10-K 1 a05-2042_110k.htm 10-K

FORM 10-K
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended DECEMBER 31, 2004

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

THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-12252

EQUITY RESIDENTIAL

(Exact Name of Registrant as Specified in Its Charter)

Maryland		13-3675988
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

Two North Riverside Plaza, Chicago, Illinois		60606
(Address of Principal Executive Offices)		(Zip Code)

(312) 474-1300

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Common Shares of Beneficial Interest, $0.01 Par Value		New York Stock Exchange
(Title of Class)		(Name of Each Exchange on Which Registered)

Preferred Shares of Beneficial Interest, $0.01 Par Value		New York Stock Exchange
(Title of Class)		(Name of Each Exchange on Which Registered)

Securities registered pursuant to Section 12(g) of the Act: None

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

The aggregate market value of Common Shares held by non-affiliates of the Registrant was approximately $8.3 billion based upon the closing price on June 30, 2004 of $29.73 using beneficial ownership of shares rules adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude voting shares owned by Trustees and Executive Officers, some of who may not be held to be affiliates upon judicial determination.

The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding on February 3, 2005 was 286,055,990.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference certain information to be contained in the Company’s definitive proxy statement, which the Company anticipates will be filed no later than April 15, 2005, and thus these items have been omitted in accordance with General Instruction G (3) to Form 10-K.

EQUITY RESIDENTIAL

TABLE OF CONTENTS

			PAGE
PART I.

	Item 1.	Business	4
	Item 2.	The Properties	26
	Item 3.	Legal Proceedings	30
	Item 4.	Submission of Matters to a Vote of Security Holders	30

PART II.

	Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	31
	Item 6.	Selected Financial Data	31
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
	Item 7A.	Quantitative and Qualitative Disclosure about Market Risk	50
	Item 8.	Financial Statements and Supplementary Data	51
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	51
	Item 9A.	Controls and Procedures	51
	Item 9B.	Other Information	51

PART III.

	Item 10.	Trustees and Executive Officers of the Registrant	52
	Item 11.	Executive Compensation	52
	Item 12.	Security Ownership of Certain Beneficial Owners and Management	52
	Item 13.	Certain Relationships and Related Transactions	52
	Item 14.	Principal Accountant Fees and Services	52

PART IV.

	Item 15.	Exhibits and Financial Statement Schedules	53

Item 1. Business

General

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

The Company is one of the largest publicly traded real estate companies and is the largest publicly traded owner of multifamily properties (based on the aggregate market value of its outstanding Common Shares, the number of apartment units wholly owned and total revenues earned). The Company’s corporate headquarters are located in Chicago, Illinois and the Company also leases (under operating leases) approximately thirty-five divisional, regional and area property management offices throughout the United States.

EQR is the general partner of, and as of December 31, 2004 owned an approximate 93.3% ownership interest in ERP Operating Limited Partnership, an Illinois limited partnership (the “Operating Partnership”). The Company is structured as an umbrella partnership REIT (“UPREIT”), under which all property ownership and business operations are conducted through the Operating Partnership and its various subsidiaries. References to the “Company” include EQR, the Operating Partnership and each of the partnerships, limited liability companies and corporations controlled by the Operating Partnership or EQR.

As of December 31, 2004, the Company, directly or indirectly through investments in title holding entities, owned all or a portion of 939 properties in 32 states and the District of Columbia consisting of 200,149 units. The ownership breakdown includes:

	Properties	Units
Wholly Owned Properties	842	176,711
Partially Owned Properties (Consolidated)	39	7,220
Unconsolidated Properties	58	16,218
	939	200,149

As of March 1, 2005, the Company has approximately 6,000 employees who provide real estate operations, leasing, legal, financial, accounting, acquisition, disposition, development and other support functions.

Certain capitalized terms as used herein are defined in the Notes to Consolidated Financial Statements.

Available Information

You may access our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to any of those reports we file with the SEC free of charge at our website, www.equityresidential.com. These reports are made available at our website as soon as reasonably practicable after we file them with the SEC.

Business Objectives and Operating Strategies

The Company seeks to maximize both current income and long-term growth in income, thereby increasing:

• the value of the properties;

• distributions on a per Common Share basis; and

• shareholders’ value.

The Company’s strategy for accomplishing these objectives include:

• Leveraging our size and scale in four critical ways:

• Investing or “recycling” capital investments in apartment communities located in strategically targeted markets, to maximize our total return on an enterprise level;

• Meeting the needs of our customers by offering a wide array of product choices and a commitment to service;

• Engaging, retaining, and attracting the best people by providing them with the education, resources and opportunities to succeed; and

• Sharing resources, customers and best practices in property management and across the enterprise.

• Owning a highly diversified portfolio by investing in target markets defined by a combination of the following criteria:

• High barrier-to-entry (low supply);

• Strong economic predictors (high demand); and

• Attractive quality of life (high demand and retention).

• Giving customers reasons to stay with Equity by providing a range of product options available in our diversified portfolio and by enhancing their experience through our employees and our services.

• Being open and responsive to market realities to take advantage of investment opportunities that align with our long-term vision.

Acquisition and Development Strategies

The Company anticipates that future property acquisitions and developments will occur within the United States. Acquisitions and developments may be financed from various sources of capital, which may include retained cash flow, issuance of additional equity and debt securities, sales of properties, joint venture agreements and collateralized and uncollateralized borrowings. In addition, the Company may acquire additional properties in transactions that include the issuance of limited partnership interests in the Operating Partnership (“OP Units”) as consideration for the acquired properties. Such transactions may, in certain circumstances, enable the sellers to defer, in part, the recognition of taxable income or gain, which might otherwise result from the sales.

When evaluating potential acquisitions and developments, the Company generally considers the following factors:

• the geographic area and type of community;

• the location, construction quality, condition and design of the property;

• the current and projected cash flow of the property and the ability to increase cash flow;

• the potential for capital appreciation of the property;

• the terms of resident leases, including the potential for rent increases;

• income levels and employment growth trends in the relevant market;

• employment and household growth and net migration of the relevant market’s population;

• the potential for economic growth and the tax and regulatory environment of the community in which the property is located;

• the occupancy and demand by residents for properties of a similar type in the vicinity (the overall market and submarket);

• the prospects for liquidity through sale, financing or refinancing of the property;

• the benefits of integration into existing operations;

• barriers to entry that would limit competition (zoning laws, building permit availability, supply of undeveloped or developable real estate, local building costs and construction labor costs among other factors);

• purchase prices and yields of available existing stabilized communities, if any; and

• competition from existing multifamily properties, residential properties under development and the potential for the construction of new multifamily properties in the area.

Disposition Strategies

When evaluating potential dispositions, the Company generally considers the following factors:

• low barrier-to-entry (high supply);

• weak economic predictors (low demand);

• markets where the Company does not intend to establish long-term concentrations;

• age or location of a particular property; and

• opportunistic selling based on demand and price of high quality assets, including condominium conversions.

The Company generally reinvests the proceeds received from property dispositions primarily to achieve its acquisition and development strategies. In addition, when feasible, the Company may structure these transactions as tax deferred exchanges.

Financing Strategies

The Company’s “Consolidated Debt-to-Total Market Capitalization Ratio” as of December 31, 2004 is presented in the following table. The Company calculates the equity component of its market capitalization as the sum of (i) the total outstanding Common Shares and assumed conversion of all OP Units at the equivalent market value of the closing price of the Company’s Common Shares on the New York Stock Exchange; (ii) the “Common Share Equivalent” of all convertible preferred shares and preference interests/units; and (iii) the liquidation value of all perpetual preferred shares and preference interests outstanding.

Capitalization as of December 31, 2004

Total Debt			$	6,459,806,228

Common Shares & OP Units	305,629,855
Common Share Equivalents (see below)	1,968,453
Total Outstanding at year-end	307,598,308
Common Share Price at December 31, 2004	$	36.18
			11,128,906,783
Perpetual Preferred Shares Liquidation Value			615,000,000
Perpetual Preference Interests Liquidation Value			171,500,000

Total Market Capitalization			$	18,375,213,011

Total Debt/Total Market Capitalization			35		%

Convertible Preferred Shares, Preference Interests
and Junior Preference Units
as of December 31, 2004

	Shares/Units	Conversion Ratio	Common Share Equivalents
Preferred Shares:
Series E	811,724	1.1128	903,286
Series H	36,934	1.4480	53,480
Preference Interests:
Series H	190,000	1.5108	287,052
Series I	270,000	1.4542	392,634
Series J	230,000	1.4108	324,484
Junior Preference Units:
Series B	7,367	1.020408	7,517

Total			1,968,453

The Company’s policy is to maintain a ratio of consolidated debt-to-total market capitalization of less than 50% and not incur indebtedness other than short-term trade, employee compensation or similar indebtedness that will be paid in the ordinary course of business.

Equity Offerings For the Years Ended December 31, 2004, 2003 and 2002

During 2004, the Company:

• Issued 3,350,759 Common Shares pursuant to its Share Incentive Plans and received net proceeds of approximately $79.0 million.

• Issued 275,616 Common Shares pursuant to its Employee Share Purchase Plan and received net proceeds of approximately $6.9 million.

During 2003, the Company:

• Issued 600,000 Series N Cumulative Redeemable Preferred Shares with a liquidation value of $150.0 million and received net proceeds of approximately $145.3 million.

• Issued 3,249,555 Common Shares pursuant to its Share Incentive Plans and received net proceeds of approximately $68.4 million.

• Issued 289,274 Common Shares pursuant to its Employee Share Purchase Plan and received net proceeds of approximately $6.3 million.

During 2002, the Company:

• Issued 1,435,115 Common Shares pursuant to its Share Incentive Plans and received net proceeds of approximately $29.6 million.

• Issued 324,238 Common Shares pursuant to its Employee Share Purchase Plan and received net proceeds of approximately $7.4 million.

• Issued 31,354 Common Shares pursuant to its Share Purchase – DRIP Plan and received net proceeds of approximately $0.9 million.

• Issued 41,407 Common Shares pursuant to its Dividend Reinvestment – DRIP Plan and received net proceeds of approximately $1.2 million.

• Repurchased 5,092,300 of its Common Shares on the open market at an average price of $22.58 per share. The purchases were made between October 1 and October 22, 2002. The Company paid approximately $115.0 million in connection therewith. These shares were subsequently retired.

In February 1998, the Company filed and the SEC declared effective a Form S-3 Registration Statement to register $1.0 billion of equity securities. In addition, the Company carried over $272.4 million related to a prior registration statement. As of February 2, 2005, $956.5 million in equity securities remained available for issuance under this registration statement.

In May 2002, the Company’s shareholders approved the Company’s 2002 Share Incentive Plan. In January 2003, the Company filed a Form S-8 registration statement to register 23,125,828 Common Shares under this plan. As of January 1, 2005, 23,069,873 shares are available for issuance under this plan.

Cumulative through December 31, 2004, the Company, through a subsidiary of the Operating Partnership, issued and has outstanding various series of Preference Interests (the “Preference Interests”) with an equity value of $206.0 million receiving net proceeds of $200.9 million.

Debt Offerings For the Years Ended December 31, 2004, 2003 and 2002

During 2004:

• The Operating Partnership issued $300.0 million of five-year 4.75% redeemable unsecured fixed rate notes (the “June 2009 Notes”) in a public debt offering in June 2004. The June 2009 Notes were issued at a discount, which is being amortized over the life of the notes on a straight-line basis. The June 2009 Notes are due June 15, 2009 with interest payable semiannually in arrears on June 1 and December 1, commencing December 1, 2004. The Operating Partnership received net proceeds of approximately $296.8 million in connection with this issuance.

