outstanding as of June 30, 2002 and 11,344,521 shares issued and outstanding as of December 31, 2001  950,356  966,671 
 Common Shares of beneficial interest, $.01 par value; 1,000,000,000 shares authorized; 275,467,781 shares issued and outstanding as of June 30, 2002 and 271,621,374 shares issued and outstanding as of December 31, 2001  2,755  2,716 
 Paid in capital  4,967,957  4,892,744 
 Employee notes  (3,870) (4,043)
 Deferred compensation  (31,607) (25,778)
 Distributions in excess of accumulated earnings  (457,264) (385,320)
 Accumulated other comprehensive loss  (30,665) (33,040)
  
 
 
  Total shareholders' equity  5,397,662  5,413,950 
  
 
 
  Total liabilities and shareholders' equity $12,111,800 $12,235,625 
  
 
 

 

 

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 SHAREHOLDERS’ EQUITY

 

 

 

 

 

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:

 

 

 

 

 

Operating Partnership

 

345,983

 

349,646

 

Preference Interests

 

246,000

 

246,000

 

Junior Preference Units

 

5,846

 

5,846

 

Partially Owned Properties

 

9,395

 

9,811

 

Total Minority Interests

 

607,224

 

611,303

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares authorized;
10,520,784 shares issued and outstanding as of March 31, 2003 and 10,524,034 shares issued and outstanding as of December 31, 2002

 

946,076

 

946,157

 

Common Shares of beneficial interest, $0.01 par value; 1,000,000,000 shares authorized;
272,488,106 shares issued and outstanding as of March 31, 2003 and 271,095,481 shares issued and outstanding as of December 31, 2002

 

2,725

 

2,711

 

Paid in capital

 

4,827,623

 

4,839,218

 

Deferred compensation

 

(9,832

)

(12,118

)

Distributions in excess of accumulated earnings

 

(541,721

)

(535,056

)

Accumulated other comprehensive loss

 

(42,228

)

(43,789

)

Total shareholders’ equity

 

5,182,643

 

5,197,123

 

Total liabilities and shareholders’ equity

 

$

12,030,770

 

$

11,810,917

 

See accompanying notes

2



EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands except per share data)

(Unaudited)

 
 Six Months Ended June 30,
 Quarter Ended June 30,
 
 
 2002
 2001
 2002
 2001
 
REVENUES             
 Rental income $1,011,823 $1,014,813 $506,915 $509,428 
 Fee and asset management  4,310  4,140  2,592  2,168 
 Interest and other income  9,318  11,525  5,210  5,024 
 Interest income—investment in mortgage notes  —  8,763  —  6,019 
  
 
 
 
 
  Total revenues  1,025,451  1,039,241  514,717  522,639 
  
 
 
 
 
EXPENSES             
 Property and maintenance  257,727  273,318  129,360  138,747 
��Real estate taxes and insurance  103,415  95,613  51,422  48,165 
 Property management  37,289  36,364  18,256  17,686 
 Fee and asset management  3,577  3,648  1,758  1,764 
 Depreciation  232,721  221,797  117,509  111,296 
 Interest:             
  Expense incurred, net  171,993  178,660  87,229  88,857 
  Amortization of deferred financing costs  2,988  2,810  1,597  1,413 
 General and administrative  22,327  14,079  11,527  7,325 
 Impairment on technology investments  581  6,775  290  3,772 
 Amortization of goodwill  —  1,281  —  638 
  
 
 
 
 
  Total expenses  832,618  834,345  418,948  419,663 
  
 
 
 
 

Income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle
 
 
192,833
 
 
204,896
 
 
95,769
 
 
102,976
 
Allocation to Minority Interests:             
 Operating Partnership  (13,784) (16,474) (7,343) (6,678)
 Partially Owned Properties  (1,325) (238) (519) (133)
Income from investments in unconsolidated entities  233  960  7  610 
Net gain (loss) on sales of unconsolidated entities  5,246  339  (411) 339 
  
 
 
 
 
Income before discontinued operations, extraordinary items and cumulative effect of change in accounting principle  183,203  189,483  87,503  97,114 
Net gain on sales of discontinued operations  28,446  46,226  25,630  4,448 
Discontinued operations, net  2,994  3,666  535  1,574 
  
 
 
 
 
Income before extraordinary items and cumulative effect of change in accounting principle  214,643  239,375  113,668  103,136 
Extraordinary items  (468) 106  (371) (205)
Cumulative effect of change in accounting principle  —  (1,270) —  — 
  
 
 
 
 
Net income  214,175  238,211  113,297  102,931 
Preferred distributions  (48,781) (57,419) (24,256) (28,893)
  
 
 
 
 
Net income available to Common Shares $165,394 $180,792 $89,041 $74,038 
  
 
 
 
 
Net income per share—basic $0.61 $0.68 $0.33 $0.28 
  
 
 
 
 
Net income per share—diluted $0.60 $0.67 $0.32 $0.27 
  
 
 
 
 
Weighted average Common Shares outstanding—basic  272,126  265,781  273,146  266,357 
  
 
 
 
 
Weighted average Common Shares outstanding—diluted  298,422  293,817  299,494  293,939 
  
 
 
 
 
Distributions declared per Common Share outstanding $0.8650 $0.8150 $0.4325 $0.4075 
  
 
 
 
 

 

 

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:

 

 

 

 

 

Operating Partnership

 

(9,110

)

(6,441

)

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

 

64,259

 

88,098

 

Net gain on sales of discontinued operations

 

70,672

 

2,816

 

Discontinued operations, net

 

416

 

9,964

 

Net income

 

135,347

 

100,878

 

Preferred distributions

 

(24,180

)

(24,525

)

Net income available to Common Shares

 

$

111,167

 

$

76,353

 

Net income per share – basic

 

$

0.41

 

$

0.28

 

Net income per share – diluted

 

$

0.41

 

$

0.28

 

Weighted average Common Shares outstanding – basic

 

270,678

 

271,094

 

Weighted average Common Shares outstanding – diluted

 

297,646

 

297,229

 

Distributions declared per Common Share outstanding

 

$

0.4325

 

$

0.4325

 

See accompanying notes

3

 
 Six Months Ended June 30,
 Quarter Ended June 30,
 
 2002
 2001
 2002
 2001
Comprehensive income:            
 Net income $214,175 $238,211 $113,297 $102,931
  Other comprehensive income (loss)—derivative instruments:            
   Cumulative effect of change in accounting principle  —  (5,334) —  —
   Unrealized holding gains (losses) arising during the period  1,990  (3,396) (5,219) 8,358
   Losses reclassified into earnings from other comprehensive income  385  226  217  171
  
 
 
 
 Comprehensive income $216,550 $229,707 $108,295 $111,460
  
 
 
 

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(Amounts in thousands except per share data)

(Unaudited)

 

 

Quarter ended March 31,

 

 

 

2003

 

2002

 

Comprehensive income:

 

 

 

 

 

Net income

 

$

135,347

 

$

100,878

 

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

 

$

136,908

 

$

108,255

 

See accompanying notes

4



EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 
 Six Months Ended June 30,
 
 
 2002
 2001
 
CASH FLOWS FROM OPERATING ACTIVITIES:       
Net income $214,175 $238,211 
Adjustments to reconcile net income to net cash provided by operating activities:       
 Allocation to Minority Interests:       
  Operating Partnership  13,784  16,474 
  Partially Owned Properties  1,325  238 
 Cumulative effect of change in accounting principle  —  1,270 
 Depreciation  234,846  230,805 
 Amortization of deferred financing costs  2,988  2,810 
 Amortization of discount on investment in mortgage notes  —  (2,256)
 Amortization of goodwill  —  1,924 
 Amortization of discounts and premiums on debt  (424) (1,007)
 Amortization of deferred settlements on interest rate protection agreements  (176) 317 
 Impairment on technology investments  581  6,775 
 Income from investments in unconsolidated entities  (233) (960)
 Net gain on sales of discontinued operations  (28,446) (46,226)
 Net gain on sales of unconsolidated entities  (5,246) (339)
 Extraordinary items  468  (106)
 Unrealized loss (gain) on interest rate protection agreements  483  (132)
 Book value of furniture sales and rental buyouts  —  5,497 
 Compensation paid with Company Common Shares  10,061  6,741 

Changes in assets and liabilities:
 
 
 
 
 
 
 
 (Increase) in rents receivable  (227) (705)
 Decrease (increase) in deposits—restricted  12,108  (12,574)
 Additions to rental furniture  —  (14,532)
 Decrease (increase) in other assets  3,898  (20,327)
 Increase in accounts payable and accrued expenses  9,026  597 
 Increase in accrued interest payable  316  11,626 
 (Decrease) in rents received in advance and other liabilities  (9,972) (4)
 (Decrease) increase in security deposits  (189) 522 
  
 
 
 Net cash provided by operating activities  459,146  424,639 
  
 
 

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 Investment in real estate—acquisitions  (153,034) (187,059)
 Investment in real estate—development  (57,066) (31,472)
 Improvements to real estate  (66,509) (63,269)
 Additions to non-real estate property  (4,602) (3,520)
 Interest capitalized for real estate under development  (4,369) (3,501)
 Interest capitalized for unconsolidated entities under development  (7,954) (9,316)
 Proceeds from disposition of real estate, net  183,494  345,039 
 Proceeds from disposition of furniture rental business  28,741  — 
 Investment in property and equipment  —  (1,626)
 Principal receipts on investment in mortgage notes  —  5,675 
 Investments in unconsolidated entities  (42,441) (43,167)
 Distributions from unconsolidated entities  21,483  16,711 
 Proceeds from disposition of unconsolidated entities  11,317  359 
 Proceeds from refinancing of unconsolidated entities  —  4,450 
 Decrease in deposits on real estate acquisitions, net  56,305  8,594 
 Decrease (increase) in mortgage deposits  14,651  (2,344)
 Business combinations, net of cash acquired  (461) (7,603)
 Other investing activities, net  192  (29)
  
 
 
 Net cash (used for) provided by investing activities  (20,253) 27,922 
  
 
 

 

 

Quarter Ended March 31,

 

 

 

2003

 

2002

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

135,347

 

$

100,878

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Allocation to Minority Interests:

 

 

 

 

 

Operating Partnership

 

9,110

 

6,441

 

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

)

See accompanying notes

5

 
 Six Months Ended June 30,
 
 
 2002
 2001
 
CASH FLOWS FROM FINANCING ACTIVITIES:       
 Loan and bond acquisition costs $(9,124)$(3,948)
 Mortgage notes payable:       
  Proceeds  47,213  45,118 
  Lump sum payoffs  (119,386) (237,040)
  Scheduled principal repayments  (16,322) (16,367)
  Prepayment premiums/fees  (468) (202)
 Notes, net:       
  Proceeds  397,064  299,316 
  Lump sum payoffs  (225,000) — 
  Scheduled principal repayments  (253) (147)
 Lines of credit:       
  Proceeds  292,000  316,491 
  Repayments  (487,000) (538,953)
 (Payments) from settlement of interest rate protection agreements  (1,533) (7,360)
 Proceeds from sale of Common Shares  6,354  5,383 
 Proceeds from sale of Preference Interests  —  48,500 
 Proceeds from exercise of options  27,030  29,468 
 Redemption of Preferred Shares  —  (210,500)
 Payment of offering costs  (158) (1,317)
 Distributions:       
  Common Shares  (235,548) (109,189)
  Preferred Shares  (35,832) (49,898)
  Preference Interests  (10,132) (8,496)
  Junior Preference Units  (162) (109)
  Minority Interests—Operating Partnership  (20,095) (9,949)
  Minority Interests—Partially Owned Properties  (10,375) (665)
 Principal receipts on employee notes, net  173  145 
  
 
 
 Net cash (used for) financing activities  (401,554) (449,719)
  
 
 

Net increase in cash and cash equivalents
 
 
37,339
 
 
2,842
 
Cash and cash equivalents, beginning of period  51,603  23,772 
  
 
 
Cash and cash equivalents, end of period $88,942 $26,614 
  
 
 

SUPPLEMENTAL INFORMATION:
 
 
 
 
 
 
 

Cash paid during the period for interest
 
$
184,216
 
$
187,195
 
  
 
 

Mortgage loans assumed through real estate acquisitions
 
$
14,000
 
$
45,918
 
  
 
 

Mortgage loans (assumed) by purchaser in real estate and furniture rental business dispositions
 
$
(1,680
)
$
(27,358
)
  
 
 

Transfers to real estate held for disposition
 
$
—
 
$
38,741
 
  
 
 

EQUITY RESIDENTIAL

CONSOLIDATED 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 Common Shares

 

2,606

 

4,236

 

Proceeds from exercise of options

 

4,270

 

9,777

 

Payment of offering costs

 

(71

)

(141

)

Distributions:

 

 

 

 

 

Common Shares

 

(117,242

)

(117,338

)

Preferred Shares

 

(19,048

)

(16,441

)

Preference Interests

 

(5,053

)

(5,080

)

Junior Preference Units

 

(81

)

(81

)

Minority Interests – Operating Partnership

 

(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

 

See accompanying notes

6



EQUITY RESIDENTIAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.    Business(Unaudited)

 

1.Business of the Company

Equity Residential ("EQR"(“EQR”), formed in March 1993, is a fully integrated real estate company engaged in the acquisition, ownership, management and operation of multifamily properties.  The CompanyEQR has elected to be taxed as a real estate investment trust ("REIT"(“REIT”).

