Edgar Filing: EQUITY RESIDENTIAL

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FORM 10-Q

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, 2011

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

For the transition period from to

Commission File Number: 1-12252 (Equity Residential)

Commission File Number: 0-24920 (ERP Operating Limited Partnership)

EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

(Exact name of Registrant as Specified in Its Charter)


Maryland (Equity Residential)		13-3675988 (Equity Residential)
Illinois (ERP Operating Limited Partnership)		36-3894853 (ERP Operating Limited Partnership)
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

Two North Riverside Plaza, Chicago, Illinois 60606		(312) 474-1300
(Address of Principal Executive Offices) (Zip Code)		(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.

Equity Residential Yes x No ¨ ERP Operating Limited Partnership Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Equity Residential Yes x No ¨ ERP Operating Limited Partnership Yes x No ¨

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

Equity Residential:

ERP Operating Limited Partnership:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Equity Residential Yes ¨ No x ERP Operating Limited Partnership Yes ¨ No x

The number of EQR Common Shares of Beneficial Interest, $0.01 par value, outstanding on October 27, 2011 was 296,628,624.

EXPLANATORY NOTE

This report combines the reports on Form 10-Q for the quarterly period ended September 30, 2011 of Equity Residential and ERP Operating Limited Partnership. Unless stated otherwise or the context otherwise requires, references to “EQR” mean Equity Residential, a Maryland real estate investment trust (“REIT”), and references to “ERPOP” mean ERP Operating Limited Partnership, an Illinois limited partnership. References to the “Company,” “we,” “us” or “our” mean collectively EQR, ERPOP and those entities/subsidiaries owned or controlled by EQR and/or ERPOP. References to the “Operating Partnership” mean collectively ERPOP and those entities/subsidiaries owned or controlled by ERPOP. The following chart illustrates the Company’s and the Operating Partnership’s corporate structure:

LOGO

EQR is the general partner of, and as of September 30, 2011 owned an approximate 95.6% ownership interest in ERPOP. The remaining 4.4% interest is owned by limited partners. As the sole general partner of ERPOP, EQR has exclusive control of ERPOP’s day-to-day management.

The Company is structured as an umbrella partnership REIT (“UPREIT”) and contributes all net proceeds from its various equity offerings to the Operating Partnership. In return for those contributions, the Company receives a number of OP Units (see definition below) in the Operating Partnership equal to the number of Common Shares it has issued in the equity offering. Contributions of properties to the Company can be structured as tax-deferred transactions through the issuance of OP Units in the Operating Partnership. Based on the terms of ERPOP’s partnership agreement, OP Units can be exchanged with Common Shares on a one-for-one basis. The Company maintains a one-for-one relationship between the OP Units of the Operating Partnership issued to EQR and the Common Shares issued to the public.

The Company believes that combining the reports on Form 10-Q of EQR and ERPOP into this single report provides the following benefits:

•

enhances investors’ understanding of the Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;

•

eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure applies to both the Company and the Operating Partnership; and

•

creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.

Management operates the Company and the Operating Partnership as one business. The management of EQR consists of the same members as the management of ERPOP.

The Company believes it is important to understand the few differences between EQR and ERPOP in the context of how EQR and ERPOP operate as a consolidated company. All of the Company’s property ownership, development and related business operations are conducted through the Operating Partnership and EQR has no material assets or liabilities other than its investment in ERPOP. EQR’s primary function is acting as the general partner of ERPOP. EQR also issues public equity from time to time and guarantees certain debt of ERPOP, as disclosed in this report. EQR does not have any indebtedness as all debt is incurred by the Operating Partnership. The Operating Partnership holds substantially all of the assets of the Company, including the Company’s ownership interests in its joint ventures. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for the net proceeds from equity offerings by the Company, which are contributed to the capital of the Operating Partnership in exchange for additional limited partnership interests in the Operating Partnership (“OP Units”) (on a one-for-one Common Share per OP Unit basis), the Operating Partnership generates all remaining capital required by the Company’s business. These sources include the Operating Partnership’s working capital, net cash provided by operating activities, borrowings under its revolving credit facility, the issuance of secured and unsecured debt and equity securities, including additional OP Units, and proceeds received from disposition of certain properties and joint ventures.

Shareholders’ equity, partners’ capital and noncontrolling interests are the main areas of difference between the consolidated financial statements of the Company and those of the Operating Partnership. The limited partners of the Operating Partnership are accounted for as partners’ capital in the Operating Partnership’s financial statements and as noncontrolling interests in the Company’s financial statements. The noncontrolling interests in the Operating Partnership’s financial statements include the interests of unaffiliated partners in various consolidated partnerships and development joint venture partners. The noncontrolling interests in the Company’s financial statements include the same noncontrolling interests at the Operating Partnership level and limited partner OP Unit holders of the Operating Partnership. The differences between shareholders’ equity and partners’ capital result from differences in the equity issued at the Company and Operating Partnership levels.

To help investors understand the significant differences between the Company and the Operating Partnership, this report provides separate consolidated financial statements for the Company and the Operating Partnership; a single set of consolidated notes to such financial statements that includes separate discussions of each entity’s debt, noncontrolling interests and shareholders’ equity or partners’ capital, as applicable; and a combined Management’s Discussion and Analysis of Financial Condition and Results of Operations section that includes discrete information related to each entity.

This report also includes separate Part I, Item 4. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for each of the Company and the Operating Partnership in order to establish that the requisite certifications have been made and that the Company and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.

In order to highlight the differences between the Company and the Operating Partnership, the separate sections in this report for the Company and the Operating Partnership specifically refer to the Company and the Operating Partnership. In the sections that combine disclosure of the Company and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the Company. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and joint ventures and holds assets and debt, reference to the Company is appropriate because the Company is one business and the Company operates that business through the Operating Partnership.

As general partner with control of the Operating Partnership, the Company consolidates the Operating Partnership for financial reporting purposes, and EQR essentially has no assets or liabilities other than its investment in ERPOP. Therefore, the assets and liabilities of the Company and the Operating Partnership are the same on their respective financial statements. The separate discussions of the Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company on a consolidated basis and how management operates the Company.

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	PAGE
PART I.

Item 1. Financial Statements of Equity Residential:

Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010		2

Consolidated Statements of Operations for the nine months and quarters ended September 30, 2011 and 2010		3 to 4

Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010		5 to 7

Consolidated Statement of Changes in Equity for the nine months ended September 30, 2011		8 to 9

Financial Statements of ERP Operating Limited Partnership:

Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010		10

Consolidated Statements of Operations for the nine months and quarters ended September 30, 2011 and 2010		11 to 12

Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010		13 to 15

Consolidated Statement of Changes in Capital for the nine months ended September 30, 2011		16 to 17

Notes to Consolidated Financial Statements of Equity Residential and ERP Operating Limited Partnership		18 to 40

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		41 to 61

Item 3. Quantitative and Qualitative Disclosures about Market Risk		61

Item 4. Controls and Procedures		62

PART II.

Item 1. Legal Proceedings		63

Item 1A. Risk Factors		63

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		63

Item 6. Exhibits		63

EQUITY RESIDENTIAL

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands except for share amounts)

(Unaudited)


	September 30, 2011			December 31, 2010
ASSETS
Investment in real estate
Land	$	4,158,288		$	4,110,275
Depreciable property		15,055,570			15,226,512
Projects under development		119,433			130,337
Land held for development		205,476			235,247

Investment in real estate		19,538,767			19,702,371
Accumulated depreciation		(4,405,479	)		(4,337,357	)

Investment in real estate, net		15,133,288			15,365,014
Cash and cash equivalents		45,986			431,408
Investments in unconsolidated entities		11,020			3,167
Deposits – restricted		369,461			180,987
Escrow deposits – mortgage		10,677			12,593
Deferred financing costs, net		37,334			42,033
Other assets		149,051			148,992

Total assets	$	15,756,817		$	16,184,194

LIABILITIES AND EQUITY
Liabilities:
Mortgage notes payable	$	4,136,848		$	4,762,896
Notes, net		4,614,323			5,185,180
Lines of credit		26,000			—
Accounts payable and accrued expenses		97,845			39,452
Accrued interest payable		69,895			98,631
Other liabilities		409,591			304,202
Security deposits		62,073			60,812
Distributions payable		106,673			140,905

Total liabilities		9,523,248			10,592,078

Commitments and contingencies
Redeemable Noncontrolling Interests – Operating Partnership		378,798			383,540

Equity:
Shareholders’ equity:
Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares authorized; 1,600,000 shares issued and outstanding as of September 30, 2011 and December 31, 2010		200,000			200,000
Common Shares of beneficial interest, $0.01 par value; 1,000,000,000 shares authorized; 296,620,833 shares issued and outstanding as of September 30, 2011 and 290,197,242 shares issued and outstanding as of December 31, 2010		2,966			2,902
Paid in capital		5,032,863			4,741,521
Retained earnings		684,902			203,581
Accumulated other comprehensive (loss)		(185,032	)		(57,818	)

Total shareholders’ equity		5,735,699			5,090,186
Noncontrolling Interests:
Operating Partnership		120,786			110,399
Partially Owned Properties		(1,714	)		7,991

Total Noncontrolling Interests		119,072			118,390

Total equity		5,854,771			5,208,576

Total liabilities and equity	$	15,756,817		$	16,184,194

See accompanying notes

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands except per share data)

(Unaudited)


	Nine Months Ended September 30,						Quarter Ended September 30,
	2011			2010			2011			2010
REVENUES
Rental income	$	1,470,398		$	1,311,377		$	509,030		$	451,832
Fee and asset management		6,682			7,596			2,928			2,128

Total revenues		1,477,080			1,318,973			511,958			453,960

EXPENSES
Property and maintenance		314,768			303,916			106,635			104,259
Real estate taxes and insurance		168,056			160,307			59,083			56,205
Property management		62,389			59,770			19,241			19,014
Fee and asset management		3,207			4,242			1,250			679
Depreciation		482,039			457,822			164,552			158,318
General and administrative		32,462			31,029			10,121			10,221

