EQUITY RESIDENTIAL - 10-Q Quarterly Report

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

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

For the quarterly period ended SEPTEMBER 30, 2002

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

Commission File Number: 1-12252

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

Maryland		13-3675988
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
Two North Riverside Plaza, Chicago, Illinois		60606
(Address of Principal Executive Offices)		(Zip Code)

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

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

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

The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding on October 31, 2002 was 270,855,698.

EQUITY RESIDENTIAL
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except for share amounts)
(Unaudited)

			September 30, 2002			December 31, 2001
ASSETS
Investment in real estate
	Land		$	1,854,750		$	1,840,170
	Depreciable property			11,228,526			11,096,847
	Construction in progress			124,811			79,166

				13,208,087			13,016,183
	Accumulated depreciation			(2,026,010	)		(1,718,845	)

Investment in real estate, net of accumulated depreciation				11,182,077			11,297,338
Real estate held for disposition				—			3,371
Cash and cash equivalents				21,756			51,603
Investments in unconsolidated entities				435,701			397,237
Rents receivable				2,951			2,400
Deposits—restricted				168,108			218,557
Escrow deposits—mortgage				58,343			76,700
Deferred financing costs, net				32,881			27,011
Rental furniture, net				—			20,168
Property and equipment, net				—			3,063
Goodwill, net				30,000			47,291
Other assets				66,379			90,886

		Total assets	$	11,998,196		$	12,235,625

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

		Total liabilities		6,037,865			6,185,853

*Commitments and contingencies*
Minority Interests:
	Operating Partnership			358,729			379,898
	Preference Interests			246,000			246,000
	Junior Preference Units			5,846			5,846
	Partially Owned Properties			10,568			4,078

		Total Minority Interests		621,143			635,822

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

		Total shareholders' equity		5,339,188			5,413,950

		Total liabilities and shareholders' equity	$	11,998,196		$	12,235,625

See accompanying notes

EQUITY RESIDENTIAL
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)

			Nine Months Ended September 30,						Quarter Ended September 30,
			2002			2001			2002			2001
REVENUES
	Rental income		$	1,504,274		$	1,523,723		$	501,853		$	518,096
	Fee and asset management			6,957			5,805			2,647			1,665
	Interest and other income			11,551			17,685			2,235			6,166
	Interest income—investment in mortgage notes			—			8,786			—			23

		Total revenues		1,522,782			1,555,999			506,735			525,950

EXPENSES
	Property and maintenance			390,241			411,370			136,104			140,573
	Real estate taxes and insurance			153,127			139,827			50,698			45,173
	Property management			55,767			56,302			17,565			19,760
	Fee and asset management			5,366			5,358			1,702			1,888
	Depreciation			348,947			333,041			118,120			113,300
	Interest:
		Expense incurred, net		255,693			267,572			84,153			89,212
		Amortization of deferred financing costs		4,344			4,328			1,362			1,524
	General and administrative			33,000			23,604			10,673			9,525
	Impairment on corporate housing business			17,122			—			17,122			—
	Impairment on technology investments			872			7,968			291			1,193
	Amortization of goodwill			—			1,862			—			581

		Total expenses		1,264,479			1,251,232			437,790			422,729

Income before allocation to Minority Interests, income (loss) from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle				258,303			304,767			68,945			103,221
Allocation to Minority Interests:
	Operating Partnership			(19,067	)		(22,666	)		(5,283	)		(6,192	)
	Partially Owned Properties			(1,584	)		(1,523	)		(259	)		(1,285	)
Income (loss) from investments in unconsolidated entities				(1,746	)		1,885			(1,979	)		925
Net gain (loss) on sales of unconsolidated entities				(626	)		339			(5,872	)		—

Income before discontinued operations, extraordinary items and cumulative effect of change in accounting principle				235,280			282,802			55,552			96,669
Net gain on sales of discontinued operations				61,209			99,793			32,763			53,567
Discontinued operations, net				6,815			(49,241	)		346			(56,257	)

Income before extraordinary items and cumulative effect of change in accounting principle				303,304			333,354			88,661			93,979
Extraordinary items				(468	)		(22	)		—			(128	)
Cumulative effect of change in accounting principle				—			(1,270	)		—			—

Net income				302,836			332,062			88,661			93,851
Preferred distributions				(72,969	)		(81,759	)		(24,188	)		(24,340	)

Net income available to Common Shares			$	229,867		$	250,303		$	64,473		$	69,511

Net income per share—basic			$	0.84		$	0.94		$	0.24		$	0.26

Net income per share—diluted			$	0.83		$	0.93		$	0.23		$	0.26

Weighted average Common Shares outstanding—basic				272,738			266,614			273,943			268,253

Weighted average Common Shares outstanding—diluted				298,690			294,661			299,057			296,391

Distributions declared per Common Share outstanding			$	1.2975		$	1.2475		$	0.4325		$	0.4325

See accompanying notes

				Nine Months Ended September 30,						Quarter Ended September 30,
				2002			2001			2002			2001
Comprehensive income:
	Net income			$	302,836		$	332,062		$	88,661		$	93,851
		Other comprehensive income (loss)—derivative instruments:
			Cumulative effect of change in accounting principle		—			(5,334	)		—			—
			Unrealized holding gains (losses) arising during the period		(12,605	)		(20,451	)		(14,595	)		(17,055	)
			Losses reclassified into earnings from other comprehensive income		615			397			230			171

Comprehensive income				$	290,846		$	306,674		$	74,296		$	76,967

See accompanying notes

EQUITY RESIDENTIAL
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

			Nine Months Ended September 30,
			2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income			$	302,836		$	332,062
Adjustments to reconcile net income to net cash provided by operating activities:
	Allocation to Minority Interests:
		Operating Partnership		19,067			22,666
		Partially Owned Properties		1,584			1,523
	Cumulative effect of change in accounting principle			—			1,270
	Depreciation			353,206			349,313
	Amortization of deferred financing costs			4,350			4,338
	Amortization of discount on investment in mortgage notes			—			(2,256	)
	Amortization of goodwill			—			2,852
	Amortization of discounts and premiums on debt			(589	)		(1,424	)
	Amortization of deferred settlements on interest rate protection agreements			(238	)		533
	Impairment on corporate housing business			17,122			—
	Impairment on furniture rental business			—			60,000
	Impairment on technology investments			872			7,968
	Loss (income) from investments in unconsolidated entities			1,746			(1,885	)
	Net gain on sales of discontinued operations			(61,209	)		(99,793	)
	Net loss (gain) on sales of unconsolidated entities			626			(339	)
	Extraordinary items			468			22
	Unrealized loss (gain) on interest rate protection agreements			383			(161	)
	Book value of furniture sales and rental buyouts			—			8,703
	Compensation paid with Company Common Shares			15,158			12,298
	Changes in assets and liabilities:
		(Increase) in rents receivable		(551	)		(2,069	)
		Decrease in deposits—restricted		8,186			4,538
		Additions to rental furniture		—			(17,827	)
		Decrease (increase) in other assets		11,849			(17,124	)
		Increase in accounts payable and accrued expenses		32,102			25,535
		Increase in accrued interest payable		5,365			25,702
		(Decrease) in rents received in advance and other liabilities		(579	)		(7,628	)
		(Decrease) increase in security deposits		(1,037	)		885

