UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended MARCH 31, 2007

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)

 

(312) 474-1300

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer  x   Accelerated filer  o Non-accelerated filer   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  x

The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding on March 31, 2007 was 290,747,000.

EQUITY RESIDENTIAL

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands except for share amounts)

(Unaudited)

		March 31, 2007			December 31, 2006
ASSETS
Investment in real estate
Land		$	3,391,105		$	3,217,672
Depreciable property		13,784,447			13,376,359
Projects under development		384,534			399,131
Land held for development		296,990			242,013
Investment in real estate		17,857,076			17,235,175
Accumulated depreciation		(3,103,329		)	(3,022,480		)
Investment in real estate, net		14,753,747			14,212,695
Cash and cash equivalents		171,742			260,277
Investments in unconsolidated entities		4,196			4,448
Deposits – restricted		188,958			391,825
Escrow deposits – mortgage		23,426			25,528
Deferred financing costs, net		46,434			43,384
Other assets		133,391			124,062
Total assets		$	15,321,894		$	15,062,219
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Mortgage notes payable		$	3,105,938		$	3,178,223
Notes, net		4,420,467			4,419,433
Lines of credit		947,500			460,000
Accounts payable and accrued expenses		118,319			96,699
Accrued interest payable		70,303			91,172
Other liabilities		367,567			311,557
Security deposits		60,474			58,072
Distributions payable		150,577			151,382
Total liabilities		9,241,145			8,766,538
Commitments and contingencies
Minority Interests:
Operating Partnership		352,639			372,961
Preference Interests and Units		11,684			11,684
Partially Owned Properties		20,995			26,814
Total Minority Interests		385,318			411,459
Shareholders’ equity:
Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares authorized; 2,746,850 shares issued and outstanding as of March 31, 2007 and 2,762,950 shares issued and outstanding as of December 31, 2006		386,171			386,574
Common Shares of beneficial interest, $0.01 par value; 1,000,000,000 shares authorized; 290,747,000 shares issued and outstanding as of March 31, 2007 and 293,551,633 shares issued and outstanding as of December 31, 2006		2,907			2,936
Paid in capital		5,176,897			5,349,194
Retained earnings		143,024			159,528
Accumulated other comprehensive loss		(13,568		)	(14,010		)
Total shareholders’ equity		5,695,431			5,884,222
Total liabilities and shareholders’ equity		$	15,321,894		$	15,062,219

 

See accompanying notes

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EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands except per share data)

(Unaudited)

		Quarter Ended March 31,
		2007			2006
REVENUES
Rental income		$	523,898		$	459,971
Fee and asset management		2,267			2,487
Total revenues		526,165			462,458
EXPENSES
Property and maintenance		141,581			122,061
Real estate taxes and insurance		58,977			46,071
Property management		24,904			23,642
Fee and asset management		2,341			2,168
Depreciation		152,821			128,676
General and administrative		9,966			13,040
Impairment		236			566
Total expenses		390,826			336,224
Operating income		135,339			126,234
Interest and other income		2,444			2,352
Interest:
Expense incurred, net		(111,660		)	(104,555		)
Amortization of deferred financing costs		(2,564		)	(2,738		)
Income before allocation to Minority Interests, loss from investments in unconsolidated entities, net gain on sales of unconsolidated entities and discontinued operations		23,559			21,293
Allocation to Minority Interests:
Operating Partnership, net		(939		)	(543		)
Preference Interests and Units		(223		)	(1,099		)
Partially Owned Properties		(592		)	(1,521		)
Premium on redemption of Preference Interests		—			(674		)
Loss from investments in unconsolidated entities		(229		)	(230		)
Net gain on sales of unconsolidated entities		—			329
Income from continuing operations, net of minority interests		21,576			17,555
Discontinued operations, net of minority interests		104,661			360,260
Net income		126,237			377,815
Preferred distributions		(7,424		)	(10,095		)
Net income available to Common Shares		$	118,813		$	367,720
Earnings per share – basic:
Income from continuing operations available to Common Shares		$	0.05		$	0.03
Net income available to Common Shares		$	0.41		$	1.27
Weighted average Common Shares outstanding		292,251			288,880
Earnings per share – diluted:
Income from continuing operations available to Common Shares		$	0.05		$	0.03
Net income available to Common Shares		$	0.40		$	1.25
Weighted average Common Shares outstanding		316,265			314,049
Distributions declared per Common Share outstanding		$	0.4625		$	0.4425

 

See accompanying notes

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EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(Amounts in thousands except per share data)

(Unaudited)

		Quarter Ended March 31,
		2007			2006
Comprehensive income:
Net income		$	126,237		$	377,815
Other comprehensive income (loss) – derivative and other instruments:
Unrealized holding (losses) gains arising during the period		(121		)	1,523
Losses reclassified into earnings from other comprehensive income		563			589
Comprehensive income		$	126,679		$	379,927

