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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 JUNE 30, 2002

OR

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

Commission File Number: 0-24920


ERP OPERATING LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)

Illinois
(State or Other Jurisdiction of
Incorporation or Organization)
  36-3894853
(I.R.S. Employer
Identification No.)

Two North Riverside Plaza, Chicago, Illinois
(Address of Principal Executive Offices)

 

60606
(Zip Code)

(312) 474-1300
(Registrant's Telephone Number, Including Area Code)

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


        Indicate by check mark whether the registrant (1) has filed all 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




ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)

 
  June 30,
2002

  December 31,
2001

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

Real estate held for disposition

 

 


 

 

3,371

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

LIABILITIES AND PARTNERS' CAPITAL

 

 

 

 

 

 

 
Liabilities:              
  Mortgage notes payable   $ 3,210,510   $ 3,286,814  
  Notes, net     2,438,974     2,260,944  
  Line of credit         195,000  
  Accounts payable and accrued expenses     116,192     108,254  
  Accrued interest payable     62,676     62,360  
  Rents received in advance and other liabilities     65,226     83,005  
  Security deposits     47,098     47,644  
  Distributions payable     145,880     141,832  
   
 
 
    Total liabilities     6,086,556     6,185,853  
   
 
 
Commitments and contingencies              
  Minority Interests—Partially Owned Properties     11,503     4,078  
   
 
 
Partners' capital:              
  Preference Units     950,356     966,671  
  Preference Interests     246,000     246,000  
  Junior Preference Units     5,846     5,846  
  General Partner     4,509,578     4,506,097  
  Limited Partners     364,233     379,898  
  Deferred compensation     (31,607 )   (25,778 )
  Accumulated other comprehensive loss     (30,665 )   (33,040 )
   
 
 
    Total partners' capital     6,013,741     6,045,694  
   
 
 
    Total liabilities and partners' capital   $ 12,111,800   $ 12,235,625  
   
 
 

See accompanying notes

2



ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands except per OP Unit data)

(Unaudited)

 
  Six Months Ended June 30,
  Quarter Ended June 30,
 
 
  2002
  2001
  2002
  2001
 
REVENUES                          
  Rental income   $ 1,011,823   $ 1,014,813   $ 506,915   $ 509,428  
  Fee and asset management     4,310     4,140     2,592     2,168  
  Interest and other income     9,318     11,525     5,210     5,024  
  Interest income—investment in mortgage notes         8,763         6,019  
   
 
 
 
 
    Total revenues     1,025,451     1,039,241     514,717     522,639  
   
 
 
 
 
EXPENSES                          
  Property and maintenance     257,727     273,318     129,360     138,747  
  Real estate taxes and insurance     103,415     95,613     51,422     48,165  
  Property management     37,289     36,364     18,256     17,686  
  Fee and asset management     3,577     3,648     1,758     1,764  
  Depreciation     232,721     221,797     117,509     111,296  
  Interest:                          
    Expense incurred, net     171,993     178,660     87,229     88,857  
    Amortization of deferred financing costs     2,988     2,810     1,597     1,413  
  General and administrative     22,327     14,079     11,527     7,325  
  Impairment on technology investments     581     6,775     290     3,772  
  Amortization of goodwill         1,281         638  
   
 
 
 
 
    Total expenses     832,618     834,345     418,948     419,663  
   
 
 
 
 
Income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle     192,833     204,896     95,769     102,976  
Allocation to Minority Interests—Partially Owned Properties     (1,325 )   (238 )   (519 )   (133 )
Income from investments in unconsolidated entities     233     960     7     610  
Net gain (loss) on sales of unconsolidated entities     5,246     339     (411 )   339  
   
 
 
 
 
Income before discontinued operations, extraordinary items and cumulative effect of change in accounting principle     196,987     205,957     94,846     103,792  
Net gain on sales of discontinued operations     28,446     46,226     25,630     4,448  
Discontinued operations, net     2,994     3,666     535     1,574  
   
 
 
 
 
Income before extraordinary items and cumulative effect of change in accounting principle     228,427     255,849     121,011     109,814  
Extraordinary items     (468 )   106     (371 )   (205 )
Cumulative effect of change in accounting principle         (1,270 )        
   
 
 
 
 
Net income   $ 227,959   $ 254,685   $ 120,640   $ 109,609  
   
 
 
 
 
ALLOCATION OF NET INCOME:                          
Preference Units   $ 38,513   $ 48,672   $ 19,122   $ 24,213  
   
 
 
 
 
Preference Interests   $ 10,106   $ 8,557   $ 5,053   $ 4,599  
   
 
 
 
 
Junior Preference Units   $ 162   $ 190   $ 81   $ 81  
   
 
 
 
 
General Partner   $ 165,394   $ 180,792   $ 89,041   $ 74,038  
Limited Partners     13,784     16,474     7,343     6,678  
   
 
 
 
 
Net income available to OP Units   $ 179,178   $ 197,266   $ 96,384   $ 80,716  
   
 
 
 
 
Net income per OP Unit—basic   $ 0.61   $ 0.68   $ 0.33   $ 0.28  
   
 
 
 
 
Net income per OP Unit—diluted   $ 0.60   $ 0.67   $ 0.32   $ 0.27  
   
 
 
 
 
Weighted average OP Units outstanding—basic     294,957     290,086     295,799     290,509  
   
 
 
 
 
Weighted average OP Units outstanding—diluted     298,422     293,817     299,494     293,939  
   
 
 
 
 
Distributions declared per OP Unit outstanding   $ 0.8650   $ 0.8150   $ 0.4325   $ 0.4075  
   
 
 
 
 

See accompanying notes

3


 
  Six Months Ended June 30,
  Quarter Ended June 30,
 
  2002
  2001
  2002
  2001
Comprehensive income:                        
  Net income   $ 227,959   $ 254,685   $ 120,640   $ 109,609
    Other comprehensive income (loss)—derivative instruments:                        
      Cumulative effect of change in accounting principle         (5,334 )      
      Unrealized holding gains (losses) arising during the period     1,990     (3,396 )   (5,219 )   8,358
      Losses reclassified into earnings from other comprehensive income     385     226     217     171
   
 
 
 
  Comprehensive income   $ 230,334   $ 246,181   $ 115,638   $ 118,138
   
 
 
 

See accompanying notes

4



ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 
  Six Months Ended June 30,
 
