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Filed pursuant to Rule 424(b)(5)
Registration No. 333-169956

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered		Amount to be Registered		Maximum Offering Price Per Share		Maximum Aggregate Offering Price		Amount of Registration Fee(1)
Common Shares of Beneficial Interest, $0.01 par value		21,850,000		$54.75		$1,196,287,500		$163,174

 

(1)

The registration fee has been calculated and is being paid in accordance with Rule 457(r) under the Securities Act.

 

 

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PROSPECTUS SUPPLEMENT

Issued November 28, 2012

(To Prospectus dated October 15, 2010)

 

 

19,000,000 COMMON SHARES

 

 

 

We are offering 19,000,000 of our common shares of beneficial interest, par value $0.01 per share. For a detailed description of our common shares, see the section entitled “Description of Equity Residential Securities—Common Shares” beginning on page 5 of the accompanying prospectus.

 

 

 

Our common shares are listed on the New York Stock Exchange under the symbol “EQR”. The last reported sale price of our common shares on the New York Stock Exchange on November 28, 2012 was $55.18 per share.

 

 

 

To assist us in maintaining our qualification as a real estate investment trust, or “REIT,” for federal income tax purposes, our articles of restatement of declaration of trust contain certain restrictions on ownership of our common shares. See “Description of Equity Residential Securities—Restriction on Ownership and Transfer” in the accompanying prospectus.

 

 

 

Investing in our common shares involves risks. See “Risk Factors” beginning on page S-9 of this prospectus supplement and the risks set forth in the documents we have filed with the Securities and Exchange Commission that are incorporated by reference in this prospectus supplement.

 

 

 

		Price to Public		Underwriting Discounts and Commissions		Proceeds to Us, Before Expenses
Per Share		$54.75		$1.6425		$53.1075
Total		$1,040,250,000		$31,207,500		$1,009,042,500

 

We have granted the underwriters the right to purchase an additional 2,850,000 common shares to cover over-allotments.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the common shares to purchasers on December 4, 2012.

 

 

 

MORGAN STANLEY
		BofA MERRILL LYNCH
				DEUTSCHE BANK SECURITIES
						WELLS FARGO SECURITIES

 

 

Barclays		Citigroup		J.P. Morgan			RBC Capital Markets

 

 

 

Mitsubishi UFJ Securities		Piper Jaffray		PNC Capital Markets LLC			SunTrust Robinson Humphrey

 

November 28, 2012

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You should rely only on the information contained or incorporated by reference in this prospectus supplement and the accompanying prospectus or in any free writing prospectus. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus supplement and the accompanying prospectus is accurate only as of their respective dates. Our business, financial condition, results of operations and prospects may have changed since then.

 

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ABOUT THIS PROSPECTUS SUPPLEMENT

 

This document is in two parts. The first part is this prospectus supplement, which describes the specific terms of this offering and also adds to and updates information contained in the accompanying prospectus and the documents incorporated by reference in this prospectus supplement and the accompanying prospectus. The second part is the accompanying prospectus, which gives a description of our common shares and more general information about other securities we may offer from time to time under our shelf registration statement, some of which does not apply to this offering.

 

If the description of this offering varies between this prospectus supplement and the accompanying prospectus, you should rely on the information contained in or incorporated by reference in this prospectus supplement.

 

It is important for you to read and consider all information contained in this prospectus supplement and the accompanying prospectus, including the documents incorporated by reference herein and therein, in making your investment decision. This prospectus supplement and the accompanying prospectus incorporate important business and financial information about us and our subsidiaries that is not included in or delivered with these documents. This information is available without charge to security holders upon written or oral request. See “Where You Can Find More Information About Us.”

 

Unless the context otherwise requires or as otherwise specified, references in this prospectus to “we,” “us,” “our” or “the Company” refer to Equity Residential and its subsidiaries, including ERP Operating Limited Partnership. The term “Archstone” refers to Archstone Enterprise LP and its consolidated subsidiaries. See “Prospectus Supplement Summary—Recent Developments.” The “underwiriters” refers to the financial institutions named in the “Underwriting” section of this prospectus supplement.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus supplement, the accompanying prospectus and the documents incorporated or deemed incorporated by reference as described under “Where You Can Find More Information About Us” contain certain information that we intend to be considered “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended. These forward-looking statements relate to such things as our anticipated future economic performance, our plans and objectives for future operations and projections of revenue and other financial items, which can be identified by the use of forward-looking words such as “may,” “will,” “should,” “expect,” “anticipate,” “estimate” or “continue” or the negative thereof or other variations thereon or comparable terms. Forward-looking statements also include, without limitation, statements regarding our ability to complete the Archstone Transaction (as described herein), our ability to finance the Archstone Transaction as expected (including our ability to complete successfully dispositions of certain of our assets and the impact of the timing of those dispositions on our financial results), our ability to and the impact of incurring additional debt in connection with the Archstone Transaction (including significant additional near-term maturities), and the impact on the market price of our common shares if we fail to consummate the Archstone Transaction. Factors that could cause actual results to vary from our forward-looking statements include, without limitation, the failure to receive, on a timely basis or otherwise, the required approvals by government or regulatory agencies in connection with the Archstone Transaction or other third party consents, the risk that a condition to closing under the agreement governing the Archstone Transaction may not be satisfied, the possibility that the anticipated benefits from the Archstone Transaction will take longer to realize than expected or will not be realized at all, risks related to the diversion of management time and attention to the operation of our business as a result of the Archstone Transaction, and risks related to our investments in joint ventures, including the joint ventures with AvalonBay Communities, Inc. relating to the Archstone Transaction.

 

Actual results could differ materially from those contemplated by these forward-looking statements as a result of many factors. The cautionary statements under the caption “Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2011, which is incorporated herein by reference, and other similar statements contained in this prospectus supplement, the accompanying prospectus and the documents incorporated or deemed incorporated by reference herein and therein, identify important factors with respect to forward-looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from those in such forward-looking statements. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely affect us. Should any known or unknown risks and uncertainties develop into actual events, those developments could have a material adverse effect on our business, financial condition and results of operations.

 

In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking information contained in this prospectus supplement and the documents incorporated by reference or deemed incorporated by reference herein will in fact transpire. Potential investors are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.

 

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ARCHSTONE TRANSACTION

 

The Archstone Transaction

 

On November 26, 2012, we and ERP Operating Limited Partnership (“ERP”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with AvalonBay Communities, Inc. (“AVB”), Archstone Enterprise LP (“Archstone”) and Lehman Brothers Holdings Inc. (“LBHI”). Pursuant to the terms of the Purchase Agreement, ERP, AVB and certain of their respective subsidiaries have agreed to acquire from Archstone and its affiliates (the “Archstone Transaction”), substantially all of the assets and interests in various entities affiliated with Archstone, constituting a portfolio of apartment properties and other assets (the “Archstone Assets”) in exchange for (i) $2.016 billion in cash to be paid by us and $669 million in cash to be paid by AVB, (ii) 34,468,085 of our common shares and 14,889,706 shares of AVB common stock and (iii) the assumption of substantially all of the liabilities related to the Archstone Assets. Following consummation of the Archstone Transaction, we will own assets representing approximately 60% of the Archstone Assets and AVB will own assets representing approximately 40% of the Archstone Assets, as described further herein.

 

Assets to be Acquired

 

Pursuant to the Archstone Transaction, we have agreed to acquire, directly or indirectly, 78 wholly-owned, stabilized properties consisting of 23,110 apartment units with an average monthly rent of $2,492 per unit, five additional partially-owned and unconsolidated stabilized properties consisting of 1,936 apartment units, as well as ownership or ownership interests in four projects under construction for 1,225 apartment units, and fifteen land sites for the potential development of approximately 3,636 apartment units. The 78 wholly-owned, stabilized properties are located in the following markets:

 

Market		Properties				Apartment Units
New York Metro			10				2,638
Washington D.C.			24				7,578
Southern California			12				3,374
South Florida			1				196
Boston			8				1,984
San Francisco Bay Area			14				4,827
Seattle			7				1,841
All Other Markets			2				672
Total			78				23,110

 

The following table provides the percentage of net operating income (“NOI”) generated during the nine months ended September 30, 2012, by market for all operating properties and pro forma combined with the Archstone Portfolio:

 

Market		Equity Residential % of 2012 YTD 9/30/12 NOI				Archstone % of 2012 YTD 9/30/12 NOI				Pro Forma % of 2012 YTD 9/30/12 NOI
New York Metro			13.8	%			18.1	%			14.8	%
Washington D.C.			16.1	%			33.5	%			20.1	%
Southern California			20.3	%			11.0	%			18.1	%
South Florida			9.4	%			0.4	%			7.3	%
Boston			8.0	%			13.3	%			9.2	%
San Francisco Bay Area			7.8	%			18.5	%			10.3	%
Seattle			7.3	%			4.3	%			6.6	%
All Other Markets			17.3	%			0.9	%			13.6	%
Total			100.0	%			100.0	%			100.0	%

 

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The following table provides the name and location of the 78 wholly-owned, stabilized properties we have agreed to acquire:

 

Washington D.C.		San Francisco Bay Area		Southern California		New York Metro
Archstone 2501 Porter The Flats at DuPont Circle Calvert Woodley Cleveland House Archstone Connecticut Heights Archstone DuPont Circle Park Connecticut Alban Towers Archstone Van Ness Westchester at the Pavilions Westchester Rockville Station Archstone 2201 Wilson Archstone Columbia Crossing Archstone Courthouse Plaza Crystal Place Archstone Crystal Towers Archstone Lofts 590 Archstone Fairchase Archstone Monument Park Oakwood Crystal City/Gateway Place Archstone Pentagon City Archstone Rosslyn Archstone Virginia Square Water Park Towers		Archstone Cupertino Archstone Emerald Park Archstone Emeryville Archstone Santa Clara Archstone Fox Plaza Archstone Fremont Center Archstone Hacienda Archstone Mountain View Archstone Redwood Shores Harborside Archstone San Mateo Archstone Sausalito Archstone South Market Archstone South San Francisco     Seattle   Archstone Belltown Cedar River* Archstone Elliot Bay Archstone Northcreek Oakwood Bellevue Archstone Redmond Park Archstone Redmond Court		Archstone Agoura Hills Archstone City Place Archstone Glendale Archstone Playa Del Rey Archstone Santa Monica Archstone Ventura Archstone Westside Breakwater at Marina Del Rey/Villa Venetia Archstone Marina Del Rey Oakwood Marina Del Rey Archstone Del Mar Heights Archstone Encinitas         Boston   Archstone Avenir Archstone CambridgePark Archstone Cronin’s Landing Archstone Kendall Square Oakwood Boston Archstone Quarry Hills Archstone Watertown Square Archstone Boston Common		Archstone 101 West End Archstone Brooklyn Heights Archstone Camargue Archstone Chelsea Archstone East 39th Archstone Hoboken West 96th/Key West Archstone Murray Hill The Westmont Archstone West 54th               Southern Florida   Archstone Delray Beach     All Other Markets   Westchester at Clairmont Archstone Desert Harbor

 

*

The above property information is as of September 30, 2012. Cedar River was sold subsequent to September 30, 2012, with EQR receiving the economic benefit of such sale.

 

In addition, EQR and AVB will acquire certain assets of Archstone, including Archstone’s interests in certain joint ventures, interests in Archstone’s German portfolio and certain development land parcels, through one or more unconsolidated joint ventures between EQR and AVB that are expected to be owned 60% by EQR and 40% by AVB. These joint ventures between EQR and AVB will consist of assets that do not fit EQR’s or AVB’s core strategy or asset class. As a result, EQR and AVB plan to divest these joint venture assets as promptly as reasonably possible, subject to market and other economic conditions.