 

See accompanying notes

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EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

		Quarter Ended March 31,
		2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	126,237		$	377,815
Adjustments to reconcile net income to net cash provided by operating activities:
Allocation to Minority Interests:
Operating Partnership		7,886			25,960
Preference Interests and Units		223			1,099
Partially Owned Properties		592			1,521
Premium on redemption of Preference Interests		—			674
Depreciation		154,674			146,771
Amortization of deferred financing costs		2,564			2,790
Amortization of discounts and premiums on debt		(1,396		)	(1,894		)
Amortization of deferred settlements on derivative instruments		218			244
Impairment		236			792
Loss from investments in unconsolidated entities		229			230
Distributions from unconsolidated entities – return on capital		23			68
Net (gain) on sales of unconsolidated entities		—			(329		)
Net (gain) on sales of discontinued operations		(111,767		)	(372,501		)
Loss on debt extinguishments		141			2,867
Compensation paid with Company Common Shares		4,902			6,294
Other operating activities, net		—			(1		)
Changes in assets and liabilities:
(Increase) in deposits – restricted		(746		)	(2,303		)
Decrease in other assets		5,381			2,664
Increase in accounts payable and accrued expenses		16,317			4,627
(Decrease) in accrued interest payable		(20,869		)	(8,580		)
(Decrease) in other liabilities		(20,147		)	(29,290		)
Increase in security deposits		2,402			1,559
Net cash provided by operating activities		167,100			161,077
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate – acquisitions		(677,058		)	(444,901		)
Investment in real estate – development/other		(79,926		)	(34,831		)
Improvements to real estate		(57,354		)	(51,414		)
Additions to non-real estate property		(1,738		)	(1,620		)
Interest capitalized for real estate under development		(7,866		)	(4,016		)
Proceeds from disposition of real estate, net		280,592			810,898
Proceeds from disposition of unconsolidated entities		—			333
Investments in unconsolidated entities		—			(1,010		)
Distributions from unconsolidated entities – return of capital		—			92
Decrease (increase) in deposits on real estate acquisitions, net		218,224			(46,090		)
Decrease in mortgage deposits		2,102			3,391
Consolidation of previously Unconsolidated Properties:
Via EITF 04-5 (cash consolidated)		—			1,436
Acquisition of Minority Interests – Partially Owned Properties		—			(1		)
Other investing activities, net		—			2
Net cash (used for) provided by investing activities		(323,024		)	232,269

 

See accompanying notes

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EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)

		Quarter Ended March 31,
		2007			2006
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan and bond acquisition costs		$	(5,691	)	$	(4,464	)
Mortgage notes payable:
Proceeds		33,559			168,787
Restricted cash		(14,611		)	—
Lump sum payoffs		(135,611		)	(141,183		)
Scheduled principal repayments		(6,046		)	(6,810		)
Prepayment premiums/fees		(141		)	(2,867		)
Notes, net:
Proceeds		—			398,052
Lines of credit:
Proceeds		4,052,000			1,884,500
Repayments		(3,564,500		)	(2,508,500		)
(Payments on) proceeds from settlement of derivative instruments		(29		)	10,729
Proceeds from sale of Common Shares		3,347			3,308
Proceeds from exercise of options		7,041			22,155
Common Shares repurchased and retired		(142,754		)	(44,758		)
Redemption of Preference Interests		—			(25,500		)
Payment of offering costs		(64		)	(16		)
Contributions – Minority Interests – Partially Owned Properties		1,337			815
Distributions:
Common Shares		(135,829		)	(127,911		)
Preferred Shares		(7,431		)	(11,150		)
Preference Interests and Units		(223		)	(1,137		)
Minority Interests – Operating Partnership		(9,217		)	(9,181		)
Minority Interests – Partially Owned Properties		(7,748		)	(266		)
Net cash provided by (used for) financing activities		67,389			(395,397		)
Net (decrease) in cash and cash equivalents		(88,535		)	(2,051		)
Cash and cash equivalents, beginning of period		260,277			88,828
Cash and cash equivalents, end of period		$	171,742		$	86,777

 

See accompanying notes

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EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)

		Quarter Ended March 31,
		2007			2006
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest		$	141,879		$	124,870
Cash paid during the period for income, franchise and excise taxes		$	77		$	899
Real estate acquisitions/dispositions/other:
Mortgage loans assumed		$	40,672		$	50,604
Valuation of OP Units issued		$	—		$	27,855
Mortgage loans (assumed) by purchaser		$	(4,845	)	$	(14,205	)
Consolidation of previously Unconsolidated Properties — Via EITF 04-5:
Investment in real estate, net		$	—		$	(24,637	)
Mortgage loans consolidated		$	—		$	22,545
Investments in unconsolidated entities		$	—		$	2,602
Net other liabilities recorded		$	—		$	926

 

See accompanying notes

7

EQUITY RESIDENTIAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.                                      Business

Equity Residential (“EQR”), a Maryland real estate investment trust (“REIT”) formed in March 1993, is an S&P 500 company focused on the acquisition, development and management of high quality apartment properties in top United States growth markets.  EQR has elected to be taxed as a REIT.

