| **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 September 30, 2010**                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                   |
| **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 October 26, 2010 was 41,368,595 shares.                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |  |  |

 

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**ASSOCIATED ESTATESREALTY CORPORATION**

** **

**Index**

| **PART I – FINANCIAL INFORMATION** | **Page**                                                                                                                                                                                                                 |
|-----------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                    |                                                     | ** ** |
| ITEM 1                                  | Consolidated Financial Statements (Unaudited)                                                                                                                                                                            | ** ** |
|                                    |                                                                                                                      |   |
|                                    | Consolidated Balance  Sheets at September 30, 2010 and December 31, 2009                                                                                                                                                 | 3 |
|                                    |                                                                                                                      |   |
|                                    | Consolidated  Statements of Operations for the three and nine month                                                                                                                                                      |   |
|                                    |     periods ended September 30, 2010 and 2009                                                                                                                                                             | 4 |
|                                    |                                                                                                       |   |
|                                    | Consolidated  Statements of Cash Flows for the nine month periods                                                                                                                                                        |   |
|                                    |     ended September 30, 2010 and 2009                                                                                                                                                                     | 5 |
|                                    |                                                                                        |   |
|                                    | Notes to  Consolidated Financial Statements                                                                                                                                                                              | 6 |
|                                    |                                                                                             |   |
| ITEM 2                                  | Management's  Discussion and Analysis of Financial                                                                                                                                                                       |   |
|                                    |     Condition and Results of Operations                                                                                                                                                                   | 19 |
|                                    |                                                                         |   |
| ITEM 3                                  | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                                              | 28 |
|                                    |                                                                                   |   |
| ITEM 4                                  | Controls and Procedures                                                                                                                                                                                                  | 28 |
|                                    |                                      |   |
| **PART II – OTHER INFORMATION**    |                                                                                                                                                                                                                     |
| ** **                              | **                          **                                                         |   |
| ITEM 1                                  | Legal Proceedings                                                                                                                                                                                                        | 28 |
|                                    |                                                                                   |   |
| ITEM 1A                                 | Risk Factors                                                                                                                                                                                                             | 28 |
|                                    |                                                                              |   |
| ITEM 2                                  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                                             | 29 |
|                                    |                                                                                                                                                    |   |
| ITEM 6                                  | Exhibits                                                                                                                                                                                                                 | 30 |
|                                    |                                                                              |   |
| **SIGNATURES**                          | 33                                                                                                                                                                                                                       |

