Edgar Filing: EQUITY RESIDENTIAL

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended JUNE 30, 2009

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

For the transition period from to

Commission File Number: 1-12252

EQUITY RESIDENTIAL

(Exact name of registrant as specified in its charter)

Maryland

13-3675988

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


Two North Riverside Plaza, Chicago, Illinois		60606
(Address of principal executive offices)		(Zip Code)

(312) 474-1300

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

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

The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding on June 30, 2009 was 273,975,692.

EQUITY RESIDENTIAL

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands except for share amounts)

(Unaudited)


	June 30, 2009		December 31, 2008
ASSETS
Investment in real estate
Land	$	3,669,394	$	3,671,299
Depreciable property		13,993,241		13,908,594
Projects under development		725,598		855,473
Land held for development		239,377		254,873

Investment in real estate		18,627,610		18,690,239
Accumulated depreciation		(3,759,948)		(3,561,300)

Investment in real estate, net		14,867,662		15,128,939

Cash and cash equivalents		667,495		890,794
Investments in unconsolidated entities		3,666		5,795
Deposits – restricted		158,181		152,372
Escrow deposits – mortgage		17,541		19,729
Deferred financing costs, net		54,283		53,817
Other assets		154,234		283,664

Total assets	$	15,923,062	$	16,535,110


LIABILITIES AND EQUITY
Liabilities:
Mortgage notes payable	$	5,028,736	$	5,036,930
Notes, net		4,945,244		5,447,012
Lines of credit		-		-
Accounts payable and accrued expenses		113,915		108,463
Accrued interest payable		107,566		113,846
Other liabilities		258,677		289,562
Security deposits		62,035		64,355
Distributions payable		142,187		141,843

Total liabilities		10,658,360		11,202,011


Commitments and contingencies

Redeemable Noncontrolling Interests – Operating Partnership		185,923		264,394


Equity:
Shareholders’ equity:
Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares authorized; 1,950,925 shares issued and outstanding as of June 30, 2009 and 1,951,475 shares issued and outstanding as of December 31, 2008		208,773		208,786
Common Shares of beneficial interest, $0.01 par value; 1,000,000,000 shares authorized; 273,975,692 shares issued and outstanding as of June 30, 2009 and 272,786,760 shares issued and outstanding as of December 31, 2008		2,740		2,728
Paid in capital		4,373,983		4,273,489
Retained earnings		365,705		456,152
Accumulated other comprehensive loss		(22,222)		(35,799)

Total shareholders’ equity		4,928,979		4,905,356
Noncontrolling Interests:
Operating Partnership		136,251		137,645
Preference Interests and Units		184		184
Partially Owned Properties		13,365		25,520

Total Noncontrolling Interests		149,800		163,349

Total equity		5,078,779		5,068,705

Total liabilities and equity	$	15,923,062	$	16,535,110

See accompanying notes

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands except per share data)

(Unaudited)


	Six Months Ended June 30,				Quarter Ended June 30,
	2009		2008		2009		2008
REVENUES
Rental income	$	1,007,540	$	1,003,532	$	502,738	$	510,567
Fee and asset management		5,275		5,010		2,412		2,716

Total revenues		1,012,815		1,008,542		505,150		513,283


EXPENSES
Property and maintenance		254,977		261,248		123,430		130,402
Real estate taxes and insurance		108,799		103,884		53,824		51,457
Property management		37,732		40,667		18,718		19,491
Fee and asset management		3,985		4,171		1,982		1,991
Depreciation		298,194		279,253		149,909		139,812
General and administrative		20,595		24,191		10,201		11,774
Impairment		11,124		-		11,124		-

Total expenses		735,406		713,414		369,188		354,927


Operating income		277,409		295,128		135,962		158,356

Interest and other income		12,639		8,167		6,622		4,808
Other expenses		(306)		(780)		(14)		(604)
Interest:
Expense incurred, net		(239,565)		(238,780)		(115,866)		(119,511)
Amortization of deferred financing costs		(6,220)		(4,338)		(3,255)		(2,178)


Income before income and other taxes, (loss) from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities and discontinued operations		43,957		59,397		23,449		40,871
Income and other tax (expense) benefit		(2,389)		(4,622)		(259)		(1,628)
(Loss) from investments in unconsolidated entities		(2,221)		(190)		(2,026)		(95)
Net gain (loss) on sales of unconsolidated entities		2,759		-		(6)		-

Income from continuing operations		42,106		54,585		21,158		39,148
Discontinued operations, net		149,247		232,936		84,774		100,845

Net income		191,353		287,521		105,932		139,993
Net (income) loss attributable to Noncontrolling Interests:
Operating Partnership		(10,420)		(17,481)		(5,729)		(8,348)
Preference Interests and Units		(7)		(7)		(3)		(3)
Partially Owned Properties		74		(1,659)		5		(1,391)

Net income attributable to controlling interests		181,000		268,374		100,205		130,251
Preferred distributions		(7,240)		(7,259)		(3,620)		(3,626)

Net income available to Common Shares	$	173,760	$	261,115	$	96,585	$	126,625


Earnings per share – basic:
Income from continuing operations available to Common Shares	$	0.12	$	0.16	$	0.06	$	0.12

Net income available to Common Shares	$	0.64	$	0.97	$	0.35	$	0.47

Weighted average Common Shares outstanding		272,614		269,196		272,901		269,608


Earnings per share – diluted:
Income from continuing operations available to Common Shares	$	0.12	$	0.16	$	0.06	$	0.12

Net income available to Common Shares	$	0.64	$	0.96	$	0.35	$	0.46

Weighted average Common Shares outstanding		289,152		289,921		289,338		290,445


Distributions declared per Common Share outstanding	$	0.9650	$	0.9650	$	0.4825	$	0.4825

See accompanying notes

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(Amounts in thousands except per share data)

(Unaudited)


	Six Months Ended June 30,				Quarter Ended June 30,
	2009		2008		2009		2008
Comprehensive income:

Net income	$	191,353	$	287,521	$	105,932	$	139,993
Other comprehensive income (loss) – derivative instruments:
Unrealized holding gains (losses) arising during the period		12,655		(5,207)		9,995		3,941
Losses reclassified into earnings from other comprehensive income		2,305		1,216		812		703
Other		449		-		-		-
Other comprehensive income (loss) – other instruments:
Unrealized holding gains (losses) arising during the period		3,111		(372)		1,203		24
(Gains) realized during the period		(4,943)		-		(4,943)		-

Comprehensive income		204,930		283,158		112,999		144,661
Comprehensive (income) attributable to Noncontrolling Interests		(10,353)		(19,147)		(5,727)		(9,742)

Comprehensive income attributable to controlling interests	$	194,577	$	264,011	$	107,272	$	134,919

See accompanying notes

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)


	Six Months Ended June 30,
	2009		2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	191,353	$	287,521
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		301,835		294,174
Amortization of deferred financing costs		6,252		4,340
Amortization of discounts on investment securities		(1,658)		-
Amortization of discounts and premiums on debt		2,541		2,697
Amortization of deferred settlements on derivative instruments		1,604		527
Impairment		11,124		-
Write-off of pursuit costs		162		759
Transaction costs		144		21
Loss from investments in unconsolidated entities		2,221		190
Distributions from unconsolidated entities – return on capital		82		49
Net (gain) on sales of investment securities		(4,943)		-
Net (gain) on sales of unconsolidated entities		(2,759)		-
Net (gain) on sales of discontinued operations		(145,798)		(214,797)
(Gain) on debt extinguishments		(1,985)		-
Compensation paid with Company Common Shares		9,533		11,677

Changes in assets and liabilities:
Decrease (increase) in deposits – restricted		1,801		(3,477)
(Increase) in other assets		(2,656)		(13,287)
Increase in accounts payable and accrued expenses		14,315		37,702
(Decrease) in accrued interest payable		(6,280)		(7,732)
(Decrease) in other liabilities		(8,958)		(13,304)
(Decrease) increase in security deposits		(2,320)		2,066

Net cash provided by operating activities		365,610		389,126


CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate – acquisitions		-		(344,230)
Investment in real estate – development/other		(197,362)		(275,074)
Improvements to real estate		(59,120)		(86,381)
Additions to non-real estate property		(1,107)		(1,413)
Interest capitalized for real estate under development		(21,018)		(29,477)
Proceeds from disposition of real estate, net		347,519		494,215
Proceeds from disposition of unconsolidated entities		-		2,629
Distributions from unconsolidated entities – return of capital		2,585		-
Purchase of investment securities		(52,822)		-
Proceeds from sale of investment securities		181,692		-
Transaction costs		(144)		(21)
(Increase) decrease in deposits on real estate acquisitions, net		(29,309)		25,984
Decrease in mortgage deposits		2,188		537
Acquisition of Noncontrolling Interests – Partially Owned Properties		(9,220)		(20)

Net cash provided by (used for) investing activities		163,882		(213,251)

See accompanying notes

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)


	Six Months Ended June 30,
	2009		2008
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan and bond acquisition costs	$	(8,851)	$	(3,902)
Mortgage notes payable:
Proceeds		614,409		619,745
Restricted cash		21,699		13,662
Lump sum payoffs		(593,453)		(132,232)
Scheduled principal repayments		(9,666)		(12,449)
Prepayment premiums/fees		(35)		-
Notes, net:
Lump sum payoffs		(505,849)		-
Gain on debt extinguishments		2,020		-
Lines of credit:
Proceeds		-		841,000
Repayments		-		(980,000)
Proceeds from (payments on) settlement of derivative instruments		11,251		(13,256)
Proceeds from sale of Common Shares		3,960		4,320
Proceeds from exercise of options		128		6,939
Common Shares repurchased and retired		(1,124)		(10,935)
Payment of offering costs		(131)		(45)
Other financing activities, net		(8)		(8)
Contributions – Noncontrolling Interests – Partially Owned Properties		874		1,221
Contributions – Noncontrolling Interests – Operating Partnership		78		-
Distributions:
Common Shares		(263,636)		(260,426)
Preferred Shares		(7,240)		(7,268)
Preference Interests and Units		(7)		(7)
Noncontrolling Interests – Operating Partnership		(15,914)		(17,718)
Noncontrolling Interests – Partially Owned Properties		(1,296)		(1,747)

Net cash (used for) provided by financing activities		(752,791)		46,894

Net (decrease) increase in cash and cash equivalents		(223,299)		222,769
Cash and cash equivalents, beginning of period		890,794		50,831

Cash and cash equivalents, end of period	$	667,495	$	273,600

See accompanying notes

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)


	Six Months Ended June 30,
	2009		2008
SUPPLEMENTAL INFORMATION:
Cash paid for interest, net of amounts capitalized	$	242,010	$	244,303


Net cash paid for income and other taxes	$	3,343	$	2,240


Real estate acquisitions/dispositions/other:
Mortgage loans assumed	$	-	$	24,946

Valuation of OP Units issued	$	-	$	849

Mortgage loans (assumed) by purchaser	$	(4,387)	$	-


Amortization of deferred financing costs:
Investment in real estate, net	$	(2,133)	$	(1,048)

Deferred financing costs, net	$	8,385	$	5,388


Amortization of discounts and premiums on debt:
Investment in real estate, net	$	(3)	$	-

Mortgage notes payable	$	(3,091)	$	(3,147)

Notes, net	$	5,635	$	5,844


Amortization of deferred settlements on derivative instruments:
Other liabilities	$	(701)	$	(689)

Accumulated other comprehensive loss	$	2,305	$	1,216


Unrealized (gain) loss on derivative instruments:
Other assets	$	(7,894)	$	(3,090)

Mortgage notes payable	$	(1,806)	$	1,079

Notes, net	$	(1,105)	$	1,233

Other liabilities	$	(1,850)	$	5,985

Accumulated other comprehensive loss	$	12,655	$	(5,207)


Proceeds from (payments on) settlement of derivative instruments:
Other assets	$	11,251	$	(39)

Other liabilities	$	-	$	(13,217)

See accompanying notes

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Amounts in thousands)

(Unaudited)


SHAREHOLDERS’ EQUITY	Six Months Ended June 30, 2009

PREFERRED SHARES
Balance, beginning of year	$	208,786
Conversion of 7.00% Series E Cumulative Convertible		(13)

Balance, end of period	$	208,773


COMMON SHARES, $0.01 PAR VALUE
Balance, beginning of year	$	2,728
Conversion of OP Units into Common Shares		6
Employee Share Purchase Plan (ESPP)		3
Share-based employee compensation expense:
Restricted/performance shares		3

Balance, end of period	$	2,740


PAID IN CAPITAL
Balance, beginning of year	$	4,273,489
Common Share Issuance:
Conversion of Preferred Shares into Common Shares		13
Conversion of OP Units into Common Shares		11,132
Exercise of share options		128
Employee Share Purchase Plan (ESPP)		3,957
Share-based employee compensation expense:
Performance shares		108
Restricted shares		6,004
Share options		3,112
ESPP discount		840
Common Shares repurchased and retired		(1,124)
Offering costs		(131)
Supplemental Executive Retirement Plan (SERP)		12,831
Acquisition of Noncontrolling Interests – Partially Owned Properties		(513)
Change in market value of Redeemable Noncontrolling Interests – Operating Partnership		67,674
Adjustment for Noncontrolling Interests ownership in Operating Partnership		(3,537)

Balance, end of period	$	4,373,983


RETAINED EARNINGS
Balance, beginning of year	$	456,152
Net income attributable to controlling interests		181,000
Common Share distributions		(264,207)
Preferred Share distributions		(7,240)

Balance, end of period	$	365,705


ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of year	$	(35,799)
Accumulated other comprehensive income – derivative instruments:
Unrealized holding gains arising during the period		12,655
Losses reclassified into earnings from other comprehensive income		2,305
Other		449
Accumulated other comprehensive income – other instruments:
Unrealized holding gains arising during the period		3,111
(Gains) realized during the period		(4,943)

Balance, end of period	$	(22,222)

See accompanying notes

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Continued)

(Amounts in thousands)

(Unaudited)


NONCONTROLLING INTERESTS	Six Months Ended June 30, 2009

OPERATING PARTNERSHIP
Balance, beginning of year	$	137,645
Issuance of LTIP Units to Noncontrolling Interests		78
Conversion of OP Units held by Noncontrolling Interests into OP Units held by General Partner		(11,138)
Equity compensation associated with Noncontrolling Interests		599
Net income attributable to Noncontrolling Interests		10,420
Distributions to Noncontrolling Interests		(15,687)
Change in carrying value of Redeemable Noncontrolling Interests – Operating Partnership		10,797
Adjustment for Noncontrolling Interests ownership in Operating Partnership		3,537

Balance, end of period	$	136,251


PREFERENCE INTERESTS AND UNITS
Balance, beginning of year and end of period	$	184


PARTIALLY OWNED PROPERTIES
Balance, beginning of year	$	25,520
Net (loss) attributable to Noncontrolling Interests		(74)
Contributions by Noncontrolling Interests		874
Distributions to Noncontrolling Interests		(1,304)
Acquisition of additional ownership interest by Operating Partnership		(11,651)

Balance, end of period	$	13,365

See accompanying notes

EQUITY RESIDENTIAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	Business

Equity Residential (“EQR”), a Maryland real estate investment trust (“REIT”) formed in March 1993, is an S&P 500 company focused on the acquisition, development and management of high quality apartment properties in top United States growth markets. EQR has elected to be taxed as a REIT.

