Exhibit 99.1

Item 6.    Selected Financial Data

The following table sets forth selected financial and operating information on a historical basis for the Company. The following information should be read in conjunction with all of the financial statements and notes thereto included elsewhere in this Form 8-K. The historical operating and balance sheet data have been derived from the historical financial statements of the Company. All amounts have also been restated in accordance with the discontinued operations provisions of SFAS No. 144. Certain capitalized terms as used herein are defined in the Notes to Consolidated Financial Statements.

CONSOLIDATED HISTORICAL FINANCIAL INFORMATION

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

		Year Ended December 31,
		2005			2004			2003			2002			2001
OPERATING DATA:
Total revenues from continuing operations		$	1,881,191		$	1,686,426		$	1,518,920		$	1,493,975		$	1,523,798
Interest and other income		$	68,297		$	8,956		$	15,511		$	14,291		$	21,752
Income from continuing operations, net of minority interests		$	178,924		$	121,837		$	134,606		$	146,988		$	198,527
Gain on sales of discontinued operations, net of minority interests		$	650,563		$	296,343		$	287,372		$	96,317		$	136,696
Discontinued operations, net of minority interests		$	32,306		$	54,149		$	101,333		$	157,472		$	121,351
Net income		$	861,793		$	472,329		$	523,311		$	400,777		$	455,408
Net income available to Common Shares		$	807,792		$	418,583		$	426,639		$	324,162		$	362,580
Earnings per share — basic:
Income from continuing operations available to Common Shares		$	0.44		$	0.24		$	0.14		$	0.26		$	0.40
Net income available to Common Shares		$	2.83		$	1.50		$	1.57		$	1.19		$	1.36
Weighted average Common Shares outstanding		285,760			279,744			272,337			271,974			267,349
Earnings per share — diluted:
Income from continuing operations available to Common Shares		$	0.43		$	0.24		$	0.14		$	0.26		$	0.39
Net income available to Common Shares		$	2.79		$	1.48		$	1.55		$	1.18		$	1.34
Weighted average Common Shares outstanding		310,785			303,871			297,041			297,969			295,213
Distributions declared per Common Share outstanding		$	1.74		$	1.73		$	1.73		$	1.73		$	1.68
BALANCE SHEET DATA (at end of period):
Real estate, before accumulated depreciation		$	16,590,370		$	14,852,621		$	12,874,379		$	13,046,263		$	13,016,183
Real estate, after accumulated depreciation		$	13,702,230		$	12,252,794		$	10,578,366		$	10,934,246		$	11,297,338
Total assets		$	14,098,945		$	12,645,275		$	11,466,893		$	11,810,917		$	12,235,625
Total debt		$	7,591,073		$	6,459,806		$	5,360,489		$	5,523,699		$	5,742,758
Minority Interests		$	422,183		$	535,582		$	600,929		$	611,303		$	635,822
Shareholders’ equity		$	5,395,340		$	5,072,528		$	5,015,441		$	5,197,123		$	5,413,950
OTHER DATA:
Total properties (at end of period)		926			939			968			1,039			1,076
Total apartment units (at end of period)		197,404			200,149			207,506			223,591			224,801
Funds from operations available to Common Shares and OP Units - basic (1)(2)		$	784,625		$	651,741		$	640,390		$	719,265		$	706,294
Cash flow provided by (used for):
Operating activities		$	714,291		$	717,750		$	744,319		$	888,263		$	889,668
Investing activities		$	(607,961	)	$	(565,968	)	$	334,028		$	(48,622	)	$	57,429
Financing activities		$	(101,007	)	$	(117,856	)	$	(1,058,643	)	$	(861,369	)	$	(919,266	)

 

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

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

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

Overview

The following discussion and analysis of the results of operations and financial condition of the Company should be read in connection with the Consolidated Financial Statements and Notes thereto. Due to the Company’s ability to control the Operating Partnership and its subsidiaries other than entities owning interests in the Unconsolidated Properties and certain other entities in which the Company has investments, the Operating Partnership and each such subsidiary entity has been consolidated with the Company for financial reporting purposes. Capitalized terms used herein and not defined are as defined elsewhere in the Annual Report on Form 10-K for the year ended December 31, 2005.

Forward-looking statements in this Item 7 as well as elsewhere in the Annual Report on Form 10-K are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates, projections and assumptions made by management. While the Company’s management believes the assumptions underlying its forward-looking statements are reasonable, such information is inherently subject to uncertainties and may involve certain risks, which could cause actual results, performance, or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Many of these uncertainties and risks are difficult to predict and beyond management’s control. Forward-looking statements are not guarantees of future performance, results or events. The Company assumes no obligation to update or supplement forward-looking statements because of subsequent events. Factors that might cause such differences include, but are not limited to, the following:

