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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

For the quarterly period ended SEPTEMBER 30, 2002

OR

For the quarterly period ended JUNE 30, 2003

OR

o

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

Commission File Number: 1-12252


EQUITY RESIDENTIAL
(Exact name of registrant as specified in its charter)

Maryland13-3675988

Commission File Number: 1-12252

EQUITY RESIDENTIAL

(Exact Name of Registrant as Specified in its Charter)

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   No  o

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

 

The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding on OctoberJuly 31, 20022003 was 270,855,698.273,706,254.






EQUITY RESIDENTIAL

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands except for share amounts)

(Unaudited)

 
 September 30,
2002

 December 31,
2001

 
ASSETS       
Investment in real estate       
 Land $1,854,750 $1,840,170 
 Depreciable property  11,228,526  11,096,847 
 Construction in progress  124,811  79,166 
  
 
 
   13,208,087  13,016,183 
 Accumulated depreciation  (2,026,010) (1,718,845)
  
 
 
Investment in real estate, net of accumulated depreciation  11,182,077  11,297,338 

Real estate held for disposition

 

 


 

 

3,371

 
Cash and cash equivalents  21,756  51,603 
Investments in unconsolidated entities  435,701  397,237 
Rents receivable  2,951  2,400 
Deposits—restricted  168,108  218,557 
Escrow deposits—mortgage  58,343  76,700 
Deferred financing costs, net  32,881  27,011 
Rental furniture, net    20,168 
Property and equipment, net    3,063 
Goodwill, net  30,000  47,291 
Other assets  66,379  90,886 
  
 
 
  Total assets $11,998,196 $12,235,625 
  
 
 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 
Liabilities:       
 Mortgage notes payable $3,088,798 $3,286,814 
 Notes, net  2,446,779  2,260,944 
 Line of credit  35,000  195,000 
 Accounts payable and accrued expenses  139,268  108,254 
 Accrued interest payable  67,725  62,360 
 Rents received in advance and other liabilities  71,037  83,005 
 Security deposits  46,250  47,644 
 Distributions payable  143,008  141,832 
  
 
 
  Total liabilities  6,037,865  6,185,853 
  
 
 

Commitments and contingencies

 

 

 

 

 

 

 
Minority Interests:       
 Operating Partnership  358,729  379,898 
 Preference Interests  246,000  246,000 
 Junior Preference Units  5,846  5,846 
 Partially Owned Properties  10,568  4,078 
  
 
 
  Total Minority Interests  621,143  635,822 
  
 
 

Shareholders' equity:

 

 

 

 

 

 

 
 Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares authorized; 10,539,534 shares issued and outstanding as of September 30, 2002 and 11,344,521 shares issued and outstanding as of December 31, 2001  946,544  966,671 
 Common Shares of beneficial interest, $0.01 par value; 1,000,000,000 shares authorized; 275,850,003 shares issued and outstanding as of September 30, 2002 and 271,621,374 shares issued and outstanding as of December 31, 2001  2,759  2,716 
 Paid in capital  4,977,195  4,892,744 
 Employee notes  (3,780) (4,043)
 Deferred compensation  (26,407) (25,778)
 Distributions in excess of accumulated earnings  (512,093) (385,320)
 Accumulated other comprehensive loss  (45,030) (33,040)
  
 
 
  Total shareholders' equity  5,339,188  5,413,950 
  
 
 
  Total liabilities and shareholders' equity $11,998,196 $12,235,625 
  
 
 

 

 

June 30,
2003

 

December 31,
2002

 

ASSETS

 

 

 

 

 

Investment in real estate

 

 

 

 

 

Land

 

$

1,815,685

 

$

1,803,577

 

Depreciable property

 

11,178,596

 

11,240,245

 

Construction in progress

 

2,502

 

2,441

 

 

 

12,996,783

 

13,046,263

 

Accumulated depreciation

 

(2,247,136

)

(2,112,017

)

Investment in real estate, net of accumulated depreciation

 

10,749,647

 

10,934,246

 

 

 

 

 

 

 

Cash and cash equivalents

 

243,838

 

29,875

 

Investments in unconsolidated entities

 

509,937

 

509,789

 

Rents receivable

 

2,119

 

2,926

 

Deposits – restricted

 

280,935

 

141,278

 

Escrow deposits – mortgage

 

44,831

 

50,565

 

Deferred financing costs, net

 

32,321

 

32,144

 

Goodwill, net

 

30,000

 

30,000

 

Other assets

 

150,064

 

80,094

 

Total assets

 

$

12,043,692

 

$

11,810,917

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgage notes payable

 

$

2,850,493

 

$

2,927,614

 

Notes, net

 

2,854,198

 

2,456,085

 

Line of credit

 

 

140,000

 

Accounts payable and accrued expenses

 

71,746

 

64,369

 

Accrued interest payable

 

64,374

 

63,151

 

Rents received in advance and other liabilities

 

165,244

 

165,095

 

Security deposits

 

44,965

 

45,333

 

Distributions payable

 

142,004

 

140,844

 

Total liabilities

 

6,193,024

 

6,002,491

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

Minority Interests:

 

 

 

 

 

Operating Partnership

 

347,598

 

349,646

 

Preference Interests

 

246,000

 

246,000

 

Junior Preference Units

 

5,846

 

5,846

 

Partially Owned Properties

 

8,622

 

9,811

 

Total Minority Interests

 

608,066

 

611,303

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares authorized; 7,101,384 shares issued and outstanding as of June 30, 2003 and 10,524,034 shares issued and outstanding as of December 31, 2002

 

995,591

 

946,157

 

Common Shares of beneficial interest, $0.01 par value; 1,000,000,000 shares authorized; 273,119,105 shares issued and outstanding as of June 30, 2003 and 271,095,481 shares issued and outstanding as of December 31, 2002

 

2,731

 

2,711

 

Paid in capital

 

4,837,961

 

4,839,218

 

Deferred compensation

 

(7,538

)

(12,118

)

Distributions in excess of accumulated earnings

 

(547,693

)

(535,056

)

Accumulated other comprehensive loss

 

(38,450

)

(43,789

)

Total shareholders’ equity

 

5,242,602

 

5,197,123

 

Total liabilities and shareholders’ equity

 

$

12,043,692

 

$

11,810,917

 

See accompanying notes

2




EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands except per share data)

(Unaudited)

 
 Nine Months Ended
September 30,

 Quarter Ended
September 30,

 
 
 2002
 2001
 2002
 2001
 
REVENUES             
 Rental income $1,504,274 $1,523,723 $501,853 $518,096 
 Fee and asset management  6,957  5,805  2,647  1,665 
 Interest and other income  11,551  17,685  2,235  6,166 
 Interest income—investment in mortgage notes    8,786    23 
  
 
 
 
 
  Total revenues  1,522,782  1,555,999  506,735  525,950 
  
 
 
 
 
EXPENSES             
 Property and maintenance  390,241  411,370  136,104  140,573 
 Real estate taxes and insurance  153,127  139,827  50,698  45,173 
 Property management  55,767  56,302  17,565  19,760 
 Fee and asset management  5,366  5,358  1,702  1,888 
 Depreciation  348,947  333,041  118,120  113,300 
 Interest:             
  Expense incurred, net  255,693  267,572  84,153  89,212 
  Amortization of deferred financing costs  4,344  4,328  1,362  1,524 
 General and administrative  33,000  23,604  10,673  9,525 
 Impairment on corporate housing business  17,122    17,122   
 Impairment on technology investments  872  7,968  291  1,193 
 Amortization of goodwill    1,862    581 
  
 
 
 
 
  Total expenses  1,264,479  1,251,232  437,790  422,729 
  
 
 
 
 

Income before allocation to Minority Interests, income (loss) 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

 

 

258,303

 

 

304,767

 

 

68,945

 

 

103,221

 
Allocation to Minority Interests:             
 Operating Partnership  (19,067) (22,666) (5,283) (6,192)
 Partially Owned Properties  (1,584) (1,523) (259) (1,285)
Income (loss) from investments in unconsolidated entities  (1,746) 1,885  (1,979) 925 
Net gain (loss) on sales of unconsolidated entities  (626) 339  (5,872)  
  
 
 
 
 
Income before discontinued operations, extraordinary items and cumulative effect of change in accounting principle  235,280  282,802  55,552  96,669 
Net gain on sales of discontinued operations  61,209  99,793  32,763  53,567 
Discontinued operations, net  6,815  (49,241) 346  (56,257)
  
 
 
 
 
Income before extraordinary items and cumulative effect of change in accounting principle  303,304  333,354  88,661  93,979 
Extraordinary items  (468) (22)   (128)
Cumulative effect of change in accounting principle    (1,270)    
  
 
 
 
 
Net income  302,836  332,062  88,661  93,851 
Preferred distributions  (72,969) (81,759) (24,188) (24,340)
  
 
 
 
 
Net income available to Common Shares $229,867 $250,303 $64,473 $69,511 
  
 
 
 
 
Net income per share—basic $0.84 $0.94 $0.24 $0.26 
  
 
 
 
 
Net income per share—diluted $0.83 $0.93 $0.23 $0.26 
  
 
 
 
 
Weighted average Common Shares outstanding—basic  272,738  266,614  273,943  268,253 
  
 
 
 
 
Weighted average Common Shares outstanding—diluted  298,690  294,661  299,057  296,391 
  
 
 
 
 
Distributions declared per Common Share outstanding $1.2975 $1.2475 $0.4325 $0.4325 
  
 
 
 
 

 

 

Six Months Ended June 30,

 

Quarter Ended June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

REVENUES

 

 

 

 

 

 

 

 

 

Rental income

 

$

943,529

 

$

950,540

 

$

473,967

 

$

476,418

 

Fee and asset management

 

7,878

 

4,310

 

5,390

 

2,592

 

Interest and other income

 

7,128

 

9,304

 

3,787

 

5,206

 

Total revenues

 

958,535

 

964,154

 

483,144

 

484,216

 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

 

Property and maintenance

 

258,017

 

239,744

 

129,269

 

120,338

 

Real estate taxes and insurance

 

101,780

 

96,872

 

50,455

 

48,267

 

Property management

 

32,194

 

37,663

 

16,343

 

18,213

 

Fee and asset management

 

3,607

 

3,620

 

1,837

 

1,758

 

Depreciation

 

231,582

 

218,684

 

116,555

 

110,464

 

Interest:

 

 

 

 

 

 

 

 

 

Expense incurred, net

 

164,532

 

170,528

 

84,103

 

86,573

 

Amortization of deferred financing costs

 

3,104

 

2,962

 

1,701

 

1,584

 

General and administrative

 

20,146

 

22,327

 

8,970

 

11,527

 

Impairment on technology investments

 

581

 

581

 

290

 

290

 

Total expenses

 

815,543

 

792,981

 

409,523

 

399,014

 

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

 

142,992

 

171,173

 

73,621

 

85,202

 

Allocation to Minority Interests:

 

 

 

 

 

 

 

 

 

Operating Partnership

 

(18,281

)

(13,784

)

(9,171

)

(7,343

)

Partially Owned Properties

 

(243

)

(1,325

)

(128

)

(519

)

Income (loss) from investments in unconsolidated entities

 

(1,744

)

233

 

(1,851

)

7

 

Net gain (loss) on sales of unconsolidated entities

 

4,675

 

5,246

 

3,463

 

(411

)

Income from continuing operations

 

127,399

 

161,543

 

65,934

 

76,936

 

Net gain on sales of discontinued operations

 

140,992

 

28,446

 

70,320

 

25,630

 

Discontinued operations, net

 

3,347

 

24,186

 

137

 

10,731

 

Net income

 

271,738

 

214,175

 

136,391

 

113,297

 

Preferred distributions

 

(48,417

)

(48,781

)

(24,237

)

(24,256

)

 

 

 

 

 

 

 

 

 

 

Net income available to Common Shares

 

$

223,321

 

$

165,394

 

$

112,154

 

$

89,041

 

 

 

 

 

 

 

 

 

 

 

Net income per share – basic

 

$

0.82

 

$

0.61

 

$

0.41

 

$

0.33

 

 

 

 

 

 

 

 

 

 

 

Net income per share – diluted

 

$

0.82

 

$

0.60

 

$

0.41

 

$

0.32

 

 

 

 

 

 

 

 

 

 

 

Weighted average Common Shares outstanding – basic

 

271,031

 

272,126

 

271,380

 

273,146

 

 

 

 

 

 

 

 

 

 

 

Weighted average Common Shares outstanding – diluted

 

298,405

 

298,422

 

299,217

 

299,494

 

 

 

 

 

 

 

 

 

 

 

Distributions declared per Common Share outstanding

 

$

0.865

 

$

0.865

 

$

0.4325

 

$

0.4325

 

See accompanying notes

3


 
 Nine Months Ended
September 30,

 Quarter Ended
September 30,

 
 
 2002
 2001
 2002
 2001
 
Comprehensive income:             
 Net income $302,836 $332,062 $88,661 $93,851 
  Other comprehensive income (loss)—derivative instruments:             
   Cumulative effect of change in accounting principle    (5,334)    
   Unrealized holding gains (losses) arising during the period  (12,605) (20,451) (14,595) (17,055)
   Losses reclassified into earnings from other comprehensive income  615  397  230  171 
  
 
 
 
 
Comprehensive income $290,846 $306,674 $74,296 $76,967 
  
 
 
 
 

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(Amounts in thousands except per share data)

(Unaudited)

 

 

Six Months Ended June 30,

 

Quarter Ended June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

271,738

 

$

214,175

 

$

136,391

 

$

113,297

 

Other comprehensive income (losses) – derivative and other instruments:

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

1,879

 

1,085

 

1,742

 

(3,091

)

Equity in unrealized holding gains (losses) arising during the period – unconsolidated entities

 

2,759

 

905

 

1,565

 

(2,128

)

Losses reclassified into earnings from other comprehensive income

 

701

 

385

 

471

 

217

 

Comprehensive income

 

$

277,077

 

$

216,550

 

$

140,169

 

$

108,295

 

See accompanying notes

4




EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 
 Nine Months Ended
September 30,

 
 
 2002
 2001
 
CASH FLOWS FROM OPERATING ACTIVITIES:       
Net income $302,836 $332,062 
Adjustments to reconcile net income to net cash provided by operating activities:       
 Allocation to Minority Interests:       
  Operating Partnership  19,067  22,666 
  Partially Owned Properties  1,584  1,523 
 Cumulative effect of change in accounting principle    1,270 
 Depreciation  353,206  349,313 
 Amortization of deferred financing costs  4,350  4,338 
 Amortization of discount on investment in mortgage notes    (2,256)
 Amortization of goodwill    2,852 
 Amortization of discounts and premiums on debt  (589) (1,424)
 Amortization of deferred settlements on interest rate protection agreements  (238) 533 
 Impairment on corporate housing business  17,122   
 Impairment on furniture rental business    60,000 
 Impairment on technology investments  872  7,968 
 Loss (income) from investments in unconsolidated entities  1,746  (1,885)
 Net gain on sales of discontinued operations  (61,209) (99,793)
 Net loss (gain) on sales of unconsolidated entities  626  (339)
 Extraordinary items  468  22 
 Unrealized loss (gain) on interest rate protection agreements  383  (161)
 Book value of furniture sales and rental buyouts    8,703 
 Compensation paid with Company Common Shares  15,158  12,298 
 
