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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION





Washington, DC 20549





---




FORM 10-K





|(Mark |  | One)
|----- |  | ----

|x |  | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- |  | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2001





OR





| ̈ |  | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- |  | ----------------------------------------------------------------------------------------

For the transition period from             to             .





Commission File Number 1-10272





ARCHSTONE-SMITH OPERATING TRUST


(Exact Name of Registrant as Specified in Its Charter)





MARYLAND

74-6056896(State or Other Jurisdiction of Incorporation or Organization)

(IRS Employer Identification No.)





9200 E. Panorama Circle, Suite 400


Englewood, Colorado 80112


(Address of Principal Executive Offices and Zip Code)





(303) 708-5959


(Registrants Telephone Number, Including Area Code)








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


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





Class A-1
Common Units


(Title of Class)





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





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





Based on the closing
price of Archstone-Smiths Common Shares on March 7, 2002, which are issuable upon redemption of the A-1 Common Units. The aggregate market value of the Class A-1 Common Units held by non-affiliates was approximately $669,502,000.





At March 7, 2002, there were approximately 24,978,000 Class A-1 Common Units outstanding held by non-affiliates.





DOCUMENTS INCORPORATED BY REFERENCE





Portions of Archstone-Smith Trusts definitive proxy statement for the 2002 annual meeting of its shareholders are incorporated by reference in Part III of this report.









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Table of Contents





Item

Description

PagePART IGlossary

31.

Business

6Archstone-Smith Operating Trust

6Trustees and Officers of Archstone-Smith Operating Trust

12Employees

14Insurance

14Risk Factors

152.

Properties

19Geographic Distribution

19Real Estate Portfolio

203.

Legal Proceedings

224.

Submission of Matters to a Vote of Security Holders

22PART II5.

Market for the Registrants Common Equity and Related Unitholder Matters

236.

Selected Financial Data

247.

Managements Discussion and Analysis of Financial Condition and Results of Operations

26Results of Operations

28Liquidity and Capital Resources

327A.

Quantitative and Qualitative Disclosures About Market Risk

378.

Financial Statements and Supplementary Data

399.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

39PART III10.

Trustees and Executive Officers of the Registrant

3911.

Executive Compensation

3912.

Security Ownership of Certain Beneficial Owners and Management

3913.

Certain Relationships and Related Transactions

39PART IV14.

Exhibits, Financial Statement Schedules and Reports on Form 8-K

39




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GLOSSARY





The following abbreviations, acronyms or defined terms used in this document are defined below:





Abbreviation, Acronym or Defined Term

Definition/DescriptionA-1 Common Unitholders

Holders of A-1 Common Units.A-1 Common Units

Archstone-Smith Operating Trust Class A-1 Common Units of beneficial interest, which are
convertible into Common Units. A-1 Common Units are the only units of the Operating Trust not held by Archstone-Smith and they represent approximately a 12.7% interest in the Operating Trust at December 31, 2001.A-2 Common Units

Archstone-Smith Operating Trust Class A-2 common units of beneficial interest. Archstone-Smith is the sole holder of our A-2 Common Units, and they represent approximately
an 87.3% interest in the Operating Trust at December 31, 2001.Ameriton

AMERITON Properties Incorporated is a taxable REIT subsidiary, which engages in the opportunistic acquisition, development and eventual disposition of real estate with a
shorter-term investment horizon.Ameriton Holdings

Ameriton Holdings, LLC, which owns 100% of the voting stock of Ameriton.Annual Report

This Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2001.APB

Accounting Principles Board.Archstone

Archstone Communities Trust.Archstone-Smith

Archstone-Smith Trust.Atlantic Merger

In July 1998, Security Capital Atlantic Incorporated was merged with and into Security Capital Pacific Trust and the combined company was renamed Archstone Communities
Trust.Board

Collectively, refers to Archstone-Smiths Board of Trustees or to Archstone-Smith our sole trustee unless the context otherwise requires.Charles E. Smith Division

Charles E. Smith Residential high-rise division of Archstone-Smith Operating Trust, which owns and operates high-rise apartment buildings.Common Share(s)

Archstone-Smith Common Shares of beneficial interest, par value $0.01 per share.Common Unit(s)

For periods prior to the Smith Merger and reorganization into an UPREIT, Archstones common shares of beneficial interest are referred to as Common Units. For periods
subsequent to the Smith Merger, Common Units refer collectively to our A-1 and A-2 Common Units.Consolidated Engineering Services (CES)

Consolidated Engineering Services, Inc. is a taxable REIT subsidiary in the business of delivering mission critical facilities management services for corporate, government
and institutional customers.Convertible Preferred Units

Collectively, the Series A, H, J, K and L Convertible Preferred Units.Declaration of Trust

The Operating Trusts Amended and Restated Declaration of Trust as filed with the State of Maryland on October 26, 2001.DEU

Dividend Equivalent Unit.Distributions

Refers to dividends paid by Archstone on either Archstone common or preferred shares of beneficial interest paid prior to the UPREIT reorganization on Smith Merger.
Subsequent to the Smith Merger, refers to distributions paid on Operating Trust Common Units or Preferred Units.DownREIT OP Units

Operating Partnership Units issued in connection with Archstone Communities Limited Partnership and Archstone Communities Limited Partnership II convertible into Common
Shares.




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Abbreviation, Acronym or Defined Term

Definition/DescriptionDownREIT Perpetual Preferred Units

Collectively, the Series E, F, and G Preferred Units issued by the Operating Trusts subsidiaries. These Units are convertible into the same series of Archstone-Smith
preferred Shares. However these units are not convertible into Archstone-Smith Common Shares.EITF

Emerging Issues Task Force of The Financial Accounting Standards Board.EPS

Earnings Per Share determined in accordance with GAAP.FASB

Financial Accounting Standards Board.Fannie Mae

Federal National Mortgage Association.Freddie Mac

Federal Home Loan Mortgage Corporation.GAAP

Generally accepted accounting principles.Homestead

Homestead Village Incorporated.In Planning

Parcels of land owned or Under Control upon which construction of apartments is expected to commence within 36 months.Lease-Up

The phase during which newly constructed apartment units are being leased for the first time, but prior to the community becoming Stabilized.LIBOR

London Interbank Offered Rate.Long-Term Unsecured Debt

Collectively, the Operating Trusts long-term unsecured senior notes payable and tax-exempt unsecured bonds.NAREIT

National Association of Real Estate Investment Trusts.Net Operating Income (NOI)

Represents rental revenues less rental expenses and real estate taxes. Also referred to as NOI.NYSE

New York Stock Exchange.Operating Trust

Archstone-Smith Operating Trust.Perpetual Preferred Units

Collectively, the Series B, C, D and I Preferred Units. These Units are not convertible, but are redeemable at the option of Archstone-Smith at certain future
dates.Preferred Units

Collectively, the Series A, C, D, H, I, J, K, and L Preferred Units.REIT

Real estate investment trust.RSU

Restricted Share Unit.Same-Store

Term used to refer to a group of operating communities that were fully operating during the entire time relating to two periods being compared.Security Capital

Security Capital Group Incorporated (NYSE:SCZ).Series A Preferred Units

Archstone-Smith Operating Trust Series A Cumulative Preferred Units of Beneficial Interest, par value $0.01 per unit.Series B Preferred Units

Archstone-Smith Operating Trust Series B Cumulative Perpetual Preferred Units of Beneficial Interest, par value $0.01 per unit.Series C Preferred Units

Archstone-Smith Operating Trust Series C Cumulative Perpetual Preferred Units of Beneficial Interest, par value $0.01 per unit.Series D Preferred Units

Archstone-Smith Operating Trust Series D Cumulative Perpetual Preferred Units of Beneficial Interest, par value $0.01 per unit.Series E Perpetual Preferred Units

8.375% Cumulative Perpetual Preferred Units.Series F Perpetual Preferred Units

8.125% Cumulative Perpetual Preferred Units.Series G Perpetual Preferred Units

8.625% Cumulative Perpetual Preferred Units.Series H Preferred Units

Archstone-Smith Operating Trust Series H Cumulative Convertible Perpetual Preferred Units of Beneficial Interest, par value $0.01 per unit.Series I Preferred Units

Archstone-Smith Operating Trust Series I Cumulative Perpetual Preferred Units of Beneficial Interest, par value $0.01 per unit.Series J Preferred Units

Archstone-Smith Operating Trust Series J Cumulative Convertible Perpetual Preferred Units of Beneficial Interest, par value $0.01 per unit.




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Abbreviation, Acronym or Defined Term

Definition/DescriptionSeries K Preferred Units

Archstone-Smith Operating Trust Series K Cumulative Convertible Perpetual Preferred Units of Beneficial Interest, par value $0.01 per unit.Series L Preferred Units

Archstone-Smith Operating Trust Series L Cumulative Convertible Perpetual Preferred Units of Beneficial Interest, par value $0.01 per unit.Service Businesses

Collectively, Consolidated Engineering Services, Inc., and Smith Management Construction. Both of these entities are taxable REIT subsidiaries and were acquired in the Smith
Merger.Smith Management Construction (SMC)

Smith Management Construction is a taxable REIT subsidiary in the business of providing construction management and building maintenance services.Smith Merger

The series of merger transactions in October 2001 whereby Archstone-Smith merged with Smith Residential and Archstone merged with Smith Partnership.Smith Partnership

Charles E. Smith Residential Realty, L.P.Smith Residential

Charles E. Smith Residential Realty, Inc.SFAS

Statement of Financial Accounting Standards.Stabilized or Stabilization

The classification assigned to an apartment community that has achieved 93% occupancy at market rents, and for which the redevelopment, new management and new marketing
programs (or development and marketing in the case of newly developed community) have been completed. The stabilization process takes up to 12 months except for major redevelopments, which could take longer.Total Expected Investment

For development communities, represents the total expected investment at completion, for operating communities, represents the total expected investment plus planned capital
expenditures.Under Control

Land parcels which Archstone-Smith Operating Trust does not own, yet has an exclusive right (through contingent contract or letter of intent) during a contractually agreed
upon time period to acquire for the future development of apartment communities, subject to approval of contingencies during the due diligence process. There is no commitment by Archstone-Smith Operating Trust to acquire such land and there can be
no assurance that any such land will be acquired.UPREIT

Umbrella Partnership Real Estate Investment Trust.




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PART I





Item 1.    
Business





Archstone-Smith Operating Trust is a leading real estate operating company focused on the operation, development, redevelopment, acquisition and long-term ownership of garden apartment communities and high-rise apartment
properties in protected markets throughout the United States. Our garden communities operate under the Archstone Communities brand name; our high-rise properties operate under the Charles E. Smith Residential brand name. As of December 31, 2001, our
portfolio comprised 176 garden communities and 49 high-rise properties, representing a total of 79,982 units, including 2,812 units in our development pipeline. At the end of 2001, 80% of our operating portfolio was concentrated in protected
locations in our core markets, based on NOI. Core markets and related NOI were:





Greater Washington, D.C. Metropolitan Area

33.2
%Southern California

11.8San Francisco Bay Area, California

9.8Chicago, Illinois

9.0Southeast Florida

7.2Boston, Massachusetts

5.1Seattle, Washington

4.0Total

80.1
%





Our principal focus is to maximize unitholder value by:





| |  |  | Owning apartments in protected markets with limited land for new apartment construction, strong employment growth and expensive single-family homes;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Generating long-term sustainable growth in cash flow from operations;
| | - |  | ---------------------------------------------------------------------

| |  |  | Creating significant incremental value through the acquisition and development of new apartment properties;
| | - |  | -----------------------------------------------------------------------------------------------------------

| |  |  | Managing our invested capital through the disposition of assets that no longer meet our investment objectives in an effort to maximize long-term value creation, and redeploying
that capital into investments in our protected core markets; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Leveraging technology and innovation to improve our customer service delivery, strengthen our brand position and solidify our reputation for operational leadership.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------




The Company





Archstone-Smith Operating Trust, is engaged primarily in the acquisition, development, management and operation of apartment communities throughout the United States. The company is structured as an UPREIT, under which all property
ownership and business operations are conducted through the Operating Trust. Archstone-Smith is our sole trustee and owns approximately 87.3% of our Common Units and trades on the New York Stock Exchange (NYSE:ASN).





2001 Accomplishments





Major Strategic
Transactions





| |  |  | We completed the Smith Merger to create the Operating Trust. This transaction represents a dramatic advancement of our investment strategy to concentrate our assets in
protected locations in markets where it is very difficult to build new apartments. The strategic combination of these two real estate organizations brings together two of the most respected brands in the apartment industry and creates an exceptional
portfolio concentrated in major metropolitan markets with high barriers to entry.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | In conjunction with the Smith Merger, we moved our accounting group from El Paso, Texas to Denver, Colorado, effectively centralizing our corporate and property accounting
functions at our company headquarters. Additionally, we internalized a number of servicesincluding accounts payable, risk management, cash management and internal auditwhich had formerly been purchased from Security Capital through an
administrative services agreement.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Concurrent with this sale, we repurchased 2.3 million Common Units from Security Capital at $22.08 per unit. As a result of these transactions, Security Capital liquidated its
entire investment in our Common Units and was no longer entitled to Board representation previously associated with its investment. Including this transaction, we have repurchased a total of 25.9 million Common Units since February 1999,
representing 18.1% of our outstanding Common Units, at an average price of $21.45 per unit.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We facilitated the sale of 29.5 million Common Units owned by Security Capital in an underwritten secondary offering at a price of $23.30 per unit. This transaction was the
largest real estate secondary offering in history, and was more than 2 times oversubscribed. Over 40% of the units sold in the offering were to new unitholders.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | During the year, seven development properties achieved Stabilization in markets that include the Greater Washington, D.C. Metropolitan Area, San Diego and Southeast Florida,
representing a Total Expected Investment of $261.7 million and adding a total of 2,868 units to Archstone-Smiths operating portfolio. These properties exceeded budgeted lease-up absorption levels by an average of 6.8% at rental rates in line
with our expectations.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Operations and Investments





| |  |  | We achieved Same-Store revenue growth (including the assets acquired in the Smith Merger) in our high-rise and garden portfolios of 5.7% over the prior year, driven principally
by properties in the Greater Washington, D.C. Metropolitan Area, which represents 33.2% of our NOI, Southern California, which represents 11.8% of our NOI, and Boston, which represents 5.1% of our NOI, which produced Same-Store revenue growth of
8.1%, 6.4% and 10.4% respectively.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | NOI for our Same-Store properties increased 6.5% over 2001, driven principally by Same-Store NOI growth of 10.5% in Washington, D.C., 7.1% in Southern California, and 14.1% in
Boston.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We completed the disposition of $1.2 billion of communities in secondary, non-core markets, which allowed us to substantially reduce our investments in markets with less
attractive growth fundamentals including Austin, Charlotte, Raleigh, Phoenix, Salt Lake City and Atlanta. We also exited the Minneapolis, Indianapolis and Richmond markets during 2001. Proceeds were redeployed into acquisitions and development
projects in our core markets and also to reduce debt balances.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | As of December 31, 2001, we had 10 communities under construction, representing 2,812 units and a Total Expected Investment of $535.7 million, in some of the nations most
desirable markets, including the Greater Washington, D.C. Metropolitan Area, Los Angeles County and the Greater New York City Metropolitan Area. Of these communities, $358.4 million has already been funded, leaving only $177.3 million remaining to
fund.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Strategic Operating Initiatives





In 2001, we led the industry by launching several new programs that we anticipate will significantly enhance our ability to improve our operating performance:





| |  |  | We completed pilot testing of Lease Rent OptimizerTM(LRO), the first revenue management tool created for the apartment industry. We developed this product in conjunction with Manugistics, Inc. (NASDAQ: MANU), a global leader in pricing and revenue management products and
services. LRO enables us to more precisely forecast and analyze market demand and availability to optimize pricing for our apartments, thereby increasing revenues. The success of the pilot program allowed us to expand the second version of LRO,
which was operational at approximately 75 garden communities in 14 markets as of February 28, 2002. We will begin piloting LRO in our high-rise portfolio in the second quarter of 2002. We expect LRO will begin to positively impact our revenue growth
in 2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Through the implementation of a dynamic, real-time online recruiting software program, we have virtually eliminated our reliance on traditional classified newspaper advertising
and, because applicants complete an online questionnaire that pre-screens for relevant job skills, streamline our overall recruiting efforts. Archstone-Smith Operating Trust is the first real estate company to provide real-time job postings on our
corporate web site.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Financial





| |  |  | We increased our total credit facility capacity from $680 million to $800 million in connection with the Smith Merger. As a result of this increased capacity and the cash
generated by the $1.2 billion of dispositions in 2001, we had total available line of credit capacity at year-end of $611.4 million. Additionally, we held more than $120 million in cash in tax-deferred exchange escrow accounts at December 31, 2001.
We believe that our cash balances and unused line of credit capacity position us very well to capitalize on investment opportunities in 2002.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------






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| |  |  | We paid distributions of $1.64 per Common Unit in 2001, a 6.5% increase over Common Unit distributions paid in 2000. We also announced our anticipated 2002 distribution level
of $1.70 per unit, a 3.7% increase over the 2001 level. Including the announced increase, our annual distribution per unit has increased 166% since 1991.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Investment Strategy





We use our extensive research to identify investment opportunities
for garden communities and high-rise properties that we believe will produce total returns in excess of our long-term cost of capital. We believe our cost of equity is 12% to 13%. When combined with current long-term debt rates, this gives us a
weighted average long-term cost of capital of approximately 10%-10.5%. We only make an investment when the anticipated total return, which includes the initial expected yield plus expected long-term value creation through continued growth in NOI, is
projected to exceed our long-term cost of capital.





To maximize the return on our investments, we utilize a sophisticated
capital allocation strategy including the redeployment of disposition proceeds into investments in our core markets and the repurchase of our Common Units. By executing this capital allocation strategy and intelligently managing our capital with a
focus on long-term growth rather than short-term accretion, we believe we will solidify our position as a company with long-term investments concentrated in markets and sub-markets with strong economic fundamentals and significant supply
constraints.





Core Markets





We focus our investment activities in core protected markets characterized by: (i) high barriers to entry against new supply; (ii) attractive long-term economic fundamentals; and (iii) expensive single-family housing.





Barriers to entry exist in areas where there is a very limited amount of land zoned for apartment development, and where local
municipalities are reluctant to zone additional land for apartment properties. Examples of protected markets include the Greater Washington, D.C. Metropolitan Area, Los Angeles, San Diego, the San Francisco Bay Area, Seattle, Chicago, Southeast
Florida and Bostonall markets where we continue to establish a long-term strategic presence. We believe that the consistent growth in demand and limited competition typical of our core markets maximizes our ability to keep our occupancy
relatively stable and produce sustainable long-term cash flow growth.





Investment Capabilities





Our disciplined investment strategy is executed through four internal capabilities: (i) dispositions and capital redeployment; (ii) development; (iii)
acquisitions; and (iv) redevelopment.





| | 1. |  | Dispositions and Capital Redeployment.    In 1995, roughly 85% of our portfolio was concentrated in Texas, Arizona and New Mexico, all of
which are markets with ample available land, minimal constraints against new development and inexpensive single-family homes. At that time, we articulated a strategy that still guides our decisions today: to build a national apartment portfolio in
protected locations in major metropolitan areas. To execute this strategy, we sold virtually all the assets we owned at the time and effectively repositioned our disposition proceeds into our new long-term markets. As a result, today over 80% of our
portfolio is located in the Greater Washington, D.C. Metropolitan Area, Southern California, the San Francisco Bay Area, Chicago, Southeast Florida, Boston and Seattle. We believe that concentrating our portfolio in protected markets improves our
core growth rate and long-term business fundamentals.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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LOGO





LOGO





Since December 1995, we have disposed of $3.6 billion of assets, generating aggregate gross
gains of $464.6 million and producing an average annual unleveraged rate of return during the holding period of approximately 12%. In total, we have exited 17 non-core markets: Sacramento, Sarasota, Asheville, Oklahoma City, Tulsa, Columbus, El
Paso, Memphis, Santa Fe, Omaha, Richmond, Jacksonville, Indianapolis, Birmingham, Minneapolis, Kansas City and Tucson.





2.Development.    We place considerable emphasis on the value created through the development of new apartment communities. At December 31, 2001, we had
$535.7 million of development communities under construction, with 67%, or $358.4 million, of this amount already funded. In 2001, we completed $235.4 million of new development communities, representing 2,476 units, in markets that include
Southeast Florida and San Diego.





We believe that our locally based development infrastructure creates a significant competitive
advantage for identifying and completing very attractive investment opportunities in our core markets. As such, we expect our development capability to continue to be a key contributor to growth and to create significant value as properties are
completed and Stabilized at attractive yields during the next several years. Additionally, we utilize guaranteed maximum price contracts through qualified third-party developers to reduce our development risk from a cost perspective.




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| | 3. |  | Acquisitions.    Since 1992, we have completed approximately $3.4 billion in acquisitions (excluding mergers). In 2001, we acquired $232.5
million of operating communities, representing a total of 1,954 units, which were funded with disposition proceeds through tax-deferred exchanges. We focus our acquisition activity on assets in highly desirable residential locations with minimal
competition and strong, long-term growth prospects. Our locally based acquisition infrastructure often allows us to identify attractive opportunities before they are made available to the general market, which generally results in advantageous
pricing.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 4. |  | Redevelopment.    Our redevelopment strategy is to reposition well-located assets through the intelligent deployment of capital into
renovations including upgrades to interiors, exteriors, leasing offices, landscaping and amenities. In addition, we have invested in revenue-enhancing capital expenditures such as building garages/carports and additional storage facilities, and also
expense-reducing expenditures such as water sub-metering systems and xeriscaping.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Customer-Focused Operations





One of our primary objectives is to be viewed as a well-run operating company in corporate America, not just a well-run company within the
real estate industry. We believe we will achieve this objective by leveraging our two powerful and well-respected brands, Archstone Communities and Charles E. Smith Residential. We are dedicated to maximizing our operations by providing our
customers with quality of life and a unique offering, backed by service guarantees, in a consistent manner across each of our two brands. We actively pursue and emulate innovative ideas and best practices from other industries, by offering programs
and services designed to enhance our customers experience with our company. These include:





| |  |  | Archstones unconditional Seal of Serviceguarantees and Charles E. Smith Residentials SmithAdvantageprogram emulate successful customer service programs from
other industries with prominent brands to create customer loyalty and trust, while establishing the service benchmark for the apartment industry. The Seal of Servicefeatures five unconditional guarantees, which have contributed positively to our
customer-focused operations. For example, through theArchstone Relocation Guarantee, approximately 2,780 residents transferred to other Archstone communities throughout the country in 2001representing a 6.9% increase over 2000 and
allowing us to retain an estimated $32 million in incremental rental revenue.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | SmithAdvantageis a collection of conveniences designed to improve customer relationships. The program includes resident incentives, activities, out-of-town excursions, discounts and
personal concierge services. In 2001, Smith Residential launched an online version of this program, SmithAdvantage.com. This online service includes web pages customized to each specific property and puts the SmithAdvantageat residents fingertips, and also allows them to review
account balances, search for local restaurants, fitness facilities and entertainment ideas, and make service requests with a few clicks of the mouse. SmithAdvantage.com will roll out to the rest of the Charles E. Smith portfolio in 2002.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Lease Rent Optimizer, the apartment industrys first revenue management software, enables us to more precisely forecast and analyze market demand and
availability to optimize pricing for our apartments. This product also creates a new kind of flexibility that has never been seen in the apartment industry. In this new marketplace, we accommodate customers move-in dates and lease term
needsrather than have the customer conform to our requirements. Our unwavering commitment to meet our customers needs builds the enduring relationships that build the Archstone brand, which improves our overall business.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Conservative Balance Sheet Management





We are committed to preserving our strong balance sheet in order to enhance financial flexibility. Our investment-grade debt ratings from Standard & Poors (BBB+), Moodys Investors Service (Baa1) and
Fitch, Inc. (BBB+) are indicative of our solid financial position.





One of our primary financial objectives is to structure our
balance sheet in order to have access to capital when others in the industry do not. We believe that careful balance sheet management will enable us to take advantage of compelling investment opportunities that are more likely to emerge in a
capital-constrained environment.




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During 2001, we financed our investment activity primarily through internally generated cash
flow from operations and asset dispositions. We are focused on ensuring that we do not face liquidity issues in any given quarter or year. In October 2001, we received $120 million of incremental commitments from four new financial institutions on
our unsecured credit facilities, increasing our total available capacity from $680 million to $800 million. Combined with our available cash on hand, which totaled $89.1 million on March 7, 2002 we have significant financial capacity that we believe
positions us very well for future investment opportunities.





Our long-term debt is structured to create a relatively level
principal maturity schedule, without significant repayment obligations in any year. We only have $120 million of long-term debt maturing in 2002, representing 1.2% of our total market capitalization. In addition, we have $4.1 billion of unencumbered
assets and a significant equity base, with a total equity market capitalization of $5.9 billion as of December 31, 2001.