**

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

**ASSOCIATED ESTATES REALTY CORPORATIONCONSOLIDATED BALANCE SHEETS(UNAUDITED)**
| *(In thousands, except  share amounts)*                                                  | September 30,   |               | December 31,  |
|------------------------------------------------------------------------------------------|-----------------|---------------|---------------|
| **ASSETS**                                                                               | 2010            |               | 2009          |
| Real estate assets                                                                       |                 |               |               |
| Land                                                                                     |  $         | 149,048  |               |  $ | 107,815  |
| Buildings  and improvements                                                              | 917,924    |               | 798,321  |
| Furniture  and fixtures                                                                  | 32,342     |               | 29,710   |
| Construction  in progress                                                                | 476        |               | 4,797    |
| Gross  real estate                                                                       | 1,099,790  |               | 940,643  |
| Less:   accumulated depreciation                                                    | (326,788)       |               | (302,108)     |
| Real  estate, net                                                                        | 773,002    |               | 638,535  |
| Cash and cash equivalents                                                                | 3,294      |               | 3,600    |
| Restricted cash                                                                          | 8,648      |               | 7,093    |
| Accounts and notes  receivable, net                                                      |                 |               |               |
| Rents                                                                                    | 1,179      |               | 1,115    |
| Affiliates                                                                               | 39         |               | 135      |
| Other                                                                                    | 6,883      |               | 1,910    |
| Goodwill                                                                                 | 1,725      |               | 1,725    |
| Other assets, net                                                                        | 13,519     |               | 8,392    |
| **Total assets**                                                                         |  $         | 808,289  |               |  $ | 662,505  |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                                 |                 |               |               |
| Mortgage notes payable                                                                   |  $         | 463,963  |               |  $ | 487,556  |
| Unsecured revolving credit  facility                                                     | 96,200     |               | 12,500   |
| Unsecured debt                                                                           | -          |               | 25,780   |
| Total  debt                                                                              | 560,163    |               | 525,836  |
| Accounts payable, accrued  expenses and other liabilities                                | 28,475     |               | 27,307   |
| Dividends payable                                                                        | 5,611      |               | 2,849    |
| Resident security deposits                                                               | 3,078      |               | 2,956    |
| Accrued interest                                                                         | 2,298      |               | 2,288    |
| **Total liabilities**                                                                    | 599,625    |               | 561,236  |
| Noncontrolling redeemable  interest                                                      | 1,734      |               | 1,829    |
| Shareholders' equity                                                                     |                 |               |               |
| Preferred  shares, without par value; 9,000,000 shares authorized;                       |                 |               |               |
| 8.70%  Class B Series II cumulative redeemable, $250 per share                           |                 |               |               |
| liquidation  preference, 232,000 issued and 193,050 outstanding                          |                 |               |               |
| at  December 31, 2009                                                                    | -          |               | 48,263   |
| Common  shares, without par value, $.10 stated value; 91,000,000                         |                 |               |               |
| authorized,  37,370,763 issued and 32,169,761 outstanding at                             |                 |               |               |
| September  30, 2010 and 41,000,000 authorized, 22,995,763 issued                         |                 |               |               |
| and  16,675,826 outstanding at December 31, 2009                                         | 3,737      |               | 2,300    |
| Paid-in  capital                                                                         | 455,745    |               | 283,090  |
| Accumulated  distributions in excess of accumulated net income                           | (194,980)       |               | (168,822)     |
| Accumulated  other comprehensive loss                                                    | (130)           |               | (1,420)       |
| Less:   Treasury shares, at cost, 5,201,002 and 6,319,937 shares                    |                 |               |               |
| at  September 30, 2010 and December 31, 2009, respectively                               | (58,482)        |               | (63,971)      |
| **Total shareholders' equity attributable to AERC**                                      | 205,890    |               | 99,440   |
| Noncontrolling  interest                                                                 | 1,040      |               | -        |
| **Total equity**                                                                         | 206,930    |               | 99,440   |
| **Total liabilities and equity**                                                         |  $         | 808,289  |               |  $ | 662,505  |
|                                                                                          |                 |               |               |
| 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 | Nine Months Ended |