·                  We intend to actively acquire and develop multifamily properties for rental operations and/or conversion into condominiums, as well as upgrade and sell existing properties as individual condominiums. We may underestimate the costs necessary to bring an acquired or condominium conversion property up to standards established for its intended market position or to otherwise develop a property. Additionally, we expect that other major real estate investors with significant capital will compete with us for attractive investment opportunities or may also develop properties in markets where we focus our development efforts. This competition may increase prices for multifamily properties or decrease the price at which we expect to sell individual condominiums. Upon conversion of properties to condominiums, we have increased our risk related to construction performed during the conversion. Condominium associations may assert that the construction performed was defective, resulting in litigation and/or settlement discussions. We may not be in a position or have the opportunity in the future to make suitable property acquisitions on favorable terms. We also

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plan to develop more properties ourselves in addition to co-investing with our development partners for either the rental or condominium market, depending on opportunities in each sub-market. This may increase the overall level of risk associated with our developments. The total number of development units, cost of development and estimated completion dates are subject to uncertainties arising from changing economic conditions (such as the cost of labor and construction materials), competition and local government regulation.

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

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

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

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

Results of Operations

In conjunction with our business objectives and operating strategy, the Company has continued to invest or recycle its capital investment in apartment properties located in strategically targeted markets during the years ended December 31, 2005 and December 31, 2004. In summary, we:

Year Ended December 31, 2005:

·                  Acquired $2.5 billion of apartment properties consisting of forty-one properties and 12,059 units, and $138.3 million of land parcels, all of which we deem to be in our strategic targeted markets; and

·                  Sold $1.4 billion of apartment properties consisting of 50 properties and 12,848 units, as well as 2,241 condominium units for $593.3 million and five land parcels for $108.3 million.

Year Ended December 31, 2004:

·                  Acquired $900.8 million of apartment properties consisting of twenty-four properties and 6,182 units, as well as $12.4 million of land parcels; and

·                  Sold $787.8 million of apartment properties consisting of fifty-six properties and 14,159 units as well as 977 condominium units for $177.3 million and two land parcels for $27.9 million.

The Company’s primary financial measure for evaluating each of its apartment communities is net operating income (“NOI”). NOI represents rental income less property and maintenance expense, real estate tax and insurance expense, and property management expense. The Company believes that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it is a direct measure of the actual operating results of the Company’s apartment communities.

Properties that the Company owned for all of both 2005 and 2004 (the “2005 Same Store Properties”), which represented 154,854 units, impacted the Company’s results of operations. Properties that the Company owned for all of both 2004 and 2003 (the “2004 Same Store Properties”), which

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represented 162,201 units, also impacted the Company’s results of operations. Both the 2005 Same Store Properties and 2004 Same Store Properties are discussed in the following paragraphs.

The Company’s acquisition, disposition, completed development and consolidation of previously unconsolidated property and variable interest entity activities also impacted overall results of operations for the years ended December 31, 2005 and 2004. The impacts of these activities are also discussed in greater detail in the following paragraphs.

Comparison of the year ended December 31, 2005 to the year ended December 31, 2004

For the year ended December 31, 2005, income from continuing operations, net of minority interests increased by approximately $57.1 million when compared to the year ended December 31, 2004. The increase in continuing operations, net of minority interests is discussed below.

Revenues from the 2005 Same Store Properties increased $61.9 million primarily as a result of lower concessions provided residents and a slight increase in average per unit and occupancy rates. Expenses from the 2005 Same Store Properties increased $36.2 million primarily due to higher payroll, utility costs and real estate taxes. The following tables provide comparative revenue, expense, NOI and weighted average occupancy for the 2005 Same Store Properties:

 

(1)          Results have not been updated to remove properties sold in the first three months of 2006.

(2)          Year 2005 expenses exclude $11.1 million of uninsured property damage caused by Hurricane Wilma. Year 2004 expenses exclude $15.2 million of uninsured property damage caused by Hurricanes Charley, Frances, Ivan and Jeanne.

 

The following table presents a reconciliation of operating income per the consolidated statements of operations included in the original Form 10-K to NOI for the 2005 Same Store Properties (table has not been updated to reflect discontinued operations treatment for properties sold in the first three months of 2006).

 

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(1)  Hurricane property damage net of reimbursement from insurance company.

For properties that the Company acquired prior to January 1, 2005 and expects to continue to own through December 31, 2006, the Company anticipates the following same store results for the full year ending December 31, 2006:

 

These 2006 assumptions are based on current expectations and are forward-looking.

Non-same store operating results increased $78.6 million and consist primarily of properties acquired in calendar years 2005 and 2004 as well as our corporate housing business.

Fee and asset management revenues, net of fee and asset management expenses, decreased by $1.6 million primarily as a result of lower income earned from Ft. Lewis and managing fewer properties for third parties and unconsolidated entities. As of December 31, 2005 and 2004, the Company managed 16,269 units and 17,988 units, respectively, for third parties and unconsolidated entities.

Property management expenses from continuing operations include off-site expenses associated with the self-management of the Company’s properties as well as management fees paid to any third party management companies. These expenses increased by approximately $11.2 million or 13.1%. This increase is primarily attributable to higher overall payroll costs including bonuses, long-term compensation costs and an increase of the Company’s match for employee 401(k) contributions.

