<Page>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-24920
ERP OPERATING LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in Its Charter)
ILLINOIS 36-3894853
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
TWO NORTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
(Address of Principal Executive Offices) (Zip Code)
(312) 474-1300
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark 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 X No
---
<Page>
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
---------------- ----------------
ASSETS
Investment in real estate
Land $ 1,827,926 $ 1,770,019
Depreciable property 10,990,785 10,782,311
Construction in progress 81,062 39,130
--------------- ---------------
12,899,773 12,591,460
Accumulated depreciation (1,621,752) (1,352,236)
--------------- ---------------
Investment in real estate, net of accumulated depreciation 11,278,021 11,239,224
Real estate held for disposition 4,102 51,637
Cash and cash equivalents 110,807 23,772
Investment in mortgage notes, net - 77,184
Investments in unconsolidated entities 351,947 316,540
Rents receivable 4,070 1,801
Deposits - restricted 157,299 231,639
Escrow deposits - mortgage 79,350 70,470
Deferred financing costs, net 31,588 29,706
Rental furniture, net 23,897 60,183
Property and equipment, net 3,419 7,620
Goodwill, net 48,218 67,589
Other assets 101,899 86,601
--------------- ---------------
TOTAL ASSETS $ 12,194,617 $ 12,263,966
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 3,268,935 $ 3,230,611
Notes, net 2,419,245 2,120,079
Lines of credit - 355,462
Accounts payable and accrued expenses 135,153 107,818
Accrued interest payable 77,769 51,877
Rents received in advance and other liabilities 70,535 100,819
Security deposits 48,632 46,272
Distributions payable 144,535 18,863
--------------- ---------------
TOTAL LIABILITIES 6,164,804 6,031,801
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
Minority Interests - Partially Owned Properties 3,538 2,884
Partners' Capital
Junior Convertible Preference Units 5,846 7,896
Cumulative Convertible Redeemable Preference Interests 234,500 186,000
Cumulative Convertible or Redeemable Preference Units 967,741 1,183,136
General Partner 4,452,701 4,436,411
Limited Partners 390,875 415,838
Accumulated other comprehensive income (25,388) -
--------------- ---------------
TOTAL PARTNERS' CAPITAL 6,026,275 6,229,281
--------------- ---------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 12,194,617 $ 12,263,966
=============== ===============
</Table>
SEE ACCOMPANYING NOTES
2
<Page>
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER OP UNIT DATA)
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ----------------------------
2001 2000 2001 2000
------------------------------- ----------------------------
REVENUES
Rental income $ 1,556,812 $ 1,454,019 $ 529,141 $ 501,279
Fee and asset management 5,805 4,711 1,665 1,876
Interest income - investment in mortgage notes 8,786 8,282 23 2,783
Interest and other income 18,240 19,009 6,529 10,624
Furniture income 45,051 15,167 15,024 15,167
------------ ------------ ------------ ------------
Total revenues 1,634,694 1,501,188 552,382 531,729
------------ ------------ ------------ ------------
EXPENSES
Property and maintenance 420,365 369,452 143,715 141,607
Real estate taxes and insurance 143,015 141,420 46,240 46,419
Property management 56,302 56,204 19,760 18,444
Fee and asset management 5,358 3,647 1,888 1,545
Depreciation 341,014 334,840 115,908 110,328
Interest:
Expense incurred 287,329 285,337 96,946 95,074
Amortization of deferred financing costs 4,338 4,063 1,528 1,360
General and administrative 23,604 19,354 9,525 6,138
Furniture expenses 45,390 10,361 14,891 10,361
Amortization of goodwill 2,852 767 928 767
Impairment on furniture rental business 60,000 - 60,000 -
Impairment on technology investments 7,968 - 1,193 -
------------ ------------ ------------ ------------
Total expenses 1,397,535 1,225,445 512,522 432,043
------------ ------------ ------------ ------------
Income before allocation to Minority Interests,
income from investments in unconsolidated entities,
net gain on sales of real estate, extraordinary items and
cumulative effect of change in accounting principle 237,159 275,743 39,860 99,686
Allocation to Minority Interests - Partially Owned Properties (1,523) 145 (1,285) (12)
Income from investments in unconsolidated entities 20,252 14,589 8,029 5,525
Net gain on sales of real estate 100,132 165,025 53,567 77,373
------------ ------------ ------------ ------------
Income before extraordinary items and cumulative effect of
change in accounting principle 356,020 455,502 100,171 182,572
Extraordinary items (22) - (128) -
Cumulative effect of change in accounting principle (1,270) - - -
------------ ------------ ------------ ------------
Net income $ 354,728 $ 455,502 $ 100,043 $ 182,572
============ ============ ============ ============
ALLOCATION OF NET INCOME:
Junior Convertible Preference Units $ 272 $ 327 $ 82 $ 109
============ ============ ============ ============
Cumulative Convertible Redeemable Preference Interests $ 13,390 $ 6,900 $ 4,833 $ 3,233
============ ============ ============ ============
Cumulative Convertible or Redeemable Preference Units $ 68,097 $ 76,370 $ 19,425 $ 24,601
============ ============ ============ ============
General Partner $ 250,303 $ 339,517 $ 69,511 $ 141,373
Limited Partners 22,666 32,388 6,192 13,256
------------ ------------ ------------ ------------
Net income available to OP Unit holders $ 272,969 $ 371,905 $ 75,703 $ 154,629
============ ============ ============ ============
Net income per OP Unit - basic $ 0.94 $ 1.31 $ 0.26 $ 0.54
============ ============ ============ ============
Net income per OP Unit - diluted $ 0.93 $ 1.30 $ 0.26 $ 0.53
============ ============ ============ ============
Weighted average OP Units outstanding - basic 290,803 283,636 292,213 287,464
============ ============ ============ ============
Weighted average OP Units outstanding - diluted 294,661 289,894 296,391 304,988
============ ============ ============ ============
Distributions declared per OP Unit outstanding $ 1.2475 $ 1.1675 $ 0.4325 $ 0.4075
============ ============ ============ ============
</Table>
SEE ACCOMPANYING NOTES
3
<Page>
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 354,728 $ 455,502
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Allocation to Minority Interests - Partially Owned Properties 1,523 (145)
Cumulative effect of change in accounting principle 1,270 -
Depreciation 349,313 335,844
Amortization of deferred financing costs 4,338 4,063
Amortization of discount on investment in mortgage notes (2,256) -
Amortization of goodwill 2,852 767
Amortization of discounts and premiums on debt (1,424) (1,725)
Amortization of deferred settlements on interest rate protection agreements 533 290
Impairment on furniture rental business 60,000 -
Impairment on technology investments 7,968 -
Income from investments in unconsolidated entities (20,252) (14,589)
Net gain on sales of real estate (100,132) (165,025)
Extraordinary items 22 -
Unrealized gain on interest rate protection agreements (161) -
Book value of furniture sales and rental buy outs 8,703 4,802
Compensation paid with Company Common Shares 12,298 4,300
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in rents receivable (2,069) 44
Decrease in deposits - restricted 4,538 3,660
Additions to rental furniture (17,827) (7,477)
(Increase) in other assets (17,630) (7,285)
Increase in accounts payable and accrued expenses 25,535 39,186
Increase in accrued interest payable 25,702 22,612
(Decrease) in rents received in advance and other liabilities (7,628) (9,755)
Increase in security deposits 885 14
---------- ----------
Net cash provided by operating activities 690,829 665,083
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate (296,710) (238,055)
Improvements to real estate (108,310) (100,347)
Additions to non-real estate property (5,210) (3,919)
Interest capitalized for real estate under construction (2,159) (827)
Proceeds from disposition of real estate, net 452,060 416,603
Investment in property and equipment (2,185) (416)
Principal receipts on investment in mortgage notes 61,419 5,287
Investments in unconsolidated entities (69,195) (122,535)
Distributions from unconsolidated entities 26,311 15,077
Proceeds from refinancing of unconsolidated entities, net 5,691 1,695
Proceeds from disposition of unconsolidated entities, net 359 4,602
Decrease (increase) in deposits on real estate acquisitions, net 98,582 (154,711)
(Increase) decrease in mortgage deposits (4,167) 2,283
Purchase of management contract rights - (779)
Consolidation of previously Unconsolidated Properties 52,841 (163)
Business combinations, net of cash acquired (8,231) (71,228)
Other investing activities, net 989 (2,950)
---------- ----------
Net cash provided by (used for) investing activities 202,085 (250,383)
---------- ----------
</Table>
SEE ACCOMPANYING NOTES
4
<Page>
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2001 2000
------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan and bond acquisition costs $ (4,383) $ (2,392)
MORTGAGE NOTES PAYABLE:
Proceeds, net 59,312 389,051
Lump sum payoffs (315,302) (119,412)
Scheduled principal repayments (24,210) (19,930)
Prepayment premiums (201) -
NOTES, NET:
Proceeds, net 299,316 -
Lump sum payoffs - (208,000)
Scheduled principal repayments (4,649) -
LINES OF CREDIT:
Proceeds 436,491 209,305
Repayments (791,953) (505,179)
(Payments) proceeds from settlement of interest rate protection agreements (7,360) 7,055