		Net cash provided by operating activities		710,717			709,702

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

	Net cash (used for) provided by investing activities			(99,605	)		183,212

See accompanying notes

			Nine Months Ended September 30,
			2002			2001
CASH FLOWS FROM FINANCING ACTIVITIES:
	Loan and bond acquisition costs		$	(10,495	)	$	(4,383	)
	Mortgage notes payable:
		Proceeds		104,572			59,312
		Lump sum payoffs		(283,681	)		(315,302	)
		Scheduled principal repayments		(24,351	)		(24,210	)
		Prepayment premiums/fees		(468	)		(201	)
	Notes, net:
		Proceeds		397,064			299,316
		Lump sum payoffs		(225,000	)		—
		Scheduled principal repayments		(4,669	)		(4,649	)
	Line of credit:
		Proceeds		368,500			436,491
		Repayments		(528,500	)		(791,953	)
	(Payments) from settlement of interest rate protection agreements			(1,534	)		(7,360	)
	Proceeds from sale of Common Shares			8,425			7,277
	Proceeds from sale of Preference Interests			—			48,500
	Proceeds from exercise of options			28,542			56,326
	Redemption of Preferred Shares			—			(210,500	)
	Payment of offering costs			(170	)		(1,535	)
	Distributions:
		Common Shares		(354,683	)		(218,632	)
		Preferred Shares		(57,919	)		(69,359	)
		Preference Interests		(15,185	)		(13,338	)
		Junior Preference Units		(243	)		(190	)
		Minority Interests—Operating Partnership		(29,859	)		(19,738	)
		Minority Interests—Partially Owned Properties		(11,568	)		(31,970	)
	Principal receipts on employee notes, net			263			219

		Net cash (used for) financing activities		(640,959	)		(805,879	)

	Net (decrease) increase in cash and cash equivalents			(29,847	)		87,035
	Cash and cash equivalents, beginning of period			51,603			23,772

	Cash and cash equivalents, end of period		$	21,756		$	110,807

SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest			$	270,885		$	270,849

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

Mortgage loans (assumed) by purchaser in real estate and furniture rental business dispositions			$	(8,840	)	$	(28,231	)

Transfers to real estate held for disposition			$	—		$	4,102

Mortgage loans recorded as a result of consolidation of previously Unconsolidated Properties			$	—		$	301,502

Net (assets) liabilities recorded as a result of consolidation of previously Unconsolidated Properties			$	—		$	(20,839	)

See accompanying notes

EQUITY RESIDENTIAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Business

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

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

As of September 30, 2002, the Company owned or had interests in a portfolio of 1,059 multifamily properties containing 227,426 apartment units located in 36 states consisting of the following:

	Number of Properties	Number of Units
Wholly Owned Properties	934	197,354
Partially Owned Properties (Consolidated)	36	6,931
Unconsolidated Properties	89	23,141

Total Properties	1,059	227,426

2. Summary of Significant Accounting Policies

Basis of Presentation

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

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

Other

In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141 requires companies to account for all business combinations using the purchase method of accounting. SFAS No. 141 is effective for fiscal years beginning after December 15, 2001. The Company adopted the standard effective January 1, 2002.

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires companies to eliminate the amortization of goodwill in favor of a periodic impairment based approach. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The Company adopted the standard effective January 1, 2002. See Note 16 for further discussion.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, 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 Company 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. Shareholders' Equity and Minority Interests

The following table presents the changes in the Company's issued and outstanding Common Shares for the nine months ended September 30, 2002:

		2002
Common Shares outstanding at January 1,		271,621,374
Common Shares Issued:
Conversion of Series E Preferred Shares		892,625
Conversion of Series G Preferred Shares		70
Conversion of Series H Preferred Shares		4,050
Employee Share Purchase Plan		278,655
Dividend Reinvestment—DRIP Plan		41,407
Share Purchase—DRIP Plan		31,347
Exercise of options		1,385,584
Restricted share grants, net		900,000
Conversion of OP Units		694,891

Common Shares outstanding at September 30,		275,850,003

The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for a partnership interest are collectively referred to as the "Minority Interests—Operating Partnership". The Minority Interests—Operating Partnership held 22,537,901 units of limited partnership interest ("OP Units") representing a 7.6% interest in the Operating Partnership at September 30, 2002. Assuming conversion of all OP Units into Common Shares, total Common Shares outstanding at September 30, 2002 would have been 298,387,904. Subject to applicable securities law restrictions, the Minority Interests—Operating Partnership may exchange their OP Units for EQR Common Shares on a one-for-one basis.

Net proceeds from the Company's Common Share and Preferred Share offerings are contributed by the Company to the Operating Partnership. In return for those contributions, EQR receives a number of OP Units in the Operating Partnership equal to the number of Common Shares it has issued in the equity offering (or in the case of a preferred equity offering, a number of preference units in the Operating Partnership equal in number and having the same terms as the Preferred Shares issued in the equity offering).

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

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

				Amounts in thousands
		Annual Dividend Rate per Share (1)		Amounts in thousands
		Annual Dividend Rate per Share (1)		September 30, 2002		December 31, 2001
Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares authorized:
	9¹/8% Series B Cumulative Redeemable Preferred; liquidation value $250 per share; 500,000 shares issued and outstanding at September 30, 2002 and December 31, 2001	$	22.81252	$	125,000	$	125,000
	9¹/8% Series C Cumulative Redeemable Preferred; liquidation value $250 per share; 460,000 shares issued and outstanding at September 30, 2002 and December 31, 2001	$	22.81252		115,000		115,000
	8.60% Series D Cumulative Redeemable Preferred; liquidation value $250 per share; 700,000 shares issued and outstanding at September 30, 2002 and December 31, 2001	$	21.50000		175,000		175,000
	7.00% Series E Cumulative Convertible Preferred; liquidation value $25 per share; 2,563,614 and 3,365,794 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively	$	1.75000		64,090		84,145
	7¹/4% Series G Convertible Cumulative Preferred; liquidation value $250 per share; 1,264,692 and 1,264,700 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively	$	18.12500		316,173		316,175
	7.00% Series H Cumulative Convertible Preferred; liquidation value $25 per share; 51,228 and 54,027 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively	$	1.75000		1,281		1,351
	8.29% Series K Cumulative Redeemable Preferred; liquidation value $50 per share; 1,000,000 shares issued and outstanding at September 30, 2002 and December 31, 2001	$	4.14500		50,000		50,000
	7.625% Series L Cumulative Redeemable Preferred; liquidation value $25 per share; 4,000,000 shares issued and outstanding at September 30, 2002 and December 31, 2001	$	1.90625		100,000		100,000