 

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EQR and AVB will also own, through an unconsolidated joint venture expected to be owned 60% by EQR and 40% by AVB, certain entities that are subject to existing tax protection arrangements and approximately $330.0 million in preferred interests of Archstone unitholders ($260.6 million of which are subject to tax protection arrangements), which will restrict our ability to dispose of certain assets acquired from Archstone and require the joint venture to comply with the requirements of the preferred interests, including their right of redemption.

 

Additional Agreements; Closing

 

At the closing of the Archstone Transaction, LBHI and EQR have agreed to enter into a Registration Rights Agreement, which grants LBHI certain customary registration rights to cover resales of the EQR common shares to be acquired by LBHI, and EQR, Archstone, LBHI and certain affiliates receiving EQR common shares have agreed to enter into a Shareholders Agreement pursuant to which LBHI will agree to vote their common shares in most cases in accordance with the recommendations of our board of trustees.

 

The Archstone Transaction is expected to close in the first quarter of 2013, subject to the satisfaction or waiver of a number of customary conditions set forth in the Purchase Agreement. The consummation of the Archstone Transaction is not conditioned on receipt of any third-party consents, including Archstone unitholders.

 

Financing

 

The consummation of the Archstone Transaction is not subject to a financing condition. We plan to fund our portion of the cash purchase price through a combination of cash on-hand, available borrowings under our $1.75 billion revolving credit facility (which we have the right to increase to $2.25 billion under certain conditions, and which we may attempt to further increase), proceeds from the disposition of non-core apartment assets, bank term debt and unsecured debt and equity offerings. Contemporaneously with entering into the Purchase Agreement, we also obtained a commitment from Morgan Stanley Senior Funding, Inc. to provide a $2.5 billion senior unsecured bridge loan facility (the “Facility”), for purposes of financing our portion of cash purchase price and to pay fees and expenses relating to the Archstone Transaction. The Facility will only be entered into if we do not otherwise raise all of the capital necessary to finance our portion of the cash purchase price from sources other than the Facility.

 

As part of the Archstone Transaction we will assume approximately $5.0 billion of outstanding Archstone debt, inclusive of an estimated mark-to-market adjustment of $311.0 million but excluding the anticipated payoff of approximately $421.2 million of Archstone secured debt at closing. In addition, we will assume, through certain partially owned unconsolidated assets in which we are acquiring an interest, approximately $385.6 million of outstanding secured debt, of which our share is approximately $161.7 million. Finally, the unconsolidated joint ventures between EQR and AVB will assume approximately $321.4 million of outstanding secured debt (representing the ventures’ share of $2.2 billion in secured debt), of which our share is approximately $192.3 million. Approximately $5.1 billion of such assumed debt is secured mortgage indebtedness held by (or credit enhanced by) Fannie Mae or Freddie Mac. Approximately $2.5 billion of such secured debt to be assumed matures prior to the end of 2014. Fannie Mae and Freddie Mac have agreed to the assumption of this debt by EQR. Of the $421.2 million discussed above, $300 million is a required prepayment of debt held by Fannie Mae.

 

We intend to finance a portion of the Archstone Transaction cash purchase price, and refinance a portion of the debt incurred or assumed in the Archstone Transaction, through dispositions of our assets in markets we intend to exit, including Atlanta, Orlando, Phoenix and Jacksonville, as well as other non-core assets in other markets. We intend these dispositions to be between $3.0 billion and $4.0 billion by the end of 2013, all of which are intended to be structured as tax free exchanges. Of this amount, we expect to close approximately $1.0 billion of asset sales by the close of the Archstone Transaction and expect that Archstone will sell approximately $750 million of assets that were to be acquired by us prior to the close of the transaction, reducing our cash purchase price by a like amount. We then intend to sell approximately $2.0 billion to $3.0 billion of assets in the balance

 

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of 2013, depending on market and other conditions. As a result of these dispositions, as well as the additional indebtedness assumed or incurred in the Archstone Transaction, we expect that the Archstone Transaction will negatively impact our results of operations in 2013.

 

We cannot assure you that we will be able to complete our dispositions in the amounts targeted, in the time period expected, or otherwise obtain alternative sources of financing for the Archstone Transaction on attractive terms, or at all. See “Risk Factors.”

 

Additional Information

 

There can be no assurance that the Archstone Transaction will be consummated or if consummated, of the timing thereof. The foregoing description of the Archstone Transaction and the Purchase Agreement is not complete and is subject to and qualified in its entirety by reference to Item 1.01 of our Current Report on Form 8-K filed on November 26, 2012, the terms of which are incorporated herein and in the accompanying prospectus by reference. This offering is not conditioned upon completion of the Archstone Transaction.

 

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RISK FACTORS

 

An investment in our common shares involves various material risks. You should carefully consider the risk factors set forth below and the risks starting on page 11 of our most recent annual report on Form 10-K incorporated by reference in this prospectus supplement and the accompanying prospectus, as updated by our subsequent filings under the Securities Exchange Act of 1934, as amended.

 

We plan to fund a portion of the cash purchase price of the Archstone Transaction as well as repay indebtedness incurred or assumed in connection with the Archstone Transaction with capital raised through significant dispositions of assets. If we are unable to consummate such dispositions in a timely manner, on attractive terms, or at all, we will likely have to incur greater indebtedness and/or issue additional equity securities.

 

We currently expect to finance a portion of the cash purchase price of the Archstone Transaction and to ultimately refinance indebtedness assumed or incurred in connection with the Archstone Transaction with proceeds generated from the disposition of certain Archstone assets and of our assets that we believe are not consistent with our ongoing business strategy or that may be in markets in which we intend to reduce our current presence. The amount of such proposed dispositions is significant, with targeted sales between $3.0 billion and $4.0 billion by the end of 2013. We can provide no assurance that we will in fact be able to consummate such dispositions at all, at a time necessary to apply the proceeds to the Archstone Transaction or the refinancing of debt, or at prices that we would otherwise expect to achieve. Factors that could limit our ability to successfully dispose of assets include:

 

•

the possible lack of financing available to potential buyers, in particular if prevailing interest rates rise or if Fannie Mae or Freddie Mac increase their interest rates on their lending, make their underwriting criteria more restrictive, or if the lending of Fannie Mae and/or Freddie Mac are curtailed or ultimately terminated;

 

•

our ability to successfully execute a disposition plan that is significant in size and more significant than any disposition plan that we have previously executed;

 

•

other sellers marketing competing properties; and

 

•

the fact that potential purchasers will perceive that we are more likely to sell on less favorable terms to us due to the Archstone Transaction and related refinancing requirements.

 

Any failure to timely achieve any anticipated dispositions would likely require us to incur greater indebtedness to fund the Archstone Transaction or seek other methods to refinance the debt incurred or assumed in connection with the Archstone Transaction, which involves the risk described herein, or issue more equity securities, which is subject to execution risk. The failure to successfully execute our disposition plan could have a material adverse effect on our financial condition, liquidity, results of operations and distributions to our shareholders.

 

In addition, we plan to defer the taxable gain on certain of our dispositions as exchanges made in connection with the Archstone Transaction pursuant to Section 1031 of the Internal Revenue Code. The requirements for qualification under Section 1031 are technical and complex. To the extent we are unable to defer such gains to the extent anticipated, the benefits of such dispositions will be reduced, and we could recognize significant taxable gains as a result of such dispositions, which would require us to make distributions in excess of our expectations, which would have a material adverse effect on our financial condition.

 

There can be no assurance that the Archstone Transaction will be consummated in accordance with the anticipated timing or at all, and the closing of this offering is not conditioned on the consummation of the Archstone Transaction.

 

Although we expect to close the Archstone Transaction in the first quarter of 2013, there can be no assurance that the Archstone Transaction will be completed in accordance with the anticipated timing or at all.

 

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The Purchase Agreement contains closing conditions, which may not be satisfied or waived, in which case ERP and AVB and/or LBHI will not be obligated to complete the Archstone Transaction. In addition, under circumstances specified in the Purchase Agreement, ERP and AVB or LBHI may terminate the Purchase Agreement.

 

Additionally, the closing of this offering is not conditioned on the consummation of the Archstone Transaction. Therefore, upon the closing of this offering, you will become a holder of our common shares irrespective of whether the Archstone Transaction is consummated or delayed. If this offering is consummated, your expected earnings per common share and our distributions per common share may be reduced. Also, the price of our common shares may decline to the extent that the current market price of our common shares reflects a market assumption that the Archstone Transaction will be consummated and that we will realize certain anticipated benefits of the Archstone Transaction.

 

We expect to incur significant additional indebtedness, including significant floating rate debt and significant amounts of indebtedness with maturity dates in 2013 and 2014, in order to consummate the Archstone Transaction, which may have a material adverse effect on our financial condition, results of operations, and distributions to our shareholders.

 

This offering of common shares forms part of a larger financing plan for the Archstone Transaction described elsewhere in this prospectus supplement. In addition to this offering of common shares, we may raise additional funds to finance our portion of the Archstone Transaction cash purchase price through one or more methods, including, without limitation, from borrowings under our revolving credit facility, proceeds from asset dispositions, bank term debt or unsecured debt or equity offerings. Depending on market conditions, we may increase or decrease the anticipated sources of debt financing that are reflected in the footnotes to the “Unaudited Pro Forma Condensed Consolidated Financial Statements” and “Capitalization.”

 

In the event we are unable to fund our portion of the cash purchase price from the sources described above, we have obtained a commitment for a bridge loan facility pursuant to which the bridge lenders have committed to provide, subject to certain conditions, the additional financing required for the Archstone Transaction through a $2.5 billion bridge loan. We may use this bridge loan facility to finance all or part of the Archstone Transaction. Any such bridge facility financing will be at a higher cost than other sources of financing. Our obligations under the Purchase Agreement are not conditioned upon the consummation of any or all of the financing transactions. See “Archstone Transaction—Financing” and “Use of Proceeds.”

 

In connection with the Archstone Transaction, we will also assume significant indebtedness, including a significant amount of secured mortgage indebtedness. At September 30, 2012, we had indebtedness of $9.3 billion, including $7.0 million of outstanding borrowings under our revolving credit facility, a total of $5.4 billion of outstanding unsecured senior debt securities and $3.9 billion of outstanding mortgage debt. Taking into account our existing indebtedness, the assumption of indebtedness in the Archstone Transaction, and possible financing plans to fund our portion of the Archstone Transaction cash purchase price, our pro forma consolidated indebtedness as of September 30, 2012, after giving effect to the Archstone Transaction, would be approximately $15.9 billion, $5.9 billion of which will mature between September 30, 2012 and December 31, 2014. We may not be able to repay or otherwise refinance such indebtedness when it becomes due and payable, which would have a material adverse effect on our results of operations, liquidity and financial condition. If we default under a mortgage loan, we may lose the properties securing these loans.

 

Further, because a significant amount of the assets we expect to acquire from Archstone are secured by mortgage indebtedness, and because we intend to dispose of significant amounts of our properties that are currently unencumbered, our unencumbered asset pool will be reduced significantly. This may increase our costs of raising additional unsecured indebtedness and could significantly limit our financial flexibility.

 

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rates increase and we are unable to successfully hedge against rising interest rates, our interest expense could increase substantially. For example, based upon our current expectations relating to the Archstone Transaction, a 100 basis point increase in short term interest rates would result in an annualized increase in our interest expense of approximately $30 million.