EQR is the general partner of, and as of March 31, 2007 owned an approximate 93.8% ownership interest in, ERP Operating Limited Partnership, an Illinois limited partnership (the “Operating Partnership”).  The Company is structured as an umbrella partnership REIT (“UPREIT”), under which all property ownership and business operations are conducted through the Operating Partnership and its subsidiaries.  References to the “Company” include EQR, the Operating Partnership and those entities owned or controlled by the Operating Partnership and/or EQR.

As of March 31, 2007, the Company, directly or indirectly through investments in title holding entities, owned all or a portion of 618 properties in 25 states and the District of Columbia consisting of 166,324 units.   The ownership breakdown includes (table does not include various uncompleted development properties):

		Properties		Units
Wholly Owned Properties		545		146,473
Partially Owned Properties:
Consolidated		27		5,445
Unconsolidated		45		10,846
Military Housing (Fee Managed)		1		3,560
		618		166,324

 

2.                                      Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) and certain reclassifications considered necessary for a fair presentation have been included.  Certain reclassifications have been made to the prior period financial statements in order to conform to the current year presentation.  Operating results for the quarter ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

The balance sheet at December 31, 2006 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

For further information, including definition of capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2006.

Income Taxes

Due to the structure of the Company as a REIT and the nature of the operations of its operating properties, no provision for federal income taxes has been made at the EQR level.  Historically, the Company

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has generally only incurred certain state and local income, excise and franchise taxes.  The Company has elected Taxable REIT Subsidiary (“TRS”) status for certain of its corporate subsidiaries, primarily those entities engaged in condominium conversion, corporate housing and sale activities and as a result, these entities incurred both federal and state income taxes.

Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  These assets and liabilities are measured using enacted tax rates for which the temporary differences are expected to be recovered or settled.  The effect of deferred tax assets and liabilities are recognized in earnings in the period enacted.  As of March 31, 2007, the Company has recorded a deferred tax asset which was fully offset by a valuation allowance.

Other

The Company adopted SFAS No. 123(R), Share-Based Payment, as required effective January 1, 2006.  SFAS No. 123(R) requires all companies to expense share-based compensation (such as share options), as well as making other revisions to SFAS No. 123.  As the Company began expensing all share-based compensation effective January 1, 2003, the adoption of SFAS No. 123(R) did not have a material effect on its consolidated statements of operations or financial position.

The Company adopted the disclosure provisions of SFAS No. 150 and FSP No. FAS 150-3, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, effective December 31, 2003.  SFAS No. 150 and FSP No. FAS 150-3 require the Company to make certain disclosures regarding noncontrolling interests that are classified as equity in the financial statements of a subsidiary but would be classified as a liability in the parent’s financial statements under SFAS No. 150 (e.g., minority interests in consolidated limited-life subsidiaries).  The Company is presently the controlling partner in various consolidated partnerships consisting of 27 properties and 5,445 units and various uncompleted development properties having a minority interest book value of $21.0 million at March 31, 2007.  Some of these partnerships contain provisions that require the partnerships to be liquidated through the sale of its assets upon reaching a date specified in each respective partnership agreement.  The Company, as controlling partner, has an obligation to cause the property owning partnerships to distribute proceeds of liquidation to the Minority Interests in these Partially Owned Properties only to the extent that the net proceeds received by the partnerships from the sale of its assets warrant a distribution based on the partnership agreements.  As of March 31, 2007, the Company estimates the value of Minority Interest distributions would have been approximately $102.8 million (“Settlement Value”) had the partnerships been liquidated.  This Settlement Value is based on estimated third party consideration realized by the partnerships upon disposition of the Partially Owned Properties and is net of all other assets and liabilities, including yield maintenance on the mortgages encumbering the properties, that would have been due on March 31, 2007 had those mortgages been prepaid.  Due to, among other things, the inherent uncertainty in the sale of real estate assets, the amount of any potential distribution to the Minority Interests in the Company’s Partially Owned Properties is subject to change.  To the extent that the partnerships’ underlying assets are worth less than the underlying liabilities, the Company has no obligation to remit any consideration to the Minority Interests in Partially Owned Properties.

The Company adopted EITF Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (“Issue 04-5”), effective January 1, 2006.  Issue 04-5 provides guidance in determining whether a general partner controls a limited partnership.  The Company consolidated its Lexford syndicated portfolio consisting of 20 separate partnerships (10 properties) containing 1,272 units, all of which were sold October 5, 2006.  The adoption did not have a material effect on the results of operations or financial position.