 

EQR is the general partner of, and as of June 30, 2002March 31, 2003 owned an approximate 92.4% ownership interest in, ERP Operating Limited Partnership, an Illinois limited partnership (the "Operating Partnership"“Operating Partnership”). The Company conducts substantially all of its business and owns substantially all of its assets through the Operating Partnership. The Operating Partnership is, in turn, directly or indirectly, a partner, member or shareholder of numerous partnerships, limited liability companies and corporations which have been established primarily to own fee simple title to multifamily properties or to conduct property management activities and other businesses related to the ownership and operation of multifamily residential real estate.  References to the "Company"“Company” include EQR, the Operating Partnership and each of the partnerships, limited liability companies and corporations controlled by the Operating Partnership and/or EQR.

 

As of June 30, 2002,March 31, 2003, the Company owned or had interestsinvestments in a portfolio of 1,065 multifamily 1,027properties containing 227,963 apartment units located in 36 states consisting of the following:221,249 units.  An ownership breakdown includes:


 Number of
Properties
 Number
of Units

 

Number of
Properties

 

Number of
Units

 

Wholly Owned Properties 943 198,676

 

906

 

191,875

 

Partially Owned Properties (Consolidated) 36 6,931

 

36

 

6,931

 

Unconsolidated Properties 86 22,356

 

85

 

22,443

 

 
 
Total Properties 1,065 227,963

 

1,027

 

221,249

 

 
 

2.                                      Summary of Significant Accounting Policies

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) and certain reclassifications considered necessary for a fair presentation have been included.  Certain reclassifications have been made to the prior period financial statements in order to conform to the current year presentation.  Operating results for the sixthree months ended June 30, 2002March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.2003.

 

The balance sheet at December 31, 20012002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

 

For further information, including definition of capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company'sCompany’s annual report on Form 10-K for the year ended December 31, 2001.

7

    Derivative Instruments and Hedging Activities

        The following table summarizes the Company's consolidated derivative instruments and hedging activities at June 30, 2002 (amounts are in thousands):

 
 Cash Flow
Hedges
 Fair Value
Hedges
 Offsetting
Swaps/Caps
 Offsetting
Reverse
Swap/Caps
 
Current Notional Balance $400,000 $220,000 $255,117 $255,117 
Lowest Possible Notional $400,000 $220,000 $251,410 $251,410 
Highest Possible Notional $400,000 $220,000 $431,444 $431,444 
Lowest Interest Rate  3.65125% 5.3325% 4.528% 4.458%
Highest Interest Rate  5.81000% 7.2500% 6.000% 6.000%
Earliest Maturity Date  2003  2005  2003  2003 
Latest Maturity Date  2005  2011  2007  2007 
Estimated Asset (Liability) Fair Value $(14,664)$4,258 $(5,093)$4,821 

        At June 30, 2002, certain unconsolidated development partnerships in which the Company invested had entered into swaps to hedge the interest rate risk exposure on unconsolidated floating rate construction mortgage loans. The Company has recorded its proportionate share of these qualifying hedges on its consolidated balance sheets. These swaps have been designated as cash flow hedges with a current aggregate notional amount of $379.3 million (notional amounts range from $123.9 million to $562.3 million over the terms of the swaps) at interest rates ranging from 2.28% to 6.94% maturing at various dates ranging from 2002 to 2005 with a net liability fair value of $11.3 million.2002.

 On June 30, 2002, the net derivative instruments were reported at their fair value as other liabilities of approximately $10.7 million and as a reduction to investment in unconsolidated entities of approximately $11.3 million. As of June 30, 2002, there were approximately $30.8 million in deferred losses, net, included in accumulated other comprehensive loss. Based on the estimated fair values of the net derivative instruments at June 30, 2002, the Company may recognize an estimated $16.4 million of accumulated other comprehensive loss as additional interest expense during the twelve months ending June 30, 2003, of which $6.0 million is related to the unconsolidated development partnerships.

    Other

        In June 2001, the FASB issued SFAS No. 141,Business Combinations. SFAS No. 141 requires companies to account for all business combinations using the purchase method of accounting. SFAS No. 141 is effective for fiscal years beginning after December 15, 2001. The Company adopted the standard effective January 1, 2002, but it has not had any impact on the Company's financial condition and results of operations.

        In June 2001, the FASB issued SFAS No. 142,Goodwill and Other Intangible Assets. SFAS No. 142 requires companies to eliminate the amortization of goodwill in favor of a periodic impairment based approach. SFAS No. 142 is effective for the fiscal years beginning after December 15, 2001. The Company adopted the standard effective January 1, 2002, but it has not had a material impact on the Company's financial condition and results of operations.

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

7


rescinds the automatic classification of costs incurred on debt extinguishment as extraordinary charges.  Instead, gains and losses from debt extinguishment should only be classified as extraordinary if they meet the "unusual“unusual and infrequently occurring"occurring” criteria outlined in APB No. 30.  SFAS No. 145 is effective for fiscal years beginning after May 15, 2002.  The Company will adoptadopted the standard effective

8


January 1, 2003.

In January 2003, the FASB issued Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities.  FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both.  The consolidation requirements of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003 and apply to older entities in the first fiscal year or interim period beginning after June 15, 2003.  The Company will adopt FIN No. 46 in the third quarter of 2003 but doeshas not expect it toyet determined the effect that adoption will have a material impact on its consolidated financial conditionposition and results of operations.

3.    Shareholders'Shareholders’ Equity and Minority Interests

 

The following table presents the changes in the Company'sCompany’s issued and outstanding Common Shares for the six monthsquarter ended June 30, 2002:March 31, 2003:


20022003

Common Shares outstanding at January 1,

271,621,374

271,095,481


Common Shares Issued:



Conversion of Series E Preferred Shares

723,048

3,613

Conversion of Series H Preferred Shares4,050

Employee Share Purchase Plan

212,395

126,273

Dividend Reinvestment—DRIP Plan26,843
Share Purchase—DRIP Plan21,819

Exercise of options

1,301,917

218,980

Restricted share grants, net

912,128

996,815

Conversion of OP Units

644,207

46,944

Common Shares outstanding at June 30,March 31,

275,467,781

272,488,106

 

The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for a partnership interest are collectively referred to as the "Minority Interests—“Minority Interests – Operating Partnership"Partnership”.  The Minority Interests—Interests – Operating Partnership held 22,555,505 22,253,699 units of limited partnership interest (“OP UnitsUnits”) representing a 7.57%7.6% interest in the Operating Partnership at June 30, 2002.March 31, 2003.  Assuming conversion of all OP Units into Common Shares, total Common Shares outstanding at June 30, 2002March 31, 2003 would have been 298,023,286.294,741,805.  Subject to applicable securities law restrictions, the Minority Interests—Interests – Operating Partnership may exchange their OP Units for EQR Common Shares on a one-for-one basis.

Net proceeds from the Company'sCompany’s Common Share and Preferred Share (see definition below) offerings are contributed by the Company to the Operating Partnership.  In return for those contributions, EQR receives a number of OP Units in the Operating Partnership equal to the number of Common Shares it has issued in the equity offering (or in the case of a preferred equity offering, a number of preference units in the Operating Partnership equal in number and having the same terms as the Preferred Shares issued in the equity offering).  As a result, the net offering proceeds from Common Shares are allocated between shareholders’ equity and Minority Interests – Operating Partnership to account for the change in their respective percentage ownership of the underlying equity of the Operating Partnership.

The Company'sCompany’s declaration of trust authorizes the Company to issue up to 100,000,000 preferred shares of beneficial interest, $0.01 par value per share (the "Preferred Shares"“Preferred Shares”), with specific rights, preferences and other attributes as the Board of Trustees may determine, which may include preferences, powers and rights that are senior to the rights of holders of the Company'sCompany’s Common Shares.

9


The following table presents the Company'sCompany’s issued and outstanding Preferred Shares as of June 30, 2002March 31, 2003 and December 31, 2001:2002:

8


 
  
 

Amounts in thousands
 
 Annual
Dividend
Rate per
Share(1)
 
 June 30,
2002
 December 31, 2001
Preferred Shares of beneficial interest, $.01 par value; 100,000,000 shares authorized:         
 
91/8% Series B Cumulative Redeemable Preferred; liquidation value $250 per share; 500,000 shares issued and outstanding at June 30, 2002 and December 31, 2001
 
$
22.81252
 
$
125,000
 
$
125,000
 
91/8% Series C Cumulative Redeemable Preferred; liquidation value $250 per share; 460,000 shares issued and outstanding at June 30, 2002 and December 31, 2001
 
$
22.81252
 
 
115,000
 
 
115,000
 
8.60% Series D Cumulative Redeemable Preferred; liquidation value $250 per share; 700,000 shares issued and outstanding at June 30, 2002 and December 31, 2001
 
$
21.50000
 
 
175,000
 
 
175,000
 
Series E Cumulative Convertible Preferred; liquidation value $25 per share; 2,716,012 and 3,365,794 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively
 
$
1.75000
 
 
67,900
 
 
84,145
 
71/4% Series G Convertible Cumulative Preferred; liquidation value $250 per share; 1,264,700 shares issued and outstanding at June 30, 2002 and December 31, 2001
 
$
18.12500
 
 
316,175
 
 
316,175
 
7.00% Series H Cumulative Convertible Preferred; liquidation value $25 per share; 51,228 and 54,027 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively
 
$
1.75000
 
 
1,281
 
 
1,351
 
8.29% Series K Cumulative Redeemable Preferred; liquidation value $50 per share; 1,000,000 shares issued and outstanding at June 30, 2002 and December 31, 2001
 
$
4.14500
 
 
50,000
 
 
50,000
 
7.625% Series L Cumulative Redeemable Preferred; liquidation value $25 per share; 4,000,000 shares issued and outstanding at June 30, 2002 and December 31, 2001
 
$
1.90625
 
 
100,000
 
 
100,000

 
 
 
 
 

 

 
 
 
 
 
$
950,356
 
$
966,671

 
 
 
 
 

 

 

 

Annual
Dividend
Rate per
Share (1)

 

Amounts in thousands

 

 

 

 

March 31,
2003

 

December 31,
2002

 

Preferred Shares of beneficial interest, $0.01 par value;
100,000,000 shares authorized:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9 1/8% Series B Cumulative Redeemable Preferred; liquidation value $250 per share; 500,000 shares issued and outstanding at March 31, 2003 and December 31, 2002

 

$

22.81252

 

$

125,000

 

$

125,000

 

 

 

 

 

 

 

 

 

9 1/8% Series C Cumulative Redeemable Preferred; liquidation value $250 per share; 460,000 shares issued and outstanding at March 31, 2003 and December 31, 2002

 

$

22.81252

 

115,000

 

115,000

 

 

 

 

 

 

 

 

 

8.60% Series D Cumulative Redeemable Preferred; liquidation value $250 per share; 700,000 shares issued and outstanding at March 31, 2003 and December 31, 2002

 

$

21.50000

 

175,000

 

175,000

 

 

 

 

 

 

 

 

 

7.00% Series E Cumulative Convertible Preferred; liquidation value $25 per share; 2,544,864 and 2,548,114 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively

 

$

1.75000

 

63,622

 

63,703

 

 

 

 

 

 

 

 

 

7 ¼% Series G Convertible Cumulative Preferred; liquidation value $250 per share; 1,264,692 shares issued and outstanding at March 31, 2003 and December 31, 2002

 

$

18.12500

 

316,173

 

316,173

 

 

 

 

 

 

 

 

 

7.00% Series H Cumulative Convertible Preferred; liquidation value $25 per share; 51,228 shares issued and outstanding at March 31, 2003 and December 31, 2002

 

$

1.75000

 

1,281

 

1,281

 

 

 

 

 

 

 

 

 

8.29% Series K Cumulative Redeemable Preferred; liquidation value $50 per share; 1,000,000 shares issued and outstanding at March 31, 2003 and December 31, 2002

 

$

4.14500

 

50,000

 

50,000

 

 

 

 

 

 

 

 

 

7.625% Series L Cumulative Redeemable Preferred; liquidation value $25 per share; 4,000,000 shares issued and outstanding at March 31, 2003 and December 31, 2002

 

$

1.90625

 

100,000

 

100,000

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 946,076

 

$

946,157

 

(1)

Dividends on all series of Preferred Shares are payable quarterly at various pay dates.  Dividend rates listed for Series B, C, D and G are Preferred Share rates and the equivalent Depositary Share annual dividend rates are $2.281252, $2.281252, $2.15 and $1.8125, respectively.

 

The liquidation value of the Preference Interests and the Junior Preference Units (see(both as defined below) are included as separate components of Minority Interests in the consolidated balance sheets and the distributions incurred are included in preferred distributions in the consolidated statements of operations.