The following summarizes our long-term debt maturity profile for the next five years and thereafter as of December 31, 2001 (dollar amounts in millions):





Year

Long-Term Unsecured Debt

Mortgages

Total

% of Total Market
Capitalization (1)2002

$
97.5

$
22.5

$
120.0

1.2%2003


171.3


75.0


246.3

2.5%2004


51.3


86.6


137.9

1.4%2005


251.3


46.0


297.3

3.1%2006


51.3


464.8


516.1

5.3%Thereafter


711.2


1,635.6


2,346.8

24.2%Total

$
1,333.9

$
2,330.5

$
3,664.4

37.7%


| | (1) |  | Total market capitalization is as of December 31, 2001.
| | --- |  | -------------------------------------------------------




Affiliates





We own the majority of the economic interest in the following companies, which provide various
investment and operational services as described below:





Ameriton utilizes Archstone-Smiths national development,
acquisition and operating infrastructure to make real estate investments with a shorter-term ownership horizon. Ameriton creates the potential for additional positive earnings growth for Archstone-Smith.





Archstone Management Services, Inc. is a full-service, third-party property management company, which manages assets for private and
institutional owners of apartment properties throughout the United States. At December 31, 2001, Archstone Management Services third-party management portfolio comprised 20 properties representing 5,211 units with an additional 13,251 units
managed for affiliates.





Consolidated Engineering Servicesis a broad-based building technical services company with a
network of leading regional companies that provide specialized technical services for building equipment, systems and operations. CES has particular expertise in operating mission critical facilities. From its initial role in servicing Charles E.
Smith properties, CES has grown its scope of operations to more than 9,400 buildings comprising over 260 million square feet of commercial, industrial and government operations.





Management





We have several senior executives who possess the leadership, operational,
investment and financial skills and experience to oversee the entire operations of our company. Several of our senior officers could serve as the principal executive officer and continue our strong performance. Our management team emphasizes active
training and organizational development initiatives for associates at all levels of our company in order to build long-term management depth and facilitate succession planning.




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Trustees and Officers of Archstone-Smith Operating Trust





Archstone-Smith is the majority owner of
the Operating Trust and owns approximately 87.3% of our total outstanding Common Units. Archstone-Smith is the Operating Trusts sole Trustee.





References throughout this section are labeled Archstone-Smith Operating Trust for the post-merger period as a result of this name change. Pre-merger periods will be referenced as follows: (i) as
Archstone-Smith Operating Trust for individuals who were associated with Archstone and/or its affiliates; and (ii) as Smith Residential for individuals who were associated with Smith Residential and/or its affiliates. See
Note 1 of Archstone-Smith Operating Trusts audited financial statements in this Annual Report or in Managements Discussion and Analysis in this Annual Report for additional information on the Smith Merger.





Senior Officers of Archstone-Smith Operating Trust





The senior officers of Archstone-Smith Operating Trust are:





Name

TitleR. Scot Sellers

Chairman and Chief Executive OfficerCharles E. Mueller, Jr.

Chief Financial OfficerRichard A. Banks

President  West DivisionJ. Lindsay Freeman

President  East DivisionWesley D. Minami

President  Charles E. Smith DivisionDana K. Hamilton

Executive Vice President  National OperationsDaniel E. Amedro

Senior Vice President and Chief Information OfficerCaroline Brower

Senior Vice President, Secretary and General CounselMark A. Schumacher

Senior Vice President and Controller





Biographies of Senior Officers





R. Scot Sellers45Chairman and Chief Executive Officer of Archstone-Smith Operating Trust since June 1997, with overall responsibility
for Archstone-Smith Operating Trusts strategic direction, investments and operations; Co-Chairman and Chief Investment Officer of Archstone-Smith Operating Trust from July 1998 to December 1998. From September 1994 to June 1997, Managing
Director of Archstone-Smith Operating Trust, where he had overall responsibility for Archstone-Smith Operating Trusts investment strategy and implementation; Senior Vice President of Archstone-Smith Operating Trust from May 1994 to September
1994; from April 1993 to May 1994, Senior Vice President of a Security Capital affiliate, where he was responsible for portfolio acquisitions from institutional sources. Mr. Sellers is a member of the Executive Committee of the Board of Governors of
NAREIT and also is a member of the Executive Committee of the Board of Directors of the National Multi Housing Council.





Charles E. Mueller, Jr.38Chief Financial Officer of Archstone-Smith Operating Trust since December 1998, with responsibility for the planning and execution of the companys financial strategy and balance sheet
management; Mr. Mueller oversees the companys accounting/financial reporting, corporate finance, investor relations, corporate and property tax, due diligence and risk management functions. Vice President of Archstone-Smith Operating Trust
from September 1996 to December 1998; prior thereto, he held various financial positions with Security Capital, where he provided financial services to Security Capital and its affiliates.





Richard A. Banks54President-West Division of Archstone-Smith Operating Trust since October 2001, with responsibility for all investments and operations of the West
Division; from December 1997 to October 2001; Managing Director of Archstone-Smith Operating Trust, with responsibility for investments and operations in the West Region; Senior Vice President of Archstone-Smith Operating Trust from August 1997 to
December 1997; from January 1995 to August 1997, President and Chief Executive Officer of Lincoln Residential Services, where he was responsible for all aspects of leading a full service property management company of approximately 40,000 apartment
units in the western United States; member of the Executive Committee of the Board of Directors of the National Multi Housing Council.




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##### Table of Contents




J. Lindsay Freeman56President-East Division of Archstone-Smith Operating
Trust since October 2001, with responsibility for all investments and operations of the East Division; from July 1998 to October 2001; Managing Director of Archstone-Smith Operating Trust, with responsibility for investments and operations in the
East and Central Regions; Managing Director of Security Capital Atlantic Incorporated from December 1997 to July 1998; Senior Vice President of Security Capital Atlantic Incorporated from May 1994 to November 1997; previously, Senior Vice President
and Operating Partner of Lincoln Property Company in Atlanta, Georgia, where he was responsible for acquisitions, financing, construction and management of apartment communities within the Atlantic region and oversaw operations of 16,000 apartment
units.





Wesley D. Minami45President-Charles E. Smith division of Archstone-Smith Operating Trust since
October 2001, with responsibility for all investments and operations of the division; from July 2001 to October 2001 President, of Smith Residential, with overall responsibility for the management and operation of the apartment portfolio and the
corporate financial and information systems departments; Chief Financial Officer and Chief Operating Officer of Smith Residential from October 2000 to July 2001; Chief Financial Officer from the time he joined Smith Residential in 1997 to October
2000; prior to joining Smith Residential in 1997, Chief Financial Officer of Ascent Entertainment Company, a former subsidiary of Comsat Corporation; from 1985 to 1993, Mr. Minami held several positions including Chief Financial Officer at Oxford
Realty Services Corporation, a private developer and operator of over 45,000 apartment units.





Dana K.
Hamilton33Executive Vice President of National Operations for Archstone-Smith since May 2001, with responsibility for corporate services, including human resources, training and development, marketing and corporate communications,
and new business development; property operations in the central United States; and Archstone Management Services, the companys third-party management business; Senior Vice President of Archstone-Smith from December 1998 to May 2001; Vice
President from December 1996 to December 1998, with responsibility for new product development and revenue enhancement through portfolio-wide initiatives.





Daniel E. Amedro45Chief Information Officer and Senior Vice President of Archstone-Smith Operating Trust since May 1998, with primary responsibility for the
companys information technology functions and initiatives; Chief Information Officer and Vice President from May 1998 to January 1999; from September 1996 to March 1998, Vice President of Information Services for American Medical Response, the
largest private ambulance operation in the United States; prior thereto, Vice President of Information Services for Hyatt Hotels and Resorts, where he was responsible for all strategic information systems including Spirit, Hyatts
worldwide reservation system, which supported over 50,000 users and was recognized as the leading reservations system in the hospitality industry.





Caroline Brower53Senior Vice President, General Counsel and Secretary of Archstone-Smith Operating Trust since September 1999, with responsibility for legal and corporate governance; from September
1998 to September 1999, President of Ameriton Properties Incorporated; prior thereto, Ms. Brower was a partner of Mayer, Brown & Platt (now Mayer Brown Rowe & Maw), where she practiced transaction and real estate law.





Mark A. Schumacher43Senior Vice President and Corporate Controller of Archstone-Smith Operating Trust since January 2002,
with principal responsibility for accounting and financial reporting; prior thereto, Vice President and Corporate Controller of Qwest Communications International from December 2000 to December 2001 where he had principal responsibility for
accounting and financial reporting; from April 1991 to December 2000, held various senior and executive level positions in the accounting and financial reporting department of Qwest Communications International and predecessor entity US West; from
April 1984 to April 1991 he held various managerial level positions in the accounting and financial reporting department of US West.




13




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##### Table of Contents




Employees





The Operating Trust currently employs approximately 3,300 individuals, of which
approximately 2,700 are focused on the site-level operation of our garden communities and high-rise properties. The balance are professionals who manage corporate and regional operations, including our investment program, property operations,
financial reporting and other support functions. We consider our relationship with our employees to be good. None of our employees are represented by a collective bargaining agreement.





Insurance





We carry comprehensive general liability coverage on our owned communities, with limits
of liability customary within the industry to insure against liability claims and related defense costs. Similarly, we are insured against the risk of direct physical damage in amounts necessary to reimburse the company on a replacement cost basis
for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period. Our blanket property policies for all operating and development communities include coverages for the perils of flood and
earthquake shock with limits on deductibles customary in the industry. We also obtain title insurance when acquiring new properties, which insure fee title to our real property. Our insurance policies currently cover losses incurred in connection
with terrorist related activities. However, due to anticipated increases in premiums for terrorism related losses, we may find it economically unfeasible to insure against such losses upon renewal of our policy in July 2002.




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##### Table of Contents




Risk Factors





The following factors could affect our future financial performance:





We historically have not owned or operated high-rise apartment buildings and the market price of our Archstone-Smiths Common Shares
and the value of our Common Units may decline if we fail to successfully operate the high-rise apartment buildings acquired in the Smith Merger.





In the Smith Merger, we acquired Smith Partnerships interest in approximately 50 high-rise apartment buildings. The high-rise apartment building properties represent 33.3% of our combined portfolio based on NOI
for the fourth quarter of 2001. We historically have not owned or operated high-rise apartment buildings. If we fail to successfully operate these apartment buildings, the market price of Archstone-Smiths Common Shares and our Common Units
could decline. In addition, if we determine to liquidate these high-rise apartment buildings over time, we may not be successful in doing so or may not do so at attractive prices, which could adversely affect the market price of
Archstone-Smiths Common Shares and the value of our Common Units.





We will be restricted in our ability to sell the
properties located in the Crystal City area of Arlington, Virginia without the consent of Messrs. Smith and Kogod, which could result in our inability to sell these properties at an opportune time and at increased costs to us.





Under the shareholders agreement between Archstone-Smith, the Operating Trust, Robert H. Smith and Robert P. Kogod, we are restricted
from transferring specified high-rise properties located in the Crystal City area of Arlington, Virginia until October 31, 2016, without the consent of Messrs. Smith and Kogod, which could result in our inability to sell these properties at an
opportune time and at increased costs to us. We are permitted to transfer these properties in connection with a sale of all of the properties in a single transaction or pursuant to a bona fide mortgage of any or all of such properties in order to
secure a loan or other financing. Also, a sale of any of the properties acquired in the Smith Merger prior to January 1, 2022, could result in increased costs to us in light of the tax related undertakings made to the former Smith Partnership
unitholders.





The operations of Archstone and Smith Residential may not be integrated successfully and the intended benefits
of the merger may not be realized, which could have a negative impact on the market price of Archstone-Smith Common Shares and the value of our Common Units after the merger.





The completion of the Smith Merger poses risks for the ongoing operations of the Operating Trust, including that:





| |  |  | We may not achieve the expected cost savings and operating efficiencies from the Smith Merger, including the potential inability to realize economies of scale;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The Charles E. Smith Division and garden community portfolios may not perform as well as currently anticipated;
| | - |  | ---------------------------------------------------------------------------------------------------------------

| |  |  | The concentration of our properties in a few identified markets increases our exposure to the economic conditions of those markets;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------

| |  |  | We may experience difficulties and incur expenses related to the retention of Smith Residential employees; and
| | - |  | --------------------------------------------------------------------------------------------------------------

| |  |  | We may not effectively merge and integrate Smith Residentials operations.
| | - |  | --------------------------------------------------------------------------




If we fail to successfully integrate Smith Residential and/or fail to realize the intended benefits of the merger, the market price of Archstone-Smiths Common Shares and the value
of our Common Units could decline.





We depend on our key personnel.





Our success depends on our ability to attract and retain the services of executive officers, senior officers and company managers. There is substantial competition for qualified
personnel in the real estate industry and the loss of several of our key personnel could have an adverse effect on us.




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Debt financing could adversely affect our performance.





We are subject to risks associated with debt financing and preferred equity. These risks include the risks that we will not have sufficient cash flow
from operations to meet required payments of principal and interest or to pay distributions on our securities at expected rates, that we will be unable to refinance current or future indebtedness, that the terms of any refinancing will not be as
favorable as the terms of existing indebtedness, and that we will be unable to make necessary investments in new business initiatives due to lack of available funds. Increases in interest rates could increase interest expense, which would adversely
affect net earnings and cash available for payment of obligations. If we are unable to make required payments on indebtedness that is secured by a mortgage on our property, the asset may be transferred to the lender with a consequent loss of income
and value to us.





Additionally, our debt agreements contain customary covenants which, among other things, restrict our ability
to incur additional indebtedness and, in certain instances, restrict our ability to engage in material asset sales, mergers, consolidations and acquisitions. These debt agreements also require us to maintain various financial ratios. Failure to
comply with these covenants could result in a requirement to repay the indebtedness prior to its maturity, which could have an adverse effect on our operations and ability to make distributions to unitholders.





Some of our debt instruments bear interest at variable rates. Increases in interest rates would increase our interest expense under these instruments
and would increase the cost of refinancing these instruments and issuing new debt. As a result, higher interest rates would adversely affect cash flow and our ability to service our indebtedness.





We had $3.9 billion in total debt outstanding as of December 31, 2001, of which $2.3 billion was secured by real estate assets and $756.9 million was subject to variable interest
rates, including $188.6 million outstanding on our short-term credit facilities.





We may not have access to equity capital.





A prolonged period in which real estate operating companies cannot effectively access the public equity markets may result
in heavier reliance on alternative financing sources to undertake new investment activities.





We are subject to risks
inherent in ownership of real estate.





Real estate cash flows and values are affected by a number of factors, including
changes in the general economic climate, local, regional or national conditions (such as an oversupply of communities or a reduction in rental demand in a specific area), the quality and philosophy of management, competition from other available
properties and the ability to provide adequate property maintenance and insurance and to control operating costs. Real estate cash flows and values are also affected by such factors as government regulations, including zoning, usage and tax laws,
interest rate levels, the availability of financing, property tax rates, utility expenses, potential liability under environmental and other laws and changes in environmental and other laws. Although we seek to minimize these risks through our
market research and property management capabilities, they cannot be totally eliminated.





We are subject to risks inherent in
real estate development.





We have developed or commenced development on a substantial number of apartment communities and
expect to develop additional apartment communities in the future. Real estate development involves risks in addition to those involved in the ownership and operation of established communities, including the risks that financing, if needed, may not
be available on favorable terms, construction may not be completed on schedule, contractors may default, estimates of the costs of developing apartment communities may prove to be inaccurate and communities may not be leased or rented on profitable
terms or in the time frame anticipated. Timely construction may be affected by local weather conditions, local or national strikes and local or national shortages in materials, building supplies or energy and fuel for equipment. These risks may
cause the development project to fail to perform as expected.




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##### Table of Contents




Real estate investments are relatively illiquid and we may not be able to sell
properties when appropriate.





Equity real estate investments are relatively illiquid, which may tend to limit our ability to
react promptly to changes in economic or other market conditions. Our ability to dispose of assets in the future will depend on prevailing economic and market conditions.





We are subject to the Americans with Disabilities Act.





Our communities must comply with Title III of the Americans with Disabilities Act to the extent that such communities are or contain public accommodations and/or commercial facilities as defined by the Act. The Act does not consider
apartment communities to be public accommodations or commercial facilities, except for portions of such facilities which are open to the public, such as the leasing office. Noncompliance could result in imposition of fines or an award of damages to
private litigants. We believe our communities comply with all present requirements under the Act and applicable state laws.





Compliance with environmental regulations may be costly.





We must comply with certain
environmental and health and safety laws and regulations related to the ownership, operation, development and acquisition of apartments. Under those laws and regulations, we may be liable for, among other things, the costs of removal or remediation
of certain hazardous substances, including asbestos-related liability. Those laws and regulations often impose liability without regard to fault. As part of our due diligence procedures, we have conducted Phase I environmental assessments on each of
our communities prior to acquisition; however, we cannot give any assurance that those assessments have revealed all potential liabilities. We are not aware of any environmental condition on any of our real estate investments which is likely to have
a material adverse effect on our financial position or results of operations; however, we cannot give any assurance that any such condition does not exist or may not arise in the future.





Changes in laws may result in increased cost.





We may not
be able to pass on increased costs resulting from increases in real estate taxes, income taxes or other governmental requirements directly to our residents. Substantial increases in rents, as a result of those increased costs, may affect the ability
of a resident to pay rent, causing increased vacancy. Changes in laws increasing potential liability for environmental conditions or increasing the restrictions on discharges or other environmental conditions may result in significant unanticipated
expenditures.





We intend to qualify as a partnership, but we cannot guarantee that we will qualify.





We intend to qualify as a partnership for federal income tax purposes. However, we will be treated as an association
taxable as a corporation for federal income tax purposes if it is deemed to be a publicly traded partnership, unless at least 90% of its income is qualifying income as defined in the tax code. Qualifying income for the 90% test generally includes
passive income, such as real property rents, distributions and interest. The income requirements applicable to REITs and the definition of qualifying income for purposes of this 90% test are similar in most respects. We believe that the we will meet
this qualifying income test, but cannot guarantee that we will. If we were to be taxed as a corporation, we would incur substantial tax liabilities. Archstone-Smith would fail to qualify as a REIT for tax purposes and Archstone-Smiths and the
Operating Trusts ability to raise additional capital would be impaired.




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##### Table of Contents




Archstone-Smiths failure to qualify as a REIT would have adverse consequences.





We believe that Archstone-Smith has qualified for taxation as a REIT under the Internal Revenue Code and they plan to
continue to meet the requirements for taxation as a REIT. We cannot, however, guarantee that they will continue to qualify in the future as a REIT. They cannot give any assurance that new legislation, regulations, administrative interpretations or
court decisions will not significantly change the requirements relating to Archstone-Smiths qualification. If they fail to qualify as a REIT, they would be subject to federal income tax at regular corporate rates. Also, unless the Internal
Revenue Service granted them relief, they would remain disqualified as a REIT for four years following the year in which it failed to qualify. In the event that they fail to qualify as a REIT, they would be required to pay significant income taxes
and we would have less money available for operations and distributions to unitholders. This would likely have a significant adverse effect on the value of our securities and our ability to raise additional capital. In order to maintain its
qualification as a REIT under the Internal Revenue Code, Archstone-Smiths declaration of trust limits the ownership of its shares by any person or group of related persons to 9.8%, unless special approval is granted by our Board.





We are subject to losses that may not be covered by insurance.





There are certain types of losses (such as from war), which may be uninsurable or not economically insurable. Additionally, many of our communities in California are located in the
general vicinity of active earthquake fault lines. Although we maintain insurance to cover most reasonably likely risks, including earthquakes, if an uninsured loss or a loss in excess of insured limits occurs, we could lose both our invested
capital in, and anticipated profits from, one or more communities. We would also be required to continue to repay mortgage indebtedness or other obligations related to such communities. Any such loss could materially adversely affect our business,
financial condition and results of operations.





We have a concentration of investments in certain markets.





At December 31, 2001, approximately 33% of our apartment communities are located in the Greater Washington, D.C. Metropolitan Area, based on
NOI. Approximately 12% of our apartment communities are located in Southern California as of December 31, 2001, based on NOI. Southern California is the geographic area comprised of the Los Angeles, Inland Empire, Orange County, San Diego and
Ventura County markets. Additionally, approximately 10% of our apartment communities are located in the San Francisco Bay Area of California based on NOI. We are, therefore, subject to increased exposure (positive or negative) to economic and other
competitive factors specific to protected markets within these geographic areas.





Our business is subject to extensive
competition.





There are numerous commercial developers, real estate companies and other owners of real estate that we
compete with in seeking land for development, apartment communities for acquisition and disposition and residents for apartment communities. All of our apartment communities are located in developed areas that include other apartment communities.
The number of competitive apartment communities in a particular area could have a material adverse effect on our ability to lease units and on the rents charged. In addition, single-family homes and other residential properties provide housing
alternatives to residents and potential residents of our apartment communities.




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##### Table of Contents




Item 2.    
Properties





Geographic Distributions





At December 31, 2001, our top seven markets based on NOI were as follows:





Greater Washington, D.C. Metropolitan Area

33.2
%Southern California

11.8San Francisco Bay Area, California

9.8Chicago, Illinois

9.0Southeast Florida

7.2Boston, Massachusetts

5.1Seattle, Washington

4.0Total

80.1
%





The following table summarizes the geographic distribution of our garden
communities and high-rise properties at December 31, 2001 based on NOI:





Total Portfolio (1)2001


2000


1999East Division (garden communities):Atlanta, Georgia

3.3
%

6.3
%

8.5
%Austin, Texas

0.6


2.6


2.4Boston, Massachusetts

3.5


4.2


1.0Charlotte, North Carolina

0.6


1.9


2.7Chicago, Illinois

3.2


1.9


1.3Dallas, Texas

1.2


1.9


2.1Denver, Colorado

2.7


4.9


4.8Houston, Texas

1.4


2.7


3.3Nashville, Tennessee

0.4


1.1


1.7Orlando, Florida

0.4


1.4


1.5Raleigh, North Carolina

1.8


4.5


4.7San Antonio, Texas

0.8


1.8


3.2Southeast Florida

2.2


4.4


4.9Greater Washington, D.C. Metropolitan Area

12.3


7.2


4.1West Coast Florida

0.8


1.8


2.1Other




2.6


4.6East Division Total

35.2
%

51.2
%

52.9
%West Division (garden communities):Albuquerque, New Mexico

1.1
%

2.1
%

2.5
%Las Vegas, Nevada

0.6


1.4


1.8Phoenix, Arizona

2.3


5.1


7.5Portland, Oregon

0.8


1.9


1.9Salt Lake City, Utah

0.7


2.8


3.3San Francisco Bay Area, California

9.8


13.7


9.8Seattle, Washington

4.0


6.3


6.4Southern California

11.8


14.5


12.7Other

0.4


1.0


1.2West Division Total

31.5
%

48.8
%

47.1
%Total garden communities

66.7
%

100
%

100
%Charles E. Smith Division (high-rise properties):Boston, Massachusetts

1.6
%


%


%Chicago, Illinois

5.8





Southeast Florida

5.0





Greater Washington, D.C. Metropolitan Area

20.9





Charles E. Smith Division Total

33.3
%


%


%Total All Markets

100
%

100
%

100
%


| | (1) |  | Based on NOI for the fourth quarter of each calendar year, excluding NOI from communities disposed of during the period. For 2001, includes an entire quarter of NOI for the
assets acquired in the Smith Merger.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents




Real Estate Portfolio





We are a leading real estate operating company focused on the operation,
development, redevelopment, acquisition and long-term ownership of apartment communities in protected markets throughout the United States. We have a strategic national presence with 225 communities representing 79,982 units, including 2,812 units
in our development pipeline at December 31, 2001. The following information summarizes our real estate portfolio as of December 31, 2001 (dollar amounts in thousands). Additional information on our real estate portfolio is contained in
Schedule III, Real Estate and Accumulated Depreciation and in our audited financial statements contained in this Annual Report:





Number of Communities

Number of Units

Archstone-Smith Operating Trust Investment

Percentage Leased(1)OPERATING APARTMENT COMMUNITIES:East Division (garden communities):Atlanta, Georgia

11

3,403

$
253,667

96.7
%Austin, Texas

2

714


33,246

94.1
%Boston, Massachusetts

7

1,699


256,633

96.0
%Charlotte, North Carolina

2

668


46,617

94.9
%Chicago, Illinois

8

3,912


311,776

92.8
%Dallas, Texas

6

1,616


97,813

91.8
%Denver, Colorado

8

2,763


181,677

94.3
%Houston, Texas

2

1,408


72,512

95.5
%Nashville, Tennessee

2

445


25,980

90.8
%Orlando, Florida

1

312


21,255

95.2
%Raleigh, North Carolina

8

2,026


144,513

97.9
%San Antonio, Texas

4

978


52,294

95.1
%Southeast Florida

8

2,315


165,080

98.7
%Greater Washington, D.C. Metropolitan Area

24

8,980


955,898

97.8
%West Coast Florida

5

934


54,518

97.5
%East Division Subtotal/Average

98

32,173

$
2,673,479

96.0
%West Division (garden communities):Albuquerque, New Mexico

6

1,491

$
75,571

96.1
%Inland Empire, California

5

1,884


111,797

97.3
%Las Vegas, Nevada

1

896


46,999

91.0
%Los Angeles County, California

4

1,066


128,714

96.4
%Orange County, California

6

1,431


141,554

97.1
%Phoenix, Arizona

6

2,648


148,891

94.6
%Portland, Oregon

5

1,189


74,340

95.0
%Reno, Nevada

1

324


21,479

95.1
%Salt Lake City, Utah

3

776


54,082

96.7
%San Francisco Bay Area, California

13

4,730


575,097

96.6
%San Diego, California

9

3,241


343,340

97.2
%Seattle, Washington

9

3,402


277,946

96.0
%Ventura County, California

2

770


67,952

98.3
%West Division Subtotal/Average

70

23,848

$
2,067,762

96.1
%Charles E. Smith Division (high-rise properties):Boston, Massachusetts

3

693

$
166,982

91.4
%Chicago, Illinois

7

3,359


542,363

92.2
%Southeast Florida

6

5,059


459,132

94.2
%Greater Washington, D.C Metropolitan Area

31

12,038


1,899,726

97.7
%Charles E. Smith Division Subtotal/Average

47

21,149

$
3,068,203

95.8
%Operating Apartment Communities Subtotal/Average

215

77,170

$
7,809,444

96.0
%




20




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##### Table of Contents




Number of Communities

Number of Units

Archstone-Smith Operating Trust Investment

Percentage Leased(1)APARTMENT COMMUNITIES UNDER CONSTRUCTION:East Division (garden communities):Denver, Colorado

1

273

$
14,555

N/AGreater Washington, D.C. Metropolitan Area

2

425


24,918

N/AStamford, Connecticut

1

160


28,140

N/AEast Division Subtotal/Average

4

858

$
67,613

N/AWest Division (garden communities):San Francisco Bay Area, California

1

412

$
67,757

94.17
%Southern California

3

833


93,078

21.01
%West Division Subtotal/Average

4

1,245

$
160,835

45.22
%Charles E. Smith Division (high-rise properties):Chicago, Illinois

1

480

$
69,366

N/AGreater Washington, D.C. Metropolitan Area

1

229


60,553

65.00
%Charles E. Smith Division Subtotal/Average

2

709

$
129,919

20.99
%Apartment Communities Under Construction Subtotal/Average

10

2,812

$
358,367

25.31
%APARTMENT COMMUNITIES IN PLANNING AND OWNED:East Division

3

864

$
37,815West Division

4

538


38,796Total Apartment Communities In Planning and Owned Subtotal/Average

7

1,402

$
76,611Total Apartment Communities Owned at December 31, 2001

232

81,384

$
8,244,422OTHER REAL ESTATE ASSETS(2)






2,729RETAIL AND HOTEL ASSETS






28,853Total Real Estate Owned at December 31, 2001



81,384

$
8,276,004Expected Number of UnitsAPARTMENT COMMUNITIES IN PLANNING AND UNDER CONTROL(3):East Division



567West Division



424Total Apartment Communities In Planning and Under Control



991


| | (1) |  | Represents the percentage leased as of December 31, 2001. For communities in Lease-Up, the percentage leased is based on leased units divided by total number of units in the
community (completed and under construction) as of December 31, 2001. A N/A indicates markets with communities under construction where Lease-Up has not yet commenced.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(2)  Includes land that is not In Planning.