 
  2002
  2001
 
CASH FLOWS FROM OPERATING ACTIVITIES:              
Net income   $ 227,959   $ 254,685  
Adjustments to reconcile net income to net cash provided by operating activities:              
  Allocation to Minority Interests—Partially Owned Properties     1,325     238  
  Cumulative effect of change in accounting principle         1,270  
  Depreciation     234,846     230,805  
  Amortization of deferred financing costs     2,988     2,810  
  Amortization of discount on investment in mortgage notes         (2,256 )
  Amortization of goodwill         1,924  
  Amortization of discounts and premiums on debt     (424 )   (1,007 )
  Amortization of deferred settlements on interest rate protection agreements     (176 )   317  
  Impairment on technology investments     581     6,775  
  Income from investments in unconsolidated entities     (233 )   (960 )
  Net gain on sales of discontinued operations     (28,446 )   (46,226 )
  Net gain on sales of unconsolidated entities     (5,246 )   (339 )
  Extraordinary items     468     (106 )
  Unrealized loss (gain) on interest rate protection agreements     483     (132 )
  Book value of furniture sales and rental buyouts         5,497  
  Compensation paid with Company Common Shares     10,061     6,741  

Changes in assets and liabilities:

 

 

 

 

 

 

 
  (Increase) in rents receivable     (227 )   (705 )
  Decrease (increase) in deposits—restricted     12,108     (12,574 )
  Additions to rental furniture         (14,532 )
  Decrease (increase) in other assets     3,898     (20,327 )
  Increase in accounts payable and accrued expenses     9,026     597  
  Increase in accrued interest payable     316     11,626  
  (Decrease) in rents received in advance and other liabilities     (9,972 )   (4 )
  (Decrease) increase in security deposits     (189 )   522  
   
 
 
  Net cash provided by operating activities     459,146     424,639  
   
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:              
  Investment in real estate—acquisitions     (153,034 )   (187,059 )
  Investment in real estate—development     (57,066 )   (31,472 )
  Improvements to real estate     (66,509 )   (63,269 )
  Additions to non-real estate property     (4,602 )   (3,520 )
  Interest capitalized for real estate under development     (4,369 )   (3,501 )
  Interest capitalized for unconsolidated entities under development     (7,954 )   (9,316 )
  Proceeds from disposition of real estate, net     183,494     345,039  
  Proceeds from disposition of furniture rental business     28,741      
  Investment in property and equipment         (1,626 )
  Principal receipts on investment in mortgage notes         5,675  
  Investments in unconsolidated entities     (42,441 )   (43,167 )
  Distributions from unconsolidated entities     21,483     16,711  
  Proceeds from disposition of unconsolidated entities     11,317     359  
  Proceeds from refinancing of unconsolidated entities         4,450  
  Decrease in deposits on real estate acquisitions, net     56,305     8,594  
  Decrease (increase) in mortgage deposits     14,651     (2,344 )
  Business combinations, net of cash acquired     (461 )   (7,603 )
  Other investing activities, net     192     (29 )
   
 
 
  Net cash (used for) provided by investing activities     (20,253 )   27,922  
   
 
 

See accompanying notes

5


 
  Six Months Ended June 30,
 
 
  2002
  2001
 
CASH FLOWS FROM FINANCING ACTIVITIES:              
Loan and bond acquisition costs   $ (9,124 ) $ (3,948 )
Mortgage notes payable:              
  Proceeds     47,213     45,118  
  Lump sum payoffs     (119,386 )   (237,040 )
  Scheduled principal repayments     (16,322 )   (16,367 )
  Prepayment premiums/fees     (468 )   (202 )
Notes, net:              
  Proceeds     397,064     299,316  
  Lump sum payoffs     (225,000 )    
  Scheduled principal repayments     (253 )   (147 )
Lines of credit:              
  Proceeds     292,000     316,491  
  Repayments     (487,000 )   (538,953 )
(Payments) from settlement of interest rate protection agreements     (1,533 )   (7,360 )
Proceeds from sale of OP Units     6,354     5,383  
Proceeds from sale of Preference Interests         48,500  
Proceeds from exercise of EQR options     27,030     29,468  
Redemption of Preference Units         (210,500 )
Payment of offering costs     (158 )   (1,317 )
Distributions:              
  OP Units—General Partner     (235,548 )   (109,189 )
  Preference Units     (35,832 )   (49,898 )
  Preference Interests     (10,132 )   (8,496 )
  Junior Preference Units     (162 )   (109 )
  OP Units—Limited Partners     (20,095 )   (9,949 )
  Minority Interests—Partially Owned Properties     (10,375 )   (665 )
Principal receipts on employee notes, net     173     145  
   
 
 
Net cash (used for) financing activities     (401,554 )   (449,719 )
   
 
 
Net increase in cash and cash equivalents     37,339     2,842  
Cash and cash equivalents, beginning of period     51,603     23,772  
   
 
 
Cash and cash equivalents, end of period   $ 88,942   $ 26,614  
   
 
 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

 

 
Cash paid during the period for interest   $ 184,216   $ 187,195  
   
 
 
Mortgage loans assumed through real estate acquisitions   $ 14,000   $ 45,918  
   
 
 
Mortgage loans (assumed) by purchaser in real estate and furniture rental business dispositions   $ (1,680 ) $ (27,358 )
   
 
 
Transfers to real estate held for disposition   $   $ 38,741  
   
 
 

See accompanying notes

6



ERP OPERATING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.    Business

        ERP Operating Limited Partnership ("ERPOP"), an Illinois limited partnership, was formed in May 1993 to conduct the multifamily residential property business of Equity Residential ("EQR"). EQR is a Maryland real estate investment trust ("REIT") formed on March 31, 1993 and is a fully integrated real estate company engaged in the acquisition, ownership, management and operation of multifamily properties.

        EQR is the general partner of, and as of June 30, 2002, owned an approximate 92.4% ownership interest in ERPOP. The Company conducts substantially all of its business and owns substantially all of its assets through ERPOP. ERPOP 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. As used herein, the term "Operating Partnership" includes ERPOP and those entities owned or controlled by it. As used herein, the term "Company" means EQR and the Operating Partnership.

