424B5
Table of Contents

Filed pursuant to Rule 424(b)(5)
Registration No. 333-169956

 

The information in this preliminary supplement is not complete and may be changed. This preliminary supplement and the accompanying base prospectus are not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

 

PROSPECTUS SUPPLEMENT (Subject to Completion)

Issued November 26, 2012

(To Prospectus dated October 15, 2010)

 

Equity Residential

 

19,000,000 COMMON SHARES

 

 

 

We are offering 19,000,000 of our common shares of beneficial interest, par value $0.01 per share. For a detailed description of our common shares, see the section entitled “Description of Equity Residential Securities—Common Shares” beginning on page 5 of the accompanying prospectus.

 

 

 

Our common shares are listed on the New York Stock Exchange under the symbol “EQR”. The last reported sale price of our common shares on the New York Stock Exchange on November 23, 2012 was $54.46 per share.

 

 

 

To assist us in maintaining our qualification as a real estate investment trust, or “REIT,” for federal income tax purposes, our articles of restatement of declaration of trust contain certain restrictions on ownership of our common shares. See “Description of Equity Residential Securities—Restriction on Ownership and Transfer” in the accompanying prospectus.

 

 

 

Investing in our common shares involves risks. See “Risk Factors” beginning on page S-9 of this prospectus supplement and the risks set forth in the documents we have filed with the Securities and Exchange Commission that are incorporated by reference in this prospectus supplement.

 

 

 

      

Price to

Public

    

Underwriting

Discounts and
Commissions

    

Proceeds to Us,
Before Expenses

Per Share

     $                     $                     $               

Total

     $                          $                          $                    

 

We have granted the underwriters the right to purchase an additional 2,850,000 common shares to cover over-allotments.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the common shares to purchasers on December     , 2012.

 

 

MORGAN STANLEY

 

November     , 2012


Table of Contents

TABLE OF CONTENTS

Prospectus Supplement

 

About this Prospectus Supplement

    S-ii   

Special Note Regarding Forward-Looking Statements

    S-1   

Prospectus Supplement Summary

    S-2   

Archstone Transaction

    S-5   

Risk Factors

    S-9   

Unaudited Pro Forma Condensed Consolidated Financial Statements

    S-17   

Use of Proceeds

    S-34   

Capitalization

    S-35   

Additional Federal Income Tax Considerations

    S-36   

Underwriters

    S-37   

Experts

    S-41   

Legal Matters

    S-41   

Where You Can Find More Information About Us

    S-41   

Prospectus

 

About this Prospectus

    2   

Where You Can Find More Information About Us

    3   

Special Note Regarding Forward-Looking Statements

    4   

Equity Residential and ERP Operating Limited Partnership

    4   

Anticipated Use of Proceeds

    4   

Ratios of Earnings to Combined Fixed Charges

    5   

Description of Equity Residential Securities

    5   

Description of ERP Operating Limited Partnership Securities

    19   

Federal Income Tax Considerations Related to Common Shares

    35   

Plan of Distribution

    44   

Experts

    45   

Legal Matters

    45   
 

 

 

You should rely only on the information contained or incorporated by reference in this prospectus supplement and the accompanying prospectus or in any free writing prospectus. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus supplement and the accompanying prospectus is accurate only as of their respective dates. Our business, financial condition, results of operations and prospects may have changed since then.

 

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ABOUT THIS PROSPECTUS SUPPLEMENT

 

This document is in two parts. The first part is this prospectus supplement, which describes the specific terms of this offering and also adds to and updates information contained in the accompanying prospectus and the documents incorporated by reference in this prospectus supplement and the accompanying prospectus. The second part is the accompanying prospectus, which gives a description of our common shares and more general information about other securities we may offer from time to time under our shelf registration statement, some of which does not apply to this offering.

 

If the description of this offering varies between this prospectus supplement and the accompanying prospectus, you should rely on the information contained in or incorporated by reference in this prospectus supplement.

 

It is important for you to read and consider all information contained in this prospectus supplement and the accompanying prospectus, including the documents incorporated by reference herein and therein, in making your investment decision. This prospectus supplement and the accompanying prospectus incorporate important business and financial information about us and our subsidiaries that is not included in or delivered with these documents. This information is available without charge to security holders upon written or oral request. See “Where You Can Find More Information About Us.”

 

Unless the context otherwise requires or as otherwise specified, references in this prospectus to “we,” “us,” “our” or “the Company” refer to Equity Residential and its subsidiaries, including ERP Operating Limited Partnership. The term “Archstone” refers to Archstone Enterprise LP and its consolidated subsidiaries. See “Prospectus Supplement Summary—Recent Developments.” The “underwiriters” refers to the financial institutions named in the “Underwriting” section of this prospectus supplement.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus supplement, the accompanying prospectus and the documents incorporated or deemed incorporated by reference as described under “Where You Can Find More Information About Us” contain certain information that we intend to be considered “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended. These forward-looking statements relate to such things as our anticipated future economic performance, our plans and objectives for future operations and projections of revenue and other financial items, which can be identified by the use of forward-looking words such as “may,” “will,” “should,” “expect,” “anticipate,” “estimate” or “continue” or the negative thereof or other variations thereon or comparable terms. Forward-looking statements also include, without limitation, statements regarding our ability to complete the Archstone Transaction (as described herein), our ability to finance the Archstone Transaction as expected (including our ability to complete successfully dispositions of certain of our assets and the impact of the timing of those dispositions on our financial results), our ability to and the impact of incurring additional debt in connection with the Archstone Transaction (including significant additional near-term maturities), and the impact on the market price of our common shares if we fail to consummate the Archstone Transaction. Factors that could cause actual results to vary from our forward-looking statements include, without limitation, the failure to receive, on a timely basis or otherwise, the required approvals by government or regulatory agencies in connection with the Archstone Transaction or other third party consents, the risk that a condition to closing under the agreement governing the Archstone Transaction may not be satisfied, the possibility that the anticipated benefits from the Archstone Transaction will take longer to realize than expected or will not be realized at all, risks related to the diversion of management time and attention to the operation of our business as a result of the Archstone Transaction, and risks related to our investments in joint ventures, including the joint ventures with AvalonBay Communities, Inc. relating to the Archstone Transaction.

 

Actual results could differ materially from those contemplated by these forward-looking statements as a result of many factors. The cautionary statements under the caption “Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2011, which is incorporated herein by reference, and other similar statements contained in this prospectus supplement, the accompanying prospectus and the documents incorporated or deemed incorporated by reference herein and therein, identify important factors with respect to forward-looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from those in such forward-looking statements. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely affect us. Should any known or unknown risks and uncertainties develop into actual events, those developments could have a material adverse effect on our business, financial condition and results of operations.

 

In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking information contained in this prospectus supplement and the documents incorporated by reference or deemed incorporated by reference herein will in fact transpire. Potential investors are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.

 

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PROSPECTUS SUPPLEMENT SUMMARY

 

This summary highlights selected information about us. It may not contain all the information that may be important to you in deciding whether to invest in our common shares. You should read this entire prospectus supplement and the accompanying prospectus, together with the information incorporated by reference, including the risk factors, financial data and related notes, before making an investment decision.

 

EQUITY RESIDENTIAL

 

We are a Maryland real estate investment trust (“REIT”) formed in March 1993 and an S&P 500 company focused on the acquisition, development and management of high quality apartment properties in top United States growth markets. We are the managing general partner of ERP Operating Limited Partnership and have elected to be taxed as a REIT. As of September 30, 2012, we had a national portfolio of 418 multifamily properties containing 118,986 apartment units located in 13 states and the District of Columbia.

 

Our principal executive offices are located at Two North Riverside Plaza, Suite 400, Chicago, Illinois 60606, and our telephone number is (312) 474-1300.

 

RECENT DEVELOPMENTS

 

On November 26, 2012, we and ERP Operating Limited Partnership (“ERP”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with AvalonBay Communities, Inc. (“AVB”), Archstone Enterprise LP (“Archstone”) and Lehman Brothers Holdings Inc. (“LBHI”). Pursuant to the terms of the Purchase Agreement, ERP, AVB and certain of their respective subsidiaries have agreed to acquire from Archstone and its affiliates (the “Archstone Transaction”), substantially all of the assets and interests in various entities affiliated with Archstone, constituting a portfolio of apartment properties and other assets (the “Archstone Assets”) in exchange for (i) $2.016 billion in cash to be paid by us and $669 million in cash to be paid by AVB, (ii) 34,468,085 of our common shares and 14,889,706 shares of AVB common stock and (iii) the assumption of substantially all of the liabilities related to the Archstone Assets. Following consummation of the Archstone Transaction, we will own assets representing approximately 60% of the Archstone Assets and AVB will own assets representing approximately 40% of the Archstone Assets, as described further herein. See “Archstone Transaction.”

 

Pursuant to the Archstone Transaction, we have agreed to acquire, directly or indirectly, 78 wholly-owned, stabilized properties consisting of 23,110 apartment units, five additional partially owned and unconsolidated stabilized properties consisting of 1,936 apartment units as well as ownership or ownership interests in four projects under construction for 1,225 apartment units, and fifteen land sites for the potential development of approximately 3,636 apartment units. In addition, EQR and AVB will acquire interests in certain assets and liabilities of Archstone through one or more unconsolidated joint ventures between EQR and AVB that are expected to be owned 60% by EQR and 40% by AVB. These assets include Archstone’s interests in unconsolidated joint ventures that own apartment properties in various U.S. markets and Archstone’s interest in a portfolio of apartment properties in Germany. EQR and AVB will co-manage these assets while working towards liquidating them.

 

The consummation of the Archstone Transaction is not subject to a financing condition. We plan to initially fund our portion of the cash purchase price through a combination of cash on-hand, available borrowings under our revolving credit facility, proceeds from the disposition of assets sold prior to closing, bank term debt and unsecured debt and equity offerings. Contemporaneously with entering into the Purchase Agreement, we also obtained a commitment from Morgan Stanley Senior Funding, Inc. to provide a $2.5 billion senior unsecured bridge loan

 

 

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facility, for purposes of financing our portion of the cash purchase price and to pay fees and expenses relating to the Archstone Transaction. This facility will only be entered into if we do not otherwise raise all of the capital necessary to finance our portion of the cash purchase price from sources other than the bridge loan facility. As part of the Archstone Transaction we will assume approximately $5.0 billion of outstanding Archstone debt, inclusive of an estimated mark-to-market adjustment of $311.0 million but excluding the anticipated payoff of approximately $421.2 million of Archstone secured debt at closing. In addition, we will assume, through certain partially owned unconsolidated assets in which we are acquiring an interest, approximately $385.6 million of outstanding secured debt, of which our share is approximately $161.7 million. Finally, the unconsolidated joint ventures between EQR and AVB will assume approximately $321.4 million of outstanding secured debt (representing the ventures’ share of $2.2 billion in secured debt), of which our share is approximately $192.3 million. Approximately $5.1 billion of this assumed debt is secured mortgage indebtedness held by (or credit enhanced by) the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Of the $421.2 million discussed above, $300 million is a required prepayment of debt held by Fannie Mae.

 

We intend to finance a portion of the Archstone Transaction cash purchase price, and refinance a portion of the debt incurred or assumed in the Archstone Transaction, through dispositions of our assets in markets we intend to exit, including Atlanta, Orlando, Phoenix and Jacksonville, as well as other non-core assets in other markets. We intend these dispositions to be between $3.0 billion and $4.0 billion by the end of 2013, all of which are intended to be structured as tax free exchanges. Of this amount, we expect to close approximately $1.0 billion of asset sales by the close of the Archstone Transaction and expect that Archstone will sell approximately $750 million of assets that were to be acquired by us prior to the close of the transaction, reducing our cash purchase price by a like amount. We then intend to sell approximately $2.0 billion to $3.0 billion of assets in the balance of 2013, depending on market and other conditions. As a result of these dispositions, as well as the additional indebtedness assumed or incurred in the Archstone Transaction, we expect that the Archstone Transaction will negatively impact our results of operations in 2013.

 

We cannot assure you that we will be able to complete our dispositions or otherwise obtain alternative sources of financing for the Archstone Transaction in the amounts targeted, in the time period expected, on attractive terms, or at all. See “Archstone Transaction—Financing” and “Risk Factors.”

 

The Archstone Transaction is expected to close in the first quarter of 2013, subject to the satisfaction or waiver of a number of customary conditions set forth in the Purchase Agreement.

 

 

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THE OFFERING

 

Common Shares Offered by Us

  

19,000,000 (or 21,850,000 if the underwriters’ overallotment option is exercised in full)

Common Shares Outstanding after this Offering

  

321,674,716 (or 324,524,716 if the underwriters’ overallotment option is exercised in full)

Use of Proceeds

  

We estimate that the net proceeds from this offering will be approximately $         ($         if the underwriters’ overallotment option is exercised in full), after deducting underwriting discounts and estimated offering expenses. We intend to use the net proceeds of this offering to finance a portion of the cash purchase price of the Archstone Transaction. See “Archstone Transaction—Financing.” If the Archstone Transaction is not consummated, we intend to use the net proceeds from this offering for working capital and general company purposes, including, without limitation, the acquisition or development of multifamily properties and the repayment of debt.

New York Stock Exchange Symbol

  

EQR

 

 

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ARCHSTONE TRANSACTION

 

The Archstone Transaction

 

On November 26, 2012, we and ERP Operating Limited Partnership (“ERP”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with AvalonBay Communities, Inc. (“AVB”), Archstone Enterprise LP (“Archstone”) and Lehman Brothers Holdings Inc. (“LBHI”). Pursuant to the terms of the Purchase Agreement, ERP, AVB and certain of their respective subsidiaries have agreed to acquire from Archstone and its affiliates (the “Archstone Transaction”), substantially all of the assets and interests in various entities affiliated with Archstone, constituting a portfolio of apartment properties and other assets (the “Archstone Assets”) in exchange for (i) $2.016 billion in cash to be paid by us and $669 million in cash to be paid by AVB, (ii) 34,468,085 of our common shares and 14,889,706 shares of AVB common stock and (iii) the assumption of substantially all of the liabilities related to the Archstone Assets. Following consummation of the Archstone Transaction, we will own assets representing approximately 60% of the Archstone Assets and AVB will own assets representing approximately 40% of the Archstone Assets, as described further herein.

 

Assets to be Acquired

 

Pursuant to the Archstone Transaction, we have agreed to acquire, directly or indirectly, 78 wholly-owned, stabilized properties consisting of 23,110 apartment units with an average monthly rent of $2,492 per unit, five additional partially-owned and unconsolidated stabilized properties consisting of 1,936 apartment units, as well as ownership or ownership interests in four projects under construction for 1,225 apartment units, and fifteen land sites for the potential development of approximately 3,636 apartment units. The 78 wholly-owned, stabilized properties are located in the following markets:

 

Market

   Properties      Apartment
Units
 

New York Metro

     10         2,638   

Washington D.C.

     24         7,578   

Southern California

     12         3,374   

South Florida

     1         196   

Boston

     8         1,984   

San Francisco Bay Area

     14         4,827   

Seattle

     7         1,841   

All Other Markets

     2         672   
  

 

 

    

 

 

 

Total

     78         23,110   

 

The following table provides the percentage of net operating income (“NOI”) generated during the nine months ended September 30, 2012, by market for all operating properties and pro forma combined with the Archstone Portfolio:

 

Market

   Equity Residential
% of 2012 YTD
9/30/12 NOI
    Archstone
% of 2012 YTD
9/30/12 NOI
    Pro Forma
% of 2012 YTD
9/30/12 NOI
 

New York Metro

     13.8     18.1     14.8

Washington D.C.

     16.1     33.5     20.1

Southern California

     20.3     11.0     18.1

South Florida

     9.4     0.4     7.3

Boston

     8.0     13.3     9.2

San Francisco Bay Area

     7.8     18.5     10.3

Seattle

     7.3     4.3     6.6

All Other Markets

     17.3     0.9     13.6
  

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0

 

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The following table provides the name and location of the 78 wholly-owned, stabilized properties we have agreed to acquire:

 

Washington D.C.