Depreciation expense from continuing operations, which includes depreciation on non-real estate assets, increased $60.3 million primarily as a result of additional depreciation expense on newly acquired properties and capital expenditures for all properties owned.

General and administrative expenses, which include corporate operating expenses, increased approximately $22.5 million between the periods under comparison. This increase was primarily due to higher executive compensation expense due to severance costs of $9.8 million for several executive officers, $7.9 million of additional accruals specific to performance shares for selected executive officers

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and a $2.5 million profit sharing accrual to be paid in the first quarter of 2006. The Company anticipates that general and administrative expenses will approximate $50.0 million for the year ending December 31, 2006. The above assumption is based on current expectations and is forward-looking.

Interest and other income from continuing operations increased approximately $59.3 million, primarily as a result of the $57.1 million in cash received for the Company’s ownership interest in Rent.com, which was acquired by eBay, Inc.

Interest expense from continuing operations, including amortization of deferred financing costs, increased approximately $55.8 million primarily as a result of higher overall debt balances as well as higher variable interest rates. During the year ended December 31, 2005, the Company capitalized interest costs of approximately $13.7 million as compared to $14.0 million for the year ended December 31, 2004. This capitalization of interest primarily relates to consolidated projects under development. The effective interest cost on all indebtedness for the year ended December 31, 2005 was 6.16% as compared to 5.87% for the year ended December 31, 2004.

Income (loss) from investments in unconsolidated entities increased approximately $7.8 million between the periods under comparison. This increase is primarily the result of consolidation of properties that were previously unconsolidated in the first quarter of 2004.

Net gain on sales of unconsolidated entities decreased $3.3 million, primarily due to a decrease in the number of unconsolidated entities sold.

Net gain on sales of land parcels increased $24.8 million, primarily due to an increase in the number of land parcels sold and large gains recorded on two land parcels located in Tyson’s Corner, Virginia.

Gain on sales of discontinued operations, net of minority interests increased approximately $354.2 million between the periods under comparison. This increase is primarily the result of higher per unit sales prices and lower real estate net book values for properties sold during the year ended December 31, 2005 as compared to the same period in 2004 as well as higher condominium sales. The Company recognized $91.6 million and $32.1 million of net incremental gain on sales of condominium units (net of provision for income taxes) for the years ended December 31, 2005 and 2004, respectively.

Discontinued operations, net of minority interests, decreased approximately $21.8 million between the periods under comparison. The decrease in revenues and expenses between period results from the timing, size and number of properties sold. Any property sold after December 31, 2004 will include a full period’s results in the year ended December 31, 2004 but minimal to no results in the year ended December 31, 2005. See Note 13 in the Notes to Consolidated Financial Statements for further discussion.

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

For the year ended December 31, 2004, income from continuing operations, net of minority interests decreased by approximately $12.8 million when compared to the year ended December 31, 2003 due to the reasons noted below.

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

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(1)          Year 2004 expenses exclude $15.2 million of uninsured property damage
caused by Hurricanes Charley, Frances, Ivan and Jeanne.

 

Non-same store operating results are primarily from newly acquired properties not yet included as 2004 Same Store Properties and the consolidation of all previously unconsolidated development projects.

Fee and asset management revenues, net of fee and asset management expenses, decreased by $3.8 million primarily as a result of lower income earned from Ft. Lewis and managing fewer properties for third parties and unconsolidated entities. As of December 31, 2004 and 2003, the Company managed 17,988 units and 18,475 units, respectively, for third parties and unconsolidated entities.

Property management expenses from continuing operations include off-site expenses associated with the self-management of the Company’s properties as well as management fees paid to any third party management companies. These expenses increased by approximately $8.1 million or 10.4%. This increase is primarily attributable to higher payroll costs, including bonuses and long-term compensation costs as well as severance costs for certain employees. In addition, the property management company experienced slightly higher costs for travel, temporary help, internal conferences and legal and professional fees.

Depreciation expense from continuing operations, which includes depreciation on non-real estate assets, increased $59.2 million primarily as a result of the consolidation of previously unconsolidated projects and properties acquired after December 31, 2003, many of which had significantly higher per unit acquisition costs than properties previously acquired, and also due to additional depreciation on capital expenditures for all properties owned.

General and administrative expenses, which include corporate operating expenses, increased approximately $12.3 million between the periods under comparison. This increase was primarily due to the costs of consulting services rendered to increase operating efficiencies and increased litigation and internal control costs partially offset by $1.4 million of immediate expense recognition related to options granted in the first quarter of 2003 to the Company’s former chief executive officer. Consulting services were contracted to enhance resident satisfaction/retention, unit pricing and expense procurement/reduction.

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

Interest and other income from continuing operations decreased approximately $6.6 million, primarily as a result of lower balances available for investments including deposits in tax deferred exchange accounts and collateral agreements related to development projects.

