Equity Residential - 10-Q quarterly report FY

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

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

For the quarterly period ended SEPTEMBER 30, 2005

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-12252

EQUITY RESIDENTIAL

(Exact Name of Registrant as Specified in its Charter)

(312) 474-1300

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes ý  No o

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

The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding on September 30, 2005 was 288,165,764.

EQUITY RESIDENTIAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.                                      Business

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

EQR is the general partner of, and as of September 30, 2005 owned an approximate 93.3% ownership interest in ERP Operating Limited Partnership, an Illinois limited partnership (the “Operating Partnership”).  The Company is structured as an umbrella partnership REIT (“UPREIT”), under which all property ownership and business operations are conducted through the Operating Partnership and its various subsidiaries.  References to the “Company” include EQR, the Operating Partnership and each of the partnerships, limited liability companies and corporations controlled by the Operating Partnership and/or EQR.

As of September 30, 2005, the Company, directly or indirectly through investments in title holding entities, owned all or a portion of 922 properties in 32 states and the District of Columbia consisting of 195,575 units.  The ownership breakdown includes:

2.                                      Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) and certain reclassifications considered necessary for a fair presentation have been included.  Certain reclassifications have been made to the prior period financial statements in order to conform to the current year presentation.  Operating results for the nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

For further information, including definition of capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

Stock-Based Compensation

The Company elected to account for its stock-based compensation in accordance with SFAS No. 123 and its amendment (SFAS No. 148), Accounting for Stock Based Compensation, effective in the first quarter of 2003, which resulted in compensation expense being recorded based on the fair value of the stock compensation granted.

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of operations of these development properties were previously included in income (loss) from investments in unconsolidated entities.

The Company adopted the disclosure provisions of SFAS No. 150 and FSP No. FAS 150-3, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, effective December 31, 2003.  SFAS No. 150 and FSP No. FAS 150-3 require the Company to make certain disclosures regarding noncontrolling interests that are classified as equity in the financial statements of a subsidiary but would be classified as a liability in the parent’s financial statements under SFAS No. 150 (e.g., minority interests in consolidated limited-life subsidiaries).  The Company is presently the controlling partner in various consolidated partnerships consisting of 36 properties and 6,134 units and various uncompleted development properties having a minority interest book value of $10.7 million at September 30, 2005.  Some of these partnerships contain provisions that require the partnerships to be liquidated through the sale of its assets upon reaching a date specified in each respective partnership agreement.  The Company, as controlling partner, has an obligation to cause the property owning partnerships to distribute proceeds of liquidation to the Minority Interests in these Partially Owned Properties only to the extent that the net proceeds received by the partnerships from the sale of its assets warrant a distribution based on the partnership agreements.  As of September 30, 2005, the Company estimates the value of Minority Interest distributions would have been approximately $75.9 million (“Settlement Value”) had the partnerships been liquidated.  This Settlement Value is based on estimated third party consideration realized by the partnerships upon disposition of the Partially Owned Properties and is net of all other assets and liabilities, including yield maintenance on the mortgages encumbering the properties, that would have been due on September 30, 2005 had those mortgages been prepaid.  Due to, among other things, the inherent uncertainty in the sale of real estate assets, the amount of any potential distribution to the Minority Interests in the Company’s Partially Owned Properties is subject to change.  To the extent that the partnerships’ underlying assets are worth less than the underlying liabilities, the Company has no obligation to remit any consideration to the Minority Interests in Partially Owned Properties.

In June 2005, the FASB ratified the consensus in EITF Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (“Issue 04-5”), which provides guidance in determining whether a general partner controls a limited partnership.  Issue 04-5 states that the general partner in a limited partnership is presumed to control that limited partnership.  The presumption may be overcome if the limited partners have either (1) the substantive ability to dissolve the limited partnership or otherwise remove the general partner without cause or (2) substantive participating rights, which provide the limited partners with the ability to effectively participate in significant decisions that would be expected to be made in the ordinary course of the limited partnership’s business and thereby preclude the general partner from exercising unilateral control over the partnership.  If the criteria in Issue 04-5 are met, the Company could be required to consolidate certain of its existing Unconsolidated Properties.  The adoption of Issue 04-5 by the Company is required for new or modified limited partnership arrangements effective June 30, 2005 and existing limited partnership arrangements effective January 1, 2006.  The adoption is not expected to have a material effect on the results of operations or financial position nor is it expected to have any effect on net equity or net income as the aggregate results of any Unconsolidated Properties required to be consolidated are already included in investments in unconsolidated entities and income (loss) from investments in unconsolidated entities, respectively.