 

San Francisco Bay Area

 

Southern California

 

New York Metro

Archstone 2501 Porter

The Flats at DuPont Circle

Calvert Woodley

Cleveland House

Archstone Connecticut Heights

Archstone DuPont Circle

Park Connecticut

Alban Towers

Archstone Van Ness

Westchester at the Pavilions

Westchester Rockville Station

Archstone 2201 Wilson

Archstone Columbia Crossing

Archstone Courthouse Plaza

Crystal Place

Archstone Crystal Towers

Archstone Lofts 590

Archstone Fairchase

Archstone Monument Park

Oakwood Crystal City/Gateway Place

Archstone Pentagon City

Archstone Rosslyn

Archstone Virginia Square

Water Park Towers

 

Archstone Cupertino

Archstone Emerald Park

Archstone Emeryville

Archstone Santa Clara

Archstone Fox Plaza

Archstone Fremont Center

Archstone Hacienda

Archstone Mountain View

Archstone Redwood Shores

Harborside

Archstone San Mateo

Archstone Sausalito

Archstone South Market

Archstone South San Francisco

 

 

Seattle

 

Archstone Belltown

Cedar River*

Archstone Elliot Bay

Archstone Northcreek

Oakwood Bellevue

Archstone Redmond Park

Archstone Redmond Court

 

Archstone Agoura Hills

Archstone City Place

Archstone Glendale

Archstone Playa Del Rey

Archstone Santa Monica

Archstone Ventura

Archstone Westside

Breakwater at Marina Del Rey/Villa Venetia

Archstone Marina Del Rey

Oakwood Marina Del Rey

Archstone Del Mar Heights

Archstone Encinitas

 

 

 

 

Boston

 

Archstone Avenir

Archstone CambridgePark

Archstone Cronin’s Landing

Archstone Kendall Square

Oakwood Boston

Archstone Quarry Hills

Archstone Watertown Square

Archstone Boston Common

 

Archstone 101 West End

Archstone Brooklyn Heights

Archstone Camargue

Archstone Chelsea

Archstone East 39th

Archstone Hoboken

West 96th/Key West

Archstone Murray Hill

The Westmont

Archstone West 54th

 

 

 

 

 

 

 

Southern Florida

 

Archstone Delray Beach

 

 

All Other Markets

 

Westchester at Clairmont

Archstone Desert Harbor

     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     

 

*   The above property information is as of September 30, 2012. Cedar River was sold subsequent to September 30, 2012, with EQR receiving the economic benefit of such sale.

 

In addition, EQR and AVB will acquire certain assets of Archstone, including Archstone’s interests in certain joint ventures, interests in Archstone’s German portfolio and certain development land parcels, through one or more unconsolidated joint ventures between EQR and AVB that are expected to be owned 60% by EQR and 40% by AVB. These joint ventures between EQR and AVB will consist of assets that do not fit EQR’s or AVB’s core strategy or asset class. As a result, EQR and AVB plan to divest these joint venture assets as promptly as reasonably possible, subject to market and other economic conditions.

 

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EQR and AVB will also own, through an unconsolidated joint venture expected to be owned 60% by EQR and 40% by AVB, certain entities that are subject to existing tax protection arrangements and approximately $330.0 million in preferred interests of Archstone unitholders ($260.6 million of which are subject to tax protection arrangements), which will restrict our ability to dispose of certain assets acquired from Archstone and require the joint venture to comply with the requirements of the preferred interests, including their right of redemption.

 

Additional Agreements; Closing

 

At the closing of the Archstone Transaction, LBHI and EQR have agreed to enter into a Registration Rights Agreement, which grants LBHI certain customary registration rights to cover resales of the EQR common shares to be acquired by LBHI, and EQR, Archstone, LBHI and certain affiliates receiving EQR common shares have agreed to enter into a Shareholders Agreement pursuant to which LBHI will agree to vote their common shares in most cases in accordance with the recommendations of our board of trustees.

 

The Archstone Transaction is expected to close in the first quarter of 2013, subject to the satisfaction or waiver of a number of customary conditions set forth in the Purchase Agreement. The consummation of the Archstone Transaction is not conditioned on receipt of any third-party consents, including Archstone unitholders.

 

Financing

 

The consummation of the Archstone Transaction is not subject to a financing condition. We plan to fund our portion of the cash purchase price through a combination of cash on-hand, available borrowings under our $1.75 billion revolving credit facility (which we have the right to increase to $2.25 billion under certain conditions, and which we may attempt to further increase), proceeds from the disposition of non-core apartment assets, bank term debt and unsecured debt and equity offerings. Contemporaneously with entering into the Purchase Agreement, we also obtained a commitment from Morgan Stanley Senior Funding, Inc. to provide a $2.5 billion senior unsecured bridge loan facility (the “Facility”), for purposes of financing our portion of cash purchase price and to pay fees and expenses relating to the Archstone Transaction. The Facility will only be entered into if we do not otherwise raise all of the capital necessary to finance our portion of the cash purchase price from sources other than the Facility.

 

As part of the Archstone Transaction we will assume approximately $5.0 billion of outstanding Archstone debt, inclusive of an estimated mark-to-market adjustment of $311.0 million but excluding the anticipated payoff of approximately $421.2 million of Archstone secured debt at closing. In addition, we will assume, through certain partially owned unconsolidated assets in which we are acquiring an interest, approximately $385.6 million of outstanding secured debt, of which our share is approximately $161.7 million. Finally, the unconsolidated joint ventures between EQR and AVB will assume approximately $321.4 million of outstanding secured debt (representing the ventures’ share of $2.2 billion in secured debt), of which our share is approximately $192.3 million. Approximately $5.1 billion of such assumed debt is secured mortgage indebtedness held by (or credit enhanced by) Fannie Mae or Freddie Mac. Approximately $2.5 billion of such secured debt to be assumed matures prior to the end of 2014. Fannie Mae and Freddie Mac have agreed to the assumption of this debt by EQR. Of the $421.2 million discussed above, $300 million is a required prepayment of debt held by Fannie Mae.

 

We intend to finance a portion of the Archstone Transaction cash purchase price, and refinance a portion of the debt incurred or assumed in the Archstone Transaction, through dispositions of our assets in markets we intend to exit, including Atlanta, Orlando, Phoenix and Jacksonville, as well as other non-core assets in other markets. We intend these dispositions to be between $3.0 billion and $4.0 billion by the end of 2013, all of which are intended to be structured as tax free exchanges. Of this amount, we expect to close approximately $1.0 billion of asset sales by the close of the Archstone Transaction and expect that Archstone will sell approximately $750 million of assets that were to be acquired by us prior to the close of the transaction, reducing our cash purchase price by a like amount. We then intend to sell approximately $2.0 billion to $3.0 billion of assets in the balance

 

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of 2013, depending on market and other conditions. As a result of these dispositions, as well as the additional indebtedness assumed or incurred in the Archstone Transaction, we expect that the Archstone Transaction will negatively impact our results of operations in 2013.

 

We cannot assure you that we will be able to complete our dispositions in the amounts targeted, in the time period expected, or otherwise obtain alternative sources of financing for the Archstone Transaction on attractive terms, or at all. See “Risk Factors.”

 

Additional Information

 

There can be no assurance that the Archstone Transaction will be consummated or if consummated, of the timing thereof. The foregoing description of the Archstone Transaction and the Purchase Agreement is not complete and is subject to and qualified in its entirety by reference to Item 1.01 of our Current Report on Form 8-K filed on November 26, 2012, the terms of which are incorporated herein and in the accompanying prospectus by reference. This offering is not conditioned upon completion of the Archstone Transaction.

 

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RISK FACTORS

 

An investment in our common shares involves various material risks. You should carefully consider the risk factors set forth below and the risks starting on page 11 of our most recent annual report on Form 10-K incorporated by reference in this prospectus supplement and the accompanying prospectus, as updated by our subsequent filings under the Securities Exchange Act of 1934, as amended.

 

We plan to fund a portion of the cash purchase price of the Archstone Transaction as well as repay indebtedness incurred or assumed in connection with the Archstone Transaction with capital raised through significant dispositions of assets. If we are unable to consummate such dispositions in a timely manner, on attractive terms, or at all, we will likely have to incur greater indebtedness and/or issue additional equity securities.

 

We currently expect to finance a portion of the cash purchase price of the Archstone Transaction and to ultimately refinance indebtedness assumed or incurred in connection with the Archstone Transaction with proceeds generated from the disposition of certain Archstone assets and of our assets that we believe are not consistent with our ongoing business strategy or that may be in markets in which we intend to reduce our current presence. The amount of such proposed dispositions is significant, with targeted sales between $3.0 billion and $4.0 billion by the end of 2013. We can provide no assurance that we will in fact be able to consummate such dispositions at all, at a time necessary to apply the proceeds to the Archstone Transaction or the refinancing of debt, or at prices that we would otherwise expect to achieve. Factors that could limit our ability to successfully dispose of assets include:

 

   

the possible lack of financing available to potential buyers, in particular if prevailing interest rates rise or if Fannie Mae or Freddie Mac increase their interest rates on their lending, make their underwriting criteria more restrictive, or if the lending of Fannie Mae and/or Freddie Mac are curtailed or ultimately terminated;

 

   

our ability to successfully execute a disposition plan that is significant in size and more significant than any disposition plan that we have previously executed;

 

   

other sellers marketing competing properties; and

 

   

the fact that potential purchasers will perceive that we are more likely to sell on less favorable terms to us due to the Archstone Transaction and related refinancing requirements.

 

Any failure to timely achieve any anticipated dispositions would likely require us to incur greater indebtedness to fund the Archstone Transaction or seek other methods to refinance the debt incurred or assumed in connection with the Archstone Transaction, which involves the risk described herein, or issue more equity securities, which is subject to execution risk. The failure to successfully execute our disposition plan could have a material adverse effect on our financial condition, liquidity, results of operations and distributions to our shareholders.

 

In addition, we plan to defer the taxable gain on certain of our dispositions as exchanges made in connection with the Archstone Transaction pursuant to Section 1031 of the Internal Revenue Code. The requirements for qualification under Section 1031 are technical and complex. To the extent we are unable to defer such gains to the extent anticipated, the benefits of such dispositions will be reduced, and we could recognize significant taxable gains as a result of such dispositions, which would require us to make distributions in excess of our expectations, which would have a material adverse effect on our financial condition.

 

There can be no assurance that the Archstone Transaction will be consummated in accordance with the anticipated timing or at all, and the closing of this offering is not conditioned on the consummation of the Archstone Transaction.

 

Although we expect to close the Archstone Transaction in the first quarter of 2013, there can be no assurance that the Archstone Transaction will be completed in accordance with the anticipated timing or at all.

 

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The Purchase Agreement contains closing conditions, which may not be satisfied or waived, in which case ERP and AVB and/or LBHI will not be obligated to complete the Archstone Transaction. In addition, under circumstances specified in the Purchase Agreement, ERP and AVB or LBHI may terminate the Purchase Agreement.

 

Additionally, the closing of this offering is not conditioned on the consummation of the Archstone Transaction. Therefore, upon the closing of this offering, you will become a holder of our common shares irrespective of whether the Archstone Transaction is consummated or delayed. If this offering is consummated, your expected earnings per common share and our distributions per common share may be reduced. Also, the price of our common shares may decline to the extent that the current market price of our common shares reflects a market assumption that the Archstone Transaction will be consummated and that we will realize certain anticipated benefits of the Archstone Transaction.

 

We expect to incur significant additional indebtedness, including significant floating rate debt and significant amounts of indebtedness with maturity dates in 2013 and 2014, in order to consummate the Archstone Transaction, which may have a material adverse effect on our financial condition, results of operations, and distributions to our shareholders.

 

This offering of common shares forms part of a larger financing plan for the Archstone Transaction described elsewhere in this prospectus supplement. In addition to this offering of common shares, we may raise additional funds to finance our portion of the Archstone Transaction cash purchase price through one or more methods, including, without limitation, from borrowings under our revolving credit facility, proceeds from asset dispositions, bank term debt or unsecured debt or equity offerings. Depending on market conditions, we may increase or decrease the anticipated sources of debt financing that are reflected in the footnotes to the “Unaudited Pro Forma Condensed Consolidated Financial Statements” and “Capitalization.”

 

In the event we are unable to fund our portion of the cash purchase price from the sources described above, we have obtained a commitment for a bridge loan facility pursuant to which the bridge lenders have committed to provide, subject to certain conditions, the additional financing required for the Archstone Transaction through a $2.5 billion bridge loan. We may use this bridge loan facility to finance all or part of the Archstone Transaction. Any such bridge facility financing will be at a higher cost than other sources of financing. Our obligations under the Purchase Agreement are not conditioned upon the consummation of any or all of the financing transactions. See “Archstone Transaction—Financing” and “Use of Proceeds.”

 

In connection with the Archstone Transaction, we will also assume significant indebtedness, including a significant amount of secured mortgage indebtedness. At September 30, 2012, we had indebtedness of $9.3 billion, including $7.0 million of outstanding borrowings under our revolving credit facility, a total of $5.4 billion of outstanding unsecured senior debt securities and $3.9 billion of outstanding mortgage debt. Taking into account our existing indebtedness, the assumption of indebtedness in the Archstone Transaction, and possible financing plans to fund our portion of the Archstone Transaction cash purchase price, our pro forma consolidated indebtedness as of September 30, 2012, after giving effect to the Archstone Transaction, would be approximately $16.2 billion, $6.2 billion of which will mature between September 30, 2012 and December 31, 2014. We may not be able to repay or otherwise refinance such indebtedness when it becomes due and payable, which would have a material adverse effect on our results of operations, liquidity and financial condition. If we default under a mortgage loan, we may lose the properties securing these loans.

 

Further, because a significant amount of the assets we expect to acquire from Archstone are secured by mortgage indebtedness, and because we intend to dispose of significant amounts of our properties that are currently unencumbered, our unencumbered asset pool will be reduced significantly. This may increase our costs of raising additional unsecured indebtedness and could significantly limit our financial flexibility.

 

In addition, a significant amount of the indebtedness we expect to incur and assume in connection with the Archstone Transaction will have floating interest rates rather than fixed interest rates. To the extent that interest

 

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rates increase and we are unable to successfully hedge against rising interest rates, our interest expense could increase substantially. For example, based upon our current expectations relating to the Archstone Transaction, a 100 basis point increase in short term interest rates would result in an annualized increase in our interest expense of approximately $30 million.

 

Our indebtedness could have additional significant adverse consequences on our business, such as:

 

   

having our long-term debt downgraded or put on a watch list by one or more rating agencies;

 

   

requiring us to use a substantial portion of our cash flow from operations to service our indebtedness, which would reduce the available cash flow to fund working capital, capital expenditures, development projects and other general corporate purposes and reduce cash for distributions;

 

   

limiting our ability to obtain additional financing to fund our working capital needs, acquisitions, capital expenditures or other debt service requirements or for other purposes;

 

   

increasing the costs of incurring additional debt and, to the extent we are required to use the bridge loan facility to fund the Archstone Transaction, increase our debt costs relative to other potential sources of debt financing;

 

   

increasing our exposure to floating interest rates;

 

   

limiting our ability to compete with other companies who are not as highly leveraged, as we may be less capable of responding to adverse economic and industry conditions;

 

   

restricting us from making strategic acquisitions, developing properties or exploiting business opportunities;

 

   

restricting the way in which we conduct our business because of financial and operating covenants in the agreements governing our and our subsidiaries’ existing and future indebtedness, including, in the case of certain indebtedness of subsidiaries, certain covenants that restrict the ability of subsidiaries to pay dividends or make other distributions to us;

 

   

exposing us to potential events of default (if not cured or waived) under financial and operating covenants contained in our or our subsidiaries’ debt instruments that could have a material adverse effect on our business, financial condition and operating results;

 

   

increasing our vulnerability to a downturn in general economic conditions; and

 

   

limiting our ability to react to changing market conditions in our industry and in our tenants’ and borrowers’ industries.

 

The impact of any of the potential adverse consequences could have a material adverse effect on our results of operations, financial condition, liquidity, and distributions to our shareholders.

 

We have not identified any specific use of the net proceeds of this offering in the event that the Archstone Transaction is not consummated or the Purchase Agreement is terminated.

 

This offering of common shares is not conditioned upon the completion of the Archstone Transaction. Consummation of the Archstone Transaction is subject to a number of conditions, and, if the Archstone Transaction is not consummated or the Purchase Agreement is terminated for any reason, our board of trustees and management will have broad discretion in the application of the net proceeds from this offering. We have not identified a specific use for any such net proceeds if the Archstone Transaction is not consummated or the Purchase Agreement is terminated. If the Archstone Transaction is not consummated or the Purchase Agreement is terminated for any reason, we intend to use the net proceeds of this offering for general corporate purposes. The failure of our management to use such net proceeds effectively could have a material adverse effect on our business and results of operations, including our earnings per share.

 

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The Archstone Acquisition is expected to be dilutive initially to our earnings and earnings per share.