Total expenses		1,062,921			1,017,086			360,882			348,696

Operating income		414,159			301,887			151,076			105,264
Interest and other income		6,608			5,045			5,317			201
Other expenses		(9,318	)		(9,513	)		(2,528	)		(3,487	)
Interest:
Expense incurred, net		(354,960	)		(348,279	)		(113,370	)		(121,116	)
Amortization of deferred financing costs		(12,129	)		(7,729	)		(4,721	)		(2,437	)

Income (loss) before income and other taxes, (loss) income from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entites and land parcels and discontinued operations		44,360			(58,589	)		35,774			(21,575	)
Income and other tax (expense) benefit		(669	)		(283	)		(283	)		(291	)
(Loss) income from investments in unconsolidated entities		—			(735	)		—			188
Net gain on sales of unconsolidated entities		—			28,101			—			22,544
Net gain (loss) on sales of land parcels		4,217			(1,161	)		—			(1,161	)

Income (loss) from continuing operations		47,908			(32,667	)		35,491			(295	)
Discontinued operations, net		779,888			130,438			77,486			30,121

Net income		827,796			97,771			112,977			29,826
Net (income) loss attributable to Noncontrolling Interests:
Operating Partnership		(36,275	)		(4,167	)		(4,742	)		(1,231	)
Partially Owned Properties		(418	)		623			(387	)		188

Net income attributable to controlling interests		791,103			94,227			107,848			28,783
Preferred distributions		(10,399	)		(10,855	)		(3,466	)		(3,617	)

Net income available to Common Shares	$	780,704		$	83,372		$	104,382		$	25,166

Earnings per share – basic:
Income (loss) from continuing operations available to Common Shares	$	0.12		$	(0.15	)	$	0.10		$	(0.01	)

Net income available to Common Shares	$	2.65		$	0.30		$	0.35		$	0.09

Weighted average Common Shares outstanding		294,474			281,867			295,831			282,717

Earnings per share – diluted:
Income (loss) from continuing operations available to Common Shares	$	0.12		$	(0.15	)	$	0.10		$	(0.01	)

Net income available to Common Shares	$	2.62		$	0.30		$	0.35		$	0.09

Weighted average Common Shares outstanding		311,908			281,867			312,844			282,717

Distributions declared per Common Share outstanding	$	1.0125		$	1.0125		$	0.3375		$	0.3375

See accompanying notes

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(Amounts in thousands except per share data)

(Unaudited)


	Nine Months Ended September 30,						Quarter Ended September 30,
	2011			2010			2011			2010
Comprehensive income (loss):
Net income	$	827,796		$	97,771		$	112,977		$	29,826
Other comprehensive (loss):
Other comprehensive (loss) – derivative instruments:
Unrealized holding (losses) arising during the period		(130,367	)		(123,472	)		(105,248	)		(37,726	)
Losses reclassified into earnings from other comprehensive income		2,842			2,379			951			914
Other comprehensive income (loss) – other instruments:
Unrealized holding gains (losses) arising during the period		311			(52	)		(182	)		14

Other comprehensive (loss)		(127,214	)		(121,145	)		(104,479	)		(36,798	)

Comprehensive income (loss)		700,582			(23,374	)		8,498			(6,972	)
Comprehensive (income) attributable to Noncontrolling Interests		(36,693	)		(3,544	)		(5,129	)		(1,043	)

Comprehensive income (loss) attributable to controlling interests	$	663,889		$	(26,918	)	$	3,369		$	(8,015	)

See accompanying notes

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	827,796		$	97,771
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		496,383			501,695
Amortization of deferred financing costs		12,769			7,981
Amortization of discounts and premiums on debt		144			1,454
Amortization of deferred settlements on derivative instruments		2,441			1,978
Write-off of pursuit costs		4,052			3,512
Income from technology investments		(4,537	)		—
Loss from investments in unconsolidated entities		—			735
Distributions from unconsolidated entities – return on capital		318			61
Net (gain) on sales of unconsolidated entities		—			(28,101	)
Net (gain) loss on sales of land parcels		(4,217	)		1,161
Net (gain) on sales of discontinued operations		(759,100	)		(69,538	)
Loss on debt extinguishments		—			158
Unrealized loss on derivative instruments		—			1
Compensation paid with Company Common Shares		16,722			14,716
Changes in assets and liabilities:
Decrease in deposits – restricted		5,101			75
Decrease (increase) in other assets		3,239			(6,385	)
Increase in accounts payable and accrued expenses		60,608			66,070
(Decrease) in accrued interest payable		(28,736	)		(31,257	)
(Decrease) in other liabilities		(20,193	)		(4,150	)
Increase in security deposits		1,261			2,744

Net cash provided by operating activities		614,051			560,681

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate – acquisitions		(634,581	)		(1,108,014	)
Investment in real estate – development/other		(93,761	)		(98,282	)
Improvements to real estate		(106,070	)		(98,959	)
Additions to non-real estate property		(4,879	)		(1,022	)
Interest capitalized for real estate and unconsolidated entities under development		(5,931	)		(10,196	)
Proceeds from disposition of real estate, net		1,402,475			134,603
Investments in unconsolidated entities		(865	)		—
Distributions from unconsolidated entities – return of capital		—			26,924
Proceeds from sale of investment securities		—			25,000
Proceeds from technology investments		4,537			—
(Increase) decrease in deposits on real estate acquisitions, net		(210,170	)		248,547
Decrease (increase) in mortgage deposits		1,916			(2,340	)
Consolidation of previously unconsolidated properties		—			(26,854	)
Deconsolidation of previously consolidated properties		28,360			—
Acquisition of Noncontrolling Interests – Partially Owned Properties		(12,809	)		(1,936	)

Net cash provided by (used for) investing activities		368,222			(912,529	)

See accompanying notes

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2011			2010
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan and bond acquisition costs	$	(8,070	)	$	(7,897	)
Mortgage notes payable:
Proceeds		152,930			124,020
Restricted cash		16,595			36,411
Lump sum payoffs		(859,066	)		(491,100	)
Scheduled principal repayments		(12,463	)		(12,508	)
(Loss) on debt extinguishments		—			(158	)
Notes, net:
Proceeds		—			595,422
Lump sum payoffs		(575,641	)		—
Lines of credit:
Proceeds		213,000			4,375,125
Repayments		(187,000	)		(4,229,125	)
(Payments on) settlement of derivative instruments		—			(10,040	)
Proceeds from sale of Common Shares		154,508			73,356
Proceeds from Employee Share Purchase Plan (ESPP)		4,558			4,251
Proceeds from exercise of options		94,373			57,933
Common Shares repurchased and retired		—			(1,887	)
Payment of offering costs		(2,770	)		(730	)
Other financing activities, net		(33	)		(33	)
Contributions – Noncontrolling Interests – Partially Owned Properties		64			222
Distributions:
Common Shares		(331,928	)		(284,185	)
Preferred Shares		(10,399	)		(10,858	)
Noncontrolling Interests – Operating Partnership		(15,464	)		(14,187	)
Noncontrolling Interests – Partially Owned Properties		(889	)		(1,812	)

Net cash (used for) provided by financing activities		(1,367,695	)		202,220

Net (decrease) in cash and cash equivalents		(385,422	)		(149,628	)
Cash and cash equivalents, beginning of period		431,408			193,288

Cash and cash equivalents, end of period	$	45,986		$	43,660

See accompanying notes

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2011			2010
SUPPLEMENTAL INFORMATION:
Cash paid for interest, net of amounts capitalized	$	381,194		$	377,467

Net cash paid (received) for income and other taxes	$	607		$	(2,892	)

Real estate acquisitions/dispositions/other:
Mortgage loans assumed	$	99,131		$	338,196

Valuation of OP Units issued	$	—		$	7,433

Mortgage loans (assumed) by purchaser	$	—		$	(39,999	)

Amortization of deferred financing costs:
Investment in real estate, net	$	—		$	(1,824	)

Deferred financing costs, net	$	12,769		$	9,805

Amortization of discounts and premiums on debt:
Mortgage notes payable	$	(6,116	)	$	(5,048	)

Notes, net	$	6,260		$	6,502

Amortization of deferred settlements on derivative instruments:
Other liabilities	$	(401	)	$	(401	)

Accumulated other comprehensive income	$	2,842		$	2,379

Unrealized loss on derivative instruments:
Other assets	$	5,217		$	13,788

Mortgage notes payable	$	(464	)	$	6

Notes, net	$	(1,476	)	$	9,835

Other liabilities	$	127,090		$	99,844

Accumulated other comprehensive (loss)	$	(130,367	)	$	(123,472	)

Interest capitalized for real estate and unconsolidated entities under development:
Investment in real estate, net	$	(5,760	)	$	(10,196	)

Investments in unconsolidated entities	$	(171	)	$	—

Consolidation of previously unconsolidated properties:
Investment in real estate, net	$	—		$	(105,065	)

Investments in unconsolidated entities	$	—		$	7,376

Deposits – restricted	$	—		$	(42,633	)

Mortgage notes payable	$	—		$	112,631

Net other assets recorded	$	—		$	837

Deconsolidation of previously consolidated properties:
Investment in real estate, net	$	35,495		$	—

Investments in unconsolidated entities	$	(7,135	)	$	—

(Payments on) settlement of derivative instruments:
Other liabilities	$	—		$	(10,040	)

Other:
Receivable on sale of Common Shares	$	—		$	37,550

Transfer from notes, net to mortgage notes payable	$	—		$	35,600

See accompanying notes

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Amounts in thousands)

(Unaudited)


	Nine Months Ended September 30, 2011
SHAREHOLDERS’ EQUITY
PREFERRED SHARES
Balance, beginning of year	$	200,000