In July 2006, the FASB ratified the consensus in FIN No. 48, Accounting for Uncertainty in Income Taxes.  FIN No. 48 creates a single model to address uncertainty in income tax positions and prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial

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statements.  It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition, and clearly scopes income taxes out of SFAS No. 5, Accounting for Contingencies.  The Company adopted FIN No. 48 as required effective January 1, 2007.  The adoption of FIN No. 48 did not have a material effect on the consolidated results of operations or financial position.

3.                                      Shareholders’ Equity and Minority Interests

The following tables present the changes in the Company’s issued and outstanding Common Shares and OP Units for the quarter ended March 31, 2007:

		2007
Common Shares outstanding at January 1,		293,551,633
Common Shares Issued:
Conversion of Series E Preferred Shares		17,358
Conversion of Series H Preferred Shares		724
Conversion of OP Units		603,298
Exercise of options		217,165
Employee Share Purchase Plan		77,537
Restricted share grants, net		419,539
Common Shares Other:
Repurchased and retired		(4,140,254	)
Common Shares outstanding at March 31,		290,747,000

 

		2007
OP Units outstanding at January 1,		19,914,583
Conversion of OP Units to Common Shares		(603,298	)
OP Units Outstanding at March 31,		19,311,285
Total Common Shares and OP Units Outstanding at March 31,		310,058,285
OP Units Ownership Interest in Operating Partnership		6.2	%

 

During the quarter ended March 31, 2007, the Company repurchased 4,140,254 of its Common Shares at an average price of $48.76 per share for total consideration of $201.9 million, of which $142.8 million was paid in cash during the first quarter of 2007 and $59.1 million was accrued for at March 31, 2007 (see below).  These shares were retired subsequent to the repurchase.  Of the total shares repurchased, 80,054 shares were repurchased at an average price of $54.37 per share to cover the minimum statutory tax withholding obligations related to the vesting of employees’ restricted shares.  The remaining 4,060,200 shares were repurchased in the open market at an average price of $48.65 per share.  As of March 31, 2007, transactions to repurchase 1,245,100 of the 4,140,254 Common Shares had not yet settled.  As of March 31, 2007, the Company has reduced the number of Common Shares issued and outstanding by this amount and recorded a liability of $59.1 million included in other liabilities on the consolidated balance sheets.

The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for OP Units are collectively referred to as the “Minority Interests – Operating Partnership”.  Subject to certain restrictions, the Minority Interests – Operating Partnership may exchange their OP Units for EQR Common Shares on a one-for-one basis.

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

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equity and Minority Interests – Operating Partnership to account for the change in their respective percentage ownership of the underlying equity of the Operating Partnership.

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

The following table presents the Company’s issued and outstanding Preferred Shares as of March 31, 2007 and December 31, 2006:

						Annual			Amounts in thousands
		Redemption Date (1) (2)		Conversion Rate (2)		Dividend per Share (3)			March 31, 2007			December 31, 2006
Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares authorized:
8.60% Series D Cumulative Redeemable Preferred; liquidation value $250 per share; 700,000 shares issued and outstanding at March 31, 2007 and December 31, 2006 (4)		7/15/07		N/A		$	21.50		$	175,000		$	175,000
7.00% Series E Cumulative Convertible Preferred; liquidation value $25 per share; 419,216 and 434,816 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively		11/1/98		1.1128		$	1.75		10,480			10,871
7.00% Series H Cumulative Convertible Preferred; liquidation value $25 per share; 27,634 and 28,134 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively		6/30/98		1.4480		$	1.75		691			703
8.29% Series K Cumulative Redeemable Preferred; liquidation value $50 per share; 1,000,000 shares issued and outstanding at March 31, 2007 and December 31, 2006		12/10/26		N/A		$	4.145		50,000			50,000
6.48% Series N Cumulative Redeemable Preferred; liquidation value $250 per share; 600,000 shares issued and outstanding at March 31, 2007 and December 31, 2006 (4)		6/19/08		N/A		$	16.20		150,000			150,000
									$	386,171		$	386,574

 

(1)          On or after the redemption date, redeemable preferred shares (Series D, K and N) may be redeemed for cash at the option of the Company, in whole or in part, at a redemption price equal to the liquidation price per share, plus accrued and unpaid distributions, if any.

(2)          On or after the redemption date, convertible preferred shares (Series E & H) may be redeemed under certain circumstances at the option of the Company for cash (in the case of Series E) or Common Shares (in the case of Series H), in whole or in part, at various redemption prices per share based upon the contractual conversion rate, plus accrued and unpaid distributions, if any.

(3)          Dividends on all series of Preferred Shares are payable quarterly at various pay dates.  Dividends listed for Series D and N are Preferred Share rates and the equivalent Depositary Share annual dividends are $2.15 and $1.62 per share, respectively.

(4)          Series D and N Preferred Shares each have a corresponding depositary share that consists of ten times the number of shares and one-tenth the liquidation value and dividend per share.

