UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

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

 

For the quarterly period ended SEPTEMBER 30, 2006

 

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)

Maryland	13-3675988
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
Two North Riverside Plaza, Chicago, Illinois	60606
(Address of Principal Executive Offices)	(Zip Code)
(312) 474-1300
(Registrant’s Telephone Number, Including Area Code)

 

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

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

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

The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding on September 30, 2006 was 292,132,743.

 

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

		September 30, 2006			December 31, 2005
ASSETS
Investment in real estate
Land		$	3,118,538		$	2,848,601
Depreciable property		13,195,156			13,336,636
Projects under development		335,227			240,980
Land held for development		199,369			164,153
Investment in real estate		16,848,290			16,590,370
Accumulated depreciation		(2,911,481		)	(2,888,140		)
Investment in real estate, net		13,936,809			13,702,230
Real estate held for sale		646,155			-
Cash and cash equivalents		76,324			88,828
Investments in unconsolidated entities		4,528			6,838
Rents receivable		1,452			789
Deposits — restricted		96,567			77,093
Escrow deposits — mortgage		32,410			35,225
Deferred financing costs, net		43,957			40,636
Goodwill, net		30,000			30,000
Other assets		101,864			117,306
Total assets		$	14,970,066		$	14,098,945
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Mortgage notes payable		$	3,157,088		$	3,379,289
Mortgage notes payable, held for sale		196,325			-
Notes, net		4,469,043			3,442,784
Lines of credit		506,000			769,000
Accounts payable and accrued expenses		146,091			108,855
Accrued interest payable		73,174			78,441
Rents received in advance and other liabilities		292,515			302,418
Security deposits		63,901			54,823
Distributions payable		144,758			145,812
Total liabilities		9,048,895			8,281,422
Commitments and contingencies
Minority Interests:
Operating Partnership		361,060			345,034
Preference Interests and Units		11,684			60,184
Partially Owned Properties		23,842			16,965
Total Minority Interests		396,586			422,183
Shareholders’ equity:
Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares authorized; 2,794,050 shares issued and outstanding as of September 30, 2006 and 3,323,830 shares issued and outstanding as of December 31, 2005		387,351			504,096
Common Shares of beneficial interest, $0.01 par value; 1,000,000,000 shares authorized; 292,132,743 shares issuedand outstanding as of September 30, 2006 and 289,536,344 shares issued and outstanding as of December 31, 2005		2,921			2,895
Paid in capital		5,311,347			5,253,188
Distributions in excess of accumulated earnings		(162,408		)	(350,367		)
Accumulated other comprehensive loss		(14,626		)	(14,472		)
Total shareholders’ equity		5,524,585			5,395,340
Total liabilities and shareholders’ equity		$	14,970,066		$	14,098,945

 