EQR is the general partner of, and as of June 30, 2009 owned an approximate 94.4% ownership interest in, ERP Operating Limited Partnership, an Illinois limited partnership (the “Operating Partnership”). The Company is structured as an umbrella partnership REIT (“UPREIT”) under which all property ownership and related business operations are conducted through the Operating Partnership and its subsidiaries. References to the “Company” include EQR, the Operating Partnership and those entities owned or controlled by the Operating Partnership and/or EQR.

As of June 30, 2009, the Company, directly or indirectly through investments in title holding entities, owned all or a portion of 526 properties in 23 states and the District of Columbia consisting of 143,856 units. The ownership breakdown includes (table does not include various uncompleted development properties):


	Properties	Units
Wholly Owned Properties	459	124,627
Partially Owned Properties:
Consolidated	25	5,110
Unconsolidated	40	9,560
Military Housing (Fee Managed)	2	4,559

	526	143,856

2.	Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and certain reclassifications considered necessary for a fair presentation have been included. Certain reclassifications have been made to the prior period financial statements in order to conform to the current year presentation. Operating results for the six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

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

The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

For further information, including definitions of capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2008.

Income and Other Taxes

Due to the structure of the Company as a REIT and the nature of the operations of its operating properties, no provision for federal income taxes has been made at the EQR level. Historically, the Company has generally only

incurred certain state and local income, excise and franchise taxes. The Company has elected Taxable REIT Subsidiary (“TRS”) status for certain of its corporate subsidiaries, primarily those entities engaged in condominium conversion and corporate housing activities and as a result, these entities will incur both federal and state income taxes on any taxable income of such entities.

Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates for which the temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities are recognized in earnings in the period enacted. The Company’s deferred tax assets are generally the result of tax affected amortization of goodwill, differing depreciable lives on capitalized assets and the timing of expense recognition for certain accrued liabilities. As of June 30, 2009, the Company has recorded a deferred tax asset of approximately $38.5 million, which was fully offset by a valuation allowance due to the uncertainty in forecasting future TRS taxable income.

Other

In December 2008, the FASB issued FASB Staff Position (“FSP”) FAS 140-4 and FASB Interpretation (“FIN”) 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (“FAS 140-4 and FIN 46(R)-8”). FAS 140-4 and FIN 46(R)-8 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to require public companies to provide additional disclosures about transfers of financial assets. It also amends FIN No. 46(R) to require public enterprises, including sponsors that have a variable interest in a Variable Interest Entity (“VIE”), to provide additional disclosures about their involvement with VIEs. FIN No. 46(R) requires the Company to consolidate the assets, liabilities and results of operations of the activities of its VIEs, which for the Company includes only its development partnerships since the Company provides substantially all of the capital for these ventures (other than third party mortgage debt, if any). The Company does not have any unconsolidated FIN No. 46(R) assets. FAS 140-4 and FIN 46(R)-8 were effective for the Company for the year ended December 31, 2008 and affected disclosures only. The adoption of this standard has no impact on the Company’s consolidated results of operations or financial position.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140. SFAS No. 166 will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets and requires additional disclosures. SFAS No. 166 is effective for the Company beginning January 1, 2010. The Company is currently evaluating the impact SFAS No. 166 will have on its consolidated results of operations and financial position.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar) rights should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS No. 167 is effective for the Company beginning January 1, 2010. The Company is currently evaluating the impact SFAS No. 167 will have on its consolidated results of operations and financial position.

The Company adopted the disclosure provisions of SFAS No. 150 and FSP No. FAS 150-3, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, effective December 31, 2003. SFAS No. 150 and FSP No. FAS 150-3 require the Company to make certain disclosures regarding noncontrolling interests that are classified as equity in the financial statements of a subsidiary but would be classified as a liability in the parent’s financial statements under SFAS No. 150 (e.g., noncontrolling interests in consolidated limited-life subsidiaries). The Company is presently the controlling partner in various consolidated partnerships consisting of 25 properties and 5,110 units and various uncompleted development properties having a noncontrolling interest book value of $13.4 million at June 30, 2009. Some of these partnerships contain provisions that require the partnerships to be liquidated through the sale of its assets upon reaching a date specified in each respective partnership agreement. The Company, as controlling partner, has an obligation to cause the property owning partnerships to distribute proceeds of liquidation to the Noncontrolling Interests (see definition below) in these Partially Owned Properties only to the extent that the net proceeds received by the partnerships from the sale of its assets warrant a distribution based on the partnership agreements. As of June 30, 2009, the Company estimates the value of Noncontrolling Interest distributions would have been approximately $48.9 million (“Settlement Value”) had the partnerships been liquidated. This Settlement Value is

based on estimated third party consideration realized by the partnerships upon disposition of the Partially Owned Properties and is net of all other assets and liabilities, including yield maintenance on the mortgages encumbering the properties, that would have been due on June 30, 2009 had those mortgages been prepaid. Due to, among other things, the inherent uncertainty in the sale of real estate assets, the amount of any potential distribution to the Noncontrolling Interests in the Company’s Partially Owned Properties is subject to change. To the extent that the partnerships’ underlying assets are worth less than the underlying liabilities, the Company has no obligation to remit any consideration to the Noncontrolling Interests in Partially Owned Properties.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosure about fair value measurements. The Company adopted SFAS No. 157 as required effective January 1, 2008. The adoption of SFAS No. 157 did not have a material effect on the consolidated results of operations or financial position. See Note 11 for further discussion.

In February 2008, the FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No. 157 (“FAS 157-2”), which delays the effective date of SFAS No. 157 for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FAS 157-2 partially defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008. The Company adopted FAS 157-2 as required effective January 1, 2009. The adoption of FAS 157-2 did not have a material effect on the consolidated results of operations or financial position.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 provides a “Fair Value Option” under which a company may irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial instruments. The Fair Value Option will be available on a contract-by-contract basis with changes in fair value recognized in earnings as those changes occur. SFAS No. 159 is effective beginning January 1, 2008, but the Company has decided not to adopt this optional standard.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FAS 107-1 and APB 28-1”), which requires disclosures about fair value of financial instruments for interim reporting periods for publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. The Company adopted FAS 107-1 and APB 28-1 as required effective for the quarterly period ending June 30, 2009. The adoption of FAS 107-1 and APB 28-1 did not have a material effect on the consolidated results of operations or financial position. See Note 11 for further discussion.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R) significantly changes the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity is required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141(R) changes the accounting treatment for certain specific acquisition related items including: (1) expensing acquisition related costs as incurred (amounts are included in the other expenses line item in the consolidated statements of operations); (2) valuing noncontrolling interests at fair value at the acquisition date; and (3) expensing restructuring costs associated with an acquired business. SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS No. 141(R) has been applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. Due to the current decline in the Company’s acquisition activities, the initial adoption of SFAS No. 141(R) has not had a material effect on the consolidated results of operations or financial position.

In April 2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (“FAS 141(R)-1”), which amends and clarifies SFAS No. 141(R) to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FAS 141(R)-1 has been applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. Due to the current decline in the Company’s acquisition activities, the initial adoption of FAS 141(R)-1 has not had a material effect on the consolidated results of operations or financial position.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 160 establishes new accounting and reporting standards for the “Noncontrolling Interest” in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary (minority interest) is in most cases an ownership interest in the consolidated entity that should be reported as equity in the

consolidated financial statements and separate from the parent company’s equity. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the Consolidated Statements of Operations, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. The Company adopted SFAS No. 160 as required effective January 1, 2009. Other than modifications to allocations and presentation, the adoption of SFAS No. 160 did not have a material effect on the consolidated results of operations or financial position. See Note 3 for further discussion.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133. SFAS No. 161 is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. Among other requirements, entities are required to provide enhanced disclosures about: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The Company adopted SFAS No. 161 as required effective January 1, 2009. Other than the enhanced disclosure requirements, the adoption of SFAS No. 161 did not have a material effect on the consolidated financial statements. See Note 11 for further discussion.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 requires the disclosure of the date through which an entity has evaluated subsequent events, which for public companies is the date the financial statements were issued. The Company adopted SFAS No. 165 as required effective for the quarterly period ending June 30, 2009. The adoption of SFAS No. 165 did not have a material effect on the consolidated results of operations or financial position.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162. SFAS No. 168 will become the source of authoritative U.S. generally accepted accounting principles recognized by the FASB to be applied by nongovernmental entities. The Codification will supersede all then-existing non-SEC accounting and reporting standards and is effective for the Company for the quarterly period ending September 30, 2009. The adoption of this standard has no impact on the Company’s consolidated results of operations or financial position but will change the way we refer to accounting literature beginning with the quarter ended September 30, 2009.

In May 2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“APB 14-1”). APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash on conversion to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The Company adopted APB 14-1, which is applied retrospectively, as required effective January 1, 2009. The adoption of APB 14-1 affects the accounting for the Operating Partnership’s $650.0 million ($531.1 million outstanding at June 30, 2009) 3.85% convertible unsecured notes that were issued in August 2006 and mature in August 2026. The amount of the conversion option as of the date of issuance calculated by the Company was $44.3 million and is being amortized to interest expense over the expected life of the convertible notes (through the first put date on August 18, 2011). Total amortization of the cash discount and conversion option discount on the unsecured notes resulted in a reduction to earnings of approximately $5.0 million for the six months ended June 30, 2009 and is anticipated to result in a reduction to earnings of approximately $9.3 million during the full year of 2009 assuming the Company does not repurchase any additional amounts of this debt. As a result of the adoption of APB 14-1, the Company decreased the January 1, 2009 balance of retained earnings by $27.0 million, decreased the January 1, 2009 balance of notes by $17.3 million and increased the January 1, 2009 balance of paid in capital by $44.3 million. Due to the required retrospective application, APB 14-1 resulted in a reduction to earnings of approximately $5.0 million or $0.02 per share for the six months ended June 30, 2008.

3.	Equity and Redeemable Noncontrolling Interests

The following tables present the changes in the Company’s issued and outstanding Common Shares and “Units” (which includes OP Units and Long-Term Incentive Plan (“LTIP”) Units) for the six months ended June 30, 2009:


		2009
Common Shares
Common Shares outstanding at January 1,		272,786,760

Common Shares Issued:
Conversion of Series E Preferred Shares		612
Conversion of OP Units		629,061
Exercise of options		6,216
Employee Share Purchase Plan		263,003
Restricted share grants, net		337,490

Common Shares Other:
Repurchased and retired		(47,450)

Common Shares outstanding at June 30,		273,975,692


Units
Units outstanding at January 1,		16,679,777
LTIP Unit issuance		155,189
Conversion of OP Units to Common Shares		(629,061)

Units outstanding at June 30,		16,205,905

Total Common Shares and Units outstanding at June 30,		290,181,597

Units Ownership Interest in Operating Partnership		5.6%

LTIP Units Issued:
Issuance – per unit		$0.50
Issuance – contribution valuation		$0.1 million

During the six months ended June 30, 2009, the Company repurchased 47,450 of its Common Shares at an average price of $23.69 per share for total consideration of $1.1 million. These shares were retired subsequent to the repurchases. All of the shares repurchased during the six months ended June 30, 2009 were repurchased from employees at the then current market prices to cover the minimum statutory tax withholding obligations related to the vesting of employees’ restricted shares. EQR has authorization to repurchase an additional $466.5 million of its shares as of June 30, 2009.

The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for OP Units, as well as the equity positions of the holders of LTIP Units, are collectively referred to as the “Noncontrolling Interests – Operating Partnership”. Subject to certain exceptions (including the “book-up” requirements of LTIP Units), the Noncontrolling Interests – Operating Partnership may exchange their Units with EQR for EQR Common Shares on a one-for-one basis.

A portion of the Noncontrolling Interests – Operating Partnership Units are classified as mezzanine equity in accordance with EITF Topic D-98, Classification and Measurement of Redeemable Securities (“EITF D-98”) and EITF 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock (“EITF 00-19”), as they do not meet the requirements for permanent equity classification. The Operating Partnership has the right but not the obligation to make a cash payment to any and all holders of Units requesting an exchange from EQR. However, no aspect of an exchange requires a cash settlement by the Operating Partnership under any circumstances. Once the Operating Partnership elects not to redeem the Units for cash, EQR is obligated, either by contract or securities law, to deliver registered EQR Common Shares for a portion of the Units. This portion of the Units are collectively referred to as the “Redeemable Noncontrolling Interests – Operating Partnership” and are adjusted to the greater of carrying value or fair market value based on the Common Share price of EQR at the end of each respective reporting period as prescribed by EITF D-98 and EITF 00-19. EQR has the ability to deliver unregistered EQR Common Shares for the remaining portion of the Units that are classified in permanent equity at June 30, 2009 and December 31, 2008.

The carrying value of the Noncontrolling Interests – Operating Partnership is based on the proportional relationship between the carrying value of equity associated with EQR’s Common Shares relative to that of the Unit holders of the Operating Partnership. Net income is allocated to the Noncontrolling Interests – Operating Partnership based on the weighted average ownership percentage during the period. As of June 30, 2009, the Redeemable Noncontrolling Interests – Operating Partnership have a redemption value of approximately $185.9 million, which represents the value of EQR Common Shares that would be exchanged with the limited noncontrolling partners of the Operating Partnership.