 

Our indebtedness could have additional significant adverse consequences on our business, such as:

 

•

having our long-term debt downgraded or put on a watch list by one or more rating agencies;

 

•

requiring us to use a substantial portion of our cash flow from operations to service our indebtedness, which would reduce the available cash flow to fund working capital, capital expenditures, development projects and other general corporate purposes and reduce cash for distributions;

 

•

limiting our ability to obtain additional financing to fund our working capital needs, acquisitions, capital expenditures or other debt service requirements or for other purposes;

 

•

increasing the costs of incurring additional debt and, to the extent we are required to use the bridge loan facility to fund the Archstone Transaction, increase our debt costs relative to other potential sources of debt financing;

 

•

increasing our exposure to floating interest rates;

 

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limiting our ability to compete with other companies who are not as highly leveraged, as we may be less capable of responding to adverse economic and industry conditions;

 

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restricting us from making strategic acquisitions, developing properties or exploiting business opportunities;

 

•

restricting the way in which we conduct our business because of financial and operating covenants in the agreements governing our and our subsidiaries’ existing and future indebtedness, including, in the case of certain indebtedness of subsidiaries, certain covenants that restrict the ability of subsidiaries to pay dividends or make other distributions to us;

 

•

exposing us to potential events of default (if not cured or waived) under financial and operating covenants contained in our or our subsidiaries’ debt instruments that could have a material adverse effect on our business, financial condition and operating results;

 

•

increasing our vulnerability to a downturn in general economic conditions; and

 

•

limiting our ability to react to changing market conditions in our industry and in our tenants’ and borrowers’ industries.

 

The impact of any of the potential adverse consequences could have a material adverse effect on our results of operations, financial condition, liquidity, and distributions to our shareholders.

 

We have not identified any specific use of the net proceeds of this offering in the event that the Archstone Transaction is not consummated or the Purchase Agreement is terminated.

 

This offering of common shares is not conditioned upon the completion of the Archstone Transaction. Consummation of the Archstone Transaction is subject to a number of conditions, and, if the Archstone Transaction is not consummated or the Purchase Agreement is terminated for any reason, our board of trustees and management will have broad discretion in the application of the net proceeds from this offering. We have not identified a specific use for any such net proceeds if the Archstone Transaction is not consummated or the Purchase Agreement is terminated. If the Archstone Transaction is not consummated or the Purchase Agreement is terminated for any reason, we intend to use the net proceeds of this offering for general corporate purposes. The failure of our management to use such net proceeds effectively could have a material adverse effect on our business and results of operations, including our earnings per share.

 

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The Archstone Acquisition is expected to be dilutive initially to our earnings and earnings per share.

 

As a result of the issuance of our common shares to LBHI as part of the consideration paid in the Archstone Transaction and the sale of our common shares in this offering to finance the Archstone Transaction, as well as a result of the expected dispositions necessary to enable us to finance the Archstone Transaction, the Archstone Transaction is expected to be dilutive to our operating results, both on an absolute basis and on a per share basis. However, the amount of any dilution will depend on a number of factors, including the pace of our planned asset sales, as discussed above and the ultimate mix of sources used to finance the Archstone Transaction. For example, if our disposition plan occurs at a faster pace than anticipated, such dispositions will result in more dilution to our revenues, net income, NOI, funds from operations and normalized funds from operations.

 

We will incur substantial expenses and payments even if the Archstone Transaction is not completed.

 

We have incurred substantial legal, accounting, financial advisory and other costs and our management has devoted considerable time and effort in connection with the Archstone Transaction. If the Archstone Transaction is not completed, we will bear certain fees and expenses associated with the Archstone Transaction without realizing the benefits of the Archstone Transaction. The fees and expenses may be significant and could have an adverse impact on our results of operations.

 

The Purchase Agreement provides for a break-up fee payable by ERP and AVB of $650 million (or $800 million if ERP and AVB extend the closing date of the Archstone Transaction beyond January 24, 2013) if the Purchase Agreement is terminated under certain circumstances, including as a result of a breach by ERP and AVB of any covenant or agreement under the Purchase Agreement. Any payment of the break-up fees would have a material adverse impact on our results of operations and our liquidity.

 

Our obligations under the Purchase Agreement entered into in the Archstone Transaction are joint and several with AVB. The failure of AVB to perform its obligations could cause the Purchase Agreement to be terminated and could have a material adverse effect on our results of operations and financial condition.

 

Although we have agreed to purchase approximately 60% of the Archstone Assets in the Archstone Transaction and AVB has agreed to acquire approximately 40% of the Archstone Assets, our obligations under the Purchase Agreement are joint and several with AVB. If AVB determines not to consummate the Archstone Transaction, we do not have the right to consummate the transaction alone. In addition, although we expect to be liable only for our pro rata share of any break-up fee or other obligations arising under the Purchase Agreement (approximately 60%) pursuant to arrangements with AVB, in the event AVB fails to pay its pro rata share of any such obligations, we will be responsible for paying 100% of such obligations. As a result, the failure of AVB to perform its obligations under the Purchase Agreement would have a material adverse effect on our results of operations, financial condition, liquidity, and distributions to our shareholders.

 

Several of the assets we expect to acquire in the Archstone Transaction are subject to tax protection agreements, which could limit our flexibility with respect to our ownership of such assets.

 

Several of the assets we expect to acquire in the Archstone Transaction were contributed to Archstone subject to various agreements limiting the ability of the owner of the property to take actions that would trigger income tax liability for the contributing owner of the property, including a taxable disposition of the property. In addition, we will also be required to maintain a certain amount of qualified nonrecourse financing on the tax protected properties during their respective restricted periods. Our obligations relating to the tax protected properties may affect the way in which we conduct our business, including whether, when and under what circumstances we sell properties or interests therein and the timing and nature of our financings and refinancing transactions. As a result, we may not be able to dispose of or refinance the tax protected properties when to do so may have otherwise been favorable to us and our shareholders, which could have a material adverse effect on our results of operations and financial condition.

 

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Our business and the market price of our common shares may be adversely affected if the Archstone Transaction is not completed.

 

The Archstone Transaction is subject to customary and other closing conditions. If the Archstone Transaction is not completed, we could be subject to a number of risks that may adversely affect our business and the market price of our common shares, including:

 

•

our management’s attention may be diverted from our day-to-day business and our employees and our relationships with customers may be disrupted as a result of efforts relating to attempting to consummate the Archstone Transaction;

 

•

the market price of our common shares may decline to the extent that the current market price reflects a market assumption that the Archstone Transaction will be completed;

 

•

we must pay certain costs related to the Archstone Transaction, such as legal and accounting fees and expenses, regardless of whether the Archstone Transaction is consummated; and

 

•

we would not realize the benefits we expect to realize from consummating the Archstone Transaction.

 

The intended benefits of the Archstone Transaction may not be realized, which could have a negative impact on our results of operations, financial conditions, the market price of our common shares, and our distributions to our shareholders.

 

We may be subject to additional risks and may not be able to achieve the anticipated benefits of the Archstone Transaction if the transaction is consummated. Upon completion of the Archstone Transaction, we will need to integrate the properties and other assets we acquire from Archstone (the “Archstone Portfolio”) with our existing operations. The Archstone Transaction represents the largest acquisition of a property portfolio ever attempted by us other than the acquisition by merger of entire operating companies and their supportive infrastructure. We may not be able to accomplish the integration of the Archstone Portfolio smoothly, successfully or within the anticipated costs. The diversion of our management’s attention from our current operations to integration efforts and any difficulties encountered could prevent us from realizing the full benefits anticipated to result from the Archstone Transaction and could adversely affect our business and the price of our common shares. Additional risks include, among others:

 

•

inability to successfully integrate the operations or information technology of acquired companies, maintain consistent standards, controls, policies and procedures, or realize the anticipated benefits of the acquisitions within the anticipated timeframe or at all;

 

•

inability to effectively monitor and manage our expanded portfolio of properties, retain key employees or attract highly qualified new employees;

 

•

increased costs or increases in taxable income due to restructuring or other steps required in connection with the integration of the Archstone Portfolio as a result of our compliance with the tax requirements applicable to real estate investment trusts under the Internal Revenue Code;

 

•

projections of estimated future revenues, cost savings or operating metrics that we develop during the due diligence and integration planning process might be inaccurate;

 

•

the value of acquired assets or the market price of our common shares may decline;

 

•

the impact of the Archstone Portfolio on our internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002;

 

•

unanticipated issues, expenses and liabilities;

 

•

diversion of our management’s attention away from other business concerns;

 

•

exposure to any undisclosed or unknown potential liabilities relating to the Archstone Portfolio; and

 

•

potential underinsured losses on the Archstone Portfolio.

 

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We cannot assure you that we would be able to integrate the Archstone Portfolio without encountering difficulties or that any such difficulties will not have a material adverse effect on us. Failure to realize the intended benefits of the Archstone Transaction could have a material adverse effect on our results of operations, financial condition, the market price of our common shares and our distributions to our shareholders.

 

We will increase our concentration of properties in certain core markets as a result of the Archstone Transaction, which could have an adverse effect on our operations if a particular market is adversely affected by economic or other conditions.

 

As a result of the Archstone Transaction, we will increase our concentration of properties in certain core markets as a result of our strategy to reposition our portfolio from low barrier to entry/non-core markets to high barrier to entry/core markets. If any one or more of such core markets, such as Washington D.C., Southern California, New York or San Francisco, which will generate approximately 20%, 18%, 15% and 10%, respectively, of our NOI as of September 30, 2012, on a pro forma basis, is adversely affected by local or regional economic conditions (such as business layoffs, industry slowdowns, changing demographics and other factors) or local real estate conditions (such as oversupply of or reduced demand for multi-family properties), such conditions may have an increased adverse impact on our results of operations than if our portfolio was more geographically diverse.

 

Our real estate development activities are subject to risks particular to development, such as unanticipated expenses, delays and other contingencies, any of which could adversely affect our financial condition, results of operations, cash flow and the per share trading price of our common shares.

 

We engage in development and redevelopment activities with respect to certain of our properties and will engage in such development and redevelopment activities with respect to certain of the assets we expect to acquire in the Archstone Transaction. To the extent that we continue to engage in development and redevelopment activities, we will be subject to certain risks, including, without limitation:

 

•

the potential that we may fail to recover expenses already incurred if we abandon development or redevelopment opportunities after we begin to explore them;

 

•

the potential that we may expend funds on and devote management time to projects which we do not complete;

 

•

construction or redevelopment costs of a project may exceed original estimates, possibly making the project less profitable than originally estimated, or unprofitable;

 

•

time required to complete the construction or redevelopment of a project or to lease up the completed project may be greater than originally anticipated, thereby adversely affecting our cash flow and liquidity;

 

•

the cost and timely completion of construction (including risks beyond our control, such as weather or labor conditions, or material shortages);

 

•

contractor and subcontractor disputes, strikes, labor disputes or supply disruptions;

 

•

failure to achieve expected occupancy and/or rent levels within the projected time frame, if at all;

 

•

delays with respect to obtaining or the inability to obtain necessary zoning, occupancy, land use and other governmental permits, and changes in zoning and land use laws;

 

•

occupancy rates and rents of a completed project may not be sufficient to make the project profitable;

 

•

our ability to dispose of properties developed or redeveloped with the intent to sell could be impacted by the ability of prospective buyers to obtain financing given the current state of the credit markets; and

 

•

the availability and pricing of financing to fund our development activities on favorable terms or at all.

 

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These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent the initiation of development and redevelopment activities or the completion of development and redevelopment activities once undertaken, any of which could have an adverse effect on our financial condition, results of operations, cash flow, per share trading price of our common shares, distributions to our shareholders, and ability to satisfy our principal and interest obligations.

 

The unaudited pro forma financial information in this prospectus supplement may not be indicative of our actual financial position or results of operations, and the purchase price of the Archstone Portfolio may not reflect the prices that we would obtain if such assets were sold to a third party.

 

The unaudited pro forma financial information contained in this prospectus supplement is presented for illustrative purposes only and is not necessarily indicative of what our actual financial position or results of operations would have been had the Archstone Transaction been completed as of the date indicated. The unaudited pro forma financial information reflects adjustments, which are based upon assumptions and preliminary estimates that we believe to be reasonable, including an estimate relating to the financing of the Archstone Transaction, but we can provide no assurance that any or all of such assumptions or estimates are correct. See “Unaudited Pro Forma Condensed Consolidated Financial Statements” for more information.

