Washington, D.C.  20549

 

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

 

For the Fiscal Year Ended DECEMBER 31, 2002

 

OR

 

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

 

Commission File Number: 1-12252

 

EQUITY RESIDENTIAL

(Exact Name of Registrant as Specified in Its Charter)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý  No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes  ý  No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

 

The aggregate market value of Common Shares held by non-affiliates of the Registrant was approximately $7.9 billion based upon the closing price on June 28, 2002 of $28.75 using beneficial ownership of shares rules adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude voting shares owned by Trustees and Executive Officers, some of who may not be held to be affiliates upon judicial determination.

 

The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding on January 31, 2003 was 271,671,082.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III incorporates by reference information to be contained in the Company’s definitive proxy statement, which the Company anticipates will be filed no later than April 30, 2003, and thus these items have been omitted in accordance with General Instruction G (3) to Form 10-K.

 

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EQUITY RESIDENTIAL

 

TABLE OF CONTENTS

 

PART I.			Page
	Item 1.	Business	4
	Item 2.	The Properties	27
	Item 3.	Legal Proceedings	30
	Item 4.	Submission of Matters to a Vote of Security Holders	30
PART II.
	Item 5.	Market for Registrant’s Common Equity and Related Shareholder Matters	31
	Item 6.	Selected Financial Data	32
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
	Item 7A.	Quantitative and Qualitative Disclosure about Market Risk	50
	Item 8.	Financial Statements and Supplementary Data	51
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	51
PART III.
	Item 10.	Trustees and Executive Officers of the Registrant	52
	Item 11.	Executive Compensation	52
	Item 12.	Security Ownership of Certain Beneficial Owners and Management	52
	Item 13.	Certain Relationships and Related Transactions	52
	Item 14.	Disclosure Controls and Procedures	52
PART IV.
	Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	52

 

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PART I

 

Item 1.  Business

 

General

 

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.  EQR has elected to be taxed as a real estate investment trust (“REIT”).

 

EQR is the general partner of, and as of December 31, 2002 owned an approximate 92.4% ownership interest in, ERP Operating Limited Partnership, an Illinois limited partnership (the “Operating Partnership”).  The Operating Partnership is, 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 December 31, 2002, the Company owned or had investments in 1,039 properties in 36 states consisting of 223,591 units.  An ownership breakdown includes:

 

		Number of Properties		Number of Units
Wholly Owned Properties		919		194,886
Partially Owned Properties (Consolidated)		36		6,931
Unconsolidated Properties		84		21,774
Total Properties		1,039		223,591

 

The “Wholly Owned Properties” are accounted for under the consolidation method of accounting.  The Company beneficially owns 100% fee simple title to 912 of the 919 Wholly Owned Properties.  The Company owns the building and improvements and leases the land underlying the improvements under a long-term ground lease that expires in 2066 for one property.  This one property is consolidated and reflected as a real estate asset while the ground lease is accounted for as an operating lease in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 13, Accounting for Leases.  The Company owns the debt collateralized by two properties and owns an interest in the debt collateralized by the remaining four properties.  The Company consolidates its interest in these six properties in accordance with the accounting standards outlined in the AcSEC guidance for real estate acquisition, development and construction arrangements issued in the CPA letter dated February 10, 1986, and as such, reflects these assets as real estate in the consolidated financial statements.

 

The “Partially Owned Properties” are controlled and partially owned by the Company but have partners with minority interests and are accounted for under the consolidation method of accounting.  The “Unconsolidated Properties” are partially owned but not controlled by the Company.  With the exception of one property, the Unconsolidated Properties consist of investments in partnership interests and/or subordinated mortgages that are accounted for under the equity method of accounting.   The remaining one property consists of an investment in a limited liability company that, as a result of the terms of the operating agreement, is accounted for as a management contract right with all fees recognized as fee and asset management revenue.  The above table does not include various uncompleted development properties (see Item 2, “Properties – Development Projects”).

 

The Company is one of the largest publicly traded REIT’s (based on the aggregate market value of its outstanding Common Shares) and is the largest publicly traded REIT owner of multifamily properties (based on the number of apartment units wholly owned and total revenues earned).  The Company’s

 

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corporate headquarters are located in Chicago, Illinois and the Company also leases (under operating leases) over thirty-five divisional, regional and area property management offices throughout the United States.

 

Direct fee simple title for certain of the properties is owned by single-purpose nominee corporations, limited partnerships, limited liability companies or land trusts that engage in no business other than holding title to the property for the benefit of the Company.  Holding title in such a manner is expected to make it less costly to transfer such property in the future in the event of a sale and should facilitate financing, since lenders often require title to a property to be held in a single purpose entity in order to isolate that property from potential liabilities of other properties.

 

The Company has approximately 6,400 employees as of March 1, 2003.  An on-site manager, who supervises the on-site employees and is responsible for the day-to-day operations of the property, directs each of the Company’s properties.  An assistant manager and/or leasing staff generally assist the manager.  In addition, a maintenance director at each property supervises a maintenance staff whose responsibilities include a variety of tasks, including responding to service requests, preparing vacant apartments for the next resident and performing preventive maintenance procedures year-round.

 

Certain capitalized terms as used herein but not defined are defined in the Notes to Consolidated Financial Statements.

 

Business Objectives and Operating Strategies

 

The Company seeks to maximize both current income and long-term growth in income, thereby increasing:

 

•                  the value of the properties;

•                  distributions on a per Common Share basis; and

•                  shareholders’ value.

 

The Company’s strategies for accomplishing these objectives are:

 

•                  maintaining and increasing property occupancy while increasing rental rates;

•                  controlling expenses, providing regular preventive maintenance, making periodic renovations and enhancing amenities;

•                  maintaining a ratio of consolidated debt-to-total market capitalization of less than 50%;

•                  strategically acquiring and disposing of properties, with an emphasis on acquiring attractive properties in high barrier to entry markets and on selling properties in low barrier to entry markets;

•                  purchasing newly developed, as well as co-investing in the development of, multifamily communities;

•                  entering into joint ventures related to the ownership of established properties; and

•                  strategically investing in various businesses that will enhance services for the properties.

 

The Company is committed to resident satisfaction by striving to anticipate industry trends and implementing strategies and policies consistent with providing quality resident services.  In addition, the Company continuously surveys rental rates of competing properties and conducts resident satisfaction surveys to determine the factors they consider most important in choosing a particular apartment unit and/or property.

 

Acquisition and Development Strategies

 

The Company anticipates that future property acquisitions and developments will occur within the United States.  Management will continue to use market information to evaluate opportunities.  The Company’s market database allows it to review the primary economic indicators of the markets where the Company currently owns properties and where it expects to expand its operations.  Acquisitions and

 

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developments may be financed from various sources of capital, which may include retained cash flow, issuance of additional equity and debt securities, sales of properties, joint venture agreements and collateralized and uncollateralized borrowings.  In addition, the Company may acquire additional properties in transactions that include the issuance of limited partnership interests in the Operating Partnership (“OP Units”) as consideration for the acquired properties. Such transactions may, in certain circumstances, enable the sellers to defer, in part, the recognition of taxable income or gain, which might otherwise result from the sales.

 

When evaluating potential acquisitions and developments, the Company will consider:

 

•                  the geographic area and type of community;

•                  the location, construction quality, condition and design of the property;

•                  the current and projected cash flow of the property and the ability to increase cash flow;

•                  the potential for capital appreciation of the property;

•                  the terms of resident leases, including the potential for rent increases;

•                  income levels and employment growth trends in the relevant market;

•                  employment and household growth and net migration of the relevant market’s population;

•                  the potential for economic growth and the tax and regulatory environment of the community in which the property is located;

•                  the occupancy and demand by residents for properties of a similar type in the vicinity (the overall market and submarket);

•                  the prospects for liquidity through sale, financing or refinancing of the property;

•                  the benefits of integration into existing operations;

•                  barriers to entry that would limit competition (zoning laws, building permit availability, supply of undeveloped or developable real estate, local building costs and construction labor costs among other factors);

•                  purchase prices and yields of available existing stabilized communities, if any; and

•                  competition from existing multifamily properties, residential properties under development and the potential for the construction of new multifamily properties in the area.

 

Disposition Strategies

 

Management uses market information to evaluate dispositions.  Factors the Company considers in deciding whether to dispose of its properties include the following:

 

•                  potential increases in new construction;

•                  submarkets that will underperform the average performance of the portfolio in the mid and long-term;

•                  markets where the Company does not intend to establish long-term concentrations; and

•                  age or location of a particular property.

 

The Company will reinvest the proceeds received from property dispositions primarily to fund property acquisitions as well as fund development activities.  In addition, when feasible, the Company may structure these transactions as tax deferred exchanges.