        As of June 30, 2002, the Operating Partnership owned or had interests in a portfolio of 1,065 multifamily properties containing 227,963 apartment units located in 36 states consisting of the following:

 
  Number of
Properties

  Number of
Units

Wholly Owned Properties   943   198,676
Partially Owned Properties (Consolidated)   36   6,931
Unconsolidated Properties   86   22,356
   
 
Total Properties   1,065   227,963
   
 

2.    Summary of Significant Accounting Policies

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

        The balance sheet at December 31, 2001 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.

7



        For further information, including definition of capitalized terms not defined herein, 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, 2001.

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

 
  Cash Flow
Hedges

  Fair Value
Hedges

  Offsetting
Swaps/Caps

  Offsetting
Reverse
Swap/Caps

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

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

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

        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 Operating Partnership adopted the standard effective January 1, 2002, but it has not had any impact on the Operating Partnership's financial condition and results of operations.

        In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires companies to eliminate the amortization of goodwill in favor of a periodic impairment based

8



approach. SFAS No. 142 is effective for the fiscal years beginning after December 15, 2001. The Operating Partnership adopted the standard effective January 1, 2002, but it has not had a material impact on the Operating Partnership's financial condition and results of operations.

        In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145, among other items, 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 and infrequently occurring" criteria outlined in APB No. 30. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The Operating Partnership will adopt the standard effective January 1, 2003, but does not expect it to have a material impact on its financial condition and results of operations.

3.    Partners' Capital

        The following table presents the changes in the Operating Partnership's issued and outstanding OP Units for the six months ended June 30, 2002:

 
  2002
Operating Partnership's OP Units outstanding at January 1,   294,818,566

Issued to General Partner:

 

 
Conversion of Series E Preference Units   723,048
Conversion of Series H Preference Units   4,050
Employee Share Purchase Plan   212,395
Dividend Reinvestment—DRIP Plan   26,843
Share Purchase—DRIP Plan   21,819
Exercise of EQR options   1,301,917
Restricted EQR share grants, net   912,128

Issued to Limited Partners:

 

 
Issuance through acquisitions   2,520
   
Operating Partnership's OP Units outstanding at June 30,   298,023,286
   

        The limited partners of the Operating Partnership as of June 30, 2002 include various individuals and entities that contributed their properties to the Operating Partnership in exchange for OP Units (the "Limited Partners") and own an approximate 7.57% ownership interest in ERPOP. Subject to applicable securities law restrictions, the Limited Partners may exchange their OP Units for EQR Common Shares on a one-for-one basis.

        EQR contributes all net proceeds from its various equity offerings (including proceeds from exercise of options for EQR Common Shares) to the Operating Partnership. In return for those contributions, EQR receives a number of OP Units in ERPOP 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 ERPOP equal in number and having the same terms as the preferred shares issued in the equity offering).

9



        The following table presents the Operating Partnership's issued and outstanding "Preference Units" as of June 30, 2002 and December 31, 2001:

 
   
  Amounts in thousands
 
  Annual
Dividend
Rate per
Unit(1)

 
  June 30,
2002

  December 31,
2001

Preference Units:                  

91/8% Series B Cumulative Redeemable Preference Units; liquidation value $250 per unit; 500,000 units issued and outstanding at June 30, 2002 and December 31, 2001

 

$

22.81252

 

$

125,000

 

$

125,000

91/8% Series C Cumulative Redeemable Preference Units; liquidation value $250 per unit; 460,000 units issued and outstanding at June 30, 2002 and December 31, 2001

 

$

22.81252

 

 

115,000

 

 

115,000

8.60% Series D Cumulative Redeemable Preference Units; liquidation value $250 per unit; 700,000 units issued and outstanding at June 30, 2002 and December 31, 2001

 

$

21.50000

 

 

175,000

 

 

175,000

Series E Cumulative Convertible Preference Units; liquidation value $25 per unit; 2,716,012 and 3,365,794 units issued and outstanding at June 30, 2002 and December 31, 2001, respectively

 

$

1.75000

 

 

67,900

 

 

84,145

71/4% Series G Convertible Cumulative Preference Units; liquidation value $250 per unit; 1,264,700 units issued and outstanding at June 30, 2002 and December 31, 2001

 

$

18.12500

 

 

316,175

 

 

316,175

7.00% Series H Cumulative Convertible Preference Units, liquidation value $25 per unit; 51,228 and 54,027 units issued and outstanding at June 30, 2002 and December 31, 2001, respectively

 

$

1.75000

 

 

1,281

 

 

1,351

8.29% Series K Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding at June 30, 2002 and December 31, 2001

 

$

4.14500

 

 

50,000

 

 

50,000

7.625% Series L Cumulative Redeemable Preference Units; liquidation value $25 per unit; 4,000,000 units issued and outstanding at June 30, 2002 and December 31, 2001

 

$

1.90625

 

 

100,000

 

 

100,000
         
 
          $ 950,356   $ 966,671
         
 

(1)
Dividends on all series of Preference Units are payable quarterly at various 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.

10


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

 
   
  Amounts in thousands
 
  Annual
Dividend
Rate per
Unit(1)

 
  June 30,
2002

  December 31,
2001

Preference Interests:                  

8.00% Series A Cumulative Redeemable Preference Interests; liquidation value $50 per unit; 800,000 units issued and outstanding at June 30, 2002 and December 31, 2001

 

$

4.0000

 

$

40,000

 

$

40,000

8.50% Series B Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,100,000 units issued and outstanding at June 30, 2002 and December 31, 2001

 

$

4.2500

 

 

55,000

 

 

55,000

8.50% Series C Cumulative Redeemable Preference Units; liquidation value $50 per unit; 220,000 units issued and outstanding at June 30, 2002 and December 31, 2001

 

$

4.2500

 

 

11,000

 

 

11,000

8.375% Series D Cumulative Redeemable Preference Units; liquidation value $50 per unit; 420,000 units issued and outstanding at June 30, 2002 and December 31, 2001

 

$

4.1875

 

 

21,000

 

 

21,000

8.50% Series E Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding at June 30, 2002 and December 31, 2001

 

$

4.2500

 

 

50,000

 

 

50,000

8.375% Series F Cumulative Redeemable Preference Units; liquidation value $50 per unit; 180,000 units issued and outstanding at June 30, 2002 and December 31, 2001

 

$

4.1875

 

 

9,000

 

 