• The Operating Partnership issued $500.0 million of ten-year 5.25% redeemable unsecured fixed rate notes (the “September 2014 Notes”) in a public debt offering in September 2004. The September 2014 Notes were issued at a discount, which is being amortized over the life of the notes on a straight-line basis. The September 2014 Notes are due September 15, 2014 with interest payable semiannually in arrears on September 1 and March 1, commencing March 1, 2005. The Operating Partnership received net proceeds of approximately $496.1 million in connection with this issuance.

• The Operating Partnership received $100.0 million as an initial draw on a $300.0 million floating rate loan in July 2004. The loan was paid off in full and terminated in September 2004.

During 2003:

• The Operating Partnership issued $400.0 million of ten-year 5.20% redeemable unsecured fixed rate

notes (the “April 2013 Notes”) in a public debt offering in March 2003. The April 2013 Notes were issued at a discount, which is being amortized over the life of the notes on a straight-line basis. The April 2013 Notes are due April 1, 2013 with interest payable semiannually in arrears on April 1 and October 1, commencing October 1, 2003. The Operating Partnership received net proceeds of approximately $397.5 million in connection with this issuance.

During 2002:

• The Operating Partnership issued $400.0 million of ten-year 6.625% redeemable unsecured fixed rate notes (the “March 2012 Notes”) in a public debt offering in March 2002. The March 2012 Notes were issued at a discount, which is being amortized over the life of the notes on a straight-line basis. The March 2012 Notes are due March 15, 2012 with interest payable semiannually in arrears on September 15 and March 15, commencing September 15, 2002. The Operating Partnership received net proceeds of approximately $394.5 million in connection with this issuance.

• The Operating Partnership issued $50.0 million of five-year 4.861% redeemable unsecured fixed rate notes (the “November 2007 Notes”) in a public debt offering in November 2002. The November 2007 Notes are due November 30, 2007 with interest payable semiannually in arrears on May 30 and November 30, commencing May 30, 2003. The Operating Partnership received net proceeds of approximately $49.9 million in connection with this issuance.

In June 2003, the Operating Partnership filed and the SEC declared effective a Form S-3 registration statement to register $2.0 billion of debt securities. In addition, the Operating Partnership carried over $280.0 million related to a prior registration statement. As of February 2, 2005, $1.48 billion in debt securities remained available for issuance under this registration statement.

Credit Facilities

In May 2002, the Operating Partnership obtained a three-year $700.0 million unsecured revolving credit facility maturing May 29, 2005. Advances under the credit facility bear interest at variable rates based upon LIBOR at various interest periods, plus a spread dependent upon the Operating Partnership’s credit rating, or based upon bids received from the lending group. As of December 31, 2004, $150.0 million was outstanding and $65.4 million was restricted (dedicated to support letters of credit and not available for borrowing) on the credit facility. During the year ended December 31, 2004, the weighted average interest rate on borrowings under the line of credit was 1.73%.

The Operating Partnership is currently negotiating a new credit facility to replace or expand its existing facility and fully expects to obtain this at current or improved terms in March or April 2005.

Business Combinations

In January 2002, the Company sold the former Globe Business Resources, Inc. (“Globe”) furniture rental business it acquired in July 2000 for approximately $30.0 million in cash, which approximated the net book value at the sale date. The Company has retained ownership of the former Globe short-term furnished housing business, which is now known as Equity Corporate Housing (“ECH”).

For the year ended December 31, 2002, the Company recorded approximately $17.1 million of asset impairment charges related to ECH. Following the guidance in SFAS No. 142, these charges were the result of the Company’s decision to reduce the carrying value of ECH to $30.0 million, given the weakness in the economy and management’s expectations for near-term performance and were determined based upon a discounted cash flow analysis of the business. This impairment loss is reflected on the consolidated statements of operations as impairment on corporate housing business and on the consolidated balance sheets as a reduction in goodwill, net.

Competition

All of the Company’s properties are located in developed areas that include other multifamily properties. The number of competitive multifamily properties in a particular area could have a material effect on the Company’s ability to lease units at the properties or at any newly acquired properties and on the rents charged. The Company may be competing with other entities that have greater resources than the Company and whose managers have more experience than the Company’s managers. In addition, other forms of rental properties and single-family housing provide housing alternatives to potential residents of multifamily properties. Throughout 2003 and 2004, historically low mortgage interest rates coupled with increased residential construction and single-family home sales have had an adverse competitive effect on the Company.

Risk Factors

The following Risk Factors may contain defined terms that are different from those used in the other sections of this report. Unless otherwise indicated, when used in this section, the terms “we” and “us” refer to Equity Residential and its subsidiaries, including ERP Operating Limited Partnership.

Set forth below are the risks that we believe are important to investors who purchase or own our common shares of beneficial interest or preferred shares of beneficial interest (which we refer to collectively as “Shares”); preference interests (“Interests”) of a subsidiary of ERP Operating Limited Partnership; preference units (“Units”); or units of limited partnership interest (“OP Units”) of ERP Operating Limited Partnership, our operating partnership, which are redeemable on a one-for-one basis for common shares or their cash equivalent. In this section, we refer to the Shares, Interests, Units and the OP Units together as our “securities,” and the investors who own Shares, Interests, Units and/or OP Units as our “security holders.”

Our Performance and Share Value are Subject to Risks Associated with the Real Estate Industry

General

Real property investments are subject to varying degrees of risk and are relatively illiquid. Several factors may adversely affect the economic performance and value of our properties. These factors include changes in the national, regional and local economic climate, local conditions such as an oversupply of multifamily properties or a reduction in demand for our multifamily properties, the attractiveness of our properties to residents, competition from other available multifamily property owners and changes in market rental rates. Our performance also depends on our ability to collect rent from residents and to pay for adequate maintenance, insurance and other operating costs, including real estate taxes, which could increase over time. Also, the expenses of owning and operating a property are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from the property.

We May be Unable to Renew Leases or Relet Units as Leases Expire

When our residents decide not to renew their leases upon expiration, we may not be able to relet their units. Even if the residents do renew or we can relet the units, the terms of renewal or reletting may be less favorable than current lease terms. Because virtually all of our leases are for apartments, they are generally for terms of no more than one year. If we are unable to promptly renew the leases or relet the units, or if the rental rates upon renewal or reletting are significantly lower than expected rates, then our results of operations and financial condition will be adversely affected. Consequently, our cash flow and ability to service debt and make distributions to security holders would be reduced.

New Acquisitions, Developments and/or Condominium Conversion Projects May Fail to Perform as Expected and Competition for Acquisitions May Result in Increased Prices for Properties

We intend to actively acquire and develop multifamily properties for rental operations and/or specifically to convert directly into condominiums as well as upgrade and sell existing properties as individual condominiums. We may underestimate the costs necessary to bring an acquired or condominium conversion property up to standards established for its intended market position or to develop a property. Additionally, we expect that other major real estate investors with significant capital will compete with us for attractive investment opportunities or may also develop properties in markets where we focus our development efforts. This competition may increase prices for multifamily properties or decrease the price we expect to sell individual condominiums. We may not be in a position or have the opportunity in the future to make suitable property acquisitions on favorable terms. We also plan to develop more properties ourselves over the next few years in addition to co-investing with our development partners for either the rental or condominium market, depending on opportunities in each sub-market. This may increase the overall level of risk associated with developments. The total number of development units, cost of development and estimated completion dates are subject to uncertainties arising from changing economic conditions (such as the cost of labor and construction materials), competition and local government regulation.

Because Real Estate Investments Are Illiquid, We May Not Be Able To Sell Properties When Appropriate

Real estate investments generally cannot be sold quickly. We may not be able to change our portfolio promptly in response to economic or other conditions. This inability to respond promptly to changes in the performance of our investments could adversely affect our financial condition and ability to make distributions to our security holders.

Changes in Laws and Litigation Risk Could Affect Our Business

We are generally not able to pass through to our residents under existing leases real estate taxes, income taxes or other taxes. Consequently, any such tax increases may adversely affect our financial condition and limit our ability to make distributions to our security holders. Similarly, changes that increase our potential liability under environmental laws or our expenditures on environmental compliance would adversely affect our cash flow and ability to make distributions on our securities.

As the largest publicly traded owner of multifamily properties, we may become involved in legal proceedings, including but not limited to, consumer, employment, tort and commercial, that if decided adversely to or settled by us, could result in liability material to our financial condition or results of operations.

Environmental Problems are Possible and can be Costly

Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and clean up hazardous or toxic substances or petroleum product releases at such property. The owner or operator may have to pay a governmental entity or third parties for property damage and for investigation and clean-up costs incurred by such parties in connection with the contamination. These laws typically impose clean-up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants. Even if more than one person may have been responsible for the contamination each person covered by the environmental laws may be held responsible for all of the clean-up costs incurred. In addition, third parties may sue the owner or operator of a site for damages and costs resulting from environmental contamination emanating from that site.

Substantially all of our properties have been the subject of environmental assessments completed by qualified independent environmental consultant companies. These environmental assessments have not revealed, nor are we aware of, any environmental liability that our management believes would have a material adverse effect on our business, results of operations, financial condition or liquidity.

Over the past four years, there have been an increasing number of lawsuits against owners and managers of multifamily properties other than the Company alleging personal injury and property damage caused by the presence of mold in residential real estate. Some of these lawsuits have resulted in

substantial monetary judgments or settlements. Insurance carriers have reacted to these liability awards by excluding mold related claims from standard policies and pricing mold endorsements at prohibitively high rates. We have adopted programs designed to minimize the existence of mold in any of our properties as well as guidelines for promptly addressing and resolving reports of mold to minimize any impact mold might have on residents or the property.

We cannot be assured that existing environmental assessments of our properties reveal all environmental liabilities, that any prior owner of any of our properties did not create a material environmental condition not known to us, or that a material environmental condition does not otherwise exist as to any one or more of our properties.

Insurance Policy Deductibles and Exclusions

In order to partially mitigate the substantial increase in insurance costs in recent years, management has determined to gradually increase deductible and self-insured retention amounts. As of December 31, 2004, the Company’s property insurance policy (for Wholly Owned Properties) provides for a per occurrence deductible of $250,000 and self insured retention of $5.0 million per occurrence, subject to a maximum annual aggregate self insured retention of $7.5 million. The Company’s liability and worker’s compensation policies at December 31, 2004, provide for a $1.0 million per occurrence deductible. These higher deductible and self-insured retention amounts do expose the Company to greater potential uninsured losses, such as the property damage caused by Hurricanes Charley, Frances, Ivan and Jeanne, but management believes the savings in insurance premium expense justifies this increased exposure over the long-term.

As a result of the terrorist attacks of September 11, 2001, property insurance carriers have created exclusions for losses from terrorism from our “all risk” insurance policies. While separate terrorism insurance coverage is available in certain instances, premiums for such coverage are generally very expensive and deductibles are very high. Additionally, the terrorism insurance coverage that is available typically excludes coverage for losses from nuclear, biological and chemical attacks. At the present time, the Company has determined that it is not economically prudent to obtain property terrorism insurance for its entire portfolio to the extent otherwise available, especially given the significant risks that are not covered by such insurance. As of December 31, 2004, the Company’s high-rise properties were insured for $125 million in terrorism insurance coverage, with a $5 million deductible. In the event of a terrorist attack impacting one or more of the properties, we could lose the revenues from the property, our capital investment in the property and possibly face liability claims from residents or others suffering injuries or losses. The Company believes, however, that the number and geographic diversity of its portfolio and its high-rise terrorism insurance coverage help to mitigate its exposure to the risks associated with potential terrorist attacks.