 

As a result of the issuance of our common shares to LBHI as part of the consideration paid in the Archstone Transaction and the sale of our common shares in this offering to finance the Archstone Transaction, as well as a result of the expected dispositions necessary to enable us to finance the Archstone Transaction, the Archstone Transaction is expected to be dilutive to our operating results, both on an absolute basis and on a per share basis. However, the amount of any dilution will depend on a number of factors, including the pace of our planned asset sales, as discussed above and the ultimate mix of sources used to finance the Archstone Transaction. For example, if our disposition plan occurs at a faster pace than anticipated, such dispositions will result in more dilution to our revenues, net income, NOI, funds from operations and normalized funds from operations.

 

We will incur substantial expenses and payments even if the Archstone Transaction is not completed.

 

We have incurred substantial legal, accounting, financial advisory and other costs and our management has devoted considerable time and effort in connection with the Archstone Transaction. If the Archstone Transaction is not completed, we will bear certain fees and expenses associated with the Archstone Transaction without realizing the benefits of the Archstone Transaction. The fees and expenses may be significant and could have an adverse impact on our results of operations.

 

The Purchase Agreement provides for a break-up fee payable by ERP and AVB of $650 million (or $800 million if ERP and AVB extend the closing date of the Archstone Transaction beyond January 24, 2013) if the Purchase Agreement is terminated under certain circumstances, including as a result of a breach by ERP and AVB of any covenant or agreement under the Purchase Agreement. Any payment of the break-up fees would have a material adverse impact on our results of operations and our liquidity.

 

Our obligations under the Purchase Agreement entered into in the Archstone Transaction are joint and several with AVB. The failure of AVB to perform its obligations could cause the Purchase Agreement to be terminated and could have a material adverse effect on our results of operations and financial condition.

 

Although we have agreed to purchase approximately 60% of the Archstone Assets in the Archstone Transaction and AVB has agreed to acquire approximately 40% of the Archstone Assets, our obligations under the Purchase Agreement are joint and several with AVB. If AVB determines not to consummate the Archstone Transaction, we do not have the right to consummate the transaction alone. In addition, although we expect to be liable only for our pro rata share of any break-up fee or other obligations arising under the Purchase Agreement (approximately 60%) pursuant to arrangements with AVB, in the event AVB fails to pay its pro rata share of any such obligations, we will be responsible for paying 100% of such obligations. As a result, the failure of AVB to perform its obligations under the Purchase Agreement would have a material adverse effect on our results of operations, financial condition, liquidity, and distributions to our shareholders.

 

Several of the assets we expect to acquire in the Archstone Transaction are subject to tax protection agreements, which could limit our flexibility with respect to our ownership of such assets.

 

Several of the assets we expect to acquire in the Archstone Transaction were contributed to Archstone subject to various agreements limiting the ability of the owner of the property to take actions that would trigger income tax liability for the contributing owner of the property, including a taxable disposition of the property. In addition, we will also be required to maintain a certain amount of qualified nonrecourse financing on the tax protected properties during their respective restricted periods. Our obligations relating to the tax protected properties may affect the way in which we conduct our business, including whether, when and under what circumstances we sell properties or interests therein and the timing and nature of our financings and refinancing transactions. As a result, we may not be able to dispose of or refinance the tax protected properties when to do so may have otherwise been favorable to us and our shareholders, which could have a material adverse effect on our results of operations and financial condition.

 

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Our business and the market price of our common shares may be adversely affected if the Archstone Transaction is not completed.

 

The Archstone Transaction is subject to customary and other closing conditions. If the Archstone Transaction is not completed, we could be subject to a number of risks that may adversely affect our business and the market price of our common shares, including:

 

   

our management’s attention may be diverted from our day-to-day business and our employees and our relationships with customers may be disrupted as a result of efforts relating to attempting to consummate the Archstone Transaction;

 

   

the market price of our common shares may decline to the extent that the current market price reflects a market assumption that the Archstone Transaction will be completed;

 

   

we must pay certain costs related to the Archstone Transaction, such as legal and accounting fees and expenses, regardless of whether the Archstone Transaction is consummated; and

 

   

we would not realize the benefits we expect to realize from consummating the Archstone Transaction.

 

The intended benefits of the Archstone Transaction may not be realized, which could have a negative impact on our results of operations, financial conditions, the market price of our common shares, and our distributions to our shareholders.

 

We may be subject to additional risks and may not be able to achieve the anticipated benefits of the Archstone Transaction if the transaction is consummated. Upon completion of the Archstone Transaction, we will need to integrate the properties and other assets we acquire from Archstone (the “Archstone Portfolio”) with our existing operations. The Archstone Transaction represents the largest acquisition of a property portfolio ever attempted by us other than the acquisition by merger of entire operating companies and their supportive infrastructure. We may not be able to accomplish the integration of the Archstone Portfolio smoothly, successfully or within the anticipated costs. The diversion of our management’s attention from our current operations to integration efforts and any difficulties encountered could prevent us from realizing the full benefits anticipated to result from the Archstone Transaction and could adversely affect our business and the price of our common shares. Additional risks include, among others:

 

   

inability to successfully integrate the operations or information technology of acquired companies, maintain consistent standards, controls, policies and procedures, or realize the anticipated benefits of the acquisitions within the anticipated timeframe or at all;

 

   

inability to effectively monitor and manage our expanded portfolio of properties, retain key employees or attract highly qualified new employees;

 

   

increased costs or increases in taxable income due to restructuring or other steps required in connection with the integration of the Archstone Portfolio as a result of our compliance with the tax requirements applicable to real estate investment trusts under the Internal Revenue Code;

 

   

projections of estimated future revenues, cost savings or operating metrics that we develop during the due diligence and integration planning process might be inaccurate;

 

   

the value of acquired assets or the market price of our common shares may decline;

 

   

the impact of the Archstone Portfolio on our internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002;

 

   

unanticipated issues, expenses and liabilities;

 

   

diversion of our management’s attention away from other business concerns;

 

   

exposure to any undisclosed or unknown potential liabilities relating to the Archstone Portfolio; and

 

   

potential underinsured losses on the Archstone Portfolio.

 

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We cannot assure you that we would be able to integrate the Archstone Portfolio without encountering difficulties or that any such difficulties will not have a material adverse effect on us. Failure to realize the intended benefits of the Archstone Transaction could have a material adverse effect on our results of operations, financial condition, the market price of our common shares and our distributions to our shareholders.

 

We will increase our concentration of properties in certain core markets as a result of the Archstone Transaction, which could have an adverse effect on our operations if a particular market is adversely affected by economic or other conditions.

 

As a result of the Archstone Transaction, we will increase our concentration of properties in certain core markets as a result of our strategy to reposition our portfolio from low barrier to entry/non-core markets to high barrier to entry/core markets. If any one or more of such core markets, such as Washington D.C., Southern California, New York or San Francisco, which will generate approximately 20%, 18%, 15% and 10%, respectively, of our NOI as of September 30, 2012, on a pro forma basis, is adversely affected by local or regional economic conditions (such as business layoffs, industry slowdowns, changing demographics and other factors) or local real estate conditions (such as oversupply of or reduced demand for multi-family properties), such conditions may have an increased adverse impact on our results of operations than if our portfolio was more geographically diverse.

 

Our real estate development activities are subject to risks particular to development, such as unanticipated expenses, delays and other contingencies, any of which could adversely affect our financial condition, results of operations, cash flow and the per share trading price of our common shares.

 

We engage in development and redevelopment activities with respect to certain of our properties and will engage in such development and redevelopment activities with respect to certain of the assets we expect to acquire in the Archstone Transaction. To the extent that we continue to engage in development and redevelopment activities, we will be subject to certain risks, including, without limitation:

 

   

the potential that we may fail to recover expenses already incurred if we abandon development or redevelopment opportunities after we begin to explore them;

 

   

the potential that we may expend funds on and devote management time to projects which we do not complete;

 

   

construction or redevelopment costs of a project may exceed original estimates, possibly making the project less profitable than originally estimated, or unprofitable;

 

   

time required to complete the construction or redevelopment of a project or to lease up the completed project may be greater than originally anticipated, thereby adversely affecting our cash flow and liquidity;

 

   

the cost and timely completion of construction (including risks beyond our control, such as weather or labor conditions, or material shortages);

 

   

contractor and subcontractor disputes, strikes, labor disputes or supply disruptions;

 

   

failure to achieve expected occupancy and/or rent levels within the projected time frame, if at all;

 

   

delays with respect to obtaining or the inability to obtain necessary zoning, occupancy, land use and other governmental permits, and changes in zoning and land use laws;

 

   

occupancy rates and rents of a completed project may not be sufficient to make the project profitable;

 

   

our ability to dispose of properties developed or redeveloped with the intent to sell could be impacted by the ability of prospective buyers to obtain financing given the current state of the credit markets; and

 

   

the availability and pricing of financing to fund our development activities on favorable terms or at all.

 

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These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent the initiation of development and redevelopment activities or the completion of development and redevelopment activities once undertaken, any of which could have an adverse effect on our financial condition, results of operations, cash flow, per share trading price of our common shares, distributions to our shareholders, and ability to satisfy our principal and interest obligations.

 

The unaudited pro forma financial information in this prospectus supplement may not be indicative of our actual financial position or results of operations, and the purchase price of the Archstone Portfolio may not reflect the prices that we would obtain if such assets were sold to a third party.

 

The unaudited pro forma financial information contained in this prospectus supplement is presented for illustrative purposes only and is not necessarily indicative of what our actual financial position or results of operations would have been had the Archstone Transaction been completed as of the date indicated. The unaudited pro forma financial information reflects adjustments, which are based upon assumptions and preliminary estimates that we believe to be reasonable, including an estimate relating to the financing of the Archstone Transaction, but we can provide no assurance that any or all of such assumptions or estimates are correct. See “Unaudited Pro Forma Condensed Consolidated Financial Statements” for more information.

 

We did not obtain third-party appraisals for the Archstone Portfolio and based the purchase price for such assets on internal valuations. Accordingly, the values of such assets as set forth in our pro forma financial statements may not reflect the prices that we would obtain if such assets were sold to a third party.

 

Our investments in joint ventures could be adversely affected by our lack of sole decision-making authority regarding major decisions, our reliance on our joint venture partners’ financial condition, any disputes that may arise between us and our joint venture partners, and our exposure to potential losses from the actions of our joint venture partners.

 

A portion of the assets we are acquiring in the Archstone Transaction are being acquired through joint ventures with AVB that neither we nor AVB will control solely. Joint ventures, including our proposed joint ventures with AVB, involve risks not present with respect to our wholly owned properties, including the following:

 

   

We may be unable to take actions that are opposed by our joint venture partners under arrangements that require us to share decision-making authority over major decisions affecting the ownership or operation of the joint venture and any property owned by the joint venture, such as the sale or financing of the property or the making of additional capital contributions for the benefit of the property;

 

   

Our joint venture partners may take actions that we oppose;

 

   

Our ability to sell or transfer our interest in a joint venture to a third party may be restricted without prior consent of our joint venture partners;

 

   

Our joint venture partners might become bankrupt or fail to fund their share of required capital contributions, which may delay construction or development of a property or increase our financial commitment to the joint venture;

 

   

Our joint venture partners may have business interests or goals with respect to a property that conflict with our business interests and goals, which could increase the likelihood of disputes regarding the ownership, management or disposition of the property;

 

   

We may disagree with our joint venture partners about decisions affecting a property or the joint venture, which could result in litigation or arbitration that increases our expenses, distracts our officers and directors and disrupts the day-to-day operations of the property, including by delaying important decisions until the dispute is resolved; and

 

   

We may suffer losses as a result of actions taken by our joint venture partners with respect to our joint venture investments.

 

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Any of these risks could materially and adversely affect our ability to generate and recognize attractive returns on our joint venture investments, which could have a material adverse effect on our results of operations, financial condition, and distributions to our shareholders.

 

Shares eligible for future resale by LBHI may depress our share price.

 

We have agreed to issue 34,468,085 of our common shares to LBHI in connection with the Archstone Transaction. We have agreed to enter into a Registration Rights Agreement at the closing of the Archstone Transaction to cover resales of such shares. The resale of substantial amounts of our common shares by LBHI in the public markets, or even the anticipation of the resale of such shares, could have a material adverse effect on the market price of our common shares. Such an adverse effect on the market price of our common shares would make it more difficult for us to sell our shares in the future at prices which we deem appropriate or to use our shares as currency for future acquisitions.

 

The inability of LBHI to fulfill its indemnification obligations to us under the Purchase Agreement could increase our liabilities and adversely affect our results of operations and financial condition.

 

In addition to certain indemnification obligations of each party to the Purchase Agreement relating to breaches of fundamental representations and warranties and breaches of covenants and certain other specified matters, we have negotiated as a term in the Purchase Agreement that LBHI retain responsibility for and indemnify us against damages resulting from certain third-party claims or other liabilities. These third-party claims and other liabilities include, without limitation, costs associated with various litigation matters. LBHI filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code in September 2008 and is currently in the process of post-petition liquidation. If LBHI completes its liquidation prior to the termination of their indemnity obligations to us under the Purchase Agreement, or otherwise distributes substantially all of its assets to its creditors prior to such time, LBHI may not be able to satisfy its obligations with respect to claims and retained liabilities covered by the Purchase Agreement. The failure of LBHI to satisfy such obligations could have a material adverse effect on our results of operations and financial condition because claimants may successfully assert that we are liable for those claims and/or retained liabilities. In addition, we expect that certain obligations of LBHI to indemnify us will terminate upon expiration of the applicable indemnification period (generally no more than three years following the closing). The assertion of third-party claims after the expiration of the applicable indemnification period, or the failure of LBHI to satisfy its indemnification obligations, could have a material adverse effect on our results of operations and financial condition.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

On November 26, 2012, Equity Residential and ERP Operating Limited Partnership (collectively, the “Company”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Avalon Bay Communities, Inc. (“AVB”), Archstone Enterprise LP (“Archstone”) and Lehman Brothers Holdings Inc. (“LBHI”) pursuant to which the Company, AVB and certain of their respective subsidiaries have agreed to acquire from Archstone and its affiliates, all of the assets and interests in various entities affiliated with Archstone. In connection with the acquisition, the Company will acquire a portfolio of apartment properties in exchange for (i) cash in the aggregate amount of $2.0 billion, (ii) 34.5 million common shares of beneficial interest of Equity Residential, and (iii) the assumption of liabilities related to the Archstone Portfolio (see definition below). Following consummation of these transactions, the Company will own assets representing approximately 60% of the Archstone Portfolio and AVB will own assets representing approximately 40% of the Archstone Portfolio.

 

The Company will pay approximately $9.6 billion, inclusive of assumed debt of approximately $5.0 billion, and receive approximately seventy-five wholly owned and five partially owned properties containing approximately 25,000 apartment units located primarily in high barrier to entry markets where the Company already operates. The portfolio contains 22.2 million net rentable square feet of residential space and approximately 475,000 square feet of commercial space. In addition, the Company and AVB will acquire interests in certain assets of Archstone, including Archstone’s interests in certain joint ventures, interests in the Archstone German portfolio and certain development land parcels through one or more unconsolidated joint ventures between the Company and AVB that are expected to be owned 60% by the Company and 40% by AVB (the Company’s collective acquisition is referred to as the “Archstone Portfolio”). The joint ventures between the Company and AVB will consist of assets that do not fit the Company’s or AVB’s core strategy or asset class. As a result, the Company and AVB plan to divest (held for sale) the joint venture assets as promptly as reasonably possible, subject to market and other economic conditions.

 

The closing of this pending transaction is subject to certain conditions and restrictions, therefore, there can be no assurance that this transaction will be consummated or that the final terms will not differ in material respects from those summarized in the preceding paragraph.

 

The accompanying unaudited Pro Forma Condensed Consolidated Balance Sheets of Equity Residential and ERP Operating Limited Partnership are presented as if the Archstone Portfolio had been acquired on September 30, 2012. The accompanying unaudited Pro Forma Condensed Consolidated Statements of Operations for the nine-month period ended September 30, 2012 and for the year ended December 31, 2011 of Equity Residential and ERP Operating Limited Partnership are presented as if the Archstone Portfolio had been acquired on January 1, 2011. The Archstone Portfolio is expected to be purchased during 2013. The unaudited Pro Forma Condensed Consolidated Balance Sheets are segregated into separate components as follows:

 

   

the historical Consolidated Balance Sheets of the Company;

 

   

the carrying value of the Archstone historical working capital;

 

   

the Company’s ownership interest in the net working capital of the joint ventures with AVB;

 

   

the details of the transaction including the issuance of common shares, financing required and the allocation of the estimated purchase price to the real estate assets acquired; and

 

   

the Pro Forma Condensed Consolidated Balance Sheets of the Company.