Capital contributions from General Partner, net 62,068 21,228
Proceeds from sale of preference units/interests 48,500 137,000
Redemption of preference units/interests (210,500) -
Distributions paid to partners (321,257) (296,448)
Distributions to Minority Interests - Partially Owned Properties (31,970) (617)
Principal receipts on employee notes, net 219 254
Principal receipts on other notes receivable, net - 510
---------- ----------
Net cash (used for) financing activities (805,879) (387,575)
---------- ----------
Net increase in cash and cash equivalents 87,035 27,125
Cash and cash equivalents, beginning of period 23,772 29,117
---------- ----------
Cash and cash equivalents, end of period $ 110,807 $ 56,242
========== ==========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 270,849 $ 264,582
========== ==========
Mortgage loans assumed through real estate acquisitions $ 45,918 $ 38,442
========== ==========
Net real estate contributed in exchange for OP Units or preference units $ - $ 4,707
========== ==========
Mortgage loans (assumed) by purchaser in real estate dispositions $ (28,231) $ (220,000)
========== ==========
Transfers to real estate held for disposition $ 4,102 $ 224,553
========== ==========
Mortgage loans recorded as a result of consolidation of previously
Unconsolidated Properties $ 301,502 $ 65,095
========== ==========
Net (assets) liabilities recorded as a result of consolidation of previously
Unconsolidated Properties $ (20,839) $ 792
========== ==========
</Table>
SEE ACCOMPANYING NOTES
5
<Page>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS
ERP Operating Limited Partnership ("ERPOP"), an Illinois limited
partnership, was formed to conduct the multifamily residential property business
of Equity Residential Properties Trust ("EQR"). EQR is a Maryland real estate
investment trust ("REIT") formed on March 31, 1993 and is the general partner of
ERPOP. As used herein, the term "Operating Partnership" also includes its
subsidiaries, including entities that own residential real property and other
assets acquired by virtue of the mergers between EQR and each of Wellsford
Residential Property Trust, Evans Withycombe Residential, Inc., Merry Land &
Investment Company, Inc. and Lexford Residential Trust (collectively, the
"Mergers"). The Operating Partnership also includes the businesses formally
operated by Globe Business Resources, Inc., Temporary Quarters, Inc. and Grove
Operating, L.P. As used herein, the term "Company" means EQR and the Operating
Partnership. EQR has elected to be taxed as a REIT under Section 856(c) of the
Internal Revenue Code 1986, as amended (the "Code").
The Operating Partnership is engaged in the acquisition, disposition,
ownership, management and operation of multifamily properties. As of September
30, 2001, the Operating Partnership owned or had interests in a portfolio of
1,081 multifamily properties containing 225,590 apartment units (individually a
"Property" and collectively the "Properties") consisting of the following:
<Table>
<Caption>
Number of Number of
Properties Units
----------------------------------------------------------------------
Wholly Owned Properties 961 201,089
Partially Owned Properties 36 6,963
Unconsolidated Properties 84 17,538
----------------- -----------------
Total Properties 1,081 225,590
================= =================
</Table>
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 nine months ended September 30, 2001 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2001.
The balance sheet at December 31, 2000 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 definitions for capitalized terms, refer
to the consolidated financial statements and footnotes thereto included in the
Operating Partnership's annual report on Form 10-K for the year ended December
31, 2000.
6
<Page>
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, the Operating Partnership is exposed to
the effect of interest rate changes. The Operating Partnership limits these
risks by following established risk management policies and procedures including
the use of derivatives.
The Operating Partnership 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 Operating Partnership 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.
On January 1, 2001, the Operating Partnership adopted SFAS No. 133/138,
which requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and to measure those
instruments at fair value. Additionally, the fair value adjustments will affect
either partners' capital or net income depending on whether the derivative
instruments qualify as a hedge for accounting purposes and, if so, the nature of
the hedging activity. When the terms of an underlying transaction are modified,
or when the underlying transaction is terminated or completed, all changes in
the fair value of the instrument are marked-to-market with changes in value
included in net income each period until the instrument matures. Any derivative
instrument used for risk management that does not meet the hedging criteria is
marked-to-market each period.
As of January 1, 2001, the adoption of the new standard resulted in
derivative instruments reported on the balance sheet as liabilities of
approximately $6.6 million; an adjustment of approximately $5.3 million to
"Accumulated Other Comprehensive Income", which are gains and losses not
affecting retained earnings in the Consolidated Statement of Partners' Capital;
and a charge of approximately $1.3 million as a cumulative effect of change in
accounting principle in the Consolidated Statement of Operations.
The Operating Partnership employs derivative financial instruments to hedge
qualifying anticipated transactions. Gains and losses are deferred and
recognized in net income in the same period that the underlying transaction
occurs, expires or is otherwise terminated. As of September 30, 2001, there were
approximately $25.4 million in deferred losses, net, included in accumulated
other comprehensive income.
At September 30, 2001, the Operating Partnership had entered into swaps
which have been designated as cash flow hedges with an aggregate notional amount
of $626.4 million at interest rates ranging from 3.65125% to 6.15% maturing at
various dates ranging from 2003 to 2007 with a net liability fair value of $27.1
million; and swaps which have been designated as fair value hedges with an
aggregate notional amount of $296.4 million at interest rates ranging from
4.458% to 7.25% maturing at various dates ranging from 2003 to 2005 with a net
asset fair value of $13.1 million.
On September 30, 2001, the net derivative instruments were reported at
their fair value as other liabilities of approximately $14.0 million. Within the
next twelve months the Operating Partnership expects to recognize an estimated
$7.6 million of accumulated other comprehensive income as additional interest
expense.
OTHER
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS. SFAS Nos. 141 and 142 require companies to account for all business
combinations using the purchase method of accounting and to eliminate the
amortization of goodwill in favor of a periodic impairment based approach. SFAS
Nos. 141 and 142 will be effective for fiscal years beginning after December 15,
2001. The Operating Partnership will adopt the standards effective January 1,
2002, and does not anticipate that the adoptions will have a material impact on
the Operating Partnership's financial condition and results of operations.
7
<Page>
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 Operating Partnership will adopt the standard
effective January 1, 2002, and does not anticipate that the adoption will have a
material impact on the Operating Partnership's financial condition and results
of operations.
3. PARTNERS' CAPITAL
On October 11, 2001, the Operating Partnership effected a two-for-one split
of its OP Units to unit holders of record as of September 21, 2001. All OP Units
presented have been retroactively adjusted to reflect the OP Unit split.
The following table presents the changes in the Operating Partnership's
issued and outstanding OP Units for the nine months ended September 30, 2001:
<Table>
<Caption>
----------------------------------------------------------------------------------------
2001
----------------------------------------------------------------------------------------
Operating Partnership's OP Units outstanding at January 1, 290,090,252
ISSUED TO GENERAL PARTNER:
Conversion of Series E Preferred Shares 212,444
Conversion of Series H Preferred Shares 6,972
Employee Share Purchase Plan 266,694
Dividend Reinvestment - DRIP Plan 28,462
Share Purchase - DRIP Plan 21,752
Exercise of EQR options 2,712,714
Restricted EQR share grants, net 756,598
ISSUED TO LIMITED PARTNERS:
Conversion of Series A Junior Convertible Preference Units 83,698
Issuance pursuant to acquisition of remaining
minority interest in Globe 69,432
Issuance pursuant to an earnout agreement with one property 2,782
----------------------------------------------------------------------------------------
Operating Partnership's OP Units outstanding at September 30, 294,251,800
----------------------------------------------------------------------------------------
</Table>
As of September 30, 2001, EQR (as the general partner) had an approximate
91.89% interest and the Limited Partners had an approximate 8.11% interest in
the Operating Partnership. The limited partners of the Operating Partnership as
of September 30, 2001 include various individuals and entities that contributed
their properties to the Operating Partnership in exchange for OP Units (the
"Limited Partners") and are represented by 23,876,662 OP Units.