3.                                      Shareholders’ Equity and Minority Interests

The following table presents the changes in the Company’s issued and outstanding Common Shares and OP Units for the nine months ended September 30, 2005:

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

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

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

The following table presents the Company’s issued and outstanding Preferred Shares as of September 30, 2005 and December 31, 2004:

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

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

(3)          Dividends on all series of Preferred Shares are payable quarterly at various pay dates.  Dividend rates listed for Series C, D and N are Preferred Share rates and the equivalent depositary share annual dividend rates are $2.281252, $2.15 and $1.62, respectively.

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

(5)          On September 14, 2005, the Company issued an irrevocable notice to redeem for cash on October 17, 2005 all 500,000 shares of its Series B Preferred Shares.  The liquidation value of $125.0 million was included as a separate component of rents received in advance and other liabilities in

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the accompanying consolidated balance sheets at September 30, 2005.  Additionally, the Company recorded the write-off of approximately $4.3 million in original costs as a premium on redemption of Preferred Shares in the accompanying consolidated statements of operations.

The following table presents the issued and outstanding Preference Interests as of September 30, 2005 and December 31, 2004:

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

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

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

(4)          During the nine months ended September 30, 2005, the Company redeemed or repurchased for cash all of its Series B through F Preference Interests with a liquidation value of $146.0 million. The Company recorded approximately $4.1 million as premiums on redemption of Preference Interests (Minority Interests) in the accompanying consolidated statements of operations, which included $3.8 million in original issuance costs and $0.3 million in cash redemption charges.

The following table presents the Operating Partnership’s issued and outstanding Junior Convertible Preference Units (the “Junior Preference Units”) as of September 30, 2005 and December 31, 2004:

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

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

4.                                      Real Estate

During the nine months ended September 30, 2005, the Company acquired the entire equity interest in twenty-six properties containing 7,168 units and three land parcels from unaffiliated parties for a total purchase price of $1.2 billion.

During the nine months ended September 30, 2005, the Company acquired additional ownership interests in twelve Partially Owned Properties, all of which remain partially owned.  The acquisitions were funded using $20.3 million in cash and through the issuance of 570,812 OP Units valued at $19.2 million, with $37.8 million recorded as additional building basis and $1.7 million recorded as a reduction of Minority Interests – Partially Owned Properties.  The Company also acquired the majority of the remaining third party equity interests it did not previously own in two properties, consisting of 120 units. The properties were previously accounted for under the equity method of accounting and subsequent to the purchase were consolidated.

During the nine months ended September 30, 2005, the Company disposed of the following to unaffiliated parties (including two land parcels and various individual condominium units) (sales price in millions):

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The Company recognized a net gain on sales of discontinued operations of approximately $513.4 million on the above sales (amount is net of $5.8 million of income taxes incurred on condominium sales – see additional discussion in Note 13).

5.                                      Commitments to Acquire/Dispose of Real Estate

As of November 3, 2005, in addition to the properties there were subsequently acquired as discussed in Note 16, the Company had entered into separate agreements to acquire five multifamily properties containing 1,750 units and two land parcels from unaffiliated parties.  The Company expects a combined purchase price of approximately $333.4 million.

As of November 3, 2005, in addition to the properties that were subsequently disposed of as discussed in Note 16, the Company had entered into separate agreements to dispose of eight multifamily properties containing 1,895 units to unaffiliated parties.  The Company expects a combined disposition price of approximately $222.4 million.

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

6.                                      Investments in Unconsolidated Entities

The Company has co-invested in various properties with unrelated third parties which are accounted for under the equity method of accounting.  The following table summarizes the Company’s investments in unconsolidated entities as of September 30, 2005 (amounts in thousands except for project and unit amounts):

(1)                Totals exclude Fort Lewis Military Housing consisting of one property and 3,733 units, which is not accounted for under the equity method of accounting but is included in the Company’s property/unit counts as of September 30, 2005.