Debt Financing, Preferred Shares and Preference Interests and Units Could Adversely Affect Our Performance

General

The Company’s total debt summary, as of December 31, 2004, included:

Debt Summary

	$ Millions *		Weighted Average Rate *
Secured	$	3,167	5.46	%
Unsecured	3,293		5.81	%
Total	$	6,460	5.63	%

Fixed Rate	$	5,071	6.45	%
Floating Rate	1,389		2.51	%
Total	$	6,460	5.63	%

Above Totals Include:
Tax Exempt:
Fixed	$	287	4.30	%
Floating	562		1.79	%
Total	$	849	2.70	%

Unsecured Revolving Credit Facility	$	150	1.73	%

* Net of the effect of any derivative instruments.

In addition to debt, we have $842.4 million of combined liquidation value of outstanding preferred shares of beneficial interest and preference interests and units, with a weighted average dividend preference of 8.23% per annum, as of December 31, 2004. Our use of debt and preferred equity financing creates certain risks, including the following:

Scheduled Debt Payments Could Adversely Affect Our Financial Condition

In the future, our cash flow could be insufficient to meet required payments of principal and interest or to pay distributions on our securities at expected levels.

We may not be able to refinance existing debt (which in virtually all cases requires substantial principal payments at maturity) and, if we can, the terms of such refinancing might not be as favorable as the terms of existing indebtedness. If principal payments due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow will not be sufficient in all years to repay all maturing debt. As a result, we may be forced to postpone capital expenditures necessary for the maintenance of our properties and may have to dispose of one or more properties on terms that would otherwise be unacceptable to us. The Company’s debt maturity schedule as of December 31, 2004 is as follows:

Debt Maturity Schedule

Year	$ Millions		% of Total
2005(1)(2)	$	818	12.7	%
2006(3)	492		7.6	%
2007	449		7.0	%
2008	627		9.7	%
2009	838		13.0	%
2010	232		3.6	%
2011	718		11.1	%
2012	454		7.0	%
2013	415		6.4	%
2014+	1,417		21.9	%
Total	$	6,460	100.0	%

(1) Includes $300 million of unsecured debt with a final maturity of 2015 that is putable/callable in 2005.

(2) Includes $150 million outstanding on the Company’s unsecured revolving credit facility.

(3) Includes $150 million of unsecured debt with a final maturity of 2026 that is putable in 2006.

Financial Covenants Could Adversely Affect the Company’s Financial Condition

If a property we own is mortgaged to secure payment of indebtedness and we are unable to meet the mortgage payments, the holder of the mortgage could foreclose on the property, resulting in loss of income and asset value. Foreclosure on mortgaged properties or an inability to refinance existing indebtedness would likely have a negative impact on our financial condition and results of operations.

The mortgages on our properties may contain customary negative covenants that, among other things, limit our ability, without the prior consent of the lender, to further mortgage the property and to reduce or change insurance coverage. In addition, our unsecured credit facilities contain certain customary restrictions, requirements and other limitations on our ability to incur indebtedness. The indentures under which a substantial portion of our debt was issued also contain certain financial and operating covenants including, among other things, maintenance of certain financial ratios, as well as limitations on our ability to incur secured and unsecured indebtedness (including acquisition financing), and to sell all or substantially all of our assets. Our credit facility and indentures are cross-defaulted and also contain cross default provisions with other material indebtedness. Our unsecured public debt covenants as of December 31, 2004 and 2003, respectively, are (terms are defined in the indentures):

Unsecured Public Debt Covenants

	As of 12/31/04		As of 12/31/03
Total Debt to Adjusted Total Assets (not to exceed 60%)	42.5	%	39.1	%

Secured Debt to Adjusted Total Assets (not to exceed 40%)	20.8	%	19.6	%

Consolidated Income Available For Debt Service To Maximum Annual Service Charges (must be at least 1.5 to 1)	2.88		2.90

Total Unsecured Assets to Unsecured Debt (must be at least 150%)	278.1	%	330.2	%

Some of the properties were financed with tax-exempt bonds that contain certain restrictive covenants or deed restrictions. We have retained an independent outside consultant to monitor compliance with the restrictive covenants and deed restrictions that affect these properties. If these bond compliance requirements restrict our ability to increase our rental rates to attract low or moderate-income residents, or eligible/qualified residents, then our income from these properties may be limited.

Our Degree of Leverage Could Limit Our Ability to Obtain Additional Financing

Our Consolidated Debt-to-Total Market Capitalization Ratio was 35% as of December 31, 2004. We have a policy of incurring indebtedness for borrowed money only through the Operating Partnership and its subsidiaries and only if upon such incurrence our debt to market capitalization ratio would be approximately 50% or less. Our degree of leverage could have important consequences to security holders. For example, the degree of leverage could affect our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, development or other general corporate purposes, making us more vulnerable to a downturn in business or the economy in general.

Rising Interest Rates Could Adversely Affect Cash Flow

Advances under our credit facility bear interest at variable rates based upon LIBOR at various interest periods, plus a spread dependent upon the Operating Partnership’s credit rating, or based upon bids received from the lending group. Certain public issuances of our senior unsecured debt instruments may also, from time to time, bear interest at floating rates. We may also borrow additional money with variable interest rates in the future. Increases in interest rates would increase our interest expenses under these debt instruments and would increase the costs of refinancing existing indebtedness and of issuing new debt. Accordingly, higher interest rates could adversely affect cash flow and our ability to service our debt and to make distributions to security holders.

We Depend on Our Key Personnel

We depend on the efforts of the Chairman of our Board of Trustees, Samuel Zell, and our executive officers, particularly Bruce W. Duncan, our President and Chief Executive Officer and Gerald A. Spector, our Chief Operating Officer. If they resign, our operations could be temporarily adversely affected. Mr. Zell has entered into executive compensation and retirement benefit agreements with the Company. Mr. Duncan and Mr. Spector have entered into Deferred Compensation Agreements with the Company that under certain conditions could provide both with a salary benefit after their respective termination of employment with the Company. In addition, Mr. Zell and Mr. Spector have entered into Noncompetition Agreements with the Company and Mr. Duncan’s Employment Agreement contains covenants not to compete in favor of the Company.

In the event the Chairman of the Board and/or CEO are unable to serve, (i) the Lead Trustee shall automatically be appointed to serve as the interim successor to the Chairman, (ii) the Chairman shall automatically be appointed to serve as the interim successor to the CEO and (iii) the Chair of the Compensation Committee of the Board will immediately call a meeting of the Committee to recommend to the full Board the selection of a permanent replacement for either or both positions, as necessary.

Control and Influence by Significant Shareholders Could be Exercised in a Manner Adverse to Other Shareholders

As of December 31, 2004, Samuel Zell, the Chairman of the Board of the Company, and certain of the current holders of OP Units issued to affiliates of Mr. Zell, and our executive officers and trustees, owned some of our common shares. In addition, the consent of certain affiliates of Mr. Zell is required for certain amendments to the Fifth Amended and Restated Agreement of Limited Partnership of ERP Operating Limited Partnership (the “Partnership Agreement”). As a result of their security ownership and rights concerning amendments to the Partnership Agreement, the Zell affiliates may have influence over the Company. Although these security holders have not agreed to act together on any matter, they would be in a position to exercise even more influence over the Company’s affairs if they were to act together in the future. This influence could conceivably be exercised in a manner that is inconsistent with the interests of other security holders. For additional information regarding the security ownership of Mr. Zell and our executive officers and trustees, see the Company’s definitive proxy statement.

Shareholders’ Ability to Effect Changes in Control of the Company is Limited

Provisions of Our Declaration of Trust and Bylaws Could Inhibit Changes in Control

Certain provisions of our Declaration of Trust and Bylaws may delay or prevent a change in control of the Company or other transactions that could provide the security holders with a premium over the then-prevailing market price of their securities or which might otherwise be in the best interest of our security holders. This includes the 5% Ownership Limit described below. See “We Have a Share Ownership Limit for REIT Tax Purposes.” Also, any future series of preferred shares of beneficial interest may have certain voting provisions that could delay or prevent a change of control or other transactions that might otherwise be in the interest of our security holders.

We Have a Share Ownership Limit for REIT Tax Purposes

To remain qualified as a REIT for federal income tax purposes, not more than 50% in value of our outstanding Shares may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of any year. To facilitate maintenance of our REIT qualification, our Declaration of Trust, subject to certain exceptions, prohibits ownership by any single shareholder of more than 5% of the lesser of the number or value of the outstanding class of common or preferred shares. We refer to this restriction as the “Ownership Limit.” Absent any exemption or waiver granted by our Board of Trustees, securities acquired or held in violation of the Ownership Limit will be transferred to a trust for the exclusive benefit of a designated charitable beneficiary, and the security holder’s rights to distributions and to vote would terminate. A transfer of Shares may be void if it causes a person to violate the Ownership Limit. The Ownership Limit could delay or prevent a change in control and, therefore, could adversely affect our security holders’ ability to realize a premium over the then-prevailing market price for their Shares. To reduce the ability of the Board to use the Ownership Limit as an anti-takeover device, on May 28, 2004 the Company amended the Ownership Limit to require, rather than permit, the Board to grant a waiver of the

Ownership Limit if the individual seeking a waiver demonstrates that such ownership would not jeopardize the Company’s status as a REIT.

Our Preferred Shares of Beneficial Interest May Affect Changes in Control

Our Declaration of Trust authorizes the Board of Trustees to issue up to 100 million preferred shares of beneficial interest, and to establish the preferences and rights (including the right to vote and the right to convert into common shares) of any preferred shares issued. The Board of Trustees may use its powers to issue preferred shares and to set the terms of such securities to delay or prevent a change in control of the Company, even if a change in control were in the interest of security holders. As of December 31, 2004, 4,108,658 preferred shares were issued and outstanding.

Inapplicability of Maryland Law Limiting Certain Changes in Control

Certain provisions of Maryland law applicable to real estate investment trusts prohibit “business combinations” (including certain issuances of equity securities) with any person who beneficially owns ten percent or more of the voting power of outstanding securities, or with an affiliate who, at any time within the two-year period prior to the date in question, was the beneficial owner of ten percent or more of the voting power of the trust’s outstanding voting securities (an “Interested Shareholder”), or with an affiliate of an Interested Shareholder. These prohibitions last for five years after the most recent date on which the Interested Shareholder became an Interested Shareholder. After the five-year period, a business combination with an Interested Shareholder must be approved by two super-majority shareholder votes unless, among other conditions, holders of common shares receive a minimum price for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Shareholder for its common shares. As permitted by Maryland law, however, the Board of Trustees of the Company has opted out of these restrictions with respect to any business combination involving the Zell Original Owners and persons acting in concert with any of the Zell Original Owners. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to a business combination involving us and/or any of them. Such business combinations may not be in the best interest of our security holders.

Our Success as a REIT is Dependent on Compliance with Federal Income Tax Requirements

Our Failure to Qualify as a REIT Would Have Serious Adverse Consequences to Our Security Holders

We believe that we have qualified for taxation as a REIT for federal income tax purposes since our taxable year ended December 31, 1992 based, in part, upon opinions of tax counsel received whenever we have issued equity securities or engaged in significant merger transactions. We plan to continue to meet the requirements for taxation as a REIT. Many of these requirements, however, are highly technical and complex. We cannot, therefore, guarantee that we have qualified or will qualify in the future as a REIT. The determination that we are a REIT requires an analysis of various factual matters that may not be totally within our control. For example, to qualify as a REIT, at least 95% of our gross income must come from sources that are itemized in the REIT tax laws. We are also required to distribute to security holders at least 90% of our REIT taxable income excluding capital gains. The fact that we hold our assets through ERP Operating Limited Partnership and its subsidiaries further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, Congress and the IRS might make changes to the tax laws and regulations, and the courts might issue new rulings that make it more difficult, or impossible, for us to remain qualified as a REIT. We do not believe, however, that any pending or proposed tax law changes would jeopardize our REIT status.