 

We did not obtain third-party appraisals for the Archstone Portfolio and based the purchase price for such assets on internal valuations. Accordingly, the values of such assets as set forth in our pro forma financial statements may not reflect the prices that we would obtain if such assets were sold to a third party.

 

Our investments in joint ventures could be adversely affected by our lack of sole decision-making authority regarding major decisions, our reliance on our joint venture partners’ financial condition, any disputes that may arise between us and our joint venture partners, and our exposure to potential losses from the actions of our joint venture partners.

 

A portion of the assets we are acquiring in the Archstone Transaction are being acquired through joint ventures with AVB that neither we nor AVB will control solely. Joint ventures, including our proposed joint ventures with AVB, involve risks not present with respect to our wholly owned properties, including the following:

 

•

We may be unable to take actions that are opposed by our joint venture partners under arrangements that require us to share decision-making authority over major decisions affecting the ownership or operation of the joint venture and any property owned by the joint venture, such as the sale or financing of the property or the making of additional capital contributions for the benefit of the property;

 

•

Our joint venture partners may take actions that we oppose;

 

•

Our ability to sell or transfer our interest in a joint venture to a third party may be restricted without prior consent of our joint venture partners;

 

•

Our joint venture partners might become bankrupt or fail to fund their share of required capital contributions, which may delay construction or development of a property or increase our financial commitment to the joint venture;

 

•

Our joint venture partners may have business interests or goals with respect to a property that conflict with our business interests and goals, which could increase the likelihood of disputes regarding the ownership, management or disposition of the property;

 

•

We may disagree with our joint venture partners about decisions affecting a property or the joint venture, which could result in litigation or arbitration that increases our expenses, distracts our officers and directors and disrupts the day-to-day operations of the property, including by delaying important decisions until the dispute is resolved; and

 

•

We may suffer losses as a result of actions taken by our joint venture partners with respect to our joint venture investments.

 

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Any of these risks could materially and adversely affect our ability to generate and recognize attractive returns on our joint venture investments, which could have a material adverse effect on our results of operations, financial condition, and distributions to our shareholders.

 

Shares eligible for future resale by LBHI may depress our share price.

 

We have agreed to issue 34,468,085 of our common shares to LBHI in connection with the Archstone Transaction. We have agreed to enter into a Registration Rights Agreement at the closing of the Archstone Transaction to cover resales of such shares. The resale of substantial amounts of our common shares by LBHI in the public markets, or even the anticipation of the resale of such shares, could have a material adverse effect on the market price of our common shares. Such an adverse effect on the market price of our common shares would make it more difficult for us to sell our shares in the future at prices which we deem appropriate or to use our shares as currency for future acquisitions.

 

The inability of LBHI to fulfill its indemnification obligations to us under the Purchase Agreement could increase our liabilities and adversely affect our results of operations and financial condition.

 

In addition to certain indemnification obligations of each party to the Purchase Agreement relating to breaches of fundamental representations and warranties and breaches of covenants and certain other specified matters, we have negotiated as a term in the Purchase Agreement that LBHI retain responsibility for and indemnify us against damages resulting from certain third-party claims or other liabilities. These third-party claims and other liabilities include, without limitation, costs associated with various litigation matters. LBHI filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code in September 2008 and is currently in the process of post-petition liquidation. If LBHI completes its liquidation prior to the termination of their indemnity obligations to us under the Purchase Agreement, or otherwise distributes substantially all of its assets to its creditors prior to such time, LBHI may not be able to satisfy its obligations with respect to claims and retained liabilities covered by the Purchase Agreement. The failure of LBHI to satisfy such obligations could have a material adverse effect on our results of operations and financial condition because claimants may successfully assert that we are liable for those claims and/or retained liabilities. In addition, we expect that certain obligations of LBHI to indemnify us will terminate upon expiration of the applicable indemnification period (generally no more than three years following the closing). The assertion of third-party claims after the expiration of the applicable indemnification period, or the failure of LBHI to satisfy its indemnification obligations, could have a material adverse effect on our results of operations and financial condition.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

On November 26, 2012, Equity Residential and ERP Operating Limited Partnership (collectively, the “Company”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Avalon Bay Communities, Inc. (“AVB”), Archstone Enterprise LP (“Archstone”) and Lehman Brothers Holdings Inc. (“LBHI”) pursuant to which the Company, AVB and certain of their respective subsidiaries have agreed to acquire from Archstone and its affiliates, all of the assets and interests in various entities affiliated with Archstone. In connection with the acquisition, the Company will acquire a portfolio of apartment properties in exchange for (i) cash in the aggregate amount of $2.0 billion, (ii) 34.5 million common shares of beneficial interest of Equity Residential, and (iii) the assumption of liabilities related to the Archstone Portfolio (see definition below). Following consummation of these transactions, the Company will own assets representing approximately 60% of the Archstone Portfolio and AVB will own assets representing approximately 40% of the Archstone Portfolio.

 

The Company will pay approximately $9.6 billion, inclusive of assumed debt of approximately $5.0 billion, and receive approximately seventy-five wholly owned and five partially owned properties containing approximately 25,000 apartment units located primarily in high barrier to entry markets where the Company already operates. The portfolio contains 22.2 million net rentable square feet of residential space and approximately 475,000 square feet of commercial space. In addition, the Company and AVB will acquire interests in certain assets of Archstone, including Archstone’s interests in certain joint ventures, interests in the Archstone German portfolio and certain development land parcels through one or more unconsolidated joint ventures between the Company and AVB that are expected to be owned 60% by the Company and 40% by AVB (the Company’s collective acquisition is referred to as the “Archstone Portfolio”). The joint ventures between the Company and AVB will consist of assets that do not fit the Company’s or AVB’s core strategy or asset class. As a result, the Company and AVB plan to divest (held for sale) the joint venture assets as promptly as reasonably possible, subject to market and other economic conditions.

 

The closing of this pending transaction is subject to certain conditions and restrictions, therefore, there can be no assurance that this transaction will be consummated or that the final terms will not differ in material respects from those summarized in the preceding paragraph.

 

The accompanying unaudited Pro Forma Condensed Consolidated Balance Sheets of Equity Residential and ERP Operating Limited Partnership are presented as if the Archstone Portfolio had been acquired on September 30, 2012. The accompanying unaudited Pro Forma Condensed Consolidated Statements of Operations for the nine-month period ended September 30, 2012 and for the year ended December 31, 2011 of Equity Residential and ERP Operating Limited Partnership are presented as if the Archstone Portfolio had been acquired on January 1, 2011. The Archstone Portfolio is expected to be purchased during 2013. The unaudited Pro Forma Condensed Consolidated Balance Sheets are segregated into separate components as follows:

 

•

the historical Consolidated Balance Sheets of the Company;

 

•

the carrying value of the Archstone historical working capital;

 

•

the Company’s ownership interest in the net working capital of the joint ventures with AVB;

 

•

the details of the transaction including the issuance of common shares, financing required and the allocation of the estimated purchase price to the real estate assets acquired; and

 

•

the Pro Forma Condensed Consolidated Balance Sheets of the Company.

 

The unaudited Pro Forma Condensed Consolidated Statements of Operations are segregated into separate components as follows (with the year ended December 31, 2011 including an additional reclassification for discontinued operations):

 

•

the historical Consolidated Statements of Operations of the Company;

 

•

the historical combined revenues and certain expenses of the properties to be acquired for Archstone’s period of ownership;

 

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•

removal of the historical combined revenues and certain expenses of the properties to be acquired for unconsolidated entities that are included at full ownership in the previous column;

 

•

the pro forma loss from investments in unconsolidated entities for Archstone’s period of ownership with respect to the Company’s 60% ownership interest in the unconsolidated joint ventures with AVB;

 

•

the pro forma details of the transaction including the adjusted depreciation and interest expense; and

 

•

the Pro Forma Condensed Consolidated Statements of Operations of the Company.

 

These Unaudited Pro Forma Condensed Consolidated Financial Statements should be read in conjunction with:

 

•

The Company’s historical consolidated financial statements and notes thereto as of and for the nine-month period ended September 30, 2012, included in the Company’s Combined Form 10-Q filed with the SEC on November 1, 2012;

 

•

The Company’s historical consolidated financial statements and notes thereto as of and for the year ended December 31, 2011, included in the Company’s Combined Form 10-K filed with the SEC on February 24, 2012 and as updated for discontinued operations on the Combined Form 8-K filed with the SEC on June 13, 2012; and

 

•

Financial statements of real estate operations acquired included in the Company’s Form 8-K filed on November 26, 2012.

 

In management’s opinion, all adjustments necessary to reflect the transaction including the acquisition of the Archstone Portfolio have been made. The following unaudited Pro Forma Condensed Consolidated Balance Sheets do not purport to represent the future financial position of the Company. The unaudited Pro Forma Condensed Consolidated Statements of Operations are not necessarily indicative of what the actual results of operations would have been for the nine-month period ended September 30, 2012 or for the year ended December 31, 2011 assuming the above transaction had been consummated on January 1, 2011, nor do they purport to represent the future results of operations of the Company.

 

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EQUITY RESIDENTIAL

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 2012

(Amounts in thousands)

(Unaudited)

 

		(1) Equity Residential Historical				(2) Archstone Historical				(3) Joint Venture				(4) Transaction				Pro Forma Amounts
ASSETS
Investment in real estate
Land		$	4,609,337			$	—			$	—			$	2,372,000	(4a)		$	6,981,337
Depreciable property			15,943,139				—				—				6,156,689	(4b)			22,415,646
															316,870	(4c)
															(1,052	)(4d)
Projects under development			194,254				—				—				22,638	(4e)			216,892
Land held for development			404,846				—				—				242,240	(4f)			647,086
Investment in real estate			21,151,576				—				—				9,109,385				30,260,961
Accumulated depreciation			(4,880,808	)			—				—				—				(4,880,808	)
Investment in real estate, net			16,270,768				—				—				9,109,385				25,380,153
Cash and cash equivalents			45,623				64,393				—				16,178	(4g)			126,194
															1,008,443	(4h)
															123,706	(4i)
															1,580,000	(4j)
															(2,712,149	)(4k)
Investments in unconsolidated entities			17,906				(3,795	)			(56,090	)			164,548	(4l)			191,000
															68,431	(4m)
Deposits – restricted			120,440				5,473				—				—				125,913
Escrow deposits – mortgage			10,462				40,596				—				—				51,058
Deferred financing costs, net			38,823				—				—				72,848	(4n)			111,671
Other assets			164,523				16,986				—				169,910	(4o)			351,419
Total assets		$	16,668,545			$	123,653			$	(56,090	)		$	9,601,300			$	26,337,408
LIABILITIES AND EQUITY
Liabilities:
Mortgage notes payable		$	3,948,115			$	—			$	—			$	5,047,859	(4p)		$	8,995,974
Notes, net			5,354,038				—				—				830,000	(4q)			6,184,038
Lines of credit			7,000				—				—				750,000	(4r)			757,000
Accounts payable and accrued expenses			105,602				12,035				—				—				117,637
Accrued interest payable			78,869				17,737				—				—				96,606
Other liabilities			370,046				21,504				—				11,410	(4s)			600,963
															198,003	(4t)
Security deposits			68,758				10,908				—				—				79,666
Distributions payable			108,048				—				—				—				108,048
Total liabilities			10,040,476				62,184				—				6,837,272				16,939,932
Commitments and contingencies
Redeemable Noncontrolling Interests – Operating Partnership			414,219				—				—				34	(4aa)			414,253
Equity:
Shareholders’ equity:
Preferred Shares			50,000				—				—				—				50,000
Common Shares			3,027				—				—				345	(4u)			3,562
															190	(4v)
Paid in capital			5,364,802				183,486				(56,090	)			1,901,604	(4w)			8,182,237
															1,008,253	(4x)
															(187,281	)(4y)
															(32,537	)(4aa)
Retained earnings			770,697				(122,017	)			—				122,017	(4y)			689,597
															(81,100	)(4z)
Accumulated other comprehensive (loss)			(197,754	)			—				—				—				(197,754	)
Total shareholders’ equity			5,990,772				61,469				(56,090	)			2,731,491				8,727,642
Noncontrolling Interests:
Operating Partnership			147,650				—				—				32,503	(4aa)			180,153
Partially Owned Properties			75,428				—				—				—				75,428
Total Noncontrolling Interests			223,078				—				—				32,503				255,581
Total equity			6,213,850				61,469				(56,090	)			2,763,994				8,983,223
Total liabilities and equity		$	16,668,545			$	123,653			$	(56,090	)		$	9,601,300			$	26,337,408

 

See accompanying notes.