See accompanying notes

2

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

		Nine Months Ended September 30,						Quarter Ended September 30,
		2006			2005			2006			2005
REVENUES
Rental income		$	1,470,705		$	1,237,279		$	511,794		$	428,357
Fee and asset management		6,878			7,763			2,071			2,401
Total revenues		1,477,583			1,245,042			513,865			430,758
EXPENSES
Property and maintenance		390,732			338,810			138,285			121,562
Real estate taxes and insurance		148,604			136,813			51,525			50,181
Property management		70,081			63,351			23,417			21,944
Fee and asset management		6,477			6,358			2,151			2,182
Depreciation		415,179			323,608			143,255			111,370
General and administrative		37,638			45,944			14,448			14,442
Total expenses		1,068,711			914,884			373,081			321,681
Operating income		408,872			330,158			140,784			109,077
Interest and other income		11,668			64,824			7,303			2,554
Interest:
Expense incurred, net		(319,236		)	(266,063		)	(110,187		)	(92,335		)
Amortization of deferred financing costs		(6,419		)	(4,832		)	(1,906		)	(1,602		)
Income before allocation to Minority Interests, loss from investments in unconsolidated entities, net gain on sales of unconsolidated entities and land parcels and discontinued operations		94,885			124,087			35,994			17,694
Allocation to Minority Interests:
Operating Partnership, net		(3,891		)	(5,509		)	(1,627		)	183
Preference Interests and Units		(1,779		)	(6,442		)	(223		)	(1,163		)
Partially Owned Properties		(2,550		)	672			(482		)	(1,624		)
Premium on redemption of Preference Interests		(684		)	(4,134		)	(1		)	(22		)
Loss from investments in unconsolidated entities		(565		)	(450		)	(190		)	(235		)
Net gain on sales of unconsolidated entities		370			124			18			-
Net gain on sales of land parcels		3,183			10,366			2,937			-
Income from continuing operations, net of minority interests		88,969			118,714			36,426			14,833
Discontinued operations, net of minority interests		518,814			517,193			33,385			252,691
Net income		607,783			635,907			69,811			267,524
Preferred distributions		(29,682		)	(39,004		)	(9,514		)	(12,961		)
Premium on redemption of Preferred Shares		(3,941		)	(4,316		)	(3,941		)	(4,316		)
Net income available to Common Shares		$	574,160		$	592,587		$	56,356		$	250,247
Earnings per share — basic:
Income (loss) from continuing operations available to Common Shares		$	0.19		$	0.26		$	0.08		$	(0.01	)
Net income available to Common Shares		$	1.98		$	2.08		$	0.19		$	0.87
Weighted average Common Shares outstanding		289,463			285,331			290,036			286,182
Earnings per share — diluted:
Income (loss) from continuing operations available to Common Shares		$	0.19		$	0.26		$	0.08		$	(0.01	)
Net income available to Common Shares		$	1.95		$	2.05		$	0.19		$	0.87
Weighted average Common Shares outstanding		314,982			310,211			315,886			286,182
Distributions declared per Common Share outstanding		$	1.3275		$	1.2975		$	0.4425		$	0.4325

 

 

See accompanying notes

3

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

 

		Nine Months Ended September 30,						Quarter Ended September 30,
		2006			2005			2006			2005
Comprehensive income:
Net income		$	607,783		$	635,907		$	69,811		$	267,524
Other comprehensive income — derivative and other instruments:
Unrealized holding gains (losses) arising during the period		(1,843		)	2,010			(4,252		)	13,684
Losses reclassified into earnings from other comprehensive income		1,689			1,797			553			629
Comprehensive income		$	607,629		$	639,714		$	66,112		$	281,837

 

See accompanying notes

4

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

		Nine Months Ended September 30,
		2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	607,783		$	635,907
Adjustments to reconcile net income to net cash provided by operating activities:
Allocation to Minority Interests:
Operating Partnership		40,493			43,060
Preference Interests and Units		1,779			6,442
Partially Owned Properties		2,550			(672		)
Premium on redemption of Preference Interests		684			4,134
Depreciation		440,727			391,151
Amortization of deferred financing costs		7,092			5,470
Amortization of discounts and premiums on debt		(5,100		)	(1,677		)
Amortization of deferred settlements on derivative instruments		628			761
Income from technology investments		(3,736		)	(57,054		)
Loss from investments in unconsolidated entities		565			450
Distributions from unconsolidated entities — return on capital		138			—
Net (gain) on sales of unconsolidated entities		(370		)	(124		)
Net (gain) on sales of land parcels		(3,183		)	(10,366		)
Net (gain) on sales of discontinued operations		(526,873		)	(503,053		)
Loss on debt extinguishments		2,901			10,977
Unrealized (gain) loss on derivative instruments		(12		)	10
Compensation paid with Company Common Shares		18,401			26,799
Other operating activities, net		2,623			480
Changes in assets and liabilities:
(Increase) decrease in rents receivable		(656		)	762
(Increase) decrease in deposits — restricted		(10,441		)	12,319
Decrease (increase) in other assets		11,224			(1,468		)
Increase in accounts payable and accrued expenses		35,659			25,463
(Decrease) in accrued interest payable		(5,422		)	(6,146		)
(Decrease) in rents received in advance and other liabilities		(40,908		)	(7,123		)
Increase in security deposits		8,743			452
Net cash provided by operating activities		585,289			576,954
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate — acquisitions		(1,399,339		)	(871,477		)
Investment in real estate — development/other		(193,601		)	(127,461		)
Improvements to real estate		(181,226		)	(167,274		)
Additions to non-real estate property		(7,278		)	(12,447		)
Interest capitalized for real estate under development		(13,176		)	(9,105		)
Proceeds from disposition of real estate, net		1,066,894			1,476,746
Proceeds from disposition of unconsolidated entities		373			124
Proceeds from technology investments		3,736			82,054
Investments in unconsolidated entities		(1,052		)	(1,377		)
Distributions from unconsolidated entities — return of capital		92			330
Decrease (increase) in deposits on real estate acquisitions, net		10,303			(235,491		)
Decrease (increase) in mortgage deposits		3,215			(564		)
Consolidation of previously Unconsolidated Properties:
Via acquisition (net of cash acquired)		—			(65		)
Via EITF 04-05 (cash consolidated)		1,436			—
Acquisition of Minority Interests — Partially Owned Properties		(71		)	(1,712		)
Other investing activities, net		2			67,200
Net cash (used for) provided by investing activities		(709,692		)	199,481