If we fail to qualify as a REIT, we would be subject to federal income tax at regular corporate rates. Also, unless the IRS granted us relief under certain statutory provisions, we would remain disqualified as a REIT for four years following the year we first failed to qualify. If we fail to qualify as a REIT, we would have to pay significant income taxes. We, therefore, would have less money available for

investments or for distributions to security holders. This would likely have a significant adverse affect on the value of our securities. In addition, we would no longer be required to make any distributions to security holders.

We could be Disqualified as a REIT or Have to Pay Taxes if Our Merger Partners Did Not Qualify as REITs

If any of our recent merger partners had failed to qualify as a REIT throughout the duration of their existence, then they might have had undistributed “C corporation earnings and profits” at the time of their merger with us. If that was the case and we did not distribute those earnings and profits prior to the end of the year in which the merger took place, we might not qualify as a REIT. We believe based, in part, upon opinions of legal counsel received pursuant to the terms of our merger agreements as well as our own investigations, among other things, that each of our merger partners qualified as a REIT and that, in any event, none of them had any undistributed “C corporation earnings and profits” at the time of their merger with us. If any of our merger partners failed to qualify as a REIT, an additional concern would be that they would have recognized taxable gain at the time they were merged with us. We would be liable for the tax on such gain. In this event, we would have to pay corporate income tax on any gain existing at the time of the applicable merger on assets acquired in the merger if the assets are sold within ten years of the merger. Finally, we could be precluded from electing REIT status for up to four years after the year in which the predecessor entity failed to qualify for REIT status.

Other Tax Liabilities

Even if we qualify as a REIT, we will be subject to certain federal, state and local taxes on our income and property. In addition, our third-party management operations, corporate housing business and condominium conversion business, which are conducted through subsidiaries, generally will be subject to federal income tax at regular corporate rates.

Compliance with REIT Distribution Requirements May Affect Our Financial Condition

Distribution Requirements May Increase the Indebtedness of the Company

We may be required from time to time, under certain circumstances, to accrue as income for tax purposes interest and rent earned but not yet received. In such event, or upon our repayment of principal on debt, we could have taxable income without sufficient cash to enable us to meet the distribution requirements of a REIT. Accordingly, we could be required to borrow funds or liquidate investments on adverse terms in order to meet these distribution requirements.

Federal Income Tax Considerations

General

The following discussion summarizes the federal income tax considerations material to a holder of common shares. It is not exhaustive of all possible tax considerations. For example, it does not give a detailed discussion of any state, local or foreign tax considerations. The following discussion also does not address all tax matters that may be relevant to prospective shareholders in light of their particular circumstances. Moreover, it does not address all tax matters that may be relevant to shareholders who are subject to special treatment under the tax laws, such as insurance companies, tax-exempt entities, financial institutions or broker-dealers, foreign corporations and persons who are not citizens or residents of the United States.

The specific tax attributes of a particular shareholder could have a material impact on the tax considerations associated with the purchase, ownership and disposition of common shares. Therefore, it is essential that each prospective shareholder consult with his or her own tax advisors with regard to the

application of the federal income tax laws to the shareholder’s personal tax situation, as well as any tax consequences arising under the laws of any state, local or foreign taxing jurisdiction.

The information in this section is based on the current Internal Revenue Code, current, temporary and proposed Treasury regulations, the legislative history of the Internal Revenue Code, current administrative interpretations and practices of the Internal Revenue Service, including its practices and policies as set forth in private letter rulings, which are not binding on the Internal Revenue Service, and existing court decisions. Future legislation, regulations, administrative interpretations and court decisions could change current law or adversely affect existing interpretations of current law. Any change could apply retroactively. Thus, it is possible that the Internal Revenue Service could challenge the statements in this discussion, which do not bind the Internal Revenue Service or the courts, and that a court could agree with the Internal Revenue Service.

Our Taxation

We elected REIT status beginning with the year that ended December 31, 1992. In any year in which we qualify as a REIT, we generally will not be subject to federal income tax on the portion of our REIT taxable income or capital gain that we distribute to our shareholders. This treatment substantially eliminates the double taxation that applies to most corporations, which pay a tax on their income and then distribute dividends to shareholders who are in turn taxed on the amount they receive.

We will be subject to federal income tax at regular corporate rates upon our REIT taxable income or capital gain that we do not distribute to our shareholders. In addition, we will be subject to a 4% excise tax if we do not satisfy specific REIT distribution requirements. We could also be subject to the “alternative minimum tax” on our items of tax preference. In addition, any net income from “prohibited transactions” (i.e., dispositions of property, other than property held by a taxable REIT subsidiary, held primarily for sale to customers in the ordinary course of business) will be subject to a 100% tax. We could also be subject to a 100% penalty tax on certain payments received from or on certain expenses deducted by a taxable REIT subsidiary if any such transaction is not respected by the Internal Revenue Service. If we fail to satisfy the 75% gross income test or the 95% gross income test (described below) but have maintained our qualification as a REIT because we satisfied certain other requirements, we will still generally be subject to a 100% penalty tax on the amount by which we fail such gross income test. If we fail to satisfy any of the REIT asset tests (described below) by more than a de minimis amount, due to reasonable cause, and we nonetheless maintain our REIT qualification because of specified cure provisions, we will be required to pay a tax equal to the greater of $50,000 or the highest corporate tax rate multiplied by the net income generated by the nonqualifying assets (this relief provision is generally applicable only for our taxable years commencing on or after January 1, 2005). If we fail to satisfy any provision of the Internal Revenue Code that would result in our failure to qualify as a REIT (other than a violation of the REIT gross income or asset tests described below) and the violation is due to reasonable cause, we may retain our REIT qualification but we will be required to pay a penalty of $50,000 for each such failure (this relief provision is generally applicable only for our taxable years commencing on or after January 1, 2005). Moreover, we may be subject to taxes in certain situations and on certain transactions that we do not presently contemplate.

We believe that we have qualified as a REIT for all of our taxable years beginning with 1992. We also believe that our current structure and method of operation is such that we will continue to qualify as a REIT. However, given the complexity of the REIT qualification requirements, we cannot provide any assurance that the actual results of our operations have satisfied or will satisfy the requirements under the Internal Revenue Code for a particular year.

If we fail to qualify for taxation as a REIT in any taxable year and the relief provisions described herein do not apply, we will be subject to tax on our taxable income at regular corporate rates. We also may be subject to the corporate “alternative minimum tax.” As a result, our failure to qualify as a REIT would significantly reduce the cash we have available to distribute to our shareholders. Unless entitled to statutory relief, we would be disqualified as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether we would be entitled to statutory relief.

Our qualification and taxation as a REIT depend on our ability to satisfy various requirements under the Internal Revenue Code. We are required to satisfy these requirements on a continuing basis through actual annual operating and other results. Accordingly, there can be no assurance that we will be able to continue to operate in a manner so as to remain qualified as a REIT.

Share Ownership Test and Organizational Requirement. In order to qualify as a REIT, our shares of beneficial interest must be held by a minimum of 100 persons for at least 335 days of a taxable year that is 12 months, or during a proportionate part of a taxable year of less than 12 months. Also, not more than 50% in value of our shares of beneficial interest may be owned directly or indirectly by applying certain constructive ownership rules, by five or fewer individuals during the last half of each taxable year. In addition, we must meet certain other organizational requirements, including, but not limited to, that (i) the beneficial ownership in us is evidenced by transferable shares and (ii) we are managed by one or more trustees. We believe that we have satisfied all of these tests and all other organizational requirements and that we will continue to do so in the future. In order to ensure compliance with the 100 person test and the 50% share ownership test discussed above, we have placed certain restrictions on the transfer of our shares that are intended to prevent further concentration of share ownership. However, such restrictions may not prevent us from failing these requirements, and thereby failing to qualify as a REIT.

Gross Income Tests. To qualify as a REIT, we must satisfy two gross income tests. First, at least 75% of our gross income for each taxable year must be derived directly or indirectly from rents from real property, investments in real estate and/or real estate mortgages, dividends paid by another REIT and from some types of temporary investments. Second, at least 95% of our gross income for each taxable year must be derived from any combination of income qualifying under the 75% test and dividends, non-real estate mortgage interest, some payments under hedging instruments and gain from the sale or disposition of stock or securities. To qualify as rents from real property for the purpose of satisfying the gross income tests, rental payments must generally be received from unrelated persons and not be based on the net income of the resident. Also, the rent attributable to personal property must not exceed 15% of the total rent. We may generally provide services to residents without “tainting” our rental income only if such services are “usually or customarily rendered” in connection with the rental of real property and not otherwise considered “impermissible services”. If such services are impermissible, then we may generally provide them only if they are considered de minimis in amount, or are provided through an independent contractor from whom we derive no revenue and that meets other requirements, or through a taxable REIT subsidiary. We believe that services provided to residents by us either are usually or customarily rendered in connection with the rental of real property and not otherwise considered impermissible, or, if considered impermissible services, will meet the de minimis test or will be provided by an independent contractor or taxable REIT subsidiary. However, we cannot provide any assurance that the Internal Revenue Service will agree with these positions.

If we fail to satisfy one or both of the gross income tests for any taxable year, we may nevertheless qualify as a REIT for the year if we are entitled to relief under certain provisions of the Internal Revenue Code. In this case, a penalty tax would still be applicable as discussed above. Generally, it is not possible to state whether in all circumstances we would be entitled to the benefit of these relief provisions and in the event these relief provisions do not apply, we will not qualify as a REIT.

Asset Tests. In general, at the close of each quarter of our taxable year, we must satisfy four tests relating to the nature of our assets: (1) at least 75% of the value of our total assets must be represented by real estate assets (which include for this purpose shares in other real estate investment trusts) and certain cash related items; (2) not more than 25% of our total assets may be represented by securities other than those in the 75% asset class; (3) except for equity investments in other REITs, qualified REIT subsidiaries (i.e., corporations owned 100% by a REIT that are not TRSs or REITs), or taxable REIT subsidiaries: (a) the value of any one issuer’s securities owned by us may not exceed 5% of the value of our total assets and (b) we may not own more than 10% of the value of or the voting securities of any one issuer; and (4) not more than 20% of our total assets may be represented by securities of one or more taxable REIT subsidiaries. Securities for purposes of the asset tests described in (3) above may include debt securities other than those qualifying as "straight debt". We currently own equity interests in certain entities that have elected to be taxed as REITs for federal income tax purposes and are not publicly traded. If any such entity were to fail to qualify as a REIT, we would not meet the

10% voting stock limitation and the 10% value limitation and we would fail to qualify as a REIT. We believe that we and each of the REITs we own an interest in have and will comply with the foregoing asset tests for REIT qualification. However, we cannot provide any assurance that the Internal Revenue Service might not disagree with our determinations.

For taxable years commencing on or after January 1, 2005, if we fail to satisfy the 5% or 10% asset tests described above after a 30-day cure period provided in the Internal Revenue Code, we will be deemed to have met such tests if the value of our non-qualifying assets is de minimis (i.e., does not exceed the lesser of 1% of the total value of our assets at the end of the applicable quarter or $10,000,000) and we dispose of the non-qualifying assets within six months after the last day of the quarter in which the failure to satisfy the asset tests is discovered. For violations due to reasonable cause and not willful neglect that are in excess of the de minimis exception described above, we may avoid disqualification as a REIT under any of the asset tests, after the 30-day cure period, by disposing of sufficient assets to meet the asset test within such six month period, paying a tax equal to the greater of $50,000 or the highest corporate tax rate multiplied by the net income generated by the non-qualifying assets and disclosing certain information to the Internal Revenue Service. If we cannot avail ourselves of these relief provisions, or if we fail to timely cure any noncompliance with the asset tests, we would cease to qualify as a REIT.