|------------------------------------------------------------------------------------------|--------------------|-------------------|
|                                                                                          | September 30,      | September 30,     |
| *(In thousands, except per  share amounts)*                                              | 2010               |                   | 2009 |  | 2010 |  | 2009 |
| **Revenue**                                                                              |                    |                   |  |  |  |  |  |
| Property  revenue                                                                        |  $            | 34,356       |  |  $ | 32,255  |  |  $ | 98,963  |  |  $ | 96,217  |
| Management  and service company revenue:                                                 |                    |                   |  |  |  |  |  |
| Fees,  reimbursements and other                                                          | 217           |                   | 232  |  | 715  |  | 1,057  |
| Construction  and other services                                                         | 5,717         |                   | 379  |  | 8,448  |  | 730  |
| Total  revenue                                                                           | 40,290        |                   | 32,866  |  | 108,126  |  | 98,004  |
| **Expenses**                                                                             |                    |                   |  |  |  |  |  |
| Property  operating and maintenance                                                      | 14,934        |                   | 13,999  |  | 43,120  |  | 41,566  |
| Depreciation  and amortization                                                           | 10,126        |                   | 8,502  |  | 27,716  |  | 26,297  |
| Direct  property management and service company expense                                  | 192           |                   | 210  |  | 602  |  | 918  |
| Construction  and other services                                                         | 5,384         |                   | 465  |  | 8,685  |  | 999  |
| General  and administrative                                                              | 3,560         |                   | 3,831  |  | 10,957  |  | 10,136  |
| Costs  associated with acquisitions                                                      | 368           |                   | -  |  | 429  |  | -  |
| Total  expenses                                                                          | 34,564        |                   | 27,007  |  | 91,509  |  | 79,916  |
| Operating income                                                                         | 5,726         |                   | 5,859  |  | 16,617  |  | 18,088  |
| Interest income                                                                          | 6             |                   | 6  |  | 27  |  | 41  |
| Interest expense                                                                         | (7,516)            |                   | (8,665) |  | (23,882) |  | (25,586) |
| (Loss) income before gain on  insurance recoveries                                       |                    |                   |  |  |  |  |  |
| and  (loss) income from discontinued operations                                          | (1,784)            |                   | (2,800) |  | (7,238) |  | (7,457) |
| Gain  on insurance recoveries                                                            | -             |                   | -  |  | -  |  | 544  |
| (Loss) income from  continuing operations                                                | (1,784)            |                   | (2,800) |  | (7,238) |  | (6,913) |
| Income from discontinued  operations:                                                    |                    |                   |  |  |  |  |  |
| Operating  income                                                                        | -             |                   | -  |  | -  |  | 568  |
| (Loss)  gain on disposition of properties                                                | -             |                   | (2) |  | -  |  | 15,411  |
| (Loss) income from  discontinued operations                                              | -             |                   | (2) |  | -  |  | 15,979  |
| **Net (loss) income**                                                                    | (1,784)            |                   | (2,802) |  | (7,238) |  | 9,066  |
| Net  income attributable to noncontrolling redeemable interest                           | (13)               |                   | (14) |  | (39) |  | (40) |
| **Net (loss) income  attributable to AERC**                                              | (1,797)            |                   | (2,816) |  | (7,277) |  | 9,026  |
| Preferred share dividends                                                                | -             |                   | (1,049) |  | (2,030) |  | (3,149) |
| Preferred share redemption  costs                                                        | -             |                   | -  |  | (993) |  | -  |
| Allocation to participating  securities                                                  | -             |                   | -  |  | -  |  | (457) |
| **Net (loss) income  applicable to common shares**                                       |  $            | (1,797)           |  |  $ | (3,865) |  |  $ | (10,300) |  |  $ | 5,420  |
|                                                                                          |                    |                   |  |  |  |  |  |
| **Earnings per common share  - basic and diluted:**                                      |                    |                   |  |  |  |  |  |
| (Loss)  income from continuing operations applicable to common shares                    |  $            | (0.06)            |  |  $ | (0.23) |  |  $ | (0.38) |  |  $ | (0.61) |
| Income  from discontinued operations                                                     | -             |                   | -    |  | -    |  | 0.94  |
| Net  (loss) income applicable to common shares                                           |  $            | (0.06)            |  |  $ | (0.23) |  |  $ | (0.38) |  |  $ | 0.33  |
|                                                                                          |                    |                   |  |  |  |  |  |
| **Weighted average number  of common shares**                                            |                    |                   |  |  |  |  |  |
| **outstanding - basic and diluted**                                                      | 31,906        |                   | 16,539  |  | 26,846  |  | 16,500  |
|                                                                                          |                    |                   |  |  |  |  |  |
| The accompanying notes are an integral part of these  consolidated financial statements. |

****

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**ASSOCIATEDESTATES REALTY CORPORATIONCONSOLIDATED STATEMENTS OF CASHFLOWS(UNAUDITED)**
|                                                                                          | Nine Months Ended |
|------------------------------------------------------------------------------------------|-------------------|
|                                                                                          | September 30,     |
| *(In thousands)*                                                                         | 2010              |  | 2009 |
| **Cash flow from  operations:**                                                          |                   |  |  |
| Net  (loss) income                                                                       |  $           | (7,238) |  |  $ | 9,066  |
| Adjustments  to reconcile net (loss) income to net cash provided by operations:          |                   |  |  |
| Depreciation  and amortization (including discontinued operations)                       | 27,716       |  | 26,771  |
| Loss  on fixed asset replacements write-off                                              | 39           |  | 16  |
| Gain  on disposition of properties                                                       | -            |  | (15,411) |
| Gain  on insurance recoveries                                                            | -            |  | (544) |
| Amortization  of deferred financing costs and other                                      | 1,003        |  | 925  |
| Write-off  of unamortized debt procurement costs                                         | 727          |  | -  |
| Share-based  compensation                                                                | 2,153        |  | 1,479  |
| Net  change in assets and liabilities:                                                   |                   |  |  |
| Accounts  and notes receivable                                                           | (5,389)           |  | 1,108  |
| Accounts  payable and accrued expenses                                                   | 4,666        |  | 2,038  |
| Other  operating assets and liabilities                                                  | (1,725)           |  | (1,915) |
| Restricted  cash                                                                         | (1,351)           |  | (656) |
| Total  adjustments                                                                       | 27,839       |  | 13,811  |
| Net  cash flow provided by operations                                                    | 20,601       |  | 22,877  |
| **Cash flow from investing  activities:**                                                |                   |  |  |
| Recurring  fixed asset additions                                                         | (6,672)           |  | (6,240) |
| Revenue  enhancing/non-recurring fixed asset additions                                   | (5,716)           |  | (3,065) |
| Acquisition/development  fixed asset additions                                           | (154,533)         |  | (1,939) |
| Net  proceeds from disposition of operating properties                                   | -            |  | 32,714  |
| Other  investing activity                                                                | (594)             |  | -  |
| Net  cash flow (used for) provided by investing activities                               | (167,515)         |  | 21,470  |
| **Cash flow from financing  activities:**                                                |                   |  |  |
| Principal  amortization payments on mortgage notes payable                               | (2,325)           |  | (2,186) |
| Principal  repayments of mortgage notes payable                                          | (57,268)          |  | (72,096) |
| Payment  of debt procurement costs                                                       | (457)             |  | (686) |
| Proceeds  from mortgage notes obtained                                                   | 36,000       |  | 52,450  |
| Revolving  credit facility borrowings                                                    | 189,650      |  | 131,900  |
| Revolving  credit facility repayments                                                    | (105,950)         |  | (141,400) |
| Principal  repayments of unsecured trust preferred securities                            | (25,780)          |  | -  |
| Common  share dividends paid                                                             | (11,921)          |  | (8,452) |
| Preferred  share dividends paid                                                          | (2,029)           |  | (3,149) |
| Operating  partnership distributions paid                                                | (39)              |  | (40) |
| Purchase  of operating partnership units                                                 | (59)              |  | -  |
| Exercise  of stock options                                                               | 5,405        |  | -  |
| Issuance  of common shares                                                               | 169,199      |  | -  |
| Purchase  of treasury shares                                                             | (595)             |  | (178) |
| Redemption  of preferred shares                                                          | (48,263)          |  | -  |
| Noncontrolling interest investment in partnership                                        | 1,040        |  | -  |
| Net  cash flow provided by (used for) financing activities                               | 146,608      |  | (43,837) |
| (Decrease) increase in cash  and cash equivalents                                        | (306)             |  | 510  |
| Cash and cash equivalents,  beginning of period                                          | 3,600        |  | 3,551  |
| **Cash and cash  equivalents, end of period**                                            |  $           | 3,294  |  |  $ | 4,061  |
|                                                                                          |                   |  |  |
| Supplemental disclosure of  cash flow information:                                       |                   |  |  |
| Dividends  declared but not paid                                                         |  $           | 5,611  |  |  $ | 2,995  |
| Net  change in accounts payable related to fixed asset additions                         | 505          |  | 739  |
| Reclassification  of deferred directors' compensation                                    | 2,233        |  | -  |
|                                                                                          |                   |  |  |
| 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 EstatesRealty Corporation and its 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.

As of September 30, 2010, our operating property portfolio consisted of: (i)50 apartment communities containing 12,976 units in seven states that arewholly owned, either directly or indirectly through subsidiaries; (ii) oneapartment community that we manage for a third party owner consisting of 258units; and (iii) and a commercial property containing approximately 145,000square feet that we asset manage for a government sponsored pension fund. Effective November 1, 2010, we no longer manage the 258-unit apartmentcommunity or the commercial property.

**Basis of Presentation**

 The accompanying unaudited consolidated financial statements have beenprepared by management in accordance with accounting principles generallyaccepted in the United States of America ("GAAP") for interimfinancial information and applicable rules and regulations of the Securitiesand Exchange Commission.  Accordingly, they do not include all of theinformation and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal andrecurring adjustments considered necessary for a fair statement, have beenincluded.  The reported results of operations are not necessarily indicative ofthe results that may be expected for the full year.  These financial statementsshould be read in conjunction with the audited financial statements andaccompanying notes in our Annual Report on Form 10-K for the year endedDecember 31, 2009.  We have evaluated all subsequent events through November 2,2010, which is the date the financial statements were issued.

**SegmentReporting**

 All of our owned properties are multifamily communities that havesimilar economic characteristics.  Management evaluates the performance of our propertieson an individual basis.  Our multifamily properties provided approximately 91.5%of our consolidated revenue for the nine months ended September 30, 2010; wehave only one reportable segment, which is multifamily properties.

**Share-BasedCompensation**

 During the three and nine months ended September 30, 2010, we recognizedtotal share-based compensation cost of $654,000 and $2.2 million, respectively,in "General and administrative expense" in the Consolidated Statements ofOperations.  During the three and nine months ended September 30, 2009, werecognized total share based compensation cost of $432,000 and $1.5 million,respectively, in "General and administrative expense." 

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*Stock Options.*  During the nine months ended September 30, 2010,there were no stock options awarded and 613,724 options exercised.  During the ninemonths ended September 30, 2009, there were 58,000 stock options awarded and nostock options were exercised.  We use the Black-Scholes option pricing model toestimate the fair value of share-based awards.  The weighted averageBlack-Scholes assumptions and fair value for options awarded during the ninemonths ended September 30, 2010, were as follows:
| Expected volatility                  |  | 36.5%                                                                                    |
|--------------------------------------|--|------------------------------------------------------------------------------------------|
| Risk-free interest rate              |  | 2.0%                                                                                     |
| Expected life of options (in  years) |  |                7.2 |
| Dividend yield                       |  | 12.2%                                                                                    |
| Grant-date fair value                |  | $                                                                                        | 0.44  |

 

 The expected volatility was based upon the historical volatility of ourweekly share closing prices over a period equal to the expected life of theoptions granted.  The risk-free interest rate used was the yield from U.S.Treasury bonds on the date of grant with a maturity approximating the expectedlife of the options.  The expected life of the options was derived using ourhistorical experience for similar awards.  The dividend yield was derived usingour annual dividend rate as a percentage of the price of our shares on the dateof grant.