The following table presents the change in the redemption value of the Redeemable Noncontrolling Interests – Operating Partnership for the six months ended June 30, 2009 (amounts in thousands):


	2009
Balance at January 1,	$	264,394
Change in market value		(67,674)
Change in carrying value		(10,797)

Balance at June 30,	$	185,923

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

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

The following table presents the Company’s issued and outstanding Preferred Shares as of June 30, 2009 and December 31, 2008:


				Amounts in thousands
	Redemption Date (1) (2)	Conversion Rate (2)	Annual Dividend per Share (3)	June 30, 2009		December 31, 2008
Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares authorized:

7.00% Series E Cumulative Convertible Preferred; liquidation value $25 per share; 328,466 and 329,016 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively	11/1/98	1.1128	$1.75	$	8,212	$	8,225

7.00% Series H Cumulative Convertible Preferred; liquidation value $25 per share; 22,459 shares issued and outstanding at June 30, 2009 and December 31, 2008	6/30/98	1.4480	$1.75		561		561

8.29% Series K Cumulative Redeemable Preferred; liquidation value $50 per share; 1,000,000 shares issued and outstanding at June 30, 2009 and December 31, 2008	12/10/26	N/A	$4.145		50,000		50,000

6.48% Series N Cumulative Redeemable Preferred; liquidation value $250 per share; 600,000 shares issued and outstanding at June 30, 2009 and December 31, 2008 (4)	6/19/08	N/A	$16.20		150,000		150,000

				$	208,773	$	208,786

(1)

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

(2)

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

(3)

Dividends on all series of Preferred Shares are payable quarterly at various pay dates. The dividend listed for Series N is a Preferred Share rate and the equivalent Depositary Share annual dividend is $1.62 per share.

(4)

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

The following table presents the Operating Partnership’s issued and outstanding Junior Convertible Preference Units (the “Junior Preference Units”) as of June 30, 2009 and December 31, 2008:


				Amounts in thousands
	Redemption Date (2)	Conversion Rate (2)	Annual Dividend per Unit (1)	June 30, 2009		December 31, 2008
Junior Preference Units:

Series B Junior Convertible Preference Units; liquidation value $25 per unit; 7,367 units issued and outstanding at June 30, 2009 and December 31, 2008	7/29/09	1.020408	$2.00	$	184	$	184

				$	184	$	184

(1)

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

(2)

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

During the six months ended June 30, 2009, the Company acquired all of its partners’ interests in five partially owned properties consisting of 1,587 units for $9.2 million. In addition, the Company also acquired a portion of the outside partner interests in a partially owned property for $2.1 million. In conjunction with these transactions, the Company reduced paid in capital by $0.5 million and Noncontrolling Interests – Partially Owned Properties by $11.7 million.

4.	Real Estate

The following table summarizes the carrying amounts for the Company’s investment in real estate (at cost) as of June 30, 2009 and December 31, 2008 (amounts in thousands):


	June 30, 2009		December 31, 2008
Land	$	3,669,394	$	3,671,299
Depreciable property:
Buildings and improvements		12,896,417		12,836,310
Furniture, fixtures and equipment		1,096,824		1,072,284
Projects under development:
Land		140,618		175,355
Construction-in-progress		584,980		680,118
Land held for development:
Land		181,430		205,757
Construction-in-progress		57,947		49,116

Investment in real estate		18,627,610		18,690,239
Accumulated depreciation		(3,759,948)		(3,561,300)

Investment in real estate, net	$	14,867,662	$	15,128,939

During the six months ended June 30, 2009, the Company disposed of the following to unaffiliated parties (sales price in thousands):


	Properties	Units	Sales Price

Rental Properties:
Consolidated	23	4,199	$	353,390
Unconsolidated (1)	1	216		20,700
Condominium Conversion Properties	1	23		4,669

Total	25	4,438	$	378,759

(1)

The Company owned a 25% interest in this unconsolidated rental property. Sales price listed is the gross sales price.

The Company recognized a net gain on sales of discontinued operations of approximately $145.8 million and a net gain on sales of unconsolidated entities of approximately $2.8 million on the above sales.

5.	Commitments to Acquire/Dispose of Real Estate

As of July 30, 2009, in addition to the properties that were subsequently disposed of as discussed in Note 16, the Company had entered into separate agreements to dispose of the following (sales price in thousands):


	Properties	Units	Sales Price

Rental Properties:
Consolidated	41	6,035	$	534,089
Unconsolidated	2	516		37,000

Total	43	6,551	$	571,089

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

6.	Investments in Partially Owned Entities

The Company has co-invested in various properties with unrelated third parties which are either consolidated or accounted for under the equity method of accounting (unconsolidated). The following table summarizes the Company’s investments in partially owned entities as of June 30, 2009 (amounts in thousands except for project and unit amounts):


	Consolidated										Unconsolidated
	Development Projects
	Held for and/or Under Development		Completed, Not Stabilized (4)		Completed and Stabilized		Other		Total		Institutional Joint Ventures

Total projects (1)		-		2		2		21		25		40


Total units (1)		-		735		432		3,943		5,110		9,560


Debt – Secured (2):
EQR Ownership (3)	$	332,765	$	161,981	$	61,260	$	218,087	$	774,093	$	109,958
Noncontrolling Ownership		-		-		-		83,957		83,957		329,874


Total (at 100%)	$	332,765	$	161,981	$	61,260	$	302,044	$	858,050	$	439,832

(1)

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

(2)

All debt is non-recourse to the Company with the exception of $42.2 million in mortgage debt on various development projects. In addition, $66.0 million in mortgage debt on one development project will become recourse to the Company upon completion of that project.

(3)

Represents the Company’s current economic ownership interest.

(4)

Projects included here are substantially complete. However, they may still require additional exterior and interior work for all units to be available for leasing.

7.	Deposits – Restricted

The following table presents the Company’s restricted deposits as of June 30, 2009 and December 31, 2008 (amounts in thousands):


	June 30,		December 31,
	2009		2008

Tax–deferred (1031) exchange proceeds	$	29,309	$	-
Earnest money on pending acquisitions		1,200		1,200
Restricted deposits on debt (1)		74,530		96,229
Resident security and utility deposits		40,707		41,478
Other		12,435		13,465


Totals	$	158,181	$	152,372

(1)

Primarily represents amounts held in escrow by the lender and released as draw requests are made on fully funded development mortgage loans.

8.	Mortgage Notes Payable

As of June 30, 2009, the Company had outstanding mortgage debt of approximately $5.0 billion.

During the six months ended June 30, 2009, the Company:

•

Repaid $603.1 million of mortgage loans;

•

Obtained $500.0 million of mortgage loan proceeds through the issuance of an 11-year cross-collateralized loan with an all-in fixed interest rate for 10 years at approximately 5.6% secured by 13 properties;

•

Obtained $114.4 million of new mortgage loans primarily on development properties; and

•

Was released from $4.4 million of mortgage debt assumed by the purchaser on a disposed property.

As of June 30, 2009, scheduled maturities for the Company’s outstanding mortgage indebtedness were at various dates through September 1, 2048. At June 30, 2009, the interest rate range on the Company’s mortgage debt was 0.18% to 12.465%. During the six months ended June 30, 2009, the weighted average interest rate on the Company’s mortgage debt was 4.86%.

Notes

As of June 30, 2009, the Company had outstanding unsecured notes of approximately $4.9 billion.

During the six months ended June 30, 2009, the Company repurchased at par $105.2 million of its 4.75% fixed rate public notes due June 15, 2009 and $185.2 million of its 6.95% fixed rate public notes due March 2, 2011 pursuant to a cash tender offer announced on January 16, 2009. The Company wrote-off approximately $0.4 million of unamortized deferred financing costs and approximately $1.1 million of unamortized discounts on notes payable in connection with these repurchases. In addition, the Company repaid the remaining $122.2 million of its 4.75% fixed rate public notes at maturity and $75.8 million of its 5.20% fixed rate tax-exempt notes during the quarter ended June 30, 2009.

During the six months ended June 30, 2009, the Company repurchased $17.5 million of its 3.85% convertible fixed rate public notes due August 15, 2026 at a discount to par of approximately 11.6%. The Company recognized a gain on early debt extinguishment of $2.0 million and wrote-off approximately $0.1 million of unamortized deferred financing costs and approximately $0.8 million of unamortized discounts on notes payable in connection with these repurchases.

As of June 30, 2009, scheduled maturities for the Company’s outstanding notes were at various dates through 2028. At June 30, 2009, the interest rate range on the Company’s notes was 0.63% to 7.57%. During the six months ended June 30, 2009, the weighted average interest rate on the Company’s notes was 5.34%.

10.

Lines of Credit

The Operating Partnership has a $1.5 billion unsecured revolving credit facility maturing on February 28, 2012, with the ability to increase available borrowings by an additional $500.0 million by adding additional banks to the facility or

obtaining the agreement of existing banks to increase their commitments. Advances under the credit facility bear interest at variable rates based upon LIBOR at various interest periods plus a spread (currently 0.5%) dependent upon the Operating Partnership’s credit rating or based on bids received from the lending group. EQR has guaranteed the Operating Partnership’s credit facility up to the maximum amount and for the full term of the facility.

During the year ended December 31, 2008, one of the providers of the Operating Partnership’s unsecured revolving credit facility declared bankruptcy. Under the existing terms of the credit facility, the provider’s share is up to $75.0 million of potential borrowings. As a result, the Operating Partnership’s borrowing capacity under the unsecured revolving credit facility has in essence been permanently reduced to $1.425 billion of potential borrowings. The obligation to fund by all of the other providers has not changed.

As of June 30, 2009, the amount available on the credit facility was $1.35 billion (net of $74.5 million which was restricted/dedicated to support letters of credit and net of the $75.0 million discussed above). The Company did not draw on its revolving credit facility at any time during the six months ended June 30, 2009.

11.

Derivative and Other Fair Value Instruments

The Company follows the guidance under SFAS No. 157 when valuing its financial instruments. The valuation of financial instruments under SFAS No. 107, Disclosures about Fair Value of Financial Instruments, and SFAS No. 133 and its amendments (SFAS Nos. 137/138/149), Accounting for Derivative Instruments and Hedging Activities, requires the Company to make estimates and judgments that affect the fair value of the instruments. The Company, where possible, bases the fair values of its financial instruments, including its derivative instruments, on listed market prices and third party quotes. Where these are not available, the Company bases its estimates on current instruments with similar terms and maturities or on other factors relevant to the financial instruments.

The carrying value of the Company’s mortgage notes payable and unsecured notes were approximately $5.0 billion and $4.9 billion, respectively, at June 30, 2009. The fair value of the Company’s mortgage notes payable and unsecured notes were approximately $4.9 billion and $4.8 billion, respectively, at June 30, 2009. The fair values of the Company’s financial instruments, other than mortgage notes payable, unsecured notes, derivative instruments and investment securities, including cash and cash equivalents, lines of credit and other financial instruments, approximate their carrying or contract values.

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

The following table summarizes the Company’s consolidated derivative instruments at June 30, 2009 (dollar amounts are in thousands):


	Fair Value Hedges (1)		Development Cash Flow Hedges (2)

Current Notional Balance	$	15,693	$	250,762
Lowest Possible Notional	$	15,693	$	46,753
Highest Possible Notional	$	17,694	$	320,061
Lowest Interest Rate		4.800%		4.059%
Highest Interest Rate		4.800%		6.000%
Earliest Maturity Date		2012		2009
Latest Maturity Date		2012		2011

(1)

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

(2)

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

The following table provides the location of the Company’s derivative instruments within the accompanying Consolidated Balance Sheets and their fair market values as of June 30, 2009 (amounts in thousands):


	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:
Interest Rate Contracts:
Fair Value Hedges	Other assets	$	3,442	Other liabilities	$	-
Development Cash Flow Hedges	Other assets		7	Other liabilities		(4,977)

Total		$	3,449		$	(4,977)

The following table provides a summary of the effect of fair value hedges on the Company’s accompanying Consolidated Statements of Operations for the six months ended June 30, 2009 (amounts in thousands):

Type of Fair Value Hedge

Location of Gain/(Loss)
Recognized in Income
on Derivative

Amount of Gain/(Loss)
Recognized in Income on
Derivative

Hedged Item

Income Statement
Location of Hedged
Item Gain/(Loss)

Amount of Gain/(Loss)
Recognized in Income on
Hedged Item

Derivatives designated as hedging instruments:

Interest Rate Contracts:

Interest Rate Swaps

Interest expense

(2,911)

Fixed rate debt

Interest expense

2,911

Total

(2,911)

2,911

The following table provides a summary of the effect of cash flow hedges on the Company’s accompanying Consolidated Statements of Operations for the six months ended June 30, 2009 (amounts in thousands):


Type of Cash Flow Hedge	Effective Portion					Ineffective Portion
Type of Cash Flow Hedge	Amount of Gain/(Loss) Recognized in OCI on Derivative		Location of Gain/(Loss) Reclassified from Accumulated OCI into Income	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income		Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income
Derivatives designated as hedging instruments:
Interest Rate Contracts:
Forward Starting Swaps/Treasury Locks	$	10,803	Interest expense	$	(2,305)	N/A	$	-
Development Interest Rate Swaps/Caps		1,852	Interest expense		-	N/A		-

Total	$	12,655		$	(2,305)		$	-

As of June 30, 2009, there were approximately $22.2 million in deferred losses, net, included in accumulated other comprehensive loss. Based on the estimated fair values of the net derivative instruments at June 30, 2009, the Company may recognize an estimated $6.5 million of accumulated other comprehensive loss as additional interest expense during the twelve months ending June 30, 2010.

In January 2009, the Company received approximately $0.4 million to terminate a fair value hedge of interest rates in conjunction with the public tender of the Company’s 4.75% fixed rate public notes due June 15, 2009. Approximately $0.2 million of the settlement received was deferred and recognized as a reduction of interest expense through the maturity on June 15, 2009.

In April and May 2009, the Company received approximately $10.8 million to terminate six treasury locks in conjunction with the issuance of a $500.0 million 11-year mortgage loan. The entire amount has been deferred as a component of accumulated other comprehensive loss and will be recognized as a reduction of interest expense over the first ten years of the mortgage loan.