(3) As of
December 31, 2001, our actual investment in communities In Planning and Under Control was $4.9 million, which is reflected in the Other assets caption of Archstone-Smiths Balance Sheet.




21




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##### Table of Contents




Item 3.    
Legal Proceedings





We are party to various claims and routine litigation arising in the ordinary
course of business. We do not believe that the results of any such claims and litigation, individually or in the aggregate, will have a material adverse effect on our business, financial position or results of operations.





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





At the October 29, 2001 Special Meeting of
Shareholders, Archstones Shareholders approved the following proposals:





| | (i) |  | The proposed amendment to Archstones amended and restated Declaration of Trust, with 98,190,916 Common Shares voted in favor, 396,866 Common Shares voted against, and
266,945 Common Shares abstained. There were no broker non-votes;
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) |  | The reorganization of Archstone into an UPREIT structure, with 97,984,097 Common Shares voted in favor, 646,754 Common Shares voted against, and 215,303 Common Shares
abstained. There were no broker non-votes; and
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) |  | The merger agreement among Archstone, Archstone-Smith, Smith Residential and Smith Partnership and the transactions contemplated thereby, including the merger of Smith
Residential with Archstone-Smith and the merger of Smith Partnership into Archstone, with 98,152,938 Common Shares voted in favor, 430,141 Common Shares voted against, and 263,076 Common Shares abstained. There were no broker non-votes.
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



22




---

##### Table of Contents




PART II





Item 5.    
Market for the Registrants Common Equity and Related Stockholder Matters





There is no
established market for the Common Units of the Operating Trust. Archstone-Smiths Common shares are listed on the New York Stock Exchange (NYSE:ASN).





The following table sets forth the Distributions on Shares made by Archstone-Smith during the past three years:





2001

2000

1999Per Common Unit:Ordinary income

$
0.89

$
1.05

$
1.26Capital gains


0.75


0.49


0.10Return of capital








0.12Total

$
1.64

$
1.54

$
1.48





Distributions are paid on a quarterly basis and equal one-fourth of the total
annual amount listed above.





As of March 7, 2002 we had approximately 830 record holders of A-1 Common Units and no beneficial
holders of A-1 Common Units.




23




---

##### Table of Contents




Item 6.    
Selected Financial Data





The following table provides selected financial data relating to our
historical financial condition and results of operations as of and for each of the years ending December 31, 1997 to 2001. We believe that NOI and net earnings attributable to Common Units are the most relevant measures of our operating performance
and allow investors to evaluate our business against our industry peers and against all publicly traded companies as a whole. This data is qualified in its entirety by, and should be read in conjunction with, Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and related notes that have been included or incorporated by reference in this Annual Report (in thousands, except per unit data):





Years Ended December 31,2001(1)

2000(1)

1999(1)

1998(1)

1997(1)Operations Summary:Total revenues

$
728,937

$
723,234

$
667,022

$
513,645

$
355,662Property operating expenses (rental expenses and real estate taxes)


229,693


225,608


217,527


173,760


123,051Net Operating Income


472,101


462,936


420,281


310,779


212,009Depreciation on real estate investments


132,126


143,694


132,437


96,337


52,893Interest expense


141,907


145,173


121,494


83,350


61,153General and administrative expense


26,503


23,157


22,156


16,092


18,350Nonrecurring expenses(2)


20,276


5,200


2,000


2,193


71,707Earnings from operations(2)


175,397


176,466


169,339


134,571


24,686Gains on dispositions of depreciated real estate, net


100,273


93,071


62,093


65,531


48,232Preferred unit cash distributions paid


22,277


25,340


23,733


20,938


19,384Net earnings attributable to Common Units:Basic


243,297


236,045


204,526


177,022


53,534Diluted


254,517


244,625


204,526


186,999


53,534Common Unit cash distributions paid

$
221,196

$
201,257

$
208,018

$
165,190

$
105,547Per Unit Data:Net earnings attributable to Common Units:Basic(2)

$
1.81

$
1.79

$
1.46

$
1.49

$
0.65Diluted(2)


1.79


1.78


1.46


1.49


0.65Common Unit cash distributions paid


1.64


1.54


1.48


1.39


1.30Cash distributions paid:Series A Preferred Unit


2.21


2.07


1.99


1.87


1.75Series B Preferred Unit(3)


0.79


2.25


2.25


2.25


2.25Series C Preferred Unit


2.16


2.16


2.16


1.08


Series D Preferred Unit


2.19


2.19


0.88





Series H, I, J, K and L Preferred Units(4)

$


$


$


$


$
Weighted average Common Units outstanding:Basic


134,589


131,874


139,801


118,592


81,870Diluted


142,090


137,730


139,829


125,825


81,908





| | (1) |  | In October 2001, Archstone reorganized into an UPREIT structure and was renamed Archstone-Smith Operating Trust. The selected financial data and accompanying text has been
recast as if the company was an UPREIT for all periods presented.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | Non-recurring expenses in 2001 include approximately $5.3 million of integration costs associated with the Smith Merger, $12.2 million in non-cash write-offs of investments in
service and technology related companies and $2.7 million in provision for possible loss on real estate investments. Non-recurring expenses during 2000 and 1999 relate to provisions for possible loss on real estate investments. Non-recurring
expenses in 1998 include $1.1 million in integration costs associated with the Atlantic Merger and $1.1 million associated with the introduction of Archstone-Smiths national branding strategy. Both are included within the other
expense category in the Operating Trusts Statement of Earnings for 1998. In 1997, the non-recurring expense represents the impact of a one-time, non-cash charge of $71.7 million associated with the costs incurred in acquiring
Archstone-Smiths REIT and property management companies from Security Capital.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) |  | All of the outstanding Series B Preferred Units were redeemed on May 7, 2001. During 2001, cash distributions of $0.79 per unit were paid of the period from January 1, 2001 to
May 7, 2001.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) |  | During the fourth quarter 2001, the Operating Trust paid approximately $5.8 million of distributions on the Series H, I, J, K and L preferred units that were declared by Smith
Residential prior to the Smith Merger.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



24




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##### Table of Contents




December 31,2001


2000


1999


1998


1997Financial Position:Real estate owned, at cost

$
8,276,004


$
5,058,910


$
5,086,486


$
4,771,315


$
2,567,599Investments in and advances to unconsolidated entities


437,365



226,020



130,845



98,486



37,320Total assets


8,549,915



5,016,131



5,302,437



5,059,898



2,805,686Unsecured credit facilities


188,589



193,719



493,536



264,651



231,500Long-Term Unsecured Debt


1,333,890



1,401,262



1,276,572



1,231,167



630,000Total liabilities


4,154,368



2,671,188



2,679,628



2,410,114



1,265,250Preferred units


374,114



286,856



297,635



272,515



240,210Unitholders equity


3,631,518



2,251,606



2,567,506



2,628,325



1,540,436Other Common Unitholders interest (at redemption value)

$
669,502


$



$



$



$
Number of Common Units outstanding


199,973



122,838



139,008



143,313



92,634Years Ended December 31,2001


2000


1999


1998


1997Other Data:Net cash flows provided by (used in):Operating activities

$
309,305


$
322,320


$
296,010


$
231,153


$
159,724Investing activities


434,330



105,563



(223,914
)


(318,764
)


(403,112
)Financing activities

$
(745,685
)

$
(428,878
)

$
(72,143
)

$
92,803


$
242,672




25




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##### Table of Contents




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





Forward-Looking Statements





Certain statements in this Form 10-K that are not historical facts are
forward-looking statements as that term is defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations, beliefs, assumptions, estimates and projections about
the industry and markets in which we operate. Words such as expects, anticipates, intends, plans, believes, seeks, estimates and variations of such words and similar
expressions are intended to identify such forward-looking statements. Information concerning expected investment balances, expected funding sources, planned investments, forecasted dates and revenue and expense growth assumptions are examples of
forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and
results may differ materially from what is expressed, forecasted or implied in such forward-looking statements. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or
otherwise, except as required by applicable law.





Our operating results depend primarily on income from apartment
communities, which is substantially influenced by supply and demand for apartment units, operating expense levels, property level operations and the pace and price at which we develop, acquire or dispose of apartment communities. Capital and credit
market conditions, which affect our cost of capital, also influence operating results. See Risk Factors in Item 1 of this Form 10-K for a complete discussion of the various risk factors that could affect our future performance.





The Company





We are engaged in the acquisition, development, management and operation of apartments in protected markets across the United States. As described below, we recently re-organized into an UPREIT structure in connection
with the Smith Merger, under which substantially all property ownership and business operations are conducted through the Operating Trust, and our subsidiaries and affiliates. Archstone-Smith is our sole trustee and owns approximately 87.3% of our
Common Units.





For periods prior to the reorganization into an UPREIT and the Smith Merger, Archstones historical
financial information, including all textual references, have been recast as if it were an UPREIT for all periods presented.





The Smith Merger





During October 2001, shareholders of both Archstone and Smith Residential (a publicly traded
REIT which primarily developed, owned and managed high-rise apartment properties and garden apartment communities in Washington, D.C, Chicago, Boston and Southeast Florida) approved the Smith Merger. The combined company operates under the name
Archstone-Smith Operating Trust. Our majority owner, Archstone-Smith, is a registrant whos Common Shares are traded on the NYSE (NYSE:ASN). The total purchase price paid for Smith Residential aggregated approximately $3.9 billion and
corresponds to a purchase price of approximately $135,000 per operating apartment unit acquired. This transaction was structured as a tax-free merger and was accounted for under the purchase method of accounting. In accordance with the terms of the
Smith Merger which closed on October 31, 2001:





| |  |  | The Operating Trust acquired Smith Partnerships assets and assumed their debt and other liabilities upon consummation of the Smith Merger.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Smith Residentials common shareholders received 1.975 Common Shares in exchange for each surrendered share of common stock and Smith Residentials preferred
shareholders received one Archstone-Smith preferred share for each surrendered preferred share.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Smith Partnerships common unit holders received 1.975 A-1 Common Units in exchange for each surrendered common unit and Smith Partnerships preferred unit holders
received one Operating Trust preferred unit for each surrendered preferred unit.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




In addition to approving
the Smith Merger, Archstones shareholders also approved the following matters on October 29, 2001: (i) an amendment to Archstones declaration of trust; (ii) the conversion of Archstone into an UPREIT structure; and, (iii) the merger of
the Operating Trust with the Smith Partnership.




26




---

##### Table of Contents




We believe the UPREIT structure significantly enhances our acquisition capabilities,
particularly for high-rise properties. With this structure, sellers transfer their properties to us in exchange for our A-1 Common Units, which allows them to realize significant tax deferral benefits by maintaining their historical cost basis. A-1
Common Units are exchangeable on a one-for-one basis into Archstone-Smith Common Shares and receive dividends equal to those paid on the Archstone-Smith Common Shares. Over time, the sellers can convert their A-1 Common Units into Archstone-Smith
Common Shares, triggering a taxable event. This entitles the seller to incur their tax liabilities in smaller increments, at their option.





As a result of the Smith Merger, our Board and management believe that the combined company has the following important attributes:





| | (i) |  | We own a highly desirable portfolio of well-located apartments in protected markets across the United States. Approximately 80% of our NOI comes from the Greater Washington,
D.C. Metropolitan Area, Southern California, San Francisco Bay Area, Boston, Chicago, Southeast Florida and Seattle. These are all markets that we believe will perform very well over the long term because of the difficulty of adding new supply;
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) |  | We have significant in-house high-rise development and management capabilities, which will allow us to expand the high-rise business on the west coast and the
Greater New York City Area;
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) |  | We are organized in a more typical UPREIT structure, which we believe will enhance our ability to acquire assets using tax deferred acquisition currency;
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iv) |  | The merger of Archstone and Smith Residential brings together what management and the Board believes are the two most respected brands in the apartment industry. The high-rise
properties are operated under the Charles E. Smith Residential brand name and all garden communities are operated under the Archstone Communities brand name;
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (v) |  | Archstone-Smith has a larger market capitalization and shareholder base which should provide increased liquidity to Archstone-Smiths shareholders and to our unitholders;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (vi) |  | We hope to benefit from enhanced economies of scale resulting from the adoption of best practices, including the elimination of redundant expenses, which in aggregate, are
expected to produce identified cost savings of approximately $7-8 million annually, beginning in early to mid 2002; and
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (vii) |  | We have a strong balance sheet that was further enhanced by the addition of $120 million of incremental commitments from four new financial institutions on our unsecured credit
facilities, which were received in connection with the closing of the Smith Merger. These new commitments increased the borrowing capacity on our credit facilities from $680 million to $800 million, while retaining the same attractive pricing level
of LIBOR plus 65 basis points.
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




We have a strategic national presence with 225 garden communities and
high-rise properties, representing a total of 79,982 units, including 2,812 units in our development pipeline at December 31, 2001. Additionally, our total market capitalization at December 31, 2001 was approximately $9.7 billion.




27




---

##### Table of Contents




Results of Operations





Overview





Our basic net earnings attributable to Common Units increased approximately $7.3 million or 3.1% in 2001 as compared to 2000. This increase is largely attributable to:





| | (i) |  | The inclusion of the results of operations for the last two months of 2001 for all properties acquired in the Smith Merger, which closed on October 31, 2001;
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) |  | A 6.5% increase in NOI in our Same-Store portfolio, driven by 5.7% Same-Store revenue growth in 2001;
| | ---- |  | -----------------------------------------------------------------------------------------------------

| | (iii) |  | An increase in gains on dispositions of depreciated real estate in our non-core markets; and
| | ----- |  | --------------------------------------------------------------------------------------------

| | (iv) |  | Higher levels of income from unconsolidated entities, including our pro rata share of the results of operations for the last two months of 2001 from CES, SMC and the real
estate joint ventures acquired in the Smith Merger.
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




These increases were partially offset by:





| | (i) |  | The loss of garden community NOI resulting from the success achieved in advancing our investment strategy through our capital recycling program, by disposing of over $1.2
billion of garden communities in non-core markets during 2001;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) |  | Inclusion of a one-time $9.3 million gain recorded in 2000 associated with the exchange of the Homestead mortgage notes for Common Units and $13.6 million of interest income on
these notes recorded during 2000;
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) |  | Write-off of investments in service and technology companies totaling $12.2 million in 2001; and
| | ----- |  | ------------------------------------------------------------------------------------------------

| | (iv) |  | Merger related costs of $5.3 million in 2001.
| | ---- |  | ---------------------------------------------




Our basic net earnings attributable to Common Units increased $31.5 million, or 15.4%, in 2000 as compared to 1999. This net increase is primarily attributable to:





| | (i) |  | Strong operating performance from our garden communities, which produced Same-Store revenue growth of 6.7%;
| | --- |  | -----------------------------------------------------------------------------------------------------------

| | (ii) |  | Continued success in the redeployment of capital into protected markets which generally have higher rental rates and stronger operating margins; and
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) |  | A significant increase in gains on dispositions of depreciated real estate in our non-core markets.
| | ----- |  | ---------------------------------------------------------------------------------------------------




Apartment Community Operations





At December 31, 2001,
investments in operating apartment communities comprised over 99% of our total real estate portfolio, based on NOI. The following table summarizes the overall performance of our apartment communities during 2001, 2000 and 1999 (in thousands, except
for units and percentages):





2001(1)


2000


1999Rental revenues

$
697,688


$
684,438


$
634,028Property operating expenses:Rental expenses


170,146



166,800



165,103Real estate taxes


59,038



58,796



52,410Total property operating expenses


229,184



225,596



217,513Net Operating Income

$
468,504


$
458,842


$
416,515Average number of operating units(2)


57,957



65,784



68,991Operating margin (Net Operating Income/rental revenues)


67.2
%


67.0
%


65.7
%Average occupancy percentage


94.7
%


96.1
%


94.9
%





| | (1) |  | Includes the results of operations for properties acquired in the Smith Merger for the last two months of 2001.
| | --- |  | ---------------------------------------------------------------------------------------------------------------

| | (2) |  | The units reflected in 2001 include 27,750 units acquired in the Smith Merger on October 31, 2001.
| | --- |  | --------------------------------------------------------------------------------------------------



28




---

##### Table of Contents




The following table reflects our reported revenue, expense and NOI growth for Same-Store
communities that were fully operating during each respective comparison period:





Same-Store Revenue Growth

Same-Store Expense Growth

Same-Store Net Operating Income Growth2001(1)

5.67%

3.93%

6.54%2000

6.65%

4.58%

7.68%1999

3.60%

(1.21%)

6.21%(1)   Includes a full year of results for assets acquired in the Smith Merger.





| | 
| | 




NOI for the entire apartment portfolio increased by $9.7 million, or 2.1%,
during 2001 and by $42.3 million, or 10.2%, during 2000. These increases were principally attributable to:





| | (i) |  | The inclusion of approximately $37.9 million of NOI from properties acquired in the Smith Merger generated during the last two months of 2001;
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) |  | The continued successful lease-up and Stabilization of development communities; and
| | ---- |  | -----------------------------------------------------------------------------------

| | (iii) |  | Continued improvements in our property level operating margins, and growth on our Same-Store NOI, due primarily to increases in rental revenues from our operating communities
and operating efficiencies achieved which contributed to controlled expense growth.
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




These increases were
partially offset by:





| | (i) |  | Lower overall garden community NOI resulting from the success achieved in advancing our investment strategy through our capital recycling program, by disposing of approximately
$1.2 billion, $790 million and $590 million of garden communities in non-core markets during 2001, 2000 and 1999, respectively;
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) |  | The impact of a deterioration of general macroeconomic conditions during the latter half of 2001 that negatively affected demand for apartments; and
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) |  | Higher property level insurance costs experienced during the last six months of 2001, subsequent to the renewal of our insurance policies on June 30, 2001.
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------




Based on our reported Same-Store NOI results, our strongest markets during 2001 included the Greater Washington, D.C.
Metropolitan Area, Boston, Southern California and Southeast Florida. Our most challenging markets during 2001 included the San Francisco Bay Area, Chicago and Atlanta.





We anticipate that NOI will increase significantly during 2002 since our consolidated results of operations will include a full year of activity from properties acquired in the Smith
Merger. However, based on current and forecasted macroeconomic conditions within the markets we operate in, we expect our Same-Store NOI growth in 2002 to be approximately 1.5-2.5%, which is significantly lower than the 6.5% growth we achieved in
2001. This lower anticipated growth rate is driven principally by slightly lower occupancies and lower rental rate increases across our portfolio.





During 2002, we will continue to focus our energies on successfully completing the integration of the Charles E. Smith Division into the core operations of the Operating Trust. As a result of the high-rise expertise
we acquired in connection with the Smith Merger, we will continue identifying attractive investment opportunities, which will allow us to expand the Charles E. Smith Division into other protected core markets such as the San Francisco Bay Area, West
Los Angeles and Manhattan.





We will also continue to focus on further strengthening and enhancing the Archstone Communities
brand name for our garden communities and the Charles E. Smith Residential brand name for our high-rise properties. We believe that we will be successful in this endeavor by continuing to focus on delivering superior customer service to our
residents, seeking to improve our product offerings, and maximizing the profitability of each asset in our portfolio through more effective pricing strategies.




29




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##### Table of Contents




Income From Unconsolidated Entities





Income from unconsolidated entities increased by $11.6 million in 2001 as compared to 2000 primarily as a result of the following factors:





| | (i) |  | Our equity in the earnings of Ameriton increased from $2.8 million in 2000 to $9.8 million in 2001 including the impact of higher gains on the sale of real estate properties by
Ameriton;
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) |  | In connection with the Smith Merger, we acquired a majority of the economic interest in CES and SMC. Our equity in the earnings of these two entities during 2001 was $1.6
million; and
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) |  | Our equity in the earnings of the real estate joint ventures, including interest in the three joint ventures acquired in the Smith Merger, was $2.9 million during 2001 as
compared to a loss of $49,000 in 2000.
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




We expect substantially higher levels of income from our
unconsolidated entities in 2002 primarily as a result of including a full year of net earnings from the unconsolidated entities acquired in the Smith Merger. See Note 4 in our audited financial statements in this Annual Report for additional
information on income from unconsolidated entities.





Income from unconsolidated entities increased in 2000 as compared to 1999
primarily as a result of higher levels of equity in the earnings of Ameriton.





Other Income





Other income decreased by $19.2 million, or 60.0%, in 2001 as compared to 2000. This decrease is principally attributable to $12.6 million of aggregate
one-time gains realized in 2000 in connection with the sale of the Spectrum Apartment Locator business and the monetization of the Homestead mortgage notes receivable, coupled with the recognition of $13.6 million of interest income on these notes
during 2000. These decreases were partially offset by a $1.3 million increase in interest income in 2001.





The $4.8 million, or
17.9%, increase in other income from 1999 to 2000 resulted primarily from the $12.6 million aggregate gain in 2000 referenced above which was partially offset by a $9.0 million decrease in interest income related to the Homestead mortgage notes,
which we no longer own.





Depreciation Expense





The $11.6 million, or 8.1%, decrease in depreciation expense in 2001 as compared to 2000 is due principally to the higher level of disposition activity in 2001 relative to 2000. These
decreases were partially offset by incremental depreciation expense related to the real estate assets acquired in the Smith Merger. Depreciation expense is expected to increase in 2002 primarily as a result of the Smith Merger.





The $11.3 million, or 8.5%, increase in depreciation expense in 2000 is primarily influenced by an increase in the cost basis of operating
communities resulting from our active development and capital redeployment programs.





Interest Expense





The $3.3 million, or 2.3%, decrease in interest expense in 2001 as compared to 2000 is the result of lower average outstanding borrowings
during 2001, coupled with an overall reduction in the interest rates. Our average outstanding debt balance decreased from $2.4 billion in 2000 to $2.3 billion during 2001. This decrease was principally attributable to using community disposition
proceeds to repay outstanding debt balances, partially offset by $1.6 billion of debt assumed in the Smith Merger. In addition, short-term rates decreased over 400 basis points throughout 2001. Finally, capitalized interest decreased approximately
$4.0 million due to the reduction in volume of our development activities.