Annual Distribution Requirements. To qualify as a REIT, we are generally required to distribute dividends, other than capital gain dividends, to our shareholders each year in an amount at least equal to 90% of our REIT taxable income. These distributions must be paid either in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for the prior year and if paid with or before the first regular dividend payment date after the declaration is made. We intend to make timely distributions sufficient to satisfy our annual distribution requirements. To the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100% of our REIT taxable income, as adjusted, we are subject to tax on these amounts at regular corporate rates. We will be subject to a 4% excise tax on the excess of the required distribution over the sum of amounts actually distributed and amounts retained for which federal income tax was paid, if we fail to distribute during each calendar year at least the sum of: (1) 85% of our REIT ordinary income for the year; (2) 95% of our REIT capital gain net income for the year; and (3) any undistributed taxable income from prior taxable years. A REIT may elect to retain rather than distribute all or a portion of its net capital gains and pay the tax on the gains. In that case, a REIT may elect to have its shareholders include their proportionate share of the undistributed net capital gains in income as long-term capital gains and receive a credit for their share of the tax paid by the REIT. For purposes of the 4% excise tax described above, any retained amounts would be treated as having been distributed.

Ownership of Partnership Interests By Us. As a result of our ownership of the Operating Partnership, we will be considered to own and derive our proportionate share of the assets and items of income of the Operating Partnership, respectively, for purposes of the REIT asset and income tests, including its share of assets and items of income of any subsidiaries that are partnerships or limited liability companies.

Ownership of Taxable REIT Subsidiaries By Us. The Internal Revenue Code provides that for taxable years beginning after December 31, 2000, REITs may own greater than ten percent of the voting power and value of the securities of "taxable REIT subsidiaries" or "TRSs", which are corporations subject to tax as a regular "C" corporation that have elected, jointly with a REIT, to be a TRS. Generally, a taxable REIT subsidiary may own assets that cannot otherwise be owned by a REIT and can perform impermissible tenant services (discussed above), which would otherwise taint our rental income under the REIT income tests. In certain circumstances, assets owned by us are sold to our TRSs. In any such sale, the price paid by the TRS to us is determined on an arms length basis and is supported by third party valuation reports. In enacting the taxable REIT subsidiary rules, Congress intended that the arrangements between a REIT and its taxable REIT subsidiaries be structured to ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. As a result, the Internal Revenue Code imposes certain limits on the ability of a taxable REIT subsidiary to deduct interest payments made to us. In addition as discussed above, we will be obligated to pay a 100% penalty tax on some payments that we receive or on certain expenses deducted by our TRSs if the economic arrangements between us, our tenants and the TRS are not comparable to similar arrangements among unrelated parties.

Our Management Company and Other Subsidiaries. A small portion of the cash to be used by the Operating Partnership to fund distributions to us is expected to come from payments of dividends from management companies and other subsidiaries of the Company that have elected TRS status. These companies pay federal and state income tax at the full applicable corporate rates. They will attempt to minimize the amount of these taxes, but we cannot guarantee whether or the extent to which, measures taken to minimize these taxes will be successful. To the extent that these companies are required to pay taxes, the cash available for distribution from these management companies by us to shareholders will be reduced accordingly.

State and Local Taxes. We may be subject to state or local taxation in various jurisdictions, including those in which we transact business or reside. Our state and local tax treatment may not conform to the federal income tax treatment discussed above. Consequently, prospective shareholders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in common shares.

Taxation of Domestic Shareholders Subject to U.S. Tax

General. If we qualify as a REIT, distributions made to our taxable domestic shareholders with respect to their common shares, other than capital gain distributions and distributions attributable to taxable REIT subsidiaries, will be treated as ordinary income to the extent that the distributions come out of earnings and profits. These distributions will not be eligible for the dividends received deduction for shareholders that are corporations nor will they constitute “qualified dividend income” under the Internal Revenue Code, meaning that such dividends will be taxed at marginal rates applicable to ordinary income rather than the special capital gain rates applicable to qualified dividend income distributed to shareholders who satisfy applicable holding period requirements. In determining whether

distributions are out of earnings and profits, we will allocate our earnings and profits first to preferred shares and second to the common shares. The portion of ordinary dividends, made after December 31, 2002, which represent ordinary dividends we receive from a TRS, will be designated as “qualified dividend income” to REIT shareholders and are eligible for preferential tax rates if paid to our non-corporate shareholders.

To the extent we make distributions to our taxable domestic shareholders in excess of our earnings and profits, such distributions will be considered a return of capital. Such distributions will be treated as a tax-free distribution and will reduce the tax basis of a shareholder’s common shares by the amount of the distribution so treated. To the extent such distributions cumulatively exceed a taxable domestic shareholder’s tax basis; such distributions are taxable as a gain from the sale of shares. Shareholders may not include in their individual income tax returns any of our net operating losses or capital losses.

Distributions made by us that we properly designate as capital gain dividends will be taxable to taxable domestic shareholders as gain from the sale or exchange of a capital asset held for more than one year. This treatment applies only to the extent that the designated distributions do not exceed our actual net capital gain for the taxable year. It applies regardless of the period for which a domestic shareholder has held his or her common shares. Despite this general rule, corporate shareholders may be required to treat up to 20% of certain capital gain dividends as ordinary income.

Generally, we will classify a portion of our designated capital gain dividends as a 15% rate gain distribution and the remaining portion as an unrecaptured Section 1250 gain distribution. A 15% rate gain distribution would be taxable to taxable domestic shareholders that are individuals, estates or trusts at a maximum rate of 15%. An unrecaptured Section 1250 gain distribution would be taxable to taxable domestic shareholders that are individuals, estates or trusts at a maximum rate of 25%.

If, for any taxable year, we elect to designate as capital gain dividends any portion of the dividends paid or made available for the year to holders of all classes of shares of beneficial interest, then the portion of the capital gains dividends that will be allocable to the holders of common shares will be the total capital gain dividends multiplied by a fraction. The numerator of the fraction will be the total dividends paid or made available to the holders of the common shares for the year. The denominator of the fraction will be the total dividends paid or made available to holders of all classes of shares of beneficial interest.

We may elect to retain (rather than distribute as is generally required) net capital gain for a taxable year and pay the income tax on that gain. If we make this election, shareholders must include in income, as long-term capital gain, their proportionate share of the undistributed net capital gain. Shareholders will be treated as having paid their proportionate share of the tax paid by us on these gains. Accordingly, they will receive a tax credit or refund for the amount. Shareholders will increase the basis in their common shares by the difference between the amount of capital gain included in their income and the amount of the tax they are treated as having paid. Our earnings and profits will be adjusted appropriately.

In general, a shareholder will recognize gain or loss for federal income tax purposes on the sale or other disposition of common shares in an amount equal to the difference between:

(a) the amount of cash and the fair market value of any property received in the sale or other disposition; and

(b) the shareholder’s adjusted tax basis in the common shares.

The gain or loss will be capital gain or loss if the common shares were held as a capital asset. Generally, the capital gain or loss will be long-term capital gain or loss if the common shares were held for more than one year.

In general, a loss recognized by a shareholder upon the sale of common shares that were held for six months or less, determined after applying certain holding period rules, will be treated as long-term capital loss to the extent that the shareholder received distributions that were treated as long-term capital gains. For shareholders who are individuals, trusts and estates, the long-term capital loss will be apportioned among the applicable long-term capital gain rates to the extent that distributions received by the shareholder were previously so treated.

Taxation of Domestic Tax-Exempt Shareholders

Most tax-exempt organizations are not subject to federal income tax except to the extent of their unrelated business taxable income, which is often referred to as UBTI. Unless a tax-exempt shareholder holds its common shares as debt financed property or uses the common shares in an unrelated trade or business, distributions to the shareholder should not constitute UBTI. Similarly, if a tax-exempt shareholder sells common shares, the income from the sale should not constitute UBTI unless the shareholder held the shares as debt financed property or used the shares in a trade or business.

However, for tax-exempt shareholders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans, income from owning or selling common shares will constitute UBTI unless the organization is able to properly deduct amounts set aside or placed in reserve so as to offset the income generated by its investment in common shares. These shareholders should consult their own tax advisors concerning these set aside and reserve requirements which are set forth in the Internal Revenue Code.

In addition, certain pension trusts that own more than 10% of a “pension-held REIT” must report a portion of the distributions that they receive from the REIT as UBTI. We have not been and do not expect to be treated as a pension-held REIT for purposes of this rule.

Taxation of Foreign Shareholders

The following is a discussion of certain anticipated United States federal income tax consequences of the ownership and disposition of common shares applicable to a foreign shareholder. For purposes of this discussion, a “foreign shareholder” is any person other than:

(a) a citizen or resident of the United States;

(b) a corporation or partnership created or organized in the United States or under the laws of the United States or of any state thereof; or

(c) an estate or trust whose income is includable in gross income for United States federal income tax purposes regardless of its source.

Distributions by Us. Distributions by us to a foreign shareholder that are neither attributable to gain from sales or exchanges by us of United States real property interests nor designated by us as capital gains dividends will be treated as dividends of ordinary income to the extent that they are made out of our earnings and profits. These distributions ordinarily will be subject to withholding of United States federal income tax on a gross basis at a 30% rate, or a lower treaty rate, unless the dividends are treated as effectively connected with the conduct by the foreign shareholder of a United States trade or business. Please note that under certain treaties lower withholding rates generally applicable to dividends do not apply to dividends from REITs. Dividends that are effectively connected with a United States trade or business will be subject to tax on a net basis at graduated rates, and are generally not subject to withholding. Certification and disclosure requirements must be satisfied before a dividend is exempt from withholding under this exemption. A foreign shareholder that is a corporation also may be subject to an additional branch profits tax at a 30% rate or a lower treaty rate.

We expect to withhold United States income tax at the rate of 30% on any distributions made to a foreign shareholder unless:

(a) a lower treaty rate applies and any required form or certification evidencing eligibility for that reduced rate is filed with us; or

(b) the foreign shareholder files an IRS Form W-8ECI with us claiming that the distribution is effectively connected income.

A distribution in excess of our current or accumulated earnings and profits will not be taxable to a foreign shareholder to the extent that the distribution does not exceed the adjusted basis of the shareholder’s common shares. Instead, the distribution will reduce the adjusted basis of the common shares. To the extent that the distribution exceeds the adjusted basis of the common shares, it will give rise to gain from the sale or exchange of the shareholder’s common shares. The tax treatment of this gain is described below.

We intend to withhold at a rate of 30%, or a lower applicable treaty rate, on the entire amount of any distribution not designated as a capital gain distribution. In such event, a foreign shareholder may seek a refund of the withheld amount from the IRS if it subsequently determined that the distribution was, in fact, in excess of our earnings and profits, and the amount withheld exceeded the foreign shareholder’s United States tax liability with respect to the distribution.

Distributions to a foreign shareholder that we designate at the time of the distributions as capital gain dividends, other than those arising from the disposition of a United States real property interest, generally will not be subject to United States federal income taxation unless:

(a) the investment in the common shares is effectively connected with the foreign shareholder’s United States trade or business, in which case the foreign shareholder will be subject to the same treatment as domestic shareholders, except that a shareholder that is a foreign corporation may also be subject to the branch profits tax, as discussed above; or

(b) the foreign shareholder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States, in which case the nonresident alien individual will be subject to a 30% tax on the individual’s capital gains.