 

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EQUITY RESIDENTIAL

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2012

(Amounts in thousands except per share data)

(Unaudited)

 

		(1) Equity Residential Historical				(2) Archstone Historical				(3) Unconsolidated Assets				(4) Joint Venture				(5) Transaction				Pro Forma Amounts
REVENUES
Rental income		$	1,602,635			$	516,064			$	(43,359	)		$	—			$	718	(5a)		$	2,076,058
Fee and asset management			7,328				—				—				—				—				7,328
Total revenues			1,609,963				516,064				(43,359	)			—				718				2,083,386
EXPENSES
Property and maintenance			325,071				107,118				(8,189	)			—				3,198	(5b)			427,198
Real estate taxes and insurance			182,222				62,335				(3,497	)			—				—				241,060
Property management			62,769				18,557				(4,878	)			—				—				76,448
Fee and asset management			3,595				—				—				—				—				3,595
Depreciation			509,338								—				—				164,075	(5c)			673,413
General and administrative			37,178				—				—				—				—				37,178
Total expenses			1,120,173				188,010				(16,564	)			—				167,273				1,458,892
Operating income (loss)			489,790				328,054				(26,795	)			—				(166,555	)			624,494
Interest and other income			70,516				—				—				—				—				70,516
Other expenses			(20,678	)			—				—				—				1,921	(5d)			(18,757	)
Interest:
Expense incurred, net			(347,452	)			—				—				—				(144,620	)(5e)			(492,072	)
Amortization of deferred financing costs			(10,319	)			—				—				—				(11,607	)(5f)			(21,926	)
Income before income and other taxes, (loss) from investments in unconsolidated entities and discontinued operations			181,857				328,054				(26,795	)			—				(320,861	)			162,255
Income and other tax (expense) benefit			(627	)			—				—				—				—				(627	)
(Loss) from investments in unconsolidated entities			(3	)			—				(290	)(3a)			(44,265	)(4a)			(9,403	)(5g)			(53,961	)
Income (loss) from continuing operations			181,227				328,054				(27,085	)			(44,265	)			(330,264	)			107,667
Net (income) loss from continuing operations attributable to Noncontrolling Interests:
Operating Partnership, net			(7,477	)			(14,730	)(6)			1,216	(6)			1,987	(6)			14,829	(6)			(4,175	)
Partially Owned Properties			(457	)			—				—				—				—				(457	)
Net income (loss) from continuing operations attributable to controlling interests:			173,293				313,324				(25,869	)			(42,278	)			(315,435	)			103,035
Preferred distributions			(9,319	)			—				—				—				—				(9,319	)
Premium on redemption of Preferred Shares			(5,150	)			—				—				—				—				(5,150	)
Income (loss) from continuing operations available to Common Shares		$	158,824			$	313,324			$	(25,869	)		$	(42,278	)		$	(315,435	)		$	88,566
Earnings per share - basic:
Income from continuing operations available to Common Shares		$	0.53																			$	0.25
Weighted average Common Shares outstanding			300,116																	(5h)			353,584
Earnings per share - diluted:
Income from continuing operations available to Common Shares		$	0.52																			$	0.25
Weighted average Common Shares outstanding			317,265																	(5h)			370,733

 

See accompanying notes.

 

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EQUITY RESIDENTIAL

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2011

(Amounts in thousands except per share data)

(Unaudited)

 

		(1) Equity Residential Historical				(2) Discontinued Operations				(3) Archstone Historical				(4) Unconsolidated Assets				(5) Joint Venture				(6) Transaction				Pro Forma Amounts
REVENUES
Rental income		$	1,960,243			$	(41,995	)		$	645,062			$	(52,015	)		$	—			$	957	(6a)		$	2,512,252
Fee and asset management			9,026				—				—				—				—				—				9,026
Total revenues			1,969,269				(41,995	)			645,062				(52,015	)			—				957				2,521,278
EXPENSES
Property and maintenance			412,233				(12,652	)			137,194				(9,433	)			—				4,264	(6b)			531,606
Real estate taxes and insurance			219,743				(3,954	)			75,944				(3,822	)			—				—				287,911
Property management			82,133				(266	)			23,096				(6,298	)			—				—				98,665
Fee and asset management			4,279				—				—				—				—				—				4,279
Depreciation			642,415				(12,367	)			—				—				—				535,637	(6c)			1,165,685
General and administrative			43,606				—				—				—				—				—				43,606
Total expenses			1,404,409				(29,239	)			236,234				(19,553	)			—				539,901				2,131,752
Operating income (loss)			564,860				(12,756	)			408,828				(32,462	)			—				(538,944	)			389,526
Interest and other income			7,977				(11	)			—				—				—				—				7,966
Other expenses			(14,557	)			—				—				—				—				1,736	(6d)			(12,821	)
Interest:
Expense incurred, net			(468,320	)			3,838				—				—				—				(198,527	)(6e)			(663,009	)
Amortization of deferred financing costs			(17,006	)			399				—				—				—				(42,397	)(6f)			(59,004	)
Income before income and other taxes, (loss) from investments in unconsolidated entities, net gain on sales of land parcels and discontinued operations			72,954				(8,530	)			408,828				(32,462	)			—				(778,132	)			(337,342	)
Income and other tax (expense) benefit			(728	)			—				—				—				—				—				(728	)
(Loss) from investments in unconsolidated entities			—				—				—				(11,884	)(4a)			(78,146	)(5a)			(12,537	)(6g)			(102,567	)
Net gain on sales of land parcels			4,217				—				—				—				—				—				4,217
Income (loss) from continuing operations			76,443				(8,530	)			408,828				(44,346	)			(78,146	)			(790,669	)			(436,420	)
Net (income) loss from continuing operations attributable to Noncontrolling Interests:
Operating Partnership, net			(2,738	)			378	(7)			(18,111	)(7)			1,965	(7)			3,462	(7)			35,027	(7)			19,983
Partially Owned Properties			(832	)			—				—				—				—				—				(832	)
Net income (loss) from continuing operations attributable to controlling interests			72,873				(8,152	)			390,717				(42,381	)			(74,684	)			(755,642	)			(417,269	)
Preferred distributions			(13,865	)			—				—				—				—				—				(13,865	)
Income (loss) from continuing operations available to Common Shares		$	59,008			$	(8,152	)		$	390,717			$	(42,381	)		$	(74,684	)		$	(755,642	)		$	(431,134	)
Earnings per share - basic:
Income (loss) from continuing operations available to Common Shares		$	0.20																							$	(1.24	)
Weighted average Common Shares outstanding			294,856																					(6h)			348,324
Earnings per share - diluted:
Income (loss) from continuing operations available to Common Shares		$	0.20																							$	(1.24	)
Weighted average Common Shares outstanding			312,065																					(6h)			348,324

 

See accompanying notes.

 

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Table of Contents

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 2012

(Amounts in thousands)

(Unaudited)

 

		(1) ERP Operating Limited Partnership Historical				(2) Archstone Historical				(3) Joint Venture				(4) Transaction				Pro Forma Amounts
ASSETS
Investment in real estate
Land		$	4,609,337			$	—			$	—			$	2,372,000	(4a)		$	6,981,337
Depreciable property			15,943,139				—				—				6,156,689	(4b)			22,415,646
															316,870	(4c)
															(1,052	)(4d)
Projects under development			194,254				—				—				22,638	(4e)			216,892
Land held for development			404,846				—				—				242,240	(4f)			647,086
Investment in real estate			21,151,576				—				—				9,109,385				30,260,961
Accumulated depreciation			(4,880,808	)			—				—				—				(4,880,808	)
Investment in real estate, net			16,270,768				—				—				9,109,385				25,380,153
Cash and cash equivalents			45,623				64,393				—				16,178	(4g)			126,194
															1,008,443	(4h)
															123,706	(4i)
															1,580,000	(4j)
															(2,712,149	)(4k)
Investments in unconsolidated entities			17,906				(3,795	)			(56,090	)			164,548	(4l)			191,000
															68,431	(4m)
Deposits – restricted			120,440				5,473				—				—				125,913
Escrow deposits – mortgage			10,462				40,596				—				—				51,058
Deferred financing costs, net			38,823				—				—				72,848	(4n)			111,671
Other assets			164,523				16,986				—				169,910	(4o)			351,419
Total assets		$	16,668,545			$	123,653			$	(56,090	)		$	9,601,300			$	26,337,408
LIABILITIES AND CAPITAL
Liabilities:
Mortgage notes payable		$	3,948,115			$	—			$	—			$	5,047,859	(4p)		$	8,995,974
Notes, net			5,354,038				—				—				830,000	(4q)			6,184,038
Lines of credit			7,000				—				—				750,000	(4r)			757,000
Accounts payable and accrued expenses			105,602				12,035				—				—				117,637
Accrued interest payable			78,869				17,737				—				—				96,606
Other liabilities			370,046				21,504				—				11,410	(4s)			600,963
															198,003	(4t)
Security deposits			68,758				10,908				—				—				79,666
Distributions payable			108,048				—				—				—				108,048
Total liabilities			10,040,476				62,184				—				6,837,272				16,939,932
Commitments and contingencies
Redeemable Limited Partners			414,219				—				—				34	(4aa)			414,253
Capital:
Partners’ Capital:
Preference Units			50,000				—				—				—				50,000
General Partner			6,138,526				61,469				(56,090	)			345	(4u)			8,875,396
															190	(4v)
															1,901,604	(4w)
															1,008,253	(4x)
															(187,281	)(4y)
															122,017	(4y)
															(81,100	)(4z)
															(32,537	)(4aa)
Limited Partners			147,650				—				—				32,503	(4aa)			180,153
Accumulated other comprehensive (loss)			(197,754	)			—				—				—				(197,754	)
Total partners’ capital			6,138,422				61,469				(56,090	)			2,763,994				8,907,795
Noncontrolling Interests – Partially Owned Properties			75,428				—				—				—				75,428
Total capital			6,213,850				61,469				(56,090	)			2,763,994				8,983,223
Total liabilities and capital		$	16,668,545			$	123,653			$	(56,090	)		$	9,601,300			$	26,337,408

 

See accompanying notes.