Changes in assets and liabilities:

 

 

 

 

 

 

 
  (Increase) in rents receivable  (551) (2,069)
  Decrease in deposits—restricted  8,186  4,538 
  Additions to rental furniture    (17,827)
  Decrease (increase) in other assets  11,849  (17,124)
  Increase in accounts payable and accrued expenses  32,102  25,535 
  Increase in accrued interest payable  5,365  25,702 
  (Decrease) in rents received in advance and other liabilities  (579) (7,628)
  (Decrease) increase in security deposits  (1,037) 885 
  
 
 
  Net cash provided by operating activities  710,717  709,702 
  
 
 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 
 Investment in real estate—acquisitions  (232,097) (242,366)
 Investment in real estate—development  (86,115) (54,344)
 Improvements to real estate  (110,291) (107,263)
 Additions to non-real estate property  (5,562) (5,210)
 Interest capitalized for real estate under development  (6,952) (6,651)
 Interest capitalized for unconsolidated entities under development  (12,492) (14,381)
 Proceeds from disposition of real estate, net  291,368  452,060 
 Proceeds from disposition of furniture rental business  28,741   
 Proceeds from disposition of unconsolidated entities  34,796  359 
 Proceeds from refinancing of unconsolidated entities  4,375  5,691 
 Investments in unconsolidated entities  (97,582) (69,195)
 Distributions from unconsolidated entities  31,021  26,311 
 Decrease in deposits on real estate acquisitions, net  42,046  98,582 
 Decrease (increase) in mortgage deposits  19,605  (4,167)
 Business combinations, net of cash acquired  (658) (8,231)
 Consolidation of previously Unconsolidated Properties    52,841 
 Investment in property and equipment    (2,185)
 Principal receipts on investment in mortgage notes    61,419 
 Other investing activities, net  192  (58)
  
 
 
 Net cash (used for) provided by investing activities  (99,605) 183,212 
  
 
 

 

 

Six Months Ended June 30,

 

 

 

2003

 

2002

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

271,738

 

$

214,175

 

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

 

 

 

 

 

Allocation to Minority Interests:

 

 

 

 

 

Operating Partnership

 

18,281

 

13,784

 

Partially Owned Properties

 

243

 

1,325

 

Depreciation

 

237,392

 

234,846

 

Amortization of deferred financing costs

 

3,110

 

2,988

 

Amortization of discounts and premiums on debt

 

(451

)

(424

)

Amortization of deferred settlements on derivative instruments

 

104

 

(176

)

Impairment on technology investments

 

581

 

581

 

Loss (income) from investments in unconsolidated entities

 

1,744

 

(233

)

Net gain on sales of discontinued operations

 

(140,992

)

(28,446

)

Net gain on sales of unconsolidated entities

 

(4,675

)

(5,246

)

Loss on debt extinguishments

 

380

 

468

 

Unrealized (gain) loss on derivative instruments

 

(83

)

483

 

Compensation paid with Company Common Shares

 

8,082

 

10,061

 

 

 

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

Decrease (increase) in rents receivable

 

512

 

(227

)

(Increase) decrease in deposits – restricted

 

(404

)

12,108

 

(Increase) decrease in other assets

 

(21,912

)

3,898

 

Increase in accounts payable and accrued expenses

 

7,420

 

9,026

 

Increase in accrued interest payable

 

1,238

 

316

 

(Decrease) in rents received in advance and other liabilities

 

(10,792

)

(9,972

)

(Decrease) in security deposits

 

(686

)

(189

)

Net cash provided by operating activities

 

370,830

 

459,146

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Investment in real estate – acquisitions

 

(243,004

)

(153,034

)

Investment in real estate – development/other

 

(4,676

)

(57,066

)

Improvements to real estate

 

(76,821

)

(66,509

)

Additions to non-real estate property

 

(1,552

)

(4,602

)

Interest capitalized for real estate under development

 

 

(4,369

)

Interest capitalized for unconsolidated entities under development

 

(10,923

)

(7,954

)

Proceeds from disposition of real estate, net

 

473,186

 

183,494

 

Proceeds from disposition of furniture rental business

 

 

28,741

 

Proceeds from disposition of unconsolidated entities

 

8,595

 

11,317

 

Investments in unconsolidated entities

 

(5,671

)

(42,441

)

Distributions from unconsolidated entities

 

14,557

 

21,483

 

(Increase) decrease in deposits on real estate acquisitions, net

 

(139,261

)

56,305

 

Decrease in mortgage deposits

 

5,848

 

14,651

 

Business combinations, net of cash acquired

 

(485

)

(461

)

Consolidation of previously Unconsolidated Properties

 

(697

)

 

Other investing activities, net

 

(45,912

)

192

 

Net cash (used for) investing activities

 

(26,816

)

(20,253

)

See accompanying notes

5


 
 Nine Months Ended
September 30,

 
 
 2002
 2001
 
CASH FLOWS FROM FINANCING ACTIVITIES:       
 Loan and bond acquisition costs $(10,495)$(4,383)
 Mortgage notes payable:       
  Proceeds  104,572  59,312 
  Lump sum payoffs  (283,681) (315,302)
  Scheduled principal repayments  (24,351) (24,210)
  Prepayment premiums/fees  (468) (201)
 Notes, net:       
  Proceeds  397,064  299,316 
  Lump sum payoffs  (225,000)  
  Scheduled principal repayments  (4,669) (4,649)
 Line of credit:       
  Proceeds  368,500  436,491 
  Repayments  (528,500) (791,953)
 (Payments) from settlement of interest rate protection agreements  (1,534) (7,360)
 Proceeds from sale of Common Shares  8,425  7,277 
 Proceeds from sale of Preference Interests    48,500 
 Proceeds from exercise of options  28,542  56,326 
 Redemption of Preferred Shares    (210,500)
 Payment of offering costs  (170) (1,535)
 Distributions:       
  Common Shares  (354,683) (218,632)
  Preferred Shares  (57,919) (69,359)
  Preference Interests  (15,185) (13,338)
  Junior Preference Units  (243) (190)
  Minority Interests—Operating Partnership  (29,859) (19,738)
  Minority Interests—Partially Owned Properties  (11,568) (31,970)
 Principal receipts on employee notes, net  263  219 
  
 
 
  Net cash (used for) financing activities  (640,959) (805,879)
  
 
 
 
Net (decrease) increase in cash and cash equivalents

 

 

(29,847

)

 

87,035

 
 Cash and cash equivalents, beginning of period  51,603  23,772 
  
 
 
 Cash and cash equivalents, end of period $21,756 $110,807 
  
 
 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

270,885

 

$

270,849

 
  
 
 

Mortgage loans assumed through real estate acquisitions

 

$

14,000

 

$

45,918

 
  
 
 

Mortgage loans (assumed) by purchaser in real estate and furniture rental business dispositions

 

$

(8,840

)

$

(28,231

)
  
 
 

Transfers to real estate held for disposition

 

$


 

$

4,102

 
  
 
 

Mortgage loans recorded as a result of consolidation of previously Unconsolidated Properties

 

$


 

$

301,502

 
  
 
 

Net (assets) liabilities recorded as a result of consolidation of previously Unconsolidated Properties

 

$


 

$

(20,839

)
  
 
 

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)

 

 

Six Months Ended June 30,

 

 

 

2003

 

2002

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Loan and bond acquisition costs

 

$

(3,616

)

$

(9,124

)

Mortgage notes payable:

 

 

 

 

 

Proceeds

 

48,680

 

47,213

 

Lump sum payoffs

 

(161,914

)

(119,386

)

Scheduled principal repayments

 

(16,187

)

(16,322

)

Prepayment premiums/fees

 

(472

)

(468

)

Notes, net:

 

 

 

 

 

Proceeds

 

398,816

 

397,064

 

Lump sum payoffs

 

 

(225,000

)

Scheduled principal repayments

 

(195

)

(253

)

Line of credit:

 

 

 

 

 

Proceeds

 

172,000

 

292,000

 

Repayments

 

(312,000

)

(487,000

)

(Payments on) settlement of derivative instruments

 

(12,999

)

(1,533

)

Proceeds from sale of Common Shares

 

4,247

 

6,354

 

Proceeds from exercise of options

 

13,626

 

27,030

 

Proceeds from sale of Preferred Shares

 

150,000

 

 

Payment of offering/redemption costs

 

(5,099

)

(158

)

Redemption of Preferred Shares

 

(100,000

)

 

Distributions:

 

 

 

 

 

Common Shares

 

(235,081

)

(235,548

)

Preferred Shares

 

(37,861

)

(35,832

)

Preference Interests

 

(10,106

)

(10,132

)

Junior Preference Units

 

(162

)

(162

)

Minority Interests – Operating Partnership

 

(19,270

)

(20,095

)

Minority Interests – Partially Owned Properties

 

(2,458

)

(10,375

)

Principal receipts on employee notes, net

 

 

173

 

Net cash (used for) financing activities

 

(130,051

)

(401,554

)

Net increase in cash and cash equivalents

 

213,963

 

37,339

 

Cash and cash equivalents, beginning of period

 

29,875

 

51,603

 

Cash and cash equivalents, end of period

 

$

243,838

 

$

88,942

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

Cash paid during the period for interest

 

$

175,009

 

$

184,216

 

 

 

 

 

 

 

Real estate acquisitions/dispositions:

 

 

 

 

 

Mortgage loans assumed

 

$

34,968

 

$

14,000

 

 

 

 

 

 

 

Valuation of OP Units issued

 

$

105

 

$

 

 

 

 

 

 

 

Mortgage loans (assumed) by purchaser

 

$

(9,075

)

$

(1,680

)

 

 

 

 

 

 

Consolidation of previously Unconsolidated Properties:

 

 

 

 

 

Mortgage loans assumed

 

$

26,500

 

$

 

 

 

 

 

 

 

Valuation of OP Units issued

 

$

4,231

 

$

 

 

 

 

 

 

 

Net (assets) liabilities recorded

 

$

1,633

 

$

 

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 SeptemberJune 30, 20022003 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 SeptemberJune 30, 2002,2003, the Company owned or had interestsinvestments in a portfolio of 1,059 multifamily 1,005properties containing 227,426 apartment units located in 3635 states consisting of the following:216,644 units.  An ownership breakdown includes:

 
 Number of
Properties

 Number of
Units

Wholly Owned Properties 934 197,354
Partially Owned Properties (Consolidated) 36 6,931
Unconsolidated Properties 89 23,141
  
 
Total Properties 1,059 227,426
  
 

 

 

Number of
Properties

 

Number of
Units

 

Wholly Owned Properties

 

884

 

187,043

 

Partially Owned Properties (Consolidated)

 

36

 

6,931

 

Unconsolidated Properties

 

85

 

22,670

 

Total Properties

 

1,005

 

216,644

 

2.                                      Summary of Significant Accounting Policies

    Basis of Presentation

 

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 ninesix months ended SeptemberJune 30, 20022003 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, 2001.2002.

7


    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.

        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 fiscal years beginning after December 15, 2001. The Company adopted the standard effective January 1, 2002. See Note 16 for further discussion.

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

7



Amendment of FASB Statement No. 13, and Technical Corrections.  SFAS No. 145, among other items, rescinds the automatic 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 January 1, 2003.

In January 2003, butthe FASB issued Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities.  FIN No. 46 requires a variable interest entity to be consolidated if a 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 Company will adopt FIN No. 46 in the third quarter of 2003 prospectively using carryover basis.  The Company has preliminarily determined its investment in real estate will increase approximately $1.3 billion, investment in unconsolidated entities will decrease approximately $494.5 million and mortgage notes payable will increase $833.5 million as a result of the consolidation of its previously unconsolidated stabilized development projects and projects under development (see Note 7).  The Company does not expect it toanticipate that the adoption of FIN No. 46 will have a material impactany effect on its financial condition and results of operations.net income.

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 ninesix months ended SeptemberJune 30, 2002:2003:


20022003


Common Shares outstanding at January 1,

271,621,374

271,095,481


Common Shares Issued:Issued:



Conversion of Series E Preferred Shares

892,625

25,198

Conversion of Series G Preferred Shares70
Conversion of Series H Preferred Shares4,050

Employee Share Purchase Plan

278,655

203,498

Dividend Reinvestment—DRIP Plan41,407
Share Purchase—DRIP Plan31,347

Exercise of options

1,385,584

732,724

Restricted share grants, net

900,000

955,658

Conversion of OP Units

694,891

106,546


Common Shares outstanding at SeptemberJune 30,

275,850,003

273,119,105


 

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 22,537,90122,353,524 units of limited partnership interest ("(“OP Units"Units”), representing a 7.6% interest in the Operating Partnership, at SeptemberJune 30, 2002.2003.  Assuming conversion of all OP Units into Common Shares, total Common Shares outstanding at SeptemberJune 30, 20022003 would have been 298,387,904.295,472,629.  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.

During the six months ended June 30, 2003, the Operating Partnership issued 159,427 OP Units to various limited partners at an average price of $27.48 per unit.  These OP Units are classified as Minority Interests – Operating Partnership in the accompanying consolidated balance sheets.

8



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.

 

The following table presents the Company'sCompany’s issued and outstanding Preferred Shares as of SeptemberJune 30, 20022003 and December 31, 2001:2002:

 
  
 Amounts in thousands
 
 Annual
Dividend
Rate per
Share (1)

 
 September 30, 2002
 December 31, 2001
Preferred Shares of beneficial interest, $0.01 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 September 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 September 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 September 30, 2002 and December 31, 2001

 

$

21.50000

 

 

175,000

 

 

175,000
 
7.00% Series E Cumulative Convertible Preferred; liquidation value $25 per share; 2,563,614 and 3,365,794 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively

 

$

1.75000

 

 

64,090

 

 

84,145
 
71/4% Series G Convertible Cumulative Preferred; liquidation value $250 per share; 1,264,692 and 1,264,700 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively

 

$

18.12500

 

 

316,173

 

 

316,175
 
7.00% Series H Cumulative Convertible Preferred; liquidation value $25 per share; 51,228 and 54,027 shares issued and outstanding at September 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 September 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 September 30, 2002 and December 31, 2001

 

$

1.90625

 

 

100,000

 

 

100,000
  
 
 

 

 

 

 

 

$

946,544

 

$

966,671

 

 

 

 

 



 


 

 

Annual
Dividend
Rate per
Share (1)

 

Amounts in thousands

 

 

 

 

June
30, 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 June 30, 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 June 30, 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 June 30, 2003 and December 31, 2002

 

$

21.50

 

175,000

 

175,000

 

 

 

 

 

 

 

 

 

7.00% Series E Cumulative Convertible Preferred; liquidation value $25 per share; 2,525,464 and 2,548,114 shares issued and  outstanding at June 30, 2003 and December 31, 2002,  respectively

 

$

1.75

 

63,137

 

63,703

 

 

 

 

 

 

 

 

 

7 1/4% Series G Convertible Cumulative Preferred; liquidation value $250 per share; 1,264,692 shares issued and outstanding  at June 30, 2003 and December 31, 2002

 

$

18.125

 

316,173

 

316,173

 

 

 

 

 

 

 

 

 

7.00% Series H Cumulative Convertible Preferred; liquidation value $25 per share; 51,228 shares issued and outstanding at  June 30, 2003 and December 31, 2002

 

$

1.75

 

1,281

 

1,281

 

 

 

 

 

 

 

 

 

8.29% Series K Cumulative Redeemable Preferred; liquidation value $50 per share; 1,000,000 shares issued and outstanding at June 30, 2003 and December 31, 2002

 

$

4.145

 

50,000

 

50,000

 

 

 

 

 

 

 

 

 

7.625% Series L Cumulative Redeemable Preferred; liquidation value $25 per share; 0 and 4,000,000 shares issued and  outstanding at June 30, 2003 and December 31, 2002, respectively

 

(2

)

 

100,000

 

 

 

 

 

 

 

 

 

6.48% Series N Cumulative Redeemable Preferred; liquidation value $250 per share; 600,000 and 0 shares issued and  outstanding at June 30, 2003 and December 31, 2002, respectively (3)

 

$

16.20

 

150,000

 

 

 

 

 

 

$

995,591

 

$

946,157

 


(1)

Dividends on all series of Preferred Shares are payable quarterly at various pay dates.  Dividend rates listed for Series B, C, D, G and GN are Preferred Share rates and the equivalent Depositary Share annual dividend rates are $2.281252, $2.281252, $2.15, $1.8125 and $1.8125,$1.62, respectively.