 

 

See accompanying notes

5

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

		Nine Months Ended September 30,
		2006			2005
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan and bond acquisition costs		$	(10,159	)	$	(10,525	)
Mortgage notes payable:
Proceeds		247,833			249,491
Restricted cash		(19,160		)	-
Lump sum payoffs		(245,895		)	(351,492		)
Scheduled principal repayments		(21,067		)	(21,060		)
Prepayment premiums/fees		(2,901		)	(10,977		)
Notes, net:
Proceeds		1,039,927			499,435
Lump sum payoffs		(10,000		)	(190,000		)
Scheduled principal repayments		(4,286		)	(4,286		)
Lines of credit:
Proceeds		5,351,500			3,573,300
Repayments		(5,614,500		)	(3,723,300		)
Proceeds from (payments on) settlement of derivative instruments		10,729			(7,823		)
Proceeds from sale of Common Shares		6,631			7,369
Proceeds from exercise of options		50,413			34,610
Common Shares repurchased and retired		(83,230		)	-
Redemption of Preferred Shares		(115,000		)	-
Redemption of Preference Interests		(25,500		)	(146,000		)
Premium on redemption of Preferred Shares		(4		)	-
Premium on redemption of Preference Interests		(10		)	(322		)
Payment of offering costs		(83		)	(26		)
Contributions — Minority Interests — Partially Owned Properties		5,830			1,746
Distributions:
Common Shares		(384,901		)	(371,373		)
Preferred Shares		(31,899		)	(39,118		)
Preference Interests and Units		(1,832		)	(6,614		)
Minority Interests — Operating Partnership		(27,106		)	(26,926		)
Minority Interests — Partially Owned Properties		(3,431		)	(9,116		)
Net cash provided by (used for) financing activities		111,899			(553,007		)
Net (decrease) increase in cash and cash equivalents		(12,504		)	223,428
Cash and cash equivalents, beginning of period		88,828			83,505
Cash and cash equivalents, end of period		$	76,324		$	306,933

 

See accompanying notes

6

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

 

		Nine Months Ended September 30,
		2006			2005
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest		$	357,109		$	303,071
Cash paid during the period for income, franchise and excise taxes		$	11,967		$	9,398
Real estate acquisitions/dispositions/other:
Mortgage loans assumed		$	92,528		$	318,424
Valuation of OP Units issued		$	49,591		$	1,800
Mortgage loans (assumed) by purchaser		$	(117,949	)	$	(35,031	)
Consolidation of previously Unconsolidated Properties — Via acquisition:
Investment in real estate		$	—		$	(2,892	)
Mortgage loans assumed		$	—		$	2,012
Minority Interests — Partially Owned Properties		$	—		$	59
Investments in unconsolidated entities		$	—		$	668
Net other liabilities recorded		$	—		$	88
Consolidation of previously Unconsolidated Properties — Via EITF 04-05:
Investment in real estate, net		$	(24,637	)	$	—
Mortgage loans consolidated		$	22,545		$	—
Investments in unconsolidated entities		$	2,602		$	—
Net other liabilities recorded		$	926		$	—

 

See accompanying notes

7

EQUITY RESIDENTIAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.             Business

Equity Residential (“EQR”), a real estate investment trust (“REIT”) formed in March 1993, is a fully integrated real estate company primarily engaged in the acquisition, development, ownership, management and operation of multifamily properties.  In addition, EQR may acquire or develop multifamily properties specifically to convert directly into condominiums as well as upgrade and sell existing properties as individual condominiums.  EQR may also acquire land parcels to hold and/or sell based on market opportunities.  EQR has elected to be taxed as a REIT.