10


The following table presents the issued and outstanding Preference Interests as of June 30, 2002March 31, 2003 and December 31, 2001:2002:

 
  
 

Amounts in thousands
 
 Annual
Dividend
Rate per
Unit(1)
 
 June 30,
2002
 December 31, 2001
Preference Interests:         
 
8.00% Series A Cumulative Redeemable Preference Interests; liquidation value $50 per unit; 800,000 units issued and outstanding at June 30, 2002 and December 31, 2001
 
$
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 June 30, 2002 and December 31, 2001
 
$
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 June 30, 2002 and December 31, 2001
 
$
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 June 30, 2002 and December 31, 2001
 
$
4.1875
 
 
21,000
 
 
21,000
 
8.50% Series E Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding at June 30, 2002 and December 31, 2001
 
$
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 June 30, 2002 and December 31, 2001
 
$
4.1875
 
 
9,000
 
 
9,000
 
7.875% Series G Cumulative Redeemable Preference Units; liquidation value $50 per unit; 510,000 units issued and outstanding at June 30, 2002 and December 31, 2001
 
$
3.9375
 
 
25,500
 
 
25,500
 
7.625% Series H Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 190,000 units issued and outstanding at June 30, 2002 and December 31, 2001
 
$
3.8125
 
 
9,500
 
 
9,500
 
7.625% Series I Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 270,000 units issued and outstanding at June 30, 2002 and December 31, 2001
 
$
3.8125
 
 
13,500
 
 
13,500
 
7.625% Series J Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 230,000 units issued and outstanding at June 30, 2002 and December 31, 2001
 
$
3.8125
 
 
11,500
 
 
11,500

 
 
 
 
 

 

 
 
 
 
 
$
246,000
 
$
246,000

 
 
 
 
 

 

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

11

 

The following table presents the Operating Partnership'sPartnership’s issued and outstanding Junior Convertible Preference Units (the "Junior“Junior Preference Units"Units”) as of June 30, 2002March 31, 2003 and December 31, 2001:2002:

 
  
 

Amounts in thousands
 
 Annual
Dividend
Rate per
Unit(1)
 
 June 30, 2002
 December 31, 2001
Junior Preference Units:         
 
Series A Junior Convertible Preference Units; liquidation value $100 per unit; 56,616 units issued and outstanding at June 30, 2002 and December 31, 2001
 
$
5.46934
 
$
5,662
 
$
5,662
 
Series B Junior Convertible Preference Units; liquidation value $25 per unit; 7,367 units issued and outstanding at June 30, 2002 and December 31, 2001
 
$
2.00000
 
 
184
 
 
184

 
 
 
 
 

 

 
 
 
 
 
$
5,846
 
$
5,846

 
 
 
 
 

 

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 series of Junior Preference Units are payable quarterly at various pay dates.

4.                                      Real Estate Acquisitions

During the six monthsquarter ended June 30, 2002,March 31, 2003, the Company acquired the sevenentire equity interest in the three properties listed below from unaffiliated parties for a total purchase price of $166.5$111.5 million.

Date
Acquired
 Property
 Location
 Number
of Units
 Acquisition Price
 
  
  
  
 (in thousands)

3/28/02 Isles at Sawgrass Sunrise, FL 368 $26,000
4/24/02 Center Pointe Beaverton, OR 264  19,100
4/30/02 Mira Flores Palm Beach Gardens, FL 352  29,250
5/15/02 Gramercy Park Houston, TX 384  26,000
5/31/02 Enclave at Winston Park Coconut Creek, FL 278  25,450
5/31/02 St. Andrews at Winston Park Coconut Creek, FL 284  25,450
6/21/02 Westside Villas VII Los Angeles, CA 53  15,250
      
 
      1,983 $166,500
      
 

12

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.                                      Real Estate Dispositions

 

During the six monthsquarter ended June 30, 2002,March 31, 2003, the Company disposed of the twenty-threeseventeen properties listed below to unaffiliated parties.  The Company recognized a net gain on sales of discontinued operations of approximately $28.4$70.7 million and a net gain on sales of unconsolidated entities of approximately $5.2$1.2 million.

Date
Disposed
 Property
 Location
 Number
Of Units
 Disposition Price
(in thousands)
01/17/02 Ravenwood Mauldin, SC 82 $2,425
01/24/02 Larkspur I & II Moraine, OH 45  899
01/31/02 Springwood II Austintown, OH 43  900
02/21/02 Scottsdale Courtyards Scottsdale, AZ 274  26,500
04/11/02 Applegate Lordstown, OH 39  723
04/11/02 Applerun Warren, OH 48  1,054
04/11/02 Brunswick Cortland, OH 59  1,424
05/01/02 The Landings Memphis, TN 292  10,300
05/03/02 Waterbury Clarksville, TN 54  1,385
05/09/02 Arboretum Tucson, AZ 496  25,000
05/09/02 Orange Grove Village Tucson, AZ 400  17,400
05/09/02 Village at Tanque Verde Tucson, AZ 217  9,100
05/14/02 Canyon Crest Views Riverside, CA 178  20,450
05/14/02 Merrimac Woods Costa Mesa, CA 123  12,950
05/14/02 Sierra Canyon Santa Clarita, CA 232  23,500
05/15/02 Meadowood Wellsville, OH 40  812
05/23/02 Pine Meadow Greensboro, NC 204  7,550
05/23/02 Palms at South Shore League City, TX 240  12,850
05/31/02 California Gardens Jacksonville, FL 71  1,468
05/31/02 Westcreek Jacksonville, FL 86  2,282
06/19/02 Apple Run Hillsdale, MI 39  1,047
Various Four Lakes Condo Units Lisle, IL 57  5,851
      
 
  Wholly Owned Properties   3,319  185,870
      
 
01/31/02 Mount Laurel Crossing* Mt. Laurel, NJ 296  11,317
04/23/02 Foxton* Seymour, IN 39  —
      
 
  Unconsolidated Properties   335  11,317
      
 
Total     3,654 $197,187
      
 

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

 

*

Represents the Company'sCompany’s share of the net disposition proceeds.

11


6.                                      Commitments to Acquire/Dispose of Real Estate

 

As of June 30, 2002, in addition to the property that was subsequently acquired as discussed in Note 17,March 31, 2003, the Company had entered into separate agreements to acquire two multifamily properties containing 603719 units from unaffiliated parties.  The Company expects a combined purchase price of approximately $42.1$114.5 million.

As of June 30, 2002,March 31, 2003, in addition to the properties that were subsequently disposed of as discussed in Note 17,19, the Company had entered into separate agreements to dispose of fourteentwenty-four multifamily properties containing 2,756 4,079units to unaffiliated parties.  The Company expects a combined disposition price of approximately $134.5$186.2 million.

13


The closings of these pending transactions are subject to certain contingencies and conditions;conditions, therefore, there can be no assurance that these transactions will be consummated or that the final terms thereof will not differ in material respects from those summarized in the preceding paragraphs.

7.Investments in Unconsolidated Entities

 

The Company has entered intoco-invested in various joint venture agreementsproperties with unrelated third party companies.parties.  The following table summarizes the Company'sCompany’s investments in unconsolidated entities as of June 30, 2002March 31, 2003 (amounts in thousands except for project and unit amounts):

 
 Institutional
Joint
Ventures
 Stabilized
Development
Projects(1)
 Projects
Under
Development
 Lexford/
Other
 Totals
 
Total projects  45  10  18  26  99(2)
  
 
 
 
 
 

Total units
 
 
10,846
 
 
3,038
 
 
5,523
 
 
3,313
 
 
22,720
(2)
  
 
 
 
 
 
EQR's percentage ownership of mortgage notes payable  25.0% 96.4% 100.0% 19.5%   
EQR's share of mortgage notes payable(4) $121,200 $242,431 $341,703 $12,913 $718,247(3)
  
 
 
 
 
 

 

 

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) 

 

 

 

 

 

 

 

 

 

 

 

 

Company’s percentage ownership of outstanding debt

 

25.0

%

100.0

%

100.0

%

11.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company’s share of outstanding debt (4)

 

$

121,200

 

$

295,103

 

$

505,587

(3)

$

5,386

 

$

927,276

 

(1)

The Company determines a project to be stabilized once it has maintained an average physical occupancy of 90% or more for a three-month period.

(2)

Includes fourtwelve projects under development consisting of 1,522containing 3,223 units, which are completed and not yet stabilized, but are included in the Company's property/unit counts at June 30, 2002. The remaining 14 development properties containing 4,001 units are not included in the Company'sCompany’s property/unit counts at June 30, 2002.March 31, 2003.   Totals also exclude Fort Lewis Military Housing consisting of 1one property and 3,637 units.3,652 units, which is not accounted for under the equity method of

12



accounting.  The Fort Lewis Military Housing is included in the Company’s property/unit counts at March 31, 2003.

(3)

A total of $698,597$763.5 million is available for funding under thesethis construction loans,debt, of which $341,703$505.6 million was funded and outstanding at June 30, 2002.

March 31, 2003.

(4)

As of JulyApril 30, 2002, EQR2003, the Company has funded $54.5$51.0 million as additional collateral for certain of these loanson selected debt (see Note 8).  All remaining debt is non-recourse to EQR.
the Company.

 

Investments in unconsolidated entities include the Unconsolidated Properties as well as various development properties under construction or pending construction.  The Company does not consolidate these entities as it does not have sole control of the major decisions (such as sale and/or financing/refinancing).  The Company'sCompany’s common equity ownership interests in these entities range from 4.5% to 57.0%50.0% at June 30, 2002.March 31, 2003.

These investments are accounted for utilizing the equity method of accounting.  Under the equity method of accounting, the net equity investment of the Company is reflected on the consolidated balance sheets and after the project is completed, the consolidated statements of operations include the Company'sCompany’s share of net income or loss from the unconsolidated entity.  Prior to the project being completed, the Company capitalizes interest on its equity contribution in accordance with the provisions of SFAS No. 58,Capitalization of Interest Cost in Financial Statements That Include Investments Accounted for by the Equity Method.  During the six monthsquarters ended June 30,March 31, 2003 and 2002, and 2001, the Company capitalized $8.0$5.4 million and $9.3$3.8 million, respectively, in interest cost related to its unconsolidated development projects (which reduced interest expense incurred in the consolidated statements of operations).

 

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

14


8.    Deposits—Deposits - Restricted

 

As of June 30, 2002,March 31, 2003, deposits-restricted totaled $149.9$173.1 million and primarily included the following:

    •

    depositsDeposits in the amount of $54.5$51.0 million held in third party escrow accounts to provide collateral for third party construction financing in connection with unconsolidated development projects;

    •

    approximately $32.9Approximately $55.0 million in tax-deferred (1031) exchange proceeds; and

    •

    approximately $62.5Approximately $67.1 million for resident security, utility, and other deposits.

9.Mortgage Notes Payable

 

As of June 30, 2002,March 31, 2003, the Company had outstanding mortgage indebtedness of approximately $3.2$2.9 billion.

 

During the six monthsquarter ended June 30, 2002,March 31, 2003, the Company:

    •

    repaid $135.7Repaid $110.1 million of mortgage loans;

    •

    assumed $14.0Assumed $35.0 million of mortgage debt on one propertycertain properties in connection with its acquisition;

    their acquisitions; and

    •

    disposed of $1.7Obtained $48.7 million of mortgage debt assumed by the purchaser in connection with the disposition of certain properties and the furniture rental business; and

    •
    received $47.2 million in construction loan draw proceedsloans on certain properties.

 

As of June 30, 2002,March 31, 2003, scheduled maturities for the Company'sCompany’s outstanding mortgage indebtedness were at various dates through October 1, 2033.  TheAt March 31, 2003, the interest rate range on the Company'sCompany’s mortgage debt was 1.10%1.09% to 12.465% at June 30, 2002..  During the six monthsquarter ended June 30, 2002,March 31, 2003, the weighted average interest rate on the Company’s mortgage debt was 6.41%6.02%.

13


10.Notes

 

As of June 30, 2002,March 31, 2003, the Company had outstanding unsecured notes of approximately $2.4 billion.$2.9 billion net of a $7.0 million discount and including an $8.3 million premium.

 

During the six monthsquarter ended June 30, 2002,March 31, 2003, the Company:

    •

    issued                  Issued $400.0 million of ten-year 6.625% fixed rate5.20% fixed-rate public notes, receiving net proceeds of $394.5 million;

    •
    repaid $100.0 million of 9.375% fixed rate public notes at maturity; and

    •
    repaid $125.0 million of 7.95% fixed rate pubic notes at maturity.
$397.5 million.

 

As of June 30, 2002,March 31, 2003, scheduled maturities for the Company'sCompany’s outstanding notes arewere at various dates through 2029.  TheAt March 31, 2003, the interest rate range on the Company'sCompany’s notes was 4.75% to 7.75% at June 30, 2002..  During the six monthsquarter ended June 30, 2002,March 31, 2003, the weighted average interest rate on the Company’s notes was 6.50%5.73%.

11.Line of Credit

 On May 30, 2002, the

The Company obtainedhas a new three-year $700.0 million unsecured revolving credit facility maturing May 29, 2005. The new linewith potential borrowings of credit replaced the Company'sup to $700.0 million unsecured revolving credit facility that was scheduled to expire in August 2002. Advances under the new credit facility bear interest at variable rates based upon LIBOR at various interest periods, plus a spread dependent upon the Operating Partnership's credit rating, or based upon bids received from the lending group. The prior existing revolving credit facility was terminated upon the closing of the new facility.million.  As of June 30, 2002,March 31, 2003, no amounts were outstanding and $84.0$53.3 million was restricted (dedicated to support letters of credit and not available for borrowing) on the line of credit.  During the six monthsquarter ended June 30, 2002,March 31, 2003, the weighted average interest rate was 2.50%1.85%.  EQR has guaranteed the Operating Partnership’s line of credit up to the maximum amount and for the full term of the facility.

12.Derivative Instruments

The following table summarizes the consolidated derivative instruments at 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 in conjunction with the issuance of $400.0 million of ten-year unsecured notes.  The $13.0 million payment will be deferred and recognized as additional interest expense over the ten-year life of the unsecured notes.