Interest expense from continuing operations, including amortization of deferred financing costs, increased approximately $15.5 million. This increase was primarily attributable to increases in mortgage and unsecured note balances and lower capitalized interest. During the year ended December 31, 2004, the Company capitalized interest costs of approximately $14.0 million as compared to $20.6 million for the year ended December 31, 2003. This capitalization of interest primarily related to Partially Owned Properties (consolidated) engaged in development activities. The effective interest cost on all indebtedness for the year ended December 31, 2004 was 5.87% as compared to 6.36% for the year ended December 31, 2003.

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

Gain on sales of discontinued operations, net of minority interests increased approximately $9.0 million between the periods under comparison. This increase is primarily the result of an increase in the number of condominium units sold.

Discontinued operations, net of minority interests, decreased approximately $47.2 million between the periods under comparison. See Note 13 in the Notes to Consolidated Financial Statements for further discussion.

Liquidity and Capital Resources

For the Year Ended December 31, 2005

As of January 1, 2005, the Company had approximately $83.5 million of cash and cash equivalents and $484.6 million available under its line of credit (net of $65.4 million which was restricted/dedicated to support letters of credit and not available for borrowing). After taking into effect the various transactions discussed in the following paragraphs and the net cash provided by operating activities, the Company’s cash and cash equivalents balance at December 31, 2005 was approximately $88.8 million and the amount available on the Company’s line of credit was $780.8 million (net of $50.2 million which was restricted/dedicated to support letters of credit and not available for borrowing).

During the year ended December 31, 2005, the Company generated proceeds from various transactions, which included the following:

·                  Disposed of fifty-six properties (including various individual condominium units) and five land parcels and received net proceeds of approximately $2.0 billion;

·                  Obtained $496.2 million in net proceeds from the issuance of $500.0 million of ten and one-half year 5.125% fixed rate public notes;

·                  Obtained $280.1 million in new mortgage financing;

·                  Obtained $57.1 million for its ownership interest in Rent.com;

·                  Received $25.0 million in full redemption of 1,000,000 shares of Wellsford 8.25% Convertible Trust Preferred Securities; and

·                  Issued approximately 2.5 million Common Shares and received net proceeds of $63.1 million.

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During the year ended December 31, 2005, the above proceeds were primarily utilized to:

·                  Acquire forty-one properties and seven land parcels (including one additional unit at one property) utilizing cash of $2.2 billion;

·                  Repay $470.4 million of mortgage loans;

·                  Repay $194.3 million of fixed rate public notes;

·                  Redeem or repurchase the Series B through F Preference Interests at a liquidation value of $146.0 million;

·                  Redeem the Series B Preferred Shares at a liquidation value of $125.0 million; and

·                  Invest $180.0 million primarily in development projects.

Depending on its analysis of market prices, economic conditions, and other opportunities for the investment of available capital, the Company may repurchase its Common Shares pursuant to its existing share buyback program authorized by the Board of Trustees. The Company did not repurchase any of its Common Shares during the year ended December 31, 2005 but did repurchase $31.5 million (719,800 shares at an average price per share of $43.76) during February 2006 to offset the issuance of 661,962 OP Units in connection with a property acquisition and to partially offset restricted shares granted in February 2006. The Company is authorized to repurchase approximately $553.5 million of additional Common Shares.

The Company’s total debt summary and debt maturity schedule as of December 31, 2005, are as follows:

Debt Summary
					Weighted
		$ Millions (1)			Average Rate (1)
Secured		$	3,379		5.63	%
Unsecured		4,212			5.89	%
Total		$	7,591		5.76	%
Fixed Rate		$	5,700		6.32	%
Floating Rate		1,891			3.75	%
Total		$	7,591		5.76	%
Above Totals Include:
Tax Exempt
Fixed		$	135		4.02	%
Floating		629			2.95	%
Total		$	764		3.25	%
Unsecured Revolving Credit Facilities		$	769		3.80	%

(1)    Net of the effect of any derivative instruments

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(1)            Includes $150.0 million of 7.57% unsecured debt with a final maturity of 2026 that is putable in 2006. Also includes $215.0 million outstanding on the Company’s short-term $600.0 million unsecured revolving credit facility. This facility was terminated on January 20, 2006 in conjunction with the Company’s $400.0 million unsecured note issuance which closed on January 19, 2006.

(2)            Includes $554.0 million outstanding on the Company’s long-term unsecured revolving credit facility which matures on May 29, 2008.

As of March 1, 2006, $580.0 million in debt securities remains available for issuance by the Operating Partnership under a registration statement the SEC declared effective in June 2003 and $956.5 million in equity securities remains available for issuance by the Company under a registration statement the SEC declared effective in February 1998.

The Company’s “Consolidated Debt-to-Total Market Capitalization Ratio” as of December 31, 2005 is presented in the following table. The Company calculates the equity component of its market capitalization as the sum of (i) the total outstanding Common Shares and assumed conversion of all OP Units at the equivalent market value of the closing price of the Company’s Common Shares on the New York Stock Exchange; (ii) the “Common Share Equivalent” of all convertible preferred shares and preference interests/units; and (iii) the liquidation value of all perpetual preferred shares and preference interests outstanding.

