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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

For the quarterly period ended JUNE 30, 2002

OR

Commission File Number: 0-24920

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

(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)

See accompanying notes

2

ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands except per OP Unit data)

(Unaudited)

See accompanying notes

3

See accompanying notes

4

ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

See accompanying notes

5

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:

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 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.

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        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.

Derivative Instruments and Hedging Activities

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

        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.

Other

        In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141 requires companies to account for all business combinations using the purchase method of accounting. SFAS No. 141 is effective for fiscal years beginning after December 15, 2001. The 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

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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:

        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).

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

(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.

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

(1)

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

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        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:

(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.

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

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

*

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.

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        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):

(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

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$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:

•

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



•

approximately $32.9 million in tax-deferred exchange proceeds; and



•

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

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:

•

repaid $135.7 million of mortgage loans;



•

assumed $14.0 million of mortgage debt on one property in connection with its acquisition;



•

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



•

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

        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:

•

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



•

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



•

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

        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%.

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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: