| **UNITED STATES SECURITIES AND EXCHANGE COMMISSION**                                                                                                                                                                                                                                                                                                                                                                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Washington,  D.C.  20549**                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                  |
| **Form 10-Q**                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **                     **                                                                                                                                                                                                                                                                                                |
| **[x]  QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE**                                                                                                                                                                                                                                                                                                                                                           |
| **SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                              |
| **                         **                                                                                                                                                                                                                                                                        |
| **For the  quarterly period ended March 31, 2011**                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                   |
| **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 1-12486**                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                     |
| **Associated Estates Realty  Corporation**                                                                                                                                                                                                                                                                                                                                                                                        |
| *(Exact name of registrant as specified in its  charter)*                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                       |
| **OHIO**                                                                                                                                                                                                                                                                                                                                                                                                                          |    | **34-1747603** |
| *(State or other jurisdiction of*                                                                                                                                                                                                                                                                                                                                                                                                 |    | *(I.R.S. Employer* |
| *incorporation or organization)*                                                                                                                                                                                                                                                                                                                                                                                                  |    | *Identification Number)* |
|                                                                                                                                                                                                                                                                                                                                                                       |    |
| **1 AEC Parkway, Richmond Hts., Ohio  44143-1467**                                                                                                                                                                                                                                                                                                                                                                           |
| *(Address of principal executive offices)*                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                          |
| **(216) 261-5000**                                                                                                                                                                                                                                                                                                                                                                                                                |
| *(Registrant's telephone number, including area code)*                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                      |
| Indicate  by check mark whether the registrant (1) has filed all reports required to be  filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during  the preceding 12 months (or for such shorter period that the registrant was  required to file such reports), and (2) has been subject to such filing  requirements for the past 90 days.        Yes [x]  No [ ]      |
|                                                                                                                                                                                                                                                                                                 |
| Indicate by check mark  whether the registrant has submitted electronically and posted on its  corporate Web site, if any, every Interactive Data File required to be  submitted and posted pursuant to Rule 405 of Regulation S-T (subsection  232.405 of this chapter) during the preceding 12 months (or for such shorter  period that the registrant was required to submit and post such files).  Yes  [ ]  No [ ] |
|                                                                                                                                                                                                                                                                                       |
| Indicate  by check mark whether the registrant is a large accelerated filer, an  accelerated filer, a non-accelerated filer, or a smaller reporting company.   See the definitions of "large accelerated filer," "accelerated  filer" and "smaller reporting company" in Rule 12b-2 of the  Exchange Act.  (Check one):                                                                   |
|                                                                                                                                                                                                                                                                                            |
| Large accelerated filer [ ]   Accelerated filer [x]  Non-accelerated filer [ ]  (Do not check if a smaller  reporting company)  Smaller reporting company [ ]                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                          |
| Indicate by check mark  whether the registrant is a shell company (as defined in Rule 12b-2 of the  Exchange Act).  Yes [ ]  No [x]                                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                              |
| The number of shares outstanding as of April 26, 2011  was 41,453,205 shares.                                                                                                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |  |  |

 

 

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**ASSOCIATED ESTATESREALTY CORPORATION**

** **

**Index**

| **PART I – FINANCIAL INFORMATION** | **Page**                                                                                                                                                                                                                 |
|-----------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                    |                                                     |   |
| ITEM 1                                  | Consolidated Financial Statements (Unaudited)                                                                                                                                                                            |   |
|                                    |                                                                                                                      |   |
|                                    | Consolidated Balance  Sheets at March 31, 2011 and December 31, 2010                                                                                                                                                     | 3 |
|                                    |                                                                                                                      |   |
|                                    | Consolidated  Statements of Operations for the three month                                                                                                                                                               |   |
|                                    |     periods ended March 31, 2011 and 2010                                                                                                                                                                 | 4 |
|                                    |                                                                                                       |   |
|                                    | Consolidated  Statements of Cash Flows for the three month periods                                                                                                                                                       |   |
|                                    |     ended March 31, 2011 and 2010                                                                                                                                                                         | 5 |
|                                    |                                                                                        |   |
|                                    | Notes to  Consolidated Financial Statements                                                                                                                                                                              | 6 |
|                                    |                                                                                             |   |
| ITEM 2                                  | Management's  Discussion and Analysis of Financial                                                                                                                                                                       |   |
|                                    |     Condition and Results of Operations                                                                                                                                                                   | 17 |
|                                    |                                                                         |   |
| ITEM 3                                  | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                                              | 25 |
|                                    |                                                                                   |   |
| ITEM 4                                  | Controls and Procedures                                                                                                                                                                                                  | 25 |
|                                    |                                      |   |
| **PART II – OTHER INFORMATION**    |                                                                                                                                                                                                                     |
| ** **                              | **                          **                                                         |   |
| ITEM 1                                  | Legal Proceedings                                                                                                                                                                                                        | 26 |
|                                    |                                                                                   |   |
| ITEM 1A                                 | Risk Factors                                                                                                                                                                                                             | 26 |
|                                    |                                                                              |   |
| ITEM 2                                  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                                             | 26 |
|                                    |                                                                                                                                                    |   |
| ITEM 6                                  | Exhibits                                                                                                                                                                                                                 | 27 |
|                                    |                                                                              |   |
| **SIGNATURES**                          | 28                                                                                                                                                                                                                       |

**

| 2 |
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**PART 1.  FINANCIALINFORMATIONITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS**

**ASSOCIATED ESTATES REALTY CORPORATIONCONSOLIDATED BALANCE SHEETS(UNAUDITED)**
|                                                                                          | March 31,       |               | December 31,    |
|------------------------------------------------------------------------------------------|-----------------|---------------|-----------------|
| *(In thousands, except  share amounts)*                                                  | 2011            |               | 2010            |
| **ASSETS**                                                                               |                 |               |                 |
| Real estate assets                                                                       |                 |               |                 |
| Land                                                                                     |  $         | 169,955  |                 |  $ | 169,955  |
| Buildings  and improvements                                                              | 1,004,907  |               | 1,003,909  |
| Furniture  and fixtures                                                                  | 34,153     |               | 33,690     |
| Construction  in progress                                                                | 4,461      |               | 2,735      |
| Gross  real estate                                                                       | 1,213,476  |               | 1,210,289  |
| Less:   Accumulated depreciation                                                    | (345,749)       |               | (335,289)       |
| Net  real estate                                                                         | 867,727    |               | 875,000    |
| Cash and cash equivalents                                                                | 5,406      |               | 4,370      |
| Restricted cash                                                                          | 8,175      |               | 8,959      |
| Accounts and notes  receivable, net                                                      |                 |               |                 |
| Rents                                                                                    | 1,145      |               | 1,238      |
| Construction                                                                             | 5,969      |               | 9,119      |
| Other                                                                                    | 1,246      |               | 1,110      |
| Goodwill                                                                                 | 1,725      |               | 1,725      |
| Other assets, net                                                                        | 14,667     |               | 16,714     |
| **Total assets**                                                                         |  $         | 906,060  |                 |  $ | 918,235  |
| **LIABILITIES AND EQUITY**                                                               |                 |               |                 |
| Mortgage notes payable                                                                   |  $         | 409,084  |                 |  $ | 463,166  |
| Unsecured revolving credit  facility                                                     | 149,000    |               | 92,500     |
| Total  debt                                                                              | 558,084    |               | 555,666    |
| Accounts payable and other  liabilities                                                  | 25,370     |               | 30,545     |
| Dividends payable                                                                        | 7,301      |               | 7,242      |
| Resident security deposits                                                               | 3,386      |               | 3,256      |
| Accrued interest                                                                         | 2,301      |               | 2,568      |
| **Total liabilities**                                                                    | 596,442    |               | 599,277    |
| Noncontrolling redeemable  interest                                                      | 1,734      |               | 1,734      |
| Equity                                                                                   |                 |               |                 |
| Common  shares, without par value, $.10 stated value; 91,000,000                         |                 |               |                 |
| authorized;  46,570,763 issued and 41,453,205 and 41,380,205                             |                 |               |                 |
| outstanding  at March 31, 2011 and December 31, 2010, respectively                       | 4,657      |               | 4,657      |
| Paid-in  capital                                                                         | 575,335    |               | 574,994    |
| Accumulated  distributions in excess of accumulated net income                           | (215,235)       |               | (205,021)       |
| Less:   Treasury shares, at cost, 5,117,558 and 5,190,558 shares                    |                 |               |                 |
| at  March 31, 2011 and December 31, 2010, respectively                                   | (57,913)        |               | (58,446)        |
| **Total shareholders' equity attributable to AERC**                                      | 306,844    |               | 316,184    |
| Noncontrolling  interest                                                                 | 1,040      |               | 1,040      |
| **Total equity**                                                                         | 307,884    |               | 317,224    |
| **Total liabilities and equity**                                                         |  $         | 906,060  |                 |  $ | 918,235  |
|                                                                                          |                 |               |                 |
| The accompanying notes are an integral part of these  consolidated financial statements. |
|                                                                                          |                 |               |                 |  |  |  |  |  |  |  |

****

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**ASSOCIATEDESTATES REALTY CORPORATIONCONSOLIDATED STATEMENTS OFOPERATIONS(UNAUDITED)**
|                                                                                          | Three Months Ended |
|------------------------------------------------------------------------------------------|--------------------|
|                                                                                          | March 31,          |
| *(In thousands, except per  share amounts)*                                              | 2011               |  | 2010 |  |
| **Revenue**                                                                              |                    |  |  |  |
| Property  revenue                                                                        |  $            | 38,692   |  |  $ | 31,646  |  |
| Management  and service company revenue                                                  | -        |  | 207  |  |
| Construction  and other services                                                         | 4,672    |  | 1,103  |  |
| Total  revenue                                                                           | 43,364   |  | 32,956  |  |
| **Expenses**                                                                             |                    |  |  |  |
| Property  operating and maintenance                                                      | 16,340   |  | 13,924  |  |
| Depreciation  and amortization                                                           | 13,055   |  | 8,620  |  |
| Direct  property management and service company expense                                  | -        |  | 132  |  |
| Construction  and other services                                                         | 5,024    |  | 1,416  |  |
| General  and administrative                                                              | 4,170    |  | 3,705  |  |
| Costs  associated with acquisitions                                                      | 56       |  | -  |  |
| Total  expenses                                                                          | 38,645   |  | 27,797  |  |
| Operating income                                                                         | 4,719    |  | 5,159  |  |
| Interest income                                                                          | 4        |  | 9  |  |
| Interest expense                                                                         | (7,792)       |  | (8,061) |  |
| **Net (loss) income**                                                                    | (3,069)       |  | (2,893) |  |
| Net  income attributable to noncontrolling redeemable interest                           | (13)          |   | (13) |  |
| **Net (loss) income  attributable to AERC**                                              | (3,082)       |  | (2,906) |  |
| Preferred share dividends                                                                | -        |  | (1,050) |  |
| **Net (loss) income  applicable to common shares**                                       |  $            | (3,082)  |  |  $ | (3,956) |  |
|                                                                                          |                    |  |  |  |
| **Earnings per common share  - basic and diluted:**                                      |                    |  |  |  |
| Net  (loss) income applicable to common shares                                           |  $            | (0.07)  |  |  $ | (0.19) |  |
|                                                                                          |                    |  |  |  |
| **Weighted average number  of common shares**                                            |                    |  |  |  |
| **outstanding - basic and diluted**                                                      | 41,262   |  | 21,199  |  |
|                                                                                          |                    |  |  |  |
| The accompanying notes are an integral part of these  consolidated financial statements. |                    |
|                                                                                          |                    |  |  |  |  |  |  |  |

****

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**ASSOCIATEDESTATES REALTY CORPORATIONCONSOLIDATED STATEMENTS OF CASHFLOWS(UNAUDITED)**
|                                                                                          | Three Months Ended |
|------------------------------------------------------------------------------------------|--------------------|
|                                                                                          | March 31,          |
| *(In thousands)*                                                                         | 2011               |  | 2010 |
| **Cash flow from  operations:**                                                          |                    |  |  |
| Net  (loss) income                                                                       |  $            | (3,069) |  |  $ | (2,893) |
| Adjustments  to reconcile net (loss) income to net cash provided by operations:          |                    |  |  |
| Depreciation  and amortization                                                           | 13,055        |  | 8,620  |
| Loss  on fixed asset replacements write-off                                              | 9             |  | 7  |
| Amortization  of deferred financing costs and other                                      | 473           |  | 382  |
| Share-based  compensation                                                                | 959           |  | 880  |
| Net  change in assets and liabilities:                                                   |                    |  |  |
| Accounts  and notes receivable - construction                                            | 3,150         |  | 638  |
| Accounts  and notes receivable - other                                                   | (86)               |  | (217) |
| Accounts  payable and accrued expenses                                                   | (4,142)            |  | (2,019) |
| Other  operating assets and liabilities                                                  | (866)              |  | (715) |
| Total  adjustments                                                                       | 12,552        |  | 7,576  |
| Net  cash flow provided by operations                                                    | 9,483         |  | 4,683  |
| **Cash flow from investing  activities:**                                                |                    |  |  |
| Recurring  fixed asset additions                                                         | (1,262)            |  | (1,402) |
| Revenue  enhancing/non-recurring fixed asset additions                                   | (969)              |  | (413) |
| Acquisition/development  fixed asset additions                                           | (1,659)            |  | (2,094) |
| Other  investing activity                                                                | 741           |  | (213) |
| Net  cash flow used for investing activities                                             | (3,149)            |  | (4,122) |
| **Cash flow from financing  activities:**                                                |                    |  |  |
| Principal  amortization payments on mortgage notes payable                               | (765)              |  | (829) |
| Principal  repayments of mortgage notes payable                                          | (53,317)           |  | (57,268) |
| Payment  of debt procurement costs                                                       | (4)                |  | -  |
| Revolving  credit facility borrowings                                                    | 65,000        |  | 24,950  |
| Revolving  credit facility repayments                                                    | (8,500)            |  | (17,050) |
| Common  share dividends paid                                                             | (6,973)            |  | (3,764) |
| Preferred  share dividends paid                                                          | -             |  | (1,050) |
| Operating  partnership distributions paid                                                | (13)               |  | (13) |
| Issuance  of common shares                                                               | -             |  | 54,918  |
| Purchase  of treasury shares                                                             | (857)              |  | (594) |
| Other  financing activities, net                                                         | 131           |  | -  |
| Net  cash flow used for financing activities                                             | (5,298)            |  | (700) |
| Increase (decrease) in cash  and cash equivalents                                        | 1,036         |  | (139) |
| Cash and cash equivalents,  beginning of period                                          | 4,370         |  | 3,600  |
| **Cash and cash  equivalents, end of period**                                            |  $            | 5,406  |  |  $ | 3,461  |
|                                                                                          |                    |  |  |
| Supplemental disclosure of  cash flow information:                                       |                    |  |  |
| Dividends  declared but not paid                                                         |  $            | 7,047  |  |  $ | 3,815  |
| Issuance  of treasury shares for share based compensation                                | 1,390         |  | 1,071  |
| Net  change in accounts payable related to fixed asset additions                         | (200)              |  | (513) |
| Reclassification  of deferred directors' compensation                                    | -             |  | 2,255  |
|                                                                                          |                    |  |  |
| The accompanying notes are an integral part of these  consolidated financial statements. |

****

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**ASSOCIATEDESTATES REALTY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED**

**1.         BASIS OFPRESENTATION AND ACCOUNTING POLICIES**

*****Except as the context otherwise requires, all references to "we,""our," "us," "AERC" and the "Company"in this report collectively refer to Associated Estates Realty Corporation andits consolidated subsidiaries.*

**Business**

  We are a fully-integrated, self-administered and self-managed equityreal estate investment trust ("REIT") specializing in multifamilyownership, operation, acquisition, development, construction, disposition and propertymanagement activities.  Our primary source of income is rental revenue. Additional income is derived primarily from construction services.  We own ataxable REIT subsidiary that performs construction services for our own accountand for third parties.  As of March 31, 2011, our operating property portfolioconsisted of 52 apartment communities containing 13,662 units in eight states thatare owned either directly or indirectly through subsidiaries.

**Basis of Presentation**

 The accompanying unaudited consolidated financial statements have beenprepared by management in accordance with accounting principles generally acceptedin the United States of America ("GAAP") for interim financialinformation and applicable rules and regulations of the Securities and ExchangeCommission.  Accordingly, they do not include all of the information andfootnotes required by GAAP for complete financial statements.  In the opinionof management, all adjustments, consisting only of normal and recurringadjustments considered necessary for a fair statement, have been included.  Thereported results of operations are not necessarily indicative of the resultsthat may be expected for the full year.  These financial statements should beread in conjunction with the audited financial statements and accompanyingnotes in our Annual Report on Form 10-K for the year ended December 31, 2010.

**SegmentReporting**

 All of our properties are multifamily communities that have similareconomic characteristics.  Management evaluates the performance of our propertieson an individual basis.  Our multifamily properties provided approximately 89.2%of our consolidated revenue for the three months ended March 31, 2011.  Oursubsidiary, Merit Enterprises, Inc. ("Merit"), is a generalcontractor that acts as our in-house construction division and provides generalcontracting and construction management services to third parties.  For thethree months ended March 31, 2011, construction services provided approximately10.8% of our consolidated revenue.  These two segments, multifamily propertiesand construction and other services, represent our two reportable segments.

**Share-BasedCompensation**

 During the three months ended March 31, 2011 and 2010, we recognizedtotal share-based compensation cost of $959,000 and $880,000, respectively,in "General and administrative expense" in the ConsolidatedStatements of Operations. 

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*Stock Options.*  There were no stock options awarded or exercised duringthe three months ended March 31, 2011 and 2010, respectively.

*Restricted Shares*.  The following table represents restrictedshare activity for the three months ended March 31, 2011:
|                                   |  |               |  | Weighted   |
|-----------------------------------|--|---------------|--|------------|
|                                   |  |               |  | Average    |
|                                   |  | Number of     |  | Grant Date |
|                                   |  | Shares        |  | Fair Value |
|                                   |  |               |  |            |
| Nonvested at beginning of  period |  | 595,842  |  | $          | 6.69  |
| Granted                           |  | 124,462  |  | $          | 15.13  |
| Vested                            |  | 163,631  |  | $          | 9.22  |
| Forfeited                         |  | 112      |  | $          | 9.67  |
| Nonvested at end of period        |  | 556,561  |  | $          | 7.83  |

At March 31, 2011,there was $3.7 million of unrecognized compensation cost related to non-vestedrestricted share awards that we expect to recognize over a weighted averageperiod of 2.5 years.

**Derivative Instruments andHedging Activities**

 We record all derivatives on the balance sheet at fair value.  Theaccounting for changes in the fair value of derivatives depends on the intendeduse of the derivative and the resulting designation.  Derivatives used to hedgethe exposure to changes in the fair value of an asset, liability or firmcommitment attributable to a particular risk, such as interest rate risk, areconsidered fair value hedges.  Derivatives used to hedge the exposure tovariability in expected future cash flows or other types of forecastedtransactions are considered cash flow hedges.

 For derivatives designated as fair value hedges, changes in the fairvalue of the derivative and the hedged item relating to the hedged risk arerecognized in earnings.  For derivatives designated as cash flow hedges, theeffective portion of changes in the fair value of the derivative is initiallyreported in other comprehensive income (outside of earnings) and subsequentlyreclassified to earnings when the hedged transaction affects earnings, and theineffective portion of changes in the fair value of the derivative isrecognized directly in earnings.  Hedge ineffectiveness is measured bycomparing the changes in fair value or cash flows of the derivative hedginginstrument with the changes in fair value or cash flows of the designatedhedged item or transaction.  For derivatives not designated as hedges, changesin fair value are recognized in earnings.

 We do not use derivatives for trading or speculative purposes.  Further,we have a policy of only entering into contracts with major financialinstitutions based upon their credit ratings and other factors.  When viewed inconjunction with the underlying and offsetting exposure that the derivativesare designed to hedge, we have not sustained a material loss from these hedges.

 We have utilized interest rate swaps and caps to add stability tointerest expense and to manage our exposure to interest rate movements. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rateamounts in exchange for fixed-rate payments over the life of the agreementswithout exchange of the underlying principal amount.  Interest rate capsdesignated as cash flow hedges involve the receipt of variable-rate amounts ifinterest rates rise above a certain level in exchange for an upfront premium.

****At March 31, 2011 and December 31, 2010, we had no derivatesoutstanding.  During the three months ended March 31, 2010, we had two interestrate swaps that were executed in 2007 to hedge the cash flows of two existingvariable rate loans.  In January 2010, we prepaid one of these loans but we didnot terminate the corresponding interest rate swap and as a result reclassifiedthe fair value of the related interest rate swap of $777,000 from othercomprehensive income to earnings.  This derivative matured in June 2010, andthe change in fair value was recorded in earnings.

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The following table presents the effect of our prior derivativefinancial instruments on the Consolidated Statements of Operations (see Note 6for additional information regarding the effect of these derivative instrumentson total comprehensive income):
| The Effect of Derivative Instruments on the  Consolidated Statements of Operations |
|------------------------------------------------------------------------------------|
|                                                                                    |  |  |  |  |  |  |  |  |  |  |
|                                                                                    |  |  |  |  |  |  |  |  |  |  |
| *(In thousands)*                                                                   |  |  |  |  |  |  |  | Location of Gain or |  | Amount of Gain or |
|                                                                                    |  |  |  |  |  | Amount of Gain or |  | (Loss) Recognized |  | (Loss) Recognized in |
|                                                                                    |  | Amount of Gain or |  | Location of Gain |  | (Loss) Reclassified |  | in Income on |  | Income on Derivative |
|                                                                                    |  | (Loss) Recognized |  | or (Loss) |  |  from Accumulated |  | Derivative (Ineffective |  | (Ineffective Portion and |
|                                                                                    |  | in OCI on Derivative |  | Reclassified from |  | OCI into Income |  | Portion and |  | Amount Excluded from |
| Derivatives in Cash                                                                |  | (Effective Portion) |  | Accumulated OCI |  | (Effective Portion) |  | Amount Excluded |  | Effectiveness Testing) |
| Flow Hedging                                                                       |  | Three Months Ended |  | into Income |  | Three Months Ended |  | from Effectiveness |  | Three Months Ended |
| Relationships                                                                      |  | March 31, 2010 |  | (Effective Portion) |  | March 31, 2010 |  | Testing) |  | March 31, 2010 |
|                                                                                    |  |  |  |  |  |  |  |  |  |  |
| Interest rate swaps                                                                |  |  $ | (54) |  |  Interest expense |  |  $ | (193) |  |  Interest expense |  |  $ | (777) |
|                                                                                    |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                     |  |                     |  | Amount of Gain or    |
|---------------------|--|---------------------|--|----------------------|
|                     |  | Location of Gain or |  | (Loss) Recognized in |
| Derivatives Not     |  | (Loss) Recognized   |  | Income on Derivative |
| Designated as       |  | in Income on        |  | Three Months Ended   |
| Hedging Instruments |  | Derivative          |  | March 31, 2010       |
|                     |  |                     |  |                      |
| Interest rate swaps |  | Interest expense    |  |  $              | (17) |

**Real Estate and Depreciation**

 Real estate assets are stated at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated usefullives of the assets as follows:
| •   | Buildings and improvements         | 5 - 30 years |
|---------------|------------------------------------|--------------|
| •   | Furniture, fixtures and  equipment | 5 - 10 years |

 We capitalizereplacements and improvements, such as HVAC equipment, structural replacements,windows, appliances, flooring, carpeting and kitchen/bath replacements andrenovations.  Ordinary repairs and maintenance, such as unit cleaning, paintingand appliance repairs are expensed when incurred.

 We capitalize interest costs on funds used in construction, real estatetaxes and insurance from the commencement of development activity through thetime the property is ready for leasing.  We also capitalize direct and indirectinternal costs directly attributable to the construction of a property or asset. Such costs are included in construction in progress during the developmentperiod.  All capitalized costs related to construction are transferred tobuildings and improvements and furniture and fixtures, respectively, upon substantialcompletion of the project.

 

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**Classification of Fixed AssetAdditions**

 We definerecurring fixed asset additions to a property to be capital expenditures madeto replace worn out assets to maintain the property's value.  Revenueenhancing/non-recurring fixed asset additions are defined as capital expendituresthat increase the value of the property and/or enable us to increase rents.  Acquisition/developmentfixed asset additions are defined as capital expenditures for the purchase orconstruction of new properties to be added to our portfolio, or fixed assetadditions identified at the time of purchase that are not made until subsequentperiods.

**Reclassifications**

 Certainreclassifications have been made to the 2010 financial statements to conform tothe 2011 presentation.

**2.         DEVELOPMENT AND CONSTRUCTIONACTIVITY**

**DevelopmentActivity**

 During 2010 we began development on Vista Germantown, a 242-unitapartment community located in Nashville, Tennessee.  The total cost as ofMarch 31, 2011 of this development is $9.9 million.  During the three monthsended March 31, 2011, we recorded capitalized interest of $117,000.  See Note 5for additional information related to this development.

During 2010, we completed construction of a 60-unit expansion of theexisting 240-unit River Forest apartment community located in the Richmond,Virginia metropolitan market area.  Capitalized interest related to thisexpansion for the three months ended March 31, 2010 was $81,000.