 

9



(2)          On June 19, 2003, the Company redeemed all of its outstanding Series L Cumulative Redeemable Preferred Shares at its liquidation value for total cash consideration of $100.0 million.

(3)          On June 19, 2003, the Company issued 600,000 Series N Cumulative Redeemable Preferred Shares in a public offering.  The Company received $145.3 million in net proceeds from this offering after payment of the underwriters’ fee.

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.

9


The following table presents the issued and outstanding Preference Interests as of SeptemberJune 30, 20022003 and December 31, 2001:2002:

 
  
 Amounts in thousands
 
 Annual
Dividend
Rate Per
Unit (1)

 
 September 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 September 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 September 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 September 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 September 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 September 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 September 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 September 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 September 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 September 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 September 30, 2002 and December 31, 2001

 

$

3.8125

 

 

11,500

 

 

11,500
  
 
 

 

 

 

 

 

$

246,000

 

$

246,000

 

 

 

 

 



 


 

 

Annual
Dividend
Rate per
Unit (1)

 

Amounts in thousands

 

 

 

 

June
30, 2003

 

December
31, 2002

 

 

 

 

 

 

 

 

 

Preference Interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8.00% Series A Cumulative Redeemable Preference Interests; liquidation value $50 per unit; 800,000 units issued and outstanding at June 30, 2003 and December 31, 2002

 

$

4.00

 

$

40,000

 

$

40,000

 

 

 

 

 

 

 

 

 

8.50% Series B Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,100,000 units issued and outstanding at June 30, 2003 and December 31, 2002

 

$

4.25

 

55,000

 

55,000

 

 

 

 

 

 

 

 

 

8.50% Series C Cumulative Redeemable Preference Units; liquidation value $50 per unit; 220,000 units issued and outstanding at June 30, 2003 and December 31, 2002

 

$

4.25

 

11,000

 

11,000

 

 

 

 

 

 

 

 

 

8.375% Series D Cumulative Redeemable Preference Units; liquidation value $50 per unit; 420,000 units issued and outstanding at June 30, 2003 and December 31, 2002

 

$

4.1875

 

21,000

 

21,000

 

 

 

 

 

 

 

 

 

8.50% Series E Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding at June 30, 2003 and December 31, 2002

 

$

4.25

 

50,000

 

50,000

 

 

 

 

 

 

 

 

 

8.375% Series F Cumulative Redeemable Preference Units; liquidation value $50 per unit; 180,000 units issued and outstanding at June 30, 2003 and December 31, 2002

 

$

4.1875

 

9,000

 

9,000

 

 

 

 

 

 

 

 

 

7.875% Series G Cumulative Redeemable Preference Units; liquidation value $50 per unit; 510,000 units issued and outstanding at June 30, 2003 and December 31, 2002

 

$

3.9375

 

25,500

 

25,500

 

 

 

 

 

 

 

 

 

7.625% Series H Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 190,000 units issued and outstanding at June 30, 2003 and December 31, 2002

 

$

3.8125

 

9,500

 

9,500

 

 

 

 

 

 

 

 

 

7.625% Series I Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 270,000 units issued and outstanding at June 30, 2003 and December 31, 2002

 

$

3.8125

 

13,500

 

13,500

 

 

 

 

 

 

 

 

 

7.625% Series J Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 230,000 units issued and outstanding at June 30, 2003 and December 31, 2002

 

$

3.8125

 

11,500

 

11,500

 

 

 

 

 

$

246,000

 

$

246,000

 

10




(1)

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

 

The following table presents the Operating Partnership'sPartnership’s issued and outstanding Junior Convertible Preference Units (the "Junior“Junior Preference Units"Units”) as of SeptemberJune 30, 20022003 and December 31, 2001:2002:

10

 

 

Annual
Dividend
Rate per
Unit(1)

 

Amounts in thousands

 

 

 

 

June
30, 2003

 

December
31, 2002

 

Junior Preference Units:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A Junior Convertible Preference Units; liquidation value $100 per unit; 56,616 units issued and outstanding at June 30, 2003 and December 31, 2002

 

$

5.46934

 

$

5,662

 

$

5,662

 

 

 

 

 

 

 

 

 

Series B Junior Convertible Preference Units; liquidation value $25 per unit; 7,367 units issued and outstanding at June 30, 2003 and December 31, 2002

 

$

2.00

 

184

 

184

 

 

 

 

 

$

5,846

 

$

5,846

 


 
  
 Amounts in thousands
 
 Annual
Dividend
Rate per
Unit (1)

 
 September 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 September 30, 2002 and December 31, 2001

 

$

5.469344

 

$

5,662

 

$

5,662
 
Series B Junior Convertible Preference Units; liquidation value $25 per unit; 7,367 units issued and outstanding at September 30, 2002 and December 31, 2001

 

$

2.000000

 

 

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 ninesix months ended SeptemberJune 30, 2002,2003, the Company acquired the entire equity interest in the ten sixproperties listed below from unaffiliated parties, and onetwo additional unitunits at an existing property, for a total purchase price of $245.4$277.7 million.

Date
Acquired

 Property
 Location
 Number of
Units

 Acquisition Price
(in thousands)

03/28/02 Isles at Sawgrass Sunrise, FL 368 $26,000
04/24/02 Center Pointe Beaverton, OR 264  19,100
04/30/02 Mira Flores Palm Beach Gardens, FL 352  29,250
05/15/02 Gramercy Park Houston, TX 384  26,000
05/31/02 Enclave at Winston Park Coconut Creek, FL 278  25,450
05/31/02 St. Andrews at Winston Park Coconut Creek, FL 284  25,450
06/21/02 Westside Villas VII Los Angeles, CA 53  15,250
07/17/02 Savannah Lakes Boynton Beach, FL 466  37,400
08/01/02 Cove at Fisher's Landing Vancouver, WA 253  17,800
08/08/02 Avon Place (condo unit) Avon, CT 1  69
08/09/02 Montevista Dallas, TX 350  23,675
      
 
      3,053 $245,444
      
 

Date
Acquired

 

Property

 

Location

 

Number
of Units

 

Acquisition Price
(in thousands)

 

01/30/03

 

The Reserve @ Eisenhower

 

Alexandria, VA

 

226

 

$

41,000

 

02/14/03

 

Artisan Square

 

Northridge, CA

 

140

 

27,466

 

03/05/03

 

LaSalle (1)

 

Beaverton, OR

 

554

 

43,000

 

05/01/03

 

Gateway at Malden Center (2)

 

Malden, MA

 

203

 

34,900

 

06/17/03

 

Mill Creek

 

Milpitas, CA

 

516

 

70,000

 

06/30/03

 

Carlyle Mill

 

Alexandria, VA

 

317

 

61,200

 

Various

 

Rivers Bend (Condo Units)

 

Windsor, CT

 

2

 

125

 

 

 

 

 

 

 

1,958

 

$

277,691

 


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

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

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

                  Assumed $26.5 million in mortgage debt;

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

                  Paid cash of $0.7 million; and

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

11



5.                      ��               Real Estate Dispositions

 

During the ninesix months ended SeptemberJune 30, 2002,2003, the Company disposed of the thirty-fiveforty-four properties listed below to unaffiliated parties.  The Company recognized a net gain on sales of discontinued operations of approximately $61.2$141.0 million and a net lossgain on sales of unconsolidated entities of approximately $0.6$4.7 million.

11

Date
Disposed

 

Property

 

Location

 

Number
of Units

 

Disposition
Price
(in thousands)

 

01/14/03

 

Strawberry Place

 

Plant City, FL

 

55

 

$

1,400

 

01/14/03

 

Smoketree Polo Club

 

Indio, CA

 

288

 

18,900

 

01/29/03

 

Amberwood I

 

Lake City, FL

 

50

 

1,175

 

01/30/03

 

Emerald Place

 

Bermuda Dunes, CA

 

240

 

20,125

 

01/30/03

 

Rolido Parque

 

Houston, TX

 

369

 

14,660

 

02/27/03

 

Fox Hill Commons

 

Vernon, CT

 

74

 

4,700

 

02/27/03

 

The Landings

 

Winter Haven, FL

 

60

 

1,475

 

02/27/03

 

Morningside

 

Titusville, FL

 

183

 

3,980

 

03/04/03

 

Colony Woods

 

Birmingham, AL

 

414

 

25,000

 

03/04/03

 

Hearthstone

 

San Antonio, TX

 

252

 

7,700

 

03/04/03

 

Northgate Village

 

San Antonio, TX

 

264

 

10,150

 

03/19/03

 

Lincoln Green I, II & III

 

San Antonio, TX

 

680

 

24,900

 

03/20/03

 

Meadows on the Lake

 

Birmingham, AL

 

200

 

10,900

 

03/20/03

 

Meadows in the Park

 

Birmingham, AL

 

200

 

10,900

 

03/20/03

 

Shoal Run

 

Birmingham, AL

 

276

 

14,350

 

03/31/03

 

Colony Place

 

Fort Myers, FL

 

300

 

20,600

 

04/08/03

 

Mallgate (1)

 

Louisville, KY

 

540

 

15,500

 

04/15/03

 

Summit Chase

 

Coral Springs, FL

 

140

 

8,875

 

04/16/03

 

Bayside

 

Sebring, FL

 

59

 

885

 

04/30/03

 

Essex Place II (Vacant Land)

 

Tampa, FL

 

 

575

 

05/08/03

 

Pueblo Villas

 

Albuquerque, NM

 

232

 

9,250

 

05/14/03

 

Emerald Bay

 

Winter Park, FL

 

432

 

17,200

 

05/16/03

 

Meadowood

 

Flatwoods, KY

 

52

 

975

 

05/29/03

 

Spicewood Springs

 

Jacksonville, FL

 

512

 

28,000

 

05/30/03

 

Princeton Square

 

Jacksonville, FL

 

288

 

16,750

 

05/30/03

 

Boulder Creek

 

Wilsonville, OR

 

296

 

16,700

 

05/30/03

 

Bridge Creek

 

Wilsonville, OR

 

315

 

18,100

 

05/30/03

 

Settlers Point/Brookfield

 

Salt Lake City, UT

 

416

 

21,500

 

05/30/03

 

Ridgewood

 

Russellville, KY

 

52

 

 

06/04/03

 

Lake Point

 

Charlotte, NC

 

296

 

12,401

 

06/05/03

 

Clearlake Pines II

 

Cocoa, FL

 

52

 

1,392

 

06/05/03

 

Sky Pines I & II

 

Orlando, FL

 

140

 

3,694

 

06/05/03

 

Brandywine East

 

Winter Haven, FL

 

38

 

884

 

06/05/03

 

Woodland I & II

 

Orlando, FL

 

169

 

5,175

 

06/12/03

 

Parkville

 

Parkersburg, WV

 

49

 

1,063

 

06/12/03

 

Cedarwood I

 

Belpre, OH

 

44

 

889

 

06/24/03

 

Greenwood Village

 

Tempe, AZ

 

270

 

14,600

 

06/25/03

 

Woodbine

 

Portsmouth, OH

 

41

 

660

 

06/26/03

 

Laurel Gardens

 

Coral Springs, FL

 

384

 

34,550

 

06/27/03

 

Crystal Creek

 

Phoenix, AZ

 

273

 

12,775

 

06/30/03

 

Harbor Pointe

 

Milwaukee, WI

 

595

 

27,800

 

06/30/03

 

Calais

 

Arlington, TX

 

264

 

12,500

 

12


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
07/02/02 Cedar Ridge Arlington, TX 121  5,500
07/02/02 Fielder Crossing Arlington, TX 119  4,100
07/09/02 Vacant Land Detroit, MI   10
07/11/02 Stonehenge Tecumseh, MI 48  1,238
07/11/02 Ashgrove Marshall, MI 51  1,314
07/12/02 Mill Village Randolph, MA 311  31,800
07/18/02 Meadowood I Jackson, MI 47  1,450
07/24/02 Mountain Run Albuquerque, NM 472  21,500
07/30/02 Celebration at Westchase Houston, TX 367  16,150
07/30/02 Pleasant Ridge Arlington, TX 63  2,605
07/31/02 Cedargate I & II Bowling Green, KY 117  3,020
08/15/02 The Cedars Charlotte, NC 360  14,800
08/29/02 Bourbon Square (Retail) Palatine, IL   1,200
09/30/02 River Bend Tampa, FL 296  11,200
Various Four Lakes Condo Units Lisle, IL 77  8,191
      
 
  Wholly Owned Properties   5,711  304,097
      
 
01/31/02 Mount Laurel Crossing* Mt. Laurel, NJ 296  11,317
04/23/02 Foxton* Seymour, IN 39  
08/13/02 Chase Knolls* Los Angeles, CA   23,479
      
 
  Unconsolidated Properties   335  34,796
      
 
Total     6,046 $338,893
      
 

Date
Disposed

 

Property

 

Location

 

Number
of Units

 

Disposition
Price
(in thousands)

 

Various

 

Four Lakes Condo Units

 

Lisle, IL

 

75

 

$

9,168

 

Various

 

Pointe East Condo Units

 

Redmond, WA

 

17

 

3,177

 

Various

 

Squaw Peak Condo Units

 

Phoenix, AZ

 

39

 

4,125

 

 

 

Wholly Owned Properties

 

 

 

9,985

 

490,078

 

02/28/03

 

Kings Crossing I (2)

 

Jacksonville, FL

 

69

 

963

 

05/14/03

 

Culbreath Key (2)

 

Tampa, FL

 

254

 

7,382

 

 

 

Unconsolidated Properties

 

 

 

323

 

8,345

 

Total

 

 

 

 

 

10,308

 

$

498,423

 


*
Represents

(1)          The Company was leasing the Company'sland under a long-term operating ground lease.