Balance, end of period	$	200,000

COMMON SHARES, $0.01 PAR VALUE
Balance, beginning of year	$	2,902
Conversion of OP Units into Common Shares		3
Issuance of Common Shares		30
Exercise of share options		29
Employee Share Purchase Plan (ESPP)		1
Conversion of restricted shares to LTIP Units		(1	)
Share-based employee compensation expense:
Restricted shares		2

Balance, end of period	$	2,966

PAID IN CAPITAL
Balance, beginning of year	$	4,741,521
Common Share Issuance:
Conversion of OP Units into Common Shares		8,092
Issuance of Common Shares		154,478
Exercise of share options		94,344
Employee Share Purchase Plan (ESPP)		4,557
Conversion of restricted shares to LTIP Units		(3,933	)
Share-based employee compensation expense:
Restricted shares		7,275
Share options		7,389
ESPP discount		1,070
Offering costs		(2,770	)
Supplemental Executive Retirement Plan (SERP)		10,198
Acquisition of Noncontrolling Interests – Partially Owned Properties		(4,784	)
Change in market value of Redeemable Noncontrolling Interests – Operating Partnership		16,023
Adjustment for Noncontrolling Interests ownership in Operating Partnership		(597	)

Balance, end of period	$	5,032,863

RETAINED EARNINGS
Balance, beginning of year	$	203,581
Net income attributable to controlling interests		791,103
Common Share distributions		(299,383	)
Preferred Share distributions		(10,399	)

Balance, end of period	$	684,902

ACCUMULATED OTHER COMPREHENSIVE (LOSS)
Balance, beginning of year	$	(57,818	)
Accumulated other comprehensive (loss) – derivative instruments:
Unrealized holding (losses) arising during the period		(130,367	)
Losses reclassified into earnings from other comprehensive income		2,842
Accumulated other comprehensive income – other instruments:
Unrealized holding gains arising during the period		311

Balance, end of period	$	(185,032	)

See accompanying notes

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Continued)

(Amounts in thousands)

(Unaudited)


	Nine Months Ended September 30, 2011
NONCONTROLLING INTERESTS
OPERATING PARTNERSHIP
Balance, beginning of year	$	110,399
Conversion of OP Units held by Noncontrolling Interests into OP Units held by General Partner		(8,095	)
Conversion of restricted shares to LTIP Units		3,934
Equity compensation associated with Noncontrolling Interests		2,734
Net income attributable to Noncontrolling Interests		36,275
Distributions to Noncontrolling Interests		(13,777	)
Change in carrying value of Redeemable Noncontrolling Interests – Operating Partnership		(11,281	)
Adjustment for Noncontrolling Interests ownership in Operating Partnership		597

Balance, end of period	$	120,786

PARTIALLY OWNED PROPERTIES
Balance, beginning of year	$	7,991
Net income attributable to Noncontrolling Interests		418
Contributions by Noncontrolling Interests		64
Distributions to Noncontrolling Interests		(922	)
Acquisition of Noncontrolling Interests – Partially Owned Properties		(8,025	)
Other		(1,240	)

Balance, end of period	$	(1,714	)

See accompanying notes

ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

(Unaudited)


	September 30, 2011			December 31, 2010
ASSETS
Investment in real estate
Land	$	4,158,288		$	4,110,275
Depreciable property		15,055,570			15,226,512
Projects under development		119,433			130,337
Land held for development		205,476			235,247

Investment in real estate		19,538,767			19,702,371
Accumulated depreciation		(4,405,479	)		(4,337,357	)

Investment in real estate, net		15,133,288			15,365,014
Cash and cash equivalents		45,986			431,408
Investments in unconsolidated entities		11,020			3,167
Deposits – restricted		369,461			180,987
Escrow deposits – mortgage		10,677			12,593
Deferred financing costs, net		37,334			42,033
Other assets		149,051			148,992

Total assets	$	15,756,817		$	16,184,194

LIABILITIES AND CAPITAL
Liabilities:
Mortgage notes payable	$	4,136,848		$	4,762,896
Notes, net		4,614,323			5,185,180
Lines of credit		26,000			—
Accounts payable and accrued expenses		97,845			39,452
Accrued interest payable		69,895			98,631
Other liabilities		409,591			304,202
Security deposits		62,073			60,812
Distributions payable		106,673			140,905

Total liabilities		9,523,248			10,592,078

Commitments and contingencies
Redeemable Limited Partners		378,798			383,540

Capital:
Partners’ Capital:
Preference Units		200,000			200,000
General Partner		5,720,731			4,948,004
Limited Partners		120,786			110,399
Accumulated other comprehensive (loss)		(185,032	)		(57,818	)

Total partners’ capital		5,856,485			5,200,585
Noncontrolling Interests – Partially Owned Properties		(1,714	)		7,991

Total capital		5,854,771			5,208,576

Total liabilities and capital	$	15,756,817		$	16,184,194

See accompanying notes

ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands except per Unit data)

(Unaudited)


	Nine Months Ended September 30,						Quarter Ended September 30,
	2011			2010			2011			2010
REVENUES
Rental income	$	1,470,398		$	1,311,377		$	509,030		$	451,832
Fee and asset management		6,682			7,596			2,928			2,128

Total revenues		1,477,080			1,318,973			511,958			453,960

EXPENSES
Property and maintenance		314,768			303,916			106,635			104,259
Real estate taxes and insurance		168,056			160,307			59,083			56,205
Property management		62,389			59,770			19,241			19,014
Fee and asset management		3,207			4,242			1,250			679
Depreciation		482,039			457,822			164,552			158,318
General and administrative		32,462			31,029			10,121			10,221

Total expenses		1,062,921			1,017,086			360,882			348,696

Operating income		414,159			301,887			151,076			105,264
Interest and other income		6,608			5,045			5,317			201
Other expenses		(9,318	)		(9,513	)		(2,528	)		(3,487	)
Interest:
Expense incurred, net		(354,960	)		(348,279	)		(113,370	)		(121,116	)
Amortization of deferred financing costs		(12,129	)		(7,729	)		(4,721	)		(2,437	)

Income (loss) before income and other taxes, (loss) income from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities and land parcels and discontinued operations		44,360			(58,589	)		35,774			(21,575	)
Income and other tax (expense) benefit		(669	)		(283	)		(283	)		(291	)
(Loss) income from investments in unconsolidated entities		—			(735	)		—			188
Net gain on sales of unconsolidated entities		—			28,101			—			22,544
Net gain (loss) on sales of land parcels		4,217			(1,161	)		—			(1,161	)

Income (loss) from continuing operations		47,908			(32,667	)		35,491			(295	)
Discontinued operations, net		779,888			130,438			77,486			30,121

Net income		827,796			97,771			112,977			29,826
Net (income) loss attributable to Noncontrolling Interests – Partially Owned Properties		(418	)		623			(387	)		188

Net income attributable to controlling interests	$	827,378		$	98,394		$	112,590		$	30,014

ALLOCATION OF NET INCOME:
Preference Units	$	10,399		$	10,855		$	3,466		$	3,617

General Partner	$	780,704		$	83,372		$	104,382		$	25,166
Limited Partners		36,275			4,167			4,742			1,231

Net income available to Units	$	816,979		$	87,539		$	109,124		$	26,397

Earnings per Unit – basic:
Income (loss) from continuing operations available to Units	$	0.12		$	(0.15	)	$	0.10		$	(0.01	)

Net income available to Units	$	2.65		$	0.30		$	0.35		$	0.09

Weighted average Units outstanding		307,705			295,572			308,884			296,348

Earnings per Unit – diluted:
Income (loss) from continuing operations available to Units	$	0.12		$	(0.15	)	$	0.10		$	(0.01	)

Net income available to Units	$	2.62		$	0.30		$	0.35		$	0.09

Weighted average Units outstanding		311,908			295,572			312,844			296,348

Distributions declared per Unit outstanding	$	1.0125		$	1.0125		$	0.3375		$	0.3375

See accompanying notes

ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(Amounts in thousands except per Unit data)

(Unaudited)


	Nine Months Ended September 30,						Quarter Ended September 30,
	2011			2010			2011			2010
Comprehensive income (loss):
Net income	$	827,796		$	97,771		$	112,977		$	29,826
Other comprehensive (loss):
Other comprehensive (loss) – derivative instruments:
Unrealized holding (losses) arising during the period		(130,367	)		(123,472	)		(105,248	)		(37,726	)
Losses reclassified into earnings from other comprehensive income		2,842			2,379			951			914
Other comprehensive income (loss) – other instruments:
Unrealized holding gains (losses) arising during the period		311			(52	)		(182	)		14

Other comprehensive (loss)		(127,214	)		(121,145	)		(104,479	)		(36,798	)

Comprehensive income (loss)		700,582			(23,374	)		8,498			(6,972	)
Comprehensive (income) loss attributable to Noncontrolling Interests – Partially Owned Properties		(418	)		623			(387	)		188

Comprehensive income (loss) attributable to controlling interests	$	700,164		$	(22,751	)	$	8,111		$	(6,784	)

See accompanying notes

ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	827,796		$	97,771
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		496,383			501,695
Amortization of deferred financing costs		12,769			7,981
Amortization of discounts and premiums on debt		144			1,454
Amortization of deferred settlements on derivative instruments		2,441			1,978
Write-off of pursuit costs		4,052			3,512
Income from technology investments		(4,537	)		—
Loss from investments in unconsolidated entities		—			735
Distributions from unconsolidated entities – return on capital		318			61
Net (gain) on sales of unconsolidated entities		—			(28,101	)
Net (gain) loss on sales of land parcels		(4,217	)		1,161
Net (gain) on sales of discontinued operations		(759,100	)		(69,538	)
Loss on debt extinguishments		—			158
Unrealized loss on derivative instruments		—			1
Compensation paid with Company Common Shares		16,722			14,716
Changes in assets and liabilities:
Decrease in deposits – restricted		5,101			75
Decrease (increase) in other assets		3,239			(6,385	)
Increase in accounts payable and accrued expenses		60,608			66,070
(Decrease) in accrued interest payable		(28,736	)		(31,257	)
(Decrease) in other liabilities		(20,193	)		(4,150	)
Increase in security deposits		1,261			2,744