 

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Table of Contents

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2012

(Amounts in thousands except per Unit data)

(Unaudited)

 

		(1) ERP Operating Limited Partnership Historical				(2) Archstone Historical				(3) Unconsolidated Assets				(4) Joint Venture				(5) Transaction				Pro Forma Amounts
REVENUES
Rental income		$	1,602,635			$	516,064			$	(43,359	)		$	—			$	718	(5a)		$	2,076,058
Fee and asset management			7,328				—				—				—				—				7,328
Total revenues			1,609,963				516,064				(43,359	)			—				718				2,083,386
EXPENSES
Property and maintenance			325,071				107,118				(8,189	)			—				3,198	(5b)			427,198
Real estate taxes and insurance			182,222				62,335				(3,497	)			—								241,060
Property management			62,769				18,557				(4,878	)			—								76,448
Fee and asset management			3,595				—				—				—								3,595
Depreciation			509,338				—				—				—				164,075	(5c)			673,413
General and administrative			37,178				—				—				—								37,178
Total expenses			1,120,173				188,010				(16,564	)			—				167,273				1,458,892
Operating income (loss)			489,790				328,054				(26,795	)			—				(166,555	)			624,494
Interest and other income			70,516				—				—				—								70,516
Other expenses			(20,678	)			—				—				—				1,921	(5d)			(18,757	)
Interest:
Expense incurred, net			(347,452	)			—				—				—				(144,620	)(5e)			(492,072	)
Amortization of deferred financing costs			(10,319	)			—				—				—				(11,607	)(5f)			(21,926	)
Income before income and other taxes, (loss) from investments in unconsolidated entities and discontinued operations			181,857				328,054				(26,795	)			—				(320,861	)			162,255
Income and other tax (expense) benefit			(627	)			—				—				—								(627	)
(Loss) from investments in unconsolidated entities			(3	)			—				(290	)(3a)			(44,265	)(4a)			(9,403	)(5g)			(53,961	)
Income (loss) from continuing operations			181,227				328,054				(27,085	)			(44,265	)			(330,264	)			107,667
Net (income) loss from continuing operations attributable to Noncontrolling Interests – Partially Owned Properties			(457	)			—																(457	)
Net income (loss) from continuing operations attributable to controlling interests		$	180,770			$	328,054			$	(27,085	)		$	(44,265	)		$	(330,264	)		$	107,210
ALLOCATION OF INCOME FROM CONTINUING OPERATIONS:
Preference Units		$	9,319			$	—			$	—			$	—			$	—			$	9,319
Premium on redemption of Preference Units		$	5,150			$	—			$	—			$	—			$	—			$	5,150
Income (loss) from continuing operations available to Units		$	166,301			$	328,054			$	(27,085	)		$	(44,265	)		$	(330,264	)		$	92,741
Earnings per Unit - basic:
Income from continuing operations available to Units		$	0.53																			$	0.25
Weighted average Units outstanding			313,932																	(5h)			367,400
Earnings per Unit - diluted:
Income from continuing operations available to Units		$	0.52																			$	0.25
Weighted average Units outstanding			317,265																	(5h)			370,733

 

See accompanying notes.

 

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Table of Contents

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2011

(Amounts in thousands except per Unit data)

(Unaudited)

 

		(1) ERP Operating Limited Partnership Historical				(2) Discontinued Operations				(3) Archstone Historical				(4) Unconsolidated Assets				(5) Joint Venture				(6) Transaction				Pro Forma Amounts
REVENUES
Rental income		$	1,960,243			$	(41,995	)		$	645,062			$	(52,015	)		$	—			$	957	(6a)		$	2,512,252
Fee and asset management			9,026				—				—				—				—				—				9,026
Total revenues			1,969,269				(41,995	)			645,062				(52,015	)			—				957				2,521,278
EXPENSES
Property and maintenance			412,233				(12,652	)			137,194				(9,433	)			—				4,264	(6b)			531,606
Real estate taxes and insurance			219,743				(3,954	)			75,944				(3,822	)			—				—				287,911
Property management			82,133				(266	)			23,096				(6,298	)			—				—				98,665
Fee and asset management			4,279				—				—				—				—				—				4,279
Depreciation			642,415				(12,367	)			—				—				—				535,637	(6c)			1,165,685
General and administrative			43,606				—				—				—				—				—				43,606
Total expenses			1,404,409				(29,239	)			236,234				(19,553	)			—				539,901				2,131,752
Operating income (loss)			564,860				(12,756	)			408,828				(32,462	)			—				(538,944	)			389,526
Interest and other income			7,977				(11	)			—				—				—				—				7,966
Other expenses			(14,557	)			—				—				—				—				1,736	(6d)			(12,821	)
Interest:
Expense incurred, net			(468,320	)			3,838				—				—				—				(198,527	)(6e)			(663,009	)
Amortization of deferred financing costs			(17,006	)			399				—				—				—				(42,397	)(6f)			(59,004	)
Income before income and other taxes, (loss) from investments in unconsolidated entities, net gain on sales of land parcels and discontinued operations			72,954				(8,530	)			408,828				(32,462	)			—				(778,132	)			(337,342	)
Income and other tax (expense) benefit			(728	)			—				—				—				—				—				(728	)
(Loss) from investments in unconsolidated entities			—				—				—				(11,884	)(4a)			(78,146	)(5a)			(12,537	)(6g)			(102,567	)
Net gain on sales of land parcels			4,217				—				—				—				—				—				4,217
Income (loss) from continuing operations			76,443				(8,530	)			408,828				(44,346	)			(78,146	)			(790,669	)			(436,420	)
Net (income) loss from continuing operations attributable to Noncontrolling Interests – Partially Owned Properties			(832	)			—				—				—				—				—				(832	)
Net income (loss) from continuing operations attributable to controlling interests		$	75,611			$	(8,530	)		$	408,828			$	(44,346	)		$	(78,146	)		$	(790,669	)		$	(437,252	)
ALLOCATION OF INCOME FROM CONTINUING OPERATIONS:
Preference Units		$	13,865			$	—			$	—			$	—			$	—			$	—			$	13,865
Income (loss) from continuing operations available to Units		$	61,746			$	(8,530	)		$	408,828			$	(44,346	)		$	(78,146	)		$	(790,669	)		$	(451,117	)
Earnings per Unit - basic:
Income (loss) from continuing operations available to Units		$	0.20																							$	(1.24	)
Weighted average Units outstanding			308,062																					(6h)			361,530
Earnings per Unit - diluted:
Income (loss) from continuing operations available to Units		$	0.20																							$	(1.24	)
Weighted average Units outstanding			312,065																					(6h)			361,530

 

See accompanying notes.

 

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Table of Contents

EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(Unaudited)

 

Notes to Pro Forma Condensed Consolidated Balance Sheets

 

(1)

Historical Balances – Reflects the consolidated balance sheet of the Company as contained in its historical consolidated financial statements included in the Form 10-Q as of and for the nine months ended September 30, 2012 previously filed with the Securities and Exchange Commission.

(2)

Archstone Historical – Reflects the carrying value of Archstone’s historical net working capital (which approximates fair value) for the properties to be purchased by the Company as of September 30, 2012. Additionally, reclassifications were made to conform to the Company’s presentation.

(3)

Joint Venture – Reflects the Company’s 60% ownership interest in the net working capital of the anticipated joint ventures with AVB as of September 30, 2012. The joint ventures are expected to consist of over 13,000 apartment units in Germany and approximately 20 domestic properties, with ownership interests ranging from 10% - 20%. See note (4m) below.

(4)

Transaction – In connection with completing the transaction, the following adjustments were made to account for the assumption of existing debt, issuance of common shares, additional financing required and the allocation of the estimated purchase price to the real estate assets to be acquired, all at fair value based on an analysis of current market conditions. The major components of the transaction funding and the purchase price include the following (amounts in thousands):

 

Funding Source		Amount				Asset		Allocated Purchase Price
Equity Offering		$	1,008,443			Land		$	2,372,000
Common Share Issuance to Seller			1,901,949			Building			5,999,639
Line of Credit draw			750,000			Site Improvements			94,730
Bridge Loan			830,000			FF&E			62,320
Debt Assumed			4,736,890			In-Place Leases			316,870
Mark to Market of Debt Assumed			310,969			Projects Under Development			22,638
Assumption of Preferred Shares			198,003			Land Held for Development			242,240
Transaction Costs			(81,100	)		Investment in Unconsolidated Entities			232,979
Working Capital			(65,264	)		Ground/Retail Leases above/below market			158,500
						Mark to Market of Debt Assumed			310,969
						Common Share FMV Adjustment			(123,051	)
						Cash and Working Capital Adjustment			(188,970	)
						Other Transaction Costs			89,026
Total		$	9,589,890			Total		$	9,589,890

 

a.

Reflects the estimated purchase price allocation to land.

 

b.

Reflects the estimated purchase price allocation to depreciable property (building, site improvements and FF&E).

 

c.

Reflects the estimated purchase price allocation to the intangible value of the existing in place leases.

 

d.

Reflects purchase price adjustments including:

 

•

Fair market value of the debt assumed which resulted in an increase of $311.0 million;

 

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EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(Unaudited)

 

 

•

Market adjustment on the common share issuance to the seller reflecting the difference in the share price of our common shares used for determining the number of shares issued to LBHI ($58.75) and the actual price as of November 28, 2012 ($55.18), resulting in a decrease of $123.1 million;

 

•

corporate cash assumed from Archstone resulting in a decrease of $123.7 million; and

 

•

historical net equity value with respect to the working capital assumed resulting in a decrease of $65.3 million.

 

e.

Reflects the reclassification of a portion of land and construction-in-progress acquired consistent with the Company’s classification.

 

f.

Reflects the reclassification of a portion of land and construction-in-progress acquired consistent with the Company’s classification.

 

g.

Reflects the excess cash drawn from the bridge loan for miscellaneous transaction closing costs.

 

h.

Reflects proceeds from a $1.04 billion equity offering by the Company as part of the financing for the transaction. In conjunction with the equity offering, underwriting and other fees are estimated at $31.8 million which will reduce the proceeds received.

 

i.

Reflects the assumption of an estimated $123.7 million in Archstone corporate cash.

 

j.

Reflects the aggregate loan proceeds of $1.58 billion resulting from a $750.0 million draw on the existing line of credit and funding from the bridge loan in the amount of $830.0 million which terminates 364 days after funding. Loan fundings may not materialize or could be reduced by asset sales completed prior to close of this transaction. The Company is currently marketing a significant number of assets for sale which could reduce the need for debt financing.

 

k.

Reflects the use of cash raised noted above in notes (4h, i, j) for the acquisition.

 

l.

Reflects the fair value of the real estate, lease intangibles and debt assumed for the Company’s ownership interest in 9 unconsolidated properties (including development), at varying ownership percentages.

 

m.

Reflects the fair value of the real estate, lease intangibles and debt assumed for the Company’s 60% ownership interest in the joint ventures with AVB. These amounts take into account 807 wholly owned German apartment units and a 16.5% interest in a German Fund owning over 12,000 additional apartment units.

 

n.

Reflects the estimated $72.8 million of financing costs associated with the assumption of existing debt discussed in note (4p) and the $1.58 billion in proceeds discussed in note (4q and r) which will be amortized over a weighted average of 5.1 years. The bridge loan is for a term of 364 days.

 

o.

Reflects the estimated purchase price allocation at fair value to the intangible value of below market ground and above market retail lease intangibles of $167.6 million and $2.3 million, respectively.

 

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EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(Unaudited)

 

 

p.

Reflects the assumption of $5.0 billion in mortgage debt. Total principal assumed consisted of the following components: $2.9 billion of fixed rate mortgages, $1.8 billion of variable rate tax exempt bonds and mortgages and the fair market value adjustment of $311.0 million. The fixed rate mortgages have interest rates ranging from 3.12% to 6.26%. The variable rate tax exempt bonds have interest rates ranging from SIFMA + 0.81% to SIFMA + 1.517%. The variable rate mortgages have interest rates ranging from LIBOR + 2.95% to LIBOR + 3.50%.

 

q.

Reflects the estimated loan proceeds of funding the bridge loan in the amount of $830.0 million which terminates 364 days after funding.

 

r.

Reflects the estimated loan proceeds of a $750.0 million draw on the existing line of credit.

 

s.

Reflects the estimated purchase price allocation at fair value to the intangible value of above market ground and below market retail leases of $2.4 million and $9.0 million, respectively.

 

t.

Reflects the assumption of $198.0 million liquidation value of preferred shares assumed as part of this transaction in a 60% owned unconsolidated joint venture with AVB. The stated dividend rates range from 6.00% to 7.66%.