The $23.7 million, or 19.5%, increase in interest
expense from 1999 to 2000 is primarily attributable to higher outstanding debt balances and higher effective interest rates on our debt. The level of capitalized interest decreased $7.6 million in 2000 as compared to 1999 as a result of lower levels
of communities undergoing active construction.




30




---

##### Table of Contents




General and Administrative Expenses





The $3.3 million, or 14.4%, increase in general and administrative expenses in 2001 as compared to 2000 is principally attributable to the Smith Merger,
including higher payroll, long-term incentive program costs, travel and professional fees. We expect higher general and administrative expenses in 2002 as a result of including a full year of the Charles E. Smith Division overhead.





General and administrative costs incurred under an administrative service agreement with Security Capital have steadily declined since the
inception of the agreement in September 1997 as functions related to information technology, human resources, payroll, investor relations, legal and tax have all been internalized. As substantially all administrative services have been internalized
at December 31, 2001, we anticipate that future expenditures under this agreement will be minimal.





The $1.0
million, or 4.3%, increase in general and administrative expenses in 2000 compared to 1999 related primarily to higher information technology related costs and higher expenses associated with our long-term incentive plan.





Provisions for Possible Loss on Investments





Provisions for loss on investments increased $9.7 million from 2000 to 2001. This increase is principally attributable to a $12.2 million write-off due to the reduction in the estimated fair value of technology and
service-related equity investments. This amount is partially offset by a $2.5 million decrease in the write-offs made to the estimated fair value of certain real estate investments held for sale.





Other Expenses





The $4.4 million increase in other
expenses in 2001 is principally due to merger-related costs approximating $5.3 million. This amount is partially offset by the $2.8 million write off of the net unamortized balance of the conversion factors associated with the Homestead mortgage
notes in 2000.





Minority Interest





The $552,000 or 7.6% increase in minority interest in 2001 compared to 2000 is principally due to the increase in the distribution rate in 2001 coupled with a full year in distributions
paid on the perpetual preferred units issued in 2000.





Minority interest increased in 2000 primarily as a result of the issuance
of perpetual preferred units during the year.





Gains on Dispositions of Real Estate Investments





We recognized $100.3 million, $93.1 million and $62.1 million of net gains on the disposition of depreciated real estate assets during 2001, 2000 and
1999, respectively. These gains have resulted from our active capital redeployment program, which involves the disposition of operating communities in non-core markets with less attractive growth prospects to fund investments in our core protected
markets.





Preferred Unit Distributions





Preferred unit distributions declared decreased by $3.1 million, or 12.1%, during 2001 principally as a result of the redemption of Series B Preferred Units in May 2001 and lower
distributions on Series A Preferred Units resulting from periodic conversions by unitholders into Common Units. We expect higher preferred unit distributions in 2002 as a result of having a full year of preferred unit distribution payments on Series
H, I, J, K and L Preferred Units, which we issued in connection with the Smith Merger.





The $1.6 million, or 6.8%, increase of
preferred unit distributions declared and paid during 2000 is primarily attributable to the issuance of Series D Preferred Units in August 1999. The increases were partially offset by lower distributions on Series A Preferred Units resulting from
periodic conversions by unitholders into Common Units, which more than offset the annual increase in the distribution rate.




31




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##### Table of Contents




Liquidity and Capital Resources





Financial Flexibility





We are committed to maintaining a strong balance sheet and preserving our financial flexibility, which we believe enhances our ability to capitalize on
attractive investment opportunities as they become available. As a result of the significant cash flow generated by our operations, cash positions at December 31, 2001, and the available capacity under our unsecured credit facilities, we believe our
liquidity and financial condition are sufficient to meet all of our cash flow needs in 2002.





Operating Activities





Our net cash flow provided by operating activities decreased by $13.0 million, or 4.0%, in 2001 as compared to 2000,
principally due to significant disposition activities. The decrease is principally attributable to lost apartment community NOI associated with the $1.2 billion of dispositions in 2001.





During 2000, our net cash flow provided by operating activities increased by $26.3 million, or 8.9%, as compared to 1999, due primarily to higher NOI from apartment communities. For a
more complete discussion of the factors impacting our operating performance, see Apartment Community Operations and our accompanying Statement of Cash Flows in this Annual Report for more detailed information.





Investing and Financing Activities





During 2001, cash flows from investing activities increased $328.8 million as compared to 2000. The increase was principally attributable to a $306.0 million increase in proceeds from dispositions, a $140.4 million
decrease in investments in real estate and a $90.1 million net decrease in our investment in and advances to our unconsolidated investees. These increases were partially offset by the $181.9 million increase in tax-deferred exchange escrows.





During 2001, cash used in financing activities increased $316.8 million, or 73.9%, as compared to 2000. This increase is
primarily attributable to a $309.0 million net repayment of outstanding debt. In addition, there was a $31.2 million reduction in proceeds from preferred unit issuances. This activity was partially offset by a $24.0 million reduction in the
repurchase or redemption of our common and preferred units.





During 2000 and 1999, we invested an average of $720.0 million per
year primarily in the development of new communities and the acquisition of existing operating communities. During 2000 and 1999 we also repurchased a total of $506.2 million of our Common and Preferred Units including 17.5 million Common Units
repurchased from Security Capital in July 2000 in exchange for Homestead mortgage notes with a face amount of $221.3 million and cash of $178.7 million. See Note 13 in our audited financial statements in this Annual Report for additional information
on this transaction. These cash outflows were partially offset by $121.4 million in issuance of perpetual Preferred Units during 2000 and 1999. Smaller investments were made during this period in our unconsolidated investees. These investments were
financed primarily through use of disposition proceeds, which averaged $672.0 million per year during 2000 and 1999, cash flow from operating activities and debt.





We attempt to structure most of our acquisition and disposition transactions as tax-deferred exchanges. When we fund an investment using debt, we typically borrow under our unsecured
credit facilities, which are then repaid from other long-term financing sources. See our Statement of Cash Flows in this Annual Report for more detailed information.





Other significant financing activity included the payment of $247.4 million, $233.8 million and $233.8 million in Common and Preferred Units and minority interest distributions during
2001, 2000 and 1999, respectively. The level of distributions in 2000 was comparable to 1999 because unit repurchases in 1999 and 2000 offset the increases in distributions per Common Units and distributions on Preferred Units.




32




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Our most significant non-cash investing and financing activities during the three-year period
ended December 31, 2001 included:





| | (i) |  | The Smith Merger during 2001 (see Note 1 in our audited financial statements in this Annual Report for more information on assets acquired and liabilities assumed in the Smith
Merger);
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) |  | The exchange of Homestead mortgage notes for Common Units in 2000;
| | ---- |  | ------------------------------------------------------------------

| | (iii) |  | The assumption of mortgages payable in connection with the acquisition of real estate;
| | ----- |  | --------------------------------------------------------------------------------------

| | (iv) |  | The conversion of preferred units into Common Units; and
| | ---- |  | --------------------------------------------------------

| | (v) |  | The exchange of apartment communities and land for interests in joint ventures (see Note 4 in our audited financial statements in this Annual Report for more information).
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------




See Note 16 in our audited financial statements in this Annual Report for additional information on non-cash
investing and financing activities.





Scheduled Debt Maturities and Interest Payment Requirements





We have structured the repayments of our long-term debt to create a relatively level principal maturity schedule and to avoid significant repayment
obligations in any year which would impact our financial flexibility. We had $80.9 million in scheduled maturities during 2001, and we only have $120.0 million and $246.3 million of long-term debt maturing during 2002 and 2003, respectively. See
Note 5 in our audited financial statements in this Annual Report for additional information on scheduled debt maturities.





In
October 2001, we increased the available capacity on our unsecured line of credit by $120 million, which enables us to borrow up to $700 million under this facility with JPMorgan Chase Bank. The facility bears interest at the greater of prime or the
federal funds rate plus 0.50%, or at our option, LIBOR plus 0.65%. The spread over LIBOR can vary from LIBOR plus 0.50% to LIBOR plus 1.25% based upon the rating of our Long-Term Unsecured Debt. The three-year facility matures in December 2003 and
includes an option in our favor for a one-year extension. We also have a short-term unsecured borrowing agreement with JPMorgan Chase Bank, which provides for maximum borrowings of $100 million.





We had $193.0 million outstanding and an available balance of $607.0 million on our unsecured credit facilities at March 7, 2002.





Our unsecured credit facilities, Long-Term Unsecured Debt and mortgages payable had effective interest rates of 9.8%, 7.5% and 6.1%, respectively, as of
December 31, 2001. The higher interest rate on our credit facilities is primarily attributable to fixed renewal costs amortized over the life of the facility, applied to a lower outstanding balance at December 31, 2001. All of these rates give
effect to debt issuance costs, fair value hedges and other fees and expenses, as applicable.





We were in compliance with all
financial covenants pertaining to our debt instruments as of and for the year ended December 31, 2001.




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Unitholder Distribution Requirements





Based on anticipated distribution levels for 2002 and the number of units and units outstanding as of December 31, 2001, we anticipate that we will pay
the following distributions in 2002 (in thousands, except per unit amounts):





Per Unit

TotalCommon Units distributions

$
1.70

$
339,955DownREIT OP Unit distributions(1)


1.70


1,480Series A Preferred Unit distributions


2.29


7,222Series C Preferred Unit distributions


2.16


4,240Series D Preferred Unit distributions


2.19


4,341Series E Perpetual Preferred Unit distributions(1)


2.09


3,350Series F Perpetual Preferred Unit distributions(1)


2.03


1,625Series G Perpetual Preferred Unit distributions(1)


2.16


1,294Series H Preferred Unit distributions


3.36


8,865Series I Preferred Unit distributions(2)


7,660.00


3,830Series J Preferred Unit distributions


3.36


2,300Series K Preferred Unit distributions


3.36


2,238Series L Preferred Unit distributions

$
3.36


2,152Total distribution requirements




$
382,892


| | (1) |  | See Note 8 in our audited financial statements in this Annual Report for more information on minority interests.
| | --- |  | ----------------------------------------------------------------------------------------------------------------

| | (2) |  | Series I Preferred Units have a par value of $100,000 per unit.
| | --- |  | ---------------------------------------------------------------




Unit Repurchase and Redemption Activity





In February 2001, we repurchased 2.3 million of
our Common Units from Security Capital for $50.0 million at a price of $22.08 per unit. In May 2001, we redeemed all of our Series B Preferred Units for $104.7 million at $25.00 per unit. The repurchase of Common Units and the redemption of Series B
Preferred Units were funded through borrowings under our unsecured credit facilities, which we repaid with proceeds from dispositions. See Note 7 in our audited financial statements of this Annual Report for additional information on the Common Unit
repurchase transaction and the concurrent sale of other Common Units by Security Capital and the redemption of the Series B Preferred Units.





Planned Investments





Following is a summary of unfunded planned investments as of
December 31, 2001 (dollar amounts in thousands). The amounts labeled Discretionary represent future investments that we plan to make, although there is not a contractual commitment to do so. The amounts labeled Committed
represent the approximate amount that we are contractually committed to fund for communities under construction.





Planned InvestmentsUnits

Discretionary

CommittedCommunities under redevelopment

4,008

$


$
56,838Communities under construction

2,812





177,363Communities In Planning and owned

1,402


203,143


Communities In Planning and Under Control

991


152,010


Community acquisitions under contract

242


29,900


Total

9,455

$
385,053

$
234,201





In addition to the planned investments noted above, we expect to make additional
investments relating to planned expenditures on recently acquired communities as well as redevelopment and recurring expenditures to improve and maintain our more established operating communities.




34




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We anticipate completion of most of the communities that are currently under construction and
the planned operating community improvements during the remainder of 2002 and 2003 and expect to start construction on approximately $300$400 million, based on Total Expected Investment, of communities that are currently In Planning. We expect
to fund the costs of these development projects over a two-to-three year period following the date construction commences. No assurances can be given that communities we do not currently own will be acquired or that planned developments will
actually occur. In addition, actual costs incurred could be greater or less than our current estimates.





Funding Sources





We anticipate financing our planned investment and operating needs primarily with cash flow from operating activities,
disposition proceeds from our capital redeployment program and borrowings under our unsecured credit facilities, prior to arranging long-term financing. Consistent with our performance in 2001, we anticipate that net cash flow from operating
activities during 2002 will be sufficient to fund anticipated distribution requirements and debt principal amortization payments. To fund planned investment activities, we had $607.0 million in available capacity on our unsecured credit facilities
and $89.1 million of cash on hand at March 7, 2002. In addition, we expect to complete the disposition of $300$500 million of operating communities during 2002.





In February 2002, we issued $200 million in long-term unsecured senior notes from its shelf registration statement. At March 7, 2002, we had $377.2 million available in shelf registered
securities, which can be issued in the form of unsecured senior notes on an as-needed basis, subject to our ability to effect offerings on satisfactory terms based on prevailing market conditions.





Other Contingencies and Hedging Activities





We are party to various claims and routine litigation arising in the ordinary course of business. When considering our insurance coverage and other aspects of our risk management program, we do not believe that the
results of any such claims and litigation, individually or in the aggregate, will have a material adverse effect on our business, financial position or results of operations.





Our involvement with derivative financial instruments is limited, and we do not use them for trading or other speculative purposes. We occasionally utilize derivative financial
instruments to lower our overall borrowing costs. See Note 10 in our audited financial statements in this Annual Report for additional information on derivative financial instruments currently in use.





Critical Accounting Policies





We define critical
accounting policies as those accounting policies that require our management to exercise their most difficult, subjective and complex judgments. Our critical accounting policies relate principally to the following key areas:





Internal Cost Capitalization





We have a significant development organization that supports the due diligence, acquisition, development and re-development of properties. All direct and indirect costs, including interest and real estate taxes during construction, relating
to these activities are capitalized as a cost of the properties. Included in indirect costs is an estimate of internal costs that involves management judgments.





Purchase Accounting





In October 2001, we merged with Smith
Residential and we recorded Smith Residentials assets and assumed liabilities at their estimated fair values. Due to the magnitude and complexity of the assumptions required in applying purchase accounting, management is required to exercise a
significant amount of judgment. If our estimates or judgments were different from the amounts recorded during the first twelve months following the Smith Merger, the fair value of assets acquired and liabilities assumed would be subject to
adjustment.




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Valuation of Real Estate





Long-lived assets to be held and used are carried at cost and evaluated for impairment when events or changes in circumstances indicate such an evaluation is warranted. Long-lived assets
to be disposed of are reported at the lower of their current depreciated cost or fair value less estimated costs to sell. The evaluation of impairment and the determination of fair values involve a number of assumptions relating to future economic
events that affect the determination of the ultimate value, and therefore, the carrying amounts of our real estate.





Capital
Expenditures





We incur substantial costs relating to redevelopment initiatives, revenue enhancing and expense reducing
capital expenditures, and recurring capital expenditures that are capitalized as part of our real estate. These amounts are capitalized and depreciated over estimated useful lives determined by our management. The determination as to whether
expenditures should be capitalized and the assignment of depreciable lives requires judgment to be exercised by our management.





Off Balance Sheet
Arrangements





Investments in entities that are not controlled through majority voting interest are not consolidated and are
reported as investments in unconsolidated entities. Our investments in unconsolidated entities include real estate joint ventures, Ameriton, CES and SMC. In connection with our investments in Ameriton, we have extended a $10 million committed
unsecured credit facility with $2.1 million of available capacity at December 31, 2001. Additionally, we have extended uncommitted unsecured credit facilities with Ameriton and CES whereby advances are made solely at our discretion. Ameriton and CES
had $174.9 million and $35.9 million, respectively, of available capacity as of December 31, 2001. Advances under these uncommitted lines of credit are made solely at the discretion of the Operating Trust. Other than these lines of credit, there are
no side agreements, financial guarantees, or other derivative financial instruments related to or between the Operating Trust and its unconsolidated entities. Ameriton and the real estate joint ventures also have third-party debt which is secured by
real estate and is non-recourse to the Operating Trust. Accordingly, our maximum risk of loss related to these entities is limited to the aggregate carrying amount of our investment in the unconsolidated entities as reported in our consolidated
financial statements, plus the unfunded portion of the $10 million committed line of credit facility described above. See Note 4 in our audited financial statements in this Annual Report for additional information on our investments in
unconsolidated entities.





Contractual Commitments





The following table summarizes information contained in Managements Discussion and Analysis and in our audited financial statements in this Annual Report regarding contractual commitments (amounts in millions):





2002

2003 and 2004

2005 and 2006

2007 thru 2083

TotalScheduled long-term debt maturities

$
120.0

$
384.2

$
813.3

$
2,346.8

$
3,664.3Unsecured credit facilities


15.6


173.0








188.6Ameriton credit facility


2.1











2.1Development and redevelopment expenditures


234.2











234.2Leases (See Note 15)


4.4


7.8


6.7


105.3


124.2Total

$
376.3

$
565.0

$
820.0

$
2,452.1

$
4,213.4




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##### Table of Contents




Related Party Transactions





We own 100% of the non-voting stock in Ameriton representing a 95% economic interest. In June 2001, the voting stock of Ameriton, representing the remaining 5% economic interest,
was acquired by Ameriton Holdings from third parties for approximately $5.8 million. We also own 100% of the non-voting stock of Ameriton Holdings representing a 95% economic interest. Our chief executive officer owns all the voting stock of
Ameriton Holdings representing the remaining 5% economic interest. Our interest in the Service Businesses is structured similarly to that of our interest in Ameriton, as described above, whereby an entity controlled by our chief executive officer
has 100% of the voting interest in the Service Businesses.





Our chief executive officer did not receive any loans or other
consideration from the Operating Trust, our subsidiaries or our affiliates in connection with the purchase of his interests in Ameriton, CES or SMC. During 2001, Ameriton paid approximately $600,000 to certain other executive officers and employees
of the Operating Trust related to realized returns on investments sold during the year.





Three members of Ameritons board
(James H. Polk, III, R. Scot Sellers and Charles E. Mueller, Jr.) are either Trustees of Archstone-Smith or executive officers of the Operating Trust. All CES board members (Ernest A. Gerardi, Jr., Robert H. Smith, Dana K. Hamilton and Messrs.
Sellers and Mueller) and SMC board members (Robert P. Kogod, Ms. Hamilton and Messrs. Sellers, Smith and Mueller) are either Trustees of Archstone-Smith or executive officers of the Operating Trust. Mr. Gerardi is Chairman and Chief Executive
Officer of CES and receives compensation from CES for his position. No other Trustee of Archstone-Smith or executive officer of the Operating Trust receives compensation for board positions on Ameriton, CES or SMC.





Item 7A.    
Quantitative and Qualitative Disclosures About Market Risk





Stock Investments





We have both public and private investments in the equity securities of service and technology companies. The publicly-traded equity
securities are classified as available for sale securities and carried at fair value, with unrealized gains and losses reported as a separate component of unitholders equity. The private investments, for which we lack the ability
to exercise significant influence, are accounted for at cost. Declines in the value of public and private investments that our management determines are other than temporary, are recorded as a provision for possible loss on investments. Our
evaluation of the carrying value of these investments is primarily based upon a regular review of market valuations (if available), each companys operating performance and assumptions underlying cash flow forecasts. In addition, our management
considers events and circumstances that may signal the impairment of an investment. During 2001, we concluded that our investments in private service and technology companies were impaired due to the financial position of the investees. Since the
decline was deemed to be other than temporary, we recorded a $12.2 million provision for possible loss on investments during 2001. After giving effect to this valuation adjustment, we only had stock investments in public companies with an aggregate
carrying and estimated fair value of approximately $244,000 at December 31, 2001.





Use of Derivatives in Hedging Activities





We are exposed to the impact of interest rate changes and will occasionally utilize interest rate swaps and
interest rate caps as hedges with the objective of lowering our overall borrowing costs. We do not use these derivatives for trading or other speculative purposes. Further, as a matter of policy, we only enter into contracts with major financial
institutions with strong investment grade credit ratings. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, we have not nor do we expect to sustain a material loss from the use of
these hedging instruments.





To determine the fair values of derivative and other financial instruments, we use a variety of
methods and assumptions that are based on market conditions and risks existing at each balance sheet date. These methods and assumptions include standard market conventions and techniques such as discounted cash flow analysis, option pricing models,
replacement cost and termination cost. All methods of assessing fair value result in a general approximation of value, and therefore, are not necessarily indicative of the actual amounts that we could realize upon disposition.




37




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##### Table of Contents




The following table summarizes the notional amount, carrying and estimated fair value of our
derivative financial instruments, as of December 31, 2001 (dollar amounts in thousands). The notional amount represents the aggregate amount of a particular security that is currently hedged at that time, but does not represent exposure to credit,
interest rate or market risks:





Notional Amount

Maturity Date Range

Carrying and Estimated Fair ValueCash flow hedges:Interest rate caps

$
152,958

20022005

$
20Interest rate swaps


200,000

20022006


(5,478
)Total cash flow hedges

$
352,958

20022006

$
(5,458
)Fair value hedges:Interest rate swaps

$
104,005

20062008

$
3,911Total rate of return swaps


69,756

20042007


797Total fair value hedges

$
173,761

20042008


4,708Total hedges

$
526,719

20022008

$
(750
)





Interest Rate Sensitive Liabilities





The table below provides information about our liabilities that are sensitive to changes in interest rates as of December 31, 2001. As the table
incorporates only those exposures that existed as of December 31, 2001, it does not consider those exposures or positions which could arise after that date. Moreover, because there were no firm commitments to actually sell these instruments at fair
value as of December 31, 2001, the information presented herein is merely an estimate and has limited predictive value. As a result, our ultimate realized gain or loss, if any, will depend on the exposures that arise during future periods, hedging
strategies, prevailing interest rates and other market factors existing at the time. The debt classification and interest rates shown below give effect to fair value hedges and other fees or expenses, where applicable (in thousands):





Expected Maturity/Principal Repayment Schedule at December 31,2002


2003


2004


2005


2006


Thereafter


Total Balance

Estimated Fair Value(1)Interest rate sensitive liabilities:Unsecured Credit Facilities:

$
15,589


$



$
173,000


$



$



$



$
188,589

$
188,589Average nominal interest rate(2)


3.00
%


3.00
%


3.00
%

















Long-Term Unsecured Debt:(3)Fixed rate

$
97,500


$
171,250


$
51,250


$
251,250


$
51,250


$
633,037


$
1,255,537

$
1,266,564Average nominal interest rate(2)


7.55
%


7.62
%


7.64
%


7.51
%


7.54
%


7.53
%





Variable rate(4)

$



$



$



$



$



$
78,353


$
78,353

$
78,353Average nominal interest rate(2)


3.16
%


3.16
%


3.16
%


3.16
%


3.16
%


3.16
%





Mortgages payable:Fixed rate debt(5)

$
21,417


$
73,838


$
48,954


$
44,671


$
337,428


$
1,314,292


$
1,840,600

$
1,840,216Average nominal interest rate(2)


6.94
%


6.89
%


6.88
%


6.87
%


6.97
%


6.98
%





Variable rate debt(5)

$
1,124


$
1,209


$
37,718


$
1,311


$
127,411


$
321,160


$
489,933

$
489,933Average nominal interest rate(2)


4.00
%


4.00
%


4.05
%


4.05
%


3.60
%


3.61
%











(1)

The estimated fair value for each of the liabilities listed was calculated by discounting the actual principal payment stream at prevailing(2)

Reflects the weighted average nominal interest rate on the liabilities outstanding during each period, giving effect to principal payments and final maturities during each
period, if any. The nominal rates for variable rate mortgages payable have been held constant during each period presented based on the actual variable rates as of December 31, 2001. The weighted average effective interest rate on the unsecured
credit facilities, Long-Term Unsecured Debt and mortgages payable was 9.76%, 7.48% and 6.05%, respectively, as of December 31, 2001.(3)

In February 2002, we also issued $200 million in long-term unsecured senior notes that matures in February 2012 with an effective interest rate of 6.6%.(4)

Represents unsecured tax-exempt bonds.(5)

The mortgages payable balance includes $661.8 million of Fannie Mae secured debt.




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##### Table of Contents




Item 8.    
Financial Statements and Supplementary Data





Our Balance Sheets as of December 31, 2001 and
2000, and our Statements of Earnings, Unitholders Equity and Other Common Unitholders Interest and Cash Flows for each of the years in the three-year period ended December 31, 2001 and Schedule III  Real Estate and Accumulated
Depreciation, together with the reports of KPMG LLP, independent auditors, are included under Item 14 of this Annual Report and are incorporated herein by reference. Selected quarterly financial data is presented in Note 11 of our audited financial
statements in this Annual Report.





Item 9.    
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure





Not
applicable.