**ConstructionActivity**

 Our subsidiary, Merit, is engaged as a general contractor andconstruction manager that acts as our in-house construction division and also providesgeneral contracting and construction management services to third parties.  Weaccount for construction contracts using the percentage-of-completion method.  Underthis method, we recognize revenue in the ratio of costs incurred to totalestimated costs, with any changes in estimates recognized in the period inwhich they are known on a prospective basis.  We recognized $4.7 million inrevenue under this method during the three months ended March 31, 2011 and $1.1million in revenue under this method during the three months ended March 31,2010.  At March 31, 2011 and 2010, respectively, we had $6.0 million and$638,000 still owed to us, which was included in accounts receivable on the ConsolidatedBalance Sheets.  For the three months ended March 31, 2011, under thepercentage of completion method, we reported costs of $4.6 million of which $3.4million remained unpaid and was included in accounts payable and otherliabilities.  For the three months ended March 31, 2010, under this method, wereported $1.0 million of costs with $570,000 unpaid.

 

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**3.         DEBT**

 The following table identifies ourtotal debt outstanding and weighted average interest rates:
|                                      | March 31, 2011 |               | December 31, 2010 |
|--------------------------------------|----------------|---------------|-------------------|
|                                      | Balance        |               | Weighted Average  |  | Balance |  | Weighted Average |
| *(Dollar amounts in  thousands)*     | Outstanding    |               | Interest Rate     |  | Outstanding |  | Interest Rate |
|                                      |                |               |                   |  |  |  |  |
| **FIXED RATE DEBT**                  |                |               |                   |  |  |  |  |
| Mortgages payable - CMBS             |  $        | 44,517   |                   | 7.9% |  |  $ | 98,212  |  | 7.7% |
| Mortgages payable - other            | 330,408   |               | 5.7%              |  | 330,648  |  | 5.7% |
| **Total  fixed rate debt**           | 374,925   |               | 6.0%              |  | 428,860  |  | 6.2% |
|                                      |                |               |                   |  |  |  |  |
| **VARIABLE RATE DEBT**               |                |               |                   |  |  |  |  |
| Mortgages payable                    | 34,159    |               | 4.7%              |  | 34,306  |  | 4.7% |
| Unsecured revolving credit  facility | 149,000   |               | 2.6%              |  | 92,500  |  | 2.7% |
| **Total  variable rate debt**        | 183,159   |               | 3.0%              |  | 126,806  |  | 3.2% |
| **Total  debt**                      |  $        | 558,084  |                   | 5.0% |  |  $ | 555,666  |  | 5.5% |
|                                      |                |               |                   |  |  |  |  |

 

**Mortgage Notes Payable**

 The following table provides information on mortgage loans repaid during2011:
| *(Dollar amounts in  thousands)* |  | Loans Repaid |
|----------------------------------|--|--------------|
| Property                         |  | Amount       |  |  Interest Rate |
|                                  |  |              |  |  |
| Central Park Place               |  |  $      | 6,170  |  | 7.6% |
| Perimeter Lakes                  |  | 5,485   |  | 7.6% |
| Residence at Turnberry           |  | 7,756   |  | 7.6% |
| Residence at Christopher  Wren   |  | 9,052   |  | 7.6% |
| Clinton Place Apartments         |  | 8,145   |  | 7.6% |
| Heathermoor                      |  | 8,232   |  | 7.6% |
| Summer Ridge                     |  | 8,477   |  | 7.6% |
| Total / weighted average  rate   |  |  $      | 53,317  |  | 7.6% |
|                                  |  |              |  |  |

 

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During 2008, 2007 and 2006, we defeased 21 CMBS loans.  These loans weredefeased pursuant to the terms of the underlying loan documents.  In accordancewith GAAP, we removed those financial assets and the mortgage loans from ourfinancial records.  All risk of loss associated with these defeasances havebeen transferred from us to the successor borrower and any ongoing relationshipbetween the successor borrower and us was deemed inconsequential at the time ofcompletion of the respective transfers.  However, we subsequently learned that forcertain defeasance transactions completed prior to June 2007, the successorborrower may be able to prepay the loans thus enabling us to receive a refundof a portion of the costs incurred in connection with the transaction.  Wereceived defeasance refunds of $554,000 for the three months ended March 31,2010, which were included as a reduction to interest expense.

Cash paid for interest, excluding $117,000 and $81,000 of capitalizedinterest, was $7.6 million and $7.8 million for the three months ended March31, 2011 and 2010, respectively.  Included in cash paid for interest was thedefeasance refund received of $554,000 for the three months ended March 31, 2010,as discussed above.

**4.         GOODWILLAND OTHER INTANGIBLE ASSETS**

**Goodwill**

 We have a policy of completing our annual review of goodwill during thefirst quarter of each year and more frequently if events or changes incircumstances indicate that the carrying value may not be recoverable.  Thereview that was completed during the three months ended March 31, 2011,determined that goodwill was not impaired and as such there were no changes tothe carrying value of goodwill as of March 31, 2011.  In performing thisanalysis, we use a multiple of revenues to the range of potential alternatives. We then assign a probability to the various alternatives under our consideration. Should the estimates used to determine alternatives or the probabilities of theoccurrence thereof change, impairment may result which could materially impactour results of operations for the period in which it is recorded**.**

**IntangibleAssets**

 We allocate aportion of the total purchase price of a property acquisition to any intangibleassets identified, such as existing leases and tenant relationships.  Theintangible assets are amortized over the remaining lease terms or estimatedlife of the tenant relationship, which is approximately 12 months.  Due to theshort term nature of residential leases, we believe that existing lease ratesapproximate market rates; therefore, no allocation is made for above/belowmarket leases.

**5.         INVESTMENT IN PARTNERSHIP**

 On September 24, 2010, we entered into a partnership agreement withBristol Development Group, an unrelated third-party, for the development ofVista Germantown, a 242-unit apartment community located in downtown Nashville,Tennessee.  We contributed $9.4 million to the partnership and hold a 90.0%equity interest.  We have determined that this entity is not a variableinterest entity and that we hold a controlling financial interest in theentity.  As such, this entity is included in our consolidated financialstatements.  We have also determined that the noncontrolling interest in thisentity meets the criterion to be classified as a component of permanent equity.

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**6.         EQUITY**

 The following table provides a reconciliation of activity in equityaccounts:
|                                    |  | Three Months Ended March 31, 2011 |
|------------------------------------|--|-----------------------------------|
|                                    |  |                                   |  |  |  |  Accumulated |  |  |  |  |
|                                    |  |  Common                      |  |  |  |  Distributions |  |  |  |  |
|                                    |  |  Shares                      |  |  |  |  In Excess of |  |  Treasury |  |  |
|                                    |  |  (at $.10                    |  |  Paid-In |  |  Accumulated |  |  Shares |  |  Noncontrolling |
| *(In thousands)*                   |  |  stated value)               |  |  Capital |  |  Net Income |  |   (at Cost) |  |  Interest |
| Balance, December 31, 2010         |  |  $                           | 4,657  |  |  $ | 574,994  |  |  $ | (205,021) |  |  $ | (58,446) |  |  $ | 1,040  |
| Total comprehensive (loss)  income |  | -                            |  | -  |  | (3,082) |  | -  |  | -  |
| Share-based compensation           |  | -                            |  | 341  |  | 2  |  | 1,390  |  | -  |
| Purchase of treasury shares        |  | -                            |  | -  |  | -  |  | (857) |  | -  |
| Common share dividends  declared   |  | -                            |  | -  |  | (7,134) |  | -  |  | -  |
| Balance, March 31, 2011            |  |  $                           | 4,657  |  |  $ | 575,335  |  |  $ | (215,235) |  |  $ | (57,913) |  |  $ | 1,040  |
|                                    |  |                                   |  |  |  |  |  |  |  |  |

The following table identifies total comprehensive (loss) income:
|                                                                 | Three Months Ended |
|-----------------------------------------------------------------|--------------------|
|                                                                 | March 31,          |
| *(In thousands)*                                                | 2011               |  | 2010 |
| Comprehensive (loss) income:                                    |                    |  |  |
| Net (loss) income  attributable to AERC                         |  $            | (3,082) |  |  $ | (2,906) |
| Other comprehensive income:                                     |                    |  |  |
| Change  in fair value and reclassification of hedge instruments | -             |  | 917  |
| Total comprehensive (loss)  income                              |  $            | (3,082) |  |  $ | (1,989) |
|                                                                 |                    |  |  |

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**7.         EARNINGS PER SHARE**

There were approximately770,000 and 1.4 million options to purchase common shares outstanding at March31, 2011 and 2010, respectively.  The dilutive effect of these options were notincluded in the calculation of diluted earnings per share for the periodspresented as their inclusion would be anti-dilutive to the net loss applicableto common shares.