(2)          Disposition price listed represents the Company’s share of the net disposition proceeds.
  Culbreath Key was sold for $26.4 million with a portion of the net sales proceeds used to payoff the mortgage debt of $16.2 million.

6.                                      Commitments to Acquire/Dispose of Real Estate

 

As of SeptemberJune 30, 2002,2003, in addition to the property that was subsequently acquired as discussed in Note 19, the Company had entered into separate agreements to acquire twofour multifamily properties containing 5811,205 units from unaffiliated parties.  The Company expects a combined

12


purchase price of approximately $44.5$195.4 million, including the assumption of mortgage indebtednessdebt of approximately $18.4$54.8 million.

 

As of SeptemberJune 30, 2002,2003, in addition to the properties that were subsequently disposed of as discussed in Note 18,19, the Company had entered into separate agreements to dispose of seventeentwenty-three multifamily properties containing 3,338 6,426units to unaffiliated parties.  The Company expects a combined disposition price of approximately $148.9$341.8 million.

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 agreementsproperties with unrelated third party companies.parties.  The following table summarizes the Company'sCompany’s investments in unconsolidated entities as of SeptemberJune 30, 20022003 (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  13  15  26  99(2)
  
 
 
 
 
 
Total units  10,846  4,116  4,445  3,313  22,720(2)
  
 
 
 
 
 
EQR's percentage ownership of outstanding debt  25.0% 97.4% 100.0% 21.1%   

EQR's share of outstanding debt(4)

 

$

121,200

 

$

335,810

 

$

317,898

(3)

$

14,702

 

$

789,610

 

 

 

Institutional
Joint
Ventures

 

Stabilized
Development
Projects (1)

 

Projects
Under
Development

 

Lexford/
Other

 

Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

Total projects

 

45

 

10

 

18

 

22

 

95

(2)

 

 

 

 

 

 

 

 

 

 

 

 

Total units

 

10,846

 

3,349

 

4,799

 

2,704

 

21,698

(2)

 

 

 

 

 

 

 

 

 

 

 

 

Company’s percentage share of outstanding debt

 

25.0

%

100.0

%

100.0

%

11.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company’s share of outstanding debt (4)

 

$

121,200

 

$

252,101

 

$

581,422

(3)

$

5,361

 

$

960,084

 

13




(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 eleven projects under development consisting of 3,216containing 2,827 units, which are not included in the Company'sCompany’s property/unit counts at SeptemberJune 30, 2002.2003.   Totals also exclude Fort Lewis Military Housing consisting of 1one property and 3,637 units.

3,799 units, which is not accounted for under the equity method of accounting.  The Fort Lewis Military Housing is included in the Company’s property/unit counts at June 30, 2003.

(3)

A total of $609.4$790.5 million is available for funding under this construction debt, of which $317.9$581.4 million was funded and outstanding at SeptemberJune 30, 2002.

2003.

(4)

As of November 4, 2002, EQRAugust 8, 2003, the Company has funded $54.5$51.0 million as additional collateral on 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 major decisions (such as sale and/or financing/refinancing). The Company's common equity ownership interests in these entities range from 4.5% to 57.0% at September 30, 2002.

  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

13


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 ninesix months ended SeptemberJune 30, 20022003 and 2001,2002, the Company capitalized $12.5$10.9 million and $14.4$8.0 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.

8.    Deposits—Restricted

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

 

8.                                      Deposits - - Restricted

As of SeptemberJune 30, 2002,2003, deposits-restricted totaled $168.1$280.9 million and primarily included the following:

    deposits                  Deposits 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 $47.5                  Approximately $163.1 million in tax-deferred (1031) exchange proceeds; and

    approximately $66.1                  Approximately $66.8 million for resident security, utility, and other deposits.

9.                                      Mortgage Notes Payable

 

As of SeptemberJune 30, 2002,2003, the Company had outstanding mortgage indebtedness of approximately $3.1$2.9 billion.

 

During the ninesix months ended SeptemberJune 30, 2002,2003, the Company:

    repaid $308.0                  Repaid $178.1 million of mortgage loans;

    assumed $14.0                  Assumed $61.5 million of mortgage debt on one propertycertain properties in connection with its acquisition;

    their acquisitions and/or consolidation;

    disposed                  Obtained $48.7 million of $8.8mortgage loans on certain properties; and

    14



                      Relinquished $9.1 million of mortgage debt assumed by the purchaser in connection with the disposition of certain properties and the furniture rental business;

    obtained $74.6 million in construction loans on certain properties; and

    obtained $30.0 million of mortgage loans on certain properties.

 

As of SeptemberJune 30, 2002,2003, scheduled maturities for the Company'sCompany’s outstanding mortgage indebtedness were at various dates through October 1, 2033.  TheAt June 30, 2003, the interest rate range on the Company'sCompany’s mortgage debt was 1.55%0.90% to 12.465% at September 30, 2002..  During the ninesix months ended SeptemberJune 30, 2002,2003, the weighted average interest rate on the Company’s mortgage debt was 6.37%5.96%.

10.                               Notes

 

As of SeptemberJune 30, 2002,2003, the Company had outstanding unsecured notes of approximately $2.4 billion.$2.9 billion net of a $6.8 million discount and including a $7.9million premium.

 

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

During the ninesix months ended SeptemberJune 30, 2002,2003, the Company:

    issued                  Issued $400.0 million of ten-year 6.625% fixed 5.20% fixed–rate public notes, receiving net proceeds of $394.5 million;

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

    repaid $125.0 million of 7.95% fixed rate pubic notes at maturity; and

    repaid $4.7 million of other unsecured notes.

14$397.5 million.


     

    As of SeptemberJune 30, 2002,2003, scheduled maturities for the Company'sCompany’s outstanding notes arewere at various dates through 2029.  TheAt June 30, 2003, the interest rate range on the Company'sCompany’s notes was 4.75% to 7.75% at September 30, 2002.. During the ninesix months ended SeptemberJune 30, 2002,2003, the weighted average interest rate on the Company’s notes was 6.47%6.52%.

    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. The prior existing revolving credit facility was terminated upon the closing of the new facility. 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.million.  As of SeptemberJune 30, 2002, $35.0 million was2003, no amounts were outstanding and $83.3$50.2 million was restricted (dedicated to support letters of credit and not available for borrowing) on the line of credit.  During the ninesix months ended SeptemberJune 30, 2002,2003, the weighted average interest rate on borrowings underwas 1.85%.  EQR has guaranteed the former and new linesOperating Partnership’s line of credit was 2.49%.up to the maximum amount and for the full term of the facility.

    12.                               Derivative Instruments and Hedging Activities

     

    The following table summarizes the Company's consolidated derivative instruments and hedging activities at SeptemberJune 30, 2002 (amounts2003 (dollar amounts are in thousands):

     
     Cash Flow
    Hedges

     Fair Value
    Hedges

     Forward
    Starting
    Swaps

     Offsetting
    Receive
    Floating
    Swaps/Caps

     Offsetting
    Pay
    Floating
    Swaps/Caps

    Current Notional Balance $400,000 $220,000 $250,000 $255,117 $255,117
    Lowest Possible Notional $400,000 $220,000 $250,000 $251,410 $251,410
    Highest Possible Notional $400,000 $220,000 $250,000 $431,444 $431,444
    Lowest Interest Rate  3.65125%  5.33250%  5.06375%  4.52800%  4.45800%
    Highest Interest Rate  5.81000%  7.25000%  5.42600%  6.00000%  6.00000%
    Earliest Maturity Date  2003  2005  2013  2003  2003
    Latest Maturity Date  2005  2011  2013  2007  2007
    Estimated Asset (Liability) Fair Value $(16,244)$16,567 $(9,174)$(4,708)$4,529

     

     

     

    Cash Flow
    Hedges

     

    Fair Value  Hedges

     

    Forward
    Starting
     Swaps

     

    Interest
    Rate Caps

     

    Offsetting
    Receive
    Floating
    Swaps/Caps

     

    Offsetting 
    Pay
    Floating
    Swaps/Caps

     

    Current Notional Balance

     

    $

    400,000

     

    $

    120,000

     

    $

    150,000

     

    $

    37,000

     

    $

    255,120

     

    $

    255,120

     

    Lowest Possible Notional

     

    $

    400,000

     

    $

    120,000

     

    $

    150,000

     

    $

    37,000

     

    $

    251,410

     

    $

    251,410

     

    Highest Possible Notional

     

    $

    400,000

     

    $

    120,000

     

    $

    150,000

     

    $

    37,000

     

    $

    431,444

     

    $

    431,444

     

    Lowest Interest Rate

     

    3.65

    %

    7.25

    %

    4.34

    %

    6.50

    %

    4.53

    %

    4.46

    %

    Highest Interest Rate

     

    5.81

    %

    7.25

    %

    4.48

    %

    6.50

    %

    6.00

    %

    6.00

    %

    Earliest Maturity Date

     

    2003

     

    2005

     

    2014

     

    2004

     

    2003

     

    2003

     

    Latest Maturity Date

     

    2005

     

    2005

     

    2014

     

    2004

     

    2007

     

    2007

     

    Estimated Asset (Liability) Fair Value

     

    $

    (9,771

    )

    $

    8,877

     

    $

    (2,413

    )

    $

     

    $

    (1,136

    )

    $

    1,096

     

    15



    During the six months ended June 30, 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 has been deferred and will be recognized as additional interest expense over the ten-year life of the unsecured notes.

    At SeptemberJune 30, 2002,2003, 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 $427.7 $338.2million (notional amounts range from $166.5 $77.1million to $552.4 $391.2million over the terms of the swaps) at interest rates ranging from 2.25%1.78% to 6.94% maturing at various dates ranging from 2003 to 2005 with a net liability fair value of $15.0 $10.4million.  During the ninesix months ended SeptemberJune 30, 2002,2003, the Company recognized an unrealized lossgain of $0.8 million due to ineffectiveness of certain of these unconsolidated development derivatives (included in income (loss) from investments in unconsolidated entities).

     

    On SeptemberJune 30, 2002,2003, the net derivative instruments were reported at their fair value as other liabilities of approximately $9.0$3.3 million and as a reduction to investments in unconsolidated entities of approximately $15.0$10.4 million.  As of SeptemberJune 30, 2002,2003, there were approximately $44.2$39.0 million in deferred losses, net, included in accumulated other comprehensive loss.  Based on the estimated fair values of the net derivative instruments at SeptemberJune 30, 2002,2003, the Company may recognize an estimated $19.3$14.8 million of

    15


    accumulated other comprehensive loss as additional interest expense during the twelve months ending SeptemberJune 30, 2003,2004, of which $8.0$7.3 million is related to the unconsolidated development partnerships.

    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:

     
     Nine Months Ended
    September 30,

     Quarter Ended
    September 30,

     
     
     2002
     2001
     2002
     2001
     
     
     (Amounts in thousands except per share amounts)

     
    Numerator:             
    Income before allocation to Minority Interests, income (loss) from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items, cumulative effect of change in accounting principle and preferred distributions $258,303 $304,767 $68,945 $103,221 

    Allocation to Minority Interests:

     

     

     

     

     

     

     

     

     

     

     

     

     
     Operating Partnership  (19,067) (22,666) (5,283) (6,192)
     Partially Owned Properties  (1,584) (1,523) (259) (1,285)
    Income (loss) from investments in unconsolidated entities  (1,746) 1,885  (1,979) 925 
    Preferred distributions  (72,969) (81,759) (24,188) (24,340)
      
     
     
     
     

    Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle

     

     

    162,937

     

     

    200,704

     

     

    37,236

     

     

    72,329

     

    Net gain (loss) on sales of unconsolidated entities

     

     

    (626

    )

     

    339

     

     

    (5,872

    )

     


     
    Net gain on sales of discontinued operations  61,209  99,793  32,763  53,567 
    Discontinued operations, net  6,815  (49,241) 346  (56,257)
    Extraordinary items  (468) (22)   (128)
    Cumulative effect of change in accounting principle    (1,270)    
      
     
     
     
     
    Numerator for net income per share—basic  229,867  250,303  64,473  69,511 

    Effect of dilutive securities:

     

     

     

     

     

     

     

     

     

     

     

     

     
     Allocation to Minority Interests—Operating Partnership  19,067  22,666  5,283  6,192 
     Distributions on convertible preferred shares/units    74     
      
     
     
     
     
    Numerator for net income per share—diluted $248,934 $273,043 $69,756 $75,703 
      
     
     
     
     

    Denominator:

     

     

     

     

     

     

     

     

     

     

     

     

     
    Denominator for net income per share—basic  272,738  266,614  273,943  268,253 

    Effect of dilutive securities:

     

     

     

     

     

     

     

     

     

     

     

     

     
     OP Units  22,745  24,189  22,576  23,960 
     Convertible preferred shares/units    82     
     Share options/restricted shares  3,207  3,776  2,538  4,178 
      
     
     
     
     
    Denominator for net income per share—diluted  298,690  294,661  299,057  296,391 
      
     
     
     
     

    Net income per share—basic

     

    $

    0.84

     

    $

    0.94

     

    $

    0.24

     

    $

    0.26

     
      
     
     
     
     

    Net income per share—diluted

     

    $

    0.83

     

    $

    0.93

     

    $

    0.23

     

    $

    0.26

     
      
     
     
     
     

     

     

    Six Months Ended June 30,

     

    Quarter Ended June 30,

     

     

     

    2003

     

    2002

     

    2003

     

    2002

     

     

     

    (Amounts in thousands except per share amounts)

     

     

     

     

     

     

     

     

     

     

     

    Numerator:

     

     

     

     

     

     

     

     

     

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

     

    $

    142,992

     

    $

    171,173

     

    $

    73,621

     

    $

    85,202

     

     

     

     

     

     

     

     

     

     

     

    Allocation to Minority Interests:

     

     

     

     

     

     

     

     

     

    Operating Partnership

     

    (18,281

    )

    (13,784

    )

    (9,171

    )

    (7,343

    )

    Partially Owned Properties

     

    (243

    )

    (1,325

    )

    (128

    )

    (519

    )

    Income (loss) from investments in unconsolidated entities

     

    (1,744

    )

    233

     

    (1,851

    )

    7

     

    Net gain (loss) on sales of unconsolidated entities

     

    4,675

     

    5,246

     

    3,463

     

    (411

    )

    Preferred distributions

     

    (48,417

    )

    (48,781

    )

    (24,237

    )

    (24,256

    )

    Income from continuing operations available to Common Shares

     

    78,982

     

    112,762

     

    41,697

     

    52,680

     

     

     

     

     

     

     

     

     

     

     

    Net gain on sales of discontinued operations

     

    140,992

     

    28,446

     

    70,320

     

    25,630

     

    Discontinued operations, net

     

    3,347

     

    24,186

     