The following table presents the issued and outstanding Preference Interests as of March 31, 2007 and December 31, 2006:

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						Annual			Amounts in thousands
		Redemption Date (1) (2)		Conversion Rate (2)		Dividend per Unit (3)			March 31, 2007			December 31, 2006
Preference Interests:
7.625% Series J Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 230,000 units issued and outstanding at March 31, 2007 and December 31, 2006		12/14/06		1.4108		$	3.8125		$	11,500		$	11,500
									$	11,500		$	11,500

 

(1)          On or after the fifth anniversary of the issuance (the “Redemption Date”), the Series J 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 issuance (the “Conversion Date”), the Series J 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 Series J Preference Interests 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.  Prior to the Conversion Date, the Series J Preference Interests 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, if the issuer has called the series for redemption (the “Accelerated Conversion Right”).

(3)          Dividends on the Series J Preference Interests are payable quarterly on March 25th, June 25th, September 25th and December 25th of each year.

The following table presents the Operating Partnership’s issued and outstanding Junior Convertible Preference Units (the “Junior Preference Units”) as of March 31, 2007 and December 31, 2006:

						Annual			Amounts in thousands
		Redemption Date (2)		Conversion Rate (2)		Dividend per Unit (1)			March 31, 2007			December 31, 2006
Junior Preference Units:
Series B Junior Convertible Preference Units; liquidation value $25 per unit; 7,367 units issued and outstanding at March 31, 2007 and December 31, 2006		07/29/09		1.020408		$	2.00		$	184		$	184
									$	184		$	184

 

(1)          Dividends on the Junior Preference Units are payable quarterly at various pay dates.

(2)          On or after the tenth anniversary of the issuance (the “Redemption Date”), the Series B Junior Preference Units may be converted into OP Units at the option of the Operating Partnership based on the contractual conversion rate.  Prior to the Redemption Date, the holders may elect to convert the Series B Junior Preference Units to OP Units under certain circumstances based on the contractual conversion rate.  The contractual rate is based upon a ratio dependent upon the closing price of EQR’s Common Shares.

4.                                      Real Estate

The following table summarizes the carrying amounts for investment in real estate (at cost) as of March 31, 2007 and December 31, 2006 (Amounts in thousands):

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		March 31, 2007			December 31, 2006
Land		$	3,391,105		$	3,217,672
Depreciable property:
Buildings and improvements		12,918,797			12,563,807
Furniture, fixtures and equipment		865,650			812,552
Projects under development:
Land		125,006			137,505
Construction-in-progress		259,528			261,626
Land held for development:
Land		246,114			202,695
Construction-in-progress		50,876			39,318
Investment in real estate		17,857,076			17,235,175
Accumulated depreciation		(3,103,329		)	(3,022,480		)
Investment in real estate, net		$	14,753,747		$	14,212,695

 

During the quarter ended March 31, 2007, the Company acquired the following from unaffiliated parties (purchase price in thousands):

		Properties		Units		Purchase Price
Rental Properties		13		3,899		$	674,156
Land Parcels (three)		—		—		42,450
		13		3,899		$	716,606

 

During the quarter ended March 31, 2007, the Company disposed of the following to unaffiliated parties (sales price in thousands):

		Properties		Units		Sales Price
Rental Properties		12		3,711		$	253,930
Condominium Units		2		157		37,280
		14		3,868		$	291,210

 

The Company recognized a net gain on sales of discontinued operations of approximately $111.8 million on the above sales.

5.                                      Commitments to Acquire/Dispose of Real Estate

As of May 2, 2007, in addition to the properties that were subsequently acquired as discussed in Note 16, the Company had entered into separate agreements to acquire the following (purchase price in thousands):

		Properties/ Parcels		Units		Purchase Price
Operating Properties		6		1,528		$	361,200
Land Parcels		1		—		53,052
Total		7		1,528		$	414,252

 

As of May 2, 2007, in addition to the properties that were subsequently disposed as discussed in Note 16, the Company had entered into separate agreements to dispose of the following (sales price in thousands):

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		Properties/ Parcels		Units		Sales Price
Operating Properties		19		4,635		$	397,429
Development Properties		1		—		44,700
Land Parcels		1		—		3,000
Total		21		4,635		$	445,129

 

The closings of these pending transactions are subject to certain contingencies and conditions; therefore, there can be no assurance that these transactions will be consummated or that the final terms thereof will not differ in material respects from those summarized in the preceding paragraphs.