At March 31, 2003, certain unconsolidated development partnerships in which the Company invested had entered into swaps to hedge the interest rate risk exposure on unconsolidated floating rate construction mortgage loans.  The Company has recorded its proportionate share of these hedges on its consolidated balance sheets.  These swaps have been designated as cash flow hedges with a current aggregate notional amount of $363.2million (notional amounts range from $142.1million to $456.2million over the terms of the swaps) at interest rates ranging from 1.78% to 6.94% maturing at various dates ranging from 2003 to 2005 with a net liability fair value of $12.1million.  During the quarter ended March 31, 2003, the Company recognized an unrealized gain of $0.7 million due to ineffectiveness of

14


certain of these unconsolidated development derivatives (included in income from investments in unconsolidated entities).

15


On March 31, 2003, the net derivative instruments were reported at their fair value as other liabilities of approximately $3.3 million and as a reduction to investments in unconsolidated entities of approximately $12.1 million.  As of March 31, 2003, there were approximately $40.9 million in deferred losses, net, included in accumulated other comprehensive loss.  Based on the estimated fair values of the net derivative instruments at March 31, 2003, the Company may recognize an estimated $17.4 million of accumulated other comprehensive loss as additional interest expense during the twelve months ending March 31, 2004, of which $8.1 million is related to the unconsolidated development partnerships.

12.13.                               Calculation of Net Income Per Weighted Average Common Share

 

The following tables set forth the computation of net income per share—share – basic and net income per share—share – diluted:

 
 Six Months Ended June 30,
 Quarter Ended June 30,
 
 
 2002
 2001
 2002
 2001
 
 
 (Amounts in thousands except per share amounts)

 
Numerator:             
Income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items, cumulative effect of change in accounting principle and preferred distributions $192,833 $204,896 $95,769 $102,976 

Allocation to Minority Interests:
 
 
 
 
 
 
 
 
 
 
 
 
 
 Operating Partnership  (13,784) (16,474) (7,343) (6,678)
 Partially Owned Properties  (1,325) (238) (519) (133)
Income from investments in unconsolidated entities  233  960  7  610 
Preferred distributions  (48,781) (57,419) (24,256) (28,893)
  
 
 
 
 

Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle
 
 
129,176
 
 
131,725
 
 
63,658
 
 
67,882
 

Net gain (loss) on sales of unconsolidated entities
 
 
5,246
 
 
339
 
 
(411
)
 
339
 
Net gain on sales of discontinued operations  28,446  46,226  25,630  4,448 
Discontinued operations, net  2,994  3,666  535  1,574 
Extraordinary items  (468) 106  (371) (205)
Cumulative effect of change in accounting principle  —  (1,270) —  — 
  
 
 
 
 
Numerator for net income per share—basic  165,394  180,792  89,041  74,038 

Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 Allocation to Minority Interests—Operating Partnership  13,784  16,474  7,343  6,678 
 Distributions on convertible preferred shares/units  —  242  22  — 
  
 
 
 
 
Numerator for net income per share—diluted $179,178 $197,508 $96,406 $80,716 
  
 
 
 
 

Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
Denominator for net income per share—basic  272,126  265,781  273,146  266,357 

Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 OP Units  22,831  24,305  22,653  24,152 
 Convertible preferred shares/units  —  370  75  — 
 Share options/restricted shares  3,465  3,361  3,620  3,430 
  
 
 
 
 
Denominator for net income per share—diluted  298,422  293,817  299,494  293,939 
  
 
 
 
 

Net income per share—basic
 
$
0.61
 
$
0.68
 
$
0.33
 
$
0.28
 
  
 
 
 
 

Net income per share—diluted
 
$
0.60
 
$
0.67
 
$
0.32
 
$
0.27
 
  
 
 
 
 

16

 

 

Quarter Ended March 31,

 

 

 

2003

 

2002

 

 

 

(Amounts in thousands except per
share amounts)

 

Numerator:

 

 

 

 

 

Income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain on sales of unconsolidated entities, discontinued operations and preferred distributions

 

$

72,165

 

$

89,462

 

 

 

 

 

 

 

Allocation to Minority Interests:

 

 

 

 

 

Operating Partnership

 

(9,110

)

(6,441

)

Partially Owned Properties

 

(115

)

(806

)

Income from investments in unconsolidated entities

 

107

 

226

 

Preferred distributions

 

(24,180

)

(24,525

)

 

 

 

 

 

 

Income before net gain on sales of unconsolidated entities and discontinued operations

 

38,867

 

57,916

 

 

 

 

 

 

 

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 share – basic

 

111,167

 

76,353

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

Allocation to Minority Interests - Operating Partnership

 

9,110

 

6,441

 

Distributions on convertible preferred shares/units

 

1,214

 

—

 

 

 

 

 

 

 

Numerator for net income per share – diluted

 

$

121,491

 

$

82,794

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Denominator for net income per share – basic

 

270,678

 

271,094

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

OP Units

 

22,271

 

23,012

 

Convertible preferred shares/units

 

3,139

 

—

 

Share options/restricted shares

 

1,558

 

3,123

 

 

 

 

 

 

 

Denominator for net income per share – diluted

 

297,646

 

297,229

 

 

 

 

 

 

 

Net income per share – basic

 

$

0.41

 

$

0.28

 

 

 

 

 

 

 

Net income per share – diluted

 

$

0.41

 

$

0.28

 

15

 
 Six Months Ended June 30,
 Quarter Ended June 30,
 
 2002
 2001
 2002
 2001
 
 (Amounts in thousands except per share amounts)

Net income per share—basic:            
Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle per share—basic $0.48 $0.51 $0.24 $0.26
Net gain (loss) on sales of unconsolidated entities  0.02  —  —  —
Net gain on sales of discontinued operations  0.10  0.16  0.09  0.02
Discontinued operations, net  0.01  0.01  —  —
Extraordinary items  —  —  —  —
Cumulative effect of change in accounting principle  —  —  —  —
  
 
 
 
Net income per share—basic $0.61 $0.68 $0.33 $0.28
  
 
 
 

Net income per share—diluted:
 
 
 
 
 
 
 
 
 
 
 
 
Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle per share—diluted $0.48 $0.50 $0.24 $0.25
Net gain (loss) on sales of unconsolidated entities  0.01  —  —  —
Net gain on sales of discontinued operations  0.10  0.16  0.08  0.02
Discontinued operations, net  0.01  0.01  —  —
Extraordinary items  —  —  —  —
Cumulative effect of change in accounting principle  —  —  —  —
  
 
 
 
Net income per share—diluted $0.60 $0.67 $0.32 $0.27
  
 
 
 

 

 

Quarter Ended March 31,

 

 

 

2003

 

2002

 

 

 

(Amounts in thousands except per
share amounts)

 

Net income per share – basic:

 

 

 

 

 

Income before net gain on sales of unconsolidated entities and discontinued operations per share – 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 share – basic

 

$

0.41

 

$

0.28

 

 

 

 

 

 

 

Net income per share – diluted:

 

 

 

 

 

Income before net gain on sales of unconsolidated entities and discontinued operations per share - 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 share – diluted

 

$

0.41

 

$

0.28

 

All net income per share-basic amounts have been calculated prior to considering any allocation for Minority Interests – Operating Partnership due to the ability of the OP Unit holders to exchange their OP Units for Common Shares on a one-for-one basis.

Convertible preferred shares/units that could be converted into 15,648,03411,807,095 and 14,921,384 weighted average Common Shares for the six months ended June 30, 2002 and 2001, respectively, and 15,369,255 and 15,379,91015,853,687 weighted average Common Shares for the quarters ended June 30,March 31, 2003 and 2002, and 2001, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.

On October 11, 2001, the Company effected a two-for-one split of its Common Shares and OP Units to shareholders and unitholders of record as of September 21, 2001. All per share and OP Unit data and numbers of Common Shares and OP Units have been retroactively adjusted to reflect the Common Share and OP Unit split.

13.  Discontinued14.                               Discontinued Operations

        In August 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001.

The Company adoptedhas presented separately as discontinued operations in all periods the standard effectiveresults of operations for all wholly owned assets disposed of on or after January 1, 2002 which did not have a material effect on the Company's financial condition and results(the date of operations.

        Under the provisionsadoption of SFAS No. 144, for long-lived assets to be held and used, the Company first determines whether any indicators of impairment exist. If indicators exist, the Company compares the expected future undiscounted cash flows for the long-lived asset against the carrying amount of that asset. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the asset, an impairment loss would be recorded for the difference between the estimated fair value and the carrying amount of the asset.

17


        For long-lived assets to be disposed of, an impairment loss is recognized when the estimated fair value of the asset, less the estimated cost to sell, is less than the carrying amount of the asset measured at the time that the Company has determined it will sell the asset. Long-lived assets held for disposition are reported at the lower or their carrying amounts or their estimated fair values, less their costs to sell.144).

 Goodwill and investments in unconsolidated entities accounted for under the equity method of accounting are specifically excluded from the scope of SFAS No. 144.

        On January 11, 2002, the Company disposed of its furniture rental business for $30.0 million and received net proceeds of $28.7 million. No gain/loss on sale was recognized as the net book value at the sale date after giving effect to a previously recorded impairment loss approximated the sales price.

The components of discontinued operations for the six months and quarters ended June 30, 2002 and 2001, respectively, are outlined below and include the results of operations through the date of each respective sale for the six monthsrespective periods that the Company owned such assets during each of the quarters ended March 31, 2003 and quarter ended June 30, 2002, and a full six months and quarter of operations for the six months and quarter ended June 30, 2001, forincluding the following:

    •

    the sale of the furniture rental business; and

    •
    the twenty-oneThe Wholly Owned Properties sold during 2003 (see Note 5).
; and

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

16
 Six Months Ended June 30,
 Quarter Ended June 30,

 

Quarter Ended March 31,

 
 2002
 2001
 2002
 2001

 

2003

 

2002

 
 (Amounts in thousands)

 

(Amounts in thousands)

 

REVENUESREVENUES        

 

 

 

 

 

Rental income

 

$

5,026

 

$

25,898

 

Interest and other income

 

11

 

10

 

Furniture income

 

—

 

1,365

 

Total revenues

 

5,037

 

27,273

 

Rental income $8,762 $12,858 $2,628 $6,432

 

 

 

 

 

Interest and other income 3 26 1 25
Furniture income 1,361 30,027 (4) 15,155
 
 
 
 
 Total revenues 10,126 42,911 2,625 21,612
 
 
 
 

EXPENSES
 
 
 
 
 
 
 
 
Property and maintenance 2,787 3,332 1,267 1,617
Real estate taxes and insurance 881 1,162 254 589
Depreciation 2,125 3,309 569 1,662
Interest expense incurred, net 36 300 — 147
Furniture expenses 1,303 30,499 — 15,670
Amortization of goodwill — 643 — 353
 
 
 
 
 Total expenses 7,132 39,245 2,090 20,038

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, netDiscontinued operations, net $2,994 $3,666 $535 $1,574

 

$

416

 

$

9,964

 

 
 
 
 

14.  (1)Includes trailing expenses for Wholly Owned Properties sold in prior periods related to the Company’s period of ownership.

15.Stock-Based Compensation

Prior to 2003, the Company had chosen to account for its stock-based compensation in accordance with APB No. 25, Accounting for Stock Issued to Employees,which resulted in no compensation expense for options issued with an exercise price equal to or exceeding the market value of the Company’s Common Shares on the date of grant (intrinsic method).  The Company has elected to expense its stock-based compensation in accordance with SFAS No. 123 and its amendment (SFAS No. 148), Accounting for Stock Based Compensation, effective in the first quarter of 2003, which resulted in compensation expense being recorded based on the fair value of the stock compensation granted or modified.

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

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

17


 

 

Quarter Ended March 31,

 

 

 

2003

 

2002

 

 

 

(Amounts in thousands
except per share amounts)

 

Net income available to Common Shares, as reported

 

$

111,167

 

$

76,353

 

Add:  Stock-based employee compensation expense included in reported net income:

 

 

 

 

 

Restricted/performance shares

 

2,334

 

5,084

 

Share options (1)

 

1,707

 

—

 

ESPP discount

 

490

 

—

 

Deduct:  Total stock-based employee compensation expense determined under fair value based method for all awards:

 

 

 

 

 

Restricted/performance shares

 

(2,334

)

(5,084

)

Share options (1)

 

(2,899

)

(1,527

)

ESPP discount

 

(490

)

(658

)

Pro forma net income available to Common Shares

 

$

109,975

 

$

74,168

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

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 the quarter ended March 31, 2003 included $1.4 million of expense recognition related to options granted in the first quarter of 2003 to the Company’s former chief executive officer.  These options vested immediately upon grant.

16.Commitments and Contingencies

 

The Company, as an owner of real estate, is subject to various environmental laws of Federal, state and local governments.environmental laws.  Compliance by the Company with existing laws has not had a material adverse effect on the Company'sCompany’s financial condition and results of operations.  However, the Company cannot predict the impact of new or changed laws or regulations on its current properties or on properties that it may acquire in the future.

 

The Company does not believe there is any litigation pending or threatened against the Company other than routine litigation arising out of the ordinary course of business, some of which is expected to be covered by liability insurance, none of which is expected to have a material adverse effect on the consolidated financial statements of the Company.

18


        In regards toAs of March 31, 2003, the fundingCompany has 17 projects in various stages of properties in the development stage and the agreements with multifamily residential real estate developers, theestimated completion dates ranging through June 30, 2004.  The Company funded a net total of $40.3 $1.7million during the six monthsquarter ended June 30, 2002. InMarch 31, 2003 for the development of multifamily properties pursuant to its agreements with developers.  The Company expects to fund approximately $5.0 million in connection with onethese properties during the remainder of 2003 and in 2004.  The three development agreement,agreements currently in place have the Company has an obligation to fund up to an additional $9.5 million to guarantee third party construction financing. As of June 30, 2002, the Company has 21 projects underfollowing key terms:

•The first development (includes three consolidated projects) with estimated completion dates ranging through March 31, 2004.