Net cash provided by operating activities		614,051			560,681

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate – acquisitions		(634,581	)		(1,108,014	)
Investment in real estate – development/other		(93,761	)		(98,282	)
Improvements to real estate		(106,070	)		(98,959	)
Additions to non-real estate property		(4,879	)		(1,022	)
Interest capitalized for real estate and unconsolidated entities under development		(5,931	)		(10,196	)
Proceeds from disposition of real estate, net		1,402,475			134,603
Investments in unconsolidated entities		(865	)		—
Distributions from unconsolidated entities – return of capital		—			26,924
Proceeds from sale of investment securities		—			25,000
Proceeds from technology investments		4,537			—
(Increase) decrease in deposits on real estate acquisitions, net		(210,170	)		248,547
Decrease (increase) in mortgage deposits		1,916			(2,340	)
Consolidation of previously unconsolidated properties		—			(26,854	)
Deconsolidation of previously consolidated properties		28,360			—
Acquisition of Noncontrolling Interests – Partially Owned Properties		(12,809	)		(1,936	)

Net cash provided by (used for) investing activities		368,222			(912,529	)

See accompanying notes

ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2011			2010
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan and bond acquisition costs	$	(8,070	)	$	(7,897	)
Mortgage notes payable:
Proceeds		152,930			124,020
Restricted cash		16,595			36,411
Lump sum payoffs		(859,066	)		(491,100	)
Scheduled principal repayments		(12,463	)		(12,508	)
(Loss) on debt extinguishments		—			(158	)
Notes, net:
Proceeds		—			595,422
Lump sum payoffs		(575,641	)		—
Lines of credit:
Proceeds		213,000			4,375,125
Repayments		(187,000	)		(4,229,125	)
(Payments on) settlement of derivative instruments		—			(10,040	)
Proceeds from sale of OP Units		154,508			73,356
Proceeds from EQR’s Employee Share Purchase Plan (ESPP)		4,558			4,251
Proceeds from exercise of EQR options		94,373			57,933
OP Units repurchased and retired		—			(1,887	)
Payment of offering costs		(2,770	)		(730	)
Other financing activities, net		(33	)		(33	)
Contributions – Noncontrolling Interests – Partially Owned Properties		64			222
Distributions:
OP Units – General Partner		(331,928	)		(284,185	)
Preference Units		(10,399	)		(10,858	)
OP Units – Limited Partners		(15,464	)		(14,187	)
Noncontrolling Interests – Partially Owned Properties		(889	)		(1,812	)

Net cash (used for) provided by financing activities		(1,367,695	)		202,220

Net (decrease) in cash and cash equivalents		(385,422	)		(149,628	)
Cash and cash equivalents, beginning of period		431,408			193,288

Cash and cash equivalents, end of period	$	45,986		$	43,660

See accompanying notes

ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2011			2010
SUPPLEMENTAL INFORMATION:
Cash paid for interest, net of amounts capitalized	$	381,194		$	377,467

Net cash paid (received) for income and other taxes	$	607		$	(2,892	)

Real estate acquisitions/dispositions/other:
Mortgage loans assumed	$	99,131		$	338,196

Valuation of OP Units issued	$	—		$	7,433

Mortgage loans (assumed) by purchaser	$	—		$	(39,999	)

Amortization of deferred financing costs:
Investment in real estate, net	$	—		$	(1,824	)

Deferred financing costs, net	$	12,769		$	9,805

Amortization of discounts and premiums on debt:
Mortgage notes payable	$	(6,116	)	$	(5,048	)

Notes, net	$	6,260		$	6,502

Amortization of deferred settlements on derivative instruments:
Other liabilities	$	(401	)	$	(401	)

Accumulated other comprehensive income	$	2,842		$	2,379

Unrealized loss on derivative instruments:
Other assets	$	5,217		$	13,788

Mortgage notes payable	$	(464	)	$	6

Notes, net	$	(1,476	)	$	9,835

Other liabilities	$	127,090		$	99,844

Accumulated other comprehensive (loss)	$	(130,367	)	$	(123,472	)

Interest capitalized for real estate and unconsolidated entities under development:
Investment in real estate, net	$	(5,760	)	$	(10,196	)

Investments in unconsolidated entities	$	(171	)	$	—

Consolidation of previously unconsolidated properties:
Investment in real estate, net	$	—		$	(105,065	)

Investments in unconsolidated entities	$	—		$	7,376

Deposits – restricted	$	—		$	(42,633	)

Mortgage notes payable	$	—		$	112,631

Net other assets recorded	$	—		$	837

Deconsolidation of previously consolidated properties:
Investment in real estate, net	$	35,495		$	—

Investments in unconsolidated entities	$	(7,135	)	$	—

(Payments on) settlement of derivative instruments:
Other liabilities	$	—		$	(10,040	)

Other:
Receivable on sale of OP Units	$	—		$	37,550

Transfer from notes, net to mortgage notes payable	$	—		$	35,600

See accompanying notes

ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL

(Amounts in thousands)

(Unaudited)


	Nine Months Ended September 30, 2011
PARTNERS’ CAPITAL
PREFERENCE UNITS
Balance, beginning of year	$	200,000

Balance, end of period	$	200,000

GENERAL PARTNER
Balance, beginning of year	$	4,948,004
OP Unit Issuance:
Conversion of OP Units held by Limited Partners into OP Units held by General Partner		8,095
Issuance of OP Units		154,508
Exercise of EQR share options		94,373
EQR’s Employee Share Purchase Plan (ESPP)		4,558
Conversion of EQR restricted shares to LTIP Units		(3,934	)
Share-based employee compensation expense:
EQR restricted shares		7,277
EQR share options		7,389
EQR ESPP discount		1,070
Offering costs		(2,770	)
Net income available to Units – General Partner		780,704
OP Units – General Partner distributions		(299,383	)
Supplemental Executive Retirement Plan (SERP)		10,198
Acquisition of Noncontrolling Interests – Partially Owned Properties		(4,784	)
Change in market value of Redeemable Limited Partners		16,023
Adjustment for Limited Partners ownership in Operating Partnership		(597	)

Balance, end of period	$	5,720,731

LIMITED PARTNERS
Balance, beginning of year	$	110,399
Conversion of OP Units held by Limited Partners into OP Units held by General Partner		(8,095	)
Conversion of EQR restricted shares to LTIP Units		3,934
Equity compensation associated with Units – Limited Partners		2,734
Net income available to Units – Limited Partners		36,275
Units – Limited Partners distributions		(13,777	)
Change in carrying value of Redeemable Limited Partners		(11,281	)
Adjustment for Limited Partners ownership in Operating Partnership		597

Balance, end of period	$	120,786

ACCUMULATED OTHER COMPREHENSIVE (LOSS)
Balance, beginning of year	$	(57,818	)
Accumulated other comprehensive (loss) – derivative instruments:
Unrealized holding (losses) arising during the period		(130,367	)
Losses reclassified into earnings from other comprehensive income		2,842
Accumulated other comprehensive income – other instruments:
Unrealized holding gains arising during the period		311

Balance, end of period	$	(185,032	)

See accompanying notes

ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL (Continued)

(Amounts in thousands)

(Unaudited)


	Nine Months Ended September 30, 2011
NONCONTROLLING INTERESTS
NONCONTROLLING INTERESTS – PARTIALLY OWNED PROPERTIES
Balance, beginning of year	$	7,991
Net income attributable to Noncontrolling Interests		418
Contributions by Noncontrolling Interests		64
Distributions to Noncontrolling Interests		(922	)
Acquisition of Noncontrolling Interests – Partially Owned Properties		(8,025	)
Other		(1,240	)

Balance, end of period	$	(1,714	)

See accompanying notes

EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	Business

Equity Residential (“EQR”), a Maryland real estate investment trust (“REIT”) formed in March 1993, is an S&P 500 company focused on the acquisition, development and management of high quality apartment properties in top United States growth markets. ERP Operating Limited Partnership (“ERPOP”), an Illinois limited partnership, was formed in May 1993 to conduct the multifamily residential property business of Equity Residential. EQR has elected to be taxed as a REIT. References to the “Company,” “we,” “us” or “our” mean collectively EQR, ERPOP and those entities/subsidiaries owned or controlled by EQR and/or ERPOP. References to the “Operating Partnership” mean collectively ERPOP and those entities/subsidiaries owned or controlled by ERPOP. Unless otherwise indicated, the notes to consolidated financial statements apply to both the Company and the Operating Partnership.

EQR is the general partner of, and as of September 30, 2011 owned an approximate 95.6% ownership interest in ERPOP. All of the Company’s property ownership, development and related business operations are conducted through the Operating Partnership and EQR has no material assets or liabilities other than its investment in ERPOP. EQR issues public equity from time to time but does not have any indebtedness as all debt is incurred by the Operating Partnership. The Operating Partnership holds substantially all of the assets of the Company, including the Company’s ownership interests in its joint ventures. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity.

As of September 30, 2011, the Company, directly or indirectly through investments in title holding entities, owned all or a portion of 417 properties located in 15 states and the District of Columbia consisting of 119,011 apartment units. The ownership breakdown includes (table does not include various uncompleted development properties):


	Properties		Apartment Units
Wholly Owned Properties		394		110,194
Partially Owned Properties – Consolidated		21		3,916
Military Housing		2		4,901

		417		119,011

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 promulgated under the Securities Act of 1933, as amended. 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, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

In preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

The balance sheets at December 31, 2010 have 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 definitions of capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in each of the Company’s and the Operating Partnership’s annual reports on Form 10-K for the year ended December 31, 2010.