 

The unaudited Pro Forma Condensed Consolidated Statements of Operations are segregated into separate components as follows (with the year ended December 31, 2011 including an additional reclassification for discontinued operations):

 

   

the historical Consolidated Statements of Operations of the Company;

 

   

the historical combined revenues and certain expenses of the properties to be acquired for Archstone’s period of ownership;

 

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removal of the historical combined revenues and certain expenses of the properties to be acquired for unconsolidated entities that are included at full ownership in the previous column;

 

   

the pro forma loss from investments in unconsolidated entities for Archstone’s period of ownership with respect to the Company’s 60% ownership interest in the unconsolidated joint ventures with AVB;

 

   

the pro forma details of the transaction including the adjusted depreciation and interest expense; and

 

   

the Pro Forma Condensed Consolidated Statements of Operations of the Company.

 

These Unaudited Pro Forma Condensed Consolidated Financial Statements should be read in conjunction with:

 

   

The Company’s historical consolidated financial statements and notes thereto as of and for the nine-month period ended September 30, 2012, included in the Company’s Combined Form 10-Q filed with the SEC on November 1, 2012;

 

   

The Company’s historical consolidated financial statements and notes thereto as of and for the year ended December 31, 2011, included in the Company’s Combined Form 10-K filed with the SEC on February 24, 2012 and as updated for discontinued operations on the Combined Form 8-K filed with the SEC on June 13, 2012; and

 

   

Financial statements of real estate operations acquired included in the Company’s Form 8-K filed on November 26, 2012.

 

In management’s opinion, all adjustments necessary to reflect the transaction including the acquisition of the Archstone Portfolio have been made. The following unaudited Pro Forma Condensed Consolidated Balance Sheets do not purport to represent the future financial position of the Company. The unaudited Pro Forma Condensed Consolidated Statements of Operations are not necessarily indicative of what the actual results of operations would have been for the nine-month period ended September 30, 2012 or for the year ended December 31, 2011 assuming the above transaction had been consummated on January 1, 2011, nor do they purport to represent the future results of operations of the Company.

 

These unaudited pro forma condensed consolidated financial statements assume a $750.0 million offering of our common shares. The offering contemplated by this prospectus supplement relates to an offering of 19,000,000 of our common shares (an assumed offering price of approximately $1.035 billion at a per share price of $54.46 (the closing price of our common shares on November 23, 2012)). This increase in the size of the offering has the effect of reducing the pro forma interest expense and increasing the pro forma weighted average shares outstanding. Therefore, these unaudited pro forma condensed consolidated financial statements should not be relied on to determine the pro forma effect of this offering without taking into account the actual number of common shares offered hereby. Please see the Capitalization section of this prospectus supplement for further information on the pro forma effect of this offering.

 

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EQUITY RESIDENTIAL

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 2012

(Amounts in thousands)

(Unaudited)

 

    (1)
Equity
Residential
Historical
    (2)
Archstone
Historical
    (3)
Joint
Venture
    (4)
Transaction
    Pro Forma
Amounts
 

ASSETS

         

Investment in real estate

         

Land

  $ 4,609,337      $ —        $ —        $ 2,372,000 (4a)    $ 6,981,337   

Depreciable property

    15,943,139        —          —          6,156,689 (4b)      22,399,101   
          316,870 (4c)   
          (17,597 )(4d)   

Projects under development

    194,254        —          —          22,638 (4e)      216,892   

Land held for development

    404,846        —          —          242,240 (4f)      647,086   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment in real estate

    21,151,576        —          —          9,092,840        30,244,416   

Accumulated depreciation

    (4,880,808     —          —          —          (4,880,808
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment in real estate, net

    16,270,768        —          —          9,092,840        25,363,608   

Cash and cash equivalents

    45,623        64,393        —          24,767 (4g)      134,783   
          726,900 (4h)   
          123,706 (4i)   
          1,875,000 (4j)   
          (2,725,606 )(4k)   

Investments in unconsolidated entities

    17,906        (3,795     (56,090     164,548 (4l)      191,000   
          68,431 (4m)   

Deposits – restricted

    120,440        5,473        —          —          125,913   

Escrow deposits – mortgage

    10,462        40,596        —          —          51,058   

Deferred financing costs, net

    38,823        —          —          77,717 (4n)      116,540   

Other assets

    164,523        16,986        —          169,910 (4o)      351,419   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 16,668,545      $ 123,653      $ (56,090   $ 9,598,213      $ 26,334,321   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

         

Liabilities:

         

Mortgage notes payable

  $ 3,948,115      $ —        $ —        $ 5,047,859 (4p)    $ 8,995,974   

Notes, net

    5,354,038        —          —          1,125,000 (4q)      6,479,038   

Lines of credit

    7,000        —          —          750,000 (4r)      757,000   

Accounts payable and accrued expenses

    105,602        12,035        —          —          117,637   

Accrued interest payable

    78,869        17,737        —          —          96,606   

Other liabilities

    370,046        21,504        —          11,410 (4s)      600,963   
          198,003 (4t)   

Security deposits

    68,758        10,908        —          —          79,666   

Distributions payable

    108,048        —          —          —          108,048   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    10,040,476        62,184        —          7,132,272        17,234,932   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

         

Redeemable Noncontrolling Interests – Operating Partnership

    414,219        —          —          6 (4aa)      414,225   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity:

         

Shareholders’ equity:

         

Preferred Shares

    50,000        —          —          —          50,000   

Common Shares

    3,027        —          —          345 (4u)      3,509   
          137 (4v)   

Paid in capital

    5,364,802        183,486        (56,090     1,885,060 (4w)      7,887,498   
          726,763 (4x)   
          (187,281 )(4y)   
          (29,242 )(4aa)   

Retained earnings

    770,697        (122,017     —          122,017 (4y)      689,597   
          (81,100 )(4z)   

Accumulated other comprehensive (loss)

    (197,754     —          —          —          (197,754
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

    5,990,772        61,469        (56,090     2,436,699        8,432,850   

Noncontrolling Interests:

         

Operating Partnership

    147,650        —          —          29,236 (4aa)      176,886   

Partially Owned Properties

    75,428        —          —          —          75,428   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Noncontrolling Interests

    223,078        —          —          29,236        252,314   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    6,213,850        61,469        (56,090     2,465,935        8,685,164   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 16,668,545      $ 123,653      $ (56,090   $ 9,598,213      $ 26,334,321   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See accompanying notes.

 

S-19


Table of Contents

EQUITY RESIDENTIAL

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2012

(Amounts in thousands except per share data)

(Unaudited)

 

     (1)
Equity
Residential
Historical
    (2)
Archstone
Historical
    (3)
Unconsolidated
Assets
    (4)
Joint
Venture
    (5)
Transaction
    Pro
Forma
Amounts
 

REVENUES

            

Rental income

   $ 1,602,635      $ 516,064      $ (43,359   $ —        $ 718 (5a)    $ 2,076,058   

Fee and asset management

     7,328        —          —          —          —          7,328   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,609,963        516,064        (43,359     —          718        2,083,386   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

            

Property and maintenance

     325,071        107,118        (8,189     —          3,198 (5b)      427,198   

Real estate taxes and insurance

     182,222        62,335        (3,497     —          —          241,060   

Property management

     62,769        18,557        (4,878     —          —          76,448   

Fee and asset management

     3,595        —          —          —          —          3,595   

Depreciation

     509,338          —          —          164,075 (5c)      673,413   

General and administrative

     37,178        —          —          —          —          37,178   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     1,120,173        188,010        (16,564     —          167,273        1,458,892   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     489,790        328,054        (26,795     —          (166,555     624,494   

Interest and other income

     70,516        —          —          —          —          70,516   

Other expenses

     (20,678     —          —          —          1,921 (5d)      (18,757

Interest:

            

Expense incurred, net

     (347,452     —          —          —          (147,819 )(5e)      (495,271

Amortization of deferred financing costs

     (10,319     —          —          —          (11,607 )(5f)      (21,926
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income and other taxes, (loss) from investments in unconsolidated entities and discontinued operations

     181,857        328,054        (26,795     —          (324,060     159,056   

Income and other tax (expense) benefit

     (627     —          —          —          —          (627

(Loss) from investments in unconsolidated entities

     (3     —          (290 )(3a)      (44,265 )(4a)      (9,403 )(5g)      (53,961
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     181,227        328,054        (27,085     (44,265     (333,463     104,468   

Net (income) loss from continuing operations attributable to Noncontrolling Interests:

            

Operating Partnership, net

     (7,477     (14,730 )(6)      1,216 (6)      1,987 (6)      14,972 (6)      (4,032

Partially Owned Properties

     (457     —          —          —          —          (457
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations attributable to controlling interests:

     173,293        313,324        (25,869     (42,278     (318,491     99,979   

Preferred distributions

     (9,319     —          —          —          —          (9,319

Premium on redemption of Preferred Shares

     (5,150     —          —          —          —          (5,150
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations available to Common Shares

   $ 158,824      $ 313,324      $ (25,869   $ (42,278   $ (318,491   $ 85,510   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share - basic:

            

Income from continuing operations available to Common Shares

   $ 0.53              $ 0.25   
  

 

 

           

 

 

 

Weighted average Common Shares outstanding

     300,116                   (5h)      348,295   
  

 

 

           

 

 

 

Earnings per share - diluted:

            

Income from continuing operations available to Common Shares

   $ 0.52              $ 0.25   
  

 

 

           

 

 

 

Weighted average Common Shares outstanding

     317,265                   (5h)      365,444   
  

 

 

           

 

 

 

 

See accompanying notes.

 

S-20


Table of Contents

EQUITY RESIDENTIAL

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2011

(Amounts in thousands except per share data)

(Unaudited)

 

    (1)
Equity
Residential
Historical
    (2)
Discontinued
Operations
    (3)
Archstone
Historical
    (4)
Unconsolidated
Assets
    (5)
Joint
Venture
    (6)
Transaction
    Pro
Forma
Amounts
 

REVENUES

             

Rental income

  $ 1,960,243      $ (41,995   $ 645,062      $ (52,015   $ —        $ 957 (6a)    $ 2,512,252   

Fee and asset management

    9,026        —          —          —          —          —          9,026   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    1,969,269        (41,995     645,062        (52,015     —          957        2,521,278   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

             

Property and maintenance

    412,233        (12,652     137,194        (9,433     —          4,264 (6b)      531,606   

Real estate taxes and insurance

    219,743        (3,954     75,944        (3,822     —          —          287,911   

Property management

    82,133        (266     23,096        (6,298     —          —          98,665   

Fee and asset management

    4,279        —          —          —          —          —          4,279   

Depreciation

    642,415        (12,367     —          —          —          535,637 (6c)      1,165,685   

General and administrative

    43,606        —          —          —          —          —          43,606   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    1,404,409        (29,239     236,234        (19,553     —          539,901        2,131,752   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    564,860        (12,756     408,828        (32,462     —          (538,944     389,526   

Interest and other income

    7,977        (11     —          —          —          —          7,966   

Other expenses

    (14,557     —          —          —          —          1,736 (6d)      (12,821

Interest:

             

Expense incurred, net

    (468,320     3,838        —          —          —          (205,629 )(6e)      (670,111

Amortization of deferred financing costs

    (17,006     399        —          —          —          (47,265 )(6f)      (63,872
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income and other taxes, (loss) from investments in unconsolidated entities, net gain on sales of land parcels and discontinued operations

    72,954        (8,530     408,828        (32,462     —          (790,102     (349,312

Income and other tax (expense) benefit

    (728     —          —          —          —          —          (728

(Loss) from investments in unconsolidated entities

    —          —          —          (11,884 )(4a)      (78,146 )(5a)      (12,537 )(6g)      (102,567

Net gain on sales of land parcels

    4,217        —          —          —          —          —          4,217   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    76,443        (8,530     408,828        (44,346     (78,146     (802,639     (448,390

Net (income) loss from continuing operations attributable to Noncontrolling Interests:

             

Operating Partnership, net

    (2,738     378 (7)      (18,111 )(7)      1,965 (7)      3,462 (7)      35,557 (7)      20,513   

Partially Owned Properties

    (832     —          —          —          —          —          (832
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations attributable to controlling interests

    72,873        (8,152     390,717        (42,381     (74,684     (767,082     (428,709

Preferred distributions

    (13,865     —          —          —          —          —          (13,865
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations available to Common Shares

  $ 59,008      $ (8,152   $ 390,717      $ (42,381   $ (74,684   $ (767,082   $ (442,574
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share - basic:

             

Income (loss) from continuing operations available to Common Shares

  $ 0.20                $ (1.29
 

 

 

             

 

 

 

Weighted average Common Shares outstanding

    294,856                  (6h)      343,035   
 

 

 

             

 

 

 

Earnings per share - diluted:

             

Income (loss) from continuing operations available to Common Shares

  $ 0.20                $ (1.29
 

 

 

             

 

 

 

Weighted average Common Shares outstanding

    312,065                  (6h)      343,035   
 

 

 

             

 

 

 

 

See accompanying notes.

 

S-21


Table of Contents

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 2012

(Amounts in thousands)

(Unaudited)

 

    (1)
ERP  Operating
Limited
Partnership
Historical
    (2)
Archstone
Historical
    (3)
Joint
Venture
    (4)
Transaction
    Pro Forma
Amounts
 

ASSETS

         

Investment in real estate

         

Land

  $ 4,609,337      $ —        $ —        $ 2,372,000 (4a)    $ 6,981,337   

Depreciable property

    15,943,139        —          —          6,156,689 (4b)      22,399,101   
          316,870 (4c)   
          (17,597 )(4d)   

Projects under development

    194,254        —          —          22,638 (4e)      216,892   

Land held for development

    404,846        —          —          242,240 (4f)      647,086   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment in real estate

    21,151,576        —          —          9,092,840        30,244,416   

Accumulated depreciation

    (4,880,808     —          —          —          (4,880,808
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment in real estate, net

    16,270,768        —          —          9,092,840        25,363,608   

Cash and cash equivalents

    45,623        64,393        —          24,767 (4g)      134,783   
          726,900 (4h)   
          123,706 (4i)   
          1,875,000 (4j)   
          (2,725,606 )(4k)   

Investments in unconsolidated entities

    17,906        (3,795     (56,090     164,548 (4l)      191,000   
          68,431 (4m)   

Deposits – restricted

    120,440        5,473        —          —          125,913   

Escrow deposits – mortgage

    10,462        40,596        —          —          51,058   

Deferred financing costs, net

    38,823        —          —          77,717 (4n)      116,540   

Other assets

    164,523        16,986        —          169,910 (4o)      351,419   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 16,668,545      $ 123,653      $ (56,090   $ 9,598,213      $ 26,334,321   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND CAPITAL

         

Liabilities:

         

Mortgage notes payable

  $ 3,948,115      $ —        $ —        $ 5,047,859 (4p)    $ 8,995,974   

Notes, net

    5,354,038        —          —          1,125,000 (4q)      6,479,038   

Lines of credit

    7,000        —          —          750,000 (4r)      757,000   

Accounts payable and accrued expenses

    105,602        12,035        —          —          117,637   

Accrued interest payable

    78,869        17,737        —          —          96,606   

Other liabilities

    370,046        21,504        —          11,410 (4s)      600,963   
          198,003 (4t)   

Security deposits

    68,758        10,908        —          —          79,666   

Distributions payable

    108,048        —          —          —          108,048   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    10,040,476        62,184        —          7,132,272        17,234,932   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

         

Redeemable Limited Partners

    414,219        —          —          6 (4aa)      414,225   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capital:

         

Partners’ Capital:

         

Preference Units

    50,000        —          —          —          50,000   

General Partner

    6,138,526        61,469        (56,090     345 (4u)      8,580,604   
          137 (4v)   
          1,885,060 (4w)   
          726,763 (4x)   
          (187,281 )(4y)   
          122,017 (4y)   
          (81,100 )(4z)   
          (29,242 )(4aa)   

Limited Partners

    147,650        —          —          29,236 (4aa)      176,886   

Accumulated other comprehensive (loss)

    (197,754     —          —          —          (197,754
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total partners’ capital

    6,138,422        61,469        (56,090     2,465,935        8,609,736   

Noncontrolling Interests – Partially Owned Properties

    75,428        —          —          —          75,428   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total capital

    6,213,850        61,469        (56,090     2,465,935        8,685,164   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and capital

  $ 16,668,545      $ 123,653      $ (56,090   $ 9,598,213      $ 26,334,321   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See accompanying notes.