        For one development agreement, the Company's partner has the right, at any time following completion of a project, to stipulate a value for such project and offer to sell its interest in the project to the Company based on such value.  If the Company chooses not to purchase the interest, it must agree to a sale of the project to an unrelated third party at such value.  The Company'sCompany’s partner must exercise this right as to all projects within five years after the receipt of the final certificate of occupancy on the last developed property.  The Company has an obligation to fund up to an additional $13.0 million to

        Under a

18


guarantee third party construction financing, if required.

•The second development agreement, the Company's partner has the right, at any time following completion of a project, to require the Company to purchase the partners'partners’ interest in that project at a mutually agreeable price.  If the Company and the partner are unable to agree on a price, both parties will obtain appraisals.  If the appraised values vary by more than 10%, both the Company and its partner will agree on a third appraiser to determine which original appraisal is closest to its determination of value.  The Company may elect at that time not to purchase the property and instead, authorize its partner to sell the project at or above the agreed-upon value to an unrelated third party.  Five years following the receipt of the final certificate of occupancy on the last developed property, the Company must purchase, at the agreed-upon price, any projects remaining unsold mustunsold.

•                  The third development partner has the exclusive right for six months following stabilization (generally defined as having achieved 90% occupancy for three consecutive months following the substantial completion of a project) to market a project for sale.  Thereafter, either the Company or its development partner may market a project for sale.  If the Company’s development partner proposes the sale, the Company may elect to purchase the project at the price proposed by its partner or defer the sale until two independent appraisers appraise the project.  If the two appraised values vary by more than 5%, a third appraiser will be purchased bychosen to determine the fair market value of the property.  Once a value has been determined, the Company may elect to purchase the property or authorize its development partner to sell the project at the agreed-upon price.value.

        The

In connection with one of its mergers, the Company provided a credit enhancement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project.  As of June 30, 2002,March 31, 2003, this enhancement was still in effect at a commitment amount of $12.7 million.

15.17.                               Asset Impairment

 

For both the six monthsquarters ended June 30,March 31, 2003 and 2002, and 2001, the Company recorded approximately $0.6$0.3 million and $6.8 million, respectively, of asset impairment charges related to its technology investments.  These charges were the result of a review of the existing investments reflected on the consolidated balance sheet.  These impairment losses are reflected on the statementconsolidated statements of operations in total expenses and include the write-down of assets classified as other assets and investments in unconsolidated entities.assets.

16.  18.Reportable Segments

 

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by senior management.  Senior management decides how resources are allocated and assesses performance on a monthly basis.

 

The Company'sCompany’s primary business is owning, managing, and operating multifamily residential properties, which includes the generation of rental and other related income through the leasing of apartment units to residents.residents and includes ECH.  Senior management evaluates the performance of each of our apartment communities on an individual basis, however, each of our apartment communities has similar economic characteristics, residents, and products and services so they have been aggregated into one reportable segment.  The Company'sCompany’s rental real estate segment comprisedcomprises approximately 98.7% and 97.6%98.8% of total revenues for the six months ended June 30, 2002 and 2001, respectively, and approximately 98.5% and 97.5% of total revenues forboth the quarters ended June 30, 2002March 31, 2003 and 2001, respectively.2002.  The Company'sCompany’s rental real estate segment comprisedcomprises approximately 99.6%99.8% and 99.4%99.7% of total assets at June 30, 2002March 31, 2003 and December 31, 2001,2002, respectively.

19


The primary financial measure for the Company'sCompany’s rental real estate segment is net operating income ("NOI"(“NOI”), which represents rental income less: 1) property and maintenance expense; 2) real estate

19


taxes and insurance expense; and 3) property management expense (all as reflected in the accompanying statements of operations).  Current year NOI is compared to prior year NOI and current year budgeted NOI as a measure of financial performance.  NOI from our rental real estate totaled approximately $613.4 $279.6million and $609.5 million for the six months ended June 30, 2002, and 2001, respectively, and approximately $307.9 million and $304.8$293.3 million for the quarters ended June 30,March 31, 2003 and 2002, and 2001, respectively.

 

During the acquisition, development and/or disposition of real estate, the Company considers its NOI return on total capitalized costs isinvestment as the primary measure of financial performance the Company considers.performance.

 

The Company'sCompany’s fee and asset management activity is immaterial and does not meet the threshold requirements of a reportable segment as provided for in SFAS No. 131.

All revenues are from external customers and there is no customer who contributed 10% or more of the Company’s total revenues during the quarters ended March 31, 2003 or 2002.

17.  19.Subsequent Events/Other

 During the six months ended June 30, 2002, the Company entered into an agreement with the U.S. Army with an initial cash investment of $10.0 million and assumed management of 3,637 multifamily units at Fort Lewis, Washington.

Subsequent to June 30, 2002March 31, 2003 and through July 29, 2002,April 30, 2003, the Company:

    •

    acquired one property                  Disposed of three properties consisting of 466761 units for approximately $37.4$28.5 million;

    and

    •

    disposed of seven properties consisting of 1,171 units for approximately $67.2 million;

    •
    repaid $25.2                  Repaid $12.9 million of mortgage loans; and

    •
    funded a net of $41.8 million relateddebt at/or prior to the unconsolidated development agreements.
maturity.

20



    Item 2.  Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations

    Overview

     

    For further information including definitions for capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company'sCompany’s annual report on Form 10-K for the year ended December 31, 2001.2002.

     

    Forward-looking statements in this report are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  The words "believes"“believes”, "expects"“estimates”, “expects” and "anticipates"“anticipates” and other similar expressions that are predictions of or indicate future events and trends and which do not relate solely to historical matters identify forward-looking statements.  Such forward-looking statements are subject to risks and uncertainties, which could cause actual results, performance, or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements.  Factors that might cause such differences include, but are not limited to, the following:

      •

      alternative                  The total number of development units, cost of development and completion dates as well as anticipated capital expenditures for replacements and building improvements all reflect the Company’s best estimates and are subject to uncertainties arising from changing economic conditions (such as the cost of labor and construction materials), competition and local government regulation;

      •                  Alternative sources of capital to the Company or labor and materials required for maintenance, repair, capital expenditure or development are more expensive than anticipated;

      •

      occupancy                  Occupancy levels and market rents may be adversely affected by national and local economic and market conditions including, without limitation, new construction of multifamily housing, continuing decline in employment, availability of low interest mortgages for single-family home buyers and the potential for geopolitical instability, all of which are beyond the Company'sCompany’s control; and

      •

      additional                  Additional factors as discussed in Part I of the Annual Report on Form 10-K, particularly those under "Risk Factors"“Risk Factors”.

     

    Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  The Company undertakes no obligation to publicly release any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.  Forward-looking statements and related uncertainties are also included in Note 6 to the Notes to Consolidated Financial Statements in this report.

    21


    Results of Operations

     

    The following table summarizes the number of properties and related units for the year-to-date periods presented:

     
    		 Properties
    		 Units
    		 Purchase/
    Sale Price
    $ Millions
    At December 31, 2000 1,104 227,704   
    Q1/Q2 2001 Acquisitions 8 2,017 $232.2
    Q1/Q2 2001 Dispositions (28)(4,189)$188.7
    Q1/Q2 2001 Completed Developments 2 618   
      
    		 
    		   
    At June 30, 2001 1,086 226,150   
    Q3/Q4 2001 Acquisitions 6 1,406 $155.9
    Q3/Q4 2001 Dispositions (21)(4,618)$228.2
    Q3/Q4 2001 Completed Developments 5 1,887   
    Q4 2001 Unit Configuration Changes — (24)  
      
    		 
    		   
    At December 31, 2001 1,076 224,801   
    Q1/Q2 2002 Acquisitions 7 1,983 $166.5
    Q2 2002 Fort Lewis 1 3,637   
    Q1/Q2 2002 Dispositions (23)(3,654)$197.2
    Q1/Q2 2002 Completed Developments 4 1,181   
    Q2 2002 Unit Configuration Changes — 15   
      
    		 
    		   
    At June 30, 2002 1,065 227,963   
      
    		 
    		   

     The Company's

    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 quarters presented have resulted primarily from reduced rental income through increased concessions or reduced apartment rents and occupancy at many of our properties.  Significant changes in expenses have resulted from increases in property and maintenance expenses including payroll, maintenance, building, utilities and leasing and advertising as well as real estate taxes.  In addition, the Company’s acquisition, disposition and dispositioncompleted development activity has impacted overall results of operations for the six months and quarters ended June 30, 2002 and 2001. Significant changes in revenues and expenses have resulted primarily from the consolidation of previously Unconsolidated Properties in July 2001, the disposition of the furniture rental business on January 11, 2002, as well as the properties acquired and developments completed in 2001 and 2002, which have been partially offset by the properties disposed in 2001March 31, 2003 and 2002.  Significant change in expenses has also resulted from an increase in insurance costs and general and administrative costs and reductions in variable interest rates, impairment charges and goodwill amortization. This impact isThese changes are discussed in greater detail in the following paragraphs.

     

    Properties that the Company owned for allboth of both the six month periodsquarters ended June 30,March 31, 2003 and March 31, 2002 and June 30, 2001 (the "Six-Month 2002“First Quarter 2003 Same Store Properties"Properties”), which represented 194,491 units, and properties that the Company owned for all of both the quarters ended June 30, 2002 and June 30, 2001 (the "Second Quarter 2002 Same Store Properties"), which represented 196,211191,278 units, also impacted the Company'sCompany’s results of operations. Both the Six-Month 2002 Same Store Propertiesoperations and Second Quarter 2002 Same Store Properties are discussed as well in the following paragraphs.

      Comparison of the six monthsquarter ended June 30, 2002March 31, 2003 to the six monthsquarter ended June 30, 2001March 31, 2002

     

    For the six monthsquarter ended June 30, 2002,March 31, 2003, income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities and discontinued operations extraordinary items and cumulative effect of change in accounting principle decreased by approximately $12.1$17.3 million when compared to the six monthsquarter ended June 30, 2001.March 31, 2002.

     

    Revenues from the Six-Month 2002First Quarter 2003 Same Store Properties decreased primarily as a result of lower rental rates charged new residents,overall physical occupancy, increased concessions and lower occupancy at certain properties.

    22


    rental rates charged to both new and renewal residents.  Property operating expenses from the Six-Month 2002First Quarter 2003 Same Store Properties which include propertyincreased mainly due to higher utility, maintenance, building and maintenance, real estate taxes and insurance and an allocation of property management expenses, remained relatively stable with increases in real estate taxes and insurance costs offset by a decrease in utilitypayroll costs.  The following tables provide comparative revenue, expense, net operating income ("NOI"(“NOI”) and weighted average occupancy for the Six-Month 2002First Quarter 2003 Same Store Properties:Properties (NOI represents rental income less: 1) property and maintenance expense; 2) real estate taxes and insurance expense; and 3) property management expense):

    June 30,

    22


    First Quarter 2003 vs. First Quarter 2002 Year-to-Date Same Store
    Quarter over Quarter Same-Store Results

    $ in Millions—194,491 Same StoreMillions – 191,278 Same-Store Units

    Description
    		 Revenues
    		 Expenses
    		 NOI
    		 
    YTD 2002 $918.0 $336.8 $581.2 
    YTD 2001 $930.3 $335.4 $594.9 
      
    		 
    		 
    		 
     Change $(12.3)$1.4 $(13.7)
      
    		 
    		 
    		 

    % Change
     
     
    (1.3
    )%
     
    0.4
    %
     
    (2.3
    )%

    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

    Same-Store Occupancy Statistics

    YTD 2002

    Q1 2003

    		93.98

    92.5

    %

    YTD 2001

    Q1 2002

    		94.63

    94.0

    %

    Change

    (1.5

    Change(0.65

    )%

    The Company’s primary financial measure for evaluating each of its apartment communities is NOI.  The Company believes that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it is a direct measure of the actual operating results of the Company’s apartment communities.

    For properties that the Company acquired prior to December 31, 2000January 1, 2002 and expects to continue to own through December 31, 2002,2003, the Company anticipates the following operating assumptionsresults for the full year ending December 31, 2002:2003:

    2002

    2003 Same-Store Operating Assumptions

    Physical Occupancy

    93.0%

    Revenue Change

    		(2.3)%

    (3.5%) to (2.0)%(1.2%)

    Expense Change

    		1.0%

    2.8% to 1.5%5.2%

    NOI Change

    		(4.5)%

    (9.2%) to (3.75)%(3.7%)

    Dispositions

    $500700 million

    Refinancing$200 million at 7.0%

    These 20022003 operating assumptions are based on current expectations and are forward-looking.

    Rental income from properties other than Six-Month 2002First Quarter 2003 Same Store Properties increased by approximately $9.3$11.3 million primarily as a result of revenue from properties the Company acquired in 20012002 and 20022003 and additional Partially Owned Properties that the Company consolidated in 2001.the fourth quarter of 2002.

    Interest and other income decreased by approximately $2.2$0.8 million, primarily as a result of lower balances available for investment and related interest rates being earned on the Company's short-term investment accounts along with lower balances on deposit in tax-deferred exchange accounts.