Income and Other Taxes

Due to the structure of EQR as a REIT and the nature of the operations of its operating properties, no provision for federal income taxes has been made at the EQR level. In addition, ERPOP generally is not liable for federal income taxes as the partners recognize their proportionate share of income or loss in their tax returns; therefore no provision for federal income taxes has been made at the ERPOP level. Historically, the Company has generally only incurred certain state and local income, excise and franchise taxes. The Company has elected Taxable REIT Subsidiary (“TRS”) status for certain of its corporate subsidiaries and as a result, these entities will incur both federal and state income taxes on any taxable income of such entities after consideration of any net operating losses.

Deferred tax assets and liabilities applicable to the TRS entities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates for which the temporary differences are expected to be recovered or settled. The effects of changes in tax rates on deferred tax assets and liabilities are recognized in earnings in the period enacted. The Company’s deferred tax assets are generally the result of tax affected amortization of goodwill, differing depreciable lives on capitalized assets and the timing of expense recognition for certain accrued liabilities. As of September 30, 2011, the Company has recorded a deferred tax asset of approximately $38.7 million, which is fully offset by a valuation allowance due to the uncertainty in forecasting future TRS taxable income.

Other

Effective January 1, 2010, in an effort to improve financial standards for transfers of financial assets, more stringent conditions for reporting a transfer of a portion of a financial asset as a sale (e.g. loan participations) are required, the concept of a “qualifying special-purpose entity” and special guidance for guaranteed mortgage securitizations are eliminated, other sale-accounting criteria is clarified and the initial measurement of a transferor’s interest in transferred financial assets is changed. This does not have a material effect on the Company’s consolidated results of operations or financial position.

Effective January 1, 2010, the analysis for identifying the primary beneficiary of a Variable Interest Entity (“VIE”) has been simplified by replacing the previous quantitative-based analysis with a framework that is based more on qualitative judgments. The analysis requires the primary beneficiary of a VIE to be identified as the party that both (a) has the power to direct the activities of a VIE that most significantly impact its economic performance and (b) has an obligation to absorb losses or a right to receive benefits that could potentially be significant to the VIE. For the Company, this includes its consolidated development partnerships as the Company provides substantially all of the capital for these ventures (other than third party mortgage debt, if any). For the Company, these requirements affected only disclosures and had no impact on the Company’s consolidated results of operations or financial position. See Note 6 for further discussion.

The Company is the controlling partner in various consolidated partnerships owning 21 properties and 3,916 apartment units and various completed and uncompleted development properties having a negative noncontrolling interest book value of $1.7 million at September 30, 2011. The Company is required to make certain disclosures regarding noncontrolling interests in consolidated limited-life subsidiaries. Of the consolidated entities described above, the Company is the controlling partner in limited-life partnerships owning six properties. These six partnership agreements contain provisions that require the partnerships to be liquidated through the sale of their 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 the proceeds of liquidation to the Noncontrolling Interests in these Partially Owned Properties only to the extent that the net proceeds received by the partnerships from the sale of their assets warrant a distribution based on the partnership agreements. As of September 30, 2011, the Company estimates the value of Noncontrolling Interest distributions for these six properties would have been approximately $32.9 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 six 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, 2011 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 Noncontrolling 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 Noncontrolling Interests in these Partially Owned Properties.

Effective January 1, 2011, companies are required to separately disclose purchases, sales, issuances and settlements on a gross basis in the reconciliation of recurring Level 3 fair value measurements. This does not have a material effect on the Company’s consolidated results of operations or financial position. See Note 9 for further discussion.

Effective January 1, 2012, companies will be required to separately disclose the amounts and reasons for any transfers of assets and liabilities into and out of Level 1 and Level 2 of the fair value hierarchy. For fair value measurements using significant unobservable inputs (Level 3), companies will be required to disclose quantitative information about the significant unobservable inputs used for all Level 3 measurements and a description of the Company’s valuation processes in determining fair value. In addition, companies will be required to provide a qualitative discussion about the sensitivity of recurring Level 3 measurements to changes in the unobservable inputs disclosed, including the interrelationship between inputs. Companies will also be required to disclose information about when the current use of a non-financial asset measured at fair value differs from its highest and best use and the hierarchy classification for items whose fair value is not recorded on the balance sheet but is disclosed in the notes. The Company does not expect this will have a material effect on its consolidated results of operations or financial position.

Effective January 1, 2009, issuers of certain convertible debt instruments that may be settled in cash on conversion were required to separately account for the liability and equity components of the instrument in a manner that reflects each issuer’s nonconvertible debt borrowing rate. As the Company was required to apply this retrospectively, the accounting for its $650.0 million 3.85% convertible unsecured notes that were issued in August 2006 with a final maturity in August 2026 was affected. On August 18, 2011, the Company redeemed these notes at par ($482.5 million was outstanding on August 18, 2011) and no premium was paid. The Company recognized $11.8 million and $13.9 million in interest expense related to the stated coupon rate of 3.85% for the nine months ended September 30, 2011 and 2010, respectively. The amount of the conversion option as of the date of issuance calculated by the Company using a 5.80% effective interest rate was $44.3 million and was amortized to interest expense over the expected life of the convertible notes (through the first put date on August 18, 2011). Total amortization of the cash discount and conversion option discount on the unsecured notes resulted in a reduction to earnings of approximately $5.0 million and $5.8 million, respectively, or $0.02 per share/Unit and $0.02 per share/Unit, respectively, for the nine months ended September 30, 2011 and 2010, and will result in a reduction to earnings of approximately $5.0 million or $0.02 per share/Unit during the full year of 2011. In addition, the Company decreased the January 1, 2009 balance of retained earnings (included in general partner’s capital in the Operating Partnership’s financial statements) by $27.0 million, decreased the January 1, 2009 balance of notes by $17.3 million and increased the January 1, 2009 balance of paid in capital (included in general partner’s capital in the Operating Partnership’s financial statements) by $44.3 million. The carrying amount of the conversion option remaining in paid in capital (included in general partner’s capital in the Operating Partnership’s financial statements) was $44.3 million at both September 30, 2011 and December 31, 2010. The cash and conversion option discounts were fully amortized at September 30, 2011 and the unamortized cash and conversion option discounts totaled $5.0 million at December 31, 2010.

3.	Equity, Capital and Other Interests

Equity and Redeemable Noncontrolling Interests of Equity Residential

The following tables present the changes in the Company’s issued and outstanding Common Shares and “Units” (which includes OP Units and Long-Term Incentive Plan (“LTIP”) Units) for the nine months ended September 30, 2011:


	2011
Common Shares
Common Shares outstanding at January 1,		290,197,242
Common Shares Issued:
Conversion of OP Units		324,649
Issuance of Common Shares		3,038,980
Exercise of share options		2,914,476
Employee Share Purchase Plan (ESPP)		98,766
Restricted share grants, net		148,708
Common Shares Other:
Conversion of restricted shares to LTIP Units		(101,988	)

Common Shares outstanding at September 30,		296,620,833

Units
Units outstanding at January 1,		13,612,037
LTIP Units, net		120,112
Conversion of restricted shares to LTIP Units		101,988
Conversion of OP Units to Common Shares		(324,649	)

Units outstanding at September 30,		13,509,488

Total Common Shares and Units outstanding at September 30,		310,130,321

Units Ownership Interest in Operating Partnership		4.4	%

The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for OP Units, as well as the equity positions of the holders of LTIP Units, are collectively referred to as the “Noncontrolling Interests – Operating Partnership”. Subject to certain exceptions (including the “book-up” requirements of LTIP Units), the Noncontrolling Interests – Operating Partnership may exchange their Units with EQR for Common Shares on a one-for-one basis. The carrying value of the Noncontrolling Interests – Operating Partnership (including redeemable interests) is allocated based on the number of Noncontrolling Interests – Operating Partnership Units in total in proportion to the number of Noncontrolling Interests – Operating Partnership Units in total plus the number of Common Shares. Net income is allocated to the Noncontrolling Interests – Operating Partnership based on the weighted average ownership percentage during the period.

The Operating Partnership has the right but not the obligation to make a cash payment instead of issuing Common Shares to any and all holders of Noncontrolling Interests – Operating Partnership Units requesting an exchange of their OP Units with EQR. Once the Operating Partnership elects not to redeem the Noncontrolling Interests – Operating Partnership Units for cash, EQR is obligated to deliver Common Shares to the exchanging holder of the Noncontrolling Interests – Operating Partnership Units.

The Noncontrolling Interests – Operating Partnership Units are classified as either mezzanine equity or permanent equity. If EQR is required, either by contract or securities law, to deliver registered Common Shares, such Noncontrolling Interests – Operating Partnership are differentiated and referred to as “Redeemable Noncontrolling Interests – Operating Partnership”. Instruments that require settlement in registered shares can not be classified in permanent equity as it is not always completely within an issuer’s control to deliver registered shares. Therefore, settlement in cash is assumed and that responsibility for settlement in cash is deemed to fall to the Operating Partnership as the primary source of cash for EQR, resulting in presentation in the mezzanine section of the balance sheet. The Redeemable Noncontrolling Interests – Operating Partnership are adjusted to the greater of carrying value or fair market value based on the Common Share price of EQR at the end of each respective reporting period. EQR has the ability to deliver unregistered Common Shares for the remaining portion of the Noncontrolling Interests – Operating Partnership Units that are classified in permanent equity at September 30, 2011 and December 31, 2010.

The carrying value of the Redeemable Noncontrolling Interests – Operating Partnership is allocated based on the number of Redeemable Noncontrolling Interests – Operating Partnership Units in proportion to the number of Noncontrolling Interests – Operating Partnership Units in total. Such percentage of the total carrying value of Units which is ascribed to the Redeemable Noncontrolling Interests – Operating Partnership is then adjusted to the greater of carrying value or fair market value as described above. As of September 30, 2011, the Redeemable Noncontrolling Interests – Operating Partnership have a redemption value of approximately $378.8 million, which represents the value of Common Shares that would be issued in exchange with the Redeemable Noncontrolling Interests – Operating Partnership Units.