6.                                      Investments in Partially Owned Entities

The Company has co-invested in various properties with unrelated third parties which are either consolidated or accounted for under the equity method of accounting (unconsolidated).  The following table summarizes the Company’s investments in partially owned entities as of March 31, 2007 (amounts in thousands except for project and unit amounts):

			Consolidated															Unconsolidated
			Development Projects
			Held for and/or Under Development			Completed, Not Stabilized (4)			Completed and Stabilized			Other			Total			Institutional Joint Ventures
Total projects	(1)		—			2			4			21			27			45
Total units	(1)		—			572			977			3,896			5,445			10,846
Debt – Secured (2):
EQR Ownership (3)			$	98,860		$	90,237		$	61,000		$	286,957		$	537,054		$	121,200
Minority Ownership			—			—			—			13,321			13,321			363,600
Total (at 100%)			$	98,860		$	90,237		$	61,000		$	300,278		$	550,375		$	484,800

 

(1)          Project and unit counts exclude all uncompleted development projects until those projects are substantially completed.

(2)          All debt is non-recourse to the Company with the exception of $28.3 million in mortgage bonds on one development project.

(3)          Represents the Company’s economic ownership interest.

(4)          Projects included here are substantially complete.  However, they may still require additional exterior and interior work for all units to be available for leasing.

 

7.                                      Deposits – Restricted

The following table presents the deposits – restricted as of March 31, 2007 and December 31, 2006 (amounts in thousands):

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		March 31, 2007			December 31, 2006
Tax-deferred (1031) exchange proceeds		$	81,468		$	299,392
Earnest money on pending acquisitions		12,870			13,170
Resident security and utility deposits		37,727			36,260
Restricted deposits on debt		34,805			20,194
Other		22,088			22,809
Totals		$	188,958		$	391,825

 

8.                                      Mortgage Notes Payable

As of March 31, 2007, the Company had outstanding mortgage debt of approximately $3.1 billion.

During the quarter ended March 31, 2007, the Company:

·                  Repaid $141.7 million of mortgage loans;

·                  Assumed $40.7 million of mortgage debt on certain properties in connection with their acquisitions;

·                  Obtained $33.6 million of new mortgage loans on certain properties; and

·                  Was released from $4.8 million of mortgage debt assumed by the purchaser on disposed properties.

The Company recorded approximately $0.1 million and $0.3 million of prepayment penalties and write-offs of unamortized deferred financing costs, respectively, as additional interest related to debt extinguishment of mortgages during the quarter ended March 31, 2007.

As of March 31, 2007, scheduled maturities for the Company’s outstanding mortgage indebtedness were at various dates through September 1, 2045.  At March 31, 2007, the interest rate range on the Company’s mortgage debt was 3.32% to 12.465%.  During the quarter ended March 31, 2007, the weighted average interest rate on the Company’s mortgage debt was 5.73%.

9.                                      Notes

As of March 31, 2007, the Company had outstanding unsecured notes of approximately $4.4 billion.  There were no significant transactions during the quarter ended March 31, 2007.

As of March 31, 2007, scheduled maturities for the Company’s outstanding notes were at various dates through 2029.  At March 31, 2007, the interest rate range on the Company’s notes was 3.85% to 7.625%.  During the quarter ended March 31, 2007, the weighted average interest rate on the Company’s notes was 5.70%.

10.                               Lines of Credit

On February 28, 2007, the Operating Partnership entered into an unsecured revolving credit facility with potential borrowings of up to $1.5 billion maturing on February 28, 2012.  Advances under the 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 on bids received from the lending group.  EQR has guaranteed the Operating Partnership’s credit facility up to the maximum amount and for the full term of the facility.

On April 1, 2005, the Operating Partnership obtained a three-year $1.0 billion unsecured revolving credit facility maturing on May 29, 2008.  Advances under the credit facility bore interest at variable rates based upon LIBOR at various interest periods plus a spread dependent upon the Operating Partnership’s credit rating or based on bids received from the lending group.  EQR guaranteed the Operating Partnership’s credit facility up to the maximum amount and for the full term of the facility.  This credit facility was repaid in full and terminated on February 28, 2007.  The Company recorded $0.4 million of write-offs of unamortized deferred financing costs as

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additional interest in connection with this termination.

As of March 31, 2007, $947.5 million was outstanding and $70.8 million was restricted (dedicated to support letters of credit and not available for borrowing) on the $1.5 billion revolving credit facility.  During the quarter ended March 31, 2007, the weighted average interest rate under the credit facilities was 5.63%.

11.                               Derivative Instruments

The following table summarizes the consolidated derivative instruments at March 31, 2007 (dollar amounts are in thousands):

		Fair Value Hedges (1)			Forward Starting Swaps (2)			Development Cash Flow Hedges (3)
Current Notional Balance		$	370,000		$	100,000		$	—
Lowest Possible Notional		$	370,000		$	100,000		$	—
Highest Possible Notional		$	370,000		$	100,000		$	54,947
Lowest Interest Rate		3.245		%	5.596		%	N/A
Highest Interest Rate		3.787		%	5.596		%	5.850		%
Earliest Maturity Date		2009			2017			2009
Latest Maturity Date		2009			2017			2009
Estimated Asset (Liability) Fair Value		$	(10,713	)	$	(3,230	)	$	19

 

(1)          Fair Value Hedges – Converts outstanding fixed rate debt to a floating interest rate.