    137

     

    10,731

     

    Numerator for net income per share – basic

     

    223,321

     

    165,394

     

    112,154

     

    89,041

     

     

     

     

     

     

     

     

     

     

     

    Effect of dilutive securities:

     

     

     

     

     

     

     

     

     

    Allocation to Minority Interests – Operating Partnership

     

    18,281

     

    13,784

     

    9,171

     

    7,343

     

    Distributions on convertible preferred shares/units

     

    2,425

     

     

    1,211

     

    22

     

    Numerator for net income per share – diluted

     

    $

    244,027

     

    $

    179,178

     

    $

    122,536

     

    $

    96,406

     

    16



     


     

    Nine Months Ended
    September 30,


     

    Quarter Ended
    September 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 $0.61 $0.77 $0.15 $0.27 
    Net gain (loss) on sales of unconsolidated entities      (0.02)  
    Net gain on sales of discontinued operations  0.21  0.34  0.11  0.18 
    Discontinued operations, net  0.02  (0.17)   (0.19)
    Extraordinary items         
    Cumulative effect of change in accounting principle         
      
     
     
     
     
    Net income per share—basic $0.84 $0.94 $0.24 $0.26 
      
     
     
     
     

    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 $0.61 $0.76 $0.14 $0.27 
    Net gain (loss) on sales of unconsolidated entities      (0.02)  
    Net gain on sales of discontinued operations  0.20  0.34  0.11  0.18 
    Discontinued operations, net  0.02  (0.17)   (0.19)
    Extraordinary items         
    Cumulative effect of change in accounting principle         
      
     
     
     
     
    Net income per share—diluted $0.83 $0.93 $0.23 $0.26 
      
     
     
     
     

     

     

     

    Six Months Ended June 30,

     

    Quarter Ended June 30,

     

     

     

    2003

     

    2002

     

    2003

    ��

    2002

     

     

     

    (Amounts in thousands except per share amounts)

     

    Denominator:

     

     

     

     

     

     

     

     

     

    Denominator for net income per share – basic

     

    271,031

     

    272,126

     

    271,380

     

    273,146

     

     

     

     

     

     

     

     

     

     

     

    Effect of dilutive securities:

     

     

     

     

     

     

     

     

     

    OP Units

     

    22,294

     

    22,831

     

    22,316

     

    22,653

     

    Convertible preferred shares/units

     

    3,136

     

     

    3,133

     

    75

     

    Share options/restricted shares

     

    1,944

     

    3,465

     

    2,388

     

    3,620

     

    Denominator for net income per share – diluted

     

    298,405

     

    298,422

     

    299,217

     

    299,494

     

     

     

     

     

     

     

     

     

     

     

    Net income per share – basic

     

    $

    0.82

     

    $

    0.61

     

    $

    0.41

     

    $

    0.33

     

     

     

     

     

     

     

     

     

     

     

    Net income per share – diluted

     

    $

    0.82

     

    $

    0.60

     

    $

    0.41

     

    $

    0.32

     

     

     

     

     

     

     

     

     

     

     

    Net income per share – basic (1):

     

     

     

     

     

     

     

     

     

    Income from continuing operations available to Common Shares

     

    $

    0.33

     

    $

    0.43

     

    $

    0.17

     

    $

    0.20

     

    Net gain on sales of discontinued operations

     

    0.48

     

    0.10

     

    0.24

     

    0.09

     

    Discontinued operations, net

     

    0.01

     

    0.08

     

     

    0.04

     

    Net income per share – basic

     

    $

    0.82

     

    $

    0.61

     

    $

    0.41

     

    $

    0.33

     

     

     

     

     

     

     

     

     

     

     

    Net income per share – diluted:

     

     

     

     

     

     

     

     

     

    Income from continuing operations available to Common Shares

     

    $

    0.34

     

    $

    0.43

     

    $

    0.17

     

    $

    0.20

     

    Net gain on sales of discontinued operations

     

    0.47

     

    0.09

     

    0.24

     

    0.08

     

    Discontinued operations, net

     

    0.01

     

    0.08

     

     

    0.04

     

    Net income per share – diluted

     

    $

    0.82

     

    $

    0.60

     

    $

    0.41

     

    $

    0.32

     


    (1)          All net income per share – basic amounts have been calculated considering an allocation for Minority Interests.  The following amounts were used in the calculation of the individual components of net income per share – basic for the periods presented (all amounts are net of an allocation of Minority Interests in the Operating Partnership):

     

     

    Six Months Ended June 30,

     

    Quarter Ended June 30,

     

     

     

    2003

     

    2002

     

    2003

     

    2002

     

     

     

    (Amounts in thousands)

     

    Income from continuing operations available to Common Shares

     

    $

    89,908

     

    $

    116,809

     

    $

    47,023

     

    $

    55,451

     

    Net gain on sales of discontinued operations

     

    130,319

     

    26,259

     

    65,004

     

    23,677

     

    Discontinued operations, net

     

    3,094

     

    22,326

     

    127

     

    9,913

     

     

     

     

     

     

     

     

     

     

     

    Numerator for net income per share – basic

     

    $

    223,321

     

    $

    165,394

     

    $

    112,154

     

    $

    89,041

     

    Convertible preferred shares/share/units that could be converted into 15,461,85511,807,095 and 15,322,60715,648,034 weighted average Common Shares for the ninesix months ended SeptemberJune 30, 20022003 and 2001,2002, respectively, and 15,095,57611,807,095 and 15,626,90215,369,255 weighted average Common Shares for the quarters ended SeptemberJune 30, 20022003 and 2001,2002, 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.

    14.                               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


    144).

     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 of their carrying amounts or their estimated fair values, less their costs to sell.

            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 nine months and quarters ended September 30, 2002 and 2001, respectively, are outlined below and include the results of operations through the date of each respective sale for the ninerespective periods that the Company owned such assets during the six months and quarterquarters ended September

    17



    June 30, 2003 and 2002, and a full nine months and quarter of operations for the nine months and quarter ended September 30, 2001, forincluding the following:

      the sale of                  The Wholly Owned Properties sold during 2003 (see Note 5); and

                        The Wholly Owned Properties and the furniture rental business; and

      business sold during 2002.

       

       

      Six Months Ended June 30,

       

      Quarter Ended June 30,

       

       

       

      2003

       

      2002

       

      2003

       

      2002

       

       

       

      (Amounts in thousands)

       

      REVENUES

       

       

       

       

       

       

       

       

       

      Rental income

       

      $

      23,112

       

      $

      70,045

       

      $

      7,429

       

      $

      33,125

       

      Interest and other income

       

      122

       

      17

       

      109

       

      5

       

      Furniture income

       

       

      1,361

       

       

      (4

      )

      Total revenues

       

      23,234

       

      71,423

       

      7,538

       

      33,126

       

       

       

       

       

       

       

       

       

       

       

      EXPENSES (1)

       

       

       

       

       

       

       

       

       

      Property and maintenance

       

      10,643

       

      20,270

       

      4,239

       

      10,289

       

      Real estate taxes and insurance

       

      2,631

       

      7,424

       

      936

       

      3,409

       

      Property management

       

      112

       

      83

       

      62

       

      43

       

      Depreciation

       

      5,810

       

      16,162

       

      1,919

       

      7,614

       

      Interest:

       

       

       

       

       

       

       

       

       

      Expense incurred, net

       

      685

       

      1,969

       

      244

       

      1,027

       

      Amortization of deferred financing costs

       

      6

       

      26

       

      1

       

      13

       

      Furniture expenses

       

       

      1,303

       

       

       

      Total expenses

       

      19,887

       

      47,237

       

      7,401

       

      22,395

       

       

       

       

       

       

       

       

       

       

       

      Discontinued operations, net

       

      $

      3,347

       

      $

      24,186

       

      $

      137

       

      $

      10,731

       


      (1)             Includes expenses paid in the current period 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 ninequarter 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 2002 (see Note 5).

    net income for the six months and quarter ended June 30, 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:

    18



     

     

    Six Months Ended June 30,

     

    Quarter Ended June 30,

     

     

     

    2003

     

    2002

     

    2003

     

    2002

     

     

     

    (Amounts in thousands except per share amounts )

     

     

     

     

     

     

     

     

     

     

     

    Net income available to Common Shares – as reported

     

    $

    223,321

     

    $

    165,394

     

    $

    112,154

     

    $

    89,041

     

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

     

     

     

     

     

     

     

     

     

    Restricted/performance shares

     

    5,246

     

    9,912

     

    2,912

     

    4,828

     

    Share options (1)

     

    2,014

     

     

    307

     

     

    ESPP discount

     

    805

     

     

    315

     

     

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

     

     

     

     

     

     

     

     

     

    Restricted/performance shares

     

    (5,246

    )

    (9,912

    )

    (2,912

    )

    (4,828

    )

    Share options (1)

     

    (4,165

    )

    (3,051

    )

    (1,266

    )

    (1,524

    )

    ESPP discount

     

    (805

    )

    (925

    )

    (315

    )

    (267

    )

    Net income available to Common Shares – pro forma

     

    $

    221,170

     

    $

    161,418

     

    $

    111,195

     

    $

    87,250

     

    Earnings per share:

     

     

     

     

     

     

     

     

     

    Basic – as reported

     

    $

    0.82

     

    $

    0.61

     

    $

    0.41

     

    $

    0.33

     

    Basic – pro forma

     

    $

    0.82

     

    $

    0.59

     

    $

    0.41

     

    $

    0.32

     

    Diluted – as reported

     

    $

    0.82

     

    $

    0.60

     

    $

    0.41

     

    $

    0.32

     

    Diluted – pro forma

     

    $

    0.81

     

    $

    0.59

     

    $

    0.41

     

    $

    0.32

     

     
     Nine Months Ended
    September 30,

     Quarter Ended
    September 30,

     
     
     2002
     2001
     2002
     2001
     
     
     (Amounts in thousands)

     
    REVENUES             
     Rental income $19,759 $33,089 $1,595 $11,045 
     Interest and other income  1  49  (4) 17 
     Furniture income  1,361  45,051    15,024 
      
     
     
     
     
      Total revenues  21,121  78,189  1,591  26,086 
      
     
     
     
     
    EXPENSES             
     Property and maintenance  6,191  8,995  814  3,142 
     Real estate taxes and insurance  2,001  3,188  134  1,067 
     Depreciation  4,259  7,973  240  2,608 
     Interest expense incurred, net  546  884  57  284 
     Amortization of deferred financing costs  6  10    4 
     Amortization of goodwill    990    347 
     Impairment on furniture rental business    60,000    60,000 
     Furniture expenses  1,303  45,390    14,891 
      
     
     
     
     
      Total expenses  14,306  127,430  1,245  82,343 
      
     
     
     
     
    Discontinued operations, net $6,815 $(49,241)$346 $(56,257)
      
     
     
     
     

    15.(1)       Share options for the six months ended June 30, 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 to the fundingAs of properties in the development stage and the agreements with multifamily residential real estate developers, the Company funded a net total of $65.1 million during the nine months ended SeptemberJune 30, 2002. In connection with one development agreement,2003, the Company has an obligation to fund up to an additional $9.5 million to guarantee third party construction financing. As of September 30, 2002, the Company has 1718 projects in various stages of development (includes two consolidated projects) with estimated completion dates ranging through MarchDecember 31,2004.  The Company expects to fund approximately $5.6 million in connection with these properties during the remainder of 2003 and in 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

    19



    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 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 SeptemberJune 30, 2002,2003, this enhancement was still in effect at a commitment amount of $12.7 million.

    16.  17.Asset Impairment

    For both the ninesix months ended SeptemberJune 30, 20022003 and 2001,2002, the Company recorded approximately $0.9$0.6 million and $8.0 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.

     For the nine months ended September 30, 2002, the Company recorded approximately $17.1 million of asset impairment charges related to its corporate housing business. Following the guidance in SFAS No. 142, these charges were the result of the Company's decision to reduce the carrying value of its corporate housing business to $30.0 million, given the continued weakness in the economy and management's expectations for near-term performance. This impairment loss is reflected on the consolidated statements of operations as impairment on corporate housing business and on the consolidated balance sheets as a reduction in goodwill, net.

    18.                               Reportable Segments

     As of September 30, 2001, the Company recorded $60.0 million of asset impairment charges related to its furniture rental business. These charges were the result of a review of the existing intangible and tangible assets reflected on the consolidated balance sheet as of September 30, 2001. The Company reviewed the current net book value taking into consideration existing business and economic conditions as well as projected cash flows. The impairment loss is reflected on the income statement in discontinued operations, net, and includes the write-down of the following assets: a) goodwill of approximately $26.0 million; b) rental furniture, net of approximately $28.6 million; c) property and equipment, net of approximately $4.5 million; and d) other assets of approximately $0.9 million.

    19


    17.  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 Equity Corporate Housing (“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 98.8%98.4% and 97.9%98.6% of total revenues for the ninesix months ended SeptemberJune 30, 20022003 and 2001,2002, respectively, and approximately 99.0%98.1% and 98.5%98.4% of total revenues for the quarters ended SeptemberJune 30, 20022003 and 2001,2002, respectively.  The Company'sCompany’s rental real estate segment comprisedcomprises approximately 99.7%99.8% and 99.4%99.7% of total assets at SeptemberJune 30, 20022003 and December 31, 2001,2002, respectively.

     

    The primary financial measure for the Company'sCompany’s rental real estate segment is net operating

    20



    income ("NOI"(“NOI”), which represents rental income less: 1) property and maintenance expense; 2) real estate taxes and insurance expense; and 3) property management expense (all as reflected in the accompanying statements of operations).  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.  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 $905.1 $551.5million and $916.2$576.3 million for the ninesix months ended SeptemberJune 30, 20022003 and 2001,2002, respectively, and approximately $297.5$277.9 million and $312.6$289.6 million for the quarters ended SeptemberJune 30, 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 six months ended June 30, 2003 or 2002.

    18.19.                               Subsequent Events/Other

     During the nine months ended September 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 SeptemberJune 30, 20022003 and through November 4, 2002,August 8, 2003, the Company:

      disposed of five properties                  Acquired one property consisting of 684200 units for approximately $28.7$27.0 million;

      repaid $53.1                  Disposed of three properties and various individual condominium units consisting of 592 units for approximately $43.7 million;

                        Assumed $0.8 million of mortgage loans;

      debt on one property in connection with its consolidation;

      repaid $40.0                  Repaid $10.9 million of 7.25% fixed rate public notes atmortgage debt at/or prior to maturity;

      and

      received $3.5                  Relinquished $15.7 million representing full repayment of an executive's employee notes;

      repurchased and retired approximately 5.1 million Common Shares for approximately $115.0 million; and

      funded $4.3 million related tomortgage debt assumed by the development agreements.
    purchaser in connection with the disposition of certain properties.

    20

    21




      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:

        the                  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'sCompany’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                  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, and 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.