9,000

7.875% Series G Cumulative Redeemable Preference Units; liquidation value $50 per unit; 510,000 units issued and outstanding at June 30, 2002 and December 31, 2001

 

$

3.9375

 

 

25,500

 

 

25,500

7.625% Series H Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 190,000 units issued and outstanding at June 30, 2002 and December 31, 2001

 

$

3.8125

 

 

9,500

 

 

9,500

7.625% Series I Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 270,000 units issued and outstanding at June 30, 2002 and December 31, 2001

 

$

3.8125

 

 

13,500

 

 

13,500

7.625% Series J Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 230,000 units issued and outstanding at June 30, 2002 and December 31, 2001

 

$

3.8125

 

 

11,500

 

 

11,500
         
 
          $ 246,000   $ 246,000
         
 

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

11


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

 
   
  Amounts in thousands
 
  Annual
Dividend
Rate per
Unit(1)

 
  June 30,
2002

  December 31,
2001

Junior Preference Units:                  

Series A Junior Convertible Preference Units; liquidation value $100 per unit; 56,616 units issued and outstanding at June 30, 2002 and December 31, 2001

 

$

5.46934

 

$

5,662

 

$

5,662

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

 

$

2.00000

 

 

184

 

 

184
         
 
          $ 5,846   $ 5,846
         
 

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

4.    Real Estate Acquisitions

        During the six months ended June 30, 2002, the Operating Partnership acquired the seven properties listed below from unaffiliated parties for a total purchase price of $166.5 million.

Date
Acquired

  Property
  Location
  Number of
Units

  Acquisition
Price

 
   
   
   
  (in thousands)

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

5.    Real Estate Dispositions

        During the six months ended June 30, 2002, the Operating Partnership disposed of the twenty-three properties listed below to unaffiliated parties. The Operating Partnership recognized a net gain

12



on sales of discontinued operations of approximately $28.4 million and a net gain on sales of unconsolidated entities of approximately $5.2 million.

Date
Disposed

  Property
  Location
  Number Of
Units

  Disposition
Price
(in thousands)

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

*
Represents the Operating Partnership's share of the net disposition proceeds.

6.    Commitments to Acquire/Dispose of Real Estate

        As of June 30, 2002, in addition to the property that was subsequently acquired as discussed in Note 17, the Operating Partnership had entered into separate agreements to acquire two multifamily properties containing 603 units from unaffiliated parties. The Operating Partnership expects a combined purchase price of approximately $42.1 million.

13



        As of June 30, 2002, in addition to the properties that were subsequently disposed of as discussed in Note 17, the Operating Partnership had entered into separate agreements to dispose of fourteen multifamily properties containing 2,756 units to unaffiliated parties. The Operating Partnership expects a combined disposition price of approximately $134.5 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 various joint venture agreements with third party companies. The following table summarizes the Operating Partnership's investments in unconsolidated entities as of June 30, 2002 (amounts in thousands except for project and unit amounts):

 
  Institutional
Joint
Ventures

  Stabilized
Development
Projects(1)

  Projects
Under
Development

  Lexford /
Other

  Totals
 
Total projects     45     10     18     26     99 (2)
   
 
 
 
 
 
Total units     10,846     3,038     5,523     3,313     22,720 (2)
   
 
 
 
 
 
ERPOP's percentage ownership of mortgage notes payable     25.0 %   96.4 %   100.0 %   19.5 %      
ERPOP's share of mortgage notes payable(4)   $ 121,200   $ 242,431   $ 341,703   $ 12,913   $ 718,247 (3)
   
 
 
 
 
 

(1)
The Operating Partnership 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 four projects consisting of 1,522 units, which are completed and not yet stabilized, but are included in the Operating Partnership's property/unit counts at June 30, 2002. The remaining 14 properties containing 4,001 units are not included in the Operating Partnership's property/unit counts at June 30, 2002. Totals also exclude Fort Lewis Military Housing consisting of 1 property and 3,637 units.

(3)
A total of $698,597 is available for funding under these construction loans, of which $341,703 was funded and outstanding as of June 30, 2002.

(4)
As of July 30, 2002, the Operating Partnership has funded $54.5 million as additional collateral for certain of these loans (see Note 8). All remaining debt is non-recourse to EQR and the Operating Partnership.

        Investments in unconsolidated entities include the Unconsolidated Properties as well as various development properties under construction or pending construction. The Operating Partnership does not consolidate these entities, as it does not have sole control of major decisions (such as sale and/or financing/refinancing). The Operating Partnership's common equity ownership interests in these entities range from 4.5% to 57.0% at June 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 Operating Partnership is reflected on the consolidated balance sheets and after the project is completed, the consolidated statements of operations include the Operating Partnership's share of net income or loss from the unconsolidated entity. Prior to the project being completed, the Operating Partnership capitalizes interest on its equity contribution in accordance with the provisions of SFAS No. 58, Capitalization of Interest Cost in Financial Statements That Include Investments Accounted for by the Equity Method. During the six months ended June 30, 2002 and 2001, the Operating Partnership capitalized $8.0 million and

14



$9.3 million, respectively, in interest cost related to its unconsolidated development projects (which reduced interest expense incurred in the consolidated statements of operations).

        The Operating Partnership 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

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

9.    Mortgage Notes Payable

        As of June 30, 2002, the Operating Partnership had outstanding mortgage indebtedness of approximately $3.2 billion.

        During the six months ended June 30, 2002, the Operating Partnership:

        As of June 30, 2002, scheduled maturities for the Operating Partnership's outstanding mortgage indebtedness were at various dates through October 1, 2033. The interest rate range on the Operating Partnership's mortgage debt was 1.10% to 12.465% at June 30, 2002. During the six months ended June 30, 2002, the weighted average interest rate was 6.41%.

10.  Notes

        As of June 30, 2002, the Operating Partnership had outstanding unsecured notes of approximately $2.4 billion.

        During the six months ended June 30, 2002, the Operating Partnership:

        As of June 30, 2002, 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 7.75% at June 30, 2002. During the six months ended June 30, 2002, the weighted average interest rate was 6.50%.