The Company has invested in various investment securities in an effort to increase the amounts earned on the significant amount of unrestricted cash on hand throughout 2008 and 2009. During the quarter ended June 30, 2009, the Company sold a portion of its investment securities, receiving proceeds of approximately $52.7 million, and recorded a $4.9 million realized gain on sale (specific identification) which is included in interest and other income. The following table sets forth the maturity, amortized cost, gross unrealized gains and losses, book/fair value and interest and other income of the various investment securities held as of June 30, 2009 (amounts in thousands):


		Other Assets
Security	Maturity	Amortized Cost		Unrealized Gains		Unrealized Losses		Book/ Fair Value		Interest and Other Income

Held-to-Maturity
FDIC-insured promissory notes	Less than one year	$	25,000	$	-	$	-	$	25,000	$	445


Total Held-to-Maturity			25,000		-		-		25,000		445

Available-for-Sale
FDIC-insured certificates of deposit	Less than one year		-		-		-		-		428
Other	Between one and five years or N/A		9,732		11		(11)		9,732		7,672


Total Available-for-Sale			9,732		11		(11)		9,732		8,100


Grand Total		$	34,732	$	11	$	(11)	$	34,732	$	8,545

SFAS No. 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

•

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

•

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

•

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

The Company’s derivative positions are valued using models developed by the respective counterparty as well as models developed internally by the Company that use as their basis readily observable market parameters (such as forward yield curves and credit default swap data) and are classified within Level 2 of the valuation hierarchy. In addition, employee holdings other than EQR Common Shares within the supplemental executive retirement plan (the “SERP”) have a fair value of $39.8 million as of June 30, 2009 and are included in other assets and other liabilities on the consolidated balance sheet. These SERP investments are valued using quoted market prices for identical assets and are classified within Level 1 of the valuation hierarchy.

The Company’s investment securities are valued using quoted market prices or readily available market interest rate data. The quoted market prices are classified within Level 1 of the valuation hierarchy and the market interest rate data are classified within Level 2 of the valuation hierarchy.

The Company’s real estate asset impairment charge was the result of an analysis of the parcel’s fair value (determined using internally developed models that were based on market assumptions and comparable sales data) (Level 3) compared to its current capitalized carrying value. The valuation technique used to measure fair value is consistent with how similar assets were measured in prior periods. See Note 16 for further discussion.

12.

Earnings Per Share

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


	Six Months Ended June 30,				Quarter Ended June 30,
	2009		2008		2009		2008
Numerator for net income per share – basic:
Income from continuing operations	$	42,106	$	54,585	$	21,158	$	39,148
Allocation to Noncontrolling Interests – Operating Partnership, net		(1,973)		(2,876)		(982)		(2,116)
Net loss (income) attributable to Noncontrolling Interests – Partially Owned Properties		74		(1,659)		5		(1,391)
Net income attributable to Preference Interests and Units		(7)		(7)		(3)		(3)
Preferred distributions		(7,240)		(7,259)		(3,620)		(3,626)


Income from continuing operations available to Common Shares, net of Noncontrolling Interests		32,960		42,784		16,558		32,012
Discontinued operations, net of Noncontrolling Interests		140,800		218,331		80,027		94,613


Numerator for net income per share – basic	$	173,760	$	261,115	$	96,585	$	126,625


Numerator for net income per share – diluted:
Income from continuing operations	$	42,106	$	54,585	$	21,158	$	39,148
Net loss (income) attributable to Noncontrolling Interests – Partially Owned Properties		74		(1,659)		5		(1,391)
Net income attributable to Preference Interests and Units		(7)		(7)		(3)		(3)
Preferred distributions		(7,240)		(7,259)		(3,620)		(3,626)


Income from continuing operations available to Common Shares		34,933		45,660		17,540		34,128
Discontinued operations, net		149,247		232,936		84,774		100,845


Numerator for net income per share – diluted	$	184,180	$	278,596	$	102,314	$	134,973


Denominator for net income per share – basic and diluted:
Denominator for net income per share – basic		272,614		269,196		272,901		269,608
Effect of dilutive securities:
OP Units		16,237		18,064		16,089		17,832
Long-term compensation award shares/units		301		2,661		348		3,005


Denominator for net income per share – diluted		289,152		289,921		289,338		290,445


Net income per share – basic	$	0.64	$	0.97	$	0.35	$	0.47


Net income per share – diluted	$	0.64	$	0.96	$	0.35	$	0.46


Net income per share – basic:
Income from continuing operations available to Common Shares, net of Noncontrolling Interests	$	0.121	$	0.159	$	0.061	$	0.119
Discontinued operations, net of Noncontrolling Interests		0.516		0.811		0.293		0.351


Net income per share – basic	$	0.637	$	0.970	$	0.354	$	0.470


Net income per share – diluted:
Income from continuing operations available to Common Shares	$	0.121	$	0.158	$	0.061	$	0.117
Discontinued operations, net		0.516		0.803		0.293		0.347


Net income per share – diluted	$	0.637	$	0.961	$	0.354	$	0.464

Convertible preferred shares/units that could be converted into 405,791 and 438,825 weighted average Common Shares for the six months ended June 30, 2009 and 2008, respectively, and 405,555 and 433,179 weighted average Common Shares for the quarters ended June 30, 2009 and 2008, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effects would be anti-dilutive. In addition, the effect of the Common Shares that could ultimately be issued upon the conversion/exchange of the Operating Partnership’s $650.0 million ($531.1 million outstanding at June 30, 2009) exchangeable senior notes was not included in the computation of diluted earnings per share because the effects would be anti-dilutive.

13.

Discontinued Operations

The Company has presented separately as discontinued operations in all periods the results of operations for all consolidated assets disposed of on or after January 1, 2002 (the date of adoption of SFAS No. 144), all operations related to active condominium conversion properties effective upon their respective transfer into a TRS and all properties held

for sale, if any.

The components of discontinued operations are outlined below and include the results of operations for the respective periods that the Company owned such assets during the six months and quarters ended June 30, 2009 and 2008 (amounts in thousands).


	Six Months Ended June 30,				Quarter Ended June 30,
	2009		2008		2009		2008
REVENUES
Rental income	$	17,832	$	60,482	$	6,408	$	27,599

Total revenues		17,832		60,482		6,408		27,599


EXPENSES (1)
Property and maintenance		8,036		19,312		3,244		8,544
Real estate taxes and insurance		2,284		7,936		767		3,801
Property management		-		(62)		-		3
Depreciation		3,641		14,921		1,438		6,782
General and administrative		25		17		20		14

Total expenses		13,986		42,124		5,469		19,144


Discontinued operating income		3,846		18,358		939		8,455

Interest and other income		10		140		3		148
Interest (2):
Expense incurred, net		(310)		(1,014)		(77)		(496)
Amortization of deferred financing costs		(32)		(2)		-		(1)
Income and other tax (expense) benefit		(65)		657		(18)		459

Discontinued operations		3,449		18,139		847		8,565
Net gain on sales of discontinued operations		145,798		214,797		83,927		92,280

Discontinued operations, net	$	149,247	$	232,936	$	84,774	$	100,845

(1)

Includes expenses paid in the current period for properties sold or held for sale in prior periods related to the Company’s period of ownership.

(2)

Includes only interest expense specific to secured mortgage notes payable for properties sold and/or held for sale.

For the properties sold during the six months ended June 30, 2009 (excluding condominium conversion properties), the investment in real estate, net of accumulated depreciation, and the mortgage notes payable balances at December 31, 2008 were $205.3 million and $17.8 million, respectively.

The net real estate basis of the Company’s active condominium conversion properties owned by the TRS and included in discontinued operations (excludes the Company’s halted conversions as they are now held for use), which were included in investment in real estate, net in the consolidated balance sheets, was $8.0 million and $12.6 million at June 30, 2009 and December 31, 2008, respectively.

14.

Commitments and Contingencies

The Company, as an owner of real estate, is subject to various Federal, state and local environmental laws. Compliance by the Company with existing laws has not had a material adverse effect on the Company. However, the Company cannot predict the impact of new or changed laws or regulations on its current properties or on properties that it may acquire in the future.

The Company is party to a housing discrimination lawsuit brought by a non-profit civil rights organization in April 2006 in the U.S. District Court for the District of Maryland. The suit alleges that the Company designed and built approximately 300 of its properties in violation of the accessibility requirements of the Fair Housing Act and Americans with Disabilities Act. The suit seeks actual and punitive damages, injunctive relief (including modification of non-compliant properties), costs and attorneys’ fees. The Company believes it has a number of viable defenses, including that a majority of the named properties were completed before the operative dates of the statutes in question and/or were not designed or built

by the Company. Accordingly, the Company is defending the suit vigorously. Due to the pendency of the Company’s defenses and the uncertainty of many other critical factual and legal issues, it is not possible to determine or predict the outcome of the suit and as a result, no amounts have been accrued at June 30, 2009. While no assurances can be given, the Company does not believe that the suit, if adversely determined, would have a material adverse effect on the Company.

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

The Company has established a reserve and recorded a corresponding reduction to its net gain on sales of discontinued operations related to potential liabilities associated with its condominium conversion activities. The reserve covers potential product liability related to each conversion. The Company periodically assesses the adequacy of the reserve and makes adjustments as necessary. During the six months ended June 30, 2009, the Company recorded additional reserves of approximately $2.5 million (primarily related to an insurance settlement), paid approximately $0.7 million in settlements and released approximately $1.0 million of remaining reserves for settled claims. As a result, the Company had total reserves of approximately $11.1 million at June 30, 2009. While no assurances can be given, the Company does not believe that the ultimate resolution of these potential liabilities, if adversely determined, would have a material adverse effect on the Company.

As of June 30, 2009, the Company has seven projects totaling 2,369 units in various stages of development with estimated completion dates ranging through June 30, 2011. Some of the projects are developed solely by the Company, while others are co-developed with various third party development partners. The development venture agreements with partners are primarily deal-specific, with differing terms regarding profit-sharing, equity contributions, returns on investment, buy-sell agreements and other customary provisions. The partner is most often the “general” or “managing” partner of the development venture. The typical buy-sell arrangements contain appraisal rights and provisions that provide the right, but not the obligation, for the Company to acquire the partner’s interest in the project at fair market value upon the expiration of a negotiated time period (typically two to five years after substantial completion of the project).

15.

Reportable Segments

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by senior management. Senior management decides how resources are allocated and assesses performance on a monthly basis.

The Company’s primary business is owning, managing and operating multifamily residential properties, which includes the generation of rental and other related income through the leasing of apartment units to residents. Senior management evaluates the performance of each of our apartment communities individually and geographically, and both on a same store and non-same store basis; however, each of our apartment communities generally has similar economic characteristics, residents, products and services. The Company’s operating segments have been aggregated by geography in a manner identical to that which is provided to its chief operating decision maker.

The Company’s fee and asset management, development (including FIN No. 46(R) partially owned properties), condominium conversion and corporate housing (Equity Corporate Housing or “ECH”) activities are immaterial and do not individually meet the threshold requirements of a reportable segment as provided for in SFAS No. 131 and as such, have been aggregated in the tables presented below.

All revenues are from external customers and there is no customer who contributed 10% or more of the Company’s total revenues during the six months and quarters ended June 30, 2009 and 2008, respectively.

The primary financial measure for the Company’s rental real estate segment is net operating income (“NOI”), which represents rental income less: 1) property and maintenance expense; 2) real estate taxes and insurance expense; and 3) property management expense (all as reflected in the accompanying consolidated statements of operations). 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. Current year NOI is compared to prior year NOI and current year budgeted NOI as a measure of financial performance. The following tables present NOI for each segment from our rental real estate specific to continuing operations for the six months and quarters ended June 30, 2009 and 2008, respectively, as well as total assets at June 30, 2009 (amounts in thousands):


	Six Months Ended June 30, 2009
	Northeast		Northwest		Southeast		Southwest		Other (3)		Total
Rental income:
Same store (1)	$	279,346	$	191,779	$	218,041	$	221,113	$	-	$	910,279
Non-same store/other (2) (3)		27,942		8,977		6,547		15,917		37,878		97,261

Total rental income		307,288		200,756		224,588		237,030		37,878		1,007,540

Operating expenses:
Same store (1)		106,007		67,872		92,039		76,042		-		341,960
Non-same store/other (2) (3)		12,465		4,115		2,358		7,392		33,218		59,548

Total operating expenses		118,472		71,987		94,397		83,434		33,218		401,508

NOI:
Same store (1)		173,339		123,907		126,002		145,071		-		568,319
Non-same store/other (2) (3)		15,477		4,862		4,189		8,525		4,660		37,713

Total NOI	$	188,816	$	128,769	$	130,191	$	153,596	$	4,660	$	606,032


Total assets	$	4,728,477	$	2,666,094	$	3,021,022	$	2,953,469	$	2,554,000	$	15,923,062

(1)

Same store includes properties owned for all of both periods ending June 30, 2009 and June 30, 2008 which represented 120,452 units.

(2)

Non-same store includes properties acquired after January 1, 2008.

(3)

Other includes ECH, development, condominium conversion overhead of $1.0 million and other corporate operations. Also reflects a $4.6 million elimination of rental income recorded in Northeast, Northwest, Southeast and Southwest operating segments related to ECH.


	Six Months Ended June 30, 2008
	Northeast		Northwest		Southeast		Southwest		Other (3)		Total
Rental income:
Same store (1)	$	279,867	$	192,360	$	223,897	$	226,425	$	-	$	922,549
Non-same store/other (2) (3)		11,397		8,737		592		11,269		48,988		80,983

Total rental income		291,264		201,097		224,489		237,694		48,988		1,003,532

Operating expenses:
Same store (1)		103,468		67,377		91,543		75,759		-		338,147
Non-same store/other (2) (3)		6,161		3,446		370		8,725		48,950		67,652

Total operating expenses		109,629		70,823		91,913		84,484		48,950		405,799

NOI:
Same store (1)		176,399		124,983		132,354		150,666		-		584,402
Non-same store/other (2) (3)		5,236		5,291		222		2,544		38		13,331

Total NOI	$	181,635	$	130,274	$	132,576	$	153,210	$	38	$	597,733

(1)

Same store includes properties owned for all of both periods ending June 30, 2009 and June 30, 2008 which represented 120,452 units.

(2)

Non-same store includes properties acquired after January 1, 2008.

(3)

Other includes ECH, development, condominium conversion overhead of $1.4 million and other corporate operations. Also reflects a $6.7 million elimination of rental income recorded in Northeast, Northwest, Southeast and Southwest operating segments related to ECH.