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Capital Structure as of December 31, 2005
(Amounts in thousands except for share and per share amounts)

 

Convertible Preferred Equity as of December 31, 2005
(Amounts in thousands except for share and per share amounts)

 

Series		Redemption Date		Outstanding Shares/Units		Liquidation Value			Annual Dividend Rate Per Share/Unit			Annual Dividend Amount			Weighted Average Rate		Conversion Ratio		Common Share Equivalents
Preferred Shares:
7.00% Series E		11/1/98		529,096		$	13,228		$	1.75		$	926				1.1128		588,778
7.00% Series H		6/30/98		34,734		868			1.75			61					1.4480		50,295
Preference Interests:
7.625% Series H (1)		3/23/06		190,000		9,500			3.8125			724					1.5108		287,052
7.625% Series I		6/22/06		270,000		13,500			3.8125			1,029					1.4542		392,634
7.625% Series J		12/14/06		230,000		11,500			3.8125			877					1.4108		324,484
Junior Preference Units:
8.00% Series B		7/29/09		7,367		184			2.00			15					1.020408		7,517
Total Convertible Preferred Equity				1,261,197		$	48,780					$	3,632		7.44	%			1,650,760

 

Perpetual Preferred Equity as of December 31, 2005
(Amounts in thousands except for share and per share amounts)

 

(1)               The Series G and H Preference Interests were called for redemption on February 10, 2006, to be effective March 21, 2006 and March 23, 2006, respectively. See Note 3 in the notes to consolidated financial statements for additional discussion.

The Company expects to meet its short-term liquidity requirements, including capital expenditures related to maintaining its existing properties and certain scheduled unsecured note and mortgage note repayments, generally through its working capital, net cash provided by operating activities and borrowings under its revolving credit facilities. The Company considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions. The

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Company also expects to meet its long-term liquidity requirements, such as scheduled unsecured note and mortgage debt maturities, property acquisitions, financing of construction and development activities and capital improvements through the issuance of unsecured notes and equity securities, including additional OP Units, and proceeds received from the disposition of certain properties. In addition, the Company has significant unencumbered properties available to secure additional mortgage borrowings in the event that the public capital markets are unavailable or the cost of alternative sources of capital is too high. The fair value of and cash flow from these unencumbered properties are in excess of the requirements the Company must maintain in order to comply with covenants under its unsecured notes and line of credit. Of the $16.6 billion in investment in real estate on the Company’s balance sheet at December 31, 2005, $10.8 billion or 65.3%, was unencumbered.

As of March 1, 2006, the Operating Partnership has a revolving credit facility with potential borrowings of up to $1.0 billion. This facility matures in May 2008 and may, among other potential uses, be used to fund property acquisitions, costs for certain properties under development and short term liquidity requirements. As of March 1, 2006, $520.0 million was outstanding under this facility (and $54.8 million was restricted and dedicated to support letters of credit).

See Note 21 in the Notes to Consolidated Financial Statements for discussion of the events which occurred subsequent to December 31, 2005.

Capitalization of Fixed Assets and Improvements to Real Estate

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

·             Replacements (inside the unit). These include:

·                  carpets and hardwood floors;

·                  appliances;

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

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

·                  flooring such as vinyl, linoleum or tile; and

·                  blinds/shades.

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

·             Building improvements (outside the unit). These include:

·                  roof replacement and major renovations;

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

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

·                  major building mechanical equipment systems;

·                  interior and exterior structural repair and exterior painting and siding;

·                  major landscaping and grounds improvement; and

·                  vehicles and office and maintenance equipment.

All building improvements are depreciated over a five to ten-year estimated useful life. We expense as incurred all recurring expenditures that do not improve the value of the asset or extend its useful life.

17

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For the year ended December 31, 2005, our actual improvements to real estate totaled approximately $232.5 million. This includes the following detail (amounts in thousands except for unit and per unit amounts):

 

Capitalized Improvements to Real Estate For the Year Ended December 31, 2005
		Total Units(1)		Replacements			Avg. Per Unit			Building Improvements			Avg. Per Unit			Total			Avg. Per Unit
Established Properties(2)		145,305		$	55,508		$	382		$	89,252		$	614		$	144,760		$	996
New Acquisition Properties(3)		27,669		5,626			270			19,508			937			25,134			1,207
Other(4)		8,531		23,421						39,185						62,606
Total		181,505		$	84,555					$	147,945					$	232,500

 

(1)             Total units exclude 15,899 unconsolidated units.

(2)             Wholly Owned Properties acquired prior to January 1, 2003.

(3)             Wholly Owned Properties acquired during 2003, 2004 and 2005. Per unit amounts are based on a weighted average of 20,828 units.

(4)             Includes properties either Partially Owned or sold during the period, commercial space, condominium conversions and $6.8 million included in building improvements spent on nine specific assets related to major renovations and repositioning of these assets.