Part III





Item
10.    
Trustees and Executive Officers of the Registrant





For information regarding our Trustees and
senior officers, see Item 1. Business  Trustees and Officers of Archstone-Smith. The other information required by this Item 10 is incorporated herein by reference to the description under the captions Election of
Trustees and Section 16(a) Beneficial Ownership Reporting Compliance in the Archstone-Smith Trust definitive proxy statement for its annual meeting of shareholders (Archstone-Smith Trust 2002 Proxy Statement).





Item 11.    
Executive Compensation





Incorporated herein by reference to the description under the captions
Election of Trustees and Executive Compensation in the Archstone-Smith Trust 2002 Proxy Statement.





Item
12.    
Security Ownership of Certain Beneficial Owners and Management





Incorporated herein by reference to
the description under the captions Principal Shareholders and Election of Trustees in the Archstone-Smith Trust 2002 Proxy Statement.





Item 13.    
Certain Relationships and Related Transactions





Incorporated herein by reference to the
description under the caption Certain Relationships and Transactions in the Archstone-Smith Trust 2002 Proxy Statement.





Part IV





Item 14.    
Exhibits, Financial Statement Schedules and Reports on Form 8-K





The following documents are filed
as part of this report:





| | (a) |  | Financial Statements and Schedule:
| | --- |  | ----------------------------------




| | 1. |  | Financial Statements
| | -- |  | --------------------




See Index to
Financial Statements and Schedule on page 41 of this report, which is incorporated herein by reference.





| | 2. |  | Financial Statement Schedule:
| | -- |  | -----------------------------




See Schedule III on page 75 of this report, which is incorporated herein by reference.





All
other schedules have been omitted since the required information is presented in the financial statements and the related notes or is not applicable.




39




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##### Table of Contents




| | 3. |  | Exhibits
| | -- |  | --------




See
Index to Exhibits on page 80 of this report, which is incorporated herein by reference.





| | (b) |  | Reports on Form 8-K:
| | --- |  | --------------------




On November 1,
2001, the Operating Trust filed a Form 8-K disclosing the Companys reorganization into an UPREIT structure and merger with Smith Residential Realty, L.P.





On November 28, 2001, the Operating Trust filed a Form 8-K disclosing information to be discussed in a meeting with analysts and investors.





On November 30, 2001, the Operating Trust filed a Form 8-K, which included Smith Partnerships third quarter interim financial information.





| | (c) |  | Exhibits:
| | --- |  | ---------




The Exhibits required by
Item 601 of Registration S-K are listed in the Index to Exhibits on page 80 of this Annual Report, which is incorporated herein by reference.




40




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##### Table of Contents




Index to Financial Statements and Schedule





PageArchstone-Smith Operating TrustIndependent Auditors Report

42Consolidated Balance Sheets as of December 31, 2001 and 2000

43Consolidated Statements of Earnings for the years ended December 31, 2001, 2000 and 1999

44Consolidated Statements of Unitholders Equity and Other Common Unitholders Interest for the years ended December 31,
2001, 2000 and 1999

45Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999

46Notes to Consolidated Financial Statements

47Independent Auditors Report on Financial Statement Schedule

74Schedule IIIReal Estate and Accumulated Depreciation as of December 31, 2001

75Index to Exhibits

80




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##### Table of Contents




Independent Auditors Report





The Trustee and Unitholder


Archstone-Smith Operating Trust:





We have audited the accompanying consolidated balance sheets of Archstone-Smith Operating Trust (formerly known as Archstone Communities Trust), as of December 31, 2001 and 2000, and the related consolidated
statements of earnings, unitholders equity and other common unitholders interest, and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of
Archstone-Smith Operating Trusts management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.





We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 financial position of Archstone-Smith Operating Trust as of December
31, 2001 and 2000, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.





| | KP | MG LLP
| | -- | ------




Chicago, Illinois


February 6, 2002,


except as to Note 17,


which is as
of February 15, 2002




42




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##### Table of Contents




Archstone-Smith Operating Trust





Consolidated Balance Sheets





(In thousands, except unit data)





December 31,2001


2000ASSETSReal estate

$
8,276,004


$
5,058,910Less accumulated depreciation


406,784



375,6727,869,220



4,683,238Investments in and advances to unconsolidated entities


437,365



226,020Net investments


8,306,585



4,909,258Cash and cash equivalents


7,027



9,077Restricted cash in tax-deferred exchange escrow


120,421



3,274Other assets


115,882



94,522Total assets

$
8,549,915


$
5,016,131LIABILITIES AND EQUITYLiabilities:Unsecured credit facilities

$
188,589


$
193,719Long-Term Unsecured Debt


1,333,890



1,401,262Mortgages payable


2,330,533



875,804Distributions payable


89,326



50,330Accounts payable


18,643



24,029Accrued expenses and other liabilities


193,387



126,044Total liabilities


4,154,368



2,671,188Minority interest


94,527



93,337Other common unitholders interest, at redemption value (A-1 Common Units)


669,502



Unitholders Equity:Convertible Preferred Units


225,351



82,651Perpetual Preferred Units


148,763



204,205Common unitholders equity (A-2 Common Units)


3,267,363



1,968,697Accumulated other comprehensive income (loss)


(5,517
)


2,817Employee share purchase notes


(4,442
)


(6,764
)Total equity


3,631,518



2,251,606Total liabilities and equity

$
8,549,915


$
5,016,131





The accompanying notes are an integral part of these consolidated financial statements.




43




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##### Table of Contents




Archstone-Smith Operating Trust





Consolidated Statements of Earnings





(In thousands, except per unit
amounts)





Years Ended December 31,2001

2000

1999Revenues:Rental revenues

$
701,794

$
688,544

$
637,808Income from unconsolidated entities


14,374


2,752


2,118Other income


12,769


31,938


27,096Total revenues


728,937


723,234


667,022Expenses:Rental expenses


170,560


166,800


165,106Real estate taxes


59,133


58,808


52,421Depreciation on real estate investments


132,126


143,694


132,437Interest expense


141,907


145,173


121,494General and administrative expenses


26,503


23,157


22,156Provisions for possible loss on investments


14,927


5,200


2,000Other expenses


8,384


3,936


2,069Total expenses


553,540


546,768


497,683Earnings from operations


175,397


176,466


169,339Less: minority interest


7,793


7,241


2,060Plus: gains on dispositions of depreciated real estate, net


100,273


93,071


62,093Net earnings before extraordinary items


267,877


262,296


229,372Less: extraordinary itemsloss on early extinguishment of debt


2,303


911


1,113Net earnings


265,574


261,385


228,259Less: preferred unit distributions


22,277


25,340


23,733Net earnings attributable to Common Units

$
243,297

$
236,045

$
204,526Weighted average Common Units outstanding:Basic


134,589


131,874


139,801Diluted


142,090


137,730


139,829Net earnings before extraordinary items per Common Unit:Basic

$
1.83

$
1.80

$
1.47Diluted

$
1.81

$
1.78

$
1.47Net earnings per Common Unit:Basic

$
1.81

$
1.79

$
1.46Diluted

$
1.79

$
1.78

$
1.46Distributions paid per Common Unit

$
1.64

$
1.54

$
1.48





The accompanying notes are an integral part of these consolidated financial statements.




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Archstone-Smith Operating Trust





Consolidated Statement of Unitholders Equity and Other Common Unitholders Interest





Years Ended December 31, 2001, 2000 and 1999





(In thousandsunaudited)





Convertible Preferred Units at Aggregate Liquidation Preference


Perpetual Preferred Units at Aggregate Liquidation Preference


Common Unitholders Equity


Accumulated Other Comprehensive Income


Employee Unit Purchase Notes


Total Unitholders Equity


Other Common Unitholders Interest


TotalBalances at December 31, 1998

$
117,515


$
155,000


$
2,382,085


$



$
(26,275
)

$
2,628,325


$



$
2,628,325Comprehensive income:Net earnings










228,259











228,259







228,259Preferred unit distributions










(23,733
)










(23,733
)






(23,733
)Change in fair value of marketable securities














394







394







394Comprehensive income attributable to Common Units






























204,920Common Unit distributions










(208,173
)










(208,173
)






(208,173
)Repurchase of units, net of expenses


(750
)






(120,831
)










(121,581
)






(121,581
)Issuance of units, net of expenses






50,000



(1,740
)










48,260







48,260Other, net


(24,130
)






32,780







7,105



15,755







15,755Balances at December 31, 1999


92,635



205,000



2,288,647



394



(19,170
)


2,567,506







2,567,506Comprehensive income:Net earnings










261,385











261,385







261,385Preferred unit distributions










(25,340
)










(25,340
)






(25,340
)Change in fair value of marketable securities














2,423







2,423







2,423Comprehensive income attributable to Common Units






























238,468Common Unit distributions










(198,069
)










(198,069
)






(198,069
)Repurchase of units, net of expenses






(795
)


(383,747
)










(384,542
)






(384,542
)Other, net


(9,984
)






25,821







12,406



28,243







28,243Balances at December 31, 2000


82,651



204,205



1,968,697



2,817



(6,764
)


2,251,606







2,251,606Comprehensive income:Net earnings










257,878











257,878



7,696



265,574Preferred unit distributions










(22,277
)










(22,277
)






(22,277
)Cumulative effect of adoption of SFAS 133














3,831







3,831







3,831Change in fair value of cash flow hedges














(9,290
)






(9,290
)






(9,290
)Reclassification adjustment on realized gains














(2,167
)






(2,167
)






(2,167
)Change in fair value of marketable securities














(708
)






(708
)






(708
)Comprehensive income attributable to Common Units






























234,963Common Unit distributions










(245,035
)










(245,035
)


(10,903
)


(255,938
)Units issued in connection with Smith Merger


146,500



50,000



1,361,641











1,558,141



628,598



2,186,739Repurchase of units, net of expenses






(772
)


(50,000
)










(50,772
)






(50,772
)Redemption of Series B Preferred Units






(104,670
)














(104,670
)






(104,670
)Conversion of Common Units










1,373











1,373



(1,373
)


Other, net


(3,800
)






40,570







2,322



39,092







39,092Adjustment to redemption value










(45,484
)










(45,484
)


45,484



Balances at December 31, 2001

$
225,351


$
148,763


$
3,267,363


$
(5,517
)

$
(4,442
)

$
3,631,518


$
669,502


$
4,301,020





The accompanying notes are an integral part of these consolidated financial statements.




45




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##### Table of Contents




Archstone-Smith Operating Trust





Consolidated Statements of Cash Flows





(In thousands)





Years Ended December 31,2001


2000


1999Operating activities:Net earnings

$
265,574


$
261,385


$
228,259Adjustments to reconcile net earnings to net cash flow provided by operating activities:Depreciation and amortization


135,682



145,571



133,817Gains on dispositions of depreciated real estate, net


(100,273
)


(93,071
)


(62,093
)Gain on exchange of Homestead mortgage notes, net of writedown






(6,560
)


Provisions for possible loss on investments


14,927



5,200



2,000Extraordinary items


2,303



911



1,113Minority interest


7,793



7,241



2,060Change in accounts payable, accrued expenses and other liabilities


(2,217
)


6,277



(16,581
)Other, net


(14,484
)


(4,634
)


7,435Net cash flow provided by operating activities


309,305



322,320



296,010Investing activities:Real estate investments


(530,706
)


(671,148
)


(769,076
)Change in investments in and advances to unconsolidated real estate entities, net


21,111



(68,995
)


(32,729
)Proceeds from dispositions, net of closing costs


1,076,722



770,679



572,741Change in tax-deferred exchange escrow


(116,440
)


65,455



22,145Change in pursuit costs and earnest money deposits


(4,502
)


14,798



(9,376
)Other, net


(11,855
)


(5,226
)


(7,619
)Net cash flow provided by (used in) investing activities


434,330



105,563



(223,914
)Financing activities:Proceeds from mortgages payable






156,527



52,206Proceeds from (payments on) Long-Term Unsecured Debt, net


(69,700
)


114,628



(36,304
)Principal prepayment of mortgages payable


(85,513
)


(41,658
)


(57,574
)Regularly scheduled principal payments on mortgages payable


(4,820
)


(4,833
)


(5,391
)Proceeds from (payments on) unsecured credit facilities, net


(224,130
)


(299,817
)


228,885Repurchase of Common Units and Series B, C and D Preferred Units


(50,772
)


(179,461
)


(121,581
)Redemption of Series B Preferred Units


(104,670
)






Proceeds from issuance of Preferred Units and perpetual preferred units






31,215



90,229Cash distributions paid on Common Units


(221,196
)


(201,257
)


(208,018
)Cash distributions paid on preferred units


(17,788
)


(25,340
)


(23,733
)Cash distributions paid to minority interests


(8,406
)


(7,241
)


(2,060
)Other, net


41,310



28,359



11,198Net cash flow used in financing activities


(745,685
)


(428,878
)


(72,143
)Net change in cash and cash equivalents


(2,050
)


(995
)


(47
)Cash and cash equivalents at beginning of period


9,077



10,072



10,119Cash and cash equivalents at end of period

$
7,027


$
9,077


$
10,072





See Note 16 for supplemental information on non-cash investing and financing
activities.





The accompanying notes are an integral part of these consolidated financial statements.




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##### Table of Contents




Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements





December 31, 2001, 2000 and
1999


(The glossary included in this Annual Report is hereby incorporated by reference)





(1)    Smith Merger





On October 31, 2001, we completed our merger
with Smith Partnership, which primarily developed, owned, and managed high-rise properties and garden communities in Washington, D.C, Chicago, Boston and Southeast Florida. The purpose of the Smith Merger was to expand our portfolio in key protected
markets. Following is a sequential outline of events that occurred prior to the merger closing:





| | (i) |  | In October 2001, Archstone was reorganized into an UPREIT structure. To facilitate this reorganization, Archstone formed a wholly owned subsidiary named Archstone-Smith.
Archstone-Smith then formed a wholly owned subsidiary that was renamed Archstone-Smith Operating Trust. Archstone was merged with and into the Operating Trust, and became a wholly owned subsidiary of Archstone-Smith. The Operating Trust is the
successor entity to Archstone and Archstone-Smith is the successor registrant to Archstone;
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (ii) |  | Smith Partnership then merged with and into the Operating Trust, with the Operating Trust remaining as the successor entity; and
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------




| | (iii) |  | Finally, Smith Residential merged with and into Archstone-Smith, who remains the majority owner of the Operating Trust.
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------




The merger of Smith Partnership and the Operating Trust and the merger of Smith Residential with Archstone-Smith are collectively referred to in
aggregate as the Smith Merger.





Holders of Smith Residential common stock received 1.975 Archstone-Smith Common Shares for each
unit of Smith Residential common stock owned and holders of Smith Residential preferred shares received one Archstone-Smith preferred share for each Smith Residential preferred share owned. Holders of Smith Partnership common units received 1.975
A-1 Common Units for each Smith Partnership unit owned and holders of Smith Partnership preferred units received one Operating Trust preferred unit for each unit owned. Additionally, the Operating Trust assumed the outstanding debt and other
liabilities and acquired the assets of Smith Partnership. Archstone-Smith issued 52.1 million Common Shares and 4.6 million preferred shares to holders of Smith Residential common and preferred stock and succeeded to Smith Residentials
interest in Smith Partnership. The Operating Trust issued 52.1 million A-2 Common Units and 4.6 million preferred units for Smith Residentials interest in Smith Partnership and 25.5 million A-1 Common Units for the Smith Partnership
unitholders interest in Smith Partnership. Additionally, all outstanding Smith Residential employee stock options and restricted share grants vested immediately prior to the Smith Merger. As a result, the holders of such options and restricted
share grants were given the choice of replacement options in Archstone-Smith or a cash payment equal to the intrinsic value of the award based on a cash payment of $49.48 per option.





The Smith Merger was structured as a tax-free merger and was accounted for using the purchase method of accounting. While the allocation of purchase price is subject to revision in
accordance with GAAP during the twelve month period following the closing of the Smith Merger, management does not anticipate that the revisions will be material to the initial purchase price allocation. The following summary of the assets acquired
and liabilities assumed were recorded at the estimated fair value as determined by management, based on information currently available and on current assumptions of future performance (dollar amounts in thouands);





Real estate

$
3,739,912Investment in and advances to unconsolidated entities


164,831Other assets


27,367Total assets acquired

$
3,932,110Unsecured credit facilities

$
219,000Mortgages payable


1,393,057Other accrued expenses and accounts payables


122,263Total liabilities assumed

$
1,734,320




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##### Table of Contents



Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)







Since the Smith Merger closed on October 31, 2001, the accompanying consolidated
statements of earnings include Smith Residentials results of operations for the last two months of 2001. The following summarized pro forma unaudited information assumes that the Smith Merger had occurred on January 1, 2000. The pro forma
results of operations include estimates and assumptions which management believes are reasonable; however, the pro forma results do not include any anticipated cost savings resulting from the Smith Merger as there can be no assurance that such cost
savings will be realized. These results are not necessarily indicative of what the results of operations would have been had the business combination been in effect on the dates indicated, or which may result in the future (dollar amounts in
thousands):





Pro Forma Year Ended December 31,2001

2000Total revenues

$
1,110,936

$
1,131,887Net earnings attributable to Common Units before extraordinary items

$
348,087

$
378,245Net earnings attributable to Common Units(1)

$
345,612

$
377,334Net earnings per Common Unit:Basic

$
1.77

$
1.88Diluted

$
1.74

$
1.84


| | (1) |  | 2001 includes $5.3 million in merger related costs and $14.9 million in provision for loss on investments. Both 2000 and 2001 include extraordinary items related to early
extinguishments of debt.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




(2)    Description of Business and Summary of Significant Accounting Policies





Business





We are structured as an UPREIT under which all property ownership and business operations are conducted through the Operating Trust. Archstone-Smith Trust is our sole trustee and owns approximately 87.3% of our Common
Units. As used herein, we, our and the company refers to the Operating Trust and Archstone-Smith, collectively, except where the context otherwise requires. We are focused on the operation, development,
redevelopment, acquisition and long-term ownership of apartment communities in protected markets throughout the United States characterized by: (i) limited new supply; (ii) expensive single-family home prices; and (iii) strong economic fundamentals.





Basis of Presentation





For periods prior to the reorganization into an UPREIT and the Smith Merger, Archstones financial statements and related footnotes have been recast as if we were an UPREIT for all periods presented in the
accompanying consolidated financial statements.





Principles of Consolidation





The accounts of the Operating Trust and its controlled subsidiaries are consolidated in the accompanying financial statements. All significant
intercompany accounts and transactions have been eliminated in consolidation. We use the equity method to account for investments that we do not control through majority voting interest, but have the ability to exercise significant influence over
the operating and financial policies of the investee. For an investee accounted for under the equity method, our share of net earnings or losses of the investee is reflected in income as earned and distributions are credited against the investment
as received.




48




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##### Table of Contents



Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)







Use of Estimates





The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and
the related notes. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period they are determined to be necessary.





Cash and Cash Equivalents





Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions and short-term, highly liquid investments. We consider all highly liquid instruments with maturities when purchased of three months or less to be
cash equivalents.





Restricted Cash in Tax-Deferred Exchange Escrow





Disposition proceeds set aside and designated to fund future tax deferred exchanges of qualifying real estate investments. If these proceeds are not redeployed to qualifying real
estate investments within 180 days, these funds are redesignated as cash and cash equivalents.





Real Estate and Depreciation





Real estate, other than properties held for sale, is carried at cost. Long-lived assets designated as being held for sale
are reported at the lower of their carrying amount or estimated fair value less cost to sell, and thereafter are no longer depreciated. We review long-lived assets to be held and used for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. This review involves comparing an investments book value to its estimated market value.





We capitalize direct and certain related indirect costs associated with the successful acquisition, development or improvement of real estate. Capitalized costs associated with
unsuccessful acquisition or development pursuits are expensed at the time the pursuit is abandoned.





Depreciation is computed
over the expected useful lives of depreciable property on a straight-line basis as follows:





Buildings and related land improvements

20-40 yearsFurniture, fixtures, equipment and other

5-10 years





Interest





During 2001, 2000 and 1999, the total interest paid in cash on all outstanding debt was $156.4 million, $157.7 million and $148.0 million, respectively.





We capitalize interest during the construction period as part of the cost of apartment communities under development. Interest capitalized during 2001,
2000 and 1999 aggregated $20.3 million, $24.3 million and $31.9 million, respectively.





Cost of Raising Capital





Costs incurred in connection with the issuance of equity securities are deducted from common unitholders equity.
Costs incurred in connection with the issuance or renewal of debt are capitalized as other assets and are amortized into interest expense over the term of the related loan or the renewal period. The balance of any unamortized loan costs associated
with old debt is expensed upon replacement with new debt. Amortization of loan costs included in interest expense for 2001, 2000 and 1999 was $3.1 million, $5.0 million and $4.8 million, respectively.




49




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##### Table of Contents



Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)







Interest Rate Contracts





We utilize derivative financial instruments to manage our interest rate risk and designate these financial instruments as hedges of specific liabilities
or anticipated transactions. During 2001, we adopted SFAS No. 133/138 Accounting for Derivative Instruments and Hedging Activities. Under SFAS 133/138, the resulting assets and liabilities associated with derivative financial instruments
are carried on our financial statements at estimated fair value at the end of each reporting period. The changes in the fair value of a fair value hedge and the fair value of the items hedged are recorded in earnings for each reporting period. The
change in the fair value of effective cash flow hedges are carried on our financial statements as a component of accumulated other comprehensive income (loss). If effective, these hedges have no impact on our current earnings.





Revenue and Gain Recognition





We generally lease our apartment units under operating leases with terms of one-year or less. Rental revenue is recognized according to the terms of the underlying leases which approximates the revenue which would be
recognized if spread evenly over the lease term.





Gains on sales of real estate are recorded when the recognition criteria set
forth by GAAP have been met.





Rental Expenses





Rental expenses shown on the accompanying Statements of Earnings include costs associated with on-site and property management personnel, utilities (net of utility reimbursements from
residents), repairs and maintenance, property insurance, marketing, landscaping and other on-site and related administrative costs.





Federal Income Taxes





We have made an election to be taxed as a Partnership under the Internal Revenue Code of
1986, as amended, and we believe we qualify as a Partnership. See Note 13 for more information on income taxes.





Comprehensive Income





Comprehensive income, which is defined as net earnings and all other non-owner changes in
equity, is displayed in the accompanying Statements of Unitholders Equity and Other Common Unitholders Interest. Other comprehensive income (loss) reflects unrealized holding gains and losses on the available-for-sale investments and,
beginning in 2001, changes in the fair value of effective cash flow hedges as described above (seeInterest Rate Contracts).




50




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##### Table of Contents



Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)







Per Unit Data





Following is a reconciliation of basic net earnings attributable to Common Units to diluted net earnings attributable to Common Units for the periods indicated (in thousands):





Years Ended December 31,2001

2000

1999Reconciliation of numerator between basic and diluted net earnings per Common Unit(1):Net earnings attributable to Common UnitsBasic

$
243,297

$
236,045

$
204,526Distributions on Convertible Preferred Units


9,696


7,254


Minority interest


1,524


1,326


Net earnings attributable to Common UnitsDiluted

$
254,517

$
244,625

$
204,526Reconciliation of denominator between basic and diluted net earnings per Common Unit(1):Weighted average number of Common Units outstandingBasic


134,589


131,874


139,801Assumed conversion of Preferred Units into Common Units


5,844


4,721


Minority interest


943


876


Incremental options and warrants


714


259


28Weighted average number of Common Units outstandingDiluted


142,090


137,730


139,829


| | (1) |  | Excludes the impact of potentially dilutive equity securities during periods in which they are anti-dilutive.
| | --- |  | -------------------------------------------------------------------------------------------------------------




Reclassifications





Certain prior year amounts have been reclassified to conform to the current presentation.





New Accounting
Pronouncements





In June 2001, the FASB issued SFAS No. 141, Business Combinations (effective July 1, 2001) and
SFAS No. 142, Goodwill and Other Intangible Assets (effective for goodwill acquired in business combinations entered into after July 1, 2001). SFAS No. 141 requires the use of purchase accounting for all business combinations entered
into after June 30, 2001. SFAS No. 142 specifies that goodwill and certain intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. These new pronouncements were applied in connection with the
accounting for the Smith Merger which closed on October 31, 2001 (see Note 1). We did not record any goodwill in the Smith Merger.





In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and
for the associated retirement costs. SFAS No. 143 is required to be adopted on January 1, 2003. We do not anticipate the adoption of SFAS No. 143 will have a material impact on our financial position, results of operations or cash flows.





In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 supersedes and amends SFAS No. 121 and relevant portions of APB Opinion No. 30. SFAS No. 144 is required to be adopted on January 1, 2002. We do not anticipate that the adoption of SFAS No. 144 will have a material impact on our financial
position, results of operations or cash flows.





In July 2001, the EITF issued Topic D-98, Classification and Measurement
of Redeemable Securities. Topic D-98 provides clarification regarding the redemption criteria on redeemable securities and provides additional guidance on when such redemption criteria are not within the control of the issuer. Topic D-98 is
required to be adopted retroactively on December 31, 2001. The adoption of Topic D-98 did not have an impact on our financial position, results of operations or cash flows.