 

u.

Reflects the issuance of 34.5 million shares of the Company’s common shares at par value of $0.01 per share. See note (4w) below.

 

v.

Reflects the assumed issuance of 19.0 million shares of the Company’s common shares at par value of $0.01 per share. See note (4x) below.

 

w.

Reflects the $1.9 billion recording of additional paid in capital as a result of the issuance of 34.5 million shares of the Company’s common shares directly to LBHI as partial consideration in this transaction. The shares were valued using the closing share price of $55.18 as of November 28, 2012. See also note (4d) above. A change of $5 in the price of our common shares impacts the value recorded by $172.3 million.

 

x.

Reflects the $1.008 billion (net of fees) recording of additional paid in capital as a result of the assumed $1.04 billion equity offering planned as part of the transaction. We used the issue price of $54.75 for our valuation.

 

y.

Reflects adjustment to eliminate the historical equity balance of the Archstone properties with the net offset of $65.3 million noted above in (4d).

 

z.

Reflects $81.1 million of estimated transaction costs the Company will incur in order to complete the acquisition. The estimated transaction costs are not included in the pro forma condensed consolidated statement of operations for the year ended December 31, 2011 as they represent a non-recurring charge that results directly from the acquisition and will be included in the consolidated financial results of the Company within twelve months of the transaction.

 

aa.

Reflects the reallocation of total equity and Noncontrolling Interests – Operating Partnership based on the Noncontrolling Interests – Operating Partnership ownership of Equity Residential.

 

Reflects the reallocation of total capital and limited partners interest based on the limited partners ownership of ERP Operating Limited Partnership.

 

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EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2012

(Unaudited)

 

 

Notes to Pro Forma Condensed Consolidated Statements of Operations

 

Pursuant to the Archstone Portfolio acquisition there are certain transaction costs that will be paid at or near closing. These costs are not included in the pro forma condensed consolidated statement of operations for the nine months ended September 30, 2012 because they represent non-recurring charges that result directly from the transaction and will be included in the consolidated financial results of the Company within twelve months of the transaction.

 

1)

Historical Amounts – Represents the consolidated statements of operations of the Company as contained in the historical consolidated financial statements included in its Form 10-Q as of and for the nine months ended September 30, 2012 previously filed with the Securities and Exchange Commission.

 

2)

Archstone Historical – Represents the historical combined revenues and certain expenses of the properties to be acquired for Archstone’s period of ownership during the nine months ended September 30, 2012 attributable to the acquisition of the Archstone Portfolio as if the acquisition had occurred on January 1, 2011.

 

3)

Unconsolidated Assets – Represents removal of the historical combined revenues and certain expenses acquired for unconsolidated entities included in the Archstone Portfolio at full ownership for Archstone’s period of ownership with respect to the Company’s anticipated 60% ownership interest in the unconsolidated joint ventures with AVB during the nine months ended September 30, 2012. The amounts removed and the loss (income) from investments in unconsolidated entities recorded are attributable to the acquisition of the interests in the Unconsolidated Assets as if the acquisition had occurred on January 1, 2011. The loss (income) from investments in unconsolidated entities is based on the Company’s share of earnings and reflects its actual ownership in the unconsolidated entities.

 

a)

Reflects the $(0.3) million (loss) from investments in unconsolidated entities.

 

4)

Joint Venture – The Company will have an unconsolidated 60% interest in joint ventures with AVB. These joint ventures will hold certain assets neither partner intends to own and these assets are held for sale. Represents the pro forma loss (income) from investments in unconsolidated entities for Archstone’s period of ownership during the nine months ended September 30, 2012.

 

a)

Reflects the $(44.3) million (loss) from investments in unconsolidated entities.

 

5)

Transaction – in connection with the transaction, we have made the following adjustments for the nine months ended September 30, 2012:

 

a)

Rental income of $0.7 million relates to the amortization of $6.7 million in net below market retail leases to be assumed in the transaction. The below market retail leases are amortized over a weighted average life of seven years.

 

b)

Property and maintenance expense of $3.2 million relates to the amortization of $165.2 million in net below market ground leases to be assumed in the transaction. The below market ground leases are amortized over the term of the respective ground leases to which they relate having expirations ranging from 2042 – 2092.

 

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EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2012

(Unaudited)

 

 

c)

Depreciation expense of $164.1 million is calculated based on the fair value of the real estate related assets purchased as detailed below (amounts in thousands except for depreciable lives):

 

Asset		Basis				Weighted Average Depreciable Life		Nine Months Ended 9/30/12 Expense
Building		$	5,999,639			30 Years		$	149,991
Site Improvements			94,730			15 Years			4,736
FF&E			62,320			5 Years			9,348
In-Place Leases			316,870			6 Months			—
Total		$	6,473,559					$	164,075

 

d)

Other expenses of $1.9 million reflects the elimination of historical charges related to this transaction that are not expected to recur.

 

e)

Reflects the $144.6 million of interest expense related to debt that will be assumed or incurred as a result of or to finance this transaction. The components of interest expense are detailed below (amounts in thousands except for interest rates):

 

Debt Type		Principal				Interest Rate Range		Interest Ended 9/30/12 Expense
Fixed Rate Mortgages Assumed		$	2,901,756			3.12% - 6.26%		$	130,067
Variable Rate Mortgages Assumed			1,835,134			SIFMA + 0.81% - 1.517% LIBOR + 2.95% - 3.50%			43,240
FMV Mortgages Assumed			310,969			n/a			(46,524	)
Line of Credit			1,500,000			LIBOR + 1.15%			16,969
Term Loan			80,000			LIBOR + 1.15%			868
Total		$	6,627,859					$	144,620

 

For purposes of calculating the estimated 2012 interest, we assumed a LIBOR rate of 0.30% and a SIFMA rate of 0.20%. If the above-mentioned benchmark rates were to fluctuate by 1/8%, our year to date interest expense with respect to this transaction would vary by approximately $1.7 million. The fair market value adjustment on the assumed debt was amortized using the straight line method over the respective maturity dates with an average life of 8.5 years.

 

With the bridge loan expiring as of December 31, 2011, the Company replaced the borrowing utilizing two sources: $750.0 million on the line of credit after an expected increase in the capacity, bringing the total commitment on the line of credit to $2.5 billion, and $80.0 million on a new Term Loan with a four year maturity. We assumed the same interest rate of LIBOR + 1.15% for both the line of credit upsizing and the term loan. If the above-mentioned benchmark rates were to fluctuate by 1/8%, our year to date interest expense would vary by approximately $1.5 million.

 

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EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2012

(Unaudited)

 

 

f)

Reflects $11.6 million of amortization of estimated financing costs applicable to assuming mortgages and increasing the revolver availability and the term loan. Financing costs are amortized to interest expense over the expected life of the new loan agreements (weighted average of 4.7 years) using the straight-line method, which approximates the effective interest method.

 

g)

Reflects $9.4 million of accrued but unpaid distributions related to preferred shares assumed as part of this transaction in a 60% owned unconsolidated joint venture.

 

h)

Historical basic and diluted weighted average common shares outstanding of 300.1 million and 317.3 million, respectively, for Equity Residential should be adjusted to include the 34.5 million shares issued to LBHI in order to complete the transaction (see note (4u) on the Pro Forma Balance Sheet) and the 19.0 million shares issued to the public due to the equity offering (see note (4v) on the Pro Forma Balance Sheet).

 

Historical basic and diluted weighted average units outstanding of 313.9 million and 317.3 million, respectively, for ERP Operating Liming Partnership should be adjusted to include the 34.5 million shares issued to LBHI in order to complete the transaction (see note (4u) on the Pro Forma Balance Sheet) and the 19.0 million shares issued to the public due to the equity offering (see note (4v) on the Pro Forma Balance Sheet). ERP Operating Limited Partnership will issue one unit to Equity Residential for each common share issued by Equity Residential to maintain the one-for-one relationship between common shares and units.

 

(6)

Reflects the allocation of results between the controlling interests and the Noncontrolling Interests – Operating Partnership based on the Noncontrolling Interests – Operating Partnership weighted average ownership of 4.49% of Equity Residential for the nine months ended September 30, 2012.

 

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EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 2011

(Unaudited)

 

 

Notes to Pro Forma Condensed Consolidated Statements of Operations

 

Pursuant to the Archstone Portfolio acquisition there are certain transaction costs that will be paid at or near closing. These costs are not included in the pro forma condensed consolidated statement of operations for the year ended December 31, 2011 because they represent non-recurring charges that result directly from the transaction and will be included in the consolidated financial results of the Company within twelve months of the transaction.

 

1)

Historical Amounts – Represents the consolidated statements of operations of the Company as contained in the historical consolidated financial statements included in its Form 8-K filed on June 13, 2012 with the Securities and Exchange Commission.

 

2)

Discontinued Operations – Represents the discontinued operations for the year ended December 31, 2011 attributable to properties sold by the Company in the second and third quarters of 2012.

 

3)

Archstone Historical – Represents the historical combined revenues and certain expenses of the properties to be acquired for Archstone’s period of ownership for the year ended December 31, 2011 attributable to the acquisition of the Archstone Portfolio as if the acquisition had occurred on January 1, 2011.

 

4)

Unconsolidated Assets – Represents removal of the historical combined revenues and certain expenses acquired for unconsolidated entities included in the Archstone Portfolio at full ownership for Archstone’s period of ownership with respect to the Company’s anticipated 60% ownership interest in the unconsolidated joint ventures with AVB for the year ended December 31, 2011. The amounts removed and the loss (income) from investments in unconsolidated entities recorded are attributable to the acquisition of the interests in the Unconsolidated Assets as if the acquisition had occurred on January 1, 2011. The loss (income) from investments in unconsolidated entities is based on the Company’s share of earnings and reflects its actual ownership in the unconsolidated entities.

 

a)

Reflects the $(11.9) million (loss) from investments in unconsolidated entities.

 

5)

Joint Venture – The Company will have an unconsolidated 60% interest in joint ventures with AVB. These joint ventures will hold certain assets neither partner intends to own and these assets are held for sale. Represents the pro forma loss (income) from investments in unconsolidated entities for Archstone’s period of ownership for the year ended December 31, 2011.

 

a)

Reflects the $(78.1) million (loss) from investments in unconsolidated entities.

 

6)

Transaction – in connection with the transaction, we have made the following adjustments for the year ended December 31, 2011:

 

a)

Rental income of $1.0 million relates to the amortization of $6.7 million in net below market retail leases to be assumed in the transaction. The below market retail leases are amortized over a weighted average life of seven years.

 

b)

Property and maintenance expense of $4.3 million relates to the amortization of $165.2 million in net below market ground leases to be assumed in the transaction. The below market ground leases are amortized over the term of the respective ground leases to which they relate having expirations ranging from 2042 – 2092.

 

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EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 2011

(Unaudited)

 

 

c)

Depreciation expense of $535.6 million is calculated based on the fair value of the real estate related assets purchased as detailed below (amounts in thousands except for depreciable lives):

 

Asset		Basis				Weighted Average Depreciable Life		Year Ended 12/31/11 Expense
Building		$	5,999,639			30 Years		$	199,988
Site Improvements			94,730			15 Years			6,315
FF&E			62,320			5 Years			12,464
In-Place Leases			316,870			6 Months			316,870
Total		$	6,473,559					$	535,637

 

d)

Other expenses of $1.7 million reflects the elimination of historical charges related to this transaction that are not expected to recur.