15



11.  Line of Credit

        On May 30, 2002, the Operating Partnership obtained a new three-year $700.0 million unsecured revolving credit facility maturing May 29, 2005. The new line of credit replaced the Operating Partnership's $700.0 million unsecured revolving credit facility that was scheduled to expire in August 2002. Advances under the new credit facility bear interest at variable rates based upon LIBOR at various interest periods, plus a spread dependent upon the Operating Partnership's credit rating, or based upon bids received from the lending group. The prior existing revolving credit facility was terminated upon the closing of the new facility. As of June 30, 2002, no amounts were outstanding and $84.0 million was restricted (dedicated to support letters of credit and not available for borrowing) on the line of credit. During the six months ended June 30, 2002, the weighted average interest rate was 2.50%.

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:

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

 
Numerator:                          
Income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items, cumulative effect of change in accounting principle and allocation to preference unit/interest distributions   $ 192,833   $ 204,896   $ 95,769   $ 102,976  
Allocation to Minority Interests—Partially Owned Properties     (1,325 )   (238 )   (519 )   (133 )
Income from investments in unconsolidated entities     233     960     7     610  
Allocation to Preference Units     (38,513 )   (48,672 )   (19,122 )   (24,213 )
Allocation to Preference Interests     (10,106 )   (8,557 )   (5,053 )   (4,599 )
Allocation to Junior Preference Units     (162 )   (190 )   (81 )   (81 )
   
 
 
 
 
Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle     142,960     148,199     71,001     74,560  
Net gain (loss) on sales of unconsolidated entities     5,246     339     (411 )   339  
Net gain on sales of discontinued operations     28,446     46,226     25,630     4,448  
Discontinued operations, net     2,994     3,666     535     1,574  
Extraordinary items     (468 )   106     (371 )   (205 )
Cumulative effect of change in accounting principle         (1,270 )        
   
 
 
 
 
Numerator for net income per OP Unit—basic     179,178     197,266     96,384     80,716  
Effect of dilutive securities:                          
  Distributions on convertible preference units/interests         242     22      
   
 
 
 
 
Numerator for net income per OP Unit—diluted   $ 179,178   $ 197,508   $ 96,406   $ 80,716  
   
 
 
 
 

16


Denominator:                          
Denominator for net income per OP Unit—basic     294,957     290,086     295,799     290,509  
Effect of dilutive securities:                          
  Convertible preference units/interests         370     75      
  Dilution for OP Units issuable upon assumed exercise/vesting of the Company's share options/restricted shares     3,465     3,361     3,620     3,430  
   
 
 
 
 
Denominator for net income per OP Unit—diluted     298,422     293,817     299,494     293,939  
   
 
 
 
 
Net income per OP Unit—basic   $ 0.61   $ 0.68   $ 0.33   $ 0.28  
   
 
 
 
 
Net income per OP Unit—diluted   $ 0.60   $ 0.67   $ 0.32   $ 0.27  
   
 
 
 
 

 


 

Six Months Ended June 30,


 

Quarter Ended June 30,

 
  2002
  2001
  2002
  2001
 
  (Amounts in thousands except per OP Unit amounts)

Net income per OP Unit—basic:                        
Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle per OP Unit—basic   $ 0.48   $ 0.51   $ 0.24   $ 0.26
Net gain (loss) on sales of unconsolidated entities     0.02            
Net gain on sales of discontinued operations     0.10     0.16     0.09     0.02
Discontinued operations, net     0.01     0.01        
Extraordinary items                
Cumulative effect of change in accounting principle                
   
 
 
 
Net income per OP Unit—basic   $ 0.61   $ 0.68   $ 0.33   $ 0.28
   
 
 
 
Net income per OP Unit—diluted:                        
Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle per OP Unit—diluted   $ 0.48   $ 0.50   $ 0.24   $ 0.25
Net gain (loss) on sales of unconsolidated entities     0.01            
Net gain on sales of discontinued operations     0.10     0.16     0.08     0.02
Discontinued operations, net     0.01     0.01        
Extraordinary items                
Cumulative effect of change in accounting principle                
   
 
 
 
Net income per OP Unit—diluted   $ 0.60   $ 0.67   $ 0.32   $ 0.27
   
 
 
 

        Convertible preference units/interests that could be converted into 15,648,034 and 14,921,384 weighted average Common Shares (which would be contributed to the Operating Partnership in exchange for OP Units) for the six months ended June 30, 2002 and 2001, respectively, and 15,369,255 and 15,379,910 weighted average Common Shares for the quarters ended June 30, 2002 and 2001, respectively, were outstanding but were not included in the computation of diluted earnings per OP Unit because the effects would be anti-dilutive.

17



        On October 11, 2001, the Operating Partnership effected a two-for-one split of its OP Units to unitholders 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.  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 Operating Partnership adopted the standard effective January 1, 2002, which did not have a material effect on the Operating Partnership's financial condition and results of operations.

        Under the provisions of SFAS No. 144, for long-lived assets to be held and used, the Operating Partnership first determines whether any indicators of impairment exist. If indicators exist, the Operating Partnership 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.

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

        The components of discontinued operations for the six months and quarters ended June 30, 2002 and 2001 are outlined below and include the results of operations through the date of each respective sale for the six months and quarter ended June 30, 2002 and a full six months and quarter of operations for the six months and quarter ended June 30, 2001, for the following:

18


 
  Six Months Ended June 30,
  Quarter Ended June 30,
 
  2002
  2001
  2002
  2001
 
  (Amounts in thousands)

REVENUES                        
  Rental income   $ 8,762   $ 12,858   $ 2,628   $ 6,432
  Interest and other income     3     26     1     25
  Furniture income     1,361     30,027     (4 )   15,155
   
 
 
 
    Total revenues     10,126     42,911     2,625     21,612
   
 
 
 
EXPENSES                        
  Property and maintenance     2,787     3,332     1,267     1,617
  Real estate taxes and insurance     881     1,162     254     589
  Depreciation     2,125     3,309     569     1,662
  Interest expense incurred, net     36     300         147
  Furniture expenses     1,303     30,499         15,670
  Amortization of goodwill         643         353
   
 
 
 
    Total expenses     7,132     39,245     2,090     20,038
   
 
 
 
Discontinued operations, net   $ 2,994   $ 3,666   $ 535   $ 1,574
   
 
 
 

14.  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 stage and the agreements with multifamily residential real estate developers, the Operating Partnership funded a net total of $40.3 million during the six months ended June 30, 2002. In connection with one development agreement, the Operating Partnership has an obligation to fund up to an additional $9.5 million to guarantee third party construction financing. As of June 30, 2002, the Operating Partnership has 21 projects under development (includes three consolidated projects) with estimated completion dates ranging through March 31, 2004.