51




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##### Table of Contents



Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)







(3)    Real Estate





Investments in Real Estate





In connection with the Smith
Merger we acquired $3.7 billion of real estate representing 27,750 units. Investments in real estate, at cost, were as follows (dollar amounts in thousands):





December 31,2001

2000Investment

Units

Investment

UnitsApartment Communities:Operating communities

$
7,809,444

77,170

$
4,651,275

62,509Communities under construction(1)


358,367

2,812


298,519

4,107Development communities In Planning(1):Owned


76,611

1,402


75,662

1,902Under control(2)




991




2,167Total development communities In Planning


76,611

2,393


75,662

4,069Total apartment communities


8,244,422

82,375


5,025,456

70,685Retail, hotel and other


31,582




33,454Total real estate

$
8,276,004



$
5,058,910


| | (1) |  | Unit information is based on managements estimates and has not been audited or reviewed by our independent auditors.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------

| | (2) |  | The Operating Trusts investment as of December 31, 2001 and December 31, 2000 for development communities Under Control was $4.9 million and $5.9 million, respectively,
and are reflected on the Other assets caption of the Operating Trusts Balance Sheets.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Capital Expenditures





In conjunction with the underwriting of each acquisition of an operating community, we
prepare acquisition budgets that encompass the incremental capital needed to achieve our investment objectives. These expenditures, combined with the initial purchase price and related closing costs, are capitalized and classified as
acquisition-related capital expenditures, as incurred.





As part of our operating strategy, we periodically evaluate
each communitys physical condition relative to established business objectives and the communitys competitive position in its market. In conducting these evaluations, we consider our return on investment in relation to our long-term cost
of capital as well as our research and analysis of competitive market factors. Based on these factors, we make decisions on needed capital expenditures, which are classified as either redevelopment or recurring.





The redevelopment category includes: (i) redevelopment initiatives, which are intended to reposition the community in the marketplace and
include items such as significant upgrades to the interiors, exteriors, landscaping and amenities; (ii) revenue-enhancing expenditures, which include investments that are expected to produce incremental community revenues, such as building garages,
carports and storage facilities or gating a community; and (iii) expense-reducing expenditures, which include items such as water submetering systems and xeriscaping that reduce future operating costs.




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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)







Recurring capital expenditures consist of significant expenditures for items having
a useful life in excess of one year, which are incurred to maintain a communitys long-term physical condition at a level commensurate with our stringent operating standards. Examples of recurring capital expenditures include roof replacements,
certain make-ready expenditures, parking lot resurfacing and exterior painting.





The change in investments in real estate, at
cost, consisted of the following (in thousands):





Years Ended December 31,2001


2000


1999Balance at January 1

$
5,058,910


$
5,086,486


$
4,771,315Apartment properties acquired in the Smith Merger


3,733,936







Acquisition-related expenditures


339,055



372,539



401,392Redevelopment expenditures


39,136



37,547



72,517Recurring capital expenditures


20,184



13,937



13,022Development expenditures, excluding land acquisitions


185,988



228,819



334,049Acquisition and improvement of land for development


48,120



68,308



43,417Dispositions


(1,152,668
)


(743,287
)


(542,554
)Provision for possible loss on investments


(2,710
)


(5,200
)


(450
)Net apartment community activity


3,211,041



(27,337
)


321,393Other:Retail asset acquired in Smith Merger


5,976







Change in other real estate assets


77



(239
)


(4,672
)Provision for possible loss on investments










(1,550
)Net other activity


6,053



(239
)


(6,222
)Balance at December 31

$
8,276,004


$
5,058,910


$
5,086,486





At December 31, 2001, we had unfunded contractual commitments of $234.2 million
related to communities under construction and under redevelopment.





We were committed to the sale of six apartment communities
having an aggregate carrying value of $106.2 million as of December 31, 2001. Each propertys carrying value is less than or equal to its estimated fair market value, net of estimated costs to sell. The property-level earnings, after mortgage
interest and depreciation, from these communities at December 31, 2001, which are included in Archstone-Smith Operating Trusts earnings from operations for 2001, 2000 and 1999, were $10.4 million, $10.4 million and $6.9 million, respectively.





(4)    Investments in and Advances to Unconsolidated Entities





Unconsolidated Entities





At December 31, 2001, we had
investments in a total of three operating companies and ten real estate joint ventures that we account for under the equity method. Two of the operating companiesCES and SMC, and three of the real estate joint ventures were acquired in the
Smith Merger on October 31, 2001. Accordingly, our consolidated statements of earnings include our proportionate share of equity in earnings of these entities for the two-month period ended December 31, 2001.




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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)







As a matter of policy, we do not guarantee third-party debt incurred by our
unconsolidated investees. Investee third-party debt consists principally of mortgage notes payable. Generally, mortgages on real estate assets owned by our unconsolidated investees are secured by the underlying properties. Occasionally, the
investees are required to guarantee the mortgages. However, such guarantees are fully non-recourse to the Operating Trust or to Archstone-Smith. All off-balance sheet contingent liabilities and all third-party debt incurred by our unconsolidated
investees are fully non-recourse to us. As such, the extent of our exposure to financial losses is limited solely to our investment in each of the unconsolidated investees plus the unfunded amount of the Ameriton $10 million committed credit
facility described below. A summary of our investments in and advances to unconsolidated entities follows (in thousands):





2001

2000Ameriton

$
244,654

$
209,347CES(1)


133,878


SMC(1)


1,894


Real estate joint ventures


56,939


16,673$
437,365

$
226,020


| | (1) |  | Includes an allocation of the aggregate Smith Merger purchase price based on our estimate of the fair value of these entities as of the merger closing date.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------




Ameriton and Service Businesses





We own 100% of the non-voting stock in Ameriton representing a 95% economic interest. In June 2001, the voting stock of Ameriton, representing the remaining 5% economic interest, was
acquired by Ameriton Holdings from third parties for approximately $5.8 million. We also own 100% of the non-voting stock of Ameriton Holdings representing a 95% economic interest. Our chief executive officer owns all the voting stock of Ameriton
Holdings representing the remaining 5% economic interest. In total, our direct and indirect economic interest in Ameriton is 99.75%.





We have extended a $10 million committed unsecured credit facility with Ameriton to facilitate working capital advances, with $7.9 million outstanding and $2.1 million available at December 31, 2001. We also have an uncommitted unsecured
credit facility with Ameriton, with $174.9 million of available capacity at December 31, 2001. Advances to Ameriton under this uncommitted facility are made solely at our discretion.





Our interest in the Service Businesses is structured similarly to that of our interest in Ameriton, as described above, whereby an entity controlled by our chief executive officer has
100% of the voting interest in the Service Businesses. In connection with the Smith Merger, we acquired an aggregate 98.55% and 99.95% economic interest in CES and SMC, respectively.





We have an uncommitted unsecured credit facility with CES, with $35.9 million of available capacity at December 31, 2001. Advances to CES under this facility are made solely at our
discretion.





Our chief executive officer did not receive any loans or other consideration from Archstone-Smith, our subsidiaries
or our affiliates in connection with his purchase of his interests in Ameriton, CES or SMC. During 2001, Ameriton paid approximately $600,000 to certain other executive officers and employees of Archstone-Smith related to realized gains on
investments sold during the year.





Three members of Ameritons board are Trustees or executive officers of Archstone-Smith.
All CES and SMC board members are Trustees or executive officers of Archstone-Smith. Additionally, the Chairman and Chief Executive Officer of CES is an Archstone-Smith board member and receives compensation from CES for his position. No other
Trustee or executive officer receives compensation for board positions on Ameriton, CES or SMC.




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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)







Real Estate Joint Ventures





At December 31, 2001, we had investments in ten real estate joint ventures with economic interests ranging from 20% to 40%. In aggregate, these ventures
have 15,335 apartment units. These joint ventures were formed with institutional investors who seek investment opportunities with us to leverage our expertise in acquiring, developing and operating apartment communities and properties.





Following is a summary of the two most significant joint ventures formed during 2001. This information is presented as of the formation date.
The joint ventures were formed through the contribution of apartment communities located in 16 non-core markets throughout the United States (dollar amounts in millions):





2001Month of venture formation


March



May(1)Number of apartment communities in the ventures


12



15Archstone ownership percentage


25
%


25
%Investor partner ownership percentage


75
%


75
%Aggregate fair value of apartment communities

$
310.0


$
339.5Aggregate net book value of apartment communities


268.5



301.4Aggregate net book value of debt and other liabilities assumed by the venture


18.5



16.8Aggregate amount of mortgages obtained by the venture


202.0



225.3Cash contributions by investor partner


71.3



82.0Cash distributions to Archstone upon contribution of operating communities


267.4



297.5Aggregate net book value of communities contributed, less debt and liabilities assumed by the venture


250.0



284.6Gain recognized


17.4



12.9Gain deferred

$
23.8


$
27.3





| | (1) |  | Reflects the formation of two joint ventures. One of the joint ventures formed in May includes two operating communities sold to the joint venture by Ameriton or its
affiliates. The fair value and net book value related to these communities were $40.9 million and $33.9 million, respectively. In accordance with GAAP, no gain was recognized by Archstone-Smith on these two transactions.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




For financial reporting purposes, we accounted for the transactions as a partial disposition of communities. As a result
of our continuing economic interest in the joint ventures formed in 2001, we deferred the recognition of gains as outlined above and reduced the carrying value of our investment on the date of formation to zero. Gains on these transactions have
effectively been recorded using the cost recovery method of accounting. The cost recovery method results in application of cash proceeds from the partial disposition to the carrying value of the entire asset as if a 100% interest were sold. Under
the cost recovery method, gain is recognized only to the extent that such proceeds exceed the entire carrying value. Generally, the deferred gains noted above will be recognized in future periods in the event of a sale of the related assets to a
third party. A portion of the deferred gain may also be recognized as income from unconsolidated real estate entities to the extent that our net investment recorded using the equity method of accounting is reduced to an amount less than zero. This
could result from cash distributions exceeding our share of joint venture income in a reporting period. The ventures formed in 2001 have a ten-year life with flexible liquidation terms to ensure an orderly disposition of the communities based on
prevailing market conditions. Cash distributions to the joint venture partners are paid quarterly. The venture partners have no ongoing capital commitments and no obligation to repay cash distributions. We receive management fees for managing the
ventures and communities.




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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)







In June and July of 2000, we formed two joint ventures with another institutional
investor. The ventures were formed through our contribution of a total of 11 apartment communities with an estimated aggregate fair value of approximately $237.0 million. The investor contributed a total of $66.7 million of cash for an 80% ownership
interest in each of the ventures. The ventures also obtained an aggregate of $153.7 million in mortgage loans from Freddie Mac secured by the 11 communities. We maintained a 20% ownership interest in each of the ventures valued at approximately
$16.7 million and received cash distributions totaling $220.4 million. For financial reporting purposes, we accounted for the transactions as a partial disposition of the communities, which resulted in recognition of an aggregate net gain of $13.3
million. We only recognized 80% of the total gain, due to the 20% continuing ownership interest in the joint ventures. The ventures have a five-year life with flexible liquidation terms to ensure an orderly disposition of the communities, based on
prevailing market conditions. We receive management fees for managing the communities and the ventures.





Summary Financial
Information





Combined summary balance sheet data for our investments in unconsolidated entities follows (in thousands):





2001

2000Assets:Real estate

$
1,403,902

$
542,484Other assets


282,255


15,768Total assets

$
1,686,157

$
558,252Liabilities and owners equity:Inter-company debt payable to Archstone-Smith

$
211,839

$
279,701Mortgages payable


800,193


87,466Other liabilities


126,250


13,188Total liabilities


1,138,282


380,355Owners equity


547,875


177,897Total liabilities and owners equity

$
1,686,157

$
558,252





Selected summary results of operations for our significant unconsolidated
investees presented on a stand-alone basis follows (only periods with reportable activity are presented):





Ameriton

Service Businesses

Real Estate Joint Ventures


Totals2001

2000

1999

2001

2001

2000


2001

2000

1999Total revenues

$
44,364

$
22,218

$
13,796

$
79,246

$
97,338

$
16,134


$
220,948

$
38,352

$
13,796Net earnings

$
11,518

$
4,533

$
307

$
2,885

$
10,130

$
(243
)

$
24,533

$
4,290

$
307


Our income from unconsolidated entities differs from the stand-alone net earnings from the investees presented above due
to various accounting adjustments made in accordance with GAAP. Examples of these differences include; (i) only recording our proportionate share of net earnings in the unconsolidated investees; (ii) the impact of eliminating inter-company
transactions; (iii) adjustments to depreciation and amortization expense resulting from applying purchase accounting in connection with the Smith Merger; and (iv) timing differences in income recognition due to deferral of gains on contribution of
properties to joint ventures.




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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)





(5)    Borrowings





Unsecured Credit Facilities





In connection with the Smith Merger, we assumed approximately $219 million of outstanding borrowings on Smith Partnerships (and affiliates)
unsecured credit facilities. These facilities were fully repaid and terminated in November 2001.





We have a $700 million
unsecured revolving credit facility provided by a group of financial institutions led by JPMorgan Chase Bank. The $700 million facility matures in December 2003 and has a one-year extension, exercisable at our option. The facility bears interest at
the greater of prime or the federal funds rate plus 0.50%, or at our option, LIBOR plus 0.65%. The spread over LIBOR can vary from LIBOR plus 0.50% to LIBOR plus 1.25% based upon the rating of our Long-Term Unsecured Debt. Under a competitive bid
option contained in the credit agreement, we may be able to borrow up to $350 million at a lower interest rate spread over LIBOR, depending on market conditions. Under the agreement, we pay a facility fee of 0.15% of the commitment, which can vary
from 0.125% to 0.200% based upon the ratings of our Long-Term Unsecured Debt.





The following table summarizes our unsecured
revolving credit facility borrowings (in thousands, except for percentages):





Years Ended December 31,2001


2000Total unsecured revolving credit facility

$
700,000


$
580,000Borrowings outstanding at December 31


173,000



150,000Weighted average daily borrowings


52,575



305,016Maximum borrowings outstanding during the period

$
250,000


$
618,000Weighted average daily nominal interest rate


5.31
%


7.01
%Weighted average daily effective interest rate


9.76
%


7.45
%





We also have a short-term unsecured borrowing agreement with JPMorgan Chase Bank,
which provides for maximum borrowings of $100 million. The agreement bears interest at an overnight rate agreed to at the time of borrowing and ranged from 2.69% to 7.31% during 2001. At December 31, 2001 and 2000, there were $15.6 million and $43.7
million of borrowings outstanding under this agreement, respectively.





Long-Term Unsecured Debt





A summary of our Long-Term Unsecured Debt outstanding at December 31, 2001 and 2000 follows (dollar amounts in thousands):





Type of Debt

Coupon Rate(1)


Effective Interest Rate(2)


Balance at December 31, 2001

Balance at December 31, 2000

Average Remaining Life (Years)Long-term unsecured senior notes

7.52
%

7.72
%

$
1,255,537

$
1,325,547

6.3Unsecured tax-exempt bonds

3.16
%

3.61
%


78,353


75,715

27.5Total/average

7.26
%

7.48
%

$
1,333,890

$
1,401,262

7.5


| | (1) |  | Represents a fixed rate for the long-term unsecured notes and a variable rate for the unsecured tax-exempt bonds.
| | --- |  | -----------------------------------------------------------------------------------------------------------------

| | (2) |  | Includes the effect of fair value hedges, loan cost amortization and other ongoing fees and expenses, where applicable.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------



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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)





The
$1.3 billion of long-term unsecured senior notes generally have semi-annual interest payments and either amortizing annual principal payments or balloon payments due at maturity. The unsecured tax-exempt bonds require semi-annual payments and are
due upon maturity in 2028 (seeScheduled Debt Maturities). The notes are redeemable at our option, in whole or in part, and the unsecured tax-exempt bonds are redeemable at our option upon sale of the related property. The redemption
price is generally equal to the sum of the principal amount of the notes being redeemed plus accrued interest through the redemption date plus a standard make-whole premium, if any.





Mortgages Payable





In connection with the Smith
Merger, we acquired approximately $1.4 billion of mortgages payable, at fair value, with interest rates ranging from 6.10% to 8.51% and maturities from July 2004 to October 2027.





Our mortgages payable generally feature either monthly interest and principal payments or monthly interest-only payments with balloon payments due at maturity (seeScheduled Debt
Maturities). A summary of mortgages payable outstanding at December 31, 2001 follows (dollar amounts in thousands):





Effective Interest Rate(1)


Principal Balance at December 31,2001

2000Fannie Mae secured debt (2)

6.10
%

$
661,764

$
406,989Freddie Mac secured line of credit (3)

4.42
%


163,768


Conventional fixed rate

6.63
%


1,266,569


200,694Tax-exempt fixed rate

7.25
%


7,216


17,676Tax-exempt floating rate

3.66
%


207,716


226,325Other

5.19
%


23,500


24,120Total/average mortgage debt

6.05
%

$
2,330,533

$
875,804


(1
)

Includes the effect of fair value hedges, credit enhancement fees, and other related costs, where applicable, as of December 31, 2001.(2
)

Represents a long-term secured debt agreement with Fannie Mae. The Fannie Mae secured debt matures on dates ranging from January 2006 to July 2009, although we have the
option to extend the term of any portion of the debt for up to an additional 30-year period at any time, subject to Fannie Maes approval.(3
)

The Freddie Mac facility was assumed in connection with the Smith Merger and provides for maximum borrowings of up to $300 million if we have sufficient collateral in place.
Borrowings under the Freddie Mac facility bear interest at a floating rate over LIBOR based on debt service coverage ratios. The facility expires on May 31, 2010. In January 2002, one of our real estate properties was released from the collateral
pool, leaving one asset collateralizing this facility.





The change in mortgages payable during 2001 and 2000 consisted of the following
(in thousands):





2001


2000Balance at January 1

$
875,804


$
694,948Mortgages assumed in Smith Merger


1,393,057



Notes assumed or originated


167,289



227,536Regularly scheduled principal amortization


(4,820
)


(4,833
)Prepayments, final maturities and other


(100,797
)


(41,847
)Balance at December 31

$
2,330,533


$
875,804




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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)





Scheduled Debt Maturities





Approximate principal payments due during each of the next five calendar
years and thereafter, are as follows (in thousands):





Mortgages PayableLong-Term Unsecured Debt

Regularly Scheduled Principal Amortization

Final Maturities and Other

Total2002

$
97,500

$
11,334

$
11,207

$
120,0412003


171,250


12,079


62,968


246,2972004


51,250


12,383


74,289


137,9222005


251,250


12,952


33,030


297,2322006


51,250


12,256


452,583


516,089Thereafter (1)


711,390


258,054


1,377,398


2,346,842Total

$
1,333,890

$
319,058

$
2,011,475

$
3,664,423


| | (1) |  | The average annual principal payments due from 2007 to 2028 are $111.8 million per year.
| | --- |  | ----------------------------------------------------------------------------------------




The $700 million unsecured credit facility matures in December 2003 and has a one-year extension option.





Other





Our debt instruments generally contain
certain covenants common to the type of facility or borrowing, including financial covenants establishing minimum debt service coverage ratios and maximum leverage ratios. We were in compliance with all financial covenants pertaining to our debt
instruments at December 31, 2001.





See Note 10 for a summary of derivative financial instruments used in connection with our
debt instruments.





(6)    Distributions to Unitholders





The payment of distributions is subject to the discretion of the Board and is dependent upon our strategy, financial condition and operating results. In December, we announced an
anticipated increase in the annual distribution from $1.64 to $1.70 per Common Unit.





The following table summarizes the cash
distributions paid per unit on Common Units and Preferred Units during 2001, 2000 and 1999:





2001

2000

1999Common Units

$
1.64

$
1.54

$
1.48Series A Preferred Units


2.21


2.07


1.99Series B Preferred Units(1)


0.79


2.25


2.25Series C Preferred Units


2.16


2.16


2.16Series D Preferred Units(2)

$
2.19

$
2.19

$
0.88


| | (1) |  | All of the outstanding Series B Preferred Units were redeemed on May 7, 2001. The cash distribution paid for the period from January 1, 2001 to May 7th, 2001 was
$0.79 per unit.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | Units were issued in August 1999. The annualized distribution level is $2.19 per unit.
| | --- |  | --------------------------------------------------------------------------------------



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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)





(7)    Unitholders Equity and Other Common Unitholders Interest





A-1 Common
Units





In connection with the Smith Merger, the Operating Trust issued approximately 25.5 million A-1 Common Units to former
Smith Partnership unitholders. These units are redeemable at the option of the A-1 Common Unitholders. The Operating Trust has the option of redeeming the A-1 Common Units with cash or Archstone-Smith has the option to redeem the A-1 Common Units
with cash or with Common Shares. The A-1 Common Unitholders aggregate interest in the Operating Trust was approximately 12.7% at December 31, 2001.





Units of Beneficial Interest





During 2001, in connection with the Smith Merger, our
Declaration of Trust was amended to increase the number of authorized units to 450,000,000 from 250,000,000, and change the par value of our units to $0.01 from $1.00. Our Declaration of Trust allows us to issue Common Units, preferred units and
such other units of beneficial interest as the Board may create and authorize from time to time. The Board may classify or reclassify any unissued units from time to time by setting or changing the preferences, conversion rights, voting powers,
restrictions, limitations as to distributions, qualifications of terms or conditions of redemption.





Series B Redemption





In May 2001, we redeemed and retired all outstanding units of Series B Preferred Units at the liquidation preference of $25
per unit, plus accrued and unpaid distributions, for total cash total of $104.7 million.





Common Unit Repurchase





In February 2001, Archstone facilitated the liquidation of Security Capitals ownership of Common Units. Of the 31.8
million Common Units held by Security Capital prior to the transaction, we purchased 2.3 million units from Security Capital at $22.08 per unit and 29.5 million units were sold to the public. In connection with the sale of our Common Units, Security
Capital relinquished their right to representation on the Board.




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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)





Preferred Units





The Operating Trusts Preferred Units have substantially similar rights, preferences and
privileges as the same series of Archstone-Smith Preferred Shares.





A summary of our Convertible Preferred Units outstanding at
December 31, 2001 and 2000, including their significant rights, preferences, and privileges follows:





Redemption Date

Conversion Ratio

Liquidation value

Annual Distribution Rate Per Unit

Amounts in ThousandsDecember 31,Description





2001

2000Series A Preferred Units; 3,154,035 and 3,306,035 units issued and outstanding at December 31, 2001 and 2000,
respectively (1)(2)(3)

11/30/03

1.3469

$
25.00

$
2.21

$
78,851

$
82,651Series H Preferred Units; 2,640,325 units issued and outstanding at December 31, 2001(1)(3)

05/15/03

1.975


27.08


3.24


71,500


Series J Preferred Units; 684,931 units issued and outstanding at December 31, 2001(1)(3)

07/13/02

1.975


36.50


3.24


25,000


Series K Preferred Units; 666,667 units issued and outstanding at December 31, 2001(1)(3)

10/01/04

1.975


37.50


3.24


25,000


Series L Preferred Units; 641,026 units issued and outstanding at December 31, 2001(1)(3)

11/05/05

1.975

$
39.00

$
3.32


25,000


$
225,351

$
82,651


| | (1) |  | The distribution is calculated as the higher of the annual distribution rate per unit, or the distribution on Common Units as if converted. The distribution reflected here is
the actual distribution that would be paid based on the current Common Unit distribution.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | During 2001, 2000 and 1999 approximately 152,000, 399,000 and 965,000 of Series A Preferred Units were converted into approximately 205,000, 538,000 and 1,300,000 Common
Shares, respectively.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) |  | Series A, H, J, K and L may be redeemed for cash at our option, in whole or in part, at the redemption price equal to the liquidation value.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------




A summary of our Perpetual Preferred Units outstanding at December 31, 2001 and 2000, including their significant rights, preferences, and
privileges follows:





Redemption Date(1)

Liquidation Value

Annual Distribution Rate Per Unit

Amounts in ThousandsDecember 31,Description




2001

2000Series B Preferred Units; 4,186,800 units issued and outstanding at December 31, 2000 (redeemed on May 7, 2001)

05/24/00

$
25.00

$
2.25

$


$
104,670Series C Preferred Units; 1,966,715 and 1,989,200 units issued and outstanding at December 31, 2001 and 2000,
respectively

08/20/02


25.00


2.16


49,168


49,730Series D Preferred Units; 1,983,816 and 1,992,200 units issued and outstanding at December 31, 2001 and 2000,
respectively

08/06/04


25.00


2.19


49,595


49,805Series I Preferred Units; 500 units issued and outstanding at December 31, 2001.