EQR contributes all net proceeds from the various equity offerings
(including proceeds from exercise of options for EQR Common Shares) to the
Operating Partnership in return for an increased ownership percentage. Due to
the Limited Partners' ability to convert their interest into an ownership
interest in the general partner (on a one-for-one common share per OP Unit
basis), the net offering proceeds are allocated between EQR (as general partner)
and the Limited Partners (to the extent represented by OP Units) to account for
the change in their respective percentage ownership of the equity of the
Operating Partnership.
The following table presents the Operating Partnership's issued and
outstanding Junior Convertible Preference Units as of September 30, 2001 and
December 31, 2000:
8
<Page>
<Table>
<Caption>
ANNUAL AMOUNTS IN THOUSANDS
DIVIDEND --------------------------
RATE PER SEPTEMBER DECEMBER
UNIT 30, 2001 31, 2000
----------------------------------------------------------------------------------------------------
Junior Convertible Preference Units:
Series A Junior Convertible Preference Units; liquidation $ 5.469344 $ 5,662 $ 7,712
value $100 per unit; 56,616 and 77,123 units issued
and outstanding at September 30, 2001 and December
31, 2000, respectively
Series B Junior Convertible Preference Units; liquidation $ 2.000000 184 184
value $25 per unit; 7,367 units issued and outstanding
at September 30, 2001 and December 31, 2000
----------------------------------------------------------------------------------------------------
$ 5,846 $ 7,896
----------------------------------------------------------------------------------------------------
</Table>
During the nine months ended September 30, 2001, a subsidiary of the
Operating Partnership issued preference units with an equity value of $48.5
million, receiving net proceeds of $47.3 million:
- 510,000 7.875% Series G Cumulative Redeemable Preference Units (known
as "Preference Interests") with an equity value of $25.5 million. The
liquidation value of these units is $50 per unit. The 510,000 units
are exchangeable into 510,000 shares of 7.875% Series M-4 Cumulative
Redeemable Preferred Shares of Beneficial Interest of the Company.
Dividends for the Series G Preference Interests or the Series M-4
Preferred Shares are payable quarterly at the rate of $3.9375 per
unit/share per year.
- 190,000 7.625% Series H Cumulative Convertible Redeemable
Preference Units with an equity value of $9.5 million. The liquidation
value of these units is $50 per unit. The 190,000 units are
exchangeable into 190,000 shares of 7.625% Series M-5 Convertible
Cumulative Redeemable Preferred Shares of Beneficial Interest of the
Company or 287,052 Common Shares beginning March 2011. Dividends for
the Series H Preference Interests or the Series M-5 Preferred Shares
are payable quarterly at the rate of $3.8125 per unit/share per year.
- 270,000 7.625% Series I Cumulative Convertible Redeemable
Preference Units with an equity value of $13.5 million. The
liquidation value of these units is $50 per unit. The 270,000 units
are exchangeable into 270,000 shares of 7.625% Series M-6 Convertible
Cumulative Redeemable Preferred Shares of Beneficial Interest of the
Company or 392,634 Common Shares beginning June 2011. Dividends for
the Series I Preference Interests or the Series M-6 Preferred Shares
are payable quarterly at the rate of $3.8125 per unit/share per year.
The Series M-4 Preferred Shares are not convertible into EQR Common Shares.
The Series H Preference Interests and the Series M-5 Preferred Shares are
convertible into EQR Common Shares at a conversion price ratio of 1.5108 common
shares (equal to a conversion price of $33.095 per share) beginning in March
2011. The Series I Preference Interests and the Series M-6 Preferred Shares are
convertible into EQR Common Shares at a conversion price ratio of 1.4542 common
shares (equal to a conversion price of $34.38 per share) beginning in June 2011.
9
<Page>
The following table presents the Operating Partnership's issued and
outstanding Preference Interests as of September 30, 2001 and December 31, 2000:
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------
ANNUAL AMOUNTS IN THOUSANDS
DIVIDEND --------------------
RATE PERT SEPTEMBER DECEMBER
UNIT 30, 2001 31, 2000
- ------------------------------------------------------------------------------------------------------
Preference Interests:
8.00% Series A Cumulative Redeemable Preference $4.0000 $40,000 $ 40,000
Interests; liquidation value $50 per unit; 800,000 units issued
and outstanding at September 30, 2001 and December 31, 2000
8.50% Series B Cumulative Redeemable Preference $4.2500 55,000 55,000
Units; liquidation value $50 per unit; 1,100,000 units issued
and outstanding at September 30, 2001 and December 31, 2000
8.50% Series C Cumulative Redeemable Preference $4.2500 11,000 11,000
Units; liquidation value $50 per unit; 220,000 units issued
and outstanding at September 30, 2001 and December 31, 2000
8.375% Series D Cumulative Redeemable Preference $4.1875 21,000 21,000
Units; liquidation value $50 per unit; 420,000 units issued
and outstanding at September 30, 2001 and December 31, 2000
8.50% Series E Cumulative Redeemable Preference $4.2500 50,000 50,000
Units; liquidation value $50 per unit; 1,000,000 units issued
and outstanding at September 30, 2001 and December 31, 2000
8.375% Series F Cumulative Redeemable Preference $4.1875 9,000 9,000
Units; liquidation value $50 per unit; 180,000 units issued
and outstanding at September 30, 2001 and December 31, 2000
7.875% Series G Cumulative Redeemable Preference $3.9375 25,500 -
Units; liquidation value $50 per unit; 510,000 units issued
and outstanding at September 30, 2001
7.625% Series H Cumulative Convertible Redeemable $3.8125 9,500 -
Preference Units; liquidation value $50 per unit; 190,000 units
issued and outstanding at September 30, 2001
7.625% Series I Cumulative Convertible Redeemable $3.8125 13,500 -
Preference Units; liquidation value $50 per unit; 270,000 units
issued and outstanding at September 30, 2001
- ------------------------------------------------------------------------------------------------------
$234,500 $186,000
- ------------------------------------------------------------------------------------------------------
</Table>
10
<Page>
The following table presents the Operating Partnership's issued and
outstanding Cumulative Convertible or Redeemable Preference Units as of
September 30, 2001 and December 31, 2000:
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------------------
AMOUNTS IN THOUSANDS
ANNUAL ----------------------------------
DIVIDEND
RATEPER SEPTEMBER DECEMBER 31,
UNIT(1) 30, 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Cumulative Convertible or Redeemable Preference Units:
9 3/8% Series A Cumulative Redeemable Preference Units; liquidation (2) $ - $ 153,000
value $25 per unit; 0 and 6,120,000 units issued and outstanding
at September 30, 2001 and December 31, 2000, respectively
9 1/8% Series B Cumulative Redeemable Preference Units; liquidation $22.81252 125,000 125,000
value $250 per unit; 500,000 units issued and outstanding at
September 30, 2001 and December 31, 2000
9 1/8% Series C Cumulative Redeemable Preference Units; liquidation $22.81252 115,000 115,000
value $250 per unit; 460,000 units issued and outstanding
at September 30, 2001 and December 31, 2000
8.60% Series D Cumulative Redeemable Preference Units; liquidation $21.50000 175,000 175,000
value $250 per unit; 700,000 units issued and outstanding
at September 30, 2001 and December 31, 2000
Series E Cumulative Convertible Preference Units; liquidation value $ 1.75000 85,215 89,990
$25 per unit; 3,408,618 and 3,599,615 units issued and
outstanding at September 30, 2001 and December 31, 2000,
respectively
9.65% Series F Cumulative Redeemable Preference Units; liquidation (2) - 57,500
value $25 per unit; 0 and 2,300,000 units issued and outstanding at
September 30, 2001 and December 31, 2000, respectively
7 1/4% Series G Convertible Cumulative Preference Units; $18.12500 316,175 316,175
liquidation value $250 per unit; 1,264,700 units issued and
outstanding at September 30, 2001 and December 31, 2000
7.00% Series H Cumulative Convertible Preference Units; liquidation $ 1.75000 1,351 1,471
value $25 per unit; 54,027 and 58,851 units issued and
outstanding at September 30, 2001 and December 31, 2000,
respectively
8.29% Series K Cumulative Redeemable Preference Units; liquidation $ 4.14500 50,000 50,000
value $50 per unit; 1,000,000 units issued and outstanding at
September 30, 2001 and December 31, 2000
7.625% Series L Cumulative Redeemable Preference Units; liquidation $ 1.90625 100,000 100,000
value $25 per unit; 4,000,000 units issued and outstanding at
September 30, 2001 and December 31, 2000
- ------------------------------------------------------------------------------------------------------------------------
$967,741 $1,183,136
- ------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Dividends on all series of preference units are payable quarterly at
various pay dates. Dividend rates listed for Series B, C, D and G are
preference unit rates and the equivalent depositary unit annual
dividend rates are $2.281252, $2.281252, $2.15 and $1.8125,
respectively.