            Interest income—investment in mortgage notes decreased by $8.8 million as a result of the Company consolidating previously Unconsolidated Properties in July 2001. No additional interest income will be recognized on such mortgage notes in future years as the Company now consolidates the results related to these previously Unconsolidated Properties.

    23


    Property management expenses include off-site expenses associated with the self-management of the Company'sCompany’s properties.  These expenses increaseddecreased by approximately $0.9$3.6 million or 2.5%18.4%.  These expenses increased dueThis decrease is primarily attributable to higher overall compensation costsa reversal of a profit sharing accrual in the first quarter of 2003 related to a current period expense associated with restricted shares/awards granted to key employees. The Company continues to acquire properties in major metropolitan areas and dispose of assets in smaller multi-family rental markets wherethe 2002 calendar year as the Company doesdidn’t achieve its stated goals and management elected not haveto make a significant management presence.discretionary contribution to the plan.  In addition, the Company recorded lower expense in connection with granting less restricted shares to its employees in the first quarter of 2003.

     

    Fee and asset management revenues, net of fee and asset management expenses, increased slightlyby $0.9 million as a result of the Company managing an additional 3,637 units at Fort Lewis, Washington starting in April 2002.  As of June 30,March 31, 2003 and 2002, and 2001, the Company managed 20,142 18,896units and 19,84416,539 units, respectively, for third

    23


    parties and unconsolidated entities.

     

    The Company recorded impairment charges in 2002 totalingon its technology investments of approximately $0.6$0.3 million which is related to one investment in a technology entity.for both quarters presented.  See Note 1517 in the Notes to the Consolidated Financial Statements for further discussion.

     

    Interest expense, including amortization of deferred financing costs, decreased approximately $6.5$3.5 million primarily due to lower variable interest rates.  During the six monthsquarter ended June 30, 2002,March 31, 2003, the Company capitalized interest costs of approximately $12.3$5.4 million as compared to $12.8$5.9 million for the six monthsquarter ended June 30, 2001.March 31, 2002.  This capitalization of interest primarily related to equity investments in unconsolidated entities engaged in development activities.  The effective interest cost on all of the Company's indebtedness for the six monthsquarter ended June 30, 2002March 31, 2003 was 6.63%6.39% as compared to 7.07%6.51% for the six monthsquarter ended June 30, 2001.March 31, 2002.

     

    General and administrative expenses, which include corporate operating expenses, increased approximately $8.2$0.4 million between the six monthsperiods under comparison.  This increase was primarily due to higher state income taxesthe Company’s election to begin expensing stock-based compensation effective January 1, 2003 (see Note 15 in Michigan and New Jersey as well as the income taxes incurred at oneNotes to Consolidated Financial Statements) partially offset by lower expenses recorded in connection with granting less restricted shares to employees in the first quarter of the Company's taxable REIT subsidiaries which has an ownership interest in properties that in prior periods were classified as Unconsolidated Properties. In addition, retirement plan expenses for certain key executives, and higher overall compensation expenses including a current period expense associated with restricted shares/awards granted to key employees and additional compensation charges and costs associated with the Company's new President also contributed to the increase.2003.

     Net gain (loss) on sales of

    Income from investments in unconsolidated entities increased by $4.9 million primarily as a result of the sale of one stabilized development property (296 units).

            Net gain on sales of discontinued operations decreased approximately $17.8$0.1 million between the periods under comparison.  This decrease is primarily the result of approximately 3,500 fewer number of units sold during the six months ended June 30, 2002 as compared to the six months ended June 30, 2001 (includes approximately 3,000 units sold into a joint venture in February 2001).

    24


      Comparison of the quarter ended June 30, 2002 to the quarter ended June 30, 2001

            For the quarter ended June 30, 2002, income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle decreased by approximately $7.2 million when compared to the quarter ended June 30, 2001.

            Revenues from the Second Quarter 2002 Same Store Properties decreased primarily as a result of lower rental rates charged new residents, increased concessions and lower occupancy at certain properties. Property operating expenses from the Second Quarter 2002 Same Store Properties, which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses, decreased primarily as a result of increases in real estate taxes and insurance costsequity losses partially offset by decreases in utility costs. The following tables provide comparative revenue, expense, NOI and weighted average occupancy for the Second Quarter 2002 Same Store Properties:

    Second Quarter 2002 Same Store Results

    $ in Millions—196,211 Same Store Units

    Description
    		 Revenues
    		 Expenses
    		 NOI
    		 
    Q2 2002 $463.3 $173.3 $290.0 
    Q2 2001 $473.4 $170.6 $302.8 
      
    		 
    		 
    		 
     Change $(10.1)$2.7 $(12.8)
      
    		 
    		 
    		 

    % Change
     
     
    (2.1
    )%
     
    1.6
    %
     
    (4.2
    )%

    Same Store Occupancy Statistics

    Q2 200294.01%
    Q2 200194.60%
    Change(0.59)%

            Rental income from properties other than Second Quarter 2002 Same Store Properties increased by approximately $7.6 million primarily as a result of revenue from properties the Company acquired in 2001 and 2002 and additional Partially Owned Properties that the Company consolidated in 2001.unrealized gains on derivative instruments.

     Interest and other income increased by approximately $0.2 million, primarily as a result of a $0.7 million one-time financing fee related to the Fort Lewis loan closing, net of lower balances available for investment and related rates being earned on the Company's short term investment accounts along with lower balances on deposit in tax-deferred exchange accounts.

            Interest income—investment in mortgage notes decreased by $6.0 million as a result of the Company consolidating previously Unconsolidated Properties in July 2001. No additional interest income will be recognized on such mortgage notes in future years as the Company now consolidates the results related to these previously Unconsolidated Properties.

            Property management expenses include off-site expenses associated with the self-management of the Company's properties. These expenses increased by approximately $0.6 million or 3.2%. These expenses increased due to higher overall compensation costs related to a current period expense associated with restricted shares/awards granted to key employees. The Company continues to acquire properties in major metropolitan areas and dispose of assets in smaller multi-family rental markets where the Company does not have a significant management presence.

    25


            Fee and asset management revenues, net of fee and asset management expenses, increased slightly as a result of the Company managing an additional 3,637 units at Fort Lewis starting in April 2002. As of June 30, 2002 and 2001, the Company managed 20,142 units and 19,844 units, respectively, for third parties and unconsolidated entities.

            The Company recorded impairment charges in 2002 totaling approximately $0.3 million, which is related to one investment in a technology entity. See Note 15 in the Notes to the Consolidated Financial Statements for further discussion.

            Interest expense, including amortization of deferred financing costs, decreased approximately $1.4 million primarily due to lower variable interest rates. During the quarter ended June 30, 2002, the Company capitalized interest costs of approximately $6.4 million as compared to $6.8 million for the quarter ended June 30, 2001. This capitalization of interest primarily related to investments in unconsolidated entities engaged in development activities. The effective interest cost on all of the Company's indebtedness for the quarter ended June 30, 2002 was 6.75% as compared to 7.07% for the quarter ended June 30, 2001.

            General and administrative expenses, which include corporate operating expenses, increased approximately $4.2 million between the quarters under comparison. This increase was primarily due to higher state income taxes in Michigan and New Jersey as well as the income taxes incurred at one of the Company's taxable REIT subsidiaries which has an ownership interest in properties that in prior periods were classified as Unconsolidated Properties. In addition, retirement plan expenses for certain key executives, and higher overall compensation expenses including a current period expense associated with restricted shares/awards granted to key employees and additional compensation charges and costs associated with the Company's new President also contributed to the increase.

    Net gain on sales of discontinued operations increased approximately $21.2$67.9 million between the periods under comparison.  This increase is primarily the result of more fully depreciateda greater number of properties sold during the quarter and an increase ofended March 31, 2003, including two California properties, as well as the fact that many such sold properties were more fully depreciated.

    Discontinued operations, net, decreased approximately 1,000 units sold.$9.5 million between the periods under comparison.  See Note 14 in the Notes to Consolidated Financial Statements for further discussion.

    Liquidity and Capital Resources

     

    As of January 1, 2002,2003, the Company had approximately $51.6$29.9 million of cash and cash equivalents and $505.0$499.2 million available under its line of credit (net of $60.8 million which $59 million was restricted (notrestricted/dedicated to support letters of credit and not available for borrowings)borrowing).  After taking into effect the various transactions discussed in the following paragraphs and the net cash provided by operating activities, the Company'sCompany’s cash and cash equivalents balance at June 30, 2002March 31, 2003 was approximately $88.9$310.3 million and the amount available on the Company'sCompany’s line of credit was $700.0$646.7 million (net of $53.3 million which $84.0 million was restricted (notrestricted/dedicated to support letters of credit and not available for borrowings)borrowing).

     

    Part of the Company'sCompany’s acquisition and development funding strategy and the funding of the Company's investmentinvestments in various unconsolidated entities is to utilize its line of credit and to subsequently repay the line of credit from the disposition of properties, retained cash flows or the issuance of additional equity or debt securities.  Continuing to utilize this strategy during the six monthsquarter ended June 30, 2002,March 31, 2003, the Company:

      •

      disposed                  Disposed of twenty-threeseventeen properties (including twoone Unconsolidated Properties)Property) and received net proceeds of approximately $194.8$192.1 million;

      •

      disposed of the furniture rental business on January 11, 2002 and received net proceeds of approximately $28.7 million;

      •
      issued                  Issued $400.0 million of 6.625%5.20% fixed rate unsecured debt receiving net proceeds of $394.5$397.5 million;

      •

      issued                  Issued approximately 1.60.3 million Common Shares and received net proceeds of $33.4$6.9 million; and

    26

        •
        obtained $47.2                  Obtained $48.7 million in new mortgage financing.

       

      24


      All of these proceeds were utilized to either:to:

        •

        repay                  Purchase additional properties;

        •                  Repay the line of credit;

        •

        repay                  Repay mortgage indebtedness on selected properties;

        •

        repay public unsecured debt;

        •
        invest                  Invest in unconsolidated entities;development projects; and

        •

        purchase additional properties.
                        Invest in unconsolidated entities.

       

      During the six monthsquarter ended June 30, 2002,March 31, 2003, the Company:

        •

        repaid $195.0                  Acquired three properties utilizing cash of $76.7 million;

        •                  Repaid $140.0 million on its line of credit;

        •

        repaid $135.7                  Repaid $110.1 million of mortgage loans;

        and

        •

        repaid $100.0 million of 9.375% fixed rate public notes at maturity;

        •
        repaid $125.0 million of 7.95% fixed rate public notes at maturity;

        •
        fundedFunded a net of $40.3$1.7 million in accordance withunder its development agreements;

        •
        funded $10.0agreements.

        Depending on its analysis of market prices, economic conditions, and other opportunities for the investment of available capital, the Company may repurchase up to an additional $85.0 million in connection withof its agreement withCommon Shares pursuant to its existing share buyback program authorized by the U.S. Army; and

        •
        acquired seven properties utilizing cashBoard of $153.0 million.

      Trustees.  The Company'sCompany did not repurchase any of its Common Shares during the quarter ended March 31, 2003.

      The Company’s total debt summary and debt maturity schedule as of June 30, 2002,March 31, 2003, are as follows:

      Debt Summary as of June 30, 2002March 31, 2003
      		 $ Millions
      		 Weighted
      Average Rate
      		 

       

      $ Millions

       

      Weighted
      Average Rate

       

      SecuredSecured $3,210 6.28%

       

      $

      2,901

       

      6.05

      %

      UnsecuredUnsecured 2,439 6.52%

       

      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

      %

      Total $5,649 6.39%

       

       

       

       

       


      Fixed Rate
       
      $
      4,965
       
      6.89
      %
      Floating Rate 684 2.72%
       
      		 
      		 
      Total $5,649 6.39%

      Above Totals Include:
       
       
       
       
       

      Above Totals Include:

       

       

       

       

       

      Total Tax ExemptTotal Tax Exempt $958 3.75%

       

      $

      973

       

      3.63

      %

      Unsecured Revolving Credit FacilityUnsecured Revolving Credit Facility $— — 

       

      $

      —

       

      —

       

      27

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

      25


      Debt Maturity Schedule as of June 30, 2002March 31, 2003

      Year
      		 $ Millions
      		 % of Total
      		 

       

      $ Millions

       

      % of Total

       

      2002 $245 4.3%
      2003 310 5.5%

       

      $

      294

       

      5.1

      %

      2004 592 10.5%

       

      656

       

      11.4

      %

      2005* 684 12.1%

       

      617

       

      10.7

      %

      2006 429 7.6%

       

      490

       

      8.5

      %

      2007 273 4.8%

       

      300

       

      5.2

      %

      2008 511 9.0%

       

      489

       

      8.5

      %

      2009 405 7.2%

       

      258

       

      4.5

      %

      2010 256 4.5%

       

      199

       

      3.5

      %

      2011+ 1,944 34.4%
       
      		 
      		 

      2011

       

      691

       

      12.0

      %

      2012+

       

      1,761

       

      30.6

      %

      Total $5,649 100.0%

       

      $

      5,755

       

      100.0

      %

      *

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

      The Company's "ConsolidatedCompany’s “Consolidated Debt-to-Total Market Capitalization Ratio"Ratio” as of June 30, 2002March 31, 2003 is presented in the following table.  The Company calculates the equity component of its market capitalization as the sum of (i) the total outstanding Common Shares and assumed conversion of all OP Units at the equivalent market value of the closing price of the Company'sCompany’s Common Shares on the New York Stock Exchange; (ii) the "Common“Common Share Equivalent"Equivalent” of all convertible preferred shares and preference interests/units; and (iii) the liquidation value of all perpetual preferred shares and preference interests outstanding.