 The exchange of operating partnership non-controlling interests intocommon shares was also not included in the computation of diluted EPS becausewe intend to settle these OP units in cash.

The following table presents a reconciliation of basic and dilutedearnings per common share:
|                                                                         | Three Months Ended |
|-------------------------------------------------------------------------|--------------------|
|                                                                         | March 31,          |
| *(In thousands, except per  share amounts)*                             | 2011               |  | 2010 |
| **Numerator - basic and  diluted:**                                     |                    |  |  |
| (Loss) income                                                           |  $            | (3,069) |  |  $ | (2,893) |
| Net  income attributable to noncontrolling redeemable interest          | (13)               |  | (13) |
| Preferred  share dividends                                              | -             |  | (1,050) |
| (Loss) income applicable to  common shares                              |  $            | (3,082) |  |  $ | (3,956) |
|                                                                         |               |  |   |
|                                                                         |                    |  |  |
| **Denominator - basic and  diluted:**                                   | 41,262        |  | 21,199  |
|                                                                         |                    |  |  |
| **Net (loss) income  applicable to common shares - basic and diluted:** |                    |  |  |
| Net (loss) income applicable  to common shares - basic and diluted      |  $            | (0.07) |  |  $ | (0.19) |
|                                                                         |                    |  |  |

**8.         FAIR VALUE**

 Accounts and notes receivable, other assets, accounts payable, accruedexpenses and other liabilities are carried at amounts that reasonablyapproximate corresponding fair values.

 Mortgage notes payable, revolving debt and other unsecured debt with anaggregate carrying value of $558.1 million and $555.7 million at March 31, 2011and December 31, 2010, respectively, have an estimated aggregate fair value of $580.2million and $570.2 million, respectively.  Estimated fair value is based oninterest rates available to us as of the dates reported for issuance of debtwith similar terms and remaining maturities.  Considerable judgment isnecessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative ofthe amounts for which we could be liable upon disposition of the financialinstruments.  The use of different market assumptions and/or estimationmethodologies may have a material effect on the estimated fair value amounts.

**9.         CONTINGENCIES**

**LegalProceedings**

 We are subject to legal proceedings, lawsuits and other claims,including proceedings by government authorities (collectively "Litigation"). Litigation is subject to uncertainties and outcomes are difficult to predict. We believe any current Litigation will not have a material adverse impact on usafter final disposition.  However, because of the uncertainties of Litigation,one or more lawsuits could ultimately result in a material obligation.

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**10.        SEGMENT REPORTING**

            We have two reportablesegments, which are multifamily properties and construction and otherservices.  Our multifamily segment owns and manages multifamily communities andour construction and other services segment is a general contractor that actsas our in-house construction division and provides general contracting andconstruction management services to third parties.

            The accounting policiesof our segments are the same as those described in Note 1, "Basis ofPresentation and Accounting Policies." All of our properties aremultifamily communities that have similar economic characteristics.  Weevaluate the performance of our properties on an individual and segment basisbased on property Net Operating Income ("NOI").  We evaluate the performanceof our construction and other services segment based on income fromconstruction services, which includes direct as well as allocated general andadministrative expenses.

            Segment information forthe three months ended March 31, 2011 and 2010, respectively, is as follows:
|                                                                   |  | Three Months Ended |
|-------------------------------------------------------------------|--|--------------------|
|                                                                   |  | March 31,          |
| *(In thousands)*                                                  |  | 2011               |  | 2010 |
| **Revenue**                                                       |  |                    |  |  |
| Property  operations:                                             |  |                    |  |  |
| Total  segment revenue                                            |  |  $            | 38,692  |  |  $ | 31,646  |
| Less:  Intersegment revenue                                       |  | -             |  | -  |
| Total  net segment revenue                                        |  | 38,692        |  | 31,646  |
|                                                                   |  |                    |  |  |
| Construction  and other services:                                 |  |                    |  |  |
| Total  segment revenue                                            |  | 5,983         |  | 1,103  |
| Less:  Intersegment revenue                                       |  | (1,311)            |  | -  |
| Total  net segment revenue                                        |  | 4,672         |  | 1,103  |
|                                                                   |  |                    |  |  |
| Reconciliation  of segment revenue to total consolidated revenue: |  |                    |  |
| Total  revenue for reportable segments                            |  | 44,675        |  | 32,749  |
| Elimination  of intersegment revenue                              |  | (1,311)            |  | -  |
| Management  and service company revenue                           |  | -             |  | 207  |
| Total  consolidated revenue                                       |  |  $            | 43,364  |  |  $ | 32,956  |
|                                                                   |  |                    |  |  |

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|                                                                      |  | Three Months Ended |
|----------------------------------------------------------------------|--|--------------------|
|                                                                      |  | March 31,          |
| *(In thousands)*                                                     |  | 2011               |  | 2010 |
| **Profit (net of  intersegment revenue and expense)**                |  |                    |  |  |
| Property  operations                                                 |  |                    |  |  |
| Property  revenue                                                    |  |  $            | 38,692  |  |  $ | 31,646  |
| Property  expenses                                                   |  | 16,340        |  | 13,924  |
| Property  operations NOI                                             |  | 22,352        |  | 17,722  |
|                                                                      |  |                    |  |  |
| Construction  and other services                                     |  |                    |  |  |
| Construction  revenue                                                |  | 4,672         |  | 1,103  |
| Construction  expenses - direct                                      |  | (4,616)            |  | (1,047) |
| Construction  expenses - general and administrative (1)              |  | (408)              |  | (369) |
| Construction  and other services income                              |  | (352)              |  | (313) |
| Total  profit for reportable segments                                |  | 22,000        |  | 17,409  |
|                                                                      |  |                    |  |  |
| Reconciliation  of segment profit to consolidated net (loss) income: |  |                    |  |
| Total  profit for reportable segments                                |  | 22,000        |  | 17,409  |
| Management  and service company revenue                              |  | -             |  | 207  |
| Depreciation  and amortization                                       |  | (13,055)           |  | (8,620) |
| Direct  property management and service company expense              |  | -             |  | (132) |
| General  and administrative                                          |  | (4,170)            |  | (3,705) |
| Costs  associated with acquisitions                                  |  | (56)               |  | -  |
| Interest  income                                                     |  | 4             |  | 9  |
| Interest  expense                                                    |  | (7,792)            |  | (8,061) |
| Consolidated  net (loss) income                                      |  |  $            | (3,069) |  |  $ | (2,893) |

** **
| (1) | This  amount is included in construction and other services expenses in the  Consolidated Statements of Operations. |
|-----|---------------------------------------------------------------------------------------------------------------------|

** **
|                                  |  | March 31,   |               |  | December 31, |
|----------------------------------|--|-------------|---------------|--|--------------|
| *(In thousands)*                 |  | 2011        |               |  | 2010         |
| **Segment Assets**               |  |             |               |  |              |
| Property  operations             |  |  $     | 892,509  |  |              |  $ | 902,515  |
| Construction  and other services |  | 8,145  |               |  | 11,350  |
| Other  assets                    |  | 5,406  |               |  | 4,370   |
| Total  consolidated assets       |  |  $     | 906,060  |  |              |  $ | 918,235  |
|                                  |  |             |               |  |              |

****

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**11.        SUBSEQUENT EVENTS**

**MortgageNotes Payable**

 On April 7, 2011, we closed on a $47.6 million loan with Fannie Mae. The loan has a seven year term, requires interest-only payments and carries a4.6% fixed interest rate.** **Proceeds from this loan were used to pay downoutstanding borrowings on our unsecured revolver.

**Dividends**

 On May 2, 2011, we paid a dividend of $0.17 per common share toshareholders of record on April 15, 2011, which was declared on March 22, 2011.