(2) On June 25, 2001, the Operating Partnership redeemed all of its
remaining issued and outstanding Series A and F Cumulative Redeemable
Preference Units at their liquidation values for total cash
consideration of $210.5 million.
11
<Page>
4. REAL ESTATE ACQUISITIONS
During the nine months ended September 30, 2001, the Operating Partnership
acquired the eleven properties and one parcel of land listed below from
unaffiliated parties for a total purchase price of $287.8 million.
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------
ACQUISITION
DATE NUMBER PRICE
ACQUIRED PROPERTY LOCATION OF UNITS (IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------
01/04/01 Suerte San Diego, CA 272 $ 37,500
02/08/01 Westside Villas VI Los Angeles, CA 18 4,550
02/15/01 Riverview Norwalk, CT 92 9,600
03/15/01 Grand Reserve at Eagle Valley Woodbury, MN 394 54,250
03/22/01 Legends at Preston Morrisville, NC 382 30,200
03/30/01 Mission Hills Oceanside, CA 282 26,750
03/30/01 River Oaks Oceanside, CA 280 26,250
05/18/01 Promenade at Aventura Aventura, FL 296 43,000
08/13/01 Vacant Land Westwood, MA 0 600
08/22/01 Shadetree West Palm Beach, FL 76 1,948
08/22/01 Suntree West Palm Beach, FL 67 1,944
09/26/01 Palladia Hillsboro, OR 497 51,250
- ---------------------------------------------------------------------------------------------------------------
2,656 $287,842
- ---------------------------------------------------------------------------------------------------------------
</Table>
On July 2, 2001, the Operating Partnership acquired an additional
ownership interest in 21 previously Unconsolidated Properties containing 3,896
units. Prior to July 2, 2001, the Operating Partnership accounted for this
portfolio as in investment in mortgage notes. As a result of this additional
ownership acquisition, the Operating Partnership acquired a controlling
interest, and as such, now consolidates these properties for financial reporting
purposes. The Operating Partnership recorded additional investments in real
estate totaling $258.9 million in connection with this transaction.
5. REAL ESTATE DISPOSITIONS
During the nine months ended September 30, 2001, the Operating Partnership
disposed of the thirty-seven properties and two vacant parcels of land listed
below to unaffiliated parties. When combined with gains from the joint venture
and unconsolidated property sale discussed below, the Operating Partnership
recognized a net gain of approximately $100.1 million on these sales.
12
<Page>
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------
DISPOSITION
DATE NUMBER PRICE
DISPOSED PROPERTY LOCATION OF UNITS (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------
01/17/01 Meadowood II Indianapolis, IN 74 $ 1,300
01/31/01 Concorde Bridge Overland Park, KS 248 15,600
02/01/01 Springs of Country Woods Salt Lake City, UT 590 31,000
02/22/01 Riverview Estates Napoleon, OH 90 1,750
02/26/01 Chelsea Court Sandusky, OH 62 1,600
02/27/01 Concord Square Lawrenceburg, IN 48 1,200
02/28/01 Canyon Creek Tucson, AZ 242 9,220
03/06/01 Gentian Oaks Columbus, GA 62 1,620
03/06/01 Holly Park Columbus, GA 66 1,730
03/06/01 Stratford Lane I Columbus, GA 67 1,750
03/07/01 Estate on Quarry Lake Austin, TX 302 25,232
03/08/01 Meadowood Crawfordsville, IN 64 1,300
03/14/01 Mill Run Statesboro, GA 88 2,350
03/15/01 Laurel Court Fremont, OH 69 1,450
03/15/01 Regency Woods West Des Moines, IA 200 9,350
03/22/01 Vacant Land Richmond, VA 0 11,200
04/16/01 Rosewood Tampa, FL 66 1,650
04/25/01 Parkcrest Southfield, MI 210 12,950
04/27/01 Westwood Newark, OH 14 222
04/30/01 Desert Park Las Vegas, NV 368 9,900
05/15/01 Carleton Court Erie, PA 60 1,461
05/16/01 River Oak Louisville, KY 268 14,650
06/07/01 Willowood Milledgeville, GA 61 1,550
06/14/01 Quail Cove Salt Lake City, UT 420 20,000
06/15/01 Beckford Place Wapakoneta, OH 40 830
06/27/01 The Birches Lima, OH 58 1,120
06/28/01 Pelican Pointe I and II Jacksonville, FL 160 4,150
06/28/01 Vacant Land Jacksonville, FL 0 217
06/28/01 Camden Way I and II Kingsland, GA 118 2,000
07/11/01 Plantation Houston, TX 232 12,875
07/12/01 Wood Crest Villas Westland, MI 458 20,450
07/17/01 Hampshire Court Bluffton, IN 45 1,064
07/17/01 Meadowood Logansport, IN 42 993
07/17/01 Westwood Rochester, IN 42 993
07/19/01 Vista Pointe Irving, TX 231 17,200
07/31/01 Cedarwood Sabina, OH 31 385
08/09/01 Olentangy Commons Columbus, OH 827 53,000
08/31/01 Greenglen II Lima, OH 54 1,095
09/28/01 Glenview Huntsville, AL 90 1,687
- ------------------------------------------------------------------------------------------------------------
6,167 $298,094
- ------------------------------------------------------------------------------------------------------------
</Table>
On February 23, 2001, the Operating Partnership entered into a joint
venture with an unaffiliated joint venture partner ("JVP"). At closing, the
Operating Partnership sold and/or contributed eleven wholly owned properties
containing 3,011 units valued at $202.5 million to the joint venture encumbered
with $20.2 million in mortgage loans obtained on February 16, 2001. An
additional $123.6 million of mortgage loans was obtained by the joint venture.
The JVP contributed cash in an amount equal to 75% of the equity in the joint
venture, which was then distributed to the Operating Partnership. The Operating
Partnership retained a 25% interest in the joint venture along with the right to
manage the properties. In accordance with the respective joint venture
organization documents, the Operating Partnership and the JVP both shall have
the right, but not the obligation, to infuse additional cash into the joint
venture. There are no other agreements that require the Operating Partnership or
the JVP to infuse cash into each
13
<Page>
joint venture. In addition, the Operating Partnership and the JVP have not
guaranteed the mortgage indebtedness of the joint venture. As a result, the
Operating Partnership recognized 75% of the gain on the sales and/or
contributions of property to the joint venture, which totaled approximately
$36.4 million. The Operating Partnership has classified its initial $3.4 million
25% interest in the joint venture (at carryover basis) as investments in
unconsolidated entities and accounted for it under the equity method of
accounting.
On May 17, 2001, the Operating Partnership sold its entire interest in one
Unconsolidated Property containing 74 units for approximately $0.4 million.
6. COMMITMENTS TO ACQUIRE/DISPOSE OF REAL ESTATE
At September 30, 2001, in addition to the Property that was subsequently
acquired as discussed in Note 16 below, the Operating Partnership had entered
into separate agreements to acquire two multifamily properties containing 469
units from unaffiliated parties. The Company expects a combined purchase price
of approximately $76.5 million, including the assumption of mortgage
indebtedness of approximately $45.8 million.