      Results of Operations

       

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

      21

      22



       
       Properties
       Units
       Purchase/Sale
      Price
      $ Millions

      At December 31, 2000 1,104 227,704   
      Q1/Q2/Q3 2001 Acquisitions 11 2,657 $288.0
      Q1/Q2/Q3 2001 Dispositions (38)(6,241)$298.5
      Q1/Q2/Q3 2001 Completed Developments 4 1,470   
        
       
         
      At September 30, 2001 1,081 225,590   
      Q4 2001 Acquisitions 3 766 $100.1
      Q4 2001 Dispositions (11)(2,566)$118.4
      Q4 2001 Completed Developments 3 1,035   
      Q4 2001 Unit Configuration Changes  (24)  
        
       
         
      At December 31, 2001 1,076 224,801   
      Q1/Q2/Q3 2002 Acquisitions 10 3,053 $245.4
      Q2 2002 Fort Lewis 1 3,637   
      Q1/Q2/Q3 2002 Dispositions (35)(6,046)$338.9
      Q1/Q2/Q3 2002 Completed Developments 7 1,966   
      Q1/Q2/Q3 2002 Unit Configuration Changes  15   
        
       
         
      At September 30, 2002 1,059 227,426   
        
       
         

       

       

      Properties

       

      Units

       

      Purchase /
      Sale Price
      $ Millions

       

      At December 31, 2001

       

      1,076

       

      224,801

       

       

       

      Q1/Q2 2002 Acquisitions

       

      7

       

      1,983

       

      $

      166.5

       

      Ft. Lewis Joint Venture

       

      1

       

      3,652

       

       

       

      Q1/Q2 2002 Dispositions

       

      (23

      )

      (3,654

      )

      $

      197.2

       

      Q1/Q2 2002 Completed Developments

       

      4

       

      1,181

       

       

       

      At June 30, 2002

       

      1,065

       

      227,963

       

       

       

      Q3/Q4 2002 Acquisitions

       

      5

       

      1,651

       

      $

      123.4

       

      Q3/Q4 2002 Dispositions

       

      (35

      )

      (7,059

      )

      $

      349.0

       

      Q3/Q4 2002 Completed Developments

       

      4

       

      1,020

       

       

       

      Q3/Q4 2002 Unit Configuration Changes

       

       

      16

       

       

       

      At December 31, 2002

       

      1,039

       

      223,591

       

       

       

      Q1/Q2 2003 Acquisitions

       

      6

       

      1,958

       

      $

      277.7

       

      Q1/Q2 2003 Dispositions

       

      (44

      )

      (10,308

      )

      $

      498.4

       

      Q1/Q2 2003 Completed Developments

       

      4

       

      1,274

       

       

       

      Q1/Q2 2003 Unit Configuration Changes

       

       

      129

       

       

       

      At June 30, 2003

       

      1,005

       

      216,644

       

       

       

       The Company's acquisition and disposition activity has impacted overall results of operations for the nine months and quarters ended September 30, 2002 and 2001.

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

       

      Properties that the Company owned for all of both the nineentire six month periods ended SeptemberJune 30, 2003 as well as June 30, 2002 and September 30, 2001 (the "Nine-Month 2002“Six-Month 2003 Same Store Properties"Properties”), which represented 191,940185,329 units and properties that the Company owned for all of both the quarters ended SeptemberJune 30, 2003 and June 30, 2002 and September 30, 2001 (the "Third“Second Quarter 20022003 Same Store Properties"Properties”), which represented 197,852185,697 units, also impacted the Company'sCompany’s results of operations.  Both the Nine-Month 2002Six-Month 2003 Same Store Properties and ThirdSecond Quarter 20022003 Same Store Properties are discussed in the following paragraphs.

        Comparison of the ninesix months ended SeptemberJune 30, 20022003 to the ninesix months ended SeptemberJune 30, 20012002

      For the ninesix months ended SeptemberJune 30, 2002,2003, income before allocation to Minority Interests, income (loss) 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 $46.5$28.2 million when compared to the ninesix months ended SeptemberJune 30, 2001.2002.

       

      Revenues from the Nine-Month 2002Six-Month 2003 Same Store Properties decreased primarily as a result of lower overall physical occupancy, increased concessions and lower rental rates charged to both new and renewal residents.  Property operating expenses from the Nine-Month 2002Six-Month 2003 Same Store Properties which include propertyincreased mainly due to higher payroll, maintenance, utility 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 utilitybuilding costs.  The following tables provide comparative revenue, expense, net operating income ("NOI"(“NOI”) and weighted average occupancy for the Nine-Month 2002Six-Month 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):

      22


      September 30, 2002 Year-to-Date "Same Store" Results

      23



      June YTD 2003 vs. June YTD 2002

      YTD over YTD Same-Store Results

      $ in Millions—191,940 "Same Store"Millions – 185,329 Same-Store Units

      Description

      Description

       Revenues
       Expenses
       NOI
       

       

      Revenues

       

      Expenses

       

      NOI

       

       

       

       

       

       

       

       

      YTD 2003

       

      $

      874.9

       

      $

      344.6

       

      $

      530.3

       

      YTD 2002YTD 2002 $1,356.7 $506.5 $850.2 

       

      $

      904.2

       

      $

      324.2

       

      $

      580.0

       

      YTD 2001 $1,386.5 $503.9 $882.6 
       
       
       
       
      Change $(29.8)$2.6 $(32.4)
       
       
       
       
      % Change (2.1%) 0.5% (3.7%)

      Change

       

      $

      (29.3

      )

      $

      20.4

       

      $

      (49.7

      )

      Change

       

      (3.2

      )%

      6.3

      %

      (8.6

      )%

      "Same Store"

      Same-Store Occupancy Statistics

      YTD 20022003

      93.87

      92.8

      %

      YTD 20012002

      94.59

      94.1

      %

      Change


      (1.3

      Change(0.72

      )%)

              For properties

      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 Company acquired prior to January 1, 2001 and expects to continue to own through December 31, 2002,operating performance of a real estate company because it is a direct measure of the Company anticipatesactual operating results of the following operating assumptions for the year ending December 31, 2002:Company’s apartment communities.

      2002 "Same Store" Operating Assumptions

      Physical Occupancy93.0%
      Revenue Change(2.6%)
      Expense Change0.8%
      NOI Change(4.5%)
      Dispositions$450 million

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

      2003 "Same Store"Same-Store Operating Assumptions

      Physical Occupancy

      93.0%

      Revenue Change

      (3.9%

      (3.5%) to (1.4%(1.2%)

      Expense Change

      2.1%

      2.8% to 4.4%5.2%

      NOI Change

      (9.2%) to (3.7%)

      Dispositions

      $700700.0 million

      These 2002 and 2003 operating assumptions are based on current expectations and are forward-looking.

      Rental income from properties other than Nine-Month 2002Six-Month 2003 Same Store Properties increased by approximately $10.4 $22.3million 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 $6.1 $2.2million, primarily as a result of lower balances available for investment and related interest rates being earned on the Company's short-term

      23


      investment accounts along with lower balances on deposit in tax-deferred exchangeescrow related 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.

      Property management expenses include off-site expenses associated with the self-management of the Company's properties.Company’s properties as well as management fees paid to third party management companies.  These expenses decreased by approximately $0.5$5.5 million or 0.1%14.5%.  This decrease is primarily attributable to lower expected levelsa reversal of employee bonus anda profit sharing payments for 2002.accrual in the first quarter of 2003 related to the 2002 calendar year as the Company didn’t achieve its stated goals and management elected not to make a discretionary contribution to the plan.  In addition, the Company recorded lower expense in connection with granting less restricted shares and the anticipated 401(k) match to its employees during the first six months of 2003 and no accrued expense related to 2003 profit sharing.

       

      Fee and asset management revenues, net of fee and asset management expenses, increased by $1.1 $3.6

      24



      million primarily as a result of the Company managing an additional 3,637 units at Fortincome allocated from Ft. Lewis Washington startingfor 2002 activity and received in April 2002.May 2003.  As of SeptemberJune 30, 20022003 and 2001,2002, the Company managed 20,142 19,011units and 15,94820,142 units, respectively, for third parties and unconsolidated entities.

       The Company recorded impairment charges in 2002 on its corporate housing business and its technology investments of approximately $17.1 million and $0.9 million, respectively. See Note 16 in the Notes to Consolidated Financial Statements for further discussion.

      Interest expense, including amortization of deferred financing costs, decreased approximately $11.9 $5.9million primarily due to lower variable interest rates.  During the ninesix months ended SeptemberJune 30, 2002,2003, the Company capitalized interest costs of approximately $19.4$10.9 million as compared to $21.0$12.3 million for the ninesix months ended SeptemberJune 30, 2001.2002.  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 ninesix months ended SeptemberJune 30, 20022003 was 6.60%6.40% as compared to 7.00%6.63% for the ninesix months ended SeptemberJune 30, 2001.2002.

       

      General and administrative expenses, which include corporate operating expenses, increaseddecreased approximately $9.4$2.2 million between the nine monthsperiods under comparison.  This increasedecrease was primarily due to higherlower expenses recorded in connection with granting less restricted shares to employees during the first six months of 2003 offset by approximately a $2.1 million increase related to the Company’s decision to expense its stock based compensation in accordance with SFAS No. 123 and its amendment (SFAS No. 148).  In addition, lower state income and franchise taxes in Michigan and New Jersey, 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, retirement plan expenses for certain key executives, restricted shares/awards grantedalso contributed to key employees and additional compensation charges and costs associated with the Company's new President.this decrease.

       

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

      Income (loss) from investments in unconsolidated entities decreased approximately $3.6$2.0 million between the periods under comparison.  This decrease is primarily the result of increased operating losses from equity losses andinvestments partially offset by unrealized lossesgains on derivative instruments.

       

      Net gain on sales of discontinued operations decreasedincreased approximately $38.6$112.5 million between the periods under comparison.  This decreaseincrease is primarily the result of approximately 3,200 fewera greater number of unitsproperties sold during the ninesix months ended SeptemberJune 30, 20022003, as comparedwell as the fact that several properties were more fully depreciated.

      Discontinued operations, net, decreased approximately $20.8 million between the periods under comparison.  See Note 14 in the Notes to the nine months ended September 30, 2001 (includes approximately 3,000 units sold into a joint venture in February 2001).Consolidated Financial Statements for further discussion.

      Comparison of the quarter ended SeptemberJune 30, 20022003 to the quarter ended SeptemberJune 30, 20012002

      For the quarter ended SeptemberJune 30, 2002,2003, income before allocation to Minority Interests, income (loss) 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 $34.3$11.6 million when compared to the quarter ended SeptemberJune 30, 2001.2002.

      24


      Revenues from the ThirdSecond Quarter 20022003 Same Store Properties decreased primarily as a result of lower rental rates charged new residents,overall physical occupancy, increased concessions and lower overall physical occupancy.rental rates charged to both new and renewal residents.  Property operating expenses from the ThirdSecond Quarter 20022003 Same Store Properties which include propertyincreased mainly due to higher payroll, maintenance, utility, building and maintenance, real estate taxesleasing and insurance and an allocation of property management expenses, increased $3.5 million or 2.0% primarily as a result of increases in real estate taxes, insurance costs and payroll overtime.advertising costs.  The following tables provide comparative revenue, expense, NOI and weighted average occupancy for the ThirdSecond Quarter 20022003 Same Store Properties:

      Third

      25



      Second Quarter 2003 vs. Second Quarter 2002 "Same Store"

      Quarter over Quarter Same-Store Results

      $ in Millions—197,852 "Same Store"Millions – 185,697 Same-Store Units

      Description

       Revenues
       Expenses
       NOI
       
      Q3 2002 $467.4 $182.0 $285.4 
      Q3 2001 $485.4 $178.5 $306.9 
        
       
       
       
       Change $(18.0)$3.5 $(21.5)
        
       
       
       
      % Change  (3.7%) 2.0%  (7.0%)

      Description

       

      Revenues

       

      Expenses

       

      NOI

       

       

       

       

       

       

       

       

       

      Q2 2003

       

      $

      438.4

       

      $

      173.5

       

      $

      264.9

       

      Q2 2002

       

      $

      451.9

       

      $

      164.8

       

      $

      287.1

       

      Change

       

      $

      (13.5

      )

      $

      8.7

       

      $

      (22.2

      )

      Change

       

      (3.0

      )%

      5.3

      %

      (7.7

      )%

      "Same Store"

      Same-Store Occupancy Statistics

      Q3 2002

      Q2 2003

      93.67

      93.0

      %

      Q3 2001

      Q2 2002

      94.54

      94.1

      %

      Change


      (1.1

      Change(0.87

      )%)

      Rental income from properties other than ThirdSecond Quarter 20022003 Same Store Properties increased by approximately $1.8 $11.1million primarily as a result of revenue from properties the Company acquired in 2002 and 2003 and additional Partially Owned Properties consolidated in the third and fourth quartersquarter of 2001 and during the nine months ended September 30, 2002.

      Interest and other income decreased by approximately $3.9$1.4 million, primarily as a result of a $0.7 million one-time financing fee related to the Fort Lewis loan closing in the second quarter of 2002.  In addition, lower balances available for investment and relatedinterest rates being earned on the Company's short-term investment accounts along with lower balances on deposit in tax-deferred exchange accounts.escrow related accounts also contributed to this decrease.

      Property management expenses include off-site expenses associated with the self-management of the Company's properties.Company’s properties as well as management fees paid to third party management companies.  These expenses decreased by approximately $2.2$1.9 million or 11.1%10.3%This decrease is primarily attributableThe Company recorded lower expense in connection with granting less restricted shares and the anticipated 401(k) match to lower expected levelsits employees during the first six months of employee bonus2003 and no accrued expense related to 2003 profit sharing payments for 2002.sharing.

      Fee and asset management revenues, net of fee and asset management expenses, increased by $1.2$2.7 million primarily as a result of the Company managing an additional 3,637 units at Fortincome allocated from Ft. Lewis startingfor 2002 activity and received in April 2002.May 2003.  As of SeptemberJune 30, 20022003 and 2001,2002, the Company managed 20,142 19,011units and 15,94820,142 units, respectively, for third parties and unconsolidated entities.

       The Company recorded impairment charges in 2002 on its corporate housing business and its technology investments of approximately $17.1 million and $0.3 million, respectively. See Note 16 in the Notes to Consolidated Financial Statements for further discussion.

      Interest expense, including amortization of deferred financing costs, decreased approximately $5.2$2.4 million primarily due to lower variable interest rates.  During the quarter ended SeptemberJune 30, 2002,2003, the Company capitalized interest costs of approximately $7.1$5.5 million as compared to $8.2$6.4 million for the quarter ended SeptemberJune 30, 2001.2002.  This capitalization of interest primarily related to equity investments in unconsolidated

      25


      entities engaged in development activities.  The effective interest cost on all of the Company's indebtedness for the quarter ended SeptemberJune 30, 20022003 was 6.52%6.40% as compared to 6.82%6.75% for the quarter ended SeptemberJune 30, 2001.2002.