				$	946,544	$	966,671

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

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

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

				Amounts in thousands
		Annual Dividend Rate Per Unit (1)		Amounts in thousands
		Annual Dividend Rate Per Unit (1)		September 30, 2002		December 31, 2001
Preference Interests:
	8.00% Series A Cumulative Redeemable Preference Interests; liquidation value $50 per unit; 800,000 units issued and outstanding at September 30, 2002 and December 31, 2001	$	4.0000	$	40,000	$	40,000
	8.50% Series B Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,100,000 units issued and outstanding at September 30, 2002 and December 31, 2001	$	4.2500		55,000		55,000
	8.50% Series C Cumulative Redeemable Preference Units; liquidation value $50 per unit; 220,000 units issued and outstanding at September 30, 2002 and December 31, 2001	$	4.2500		11,000		11,000
	8.375% Series D Cumulative Redeemable Preference Units; liquidation value $50 per unit; 420,000 units issued and outstanding at September 30, 2002 and December 31, 2001	$	4.1875		21,000		21,000
	8.50% Series E Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding at September 30, 2002 and December 31, 2001	$	4.2500		50,000		50,000
	8.375% Series F Cumulative Redeemable Preference Units; liquidation value $50 per unit; 180,000 units issued and outstanding at September 30, 2002 and December 31, 2001	$	4.1875		9,000		9,000
	7.875% Series G Cumulative Redeemable Preference Units; liquidation value $50 per unit; 510,000 units issued and outstanding at September 30, 2002 and December 31, 2001	$	3.9375		25,500		25,500
	7.625% Series H Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 190,000 units issued and outstanding at September 30, 2002 and December 31, 2001	$	3.8125		9,500		9,500
	7.625% Series I Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 270,000 units issued and outstanding at September 30, 2002 and December 31, 2001	$	3.8125		13,500		13,500
	7.625% Series J Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 230,000 units issued and outstanding at September 30, 2002 and December 31, 2001	$	3.8125		11,500		11,500

				$	246,000	$	246,000

(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.

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

				Amounts in thousands
		Annual Dividend Rate per Unit (1)		Amounts in thousands
		Annual Dividend Rate per Unit (1)		September 30, 2002		December 31, 2001
Junior Preference Units:
	Series A Junior Convertible Preference Units; liquidation value $100 per unit; 56,616 units issued and outstanding at September 30, 2002 and December 31, 2001	$	5.469344	$	5,662	$	5,662
	Series B Junior Convertible Preference Units; liquidation value $25 per unit; 7,367 units issued and outstanding at September 30, 2002 and December 31, 2001	$	2.000000		184		184

				$	5,846	$	5,846

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

4. Real Estate Acquisitions

During the nine months ended September 30, 2002, the Company acquired the entire equity interest in the ten properties listed below from unaffiliated parties, and one additional unit at an existing property, for a total purchase price of $245.4 million.

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

			3,053	$	245,444

5. Real Estate Dispositions

During the nine months ended September 30, 2002, the Company disposed of the thirty-five properties listed below to unaffiliated parties. The Company recognized a net gain on sales of discontinued operations of approximately $61.2 million and a net loss on sales of unconsolidated entities of approximately $0.6 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
07/02/02	Cedar Ridge	Arlington, TX	121		5,500
07/02/02	Fielder Crossing	Arlington, TX	119		4,100
07/09/02	Vacant Land	Detroit, MI	—		10
07/11/02	Stonehenge	Tecumseh, MI	48		1,238
07/11/02	Ashgrove	Marshall, MI	51		1,314
07/12/02	Mill Village	Randolph, MA	311		31,800
07/18/02	Meadowood I	Jackson, MI	47		1,450
07/24/02	Mountain Run	Albuquerque, NM	472		21,500
07/30/02	Celebration at Westchase	Houston, TX	367		16,150
07/30/02	Pleasant Ridge	Arlington, TX	63		2,605
07/31/02	Cedargate I & II	Bowling Green, KY	117		3,020
08/15/02	The Cedars	Charlotte, NC	360		14,800
08/29/02	Bourbon Square (Retail)	Palatine, IL	—		1,200
09/30/02	River Bend	Tampa, FL	296		11,200
Various	Four Lakes Condo Units	Lisle, IL	77		8,191

	Wholly Owned Properties		5,711		304,097

01/31/02	Mount Laurel Crossing*	Mt. Laurel, NJ	296		11,317
04/23/02	Foxton*	Seymour, IN	39		—
08/13/02	Chase Knolls*	Los Angeles, CA	—		23,479

	Unconsolidated Properties		335		34,796

Total			6,046	$	338,893

*: Represents the Company's share of the net disposition proceeds.

6. Commitments to Acquire/Dispose of Real Estate

As of September 30, 2002, the Company had entered into separate agreements to acquire two multifamily properties containing 581 units from unaffiliated parties. The Company expects a combined

purchase price of approximately $44.5 million, including the assumption of mortgage indebtedness of approximately $18.4 million.

As of September 30, 2002, in addition to the properties that were subsequently disposed of as discussed in Note 18, the Company had entered into separate agreements to dispose of seventeen multifamily properties containing 3,338 units to unaffiliated parties. The Company expects a combined disposition price of approximately $148.9 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 Company has entered into various agreements with third party companies. The following table summarizes the Company's investments in unconsolidated entities as of September 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			13			15			26			99	(2)

Total units		10,846			4,116			4,445			3,313			22,720	(2)

EQR's percentage ownership of outstanding debt		25.0	%		97.4	%		100.0	%		21.1	%
EQR's share of outstanding debt(4)	$	121,200		$	335,810		$	317,898	(3)	$	14,702		$	789,610

(1): The Company determines a project to be stabilized once it has maintained an average physical occupancy of 90% or more for a three-month period.
(2): Includes eleven projects under development consisting of 3,216 units, which are not included in the Company's property/unit counts at September 30, 2002. Totals also exclude Fort Lewis Military Housing consisting of 1 property and 3,637 units.
(3): A total of $609.4 million is available for funding under this construction debt, of which $317.9 million was funded and outstanding at September 30, 2002.
(4): As of November 4, 2002, EQR has funded $54.5 million as additional collateral on selected debt (see Note 8). All remaining debt is non-recourse to EQR.

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

These investments are accounted for utilizing the equity method of accounting. Under the equity method of accounting, the net equity investment of the Company is reflected on the consolidated balance

sheets and after the project is completed, the consolidated statements of operations include the Company's share of net income or loss from the unconsolidated entity. Prior to the project being completed, the Company capitalizes interest on its equity contribution in accordance with the provisions of SFAS No. 58, Capitalization of Interest Cost in Financial Statements That Include Investments Accounted for by the Equity Method. During the nine months ended September 30, 2002 and 2001, the Company capitalized $12.5 million and $14.4 million, respectively, in interest cost related to its unconsolidated development projects (which reduced interest expense incurred in the consolidated statements of operations).