        For one development agreement, the Operating Partnership'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 Operating Partnership based on such value. If the Operating Partnership chooses not to purchase the interest, it must agree to a sale of the project to an unrelated third party at such value. The Operating Partnership'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.

        Under a second development agreement, the Operating Partnership's partner has the right, at any time following completion of a project, to require the Operating Partnership to purchase the partners' interest in that project at a mutually agreeable price. If the Operating Partnership 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 Operating Partnership and its partner will agree on a third appraiser to determine

19



which original appraisal is closest to its determination of value. The Operating Partnership 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, any projects remaining unsold must be purchased by the Operating Partnership at the agreed-upon price.

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

15.  Asset Impairment

        For the six months ended June 30, 2002 and 2001, the Operating Partnership recorded approximately $0.6 million and $6.8 million, respectively, 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. These impairment losses are reflected on the statement of operations in total expenses and include the write-down of assets classified as other assets and investments in unconsolidated entities.

16.  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 residents. 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 comprised approximately 98.7% and 97.6% of total revenues for the six months ended June 30, 2002, and 2001, respectively, and approximately 98.5% and 97.5% of total revenues for the quarters ended June 30, 2002 and 2001, respectively. The Operating Partnership's rental real estate segment comprised approximately 99.6% and 99.4% of total assets at June 30, 2002 and December 31, 2001, 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 $613.4 million and $609.5 million for the six months ended June 30, 2002 and 2001, respectively, and approximately $307.9 million and $304.8 million for the quarters ended June 30, 2002 and 2001, 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 the Operating Partnership considers.

        The Operating Partnership'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.

20


17.  Subsequent Events/Other

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

        Subsequent to June 30, 2002 and through July 29, 2002, the Operating Partnership:

21



Item 2.    Management'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 Operating Partnership's annual report on Form 10-K for the year ended December 31, 2001.

        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 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 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:

        Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Operating Partnership 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.

Results of Operations

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

 
  Properties
  Units
  Purchase / Sale
Price
$ Millions

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

22


        The Operating Partnership's acquisition and disposition activity has impacted overall results of operations for the six months and quarters ended June 30, 2002 and 2001. Significant changes in revenues and expenses have resulted primarily from the consolidation of previously Unconsolidated Properties in July 2001, the disposition of the furniture rental business on January 11, 2002, as well as the properties acquired and developments completed in 2001 and 2002, which have been partially offset by the properties disposed in 2001 and 2002. Significant change in expenses has also resulted from an increase in insurance costs and general and administrative costs and reductions in variable interest rates, impairment charges and goodwill amortization. This impact is discussed in greater detail in the following paragraphs.

        Properties that the Operating Partnership owned for all of both the six month periods ended June 30, 2002 and June 30, 2001 (the "Six-Month 2002 Same Store Properties"), which represented 194,491 units, and properties that the Operating Partnership owned for all of both the quarters ended June 30, 2002 and June 30, 2001 (the "Second Quarter 2002 Same Store Properties"), which represented 196,211 units, also impacted the Operating Partnership's results of operations. Both the Six-Month 2002 Same Store Properties and Second Quarter 2002 Same Store Properties are discussed in the following paragraphs.

        Comparison of the six months ended June 30, 2002 to the six months ended June 30, 2001

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

        Revenues from the Six-Month 2002 Same Store Properties decreased primarily as a result of lower rental rates charged new residents, increased concessions and lower occupancy at certain properties. Property operating expenses from the Six-Month 2002 Same Store Properties, which include property 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 utility costs. The following tables provide comparative revenue, expense, net operating income ("NOI") and weighted average occupancy for the Six-Month 2002 Same Store Properties:

June 30, 2002 Year-to-Date Same Store Results

$ in Millions—194,491 Same Store Units

Description

  Revenues
  Expenses
  NOI
 
YTD 2002   $ 918.0   $ 336.8   $ 581.2  
YTD 2001   $ 930.3   $ 335.4   $ 594.9  
Change   $ (12.3 ) $ 1.4   $ (13.7 )
   
 
 
 
  % Change     (1.3 %)   0.4 %   (2.3 %)
   
 
 
 

Same Store Occupancy Statistics


YTD 2002

 

93.98

%
YTD 2001   94.63 %
   
 
  Change   (0.65 %)

23


        For properties that the Operating Partnership acquired prior to December 31, 2000 and expects to continue to own through December 31, 2002, the Operating Partnership anticipates the following operating assumptions for the year ending December 31, 2002:

2002 Operating Assumptions

Physical Occupancy   93.0%
Revenue Change   (2.3%) to (2.0%)
Expense Change   1.0% to 1.5%
NOI Change   (4.5%) to (3.75%)
Dispositions   $500 million
Refinancing   $200 million at 7.0%

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

        Rental income from properties other than Six-Month 2002 Same Store Properties increased by approximately $9.3 million primarily as a result of revenue from properties the Operating Partnership acquired in 2001 and 2002 and additional Partially Owned Properties that the Operating Partnership consolidated in 2001.

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

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

        Property management expenses include off-site expenses associated with the self-management of the Operating Partnership's properties. These expenses increased by approximately $0.9 million or 2.5%. These expenses increased due to higher overall compensation costs related to a current period expense associated with EQR restricted shares/awards granted to key employees. 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.

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

        The Operating Partnership recorded impairment charges in 2002 totaling approximately $0.6 million, which is related to one investment in a technology entity. See Note 15 in the Notes to the Consolidated Financial Statements for further discussion.

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

24



        General and administrative expenses, which include corporate operating expenses, increased approximately $8.2 million between the six months under comparison. This increase was primarily due to higher state income taxes in Michigan and New Jersey as well as the income taxes incurred at one of the Operating Partnership's taxable REIT subsidiaries, which has an ownership interest in properties that in prior periods were classified as Unconsolidated Properties. In addition, retirement plan expenses for certain key executives, and higher overall compensation expenses including a current period expense associated with EQR restricted shares/awards granted to key employees and additional compensation charges and costs associated with EQR's new President also contributed to the increase.

        Net gain (loss) on sales of unconsolidated entities increased by $4.9 million primarily as a result of the sale of one stabilized development property (296 units).