	Quarter Ended June 30, 2009
	Northeast		Northwest		Southeast		Southwest		Other (3)		Total
Rental income:
Same store (1)	$	142,072	$	95,517	$	108,738	$	110,725	$	-	$	457,052
Non-same store/other (2) (3)		12,501		4,427		3,365		6,995		18,398		45,686

Total rental income		154,573		99,944		112,103		117,720		18,398		502,738

Operating expenses:
Same store (1)		51,864		33,546		44,984		37,492		-		167,886
Non-same store/other (2) (3)		5,593		1,968		1,014		3,468		16,043		28,086

Total operating expenses		57,457		35,514		45,998		40,960		16,043		195,972

NOI:
Same store (1)		90,208		61,971		63,754		73,233		-		289,166
Non-same store/other (2) (3)		6,908		2,459		2,351		3,527		2,355		17,600

Total NOI	$	97,116	$	64,430	$	66,105	$	76,760	$	2,355	$	306,766

(1)

Same store includes properties owned for all of both quarters ending June 30, 2009 and June 30, 2008 which represented 121,256 units.

(2)

Non-same store includes properties acquired after April 1, 2008.

(3)

Other includes ECH, development, condominium conversion overhead of $0.5 million and other corporate operations. Also reflects a $2.3 million elimination of rental income recorded in Northeast, Northwest, Southeast and Southwest operating segments related to ECH.


	Quarter Ended June 30, 2008
	Northeast		Northwest		Southeast		Southwest		Other (3)		Total
Rental income:
Same store (1)	$	143,824	$	97,394	$	112,412	$	114,652	$	-	$	468,282
Non-same store/other (2) (3)		4,517		4,447		572		4,854		27,895		42,285

Total rental income		148,341		101,841		112,984		119,506		27,895		510,567

Operating expenses:
Same store (1)		51,015		33,858		45,819		38,198		-		168,890
Non-same store/other (2) (3)		2,511		1,924		291		4,480		23,254		32,460

Total operating expenses		53,526		35,782		46,110		42,678		23,254		201,350

NOI:
Same store (1)		92,809		63,536		66,593		76,454		-		299,392
Non-same store/other (2) (3)		2,006		2,523		281		374		4,641		9,825

Total NOI	$	94,815	$	66,059	$	66,874	$	76,828	$	4,641	$	309,217

(1)

Same store includes properties owned for all of both quarters ending June 30, 2009 and June 30, 2008 which represented 121,256 units.

(2)

Non-same store includes properties acquired after April 1, 2008.

(3)

Other includes ECH, development, condominium conversion overhead of $0.7 million and other corporate operations. Also reflects a $3.5 million elimination of rental income recorded in Northeast, Northwest, Southeast and Southwest operating segments related to ECH.

Note: Markets included in the above geographic segments are as follows:

(a)	Northeast – New England (excluding Boston), Boston, New York Metro, DC Northern Virginia and Suburban Maryland.

(b)	Northwest – Central Valley, Denver, Portland, San Francisco Bay Area and Seattle/Tacoma.

(c)	Southeast – Atlanta, Jacksonville, Orlando, Raleigh/Durham, South Florida and Tampa.

(d)	Southwest – Albuquerque, Dallas/Ft. Worth, Inland Empire, Los Angeles, Orange County, Phoenix, San Diego and Tulsa.

The following table presents a reconciliation of NOI from our rental real estate specific to continuing operations for the six months and quarters ended June 30, 2009 and 2008, respectively (amounts in thousands):


	Six Months Ended June 30,				Quarter Ended June 30,
	2009		2008		2009		2008
Rental income	$	1,007,540	$	1,003,532	$	502,738	$	510,567
Property and maintenance expense		(254,977)		(261,248)		(123,430)		(130,402)
Real estate taxes and insurance expense		(108,799)		(103,884)		(53,824)		(51,457)
Property management expense		(37,732)		(40,667)		(18,718)		(19,491)

Total operating expenses		(401,508)		(405,799)		(195,972)		(201,350)

Net operating income	$	606,032	$	597,733	$	306,766	$	309,217

16.

Subsequent Events/Other

Subsequent Events

Subsequent to June 30, 2009 and up until the time of this filing, the Company sold three apartment properties consisting of 749 units for $74.2 million (excluding condominium units).

Other

During the six months ended June 30, 2009, the Company recorded an approximate $11.1 million non-cash asset impairment charge on a parcel of land held for development. Following the guidance in SFAS No. 144, this charge was the result of an analysis of the parcel’s estimated fair value (determined using internally developed models based on market assumptions and comparable sales data) compared to its current capitalized carrying value.

During the six months ended June 30, 2009 and 2008, the Company recorded approximately $1.0 million and $2.2 million of additional general and administrative expense, respectively, and $0.7 million and $0.2 million of additional property management expense, respectively, related primarily to cash severance for various employees.

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

For further information including definitions for capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2008.

Forward-Looking Statements

Forward-looking statements in this report are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates, projections and assumptions made by management. While the Company’s management believes the assumptions underlying its forward-looking statements are reasonable, such information is inherently subject to uncertainties and may involve certain risks, 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. Many of these uncertainties and risks are difficult to predict and beyond management’s control. Forward-looking statements are not guarantees of future performance, results or events. The forward-looking statements contained herein are made as of the date hereof and the Company undertakes no obligation to update or supplement these forward-looking statements. Factors that might cause such differences include, but are not limited to the following:

•

We intend to actively acquire multifamily properties for rental operations as market conditions dictate. The Company does not currently intend to begin the development of any new wholly-owned projects but has a substantial number of properties under development now and may commence new development activities if conditions warrant. We may underestimate the costs necessary to bring an acquired property up to standards established for its intended market position or to complete a development 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. We may not be in a position or have the opportunity in the future to make suitable property acquisitions on favorable terms. To the extent that we do develop more properties if conditions warrant, we expect to do so ourselves in addition to co-investing with our development partners. 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;

•

Sources of capital to the Company or labor and materials required for maintenance, repair, capital expenditure or development may be 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 and excess inventory of multifamily housing and single family housing, slow or negative 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 the annual report on Form 10-K, particularly those under “Item 1A. Risk Factors”.

Forward-looking statements and related uncertainties are also included in Notes 2, 5, 11 and 14 in the Notes to Consolidated Financial Statements in this report.

Overview

The Company is one of the largest publicly traded real estate companies and is the largest publicly traded owner of multifamily properties in the United States (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 operates property management offices throughout the United States. As of June 30, 2009, the Company has approximately 4,500 employees who provide real estate operations, leasing, legal, financial, accounting, acquisition, disposition, development and other support functions.

Business Objectives and Operating Strategies

The Company seeks to maximize current income, capital appreciation of each property and the total return for its shareholders. The Company’s strategy for accomplishing these objectives includes:

•

Leveraging our size and scale in four critical ways:

•

Investing in apartment communities located in strategically targeted markets to maximize our total return on an enterprise level;

•

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

•

Engaging, retaining and attracting the best employees 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 residents reasons to stay with the Company 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, Development and Disposition Strategies

The Company anticipates that future property acquisitions, developments and dispositions 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 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 whole or in part, the recognition of taxable income or gain that might otherwise result from the sales. EQR may also acquire land parcels to hold and/or sell based on market opportunities.

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

•

strategically targeted markets;

•

income levels and employment growth trends in the relevant market;

•

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

•

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

•

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;

•

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;

•

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

•

competition from existing multifamily properties, comparably priced single family homes or rentals, residential properties under development and the potential for the construction of new multifamily properties in the area; 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, development and rehab strategies and at times to fund its debt and equity repurchase activities. In addition, when feasible, the Company may structure these transactions as tax-deferred exchanges.

Current Environment

The slowdown in the economy, which accelerated in the fourth quarter of 2008 and has continued into 2009, coupled with continued job losses and/or lack of job growth leads us to be cautious regarding expected performance for the remainder of 2009. Since the fourth quarter of 2008 and continuing into the first half of 2009, our revenue has declined in most of our major markets as the economic slowdown continues to impact existing and prospective residents. Markets with little employment loss should perform better than markets with employment issues, although all of our markets are continuing to experience job losses. Should the current credit crisis and general economic recession continue, the Company may continue to experience a period of declining revenues, which would adversely impact the Company’s results of operations. The vast majority of our leases are for terms of 12 months or less. As a result, we quickly feel the impact of an economic downturn which limits our ability to raise rents or causes us to lower rents on turnover units and lease renewals. Since the second half of 2008, continued job losses and lower household formation have caused us to lower rents (sometimes significantly) for new residents. While we have generally been able to maintain existing rent levels with renewing residents, we have seen declines in certain markets. Though not material, delinquencies are at higher levels than in prior downturns and at higher levels than the prior year, while tracking with historical seasonal trends. The combination of expected declines in revenues and higher overall expense levels (see discussion below) will have a negative impact on the Company’s results of operations for 2009.

After two consecutive years of modest expense growth (same store expenses grew 2.2% between 2008 and 2007 and 2.1% between 2007 and 2006), the Company anticipates that 2009 expenses will continue that recent trend. Due to our continued focus on expense control initiatives, year-to-date over year-to-date same store expenses increased a modest 1.1% during the six months ended June 30, 2009. The primary drivers of the moderate expense growth are lower increases in payroll and utility costs, partially offset by higher than inflation increases in real estate taxes. Nevertheless, the Company continues to be mindful of the appearance and quality of its apartment properties and continues to allocate sufficient operating and capital resources for this purpose.

The continued credit crisis has negatively impacted the availability and pricing of debt capital. During this time, the multifamily residential sector has benefited from the continued liquidity provided by Fannie Mae and Freddie Mac. A vast majority of the properties we sold in 2008 and 2009 were financed for the purchaser by one of these agencies. Furthermore, Fannie Mae and Freddie Mac provided us with approximately $1.6 billion of secured mortgage financing in 2008 and $500.0 million thus far in 2009 at attractive rates when compared to other sources of credit. Should these agencies discontinue providing liquidity to our sector, have their mandates changed or reduced or be disbanded or reorganized by the government, it would significantly reduce our access to debt capital and/or increase borrowing costs and would significantly reduce our sales of assets.

In response to the recession and liquidity issues prevalent in the debt markets, we took a number of steps to better position ourselves. In early 2008, we began pre-funding our maturing debt obligations with approximately $1.6 billion in secured mortgage financing obtained from Fannie Mae and Freddie Mac. We also significantly reduced our acquisition activity. During the second half of 2008 and through the first half of 2009, we only acquired one property while we continued selling non-core assets. We expect to continue to be a net seller of assets during 2009 should current conditions continue. Additionally, we significantly reduced our development activities, starting only two new projects in the first half of 2008 and none in the second half of the year or in the first half of 2009. We also reduced the number of planned development projects we will undertake in the future and took a $116.4 million impairment charge in 2008 to reduce the value of five assets that we no longer plan on pursuing. In addition, we took an additional $11.1 million impairment charge during the six months ended June 30, 2009 to reduce the value of one asset. We do not currently

anticipate starting any new wholly-owned development projects during 2009 unless market conditions improve significantly. The Company also expects to reduce its quarterly common share dividend beginning with the dividend for the third quarter of 2009, from $0.4825 per share (an annual rate of $1.93 per share) to $0.3375 per share (an annual rate of $1.35 per share). Finally, during 2009 we also expect to continue our focus on our expense control initiatives.

Our specific current expectations regarding our results for 2009 and certain items that will affect them are set forth under Results of Operations below.

We believe that cash and cash equivalents, securities readily convertible to cash, current availability on our revolving credit facility and net disposition proceeds for 2009 will provide sufficient liquidity to meet our funding obligations relating to debt retirement and existing development projects through 2011. We expect that our remaining funding obligations will be met through some combination of new borrowings, equity issuances, property dispositions and cash generated from operations.

Despite the challenging conditions noted above, we believe that the Company is well-positioned to withstand the continuing economic downturn. Our properties are geographically diverse and were approximately 93% occupied as of June 30, 2009, little new multifamily rental supply has been added to most of our markets, the national single family home ownership rate continues to decline and the long-term demographic picture is positive.

We believe we are well-positioned with a strong balance sheet and sufficient liquidity to cover debt maturities and development fundings in the near term, which should allow us to take advantage of investment opportunities should distressed assets become available at significant discounts. When economic conditions improve, the short-term nature of our leases and the limited supply of new rental housing being constructed should allow us to quickly realize revenue growth and improvement in our operating results.

Results of Operations

In conjunction with our business objectives and operating strategy, the Company continued to dispose of its capital investment in apartment communities not located in strategically targeted markets. During the six months ended June 30, 2009, the Company sold $374.1 million of apartment properties consisting of 24 properties and 4,415 units, as well as 23 condominium units for $4.7 million.

The Company’s primary financial measure for evaluating each of its apartment communities is net operating income (“NOI”). NOI represents rental income less property and maintenance expense, real estate tax and insurance expense and property management expense. 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 of the six months ended June 30, 2009 and 2008 (the “Six-Month 2009 Same Store Properties”), which represented 120,452 units, and properties that the Company owned for all of both of the quarters ended June 30, 2009 and 2008 (the “Second Quarter 2009 Same Store Properties”), which represented 121,256 units, impacted the Company’s results of operations. Both the Six-Month 2009 Same Store Properties and the Second Quarter 2009 Same Store Properties are discussed in the following paragraphs.

The Company’s acquisition, disposition and completed development activities also impacted overall results of operations for the six months and quarters ended June 30, 2009 and 2008. Dilution, as a result of the Company’s net asset sales, negatively impacts property net operating income. The impacts of these activities are discussed in greater detail in the following paragraphs.

Comparison of the six months ended June 30, 2009 to the six months ended June 30, 2008

For the six months ended June 30, 2009, the Company reported diluted earnings per share of $0.64 compared to $0.96 per share in the same period of 2008. The difference is primarily due to a lower volume of property sales, an impairment charge and lower property net operating income.

For the six months ended June 30, 2009, income from continuing operations decreased approximately $12.5 million or 22.9% when compared to the six months ended June 30, 2008. The decrease in continuing operations is discussed below.