The following table presents the change in the redemption value of the Redeemable Noncontrolling Interests – Operating Partnership for the nine months ended September 30, 2011 (amounts in thousands):


	2011
Balance at January 1,	$	383,540
Change in market value		(16,023	)
Change in carrying value		11,281

Balance at September 30,	$	378,798

Net proceeds from EQR Common Share and Preferred Share (see definition below) offerings are contributed by EQR to ERPOP. In return for those contributions, EQR receives a number of OP Units in ERPOP 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 ERPOP 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 Noncontrolling Interests – Operating Partnership to account for the change in their respective percentage ownership of the underlying equity of ERPOP.

The Company’s declaration of trust authorizes it 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, 2011 and December 31, 2010:


			Annual		Amounts in thousands
	Redemption Date (1)		Dividend per Share (2)		September 30, 2011		December 31, 2010
Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares authorized:
8.29% Series K Cumulative Redeemable Preferred; liquidation value $50 per share; 1,000,000 shares issued and outstanding at September 30, 2011 and December 31, 2010		12/10/26	$	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, 2011 and December 31, 2010 (3)		6/19/08	$	16.20		150,000		150,000

					$	200,000	$	200,000

(1)	On or after the redemption date, redeemable preferred shares (Series 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)	Dividends on all series of Preferred Shares are payable quarterly at various pay dates. The dividend listed for Series N is a Preferred Share rate and the equivalent Depositary Share annual dividend is $1.62 per share.

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

Capital and Redeemable Limited Partners of ERP Operating Limited Partnership

The following tables present the changes in the Operating Partnership’s issued and outstanding Units and in the limited partners’ Units for the nine months ended September 30, 2011:


	2011
General and Limited Partner Units
General and Limited Partner Units outstanding at January 1,		303,809,279
Issued to General Partner:
Issuance of OP Units		3,038,980
Exercise of EQR share options		2,914,476
EQR’s Employee Share Purchase Plan (ESPP)		98,766
EQR restricted share grants, net		148,708
Issued to Limited Partners:
LTIP Units, net		120,112

General and Limited Partner Units outstanding at September 30,		310,130,321

Limited Partner Units
Limited Partner Units outstanding at January 1,		13,612,037
Limited Partner LTIP Units, net		120,112
Conversion of EQR restricted shares to LTIP Units		101,988
Conversion of Limited Partner OP Units to EQR Common Shares		(324,649	)

Limited Partner Units outstanding at September 30,		13,509,488

Limited Partner Units Ownership Interest in Operating Partnership		4.4	%

The Limited Partners of the Operating Partnership as of September 30, 2011 include various individuals and entities that contributed their properties to the Operating Partnership in exchange for OP Units, as well as the equity positions of the holders of LTIP Units. Subject to certain exceptions (including the “book-up” requirements of LTIP Units), Limited Partners may exchange their Units with EQR for Common Shares on a one-for-one basis. The carrying value of the Limited Partner Units (including redeemable interests) is allocated based on the number of Limited Partner Units in total in proportion to the number of Limited Partner Units in total plus the number of General Partner Units. Net income is allocated to the Limited Partner Units based on the weighted average ownership percentage during the period.

The Operating Partnership has the right but not the obligation to make a cash payment instead of issuing Common Shares to any and all holders of Limited Partner Units requesting an exchange of their OP Units with EQR. Once the Operating Partnership elects not to redeem the Limited Partner Units for cash, EQR is obligated to deliver Common Shares to the exchanging limited partner.

The Limited Partner Units are classified as either mezzanine equity or permanent equity. If EQR is required, either by contract or securities law, to deliver registered Common Shares, such Limited Partner Units are differentiated and referred to as “Redeemable Limited Partner Units”. Instruments that require settlement in registered shares can not be classified in permanent equity as it is not always completely within an issuer’s control to deliver registered shares. Therefore, settlement in cash is assumed and that responsibility for settlement in cash is deemed to fall to the Operating Partnership as the primary source of cash for EQR, resulting in presentation in the mezzanine section of the balance sheet. The Redeemable Limited Partner Units are adjusted to the greater of carrying value or fair market value based on the Common Share price of EQR at the end of each respective reporting period. EQR has the ability to deliver unregistered Common Shares for the remaining portion of the Limited Partner Units that are classified in permanent equity at September 30, 2011 and December 31, 2010.

The carrying value of the Redeemable Limited Partner Units is allocated based on the number of Redeemable Limited Partner Units in proportion to the number of Limited Partner Units in total. Such percentage of the total carrying value of Limited Partner Units which is ascribed to the Redeemable Limited Partner Units is then adjusted to the greater of carrying value or fair market value as described above. As of September 30, 2011, the Redeemable Limited Partner Units have a redemption value of approximately $378.8 million, which represents the value of Common Shares that would be issued in exchange with the Redeemable Limited Partner Units.

The following table presents the change in the redemption value of the Redeemable Limited Partners for the nine months ended September 30, 2011 (amounts in thousands):


	2011
Balance at January 1,	$	383,540
Change in market value		(16,023	)
Change in carrying value		11,281

Balance at September 30,	$	378,798

EQR contributes all net proceeds from its various equity offerings (including proceeds from exercise of options for Common Shares) to ERPOP. In return for those contributions, EQR receives a number of OP Units in ERPOP 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 ERPOP equal in number and having the same terms as the preferred shares issued in the equity offering).

The following table presents the Operating Partnership’s issued and outstanding “Preference Units” as of September 30, 2011 and December 31, 2010:


	Redemption Date (1)		Annual Dividend per Unit (2)		Amounts in thousands
	Redemption Date (1)		Annual Dividend per Unit (2)		September 30, 2011		December 31, 2010
Preference Units:
8.29% Series K Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding at September 30, 2011 and December 31, 2010		12/10/26	$	4.145	$	50,000	$	50,000
6.48% Series N Cumulative Redeemable Preference Units; liquidation value $250 per unit; 600,000 units issued and outstanding at September 30, 2011 and December 31, 2010 (3)		6/19/08	$	16.20		150,000		150,000

					$	200,000	$	200,000

(1)

On or after the redemption date, redeemable preference units (Series K and N) may be redeemed for cash at the option of the Operating Partnership, in whole or in part, at a redemption price equal to the liquidation price per unit, plus accrued and unpaid distributions, if any, in conjunction with the concurrent redemption of the corresponding Company Preferred Shares.

(2)	Dividends on all series of Preference Units are payable quarterly at various pay dates. The dividend listed for Series N is a Preference Unit rate and the equivalent depositary unit annual dividend is $1.62 per unit.

(3)	The Series N Preference Units have a corresponding depositary unit that consists of ten times the number of units and one-tenth the liquidation value and dividend per unit.

Other

In September 2009, EQR announced the establishment of an At-The-Market (“ATM”) share offering program which would allow EQR to sell up to 17.0 million Common Shares from time to time over the next three years into the existing trading market at current market prices as well as through negotiated transactions. Per the terms of ERPOP’s partnership agreement, EQR contributes the net proceeds from all equity offerings to the capital of ERPOP in exchange for additional OP Units (on a one-for-one Common Share per OP Unit basis). During the nine months ended September 30, 2011, EQR issued approximately 3.0 million Common Shares at an average price of $50.84 per share for total consideration of approximately $154.5 million through the ATM program. Concurrent with these transactions, ERPOP issued approximately 3.0 million OP Units to EQR. EQR has not issued any shares under this program since January 13, 2011. Including its February 2011 prospectus supplement which added approximately 5.7 million Common Shares, EQR has 10.0 million Common Shares remaining available for issuance under the ATM program as of September 30, 2011.

On June 16, 2011, the shareholders of EQR approved the Company’s 2011 Share Incentive Plan (the “2011 Plan”). The 2011 Plan reserved 12,980,741 Common Shares for issuance. In conjunction with the approval of the 2011 Plan, no further awards may be granted under the 2002 Share Incentive Plan. The 2011 Plan expires on June 16, 2021.

EQR has a share repurchase program authorized by the Board of Trustees under which it has authorization to

repurchase up to $464.6 million of its shares as of September 30, 2011. No shares were repurchased during the nine months ended September 30, 2011.

During the nine months ended September 30, 2011, the Company acquired all of its partner’s interest in three consolidated partially owned properties consisting of 1,351 apartment units for $12.8 million. In conjunction with these transactions, the Company reduced paid in capital (included in general partner’s capital in the Operating Partnership’s financial statements) by $4.8 million and Noncontrolling Interests – Partially Owned Properties by $8.0 million.

4.	Real Estate

The following table summarizes the carrying amounts for the Company’s investment in real estate (at cost) as of September 30, 2011 and December 31, 2010 (amounts in thousands):


	September 30, 2011			December 31, 2010
Land	$	4,158,288		$	4,110,275
Depreciable property:
Buildings and improvements		13,822,345			13,995,121
Furniture, fixtures and equipment		1,233,225			1,231,391
Projects under development:
Land		26,772			28,260
Construction-in-progress		92,661			102,077
Land held for development:
Land		162,355			198,465
Construction-in-progress		43,121			36,782

Investment in real estate		19,538,767			19,702,371
Accumulated depreciation		(4,405,479	)		(4,337,357	)

Investment in real estate, net	$	15,133,288		$	15,365,014

During the nine months ended September 30, 2011, the Company acquired the entire equity interest in the following from unaffiliated parties (purchase price in thousands):


	Properties		Apartment Units		Purchase Price
Rental Properties – Consolidated		10		2,529	$	701,748
Land Parcels (three) (1)		—		—		18,450
Other (2)		—		—		11,750

Total		10		2,529	$	731,948

(1)	Includes entry into a long-term ground lease for a land parcel in New York City.

(2)	Represents the acquisition of a 97,000 square foot commercial building adjacent to our Harbor Steps apartment property in downtown Seattle for potential redevelopment.