** **

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**ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 The followingdiscussion should be read in conjunction with the consolidated financialstatements and notes thereto included in Part I, Item 1 of this report on Form10-Q.  This discussion may contain forward-looking statements based on currentjudgments and current knowledge of management, which are subject to certainrisks, trends and uncertainties that could cause actual results to vary fromthose projected, including but not limited to, expectations regarding our 2011performance that are based on certain assumptions.  Accordingly, readers arecautioned not to place undue reliance on forward-looking statements that speakonly as of the date of the document.  These forward-looking statements areintended to be covered by the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995.  The words "expects," "projects,""believes," "plans," "anticipates" and similarexpressions are intended to identify forward-looking statements.  Investors arecautioned that these forward-looking statements involve risks and uncertaintythat could cause actual results to differ from estimates or projectionscontained in these forward-looking statements, including without limitation thefollowing:
| •     | changes in  the economic climate in the markets in which we own and manage properties,  including interest rates, the overall level of economic activity, the  availability of consumer credit and mortgage financing, unemployment rates  and other factors; |
|----------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •     | elimination  or limitations to federal government support for Fannie Mae and/or Freddie  Mac that might result in significantly reduced availability of mortgage  financing sources as well as increases in interest rates for mortgage  financing;           |
| •     | our ability  to refinance debt on favorable terms at maturity;                                                                                                                                                                                                |
| •     | risks of a  lessening of demand for the multifamily units that we own;                                                                                                                                                                                        |
| •     | competition  from other available multifamily units and changes in market rental rates;                                                                                                                                                                       |
| •     | new  acquisitions and/or development projects may fail to perform in accordance  with our expectations;                                                                                                                                                       |
| •     | increases  in property and liability insurance costs;                                                                                                                                                                                                         |
| •     | unanticipated  increases in real estate taxes and other operating expenses;                                                                                                                                                                                   |
| •     | weather  conditions that adversely affect operating expenses;                                                                                                                                                                                                 |
| •     | expenditures  that cannot be anticipated such as utility rate and usage increases and  unanticipated repairs;                                                                                                                                                 |
| •     | our inability  to control operating expenses or achieve increases in revenue;                                                                                                                                                                                 |
| •     | shareholder  ownership limitations that may discourage a takeover otherwise considered  favorably by shareholders;                                                                                                                                            |
| •     | the results  of litigation filed or to be filed against us;                                                                                                                                                                                                   |
| •     | changes in  tax legislation;                                                                                                                                                                                                                                  |
| •     | risks of  personal injury claims and property damage related to mold claims that are  not covered by our insurance;                                                                                                                                           |
| •     | catastrophic  property damage losses that are not covered by our insurance;                                                                                                                                                                                   |
| •     | our ability  to acquire properties at prices consistent with our investment criteria;                                                                                                                                                                         |
| •     | risks  associated with property acquisitions such as failure to achieve expected  results or matters not discovered in due diligence;                                                                                                                         |
| •     | risks  related to the perception of residents and prospective residents as to the  attractiveness, convenience and safety of our properties or the neighborhoods  in which they are located; and                                                              |
| •     | construction and construction  business risks, including, without limitation, rapid and unanticipated  increases in prices of building materials and commodities.                                                                                             |

*** ***

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**Overview.**

 We are engagedprimarily in the ownership and operation of multifamily apartment units. Oursubsidiary, Merit, is a general contractor that acts as our in-house constructiondivision and provides general contracting and construction management servicesto third parties.  Our two primary sources of cash and revenue from operationsare rents from the leasing of apartment units, which represented approximately 89.2%of our consolidated revenue and construction services, which represented approximately10.8% of our consolidated revenue for the three months ended March 31, 2011.

 The operating performance of our properties is affected by generaleconomic trends including, but not limited to, factors such as householdformation, job growth, unemployment rates, population growth, immigration, thesupply of new multifamily rental communities and in certain markets the supplyof other housing alternatives, such as condominiums, single and multifamilyrental homes and owner occupied single and multifamily homes.  Additionally,our performance may be affected by access to, and cost of, debt and equity.

 Rental revenue collections are impacted by rental rates, occupancylevels and rent concessions.  We adjust our rental rates and concessions in ourcontinuing efforts to adapt to changing market conditions and maximize rentalrevenue.  We continuously monitor physical occupancy and net collected rent perunit to track our success in maximizing rental revenue.  These indicators aremore fully described in the Results of Operations comparison.  Additionally, weconsider property NOI and Funds from Operations ("FFO") to beimportant indicators of our overall performance.  Property NOI (propertyoperating revenue less property operating and maintenance expenses) is ameasure of the profitability of our properties and has the largest impact onour financial condition and operating results.  FFO is used in the real estateindustry as a supplemental measure of the operating performance of real estatecompanies because it excludes charges such as real estate depreciation that aregenerally considered not to be reflective of the actual value of real estateassets over time.  Additionally, gains and losses from the sale of most realestate assets and certain other items are also excluded from FFO.

Property NOI isdetermined by deducting property operating and maintenance expenses fromproperty revenue (excluding amounts classified as discontinued operations).  Weconsider property NOI to be an appropriate supplemental measure of ourperformance because it reflects the operating performance of our real estateportfolio and is used to assess regional property level performance.  Property NOIshould not be considered (i) as an alternative to net income (determined inaccordance with GAAP), (ii) as an indicator of financial performance, (iii) asan alternative to cash flow from operating activities (determined in accordancewith GAAP) or (iv) as a measure of liquidity; nor is it necessarily indicativeof sufficient cash flow to fund all of our needs.  Other real estate companiesmay define property NOI in a different manner.  

 

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A reconciliation ofproperty NOI to total consolidated net (loss) income attributable to AERC is asfollows:
|                                                                | Three Months Ended |
|----------------------------------------------------------------|--------------------|
|                                                                | March 31,          |
| *(In thousands)*                                               | 2011               |  | 2010 |
|                                                                |                    |  |  |
| Property NOI                                                   |  $            | 22,352  |  |  $ | 17,722  |
| Service company NOI                                            | -             |  | 75  |
| Construction and other  services net (loss) income             | (352)              |  | (313) |
| Depreciation and amortization                                  | (13,055)           |  | (8,620) |
| General and administrative  expense                            | (4,170)            |  | (3,705) |
| Costs associated with  acquisitions                            | (56)               |  | -  |
| Interest income                                                | 4             |  | 9  |
| Interest expense                                               | (7,792)            |  | (8,061) |
| Net (loss) income                                              | (3,069)            |  | (2,893) |
| Net income attributable to  noncontrolling redeemable interest | (13)               |  | (13) |
| Consolidated net (loss)  income attributable to AERC           |  $            | (3,082) |  |  $ | (2,906) |
|                                                                |                    |  |  |

We calculate FFO inaccordance with the definition adopted by the Board of Governors of theNational Association of Real Estate Investment Trusts ("NAREIT"). This definition includes all operating results, both recurring andnon-recurring, except those results defined as "extraordinary items"under GAAP, adjusted for depreciation on real estate assets and amortization ofintangible assets, gains on insurance recoveries and gains and losses from thedisposition of properties and land.  We calculate FFO per share using theweighted average shares outstanding amounts used in the calculation of basicand diluted earnings per share in accordance with GAAP.  FFO does not representcash generated from operating activities in accordance with GAAP and is notnecessarily indicative of cash available to fund cash needs and should not beconsidered an alternative to net income, as an indicator of our operatingperformance or as an alternative to cash flow as a measure of liquidity.  FFOis used in the real estate industry as a supplemental measure of the operatingperformance of real estate companies because it excludes charges such as realestate depreciation that are generally considered not to be reflective of theactual value of real estate assets over time.  Other real estate companies maydefine FFO in a different manner.

We calculate FFO as adjusted as FFO, as defined above, as reduced by refundson previously defeased loans of $(554,000) for the three months ended March 31,2010.  In accordance with GAAP, these refunds on previously defeased loans areincluded as an offset to interest expense in our Consolidated Statement ofOperations.  We are providing this calculation as an alternative FFOcalculation as we consider it a more appropriate measure of comparing theoperating performance of a company’s real estate between periods or as comparedto different REITs.

 

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A reconciliation of net (loss) income attributable to AERC to FFO and FFOas adjusted is as follows:
|                                                                         |  | Three Months Ended |
|-------------------------------------------------------------------------|--|--------------------|
|                                                                         |  | March 31,          |
| *(In thousands, except per  share amounts)*                             |  | 2011               |  | 2010 |
|                                                                         |  |                    |  |  |
| Net (loss) income  attributable to AERC                                 |  |  $            | (3,082) |  |  $ | (2,906) |
| Depreciation - real estate  assets                                      |  | 10,498        |  | 8,223  |
| Amortization of intangible  assets                                      |  | 2,102         |  | -  |
| Preferred share dividends                                               |  | -             |  | (1,050) |
| Funds from Operations                                                   |  | 9,518         |  | 4,267  |
|                                                                         |  |                    |  |  |
| Refund of defeasance costs  for previously defeased loans               |  | -             |  | (554) |
| Funds from Operations as  adjusted                                      |  |  $            | 9,518  |  |  $ | 3,713  |
|                                                                         |  |                    |  |  |
| Funds from Operations per  common share - basic and diluted             |  |  $            | 0.23  |  |  $ | 0.20  |
| Funds from Operations as  adjusted per common share - basic and diluted |  |  $            | 0.23  |  |  $ | 0.18  |
|                                                                         |  |                    |  |  |
| Weighted average shares outstanding  - basic and diluted                |  | 41,262        |  | 21,199  |
|                                                                         |  |                    |  |  |