(2)          Forward Starting Swaps – Designed to partially fix the interest rate in advance of a planned future debt issuance.

(3)          Development Cash Flow Hedges – Converts outstanding floating rate debt to a fixed interest rate (swaps) and/or locks-in a maximum interest rate (caps).

On March 31, 2007, the net derivative instruments were reported at their fair value as other liabilities of approximately $13.9 million and other assets of $19,000.  As of March 31, 2007, there were approximately $14.2 million in deferred losses, net, included in accumulated other comprehensive loss.  Based on the estimated fair values of the net derivative instruments at March 31, 2007, the Company may recognize an estimated $2.5 million of accumulated other comprehensive loss as additional interest expense during the twelve months ending March 31, 2008.

12.                               Earnings Per Share

The following tables set forth the computation of net income per share – basic and net income per share – diluted (amounts in thousands except per share amounts):

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		Quarter Ended March 31,
		2007			2006
Numerator for net income per share – basic:
Income from continuing operations, net of minority interests		$	21,576		$	17,555
Preferred distributions		(7,424		)	(10,095		)
Income from continuing operations available to Common Shares, net of minority interests		14,152			7,460
Discontinued operations, net of minority interests		104,661			360,260
Numerator for net income per share – basic		$	118,813		$	367,720
Numerator for net income per share – diluted:
Income from continuing operations, net of minority interests		$	21,576		$	17,555
Preferred distributions		(7,424		)	(10,095		)
Effect of dilutive securities:
Allocation to Minority Interests – Operating Partnership, net		939			543
Income from continuing operations available to Common Shares		15,091			8,003
Discontinued operations		111,608			385,677
Numerator for net income per share – diluted		$	126,699		$	393,680
Denominator for net income per share – basic and diluted:
Denominator for net income per share – basic		292,251			288,880
Effect of dilutive securities:
OP Units		19,446			20,454
Share options/restricted shares		4,568			4,715
Denominator for net income per share – diluted		316,265			314,049
Net income per share – basic		$	0.41		$	1.27
Net income per share – diluted		$	0.40		$	1.25
Net income per share – basic:
Income from continuing operations available to Common Shares, net of minority interests		$	0.048		$	0.026
Discontinued operations, net of minority interests		0.358			1.247
Net income per share – basic		$	0.406		$	1.273
Net income per share – diluted:
Income from continuing operations available to Common Shares		$	0.048		$	0.025
Discontinued operations		0.353			1.228
Net income per share – diluted		$	0.401		$	1.253

 

Convertible preferred shares/units that could be converted into 853,151 and 1,615,465 weighted average Common Shares for the quarters ended March 31, 2007 and 2006, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.  In addition, the effect of the Common Shares that could ultimately be issued upon the conversion/exchange of the Operating Partnership’s $650.0 million exchangeable senior notes were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.

13.                               Discontinued Operations

The Company has presented separately as discontinued operations in all periods the results of operations for all consolidated assets disposed of on or after January 1, 2002 (the date of adoption of SFAS

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No. 144) and all operations related to condominium conversion properties effective upon their respective transfer into a TRS.

The components of discontinued operations are outlined below and include the results of operations for the respective periods that the Company owned such assets during the quarters ended March 31, 2007 and 2006 (amounts in thousands).

		Quarter Ended March 31,
		2007			2006
REVENUES
Rental income		$	7,749		$	74,789
Total revenues		7,749			74,789
EXPENSES (1)
Property and maintenance		4,484			25,461
Real estate taxes and insurance		1,209			9,746
Property management		141			2,733
Depreciation		1,853			18,095
General and administrative		2			211
Impairment		—			226
Total expenses		7,689			56,472
Discontinued operating income		60			18,317
Interest and other income		87			980
Interest (2):
Expense incurred, net		(306		)	(6,069		)
Amortization of deferred financing costs		—			(52		)
Discontinued operations		(159		)	13,176
Minority Interests – Operating Partnership		10			(869		)
Discontinued operations, net of minority interests		(149		)	12,307
Net gain on sales of discontinued operations		111,767			372,501
Minority Interests – Operating Partnership		(6,957		)	(24,548		)
Gain on sales of discontinued operations, net of minority interests		104,810			347,953
Discontinued operations, net of minority interests		$	104,661		$	360,260

 

(1)       Includes expenses paid in the current period for properties sold or held for sale in prior periods related to the Company’s period of ownership.

(2)       Includes only interest expense specific to secured mortgage notes payable for properties sold and/or held for sale.

For the properties sold during the quarter ended March 31, 2007 (excluding condominium conversion properties), the investment in real estate, net of accumulated depreciation, and the mortgage notes payable balances at December 31, 2006 were $152.1 million and $11.9 million, respectively.