EQR is the general partner of, and as of September 30, 2006 owned an approximate 93.4% ownership interest in, ERP Operating Limited Partnership, an Illinois limited partnership (the “Operating Partnership”).  The Company is structured as an umbrella partnership REIT (“UPREIT”), under which all property ownership and business operations are conducted through the Operating Partnership and its subsidiaries.  References to the “Company” include EQR, the Operating Partnership and those entities owned or controlled by the Operating Partnership and/or EQR.

As of September 30, 2006, the Company, directly or indirectly through investments in title holding entities, owned all or a portion of 905 properties in 31 states and the District of Columbia consisting of 193,692 units.   Following the Lexford Housing Division sale on October 5, 2006, the Company, directly or indirectly through investments in title holding entities, owned all or a portion of 616 properties in 26 states and the District of Columbia consisting of 166,577 units.  The ownership breakdown includes the following at each respective date (table does not include various uncompleted development properties):

 

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, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

The balance sheet at December 31, 2005 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.

8

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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, 2005.

Other

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

The Company adopted the disclosure provisions of SFAS No. 150 and FSP No. FAS 150-3, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, effective December 31, 2003.  SFAS No. 150 and FSP No. FAS 150-3 require the Company to make certain disclosures regarding noncontrolling interests that are classified as equity in the financial statements of a subsidiary but would be classified as a liability in the parent’s financial statements under SFAS No. 150 (e.g., minority interests in consolidated limited-life subsidiaries).  The Company is presently the controlling partner in various consolidated partnerships consisting of 34 properties and 5,890 units and various uncompleted development properties having a minority interest book value of $23.8 million at September 30, 2006.  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, 2006, the Company estimates the value of Minority Interest distributions would have been approximately $96.5 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, 2006 had those mortgages been prepaid.  Due to, among other things, the inherent uncertainty in the sale of real estate assets, the amount of any potential distribution to the Minority Interests in the Company’s Partially Owned Properties is subject to change.  To the extent that the partnerships’ underlying assets are worth less than the underlying liabilities, the Company has no obligation to remit any consideration to the Minority Interests in Partially Owned Properties.

The Company adopted EITF Issue No. 04-05, 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 04-05”), effective January 1, 2006.  Issue 04-05 provides guidance in determining whether a general partner controls a limited partnership.  The Company consolidated its Lexford syndicated portfolio consisting of 20 separate partnerships (10 properties) containing 1,272 units, all of which are included as held for sale at September 30, 2006.  The adoption did not have a material effect on the results of operations or financial position.  See Note 4 for further discussion of the adoption of EITF Issue No. 04-05.

In July 2006, the FASB ratified the consensus in Financial Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes.  FIN No. 48 creates a single model to address uncertainty in income tax positions and prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition and, clearly scopes income taxes out of SFAS No. 5, Accounting for Contingencies.  The Company will adopt FIN No. 48 as required effective January 1, 2007.  Adoption is not expected to have a material effect on the consolidated results of operations or financial position.

9

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3.                                      Shareholders’ Equity and Minority Interests

The following tables present the changes in the Company’s issued and outstanding Common Shares and OP Units for the nine months ended September 30, 2006:

 

 

 

During the nine months ended September 30, 2006, the Company repurchased 1,897,912 of its Common Shares on the open market at an average price of $43.85 per share.  The Company paid approximately $83.2 million for these shares, which were retired subsequent to the repurchase.

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.

10

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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, 2006 and December 31, 2005:

						Annual			Amounts in thousands
		Redemption Date (1) (2)		Conversion Rate (2)		Dividend per Share (3)			September 30, 2006			December 31, 2005
Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares authorized:
91¤8% Series C Cumulative Redeemable Preferred; liquidation value $250 per share; 0 and 460,000 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively		9/9/06		N/A		(5		)	$	—		$	115,000
8.60% Series D Cumulative Redeemable Preferred; liquidation value $250 per share; 700,000 shares issued and outstanding at September 30, 2006 and December 31, 2005 (4)		7/15/07		N/A		$	21.50		175,000			175,000
7.00% Series E Cumulative Convertible Preferred; liquidation value $25 per share; 464,616 and 529,096 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively		11/1/98		1.1128		$	1.75		11,615			13,228
7.00% Series H Cumulative Convertible Preferred; liquidation value $25 per share; 29,434 and 34,734 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively		6/30/98		1.4480		$	1.75		736			868
8.29% Series K Cumulative Redeemable Preferred; liquidation value $50 per share; 1,000,000 shares issued and outstanding at September 30, 2006 and December 31, 2005		12/10/26		N/A		$	4.145		50,000			50,000
6.48% Series N Cumulative Redeemable Preferred; liquidation value $250 per share; 600,000 shares issued and outstanding at September 30, 2006 and December 31, 2005 (4)		6/19/08		N/A		$	16.20		150,000			150,000
									$	387,351		$	504,096