 

**Updated 2011 Expectations.**
| •  ** ** | ***Portfolio performance****-*Our full-year 2011 updated guidance reflects Same Community NOI increasing  in the range of 4.0% to 5.0% as compared to 2010.                                                                                                                                                                                                                                                                                                                                                                              |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **         | ***                        ***                                                                                                                                                                                                                                                                                                                                                                                        |
| •  ** ** | ***Property acquisitions,  sales and development*****- We anticipate the acquisition of  approximately $50.0 million to $150.0 million of properties and the  disposition of approximately zero to $50.0 million of properties.  Additionally,  we anticipate development costs in connection with the development of a  242-unit apartment community in Nashville, Tennessee, in which we are a 90.0%  partner and which commenced during the fourth quarter of 2010, to be  approximately $25.0 million to $30.0 million in 2011. |
| ** **         | ***                                   ***                                                                                                                                                                                                                                                                                                                      |
| •  ** ** | ***Debt repayment*** - We  have repaid seven mortgage loans totaling $53.3 million that were scheduled  to mature during the second quarter of 2011.  We have no additional debt  maturing in 2011.                                                                                                                                                                                                                                                                                                                                 |

 

**ForecastQualification.**  Uncertainties relating to the broader domestic economic andfinancial conditions impact our ability to forecast future performance.  Webelieve that the apartment industry is better situated to weather a delayedrecovery than other real estate sectors.  However, our 2011 expectations may beadversely impacted by unanticipated changes to the Federal Reserve’s interestrate policy, or if Congress were to take immediate steps to curtail Fannie Maeor Freddie Mac financing support to the apartment industry.  Moreover, unlessand until meaningful job and wage growth occurs in our markets, significantrental growth may be limited.

 

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**LIQUIDITY AND CAPITALRESOURCES**

 Cash Flows and Liquidity.  Significant sources and uses of cash duringthe three months ended March 31, 2011 and 2010 are summarized as follows:
|  |                                                                      | Three Months Ended |
|--|----------------------------------------------------------------------|--------------------|
|  |                                                                      | March 31,          |
|  | *(In thousands)*                                                     | 2011               |  | 2010 |
|  | Net cash provided by  operations                                     |  $            | 9,483  |  |  $ | 4,683  |
|  | Fixed assets:                                                        |                    |  |  |
|  | Acquisition  and development expenditures, net                       | (1,659)            |  | (2,094) |
|  | Recurring,  revenue enhancing and non-recurring capital expenditures | (2,231)            |  | (1,815) |
|  | Debt:                                                                |                    |  |  |
|  | Decrease  in mortgage notes                                          | (54,082)           |  | (58,097) |
|  | Increase  in revolving credit facility borrowings                    | 56,500        |  | 7,900  |
|  | Cash dividends and operating  partnership distributions paid         | (6,986)            |  | (4,827) |
|  |                                                                      |                    |  |  |  |  |

 

 Our primary sources ofliquidity are cash flow provided by operations, short-term borrowings on the unsecuredrevolver, project specific loans and the sale of debt or equity securities.  Ourscheduled debt maturities for 2011 consisted of seven mortgage loans totalingapproximately $53.3 million.  We have repaid all of these loans with proceedsfrom borrowings on our unsecured revolver.  On April 7, 2011, we closed on a$47.6 million mortgage loan secured by The Ashborough property.  This loan hasa fixed interest rate of 4.6% and matures on May 1, 2018.  The proceeds fromthe funding of this loan were used to pay down borrowings on our unsecuredrevolver.  

 In December 2009, weentered into a credit facility agreement with Wells Fargo MultifamilyCorporation on behalf of Freddie Mac.  Pursuant to the terms of the facility,we have the potential to borrow up to $100.0 million over a two-year periodending in December 2011 with obligations being secured by nonrecourse, noncross-collateralized fixed or variable rate mortgages having terms of five,seven or ten years.  We currently have $64.0 million of availability under thisfacility.  Our $250.0 million unsecured revolver, which matures October 18,2013, provides us additional financial flexibility.  On May 2, 2011, we had $144.0million of availability under this facility.  

 We anticipate that cashflow provided by operations for the remainder of the year will continue to meetnormal business operations and liquidity requirements for the upcoming year. We believe that if net cash provided by operations is below projections, othersources such as the unsecured revolver, secured and unsecured borrowings are orcan be made available and should be sufficient to meet our normal businessoperations and liquidity requirements.  We anticipate that we will continuepaying our regular quarterly dividends in cash.  Funds to be used for therepayment of debt, property acquisitions, development or other capitalexpenditures are expected to be provided primarily by proceeds from therefinancing of debt borrowings, our unsecured revolver and possibly the sale ofcommon shares.  The partnership in which we are a 90.0% partner is developing a242-unit apartment community that is expected to be completed during 2012.  Weare financing the construction costs through a construction loan, which thepartnership has already obtained.

  Cash flow provided byoperations increased during the three months ended March 31, 2011, compared to thethree months ended March 31, 2010, primarily due to an increase in property NOIas a result of the addition during 2010 of four new properties and thecompletion of a 60-unit expansion of one of our existing properties.  See thediscussion under results of operations for further information concerning thecontribution to our results by these five properties.

During the remainder of2011, we anticipate incurring an additional $8.2 million in capitalexpenditures.  This includes replacement of worn carpet and appliances, parkinglots and similar items in accordance with our current property expenditureplan, as well as commitments for revenue enhancing and non-recurringexpenditures.  These capital expenditures are expected to be funded with cashprovided by operating activities and borrowings on our unsecured revolver.

** **

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**RESULTS OF OPERATIONS**

***Comparison of the three months ended March31, 2011 to the three months ended March 31, 2010:***

****** Our SameCommunity portfolio represents operating properties that we have owned for allof the comparison periods.  For the three months ended March 31, 2011 and 2010,the Same Community portfolio consisted of 48 owned properties containing 12,108units.  Acquired properties represent four operating properties that weacquired during 2010, and the development property represents a 60-unitexpansion of a Virginia property.

The net loss for the threemonth comparison period increased $176,000.  The increase was primarily due tothe net of the following:  an increase in property revenue, an increase inproperty operating and maintenance expense and an increase in depreciation andamortization expense, all primarily due to the results provided by theacquisition and development properties.  Also, an increase in constructionrevenues and construction expenses, an increase in general and administrativeexpenses and a decline in interest expense had an effect on the results ofoperations.  See the following discussion for a detailed description of thechanges in these line items.

The following table reflects the amount and percentage change in lineitems that are relevant to the changes in overall operating performance:
|                                             |  | Increase when              |
|---------------------------------------------|--|----------------------------|
|                                             |  | comparing the three months |
|                                             |  | ended March 31, 2011       |
| *(Dollar amounts in  thousands)*            |  | to March 31, 2010          |
|                                             |  |                            |  |
| Property revenue                            |  |  $                    | 7,046  | 22.3% |
| Property operating and  maintenance expense |  | 2,416                 | 17.4% |
| Depreciation and  amortization              |  | 4,435                 | 51.5% |
| Construction and other  services:           |  |                            |  |
|      Revenue            |  | 3,569                 | 323.6% |
|      Expenses           |  | 3,608                 | 254.8% |
|                                             |  |                            |  |  |

 

PropertyNOI increased primarily due to the contributions by the acquiredproperties.  Property NOI for the Same Community properties increased primarilydue to increased revenues across the portfolio.