At September 30, 2001, in addition to the Properties that were subsequently
disposed of as discussed in Note 16 below, the Operating Partnership had entered
into separate agreements to dispose of seven multifamily properties containing
1,460 units, one vacant land parcel and retail space at a consolidated property
to unaffiliated parties. The Company expects a combined disposition price of
approximately $65.6 million.
The closings of these pending transactions are subject to certain
contingencies and 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 Operating Partnership has entered into two separate joint venture
agreements with third party development companies whereby the Operating
Partnership contributes 25% to 30% of the development cost to the joint venture
in return for preferential returns of 9.0% per annum. The basis of the Operating
Partnership's equity investments in these two joint ventures was $298.5 million
and $235.9 million as of September 30, 2001 and December 31, 2000, respectively.
The Operating Partnership also has various other investments in
unconsolidated entities with ownership interests ranging from 1.5% to 50.0%. The
basis of these equity investments was $53.4 million and $80.6 million as of
September 30, 2001 and December 31, 2000, respectively.
These investments are accounted for under the equity method of accounting.
8. DEPOSITS - RESTRICTED
Deposits-restricted as of September 30, 2001 primarily included the
following:
- deposits in the amount of $55.5 million held in third party
escrow accounts to provide collateral for third party
construction financing in connection with joint venture
agreements;
- approximately $39.2 million in tax-deferred (1031) exchange
proceeds; and
- approximately $62.6 million for tenant security, utility, and
other deposits.
14
<Page>
9. MORTGAGE NOTES PAYABLE
As of September 30, 2001, the Operating Partnership had outstanding
mortgage indebtedness of approximately $3.3 billion.
During the nine months ended September 30, 2001 the Operating Partnership:
- repaid $315.3 million of mortgages due at or prior to maturity
and/or at the disposition date of the respective Property;
- assumed $45.9 million of mortgage debt on four properties in
connection with their acquisitions;
- disposed of $28.2 million of mortgage debt assumed by the
purchaser in connection with the disposition of certain
properties;
- obtained $26.0 million of new mortgage debt on previously
unencumbered properties;
- obtained $301.5 million of new mortgage debt on previously
Unconsolidated Properties; and
- received $33.3 million in construction loan draw proceeds on two
properties.
As of September 30, 2001, scheduled maturities for the Operating
Partnership's outstanding mortgage indebtedness are at various dates through
October 1, 2033. The interest rate range on the Operating Partnership's mortgage
debt was 2.15% to 12.465% at September 30, 2001. During the nine months ended
September 30, 2001, the weighted average interest rate on the Operating
Partnership's mortgage debt was 6.59%.
10. NOTES
As of September 30, 2001, the Operating Partnership had outstanding
unsecured notes of approximately $2.4 billion.
During the nine months ended September 30, 2001, the Operating Partnership
issued $300.0 million of ten-year 6.95% fixed-rate public unsecured notes and
received net proceeds of $297.4 million.
As of September 30, 2001, scheduled maturities for the Operating
Partnership's outstanding notes are at various dates through 2029. The interest
rate range on the Operating Partnership's notes was 4.75% to 9.375% at September
30, 2001. During the nine months ended September 30, 2001, the weighted average
interest rate on the Operating Partnership's notes was 6.88%.
11. LINES OF CREDIT
The Operating Partnership has a revolving credit facility to provide the
Operating Partnership with potential borrowings of up to $700.0 million. As of
September 30, 2001, no amounts were outstanding under this facility and $60.0
million was restricted on the line of credit.
In connection with the Globe acquisition, the Operating Partnership assumed
a revolving credit facility with potential borrowings of up to $55.0 million.
This credit facility was terminated on May 31, 2001.
15
<Page>
12. CALCULATION OF NET INCOME PER WEIGHTED AVERAGE OP UNIT
The following tables set forth the computation of net income per OP Unit -
basic and net income per OP Unit - diluted.
<Table>
<Caption>
NINE MONTHS ENDED QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------------------
2001 2000 2001 2000
-----------------------------------------------------------
(Amounts in thousands except per OP Unit amounts)
NUMERATOR:
Income before allocation to Minority Interests, income
from investments in unconsolidated entities, net gain
on sales of real estate, extraordinary items,
cumulative effect of change in accounting principle
and allocation to preference unit/interest distributions $237,159 $275,743 $ 39,860 $ 99,686
Allocation to Minority Interests - Partially Owned
Properties (1,523) 145 (1,285) (12)
Income from investments in unconsolidated entities 20,252 14,589 8,029 5,525
Allocation to Junior Convertible Preference Units (272) (327) (82) (109)
Allocation to Cumulative Convertible
Redeemable Preference Interests (13,390) (6,900) (4,833) (3,233)
Allocation to Redeemable Preference Units (68,097) (76,370) (19,425) (24,601)
-----------------------------------------------------------
Income before net gain on sales of real estate,
extraordinary items and cumulative effect of change in
accounting principle 174,129 206,880 22,264 77,256
Net gain on sales of real estate 100,132 165,025 53,567 77,373
Extraordinary items (22) - (128) -
Cumulative effect of change in accounting principle (1,270) - - -
-----------------------------------------------------------
Numerator for net income per OP Unit - basic 272,969 371,905 75,703 154,629
Effect of dilutive securities:
Distributions on convertible preference units/interests 74 5,601 - 7,576
-----------------------------------------------------------
Numerator for net income per OP Unit - diluted $273,043 $377,506 $ 75,703 $162,205
===========================================================
DENOMINATOR:
Denominator for net income per OP Unit - basic 290,803 283,636 292,213 287,464
Effect of dilutive securities:
Convertible preference units/interests 82 4,816 - 15,554
Dilution for OP Units issuable upon
assumed exercise/vesting of
the Company's share options/restricted shares 3,776 1,442 4,178 1,970
-----------------------------------------------------------
Denominator for net income per OP Unit - diluted 294,661 289,894 296,391 304,988
===========================================================
Net income per OP Unit - basic $ 0.94 $ 1.31 $ 0.26 $ 0.54
===========================================================
Net income per OP Unit - diluted $ 0.93 $ 1.30 $ 0.26 $ 0.53
===========================================================
</Table>
16
<Page>
<Table>
<Caption>
NINE MONTHS ENDED QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------------------
2001 2000 2001 2000
-----------------------------------------------------------
(AMOUNTS IN THOUSANDS EXCEPT PER OP UNIT AMOUNTS)
NET INCOME PER OP UNIT - BASIC:
Income before net gain on sales of real estate,
extraordinary items and cumulative effect of change in
accounting principle per OP Unit - basic $ 0.60 $ 0.73 $ 0.08 $ 0.27
Net gain on sales of real estate 0.34 0.58 0.18 0.27
Extraordinary items - - - -
Cumulative effect of change in accounting principle - - - -
-----------------------------------------------------------
Net income per OP Unit - basic $ 0.94 $ 1.31 $ 0.26 $ .54
===========================================================
Net income per OP Unit - diluted:
Income before net gain on sales of real estate,
extraordinary items and cumulative effect of change in
accounting principle per OP Unit - diluted $ 0.59 $ 0.73 $ 0.08 $ 0.28
Net gain on sales of real estate 0.34 0.57 0.18 0.25
Extraordinary items - - - -
Cumulative effect of change in accounting principle - - - -
-----------------------------------------------------------
Net income per OP Unit - diluted $ 0.93 $ 1.30 $ 0.26 $ 0.53
===========================================================
</Table>
CONVERTIBLE PREFERENCE UNITS THAT COULD BE CONVERTED INTO 15,322,607 AND
13,922,972 WEIGHTED AVERAGE COMMON SHARES (WHICH WOULD BE CONTRIBUTED TO THE
OPERATING PARTNERSHIP IN EXCHANGE FOR OP UNITS) FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000, RESPECTIVELY, AND 15,626,902 AND 0 WEIGHTED AVERAGE
COMMON SHARES FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000, RESPECTIVELY,
WERE OUTSTANDING BUT WERE NOT INCLUDED IN THE COMPUTATION OF DILUTED EARNINGS
PER OP UNIT BECAUSE THE EFFECTS WOULD BE ANTI-DILUTIVE.