 

e)

Reflects the $198.5 million of interest expense related to debt that will be assumed or incurred as a result of or to finance this transaction. The components of interest expense are detailed below (amounts in thousands except for interest rates):

 

Debt Type		Principal				Interest Rate Range		Interest Ended 12/31/11 Expense
Fixed Rate Mortgages Assumed		$	2,901,756			3.12% - 6.26%		$	173,423
Variable Rate Mortgages Assumed			1,835,134			SIFMA + 0.81% - 1.517% LIBOR + 2.95% - 3.50%			57,172
FMV Mortgages Assumed			310,969			n/a			(62,893	)
Line of Credit			750,000			LIBOR + 1.15%			10,845
Bridge			830,000			LIBOR + 1.15%			19,980
Total		$	6,627,859					$	198,527

 

For purposes of calculating the estimated 2011 interest, we assumed a LIBOR rate of 0.30% and a SIFMA rate of 0.20%. If the above-mentioned benchmark rates were to fluctuate by 1/8%, our year to date interest expense with respect to this transaction would vary by approximately $2.28 million. The fair market value adjustment on the assumed debt was amortized using the straight line method over the respective maturity dates with an average life of 8.5 years.

 

The financing to complete the transaction was achieved using a $750.0 million draw on the existing line of credit and funding the bridge loan in the amount of $830.0 million which terminates 364 days after funding. We used the current interest rate of LIBOR + 1.15% on the line of credit and the bridge loan to calculate estimated interest. If the above-mentioned benchmark rates were to fluctuate by 1/8%, our year to date interest expense would vary by approximately $2.0 million.

 

f)

Reflects $42.4 million of amortization of estimated financing costs applicable to assuming mortgages and draws on the existing line of credit and bridge loan. Financing costs are amortized to interest expense over the expected life of the new loan agreements (weighted average of 4.7 years) using the straight-line method, which approximates the effective interest method.

 

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EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 2011

(Unaudited)

 

 

g)

Reflects $12.5 million of accrued but unpaid distributions related to preferred shares assumed as part of this transaction in a 60% owned unconsolidated joint venture.

 

h)

Historical basic weighted average common shares outstanding of 294.9 million for Equity Residential should be adjusted to include the 34.5 million shares issued to LBHI in order to complete the transaction (see note (4u) on the Pro Forma Balance Sheet) and the 19.0 million shares issued to the public due to the equity offering (see note (4v) on the Pro Forma Balance Sheet). We did not adjust the number of diluted shares outstanding as it would be antidilutive.

 

Historical basic weighted average units outstanding of 308.1 million for ERP Operating Limited Partnership should be adjusted to include the 34.5 million shares issued to LBHI in order to complete the transaction (see note (4u) on the Pro Forma Balance Sheet) and the 19.0 million shares issued to the public due to the equity offering (see note (4v) on the Pro Forma Balance Sheet). We did not adjust the number of diluted units outstanding as it would be antidilutive. ERP Operating Limited Partnership will issue one unit to Equity Residential for each common share issued by Equity Residential to maintain the one-for-one relationship between common shares and units.

 

(7)

Reflects the allocation of results between the controlling interests and the Noncontrolling Interests – Operating Partnership based on the Noncontrolling Interests – Operating Partnership weighted average ownership of 4.43% of Equity Residential for the year ended December 31, 2011.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds from this offering will be approximately $1.0 billion ($1.2 billion if the underwriters’ overallotment option is exercised in full), after deducting underwriting discounts and estimated offering expenses. We intend to use the net proceeds of this offering, cash on hand and any amounts raised in future capital raising activities or financings to finance the aggregate purchase price of the Archstone Transaction. See “Archstone Transaction—Financing.” If the Archstone Transaction is not consummated, we intend to use the net proceeds from this offering for working capital and general company purposes, including, without limitation, the acquisition or development of multifamily properties and the repayment of debt. Net proceeds may be temporarily invested prior to use.

 

Affiliates of certain of the underwriters of this offering are lenders, and in some cases agents or managers for the lenders, under our unsecured revolving credit facility and our $2.5 billion bridge loan facility, and, accordingly, will receive pro rata portions of the net proceeds from this offering to the extent such net proceeds are used to repay borrowings under our unsecured revolving credit facility or our $2.5 billion bridge loan facility.

 

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CAPITALIZATION

 

The following table sets forth our capitalization on a consolidated basis as of September 30, 2012. We have presented our capitalization:

 

•

on an actual basis;

 

•

on an as adjusted basis to reflect the offering and sale of 19,000,000 common shares in this offering at a public offering price per share of $54.75, after deducting underwriting discounts and estimated offering expenses; and

 

•

on a pro forma as adjusted basis to reflect the offering and sale of 19,000,000 common shares in this offering at a public offering price per share of $54.75, after deducting underwriting discounts and estimated offering expenses, and to give effect to the consummation of the Archstone Transaction, as if it had occurred on September 30, 2012.

 

You should read the following table along with our consolidated financial statements and the accompanying notes to those statements, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K for the year ended December 31, 2011, that we have incorporated by reference in this prospectus supplement (amounts in thousands except for share amounts):

 

		As of September 30, 2012
		Actual				As Adjusted(1)				Pro Forma as Adjusted(1)
Cash and cash equivalents		$	45,623			$	1,054,066			$	126,194
Debt:
Secured debt		$	3,948,115			$	3,948,115			$	8,995,974
Unsecured notes			5,354,038				5,354,038				6,184,038
Lines of credit			7,000				7,000				757,000
Total debt		$	9,309,153			$	9,309,153			$	15,937,012
Redeemable Noncontrolling Interests – Operating Partnership		$	414,219			$	414,227			$	414,253
Equity:
Preferred shares, par value $0.01 per share; 100,000,000 shares authorized and 1,000,000 shares issued and outstanding,		$	50,000			$	50,000			$	50,000
Common shares, par value $0.01 per share; 1,000,000,000 shares authorized and 302,674,716 shares issued and outstanding, actual, 321,674,716 shares outstanding, as adjusted and 356,142,801 shares outstanding, Pro Forma as adjusted			3,027				3,217				3,562
Paid in capital			5,364,802				6,359,790				8,182,237
Retained earnings			770,697				770,697				689,597
Accumulated other comprehensive (loss)			(197,754	)			(197,754	)			(197,754	)
Total shareholders’ equity			5,990,772				6,985,950				8,727,642
Noncontrolling Interests – Operating Partnership			147,650				160,906				180,153
Noncontrolling Interests – Partially Owned Properties			75,428				75,428				75,428
Total Noncontrolling Interests			223,078				236,334				255,581
Total equity		$	6,213,850			$	7,222,284			$	8,983,223
Total Capitalization		$	15,937,222			$	16,945,664			$	25,334,488

 

(1)

Does not include the underwriters’ option to purchase up to 2,850,000 additional shares.

 

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ADDITIONAL FEDERAL INCOME TAX CONSIDERATIONS

 

The following discussion supplements the discussions under the heading “Federal Income Tax Considerations” in the accompanying prospectus and in our annual report on Form 10-K for the year ended December 31, 2011, which has been incorporated into this prospectus supplement by reference. In the accompanying prospectus, we noted that, for taxable years beginning after December 31, 2010, the current long-term capital gains rate of 15% would revert to 20% and the current maximum ordinary income tax rate of 35% would revert to 39.6%. Under current law, such changes in rates now are scheduled to take effect for taxable years beginning after December 31, 2012. In addition, in the accompanying prospectus we noted new legislation (i.e., the Foreign Account Tax Compliance Act) imposing a withholding tax on payments made with respect to certain foreign accounts generally would take effect with respect to payments made after December 31, 2012. The IRS and Treasury Department have issued proposed Treasury regulations deferring application of such legislation’s withholding obligations to payments of income items until January 1, 2014 and payments of gross proceeds until January 1, 2015.

 

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UNDERWRITERS

 

Under the terms and subject to the conditions in an underwriting agreement dated the date of this prospectus supplement, the underwriters named below, for whom Morgan Stanley & Co. LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank Securities Inc. and Wells Fargo Securities, LLC are acting as representatives, have severally agreed to purchase, and we have agreed to sell to them, severally, the number of shares indicated below:

 

Name		Number of Shares
Morgan Stanley & Co. LLC			7,600,000
Merrill Lynch, Pierce, Fenner & Smith                           Incorporated			1,900,000
Deutsche Bank Securities Inc.			1,900,000
Wells Fargo Securities, LLC			1,900,000
Barclays Capital Inc.			950,000
Citigroup Global Markets Inc.			950,000
J.P. Morgan Securities LLC			950,000
RBC Capital Markets, LLC			950,000
Mitsubishi UFJ Securities (USA), Inc.			475,000
Piper Jaffray & Co.			475,000
PNC Capital Markets LLC			475,000
SunTrust Robinson Humphrey, Inc.			475,000
Total			19,000,000

 

The underwriters and the representatives are collectively referred to as the “underwriters” and the “representatives,” respectively. The underwriters are offering the shares of common shares subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common shares offered by this prospectus supplement are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common shares offered by this prospectus supplement if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters’ option to purchase additional shares described below.

 

The underwriters initially propose to offer part of the shares of common shares directly to the public at the offering price listed on the cover page of this prospectus supplement and part to certain dealers. After the initial offering of the shares of common shares, the offering price and other selling terms may from time to time be varied by the representatives.

 

We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus supplement, to purchase up to 2,850,000 additional shares of common shares at the public offering price listed on the cover page of this prospectus supplement, less underwriting discounts and commissions. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of common shares as the number listed next to the underwriter’s name in the preceding table bears to the total number of shares of common shares listed next to the names of all underwriters in the preceding table.

 

The following table shows the per share and total public offering price, underwriting discounts and commissions, and proceeds before expenses to us. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase up to an additional 2,850,000 shares of common shares.

 

						Total
		Per Share				No Exercise				Full Exercise
Public offering price		$	54.75			$	1,040,250,000			$	1,196,287,500
Underwriting discounts and commissions to be paid by:
Us		$	1.6425			$	31,207,500			$	35,888,625
Proceeds, before expenses, to us		$	53.1075			$	1,009,042,500			$	1,160,398,875

 

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The estimated offering expenses payable by us, exclusive of the underwriting discounts and commissions, are approximately $600,000.

 

Our common shares have been approved for listing on the New York Stock Exchange under the trading symbol “EQR”.

 

We and all trustees and executive officers have agreed that, without the prior written consent of Morgan Stanley & Co. LLC on behalf of the underwriters, we and they will not, during the period ending 60 days after the date of this prospectus supplement (the “restricted period”):

 

•

offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common shares or any securities convertible into or exercisable or exchangeable for shares of common shares;

 

•

file any registration statement with the SEC relating to the offering of any shares of common shares or any securities convertible into or exercisable or exchangeable for common shares; or

 

•

enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common shares.

 

whether any such transaction described above is to be settled by delivery of common shares or such other securities, in cash or otherwise. In addition, we and each such person agrees that, without the prior written consent of Morgan Stanley & Co. LLC on behalf of the underwriters, we or such other person will not, during the restricted period, make any demand for, or exercise any right with respect to, the registration of any shares of common shares or any security convertible into or exercisable or exchangeable for common shares.

 

The restrictions described in the immediately preceding paragraph to do not apply to:

 

•

the sale of shares to the underwriters; or

 

•

the issuance by the Company of shares of common shares upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus supplement of which the underwriters have been advised in writing;

 

•

issuances pursuant to outstanding options or similar awards and redemption of units of limited partnership in ERP Operating Limited Partnership;

 

•

the issuance of common shares pursuant to the Archstone Transaction;

 

•

with respect to our trustees and executive officers, the sale of common shares to the extent necessary to pay withholding taxes on restricted shares that vest during the restricted period; or

 

•

the establishment of a trading plan pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the transfer of shares of common shares, provided that (i) such plan does not provide for the transfer of common shares during the restricted period and (ii) to the extent a public announcement or filing under the Exchange Act, if any, is required of or voluntarily made regarding the establishment of such plan, such announcement or filing shall include a statement to the effect that no transfer of common shares may be made under such plan during the restricted period.