 

Financing Strategies

 

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

 

The Company’s “Consolidated Debt-to-Total Market Capitalization Ratio” as of December 31, 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

 

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“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 December 31, 2002

 

Total Debt					$	5,523,698,848
Common Shares & OP Units		293,396,124
Common Share Equivalents (see below)		14,947,898
Total Outstanding at year-end		308,344,022
Common Share Price at December 31, 2002		$	24.58
					7,579,096,061
Perpetual Preferred Shares Liquidation Value					565,000,000
Perpetual Preference Interests Liquidation Value					211,500,000
Total Market Capitalization					$	13,879,294,909
Debt/Total Market Capitalization					39.8		%

 

Convertible Preferred Shares, Preference Interests and Junior Preference Units as of December 31, 2002

 

		Shares/Units		Conversion Ratio		Common Share Equivalents
Preferred Shares:
Series E		2,548,114		1.1128		2,835,541
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						14,947,898

 

The Company’s policies are to maintain a ratio of consolidated debt-to-total market capitalization of less than 50% and that EQR shall not incur indebtedness other than short-term trade, employee compensation or similar indebtedness that will be paid in the ordinary course of business.

 

Equity Offerings For the Years Ended December 31, 2002, 2001 and 2000

 

During 2002, the Company:

 

•                  Issued 1,435,115 Common Shares pursuant to its Fifth Amended Option and Award Plan and received net proceeds of approximately $29.6 million.

•                  Issued 324,238 Common Shares pursuant to its Employee Share Purchase Plan and received net

 

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proceeds of approximately $7.4 million.

•                  Issued 31,354 Common Shares pursuant to its Share Purchase - DRIP Plan and received net proceeds of approximately $0.9 million.

•                  Issued 41,407 Common Shares pursuant to its Dividend Reinvestment – DRIP Plan and received net proceeds of approximately $1.2 million.

•                  Repurchased 5,092,300 of its Common Shares on the open market at an average price of $22.58 per share.  The purchases were made between October 1 and October 22, 2002.  The Company paid approximately $115.0 million in connection therewith.  These shares were subsequently retired.

 

During 2001, the Company:

 

•                  Issued 3,187,217 Common Shares pursuant to its Fifth Amended Option and Award Plan and received net proceeds of approximately $65.4 million.

•                  Issued 310,261 Common Shares pursuant to its Employee Share Purchase Plan and received net proceeds of approximately $6.9 million.

•                  Issued 33,106 Common Shares pursuant to its Share Purchase - DRIP Plan and received net proceeds of approximately $0.9 million.

•                  Issued 42,649 Common Shares pursuant to its Dividend Reinvestment – DRIP Plan and received net proceeds of approximately $1.2 million.

 

During 2000, the Company:

 

•                  Issued 1,370,186 Common Shares pursuant to its Fifth Amended Option and Award Plan and received net proceeds of approximately $25.2 million.

•                  Issued 299,580 Common Shares pursuant to its Employee Share Purchase Plan and received net proceeds of approximately $5.4 million.

•                  Issued 26,374 Common Shares pursuant to its Share Purchase - DRIP Plan and received net proceeds of approximately $0.6 million.

•                  Issued 69,504 Common Shares pursuant to its Dividend Reinvestment - DRIP Plan and received net proceeds of approximately $1.7 million.

 

The Company filed with the SEC on February 3, 1998 a Form S-3 Registration Statement to register $1.0 billion of equity securities.  The SEC declared this registration statement effective on February 27, 1998.  In addition, the Company carried over $272.4 million related to the registration statement that was declared effective on August 4, 1997.  As of December 31, 2002, $1.1 billion in equity securities remained available for issuance under this registration statement.

 

In May 2002, the Company’s shareholders approved the Company’s 2002 Share Incentive Plan.  In January 2003, the Company filed a Form S-8 registration statement to register 23,125,828 Common Shares under this plan.

 

Cumulative through December 31, 2002, the Company, through a subsidiary of the Operating Partnership, issued various series of Preference Interests (the “Preference Interests”) with an equity value of $246.0 million receiving net proceeds of $239.9 million.  The following table presents the issued and outstanding Preference Interests as of December 31, 2002 and December 31, 2001:

 

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		Redemption Date(1)(2)		Conversion Rate(2)		Annual Dividend Rate per Unit(3)
									Amounts in thousands
									December 31, 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 December 31, 2002 and December 31, 2001		10/01/04		N/A		$	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 December 31, 2002 and December 31, 2001		03/03/05		N/A		$	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 December 31, 2002 and December 31, 2001		03/23/05		N/A		$	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 December 31, 2002 and December 31, 2001		05/01/05		N/A		$	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 December 31, 2002 and December 31, 2001		08/11/05		N/A		$	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 December 31, 2002 and December 31, 2001		05/01/05		N/A		$	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 December 31, 2002 and December 31, 2001		03/21/06		N/A		$	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 December 31, 2002 and December 31, 2001		03/23/06		1.5108		$	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 December 31, 2002 and December 31, 2001		06/22/06		1.4542		$	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 December 31, 2002 and December 31, 2001		12/14/06		1.4108		$	3.8125		11,500			11,500
									$	246,000		$	246,000

 

(1)          On or after the fifth anniversary of the respective issuance (the “Redemption Date”), all of the Preference Interests may be redeemed for cash at the option of the Company, in whole or in part, at any time or from time to time, at a redemption price equal to the liquidation preference of $50.00 per unit plus the cumulative amount of accrued and unpaid distributions, if any.

 

(2)          On or after the tenth anniversary of the respective issuance (the “Conversion Date”), all of the Preference Interests are exchangeable at the option of the holder (in whole but not in part) on a one-for-one basis for a respective reserved series of EQR Preferred Shares.  In addition, on or after the Conversion Date, the convertible Preference Interests (Series H, I & J) may be converted under certain circumstances at the option of the holder (in whole but not in part) to Common Shares based upon the contractual conversion rate, plus accrued and unpaid distributions, if any.

 

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

 

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Debt Offerings For the Years Ended December 31, 2002, 2001 and 2000

 

During 2002:

 

•                  The Operating Partnership issued $400.0 million of redeemable unsecured fixed rate notes (the “March 2012 Notes”) in a public debt offering in March 2002.  The March 2012 Notes were issued at a discount, which is being amortized over the life of the notes on a straight-line basis.  The March 2012 Notes are due March 15, 2012.  The annual interest rate on the March 2012 Notes is 6.625%, which is payable semiannually in arrears on September 15 and March 15, commencing September 15, 2002.  The Operating Partnership received net proceeds of approximately $394.5 million in connection with this issuance.

•                  The Operating Partnership issued $50.0 million of redeemable unsecured fixed rate notes (the “November 2007 Notes”) in a public debt offering in November 2002.  The November 2007 Notes are due November 30, 2007.  The annual interest rate on the November 2007 Notes is 4.861%, which is payable semiannually in arrears on May 30 and November 30, commencing May 30, 2003.  The Operating Partnership received net proceeds of approximately $49.9 million in connection with this issuance.

 

During 2001:

 

•                  The Operating Partnership issued $300.0 million of redeemable unsecured fixed rate notes (the “March 2011 Notes”) in a public debt offering in March 2001.  The March 2011 Notes were issued at a discount, which is being amortized over the life of the notes on a straight-line basis.  The March 2011 Notes are due March 2, 2011.  The annual interest rate on the March 2011 Notes is 6.95%, which is payable semiannually in arrears on September 2 and March 2, commencing September 2, 2001.  The Operating Partnership received net proceeds of approximately $297.4 million in connection with this issuance.

 

During 2000:

 

•                  The Operating Partnership did not issue new debt securities during the year ended December 31, 2000.

 

The Operating Partnership filed a Form S-3 Registration Statement on August 25, 2000 to register $1.0 billion of debt securities.  The SEC declared this registration statement effective on September 8, 2000. In addition, the Operating Partnership carried over $430.0 million related to the registration statement effective on February 27, 1998.  As of December 31, 2002, $680.0 million remained available for issuance under this registration statement.

 

Credit Facilities

 

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 $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 December 31, 2002, $140.0 million was outstanding and $60.8 million was restricted (dedicated to support letters of credit and not available for borrowing) on the line of credit.  During the year ended December 31, 2002, the weighted average interest rate on borrowings under the former and new lines of credit was 2.30%.

 

In connection with its acquisition of Globe Business Resources, Inc. (“Globe”), the Company assumed a revolving credit facility with potential borrowings of up to $55.0 million.  On May 31, 2001, this credit facility was terminated.

 

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Business Combinations

 

Multifamily Properties

 

On October 31, 2000, the Company acquired Grove Property Trust (“Grove”) for a total purchase price of $463.2 million and succeeded to the ownership of 60 properties containing 7,308 units.  The Company:

 

•                  Paid $17.00 per share or $141.6 million in cash to purchase the 8.3 million outstanding common shares of Grove;

•                  Paid $17.00 per unit or $12.4 million in cash to purchase 0.7 million Grove OP Units outstanding at the merger date;

•                  Converted 2.1 million Grove OP Units to 1.6 million of the Operating Partnership’s OP Units using the conversion ratio of 0.7392 (after cash-out of fractional units).  The value of these converted OP Units totaled $37.2 million;

•                  Assumed $241.3 million in Grove debt, which included first and second mortgages totaling $203.4 million and Grove’s line of credit totaling $38.0 million.  Grove’s line of credit and two mortgage loans totaling $7.8 million were paid off immediately after the closing;

•                  Acquired $20.1 million in other Grove assets and assumed $11.2 million in other Grove liabilities, including a contingent earnout liability totaling $1.5 million.  This amount represented the estimated additional cash or OP Units required to be funded to the previous owners of Glen Meadow Apartments upon the transition of this property from subsidized to market rents; and

•                  Recorded acquisition costs of $19.5 million.

 

Furniture Rental and Corporate Housing Businesses

 

On July 11, 2000, the Company acquired Globe in an all cash and debt transaction valued at approximately $163.2 million.  Globe provided fully furnished short-term housing through an inventory of leased housing units to transferring or temporarily assigned corporate personnel, new hires, trainees, consultants and individual customers throughout the United States.  Additionally, Globe leased and sold furniture to a diversified base of commercial and residential customers throughout the United States.  Shareholders of Globe received $13.00 per share, which approximated $58.7 million in cash based on the 4.5 million Globe shares outstanding.  In addition, the Company:

 

•                  Acquired $94.8 million in other Globe assets and assumed $29.6 million in other Globe liabilities;

•                  Allocated $68.4 million to goodwill;

•                  Recorded acquisition costs of $4.5 million; and

•                  Assumed $70.4 million in debt, which included $1.4 million in mortgage debt, $39.5 million in unsecured notes, and Globe’s line of credit of $29.5 million outstanding.

 

On July 21, 2000, the Company, through its Globe subsidiary, acquired Temporary Quarters, Inc., the leading corporate housing provider in Atlanta, Georgia, in a $3.3 million all cash transaction.

 

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 impairment loss is reflected on the consolidated statements of operations for the year ended December 31, 2001, 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.

 

On January 11, 2002, the Company sold the former Globe furniture rental business for approximately $30.0 million in cash, which approximated the net book value at the sale date.  The Company has retained

 

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ownership of the former Globe short-term furnished housing business, which is now known as Equity Corporate Housing (“ECH”).

 

For the year ended December 31, 2002, the Company recorded approximately $17.1 million of asset impairment charges related to ECH.  Following the guidance in SFAS No. 142, these charges were the result of the Company’s decision to reduce the carrying value of ECH to $30.0 million, given the continued weakness in the economy and management’s expectations for near-term performance, and were determined based upon a discounted cash flow analysis of the business.  The 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.

 

The Company accounted for these business combinations as purchases in accordance with Accounting Principles Board (“APB”) Opinion No. 16.  The fair value of the consideration given by the Company was used as the valuation basis for each of the combinations.

 

Competition

 

All of the properties are located in developed areas that include other multifamily properties.  The number of competitive multifamily properties in a particular area could have a material effect on the Company’s ability to lease units at the properties or at any newly acquired properties and on the rents charged.  The Company may be competing with other entities that have greater resources than the Company and whose managers have more experience than the Company’s managers.  In addition, other forms of rental properties, including multifamily properties and manufactured housing, some of which may be controlled by Mr. Zell, and single-family housing provide housing alternatives to potential residents of multifamily properties.   Recently, historically low mortgage interest rates coupled with record residential construction and single-family home sales have had an adverse competitive effect on the Company.

 

Risk Factors

 

The following Risk Factors may contain defined terms that are different from those used in the other sections of this report.  Unless otherwise indicated, when used in this section, the terms “we” and “us” refer to Equity Residential and its subsidiaries, including ERP Operating Limited Partnership.

 

Set forth below are the risks that we believe are important to investors who purchase or own our common shares of beneficial interest or preferred shares of beneficial interest (which we refer to collectively as “Shares”); preference interests (“Interests”) of a subsidiary of ERP Operating Limited Partnership; preference units (“Units”); or units of limited partnership interest (“OP Units”) of ERP Operating Limited Partnership, our operating partnership, which are redeemable on a one-for-one basis for common shares or their cash equivalent.  In this section, we refer to the Shares, Interests, Units and the OP Units together as our “securities,” and the investors who own Shares, Interests, Units and/or OP Units as our “security holders.”

 

Our Performance and Share Value are Subject to Risks Associated with the Real Estate Industry

 

General

 

Real property investments are subject to varying degrees of risk and are relatively illiquid. Several factors may adversely affect the economic performance and value of our properties.  These factors include changes in the national, regional and local economic climate, local conditions such as an oversupply of multifamily properties or a reduction in demand for our multifamily properties, the attractiveness of our properties to residents, competition from other available multifamily property owners and changes in market rental rates.  Our performance also depends on our ability to collect rent from residents and to pay for adequate maintenance, insurance and other operating costs, including real estate taxes, which could increase over time.  Also, the expenses of owning and operating a property are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from the property.

 

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We May be Unable to Renew Leases or Relet Units as Leases Expire

 

When our residents decide not to renew their leases upon expiration, we may not be able to relet their units.  Even if the residents do renew or we can relet the units, the terms of renewal or reletting may be less favorable than current lease terms.  Because virtually all of our leases are for apartments, they are generally for terms of no more than one year.  If we are unable to promptly renew the leases or relet the units, or if the rental rates upon renewal or reletting are significantly lower than expected rates, then our results of operations and financial condition will be adversely affected.  Consequently, our cash flow and ability to service debt and make distributions to security holders would be reduced.  As a result of general economic conditions and competitive factors discussed above, we have experienced a trend of declining rents and increased concessions when entering into new leases across our portfolio during 2002.

 

New Acquisitions or Developments May Fail to Perform as Expected and Competition for Acquisitions May Result in Increased Prices for Properties

 

We intend to continue to actively acquire and develop multifamily properties.  Newly acquired or developed properties may fail to perform as expected.  We may underestimate the costs necessary to bring an acquired property up to standards established for its intended market position or to develop a property.  Additionally, we expect that other major real estate investors with significant capital will compete with us for attractive investment opportunities or may also develop properties in markets where we focus our development efforts.  This competition may increase prices for multifamily properties.  We may not be in a position or have the opportunity in the future to make suitable property acquisitions on favorable terms.   The total number of development units, cost of development and estimated completion dates are subject to uncertainties arising from changing economic conditions (such as the cost of labor and construction materials), competition and local government regulation.

 

Because Real Estate Investments Are Illiquid, We May Not Be Able To Sell Properties When Appropriate

 

Real estate investments generally cannot be sold quickly.  We may not be able to change our portfolio promptly in response to economic or other conditions.  This inability to respond promptly to changes in the performance of our investments could adversely affect our financial condition and ability to make distributions to our security holders.

 

Changes in Laws Could Affect Our Business

 

We are generally not able to pass through to our residents under existing leases real estate taxes, income taxes or other taxes.  Consequently, any such tax increases may adversely affect our financial condition and limit our ability to make distributions to our security holders.  Similarly, changes that increase our potential liability under environmental laws or our expenditures on environmental compliance would adversely affect our cash flow and ability to make distributions on our securities.

 

Environmental Problems are Possible and can be Costly

 

Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and clean up hazardous or toxic substances or petroleum product releases at such property.  The owner or operator may have to pay a governmental entity or third parties for property damage and for investigation and clean-up costs incurred by such parties in connection with the contamination. These laws typically impose clean-up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants. Even if more than one person may have been responsible for the contamination each person covered by the environmental laws may be held responsible for all of the clean-up costs incurred.  In addition, third parties may sue the owner or operator of a site for damages and costs resulting from environmental contamination emanating from that site.

 

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Environmental laws also govern the presence, maintenance and removal of asbestos.  These laws require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, that they notify and train those who may come into contact with asbestos and that they undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building.  These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers.

 

Substantially all of our properties have been the subject of environmental assessments completed by qualified independent environmental consultant companies.  These environmental assessments have not revealed, nor are we aware of, any environmental liability that our management believes would have a material adverse effect on our business, results of operations, financial condition or liquidity.

 

Over the past two years, there have been an increasing number of lawsuits against owners and managers of multifamily properties other than the Company alleging personal injury and property damage caused by the presence of mold in residential real estate.  Some of these lawsuits have resulted in substantial monetary judgments or settlements.  Insurance carriers have reacted to these liability awards by excluding mold related claims from standard policies and pricing mold endorsements at prohibitively high rates.  We have adopted programs designed to minimize the existence of mold in any of our properties as well as guidelines for promptly addressing and resolving reports of mold to minimize any impact mold might have on residents or the property.

 

We cannot be assured that existing environmental assessments of our properties reveal all environmental liabilities, that any prior owner of any of our properties did not create a material environmental condition not known to us, or that a material environmental condition does not otherwise exist as to any one or more of our properties.

 

Insurance Policy Deductibles and Exclusions

 

                In order to partially mitigate the substantial increase in insurance costs in recent years, management has determined to gradually increase deductible and self insured retention amounts.  As of December 31, 2002, the Company property insurance policy (for Wholly Owned Properties) provides for a per occurrence deductible of $250,000 and self insured retention of $1 million per occurrence, subject to a maximum annual aggregate self insured retention of $4 million.  The Company's liability and worker's compensation policies at December 31, 2002, provide for a $1 million per occurrence deductible.  While higher deductible and self insured retention amounts expose the Company to greater potential uninsured losses, management believes that the savings in insurance premium expense justifies this increased exposure.  Management anticipates that deductibles and self insured retention amounts will likely further increase for 2003 policy renewals.