(2)                All debt is non-recourse to the Company.

7.                                      Deposits – Restricted

The following table presents the deposits – restricted as of September 30, 2005 and December 31, 2004 (amounts in thousands):

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8.                                      Mortgage Notes Payable

As of September 30, 2005, the Company had outstanding mortgage indebtedness of approximately $3.3 billion.

During the nine months ended September 30, 2005, the Company:

•                  Repaid $372.6 million of mortgage loans;

•                  Assumed/consolidated $320.4 million of mortgage debt on certain properties in connection with their acquisitions and/or consolidations;

•                  Obtained $249.5 million of new mortgage loans on certain properties; and

•                  Was released from $35.0 million of mortgage debt assumed by the purchaser on disposed properties.

As of September 30, 2005, scheduled maturities for the Company’s outstanding mortgage indebtedness were at various dates through February 1, 2041.  At September 30, 2005, the interest rate range on the Company’s mortgage debt was 2.22% to 12.465%.  During the nine months ended September 30, 2005, the weighted average interest rate on the Company’s mortgage debt was 5.65%.

9.                                      Notes

As of September 30, 2005, the Company had outstanding unsecured notes of approximately $3.4 billion.

During the nine months ended September 30, 2005, the Company:

•                  Repaid $190.0 million of fixed rate public notes at maturity.

•                  Issued $500.0 million of ten and one-half year 5.125% fixed rate public notes, receiving net proceeds of $496.2 million.

As of September 30, 2005, scheduled maturities for the Company’s outstanding notes were at various dates through 2029.  At September 30, 2005, the interest rate range on the Company’s notes was 4.75% to 7.625%.  During the nine months ended September 30, 2005, the weighted average interest rate on the Company’s notes was 6.14%.

10.                               Lines of Credit

On April 1, 2005, the Operating Partnership obtained a new three-year $1.0 billion unsecured revolving credit facility maturing on May 29, 2008, and terminated the $700.0 million credit facility that was scheduled to expire in May 2005.  The Operating Partnership has the ability to increase available borrowings up to $500.0 million under certain circumstances.  Advances under the new credit facility bear interest at variable rates based upon LIBOR at various interest periods plus a spread dependent upon the Operating Partnership’s credit rating or based on bids received from the lending group.  EQR has guaranteed the Operating Partnership’s credit facility up to the maximum amount and for the full term of the facility.

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On August 30, 2005, the Operating Partnership obtained a new one-year $600.0 million revolving credit facility maturing on August 29, 2006.  Advances under the new facility bear interest at variable rates based on LIBOR at various interest periods plus a spread dependent upon the Operating Partnership’s credit rating.  EQR has guaranteed this credit facility up to the maximum amount and for its full term.

As of September 30, 2005, there were no outstanding borrowings and $47.3 million was restricted (dedicated to support letters of credit and not available for borrowing) on the revolving credit facilities.  During the nine months ended September 30, 2005, the weighted average interest rate under the credit facilities was 3.52%.

11.                               Derivative Instruments

The following table summarizes the consolidated derivative instruments at September 30, 2005 (dollar amounts are in thousands):

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

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

(3) Development Cash Flow Hedges – Converts outstanding floating rate debt to a fixed interest rate.

On September 30, 2005, the net derivative instruments were reported at their fair value as other assets of approximately $7.3 million and as other liabilities of approximately $14.2 million.  As of September 30, 2005, there were approximately $18.0 million in deferred losses, net, included in accumulated other comprehensive loss.  Based on the estimated fair values of the net derivative instruments at September 30, 2005, the Company may recognize an estimated $3.3 million of accumulated other comprehensive loss as additional interest expense during the twelve months ending September 30, 2006.

During the nine months ended September 30, 2005, the Company paid approximately $7.8 million to terminate eight forward starting swaps in conjunction with the issuance of $500.0 million of ten and one-half year unsecured notes.  The $7.8 million cost has been deferred and will be recognized as additional interest expense over the life of the unsecured notes.

12.                               Earnings Per Share

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

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