For the year ended December 31, 2004, our actual improvements to real estate totaled approximately $212.2 million. This includes the following detail (amounts in thousands except for unit and per unit amounts):

Capitalized Improvements to Real Estate For the Year Ended December 31, 2004
		Total Units(1)		Replacements			Avg. Per Unit			Building Improvements			Avg. Per Unit			Total			Avg. Per Unit
Established Properties(2)		153,442		$	57,300		$	373		$	95,715		$	624		$	153,015		$	997
New Acquisition Properties(3)		21,762		4,026			229			10,127			576			14,153			805
Other(4)		8,727		17,868						27,135						45,003
Total		183,931		$	79,194					$	132,977					$	212,171

 

(1)             Total units exclude 16,218 unconsolidated units.

(2)             Wholly Owned Properties acquired prior to January 1, 2002.

(3)             Wholly Owned Properties acquired during 2002, 2003 and 2004. Per unit amounts are based on a weighted average of 17,577 units.

(4)             Includes properties either Partially Owned or sold during the period, commercial space, condominium conversions and $6.6 million included in building improvements spent on fifteen specific assets related to major renovations and repositioning of these assets.

The Company expects to fund approximately $170.0 million for capital expenditures for replacements and building improvements for all consolidated properties, exclusive of condominium conversion properties, in 2006. This includes an average of approximately $1,000 per unit for capital improvements for established properties.

18

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During the year ended December 31, 2005, the Company’s total non-real estate capital additions, such as computer software, computer equipment, and furniture and fixtures and leasehold improvements to the Company’s property management offices and its corporate offices, was approximately $17.6 million. The Company expects to fund approximately $10.8 million in total additions to non-real estate property in 2006.

Improvements to real estate and additions to non-real estate property were funded from net cash provided by operating activities.

Derivative Instruments

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

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

See Note 11 in the Notes to Consolidated Financial Statements for additional discussion of derivative instruments at December 31, 2005.

Other

Minority Interests as of December 31, 2005 decreased by $113.4 million when compared to December 31, 2004. The primary factors that impacted this account in the Company’s consolidated statements of operations and balance sheets during the year ended December 31, 2005 were:

·                  The redemption or repurchase of 2.9 million shares of Series B through F Preference Interests with a combined liquidation value of $146.0 million and a premium on redemption of $4.1 million (see Note 3 in the Notes to the Consolidated Financial Statements for further discussion);

·                  Distributions declared to Minority Interests, which amounted to $36.1 million (excluding Junior Preference Unit and Preference Interest distributions);

·                  The allocation of income from operations to holders of OP Units in the amount of $58.5 million;

·                  The issuance of 956,751 OP Units valued at $33.7 million at an average price of $35.18 per unit;

·                  The conversion of 1.1 million OP Units into Common Shares valued at $24.2 million at an average price of $22.29 per unit.

Total distributions paid in January 2006 amounted to $147.2 million (excluding distributions on Partially Owned Properties), which included certain distributions declared during the fourth quarter ended December 31, 2005.

Off-Balance Sheet Arrangements and Contractual Obligations

The Company has co-invested in various properties that are unconsolidated and accounted for under the equity method of accounting. Management does not believe these investments have a materially different impact upon the Company’s liquidity, capital resources, credit or market risk than its property management and ownership activities. The nature and business purpose of these ventures are as follows:

·                              Institutional Ventures — During 2000 and 2001, the Company entered into ventures with an unaffiliated partner.  At the respective closing dates, the Company sold and/or contributed 45 properties containing 10,846 units to these ventures and retained a 25% ownership interest in the

19

ventures. The Company’s joint venture partner contributed cash equal to 75% of the agreed-upon equity value of the properties comprising the ventures, which was then distributed to the Company. The Company’s strategy with respect to these ventures was to reduce its concentration of properties in a variety of markets.

·                              Other — As of December 31, 2005, the Company has ownership interests in eleven properties containing 1,360 units acquired in a prior merger. The current weighted average ownership percentage is 11.0%. The Company’s strategy with respect to these interests is either to acquire a majority ownership or sell the Company’s interest.

As of December 31, 2005, the Company has six projects totaling 1,760 units in various stages of development with estimated completion dates ranging through March 31, 2008. The primary development agreements currently in place have the following key terms:

·                              The first development partner has the right, at any time following completion of a project subject to the agreement, to stipulate a value for such project and offer to sell its interest in the project to the Company based on such value. If the Company chooses not to purchase the interest, the Company must agree to a sale of the project to an unrelated third party at such value. The Company’s partner must exercise this right as to all projects subject to the agreement within five years after the receipt of the final certificate of occupancy on the last developed property.  In connection with this development agreement, the Company has an obligation to provide up to $40.0 million in credit enhancements to guarantee a portion of the third party construction financing. As of the date of this filing, the Company had no amounts outstanding related to this credit enhancement. The Company would be required to perform under this agreement only if there was a material default under a third party construction mortgage agreement. This agreement expires no later than December 31, 2018. Notwithstanding the termination of the agreement, the Company shall have recourse against its development partner for any losses incurred.