 

S-22


Table of Contents

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2012

(Amounts in thousands except per Unit data)

(Unaudited)

 

    (1)
ERP
Operating
Limited
Partnership
Historical
    (2)
Archstone
Historical
    (3)
Unconsolidated
Assets
    (4)
Joint
Venture
    (5)
Transaction
    Pro Forma
Amounts
 

REVENUES

           

Rental income

  $ 1,602,635      $ 516,064      $ (43,359   $ —        $ 718 (5a)    $ 2,076,058   

Fee and asset management

    7,328        —          —          —          —          7,328   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    1,609,963        516,064        (43,359     —          718        2,083,386   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

           

Property and maintenance

    325,071        107,118        (8,189     —          3,198 (5b)      427,198   

Real estate taxes and insurance

    182,222        62,335        (3,497     —            241,060   

Property management

    62,769        18,557        (4,878     —            76,448   

Fee and asset management

    3,595        —          —          —            3,595   

Depreciation

    509,338        —          —          —          164,075 (5c)      673,413   

General and administrative

    37,178        —          —          —            37,178   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    1,120,173        188,010        (16,564     —          167,273        1,458,892   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    489,790        328,054        (26,795     —          (166,555     624,494   

Interest and other income

    70,516        —          —          —            70,516   

Other expenses

    (20,678     —          —          —          1,921 (5d)      (18,757

Interest:

           

Expense incurred, net

    (347,452     —          —          —          (147,819 )(5e)      (495,271

Amortization of deferred financing costs

    (10,319     —          —          —          (11,607 )(5f)      (21,926
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income and other taxes, (loss) from investments in unconsolidated entities and discontinued operations

    181,857        328,054        (26,795     —          (324,060     159,056   

Income and other tax (expense) benefit

    (627     —          —          —            (627

(Loss) from investments in unconsolidated entities

    (3     —          (290 )(3a)      (44,265 )(4a)      (9,403 )(5g)      (53,961
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    181,227        328,054        (27,085     (44,265     (333,463     104,468   

Net (income) loss from continuing operations attributable to Noncontrolling Interests – Partially Owned Properties

    (457     —                (457
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations attributable to controlling interests

  $ 180,770      $ 328,054      $ (27,085   $ (44,265   $ (333,463   $ 104,011   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALLOCATION OF INCOME FROM CONTINUING OPERATIONS:

           

Preference Units

  $ 9,319      $ —        $ —        $ —        $ —        $ 9,319   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Premium on redemption of Preference Units

  $ 5,150      $ —        $ —        $ —        $ —        $ 5,150   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations available to Units

  $

166,301

     $

328,054

     $ (27,085   $ (44,265   $ (333,463   $ 89,542   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per Unit - basic:

           

Income from continuing operations available to Units

  $ 0.53              $ 0.25   
 

 

 

           

 

 

 

Weighted average Units outstanding

    313,932                    (5h)      362,111   
 

 

 

           

 

 

 

Earnings per Unit - diluted:

           

Income from continuing operations available to Units

  $ 0.52              $ 0.25   
 

 

 

           

 

 

 

Weighted average Units outstanding

    317,265                    (5h)      365,444   
 

 

 

           

 

 

 

 

See accompanying notes.

 

S-23


Table of Contents

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2011

(Amounts in thousands except per Unit data)

(Unaudited)

 

    (1)
ERP Operating
Limited
Partnership
Historical
    (2)
Discontinued
Operations
    (3)
Archstone
Historical
    (4)
Unconsolidated
Assets
    (5)
Joint
Venture
    (6)
Transaction
    Pro
Forma
Amounts
 

REVENUES

             

Rental income

  $ 1,960,243      $ (41,995   $ 645,062      $ (52,015   $ —        $ 957 (6a)    $ 2,512,252   

Fee and asset management

    9,026        —          —          —          —          —          9,026   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    1,969,269        (41,995     645,062        (52,015     —          957        2,521,278   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

             

Property and maintenance

    412,233        (12,652     137,194        (9,433     —          4,264 (6b)      531,606   

Real estate taxes and insurance

    219,743        (3,954     75,944        (3,822     —          —          287,911   

Property management

    82,133        (266     23,096        (6,298     —          —          98,665   

Fee and asset management

    4,279        —          —          —          —          —          4,279   

Depreciation

    642,415        (12,367     —          —          —          535,637 (6c)      1,165,685   

General and administrative

    43,606        —          —          —          —          —          43,606   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    1,404,409        (29,239     236,234        (19,553     —          539,901        2,131,752   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    564,860        (12,756     408,828        (32,462     —          (538,944     389,526   

Interest and other income

    7,977        (11     —          —          —          —          7,966   

Other expenses

    (14,557     —          —          —          —          1,736 (6d)      (12,821

Interest:

             

Expense incurred, net

    (468,320     3,838        —          —          —          (205,629 )(6e)      (670,111

Amortization of deferred financing costs

    (17,006     399        —          —          —          (47,265 )(6f)      (63,872
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income and other taxes, (loss) from investments in unconsolidated entities, net gain on sales of land parcels and discontinued operations

    72,954        (8,530     408,828        (32,462     —          (790,102     (349,312

Income and other tax (expense) benefit

    (728     —          —          —          —          —          (728

(Loss) from investments in unconsolidated entities

    —          —          —          (11,884 )(4a)      (78,146 )(5a)      (12,537 )(6g)      (102,567

Net gain on sales of land parcels

    4,217        —          —          —          —          —          4,217   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    76,443        (8,530     408,828        (44,346     (78,146     (802,639     (448,390

Net (income) loss from continuing operations attributable to Noncontrolling Interests – Partially Owned Properties

    (832     —          —          —          —          —          (832
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations attributable to controlling interests

  $ 75,611      $ (8,530   $ 408,828      $ (44,346   $ (78,146   $ (802,639   $ (449,222

ALLOCATION OF INCOME FROM CONTINUING OPERATIONS:

             

Preference Units

  $ 13,865      $ —        $ —        $ —        $ —        $ —        $ 13,865   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations available to Units

  $ 61,746      $ (8,530   $ 408,828      $ (44,346   $ (78,146   $ (802,639   $ (463,087
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per Unit - basic:

             

Income (loss) from continuing operations available to Units

  $ 0.20                $ (1.29
 

 

 

             

 

 

 

Weighted average Units outstanding

    308,062                  (6h)      356,241   
 

 

 

             

 

 

 

Earnings per Unit - diluted:

             

Income (loss) from continuing operations available to Units

  $ 0.20                $ (1.29
 

 

 

             

 

 

 

Weighted average Units outstanding

    312,065                  (6h)      356,241   
 

 

 

             

 

 

 

 

See accompanying notes.

 

S-24


Table of Contents

EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(Unaudited)

 

Notes to Pro Forma Condensed Consolidated Balance Sheets

 

  (1)   Historical Balances – Reflects the consolidated balance sheet of the Company as contained in its historical consolidated financial statements included in the Form 10-Q as of and for the nine months ended September 30, 2012 previously filed with the Securities and Exchange Commission.
  (2)   Archstone Historical – Reflects the carrying value of Archstone’s historical net working capital (which approximates fair value) for the properties to be purchased by the Company as of September 30, 2012. Additionally, reclassifications were made to conform to the Company’s presentation.
  (3)   Joint Venture – Reflects the Company’s 60% ownership interest in the net working capital of the anticipated joint ventures with AVB as of September 30, 2012. The joint ventures are expected to consist of over 13,000 apartment units in Germany and approximately 20 domestic properties, with ownership interests ranging from 10% - 20%. See note (4m) below.
  (4)   Transaction – In connection with completing the transaction, the following adjustments were made to account for the assumption of existing debt, issuance of common shares, additional financing required and the allocation of the estimated purchase price to the real estate assets to be acquired, all at fair value based on an analysis of current market conditions. The major components of the transaction funding and the purchase price include the following:

 

Funding Source

   Amount    

Asset

   Allocated
Purchase
Price
 

Assumed Equity Offering

   $ 726,900     

Land

   $ 2,372,000   

Common Share Issuance to Seller

     1,885,405     

Building

     5,999,639   

Line of Credit draw

     750,000     

Site Improvements

     94,730   

Bridge Loan

     1,125,000     

FF&E

     62,320   

Debt Assumed

     4,736,890     

In-Place Leases

     316,870   

Mark to Market of Debt Assumed

     310,969     

Projects Under Development

     22,638   

Assumption of Preferred Shares

     198,003     

Land Held for Development

     242,240   

Transaction Costs

     (81,100  

Investment in Unconsolidated Entities

     232,979   

Working Capital

     (65,264  

Ground/Retail Leases above/below market

     158,500   
    

Mark to Market of Debt Assumed

     310,969   
    

Common Share FMV Adjustment

     (139,596
    

Cash and Working Capital Adjustment

     (188,970
    

Other Transaction Costs

     102,484   
  

 

 

      

 

 

 

Total

   $ 9,586,803     

Total

   $ 9,586,803   
  

 

 

      

 

 

 

 

  a.   Reflects the estimated purchase price allocation to land.

 

  b.   Reflects the estimated purchase price allocation to depreciable property (building, site improvements and FF&E).

 

  c.   Reflects the estimated purchase price allocation to the intangible value of the existing in place leases.

 

  d.   Reflects purchase price adjustments including:

 

   

Fair market value of the debt assumed which resulted in an increase of $311.0 million;

 

S-25


Table of Contents

EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(Unaudited)

 

 

   

Market adjustment on the common share issuance to the seller reflecting the difference in the share price of our common shares used for determining the number of shares issued to LBHI ($58.75) and the actual price as of November 19, 2012 ($54.70), resulting in a decrease of $139.6 million;

 

   

corporate cash assumed from Archstone resulting in a decrease of $123.7 million; and

 

   

historical net equity value with respect to the working capital assumed resulting in a decrease of $65.3 million.

 

  e.   Reflects the reclassification of a portion of land and construction-in-progress acquired consistent with the Company’s classification.

 

  f.   Reflects the reclassification of a portion of land and construction-in-progress acquired consistent with the Company’s classification.

 

  g.   Reflects the excess cash drawn from the bridge loan for miscellaneous transaction closing costs.

 

  h.   Reflects proceeds from an assumed $750.0 million equity offering by the Company as part of the financing for the transaction. In conjunction with the assumed equity offering, underwriting and other fees are estimated at $23.1 million which will reduce the proceeds received.

 

  i.   Reflects the assumption of an estimated $123.7 million in Archstone corporate cash.

 

  j.   Reflects the aggregate loan proceeds of $1.875 billion resulting from a $750.0 million draw on the existing line of credit and funding from the bridge loan in the amount of $1.125 billion which terminates 364 days after funding. Loan fundings may not materialize or could be reduced by asset sales completed prior to close of this transaction. The Company is currently marketing a significant number of assets for sale which could reduce the need for debt financing. Additionally, loan fundings could also be reduced by an increase in the size of the assumed equity offering discussed in note (4h) above.

 

  k.   Reflects the use of cash raised noted above in notes (4h, i, j) for the acquisition.

 

  l.   Reflects the fair value of the real estate, lease intangibles and debt assumed for the Company’s ownership interest in 9 unconsolidated properties (including development), at varying ownership percentages.

 

  m.   Reflects the fair value of the real estate, lease intangibles and debt assumed for the Company’s 60% ownership interest in the joint ventures with AVB. These amounts take into account 807 wholly owned German apartment units and a 16.5% interest in a German Fund owning over 12,000 additional apartment units.

 

  n.   Reflects the estimated $77.7 million of financing costs associated with the assumption of existing debt discussed in note (4p) and the $1.875 billion in proceeds discussed in note (4q and r) which will be amortized over a weighted average of 4.4 years. The bridge loan is for a term of 364 days.

 

  o.   Reflects the estimated purchase price allocation at fair value to the intangible value of below market ground and above market retail lease intangibles of $167.6 million and $2.3 million, respectively.

 

S-26


Table of Contents

EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(Unaudited)

 

 

  p.   Reflects the assumption of $5.0 billion in mortgage debt. Total principal assumed consisted of the following components: $2.9 billion of fixed rate mortgages, $1.8 billion of variable rate tax exempt bonds and mortgages and the fair market value adjustment of $311.0 million. The fixed rate mortgages have interest rates ranging from 3.12% to 6.26%. The variable rate tax exempt bonds have interest rates ranging from SIFMA + 0.81% to SIFMA + 1.517%. The variable rate mortgages have interest rates ranging from LIBOR + 2.95% to LIBOR + 3.50%.

 

  q.   Reflects the estimated loan proceeds of funding the bridge loan in the amount of $1.125 billion which terminates 364 days after funding.

 

  r.   Reflects the estimated loan proceeds of a $750.0 million draw on the existing line of credit.

 

  s.   Reflects the estimated purchase price allocation at fair value to the intangible value of above market ground and below market retail leases of $2.4 million and $9.0 million, respectively.

 

  t.   Reflects the assumption of $198.0 million liquidation value of preferred shares assumed as part of this transaction in a 60% owned unconsolidated joint venture with AVB. The stated dividend rates range from 6.00% to 7.66%.

 

  u.   Reflects the issuance of 34.5 million shares of the Company’s common shares at par value of $0.01 per share. See note (4w) below.

 

  v.   Reflects the assumed issuance of 13.7 million shares of the Company’s common shares at par value of $0.01 per share. See note (4x) below.

 

  w.   Reflects the $1.9 billion recording of additional paid in capital as a result of the issuance of 34.5 million shares of the Company’s common shares directly to LBHI as partial consideration in this transaction. The shares were valued using the closing share price of $54.70 as of November 19, 2012. See also note (4d) above. A change of $5 in the price of our common shares impacts the value recorded by $172.3 million.

 

  x.   Reflects the $726.8 million (net of fees) recording of additional paid in capital as a result of the assumed $750.0 million equity offering planned as part of the transaction. We used the closing price on November 19, 2012 of $54.70 for our valuation.

 

  y.   Reflects adjustment to eliminate the historical equity balance of the Archstone properties with the net offset of $65.3 million noted above in (4d).

 

  z.   Reflects $81.1 million of estimated transaction costs the Company will incur in order to complete the acquisition. The estimated transaction costs are not included in the pro forma condensed consolidated statement of operations for the year ended December 31, 2011 as they represent a non-recurring charge that results directly from the acquisition and will be included in the consolidated financial results of the Company within twelve months of the transaction.

 

  aa.   Reflects the reallocation of total equity and Noncontrolling Interests – Operating Partnership based on the Noncontrolling Interests – Operating Partnership ownership of Equity Residential.

 

Reflects the reallocation of total capital and limited partners interest based on the limited partners ownership of ERP Operating Limited Partnership.

 

S-27


Table of Contents

EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2012

(Unaudited)

 

 

Notes to Pro Forma Condensed Consolidated Statements of Operations

 

Pursuant to the Archstone Portfolio acquisition there are certain transaction costs that will be paid at or near closing. These costs are not included in the pro forma condensed consolidated statement of operations for the nine months ended September 30, 2012 because they represent non-recurring charges that result directly from the transaction and will be included in the consolidated financial results of the Company within twelve months of the transaction.

 

  1)   Historical Amounts – Represents the consolidated statements of operations of the Company as contained in the historical consolidated financial statements included in its Form 10-Q as of and for the nine months ended September 30, 2012 previously filed with the Securities and Exchange Commission.

 

  2)   Archstone Historical – Represents the historical combined revenues and certain expenses of the properties to be acquired for Archstone’s period of ownership during the nine months ended September 30, 2012 attributable to the acquisition of the Archstone Portfolio as if the acquisition had occurred on January 1, 2011.

 

  3)   Unconsolidated Assets – Represents removal of the historical combined revenues and certain expenses acquired for unconsolidated entities included in the Archstone Portfolio at full ownership for Archstone’s period of ownership with respect to the Company’s anticipated 60% ownership interest in the unconsolidated joint ventures with AVB during the nine months ended September 30, 2012. The amounts removed and the loss (income) from investments in unconsolidated entities recorded are attributable to the acquisition of the interests in the Unconsolidated Assets as if the acquisition had occurred on January 1, 2011. The loss (income) from investments in unconsolidated entities is based on the Company’s share of earnings and reflects its actual ownership in the unconsolidated entities.

 

  a) Reflects the $(0.3) million (loss) from investments in unconsolidated entities.