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

8. Deposits—Restricted

As of September 30, 2002, deposits-restricted totaled $168.1 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 $47.5 million in tax-deferred exchange proceeds; and
•: approximately $66.1 million for resident security, utility, and other deposits.

9. Mortgage Notes Payable

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

During the nine months ended September 30, 2002, the Company:

•: repaid $308.0 million of mortgage loans;
•: assumed $14.0 million of mortgage debt on one property in connection with its acquisition;
•: disposed of $8.8 million of mortgage debt assumed by the purchaser in connection with the disposition of certain properties and the furniture rental business;
•: obtained $74.6 million in construction loans on certain properties; and
•: obtained $30.0 million of mortgage loans on certain properties.

As of September 30, 2002, scheduled maturities for the Company's outstanding mortgage indebtedness were at various dates through October 1, 2033. The interest rate range on the Company's mortgage debt was 1.55% to 12.465% at September 30, 2002. During the nine months ended September 30, 2002, the weighted average interest rate was 6.37%.

10. Notes

As of September 30, 2002, the Company had outstanding unsecured notes of approximately $2.4 billion.

During the nine months ended September 30, 2002, the Company:

•: 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;
•: repaid $125.0 million of 7.95% fixed rate pubic notes at maturity; and
•: repaid $4.7 million of other unsecured notes.

As of September 30, 2002, scheduled maturities for the Company's outstanding notes are at various dates through 2029. The interest rate range on the Company's notes was 4.75% to 7.75% at September 30, 2002. During the nine months ended September 30, 2002, the weighted average interest rate was 6.47%.

11. Line of Credit

On May 30, 2002, the Company obtained a new three-year $700.0 million unsecured revolving credit facility maturing May 29, 2005. The new line of credit replaced the Company's $700.0 million unsecured revolving credit facility that was scheduled to expire in August 2002. The prior existing revolving credit facility was terminated upon the closing of the new facility. Advances under the new credit facility bear interest at variable rates based upon LIBOR at various interest periods, plus a spread dependent upon the Operating Partnership's credit rating, or based upon bids received from the lending group. As of September 30, 2002, $35.0 million was outstanding and $83.3 million was restricted (dedicated to support letters of credit and not available for borrowing) on the line of credit. During the nine months ended September 30, 2002, the weighted average interest rate on borrowings under the former and new lines of credit was 2.49%.

12. Derivative Instruments and Hedging Activities

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

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

At September 30, 2002, certain unconsolidated development partnerships in which the Company invested had entered into swaps to hedge the interest rate risk exposure on unconsolidated floating rate construction mortgage loans. The Company has recorded its proportionate share of these hedges on its consolidated balance sheets. These swaps have been designated as cash flow hedges with a current aggregate notional amount of $427.7 million (notional amounts range from $166.5 million to $552.4 million over the terms of the swaps) at interest rates ranging from 2.25% to 6.94% maturing at various dates ranging from 2003 to 2005 with a net liability fair value of $15.0 million. During the nine months ended September 30, 2002, the Company recognized an unrealized loss of $0.8 million due to ineffectiveness of certain of these unconsolidated development derivatives (included in income (loss) from investments in unconsolidated entities).

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

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

13. Calculation of Net Income Per Weighted Average Common Share

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

		Nine Months Ended September 30,						Quarter Ended September 30,
		2002			2001			2002			2001
		(Amounts in thousands except per share amounts)
Numerator:
Income before allocation to Minority Interests, income (loss) from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items, cumulative effect of change in accounting principle and preferred distributions		$	258,303		$	304,767		$	68,945		$	103,221
Allocation to Minority Interests:
	Operating Partnership		(19,067	)		(22,666	)		(5,283	)		(6,192	)
	Partially Owned Properties		(1,584	)		(1,523	)		(259	)		(1,285	)
Income (loss) from investments in unconsolidated entities			(1,746	)		1,885			(1,979	)		925
Preferred distributions			(72,969	)		(81,759	)		(24,188	)		(24,340	)

Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle			162,937			200,704			37,236			72,329
Net gain (loss) on sales of unconsolidated entities			(626	)		339			(5,872	)		—
Net gain on sales of discontinued operations			61,209			99,793			32,763			53,567
Discontinued operations, net			6,815			(49,241	)		346			(56,257	)
Extraordinary items			(468	)		(22	)		—			(128	)
Cumulative effect of change in accounting principle			—			(1,270	)		—			—

Numerator for net income per share—basic			229,867			250,303			64,473			69,511
Effect of dilutive securities:
	Allocation to Minority Interests—Operating Partnership		19,067			22,666			5,283			6,192
	Distributions on convertible preferred shares/units		—			74			—			—

Numerator for net income per share—diluted		$	248,934		$	273,043		$	69,756		$	75,703

Denominator:
Denominator for net income per share—basic			272,738			266,614			273,943			268,253
Effect of dilutive securities:
	OP Units		22,745			24,189			22,576			23,960
	Convertible preferred shares/units		—			82			—			—
	Share options/restricted shares		3,207			3,776			2,538			4,178

Denominator for net income per share—diluted			298,690			294,661			299,057			296,391

Net income per share—basic		$	0.84		$	0.94		$	0.24		$	0.26

Net income per share—diluted		$	0.83		$	0.93		$	0.23		$	0.26

	Nine Months Ended September 30,					Quarter Ended September 30,
	2002		2001			2002			2001
	(Amounts in thousands except per share amounts)
Net income per share—basic:
Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle per share—basic	$	0.61	$	0.77		$	0.15		$	0.27
Net gain (loss) on sales of unconsolidated entities		—		—			(0.02	)		—
Net gain on sales of discontinued operations		0.21		0.34			0.11			0.18
Discontinued operations, net		0.02		(0.17	)		—			(0.19	)
Extraordinary items		—		—			—			—
Cumulative effect of change in accounting principle		—		—			—			—

Net income per share—basic	$	0.84	$	0.94		$	0.24		$	0.26

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

Net income per share—diluted	$	0.83	$	0.93		$	0.23		$	0.26

Convertible preferred shares/units that could be converted into 15,461,855 and 15,322,607 weighted average Common Shares for the nine months ended September 30, 2002 and 2001, respectively, and 15,095,576 and 15,626,902 weighted average Common Shares for the quarters ended September 30, 2002 and 2001, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.

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

14. Discontinued Operations

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. The Company adopted the standard effective January 1, 2002, which did not have a material effect on the Company's financial condition and results of operations.

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

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

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

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

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

•: the sale of the furniture rental business; and
•: the Wholly Owned Properties sold in the first nine months of 2002 (see Note 5).