       

      General and administrative expenses, which include corporate operating expenses, increaseddecreased approximately $1.1$2.6 million between the quartersperiods under comparison.  This increasedecrease was primarily due to retirement planlower expenses for certain key executives, higherrecorded in connection with granting less restricted shares to employees and lower accrued expenses related to deferred compensation during the quarter ended June 30, 2003 offset by a $0.3 million increase related to the Company’s decision to expense its stock based compensation.  In addition, lower state income and franchise taxes restricted shares/awards grantedalso contributed to key employees and additional compensation charges and costs associated with the Company's new President.this decrease.

       

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

      26



      further discussion.

      Income (loss) from investments in unconsolidated entities decreased approximately $2.9$1.9 million between the periods under comparison.  This decrease is primarily the result of increased equity losses and unrealizedoperating losses on derivative instruments.equity investments.

       

      Net gain (loss) on sales of unconsolidated entities decreaseddiscontinued operations increased approximately $5.9$44.7 million between the periods under comparison.  This decreaseincrease is primarily the loss associated withresult of a greater number of properties sold during the sale inquarter ended June 30, 2003, as well as the third quarter of 2002 of one property held in one of our development entities.fact that several properties were more fully depreciated.

       Net gain on sales of discontinued

      Discontinued operations, net, decreased approximately $20.8$10.6 million between the periods under comparison.  This decrease is primarilySee Note 14 in the result of certain properties sold during the quarter ended September 30, 2001 having a lower net carrying value at sale, which resulted in higher recognition of gainNotes to Consolidated Financial Statements for financial reporting purposes.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 $59.0 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 SeptemberJune 30, 20022003 was approximately $21.8$243.8 million and the amount available on the Company'sCompany’s line of credit was $665.0$649.8 million (net of $50.2 million which $83.3 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 ninesix months ended SeptemberJune 30, 2002,2003, the Company:

        disposed                  Disposed of thirty-fiveforty-four properties (including two Unconsolidated Properties) and received net proceeds of approximately $326.2$481.8 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 $150.0 million of 6.48% Series N Cumulative Redeemable Preferred Shares and received net proceeds of $145.3 million;

                          Obtained $48.7 million in new mortgage financing; and

                          Issued approximately 1.70.9 million Common Shares and received net proceeds of $37.0 million; and

        obtained $104.6 million in new mortgage financing.
      $17.9 million.

       

      All of these proceeds were primarily utilized to either:to:

        repay the line of credit;

                          Purchase additional properties;

        repay                  Repay mortgage indebtedness on selected properties;

        repay public unsecured debt;

                          Repay the line of credit; and

        invest in consolidated and unconsolidated development projects;

        invest in unconsolidated entities; and

      26                  Redeem the Series L Preferred Shares;


          purchase additional properties.

         

        During the ninesix months ended SeptemberJune 30, 2002,2003, the Company:

          repaid $160.0                  Acquired six properties, and two additional units at an existing property, utilizing cash of $243.0 million;

                            Repaid $178.1 million of mortgage loans;

                            Repaid $140.0 million on its line of credit;

          and

          repaid $308.0 million of mortgage loans;

          repaidRedeemed $100.0 million of 9.375% fixed rate public notes7.625% Series L Cumulative Redeemable Preferred Shares at maturity;its

          27




          repaid $125.0

                liquidation value.

          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 of 7.95% fixed rate public notes at maturity;

          repaid $4.7 millionits Common Shares pursuant to its existing share buyback program authorized by the Board of other unsecured notes;

          funded a netTrustees.  The Company did not repurchase any of $65.1 million in accordance with its development agreements;

          funded $10.0 million in connection with its agreement withCommon Shares during the U.S. Army for Fort Lewis military housing; and

          acquired ten properties utilizing cash of $232.1 million.
        six months ended June 30, 2003.

        The Company'sCompany’s total debt summary and debt maturity schedule as of SeptemberJune 30, 2002,2003, are as follows:


        Debt Summary as of September 30, 2002

         

         

        As of 6/30/03
        $Millions*

         

        For the Six
        Months Ended
        6/30/03
        Weighted
        Average Rate*

         

        Secured

         

        $

        2,851

         

        5.96

        %

        Unsecured

         

        2,854

         

        6.38

        %

        Total

         

        $

        5,705

         

        6.17

        %

         

         

         

         

         

         

        Fixed Rate

         

        $

        5,073

         

        6.67

        %

        Floating Rate

         

        632

         

        2.66

        %

        Total

         

        $

        5,705

         

        6.17

        %

         

         

         

         

         

         

        Above Totals Include:

         

         

         

         

         

        Tax Exempt:

         

         

         

         

         

        Fixed

         

        $

        533

         

        4.28

        %

        Floating

         

        439

         

        2.13

        %

        Total

         

        $

        972

         

        3.31

        %

         

         

         

         

         

         

        Unsecured Revolving Credit Facility

         

        $

         

        1.85

        %

         
         $ Millions
         Weighted
        Average Rate

         
        Secured $3,089 6.22%
        Unsecured  2,482 6.41%
          
         
         
         Total $5,571 6.30%

        Fixed Rate*

         

        $

        4,807

         

        6.89

        %
        Floating Rate*  764 2.58%
          
         
         
         Total* $5,571 6.30%

        Above Totals Include:

         

         

         

         

         

         
        Total Tax Exempt $986 3.71%
        Unsecured Revolving Credit Facility $35 2.44%


        *

        Net of the effect of interest rate protection agreements.


        any derivative instruments.

        Debt Maturity Schedule as of SeptemberJune 30, 20022003

        Year

         

        $ Millions

         

        % of Total

         

        2003

         

        $

        250

         

        4.4

        %

        2004

         

        654

         

        11.5

        %

        2005*

         

        606

         

        10.6

        %

        2006

         

        490

         

        8.6

        %

        2007

         

        298

         

        5.2

        %

        2008

         

        503

         

        8.8

        %

        2009

         

        248

         

        4.3

        %

        2010

         

        198

         

        3.5

        %

        2011

         

        691

         

        12.1

        %

        2012+

         

        1,767

         

        31.0

        %

        Total

         

        $

        5,705

         

        100.0

        %

        Year

         $ Millions
         % of Total
         
        2002 $111 2.0%
        2003  310 5.6%
        2004  593 10.6%
        2005*  676 12.1%
        2006  424 7.6%
        2007  273 4.9%
        2008  536 9.6%
        2009  417 7.5%
        2010  256 4.6%
        2011+  1,975 35.5%
          
         
         
        Total $5,571 100.0%


        *

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

         

        On June 5, 2003, the Operating Partnership filed a Form S-3 registration statement with the SEC to

        28



        register $2.0 billion of debt securities.  The Company's "ConsolidatedSEC declared this registration statement effective on June 11, 2003.  In addition, the Operating Partnership carried over $280.0 million related to the registration statement effective on September 8, 2000.  As of June 30, 2003, $2.28 billion remained available for issuance under this registration statement.

        The Company’s “Consolidated Debt-to-Total Market Capitalization Ratio"Ratio” as of SeptemberJune 30, 20022003 is presented in the following table.  The Company calculates the equity component of its market capitalization as

        27


        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 SeptemberJune 30, 20022003

        Total Debt    $5,570,576,350

        Common Shares & OP Units

         

         

        298,387,904

         

         

         
        Common Share Equivalents (see below)  14,965,147   
          
           
        Total Outstanding at quarter-end  313,353,051   
        Common Share Price at September 30, 2002 $23.94   
              7,501,672,041
        Perpetual Preferred Shares Liquidation Value     565,000,000
        Perpetual Preference Interests Liquidation Value     211,500,000
             
        Total Market Capitalization    $13,848,748,391

        Debt/Total Market Capitalization

         

         

         

         

         

        40.22%

        Total Debt

         

         

         

        $

        5,704,691,089

         

        Common Shares & OP Units

         

        295,472,629

         

         

         

        Common Share Equivalents (see below)

         

        14,922,693

         

         

         

        Total Outstanding at quarter-end

         

        310,395,322

         

         

         

        Common Share Price at June 30, 2003

         

        $

        25.95

         

         

         

         

         

         

         

        8,054,758,606

         

        Perpetual Preferred Shares Liquidation Value

         

         

         

        615,000,000

         

        Perpetual Preference Interests Liquidation Value

         

         

         

        211,500,000

         

        Total Market Capitalization

         

         

         

        $

        14,585,949,695

         

         

         

         

         

         

         

        Debt/Total Market Capitalization

         

         

         

        39

        %

         

        Convertible Preferred Shares, Preference Interests and Junior Preference Units
        as of SeptemberJune 30, 20022003

         
         Shares/Units
         Conversion
        Ratio

         Common
        Share
        Equivalents

        Preferred Shares:      
         Series E 2,563,614 1.1128 2,852,790
         Series G 1,264,692 8.5360 10,795,408
         Series H 51,228 1.4480 74,178
        Preference Interests:      
         Series H 190,000 1.5108 287,052
         Series I 270,000 1.4542 392,634
         Series J 230,000 1.4108 324,484
        Junior Preference Units:      
         Series A 56,616 4.081600 231,084
         Series B 7,367 1.020408 7,517
              
        Total     14,965,147
              

         

         

         

        Shares/Units

         

        Conversion
        Ratio

         

        Common
        Share  Equivalents

         

        Preferred Shares:

         

         

         

         

         

         

         

        Series E

         

        2,525,464

         

        1.1128

         

        2,810,336

         

        Series G

         

        1,264,692

         

        8.5360

         

        10,795,408

         

        Series H

         

        51,228

         

        1.4480

         

        74,178

         

        Preference Interests:

         

         

         

         

         

         

         

        Series H

         

        190,000

         

        1.5108

         

        287,052

         

        Series I

         

        270,000

         

        1.4542

         

        392,634

         

        Series J

         

        230,000

         

        1.4108

         

        324,484

         

        Junior Preference Units:

         

         

         

         

         

         

         

        Series A

         

        56,616

         

        4.081600

         

        231,084

         

        Series B

         

        7,367

         

        1.020408

         

        7,517

         

         

         

         

         

         

         

         

         

        Total

         

         

         

         

         

        14,922,693

         

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

        From OctoberJuly 1, 20022003 through November 4, 2002,August 8, 2003, the Company:

          disposed of five properties                  Acquired one property consisting of 684200 units for approximately $28.7$27.0 million;

          29




          repaid $53.1                  Disposed of three properties and various individual condominium units consisting of 592 units for approximately $43.7 million;

                            Assumed $0.8 million of mortgage loans;

          debt on one property in connection with its consolidation;

          repaid $40.0                  Repaid $10.9 million of 7.25% fixed rate public notes atmortgage debt at/or prior to maturity;

          and

          received $3.5 million representing full repayment of an executive's employee notes;

          repurchased and retired approximately 5.1 million Common Shares for approximately $115.0 million; and

          funded $4.3 million related to the development agreements.

        28


                  The Company may repurchase up to an additional $85.0                  Relinquished $15.7 million of its Common Shares pusuant tomortgage debt assumed by the common share buy back program authorized by its Board of Trustees. In addition, during the fourth quarter of 2002, the Company anticipates closing on an unsecured note offering of up to $250 million.

            Investmentspurchaser in Unconsolidated Entities

                  In connection with one development agreement,the disposition of certain properties.

          Off-Balance Sheet Arrangements and Contractual Obligations

          As of June 30, 2003, the Company has an obligation to fund up to an additional $9.5 million to guarantee third party construction financing. As18 projects in various stages of September 30, 2002, the Company has 15 projects under development with estimated completion dates ranging through MarchDecember 31, 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 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.

            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 August 8, 2003, this enhancement was still in effect at a commitment amount of $12.7 million.

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

            See also Note 2 and Note 7 and the third paragraph of Note 16 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s investments in unconsolidated entities.

            30



            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;

          29


              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.

          For the ninesix months ended SeptemberJune 30, 2002,2003, our actual improvements to real estate totaled approximately $110.3$76.8 million.  This includes the following detail (amounts in thousands except for unit and per unit amounts):

          Capitalized Improvements to Real Estate
          For the NineSix Months Ended SeptemberJune 30, 20022003

           
           Total
          Units (1)

           Replacements (2)
           Avg.
          Per
          Unit

           Building
          Improvements (3)

           Avg.
          Per
          Unit

           Total
           Avg.
          Per
          Unit

          Established Properties(4) 176,509 $37,846 $214 $52,417 $297 $90,263 $511
          New Acquisition Properties(5) 20,802  3,939  209  5,644  299  9,583  508
          Other(6) 6,974  2,731     7,714     10,445   
            
           
              
              
             
          Total 204,285 $44,516    $65,775    $110,291   
            
           
              
              
             

           

           

          Total Units
          (1)

           

          Replacements

           

          Avg.
          Per
          Unit

           

          Building
          Improvements

           

          Avg.
          Per
          Unit

           

          Total

           

          Avg.
          Per
          Unit

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

          Established Properties (2)

           

          175,480

           

          $

          27,299

           

          $

          156

           

          $

          35,401

           

          $

          201

           

          $

          62,700

           

          $

          357

           

          New Acquisition Properties (3)

           

          10,683

           

          979

           

          105

           

          2,564

           

          274

           

          3,543

           

          379

           

          Other (4)

           

          7,811

           

          4,299

           

           

           

          6,279

           

           

           

          10,578

           

           

           

          Total

           

          193,974

           

          $

          32,577

           

           

           

          $

          44,244

           

           

           

          $

          76,821

           

           

           


          (1)

          Total units exclude 23,14122,670 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, 2000.2001.

          31




          (5)

          (3)Wholly Owned Properties acquired during 2000, 2001, 2002 and YTD 2002.2003.  Per unit amounts are based on a weighted average of 18,8789,351 units.

          (6)

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

           

          We anticipate capitalizing annually an average of approximately $600$640 to $640$680 per unit annually for insidereplacements and outside the unit capitalbuilding improvements to our real estate. Totalestablished properties.  The Company expects to fund approximately $60.0million for capital expenditures for replacements and building improvements to real estatefor all consolidated properties for the remainder of 2002 are estimated to be $22.0 million.2003.

          During the ninesix months ended SeptemberJune 30, 2002,2003, 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 $5.6 $1.6million.  TotalThe Company expects to fund approximately $2.4 million in total additions to non-real estate property for the remainder of 2002 are estimated at $1.2 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.

          30


            OtherDerivative 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 June 30, 2003.

          Other

          Minority Interests as of SeptemberJune 30, 20022003 decreased by $14.7$3.2 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 ninesix months ended June 30, 2003 were:

            distributionsDistributions declared to Minority Interests, which amounted to $29.5$19.3 million for the nine months ended September 30, 2002 (excluding Junior Preference Unit and Preference Interest distributions);

            theThe allocation of income from operations to holders of OP Units in the amount of $19.1$18.3 million;

            theThe allocation of Minority Interestsincome from operations to Partially Owned Properties in the amount of $1.6$0.2 million;

            theThe issuance of 159,427 OP Units to various limited partners at an average price of $27.48 per unit;

            The issuance of Common Shares; and

            The conversion of OP Units into Common Shares; and

            the issuance of Common Shares during the nine months ended September 30, 2002.
          Shares.

          Total distributions paid in October 2002July 2003 amounted to $145.2$143.9 million (excluding distributions on Partially Owned Properties), which included certain distributions declared during the second quarter ended SeptemberJune 30, 2002.2003.