During the nine months ended September 30, 2011, the Company disposed of the following to unaffiliated parties (sales price in thousands):


	Properties		Apartment Units		Sales Price
Rental Properties – Consolidated		45		13,528	$	1,383,414
Land Parcel (one) (1)		—		—		22,786

Total		45		13,528	$	1,406,200

(1)	Represents the sale of a land parcel, on which the Company no longer planned to develop, in suburban Washington, D.C.

The Company recognized a net gain on sales of discontinued operations of approximately $759.1 million and a net gain on sales of land parcels of approximately $4.2 million on the above sales.

5.	Commitments to Acquire/Dispose of Real Estate

In addition to the properties that were subsequently acquired as discussed in Note 14, the Company has entered into separate agreements to acquire the following (purchase price in thousands):


	Properties		Apartment Units		Purchase Price
Rental Properties		6		2,466	$	354,825
Land Parcels (seven)		—		—		157,987

Total		6		2,466	$	512,812

In addition to the property that was subsequently disposed of as discussed in Note 14, the Company has entered into separate agreements to dispose of the following (sales price in thousands):


	Properties		Apartment Units		Sales Price
Rental Properties		4		351	$	15,550

Total		4		351	$	15,550

The closings of these pending transactions are subject to certain conditions and restrictions, therefore, there can be no assurance that these transactions will be consummated or that the final terms 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 tables and information summarize the Company’s investments in partially owned entities as of September 30, 2011 (amounts in thousands except for project and apartment unit amounts):


	Consolidated
	Development Projects (VIEs)
	Held for and/or Under Development		Completed and Stabilized			Other			Total
Total projects (1)		—		2			19			21

Total apartments units (1)		—		441			3,475			3,916

Balance sheet information at 9/30/11 (at 100%):
ASSETS
Investment in real estate	$	25,071	$	114,570		$	447,939		$	587,580
Accumulated depreciation		—		(11,186	)		(140,444	)		(151,630	)

Investment in real estate, net		25,071		103,384			307,495			435,950
Cash and cash equivalents		1,643		1,578			11,078			14,299
Deposits – restricted		—		2,367			15,177			17,544
Escrow deposits – mortgage		—		50			—			50
Deferred financing costs, net		—		119			1,187			1,306
Other assets		89		132			136			357

Total assets	$	26,803	$	107,630		$	335,073		$	469,506

LIABILITIES AND EQUITY/CAPITAL
Mortgage notes payable	$	—	$	84,153		$	200,337		$	284,490
Accounts payable & accrued expenses		179		1,327			2,960			4,466
Accrued interest payable		—		258			720			978
Other liabilities		1,274		47			2,862			4,183
Security deposits		—		110			1,482			1,592

Total liabilities		1,453		85,895			208,361			295,709

Noncontrolling Interests – Partially Owned Properties		2,243		1,079			(5,036	)		(1,714	)
Company equity/General and Limited Partners’ Capital		23,107		20,656			131,748			175,511

Total equity/capital		25,350		21,735			126,712			173,797

Total liabilities and equity/capital	$	26,803	$	107,630		$	335,073		$	469,506

Debt – Secured (2):
Company/Operating Partnership Ownership (3)	$	—	$	84,153		$	159,068		$	243,221
Noncontrolling Ownership		—		—			41,269			41,269

Total (at 100%)	$	—	$	84,153		$	200,337		$	284,490


	Consolidated
	Development Projects (VIEs)
	Held for and/or Under Development			Completed and Stabilized			Other			Total
Operating information for the nine months ended 9/30/11 (at 100%):
Operating revenue	$	—		$	6,649		$	43,016		$	49,665
Operating expenses		207			3,083			14,487			17,777

Net operating (loss) income		(207	)		3,566			28,529			31,888
Depreciation		—			3,121			11,256			14,377
General and administrative/other		115			6			50			171

Operating (loss) income		(322	)		439			17,223			17,340
Interest and other income		5			5			10			20
Other expenses		(289	)		—			(39	)		(328	)
Interest:
Expense incurred, net		(399	)		(2,465	)		(8,948	)		(11,812	)
Amortization of deferred financing costs		—			(202	)		(341	)		(543	)

(Loss) income before income and other taxes and net gains on sales of land parcels and discontinued operations		(1,005	)		(2,223	)		7,905			4,677
Income and other tax (expense) benefit		(57	)		—			(6	)		(63	)
Net gain on sales of land parcels		4,217			—			—			4,217
Net gain on sales of discontinued operations		169			—			13,265			13,434

Net income (loss)	$	3,324		$	(2,223	)	$	21,164		$	22,265

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

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

(3)	Represents the Company’s/Operating Partnership’s current economic ownership interest.

The Company admitted an 80% institutional partner to two separate entities/transactions (one in December 2010 and the other in August 2011), each owning a developable land parcel, in exchange for $40.1 million in cash and retained a 20% equity interest in both of these entities. These land parcels are now unconsolidated. Total project costs are approximately $232.8 million and construction will be predominantly funded with long-term, non-recourse secured loans from the partner. While the Company is the managing member of both of the joint ventures, is responsible for constructing both of the projects and has given certain construction cost overrun guarantees, all major decisions are made jointly, the large majority of funding is provided by the partner and the partner has significant involvement in and oversight of the ongoing projects. The Company’s remaining funding obligations are currently estimated at approximately $6.6 million.

The Company is the controlling partner in various consolidated partnership properties and development properties having a negative noncontrolling interest book value of $1.7 million at September 30, 2011. The Company has identified its development partnerships as VIEs as the Company provides substantially all of the capital for these ventures (other than third party mortgage debt, if any) despite the fact that each partner legally owns 50% of each venture. The Company is the primary beneficiary as it exerts the most significant power over the ventures, absorbs the majority of the expected losses and has the right to receive a majority of the expected residual returns. The assets net of liabilities of the Company’s VIEs are restricted in their use to the specific VIE to which they relate and are not available for general corporate use. The Company does not have any unconsolidated VIEs.

7.	Deposits – Restricted

The following table presents the Company’s restricted deposits as of September 30, 2011 and December 31, 2010 (amounts in thousands):


	September 30, 2011		December 31, 2010
Tax–deferred (1031) exchange proceeds	$	303,762	$	103,887
Earnest money on pending acquisitions		19,559		9,264
Restricted deposits on debt		2,371		18,966
Resident security and utility deposits		39,421		40,745
Other		4,348		8,125

Totals	$	369,461	$	180,987

Debt

EQR does not have any indebtedness as all debt is incurred by the Operating Partnership. EQR guarantees the Operating Partnership’s $500.0 million unsecured senior term loan and also guarantees the Operating Partnership’s revolving credit facility up to the maximum amount and for the full term of the facility.

Mortgage Notes Payable

As of September 30, 2011, the Company had outstanding mortgage debt of approximately $4.1 billion.

During the nine months ended September 30, 2011, the Company:

•

Repaid $871.5 million of mortgage loans;

•

Obtained $152.9 million of new mortgage loan proceeds; and

•

Assumed $99.1 million of mortgage debt on three acquired properties.

The Company recorded approximately $4.1 million of write-offs of unamortized deferred financing costs during the nine months ended September 30, 2011 as additional interest expense related to debt extinguishment of mortgages.

As of September 30, 2011, the Company had $411.2 million of secured debt subject to third party credit enhancement.

As of September 30, 2011, scheduled maturities for the Company’s outstanding mortgage indebtedness were at various dates through September 1, 2048. At September 30, 2011, the interest rate range on the Company’s mortgage debt was 0.14% to 11.25%. During the nine months ended September 30, 2011, the weighted average interest rate on the Company’s mortgage debt was 4.83%.

Notes

As of September 30, 2011, the Company had outstanding unsecured notes of approximately $4.6 billion.

During the nine months ended September 30, 2011, the Company:

•

Repaid $93.1 million of 6.95% unsecured notes at maturity;

•

Exercised the second of its two one-year extension options for its $500.0 million term loan facility and as a result, the maturity date is now October 5, 2012; and

•

Redeemed $482.5 million of its 3.85% exchangeable unsecured notes with a final maturity of 2026 at par and no premium was paid.

As of September 30, 2011, scheduled maturities for the Company’s outstanding notes were at various dates through 2026. At September 30, 2011, the interest rate range on the Company’s notes was 0.74% to 7.57%. During the nine months ended September 30, 2011, the weighted average interest rate on the Company’s notes was 5.16%.

Lines of Credit

In July 2011, the Company replaced its then existing unsecured revolving credit facility with a new $1.25 billion unsecured revolving credit facility maturing on July 13, 2014, subject to a one-year extension option exercisable by the

Company. The Company has the ability to increase available borrowings by an additional $500.0 million by adding additional banks to the facility or obtaining the agreement of existing banks to increase their commitments. The interest rate on advances under the new credit facility will generally be LIBOR plus a spread (currently 1.15%) and the Company pays an annual facility fee of 0.2%. Both the spread and the facility fee are dependent on the credit rating of the Company’s long-term debt. This facility replaced the Company’s existing $1.425 billion facility which was scheduled to mature in February 2012. The Company wrote-off $0.2 million in unamortized deferred financing costs related to the old facility.

As of September 30, 2011, the amount available on the credit facility was $1.14 billion (net of $85.9 million which was restricted/dedicated to support letters of credit and net of $26.0 million outstanding). During the nine months ended September 30, 2011, the weighted average interest rate was 1.32%.

9.	Derivative and Other Fair Value Instruments

The valuation of financial instruments requires the Company to make estimates and judgments that affect the fair value of the instruments. The Company, where possible, bases the fair values of its financial instruments, including its derivative instruments, on listed market prices and third party quotes. Where these are not available, the Company bases its estimates on current instruments with similar terms and maturities or on other factors relevant to the financial instruments.