·                              The second development partner has the right, at any time following completion of a project subject to the agreement, to require the Company to purchase the partners’ interest in that project at a mutually agreeable price. If the Company and the partner are unable to agree on a price, both parties will obtain appraisals. If the appraised values vary by more than 10%, both the Company and its partner will agree on a third appraiser to determine which original appraisal is closest to its determination of value. The Company may elect at that time not to purchase the property and instead, authorize its partner to sell the project at or above the agreed-upon value to an unrelated third party. Five years following the receipt of the final certificate of occupancy on the last developed property, the Company must purchase, at the agreed-upon price, any projects remaining unsold.

·                              The third development partner has the exclusive right for six months following stabilization, as defined, to market a subject project for sale. Thereafter, either the Company or its development partner may market a subject project for sale. If the Company’s development partner proposes the sale, the Company may elect to purchase the project at the price proposed by its partner or defer the sale until two independent appraisers appraise the project. If the two appraised values vary by more than 5%, a third appraiser will be chosen to determine the fair market value of the property. Once a value has been determined, the Company may elect to purchase the property or authorize its development partner to sell the project at the agreed-upon value.

In addition, the Company has various deal-specific development agreements with partners, the overall terms of which are similar in nature to those described above.

See Note 6 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s investments in unconsolidated entities.

20

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The Company’s guaranty of a credit enhancement agreement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project was terminated effective May 2, 2005 as the tax-exempt bonds were redeemed in full and the associated letter of credit was cancelled.

The following table summarizes the Company’s contractual obligations for the next five years and thereafter as of December 31, 2005:

Payments Due by Year (in thousands)
Contractual Obligations		2006			2007			2008			2009			2010			Thereafter			Total
Debt (a)		$	773,735		$	389,054		$	1,174,724		$	861,529		$	264,190		$	4,127,841		$	7,591,073
Operating Leases:
Minimum Rent Payments (b)		5,920			4,556			4,404			4,245			3,725			4,908			27,758
Other Long-Term Liabilities:
Deferred Compensation (c)		813			813			813			1,444			1,444			16,556			21,883
Total		$	780,468		$	394,423		$	1,179,941		$	867,218		$	269,359		$	4,149,305		$	7,640,714

 

(a)          Amounts include aggregate principal payments only. The Company paid $397,886, $348,574, and $352,391 for interest on debt, inclusive of derivative instruments, for the years ended December 31, 2005, 2004 and 2003, respectively.

(b)         Minimum basic rent due for various office space the Company leases and fixed base rent due on a ground lease for one property.

(c)          Estimated payments to the Company’s Chairman, two former CEO’s and its chief operating officer based on planned retirement dates.

Critical Accounting Policies and Estimates

The Company’s significant accounting policies are described in Note 2 in the Notes to Consolidated Financial Statements. These policies were followed in preparing the consolidated financial statements at and for the year ended December 31, 2005 and are consistent with the year ended December 31, 2004.

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

Impairment of Long-Lived Assets, Including Goodwill

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

21

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Depreciation of Investment in Real Estate

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

Cost Capitalization

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

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

Fair Value of Financial Instruments, Including Derivative Instruments

The valuation of financial instruments under SFAS No. 107 and SFAS No. 133 and its amendments (SFAS Nos. 137/138/149) requires the Company to make estimates and judgments that affect the fair value of the instruments. The Company, where possible, bases the fair values of its financial instruments, including its derivative instruments, on listed market prices and third party quotes. Where these are not available, the Company bases its estimates on current instruments with similar terms and maturities or on other factors relevant to the financial instruments.

Revenue Recognition

Rental income attributable to leases is recorded when due from residents and is recognized monthly as it is earned, which is not materially different than on a straight-line basis. Leases entered into between a resident and a property for the rental of an apartment unit are generally year-to-year, renewable upon consent of both parties on an annual or monthly basis. Fee and asset management revenue and interest income are recorded on an accrual basis.

Stock-Based Compensation

The Company elected to account for its stock-based compensation in accordance with SFAS No. 123 and its amendment (SFAS No. 148), Accounting for Stock Based Compensation, effective in the first quarter of 2003, which resulted in compensation expense being recorded based on the fair value of the stock compensation granted.

The Company elected the “Prospective Method” which requires expensing of employee awards granted or modified after January 1, 2003. Compensation expense under all of the Company’s plans is generally recognized over periods ranging from three months to five years. See Note 2 in the Notes to

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Consolidated Financial Statements for further discussion and comparative information regarding application of the fair value method to all outstanding employee awards.

Funds From Operations

For the year ended December 31, 2005, Funds From Operations (“FFO”) available to Common Shares and OP Units increased $132.9 million, or 20.4%, as compared to the year ended December 31, 2004. For the year ended December 31, 2004, FFO available to Common Shares and OP Units increased $11.4 million, or 1.8%, as compared to the year ended December 31, 2003.