 

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The following table presents property NOI results by region:
|                            |  | Property NOI for the         |              |              |
|----------------------------|--|------------------------------|--------------|--------------|
|                            |  | Three Months Ended March 31, |              |              |
| *(In thousands)*           |  | 2011                         |              | 2010         |  | Increase |
| Same Community Properties: |  |                              |              |              |  |  |
| Midwest                    |  |  $                      | 10,643  |              |  $ | 10,090  |  |  $ | 553  |
| Mid-Atlantic               |  | 3,515                   |              | 3,370   |  | 145  |
| Southeast                  |  | 4,406                   |              | 4,262   |  | 144  |
| Total Same Community       |  | 18,564                  |              | 17,722  |  | 842  |
| Acquired Properties        |  | 3,681                   |              | -       |  | 3,681  |
| Development                |  | 107                     |              | -       |  | 107  |
| Total Property NOI         |  |  $                      | 22,352  |              |  $ | 17,722  |  |  $ | 4,630  |
|                            |  |                              |              |              |  |  |

 

*Property revenue.* Property revenue is impacted by a combination of rental rates, rent concessionsand occupancy levels, i.e., net collected rent per unit.  Physical occupancy atthe end of each period and net collected rent per unit are presented in thefollowing tables:
|                                  |  | Physical Occupancy |
|----------------------------------|--|--------------------|
|                                  |  | as of March 31,    |
|                                  |  | 2011               |  | 2010 |
| Same Community Properties:       |  |                    |  |  |
| Midwest                          |  | 96.5%              |  | 95.7% |
| Mid-Atlantic                     |  | 96.0%              |  | 96.2% |
| Southeast                        |  | 93.7%              |  | 93.9% |
| Total Same Community             |  | 95.8%              |  | 95.3% |
| Acquired/Development  Properties |  | 96.5%              |  | N/A |

 
|                                  |  | Average Monthly Net Collected |
|----------------------------------|--|-------------------------------|
|                                  |  | Rent Per Unit                 |
|                                  |  | for the Three Months          |
|                                  |  | Ended March 31,               |
|                                  |  | 2011                          |  | 2010 |
| Same Community Properties:       |  |                               |  |  |
| Midwest                          |  | $                             | 797  |  | $ | 771  |
| Mid-Atlantic                     |  | $                             | 1,172  |  | $ | 1,155  |
| Southeast                        |  | $                             | 895  |  | $ | 879  |
| Total/Same Community  Properties |  | $                             | 867  |  | $ | 844  |
| Acquired/Development  Properties |  | $                             | 1,278  |  | N/A  |

             

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The following tablepresents property revenue results:
|                            |  | Property Revenue for the     |              |              |
|----------------------------|--|------------------------------|--------------|--------------|
|                            |  | Three Months Ended March 31, |              |              |
| *(In thousands)*           |  | 2011                         |              | 2010         |  | Increase |
| Same Community Properties: |  |                              |              |              |  |  |
| Midwest                    |  |  $                      | 18,994  |              |  $ | 18,346  |  |  $ | 648  |
| Mid-Atlantic               |  | 5,289                   |              | 5,214   |  | 75  |
| Southeast                  |  | 8,258                   |              | 8,086   |  | 172  |
| Total Same Community       |  | 32,541                  |              | 31,646  |  | 895  |
| Acquired Properties        |  | 5,975                   |              | -       |  | 5,975  |
| Development                |  | 176                     |              | -       |  | 176  |
| Total Property Revenue     |  |  $                      | 38,692  |              |  $ | 31,646  |  |  $ | 7,046  |
|                            |  |                              |              |              |  |  |

 

The increase in property revenue was primarily due to increases in therevenue across the portfolio for the same community properties and theacquisition and development properties.

*Property operating and maintenance expenses.*  The propertyoperating and maintenance expenses increase was primarily due to theacquisition and development properties.    

*Depreciation and amortization. *The depreciation andamortization expense increase was primarily due to the acquisition anddevelopment properties.  

*General and administrative expense. *General and administrativeexpenses increased primarily due to increases in payroll expense, consultingfees and cost involved with potential property acquisitions that did not occur.

*Construction andother services*.  Construction revenue and related expenses are recorded onthe percentage of completion method.  The increase in both revenue and expenseswas primarily due to our recording activity for seven projects during thecurrent quarter compared to only three projects during the same quarter oneyear ago.

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**CONTINGENCIES**

 For a discussion of contingencies, see Note 9 of the Notes toConsolidated Financial Statements presented in Part I, Item 1 of this report onForm 10-Q.

**ITEM 3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 We are exposed tointerest rate changes associated with variable rate debt and the refinancingrisk on our fixed-rate debt.  Based on our variable rate debt outstanding at March31, 2011 and 2010, an interest rate change of 100 basis points would impactinterest expense approximately $1.8 million and $551,000 on an annual basis,respectively. We occasionally use derivative instruments to manage our exposureto interest rates.  See Note 1 of the Notes to Consolidated Financial Statementspresented in Part I, Item 1 of this report on Form 10-Q for additionalinformation regarding derivative instruments and "Item 7A Qualitative andQuantitative Disclosures About Market Risk" of our Annual Report on Form10-K for the year ended December 31, 2010, for a more complete discussion ofinterest rate sensitive assets and liabilities.

**ITEM 4.  CONTROLS AND PROCEDURES**

*DisclosureControls and Procedures.*  We have evaluated the design and operations ofour disclosure controls and procedures to determine they are effective inensuring that the disclosure of required information is timely made inaccordance with the Securities Exchange Act of 1934 ("Exchange Act")and the rules and forms of the Securities and Exchange Commission.  Thisevaluation was made under the supervision and with the participation ofmanagement, including our Chief Executive Officer ("CEO") and ChiefFinancial Officer ("CFO"), as of the end of the period covered bythis report on Form 10-Q.  The CEO and CFO have concluded, based on theirreview, that our disclosure controls and procedures, as defined in Exchange ActRules 13a-15(e) and 15d-15(e), are effective to ensure that informationrequired to be disclosed in reports that we file under the Exchange Act is (i) recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms, and (ii) accumulated andcommunicated to management, including the principal executive and principalfinancial officers, as appropriate, to allow timely decisions regardingdisclosure.

*Changes in Internal Control over Financial Reporting.*  There wereno changes in our internal control over financial reporting during the first quarterof 2011 that materially affected, or are reasonably likely to materiallyaffect, internal control over financial reporting.

 We believe thatbecause of its inherent limitations, internal control over financial reportingmay not always prevent or detect misstatements.  Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

** **

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**PART II.     OTHER INFORMATION**

**ITEM 1.       LEGAL PROCEEDINGS**

For informationrelated to legal proceedings, see Note 9 of the Notes to Consolidated FinancialStatements presented in Part I, Item 1 of this report on Form 10-Q.

**ITEM 1A.    RISKFACTORS**

See "RiskFactors" in Part I, Item 1A of our Annual Report on Form 10-K for the yearended December 31, 2010.

**ITEM 2.       UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**
| Issuer Purchases of Equity Securities for the Three  Months Ended March 31, 2011 |
|----------------------------------------------------------------------------------|
|                                                                                  |  |  |  |  |  |  |  |  |
|                                                                                  |  |  |  |  |  |  |  | Approximate Dollar |
|                                                                                  |  |  |  |  |  | Total Number of |  | Value of Shares |
|                                                                                  |  |  |  |  |  | Shares Purchased |  | That May Yet Be |
|                                                                                  |  | Total Number |  | Average |  | As Part of |  | Purchased Under the |
|                                                                                  |  | of Shares |  | Price Paid |  | Publicly Announced |  | Plans or Programs |
| Period                                                                           |  | Purchased |  | Per Share |  | Plans or Programs |  | (in thousands) |
| January 1 through                                                                |  |  |  |  |  |  |  |  |
| January  31                                                                      |  | -    |  |  $ | -    |  | -    |  |  $ | 26,288  |
| February 1 through                                                               |  |  |  |  |  |  |  |  |
| February  28                                                                     |  | 50,819  |  | 15.50  |  | -    |  | 26,288  |
| March 1 through                                                                  |  |  |  |  |  |  |  |  |
| March  31                                                                        |  | 4,349  |  | 16.01  |  | -    |  | 26,288  |
| Total                                                                            |  | 55,168  |  |  $ | 15.54  |  | -    |  |  |
|                                                                                  |  |   |  |   |  |   |  |  |

 

There is a total of $26.3million remaining on our Board of Director authorizations to repurchase ourcommon shares.  Additionally, we have a policy which allows employees to paytheir portion of the income taxes related to restricted share vesting bysurrendering a number of shares to us equal in value on the day of vesting tothe amount of taxes due up to the minimum statutory withholding amount.  All ofthe shares we purchased during the three months ended March 31, 2011 werepurchased under our restricted share income tax withholding policy.  

 

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**ITEM 6.            EXHIBITS**

** **

** **
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | **Filed herewith or**                      |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | **incorporated herein**                    |
| **Number** | **                                                        Title                                                          ** | **by reference**                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                       |
| 31         | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Exhibit 31 to Form 10-Q  filed herewith.   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                       |
| 31.1       | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Exhibit 31.1 to Form 10-Q  filed herewith. |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                       |
| 32         | Certification  of Chief Executive Officer and Chief Financial Officer Pursuant to Section  906 of the Sarbanes Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Exhibit 32 to Form 10-Q  filed herewith.   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                       |

 

                                                               

 

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**SIGNATURES**

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                                                                                             |   | ASSOCIATED ESTATES REALTY  CORPORATION                                   |
|--------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|
|                  |   |                        |
|                                      |   |              |
| May 3, 2011                                                                                      |   | /s/ Lou Fatica                                                           |
| (Date)                                                                                           |   | Lou Fatica, Vice President                                               |
|                                                                                             |   | Chief Financial Officer and  Treasurer                                   |

 

 

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