The carrying values of the Company’s mortgage notes payable and unsecured debt (including its line of credit) were approximately $4.1 billion and $4.6 billion, respectively, at September 30, 2011. The fair values of the Company’s mortgage notes payable and unsecured debt (including its line of credit) were approximately $4.4 billion and $5.0 billion, respectively, at September 30, 2011. The fair values of the Company’s financial instruments (other than mortgage notes payable, unsecured notes, lines of credit, derivative instruments and investment securities) including cash and cash equivalents and other financial instruments, approximate their carrying or contract values.

In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company seeks to manage these risks by following established risk management policies and procedures including the use of derivatives to hedge interest rate risk on debt instruments.

The following table summarizes the Company’s consolidated derivative instruments at September 30, 2011 (dollar amounts are in thousands):


	Fair Value Hedges (1)			Forward Starting Swaps (2)
Current Notional Balance	$	315,693		$	950,000
Lowest Possible Notional	$	315,693		$	950,000
Highest Possible Notional	$	317,694		$	950,000
Lowest Interest Rate		2.009	%		3.478	%
Highest Interest Rate		4.800	%		4.695	%
Earliest Maturity Date		2012			2021
Latest Maturity Date		2013			2023

(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. These swaps have mandatory counterparty terminations from 2012 through 2014, and $750.0 million and $200.0 million are targeted to 2012 and 2013 issuances, respectively.

In June 2011, the Company’s remaining development cash flow hedge matured.

A three-level valuation hierarchy exists for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

•

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company’s derivative positions are valued using models developed by the respective counterparty as well as models developed internally by the Company that use as their basis readily observable market parameters (such as forward yield curves and credit default swap data). Employee holdings other than Common Shares within the supplemental executive retirement plan (the “SERP”) are valued using quoted market prices for identical assets and are included in other assets and other liabilities on the consolidated balance sheet. The Company’s investment securities are valued using quoted market prices or readily available market interest rate data. Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners are valued using the quoted market price of Common Shares.

The following tables provide a summary of the fair value measurements for each major category of assets and liabilities measured at fair value on a recurring basis and the location within the accompanying Consolidated Balance Sheets at September 30, 2011 and December 31, 2010:


				Fair Value Measurements at Reporting Date Using
Description	Balance Sheet Location	9/30/2011		Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
*Assets*
Derivatives designated as hedging instruments:
Interest Rate Contracts:
Fair Value Hedges	Other Assets	$	10,581	$	—	$	10,581	$	—
Supplemental Executive Retirement Plan	Other Assets		66,444		66,444		—		—
Available-for-Sale Investment Securities	Other Assets		1,505		1,505		—		—

Total		$	78,530	$	67,949	$	10,581	$	—

*Liabilities*
Derivatives designated as hedging instruments:
Interest Rate Contracts:
Forward Starting Swaps	Other Liabilities	$	166,169	$	—	$	166,169	$	—
Supplemental Executive Retirement Plan	Other Liabilities		66,444		66,444		—		—

Total		$	232,613	$	66,444	$	166,169	$	—

Redeemable Noncontrolling Interests –
Operating Partnership/Redeemable
Limited Partners	Mezzanine	$	378,798	$	—	$	378,798	$	—


				Fair Value Measurements at Reporting Date Using
Description	Balance Sheet Location	12/31/2010		Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
*Assets*
Derivatives designated as hedging instruments:
Interest Rate Contracts:
Fair Value Hedges	Other Assets	$	12,521	$	—	$	12,521	$	—
Forward Starting Swaps	Other Assets		3,276		—		3,276		—
Supplemental Executive Retirement Plan	Other Assets		58,132		58,132		—		—
Available-for-Sale Investment Securities	Other Assets		1,194		1,194		—		—

Total		$	75,123	$	59,326	$	15,797	$	—

*Liabilities*
Derivatives designated as hedging instruments:
Interest Rate Contracts:
Forward Starting Swaps	Other Liabilities	$	37,756	$	—	$	37,756	$	—
Development Cash Flow Hedges	Other Liabilities		1,322		—		1,322		—
Supplemental Executive Retirement Plan	Other Liabilities		58,132		58,132		—		—

Total		$	97,210	$	58,132	$	39,078	$	—

Redeemable Noncontrolling Interests –
Operating Partnership/Redeemable
Limited Partners	Mezzanine	$	383,540	$	—	$	383,540	$	—

The following tables provide a summary of the effect of fair value hedges on the Company’s accompanying Consolidated Statements of Operations for the nine months ended September 30, 2011 and 2010, respectively (amounts in thousands):


September 30, 2011 Type of Fair Value Hedge	Location of Gain/(Loss) Recognized in Income on Derivative		Amount of Gain/(Loss) Recognized in Income on Derivative			Hedged Item		Income Statement Location of Hedged Item Gain/(Loss)		Amount of Gain/(Loss) Recognized in Income on Hedged Item
Derivatives designated as hedging instruments:
Interest Rate Contracts:
Interest Rate Swaps		Interest expense	$	(1,940	)		Fixed rate debt		Interest expense	$	1,940

Total			$	(1,940	)					$	1,940


September 30, 2010 Type of Fair Value Hedge	Location of Gain/(Loss) Recognized in Income on Derivative		Amount of Gain/(Loss) Recognized in Income on Derivative		Hedged Item		Income Statement Location of Hedged Item Gain/(Loss)		Amount of Gain/(Loss) Recognized in Income on Hedged Item
Derivatives designated as hedging instruments:
Interest Rate Contracts:
Interest Rate Swaps		Interest expense	$	9,842		Fixed rate debt		Interest expense	$	(9,842	)

Total			$	9,842					$	(9,842	)

The following tables provide a summary of the effect of cash flow hedges on the Company’s accompanying Consolidated Statements of Operations for the nine months ended September 30, 2011 and 2010, respectively (amounts in thousands):


	Effective Portion							Ineffective Portion
September 30, 2011 Type of Cash Flow Hedge	Amount of Gain/(Loss) Recognized in OCI on Derivative			Location of Gain/(Loss) Reclassified from Accumulated OCI into Income	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income			Location of Gain/(Loss) Recognized in Income on Derivative		Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income
Derivatives designated as hedging instruments:
Interest Rate Contracts:
Forward Starting Swaps/Treasury Locks	$	(131,689	)	Interest expense	$	(2,842	)		N/A	$	—
Development Interest Rate Swaps/Caps		1,322		Interest expense		—			N/A		—

Total	$	(130,367	)		$	(2,842	)			$	—


	Effective Portion							Ineffective Portion
September 30. 2010 Type of Cash Flow Hedge	Amount of Gain/(Loss) Recognized in OCI on Derivative			Location of Gain/(Loss) Reclassified from Accumulated OCI into Income	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income			Location of Gain/(Loss) Recognized in Income on Derivative		Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income
Derivatives designated as hedging instruments:
Interest Rate Contracts:
Forward Starting Swaps/Treasury Locks	$	(124,908	)	Interest expense	$	(2,379	)		N/A	$	—
Development Interest Rate Swaps/Caps		1,436		Interest expense		—			N/A		—

Total	$	(123,472	)		$	(2,379	)			$	—

As of September 30, 2011 and December 31, 2010, there were approximately $185.9 million and $58.3 million in deferred losses, net, included in accumulated other comprehensive (loss), respectively, related to derivative instruments. Based on the estimated fair values of the net derivative instruments at September 30, 2011, the Company may recognize an estimated $4.4 million of accumulated other comprehensive (loss) as additional interest expense during the twelve months ending September 30, 2012.

The following table sets forth the maturity, amortized cost, gross unrealized gains and losses, book/fair value and interest and other income of the various investment securities held as of September 30, 2011 (amounts in thousands):


		Other Assets
Security	Maturity	Amortized Cost		Unrealized Gains		Unrealized Losses		Book/ Fair Value		Interest and Other Income
Available-for-Sale Investment Securities	N/A	$	675	$	830	$	—	$	1,505	$	—

Total		$	675	$	830	$	—	$	1,505	$	—

10.

Earnings Per Share and Earnings Per Unit

Equity Residential

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


	Nine Months Ended September 30,						Quarter Ended September 30,
	2011			2010			2011			2010
Numerator for net income per share – basic:
Income (loss) from continuing operations	$	47,908		$	(32,667	)	$	35,491		$	(295	)
Allocation to Noncontrolling Interests – Operating Partnership, net		(1,648	)		2,042			(1,371	)		173
Net (income) loss attributable to Noncontrolling Interests – Partially Owned Properties		(418	)		623			(387	)		188
Preferred distributions		(10,399	)		(10,855	)		(3,466	)		(3,617	)

Income (loss) from continuing operations available to Common Shares, net of Noncontrolling Interests		35,443			(40,857	)		30,267			(3,551	)
Discontinued operations, net of Noncontrolling Interests		745,261			124,229			74,115			28,717

Numerator for net income per share – basic	$	780,704		$	83,372		$	104,382		$	25,166

Numerator for net income per share – diluted (1):
Income from continuing operations	$	47,908					$	35,491
Net (income) attributable to Noncontrolling Interests – Partially Owned Properties		(418	)					(387	)
Preferred distributions		(10,399	)					(3,466	)

Income from continuing operations available to Common Shares		37,091						31,638
Discontinued operations, net		779,888						77,486

Numerator for net income per share – diluted (1)	$	816,979		$	83,372		$	109,124		$	25,166

Denominator for net income per share – basic and diluted (1):
Denominator for net income per share – basic		294,474			281,867			295,831			282,717
Effect of dilutive securities:
OP Units		13,231						13,053
Long-term compensation shares/units		4,203						3,960

Denominator for net income per share – diluted (1)		311,908			281,867			312,844			282,717

Net income per share – basic	$	2.65		$	0.30		$	0.35		$	0.09

Net income per share – diluted	$	2.62		$	0.30		$	0.35		$	0.09

Net income per share – basic:
Income (loss) from continuing operations available to Common Shares, net of Noncontrolling Interests	$	0.120		$	(0.145	)	$

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