Revenues from the Six-Month 2009 Same Store Properties decreased $12.3 million primarily as a result of a decrease in occupancy and average rental rates charged to residents, as well as an increase in move-in concessions offered to residents. Expenses from the Six-Month 2009 Same Store Properties increased $3.8 million primarily due to higher real estate taxes, payroll and repairs and maintenance costs. The following tables provide comparative same store results and statistics for the Six-Month 2009 Same Store Properties:

June YTD 2009 vs. June YTD 2008

YTD over YTD Same Store Results/Statistics

$ in thousands (except for Average Rental Rate) – 120,452 Same Store Units


	Results						Statistics
Description	Revenues		Expenses		NOI		Average Rental Rate (1)		Occupancy	Turnover

YTD 2009	$	910,279	$	341,960	$	568,319	$	1,346	93.7%	28.5%
YTD 2008	$	922,549	$	338,147	$	584,402	$	1,352	94.5%	29.7%

Change	$	(12,270)	$	3,813	$	(16,083)	$	(6)	(0.8%)	(1.2%)

Change		(1.3%)		1.1%		(2.8%)		(0.4%)

(1) Average rental rate is defined as total rental revenues divided by the weighted average occupied units for the period.

The following table presents a reconciliation of operating income per the consolidated statements of operations to NOI for the Six-Month 2009 Same Store Properties:


	Six Months Ended June 30,
	2009			2008
		(Amounts in thousands)

Operating income	$	277,409		$	295,128
Adjustments:
Non-same store operating results		(37,713	)		(13,331	)
Fee and asset management revenue		(5,275	)		(5,010	)
Fee and asset management expense		3,985			4,171
Depreciation		298,194			279,253
General and administrative		20,595			24,191
Impairment		11,124			-

Same store NOI	$	568,319		$	584,402

For properties that the Company acquired prior to January 1, 2008 and expects to continue to own through December 31, 2009, the Company anticipates the following same store results for the full year ending December 31, 2009:


2009 Same Store Assumptions

Physical occupancy		93.5%
Revenue change		(3.50%) to (3.00%)
Expense change		1.25% to 1.75%
NOI change		(6.50%) to (5.50%)

These 2009 assumptions are based on current expectations and are forward-looking.

Non-same store operating results increased approximately $24.4 million and consist primarily of properties acquired in calendar year 2008, as well as operations from the Company’s completed development properties and corporate housing business. While the operations of the non-same store assets have been negatively impacted during the six months ended June 30, 2009 similar to the same store assets, the non-same store assets have contributed a greater percentage of total NOI to the Company’s overall operating results primarily due to increasing occupancy for properties in lease-up and a longer ownership period in 2009 than 2008. This increase primarily resulted from:

•

Development and other miscellaneous properties in lease-up of $10.8 million;

•

Newly stabilized development and other miscellaneous properties of $2.5 million; and

•

Properties acquired in 2008 of $9.2 million.

See also Note 15 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s segment disclosures.

Fee and asset management revenues, net of fee and asset management expenses, increased approximately $0.5 million primarily due to an increase in revenue earned on the management of the Company’s military housing venture at Fort Lewis along with the addition of McChord Air Force Base, as well as a decrease in asset management expenses. As of June 30, 2009 and 2008, the Company managed 14,119 and 14,472 units, respectively, primarily for unconsolidated entities and its military housing ventures at Fort Lewis and McChord.

Property management expenses from continuing operations 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 $2.9 million or 7.2%. This decrease is primarily attributable to lower overall payroll-related costs as a result of a decrease in the number of properties in the Company’s portfolio.

Depreciation expense from continuing operations, which includes depreciation on non-real estate assets, increased approximately $18.9 million or 6.8% primarily as a result of additional depreciation expense on properties acquired in 2008 and capital expenditures for all properties owned.

General and administrative expenses from continuing operations, which include corporate operating expenses, decreased approximately $3.6 million or 14.9% primarily due to lower overall payroll-related costs as a result of a decrease in the number of properties in the Company’s portfolio, as well as a $1.2 million decrease in severance related costs in 2009. The Company anticipates that general and administrative expenses will approximate $40.0 million to $42.0 million for the year ending December 31, 2009. The above assumption is based on current expectations and is forward-looking.

Impairment from continuing operations increased approximately $11.1 million due to an impairment charge taken during the quarter ended June 30, 2009 on land held for development. See Note 16 in the Notes to Consolidated Financial Statements for further discussion.

Interest and other income from continuing operations increased approximately $4.5 million or 54.8% primarily as a result of a gain of $4.9 million on the sale of investment securities (see Note 11) as well as a $2.0 million gain recognized during the quarter ended March 31, 2009 related to the partial debt extinguishment of the Company’s August 2026 convertible notes (see Note 9). This was partially offset by a decrease in interest earned on cash and cash equivalents due to a decrease in interest rates and overall balances, as well as less litigation settlement proceeds and forfeited deposits received in 2009. The Company anticipates that interest and other income will approximate $13.0 million to $15.0 million for the year ending December 31, 2009. The above assumption is based on current expectations and is forward-looking.

Other expenses from continuing operations decreased approximately $0.5 million or 60.8% primarily due to a decrease in development pursuit cost write-offs as a result of the Company’s decision to significantly reduce its development activities in 2009, partially offset by the expensing of transaction costs associated with the Company’s acquisition of all of its partners’ interests in five previously partially owned properties consisting of 1,587 units during the six months ended June 30, 2009 due to the Company’s adoption of SFAS No. 141(R) on January 1, 2009.

Interest expense from continuing operations, including amortization of deferred financing costs, increased approximately $2.7 million or 1.1% primarily as a result of higher overall debt levels outstanding due to the Company’s pre-funding of its 2008, 2009 and 2010 debt maturities and lower capitalized interest, partially offset by lower overall effective interest rates. During the six months ended June 30, 2009, the Company capitalized interest costs of approximately $21.0 million as compared to $29.5 million for the six months ended June 30, 2008. This capitalization of interest primarily relates to consolidated projects under development. The effective interest cost on all indebtedness for the six months ended June 30, 2009 was 5.38% as compared to 5.55% for the six months ended June 30, 2008. The Company anticipates that interest expense will approximate $475.0 million to $495.0 million for the year ending December 31, 2009. The above assumption is based on current expectations and is forward-looking.

Income and other tax expense from continuing operations decreased approximately $2.2 million or 48.3% primarily due to a change in estimate for Texas state taxes and lower overall current state income taxes, partially offset by

an increase in business taxes for Washington, D.C. The Company anticipates that income and other tax expense will approximate $3.0 million to $4.0 million for the year ending December 31, 2009. The above assumption is based on current expectations and is forward-looking.

Loss from investments in unconsolidated entities increased approximately $2.0 million as compared to the six months ended June 30, 2008 primarily due to the Company’s $1.8 million share of defeasance costs incurred in conjunction with the extinguishment of cross-collateralized mortgage debt on one of the Company’s partially owned unconsolidated joint ventures.

Net gain on sales of unconsolidated entities increased approximately $2.8 million between the periods under comparison as the Company recognized a $2.8 million gain on the sale of an unconsolidated institutional joint venture property during the six months ended June 30, 2009.

Discontinued operations, net decreased approximately $83.7 million or 35.9% between the periods under comparison. This decrease is primarily due to the mix of properties sold during the six months ended June 30, 2009 compared to the same period in 2008 and the operations of those properties. In addition, properties sold in 2009 reflect operations for a partial period in 2009 in contrast to a full period in 2008. See Note 13 in the Notes to Consolidated Financial Statements for further discussion.

Comparison of the quarter ended June 30, 2009 to the quarter ended June 30, 2008

For the quarter ended June 30, 2009, the Company reported diluted earnings per share of $0.35 compared to $0.46 per share in the same period of 2008. The difference is primarily due to a lower volume of property sales, an impairment charge and lower property net operating income.

For the quarter ended June 30, 2009, income from continuing operations decreased approximately $18.0 million or 46.0% when compared to the quarter ended June 30, 2008. The decrease in continuing operations is discussed below.

Revenues from the Second Quarter 2009 Same Store Properties decreased $11.2 million primarily as a result of a decrease in occupancy and average rental rates charged to residents, as well as an increase in move-in concessions offered to residents. Expenses from the Second Quarter 2009 Same Store Properties decreased $1.0 million primarily due to a decrease in overall operating expenses and management costs, partially offset by higher real estate taxes. The following tables provide comparative same store results and statistics for the Second Quarter 2009 Same Store Properties:

Second Quarter 2009 vs. Second Quarter 2008

Quarter over Quarter Same Store Results/Statistics

$ in thousands (except for Average Rental Rate) – 121,256 Same Store Units


	Results						Statistics
Description	Revenues		Expenses		NOI		Average Rental Rate (1)		Occupancy	Turnover

Q2 2009	$	457,052	$	167,886	$	289,166	$	1,343	93.7%	15.0%
Q2 2008	$	468,282	$	168,890	$	299,392	$	1,359	94.9%	15.9%

Change	$	(11,230)	$	(1,004)	$	(10,226)	$	(16)	(1.2%)	(0.9%)

Change		(2.4%)		(0.6%)		(3.4%)		(1.2%)

(1) Average rental rate is defined as total rental revenues divided by the weighted average occupied units for the period.

The following table presents a reconciliation of operating income per the consolidated statements of operations to NOI for the Second Quarter 2009 Same Store Properties:


	Quarter Ended June 30,
	2009		2008
	(Amounts in thousands)

Operating income	$	135,962	$	158,356
Adjustments:
Non-same store operating results		(17,600)		(9,825)
Fee and asset management revenue		(2,412)		(2,716)
Fee and asset management expense		1,982		1,991
Depreciation		149,909		139,812
General and administrative		10,201		11,774
Impairment		11,124		-


Same store NOI	$	289,166	$	299,392

Non-same store operating results increased approximately $7.8 million and consist primarily of properties acquired in calendar year 2008, as well as operations from the Company’s completed development properties and corporate housing business. While the operations of the non-same store assets have been negatively impacted during the quarter ended June 30, 2009 similar to the same store assets, the non-same store assets have contributed a greater percentage of total NOI to the Company’s overall operating results primarily due to increasing occupancy for properties in lease-up and a longer ownership period in 2009 than 2008. This increase primarily resulted from:

•

Development and other miscellaneous properties in lease-up of $6.2 million;

•

Newly stabilized development and other miscellaneous properties of $1.3 million;

•

Properties acquired in 2008 of $4.1 million; and

•

Partially offset by operating losses from other miscellaneous operations.

See also Note 15 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s segment disclosures.

Fee and asset management revenues, net of fee and asset management expenses, decreased approximately $0.3 million during the quarter ended June 30, 2009 primarily due to a decrease in revenue earned on the management of the Company’s military housing ventures at Fort Lewis and McChord Air Force Base and its partially owned unconsolidated entities.

Property management expenses from continuing operations 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 approximately $0.8 million or 4.0%. This decrease is primarily attributable to lower overall payroll-related costs as a result of a decrease in the number of properties in the Company’s portfolio and a decrease in travel and education/conference expenses.

Depreciation expense from continuing operations, which includes depreciation on non-real estate assets, increased approximately $10.1 million or 7.2% primarily as a result of additional depreciation expense on properties acquired in 2008 and capital expenditures for all properties owned.

General and administrative expenses from continuing operations, which include corporate operating expenses, decreased approximately $1.6 million or 13.4% primarily due to lower overall payroll-related costs as a result of a decrease in the number of properties in the Company’s portfolio.

Interest and other income from continuing operations increased approximately $1.8 million or 37.7% primarily as a result of a gain of $4.9 million on the sale of investment securities (see Note 11), partially offset by a decrease in interest earned on cash and cash equivalents due to a decrease in interest rates and overall balances, as well as less litigation settlement proceeds received in the quarter ended June 30, 2009 compared to the quarter ended June 30, 2008.

Other expenses from continuing operations decreased approximately $0.6 million or 97.7% primarily due to a decrease in acquisition and development pursuit cost write-offs as a result of the Company’s decision to significantly reduce its acquisition and development activities in 2009.

Interest expense from continuing operations, including amortization of deferred financing costs, decreased approximately $2.6 million or 2.1% primarily as a result of lower overall effective interest rates, partially offset by higher overall debt levels outstanding due to the Company’s pre-funding of its 2008, 2009 and 2010 debt maturities and lower capitalized interest. During the quarter ended June 30, 2009, the Company capitalized interest costs of approximately $10.4 million as compared to $14.8 million for the quarter ended June 30, 2008. This capitalization of interest primarily relates to consolidated projects under development. The effective interest cost on all indebtedness for the quarter ended June 30, 2009 was 5.35% as compared to 5.47% for the quarter ended June 30, 2008.

Income and other tax expense from continuing operations decreased approximately $1.4 million or 84.1% primarily due to a change in estimate for Texas state taxes and lower overall state income taxes.

Loss from investments in unconsolidated entities increased approximately $1.9 million as compared to the quarter ended June 30, 2008 primarily due to the Company’s $1.8 million share of defeasance costs incurred in conjunction with the extinguishment of cross-collateralized mortgage debt on one of the Company’s partially owned unconsolidated joint ventures.

Net gain on sales of unconsolidated entities was consistent between the periods under comparison.

Discontinued operations, net decreased approximately $16.1 million or 15.9% between the periods under comparison. This decrease is primarily due to the mix of properties sold during the quarter ended June 30, 2009 compared to the same period in 2008 and the operations of those properties. In addition, properties sold in 2009 reflect operations for a partial period in 2009 in contrast to a full period in 2008. See Note 13 in the Notes to Consolidated Financial Statements for further discussion.

Liquidity and Capital Resources

As of January 1, 2009, the Company had approximately $890.8 million of cash and cash equivalents and $1.29 billion available under its revolving credit facility (net of $130.0 million which was restricted/dedicated to support letters of credit and $75.0 million which had been committed by a now bankrupt financial institution and is 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 June 30, 2009 was approximately $667.5 million and the amount available on the Company’s revolving credit facility was $1.35 billion (net of $74.5 million which was restricted/dedicated to support letters of credit and net of the $75.0 million discussed above). In 2008, the Company built a significant cash and cash equivalents balance as a direct result of its decision to pre-fund its 2008 and 2009 debt maturities with the closing of three secured mortgage loan pools totaling $1.6 billion. The decline in the Company’s cash and cash equivalents balance since December 31, 2008 is a direct result of the application of the pre-funded cash on hand towards the Company’s debt maturity, tender and repurchase activities, partially offset by the closing of a $500.0 million secured mortgage loan pool during the quarter ended June 30, 2009.

During the six months ended June 30, 2009, the Company generated proceeds from various transactions, which included the following:

•

Disposed of 25 properties and 23 condominium units, receiving net proceeds of approximately $347.5 million;

•

Obtained $500.0 million in new mortgage financing and terminated six treasury locks, receiving $10.8 million;

•

Obtained an additional $114.4 million of new mortgage loans primarily on development properties;

•

Received $181.7 million from maturing or sold investment securities; and

•

Issued approximately 0.3 million Common Shares and received net proceeds of $4.1 million.