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

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

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

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

(5)          On August 9, 2006, the Company issued an irrevocable notice to redeem for cash on September 11, 2006 all 460,000 shares of its 9 1/8% Series C Preferred Shares.  The Company recorded approximately $3.9 million as a premium on redemption of Preferred Shares in the accompanying consolidated statements of operations.

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The following table presents the issued and outstanding Preference Interests as of September 30, 2006 and December 31, 2005:

						Annual			Amounts in thousands
		Redemption Date (1) (2)		Conversion Rate (2)		Dividend per Unit (3)			September 30, 2006			December 31, 2005
Preference Interests:
7.875% Series G Cumulative Redeemable Preference Units; liquidation value $50 per unit; 0 and 510,000 units issued and outstanding at September 30, 2006 and December 31, 2005, respectively		03/21/06		N/A		(4		)	$	—		$	25,500
7.625% Series H Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 0 and 190,000 units issued and outstanding at September 30, 2006 and December 31, 2005, respectively		03/23/06		1.5108		(5		)	—			9,500
7.625% Series I Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 0 and 270,000 units issued and outstanding at September 30, 2006 and December 31, 2005, respectively		06/22/06		1.4542		(6		)	—			13,500
7.625% Series J Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 230,000 units issued and outstanding at September 30, 2006 and December 31, 2005		12/14/06		1.4108		$	3.8125		11,500			11,500
									$	11,500		$	60,000

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

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

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

(4)          On February 10, 2006, the Company issued an irrevocable notice to redeem for cash on March 21, 2006 all 510,000 units of its 7.875% Series G Preference Interests with a liquidation value of $25.5 million.  The Company recorded approximately $0.7 million as a premium on redemption of Preference Interests (Minority Interests) in the accompanying consolidated statements of operations.

(5)          On February 10, 2006, the Company issued an irrevocable notice to redeem for cash on March 23, 2006 all 190,000 units of its 7.625% Series H Preference Interests with a liquidation value of $9.5 million.  This notice triggered the holder’s Accelerated Conversion Right, which they exercised.  As a result, effective March 23, 2006, the 190,000 units were converted to 287,052 Common Shares.

(6)          On May 16, 2006, the Company issued an irrevocable notice to redeem for cash on June 22, 2006 all 270,000 units of its 7.625% Series I Preference Interests with a liquidation value of $13.5 million.  This notice triggered the holder’s Accelerated Conversion Right, which they exercised.  As a result, effective June 22, 2006, the 270,000 units were converted to 392,634 Common Shares.

The following table presents the Operating Partnership’s issued and outstanding Junior Convertible Preference Units (the “Junior Preference Units”) as of September 30, 2006 and December 31, 2005:

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						Annual			Amounts in thousands
		Redemption Date (2)		Conversion Rate (2)		Dividend per Unit (1)			September 30, 2006			December 31, 2005
Junior Preference Units:
Series B Junior Convertible Preference Units; liquidation value $25 per unit; 7,367 units issued and outstanding at September 30, 2006 and December 31, 2005		07/29/09		1.020408		$	2.00		$	184		$	184
									$	184		$	184

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

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

4.              Real Estate

During the nine months ended September 30, 2006, the Company acquired the entire equity interest in 28 properties containing 7,480 units and six land parcels from unaffiliated parties for a total purchase price of $1.5 billion.  The Company also acquired the majority of its partners’ interests in seventeen partially owned properties containing 1,415 units for $38.7 million, partially funded through the issuance of 417,039 OP Units valued at $18.6 million.