Under the Foreign Investment in Real Property Tax Act, which is known as FIRPTA, distributions to a foreign shareholder that are attributable to gain from sales or exchanges of United States real property interests will cause the foreign shareholder to be treated as recognizing the gain as income effectively connected with a United States trade or business. This rule applies whether or not a distribution is designated as a capital gain dividend. Accordingly, foreign shareholders generally would be taxed on these distributions at the same rates applicable to U.S. shareholders, subject to a special alternative minimum tax in the case of nonresident alien individuals. In addition, a foreign corporate shareholder might be subject to the branch profits tax discussed above. We are required to withhold 35% of these distributions. The withheld amount can be credited against the foreign shareholder’s United States federal income tax liability.

Although the law is not entirely clear on the matter, it appears that amounts we designate as undistributed capital gains in respect of the common shares held by U.S. shareholders would be treated with respect to foreign shareholders in the same manner as actual distributions of capital gain dividends. Under that approach, foreign shareholders would be able to offset as a credit against the United States

federal income tax liability their proportionate share of the tax paid by us on these undistributed capital gains. In addition, foreign shareholders would be able to receive from the IRS a refund to the extent their proportionate share of the tax paid by us were to exceed their actual United States federal income tax liability.

Foreign Shareholders' Sales of Common Shares. Gain recognized by a foreign shareholder upon the sale or exchange of common shares generally will not be subject to United States taxation unless the shares constitute a “United States real property interest” within the meaning of FIRPTA. The common shares will not constitute a United States real property interest so long as we are a domestically controlled REIT. A domestically controlled REIT is a REIT in which at all times during a specified testing period less than 50% in value of its stock is held directly or indirectly by foreign shareholders. We believe that we are a domestically controlled REIT. Therefore, we believe that the sale of common shares will not be subject to taxation under FIRPTA. However, because common shares and preferred shares are publicly traded, we cannot guarantee that we will continue to be a domestically controlled REIT. In any event, gain from the sale or exchange of common shares not otherwise subject to FIRPTA will be subject to U.S. tax, if either:

(b) the foreign shareholder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and has a tax home in the United States, in which case the nonresident alien individual will be subject to a 30% tax on the individual’s capital gains.

Even if we do not qualify as or cease to be a domestically controlled REIT, gain arising from the sale or exchange by a foreign shareholder of common shares still would not be subject to United States taxation under FIRPTA as a sale of a United States real property interest if:

(a) the class or series of shares being sold is “regularly traded,” as defined by applicable IRS regulations, on an established securities market such as the New York Stock Exchange; and

(b) the selling foreign shareholder owned 5% or less of the value of the outstanding class or series of shares being sold throughout the five-year period ending on the date of the sale or exchange.

If gain on the sale or exchange of common shares were subject to taxation under FIRPTA, the foreign shareholder would be subject to regular United States income tax with respect to the gain in the same manner as a taxable U.S. shareholder, subject to any applicable alternative minimum tax, a special alternative minimum tax in the case of nonresident alien individuals and the possible application of the branch profits tax in the case of foreign corporations. The purchaser of the common shares would be required to withhold and remit to the IRS 10% of the purchase price.

Information Reporting Requirement and Backup Withholding

We will report to our domestic shareholders and the Internal Revenue Service the amount of distributions paid during each calendar year and the amount of tax withheld, if any. Under certain circumstances, domestic shareholders may be subject to backup withholding. Backup withholding will apply only if such domestic shareholder fails to furnish certain information to us or the Internal Revenue Service. Backup withholding will not apply with respect to payments made to certain exempt recipients, such as corporations and tax-exempt organizations. Domestic shareholders should consult their own tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining such an exemption. Backup withholding is not an additional tax. Rather, the amount of any backup withholding with respect to a payment to a domestic shareholder will be allowed as a credit against such person's United States federal income tax liability and may entitle such person to a refund, provided that the required information is furnished to the Internal Revenue Service.

Item 2. The Properties

Type	Properties	Units	Average Units	December 31, 2004 Occupancy
Garden	584	154,230	264	93.5	%
Mid/High-Rise	52	14,409	277	90.3	%
Ranch	302	27,709	92	91.6	%
Military Housing	1	3,801	3,801	95.3	%
Total	939	200,149

Resident leases are generally for twelve months in length and typically require security deposits. The garden-style properties are generally defined as properties with two and/or three story buildings while the mid-rise/high-rise are defined as properties with greater than three story buildings. These two property types typically provide residents with amenities, which may include a clubhouse, swimming pool, laundry facilities and cable television access. Certain of these properties offer additional amenities such as saunas, whirlpools, spas, sports courts and exercise rooms or other amenities. The ranch-style properties are defined as single story properties, which do not provide additional amenities for residents other than laundry facilities and cable television access. The military housing properties are defined as those properties located on military bases.

It is management’s role to monitor compliance with property policies and to provide preventive maintenance of the properties including common areas, facilities and amenities. The Company has a dedicated training and education department that creates and coordinates training and strategic implementation for the Company’s property management personnel. The Company believes that, due in part to its emphasis on training and employee quality, the properties historically have had high occupancy rates.

The distribution of the properties throughout the United States reflects the Company’s belief that geographic diversification helps insulate the portfolio from regional and economic influences. At the same time, the Company has sought to create clusters of properties within each of its primary markets in order to achieve economies of scale in management and operation. The Company may nevertheless acquire additional multifamily properties located anywhere in the continental United States.

The following tables set forth certain information by type and state relating to the Company’s properties (includes development and condominium conversion properties) at December 31, 2004:

GARDEN-STYLE PROPERTIES

State	Properties	Units	Percentage of Total Units		December 31, 2004 Occupancy
Alabama	4	800	0.40	%	94.0	%
Arizona	42	11,869	5.93		93.0
California	95	24,064	12.02		94.1
Colorado	29	8,433	4.21		92.6
Connecticut	22	2,637	1.32		93.1
Florida	69	20,980	10.48		94.9
Georgia	33	10,495	5.24		93.7
Illinois	7	2,360	1.18		91.3
Maine	5	672	0.34		91.1
Maryland	22	5,203	2.60		92.7
Massachusetts	35	4,829	2.41		93.2
Michigan	6	1,948	0.97		91.3
Minnesota	17	3,819	1.91		88.0
Missouri	6	1,272	0.64		89.8
New Hampshire	1	390	0.19		90.2
New Jersey	2	980	0.49		95.6
New Mexico	2	369	0.18		91.4
New York	1	300	0.15		88.3
North Carolina	29	7,902	3.95		94.2
Oklahoma	8	2,036	1.02		95.1
Oregon	10	3,604	1.80		93.2
Rhode Island	5	778	0.39		93.2
Tennessee	10	3,171	1.58		94.2
Texas	69	21,341	10.66		93.7
Virginia	11	3,774	1.89		93.0
Washington	41	9,518	4.76		94.6
Wisconsin	3	686	0.34		86.5

Total Garden-Style	584	154,230	77.06	%
Average Garden-Style		264			93.5	%

MID-RISE/HIGH RISE PROPERTIES

State	Properties	Units	Percentage of Total Units		December 31, 2004 Occupancy
California	5	1,622	0.81	%	87.7	%
Colorado	1	339	0.17		90.8
Connecticut	2	407	0.20		92.6
Florida	3	653	0.33		96.2
Georgia	1	322	0.16		98.4
Illinois	2	1,176	0.59		85.3
Massachusetts	13	3,338	1.67		90.5
Minnesota	1	163	0.08		88.3
New Jersey	5	1,366	0.68		93.8
New York	2	497	0.25		98.6
Ohio	1	748	0.37		79.2
Oregon	1	525	0.26		93.1
Texas	3	596	0.30		92.5
Virginia	5	1,660	0.83		92.9
Washington	5	801	0.40		92.5
Washington, D.C	2	196	0.10		26.0

Total Mid-Rise/High-Rise	52	14,409	7.20	%
Average Mid-Rise/High-Rise		277			90.3	%

RANCH-STYLE PROPERTIES

Florida	86	8,112	4.05	%	95.1	%
Georgia	53	4,413	2.20		90.5
Indiana	40	3,877	1.94		91.1
Kentucky	19	1,533	0.77		89.3
Maryland	4	414	0.21		98.2
Michigan	17	1,536	0.77		93.4
Ohio	74	7,022	3.51		89.2
Pennsylvania	5	469	0.23		86.8
South Carolina	2	187	0.09		88.2
Tennessee	2	146	0.07		95.2

Total Ranch-Style	302	27,709	13.84	%
Average Ranch-Style		92			91.6	%

MILITARY HOUSING PROPERTIES

Washington (Ft. Lewis)	1	3,801	1.90	%	95.3	%

Total Military Housing	1	3,801	1.90	%
Average Military Housing		3,801			95.3	%

Total Residential Portfolio	939	200,149	100	%

The properties currently in various stages of development at December 31, 2004 are included in the following table.

CONSOLIDATED DEVELOPMENT PROJECTS as of December 31, 2004

(Amounts in thousands except for project and unit amounts)

Projects	Location	Units	Total Capital Cost (1)		Total Book Value to Date (1) (2)		Percentage Completed		Percentage Leased		Percentage Occupied		Estimated Completion Date	Estimated Stabilization Date

Projects Under Development
2400 M Street (Sovereign at 2400)	Washington, DC	359	$	111,947	$	63,774	57	%	—		—		1Q 2006	3Q 2007
Union Station	Los Angeles, CA	278	57,222		21,780		38	%	—		—		4Q 2005	4Q 2006
Indian Ridge	Waltham, MA	264	47,032		24,904		53	%	—		—		4Q 2005	4Q 2006
1111 25^th Street (Sovereign House) (3)	Washington, DC	141	40,329		38,425		95	%	—		—		1Q 2005	4Q 2005
Bella Vista III (4)	Woodland Hills, CA	264	70,179		20,293		3	%	—		—		3Q 2006	2Q 2007

Total Projects Under Development (6)		1,306	326,709		169,176

Completed Not Stabilized
1210 Massachusetts Ave. (Sovereign Park)	Washington, DC	144	39,702		39,365		100	%	31	%	26	%	Completed	4Q 2005
Water Terrace I (Regatta I) (4) (5)	Marina Del Rey, CA	450	226,175		226,175		100	%	77	%	74	%	Completed	3Q 2005
Bella Vista I&II (Warner Ridge) (4)	Woodland Hills, CA	315	80,112		77,186		100	%	90	%	90	%	Completed	1Q 2005
City View at the Highlands (4)	Lombard, IL	403	65,539		65,279		100	%	74	%	74	%	Completed	2Q 2005
City Place (Westport) (4)	Kansas City, MO	288	33,760		33,760		100	%	73	%	72	%	Completed	3Q 2005
Marina Bay II (4)	Quincy, MA	108	23,480		23,230		100	%	56	%	56	%	Completed	3Q 2005

Total Projects Completed Not Stabilized		1,708	468,768		464,995

Completed And Stabilized During the Fourth Quarter
Legacy Park Central	Concord, CA	259	52,337		51,035		100	%	98	%	96	%	Completed	4Q 2004

Total Projects Completed And Stabilized During the Fourth Quarter		259	52,337		51,035
Total Projects	12	3,273	$	847,814	$	685,206

(1) Total capital cost represents estimated development cost for projects under development and all capitalized costs incurred to date plus any estimates of costs remaining to be funded for all completed projects. Total capital cost and total book value to date exclude purchase consideration paid to the development partner of $1.8 million and $1.0 million on Water Terrace I and Bella Vista I & II, respectively.

(2) Of the total book value to date, $516.0 million has been transferred to land and depreciable property and $169.2 million is currently reflected as construction in progress (“CIP”). The remaining $148.7 million of CIP represents land held for future development and related costs. Of the $162.6 million remaining to be invested, $107.6 million will be funded through third party construction mortgages.