ON OCTOBER 11, 2001, THE OPERATING PARTNERSHIP EFFECTED A TWO-FOR-ONE SPLIT OF
ITS OP UNITS TO UNIT HOLDERS OF RECORD AS OF SEPTEMBER 21, 2001. ALL PER OP UNIT
DATA AND NUMBERS OF OP UNITS HAVE BEEN RETROACTIVELY ADJUSTED TO REFLECT THE OP
UNIT SPLIT.
13. Commitments and Contingencies
The Operating Partnership, as an owner of real estate, is subject to
various environmental laws of Federal and local governments. Compliance by the
Operating Partnership with existing laws has not had a material adverse effect
on the Operating Partnership's financial condition and results of operations.
However, the Operating Partnership 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 Operating Partnership does not believe there is any litigation
threatened against the Operating Partnership 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 Operating
Partnership.
In regards to the funding of Properties in the development and/or earnout
stage and the joint venture agreements with two multifamily residential real
estate developers, the Operating Partnership funded a net total of $109.5
million during the nine months ended September 30, 2001. During the fourth
quarter of 2001, the Operating Partnership expects to fund approximately $23.5
million in connection with these Properties. In connection with one joint
venture agreement, the Operating Partnership has an obligation to fund up to an
additional $6.5 million to guarantee third party construction financing. As of
September 30, 2001, the Operating Partnership has 19 projects under
17
<Page>
development with estimated completion dates ranging from December 31, 2001
through June 30, 2003. At any time following the completion of construction of
any development property, the Operating Partnership's joint venture partners
have the right to cause the Operating Partnership to acquire their respective
interests in the completed projects at a mutually agreeable price. If the
Operating Partnership and the joint venture partner are unable to agree on a
price, appraisals will be obtained by both parties. If the appraised values vary
by more than 10%, both the Operating Partnership and the joint venture partner
will agree on a third appraiser to determine which original appraisal is closest
to its determination of value.
In connection with the Wellsford Merger, the Operating Partnership provided
a credit enhancement with respect to certain tax-exempt bonds issued to finance
certain public improvements at a multifamily development project. As of
September 30, 2001, this enhancement was still in effect at a commitment amount
of $12.7 million.
14 . ASSET IMPAIRMENT
As of September 30, 2001, the Operating Partnership recorded $60.0 million
of asset impairment charges related to its furniture rental business. These
charges were the result of review of the existing intangible and tangible assets
reflected on the consolidated balance sheet as of September 30, 2001. The
Operating Partnership reviewed the current net book value taking into
consideration existing business and economic conditions as well as projected
operating cash flows. The impairment loss is reflected on the income statement
in total expenses 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.
For the nine months ended September 30, 2001, the Operating Partnership
recorded approximately $8.0 million of asset impairment charges related to its
technology investments. These charges were the result of review of the existing
investments reflected on the consolidated balance sheet. The Operating
Partnership reviewed the current relative value of each investment based on
existing economic conditions and current events. These impairment losses are
reflected on the income statement in total expenses and includes the write-down
of assets classified as investments in unconsolidated entities.
15. 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 Operating Partnership'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
tenants. 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 Operating
Partnership's rental real estate segment comprises approximately 95.2% and 96.9%
of total revenues for the nine months ended September 30, 2001 and 2000,
respectively, and approximately 95.8% and 94.3% of total revenues for the
quarters ended September 30, 2001 and 2000, respectively.
The primary financial measure for the Operating Partnership's rental real
estate segment is net operating income ("NOI"), which represents rental income
less: 1) property and maintenance expense; 2) real estate taxes and insurance
expense; and 3) property management expense (all as reflected in the
accompanying statements of operations). Current year NOI is compared to prior
year NOI and current year budgeted NOI as a measure of financial performance.
NOI from our rental real estate totaled approximately
18
<Page>
$937.1 million and $886.9 million for the nine months ended September 30, 2001
and 2000, respectively, and approximately $319.4 million and $294.8 million for
the quarters ended September 30, 2001 and 2000, respectively.
During the acquisition, development and/or disposition of real estate, the
NOI return on total capitalized costs is the primary measure of financial
performance (capitalization rate) the Operating Partnership considers.
The Operating Partnership's fee and asset management activity and furniture
rental/sales activities are immaterial and do not meet the threshold
requirements of a reportable segment as provided for in SFAS No. 131.
16. SUBSEQUENT EVENTS
Subsequent to September 30, 2001 and through November 7, 2001, the
Operating Partnership:
- acquired one Property consisting of 296 units for approximately
$23.7 million;
- disposed of five Properties consisting of 636 units for
approximately $22.1 million;
- repaid $25.1 million of mortgage debt at or prior to maturity on
five Properties; and
- relinquished $1.1 million of mortgage debt assumed by the purchaser
in connection with the disposition of two Properties.
19
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
For further information, including definitions for capitalized terms, refer
to the consolidated financial statements and footnotes thereto included in the
Operating Partnership's annual report on Form 10-K for the year ended December
31, 2000.
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", "expects" and "anticipates" and other similar
expressions which 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 Operating Partnership to differ materially from anticipated future results,
performance or achievements expressed or implied by such forward-looking
statements. Factors that might cause such differences include, but are not
limited to, the following:
- alternative sources of capital to the Operating Partnership are more
expensive than anticipated;
- occupancy levels and market rents may be adversely affected by
national and local economic and market conditions, which are beyond
the Operating Partnership's control; and
- additional factors as discussed in Part I of the Annual Report on Form
10-K.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Operating Partnership
assumes no obligation to update or correct any of these forward-looking
statements, in light of events or circumstances arising or existing after the
date hereof.
RESULTS OF OPERATIONS
The following table summarizes the number of Properties and related units
for the periods presented:
<Table>
<Caption>
----------------------------------------------------------------------------------------
PORTFOLIO SUMMARY
----------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------
2001 2000
--------------------------------------------------------
PROPERTIES UNITS PROPERTIES UNITS
Beginning of period 1,104 227,704 1,064 226,317
Acquisitions 11 2,657 19 3,002
Dispositions (38) (6,241) (30) (7,354)
Completed Developments 4 1,470 3 734
----------------------------------------------------------------------------------------
End of period 1,081 225,590 1,056 222,699
-------------------------------=========================================================
</Table>
In addition, the Operating Partnership sold and/or contributed eleven
wholly owned Properties containing 3,011 units to a joint venture entity during
the nine months ended September 30, 2001. The Operating Partnership sold and/or
contributed 21 wholly owned properties containing 5,211 units to two joint
venture entities during the nine months ended September 30, 2000. The Operating
Partnership retained a 25% interest along with the rights to manage these joint
venture Properties.
20
<Page>
The Operating Partnership's acquisition and disposition activity has
impacted overall results of operations for the nine months and quarters ended
September 30, 2001 and 2000. Significant changes in revenues and expenses have
resulted primarily from the consolidation of previously Unconsolidated
Properties and the acquisition of Globe, as well as the 2001 and the 2000
Acquired Properties, which have been partially offset by the disposition of the
2001 and the 2000 Disposed Properties. Significant change in expense has also
resulted from impairment charges (furniture rental and unconsolidated technology
investments) recorded in 2001. This impact is discussed in greater detail in the
following paragraphs.
Properties that the Operating Partnership owned for all of both the nine
month periods ended September 30, 2001 and September 30, 2000 (the "Nine-Month
2001 Same Store Properties"), which represented 184,391 units and Properties
that the Operating Partnership owned for all of both the quarters ended
September 30, 2001 and September 30, 2000 (the "Third-Quarter 2001 Same Store
Properties"), which represented 185,759 units, also impacted the Operating
Partnership's results of operations. Both the Nine-Month 2001 Same Store
Properties and Third-Quarter 2001 Same Store Properties are discussed in the
following paragraphs.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2001 TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
For the nine months ended September 30, 2001, income before allocation to
Minority Interests, income from investments in unconsolidated entities, net gain
on sales of real estate, extraordinary items and cumulative effect of change in
accounting principle decreased by approximately $38.6 million when compared to
the nine months ended September 30, 2000.
Rental income from the Nine-Month 2001 Same Store Properties increased by
approximately $58.9 million to $1.3 billion, or 4.7% primarily as a result of
higher rental rates charged to new tenants and tenant renewals and an increase
in income from billing tenants for their share of utility costs as well as other
ancillary services provided to tenants. For the remainder of 2001, the Operating
Partnership expects to achieve rental income increases of 3.75% to 4.0% from
Same Store Properties. For 2002, the Operating Partnership expects to see rental
income within a range of being slightly lower by 0.05% to slightly higher by as
much as 1.0%. These estimated increases are subject to certain risks and
uncertainties including, but not limited to, maintaining an overall average
occupancy rate of 93.5% to 94.0%.
Property operating expenses from the Nine-Month 2001 Same Store Properties,
which include property and maintenance, real estate taxes and insurance and an
allocation of property management expenses, increased approximately $20.5
million or 4.5%. The increase in "same store" expenses is primarily attributable
to a $4.8 million, or 6.5%, increase in utilities and an $8.3 million, or 7.3%,
increase in payroll costs. For the remainder of 2001, the Operating Partnership
expects to maintain expense growth at no more than 3.75% to 4.0% for the Same
Store Properties. For 2002, the Operating Partnership expects to maintain
expense growth between a range of 1.5% to 2.25%.
Rental income from properties other than Nine-Month 2001 Same Store
Properties increased by approximately $43.9 million primarily as a result of
revenue from the Operating Partnership's corporate housing business and the
acquisition of Properties during 2001, including the consolidation of previously
Unconsolidated Properties.
Interest income-investment in mortgage notes increased by approximately
$0.5 million as a result of receiving deferred interest income on certain of the
mortgage notes. The Operating Partnership anticipates no additional interest
income will be recognized on these mortgage notes in future quarters as the
Operating Partnership now consolidates the results related to these previously
Unconsolidated Properties.
Interest and other income decreased by approximately $0.8 million,
primarily as a result of lower balances and related interest rates being earned
on these investments.
21
<Page>
Property management expenses included off-site expenses associated with the
self-management of the Operating Partnership's Properties. These expenses
increased by approximately $0.1 million. The Operating Partnership continues to
acquire properties in major metropolitan areas and dispose of assets in smaller
multi-family rental markets where the Operating Partnership does not have a
significant management presence. As a result, the Operating Partnership is able
to achieve economies of scale by not increasing off-site management expenses as
it acquires additional properties.
Fee and asset management revenues and fee and asset management expenses
increased as a result of the Operating Partnership continuing to manage
Properties that were sold and/or contributed to various unconsolidated joint
venture entities. As of September 30, 2001, the Operating Partnership managed
15,948 units for third parties and the unconsolidated joint venture entities.
Furniture income and furniture expenses are associated with the operation
of the furniture rental business assumed in connection with the Globe
acquisition, which occurred in July 2000. Furniture expenses include a
depreciation charge on furniture held in inventory and property and equipment
directly related to the furniture business.
The Operating Partnership recorded impairment charges totaling
approximately $68.0 million, of which $60.0 million is related to the furniture
rental business and approximately $8.0 million is related to certain investments
in technology entities. See Footnote 14 in the Notes to the Consolidated
Financial Statements for further discussion.
Interest expense, including amortization of deferred financing costs,
increased approximately $2.3 million. The effective interest cost on all of the
Operating Partnership's indebtedness for the nine months ended September 30,
2001 was 6.99% as compared to 7.25% for the nine months ended September 30,
2000. For the remainder of 2001, the Operating Partnership expects interest
rates to decrease slightly due to lower variable interest rates. In connection
with the scheduled maturity of $150 million of indebtedness due in November
2001, the Operating Partnership anticipates to initially borrow under its line
of credit to repay this indebtedness. The Operating Partnership also expects to
replace this indebtedness in the first quarter of 2002 for a similar amount and
to incur interest costs approximating 6.5% to 7.0% per annum.
General and administrative expenses, which include corporate operating
expenses, increased approximately $4.3 million between the periods under
comparison. This increase was primarily due to the addition of corporate
personnel and higher overall compensation expenses including a current year
expense associated with the vesting of restricted shares/awards to key employees
in the past three years.
Net gain on sales of real estate decreased approximately $64.9 million
between the periods under comparison. This decrease is primarily the result of a
fewer number of units sold during the nine months ended September 30, 2001
(9,252 units including the joint venture properties) as compared to the nine
months ended September 30, 2000 (12,565 units including the joint venture
properties). In addition, the Operating Partnership sold older and more fully
depreciated properties during the nine months ended September 30, 2000 as
compared to the nine months ended September 30, 2001.
COMPARISON OF QUARTER ENDED SEPTEMBER 30, 2001 TO QUARTER ENDED ,
SEPTEMBER 30, 2000
For the quarter ended September 30, 2001, income before allocation to
Minority Interests, income from investments in unconsolidated entities, net gain
on sales of real estate, extraordinary items and cumulative effect of change in
accounting principle decreased by approximately $59.8 million when compared to
the quarter ended September 30, 2000.
Rental income from the Third-Quarter 2001 Same Store Properties increased
by approximately $14.8 million to $444.6 million, or 3.4%, primarily as a result
of higher rental rates charged to new tenants and tenant renewals and an
increase in income from billing tenants for their share of utility costs as well
as other ancillary services provided to tenants. For the remainder of 2001, the
Operating Partnership expects to achieve rental income increases of 3.75% to
4.0% from Same Store Properties.
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<Page>
For 2002, the Operating Partnership expects to see rental income within a range
of being slightly lower by 0.05% to slightly higher by as much as 1.0%. These
estimated increases are subject to certain risks and uncertainties including,
but not limited to, maintaining an overall average occupancy rate of 93.5% to
94.0%.
Property operating expenses from the Third-Quarter 2001 Same Store
Properties, which include property and maintenance, real estate taxes and
insurance and an allocation of property management expenses, increased
approximately $4.6 million or 2.9%. The increase in "same store" expenses is
primarily attributable to a $1.3 million, or 3.4%, increase in real estate taxes
and a $2.4 million, or 6.0%, increase in payroll costs. For the remainder of
2001, the Operating Partnership expects to maintain expense growth at no more
than 3.75% to 4.0% for the Same Store Properties. For 2002, the Operating
Partnership expects to maintain expense growth between a range of 1.5% to 2.25%.
Rental income from properties other than Third-Quarter 2001 Same Store
Properties increased by approximately $13.1 million, primarily as a result of
revenue from the Operating Partnership's corporate housing business and the
acquisition of properties during the third quarter of 2001.
Interest income-investment in mortgage notes decreased by approximately
$2.8 million as a result of the Operating Partnership receiving the final
payment related to these notes prior to consolidation of these previously
Unconsolidated Properties.
Interest and other income decreased by approximately $4.1 million,
primarily as a result of lower balances and related interest rates being earned
on the Operating Partnership's short-term investment accounts.
Property management expenses included off-site expenses associated with the
self-management of the Operating Partnership's Properties. These expenses
increased by approximately $1.3 million, primarily related to higher payroll
costs and increased health costs for employees.
Fee and asset management revenues and fee and asset management expenses
increased slightly as a result of the Operating Partnership continuing to manage
Properties that were sold and/or contributed to various unconsolidated joint
venture entities.
Furniture income and furniture expenses are associated with the operation
of the furniture rental business assumed in connection with the Globe
acquisition, which occurred in July 2000. Furniture expenses include a
depreciation charge on furniture held in inventory and property and equipment
directly related to the furniture business.
The Company recorded impairment charges totaling approximately $61.2
million, of which $60.0 million is related to the furniture rental business and
approximately $1.2 million is related to certain investments in technology
entities. See Footnote 14 in the Notes to the Consolidated Financial Statements
for further discussion.
Interest expense, including amortization of deferred financing costs,
increased approximately $2.0 million. The effective interest cost on all of the
Operating Partnership's indebtedness for the quarter ended September 30, 2001
was 6.82% as compared to 7.28% for the quarter ended September 30, 2000. For the
remainder of 2001, the Operating Partnership expects its overall interest cost
to decrease slightly due to lower variable interest rates.
General and administrative expenses, which include corporate operating
expenses, increased approximately $3.4 million between the periods under
comparison. This increase was primarily due to the addition of corporate
personnel and higher overall compensation expenses including a current year
expense associated with the awarding of restricted shares to key employees in
the past three years.
Net gain on sales of real estate decreased approximately $23.8 million
between the periods under
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comparison. This decrease is primarily the result of fewer units sold during the
quarter ended September 30, 2001, which included 2,052 wholly owned units as
compared to 3,959 wholly owned units sold in the quarter ended September 30,
2000.