During the six months ended June 30, 2009, the above proceeds were primarily utilized to:

•

Invest $197.4 million primarily in development projects;

•

Repurchase 47,450 Common Shares, utilizing cash of $1.1 million (see Note 3);

•

Repurchase $307.9 million of fixed rate public notes;

•

Repay $122.2 million of fixed rate public notes at maturity;

•

Repurchase $75.8 million of fixed rate tax-exempt notes;

•

Repay $603.1 million of mortgage loans; and

•

Acquire $52.8 million of investment securities.

Depending on its analysis of market prices, economic conditions and other opportunities for the investment of available capital, the Company may repurchase its Common Shares pursuant to its existing share repurchase program authorized by the Board of Trustees. The Company repurchased $1.1 million (47,450 shares at an average price per share of $23.69) of its Common Shares during the six months ended June 30, 2009. As of June 30, 2009, the Company had authorization to repurchase an additional $466.5 million of its shares. See Note 3 in the Notes to Consolidated Financial Statements for further discussion.

Depending on its analysis of prevailing market conditions, liquidity requirements, contractual restrictions and other factors, the Company may from time to time seek to repurchase and retire its outstanding debt in open market or privately negotiated transactions.

The Company’s total debt summary and debt maturity schedules as of June 30, 2009 are as follows:

Debt Summary as of June 30, 2009

(Amounts in thousands)


	Amounts (1)		% of Total	Weighted Average Rates (1)	Weighted Average Maturities (years)
Secured	$	5,028,736	50.4%	4.86%	9.0
Unsecured		4,945,244	49.6%	5.34%	5.2

Total	$	9,973,980	100.0%	5.11%	7.1


Fixed Rate Debt:
Secured – Conventional	$	4,033,465	40.4%	5.96%	7.7
Unsecured – Public/Private		4,409,644	44.2%	5.92%	5.5

Fixed Rate Debt		8,443,109	84.6%	5.93%	6.6

Floating Rate Debt:
Secured – Conventional		359,597	3.6%	2.07%	3.5
Secured – Tax Exempt		635,674	6.4%	0.73%	21.1
Unsecured – Public/Private		500,000	5.0%	1.36%	1.3
Unsecured – Tax Exempt		35,600	0.4%	0.44%	19.5
Unsecured – Revolving Credit Facility		-	-	-	2.7

Floating Rate Debt		1,530,871	15.4%	1.32%	10.1

Total	$	9,973,980	100.0%	5.11%	7.1

(1)	Net of the effect of any derivative instruments. Weighted average rates are for the six months ended June 30, 2009.

Note: The Company capitalized interest of approximately $21.0 million and $29.5 million during the six months ended June 30, 2009 and 2008, respectively. The Company capitalized interest of approximately $10.4 million and $14.8 million during the quarters ended June 30, 2009 and 2008, respectively.

Debt Maturity Schedule as of June 30, 2009

(Amounts in thousands)


Year	Fixed Rate (1)			Floating Rate (1)			Total		% of Total	Weighted Average Rates on Fixed Rate Debt (1)	Weighted Average Rates on Total Debt (1)

2009	$	6,455		$	86,725		$	93,180	0.9%	7.58%	2.64%
2010		220,603			672,235	(2)		892,838	8.9%	7.54%	2.93%
2011		1,258,011	(3)		87,812			1,345,823	13.5%	5.58%	5.33%
2012		955,972			3,442			959,414	9.6%	5.89%	5.88%
2013		565,881			-			565,881	5.7%	5.93%	5.93%
2014		516,964			-			516,964	5.2%	5.28%	5.28%
2015		355,107			-			355,107	3.6%	6.41%	6.41%
2016		1,088,710			-			1,088,710	10.9%	5.32%	5.32%
2017		1,345,998			456			1,346,454	13.5%	5.87%	5.87%
2018		335,501			44,677			380,178	3.8%	5.96%	5.60%
2019+		1,793,907			635,524			2,429,431	24.4%	5.86%	5.04%

Total	$	8,443,109		$	1,530,871		$	9,973,980	100.0%	5.80%	5.22%

(1)	Net of the effect of any derivative instruments. Weighted average rates are as of June 30, 2009.

(2)	Includes the Company’s $500.0 million floating rate term loan facility, which matures on October 5, 2010, subject to two one-year extension options exercisable by the Company.

(3)	Includes $531.1 million face value of 3.85% convertible unsecured debt with a final maturity of 2026. The notes are callable by the Company on or after August 18, 2011. The notes are putable by the holders on August 18, 2011, August 15, 2016 and August 15, 2021.

The following table provides a summary of the Company’s unsecured debt as of June 30, 2009:

Unsecured Debt Summary as of June 30, 2009

(Amounts in thousands)


	Coupon Rate	Due Date		Face Amount		Unamortized Premium/ (Discount)		Net Balance
Fixed Rate Notes:
	6.950%	03/02/11	(1)	$	114,806	$	1,688	$	116,494
	6.625%	03/15/12			400,000		(795)		399,205
	5.500%	10/01/12			350,000		(1,122)		348,878
	5.200%	04/01/13			400,000		(444)		399,556
	5.250%	09/15/14			500,000		(320)		499,680
	6.584%	04/13/15			300,000		(645)		299,355
	5.125%	03/15/16			500,000		(359)		499,641
	5.375%	08/01/16			400,000		(1,314)		398,686
	5.750%	06/15/17			650,000		(4,069)		645,931
	7.125%	10/15/17			150,000		(538)		149,462
	7.570%	08/15/26			140,000		-		140,000
	3.850%	08/15/26	(2)		531,092		(18,336)		512,756

					4,435,898		(26,254)		4,409,644


Floating Rate Tax Exempt Notes:
	7-Day SIFMA	12/15/28	(3)		35,600		-		35,600

Floating Rate Notes:
Term Loan Facility	LIBOR+0.50%	10/05/10	(3)(4)		500,000		-		500,000


Revolving Credit Facility:	LIBOR+0.50%	02/28/12	(5)		-		-		-


Total Unsecured Debt				$	4,971,498	$	(26,254)	$	4,945,244

Note: SIFMA stands for the Securities Industry and Financial Markets Association and is the tax-exempt index equivalent of LIBOR.

(1)

On January 27, 2009, the Company repurchased $185.2 million of these notes at par pursuant to a cash tender offer announced on January 16, 2009.

(2)

Convertible notes mature on August 15, 2026. The notes are callable by the Company on or after August 18, 2011. The notes are putable by the holders on August 18, 2011, August 15, 2016 and August 15, 2021. During the six months ended June 30, 2009, the Company repurchased $17.5 million of these notes at a discount to par of approximately 11.6% and recognized a gain on early debt extinguishment of $2.0 million. Effective January 1, 2009, the Company adopted FSP APB 14-1, which requires companies to expense the implied option value inherent in convertible debt. In conjunction with this adoption, the Company recorded an adjustment of $17.3 million to the beginning balance of the discount on its convertible notes.

(3)

Notes are private. All other unsecured debt is public.

(4)

Represents the Company’s $500.0 million term loan facility, which matures on October 5, 2010, subject to two one-year extension options exercisable by the Company.

(5)

As of June 30, 2009, there was no amount outstanding and approximately $1.35 billion available on the Company’s unsecured revolving credit facility.

As of July 30, 2009, an unlimited amount of debt securities remains available for issuance by the Operating Partnership under a registration statement that became automatically effective upon filing with the SEC in December 2008 (under SEC regulations enacted in 2005, the registration statement automatically expires on December 21, 2011 and does not contain a maximum issuance amount). As of July 30, 2009, an unlimited amount of equity securities remains available for issuance by the Company under a registration statement the SEC declared effective in December 2008 (under SEC regulations enacted in 2005, the registration statement automatically expires on December 15, 2011 and does not contain a maximum issuance amount).

The Company’s “Consolidated Debt-to-Total Market Capitalization Ratio” as of June 30, 2009 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 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 units; and (iii) the liquidation value of all perpetual preferred shares outstanding.

Capital Structure as of June 30, 2009

(Amounts in thousands except for share/unit and per share amounts)


Secured Debt				$	5,028,736	50.4%
Unsecured Debt					4,945,244	49.6%

Total Debt					9,973,980	100.0%	60.0%

Common Shares (includes Restricted Shares)		273,975,692	94.4%
Units		16,205,905	5.6%

Total Shares and Units		290,181,597	100.0%
Common Share Equivalents (see below)		405,555

Total outstanding at quarter-end		290,587,152
Common Share Price at June 30, 2009	$	22.23

					6,459,752	97.0%
Perpetual Preferred Equity (see below)					200,000	3.0%

Total Equity					6,659,752	100.0%	40.0%

Total Market Capitalization				$	16,633,732		100.0%

Convertible Preferred Equity as of June 30, 2009

(Amounts in thousands except for share/unit and per share/unit amounts)


Series	Redemption Date	Outstanding Shares/Units	Liquidation Value		Annual Dividend Per Share/Unit		Annual Dividend Amount		Weighted Average Rate		Conversion Ratio	Common Share Equivalents
Preferred Shares:
7.00% Series E	11/1/98	328,466	$	8,212	$	1.75	$	575			1.1128	365,517
7.00% Series H	6/30/98	22,459		561		1.75		39			1.4480	32,521
Junior Preference Units:
8.00% Series B	7/29/09	7,367		184		2.00		15			1.020408	7,517

Total Convertible Preferred Equity		358,292	$	8,957			$	629	7.02	%		405,555

Perpetual Preferred Equity as of June 30, 2009

(Amounts in thousands except for share and per share amounts)


Series	Redemption Date	Outstanding Shares	Liquidation Value		Annual Dividend Per Share		Annual Dividend Amount		Weighted Average Rate
Preferred Shares:
8.29% Series K	12/10/26	1,000,000	$	50,000	$	4.145	$	4,145
6.48% Series N	6/19/08	600,000		150,000		16.20		9,720

Total Perpetual Preferred Equity		1,600,000	$	200,000			$	13,865	6.93	%

The Company generally expects to meet its short-term liquidity requirements, including capital expenditures related to maintaining its existing properties and certain scheduled unsecured note and mortgage note repayments, through its working capital, net cash provided by operating activities and borrowings under its revolving credit facility. Under normal operating conditions, the Company considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions. However, there may be times when the Company experiences shortfalls in its coverage of distributions, which may cause the Company to consider reducing its distributions and/or using the proceeds from property dispositions or additional financing transactions to make up the difference. Should these shortfalls occur for lengthy periods of time or be material in nature, the Company’s financial condition may be adversely affected and it may not be able to maintain its current distribution levels. The Company expects to reduce its quarterly common share dividend beginning with the dividend for the third quarter of 2009, from $0.4825 per share (an annual rate of $1.93 per share) to $0.3375 per share (an annual rate of $1.35 per share). The above assumption is based on current expectations and is forward-looking.

The Company also expects to meet its long-term liquidity requirements, such as scheduled unsecured note and mortgage debt maturities, property acquisitions, financing of construction and development activities and capital improvements through the issuance of secured and unsecured debt and equity securities, including additional OP Units, and proceeds received from the disposition of certain properties as well as joint ventures. In addition, the Company has significant unencumbered properties available to secure additional mortgage borrowings in the event that the public capital markets are unavailable or the cost of alternative sources of capital is too high. The fair value of and cash flow from these unencumbered properties are in excess of the requirements the Company must maintain in order to comply with covenants under its unsecured notes and line of credit. Of the $18.6 billion in investment in real estate on the Company’s balance sheet at June 30, 2009, $11.0 billion or 58.9%, was unencumbered. However, there can be no assurances that these sources of capital will be available to the Company in the future.

As of July 30, 2009, the Operating Partnership’s senior debt credit ratings from Standard & Poors (“S&P”), Moody’s and Fitch are BBB+, Baa1 and A-, respectively. As of July 30, 2009, the Company’s preferred equity ratings from S&P, Moody’s and Fitch are BBB-, Baa2 and BBB+, respectively.

The Operating Partnership has a long-term revolving credit facility with available borrowings as of June 30, 2009 of $1.35 billion that matures in February 2012 (see Note 10 in the Notes to Consolidated Financial Statements for further discussion). This facility may, among other potential uses, be used to fund property acquisitions, costs for certain properties under development and short-term liquidity requirements. As of July 30, 2009, no amounts were outstanding under this facility.

See Note 16 in the Notes to Consolidated Financial Statements for discussion of the events which occurred subsequent to June 30, 2009.

Capitalization of Fixed Assets and Improvements to Real Estate

Our policy with respect to capital expenditures is generally to capitalize expenditures that improve the value of the property or extend the useful life of the component asset of the property. We track improvements to real estate in two major categories and several subcategories:

•

Replacements (inside the unit). These include:

•

flooring such as carpets, hardwood, vinyl, linoleum or tile;

•

appliances;

•

mechanical equipment such as individual furnace/air units, hot water heaters, etc;

•

furniture and fixtures such as kitchen/bath cabinets, light fixtures, ceiling fans, sinks, tubs, toilets, mirrors, countertops, etc; and

•

blinds/shades.

All replacements are depreciated over a five-year estimated useful life. We expense as incurred all make-ready maintenance and turnover costs such as cleaning, interior painting of individual units and the repair of any replacement item noted above.

•

Building improvements (outside the unit). These include:

•

roof replacement and major repairs;

•

paving or major resurfacing of parking lots, curbs and sidewalks;

•

amenities and common areas such as pools, exterior sports and playground equipment, lobbies, clubhouses, laundry rooms, alarm and security systems and offices;

•

major building mechanical equipment systems;

•

interior and exterior structural repair and exterior painting and siding;

•

major landscaping and grounds improvement; and

•

vehicles and office and maintenance equipment.

All building improvements are depreciated over a five to ten-year estimated useful life. We capitalize building improvements and upgrades only if the item: (i) exceeds $2,500 (selected projects must exceed $10,000); (ii) extends the useful life of the asset; and (iii) improves the value of the asset.