(3) Project will be converted to condominiums.

(4) Projects are wholly owned. All others are partially owned.

(5) Project sold on January 31, 2005.

(6) Projects and units excluded from total Company property and unit count.

Item 3. Legal Proceedings

In August 2004, the Company tried a class action lawsuit in Palm Beach County, Florida regarding certain charges made to residents who terminated their leases early or failed to provide sufficient notice of intent to vacate. In December 2004, the Court issued a Findings of Fact and Conclusions of Law holding those fees legally uncollectible under Florida law. In recognition of the Findings of Fact and Conclusions of Law, which awarded damages and interest to the class in the amount of approximately $1.6 million, the Company established a reserve of approximately $1.6 million and correspondingly recorded this as a general and administrative expense. Due to pending appeals, the award is neither final nor enforceable. Accordingly, it is not possible to determine or predict the ultimate outcome of the case. While no assurances can be given, the Company does not believe that this lawsuit, if the ultimate outcome is unfavorable, will have a material adverse effect on the Company.

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

Item 4. Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

The following table sets forth, for the years indicated, the high, low and closing sales prices for and the distributions paid on the Company’s Common Shares, which trade on the New York Stock Exchange under the trading symbol EQR.

	Sales Price
	High		Low		Closing		Distributions
2004
Fourth Quarter Ended December 31, 2004	$	36.75	$	30.86	$	36.18	$	0.4325
Third Quarter Ended September 30, 2004	$	33.21	$	28.74	$	31.00	$	0.4325
Second Quarter Ended June 30, 2004	$	31.11	$	26.65	$	29.73	$	0.4325
First Quarter Ended March 31, 2004	$	31.10	$	28.31	$	29.85	$	0.4325

	Sales Price
	High		Low		Closing		Distributions
2003
Fourth Quarter Ended December 31, 2003	$	30.30	$	28.03	$	29.51	$	0.4325
Third Quarter Ended September 30, 2003	$	29.79	$	25.69	$	29.28	$	0.4325
Second Quarter Ended June 30, 2003	$	27.95	$	24.05	$	25.95	$	0.4325
First Quarter Ended March 31, 2003	$	25.99	$	23.12	$	24.07	$	0.4325

The number of beneficial holders of Common Shares at February 3, 2005, was approximately 47,000. The number of outstanding Common Shares as of February 3, 2005 was 286,055,990.

Item 6. Selected Financial Data

The following table sets forth selected financial and operating information on a historical basis for the Company. The following information should be read in conjunction with all of the financial statements and notes thereto included elsewhere in this Form 10-K. The historical operating and balance sheet data have been derived from the historical financial statements of the Company. All amounts have also been restated in accordance with the discontinued operations provisions of SFAS No. 144. Certain capitalized terms as used herein are defined in the Notes to Consolidated Financial Statements.

CONSOLIDATED HISTORICAL FINANCIAL INFORMATION

(Financial information in thousands except for per share and property data)

	Year Ended December 31,
	2004			2003			2002			2001			2000
OPERATING DATA:

Total revenues from continuing operations	$	1,889,501		$	1,706,020		$	1,687,041		$	1,715,440		$	1,607,243

Income from continuing operations	$	135,276		$	157,867		$	188,114		$	242,238		$	207,800

Net income	$	472,329		$	523,311		$	400,777		$	455,408		$	538,365

Net income available to Common Shares	$	418,583		$	426,639		$	324,162		$	362,580		$	437,510

Earnings per share – basic:
Income from continuing operations available to CommonShares	$	0.38		$	0.33		$	0.47		$	0.62		$	0.52
Net income available to Common Shares	$	1.50		$	1.57		$	1.19		$	1.36		$	1.69
Weighted average Common Shares outstanding	279,744			272,337			271,974			267,349			259,015

Earnings per share – diluted:
Income from continuing operations available to CommonShares	$	0.37		$	0.32		$	0.46		$	0.61		$	0.52
Net income available to Common Shares	$	1.48		$	1.55		$	1.18		$	1.34		$	1.67
Weighted average Common Shares outstanding	303,871			297,041			297,969			295,213			286,503

Distributions declared per Common Share outstanding	$	1.73		$	1.73		$	1.73		$	1.68		$	1.575

BALANCE SHEET DATA (at end of period):
Real estate, before accumulated depreciation	$	14,852,621		$	12,874,379		$	13,046,263		$	13,016,183		$	12,591,539
Real estate, after accumulated depreciation	$	12,252,794		$	10,578,366		$	10,934,246		$	11,297,338		$	11,239,303
Total assets	$	12,645,275		$	11,466,893		$	11,810,917		$	12,235,625		$	12,263,966
Total debt	$	6,459,806		$	5,360,489		$	5,523,699		$	5,742,758		$	5,706,152
Minority Interests	$	535,582		$	600,929		$	611,303		$	635,822		$	612,618
Shareholders’ equity	$	5,072,528		$	5,015,441		$	5,197,123		$	5,413,950		$	5,619,547

OTHER DATA:
Total properties (at end of period)	939			968			1,039			1,076			1,104
Total apartment units (at end of period)	200,149			207,506			223,591			224,801			227,704

Funds from operations available to Common Shares and OP Units (1)(2)	$	651,741		$	640,390		$	719,265		$	706,294		$	719,580

Cash flow provided by (used for):
Operating activities	$	717,750		$	744,319		$	888,263		$	889,668		$	836,417
Investing activities	$	(565,968	)	$	334,028		$	(48,622	)	$	57,429		$	(557,766	)
Financing activities	$	(117,856	)	$	(1,058,643	)	$	(861,369	)	$	(919,266	)	$	(283,996	)

(1) The National Association of Real Estate Investment Trusts (“NAREIT”) defines funds from operations (“FFO”) (April 2002 White Paper) as net income (computed in accordance with accounting principles generally accepted in the United States (“GAAP”)), excluding gains (or losses) from sales of depreciable property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis. The April 2002 White Paper states that gain or loss on sales of property is excluded from FFO for previously depreciated operating properties only. Once the Company commences the conversion of units to condominiums, it simultaneously discontinues depreciation of such property. See Item 7 for a reconciliation of net income to FFO.

(2) The Company believes that FFO is helpful to investors as a supplemental measure of the operating performance of a real estate company, because it is a recognized measure of performance by the real estate industry and by excluding gains or losses related

to dispositions of depreciable property and excluding real estate depreciation (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO can help compare the operating performance of a company’s real estate between periods or as compared to different companies. FFO in and of itself does not represent net income or net cash flows from operating activities in accordance with GAAP. Therefore, FFO should not be exclusively considered as an alternative to net income or to net cash flows from operating activities as determined by GAAP or as a measure of liquidity. The Company’s calculation of FFO may differ from other real estate companies due to, among other items, variations in cost capitalization policies for capital expenditures and, accordingly, may not be comparable to such other real estate companies.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following discussion and analysis of the results of operations and financial condition of the Company should be read in connection with the Consolidated Financial Statements and Notes thereto. Due to the Company’s ability to control the Operating Partnership and its subsidiaries other than entities owning interests in the Unconsolidated Properties and certain other entities in which the Company has investments, the Operating Partnership and each such subsidiary entity has been consolidated with the Company for financial reporting purposes. Capitalized terms used herein and not defined are as defined elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2004.

Forward-looking statements in this Item 7 as well as Item 1 of this Annual Report on Form 10-K are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “believes”, “estimates”, “expects” and “anticipates” and other similar expressions that are predictions of or indicate future events and trends and which do not relate solely to historical matters identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results, performance, or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause such differences include, but are not limited to, the following:

• The total number of development units, cost of development and completion dates as well as anticipated capital expenditures for replacements and building improvements all reflect the Company’s best estimates and are subject to uncertainties arising from changing economic conditions (such as the cost of labor and construction materials), competition and local government regulation;

• Sources of capital to the Company or labor and materials required for maintenance, repair, capital expenditure or development are more expensive than anticipated;

• Occupancy levels and market rents may be adversely affected by national and local economic and market conditions including, without limitation, new construction of multifamily housing, slow employment growth, availability of low interest mortgages for single-family home buyers and the potential for geopolitical instability, all of which are beyond the Company’s control; and

• Additional factors as discussed in Part I of this Annual Report on Form 10-K, particularly those under “Risk Factors”.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Forward-looking statements and related uncertainties are also included in Note 5 and 11 to the Notes to Consolidated Financial Statements in this report.

Results of Operations

The following table summarizes the number of properties and related units for the periods presented:

	Properties		Units		Purchase / Sale Price $Millions
At December 31, 2002	1,039		223,591
2003 Acquisitions	17		5,200		$	684.1
2003 Dispositions:
Rental Properties	(95	)	(23,075	)	$	(1,162.6	)
Condominium Units	(1	)	(411	)	$	(54.8	)
Vacant Land	—		—		$	(0.6	)
2003 Completed Developments	8		2,112
2003 Unit Configuration Changes	—		89
At December 31, 2003	968		207,506
2004 Acquisitions:
Rental Properties	24		6,182		$	900.8
Vacant Land	—		—		$	12.4
2004 Dispositions:
Rental Properties	(56	)	(14,159	)	$	(787.8	)
Condominium Units	(2	)	(977	)	$	(177.3	)
Vacant Land	—		—		$	(27.9	)
2004 Completed Developments	5		1,565
2004Unit Configuration Changes	—		32
At December 31, 2004	939		200,149

The Company’s primary financial measure for evaluating each of its apartment communities is net operating income (“NOI”). The Company believes that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it is a direct measure of the actual operating results of the Company’s apartment communities.

Properties that the Company owned for all of both 2004 and 2003 (the “2004 Same Store Properties”), which represented 162,201 units, impacted the Company’s results of operations. Properties that the Company owned for all of both 2003 and 2002 (the “2003 Same Store Properties”), which represented 171,841 units, also impacted the Company’s results of operations. Both the 2004 Same Store Properties and 2003 Same Store Properties are discussed in the following paragraphs.

The Company’s acquisition, disposition, completed development and consolidation of previously unconsolidated property and variable interest entity activities also impacted overall results of operations for the years ended December 31, 2004 and 2003. The impacts of these activities are also discussed in greater detail in the following paragraphs.

Comparison of the year ended December 31, 2004 to the year ended December 31, 2003

For the year ended December 31, 2004, income from continuing operations decreased by approximately $22.6 million when compared to the year ended December 31, 2003. During the year ended December 31, 2004, the Company established a reserve and recorded a corresponding expense of $15.2 million in estimated uninsured property damage at certain of its properties primarily located in Florida caused by Hurricanes Charley, Frances, Ivan and Jeanne. Of this amount, approximately $9.4 million had been spent for hurricane related repairs through December 31, 2004.

Revenues from the 2004 Same Store Properties increased $14.1 million primarily as a result of lower concessions provided residents and a slight increase in occupancy rates. Expenses from the 2004 Same Store Properties increased $22.5 million primarily due to higher payroll, utility costs and real estate taxes. The following tables provide comparative revenue, expense, NOI and weighted average occupancy for the 2004 Same Store Properties:

2004 vs. 2003 Year over Year Same-Store Results
$ in Millions – 162,201 Same-Store Units

Description	Revenues			Expenses (1)			NOI

2004	$	1,613.5		$	653.5		$	960.0
2003	$	1,599.4		$	631.0		$	968.4
Change	$	14.1		$	22.5		$	(8.4	)
Change	0.9		%	3.6		%	(0.9%		)

(1) December 2004 expenses exclude the uninsured property damage caused by Hurricanes Charley, Frances, Ivan & Jeanne.

Same-Store Occupancy Statistics

Year 2004		93.3%
Year 2003		93.0%
Change		0.3%

The following table presents a reconciliation of operating income per the consolidated statements of operations to NOI for the 2004 Same Store Properties.