			Nine Months Ended September 30,					Quarter Ended September 30,
			2002		2001			2002			2001
			(Amounts in thousands)
REVENUES
	Rental income		$	19,759	$	33,089		$	1,595		$	11,045
	Interest and other income			1		49			(4	)		17
	Furniture income			1,361		45,051			—			15,024

		Total revenues		21,121		78,189			1,591			26,086

EXPENSES
	Property and maintenance			6,191		8,995			814			3,142
	Real estate taxes and insurance			2,001		3,188			134			1,067
	Depreciation			4,259		7,973			240			2,608
	Interest expense incurred, net			546		884			57			284
	Amortization of deferred financing costs			6		10			—			4
	Amortization of goodwill			—		990			—			347
	Impairment on furniture rental business			—		60,000			—			60,000
	Furniture expenses			1,303		45,390			—			14,891

		Total expenses		14,306		127,430			1,245			82,343

Discontinued operations, net			$	6,815	$	(49,241	)	$	346		$	(56,257	)

15. Commitments and Contingencies

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

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

In regards to the funding of properties in the development stage and the agreements with multifamily residential real estate developers, the Company funded a net total of $65.1 million during the nine months ended September 30, 2002. In connection with one development agreement, the Company has an obligation to fund up to an additional $9.5 million to guarantee third party construction financing. As of September 30, 2002, the Company has 17 projects in various stages of development (includes two consolidated projects) with estimated completion dates ranging through March 31, 2004.

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

The Company provided a credit enhancement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project. As of September 30, 2002, this enhancement was still in effect at a commitment amount of $12.7 million.

16. Asset Impairment

For the nine months ended September 30, 2002 and 2001, the Company recorded approximately $0.9 million and $8.0 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.

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

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

17. Reportable Segments

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

The Company'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 Company's rental real estate segment comprised approximately 98.8% and 97.9% of total revenues for the nine months ended September 30, 2002 and 2001, respectively, and approximately 99.0% and 98.5% of total revenues for the quarters ended September 30, 2002 and 2001, respectively. The Company's rental real estate segment comprised approximately 99.7% and 99.4% of total assets at September 30, 2002 and December 31, 2001, respectively.

The primary financial measure for the Company'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 $905.1 million and $916.2 million for the nine months ended September 30, 2002 and 2001, respectively, and approximately $297.5 million and $312.6 million for the quarters ended September 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 Company considers.

The Company'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.

18. Subsequent Events/Other

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

Subsequent to September 30, 2002 and through November 4, 2002, the Company:

•: disposed of five properties consisting of 684 units for approximately $28.7 million;
•: repaid $53.1 million of mortgage loans;
•: repaid $40.0 million of 7.25% fixed rate public notes at maturity;
•: received $3.5 million representing full repayment of an executive's employee notes;
•: repurchased and retired approximately 5.1 million Common Shares for approximately $115.0 million; and
•: funded $4.3 million related to the development agreements.

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 Company'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 Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause such differences include, but are not limited to, the following:

•: the total number of development units, cost of development and completion dates reflect the Company's best estimates and are subject to uncertainties arising from changing economic conditions (such as the cost of labor and construction materials), competition and local government regulation;
•: alternative sources of capital to the Company are more expensive than anticipated;
•: occupancy levels and market rents may be adversely affected by national and local economic and market conditions including, without limitation, new construction of multifamily housing, continuing decline in employment and availability of low interest mortgages for single-family home buyers, which are beyond the Company's control; and
•: additional factors as discussed in Part I of the Annual Report on Form 10-K, particularly those under "Risk Factors".

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

Results of Operations

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

	Properties		Units		Purchase/Sale Price $ Millions
At December 31, 2000	1,104		227,704
Q1/Q2/Q3 2001 Acquisitions	11		2,657		$	288.0
Q1/Q2/Q3 2001 Dispositions	(38	)	(6,241	)	$	298.5
Q1/Q2/Q3 2001 Completed Developments	4		1,470

At September 30, 2001	1,081		225,590
Q4 2001 Acquisitions	3		766		$	100.1
Q4 2001 Dispositions	(11	)	(2,566	)	$	118.4
Q4 2001 Completed Developments	3		1,035
Q4 2001 Unit Configuration Changes	—		(24	)

At December 31, 2001	1,076		224,801
Q1/Q2/Q3 2002 Acquisitions	10		3,053		$	245.4
Q2 2002 Fort Lewis	1		3,637
Q1/Q2/Q3 2002 Dispositions	(35	)	(6,046	)	$	338.9
Q1/Q2/Q3 2002 Completed Developments	7		1,966
Q1/Q2/Q3 2002 Unit Configuration Changes	—		15

At September 30, 2002	1,059		227,426

The Company's acquisition and disposition activity has impacted overall results of operations for the nine months and quarters ended September 30, 2002 and 2001. Significant changes in revenues 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, reduced rental income through increased concessions or reduced apartment rents at selected properties as well as the properties acquired and developments completed in 2001 and 2002, which have been partially offset by the properties disposed in 2001 and 2002. Significant changes in expenses have also resulted from changes in insurance costs, general and administrative costs, impairment charges and variable interest rates. This impact is discussed in greater detail in the following paragraphs.

Properties that the Company owned for all of both the nine month periods ended September 30, 2002 and September 30, 2001 (the "Nine-Month 2002 Same Store Properties"), which represented 191,940 units, and properties that the Company owned for all of both the quarters ended September 30, 2002 and September 30, 2001 (the "Third Quarter 2002 Same Store Properties"), which represented 197,852 units, also impacted the Company's results of operations. Both the Nine-Month 2002 Same Store Properties and Third Quarter 2002 Same Store Properties are discussed in the following paragraphs.

Comparison of the nine months ended September 30, 2002 to the nine months ended September 30, 2001

For the nine months ended September 30, 2002, income before allocation to Minority Interests, income (loss) from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle decreased by approximately $46.5 million when compared to the nine months ended September 30, 2001.

Revenues from the Nine-Month 2002 Same Store Properties decreased primarily as a result of lower overall physical occupancy, increased concessions and lower rental rates charged new residents. Property operating expenses from the Nine-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 Nine-Month 2002 Same Store Properties:

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

$ in Millions—191,940 "Same Store" Units

Description		Revenues			Expenses			NOI
YTD 2002		$	1,356.7		$	506.5		$	850.2
YTD 2001		$	1,386.5		$	503.9		$	882.6

	Change	$	(29.8	)	$	2.6		$	(32.4	)

% Change			(2.1	%)		0.5	%		(3.7	%)

"Same Store" Occupancy Statistics

YTD 2002		93.87	%
YTD 2001		94.59	%

	Change	(0.72	%)

For properties that the Company acquired prior to January 1, 2001 and expects to continue to own through December 31, 2002, the Company anticipates the following operating assumptions for the year ending December 31, 2002:

2002 "Same Store" Operating Assumptions

Physical Occupancy		93.0%
Revenue Change		(2.6%)
Expense Change		0.8%
NOI Change		(4.5%)
Dispositions		$450 million

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

2003 "Same Store" Operating Assumptions

Physical Occupancy		93.0%
Revenue Change		(3.9%) to (1.4%)
Expense Change		2.1% to 4.4%
NOI Change		(9.2%) to (3.7%)
Dispositions		$700 million

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

Rental income from properties other than Nine-Month 2002 Same Store Properties increased by approximately $10.4 million primarily as a result of revenue from properties the Company acquired in 2001 and 2002 and additional Partially Owned Properties that the Company consolidated in 2001.