For the six months ended June 30, 2009, our actual improvements to real estate totaled approximately $59.1 million. This includes the following (amounts in thousands except for unit and per unit amounts):

Capitalized Improvements to Real Estate

For the Six Months Ended June 30, 2009


	Total Units (1)	Replacements		Avg. Per Unit		Building Improvements		Avg. Per Unit		Total		Avg. Per Unit
Established Properties (2)	109,382	$	16,543	$	151	$	17,513	$	160	$	34,056	$	311

New Acquisition Properties (3)	14,348		1,578		112		3,806		271		5,384		383

Other (4)	6,007		16,853				2,827				19,680


Total	129,737	$	34,974			$	24,146			$	59,120

(1)	Total Units – Excludes 9,560 unconsolidated units and 4,559 military housing (fee managed) units, for which capitalized improvements to real estate are self-funded and do not consolidate into the Company’s results.

(2)	Established Properties – Wholly Owned Properties acquired prior to January 1, 2007.

(3)	New Acquisition Properties – Wholly Owned Properties acquired during 2007, 2008 and 2009. Per unit amounts are based on a weighted average of 14,074 units.

(4)	Other – Primarily includes properties either partially owned or sold during the period, commercial space and corporate housing. Also includes $15.4 million included in replacements spent on various assets related to major renovations and repositioning of these assets.

For 2009, the Company estimates an annual stabilized run rate of approximately $925 per unit of capital expenditures for its established properties. The above assumption is based on current expectations and is forward-looking.

During the six months ended June 30, 2009, the Company’s total non-real estate capital additions, such as computer software, computer equipment, and furniture and fixtures and leasehold improvements to the Company’s property management offices and its corporate offices, were approximately $1.1 million. The Company expects to fund approximately $1.0 million in additions to non-real estate property for the remainder of 2009. The above assumption is based on current expectations and is forward-looking.

Improvements to real estate and additions to non-real estate property are generally funded from net cash provided by operating activities and from investment cash flow.

Derivative Instruments

The Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Company has not sustained a material loss from those instruments nor does it anticipate any material adverse effect on its net income or financial position in the future from the use of derivatives it currently has in place.

See Note 11 in the Notes to Consolidated Financial Statements for additional discussion of derivative instruments at June 30, 2009.

Other

Total distributions paid in July 2009 amounted to $142.6 million (excluding distributions on Partially Owned Properties), which included certain distributions declared during the second quarter ended June 30, 2009.

Off-Balance Sheet Arrangements and Contractual Obligations

The Company has co-invested in various properties that are unconsolidated and accounted for under the equity method of accounting. Management does not believe these investments have a materially different impact upon the Company’s liquidity, cash flows, capital resources, credit or market risk than its property management and ownership activities. During 2000 and 2001, the Company entered into institutional ventures with an unaffiliated partner. At the respective closing dates, the Company sold and/or contributed 45 properties containing 10,846 units to these ventures and retained a 25% ownership interest in the ventures. The Company’s joint venture partner contributed cash equal to 75% of the agreed-upon equity value of the properties comprising the ventures, which was then distributed to the Company. The Company’s strategy with respect to these ventures was to reduce its concentration of properties in a variety of markets. The Company sold three properties consisting of 670 units and one property consisting of 400 units during the years ended December 31, 2008 and 2007, respectively. In addition, the Company sold one property consisting of 216 units during the six months ended June 30, 2009. The Company and its joint venture partner currently intend to wind up these investments over the next few years by selling the related assets. The Company cannot estimate what, if any, profit it will receive from these dispositions or if the Company will in fact receive its equity back.

As of June 30, 2009, the Company has seven projects totaling 2,369 units in various stages of development with estimated completion dates ranging through June 30, 2011. The development agreements currently in place are discussed in detail in Note 14 of the Company’s Consolidated Financial Statements.

See also Notes 2 and 6 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s investments in partially owned entities.

The Company’s contractual obligations for the next five years and thereafter have not changed materially from the amounts and disclosures included in its annual report on Form 10-K, other than as it relates to scheduled debt maturities. See the updated debt maturity schedule included in Liquidity and Capital Resources for further discussion.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to use judgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or different presentation of our financial statements.

The Company has identified five significant accounting policies as critical accounting policies. These critical accounting policies are those that have the most impact on the reporting of our financial condition and those requiring significant judgments and estimates. With respect to these critical accounting policies, management believes that the application of judgments and estimates is consistently applied and produces financial information that fairly presents the results of operations for all periods presented. The five critical accounting policies are:

Acquisition of Investment Properties

The Company allocates the purchase price of properties to net tangible and identified intangible assets acquired based on their fair values in accordance with the provisions of SFAS No. 141(R), Business Combinations. In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, our own analysis of recently acquired and existing comparable properties in our portfolio and other market data. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired.

Impairment of Long-Lived Assets

The Company periodically evaluates its long-lived assets, including its investments in real estate, for indicators of permanent impairment. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions and legal and environmental concerns, as well as the Company’s ability to hold and its intent with regard to each asset. Future events could occur which would cause the Company to conclude that impairment indicators exist and an impairment loss is warranted.

Depreciation of Investment in Real Estate

The Company depreciates the building component of its investment in real estate over a 30-year estimated useful life, building improvements over a 5-year to 10-year estimated useful life and both the furniture, fixtures and equipment and replacement components over a 5-year estimated useful life, all of which are judgmental determinations.

Cost Capitalization

See the Capitalization of Fixed Assets and Improvements to Real Estate section for a discussion of the Company’s policy with respect to capitalization vs. expensing of fixed asset/repair and maintenance costs. In addition, the Company capitalizes the payroll and associated costs of employees directly responsible for and who spend all of their time on the supervision of major capital and/or renovation projects. These costs are reflected on the balance sheet as an increase to depreciable property.

The Company follows the guidance in SFAS No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, for all development projects and uses its professional judgment in determining whether such costs meet the criteria for capitalization or must be expensed as incurred. The Company capitalizes interest, real estate taxes and insurance and payroll and associated costs for those individuals directly responsible for and who spend all of their time on development activities, with capitalization ceasing no later than 90 days following issuance of the certificate of occupancy. These costs are reflected on the balance sheet as construction-in-progress for each specific property. The Company expenses as incurred all payroll costs of on-site employees working directly at our properties, except as noted above on our development properties prior to certificate of occupancy issuance and on specific major renovations at selected properties when additional incremental employees are hired.

Fair Value of Financial Instruments, Including Derivative Instruments

The Company follows the guidance under SFAS No. 157 when valuing its financial instruments. The valuation of financial instruments under SFAS No. 107 and SFAS No. 133, as amended, requires the Company to make estimates

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

Funds From Operations

For the six months ended June 30, 2009, Funds From Operations (“FFO”) available to Common Shares and Units decreased by $18.4 million or 5.2% as compared to the six months ended June 30, 2008.

For the quarter ended June 30, 2009, FFO available to Common Shares and Units decreased by $16.3 million or 8.8% as compared to the quarter ended June 30, 2008.

The following is a reconciliation of net income to FFO available to Common Shares and Units for the six months and quarters ended June 30, 2009 and 2008:

Funds From Operations

(Amounts in thousands)

(Unaudited)


	Six Months Ended June 30,		Quarter Ended June 30,
	2009 (3)	2008 (3)	2009 (3)	2008 (3)
Net income	$ 191,353	$287,521	$105,932	$139,993
Adjustments:
Net (income) loss attributable to Noncontrolling Interests:
Preference Interests and Units	(7)	(7)	(3)	(3)
Partially Owned Properties	74	(1,659)	5	(1,391)
Depreciation	298,194	279,253	149,909	139,812
Depreciation – Non-real estate additions	(3,792)	(4,081)	(1,894)	(2,030)
Depreciation – Partially Owned and Unconsolidated Properties	431	2,040	248	1,006
Net (gain) loss on sales of unconsolidated entities	(2,759)	-	6	-
Discontinued operations:
Depreciation	3,641	14,921	1,438	6,782
Net gain on sales of discontinued operations	(145,798)	(214,797)	(83,927)	(92,280)
Net incremental gain (loss) on sales of condominium units	335	(3,090)	399	(3,456)


FFO (1) (2)	341,672	360,101	172,113	188,433
Preferred distributions	(7,240)	(7,259)	(3,620)	(3,626)


FFO available to Common Shares and Units (1) (2)	$ 334,432	$352,842	$168,493	$184,807

(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. FFO available to Common Shares and Units is calculated on a basis consistent with net income available to Common Shares and reflects adjustments to net income for preferred distributions and premiums on redemption of preferred shares in accordance with accounting principles generally accepted in the United States. The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for OP Units are collectively referred to as the “Noncontrolling Interests – Operating Partnership”. Subject to certain restrictions, the Noncontrolling Interests – Operating Partnership may exchange their OP Units for EQR Common Shares on a one-for-one basis.

(2)

The Company believes that FFO and FFO available to Common Shares and Units are helpful to investors as supplemental measures of the operating performance of a real estate company, because they are recognized measures 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 and FFO available to Common Shares and Units can help compare the operating performance of a company’s real estate between periods or as compared to different companies. FFO and FFO available to Common Shares and

Units do not represent net income, net income available to Common Shares or net cash flows from operating activities in accordance with GAAP. Therefore, FFO and FFO available to Common Shares and Units should not be exclusively considered as alternatives to net income, net income available to Common Shares or net cash flows from operating activities as determined by GAAP or as measures of liquidity. The Company’s calculation of FFO and FFO available to Common Shares and Units 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.

(3)

On January 1, 2009, the Company adopted FSP APB 14-1, which requires companies to retrospectively expense certain implied costs of the option value related to convertible debt. As a result, net income, FFO and FFO available to Common Shares and Units have all been reduced by approximately $5.0 million for both the six months ended June 30, 2009 and 2008, and by approximately $2.1 million and $2.5 million for the quarters ended June 30, 2009 and 2008, respectively.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s market risk has not changed materially from the amounts and information reported in Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk, to the Company’s Form 10-K for the year ended December 31, 2008. See the Current Environment section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations relating to market risk and the current economic environment. See also Note 11 in the Notes to Consolidated Financial Statements for additional discussion of derivative and other fair value instruments.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures:

Effective as of June 30, 2009, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Control over Financial Reporting:

There were no changes to the internal control over financial reporting of the Company identified in connection with the Company’s evaluation referred to above that occurred during the second quarter of 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.

OTHER INFORMATION

Item 1. Legal Proceedings

The Company does not believe that there have been any material developments in the legal proceedings that were discussed in Part I, Item 3 of the Company’s Form 10-K for the year ended December 31, 2008.

Item 1A. Risk Factors

There have been no material changes to the risk factors that were discussed in Part I, Item 1A of the Company’s Form 10-K for the year ended December 31, 2008.

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

(a) Unregistered Common Shares Issued in the Quarter Ended June 30, 2009

During the quarter ended June 30, 2009, the Company issued 77,471 Common Shares in exchange for 77,471 OP Units held by various limited partners of the Operating Partnership. OP Units are generally exchangeable into Common Shares of EQR on a one-for-one basis or, at the option of the Operating Partnership, the cash equivalent thereof, at any time one year after the date of issuance. However, no aspect of an exchange requires a cash settlement by the Operating Partnership under any circumstances. Some of these shares were issued in reliance on exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder, as these were transactions by an issuer not involving a public offering. In light of the manner of the sale and information obtained by the Company from the limited partners in connection with these transactions, the Company believes it may rely on this exemption.

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

The Company held its Annual Meeting of Shareholders on June 11, 2009. Shareholders holding 243,204,880 Common Shares (being the only class of shares entitled to vote at the meeting), or 88.8% of the Company’s issued and outstanding Common Shares as of the record date for the meeting, attended the meeting or were represented by proxy. The Company’s shareholders voted on three proposals presented at the meeting and all three received the requisite number of votes to pass. The results of the shareholders’ votes on the three proposals are as follows:

Proposal I – Election of the following trustees to annual terms expiring in 2010. A plurality of the votes cast was required for the election of trustees.


NOMINEE	FOR	WITHHELD
John W. Alexander	231,602,533	11,602,347
Charles L. Atwood	233,396,294	9,808,587
Boone A. Knox	231,905,654	11,299,227
John E. Neal	233,386,616	9,818,265
David J. Neithercut	232,187,192	11,017,689
Sheli Z. Rosenberg	229,309,830	13,895,051
Gerald A. Spector	230,869,801	12,335,080
B. Joseph White	231,742,420	11,462,460
Samuel Zell	221,327,580	21,877,301

Proposal II – Approval to ratify the selection of Ernst & Young LLP as the Company’s independent auditor for the year ending December 31, 2009. A majority of the votes cast was required for approval.


	FOR	AGAINST	ABSTAIN
Total Shares	241,079,676	2,078,868	46,334
% of Voted Shares	99.12%	0.85%	0.01%
% of Outstanding	88.03%	0.75%	0.01%

Proposal III – A non-binding shareholder proposal relating to a change in the voting standard for trustee elections. A majority of the votes cast was required for approval. Approval of this non-binding proposal does not require the Company to amend its Bylaws to adopt the recommended change in trustee election voting standards.


	FOR	AGAINST	ABSTAIN	BROKER NON-VOTES
Total Shares	126,181,057	101,733,290	209,770	15,080,763
% of Voted Shares	55.31%	44.59%	0.09%
% of Outstanding	46.07%	37.15%	0.07%

Item 6. Exhibits – See the Exhibit Index

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	EQUITY RESIDENTIAL

Date: August 6, 2009	By:	/s/ Mark J. Parrell
		Mark J. Parrell
		Executive Vice President and
		Chief Financial Officer

Date: August 6, 2009	By:	/s/ Ian S. Kaufman
		Ian S. Kaufman
		First Vice President and
		Chief Accounting Officer

EXHIBIT INDEX

The exhibits listed below are filed as part of this report. References to exhibits or other filings under the caption “Location” indicate that the exhibit or other filing has been filed, that the indexed exhibit and the exhibit referred to are the same and that the exhibit referred to is incorporated by reference. The Commission file number for our Exchange Act filings referenced below is 1-12252.


Exhibit	Description	Location
31.1	Certification of David J. Neithercut, Chief Executive Officer.	Attached herein.

31.2	Certification of Mark J. Parrell, Chief Financial Officer.	Attached herein.

32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of David J. Neithercut, Chief Executive Officer of the Company.	Attached herein.

32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Mark J. Parrell, Chief Financial Officer of the Company.	Attached herein.

101	XBRL (Extensible Business Reporting Language). The following materials from Equity Residential’s Quarterly Report on Form 10-Q for the period ended June 30, 2009, formatted in XBRL; (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) consolidated statements of cash flows, (iv) consolidated statement of changes in equity and (v) notes to consolidated financial statements.	Attached herein.