 

As a result of the terrorist attacks of September 11, 2001, insurance carriers have created exclusions for losses from terrorism from our “all risk” insurance policies.  While separate terrorism insurance coverage is available in certain instances, premiums for such coverage is generally very expensive, with very high deductibles.  Moreover, the terrorism insurance coverage that is available typically excludes coverage for losses from acts of foreign governments as well as nuclear, biological and chemical attacks.  The Company has determined that it is not economically prudent to obtain terrorism insurance to the extent otherwise available, especially given the significant risks that are not covered by such insurance.  In the event of a terrorist attack impacting one or more of the properties, we could lose the revenues from the property, our capital investment in the property and possibly face liability claims from residents or others suffering injuries or losses. The Company believes, however, that the number and geographic diversity of its portfolio helps to mitigate its exposure to the risks associated with potential terrorist attacks.

 

Debt Financing, Preferred Shares and Preference Interests and Units Could Adversely Affect Our Performance

 

General

 

The Company’s total debt summary, as of December 31, 2002, included:

 

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Debt Summary as of December 31, 2002

 

		$ Millions			Weighted Average Rate
Secured		$	2,928		6.15	%
Unsecured		2,596			6.30	%
Total		$	5,524		6.22	%
Fixed Rate*		$	4,776		6.83	%
Floating Rate*		748			2.33	%
Total*		$	5,524		6.22	%
Above Totals Include:
Total Tax Exempt		$	985		3.75	%
Unsecured Revolving Credit Facility		$	140		1.98	%

 

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

 

In addition to debt, we have issued $1.2 billion of combined liquidation value for the preferred shares of beneficial interest and preference interests and units, with a weighted average dividend preference of 8.07% per annum.  Our use of debt and preferred equity financing creates certain risks, including the following.

 

Scheduled Debt Payments Could Adversely Affect Our Financial Condition

 

In the future, our cash flow could be insufficient to meet required payments of principal and interest or to pay distributions on our securities at expected levels.

 

We may not be able to refinance existing debt (which in virtually all cases requires substantial principal payments at maturity) and, if we can, the terms of such refinancing might not be as favorable as the terms of existing indebtedness.  If principal payments due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow will not be sufficient in all years to repay all maturing debt.  As a result, we may be forced to postpone capital expenditures necessary for the maintenance of our properties and may have to dispose of one or more properties on terms that would otherwise be unacceptable to us.  The Company’s debt maturity schedule as of December 31, 2002 is as follows:

 

Debt Maturity Schedule as of December 31, 2002

 

 

* Includes $300 million with a final maturity of 2015 that is putable/callable in 2005 and $140 million related to the Company’s unsecured revolving credit facility.

 

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Financial Covenants Could Adversely Affect the Company’s Financial Condition

 

If a property we own is mortgaged to secure payment of indebtedness and we are unable to meet the mortgage payments, the holder of the mortgage could foreclose on the property, resulting in loss of income and asset value.  Foreclosure on mortgaged properties or an inability to refinance existing indebtedness would likely have a negative impact on our financial condition and results of operations.  A foreclosure could also result in our recognition of taxable income without our actually receiving cash proceeds from the disposition of the property with which to pay the tax.  This could adversely affect our cash flow and could make it more difficult for us to meet our REIT distribution requirements.

 

The mortgages on our properties may contain customary negative covenants that, among other things, limit our ability, without the prior consent of the lender, to further mortgage the property and to reduce or change insurance coverage.  In addition, our unsecured credit facilities contain certain customary restrictions, requirements and other limitations on our ability to incur indebtedness.  The indentures under which a substantial portion of our debt was issued also contain certain financial and operating covenants including, among other things, maintenance of certain financial ratios, as well as limitations on our ability to incur secured and unsecured indebtedness (including acquisition financing), and to sell all or substantially all of our assets.  Our credit facility and indentures are cross-defaulted and also contain cross default provisions with other material indebtedness.  Our unsecured public debt covenants as of December 31, 2002 and 2001, respectively, are (terms are defined in the indentures):

 

Unsecured Public Debt Covenants

 

 

Some of the properties were financed with tax-exempt bonds that contain certain restrictive covenants or deed restrictions.  We have retained an independent outside consultant to monitor compliance with the restrictive covenants and deed restrictions that affect these properties.  If these bond compliance requirements restrict our ability to increase our rental rates to attract low or moderate-income residents, or eligible/qualified residents, then our income from these properties may be limited.

 

Our Degree of Leverage Could Limit Our Ability to Obtain Additional Financing

 

Our Consolidated Debt-to-Total Market Capitalization Ratio was 39.8% as of December 31, 2002.  We have a policy of incurring indebtedness for borrowed money only through the Operating Partnership and its subsidiaries and only if upon such incurrence our debt to market capitalization

 

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ratio would be approximately 50% or less.  Our degree of leverage could have important consequences to security holders.  For example, the degree of leverage could affect our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, development or other general corporate purposes, making us more vulnerable to a downturn in business or the economy generally.

 

Rising Interest Rates Could Adversely Affect Cash Flow

 

Advances under our 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.  Certain public issuances of our senior unsecured debt instruments also, from time to time, bear interest at floating rates.  We may also borrow additional money with variable interest rates in the future.  Increases in interest rates would increase our interest expenses under these debt instruments and would increase the costs of refinancing existing indebtedness and of issuing new debt.  Accordingly, higher interest rates could adversely affect cash flow and our ability to service our debt and to make distributions to security holders.

 

We Depend on Our Key Personnel

 

We depend on the efforts of the Chairman of our Board of Trustees, Samuel Zell, and our executive officers, particularly Bruce W. Duncan, our President and Chief Executive Officer (“CEO”) and Gerald A. Spector, our Chief Operating Officer.  If they resign, our operations could be temporarily adversely effected.  Mr. Zell has entered into executive compensation and retirement benefit agreements with the Company.  Mr. Duncan and Mr. Spector have entered into Deferred Compensation Agreements with the Company that under certain conditions could provide both with a salary benefit after their respective termination of employment with the Company.  In addition, Mr. Zell and Mr. Spector have entered into Noncompetition Agreements with the Company and Mr. Duncan’s Employment Agreement contains covenants not to compete in favor of the Company.  Douglas Crocker II, our former CEO, retired effective January 1, 2003.

 

Control and Influence by Significant Shareholders Could be Exercised in a Manner Adverse to Other Shareholders

 

As of January 31, 2003, (1) Samuel Zell, the Chairman of the Board of the Company, and certain of the current holders of OP Units issued to affiliates of Mr. Zell owned in the aggregate approximately 3.1% of our common shares (Mr. Zell and these affiliates are described herein as the “Zell Original Owners”); and (2) our executive officers and trustees, excluding Mr. Zell (see disclosure above), owned approximately 5.0% of our common shares. These percentages assume all options are exercised for common shares and all OP Units are converted to common shares.  In addition, the consent of certain affiliates of Mr. Zell is required for certain amendments to the Fifth Amended and Restated Agreement of Limited Partnership of ERP Operating Limited Partnership (the “Partnership Agreement”).  As a result of their security ownership and rights concerning amendments to the Partnership Agreement, the Zell affiliates may have substantial influence over the Company.  Although these security holders have not agreed to act together on any matter, they would be in a position to exercise even more influence over the Company’s affairs if they were to act together in the future. This influence could conceivably be exercised in a manner that is inconsistent with the interests of other security holders.

 

Shareholders’ Ability to Effect Changes in Control of the Company is Limited

 

Provisions of Our Declaration of Trust and Bylaws Could Inhibit Changes in Control

 

Certain provisions of our Declaration of Trust and Bylaws may delay or prevent a change in control of the Company or other transactions that could provide the security holders with a premium over the then-prevailing market price of their securities or which might otherwise be in the best interest of our security holders.  These include a staggered Board of Trustees and the 5% Ownership Limit described below.  See “—We Have a Share Ownership Limit for REIT Tax Purposes.”  Also, any future series of preferred shares of beneficial interest may have certain voting provisions that could delay or prevent a change of control or other transactions that might otherwise be in the interest of our security holders.

 

We Have a Share Ownership Limit for REIT Tax Purposes

 

To remain qualified as a REIT for federal income tax purposes, not more than 50% in value of our outstanding Shares may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of any year.  To facilitate maintenance of our REIT qualification, our Declaration of Trust, subject to certain exceptions, prohibits ownership by any single shareholder of more than 5% of the lesser of the number or value of the outstanding class of common or preferred shares.  We refer to this restriction as the “Ownership Limit.”  Absent any exemption or waiver granted by our Board of Trustees, securities acquired or held in violation of the Ownership Limit will be transferred to a trust for the exclusive benefit of a

 

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designated charitable beneficiary, and the security holder’s rights to distributions and to vote would terminate.  A transfer of Shares may be void if it causes a person to violate the Ownership Limit.  The Ownership Limit could delay or prevent a change in control and, therefore, could adversely affect our security holders’ ability to realize a premium over the then-prevailing market price for their Shares.

 

Our Preferred Shares of Beneficial Interest May Affect Changes in Control

 

Our Declaration of Trust authorizes the Board of Trustees to issue up to 100 million preferred shares of beneficial interest, and to establish the preferences and rights (including the right to vote and the right to convert into common shares) of any preferred shares issued.  The Board of Trustees may use its powers to issue preferred shares and to set the terms of such securities to delay or prevent a change in control of the Company, even if a change in control were in the interest of security holders.  As of December 31, 2002, 10,524,034 preferred shares were issued and outstanding.