	Year Ended December 31,
	2004			2003
	(Amounts in millions)

Operating income	$	526.7		$	530.3
Adjustments:
Insurance (hurricane property damage)	15.2			—
Non-same store operating results	(114.7		)	(10.3		)
Fee and asset management revenue	(11.2		)	(14.4		)
Fee and asset management expense	8.6			7.8
Depreciation	484.2			415.0
General and administrative	51.2			38.8
Impairment on technology investments	—			1.2
Same store NOI	$	960.0		$	968.4

For properties that the Company acquired prior to January 1, 2004 and expects to continue to own through December 31, 2005, the Company anticipates the following same store results for the full year ending December 31, 2005:

2005 Same-Store Assumptions

Physical Occupancy		94.0%
Revenue Change		2.00% to 3.25%
Expense Change		3.6% to 5.0%
NOI Change		0.0% to 3.0%

These 2005 assumptions are based on current expectations and are forward-looking.

Rental income from properties other than 2004 Same Store Properties increased by approximately $172.6 million primarily as a result of revenue from newly acquired properties not yet included as 2004 Same Store Properties and the consolidation of all previously unconsolidated development projects.

Fee and asset management revenues, net of fee and asset management expenses, decreased by $3.9 million primarily as a result of lower income earned from Ft. Lewis and managing fewer properties for third parties and unconsolidated entities. As of December 31, 2004 and 2003, the Company managed 17,988 units and 18,475 units, respectively, for third parties and unconsolidated entities.

Property management expenses include off-site expenses associated with the self-management of the Company’s properties as well as management fees paid to any third party management companies. These expenses increased by approximately $7.8 million or 11.5%. This increase is primarily attributable to higher payroll costs, including bonuses and long-term compensation costs as well as severance costs for certain employees. In addition, the property management company experienced slightly higher costs for travel, temporary help, internal conferences and legal and professional fees.

Depreciation expense, which includes depreciation on non-real estate assets, increased $69.2 million primarily as a result of the consolidation of previously unconsolidated projects and properties acquired after December 31, 2003, many of which had significantly higher per unit acquisition costs than properties previously acquired, and also due to additional depreciation on capital expenditures for all properties owned.

General and administrative expenses, which include corporate operating expenses, increased approximately $12.4 million or 32.0% between the periods under comparison. This increase was primarily due to the costs of consulting services rendered to increase operating efficiencies and increased litigation and internal control costs. This increase was partially offset by $1.4 million of immediate expense recognition related to options granted in the first quarter of 2003 to the Company’s former chief executive officer. Consulting services were contracted to enhance resident satisfaction/retention, unit pricing and expense procurement/reduction. The Company believes that these additional expenditures may be more than offset by increased rental revenues and/or reduced operating expenses in future years. The Company also anticipates that general and administrative expenses will approximate $43.0 million for the year ended December 31, 2005. The above assumptions are based on current expectations and are forward-looking.

The Company recorded impairment charges on its technology investments of approximately $1.2 million for the year ended December 31, 2003. See Note 19 in the Notes to Consolidated Financial Statements for further discussion.

Interest and other income decreased approximately $5.5 million, primarily as a result of lower balances available for investments including deposits in tax deferred exchange accounts and collateral agreements related to development projects.

Interest expense, including amortization of deferred financing costs, increased approximately $20.8 million. This increase was primarily attributable to increases in mortgage and unsecured note balances and lower capitalized interest. During the year ended December 31, 2004, the Company capitalized interest costs of approximately $14.0 million as compared to $20.6 million for the year ended December 31, 2003. This capitalization of interest primarily related to equity investments in Partially Owned Properties (consolidated)

engaged in development activities. The effective interest cost on all indebtedness for the year ended December 31, 2004 was 5.87% as compared to 6.36% for the year ended December 31, 2003.

Loss from investments in unconsolidated entities decreased approximately $2.8 million between the periods under comparison. This decrease is primarily the result of consolidation of properties that were previously unconsolidated, partially offset by an increase in realized losses on the settlement of derivative instruments.

Net gain on sales of discontinued operations increased approximately $13.2 million between the periods under comparison. This increase is primarily the result of an increase in the number of condominium units sold.

Discontinued operations, net, decreased approximately $41.6 million between the periods under comparison. See Note 13 in the Notes to Consolidated Financial Statements for further discussion.

Comparison of the year ended December 31, 2003 to the year ended December 31, 2002

For the year ended December 31, 2003, income from continuing operations decreased by approximately $30.2 million when compared to the year ended December 31, 2002. This decrease was primarily attributable to increased operating expenses incurred including property management costs and depreciation.

Revenues from the 2003 Same Store Properties decreased by $38.2 million primarily as a result of lower overall physical occupancy, increased concessions and lower rental rates charged to both new and renewal residents. Property operating expenses from the 2003 Same Store Properties increased by $36.3 million primarily due to higher payroll, maintenance, utility, real estate taxes, insurance, leasing and advertising and building costs. The following tables provide comparative revenue, expense, NOI and weighted average occupancy for the 2003 Same Store Properties:

2003 vs. 2002 Year over Year Same-Store Results
$in Millions – 171,841 Same-Store Units

Description	Revenues			Expenses			NOI

2003	$	1,650.8		$	659.0		$	991.8
2002	$	1,689.0		$	622.7		$	1,066.3
Change	$	(38.2	)	$	36.3		$	(74.5	)
Change	(2.3%		)	5.8		%	(7.0%		)

Same-Store Occupancy Statistics

Year 2003		93.0%
Year 2002		93.7%
Change		(0.7%)

Rental income from properties other than 2003 Same Store Properties increased by approximately $47.5 million primarily as a result of revenue from newly acquired properties not yet included as 2003 Same Store Properties and additional Partially Owned Properties consolidated in the fourth quarter of 2002 and during the year ended December 31, 2003.

Fee and asset management revenues, net of fee and asset management expenses, increased by $4.9 million primarily as a result of additional income allocated from Ft. Lewis. As of December 31, 2003 and

2002, the Company managed 18,475 units and 18,965 units, respectively, for third parties and unconsolidated entities.

Property management expenses include off-site expenses associated with the self-management of the Company’s properties as well as management fees paid to any third party management companies. These expenses decreased by approximately $4.4 million or 6.0%. This decrease is primarily attributable to a reversal of a profit sharing accrual in the first quarter of 2003 related to the 2002 calendar year as the Company didn’t achieve its stated goals and management elected not to make a discretionary contribution to the plan. In addition, the Company recorded lower expense in connection with granting less restricted shares and reducing the expense associated with the Company’s matched funding of its 401(k) plan during 2003 and not incurring an expense for 2003 discretionary profit sharing contributions.

Depreciation expense, which includes depreciation on non-real estate assets, increased $25.4 million primarily as a result of properties acquired after December 31, 2002, many of which had significantly higher per unit acquisition costs than properties previously acquired, and additional depreciation on capital expenditures for all properties owned.

General and administrative expenses, which include corporate operating expenses, decreased approximately $7.7 million between the periods under comparison. This decrease was primarily due to lower expenses recorded in connection with granting less restricted shares to employees during 2003, partially offset by approximately a $2.6 million increase related to the Company’s decision to begin to expense its stock based compensation in accordance with SFAS No. 123 and its amendment (SFAS No. 148). In addition, lower state income and franchise taxes also contributed to this decrease.

The Company recorded impairment charges on its technology investments and its corporate housing business of approximately $1.2 million and $18.3 million for the years ended December 31, 2003 and 2002, respectively. See Note 19 in the Notes to Consolidated Financial Statements for further discussion.

Interest and other income increased by approximately $1.4 million, primarily as a result of higher cash balances available for short-term investments throughout 2003.

Interest expense, including amortization of deferred financing costs, decreased approximately $4.6 million primarily due to lower variable interest rates and lower overall levels of debt. During the year ended December 31, 2003, the Company capitalized interest costs of approximately $20.6 million as compared to $27.2 million for the year ended December 31, 2002. This capitalization of interest primarily related to equity investments in unconsolidated entities engaged in development activities. The effective interest cost on all indebtedness for the year ended December 31, 2003 was 6.36% as compared to 6.54% for the year ended December 31, 2002.

Loss from investments in unconsolidated entities increased approximately $6.4 million between the periods under comparison. This increase is primarily the result of increased operating losses from equity investments partially offset by unrealized gains on derivative instruments.

Net gain on sales of discontinued operations increased approximately $206.4 million between the periods under comparison. This increase is primarily the result of a greater number of properties sold during the year ended December 31, 2003, as well as the fact that several properties had lower net carrying values at sale.

Discontinued operations, net, decreased approximately $53.6 million between the periods under comparison. See Note 13 in the Notes to Consolidated Financial Statements for further discussion.

Liquidity and Capital Resources

For the Year Ended December 31, 2004

As of January 1, 2004, the Company had approximately $49.6 million of cash and cash equivalents and $633.3 million available under its line of credit (net of $56.7 million which was restricted/dedicated to support letters of credit and not available for borrowing). After taking into effect the various transactions discussed in the following paragraphs and the net cash provided by operating activities, the Company’s cash and cash equivalents balance at December 31, 2004 was approximately $83.5 million and the amount available on the Company’s line of credit was $484.6 million (net of $65.4 million which was restricted/dedicated to support letters of credit and not available for borrowing).

During the year ended December 31, 2004, the Company generated proceeds from various transactions, which included the following:

• Disposed of fifty-eight properties (including four Unconsolidated Properties and various individual condominium units) and received net proceeds of approximately $945.6 million;

• Issued $300.0 million of 4.75% fixed rate unsecured debt receiving net proceeds of $296.8 million;

• Issued $500.0 million of 5.25% fixed rate unsecured debt receiving net proceeds of $496.1 million;

• Obtained $100.0 million from an unsecured floating rate loan;

• Obtained $467.5 million in new mortgage financing; and

• Issued approximately 3.6 million Common Shares and received net proceeds of $85.9 million.

During the year ended December 31, 2004, the above proceeds were primarily utilized to:

• Acquire twenty-four properties including a vacant land parcel, and four additional units at two existing properties, utilizing cash of $820.0 million;

• Repay $494.9 million of mortgage loans;

• Repay $535.7 million of unsecured notes;

• Redeem the Series A Preference Interests at a liquidation value of $40.0 million;

• Invest $406.5 million primarily in previously unconsolidated development projects prior to their consolidation (inclusive of $339.7 million in mortgage debt paid off prior to consolidation); and

• Acquire the minority interests in fifteen previously unconsolidated development properties, two vacant land parcels and four other properties for $53.4 million in cash (prior to consideration of cash acquired of $4.2 million).

Depending on its analysis of market prices, economic conditions, and other opportunities for the investment of available capital, the Company may repurchase up to an additional $85.0 million of its Common Shares pursuant to its existing share buyback program authorized by the Board of Trustees. The Company did not repurchase any of its Common Shares during the year ended December 31, 2004.

The Company’s total debt summary and debt maturity schedule as of December 31, 2004, are as follows:

Debt Summary
	$ Millions *		Weighted Average Rate *
Secured	$	3,167	5.46	%
Unsecured	3,293		5.81	%
Total	$	6,460	5.63	%

Fixed Rate	$	5,071	6.45	%
Floating Rate	1,389		2.51	%
Total	$	6,460	5.63	%

Above Totals Include:
Tax Exempt
Fixed	$	287	4.30	%
Floating	562		1.79	%
Total	$	849	2.70	%

Unsecured Revolving Credit Facility	$	150	1.73	%

* Net of the effect of any derivative instruments.

Debt Maturity Schedule

Year

$ Millions

% of Total