The net real estate basis of the Company’s condominium conversion properties owned by the TRS and included in discontinued operations (excludes the Company’s five halted conversions as they are now held for use), which were included in investment in real estate, net in the consolidated balance sheets, was $98.1 million and $95.4 million at March 31, 2007 and December 31, 2006, respectively.

14.                               Commitments and Contingencies

The Company, as an owner of real estate, is subject to various Federal, state and local environmental laws.

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Compliance by the Company with existing laws has not had a material adverse effect on the Company.  However, the Company cannot predict the impact of new or changed laws or regulations on its current properties or on properties that it may acquire in the future.

The Company is party to a housing discrimination lawsuit brought by a non-profit civil rights organization in April 2006 in the U.S. District Court for the District of Maryland.  The suit alleges that the Company designed and built approximately 300 of its properties in violation of the accessibility requirements of the Fair Housing Act and Americans With Disabilities Act.  The suit seeks actual and punitive damages, injunctive relief (including modification of non-compliant properties), costs and attorneys’ fees.  The Company believes it has a number of viable defenses, including that a majority of the named properties were completed before the operative dates of the statutes in question and/or were not designed or built by the Company.  Accordingly, the Company is defending the suit vigorously.  Due to the pendency of the Company’s defenses and the uncertainty of many other critical factual and legal issues, it is not possible to determine or predict the outcome of the suit and as a result, no amounts have been accrued at March 31, 2007. While no assurances can be given, the Company does not believe that the suit, if adversely determined, will have a material adverse effect on the Company.

The Company does not believe there is any other litigation pending or threatened against it that, individually or in the aggregate, reasonably may be expected to have a material adverse effect on the Company.

During the years ended December 31, 2005 and 2004, the Company established a reserve and recorded a corresponding expense, net of insurance receivables, for estimated uninsured property damage at certain of its properties caused by various hurricanes in each respective year.  During the quarter ended March 31, 2007, the Company received $3.8 million in insurance proceeds and recorded an additional $2.8 million of receivables in anticipation of proceeds expected.  As of March 31, 2007, a receivable of $4.1 million and a liability of $2.5 million are included in other assets and other liabilities, respectively, on the consolidated balance sheets.

As of March 31, 2007, the Company has ten projects totaling 3,228 units in various stages of development with estimated completion dates ranging through June 30, 2009.  The primary development agreements currently in place have the following key terms:

·                  The first development partner has the right, at any time following completion of a project, to stipulate a value for such project and offer to sell its interest in the project to the Company based on such value.  If the Company chooses not to purchase the interest, the Company must agree to a sale of the project to an unrelated third party at such value.  The Company’s partner must exercise this right as to all projects subject to the agreement within five years after the receipt of the final certificate of occupancy on the last developed property.

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

·                  The third development partner has the exclusive right for six months following stabilization, as defined, to market a subject project for sale.  Thereafter, either the Company or its development partner may market a subject project for sale.  If the Company’s development partner proposes the sale, the Company may elect to purchase the project at the price proposed by its partner or defer the sale until two independent appraisers appraise the project.  If the two appraised values vary by more than 5%, a third appraiser will be chosen to determine the fair market value of the property.  Once a

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value has been determined, the Company may elect to purchase the property or authorize its development partner to sell the project at the agreed-upon value.

In addition, the Company has various deal-specific development agreements with partners, the overall terms of which are similar in nature to those described above.

15.                               Reportable Segments

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

The Company’s primary business is owning, managing, and operating multifamily residential properties, which includes the generation of rental and other related income through the leasing of apartment units to residents.  Senior management evaluates the performance of each of our apartment communities individually and geographically, and both on a same store and non-same store basis; however, each of our apartment communities generally has similar economic characteristics, residents, and products and services.  The Company’s operating segments have been aggregated by geography in a manner identical to that which is provided to its chief operating decision maker.

The Company’s fee and asset management, development (including FIN No. 46 partially owned properties), condominium conversion and corporate housing (Equity Corporate Housing or “ECH”) activities are immaterial and do not individually meet the threshold requirements of a reportable segment as provided for in SFAS No. 131 and as such, have been aggregated in the tables presented below.

All revenues are from external customers and there is no customer who contributed 10% or more of the Company’s total revenues during the quarters ended March 31, 2007 and 2006, respectively.

The primary financial measure for the Company’s rental real estate segment is net operating income (“NOI”), which represents rental income less: 1) property and maintenance expense; 2) real estate taxes and insurance expense; and 3) property management expense (all as reflected in the accompanying consolidated statements of operations).  The Company believes that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it is a direct measure of the actual operating results of the Company’s apartment communities.  Current year NOI is compared to prior year NOI and current year budgeted NOI as a measure of financial performance.  The following table presents NOI for each segement from our rental real estate specific to continuing operations as well as total assets for the quarters ended March 31, 2007 and 2006, respectively (amounts in thousands):

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