The following is a reconciliation of net income to FFO available to Common Shares and OP Units for the years ended December 31, 2005, 2004 and 2003:

Funds From Operations (Amounts in thousands)
		Year Ended December 31,
		2005			2004			2003
Net income		$	861,793		$	472,329		$	523,311
Allocation to Minority Interests — Operating Partnership, net		9,084			5,090			3,096
Adjustments:
Depreciation		487,646			427,367			368,140
Depreciation — Non-real estate additions		(5,752		)	(5,574		)	(7,019		)
Depreciation — Partially Owned and Unconsolidated Properties		2,487			1,903			19,911
Net (gain) on sales of unconsolidated entities		(1,330		)	(4,593		)	(4,942		)
Discontinued operations:
Depreciation		41,312			69,216			103,429
Gain on sales of discontinued operations, net of minority interests		(650,563		)	(296,343		)	(287,372		)
Net incremental gain on sales of condominium units		91,611			32,054			10,280
Minority Interests — Operating Partnership		2,338			4,038			8,228
FFO (1)(2)		838,626			705,487			737,062
Preferred distributions		(49,642		)	(53,746		)	(76,435		)
Premium on redemption of Preferred Shares		(4,359		)	-			(20,237		)
FFO available to Common Shares and OP Units		$	784,625		$	651,741		$	640,390

 

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

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

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Item 8. Financial Statements and Supplementary Data

See Index to Consolidated Financial Statements on page F-1.

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INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

EQUITY RESIDENTIAL

FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT				PAGE
		Report of Independent Registered Public Accounting Firm		F-2
		Consolidated Balance Sheets as of December 31, 2005 and 2004		F-3
		Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003		F-4 to F-5
		Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003		F-6 to F-8
		Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2005, 2004 and 2003		F-9 to F-10
		Notes to Consolidated Financial Statements		F-11 to F-45
SCHEDULE FILED AS PART OF THIS REPORT
		Schedule III - Real Estate and Accumulated Depreciation		S-1 to S-19

 

All other schedules have been omitted because they are inapplicable, not required or the information is included elsewhere in the consolidated financial statements or notes thereto.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Trustees and Shareholders
Equity Residential

We have audited the accompanying consolidated balance sheets of Equity Residential (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the accompanying index to the financial statements and schedule. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Equity Residential at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for variable interest entities in 2004.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Equity Residential’s internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2006 (not provided herein) expressed an unqualified opinion thereon.

		/s/ ERNST & YOUNG LLP
		ERNST & YOUNG LLP

 

Chicago, Illinois
February 28, 2006, except for the fourth paragraph
of Note 21, for which the date is March 2, 2006 and
Notes 12, 13 and 20, for which the date is May 22, 2006

F-2

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

		December 31, 2005			December 31, 2004
ASSETS
Investment in real estate
Land		$	2,848,601		$	2,183,818
Depreciable property		13,336,636			12,350,900
Construction in progress (including land)		405,133			317,903
Investment in real estate		16,590,370			14,852,621
Accumulated depreciation		(2,888,140		)	(2,599,827		)
Investment in real estate, net		13,702,230			12,252,794
Cash and cash equivalents		88,828			83,505
Investments in unconsolidated entities		6,838			11,461
Rents receivable		789			1,681
Deposits — restricted		77,093			82,194
Escrow deposits — mortgage		35,225			35,800
Deferred financing costs, net		40,636			34,986
Goodwill, net		30,000			30,000
Other assets		117,306			112,854
Total assets		$	14,098,945		$	12,645,275
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Mortgage notes payable		$	3,379,289		$	3,166,739
Notes, net		3,442,784			3,143,067
Lines of credit		769,000			150,000
Accounts payable and accrued expenses		108,855			87,422
Accrued interest payable		78,441			70,411
Rents received in advance and other liabilities		302,418			227,588
Security deposits		54,823			49,501
Distributions payable		145,812			142,437
Total liabilities		8,281,422			7,037,165
Commitments and contingencies
Minority Interests:
Operating Partnership		345,034			319,841
Preference Interests		60,000			206,000
Junior Preference Units		184			184
Partially Owned Properties		16,965			9,557
Total Minority Interests		422,183			535,582
Shareholders’ equity:
Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares authorized; 3,323,830 shares issued and outstanding as of December 31, 2005 and 4,108,658 shares issued and outstanding as of December 31, 2004		504,096			636,216
Common Shares of beneficial interest, $0.01 par value; 1,000,000,000 shares authorized; 289,536,344 shares issued and outstanding as of December 31, 2005 and 285,076,915 shares issued and outstanding as of December 31, 2004		2,895			2,851
Paid in capital		5,253,188			5,112,311
Deferred compensation		-			(18		)
Distributions in excess of accumulated earnings		(350,367		)	(657,462		)
Accumulated other comprehensive loss		(14,472		)	(21,370		)
Total shareholders’ equity		5,395,340			5,072,528
Total liabilities and shareholders’ equity		$	14,098,945		$	12,645,275

 

See accompanying notes

F-3