 

Inapplicability of Maryland Law Limiting Certain Changes in Control

 

Certain provisions of Maryland law applicable to real estate investment trusts prohibit “business combinations” (including certain issuances of equity securities) with any person who beneficially owns ten percent or more of the voting power of outstanding securities, or with an affiliate who, at any time within the two-year period prior to the date in question, was the beneficial owner of ten percent or more of the voting power of the trust’s outstanding voting securities (an “Interested Shareholder”), or with an affiliate of an Interested Shareholder.  These prohibitions last for five years after the most recent date on which the Interested Shareholder became an Interested Shareholder.  After the five-year period, a business combination with an Interested Shareholder must be approved by two super-majority shareholder votes unless, among other conditions, holders of common shares receive a minimum price for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Shareholder for its common shares.  As permitted by Maryland law, however, the Board of Trustees of the Company has opted out of these restrictions with respect to any business combination involving the Zell Original Owners and persons acting in concert with any of the Zell Original Owners.  Consequently, the five-year prohibition and the super-majority vote requirements will not apply to a business combination involving us and/or any of them.  Such business combinations may not be in the best interest of our security holders.

 

Our Success as a REIT is Dependent on Compliance With Federal Income Tax Requirements

 

Our Failure to Qualify as a REIT Would Have Serious Adverse Consequences to Our Security Holders

 

We believe that we have qualified for taxation as a REIT for federal income tax purposes since our taxable year ended December 31, 1992 based, in part, upon opinions of tax counsel received whenever we have issued equity securities or engaged in significant merger transactions.  We plan to continue to meet the requirements for taxation as a REIT.  Many of these requirements, however, are highly technical and complex.  We cannot, therefore, guarantee that we have qualified or will qualify in the future as a REIT.  The

 

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determination that we are a REIT requires an analysis of various factual matters that may not be totally within our control.  For example, to qualify as a REIT, at least 95% of our gross income must come from sources that are itemized in the REIT tax laws.  We are also required to distribute to security holders at least 90% of our REIT taxable income excluding capital gains.  The fact that we hold our assets through ERP Operating Limited Partnership and its subsidiaries further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize our REIT status.  Furthermore, Congress and the IRS might make changes to the tax laws and regulations, and the courts might issue new rulings that make it more difficult, or impossible, for us to remain qualified as a REIT.  We do not believe, however, that any pending or proposed tax law changes would jeopardize our REIT status.

 

If we fail to qualify as a REIT, we would be subject to federal income tax at regular corporate rates. Also, unless the IRS granted us relief under certain statutory provisions, we would remain disqualified as a REIT for four years following the year we first failed to qualify.  If we fail to qualify as a REIT, we would have to pay significant income taxes.  We, therefore, would have less money available for investments or for distributions to security holders.  This would likely have a significant adverse affect on the value of our securities.  In addition, we would no longer be required to make any distributions to security holders.

 

We could be Disqualified as a REIT or Have to Pay Taxes if Our Merger Partners Did Not Qualify as REIT’s

 

If any of our recent merger partners had failed to qualify as a REIT throughout the duration of their existence, then they might have had undistributed “C corporation earnings and profits” at the time of their merger with us.  If that was the case and we did not distribute those earnings and profits prior to the end of the year in which the merger took place, we might not qualify as a REIT.  We believe based, in part, upon opinions of legal counsel received pursuant to the terms of our merger agreements as well as our own investigations, among other things, that each of our merger partners qualified as a REIT and that, in any event, none of them had any undistributed “C corporation earnings and profits” at the time of their merger with us.  If any of our merger partners failed to qualify as a REIT, an additional concern would be that they would have recognized taxable gain at the time they were merged with us.  We would be liable for the tax on such gain.  In this event, we would have to pay corporate income tax on any gain existing at the time of the applicable merger on assets acquired in the merger if the assets are sold within ten years of the merger. Finally, we could be precluded from electing REIT status for up to four years after the year in which the predecessor entity failed to qualify for REIT status.

 

Other Tax Liabilities

 

Even if we qualify as a REIT, we will be subject to certain federal, state and local taxes on our income and property.  In addition, our third-party management operations, corporate housing business and condominium conversion business, which are conducted through subsidiaries, generally will be subject to federal income tax at regular corporate rates.

 

Compliance with REIT Distribution Requirements May Affect Our Financial Condition

 

Distribution Requirements May Increase the Indebtedness of the Company

 

We may be required from time to time, under certain circumstances, to accrue as income for tax purposes interest and rent earned but not yet received.  In such event, or upon our repayment of principal on debt, we could have taxable income without sufficient cash to enable us to meet the distribution requirements of a REIT.  Accordingly, we could be required to borrow funds or liquidate investments on adverse terms in order to meet these distribution requirements.

 

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Federal Income Tax Considerations

 

General

 

The following discussion summarizes the federal income tax considerations material to a holder of common shares.  It is not exhaustive of all possible tax considerations. For example, it does not give a detailed discussion of any state, local or foreign tax considerations. The following discussion also does not address all tax matters that may be relevant to prospective shareholders in light of their particular circumstances.  Moreover, it does not address all tax matters that may be relevant to shareholders who are subject to special treatment under the tax laws, such as insurance companies, tax-exempt entities, financial institutions or broker-dealers, foreign corporations and persons who are not citizens or residents of the United States.

 

The specific tax attributes of a particular shareholder could have a material impact on the tax considerations associated with the purchase, ownership and disposition of common shares. Therefore, it is essential that each prospective shareholder consult with his or her own tax advisors with regard to the application of the federal income tax laws to the shareholder’s personal tax situation, as well as any tax consequences arising under the laws of any state, local or foreign taxing jurisdiction.

 

The information in this section is based on the current Internal Revenue Code, current, temporary and proposed Treasury regulations, the legislative history of the Internal Revenue Code, current administrative interpretations and practices of the Internal Revenue Service, including its practices and policies as set forth in private letter rulings, which are not binding on the Internal Revenue Service, and existing court decisions.  Future legislation, regulations, administrative interpretations and court decisions could change current law or adversely affect existing interpretations of current law.  Any change could apply retroactively.  Thus, it is possible that the Internal Revenue Service could challenge the statements in this discussion, which do not bind the Internal Revenue Service or the courts, and that a court could agree with the Internal Revenue Service.

 

Our Taxation

 

We elected REIT status beginning with the year that ended December 31, 1992.  In any year in which we qualify as a REIT, we generally will not be subject to federal income tax on the portion of our REIT taxable income or capital gain that we distribute to our shareholders.  This treatment substantially eliminates the double taxation that applies to most corporations, which pay a tax on their income and then distribute dividends to shareholders who are in turn taxed on the amount they receive.

 

We will be subject, however, to federal income tax at regular corporate rates upon our REIT taxable income or capital gain that we do not distribute to our shareholders. In addition, we will be subject to a 4% excise tax if we do not satisfy specific REIT distribution requirements.  We could also be subject to the “alternative minimum tax” on our items of tax preference.  In addition, any net income from “prohibited transactions” (i.e., dispositions of property, other than property held by a taxable REIT subsidiary, held primarily for sale to customers in the ordinary course of business) will be subject to a 100% tax.  We could also be subject to a 100% penalty tax on certain payments received from or on certain expenses deducted by a taxable REIT subsidiary if certain rules enacted as part of the REIT Modernization Act of 1999 are not complied with.  Moreover, we may be subject to taxes in certain situations and on certain transactions that we do not presently contemplate.

 

We believe that we have qualified as a REIT for all of our taxable years beginning with 1992. We also believe that our current structure and method of operation is such that we will continue to qualify as a REIT.  However, given the complexity of the REIT qualification requirements, we cannot provide any assurance that the actual results of our operations have satisfied or will satisfy the requirements under the Internal Revenue Code for a particular year.

 

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If we fail to qualify for taxation as a REIT in any taxable year, we will be subject to tax on our taxable income at regular corporate rates.  We also may be subject to the corporate “alternative minimum tax.” As a result, our failure to qualify as a REIT would significantly reduce the cash we have available to distribute to our shareholders.  Unless entitled to statutory relief, we would be disqualified from qualification as a REIT for the four taxable years following the year during which qualification was lost.  It is not possible to state whether we would be entitled to statutory relief.

 

Tax legislation has recently been enacted which is intended to allow REITs to have greater flexibility in engaging in activities which previously had been prohibited by the REIT rules.  Among these changes was the establishment of “taxable REIT subsidiaries” or “TRSs” which are corporations subject to tax as a regular “C” corporation.  Generally, a taxable REIT subsidiary can own assets that cannot be owned by a REIT and can perform impermissible resident services (discussed below), which would otherwise taint our rental income under the REIT income tests.  In enacting the taxable REIT subsidiary rules, Congress intended that the arrangements between a REIT and its taxable REIT subsidiaries be structured to ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. As a result, the Act imposes certain limits on the ability of a taxable REIT subsidiary to deduct interest payments made to us.  In addition, we will be obligated to pay a 100% penalty tax on some payments that we receive or on certain expenses deducted by the taxable REIT subsidiary if the economic arrangements between the REIT, the REIT’s residents and the taxable REIT subsidiary are not comparable to similar arrangements among unrelated parties.

 

Our qualification and taxation as a REIT depend on our ability to satisfy various requirements under the Internal Revenue Code.  We are required to satisfy these requirements on a continuing basis through actual annual operating and other results.