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

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

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

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

Second Quarter 2002 Same Store Results

$ in Millions—196,211 Same Store Units


Description


 

Revenues


 

Expenses


 

NOI


 
Q2 2002   $ 463.3   $ 173.3   $ 290.0  
Q2 2001   $ 473.4   $ 170.6   $ 302.8  
   
 
 
 
  Change   $ (10.1 ) $ 2.7   $ (12.8 )
   
 
 
 
% Change     (2.1 %)   1.6 %   (4.2 %)

Same Store Occupancy Statistics


Q2 2002

 

94.01

%
Q2 2001   94.60 %
   
 
  Change   (0.59 %)

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

25



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

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

        Property management expenses include off-site expenses associated with the self-management of the Operating Partnership's properties. These expenses increased by approximately $0.6 million or 3.2%. These expenses increased due to higher overall compensation costs related to a current period expense associated with EQR restricted shares/awards granted to key employees. 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.

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

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

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

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

        Net gain on sales of discontinued operations increased approximately $21.2 million between the periods under comparison. This increase is primarily the result of more fully depreciated properties sold during the quarter and an increase of approximately 1,000 units sold.

Liquidity and Capital Resources

        As of January 1, 2002, the Operating Partnership had approximately $51.6 million of cash and cash equivalents and $505.0 million available under its line of credit, of which $59 million was restricted (not available for borrowings). After taking into effect the various transactions discussed in the following paragraphs, the Operating Partnership's cash and cash equivalents balance at June 30, 2002 was

26



approximately $88.9 million and the amount available on the Operating Partnership's line of credit was $700.0 million, of which $84.0 million was restricted (not available for borrowings).

        Part of the Operating Partnership's acquisition and development funding strategy and the funding of the Operating Partnership's investment in various unconsolidated entities is to utilize its line of credit and to subsequently repay the line of credit from the disposition of Properties, retained cash flows or the issuance of additional equity or debt securities. Continuing to utilize this strategy during the six months ended June 30, 2002, the Operating Partnership:

        All of these proceeds were utilized to:

        During the six months ended June 30, 2002, the Operating Partnership:

27


        The Operating Partnership's total debt summary and debt maturity schedule, as of June 30, 2002, are as follows:

Debt Summary as of June 30, 2002

 
  $ Millions
  Weighted
Average Rate

 
Secured   $ 3,210   6.28 %
Unsecured     2,439   6.52 %
   
 
 
  Total   $ 5,649   6.39 %

Fixed Rate

 

$

4,965

 

6.89

%
Floating Rate     684   2.72 %
   
 
 
  Total   $ 5,649   6.39 %

Above Totals Include:

 

 

 

 

 

 
Total Tax Exempt   $ 958   3.75 %
Unsecured Revolving Credit Facility   $    

Debt Maturity Schedule as of June 30, 2002

Year
  $ Millions
  % of Total
 
2002   $ 245   4.3 %
2003     310   5.5 %
2004     592   10.5 %
2005*     684   12.1 %
2006     429   7.6 %
2007     273   4.8 %
2008     511   9.0 %
2009     405   7.2 %
2010     256   4.5 %
2011+     1,944   34.4 %
   
 
 
Total   $ 5,649   100.0 %

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

        The Operating Partnership's "Consolidated Debt-to-Total Market Capitalization Ratio" as of June 30, 2002 is presented in the following table. The Operating Partnership calculates the equity component of its market capitalization as the sum of (i) the total outstanding OP Units at the equivalent market value of the closing price of EQR's Common Shares on the New York Stock Exchange; (ii) the "OP Unit Equivalent" of all convertible preference interests/units; and (iii) the liquidation value of all perpetual preference interests/units outstanding.

28


Capitalization as of June 30, 2002

Total Debt         $ 5,649,483,792  

OP Units

 

 

298,023,286

 

 

 

 
OP Unit Equivalents (see below)     15,134,806        
   
       
Total Outstanding at quarter-end     313,158,092        
EQR Common Share Price at June 28, 2002   $ 28.75        
   
       
            9,003,295,145  
Perpetual Preference Units Liquidation Value           565,000,000  
Perpetual Preference Interests Liquidation Value           211,500,000  
         
 
Total Market Capitalization         $ 15,429,278,937  

Debt/Total Market Capitalization

 

 

 

 

 

36.62

%

Convertible Preference Units, Preference Interests
and Junior Preference Units
As of June 30, 2002

 
  Units
  Conversion
Ratio

  OP Unit
Equivalents

Preference Units:            
  Series E   2,716,012   1.1128   3,022,378
  Series G   1,264,700   8.5360   10,795,479
  Series H   51,228   1.4480   74,178
Preference Interests:            
  Series H   190,000   1.5108   287,052
  Series I   270,000   1.4542   392,634
  Series J   230,000   1.4108   324,484
Junior Preference Units:            
  Series A   56,616   4.081600   231,084
  Series B   7,367   1.020408   7,517
   
     
Total Convertible   4,785,923       15,134,806

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

        From July 1, 2002 through July 29, 2002, the Operating Partnership:

29


        In connection with one development agreement, the Operating Partnership has an obligation to fund up to an additional $9.5 million to guarantee third party construction financing. As of June 30, 2002, the Operating Partnership has 18 projects under development with estimated completion dates ranging through March 31, 2004.

        For one development agreement, the Operating Partnership'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 Operating Partnership based on such value. If the Operating Partnership chooses not to purchase the interest, it must agree to a sale of the project to an unrelated third party at such value. The Operating Partnership'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.

        Under a second development agreement, the Operating Partnership's partner has the right, at any time following completion of a project, to require the Operating Partnership to purchase the partners' interest in that project at a mutually agreeable price. If the Operating Partnership 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 Operating Partnership and its partner will agree on a third appraiser to determine which original appraisal is closest to its determination of value. The Operating Partnership 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, any projects remaining unsold must be purchased by the Operating Partnership at the agreed-upon price.

        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:


30


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

Capitalized Improvements to Real Estate
For the Six Months Ended June 30, 2002

 
  Total
Units(1)

  Replacements(2)
  Per
Unit

  Building
Improvements(3)

  Per
Unit

  Total
  Per
Unit

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

(1)
Total units exclude 22,356 unconsolidated units.

(2)
Replacements include new expenditures inside the units such as carpets, appliances, mechanical equipment, fixtures and vinyl flooring.