 

  4)   Joint Venture – The Company will have an unconsolidated 60% interest in joint ventures with AVB. These joint ventures will hold certain assets neither partner intends to own and these assets are held for sale. Represents the pro forma loss (income) from investments in unconsolidated entities for Archstone’s period of ownership during the nine months ended September 30, 2012.

 

  a) Reflects the $(44.3) million (loss) from investments in unconsolidated entities.

 

  5)   Transaction – in connection with the transaction, we have made the following adjustments for the nine months ended September 30, 2012:

 

  a) Rental income of $0.7 million relates to the amortization of $6.7 million in net below market retail leases to be assumed in the transaction. The below market retail leases are amortized over a weighted average life of seven years.

 

  b) Property and maintenance expense of $3.2 million relates to the amortization of $165.2 million in net below market ground leases to be assumed in the transaction. The below market ground leases are amortized over the term of the respective ground leases to which they relate having expirations ranging from 2042 – 2092.

 

S-28


Table of Contents

EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2012

(Unaudited)

 

 

  c) Depreciation expense of $164.1 million is calculated based on the fair value of the real estate related assets purchased as detailed below (amounts in thousands except for depreciable lives):

 

Asset

   Basis      Weighted Average
Depreciable Life
   Nine Months
Ended
9/30/12
Expense
 

Building

   $ 5,999,639       30 Years    $ 149,991   

Site Improvements

     94,730       15 Years      4,736   

FF&E

     62,320       5 Years      9,348   

In-Place Leases

     316,870       6 Months      —     
  

 

 

       

 

 

 

Total

   $ 6,473,559          $ 164,075   
  

 

 

       

 

 

 

 

  d) Other expenses of $1.9 million reflects the elimination of historical charges related to this transaction that are not expected to recur.

 

  e) Reflects the $147.8 million of interest expense related to debt that will be assumed or incurred as a result of or to finance this transaction. The components of interest expense are detailed below.

 

Debt Type

   Principal      Interest Rate Range   Interest
Ended
9/30/12
Expense
 

Fixed Rate Mortgages Assumed

   $ 2,901,756       3.12% - 6.26%   $ 130,067   

Variable Rate Mortgages Assumed

     1,835,134       SIFMA + 0.81% - 1.517%

LIBOR + 2.95% - 3.50%

    43,240   

FMV Mortgages Assumed

     310,969       n/a     (46,524

Line of Credit

     1,500,000       LIBOR + 1.15%     16,969   

Term Loan

     375,000       LIBOR + 1.15%     4,067   
  

 

 

      

 

 

 

Total

   $ 6,922,859         $ 147,819   
  

 

 

      

 

 

 

 

For purposes of calculating the estimated 2012 interest, we assumed a LIBOR rate of 0.30% and a SIFMA rate of 0.20%. If the above-mentioned benchmark rates were to fluctuate by 1/8%, our year to date interest expense with respect to this transaction would vary by approximately $1.7 million. The fair market value adjustment on the assumed debt was amortized using the straight line method over the respective maturity dates with an average life of 8.5 years.

 

With the bridge loan expiring as of December 31, 2011, the Company replaced the borrowing utilizing two sources: $750.0 million on the line of credit after an expected increase in the capacity, bringing the total commitment on the line of credit to $2.5 billion, and $375.0 million on a new Term Loan with a four year maturity. We assumed the same interest rate of LIBOR + 1.15% for both the line of credit upsizing and the term loan. If the above-mentioned benchmark rates were to fluctuate by 1/8%, our year to date interest expense would vary by approximately $1.7 million.

 

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EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2012

(Unaudited)

 

 

  f)   Reflects $11.6 million of amortization of estimated financing costs applicable to assuming mortgages and increasing the revolver availability and the term loan. Financing costs are amortized to interest expense over the expected life of the new loan agreements (weighted average of 4.4 years) using the straight-line method, which approximates the effective interest method.

 

  g)   Reflects $9.4 million of accrued but unpaid distributions related to preferred shares assumed as part of this transaction in a 60% owned unconsolidated joint venture.

 

  h)   Historical basic and diluted weighted average common shares outstanding of 300.1 million and 317.3 million, respectively, for Equity Residential should be adjusted to include the 34.5 million shares issued to LBHI in order to complete the transaction (see note (4u) on the Pro Forma Balance Sheet) and the estimated 13.7 million shares issued to the public due to the assumed equity offering (see note (4v) on the Pro Forma Balance Sheet).

 

Historical basic and diluted weighted average units outstanding of 313.9 million and 317.3 million, respectively, for ERP Operating Liming Partnership should be adjusted to include the 34.5 million shares issued to LBHI in order to complete the transaction (see note (4u) on the Pro Forma Balance Sheet) and the estimated 13.7 million shares issued to the public due to the assumed equity offering (see note (4v) on the Pro Forma Balance Sheet). ERP Operating Limited Partnership will issue one unit to Equity Residential for each common share issued by Equity Residential to maintain the one-for-one relationship between common shares and units.

 

  (6)   Reflects the allocation of results between the controlling interests and the Noncontrolling Interests – Operating Partnership based on the Noncontrolling Interests – Operating Partnership weighted average ownership of 4.49% of Equity Residential for the nine months ended September 30, 2012.

 

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EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 2011

(Unaudited)

 

 

Notes to Pro Forma Condensed Consolidated Statements of Operations

 

Pursuant to the Archstone Portfolio acquisition there are certain transaction costs that will be paid at or near closing. These costs are not included in the pro forma condensed consolidated statement of operations for the year ended December 31, 2011 because they represent non-recurring charges that result directly from the transaction and will be included in the consolidated financial results of the Company within twelve months of the transaction.

 

  1)   Historical Amounts – Represents the consolidated statements of operations of the Company as contained in the historical consolidated financial statements included in its Form 8-K filed on June 13, 2012 with the Securities and Exchange Commission.

 

  2)   Discontinued Operations – Represents the discontinued operations for the year ended December 31, 2011 attributable to properties sold by the Company in the second and third quarters of 2012.

 

  3)   Archstone Historical – Represents the historical combined revenues and certain expenses of the properties to be acquired for Archstone’s period of ownership for the year ended December 31, 2011 attributable to the acquisition of the Archstone Portfolio as if the acquisition had occurred on January 1, 2011.

 

  4)   Unconsolidated Assets – Represents removal of the historical combined revenues and certain expenses acquired for unconsolidated entities included in the Archstone Portfolio at full ownership for Archstone’s period of ownership with respect to the Company’s anticipated 60% ownership interest in the unconsolidated joint ventures with AVB for the year ended December 31, 2011. The amounts removed and the loss (income) from investments in unconsolidated entities recorded are attributable to the acquisition of the interests in the Unconsolidated Assets as if the acquisition had occurred on January 1, 2011. The loss (income) from investments in unconsolidated entities is based on the Company’s share of earnings and reflects its actual ownership in the unconsolidated entities.

 

  a) Reflects the $(11.9) million (loss) from investments in unconsolidated entities.

 

  5)   Joint Venture – The Company will have an unconsolidated 60% interest in joint ventures with AVB. These joint ventures will hold certain assets neither partner intends to own and these assets are held for sale. Represents the pro forma loss (income) from investments in unconsolidated entities for Archstone’s period of ownership for the year ended December 31, 2011.

 

  a) Reflects the $(78.1) million (loss) from investments in unconsolidated entities.

 

  6)   Transaction – in connection with the transaction, we have made the following adjustments for the year ended December 31, 2011:

 

  a) Rental income of $1.0 million relates to the amortization of $6.7 million in net below market retail leases to be assumed in the transaction. The below market retail leases are amortized over a weighted average life of seven years.

 

  b) Property and maintenance expense of $4.3 million relates to the amortization of $165.2 million in net below market ground leases to be assumed in the transaction. The below market ground leases are amortized over the term of the respective ground leases to which they relate having expirations ranging from 2042 – 2092.

 

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EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 2011

(Unaudited)

 

 

  c)   Depreciation expense of $535.6 million is calculated based on the fair value of the real estate related assets purchased as detailed below (amounts in thousands except for depreciable lives):

 

Asset

   Basis      Weighted Average
Depreciable Life
   Year
Ended
12/31/11
Expense
 

Building

   $ 5,999,639       30 Years    $ 199,988   

Site Improvements

     94,730       15 Years      6,315   

FF&E

     62,320       5 Years      12,464   

In-Place Leases

     316,870       6 Months      316,870   
  

 

 

       

 

 

 

Total

   $ 6,473,559          $ 535,637   
  

 

 

       

 

 

 

 

  d)   Other expenses of $1.7 million reflects the elimination of historical charges related to this transaction that are not expected to recur.

 

  e)   Reflects the $205.6 million of interest expense related to debt that will be assumed or incurred as a result of or to finance this transaction. The components of interest expense are detailed below.

 

Debt Type

   Principal      Interest Rate Range    Interest
Ended
12/31/11
Expense
 

Fixed Rate Mortgages Assumed

   $ 2,901,756       3.12% - 6.26%    $ 173,423   

Variable Rate Mortgages Assumed

     1,835,134       SIFMA + 0.81% - 1.517%

LIBOR + 2.95% - 3.50%

     57,172   

FMV Mortgages Assumed

     310,969       n/a      (62,893

Line of Credit

     750,000       LIBOR + 1.15%      10,845   

Bridge

     1,125,000       LIBOR + 1.15%      27,082   
  

 

 

       

 

 

 

Total

   $ 6,922,859          $ 205,629   
  

 

 

       

 

 

 

 

For purposes of calculating the estimated 2011 interest, we assumed a LIBOR rate of 0.30% and a SIFMA rate of 0.20%. If the above-mentioned benchmark rates were to fluctuate by 1/8%, our year to date interest expense with respect to this transaction would vary by approximately $2.28 million. The fair market value adjustment on the assumed debt was amortized using the straight line method over the respective maturity dates with an average life of 8.5 years.

 

The financing to complete the transaction was achieved using a $750.0 million draw on the existing line of credit and funding the bridge loan in the amount of $1.125 billion which terminates 364 days after funding. We used the current interest rate of LIBOR + 1.15% on the line of credit and the bridge loan to calculate estimated interest. If the above-mentioned benchmark rates were to fluctuate by 1/8%, our year to date interest expense would vary by approximately $2.3 million.

 

  f)   Reflects $47.3 million of amortization of estimated financing costs applicable to assuming mortgages and draws on the existing line of credit and bridge loan. Financing costs are amortized to interest expense over the expected life of the new loan agreements (weighted average of 4.4 years) using the straight-line method, which approximates the effective interest method.

 

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EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 2011

(Unaudited)

 

 

  g)   Reflects $12.5 million of accrued but unpaid distributions related to preferred shares assumed as part of this transaction in a 60% owned unconsolidated joint venture.

 

  h)   Historical basic weighted average common shares outstanding of 294.9 million for Equity Residential should be adjusted to include the 34.5 million shares issued to LBHI in order to complete the transaction (see note (4u) on the Pro Forma Balance Sheet) and the estimated 13.7 million shares issued to the public due to the assumed equity offering (see note (4v) on the Pro Forma Balance Sheet). We did not adjust the number of diluted shares outstanding as it would be antidilutive.

 

Historical basic weighted average units outstanding of 308.1 million for ERP Operating Limited Partnership should be adjusted to include the 34.5 million shares issued to LBHI in order to complete the transaction (see note (4u) on the Pro Forma Balance Sheet) and the estimated 13.7 million shares issued to the public due to the assumed equity offering (see note (4v) on the Pro Forma Balance Sheet). We did not adjust the number of diluted units outstanding as it would be antidilutive. ERP Operating Limited Partnership will issue one unit to Equity Residential for each common share issued by Equity Residential to maintain the one-for-one relationship between common shares and units.

 

  (7)   Reflects the allocation of results between the controlling interests and the Noncontrolling Interests – Operating Partnership based on the Noncontrolling Interests – Operating Partnership weighted average ownership of 4.43% of Equity Residential for the year ended December 31, 2011.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds from this offering will be approximately $         ($         if the underwriters’ overallotment option is exercised in full), after deducting underwriting discounts and estimated offering expenses. We intend to use the net proceeds of this offering, cash on hand and any amounts raised in future capital raising activities or financings to finance the aggregate purchase price of the Archstone Transaction. See “Archstone Transaction—Financing.” If the Archstone Transaction is not consummated, we intend to use the net proceeds from this offering for working capital and general company purposes, including, without limitation, the acquisition or development of multifamily properties and the repayment of debt. Net proceeds may be temporarily invested prior to use.

 

Affiliates of certain of the underwriters of this offering are lenders, and in some cases agents or managers for the lenders, under our unsecured revolving credit facility and our $2.5 billion bridge loan facility, and, accordingly, will receive pro rata portions of the net proceeds from this offering to the extent such net proceeds are used to repay borrowings under our unsecured revolving credit facility or our $2.5 billion bridge loan facility.

 

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CAPITALIZATION

 

The following table sets forth our capitalization on a consolidated basis as of September 30, 2012. We have presented our capitalization:

 

   

on an actual basis;

 

   

on an as adjusted basis to reflect the offering and sale of 19,000,000 common shares in this offering at an assumed public offering price per share of $54.46 (the closing price of our shares on November 23, 2012), after deducting underwriting discounts and estimated offering expenses; and

 

   

on a pro forma as adjusted basis to reflect the offering and sale of 19,000,000 common shares in this offering at a public offering price per share of $54.46 (the closing price of our shares on November 23, 2012), after deducting underwriting discounts and estimated offering expenses, and to give effect to the consummation of the Archstone Transaction, as if it had occurred on September 30, 2012.

 

The amount of proceeds we ultimately receive from this offering of common shares is dependent upon numerous factors and subject to general market conditions. Also, we may increase or decrease the number of shares in this offering. Accordingly, the actual amounts shown in the “Adjustments” and the “As Adjusted” columns may differ materially from those shown below.

 

You should read the following table along with our consolidated financial statements and the accompanying notes to those statements, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K for the year ended December 31, 2011, that we have incorporated by reference in this prospectus supplement.

 

     As of September 30, 2012  
     Actual     As
Adjusted(1)
    Pro Forma
as Adjusted(1)
 
     (in Thousands)  
Cash and cash equivalents    $ 45,623      $ 1,048,721      $ 134,783   
  

 

 

   

 

 

   

 

 

 
Debt:       

Secured debt

   $ 3,948,115      $ 3,948,115      $ 8,995,974   

Unsecured notes

     5,354,038        5,354,038        6,202,840   

Lines of credit

     7,000        7,000        757,000   
  

 

 

   

 

 

   

 

 

 

Total debt

   $ 9,309,153      $ 9,309,153      $ 15,955,814   
  

 

 

   

 

 

   

 

 

 
Redeemable Noncontrolling Interests – Operating Partnership    $ 414,219      $ 414,256      $ 414,259   
  

 

 

   

 

 

   

 

 

 
Equity:       

Preferred shares, par value $0.01 per share; 100,000,000 shares authorized and 1,000,000 shares issued and outstanding,

   $ 50,000     

$

50,000

  

  $ 50,000   

Common shares, par value $0.01 per share; 1,000,000,000 shares authorized and 302,674,716 shares issued and outstanding, actual, 321,674,716 shares outstanding, as adjusted and 356,142,801 shares outstanding, Pro Forma as adjusted

     3,027     

 

3,217

  

    3,562   
Paid in capital      5,364,802        6,354,531        8,160,768   
Retained earnings      770,697        770,697        689,597   
Accumulated other comprehensive (loss)      (197,754     (197,754     (197,754
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     5,990,772        6,980,691        8,706,173   
Noncontrolling Interests – Operating Partnership      147,650        160,791        179,728   
Noncontrolling Interests – Partially Owned Properties      75,428        75,428        75,428   
  

 

 

   

 

 

   

 

 

 
Total Noncontrolling Interests      223,078        236,219        255,156   
  

 

 

   

 

 

   

 

 

 
Total equity    $ 6,213,850      $ 7,216,910      $ 8,961,329   
  

 

 

   

 

 

   

 

 

 
Total Capitalization    $ 15,937,222      $ 16,940,319      $ 25,331,402   
  

 

 

   

 

 

   

 

 

 

 

(1)   Does not include the underwriters’ option to purchase up to 2,850,000 additional shares.