 

Share Ownership Test and Organizational Requirement.  In order to qualify as a REIT, our shares of beneficial interest must be held by a minimum of 100 persons for at least 335 days of a taxable year that is 12 months, or during a proportionate part of a taxable year of less than 12 months.  Also, not more than 50% in value of our shares of beneficial interest may be owned directly, or indirectly by applying certain constructive ownership rules, by five or fewer individuals during the last half of each taxable year.  In addition, we must meet certain other organizational requirements, including, but not limited to, that (i) the beneficial ownership in us is evidenced by transferable shares and (ii) we are managed by one or more trustees.  We believe that we have satisfied all of these tests and all other organizational requirements and that we will continue to do so in the future.  In order to help comply with the 100 person test and the 50% share ownership test discussed above, we have placed certain restrictions on the transfer of our shares that are intended to prevent further concentration of share ownership.  However, such restrictions may not prevent us from failing these requirements, and thereby failing to qualify as a REIT.

 

Gross Income Tests.  To qualify as a REIT, we must satisfy two gross income tests.  First, at least 75% of our gross income for each taxable year must be derived directly or indirectly from investments in real estate and/or real estate mortgage, dividends paid by another REIT and from some types of temporary investments.  Second, at least 95% of our gross income for each taxable year must be derived from any combination of income qualifying under the 75% test and dividends, non-real estate mortgage interest, some payments under hedging instruments and gain from the sale or disposition of stock or securities.  To qualify as rents from real property for the purpose of satisfying the gross income tests, rental payments must generally be received from unrelated persons and not be based on the net income of the resident.  Also, the rent attributable to personal property must not exceed 15% of the total rent.  We may generally provide services to residents without “tainting” our rental income only if such services are “usually or customarily rendered” in connection with the rental of real property and not otherwise considered “impermissible services”.  If such services are impermissible, then we may generally provide them only if they are considered de minimis in amount, or are provided through an independent contractor from whom we derive no revenue and that meets other requirements, or through a taxable REIT subsidiary.  We believe that services provided to residents by us either are usually or customarily rendered in connection with the rental of real property and not otherwise considered impermissible, or, if considered impermissible services, will

 

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meet the de minimis test or will be provided by an independent contractor or taxable REIT subsidiary.  However, we cannot provide any assurance that the Internal Revenue Service will agree with these positions.

 

Asset Tests.  In general, at the close of each quarter of our taxable year, we must satisfy four tests relating to the nature of our assets:  (1) at least 75% of the value of our total assets must be represented by real estate assets (which include for this purpose shares in other real estate investment trusts) and certain cash related items; (2) not more than 25% of our total assets may be represented by securities other than those in the 75% asset class; (3) except for equity investments in other REITs, qualified REIT subsidiaries (i.e., corporations owned 100% by a REIT that are not TRSs or REITs), or taxable REIT subsidiaries: (a) the value of any one issuer’s securities owned by us may not exceed 5% of the value of our total assets and (b) we may not own more than 10% of the value of or the voting securities of any one issuer; and (4) not more than 20% of our total assets may be represented by securities of one or more taxable REIT subsidiaries.  Securities for purposes of the asset tests may include debt securities.  We currently own equity interests in certain entities that have elected to be taxed as REITs for federal income tax purposes and are not publicly traded.  If any such entity were to fail to qualify as a REIT, we would not meet the 10% voting stock limitation and the 10% value limitation and we would fail to qualify as a REIT.  We believe that we and each of the REITs we own an interest in have and will comply with the foregoing asset tests for REIT qualification.  However, we cannot provide any assurance that the Internal Revenue Service might not disagree with our determinations.

 

Annual Distribution Requirements.  To qualify as a REIT, we are generally required to distribute dividends, other than capital gain dividends, to our shareholders each year in an amount at least equal to 90% (95% for taxable years prior to 2001) of our REIT taxable income.  These distributions must be paid either in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for the prior year and if paid with or before the first regular dividend payment date after the declaration is made.  We intend to make timely distributions sufficient to satisfy our annual distribution requirements.  To the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100% of our REIT taxable income, as adjusted, we are subject to tax on these amounts at regular corporate rates.   We will be subject to a 4% excise tax on the excess of the required distribution over the sum of amounts actually distributed and amounts retained for which federal income tax was paid, if we fail to distribute during each calendar year at least the sum of:  (1) 85% of our REIT ordinary income for the year; (2) 95% of our REIT capital gain net income for the year; and  (3) any undistributed taxable income from prior taxable years.  A REIT may elect to retain rather than distribute all or a portion of its net capital gains and pay the tax on the gains.  In that case, a REIT may elect to have its shareholders include their proportionate share of the undistributed net capital gains in income as long-term capital gains and receive a credit for their share of the tax paid by the REIT.  For purposes of the 4% excise tax described above, any retained amounts would be treated as having been distributed.

 

Ownership of Partnership Interests By Us.  As a result of our ownership of the Operating Partnership, we will be considered to own and derive our proportionate share of the assets and items of income of the Operating Partnership, respectively, for purposes of the REIT asset and income tests, including its share of assets and items of income of any subsidiaries that are partnerships or limited liability companies, provided that the Operating Partnership is taxed as a partnership and not as a “C” corporation for federal tax purposes. Under the Internal Revenue Code, publicly traded partnerships are generally taxed as “C” corporations, unless at least 90% of their gross income consists of “qualifying income,” such as interest, dividends, real property rents, and gains from the sale or other disposition of real property held for investment.  The Operating Partnership is treated as a publicly traded partnership, however it satisfies the 90% qualifying income test. If the Operating Partnership did not satisfy the qualifying income test, then it would be taxed as a corporation for federal income tax purposes, which would jeopardize our status as a REIT.  A partnership is a “publicly traded partnership” if interests in such partnership are either traded on an established securities market or are “readily tradable on a secondary market” and there are at least 500 partners at any time during the taxable year.  We believe that all other partnerships in which we own an interest are not publicly traded partnerships.

 

Our Management Company and Other Subsidiaries.  A small portion of the cash to be used by the

 

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Operating Partnership to fund distributions to us is expected to come from payments of dividends from management companies and other subsidiaries of the Company that have elected TRS status.  These companies pay federal and state income tax at the full applicable corporate rates.  They will attempt to minimize the amount of these taxes, but we cannot guarantee whether or the extent to which, measures taken to minimize these taxes will be successful.  To the extent that these companies are required to pay taxes, the cash available for distribution from these management companies by us to shareholders will be reduced accordingly.

 

State and Local Taxes.  We may be subject to state or local taxation in various jurisdictions, including those in which we transact business or reside.  Our state and local tax treatment may not conform to the federal income tax consequence discussed above.  Consequently, prospective shareholders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in common shares.

 

Taxation of Domestic Shareholders Subject to U.S. Tax

 

General.  If we qualify as a REIT, distributions made to our taxable domestic shareholders with respect to their common shares, other than capital gain distributions, will be treated as ordinary income to the extent that the distributions come out of earnings and profits.  These distributions will not be eligible for the dividends received deduction for shareholders that are corporations.  In determining whether distributions are out of earnings and profits, we will allocate our earnings and profits first to preferred shares and second to the common shares.

 

To the extent we make distributions to our taxable domestic shareholders in excess of our earnings and profits, such distributions will be considered a return of capital.  Such distributions will be treated as a tax-free distribution and will reduce the tax basis of a shareholder’s common shares by the amount of the distribution so treated. To the extent that such distributions cumulatively exceed a taxable domestic shareholder’s tax basis, such distributions are taxable as a gain from the sale of his shares.  Shareholders may not include in their individual income tax returns any of our net operating losses or capital losses.

 

Distributions made by us that we properly designate as capital gain dividends will be taxable to taxable domestic shareholders as gain from the sale or exchange of a capital asset held for more than one year.  This treatment applies only to the extent that the designated distributions do not exceed our actual net capital gain for the taxable year.  It applies regardless of the period for which a domestic shareholder has held his or her common shares.  Despite this general rule, corporate shareholders may be required to treat up to 20% of certain capital gain dividends as ordinary income.

 

Generally, we will classify a portion of our designated capital gains dividend as a 20% rate gain distribution and the remaining portion as an unrecaptured Section 1250 gain distribution.  As the names suggest, a 20% rate gain distribution would be taxable to taxable domestic shareholders that are individuals, estates or trusts at a maximum rate of 20%.  An unrecaptured Section 1250 gain distribution would be taxable to taxable domestic shareholders that are individuals, estates or trusts at a maximum rate of 25%.

 

If, for any taxable year, we elect to designate as capital gain dividends any portion of the dividends paid or made available for the year to holders of all classes of shares of beneficial interest, then the portion of the capital gains dividends that will be allocable to the holders of common shares will be the total capital gain dividends multiplied by a fraction.  The numerator of the fraction will be the total dividends paid or made available to the holders of the common shares for the year.  The denominator of the fraction will be the total dividends paid or made available to holders of all classes of shares of beneficial interest.

 

In general, a shareholder will recognize gain or loss for federal income tax purposes on the sale or other disposition of common shares in an amount equal to the difference between:

 

(a)                                            the amount of cash and the fair market value of any property received in the sale or other disposition; and

 

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(b)                                           the shareholder’s adjusted tax basis in the common shares.