02/01/28

$
100,000.00

$
7,660


50,000


$
148,763

$
204,205


| | (1) |  | Series C, D, and I Preferred Units may be redeemed for cash at our option, in whole or in part, at a redemption price equal to the liquidation price per share, plus accrued and
unpaid distribution, if any, on or after the redemption dates indicated
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)





The
holder of our Preferred Units does not have preemptive rights over the holders of Common Units, but have limited voting rights under certain circumstances. The Preferred Units have no stated maturity, are not subject to any sinking fund requirements
and we are not obligated to redeem or retire the units. Holders of the Preferred Units are entitled to receive, when and as declared and authorized by the Board, out of funds legally available for the payment of distributions, cumulative
preferential cash distributions. All Preferred Unit distributions are cumulative from date of original issue and all series of Preferred Units rank on parity as to distributions and liquidation proceeds. All distributions due and payable on
Preferred Units have been accrued and paid as of the end of each fiscal year.





If six quarterly distribution payments (whether
or not consecutive) on any series or class of Archstone-Smith preferred shares that are of equal rank with respect to distributions and any distribution of assets, shall not be paid in full, the number of Archstone-Smith Trustees shall be increased
by two and the holders of all such Archstone-Smith preferred shares voting as a class regardless of series or class, shall be entitled to elect the two additional trustees. Whenever all arrears in distributions have been paid, the right to elect the
two additional trustees shall cease and the terms of such trustees shall terminate.





Dividend Reinvestment and Share Purchase
Plan





Archstone-Smiths Dividend Reinvestment and Share Purchase Plan was designed and implemented to increase
ownership in the company by private investors. Under the plan, holders of Archstone-Smith Common Shares and Operating Trust A-1 Common Units have the ability to automatically reinvest their cash distributions or dividends to purchase additional
Common Shares at a two percent discount from market rates, based on the average of the high and low sales price of a Common Share on the day of the purchase. Additionally, existing and prospective investors have the ability to tender cash payments
that will be applied towards the purchase of Common Shares. The amount purchased by an individual is limited to a maximum of $5,000 per month, with any investments above the limitation requiring our approval. We have not granted approvals for any
purchases above the $5,000 threshold since inception of the plan. In December 2001, Archstone-Smith filed a post-effective amendment to their registration statement with the Securities and Exchange Commission. As of December 31, 2001 Archstone-Smith
had 244,734 Common Shares left to issue under this plan.





Shelf Registration





As of December 31, 2001, we had approximately $577.2 million in shelf registered securities available for issuance. The shelf registration, as amended,
can be used to issue securities in the form of senior unsecured notes on an as-needed basis, subject to our ability to complete offerings on satisfactory terms. See Note 17 for a discussion of a subsequent event which reduced our shelf-registered
securities available for issuance to $377.2 million.




62




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##### Table of Contents




Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)





(8)    Minority Interest





Minority interest consists of the following at December 31, 2001
and 2000 (in thousands):





2001

2000DownREIT Perpetual Preferred Units

$
73,180

$
73,187DownREIT OP Units


18,747


20,150Other minority interests


2,600


Total

$
94,527

$
93,337





DownREIT Perpetual Preferred Units





At various dates, our consolidated subsidiaries have issued perpetual preferred units to limited partnerships in exchange for cash. Unless redeemed, the
units are convertible into Operating Trust preferred units and then into a specified series of Archstone-Smith non-convertible perpetual preferred shares after certain dates. Following is a summary of outstanding DownREIT Perpetual Preferred Units
as of December 31, 2001:





Redemption Date(1)

Liquidation Value

Annual Distribution Rate Per Unit

Amounts in ThousandsDecember 31,Description




2001

2000Series E Perpetual Preferred Units; 1,600,000 Units issued and outstanding at December 31, 2001 and 2000

08/13/04

$
25.00

$
2.09

$
39,123

$
39,130Series F Perpetual Preferred Units; 800,000 Units issued and outstanding at December 31, 2001 and 2000

09/27/04


25.00


2.03


19,464


19,464Series G Perpetual Preferred Units; 600,000 Units issued and outstanding at December 31, 2001 and 2000

03/03/05

$
25.00

$
2.16


14,593


14,593$
73,180

$
73,187


| | (1) |  | The units are redeemable, at our option, in whole or in part, at the liquidation preference plus unpaid distributions on or after the dates indicated here.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------




DownREIT OP Units





As of December 31, 2001, and 2000, there were approximately 871,000, and 949,000, respectively, of DownREIT OP Units outstanding that had been issued in exchange for real estate by consolidated subsidiaries of
Archstone-Smith. These units are convertible into Common Shares on a one-for-one basis and are entitled to distributions in amounts equal to those distributed on Common Shares.




63




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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)





The
following table summarizes our ownership percentage in each limited partnership before and after the issuance of partnership units during the periods covered by these financial statements:





Archstone-Smith Equity as a Percentage of Total Partnership
EquityPartnership Name

Description of Unit Issuance During Period

Transaction Date

Before Transaction


After TransactionACL(1)

680,000 DownREIT Perpetual Preferred Units

02/04/00

78.0
%

77.0
%ACL(1)

350,590 DownREIT OP Units

03/16/00

77.0
%

76.0
%ACL II(2)

600,000 DownREIT Perpetual Preferred Units

03/03/00

78.0
%

60.0
%


| | (1) |  | ACL refers to Archstone-Smith Communities Limited Partnership
| | --- |  | ---------------------------------------------------------------

| | (2) |  | ACL II refers to Archstone-Smith Communities Limited Partnership II
| | --- |  | ---------------------------------------------------------------------




(9)    Benefit Plans





Archstone-Smith maintains several different
share based incentive plans. As Archstone-Smith issues shares and options pursuant to these plans, the Operating Trust must issue Common Units on a one-for-one basis. The information contained in this footnote pertains to the share based benefit
plans of Archstone-Smith. While shares and options issued under these plans are issued by Archstone-Smith, related compensation costs, if any, are borne by the Operating Trust.





The long-term incentive plan was approved in 1997, and was subsequently modified in connection with the Smith Merger. There have been four types of awards under the plan: (i) options
with a DEU feature (only awarded prior to 2000); (ii) options without the DEU feature (generally awarded after 1999); (iii) restricted Common Share awards with a DEU feature; and (iv) employee share purchase program with matching options without the
DEU feature.





No more than 20,000,000 share or option awards in the aggregate may be granted under the plan and no individual
may be awarded more than 1,000,000 share or option awards in any one-year period. As of December 31, 2001 Archstone-Smith had 8,970,096 share awards available for future grants. The plan has a ten-year term.





Share Options and Trustee Options





The exercise price of each option granted is equal to the Common Share closing price on the date of grant. The options awarded through mid-2001 generally vest at a rate of 25% per year; options granted in the latter
part of 2001 generally vest at the rate of 331/3% a year.





Additionally, Archstone-Smith has authorized 400,000 Common Shares for issuance to their outside trustees. The exercise price of outside trustee options is equal to the fair value on the
date of the grant. All of the options granted prior to 1999 have five-year term and are exercisable in whole or in part at any time. The options issued subsequent to 1998 have a DEU feature, a 10-year term and vest over a four-year period.





A summary of all options outstanding at December 31, 2001 follows:





Number of Options

Exercise Prices



Weighted-Average Remaining Contractual LifeRange

Average

Expiration DateMatching options under the 1997 employee unit purchase program

955,975

$21.19 - $23.34

$
22.20

2007-2008

5.74 yearsOptions with DEUs

1,388,602

$19.00 - $23.34


20.59

2007-2009

7.03 yearsOptions without DEUs

2,343,566

$22.56 - $26.40


25.51

2010-2011

9.44 yearsOutside trustee options

87,000

$21.75 - $23.95


22.90

2002-2011

7.39 yearsConverted Smith options

3,332,485

$12.16 - $23.18


18.41

2004-2010

7.79 yearsTotal

8,107,628

$12.16 - $26.40

$
21.33




64




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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)





A
summary of the status of our option plans as of December 31, 2001, 2000 and 1999, and changes during the years ended on those dates is presented below:





Number of Options


Weighted Average Exercise Price

Number of Options ExercisableBalance/Average at December 31, 1998

4,156,649


$
21.62

48,000Granted

923,528



20.74Exercised

(10,000
)


18.83Forfeited

(873,763
)


21.87Balance/Average at December 31, 1999

4,196,414


$
21.36

873,325Granted

1,259,776



24.51Exercised

(371,333
)


21.49Forfeited

(931,644
)


21.40Balance/Average at December 31, 2000

4,153,213


$
22.29

1,182,120Granted

1,236,560



26.30Smith Merger replacement options

3,338,220



18.41Exercised

(404,254
)


26.02Forfeited

(216,111
)


22.42Balance/Average at December 31, 2001

8,107,628


$
21.33

5,131,390





Pro forma Compensation Expense





We have adopted SFAS No. 123, Accounting for Stock-Based Compensation, which allows us to continue to account for our various option plans
under APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations. Under APB 25, if the exercise price of the option equals the market price of the underlying share on the date of grant,
no compensation expense is recognized (except for compensation expense related to DEUs as discussed previously). Accordingly, we did not recognize compensation expense related to options, as the exercise price of all options granted was equal
to the market price on the date of grant. Had compensation cost for these plans been determined using the option valuation models prescribed by SFAS No. 123, net earnings attributable to Common Units and earnings per Common Unit for 2001, 2000 and
1999 would change as follows (dollar amounts in thousands):





2001

2000

1999Net earnings attributable to Common Units:As reported

$
243,297

$
236,045

$
204,526Pro forma

$
241,628

$
235,022

$
203,348Basic earnings per Common Unit:As reported

$
1.81

$
1.79

$
1.46Pro forma

$
1.79

$
1.78

$
1.45Diluted earnings per Common Unit:As reported

$
1.79

$
1.78

$
1.46Pro forma

$
1.78

$
1.77

$
1.45





The pro forma amounts above were calculated using the Black-Scholes model, using
the following assumptions:





2001


2000


1999Weighted average risk-free interest rate

4.06
%

5.43
%

6.52
%Weighted average distribution yield

6.79
%

6.77
%

6.97
%Weighted average volatility

15.67
%

23.65
%

16.31
%Weighted average expected option life

5.0 years


6.3 years


6.3 years




65




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##### Table of Contents




Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)





The
weighted average fair value of all options granted (excluding Trustee options) was approximately $1.60, $3.00 and $2.00 per option during 2001, 2000 and 1999, respectively.





Restricted Common Share Awards





During 2001, 2000 and 1999
Archstone-Smith awarded 168,066, 131,942 and 360,394 restricted Common Shares with a DEU feature to certain employees under the long-term incentive plan, respectively, of which 67,815 have been forfeited. Each restricted Common Share is subject to
certain vesting provisions, and upon settlement provides the holder with one Common Share. The restricted Common Unit and related DEU feature generally vest at 20%-50% per year over a two to five-year period. We recognize the value of the awards and
the related DEUs as compensation expense over the vesting period.





Dividend Equivalent Units





Under the modified long-term incentive plan, participants who are awarded restricted Common Shares may be credited with DEUs equal to the amount of
distributions paid on Common Shares with respect to such awards. The DEUs are awarded annually each year and vest under substantially the same terms as the underlying unit options or restricted Common Shares.





DEUs can be awarded at the discretion of the compensation committee of the board of trustees. However, DEUs have not been awarded on option grants after
1999. A DEU on an option grant was equal to the amount of the distribution yield on Common Units, less the average distribution yield for the Standard & Poors 500 Stock Index. As of December 31, 2001, there were a total of 359,821 DEUs
outstanding awarded to 104 holders of share options and restricted Common Shares. The outstanding DEUs were valued at $9.5 million on December 31, 2001 based upon market price of the Common Shares on that date. We recognize the value of the DEUs
awarded as compensation expense over the vesting period. The matching options granted in connection with the 1997 employee purchase program and all of the employee options granted after 1999 (including the converted Smith Residential options) do not
have a DEU feature.





401(k) Plan and Nonqualified Deferred Compensation Plan





In December 1997, the Board established a 401(k) plan and a nonqualified savings plan, which both became effective on January 1, 1998. The 401(k) plan
provides for matching employer contributions of fifty cents for every dollar contributed by the employee, up to 6% of the employees annual contribution. Contributions by employees to the 401 (k) plan are subject to federal limitations. The
matching employer contributions are made in Common Shares, which vest based on years of service at 20% per year. The Smith Residential nonqualified deferred compensation plan and the outside trustees deferred fee plan were merged into our existing
nonqualified savings plan to form a new on-going nonqualified deferred compensation plan on January 1, 2002. Generally, the deferred compensation plan permits only deferrals of compensation by eligible employees and non-employee trustees. No
employer contributions are currently being made to that plan. Amounts deferred under the deferred compensation plan are invested among a variety of investments as directed by the participants, and are generally deferred until termination of
employment or service as a trustee.





Deferral of Fees by Non-Employee Trustees





Pursuant to the terms of the nonqualified deferred compensation plan, each non-employee member of our Board has the opportunity to defer receipt of all
or a portion of the service fees they otherwise would have been paid in cash. If a participant elects to have their fees deferred, the fees are accrued based on the amount that would be payable if he had used the cash to purchase Common Shares on
the date the fee was received and reinvested any distributions received during the deferral period into additional phantom Common Shares. Distributions can be deferred up to the date the Trustee ceases to serve on the Board and are payable in Common
Shares. Alternatively, the Trustee can elect to have his or her deferred fees invested in one or more of the investment funds that are otherwise available under the deferred compensation plan, which amounts are payable only in cash.




66




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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)





(10)    Financial Instruments and Hedging Activities





Fair Value of Financial Instruments





At December 31, 2001 and 2000, the fair values of cash and cash equivalents, restricted cash held in a tax-deferred
exchange escrow accounts, receivables and accounts payable approximated their carrying values because of the short-term nature of these instruments. The estimated fair values of other financial instruments subject to fair value disclosures were
determined based on available market information and valuation methodologies believed to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, therefore, are not
necessarily indicative of the actual amounts that we could realize upon disposition. The following table summarizes these financial instruments (in thousands):





Balance at December 31, 2001


Balance at December 31, 2000Carrying Amounts


Estimated Fair Value


Carrying Amounts

Estimated Fair ValueStock investments

$
244


$
244


$
16,182

$
16,182Borrowings:Unsecured credit facilities

$
188,589


$
188,589


$
193,719

$
193,719Long-Term Unsecured Debt


1,333,890



1,344,917



1,401,262


1,392,216Mortgages payable

$
2,330,533


$
2,330,149


$
875,804

$
892,733Interest rate contracts:Interest rate swaps

$
(770
)

$
(770
)

$


$
6,599Interest rate caps


20



20



715


559





The amounts labeled stock investments in the table above include both
investments in private equity securities and publicly-traded equity services for which there is a readily determinable fair market value. The publicly-traded equity securities are classified as available for sale securities and carried
at fair market value, with unrealized gains and losses reported as a separate component of unitholders equity. The private investments, for which we do not have the ability to exercise significant influence, are accounted for at cost. Declines
in the value of public and private investments that management determines are other than temporary, are recorded as a provision for possible loss on investments. Our evaluation of the carrying value of these investments is primarily based upon a
regular review of market valuations (if available), each companys operating performance and assumptions underlying cash flow forecasts. In addition, management considers events and circumstances that may signal the impairment of an investment.
During 2001, we concluded that our investments in private service and technology companies were impaired due to the investees financial position. Since the decline was other than temporary, we recorded a $12.2 million provision for possible loss on
investments during the year ended December 31, 2001.





Hedging Activities





We are exposed to the impact of interest rate changes and will occasionally utilize interest rate swaps and interest rate caps as hedges with the
objective of lowering our overall borrowing costs. We do not use these derivatives for trading or other speculative purposes. Further, as a matter of policy, we only enter 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, we have not, nor do we expect to sustain a material loss from the use of these hedging instruments.





To determine the fair values of derivative and other financial instruments, we use a variety of methods and assumptions that
are based on market value conditions and risks existing at each balance sheet date. These methods and assumptions include standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost and
termination cost. All methods of assessing fair value result in a general approximation of value, and therefore, are not necessarily indicative of the actual amounts that we could realize upon disposition.




67




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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)





Derivatives and Hedging Activities





We adopted SFAS No. 133/138, Accounting for Derivative Instruments and
Hedging Activities on January 1, 2001. This new accounting standard requires companies to carry all derivative instruments on the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. We use only qualifying hedges that are designated specifically to reduce borrowing costs. This is typically accomplished using
interest rate swaps, interest rate caps or by locking in rates on anticipated debt issuances.





Upon adoption of SFAS No.
133/138, on January 1, 2001 we recorded a net transition loss of $205,000 in other expense and a net transition unrealized gain of $3.8 million in other comprehensive income, related to the cumulative effect of an accounting change. In addition, for
the year ended December 31, 2001 we recorded a $490,000 charge to other expense related to the change in time value of our interest rate caps. During the year ended December 31, 2001 we recorded a net charge of $19,000 to interest expense relating
to an interest rate swap designated as a cash flow hedge that was more than 100% effective at offsetting interest rates on the underlying hedged debt. Based on current interest rates, we anticipate that over the next twelve months we will record
interest expense of approximately $2.5 million resulting from the reclassification of a portion of the $5.5 million unrealized loss relating to cash flow hedges currently recorded in other comprehensive income. The combination of this expense with
the lower interest expense we expect to pay on the underlying floating rate debt will result in overall interest expense equal to the contractually fixed amount resulting from the fixed rate swaps. As a matter of policy, we pursue hedging strategies
that we expect will result in the lowest overall borrowing costs and least degree of earnings volatility possible under the new accounting standards.





The following table summarizes the notional amount, carrying value and estimated fair value of our derivative financial instruments, as of December 31, 2001 (dollar amounts in thousands). The notional amount
represents the aggregate amount of a particular security that is currently hedged at one time, but does not represent exposure to credit, interest rate or market risks.





Notional Amount

Maturity Date Range

Carrying and Estimated Fair ValueCash flow hedges:Interest rate caps

$
152,958

20022005

$
20Interest rate swaps


200,000

20022006


(5,478
)Total cash flow hedges

$
352,958

20022006

$
(5,458
)Fair value hedges:Interest rate swaps

$
104,005

20062008

$
3,911Total rate of return swaps


69,756

20042007


797Total fair value hedges

$
173,761

20042008


4,708Total hedges

$
526,719

20022008

$
(750
)




68




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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)





(11)    Selected Quarterly Financial Data (Unaudited)





Selected quarterly financial data (in
thousands, except per unit amounts) for 2001 and 2000 is summarized below. The sum of the quarterly earnings per Common Unit amounts may not equal the annual earnings per Common Unit amounts due primarily to changes in the number of Common Units
outstanding from quarter to quarter.





Three Months Ended

Year Ended 12-313-31

6-30

9-30

12-312001:Total revenues

$
175,056

$
160,779

$
163,674

$
229,428

$
728,937Earnings from operations


37,600


42,822


39,558


55,417


175,397Gains on dispositions of depreciated real estate, net


35,051


35,470


9,767


19,985


100,273Less minority interest:Perpetual preferred units


1,567


1,567


1,568


1,567


6,269Convertible operating partnership units


389


389


389


357


1,524Less extraordinary item











2,303


2,303Less Preferred Unit distributions


6,307


4,904


3,913


7,153


22,277Net earnings attributable to Common UnitsBasic

$
64,388

$
71,432

$
43,455

$
64,022

$
243,297Net earnings per Common Unit:Basic

$
0.53

$
0.59

$
0.36

$
0.37

$
1.81Diluted

$
0.52

$
0.58

$
0.36

$
0.37

$
1.792000:Total revenues

$
177,016

$
184,813

$
187,889

$
173,516

$
723,234Earnings from operations


43,197


46,882


49,971


36,416


176,466Gains on dispositions of depreciated real estate, net


4,132


41,869


37,495


9,575


93,071Less minority interest:Perpetual preferred units


1,214


1,567


1,567


1,567


5,915Convertible operating partnership units


230


366


365


365


1,326Less extraordinary item











911


911Less Preferred Unit distributions


6,431


6,370


6,307


6,232


25,340Net earnings attributable to Common UnitsBasic

$
39,454

$
80,448

$
79,227

$
36,916

$
236,045Net earnings per Common Unit:Basic

$
0.28

$
0.58

$
0.62

$
0.30

$
1.79Diluted

$
0.28

$
0.57

$
0.61

$
0.30

$
1.78




69




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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)





(12)    Segment Data





We define our garden communities and high-rise properties each as
individual operating segments. We have determined that each of our garden communities and each of our high-rise properties have similar economic characteristics and also meet the other criteria, which permit the garden communities and high-rise
properties to be aggregated into two reportable segments. We rely primarily on NOI for purposes of making decisions about allocation resources and assessing segment performance.





Following are reconciliations of each reportable segments (i) revenues to consolidated revenues; (ii) Net Operating Income to consolidated earnings from operations; and (iii)
assets to consolidated assets, for the periods indicated (in thousands):





Years Ended December 31,2001


2000


1999Reportable apartment communities segment revenues:Garden communities

$
639,004


$
684,438


$
634,028High-rise properties


58,684







Other non-reportable operating segment revenues


31,249



38,796



32,994Total segment and consolidated revenues

$
728,937


$
723,234


$
667,022Years Ended December 31,2001


2000


1999Reportable apartment communities segment NOI:Garden communities

$
430,654


$
458,842


$
416,515High-rise properties


37,850







Other non-reportable operating segment NOI


3,597



4,094



3,766Total segment NOI


472,101



462,936



420,281Reconciling items:Income from unconsolidated entities


14,374



2,752



2,118Other income


12,769



31,938



27,096Depreciation on real estate investments


(132,126
)


(143,694
)


(132,437
)Interest expense


(141,907
)


(145,173
)


(121,494
)General and administrative expenses


(26,503
)


(23,157
)


(22,156
)Provision for possible loss on investments


(14,927
)


(5,200
)


(2,000
)Other expenses


(8,384
)


(3,936
)


(2,069
)Consolidated earnings from operations

$
175,397


$
176,466


$
169,339Year Ended December 31,2001


2000Reportable operating communities segment assets:Garden communities

$
4,649,561


$
4,649,792High-rise properties


3,188,074



Other non-reportable operating segment assets


31,585



33,446Total segment assets


7,869,220



4,683,238Reconciling items:Investment in and advances to unconsolidated entities


437,365



226,020Cash and cash equivalents


7,027



9,077Restricted cash in tax-deferred exchange escrow


120,421



3,274Other assets


115,882



94,522Consolidated total assets

$
8,549,915


$
5,016,131




70




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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)





(13)    Income Taxes





These consolidated financial statements have been presented as if the
Company was a partnership for all periods presented. For income tax purposes, the Company was subject to regulations under the Internal Revenue Code pertaining to REITs through October 31, 2001 and for partnerships subsequent to that date. In either
case as a REIT or a partnership, our income is not generally subject to federal income taxes and no provision for income taxes is included in the accompanying statements of earnings.





As a partnership, we make distributions to our partners and allocate our taxable income to our partners. The major portion of distributions and income are paid/allocated to
Archstone-Smith Trust with the remainder paid/allocated to third party unitholders.





The following table reconciles net earnings
to taxable income subject to distribution requirement for the years ended December 31 (in thousands):





For the Year Ended December 31,2001


2000


1999(estimated)GAAP net earnings

$
265,574


$
261,385


$
228,259Book to tax differences:Depreciation and amortization(1)


(2,016
)


(7,311
)


11,366Gain or loss from capital transactions(2)


22,586



(29,077
)


(46,006
)Merger expenses


(15,000
)






Other


(1,445
)


1,772



1,738Taxable income, including capital gains

$
269,699


$
226,769


$
195,357


| | (1) |  | In January 1999, we began using accelerated depreciable lives for tax purposes. This change resulted in higher depreciation expense on newly acquired assets for tax purposes
relative to GAAP. This was partially offset by the Smith Merger in 2001 as GAAP depreciation expense for the Smith assets was based on fair value and tax depreciation was based on a lower historical tax basis.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | The negative tax adjustment during 1999 and 2000 was due to certain gains which were included in GAAP earnings but were deferred through 1031 exchanges for tax purposes and
therefore excluded from taxable net earnings. This was offset during 2001 as certain taxable gains were deferred according to GAAP (see Note 4).
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Distributions have been made as follows:





For the Year Ended December 31,2001

2000

1999Distributions to Archstone-Smith Trust

$
238,984

$
226,597

$
202,800Distributions to unitholders


10,426





Total distributions

$
249,410

$
226,597

$
202,800





All distributions made to Archstone-Smith Trust were subsequently paid to its
shareholders.




71




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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)





(14)    Homestead Mortgage Notes





In July 2000, we completed a transaction to repurchase
approximately 17.5 million of our Common Units held by Security Capital in exchange for Homestead mortgage notes with a face amount of $221.3 million and cash of $178.7 million. The Homestead mortgage notes and related balances had a net book value
of $195.7 million on the date of the transaction. We recognized a gain of $9.3 million related to this transaction in the third quarter of 2000.





In March 2000, we determined that the conversion feature associated with our investment in Homestead mortgage notes had no continuing economic value. Therefore, a write-off of the net unamortized balance of the
conversion feature, aggregating $2.8 million, was recorded. The remaining balances associated with the convertible mortgage notes were not affected.