 

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ADDITIONAL FEDERAL INCOME TAX CONSIDERATIONS

 

The following discussion supplements the discussions under the heading “Federal Income Tax Considerations” in the accompanying prospectus and in our annual report on Form 10-K for the year ended December 31, 2011, which has been incorporated into this prospectus supplement by reference. In the accompanying prospectus, we noted that, for taxable years beginning after December 31, 2010, the current long-term capital gains rate of 15% would revert to 20% and the current maximum ordinary income tax rate of 35% would revert to 39.6%. Under current law, such changes in rates now are scheduled to take effect for taxable years beginning after December 31, 2012. In addition, in the accompanying prospectus we noted new legislation (i.e., the Foreign Account Tax Compliance Act) imposing a withholding tax on payments made with respect to certain foreign accounts generally would take effect with respect to payments made after December 31, 2012. The IRS and Treasury Department have issued proposed Treasury regulations deferring application of such legislation’s withholding obligations to payments of income items until January 1, 2014 and payments of gross proceeds until January 1, 2015.

 

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UNDERWRITERS

 

Under the terms and subject to the conditions in an underwriting agreement dated the date of this prospectus supplement, the underwriters named below, for whom Morgan Stanley & Co. LLC is acting as representative, have severally agreed to purchase, and we have agreed to sell to them, severally, the number of shares indicated below:

 

Name

   Number of
Shares

Morgan Stanley & Co. LLC

  
  
  

Total:

  

 

The underwriters and the representative are collectively referred to as the “underwriters” and the “representative,” respectively. The underwriters are offering the shares of common shares subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common shares offered by this prospectus supplement are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common shares offered by this prospectus supplement if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters’ option to purchase additional shares described below.

 

The underwriters initially propose to offer part of the shares of common shares directly to the public at the offering price listed on the cover page of this prospectus supplement and part to certain dealers. After the initial offering of the shares of common shares, the offering price and other selling terms may from time to time be varied by the representative.

 

We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus supplement, to purchase up to 2,850,000 additional shares of common shares at the public offering price listed on the cover page of this prospectus supplement, less underwriting discounts and commissions. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of common shares as the number listed next to the underwriter’s name in the preceding table bears to the total number of shares of common shares listed next to the names of all underwriters in the preceding table.

 

The following table shows the per share and total public offering price, underwriting discounts and commissions, and proceeds before expenses to us. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase up to an additional 2,850,000 shares of common shares.

 

            Total  
     Per
Share
     No
Exercise
     Full
Exercise
 

Public offering price

   $                    $                    $                

Underwriting discounts and commissions to be paid by:

        

Us

   $                    $                    $                

Proceeds, before expenses, to us

   $                    $                    $                

 

The estimated offering expenses payable by us, exclusive of the underwriting discounts and commissions, are approximately $600,000.

 

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Our common shares have been approved for listing on the New York Stock Exchange under the trading symbol “EQR”.

 

We and all trustees and executive officers have agreed that, without the prior written consent of Morgan Stanley & Co. LLC on behalf of the underwriters, we and they will not, during the period ending 60 days after the date of this prospectus supplement (the “restricted period”):

 

   

offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common shares or any securities convertible into or exercisable or exchangeable for shares of common shares;

 

   

file any registration statement with the SEC relating to the offering of any shares of common shares or any securities convertible into or exercisable or exchangeable for common shares; or

 

   

enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common shares.

 

whether any such transaction described above is to be settled by delivery of common shares or such other securities, in cash or otherwise. In addition, we and each such person agrees that, without the prior written consent of Morgan Stanley & Co. LLC on behalf of the underwriters, we or such other person will not, during the restricted period, make any demand for, or exercise any right with respect to, the registration of any shares of common shares or any security convertible into or exercisable or exchangeable for common shares.

 

The restrictions described in the immediately preceding paragraph to do not apply to:

 

   

the sale of shares to the underwriters; or

 

   

the issuance by the Company of shares of common shares upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus supplement of which the underwriters have been advised in writing;

 

   

issuances pursuant to outstanding options or similar awards and redemption of units of limited partnership in ERP Operating Limited Partnership;

 

   

the issuance of common shares pursuant to the Archstone Transaction;

 

   

with respect to our trustees and executive officers, the sale of common shares to the extent necessary to pay withholding taxes on restricted shares that vest during the restricted period; or

 

   

the establishment of a trading plan pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the transfer of shares of common shares, provided that (i) such plan does not provide for the transfer of common shares during the restricted period and (ii) to the extent a public announcement or filing under the Exchange Act, if any, is required of or voluntarily made regarding the establishment of such plan, such announcement or filing shall include a statement to the effect that no transfer of common shares may be made under such plan during the restricted period.

 

Morgan Stanley & Co. LLC, in its sole discretion, may release the common shares and other securities subject to the lock-up agreements described above in whole or in part at any time with or without notice.

 

In connection with shares of our common shares issued in connection with the Archstone Transaction, LBHI has agreed that, without our prior written consent, it will not, during the period ending 150 days after the date of the Purchase Agreement (the “LBHI Lockup Period”), directly or indirectly:

 

   

offer, sell, assign, encumber, pledge, hypothecate, dispose, loan or otherwise transfer (by operation of law or otherwise), either voluntarily or involuntarily, or entry into any contract, option or other arrangement or understanding with respect to any offer, sale, assignment, encumbrance, pledge, hypothecation, disposition, loan or other transfer (by operation of law or otherwise), of any of our common shares (or any security convertible or exchangeable into our common shares) or interest in any of our common shares, or

 

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during the LBHI Lockup Period, in respect of our common shares or interest in our common shares, enter into any swap or any other agreement, transaction or series of transactions that hedges or transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of our common shares or interest in our common shares, whether any such swap, agreement, transaction or series of transactions is to be settled by delivery of securities, in cash or otherwise, including, without limitation, any hedging arrangement or transfer based on the FTSE NAREIT All Residential Capped Index, the FTSE NAREIT Equity Residential Index, the FTSE NAREIT Equity Apartments Index or any other index of which the capital stock of either of EQR or AVB represents at least 5% of the value at the time such hedging arrangement or transfer is entered into.

 

The restrictions described in the immediately preceding paragraph to do not apply to:

 

   

any transfer to an affiliate of LBHI or a liquidating trust established pursuant to LBHI’s plan of reorganization and liquidation, so long as such transferee executes a similar lockup agreement, and

 

   

any transfer solely to tender any of our common shares received in the Archstone Transaction into a tender or exchange offer commenced by us or a third party if our board of trustees has affirmatively publicly recommended to the our shareholders acceptance of such tender offer or exchange offer pursuant to Rule 14d-9 under the Exchange Act with respect to a third party tender or exchange offer or has determined not to oppose (as evidenced by its filings pursuant to such Rule 14d-9) the tender or exchange offer.

 

We have agreed with Morgan Stanley & Co. LLC that we will not waive any such restrictions on LBHI without the consent of Morgan Stanley & Co. LLC.

 

In order to facilitate the offering of the common shares, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common shares. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under the option. The underwriters can close out a covered short sale by exercising the option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under the option. The underwriters may also sell shares in excess of the option, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common shares in the open market after pricing that could adversely affect investors who purchase in this offering. As an additional means of facilitating this offering, the underwriters may bid for, and purchase, shares of common shares in the open market to stabilize the price of the common shares. These activities may raise or maintain the market price of the common shares above independent market levels or prevent or retard a decline in the market price of the common shares. The underwriters are not required to engage in these activities and may end any of these activities at any time.

 

Certain of the underwriters have performed and continue to perform investment banking, commercial banking and advisory services for us from time to time for which they receive customary fees and reimbursement of expenses. The underwriters may, from time to time, engage in transactions with and perform services for us in the ordinary course of their business for which they will receive customary fees and reimbursement of expenses. Affiliates of certain of the underwriters of this offering are lenders, and in some cases agents or managers for the lenders, under our unsecured revolving credit facility and, accordingly, will receive pro rata portions of the net proceeds from this offering to the extent that such net proceeds are used to repay borrowings under our unsecured revolving credit facility. Affiliates of certain of the underwriters of this offering also are lenders, and in some cases agents or managers for the lenders, under our unsecured term loan facility. Certain of the underwriters or their affiliates that have a lending relationship with us have advised us that they routinely hedge their credit exposure to us consistent with their customary risk management policies and that they typically hedge such exposure by entering into transactions which consist of either the purchase of credit default swaps or the creation

 

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of short positions in our securities, including potentially the notes offered hereby. Any such short positions could adversely affect future trading prices of the notes offered hereby. In addition, Morgan Stanley & Co. LLC has served as our advisor in connection with our proposed Archstone Transaction, as described under “Archstone Transaction,” and therefore will receive fees in connection therewith. An affiliate of Morgan Stanley & Co. LLC is also the lender under a short-term bridge facility that we may use to finance the Archstone Transaction and therefore may receive fees in connection therewith.

 

We and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.

 

A prospectus supplement in electronic format may be made available on websites maintained by one or more underwriters, or selling group members, if any, participating in this offering. The representative may agree to allocate a number of shares of common shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representative to underwriters that may make Internet distributions on the same basis as other allocations.

 

Selling Restrictions

 

European Economic Area

 

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”) an offer to the public of any shares of our common shares may not be made in that Relevant Member State, except that an offer to the public in that Relevant Member State of any shares of our common shares may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:

 

  (a)   to any legal entity which is a qualified investor as defined in the Prospectus Directive;

 

  (b)   to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives for any such offer; or

 

  (c)   in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of shares of our common shares shall result in a requirement for the publication by us or any underwriter of a prospectus pursuant to Article 3 of the Prospectus Directive.

 

For the purposes of this provision, the expression an “offer to the public” in relation to any shares of our common shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares of our common shares to be offered so as to enable an investor to decide to purchase any shares of our common shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State, and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.

 

United Kingdom

 

Each underwriter has represented and agreed that:

 

  (a)   it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the shares of our common shares in circumstances in which Section 21(1) of the FSMA does not apply to us; and

 

  (b)   it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares of our common shares in, from or otherwise involving the United Kingdom.

 

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EXPERTS

 

Ernst & Young LLP, independent registered public accounting firm, has audited our consolidated financial statements and schedules included in our Current Reports on Form 8-K dated June 13, 2012, and the effectiveness of our internal control over financial reporting as of December 31, 2011, as set forth in their reports, which are incorporated by reference in this prospectus supplement and elsewhere in the registration statement. These financial statements and schedules are incorporated by reference in reliance on Ernst & Young LLP’s reports, given on their authority as experts in accounting and auditing.

 

The combined statement of revenue and certain expenses of the Archstone Portfolio, appearing in our Current Report on Form 8-K filed with the SEC on November 26, 2012, has been incorporated by reference herein in reliance upon the report of KPMG LLP, independent auditors, appearing elsewhere herein, and upon authority of such firm as experts in accounting and auditing. KPMG LLP’s report on the combined statement of revenue and certain expenses of the Archstone Portfolio contains a paragraph that states that the combined statement of revenue and certain expenses was prepared for the purpose of complying with the rules and regulations of the SEC, as described in Note 1 to the combined statement of revenue and certain expenses, and it is not intended to be a complete presentation of the Archstone Portfolio’s revenue and expenses.

 

LEGAL MATTERS

 

The legality of the securities offered hereby and certain tax matters will be passed upon for us by DLA Piper LLP (US), Chicago, Illinois. Certain legal matters in connection with this offering will be passed upon for the underwriters by Morrison & Foerster LLP. Morrison & Foerster LLP is representing us in the Archstone Transaction and has from time to time represented us on other matters.

 

WHERE YOU CAN FIND MORE INFORMATION ABOUT US

 

This prospectus supplement and the accompanying prospectus, which we refer to together as the prospectus, do not contain all of the information included in the related registration statement. We have omitted parts of the registration statement in accordance with the rules and regulations of the SEC. For further information, we refer you to the registration statement on Form S-3, including its exhibits. Statements contained in this prospectus about the provisions or contents of any agreement or other document are not necessarily complete. In accordance with SEC rules and regulations, we have filed agreements and documents that we are required to file as exhibits to the registration statement. Please see such agreements and documents for a complete description of these matters. You should not assume that the information in this prospectus supplement or the accompanying prospectus is accurate as of any date other than the date on the front of this prospectus supplement or the date on the front of the accompanying prospectus, as the case may be.

 

We file annual, quarterly and current reports and other information with the SEC. You may read and copy any document we file at the SEC’s public reference room in Washington, D.C., 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to you at the SEC’s web site at http://www.sec.gov and at our website at http://www.equityapartments.com. The contents of our website are not deemed to be a part of this prospectus.

 

The SEC allows us to “incorporate by reference” into this prospectus the information we file with it. This means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be a part of this prospectus, and later information filed with the SEC will update and supersede information in prior filings. We incorporate by reference into this prospectus our documents listed below:

 

   

Annual Report on Form 10-K for the year ended December 31, 2011;

 

   

Definitive Proxy Statement on Schedule 14A filed with the SEC on April 16, 2012;

 

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Quarterly Reports on Form 10-Q for the quarters ended March 31, 2012, June 30, 2012 and September 30, 2012;

 

   

Current Reports on Form 8-K filed on January 9, 2012, January 11, 2012, January 23, 2012, February 2, 2012, February 21, 2012, April 19, 2012, May 25, 2012, June 7, 2012, June 13, 2012, June 25, 2012, July 26, 2012, August 29, 2012 and November 26, 2012 (two reports) and on Form 8-K/A filed February 2, 2012; and

 

   

Description of Common Shares contained in our registration statement on Form 8-A/A dated August 10, 1993.

 

All documents filed by us pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934, as amended, or the 1934 Act, after the date of this prospectus and prior to the termination of our offering under this prospectus will also be deemed to be incorporated by reference in this prospectus and to be a part hereof from the date of filing those documents. We are not, however, incorporating by reference any documents or portions thereof, whether specifically listed above or filed in the future, that are not deemed “filed” with the Commission, including, but not limited to, any information furnished pursuant to Items 2.02 or 7.01 of Form 8-K or related exhibits furnished pursuant to Item 9.01 of such form.

 

You may request copies of these filings, at no cost, by writing to or telephoning us at the following address:

 

Equity Residential

Two North Riverside Plaza, Suite 400

Chicago, Illinois 60606

Attention: Investor Relations

Telephone Number: (888) 879-6356

 

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PROSPECTUS

EQUITY RESIDENTIAL

Common Shares

Preferred Shares

Depositary Shares

Share Purchase Contracts

Warrants

EQR Debt Securities

Guarantees

ERP OPERATING LIMITED PARTNERSHIP

ERP Debt Securities

Guarantees

From time to time Equity Residential may offer (i) common shares of beneficial interest, $0.01 par value per share (“Common Shares”), (ii) in one or more series preferred shares of beneficial interest, $0.01 par value per share (“Preferred Shares”), (iii) in one or more series Preferred Shares represented by depositary shares (the “Depositary Shares”), (iv) share purchase contracts (“Share Purchase Contracts”), (v) warrants (“Warrants”), (vi) debt securities (“EQR Debt Securities”), and (vii) guarantees of debt securities of ERP Operating Limited Partnership. The Common Shares, Preferred Shares, Depositary Shares, Share Purchase Contracts, Warrants, EQR Debt Securities, and guarantees of debt securities of ERP Operating Limited Partnership (collectively, the “EQR Securities”) may be offered, separately or together, in separate series (with respect to Preferred Shares, Depositary Shares and EQR Debt Securities), in amounts, at prices and on terms to be described in one or more supplements to this prospectus.

From time to time ERP Operating Limited Partnership may offer (i) unsecured senior or subordinated debt securities (“ERP Debt Securities”) and (ii) guarantees of EQR Debt Securities (together, the “ERP Securities” and, together with the EQR Securities, the “Securities”), in amounts, at prices and on terms to be described in one or more supplements to this prospectus.

When we decide to offer the Securities, we will prepare a prospectus supplement describing the offering and the particular terms of the Securities we are selling, which terms will include, among other things: (i) in the case of Preferred Shares, the specific title and stated value, any distribution, liquidation, redemption, conversion, voting and other rights, and any initial public offering price; (ii) in the case of Common Shares, any initial public offering price; and (iii) in the case of Depositary Shares, the fractional Preferred Shares represented by each Depositary Share and the applicable terms of those preferred shares. In addition, such specific terms may include limitations on direct or beneficial ownership and restrictions on transfer of the Securities, in each case as may be appropriate to assist in maintaining our status as a real estate investment trust (a “REIT”) for federal income tax purposes. Any prospectus supplement describing the offering and the particular terms of debt securities will include, among other things:

 

  Ÿ  

the issuer of the debt securities,

 

  Ÿ  

the specific title of the debt securities,

 

  Ÿ  

the amount of the offering and the offering price,

 

  Ÿ  

the form of the debt securities (which may be registered or bearer, certificated or global),

 

  Ÿ  

the denominations in which the debt securities may be offered,

 

  Ÿ  

the maturity date,

 

  Ÿ  

the rate of interest (or manner of calculation thereof) and date of payment of interest,

 

  Ÿ  

any applicable terms for redemption (at our option) or repayment (at your option),

 

  Ÿ  

terms for any sinking fund payments,

 

  Ÿ  

covenants,

 

  Ÿ  

any material United States federal income tax considerations, and

 

  Ÿ  

the exchanges upon which we intend to apply to list the debt securities, if any.