Interest and other income decreased by approximately $6.1 million, primarily as a result of lower balances available for investment and related interest rates being earned on the Company's short-term

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

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

Property management expenses include off-site expenses associated with the self-management of the Company's properties. These expenses decreased by approximately $0.5 million or 0.1%. This decrease is primarily attributable to lower expected levels of employee bonus and profit sharing payments for 2002.

Fee and asset management revenues, net of fee and asset management expenses, increased by $1.1 million as a result of the Company managing an additional 3,637 units at Fort Lewis, Washington starting in April 2002. As of September 30, 2002 and 2001, the Company managed 20,142 units and 15,948 units, respectively, for third parties and unconsolidated entities.

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

Interest expense, including amortization of deferred financing costs, decreased approximately $11.9 million primarily due to lower variable interest rates. During the nine months ended September 30, 2002, the Company capitalized interest costs of approximately $19.4 million as compared to $21.0 million for the nine months ended September 30, 2001. This capitalization of interest primarily related to investments in unconsolidated entities engaged in development activities. The effective interest cost on all of the Company's indebtedness for the nine months ended September 30, 2002 was 6.60% as compared to 7.00% for the nine months ended September 30, 2001.

General and administrative expenses, which include corporate operating expenses, increased approximately $9.4 million between the nine months under comparison. This increase was primarily due to higher state income taxes in Michigan and New Jersey, income taxes incurred at one of the Company's taxable REIT subsidiaries which has an ownership interest in properties that in prior periods were classified as Unconsolidated Properties, retirement plan expenses for certain key executives, restricted shares/awards granted to key employees and additional compensation charges and costs associated with the Company's new President.

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

Net gain on sales of discontinued operations decreased approximately $38.6 million between the periods under comparison. This decrease is primarily the result of approximately 3,200 fewer number of units sold during the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001 (includes approximately 3,000 units sold into a joint venture in February 2001).

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

For the quarter ended September 30, 2002, income before allocation to Minority Interests, income (loss) from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle decreased by approximately $34.3 million when compared to the quarter ended September 30, 2001.

Revenues from the Third Quarter 2002 Same Store Properties decreased primarily as a result of lower rental rates charged new residents, increased concessions and lower overall physical occupancy. Property operating expenses from the Third Quarter 2002 Same Store Properties, which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses, increased $3.5 million or 2.0% primarily as a result of increases in real estate taxes, insurance costs and payroll overtime. The following tables provide comparative revenue, expense, NOI and weighted average occupancy for the Third Quarter 2002 Same Store Properties:

Third Quarter 2002 "Same Store" Results

$ in Millions—197,852 "Same Store" Units

Description		Revenues			Expenses		NOI
Q3 2002		$	467.4		$	182.0	$	285.4
Q3 2001		$	485.4		$	178.5	$	306.9

	Change	$	(18.0	)	$	3.5	$	(21.5	)

% Change			(3.7%	)		2.0%		(7.0%	)

"Same Store" Occupancy Statistics

Q3 2002		93.67	%
Q3 2001		94.54	%

	Change	(0.87	%)

Rental income from properties other than Third Quarter 2002 Same Store Properties increased by approximately $1.8 million primarily as a result of revenue from properties the Company acquired in the third and fourth quarters of 2001 and during the nine months ended September 30, 2002.

Interest and other income decreased by approximately $3.9 million, primarily as a result of lower balances available for investment and related rates being earned on the Company's short-term investment accounts along with lower balances on deposit in tax-deferred exchange accounts.

Property management expenses include off-site expenses associated with the self-management of the Company's properties. These expenses decreased by approximately $2.2 million or 11.1%. This decrease is primarily attributable to lower expected levels of employee bonus and profit sharing payments for 2002.

Fee and asset management revenues, net of fee and asset management expenses, increased by $1.2 million as a result of the Company managing an additional 3,637 units at Fort Lewis starting in April 2002. As of September 30, 2002 and 2001, the Company managed 20,142 units and 15,948 units, respectively, for third parties and unconsolidated entities.

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

Interest expense, including amortization of deferred financing costs, decreased approximately $5.2 million primarily due to lower variable interest rates. During the quarter ended September 30, 2002, the Company capitalized interest costs of approximately $7.1 million as compared to $8.2 million for the quarter ended September 30, 2001. This capitalization of interest primarily related to investments in unconsolidated

entities engaged in development activities. The effective interest cost on all of the Company's indebtedness for the quarter ended September 30, 2002 was 6.52% as compared to 6.82% for the quarter ended September 30, 2001.

General and administrative expenses, which include corporate operating expenses, increased approximately $1.1 million between the quarters under comparison. This increase was primarily due to retirement plan expenses for certain key executives, higher state income taxes, restricted shares/awards granted to key employees and additional compensation charges and costs associated with the Company's new President.

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

Net gain (loss) on sales of unconsolidated entities decreased approximately $5.9 million between the periods under comparison. This decrease is the loss associated with the sale in the third quarter of 2002 of one property held in one of our development entities.

Net gain on sales of discontinued operations decreased approximately $20.8 million between the periods under comparison. This decrease is primarily the result of certain properties sold during the quarter ended September 30, 2001 having a lower net carrying value at sale, which resulted in higher recognition of gain for financial reporting purposes.

Liquidity and Capital Resources

As of January 1, 2002, the Company had approximately $51.6 million of cash and cash equivalents and $505.0 million available under its line of credit, of which $59.0 million was restricted (not available for borrowings). After taking into effect the various transactions discussed in the following paragraphs and the net cash provided by operating activities, the Company's cash and cash equivalents balance at September 30, 2002 was approximately $21.8 million and the amount available on the Company's line of credit was $665.0 million, of which $83.3 million was restricted (not available for borrowings).

Part of the Company's acquisition and development funding strategy and the funding of the Company'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 nine months ended September 30, 2002, the Company:

•: disposed of thirty-five properties (including two Unconsolidated Properties) and received net proceeds of approximately $326.2 million;
•: disposed of the furniture rental business on January 11, 2002 and received net proceeds of approximately $28.7 million;
•: issued $400.0 million of 6.625% fixed rate unsecured debt receiving net proceeds of $394.5 million;
•: issued approximately 1.7 million Common Shares and received net proceeds of $37.0 million; and
•: obtained $104.6 million in new mortgage financing.

All of these proceeds were utilized to either:

•: repay the line of credit;
•: repay mortgage indebtedness on selected properties;
•: repay public unsecured debt;
•: invest in consolidated and unconsolidated development projects;
•: invest in unconsolidated entities; and

•: purchase additional properties.