 

The gain or loss will be capital gain or loss if the common shares were held as a capital asset.  Generally, the capital gain or loss will be long-term capital gain or loss if the common shares were held for more than one year.  The Taxpayer Relief Act of 1997 allows the IRS to issue regulations that would apply a capital gains tax rate of 25% to a portion of the capital gain realized by a noncorporate holder of REIT Shares.  The IRS has not issued these regulations.  However, if the IRS does issue these regulations, they could affect the taxation of gain and loss realized on the disposition of common shares. Shareholders are urged to consult with their own tax advisors with respect to the impact of such rules on their capital gains tax.

 

In general, a loss recognized by a shareholder upon the sale of common shares that were held for six months or less, determined after applying certain holding period rules, will be treated as long-term capital loss to the extent that the shareholder received distributions that were treated as long-term capital gains.  For shareholders who are individuals, trusts and estates, the long-term capital loss will be apportioned among the applicable long-term capital gain rates to the extent that distributions received by the shareholder were previously so treated.

 

We may elect to retain (rather than distribute as is generally required) net capital gain for a taxable year and pay the income tax on that gain.  If we make this election, shareholders must include in income, as long-term capital gain, their proportionate share of the undistributed net capital gain. Shareholders will be treated as having paid their proportionate share of the tax paid by us on these gains. Accordingly, they will receive a credit or refund for the amount.  Shareholders will increase the basis in their common shares by the difference between the amount of capital gain included in their income and the amount of the tax they are treated as having paid. Our earnings and profits will be adjusted appropriately.

 

Taxation of Domestic Tax-Exempt Shareholders

 

Most tax-exempt organizations are not subject to federal income tax except to the extent of their unrelated business taxable income, which is often referred to as UBTI.  Unless a tax-exempt shareholder holds its common shares as debt financed property or uses the common shares in an unrelated trade or business, distributions to the shareholder should not constitute UBTI.  Similarly, if a tax-exempt shareholder sells common shares, the income from the sale should not constitute UBTI unless the shareholder held the shares as debt financed property or used the shares in a trade or business.

 

However, for tax-exempt shareholders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans, income from owning or selling common shares will constitute UBTI unless the organization is able to properly deduct amounts set aside or placed in reserve so as to offset the income generated by its investment in common shares.  These shareholders should consult their own tax advisors concerning these set aside and reserve requirements which are set forth in the Internal Revenue Code.

 

In addition, certain pension trusts that own more than 10% of a “pension-held REIT” must report a portion of the distributions that they receive from the REIT as UBTI.  We have not been and do not expect to be treated as a pension-held REIT for purposes of this rule.

 

Taxation of Foreign Shareholders

 

The following is a discussion of certain anticipated United States federal income tax consequences of the ownership and disposition of common shares applicable to a foreign shareholder.  For purposes of this discussion, a “foreign shareholder” is any person other than:

 

(a)                                            a citizen or resident of the United States;

 

(b)                                           a corporation or partnership created or organized in the United States or under the laws of the

 

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United States or of any state thereof; or

 

(c)                                            an estate or trust whose income is includable in gross income for United States federal income tax purposes regardless of its source.

 

Distributions by Us

 

Distributions by us to a foreign shareholder that are neither attributable to gain from sales or exchanges by us of United States real property interests nor designated by us as capital gains dividends will be treated as dividends of ordinary income to the extent that they are made out of our earnings and profits.  These distributions ordinarily will be subject to withholding of United States federal income tax on a gross basis at a 30% rate, or a lower treaty rate, unless the dividends are treated as effectively connected with the conduct by the foreign shareholder of a United States trade or business. Please note that under certain treaties lower withholding rates generally applicable to dividends do not apply to dividends from REIT’s.  Dividends that are effectively connected with a United States trade or business will be subject to tax on a net basis at graduated rates, and are generally not subject to withholding.  Certification and disclosure requirements must be satisfied before a dividend is exempt from withholding under this exemption.  A foreign shareholder that is a corporation also may be subject to an additional branch profits tax at a 30% rate or a lower treaty rate.

 

We expect to withhold United States income tax at the rate of 30% on any distributions made to a foreign shareholder unless:

 

(a)                                            a lower treaty rate applies and any required form or certification evidencing eligibility for that reduced rate is filed with us; or

 

(b)                                           the foreign shareholder files an IRS Form W-8ECI with us claiming that the distribution is effectively connected income.

 

A distribution in excess of our current or accumulated earnings and profits will not be taxable to a foreign shareholder to the extent that the distribution does not exceed the adjusted basis of the shareholder’s common shares.  Instead, the distribution will reduce the adjusted basis of the common shares.  To the extent that the distribution exceeds the adjusted basis of the common shares, it will give rise to gain from the sale or exchange of the shareholder’s common shares.  The tax treatment of this gain is described below.

 

As a result of a legislative change made by the Small Business Job Protection Act of 1996, we may be required to withhold 10% of any distribution in excess of our earnings and profits.  Consequently, although we intend to withhold at a rate of 30%, or a lower applicable treaty rate, on the entire amount of any distribution, to the extent that we do not do so, distributions will be subject to withholding at a rate of 10%.  However, a foreign shareholder may seek a refund of the withheld amount from the IRS if it subsequently determined that the distribution was, in fact, in excess of our earnings and profits, and the amount withheld exceeded the foreign shareholder’s United States tax liability with respect to the distribution.

 

Distributions to a foreign shareholder that we designate at the time of the distributions as capital gain dividends, other than those arising from the disposition of a United States real property interest, generally will not be subject to United States federal income taxation unless:

 

(a)                                            the investment in the common shares is effectively connected with the foreign shareholder’s United States trade or business, in which case the foreign shareholder will be subject to the same treatment as domestic shareholders, except that a shareholder that is a foreign corporation may also be subject to the branch profits tax, as discussed above; or

 

(b)                                           the foreign shareholder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States, in which case the nonresident alien individual will be subject to a 30% tax on the individual’s capital gains.

 

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Under the Foreign Investment in Real Property Tax Act, which is known as FIRPTA, distributions to a foreign shareholder that are attributable to gain from sales or exchanges of United States real property interests will cause the foreign shareholder to be treated as recognizing the gain as income effectively connected with a United States trade or business. This rule applies whether or not a distribution is designated as a capital gain dividend.  Accordingly, foreign shareholders generally would be taxed on these distributions at the same rates applicable to U.S. shareholders, subject to a special alternative minimum tax in the case of nonresident alien individuals.  In addition, a foreign corporate shareholder might be subject to the branch profits tax discussed above.  We are required to withhold 35% of these distributions.  The withheld amount can be credited against the foreign shareholder’s United States federal income tax liability.

 

Although the law is not entirely clear on the matter, it appears that amounts we designate as undistributed capital gains in respect of the common shares held by U.S. shareholders would be treated with respect to foreign shareholders in the same manner as actual distributions of capital gain dividends. Under that approach, foreign shareholders would be able to offset as a credit against the United States federal income tax liability their proportionate share of the tax paid by us on these undistributed capital gains.  In addition, foreign shareholders would be able to receive from the IRS a refund to the extent their proportionate share of the tax paid by us were to exceed their actual United States federal income tax liability.

 

Sales of Common Shares

 

Gain recognized by a foreign shareholder upon the sale or exchange of common shares generally will not be subject to United States taxation unless the shares constitute a “United States real property interest” within the meaning of FIRPTA.  The common shares will not constitute a United States real property interest so long as we are a domestically controlled REIT.  A domestically controlled REIT is a REIT in which at all times during a specified testing period less than 50% in value of its stock is held directly or indirectly by foreign shareholders.  We believe that we are a domestically controlled REIT.  Therefore, we believe that the sale of common shares will not be subject to taxation under FIRPTA.  However, because common shares and preferred shares are publicly traded, we cannot guarantee that we will continue to be a domestically controlled REIT.  In any event, gain from the sale or exchange of common shares not otherwise subject to FIRPTA will be subject to U.S. tax, if either:

 

(a)                                            the investment in the common shares is effectively connected with the foreign shareholder’s United States trade or business, in which case the foreign shareholder will be subject to the same treatment as domestic shareholders with respect to the gain; or

 

(b)                                           the foreign shareholder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and has a tax home in the United States, in which case the nonresident alien individual will be subject to a 30% tax on the individual’s capital gains.

 

Even if we do not qualify as or cease to be a domestically controlled REIT, gain arising from the sale or exchange by a foreign shareholder of common shares still would not be subject to United States taxation under FIRPTA as a sale of a United States real property interest if:

 

(a)                                            the class or series of shares being sold is “regularly traded,” as defined by applicable IRS regulations, on an established securities market such as the New York Stock Exchange; and

 

(b)                                           the selling foreign shareholder owned 5% or less of the value of the outstanding class or series of shares being sold throughout the five-year period ending on the date of the sale or exchange.

 

If gain on the sale or exchange of common shares were subject to taxation under FIRPTA, the foreign shareholder would be subject to regular United States income tax with respect to the gain in the same manner

 

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as a taxable U.S. shareholder, subject to any applicable alternative minimum tax, a special alternative minimum tax in the case of nonresident alien individuals and the possible application of the branch profits tax in the case of foreign corporations.  The purchaser of the common shares would be required to withhold and remit to the IRS 10% of the purchase price.