The applicable prospectus supplement also will contain information, where applicable, about the material United States federal income tax considerations relating to, and any listing on a securities exchange of, the Securities covered by such prospectus supplement, not contained in this prospectus.

The Securities may be offered directly, through agents designated from time to time by us, or to or through underwriters or dealers. If any agents or underwriters are involved in the sale of any of the Securities, their names, and any applicable purchase price, fee, commission or discount arrangement with, between or among them, will be set forth, or will be calculable from the information set forth, in an accompanying prospectus supplement. See “Plan of Distribution.” No Securities may be sold without delivery of a prospectus supplement describing the method and terms of the offering of such Securities.

You should read this prospectus and any prospectus supplement carefully before you make an investment in our securities.

The Common Shares are listed on the New York Stock Exchange under the symbol “EQR.”

Our principal executive offices are located at Two North Riverside Plaza, Suite 400, Chicago, Illinois 60606 and our telephone number is (312) 474-1300.

Investing in our securities involves risks. Before buying our securities, you should read and consider the risk factors included in our periodic reports, in the prospectus supplements or any free writing prospectus relating to any specific offering, and in other information that we file with the Securities and Exchange Commission. See “Where You Can Find More Information About Us” and “Special Note Regarding Forward-Looking Statements.”

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is October 15, 2010.


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TABLE OF CONTENTS

 

About This Prospectus

    2   

Where You Can Find More Information About Us

    3   

Special Note Regarding Forward-Looking Statements

    4   

Equity Residential and ERP Operating Limited Partnership

    4   

Anticipated Use of Proceeds

    4   

Ratios of Earnings to Combined Fixed Charges

    5   

Description of Equity Residential Securities

    5   

Description of ERP Operating Limited Partnership Securities

    19   

Federal Income Tax Considerations Related to Common Shares

    35   

Plan of Distribution

    44   

Experts

    45   

Legal Matters

    45   

We have not authorized any person to give any information or to make any representations in connection with this offering other than those contained or incorporated or deemed to be incorporated by reference in this prospectus and any applicable prospectus supplement or free writing prospectus, and, if given or made, such information or representations must not be relied upon as having been so authorized. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy by anyone in any jurisdiction in which such offer or solicitation is not authorized, or in which the person is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this prospectus nor any sale hereunder shall, under any circumstances, create any implication that there has been no change in our affairs since the date hereof, that the information contained herein is correct as of any time subsequent to its date, or that any information incorporated or deemed to be incorporated by reference herein is correct as of any time subsequent to its date.

ABOUT THIS PROSPECTUS

This prospectus is part of an automatic shelf registration statement that we filed with the Securities and Exchange Commission, or the “SEC,” as a “well-known seasoned issuer” as defined in Rule 405 under the Securities Act of 1933, as amended, or the “Securities Act.” By using an automatic shelf registration statement, we may, at any time and from time to time, sell the securities described in this prospectus or in any applicable prospectus supplement in one or more offerings. The exhibits to the registration statement contain the full text of certain contracts and other important documents we have summarized in this prospectus. Since these summaries may not contain all the information that you may find important in deciding whether to purchase the securities we offer, you should review the full text of these documents. The registration statement and the exhibits can be obtained from the SEC as indicated under the heading “Where You Can Find More Information About Us.”

This prospectus only provides you with a general description of the securities we may offer. Each time we sell securities, we will provide a prospectus supplement that will contain specific information about the terms of those securities. The prospectus supplement may also add, update or change information contained in this prospectus. You should read both this prospectus and any prospectus supplement together with the documents incorporated or deemed to be incorporated by reference in this prospectus and the additional information described under the heading “Where You Can Find More Information About Us” in this prospectus.

Unless the context otherwise requires or as otherwise specified, references in this prospectus to “we,” “us,” or “our” refer to Equity Residential and its subsidiaries, including ERP Operating Limited Partnership. In addition, we sometimes refer to ERP Operating Limited Partnership as the “Operating Partnership” and to Equity Residential as the “Company.”


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WHERE YOU CAN FIND MORE INFORMATION ABOUT US

This prospectus does not contain all of the information included in the related registration statement. Parts of the registration statement have been omitted in accordance with the rules and regulations of the SEC. For further information, we refer you to the registration statement on Form S-3, including its exhibits. Statements contained in this prospectus about the provisions or contents of any agreement or other document are not necessarily complete. In accordance with SEC rules and regulations, we have filed agreements and documents that we are required to file as exhibits to the registration statement. Please see such agreements and documents for a complete description of these matters. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front of this prospectus.

Equity Residential and ERP Operating Limited Partnership file annual, quarterly and current reports and other information with the SEC. You may read and copy any document we file at the SEC’s public reference room located at 100 F Street NE, Washington, D.C., 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to you at the SEC’s web site at http://www.sec.gov and at our website at http://www.equityapartments.com. The contents of our website are not deemed to be part of this prospectus or any prospectus supplement.

The SEC allows us to “incorporate by reference” into this prospectus the information we file with it. This means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be a part of this prospectus, and later information filed with the SEC will update and supersede information in prior filings. We incorporate by reference into this prospectus our documents listed below:

 

  Ÿ  

Annual reports of Equity Residential and ERP Operating Limited Partnership on Form 10-K for the year ended December 31, 2009 (Files Nos. 001-12252 and 000-24920);

 

  Ÿ  

Quarterly reports of Equity Residential on Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010 (File No. 001-12252);

 

  Ÿ  

Quarterly reports of ERP Operating Limited Partnership on Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010 (File No. 000-24920);

 

  Ÿ  

Current reports of Equity Residential on Form 8-K filed on January 4, 2010, January 26, 2010, February 4, 2010, March 22, 2010, June 21, 2010, July 8, 2010 and September 14, 2010 (File No. 001-12252);

 

  Ÿ  

Current reports of ERP Operating Limited Partnership on Form 8-K filed on January 4, 2010, January 26, 2010, March 22, 2010, July 8, 2010, July 15, 2010 and September 14, 2010 (File No. 000-24920); and

 

  Ÿ  

Description of Equity Residential’s Common Shares contained in its registration statement on Form 8-A/A dated August 10, 1993.

All documents filed by either of us pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act of 1934, as amended, or the “1934 Act,” after the date of this prospectus will also be deemed to be incorporated by reference in this prospectus and to be a part hereof from the date of filing those documents. We are not, however, incorporating by reference any documents or portions thereof, whether specifically listed above or filed in the future, that are not deemed “filed” with the SEC, including, but not limited to, any information furnished pursuant to Items 2.02 or 7.01 of Form 8-K.

You may request a copy of these filings, at no cost, by writing to or telephoning either of us at the following address:

Two North Riverside Plaza, Suite 400

Chicago, Illinois 60606

Attention: Investor Relations

Telephone number: (888) 879-6356

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus and the documents incorporated or deemed incorporated by reference as described under “Where You Can Find More Information About Us” contain certain information that we intend to be considered “forward-looking statements” within the meaning of Section 27A of the Securities Act. These forward-looking statements relate to such things as our anticipated future economic performance, our plans and objectives for future operations and projections of revenue and other financial items, which can be identified by the use of forward-looking words such as “may,” “will,” “should,” “expect,” “anticipate,” “estimate” or “continue” or the negative thereof or other variations thereon or comparable terms.

Actual results could differ materially from those contemplated by these forward-looking statements as a result of many factors. The cautionary statements under the caption “Risk Factors” contained in the Annual Reports on Form 10-K of Equity Residential and ERP Operating Limited Partnership for the year ended December 31, 2009 and under Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarter ended June 30, 2010, all of which are incorporated herein by reference, and other similar statements contained in this prospectus, any accompanying prospectus supplement, any related free writing prospectus and the documents incorporated or deemed incorporated by reference herein and therein identify important factors with respect to forward-looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from those in such forward-looking statements. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely affect us. Should any known or unknown risks and uncertainties develop into actual events, those developments could have a material adverse effect on our business, financial condition and results of operations.

In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking information contained in this prospectus and the documents incorporated by reference or deemed incorporated by reference herein will in fact transpire. Potential investors are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.

EQUITY RESIDENTIAL AND ERP OPERATING LIMITED PARTNERSHIP

Equity Residential is a Maryland REIT formed in March 1993 and an S&P 500 company focused on the acquisition, development and management of high quality apartment properties in top United States growth markets. Equity Residential is the managing general partner of ERP Operating Limited Partnership and has elected to be taxed as a REIT.

Equity Residential is one of the largest publicly traded real estate companies and is the largest publicly traded owner of multifamily properties in the United States of America (based on the aggregate market value of its outstanding common shares, the number of apartment units wholly-owned and total revenues earned). As of June 30, 2010, we had a national portfolio of 492 multifamily properties containing 137,091 apartment units located in 23 states and the District of Columbia. As of June 30, 2010, our properties had an average same store occupancy rate of approximately 95%.

ERP Operating Limited Partnership was formed to conduct the multifamily residential property business of Equity Residential. ERP Operating Limited Partnership is a limited partnership organized under the laws of the State of Illinois.

Our principal executive offices are located at Two North Riverside Plaza, Suite 400, Chicago, Illinois 60606, and our telephone number is (312) 474-1300.

ANTICIPATED USE OF PROCEEDS

Unless otherwise indicated in a prospectus supplement accompanying this prospectus, we intend to use the proceeds from the sale of the Securities for working capital and general company purposes including, without

 

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limitation, the acquisition or development of multifamily properties and the repayment of debt. Net proceeds may be temporarily invested prior to use.

RATIOS OF EARNINGS TO COMBINED FIXED CHARGES

The following table sets forth Equity Residential’s and ERP Operating Limited Partnership’s ratios of (i) earnings before combined fixed charges to total combined fixed charges and (ii) earnings before combined fixed charges and preferred distributions to total combined fixed charges and preferred distributions for the periods shown.

 

     For the Six
Months Ended
June 30,(1)
   For the Years Ended December 31,(1)
     2010    2009    2009    2008    2007    2006    2005

Ratio of earnings before combined fixed charges to total combined fixed charges(1)

                    

Ratio of earnings before combined fixed charges and preferred distributions to total combined fixed charges and preferred distributions(1)

                    

 

 

(1) For the six months ended June 30, 2010 and 2009 and the years ended December 31, 2009, 2008, 2007, 2006 and 2005, the coverage deficiencies approximated $9.3 million, $6.1 million, $32.7 million, $97.9 million, $62.9 million, $77.8 million and $15.5 million, respectively. All ratios have been reduced due to the disposition of properties which resulted in the inclusion of those properties in discontinued operations. The ratios have been further reduced due to non-cash depreciation expense and impairment charges and premiums on the redemption of preferred shares and/or preference units/interests. We were in compliance with our unsecured public debt covenants for all periods presented.

Ratio of earnings before combined fixed charges to total combined fixed charges represents the ratio of income from continuing operations plus fixed charges (primarily interest and other financing costs incurred) and less preferred distributions to fixed charges. Ratios of earnings before combined fixed charges and preferred distributions to total combined fixed charges and preferred distributions represents the ratio of income from continuing operations plus fixed charges (primarily interest and other financing costs incurred) and preferred distributions to fixed charges and preferred distributions.

DESCRIPTION OF EQUITY RESIDENTIAL SECURITIES

The following description sets forth certain general terms and provisions of the EQR Securities to which any prospectus supplement may relate. The particular terms of the EQR Securities being offered and the extent to which such general provisions may apply will be described in a prospectus supplement relating to such EQR Securities. Please note that in this section entitled “Description of Equity Residential Securities,” references to “the Company,” “we,” “our” and “us” refer to Equity Residential, as the issuer of EQR Securities, unless the context requires otherwise.

The summary of the terms of the shares of beneficial interest of the Company set forth below does not purport to be complete and is subject to and qualified in its entirety by reference to the Articles of Restatement of Declaration of Trust of the Company dated December 9, 2004 (“Declaration of Trust”), as amended and/or restated from time to time, and the Sixth Amended and Restated Bylaws of the Company, as adopted on September 10, 2008, as amended, supplemented and/or restated from time to time, each of which is incorporated herein by reference.

Our Declaration of Trust provides that we may issue up to 1,100,000,000 shares of beneficial interest, consisting of 1,000,000,000 Common Shares and 100,000,000 Preferred Shares. As of June 30, 2010, 283,442,674 Common Shares and 1,947,425 Preferred Shares were issued and outstanding.

 

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Both the Maryland REIT Law and our Declaration of Trust provide that no shareholder of the Company will be liable for any debt or obligation of the Company solely as a result of his or her status as a shareholder of the Company. Our Declaration of Trust further provides that the Company has the power to indemnify each shareholder against any claim or liability to which the shareholder may become subject by reason of his or her being or having been a shareholder and to reimburse each shareholder for all reasonable expenses incurred by him or her in connection with any such claim or liability.

Common Shares

Distributions.    All Common Shares offered hereby will be duly authorized, fully paid and non-assessable. Subject to the preferential rights of any other shares of beneficial interest and to the provisions of our Declaration of Trust regarding excess shares (as defined herein), holders of Common Shares are entitled to receive distributions if, as and when authorized and declared by the Board of Trustees of the Company (the “Board of Trustees”) out of assets legally available therefor and to share ratably in the assets of the Company legally available for distribution to its shareholders in the event of its liquidation, dissolution or winding-up after payment of, or adequate provision for, all known debts and liabilities of the Company. The Company currently pays regular quarterly distributions.

Voting Rights.    Subject to the provisions of our Declaration of Trust regarding excess shares, each outstanding Common Share entitles the holder to one vote on the following matters: (a) the election or removal of Trustees; (b) the amendment of our Declaration of Trust; (c) the voluntary dissolution or termination of Equity Residential; (d) the merger of Equity Residential, provided, however, that the shareholders shall not be entitled to vote on a merger of Equity Residential which may be approved pursuant to the provisions of the Maryland REIT Law by a majority of the entire Board of Trustees without a vote of the shareholders and, further provided, that if a shareholder vote is required pursuant to the provisions of the Maryland REIT Law, such merger shall be approved by the affirmative vote of the holders of not less than a majority of all the shares then outstanding and entitled to vote thereon, (e) the sale or other disposition of all or substantially all of Equity Residential’s assets, provided, however, that the sale or other disposition of all or substantially all of Equity Residential’s assets shall be approved by the affirmative vote of the holders of not less than a majority of all the shares then outstanding and entitled to vote thereon, and (f) such other matters with respect to which the Board of Trustees has adopted a resolution declaring advisable or recommending a proposal and directing that the matter be submitted to the shareholders for consideration. Except as otherwise required by law or except as provided with respect to any other class or series of shares of beneficial interest, the holders of such Common Shares will possess the exclusive voting power. There is no cumulative voting in the election of Trustees, which means that the holders of a majority of the outstanding Common Shares can elect all of the Trustees then standing for election and the holders of the remaining shares of beneficial interest, if any, will not be able to elect any Trustees.

Conversion, Redemption, Liquidation Rights.    Holders of Common Shares have no conversion, sinking fund, redemption or preemptive rights to subscribe for any securities of the Company. Subject to the provisions of our Declaration of Trust regarding excess shares, Common Shares have equal distribution, liquidation and other rights, and have no preference, exchange or, except as expressly required by the Maryland REIT Law, appraisal rights.

Pursuant to the Maryland REIT Law, a REIT generally cannot amend its declaration of trust or merge unless approved by the affirmative vote or written consent of shareholders holding at least two-thirds of the shares entitled to vote on the matter unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is set forth in the REIT’s declaration of trust. Our Declaration of Trust provides that a merger, and amendments to the Declaration of Trust in connection with a merger, may be approved by the affirmative vote of the holders of not less than a majority of the shares then outstanding and entitled to vote thereon. Under the Maryland REIT Law, a declaration of trust may permit the trustees by a two-thirds vote to amend the declaration of trust from time to time to qualify as a REIT under the Internal Revenue Code or the Maryland REIT Law without the affirmative vote or written consent of the shareholders. Our Declaration of Trust permits such action by the Board of Trustees. Subject to the provisions of any