      Capitalization as of June 30, 2002March 31, 2003

      Total Debt   $5,649,483,792 

       

       

       

      $

      5,755,435,646

       

       

       

       

       

       


      Common Shares & OP Units
       
      298,023,286
       
       
       

       

      294,741,805

       

       

       

      Common Share Equivalents (see below) 15,134,806   

       

      14,944,282

       

       

       

       
      		   
      Total Outstanding at quarter-end 313,158,092   

       

      309,686,087

       

       

       

      Common Share Price at June 28, 2002 $28.75   

      Common Share Price at March 31, 2003

       

      $

      24.07

       

       

       

         9,003,295,145 

       

       

       

      7,454,144,114

       

      Perpetual Preferred Shares Liquidation Value   565,000,000 

       

       

       

      565,000,000

       

      Perpetual Preference Interests Liquidation Value   211,500,000 

       

       

       

      211,500,000

       

      Total Market Capitalization

       

       

       

      $

      13,986,079,760

       

         
      		 

       

       

       

       

       

      Total Market Capitalization   $15,429,278,937 

      Debt/Total Market Capitalization
       
       
       
      36.62
      %

       

       

       

      41.15

      %

      28

      26


      Convertible Preferred Shares, Preference Interests and Junior Preference Units As
      as of June 30, 2002March 31, 2003
      		 Shares/Units
      		 Conversion
      Ratio
      		 Common
      Share
      Equivalents

       

      Shares/Units

       

      Conversion
      Ratio

       

      Common
      Share
      Equivalents

       

      Preferred Shares:Preferred Shares:      

       

       

       

       

       

       

       

      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

       

      Series E 2,716,012 1.1128 3,022,378

       

       

       

       

       

       

       

      Series G 1,264,700 8.5360 10,795,479
      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 Convertible 4,785,923   15,134,806
       
      		   

      Total

       

       

       

       

       

      14,944,282

       

      The Company'sCompany’s policy is to maintain a ratio of consolidated debt-to-total market capitalization of less than 50%.

      From JulyApril 1, 20022003 through July 29, 2002,April 30, 2003, the Company:

        •

        acquired one propertyDisposed of three properties consisting of 466761 units for approximately $37.4$28.5 million;

        and

        •

        disposed of seven properties consisting of 1,171 units for approximately $67.2 million;

        •
        repaid $25.2Repaid $12.9 million of mortgage loans;

        •
        funded a netdebt at/or prior to maturity.

        Off-Balance Sheet Arrangements and Contractual Obligations

        As of $41.8 million related to the unconsolidated development agreements; and

        •
        announced that its Board of Trustees has approved a share repurchase program under which it may repurchase, from time to time, up to $200.0 million of its Common Shares through open market or privately negotiated transactions. This program would initially be funded using the Company's line of credit.

        Investments in Unconsolidated Entities

              In connection with one development agreement,March 31, 2003, the Company has an obligation to fund up to an additional $9.5 million to guarantee third party construction financing. As17 projects in various stages of June 30, 2002, the Company has 18 projects under development with estimated completion dates ranging through March 31,June 30, 2004.  The three development agreements currently in place have the following key terms:

              For one

      •The first development agreement, the Company's partner has the right, at any time following completion of a project, to stipulate a value for such project and offer to sell its interest in the project to the Company based on such value.  If the Company chooses not to purchase the interest, it must agree to a sale of the project to an unrelated third party at such value.  The Company'sCompany’s partner must exercise this right as to all projects within five years after the receipt of the final certificate of occupancy on the last developed property.  The Company has an obligation to fund up to an additional $13.0 million to guarantee third party construction financing, if required.

              Under a

      •The second development agreement, the Company's partner has the right, at any time following completion of a project, to require the Company to purchase the partners'partners’ interest in that project at a mutually agreeable price.  If the Company and the partner are unable to agree on a price, both parties will obtain appraisals.  If the appraised values vary by more than 10%, both the Company and its partner will agree on a third appraiser to determine which original appraisal is closest to its

      29


      determination of value.  The Company may elect at that time not to purchase the property and instead, authorize its partner to sell the project at or above the agreed-upon value to an unrelated third party.  Five years following the receipt of the final certificate of occupancy on the last developed property, the Company must purchase, at the agreed-upon price, any projects remaining unsold mustunsold.

      •                        The third development partner has the exclusive right for six months following stabilization (generally defined as having achieved 90% occupancy for three consecutive months following

      27


      the substantial completion of a project) to market a project for sale.  Thereafter, either the Company or its development partner may market a project for sale.  If the Company’s development partner proposes the sale, the Company may elect to purchase the project at the price proposed by its partner or defer the sale until two independent appraisers appraise the project.  If the two appraised values vary by more than 5%, a third appraiser will be purchased bychosen to determine the fair market value of the property.  Once a value has been determined, the Company may elect to purchase the property or authorize its development partner to sell the project at the agreed-upon price.value.

        In connection with one of its mergers, the Company provided a credit enhancement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project.  As of April 30, 2003, this enhancement was still in effect at a commitment amount of $12.7 million.

        As of April 30, 2003, the Company has a commitment to fund $6.1 million to Constellation Real Technologies, LLC, a real estate technology company.

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

        Capitalization of Fixed Assets and Improvements to Real Estate:Estate

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

        •

        Replacements(inside (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
        shades.

        We typically capitalize for established properties approximately $260 to $270$290 per unit annually for inside the unit replacements. All replacements are depreciated over a five-year estimated useful life.  We expense as incurred all maintenance and turnover costs such as cleaning, interior painting of individual 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 replacements and exterior painting;

        painting and siding;

        •

        major landscaping and grounds improvement;

        and

        •

        vehicles and office and maintenance equipment.

        We typically capitalize for established properties approximately $340$380 to $370$390 per unit annually for outside the unit building improvements.  All building improvements are depreciated over a five to ten-year estimated useful life.  We expense as incurred all recurring expenditures that do not improve the value of the asset or extend its useful life.

      30

      28


      For the six monthsquarter ended June 30, 2002,March 31, 2003, our actual improvements to real estate totaled approximately $66.5$33.6 million.  This includes the following detail (amounts in thousands except for unit and per unit amounts):

      Capitalized Improvements to Real Estate
      For the SixThree Months Ended June 30, 2002March 31, 2003

       
      		 Total Units(1)
      		 Replacements(2)
      		 Per
      Unit
      		 Building
      Improvements(3)
      		 Per
      Unit
      		 Total
      		 Per
      Unit
      Established Properties(4) 178,870 $22,661 $127 $31,640 $177 $54,301 $304
      New Acquisition Properties(5) 19,743  2,172  120  3,084  171  5,256  291
      Other(6) 6,994  1,639     5,313     6,952   
        
      		 
      		    
      		    
      		   
      Total 205,607 $26,472    $40,037    $66,509   
        
      		 
      		    
      		    
      		   

       

       

      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 22,35622,443 unconsolidated units.

      (2)

      Replacements include new expenditures inside the units such as carpets, appliances, mechanical equipment, fixtures and vinyl flooring.

      (3)
      Building improvements include roof replacement, paving, amenities and common areas, building mechanical equipment systems, exterior painting and siding, major landscaping, vehicles and office and maintenance equipment.

      (4)
      Wholly Owned Properties acquired prior to January 1, 2000.

      (5)
      2001.

      (3)Wholly Owned Properties acquired during 2000, 2001, 2002 and YTD 2002.2003.  Per unit amounts are based on a weighted average of 18,0708,914 units.

      (6)
      Other includes

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

      31

      We anticipate capitalizing annually an average of approximately $600$640 to $640$680 per unit annually for inside and outside the unit capital improvementsexpenditures to our real estate. Totalestablished properties.  The Company expects to fund approximately $110.0 million for capital expenditures for replacements and building improvements to real estatefor all consolidated properties for the remainder of 2002 are estimated to be $65.0 million.2003.

       

      During the six monthsquarter ended June 30, 2002,March 31, 2003, the Company'sCompany’s total non-real estate capital additions, such as computer software, computer equipment, and furniture and fixtures and leasehold improvements to the Company'sCompany’s property management offices and its corporate offices, was approximately $4.6$0.9 million.  TotalThe Company expects to fund approximately $4.0 million in total additions to non-real estate property for the remainder of 2002 are estimated at $2.2 million.2003.

       

      Improvements to real estate and additions to non-real estate property for both 2002 and 2001 were funded from net cash provided by operating activities.

        Other

       

      Derivative Instruments

      In the normal course of business, the Company is exposed to the effect of interest rate changes.  The Company limits these risks by following established risk management policies and procedures including the use of derivatives to hedge interest rate risk on debt instruments.

      The Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors.  When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Company has not sustained a material loss from those instruments nor does it anticipate any material adverse effect on its net income or financial position in the future from the use of derivatives.

      See Note 12 in the Notes to Consolidated Financial Statements for additional discussion of derivative instruments at March 31, 2003.

      29


      Other

      Minority Interests as of June 30, 2002March 31, 2003 decreased by $8.2$4.1 million when compared to December 31, 2001.2002.  The primary factors that impacted this account in the Company'sCompany’s consolidated statements of operations and balance sheets during the six monthsquarter were:

        •

        distributions             Distributions declared to Minority Interests, which amounted to $19.7$9.6 million for the six months ended June 30, 2002first quarter of 2003 (excluding Junior Preference Unit and Preference Interest distributions);

        •

        the             The allocation of income from operations to holders of OP Units in the amount of $13.8$9.1 million;

        •

        the             The allocation of Minority Interestsincome from operations to Partially Owned Properties in the amount of $1.3$0.1 million;

        •

        the             The conversion of OP Units into Common Shares; and

        •

        the             The issuance of Common Shares during the six months ended June 30, 2002.
      first quarter of 2003.

       

      Total distributions paid in July 2002April 2003 amounted to $147.7$143.6 million (excluding distributions on Partially Owned Properties), which included certain distributions declared duringin the first quarter ended June 30, 2002.of 2003.

       

      The Company expects to meet its short-term liquidity requirements, including capital expenditures related to maintaining its existing properties and certain scheduled unsecured note and mortgage note repayments, generally through its working capital, net cash provided by operating activities and borrowings under its line of credit.  The Company considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions.  The Company also expects to meet its long-term liquidity requirements, such as scheduled unsecured note and mortgage debt maturities, property acquisitions, financing of construction and development activities and capital improvements through the issuance of unsecured notes and equity securities, including additional OP Units, and proceeds received from the disposition of certain properties.  In addition, the Company has certain unencumbered properties available to secure additional mortgage borrowings in the event that the public capital markets are unavailable to the Company or the cost of alternative sources of capital to the Company is too high.  TheseThe fair value of these unencumbered properties are in excess of the required value of unencumbered properties the Company must maintain in order to comply with covenants under its unsecured notes and line of credit.

       On May 30, 2002 the

      The Company obtainedhas a new three-year $700.0 million unsecured revolving credit facility. The new line of credit replaces the Company's $700.0 million unsecured revolving credit facility that was scheduledwith potential borrowings of up to expire in August 2002. The prior existing revolving credit facility terminated upon the closing of the new facility.$700.0 million.    This new facility matures in May 2005 and will be used to fund property acquisitions, costs for certain Propertiesproperties under development and short term liquidity requirements.  As of July 31, 2002, $40.0 million wasApril 30, 2003, no amounts were outstanding under this new facility.

      32


              The Company provided a credit enhancement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project. As of July 31, 2002, this enhancement was still in effect at a commitment amount of $12.7 million.

      Critical Accounting Policies and Estimates

       The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and the related disclosures.

      The Company has identified six significant accounting policies as critical accounting policies.  These critical accounting policies are those that have the most impact on the reporting of our financial condition and those requiring significant judgments and estimates.  With respect to these critical accounting policies, management believes that the followingapplication of judgments and assessments is consistently applied and produces financial information that fairly presents the results of operations for all periods presented.  The six critical accounting policies among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.are:

        Impairment of Long-Lived Assets, Including Goodwill

       

      The Company periodically evaluates its long-lived assets, including its investments in real estate and goodwill, for impairment indicators.  The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each asset and legal factors.and environmental concerns.  Future events could occur which would cause the Company to conclude that impairment indicators exist and an impairment loss is warranted.

        30


        Depreciation of Investment in Real Estate

       

      The Company depreciates the building component of its investment in real estate over a 30-year estimated useful life, building improvements over a 5-year to 10-year estimated useful life and both the furniture, fixtures and equipment and replacements components over a 5-year estimated useful life, all of which are judgmental determinations.

        Cost Capitalization

        See the Capitalization of Fixed Assets and Improvements to Real Estate section for discussion of the policy with respect to capitalization vs. expensing of fixed asset/repair and maintenance costs.  In addition, the Company capitalizes the payroll and associated costs of employees directly responsible for and who spend all of their time on the supervision of major capital projects.  These costs are reflected on the balance sheet as an increase to depreciable property.

        The Company follows the guidance in SFAS No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, for all development projects and uses its professional judgment in determining whether such costs meet the criteria for capitalization or must be expensed as incurred.  The Company capitalizes interest, real estate taxes and insurance and payroll and associated costs for those individuals directly responsible for and who spend all of their time on development activities.  The Company expenses as incurred all payroll costs of employees working directly at our properties, except for costs that are incurred during the initial lease-up phase on a development project.  An allocated portion of payroll costs is capitalized based upon the occupancy of the project until stabilized occupancy is achieved.  Stabilized occupancy is always deemed to have occurred no later than one year from cessation of major development activities.  The incremental payroll and associated costs are capitalized to the projects under development based upon the effort directly identifiable with such projects.  These costs are reflected on the balance sheet as either construction in progress or a separate component of investments in unconsolidated entities.  The Company ceases the capitalization of such costs as the property becomes substantially complete and ready for its intended use.