During the nine months ended September 30, 2002, the Company:

•: repaid $160.0 million on its line of credit;
•: repaid $308.0 million of mortgage loans;
•: repaid $100.0 million of 9.375% fixed rate public notes at maturity;
•: repaid $125.0 million of 7.95% fixed rate public notes at maturity;
•: repaid $4.7 million of other unsecured notes;
•: funded a net of $65.1 million in accordance with its development agreements;
•: funded $10.0 million in connection with its agreement with the U.S. Army for Fort Lewis military housing; and
•: acquired ten properties utilizing cash of $232.1 million.

The Company's total debt summary and debt maturity schedule, as of September 30, 2002, are as follows:

Debt Summary as of September 30, 2002

		$ Millions		Weighted Average Rate
Secured		$	3,089	6.22	%
Unsecured			2,482	6.41	%

	Total	$	5,571	6.30	%
Fixed Rate*		$	4,807	6.89	%
Floating Rate*			764	2.58	%

	Total*	$	5,571	6.30	%
Above Totals Include:
Total Tax Exempt		$	986	3.71	%
Unsecured Revolving Credit Facility		$	35	2.44	%

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

Debt Maturity Schedule as of September 30, 2002

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

Total	$	5,571	100.0	%

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

The Company's "Consolidated Debt-to-Total Market Capitalization Ratio" as of September 30, 2002 is presented in the following table. The Company calculates the equity component of its market capitalization as

the sum of (i) the total outstanding Common Shares and assumed conversion of all OP Units at the equivalent market value of the closing price of the Company's Common Shares on the New York Stock Exchange; (ii) the "Common Share Equivalent" of all convertible preferred shares and preference interests/units; and (iii) the liquidation value of all perpetual preferred shares and preference interests outstanding.

Capitalization as of September 30, 2002

Total Debt			$	5,570,576,350
Common Shares & OP Units		298,387,904
Common Share Equivalents (see below)		14,965,147

Total Outstanding at quarter-end		313,353,051
Common Share Price at September 30, 2002	$	23.94
				7,501,672,041
Perpetual Preferred Shares Liquidation Value				565,000,000
Perpetual Preference Interests Liquidation Value				211,500,000

Total Market Capitalization			$	13,848,748,391
Debt/Total Market Capitalization				40.22%

Convertible Preferred Shares, Preference Interests and Junior Preference Units
as of September 30, 2002

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

Total				14,965,147

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

From October 1, 2002 through November 4, 2002, the Company:

•: disposed of five properties consisting of 684 units for approximately $28.7 million;
•: repaid $53.1 million of mortgage loans;
•: repaid $40.0 million of 7.25% fixed rate public notes at maturity;
•: received $3.5 million representing full repayment of an executive's employee notes;
•: repurchased and retired approximately 5.1 million Common Shares for approximately $115.0 million; and
•: funded $4.3 million related to the development agreements.

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

Investments in Unconsolidated Entities

In connection with one development agreement, the Company has an obligation to fund up to an additional $9.5 million to guarantee third party construction financing. As of September 30, 2002, the Company has 15 projects under development with estimated completion dates ranging through March 31, 2004.

Capitalization of Fixed Assets and Improvements to Real Estate:

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

•

Replacements (inside the unit). These include:

•: carpets and hardwood floors;
•: appliances;
•: mechanical equipment such as individual furnace/air units, hot water heaters, etc;
•: furniture and fixtures such as kitchen/bath cabinets, light fixtures, ceiling fans, sinks, tubs, toilets, mirrors, countertops, etc;
•: flooring such as vinyl, linoleum or tile; and
•: blinds/shades

We capitalize approximately $260 to $270 per unit annually for inside the unit replacements. All replacements are depreciated over a five-year estimated useful life. We expense as incurred all maintenance and turnover costs such as cleaning, interior painting of individual units and the repair of any replacement item noted above.

•

Building improvements (outside the unit). These include:

•: roof replacement and major repairs;
•: paving or major resurfacing of parking lots, curbs, sidewalks;
•: amenities and common areas such as pools, exterior sports and playground equipment, lobbies, clubhouses, laundry rooms, alarm and security systems and offices;
•: major building mechanical systems;
•: interior and exterior structural repair, replacements and exterior painting;

•: major landscaping and grounds improvement; and
•: vehicles and office and maintenance equipment.

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

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

Capitalized Improvements to Real Estate For the Nine Months Ended September 30, 2002

	Total Units (1)	Replacements (2)		Avg. Per Unit		Building Improvements (3)		Avg. Per Unit		Total		Avg. Per Unit
Established Properties(4)	176,509	$	37,846	$	214	$	52,417	$	297	$	90,263	$	511
New Acquisition Properties(5)	20,802		3,939		209		5,644		299		9,583		508
Other(6)	6,974		2,731				7,714				10,445

Total	204,285	$	44,516			$	65,775			$	110,291

(1): Total units exclude 23,141 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 18,878 units.
(6): Includes properties either Partially Owned or sold during the period, 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 $22.0 million.

During the nine months ended September 30, 2002, the Company's total non-real estate capital additions, such as computer software, computer equipment, and furniture and fixtures and leasehold improvements to the Company's property management offices and its corporate offices, was approximately $5.6 million. Total additions to non-real estate property for the remainder of 2002 are estimated at $1.2 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.

Other

Minority Interests as of September 30, 2002 decreased by $14.7 million when compared to December 31, 2001. The primary factors that impacted this account in the Company's consolidated statements of operations and balance sheets during the nine months were:

•: distributions declared to Minority Interests, which amounted to $29.5 million for the nine months ended September 30, 2002 (excluding Junior Preference Unit and Preference Interest distributions);
•: the allocation of income from operations in the amount of $19.1 million;
•: the allocation of Minority Interests from Partially Owned Properties in the amount of $1.6 million;
•: the conversion of OP Units into Common Shares; and
•: the issuance of Common Shares during the nine months ended September 30, 2002.

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

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

On May 30, 2002 the Company obtained a new three-year $700.0 million unsecured revolving credit facility. The new line of credit replaces the Company's $700.0 million unsecured revolving credit facility that was 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 November 7, 2002, $285.0 million was outstanding under this new facility.

The Company provided a credit enhancement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project. As of November 4, 2002, this enhancement was still in effect at a commitment amount of $12.7 million.

Critical Accounting Policies and Estimates

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

The Company has identified six significant accounting policies as critical accounting policies. These critical accounting policies are those that have the most impact on the reporting of our financial condition and those requiring significant judgments and estimates. With respect to these critical accounting policies, management believes that the application of judgments and assessments is consistently applied and produces

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

Impairment of Long-Lived Assets, Including Goodwill

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

Depreciation of Investment in Real Estate

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

Fair Value of Financial Instruments, Including Derivative Instruments

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

Stock Option Compensation

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

Cost Capitalization

See the Capitalization of Fixed Assets and Improvements to Real Estate section for discussion of the Company's policy with respect to capitalization vs. expensing of fixed asset/repair and maintenance costs. The Company expenses as incurred all payroll costs of employees working directly at our properties, except that during the initial lease-up phase on a development project, an allocated portion of payroll costs is capitalized based upon the occupancy of the project until stabilized occupancy is achieved. Stabilized occupancy is always deemed to have occurred no later than one year from cessation of major development activities.

The Company capitalizes interest, real estate taxes and insurance related to its development projects. The Company also capitalizes payroll and associated costs for those individuals directly responsible for and who spend all of their time on development activities. The incremental payroll and associated costs are capitalized to the projects under development based upon the effort directly identifiable with such projects. These costs are reflected on the balance sheet as either construction in progress or a separate component of investments in unconsolidated entities. The Company ceases the capitalization of such costs as the property becomes substantially complete and ready for its intended use. In addition, the Company capitalizes the payroll and associated costs of employees directly responsible for and who spend all of their time on major capital projects. These costs are reflected on the balance sheet as an increase to building. The Company follows the guidance in SFAS No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, and uses its professional judgment in determining whether such costs meet the criteria for capitalization or must be expensed as incurred.

Revenue Recognition

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

The Company adopted the provisions of Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition, effective October 1, 2000. SAB No. 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements.

Adjusted Net Income

For the nine months ended September 30 2002, Adjusted Net Income ("ANI") available to Common Shares and OP Units decreased $16.0 million as compared to the nine months ended September 30, 2001.

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

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

Adjusted Net Income
(Amounts in thousands)
(Unaudited)

		Nine Months Ended September 30,						Quarter Ended September 30,
		2002			2001			2002			2001
Net income available to Common Shares		$	229,867		$	250,303		$	64,473		$	69,511
Net income allocation to Minority Interests—Operating Partnership			19,067			22,666			5,283			6,192
Adjustments:
	Acquisition cost depreciation(1)		287,778			284,630			95,773			96,833
	Amortization of goodwill		—			2,852			—			928
	Acquisition cost depreciation accumulated on sold properties		(37,541	)		(46,145	)		(15,009	)		(11,371	)
	Extraordinary items		468			22			—			128
	Cumulative effect of change in accounting principle		—			1,270			—			—

ANI available to Common Shares and OP Units—basic(2)		$	499,639		$	515,598		$	150,520		$	162,221

Depreciation for replacements and capital improvements		$	67,363		$	58,586		$	23,941		$	19,756

(1): Acquisition cost depreciation represents depreciation for the initial cost of the property, including buildings and furniture, fixtures and equipment and depreciation on capital improvements identified in the acquisition underwriting and incurred in the first twenty-four months of ownership when the total cost exceeds $2,000 per unit.
(2): Adjusted Net Income ("ANI") represents net income (loss) (computed in accordance with accounting principles generally accepted in the United States ("GAAP")), including gains or losses from sales of real estate, plus acquisition cost depreciation, plus amortization of goodwill, minus the accumulated acquisition cost depreciation on sold properties, plus/minus extraordinary items and plus the cumulative effect of change in accounting principle. Depreciation associated with replacements and capital improvements is deducted in calculating ANI.

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

Funds From Operations

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

For the quarter ended September 30, 2002, FFO available to Common Shares and OP Units decreased $20.7 million as compared to the quarter ended September 30, 2001.

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

Funds from Operations
(Amounts in thousands)
(Unaudited)

		Nine Months Ended September 30,						Quarter Ended September 30,
		2002			2001			2002			2001
Net income available to Common Shares		$	229,867		$	250,303		$	64,473		$	69,511
Net income allocation to Minority Interests—Operating Partnership			19,067			22,666			5,283			6,192
Adjustments:
	Depreciation/amortization		355,141			346,068			119,714			117,517
	Net gain on sales of discontinued operations		(60,011	)		(99,793	)		(32,435	)		(53,567	)
	Net (gain) loss on sales of unconsolidated entities		626			(339	)		5,872			—
	Extraordinary items		468			22			—			128
	Cumulative effect of change in accounting principle		—			1,270			—			—
	Impairment on corporate housing business		17,122			—			17,122			—
	Impairment on furniture rental business		—			60,000			—			60,000
	Impairment on technology investments		872			7,968			291			1,193

FFO available to Common Shares and OP Units—basic(1)		$	563,152		$	588,165		$	180,320		$	200,974

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company's market risk has not changed materially from the amounts and information reported in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, to the Company's Form 10-K for the year ended December 31, 2001. See also Note 12 to the Notes to Consolidated Financial Statements for additional discussion on the Company's derivative instruments and hedging activities.

Item 4. Disclosure Controls and Procedures

Within 90 days prior to the filing date of this quarterly report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company's management including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 and 15d-14. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and

procedures are effective in timely alerting them to material information related to the Company. There have been no significant changes to the internal controls of the Company or in other factors that could significantly affect the internal controls subsequent to the completion of this evalution.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There have been no new or significant developments related to the legal proceedings that were discussed in Part I, Item III of the Company's Form 10-K for the year ended December 31, 2001.

Item 6. Exhibits and Reports on Form 8-K

(A): Exhibits:

12		Computation of Ratio of Earnings to Combined Fixed Charges.
99.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Douglas Crocker II, Chief Executive Officer of Registrant.
99.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of David J. Neithercut, Chief Financial Officer of Registrant.

(B): Reports on Form 8-K:

A report on Form 8-K dated August 13, 2002 containing the Chief Executive Officer and Chief Financial Officer sworn statements pursuant to the SEC's Order No. 4-460 issued June 27, 2002 and their respective certifications pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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

	EQUITY RESIDENTIAL
Date: November 13, 2002	By:	/s/ DAVID J. NEITHERCUT David J. Neithercut Executive Vice President and Chief Financial Officer
Date: November 13, 2002	By:	/s/ MICHAEL J. MCHUGH Michael J. McHugh Executive Vice President, Chief Accounting Officer and Treasurer

CERTIFICATIONS

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

1.

I have received this quarterly report on Form 10-Q of Equity Residential;

2.

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

3.

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

4.

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

a): Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b): Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c): Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

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

a): All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b): Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

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

Date: November 13, 2002

/s/ DOUGLAS CROCKER II

Douglas Crocker II
Chief Executive Officer

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

1.

I have received this quarterly report on Form 10-Q of Equity Residential;

2.

3.

4.

a): Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b): Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c): Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

a): All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b): Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

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

Date: November 13, 2002

/s/ DAVID J. NEITHERCUT

David J. Neithercut
Chief Financial Officer

EXHIBIT INDEX

Exhibit		Document
12		Computation of Ratio of Earnings to Combined Fixed Charges
99.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Douglas Crocker II, Chief Executive Officer of Registrant
99.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of David J. Neithercut, Chief Financial Officer of Registrant

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Disclosure Controls and Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES
CERTIFICATIONS
EXHIBIT INDEX