LIQUIDITY AND CAPITAL RESOURCES
As of January 1, 2001, the Operating Partnership had approximately $23.8
million of cash and cash equivalents and the amounts available on the Operating
Partnership's lines of credit were $399.5 million, of which $53.5 million was
restricted. After taking into effect the various transactions discussed in the
following paragraphs and the net cash provided by operating activities, the
Operating Partnership's cash and cash equivalents balance at September 30, 2001
was approximately $110.8 million and the amount available on the Operating
Partnership's line of credit was $700.0 million, of which $60.0 million was
restricted.
Part of the Operating Partnership's strategy in funding the purchase of
multifamily properties, funding its Properties in the development and/or earnout
stage and the funding of the Operating Partnership's investment in two joint
ventures with multifamily real estate developers is to utilize its lines of
credit and to subsequently repay the lines of credit from the disposition of
Properties, reinvestment of retained cash flows or the issuance of additional
equity or debt securities. Continuing to utilize this strategy during the first
nine months of 2001, the Operating Partnership:
- disposed of thirty-eight properties (including one Unconsolidated
Property) and two vacant parcels of land and received net proceeds of
$284.8 million;
- issued $300.0 million of unsecured debt receiving net proceeds of
$297.4 million;
- sold and/or contributed eleven properties to a joint venture and
received net proceeds of $167.6 million;
- issued $48.5 million of three new series of Preference Interests and
received net proceeds of $47.3 million;
- obtained $59.3 million in new mortgage financing; and
- received a $61.4 million pay-down of second and third mortgages on
previously Unconsolidated Properties.
During the nine months ended September 30, 2001, the Operating Partnership:
- reduced its line of credit borrowings by approximately $355.5 million;
- funded $210.5 million to redeem all of its Series A and F Cumulative
Redeemable Preference Units;
- repaid approximately $315.3 million of mortgages due at or prior to
maturity and/or at the disposition date of respective properties;
- funded a net of $109.5 million related to the development, earnout and
joint venture agreements; and
- acquired eleven properties and vacant land for $288.9 million ($45.9
million of mortgage assumptions and $243.0 million of cash).
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The Operating Partnership's total debt summary, as of September 30, 2001,
included:
<Table>
<Caption>
-----------------------------------------------------------------------
DEBT SUMMARY AS OF 9/30/01
-----------------------------------------------------------------------
Weighted
$ Millions Average Rate
---------------------------------
Secured 3,269 6.73%
Unsecured 2,419 6.88%
---------------------------------
Total 5,688 6.79%
Fixed Rate 5,123 6.98%
Floating Rate 565 5.02%
---------------------------------
Total 5,688 6.79%
ABOVE TOTALS INCLUDE:
Total Tax Exempt 945 5.00%
Unsecured Revolving Credit Facility - -
-----------------------------------------------------------------------
</Table>
Subsequent to September 30, 2001 and through November 7, 2001, the Operating
Partnership:
- acquired one Property consisting of 296 units for approximately
$23.7 million;
- disposed of five Properties consisting of 636 units for
approximately $22.1 million;
- repaid $25.1 million of mortgage debt at or prior to maturity on
five Properties; and
- relinquished $1.1 million in mortgage debt assumed by the
purchaser in connection with the disposition of two Properties.
During the fourth quarter of 2001, the Operating Partnership expects to
fund approximately $23.5 million related to the development, earnout and joint
venture agreements. In connection with one joint venture agreement, the
Operating Partnership has an obligation to fund up to an additional $6.5 million
to guarantee third party construction financing. As of September 30, 2001, the
Operating Partnership has 19 projects under development with estimated
completion dates ranging from December 31, 2001 through June 30, 2003. At any
time following the completion of construction of any development property, the
Operating Partnership's joint venture partners have the right to cause the
Operating Partnership to acquire their respective interests in the completed
projects at a mutually agreeable price. If the Operating Partnership and the
joint venture partner are unable to agree on a price, appraisals will be
obtained by both parties. If the appraised values vary by more than 10%, both
the Operating Partnership and the joint venture partner will agree on a third
appraiser to determine which original appraisal is closest to its determination
of value.
During the nine months ended September 30, 2001, the Operating
Partnership's total improvements to real estate approximated $108.3 million.
Replacements, which includes new carpeting, appliances, mechanical equipment,
fixtures, vinyl floors and blinds inside the unit approximated $42.8 million, or
$210 per unit. Building improvements for the 1999, 2000 and 2001 Acquired
Properties approximated $19.4 million, or $375 per unit. Building improvements
for all of the Operating Partnership's pre-1999 Acquired Properties approximated
$38.9 million or $257 per unit. In addition, approximately $3.6 million was
spent on six specific assets related to major renovations and repositioning of
these assets. Also included in total improvements to real estate was
approximately $3.6 million on commercial/other assets and Partially Owned
Properties. Such improvements to real estate were primarily funded from net cash
provided by operating activities. Total improvements to real estate budgeted for
the remainder of 2001 are estimated to be approximately $25.0 million.
During the nine months ended September 30, 2001, the Operating
Partnership's total non-real estate capital additions, such as computer
software, computer equipment, and furniture and fixtures and leasehold
improvements to the Operating Partnership's property management offices and its
corporate offices, was approximately $5.2 million. Such additions to non-real
estate property were funded from net
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cash provided by operating activities. Total additions to non-real estate
property budgeted for the remainder of 2001 are estimated to be approximately
$0.9 million.
The Operating Partnership, through its Globe subsidiary, has a policy of
capitalizing expenditures made for rental furniture and property and equipment.
Globe purchases furniture to replace furniture that has been sold and to
maintain adequate levels of rental furniture to meet existing and new customer
needs. Expenditures for property and equipment that significantly enhance the
value of existing assets or substantially extend the useful life of an asset are
also capitalized. Expenditures for ordinary maintenance and repairs related to
property and equipment are expensed as incurred. For the nine months ended
September 30, 2001, total additions to rental furniture approximated $17.8
million and property and equipment approximated $2.2 million. Total additions to
rental furniture and property and equipment budgeted for the remainder of 2001
are estimated to be approximately $1.0 million.
Total distributions paid in October 2001 amounted to approximately $146.4
million, which included distributions declared for the quarter ended September
30, 2001.
The Operating Partnership expects to meet its short-term liquidity
requirements, including capital expenditures related to maintaining its existing
Properties and certain scheduled unsecured note and mortgage note repayments,
generally through its working capital, net cash provided by operating activities
and borrowings under its line of credit. The Operating Partnership considers its
cash provided by operating activities to be adequate to meet operating
requirements and payments of distributions. The Operating Partnership 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 Operating Partnership has certain uncollateralized Properties available to
secure additional mortgage borrowings in the event that the public capital
markets are unavailable to the Operating Partnership or the cost of alternative
sources of capital to the Operating Partnership is too high.
The Operating Partnership has a revolving credit facility with Bank of
America Securities LLC and Chase Securities Inc. acting as joint lead arrangers
to provide the Operating Partnership with potential borrowings of up to $700
million. As of November 9, 2001, $35.0 million was outstanding under this
facility.
In connection with the Globe acquisition, the Operating Partnership assumed
a revolving credit facility with Fifth Third Bank with potential borrowings of
up to $55.0 million. This credit facility was terminated on May 31, 2001.
In connection with the Wellsford Merger, the Operating Partnership 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
7, 2001, this enhancement was still in effect at a commitment amount of $12.7
million.
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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 Operating
Partnership's Form 10-K for the year ended December 31, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
12 Computation of Ratio of Earnings to Fixed Charges
(B) Reports on Form 8-K:
None
27
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ERP OPERATING LIMITED PARTNERSHIP
BY: EQUITY RESIDENTIAL PROPERTIES TRUST,
ITS GENERAL PARTNER
Date: NOVEMBER 14, 2001 By: /s/ Bruce C. Strohm
----------------- ---------------------------
Bruce C. Strohm
Executive Vice President, General Counsel
and Secretary
Date: NOVEMBER 14, 2001 By: /s/ Michael J. McHugh
----------------- ---------------------------
Michael J. McHugh
Executive Vice President, Chief Accounting
Officer and Treasurer
28