        Fair Value of Financial Instruments, Including Derivative Instruments

       

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

        Revenue Recognition

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

        Stock-Based Compensation

        Stock Option CompensationPrior to 2003, t

              Thehe Company hashad chosen to account for its stock optionstock-based compensation in accordance with APB No. 25, Accounting for Stock Issued to Employees,which resultsresulted in no compensation expense for options issued with an exercise price equal to or exceeding the market value of the Company'sCompany’s Common Shares on the date of grant instead of Statement(intrinsic method).  The Company has elected to expense its stock-based compensation in accordance with SFAS No. 123 and its amendment (SFAS No. 148), Accounting for Stock Based Compensation, effective in the first quarter of 2003, which would resultresulted in

      31


      compensation expense being recorded based on the fair value of the stock option compensation issued.

      Adjusted Net Incomegranted or modified.

       

      SFAS No. 148 provides three transition methods for entities that adopt the fair value recognition provisions of SFAS No. 123.  The Company has chosen to use the “Prospective Method”.  This method requires that companies apply the recognition provisions of SFAS No. 123 to only employee awards granted or modified after the beginning of the fiscal year in which the recognition provisions are first applied, or January 1, 2003.  Compensation expense under all of the Company’s plans is generally recognized over periods ranging from three months to five years.  Therefore, the cost related to stock-based employee compensation included in the determination of net income for the quarter ended March 31, 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123.  See Note 15 in the Notes to Consolidated Financial Statements for further discussion.

      Funds From Operations

      For the six monthsquarter ended June 30 2002, Adjusted Net Income ("ANI"March 31, 2003, Funds From Operations (“FFO”) available to Common Shares and OP Units decreased $4.3$23.4 million, as compared to the six months ended June 30, 2001.

              For the quarter ended June 30, 2002, ANI available to Common Shares and OP Units increased $6.4 millionor 12.2%, as compared to the quarter ended June 30, 2001.

      33


              The following is a reconciliation of net income available to Common Shares to ANI available to Common Shares and OP Units for the six months and quarters ended June 30, 2002 and 2001:

      Adjusted Net Income
      (Amounts in thousands)
      (Unaudited)

       
      		 Six Months Ended June 30,
      		 Quarter Ended June 30,
      		 
       
      		 2002
      		 2001
      		 2002
      		 2001
      		 
      Net income available to Common Shares $165,394 $180,792 $89,041 $74,038 
      Net income allocation to Minority Interests—Operating Partnership  13,784  16,474  7,343  6,678 
      Adjustments:             
       Acquisition cost depreciation*  192,005  187,797  95,847  94,324 
       Amortization of goodwill  —  1,924  —  991 
       Acquisition cost depreciation accumulated on sold properties  (22,532) (34,774) (18,588) (8,575)
       Extraordinary items  468  (106) 371  205 
       Cumulative effect of change in accounting principle  —  1,270  —  — 
        
      		 
      		 
      		 
      		 
      ANI available to Common Shares and OP Units—basic** $349,119 $353,377 $174,014 $167,661 
        
      		 
      		 
      		 
      		 
      Depreciation for replacements and capital improvements $43,422 $38,830 $22,170 $19,762 
        
      		 
      		 
      		 
      		 
      *
      Acquisition cost depreciation represents depreciation for the initial cost of the property, including buildings and furniture, fixtures and equipment and depreciation on capital improvements identified in the acquisition underwriting and incurred in the first twenty-four months of ownership when the total cost exceeds $2,000 per unit.

      **
      ANI represents net income (loss) (computed in accordance with accounting principles generally accepted in the United States ("GAAP")), including gains or losses from sales of real estate, plus acquisition cost depreciation, plus amortization of goodwill, minus the accumulated acquisition cost depreciation on sold properties, plus/minus extraordinary items and plus the cumulative effect of change in accounting principle. Depreciation associated with replacements and capital improvements is deducted in calculating ANI.

      34

      March 31, 2002.

       The Company believes that ANI is helpful to investors as a supplemental measure of the operating performance of a real estate company because, along with cash flows from operating activities, financing activities and investing activities, it provides investors an understanding of the ability of the Company to incur and service debt and to make capital expenditures. ANI in and of itself does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indication of the Company's performance or to net cash flows from operating activities as determined by GAAP as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs. The Company's calculation of ANI may differ from the methodology for calculating ANI utilized by other real estate companies and may differ, for example, due to variations among the Company's and other real estate companies' accounting policies for replacement type items and, accordingly, may not be comparable to such other real estate companies.

      Funds From Operations

              For the six months ended June 30, 2002, Funds From Operations ("FFO") available to Common Shares and OP Units decreased $4.4 million as compared to the six months ended June 30, 2001.

              For the quarter ended June 30, 2002, FFO available to Common Shares and OP Units decreased $4.3 million as compared to the quarter ended June 30, 2001.

      The following is a reconciliation of net income available to Common Shares to FFO available to Common Shares and OP Units for the six months and quarters ended June 30, 2002March 31, 2003 and 2001:2002:

      Funds fromFrom Operations

      (Amounts in thousands)

      (Unaudited)

       
      		 Six Months Ended June 30,
      		 Quarter Ended June 30,
      		 
       
      		 2002
      		 2001
      		 2002
      		 2001
      		 
      Net income available to Common Shares $165,394 $180,792 $89,041 $74,038 
      Net income allocation to Minority Interests—Operating Partnership  13,784  16,474  7,343  6,678 
      Adjustments:             
       Depreciation/amortization  235,427  228,551  118,017  115,077 
       Net gain on sales of discontinued operations  (27,576) (46,226) (24,760) (4,448)
       Net (gain) loss on sales of unconsolidated entities  (5,246) (339) 411  (339)
       Extraordinary items  468  (106) 371  205 
       Cumulative effect of change in accounting principle  —  1,270  —  — 
       Impairment on technology investments  581  6,775  290  3,772 
        
      		 
      		 
      		 
      		 
      FFO available to Common Shares and OP Units—basic* $382,832 $387,191 $190,713 $194,983 
        
      		 
      		 
      		 
      		 

       

       

      Quarter Ended March 31,

       

       

       

      2003

       

      2002

       

       

       

       

       

       

       

      Net income available to Common Shares

       

      $

      111,167

       

      $

      76,353

       

      Net income allocation to Minority Interests – Operating Partnership

       

      9,110

       

      6,441

       

      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 Common Shares and OP Units – basic (1)(2)

       

      $

      168,635

       

      $

      192,070

       

      (1)*

      FFO represents  The National Association of Real Estate Investment Trusts (“NAREIT”) defines funds from operations (“FFO”) (April 2002 White Paper) as net income (loss) (computed in accordance with accounting principles generally accepted in the United States ("GAAP"))States), excluding gains or losses(or losses) from sales of property, plus depreciation and amortization, (afterand after adjustments for Partially Owned Propertiesunconsolidated partnerships and Unconsolidated Properties), plus/minus extraordinary items, and plus the cumulative effect of change in accounting principle and impairment charges.joint ventures.  Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFOfunds from operations on the same basis.  The April 2002 White Paper states that gain or loss on sales of property is excluded from FFO for previously depreciated operating properties only.  Once the Company commences the conversion of units to condominiums, it simultaneously discontinues depreciation of such property.  Accordingly, the Company included in FFO its incremental gains or losses from the sale of condominium units to third parties, which represented net gains of $443 and $339 for the quarters ended March 31, 2003 and 2002, respectively.

      (2)

        The Company believes that FFO is helpful to investors as a supplemental measure of the operating performance of a real estate company because, along with cash flows from operating activities,

      35

      32


      activities, financing activities and investing activities, it provides investors an understanding of the ability of the Company to incur and service debt and to make capital expenditures.  FFO in and of itself does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indication of the Company'sCompany’s performance or to net cash flows from operating activities as determined by GAAP as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs.  The Company'sCompany’s calculation of FFO may differ from the methodology for calculating FFO utilized by other real estate companies and may differ, for example, due to variations among the Company'sCompany’s and other real estate companies'companies’ accounting policies for replacement type items and, accordingly, may not be comparable to such other real estate companies.

      Item 3. Quantitative and Qualitative Disclosures About Market Risk


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

      Item 4. Disclosure Controls and Procedures

      Within 90 days prior to the filing date of this quarterly report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-14 and 15d-14.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in timely alerting them to material information.  There have been no significant changes to the internal controls of the Company or in other factors that could significantly affect the internal controls subsequent to the completion of this evaluation.

      PART II.        OTHER INFORMATION

      Item 1.    Legal Proceedings

      There have been no new or significant developments related to the legal proceedings that were discussed in Part I, Item III of the Company'sCompany’s Form 10-K for the year ended December 31, 2001.2002.


      Item 4. Submission of Matters to a Vote of Security Holders

              The Company held its Annual Meeting of Shareholders on May 15, 2002. Shareholders holding 241,525,692 Common Shares (being the only class of shares entitled to vote at the meeting), or 88.4% of the Company's issued and outstanding shares as of the record date for the meeting, attended the meeting or were represented by proxy. The Company's shareholders voted on three matters presented at the meeting and all three received the requisite number of votes to pass. The results of the shareholders vote on each of the three matters are as follows:

      Proposal I—Election of four trustees to terms expiring in 2005.

       
      		 Total Vote for Each Trustee*
      		 Total Vote Withheld from Each Trustee*
      		 
      John W. Alexander 98.30%1.70%
      Bruce W. Duncan 97.83%2.17%
      Boone A. Knox 98.28%1.72%
      Samuel Zell 97.80%2.20%
      *
      This percentage represents the number of shares voting in this matter out of the total number of shares voted at the meeting, not out of the total shares outstanding. This matter required a plurality of the votes cast for approval.

      Proposal II—Approval to change the Company's name to "Equity Residential" (this matter required the affirmative vote of two-thirds of all outstanding shares for approval).

      For88.14%
      Against0.08%
      Abstain0.14%
      Non-Votes11.64%

      36

      Proposal III—Approval of the Company's 2002 Share Incentive Plan (this matter required a majority of the votes cast for approval).

      For 190,637,623 88.51%
      Against 24,759,248 11.49%
      Abstain 927,564 — 
      Broker Non-Votes 25,201,257 — 


      Item 6.    Exhibits and Reports on Form 8-K

      (A)          Exhibits:

      10.1         First Amendment to Equity Residential 2002 Share Incentive Plan.

      12            Computation of Ratio of Earnings to Combined Fixed Charges.

      99.1Certification 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.

      (A)
      Exhibits:


      3.1

      Articles of Amendment to the Second Amended and Restated Declaration of Trust, dated May 15, 2002.

      10.1

      Revolving Credit Agreement, dated as of May 29, 2002, among ERP Operating Limited Partnership, Banc of America Securities LLC, JP Morgan Securities Inc. and the Banks named therein.

      10.2

      Guaranty of Payment, dated as of May 29, 2002, between Equity Residential and Bank of America, N.A., as administrative agent.

      12

      Computation of Ratio of Earnings to Combined Fixed Charges.

      99.2Certification 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.

      (B)

      Reports on Form 8-K:

              None.

      37


      SIGNATURES

      None.

      33


      SIGNATURES

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

      EQUITY RESIDENTIAL


      Date: AugustMay 13, 20022003



      By:


      /s/DAVID J. NEITHERCUT      

      David J. Neithercut

      David J. Neithercut

      Executive Vice President and

      Chief Financial Officer


      Date: AugustMay 13, 20022003



      By:


      /s/ MICHAEL J. McHUGH

      Michael J. McHugh

      Michael J. McHugh

      Executive Vice President,
      Chief Accounting Officer

      and Treasurer

      38

      34



      QuickLinks

      EQUITY RESIDENTIAL CONSOLIDATED BALANCE SHEETS (Amounts in thousands) (Unaudited)CERTIFICATIONS
      EQUITY RESIDENTIAL CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands except per share data) (Unaudited)
      EQUITY RESIDENTIAL CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
      EQUITY RESIDENTIAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

      I, Bruce W. Duncan, Chief Executive Officer of Financial Condition and Results of OperationsEquity Residential, certify that:

      1.

        PART II. OTHER INFORMATION
        Item 1. Legal Proceedings
        Item 4. Submission of Matters to a Vote of Security Holders
        Item 6. Exhibits and Reports                  I have reviewed this quarterly report on Form 8-K10-Q of Equity Residential;

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

        3.                  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

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

        a)                 Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

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

        c)                 Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

        5.                  The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

        a)                 All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

        b)                Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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

        Date:  May 13, 2003

        /s/ Bruce W. Duncan

        Bruce W. Duncan

        Chief Executive Officer

        35


      SIGNATURESCERTIFICATIONS

      I, David J. Neithercut, Chief Financial Officer of Equity Residential, certify that:

      1.                  I have reviewed this quarterly report on Form 10-Q of Equity Residential;

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

      3.                  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

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

      a)                 Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

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

      c)                 Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

      5.                  The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

      a)                 All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

      b)                Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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

      Date:  May 13, 2003

      /s/ David J. Neithercut

      David J. Neithercut

      Chief Financial Officer

      36


      EXHIBIT INDEX

      Exhibit

      Document

      10.1

      First Amendment to Equity Residential 2002 Share Incentive Plan

      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.

      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.