 

Available Information

 

You may access our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to any of those reports we file with the SEC free of charge at our website, www.equityapartments.com.  These reports are made available at our website as soon as reasonably practicable after we file them with the SEC.

 

Item 2.  The Properties

 

As of December 31, 2002, the Company owned or had investments in 1,039 Properties in 36 states consisting of 223,591 units.  The Company’s properties are more fully described as follows:

 

Type		Number of Properties		Number of Units		Average Number of Units		Average Occupancy Percentage		Average Monthly Rent Possible
Garden		677		180,225		266		92.5	%	$	862
Mid/High-Rise		33		10,199		309		88.4	%	$	1,397
Ranch		328		29,515		90		93.2	%	$	500
Military Housing		1		3,652		3,652		95.4	%	$	973
Total		1,039		223,591

 

Resident leases are generally for twelve months in length and typically require security deposits.  The garden-style properties are generally defined as properties with two and/or three story buildings while the mid-rise/high-rise are defined as properties with greater than three story buildings.  These two property types typically provide residents with amenities, which may include a clubhouse, swimming pool, laundry facilities and cable television access. Certain of these properties offer additional amenities such as saunas, whirlpools, spas, sports courts and exercise rooms or other amenities.  The ranch-style properties are defined as single story properties, which do not provide additional amenities for residents other than laundry facilities and cable television access.  The military housing properties are defined as those properties located on military bases.

 

It is management’s role to monitor compliance with property policies and to provide preventive maintenance of the properties including common areas, facilities and amenities.  The Company has a dedicated training and education department that creates and coordinates training and strategic implementation for the Company’s property management personnel.  The Company believes that, due in part to its emphasis on training and employee quality, the properties historically have had high occupancy rates.

 

The distribution of the properties throughout the United States reflects the Company’s belief that geographic diversification helps insulate the portfolio from regional and economic influences.  At the same time, the Company has sought to create clusters of properties within each of its primary markets in order to achieve economies of scale in management and operation.  The Company may nevertheless acquire additional multifamily properties located anywhere in the continental United States.

 

The following tables set forth certain information by type and state relating to the Company’s properties at December 31, 2002:

 

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GARDEN-STYLE PROPERTIES

 

								December 31, 2002
State		Number of Properties		Number of Units		Percentage of Total Units		Average Occupancy Percentage		Average Monthly Rent Possible per Unit
Alabama		12		2,451		1.10	%	94.1	%	$	530
Arizona		51		14,646		6.55		89.6		765
California		88		21,924		9.81		94.3		1,260
Colorado		29		8,175		3.66		91.8		810
Connecticut		23		2,705		1.21		95.4		902
Florida		83		24,277		10.86		92.7		801
Georgia		38		12,169		5.44		91.8		789
Illinois		7		2,360		1.06		94.2		1,007
Kansas		5		2,144		0.96		89.5		690
Kentucky		4		1,342		0.60		85.4		582
Maine		5		672		0.30		97.8		889
Maryland		23		5,419		2.42		94.7		923
Massachusetts		34		4,655		2.08		95.4		1,097
Michigan		8		2,388		1.07		87.3		883
Minnesota		18		4,035		1.80		91.2		962
Missouri		8		1,590		0.71		92.2		676
Nevada		7		2,078		0.93		89.3		711
New Hampshire		1		390		0.17		93.6		1,051
New Jersey		2		980		0.44		95.0		1,578
New Mexico		3		601		0.27		91.2		749
New York		1		300		0.13		93.3		1,598
North Carolina		37		10,176		4.55		91.9		608
Oklahoma		8		2,036		0.91		93.8		569
Oregon		12		4,051		1.81		91.3		734
Rhode Island		5		778		0.35		95.1		945
South Carolina		6		1,021		0.46		92.5		540
Tennessee		14		4,366		1.95		90.9		671
Texas		79		24,767		11.08		92.5		735
Utah		2		416		0.19		86.0		643
Virginia		18		5,778		2.58		93.0		897
Washington		42		10,254		4.59		91.0		841
Wisconsin		4		1,281		0.57		93.0		948
Total Garden-Style		677		180,225		80.60	%
Average Garden-Style				266				92.5	%	$	862

 

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MID-RISE/HIGH-RISE PROPERTIES

 

								December 31, 2002
State		Number of Properties		Number of Units		Percentage of Total Units		Average Occupancy Percentage		Average Monthly Rent Possible per Unit
California		1		164		0.07	%	75.6	%	$	1,524
Connecticut		2		407		0.18		87.5		2,171
Florida		2		458		0.20		94.0		1,036
Georgia		1		322		0.14		89.1		1,306
Illinois		1		1,305		0.58		93.9		841
Massachusetts		10		2,942		1.32		89.9		1,464
Minnesota		1		163		0.07		85.9		1,344
New Jersey		3		887		0.40		86.2		1,994
Ohio		1		765		0.34		74.4		1,177
Oregon		1		525		0.23		86.2		1,007
Texas		3		596		0.27		91.5		1,067
Virginia		2		865		0.39		94.4		1,326
Washington		5		800		0.36		85.5		1,200
Total Mid-Rise/High-Rise		33		10,199		4.56	%
Average Mid-Rise/High-Rise				309				88.4	%	$	1,397

 

RANCH-STYLE PROPERTIES

 

Alabama		1		69		0.03	%	92.8	%	$	396
Florida		99		9,169		4.10		93.7		518
Georgia		53		4,428		1.98		93.4		524
Indiana		44		4,059		1.82		93.0		467
Kentucky		21		1,637		0.73		92.7		451
Maryland		4		414		0.19		94.4		597
Michigan		17		1,536		0.69		93.7		601
Ohio		77		7,187		3.21		92.5		473
Pennsylvania		5		469		0.21		91.6		573
South Carolina		2		187		0.08		86.7		429
Tennessee		2		146		0.07		98.6		477
West Virginia		3		214		0.10		95.0		425
Total Ranch-Style		328		29,515		13.20	%
Average Ranch-Style				90				93.2	%	$	500

 

MILITARY HOUSING PROPERTIES

 

Washington (Ft. Lewis)		1		3,652		1.63	%	95.4	%	$	973
Total Military Housing		1		3,652		1.63	%
Average Military Housing				3,652				95.4	%	$	973
Total Residential Portfolio		1,039		223,591		100	%

 

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The properties currently under development are included in the following table.

 

DEVELOPMENT PROJECTS as of December 31, 2002

(Amounts in millions except for project and unit amounts)

 

		Location		Number of Units		Estimated Development Cost			Funded as of 12/31/2002			Estimated Future Funding Obligation			Total Funding Obligation(1)			Estimated Completion Date
Unconsolidated Projects
1210 Massachusetts Ave.		Washington, DC		142		$	36.3		$	11.4		—			$	11.4		2Q 2004
13th & N Street		Washington, DC		170		35.4			12.4			—			12.4			3Q 2003
Ball Park Lofts		Denver, CO		355		56.4			14.1			—			14.1			2Q 2003
Bella Terra (Village Green at Harbour Pointe) (2)		Mukilteo, WA		235		32.7			8.2			—			8.2			Completed
Bella Vista I&II (Warner Ridge I&II)		Woodland Hills, CA		315		80.9			18.8			$	2.9		21.7			1Q03/1Q04
Carrollton		Carrollton, TX		284		21.9			4.9			0.6			5.5			3Q 2003
City Place (Westport)		Kansas City, MO		288		34.7			8.7			—			8.7			1Q 2003
Concord Center		Concord, CA		259		52.3			13.1			—			13.1			4Q 2003
Highlands of Lombard		Lombard, IL		403		67.1			16.8			—			16.8			3Q 2003
Hudson Pointe		Jersey City, NJ		181		45.0			11.2			—			11.2			1Q 2003
Maples at Little River		Haverhill, MA		174		28.0			7.0			—			7.0			3Q 2003
Marina Bay I (2)		Quincy, MA		136		24.8			6.6			—			6.6			Completed
Marina Bay II		Quincy, MA		108		22.8			5.7			—			5.7			4Q 2003
North Pier at Harborside		Jersey City, NJ		297		94.2			23.5			—			23.5			2Q 2003
Olympus (Legacy Towers) (2)		Seattle, WA		327		89.3			22.1			0.3			22.4			Completed
Savannah Midtown (Piedmont) (2)		Atlanta, GA		322		36.7			9.6			—			9.6			Completed
Watermarke		Irvine, CA		535		120.6			35.2			—			35.2			1Q 2004
Water Terrace I (Regatta I)		Marina Del Rey, CA		450		234.8			72.5			—			72.5			1Q 2003
Total Projects				4,981		$	1,113.9		$	301.8		$	3.8		$	305.6

 

(1)                                  The Company’s funding obligation is generally between 25% and 35% of the estimated development cost for the unconsolidated projects.

 

(2)                                  Properties were substantially complete as of December 31, 2002.  As such, these properties are also included in the outstanding property and unit counts.

 

Item 3.  Legal Proceedings

 

Only ordinary routine litigation incidental to the business, which is not deemed material, was initiated during the year ended December 31, 2002.  As of December 31, 2002, the Company is not aware of any other 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.

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

None

 

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