          The Company expects to meet its short-term liquidity requirements, including capital expenditures

          32



          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.  The fair value of and cash flow from these unencumbered properties are in excess of the required valuerequirements 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 properties under development and short term liquidity requirements.  As of November 7, 2002, $285.0 million wasAugust 8, 2003, noamounts were outstanding under this new facility.

           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 November 4, 2002, this enhancement was still in effect at a commitment amount of $12.7 million.

          Critical Accounting Policies and Estimates

                  The Company's significant accounting policies are described in Note 2 in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2001. These policies were followed in preparing the unaudited condensed consolidated financial statements for the nine months ended September 30, 2002.

          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 application of judgments and assessments is consistently applied and produces

          31


          financial information that fairly presents the results of operations for all periods presented.  The six critical accounting policies 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.

            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.

            Fair Value of Financial Instruments, Including Derivative Instruments

           The valuation of financial instruments under SFAS No. 107 and SFAS No. 133 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.

            Stock Option Compensation

                  The Company has chosen to account for its stock option compensation in accordance with APB No. 25, which results in no compensation expense for options issued with an exercise price equal to or exceeding market value of the Company's Common Shares on the date of grant. The Company will elect to expense its stock option compensation in accordance with SFAS No. 123 effective January 1, 2003 which will result in compensation expense being recorded based on the fair value of the stock option compensation issued.

            Cost Capitalization

          See theCapitalization of Fixed Assets and Improvements to Real Estate section for discussion of the Company's 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

          33



          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, anproject.  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 Company capitalizes interest, real estate taxes and insurance related to its development projects. The Company also capitalizes payroll and associated costs for those individuals directly responsible for and who spend all of their time on 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. In addition,

          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. 137/138/149) requires the Company capitalizesto make estimates and judgments that affect the payroll and associated costsfair value of employees directly responsible for and who spend all of their time on major capital projects. These costs are reflected on the balance sheet as an increase to building.instruments.  The Company, followswhere possible, bases the guidance in SFAS No. 67,Accounting for Costsfair values of its financial instruments, including its derivative instruments, on listed market prices and Initial Rental Operations of Real Estate Projects, and usesthird party quotes. Where these are not available, the Company bases its professional judgment in determining whether such costs meetestimates on other factors relevant to the criteria for capitalization or must be expensed as incurred.financial instruments.

          32


            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.  Interest income is recorded on an accrual 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 a year-to-yearan annual or month-to-monthmonthly basis.  Interest income is recorded on an accrual basis.

          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 adoptedhas 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 Staff Accounting Bulletin ("SAB")SFAS No. 101,Revenue Recognition, effective October 1, 2000. SAB No. 101 provides guidance on123.  The Company has chosen to use the “Prospective Method”.  This method requires that companies apply the recognition presentationprovisions 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 six months and disclosurequarter ended June 30, 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 revenueSFAS No. 123.  See Note 15 in financial statements.

          Adjusted Net Incomethe Notes to Consolidated Financial Statements for further discussion and comparative information regarding application of the fair value method to all outstanding employee awards.

           

          34



          Funds From Operations

          For the ninesix months ended SeptemberJune 30, 2002, Adjusted Net Income ("ANI"2003, Funds From Operations (“FFO”) available to Common Shares and OP Units decreased $16.0$44.1 million, or 11.6%, as compared to the ninesix months ended SeptemberJune 30, 2001.2002.

          For the quarter ended SeptemberJune 30, 2002, ANI available to Common Shares and OP Units decreased $11.7 million as compared to the quarter ended September 30, 2001.

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

          Adjusted Net Income
          (Amounts in thousands)
          (Unaudited)

           
           Nine Months Ended
          September 30,

           Quarter Ended
          September 30,

           
           
           2002
           2001
           2002
           2001
           
          Net income available to Common Shares $229,867 $250,303 $64,473 $69,511 
          Net income allocation to Minority Interests—Operating Partnership  19,067  22,666  5,283  6,192 
          Adjustments:             
           Acquisition cost depreciation(1)  287,778  284,630  95,773  96,833 
           Amortization of goodwill    2,852    928 
           Acquisition cost depreciation accumulated on sold properties  (37,541) (46,145) (15,009) (11,371)
           Extraordinary items  468  22    128 
           Cumulative effect of change in accounting principle    1,270     
            
           
           
           
           
          ANI available to Common Shares and OP Units—basic(2) $499,639 $515,598 $150,520 $162,221 
            
           
           
           
           
          Depreciation for replacements and capital improvements $67,363 $58,586 $23,941 $19,756 
            
           
           
           
           

          33



          (1)
          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.

          (2)
          Adjusted Net Income ("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.

                  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 nine months ended September 30, 2002, Funds From Operations ("FFO") available to Common Shares and OP Units decreased $25.0 million as compared to the nine months ended September 30, 2001.

                  For the quarter ended September 30, 2002,2003, FFO available to Common Shares and OP Units decreased  $20.7 million, or 10.9%, as compared to the quarter ended SeptemberJune 30, 2001.2002.

          The following is a reconciliation of net income available to Common Shares to FFO available to Common Shares and OP Units for the ninesix months and quarters ended SeptemberJune 30, 20022003 and 2001:2002:

          34


          Funds fromFrom Operations
          (Amounts in thousands)
          (Unaudited)

           
           Nine Months Ended
          September 30,

           Quarter Ended
          September 30,

           
           
           2002
           2001
           2002
           2001
           
          Net income available to Common Shares $229,867 $250,303 $64,473 $69,511 
          Net income allocation to Minority Interests—Operating Partnership  19,067  22,666  5,283  6,192 
          Adjustments:             
           Depreciation/amortization  355,141  346,068  119,714  117,517 
           Net gain on sales of discontinued operations  (60,011) (99,793) (32,435) (53,567)
           Net (gain) loss on sales of unconsolidated entities  626  (339) 5,872   
           Extraordinary items  468  22    128 
           Cumulative effect of change in accounting principle    1,270     
           Impairment on corporate housing business  17,122    17,122   
           Impairment on furniture rental business    60,000    60,000 
           Impairment on technology investments  872  7,968  291  1,193 
            
           
           
           
           
          FFO available to Common Shares and OP Units—basic(1) $563,152 $588,165 $180,320 $200,974 
            
           
           
           
           

           

           

          Six Months Ended June 30,

           

          Quarter Ended June 30,

           

           

           

          2003

           

          2002

           

          2003

           

          2002

           

          Net income available to Common Shares

           

          $

          223,321

           

          $

          165,394

           

          $

          112,154

           

          $

          89,041

           

          Net income allocation to Minority Interests – Operating Partnership

           

          18,281

           

          13,784

           

          9,171

           

          7,343

           

          Adjustments:

           

           

           

           

           

           

           

           

           

          Depreciation

           

          231,582

           

          218,684

           

          116,555

           

          110,464

           

          Depreciation – Non-real estate additions

           

          (4,598

          )

          (4,573

          )

          (2,323

          )

          (2,596

          )

          Depreciation – Partially Owned Properties

           

          (4,116

          )

          (3,751

          )

          (2,077

          )

          (1,880

          )

          Depreciation – Unconsolidated Properties

           

          10,150

           

          8,905

           

          4,955

           

          4,415

           

          Net (gain) loss on sales of unconsolidated entities

           

          (4,675

          )

          (5,246

          )

          (3,463

          )

          411

           

          Discontinued Operations:

           

           

           

           

           

           

           

           

           

          Depreciation

           

          5,810

           

          16,162

           

          1,919

           

          7,614

           

          Net gain on sales of depreciable property

           

          (138,105

          )

          (27,576

          )

          (67,876

          )

          (25,099

          )

           

           

           

           

           

           

           

           

           

           

          FFO available to Common Shares and OP Units – basic (1)(2)

           

          $

          337,650

           

          $

          381,783

           

          $

          169,015

           

          $

          189,713

           


          (1)(1)

          FFO representsThe 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 $2,887 and $870 for the six months ended June 30, 2003 and 2002, respectively, and $2,444 and $531 for the quarters ended June 30, 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, 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 net income or net cash generatedflows from operating activities in accordance with GAAP and thereforeGAAP.  Therefore, FFO should not be exclusively considered as 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 or as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs.liquidity.  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's and other real estate companies' accountingin cost capitalization policies for replacement type itemscapital expenditures and, accordingly, may not be comparable to such other real estate companies.

          35



          Item 3. Quantitative and Qualitative Disclosures About Market Risk

          The Company'sCompany’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'sCompany’s Form 10-K for the year ended December 31, 2001.2002.  See also Note 12 to the Notes to Consolidated Financial Statements for additional discussion on the Company'sof derivative instruments and hedging activities.instruments.


          Item 4. Disclosure Controls and Procedures

                  Within 90 days prior to the filing date

          Effective as of this quarterly report on Form 10-Q,June 30, 2003, the Company carried out an evaluation, under the supervision and with the participation of the Company'sCompany’s management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company'sCompany’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14Rules 13a-15 and 15d-14.15d-15.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and

          35


          procedures are effective in timely alerting them to material information related toinformation.  During the Company. There have beenfiscal quarter ended June 30, 2003, there were no significant changes to the internal controls over financial reporting of the Company identified in connection with the Company’s evaluation or in other factorsotherwise that could significantlyhas materially affected, or is reasonably likely to materially affect, the Company’s internal controls subsequent to the completion of this evalution.over financial reporting.


          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 30, 2003.  Shareholders holding 246,033,712 Common Shares (being the only class of shares entitled to vote at the meeting), or 90.29% of the Company’s issued and outstanding Common Shares as of the record date for the meeting, attended the meeting or were represented by proxy.  The Company’s shareholders voted on three proposals presented at the meeting and all three received the requisite number of votes to pass.  The results of the shareholders’ votes on each of the three proposals are as follows:

          Proposal I — Election of the following trustees to annual terms expiring in 2004.  One of the nominees, Douglas Crocker II, resigned from the Board of Trustees on April 29, 2003, and therefore did not stand for re-election at the Annual Meeting.  A plurality of the votes cast is required for the election of trustees.

          NOMINEE

           

          FOR

           

          WITHHELD

          John W. Alexander

           

          239,914,006

           

          6,119,706

          Bruce W. Duncan

           

          241,652,507

           

          4,381,205

          Stephen O. Evans

           

          188,931,503

           

          57,102,209

          James D. Harper, Jr.

           

          239,892,931

           

          6,140,781

          Boone A. Knox

           

          239,888,493

           

          6,145,219

          Sheli Z. Rosenberg

           

          239,831,351

           

          6,202,361

          Gerald A. Spector

           

          240,132,759

           

          5,900,953

          Michael N. Thompson

           

          241,414,847

           

          4,618,865

          B. Joseph White

           

          239,925,190

           

          6,108,522

          Samuel Zell

           

          240,139,840

           

          5,893,872

          Proposal II – Amendment to the Company’s Declaration of Trust to declassify the Board of Trustees and provide for the annual election of trustees.  This proposal required the affirmative vote of two-thirds of all

          36



          outstanding shares for approval.

           

           

          FOR

           

          AGAINST

           

          ABSTAIN

           

          Total Shares

           

          243,072,662

           

          1,250,928

           

          1,710,116

           

          % of Voted Shares

           

          98.80

          %

          0.51

          %

          0.69

          %

          % of Outstanding

           

          89.20

          %

          0.46

          %

          0.63

          %

          Proposal III – Approval of an amendment to the Company’s Employee Share Purchase Plan to increase the number of shares authorized for issuance under this plan.  This proposal required a majority of the votes cast for approval.

           

           

          FOR

           

          AGAINST

           

          ABSTAIN

           

          Total Shares

           

          238,705,998

           

          5,231,066

           

          2,091,551

           

          % of Voted Shares

           

          97.02

          %

          2.13

          %

          0.85

          %

          % of Outstanding

           

          87.60

          %

          1.92

          %

          0.77

          %


          Item 6.Exhibits and Reports on Form 8-K

          (A)

          Exhibits:

          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 Douglas Crocker II, 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.
          (B)
          Reports on Form 8-K:

            A report on Form 8-K

            3.1Articles of Amendment to Equity Residential Declaration of Trust dated August 13,May 30, 2003.

            10.1First Amendment to Equity Residential 1993 Share Option and Share Award Plan dated as of June 10, 2003.

            10.2Second Amendment to Equity Residential 2002 containing theShare Incentive Plan dated as of June 10, 2003.

            12Computation of Ratio of Earnings to Combined Fixed Charges.

            31.1Certification of Bruce W. Duncan, Chief Executive Officer andOfficer.

            31.2Certification of David J. Neithercut, Chief Financial Officer sworn statements pursuant to the SEC's Order No. 4-460 issued June 27, 2002 and their respective certificationsOfficer.

            32.1Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

          36



          SIGNATURES
          2002, of Bruce W. Duncan, Chief Executive Officer of the Company.

          32.2Certification 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 the Company.

          (B)Reports on Form 8-K:

          A report on Form 8-K filed June 19, 2003 containing information concerning the underwriting terms of the Company’s $150.0 million Series N Preferred Share offering.

          37



          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: November

          August 13, 20022003



          By:  /s/



          /s/  
          DAVID J. NEITHERCUT      

          David J. Neithercut

          David J. Neithercut

          Executive Vice President and Chief Financial Officer


          Date: November 13, 2002


          By:


          /s/  
          MICHAEL J. MCHUGH      
          Michael J. McHugh
          Executive Vice President, Chief Accounting Officer and Treasurer

          37



          CERTIFICATIONS

          I, Douglas Crocker II, principal executive officer of Equity Residential, certify that:

          1.
          I have received 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 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: November 13, 2002/s/  DOUGLAS CROCKER II      
          Douglas Crocker II
          Chief Executive Officer

          38


          I, David J. Neithercut, principal financial officer of Equity Residential, certify that:

          1.
          I have received 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 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: November 13, 2002/s/  DAVID J. NEITHERCUT      
          David J. Neithercut
          Chief Financial Officer

          Date:

          August 13, 2003

          By:  /s/

          Michael J. McHugh

          Michael J. McHugh

          Executive Vice President,
          Chief Accounting Officer
          and Treasurer

          39

          38



          EXHIBIT INDEX

          Exhibit


          Document



          12



          3.1

          Articles of Amendment to Equity Residential Declaration of Trust dated May 30, 2003.

          10.1

          First Amendment to Equity Residential 1993 Share Option and Share Award Plan dated as of June 10, 2003.

          10.2

          Second Amendment to Equity Residential 2002 Share Incentive Plan dated as of June 10, 2003.

          12

          Computation of Ratio of Earnings to Combined Fixed ChargesCharges.


          99.1



          31.1

          Certification of Bruce W. Duncan, Chief Executive Officer.

          31.2

          Certification of David J. Neithercut, Chief Financial Officer.

          32.1

          Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Douglas Crocker II,Bruce W. Duncan, Chief Executive Officer of Registrantthe Company.


          99.2



          32.2

          Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of David J. Neithercut, Chief Financial Officer of Registrantthe Company.

          39