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

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

(5)
Wholly Owned Properties acquired during 2000, 2001 and YTD 2002. Per unit amounts are based on a weighted average of 18,070 units.

(6)
Other includes Partially Owned and sold properties, commercial space and condominium conversions.

        We anticipate capitalizing an average of approximately $600 to $640 per unit annually for inside and outside the unit capital improvements to our real estate. Total improvements to real estate for the remainder of 2002 are estimated to be $65.0 million.

        During the six months ended June 30, 2002, 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 $4.6 million. Total additions to non-real estate property for the remainder of 2002 are estimated at $2.2 million.

        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.

31



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

        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 unencumbered 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. These unencumbered properties are in excess of the value of unencumbered properties the Operating Partnership must maintain in order to comply with covenants under its unsecured notes and line of credit.

        On May 30, 2002 the Operating Partnership obtained a new three-year $700.0 million unsecured revolving credit facility. The new line of credit replaces the Operating Partnership's $700.0 million unsecured revolving credit facility that was scheduled to expire in August 2002. The prior existing revolving credit facility terminated upon the closing of the new facility. 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 July 31, 2002, $40.0 million was outstanding under this new facility.

        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 July 31, 2002, this enhancement was still in effect at a commitment amount of $12.7 million.

Critical Accounting Policies and Estimates

        The Operating Partnership's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require the Operating Partnership to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and the related disclosures. The Operating Partnership believes that the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

        The Operating Partnership 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 and legal factors. Future events could occur which would cause the Operating Partnership to conclude that impairment indicators exist and an impairment loss is warranted.

32


        The Operating Partnership 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.

        The valuation of financial instruments under SFAS No. 107 and SFAS No. 133 requires the Operating Partnership to make estimates and judgments that affect the fair value of the instruments. The Operating Partnership, 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 Operating Partnership bases its estimates on other factors relevant to the financial instruments.

        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, instead of Statement No. 123, which would result in compensation expense being recorded based on the fair value of the stock option compensation issued. Any Common Shares issued pursuant to EQR's share option plan will result in the Operating Partnership issuing OP Units to EQR on a one-for-one basis.

Adjusted Net Income

        For the six months ended June 30, 2002, Adjusted Net Income ("ANI") available to OP units decreased $4.3 million as compared to the six months ended June 30, 2001.

        For the quarter ended June 30, 2002, ANI available to OP Units increased $6.4 million as compared to the quarter ended June 30, 2001.

33



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

Adjusted Net Income
(Amounts in thousands)
(Unaudited)

 
  Six Months Ended June 30,
  Quarter Ended June 30,
 
 
  2002
  2001
  2002
  2001
 
Net income available to OP Units   $ 179,178   $ 197,266   $ 96,384   $ 80,716  
Adjustments:                          
  Acquisition cost depreciation*     192,005     187,797     95,847     94,324  
  Amortization of goodwill         1,924         991  
  Acquisition cost depreciation accumulated on sold properties     (22,532 )   (34,774 )   (18,588 )   (8,575 )
  Extraordinary items     468     (106 )   371     205  
  Cumulative effect of change in accounting principle         1,270          
   
 
 
 
 
ANI available to OP Units—basic**   $ 349,119   $ 353,377   $ 174,014   $ 167,661  
   
 
 
 
 
Depreciation for replacements and capital improvements   $ 43,422   $ 38,830   $ 22,170   $ 19,762  
   
 
 
 
 

*
Acquisition cost depreciation represents depreciation for the initial cost of the property, including buildings and furniture, fixtures and equipment and depreciation on capital improvements identified in the acquisition underwriting and incurred in the first twenty-four months of ownership when the total cost exceeds $2,000 per unit.

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

        The Operating Partnership 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 Operating Partnership 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 Operating Partnership'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 Operating Partnership'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 Operating Partnership's and other real estate companies' accounting policies for replacement type items and, accordingly, may not be comparable to such other real estate companies.

Funds From Operations

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

34



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

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

Funds from Operations
(Amounts in thousands)
(Unaudited)

 
  Six Months Ended June 30,
  Quarter Ended June 30,
 
 
  2002
  2001
  2002
  2001
 
Net income available to OP Units   $ 179,178   $ 197,266   $ 96,384   $ 80,716  
Adjustments:                          
  Depreciation/amortization     235,427     228,551     118,017     115,077  
  Net gain on sales of discontinued operations     (27,576 )   (46,226 )   (24,760 )   (4,448 )
  Net (gain) loss on sales of unconsolidated entities     (5,246 )   (339 )   411     (339 )
  Extraordinary items     468     (106 )   371     205  
  Cumulative effect of change in accounting principle         1,270          
  Impairment on technology investments     581     6,775     290     3,772  
   
 
 
 
 
FFO available to OP Units—basic*   $ 382,832   $ 387,191   $ 190,713   $ 194,983  
   
 
 
 
 

*
FFO represents net income (loss) (computed in accordance with accounting principles generally accepted in the United States ("GAAP")), excluding gains or losses from sales of property, plus depreciation and amortization (after adjustments for Partially Owned Properties and Unconsolidated Properties), plus/minus extraordinary items, and plus the cumulative effect of change in accounting principle and impairment charges. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis.

        The Operating Partnership 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 Operating Partnership to incur and service debt and to make capital expenditures. FFO in and of itself does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indication of the Operating Partnership'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 Operating Partnership'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 Operating Partnership's and other real estate companies' accounting policies for replacement type items and, accordingly, may not be comparable to such other real estate companies.

35




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, 2001.


Item 6. Exhibits and Reports on Form 8-K

(A)   Exhibits:    

 

 

10.1*

 

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

 

 

10.2*

 

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

 

 

12

 

Computation of Ratio of Earnings to Combined Fixed Charges.

*
Included as an exhibit to Equity Residential's Form 10-Q for the quarterly period ended June 30, 2002 and incorporated herein by reference.

(B)
Reports on Form 8-K:

        None.

36


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.

    ERP OPERATING LIMITED PARTNERSHIP
    BY:   EQUITY RESIDENTIAL,
        ITS GENERAL PARTNER

Date: August 13, 2002

 

By:

 

/s/  
DAVID J. NEITHERCUT      
David J. Neithercut
Executive Vice President and
Chief Financial Officer

Date: August 13, 2002

 

By:

 

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

37




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