The Company adopted EITF Issue No. 04-05, as required for existing limited partnership arrangements, effective January 1, 2006.  The adoption required the consolidation of the Lexford syndicated portfolio consisting of 20 separate partnerships (10 properties) containing 1,272 units, all of which are included as held for sale at September 30, 2006.  The Company recorded $24.6 million in investment in real estate and the following:

·                  Consolidated $22.5 million in mortgage debt;

·                  Reduced investments in unconsolidated entities by $2.6 million;

·                  Consolidated $0.9 million of other liabilities net of other assets acquired; and

·                  Consolidated $1.4 million of cash.

During the nine months ended September 30, 2006, the Company disposed of the following to unaffiliated parties (sales price in thousands):

 

The Company recognized a net gain on sales of discontinued operations of approximately $526.9 million (amount is net of $11.2 million of income taxes incurred on condominium sales — see additional discussion in Note 13), a net gain on sales of land parcels of $3.2 million and a net gain on sales of unconsolidated entities of $0.4 million on the above sales.

On June 28, 2006, the Company announced that it agreed to sell its Lexford Housing Division for a cash purchase price of $1.086 billion.  The sale closed on October 5, 2006.  The Lexford Housing Division results are classified as discontinued operations, net of minority interests, in the consolidated statements of operations for

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all periods presented and Lexford investment in real estate and mortgage notes payable balances are classified as held for sale in the consolidated balance sheets as of September 30, 2006.  The Company expects to record a gain on sale of approximately $420.0 million on the sale of the Lexford Housing Division in the fourth quarter of 2006.  In conjunction with the Lexford disposition, the Company paid off $196.3 million of mortgage notes payable secured by the properties and incurred approximately $10.8 million in prepayment penalties upon extinguishment.  The Company also recorded approximately $4.5 million in one-time accrued retention benefits during the third quarter of 2006 related to the Lexford disposition. These costs are included in discontinued operations, net of minority interests, in the consolidated statements of operations. See Note 13 for additional information.

5.              Commitments to Acquire/Dispose of Real Estate

As of November 1, 2006, in addition to the properties that were subsequently acquired as discussed in Note 16, the Company had entered into separate agreements to acquire the following (purchase price in thousands):

 

 

As of November 1, 2006, in addition to the properties that were subsequently disposed as discussed in Note 16, the Company had entered into separate agreements (including option rights) to dispose of the following (sales price in thousands):

 

 

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

6.              Investments in Partially Owned Entities

The Company has co-invested in various properties with unrelated third parties which are either consolidated or accounted for under the equity method of accounting (unconsolidated).  The following table summarizes the Company’s investments in partially owned entities as of September 30, 2006 (amounts in thousands except for project and unit amounts):

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		Consolidated															Unconsolidated
		Development Projects
		Held for and/or Under Development			Completed and Stabilized			Lexford			Other			Total			Institutional Joint Ventures
Total projects	(1)	—			4			9			21			34			45
Total units	(1)	—			977			1,017			3,896			5,890			10,846
Debt — Secured (2):
EQR Ownership (3)		$	142,099		$	61,000		$	13,994		$	287,086		$	504,179		$	121,200
Minority Ownership		—			—			415			13,321			13,736			363,600
Total (at 100%)		$	142,099		$	61,000		$	14,409		$	300,407		$	517,915		$	484,800

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

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

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

 

7.              Deposits — Restricted

The following table presents the deposits — restricted as of September 30, 2006 and December 31, 2005 (amounts in thousands):

 

8.              Mortgage Notes Payable

As of September 30, 2006, the Company had outstanding mortgage indebtedness of approximately $3.4 billion, of which $196.3 million is classified as held for sale.

During the nine months ended September 30, 2006, the Company:

·                  Repaid $267.0 million of mortgage loans;

·                  Assumed/consolidated $115.1 million of mortgage debt on certain properties in connection with their acquisitions and/or consolidations;

·                  Obtained $247.8 million of new mortgage loans on certain properties; and

·                  Was released from $117.9 million of mortgage debt assumed by the purchaser on disposed properties.

As of September 30, 2006, scheduled maturities for the Company’s outstanding mortgage indebtedness were at various dates through September 1, 2045.  At September 30, 2006, the interest rate range on the Company’s mortgage debt was 3.32% to 12.465%.  During the nine months ended September 30, 2006, the weighted average interest rate on the Company’s mortgage debt was 5.83%.

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