(15)    Commitments and Contingencies





Commitments





At December 31, 2001 we have seven non-cancelable ground leases for certain apartment communities and buildings that expire between 2032 and 2083. Each
ground lease generally provides for a fixed annual rental payment plus additional rental payments based on the properties operating results. Additionally, we lease certain office space under non-cancellable operating lease with fixed annual rental
payments.





The future minimum lease payments payable under non-cancelable leases are as follows at December 31, 2001 (in
thousands):





2002

$
4,3802003


3,9812004


3,8362005


3,3502006


3,368Thereafter (2007-2083)


105,336Total

$
124,251





See Note 3 for real estate-related commitments.





Litigation and Contingencies





We are a party to various claims and routine litigation arising in the ordinary course of business. We do not believe that the results of any such claims or litigation, individually or in the aggregate, will have a
material adverse effect on our business, financial position or results of operations.





We are subject to environmental
regulations related to the ownership, operation, development and acquisition of real estate. As part of our due diligence investigation procedures, we conduct Phase I environmental assessments on each property prior to acquisition. The cost of
complying with environmental regulations was not material to Archstone-Smiths results of operations for any of the years in the three-year period ended December 31, 2001. We are not aware of any environmental condition on any of our
communities, which is likely to have a material effect on our financial condition or results of operations.







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Archstone-Smith Operating Trust





Notes to Consolidated Financial Statements(Continued)





(16)    Supplemental Cash Flow Information





Significant non-cash investing and financing
activities for the years ended December 31, 2001, 2000 and 1999 are as follows:





(i)

See Note 1 regarding the Smith Merger;(ii)

We repurchased approximately 17.5 million Common Units held by Security Capital in exchange for Homestead mortgage
notes with a face amount of $221.3 million and cash of $178.7 million, see Note 14 for more information;(iii)

In connection with the acquisition of apartment communities, we assumed mortgage debt of $167.3 million, $71.0 million and $105.4 million (excluding mortgage debt assumed in
the Smith Merger) during the years ended December 31, 2001, 2000 and 1999, respectively;(iv)

Holders of Series A Preferred Units converted $3.8 million, $10.0 million and $24.1 million of their units into Common Units during the years ended December 31, 2001, 2000
and 1999, respectively;(v)

We entered into joint venture transactions formed through our contribution of apartment communities and land in exchange for cash and an ownership interest in each of the
ventures with an aggregate carrying value of $569.9 million and $19.7 million during the years ended December 31, 2001 and 2000, respectively;(vi)

A consolidated subsidiary acquired a development site in Los Angeles County, California in exchange for cash and 351,000 convertible operating partnership units valued at
approximately $6.8 million during the year ended December 31, 2000;(vii)

We refinanced approximately $54.8 million and $59.7 million in bonds during the year ended December 31, 2000 and 1999, respectively.





|(17)Subsequent |  | Events
|-------------- |  | ------




On February 15, 2002,
we issued $200 million of long-term unsecured senior notes due in February 2012. These notes bear interest at a coupon rate of 6.5% annually, with an effective interest rate of 6.6%. The net proceeds were used to repay outstanding balances on our
unsecured credit facilities.




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##### Table of Contents




Independent Auditors Report





The Trustee and Unitholders


Archstone-Smith Operating Trust:





Under date of February 6, 2002, except as to Note 17, which is as of February 15, 2002, we reported on the consolidated balance
sheets of Archstone-Smith Operating Trust (formerly known as Archstone Communities Trust) as of December 31, 2001 and 2000, and the related consolidated statements of earnings, unitholders equity and other common unitholders interest,
and cash flows for each of the years in the three-year period ended December 31, 2001. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule. This financial
statement schedule is the responsibility of Archstone-Smith Operating Trusts management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.





In our opinion, such financial statement schedule as listed in the accompanying index, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all respects, the information set forth therein.





| | KP | MG LLP
| | -- | ------




Chicago,
Illinois


February 6, 2002




74




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##### Table of Contents




Archstone-Smith Operating Trust


Real Estate and Accumulated Depreciation








December 31, 2001(Dollar amounts in thousands)Initial Cost to Archstone-Smith Operating Trust

Costs Capitalized Subsequent to Acquisition

Gross Amount at Which Carried at December 31, 2001Units

Encum- brances

Land

Buildings & Improvements


Land

Buildings & Improvements

Totals

Accumulated Depreciation

Con- struction Year

Year AcquiredApartment Communities:East Division (garden communities):Atlanta, Georgia

3,403

$
116,000

$
34,534

$
195,690

$
23,443

$
34,534

$
219,133

$
253,667

$
30,073

1978-1999

1998-2001Austin, Texas

714


26,210


3,508


7,431


22,307


3,508


29,738


33,246


5,882

1979-1996

1993Boston, Massachusetts

1,699


71,616


185,116


46,236


25,281


185,116


71,517


256,633


12,233

1975-2000

1999-2001Charlotte, North Carolina

668


0


5,945


16,489


24,183


5,945


40,672


46,617


2,862

1997-2001

1998Chicago, Illinois

3,912


118,970


159,036


143,651


9,089


159,036


152,740


311,776


11,309

1968-1988

1999-2001Dallas, Texas

1,616


15,043


11,899


61,314


24,600


11,899


85,914


97,813


13,610

1983-1998

1993-1998Denver, Colorado

3,036


64,372


23,089


57,139


116,004


23,089


173,143


196,232


20,327

1981-2001

1992-2001Houston, Texas

1,408


25,020


16,391


22,993


33,128


16,391


56,121


72,512


11,731

1972-1996

1994-1996Nashville, Tennessee

445


4,802


3,657


20,719


1,604


3,657


22,323


25,980


2,527

1986

1998Orlando, Florida

312


0


3,110


17,620


525


3,110


18,145


21,255


2,391

1988

1998Raleigh, North Carolina

2,026


26,618


19,453


110,250


14,810


19,453


125,060


144,513


16,495

1985-1999

1998San Antonio, Texas

978


9,131


5,504


4,338


42,452


5,504


46,790


52,294


9,847

1979-1996

1992-1993Stamford, Connecticut

160


0


5,775


1,225


21,140


5,775


22,365


28,140


0

2001

2000Southeast, Florida

2,315


7,967


20,630


97,180


47,270


20,630


144,450


165,080


15,072

1986-2001

1998-1999Washington, D.C.

9,405


281,931


301,243


590,595


88,978


301,243


679,573


980,816


25,452

1941-2001

1998-2001West Coast, Florida

934


5,293


7,012


39,728


7,778


7,012


47,506


54,518


6,476

1982-1988

1998East Division Total

33,031

$
772,973

$
805,902

$
1,432,598

$
502,592

$
805,902

$
1,935,190

$
2,741,092

$
186,287West Division (garden communities)Albuquerque, New Mexico

1,491

$


$
11,238

$
30,527

$
33,806

$
11,238

$
64,333

$
75,571

$
14,088

1981-1996

1991-1996Bay Area, California

5,142


127,240


178,161


243,921


220,772


178,161


464,693


642,854


51,098

1965-2001

1995-2000Inland Empire, California:

1,884


17,641


15,020


85,133


11,644


15,020


96,777


111,797


14,486

1985-1990

1995-1997Las Vegas, Nevada

896


0


5,904


33,561


7,534


5,904


41,095


46,999


7,727

1986

1995Los Angeles, California

1,371


39,342


109,232


29,518


17,484


109,232


47,002


156,234


6,216

1985-2001

1998-2001Orange County, California

1,647


50,686


25,612


46,136


101,277


25,612


147,413


173,025


13,699

1986-2001

1996-1999




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##### Table of Contents

Initial Cost to Archstone-Smith Operating Trust

Costs Capitalized Subsequent to Acquisition

Gross Amount at Which Carried at December 31, 2001Units

Encum- brances

Land

Buildings & Improvements


Land

Buildings & Improvements

Totals

Accumulated Depreciation

Con- struction Year

Year AcquiredPhoenix, Arizona

2,648


46,777


17,826


30,435


100,630


17,826


131,065


148,891


20,336

1980-2001

1993-1997Portland, Oregon

1,189


0


8,513


15,527


50,300


8,513


65,827


74,340


9,514

1985-1998

1995-1996Reno, Nevada

324


0


2,002


0


19,477


2,002


19,477


21,479


3,294

1997

1995Salt Lake City, Utah

776


7,205


7,864


14,171


32,047


7,864


46,218


54,082


4,276

1985-2000

1997San Diego, California

3,241


62,124


59,133


159,081


125,126


59,133


284,207


343,340


24,245

1985-2001

1996-1998Seattle, Washington

3,402


23,936


39,000


99,114


139,832


39,000


238,946


277,946


28,846

1986-2000

1995-1999Ventura County, California

1,082


0


13,526


53,473


35,040


13,526


88,513


102,039


7,175

1985-2001

1997-1999West Division Total

25,093

$
374,951

$
493,031

$
840,597

$
894,969

$
493,031

$
1,735,566

$
2,228,597

$
205,000Charles E. Smith Division (high rise properties):Boston, Massachusetts

693

$
65,506

$
41,345

$
121,883

$
3,754

$
41,345

$
125,637

$
166,982

$
585

1986-1998

2001Chicago, Illinois

3,839


235,849


149,558


444,357


17,814


149,558


462,171


611,729


2,084

1969-2001

2001Southeast Florida

5,059


81,194


207,359


248,503


3,270


207,359


251,773


459,132


1,276

1964-2000

2001Greater Washington, D.C. Metropolitan Area

12,267


800,060


608,218


1,333,019


19,042


608,218


1,352,061


1,960,279


6,569

1923-2001

2001Charles E. Smith Division Total

21,858

$
1,182,609

$
1,006,480

$
2,147,762

$
43,880

$
1,006,480

$
2,191,642

$
3,198,122

$
10,514Total Apartment Communities-Operating and Under Construction

79,982

$
2,330,533

$
2,305,413

$
4,420,957

$
1,441,441

$
2,305,413

$
5,862,398

$
8,167,811

$
401,801Other:Development Communities InPlanning and owned






















76,611


Hotel, Retail and Other Assets






















31,582


4,983Total Real Estate Assets





















$
8,276,004

$
406,784




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##### Table of Contents




SCHEDULE III





The following is a reconciliation of the carrying amount and related accumulated depreciation of Archstone-Smith Operating Trusts investment in real estate, at cost (in thousands):





Year Ended December 31,2001


2000


1999Carrying AmountsBalance at January 1

$
5,058,910


$
5,086,486


$
4,771,315Apartment communities:Apartment properties acquired in the Smith Merger


3,733,936







Acquisition-related expenditures


339,055



372,539



401,392Redevelopment expenditures


39,136



37,547



72,517Recurring capital expenditures


20,184



13,937



13,022Development expenditures, excluding land acquisitions


185,988



228,819



334,049Acquisition and improvement of land for development


48,120



68,308



43,417Dispositions


(1,152,668
)


(743,287
)


(542,554
)Provision for possible loss on investments


(2,710
)


(5,200
)


(450
)Net apartment community activity

$
3,211,041


$
(27,337
)

$
321,393Other:Retail asset acquired in the Smith Merger


5,976







Change in other real estate assets


77



(239
)


(4,672
)Provision for possible loss on investments










(1,550
)Net other activity


6,053



(239
)


(6,222
)Balance at December 31

$
8,276,004


$
5,058,910


$
5,086,486December 31,2001


2000


1999Accumulated DepreciationBalance at January 1

$
375,672


$
300,658


$
205,795Depreciation for the year


132,126



143,694



132,437Accumulated depreciation on real estate dispositions


(101,014
)


(68,624
)


(37,230
)Other






(56
)


(344
)Balance at December 31

$
406,784


$
375,672


$
300,658




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##### Table of Contents




Power of Attorney





KNOW ALL MEN BY THESE PRESENTS, that each of Archstone-Smith Operating Trust, A Maryland real estate investment trust, and the undersigned officers of Archstone-Smith Operating Trust,
hereby constitutes and appoints, R. Scot Sellers, Charles E. Mueller, Jr., Mark A. Schumacher, and Caroline Brower its or his-/her true and lawful attorneys-in-fact and agents, for it or him/her and in its or his/her name, place and stead, in any
and all capacities, with full power to act alone, to sign any and all amendments to this report, and to file each such amendment to this report, with all exhibits thereto, and any and all documents in connection therewith, with the Securities and
Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as it or he/she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them may lawfully do or cause to be done by virtue hereof.




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##### Table of Contents




Archstone-Smith Operating Trust


Signatures





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





ARCHSTONE-SMITH OPERATING TRUSTBy:                            /s/ R. SCOT SELLERSR. Scot SellersChief Executive Officer





Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:





Signature

Title

Date/s/ R. SCOT SELLERS

Chairman of the Board,

March 27, 2002R. Scot Sellers

Chief Executive Officer/s/ CHARLES E. MUELLER, JR.

Executive Vice President and

March 27, 2002Charles E. Mueller, Jr.

Chief Financial Officer/s/ MARK A. SCHUMACHER

Senior Vice President

March 27, 2002Mark A. Schumacher

and Controller




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##### Table of Contents




Index to Exhibits





Certain of the following documents are filed herewith. Certain other of the following documents have been previously filed with the Securities and Exchange Commission and, pursuant to
Rule 12b-32, are incorporated herein by reference:





Number

Description3.1

Amended and Restated Declaration of Trust of Archstone-Smith Operating Trust (incorporated by reference to Exhibit 4.3 to the Archstone-Smith Trusts Current Report on
Form 8-K filed with the SEC on November 1, 2001)3.2

Amended and Restated Bylaws of Archstone-Smith Operating Trust (incorporated by reference to Exhibit 4.4 to the Archstone-Smith Trusts Current Report on Form 8-K filed
with the SEC on November 1, 2001)4.1

Amended and Restated Declaration of Trust of Archstone-Smith Trust (incorporated by reference to Exhibit 4.1 to the Archstone-Smith Trusts Current Report of Form 8-K
filed with the SEC on November 1, 2001)4.2

Amended and Restated Bylaws of Archstone-Smith Trust (incorporated by reference to Exhibit 4.1 to the Archstone-Smith Trusts Current Report on Form 8-K filed with the
SEC on November 1, 2001)4.3

Indenture, dated as of February 1, 1994, between Archstone-Smith Operating Trust (formerly Archstone Communities Trust) and Morgan Guaranty Trust Company of New York, as
Trustee relating to Archstone-Smith Operating Trusts (formerly Archstone Communities Trust) unsecured senior debt securities (incorporated by reference to Exhibit 4.2 to Archstone-Smith Operating Trusts (formerly Archstone Communities
Trust) Annual Report on Form 10-K for the year ended December 31, 1993)4.4

First Supplemental Indenture, dated February 2, 1994, among Archstone-Smith Operating Trust (formerly Archstone Communities Trust), Morgan Guaranty Trust Company of New York
and State Street Bank and Trust Company, as successor Trustee (incorporated by reference to Exhibit 4.3 to Archstone-Smith Operating Trusts (formerly Archstone Communities Trust) Current Report on Form 8-K dated July 19, 1994)4.5

Indenture, dated as of August 14, 1997, between Security Capital Atlantic Incorporated and State Street Bank and Trust Company, as Trustee (incorporated by reference to
Exhibit 4.8 to Security Capital Atlantic Incorporateds Registration Statement on Form S-11 (File No. 333-30747))4.6

Rights Agreement, dated as of August 31, 2001, by and between Archstone-Smith Trust and Mellon Investor Services, LLC, including the form of rights certificate (incorporated
by reference to Exhibit 3.13 to Archstone-Smith Trusts Registration Statement on Form S-4 (File No. 333-63734))4.7

Form of Archstone-Smith Trust common share of beneficial interest ownership certificate (incorporated by reference to Exhibit 3.3 to Archstone-Smith Trusts
Registration Statement on Form S-4 (File No. 333-63734))4.8

Form of Archstone-Smith Operating Trust Class A-1 common unit certificate (incorporated by reference to Exhibit 3.11 to Archstone-Smith Operating Trusts Registration
Statement on Form S-4 (File No. 333-64540))10.1

1987 Share Option Plan for Outside Trustees, as amended (incorporated by reference to Exhibit 2.1(c) to Archstone Communities Trusts Current Report on Form 8-K filed
with the SEC on June 19, 2001)10.2

Amendment to 1996 Share Option Plan for Outside Trustees (incorporated by reference to Exhibit 4.6 to Archstone Communities Trusts Registration Statement on Form S-8
(File No. 333-60815))10.3

Archstone-Smith Trust 2001 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.14 to Archstone-Smith Trusts Registration Statement on Form S-4 (File No.
333-63734))10.4

Archstone-Smith Deferred Compensation Plan (incorporated by reference to Exhibit 10.6 to Archstone-Smith Trusts Annual Report on Form 10-K for the year ended December
31, 2001)10.5

Form of Indemnification Agreement entered into between Archstone-Smith Trust and each of its officers and Trustees (incorporated by reference to Exhibit 10.7 to
Archstone-Smith Trusts Annual Report on Form 10-K for the year ended December 31, 2001)




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##### Table of Contents




Index to Exhibits-(Continued)





Number

Description10.6

Form of Change in Control Agreement between Archstone-Smith Operating Trust (formerly Archstone Communities Trust) and certain of its officers (incorporated by reference to
Exhibit 10.7 to Archstone Communities Trusts Annual Report on Form 10-K for the year ended December 31, 1999)10.7

Credit Agreement, dated December 20, 2000, among Archstone-Smith Operating Trust (formerly Archstone Communities Trust) and The Chase Manhattan Bank, as administrative
agent, and Wells Fargo Bank, N.A., as syndication agent, and Bank of America, N.A., as documentation agent (incorporated by reference to Exhibit 99.4 to Archstone Communities Trusts Current Report on Form 8-K dated February 16,
2001)10.8

Agreement and First Amendment, dated as of September 21, 2001, to Credit Agreement, dated as of December 20, 2000, by and among Archstone-Smith Operating Trust (formerly
Archstone Communities Trust) and the financial institutions named therein (incorporated by reference to Exhibit 10.2 to Archstone-Smith Trusts Current Report on Form 8-K filed with the SEC on November 1, 2001)10.9

Agreement and Second Amendment, dated as of November 1, 2001, to Credit Agreement, dated as of December 20, 2000, by and among Archstone-Smith Operating Trust (formerly
Archstone Communities Trust) and the financial institutions named therein (incorporated by reference to Exhibit 10.3 to Archstone-Smith Trusts Current Report on Form 8-K filed with the SEC on November 1, 2001)10.10

Parent Agreement, dated as of November 1, 2001, by and among Archstone-Smith Operating Trust and Chase Manhattan Bank, in its capacity as Agent for the lenders under the
Credit Agreement, dated as of December 20, 2000, as amended, by and among Archstone-Smith Operating Trust (formerly Archstone Communities Trust) and the financial institutions named therein (incorporated by reference to Exhibit 10.4 to
Archstone-Smith Trusts Current Report on Form 8-K filed with the SEC on November 1, 2001)10.11

Master Credit Facility Agreement, dated as of December 1, 1998, by and among Archstone-Smith Operating Trust and ASN Multifamily Limited Partnership and Berkshire Mortgage
Finance Limited Partnership (incorporated by reference to Exhibit 10.10 to Archstone Communities Trusts Annual Report on Form 10-K for the year ended December 31, 1998)10.12

Archstone Dividend Reinvestment and Share Purchase Plan (incorporated by reference to the prospectus contained in Archstone-Smith Trusts Registration Statement on Form
S-3 (No. 333-44639-01))10.13

Shareholders Agreement, dated as of October 31, 2001, by and among Archstone-Smith Trust, Archstone-Smith Operating Trust, Robert H. Smith and Robert P. Kogod
(incorporated by reference to Exhibit 10.1 to Archstone-Smith Trusts Current Report on Form 8-K filed with the SEC on November 1, 2001)10.14

Noncompetition Agreement by and among Charles E. Smith Residential Realty, Inc., Charles E. Smith Residential Realty L.P. and Robert P. Kogod and Robert H. Smith
(incorporated by reference to Exhibit 10.1 of Charles E. Smith Residential Realty, Inc.s Annual Report on Form 10-K for the year ended December 31, 1994)10.15

Registration Rights and Lock-up Agreement (incorporated by reference to Exhibit 10.2 of Charles E. Smith Residential Realty, Inc.s Annual Report on Form 10-K for the
year ended December 31, 1994)10.16

License Agreement between Charles E. Smith Management, Inc. and Charles E. Smith Residential Realty, Inc. (incorporated by reference to Exhibit 10.35 of Charles E. Smith
Residential Realty, Inc.s Annual Report on Form 10-K for the year ended December 31, 1994)10.17

License Agreement between Charles E. Smith Management, Inc. and Charles E. Smith Residential Realty L.P. (incorporated by reference to Exhibit 10.36 of Charles E. Smith
Residential Realty, Inc.s Annual Report on Form 10-K for the year ended December 31, 1994)




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##### Table of Contents




Index to Exhibits-(Continued)





Number

Description10.18

Deed of Trust and Security Agreement between Smith Property Holdings Three L.P. (Smith Three) and The Northwestern Mutual Life Insurance Company
(Northwestern) (incorporated by reference to Exhibit 10.2 of Charles E. Smith Residential Realty, Inc.s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1994)10.19

Guarantee of Recourse Obligations by Smith Three and Charles E. Smith Residential Realty L.P. (incorporated by reference to Exhibit 10.3 of Charles E. Smith Residential
Realty, Inc.s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1994)10.20

Absolute Assignment of Leases and Rents between Smith Three and Northwestern (incorporated by reference to Exhibit 10.4 of Charles E. Smith Residential Realty, Inc.s
Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1994)10.21

Promissory Note of Smith Three to Northwestern (incorporated by reference to Exhibit 10.5 of Charles E. Smith Residential Realty, Inc.s Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 1994)10.22

Purchase Money Deed of Trust and Security Agreement between Smith Property Holdings Three (D.C.) L.P. (Smith Three D.C.) and Northwestern (incorporated by
reference to Exhibit 10.6 of Charles E. Smith Residential Realty, Inc.s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1994)10.23

Guarantee of Recourse Obligations by Smith Three D.C. and Charles E. Smith Residential Realty L.P. (incorporated by reference to Exhibit 10.7 of Charles E. Smith Residential
Realty, Inc.s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1994)10.24

Absolute Assignment of Leases and Rents between Smith Three D.C. and Northwestern (incorporated by reference to Exhibit 10.8 of Charles E. Smith Residential Realty,
Inc.s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1994)10.25

Purchase Money Promissory Note of Smith Three D.C. to Northwestern (incorporated by reference to Exhibit 10.9 of Charles E. Smith Residential Realty, Inc.s Quarterly
Report on Form 10-Q for the Quarter Ended June 30, 1994)10.26

Supplemental Loan Agreement by and among Smith Property Holdings Two L.P. (Smith Two), Smith Property Holdings Two (D.C.) L.P. (Smith Two D.C.) and
Green Park Financial Limited Partnership (Green Park) (incorporated by reference to Exhibit 10.47 of Charles E. Smith Residential Realty, Inc.s Annual Report on Form 10-K for the year ended December 31, 1998)10.27

Supplemental Loan Agreement by and among Smith Property Holdings One L.P. (Smith One D.C.), Smith Property Holdings One (D.C.) L.P. (Smith One D.C.)
and GMAC (incorporated by reference to Exhibit 10.13 of Charles E. Smith Residential Realty, Inc.s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1994)10.28

Multifamily Note of Smith One to GMAC (incorporated by reference to Exhibit 10.14 of Charles E. Smith Residential Realty, Inc.s Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1994)10.29

Multifamily Note of Smith One D.C. to GMAC (incorporated by reference to Exhibit 10.15 of Charles E. Smith Residential Realty, Inc.s Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1994)10.30

Absolute Assignment of Leases and Rents by Smith One D.C. to GMAC (incorporated by reference to Exhibit 10.16 of Charles E. Smith Residential Realty, Inc.s Quarterly
Report on Form 10-Q for the Quarter Ended June 30, 1994)10.31

Property Management Agreement by and between Smith One and Charles E. Smith Residential Realty L.P. (incorporated by reference to Exhibit 10.17 of Charles E. Smith
Residential Realty, Inc.s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1994)10.32

Multifamily Deed of Trust, Assignment of Rents and Security Agreement between Smith One D.C. and GMAC (incorporated by reference to Exhibit 10.18 of Charles E. Smith
Residential Realty, Inc.s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1994)




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##### Table of Contents




Index to Exhibits-(Continued)





Number

Description10.33

Commercial Leasing and Property Management Agreement between Smith Three and the Operating Partnership (incorporated by reference to Exhibit 10.19 of Charles E. Smith
Residential Realty, Inc.s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1994)10.34

Credit Agreement By and Among Smith Property Holdings Lincoln Towers LLC and Smith Property Holdings McClurg Court LLC, as Borrower and Columbia National Real Estate
Finance, Inc., as Lender. (incorporated by reference to Exhibit 99.1 of Charles E. Smith Residential Realty, Inc.s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2000)12.1

Computation of Ratio of Earnings to Fixed Charges12.2

Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Unit Distributions21

Subsidiaries of Archstone-Smith Operating Trust23.1

Consent of KPMG LLP24

Power of Attorney (included on page 78)







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