*Restricted Shares*.  The following table represents restrictedshare activity for the nine months ended September 30, 2010:
|                                   |               |  | Weighted   |
|-----------------------------------|---------------|--|------------|
|                                   |               |  | Average    |
|                                   | Number of     |  | Grant-Date |
|                                   | Shares        |  | Fair Value |
|                                   |               |  |            |
| Nonvested at beginning of  period | 184,339  |  |  $    | 7.15  |
| Granted                           | 557,975  |  |  $    | 7.23  |
| Vested                            | 146,555  |  |  $    | 8.02  |
| Forfeited                         | 3,866    |  |  $    | 8.57  |
| Nonvested at end of period        | 591,893  |  |  $    | 6.84  |

 

At September 30, 2010,there was $2.8 million of unrecognized compensation cost related to non-vestedrestricted share awards that we expect to recognize over a weighted averageperiod of 2.1 years.

Effective January 1, 2010,our Directors' Deferred Compensation Plan will be paid with common sharesinstead of cash (see Note 11 for additional information regarding the Directors'Deferred Compensation Plan).

 A portion of therestricted shares granted during 2010 were awards in which the number of sharesthat will ultimately vest are subject to satisfaction of certain market conditions,which include total shareholder return on an absolute basis and on a relativebasis against a peer group consisting of other multifamily apartmentcompanies.  The total estimated grant-date fair value of these awards was $1.1million.  We used the Monte Carlo method to estimate the fair value of theseawards.  The Monte Carlo method, which is similar to the binomial analysis,evaluates the award for changing stock prices over the term of vesting and usesrandom situations that are averaged based on past stock characteristics.  Therewere one million simulation paths used to estimate the fair value of theseawards.  The risk-free interest rate used was based on a yield curve derivedfrom U.S. Treasury zero-coupon bonds on the date of grant with a maturity equalto the market condition performance periods.  The expected life used was themarket condition performance period.  The expected volatility used for AERC wasbased upon the historical volatility of our daily share closing prices over aperiod equal to the market condition performance periods.  The expectedvolatility used for the peer group was a 50%/50% blend of historical volatilityand implied volatility.  Implied volatility was calculated using each company'sstock call option contracts. 

 

| 7 |
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 The followingrepresents the assumption ranges used in the Monte Carlo method during 2010:
| Expected volatility - AERC          |  | 39.5% to 63.1% |
|-------------------------------------|--|----------------|
| Expected volatility - peer  group   |  | 29.0% to 65.4% |
| Risk-free interest rate             |  | 0.1% to 1.5%   |
| Expected life (performance  period) |  | 3 years        |

** **

**DerivativeInstruments and Hedging 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.  

****Interest Rate Hedge Activity:  ****During 2007, we executedtwo interest rate swaps to hedge the cash flows of two existing variable rate loans. In January 2010, we prepaid one of these loans but we did not terminate thecorresponding interest rate swap and as a result reclassified the fair value ofthe related interest rate swap of $777,000 from other comprehensive income toearnings during the three months ended March 31, 2010.  This derivative maturedin June 2010, and the change in fair value was recorded in earnings.  No hedgeineffectiveness on the remaining cash flow hedge was recognized during the ninemonths ended September 30, 2010.  Amounts reported in "Accumulated othercomprehensive loss" related to the cash flow hedge will be reclassified to"Interest expense" as interest payments are made on the related variable-rateloan.  During the next twelve months, we estimate that approximately $130,000will be reclassified from "Accumulated other comprehensive loss" asan increase to "Interest expense."  The following table presents the notionalamounts of the swaps as of September 30, 2010:
| *(Dollar amount in  thousands)* |  | Number of   |  | Notional |
|---------------------------------|--|-------------|--|----------|
| Interest Rate Derivative        |  | Instruments |  | Amounts  |
|                                 |  |             |  |          |
| Interest rate swaps             |  | 1      |  | $        | 21,000  |

 

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 The following tablepresents the fair value of our derivative financial instruments as well astheir classification on the Consolidated Balance Sheets (see Note 9 foradditional information regarding the fair value of these derivativeinstruments):
| Fair Value of Derivative Instruments |
|--------------------------------------|
|                                      |  |  |  |  |  |  |  |  |
|                                      |  | Liability Derivatives |
|                                      |  | As of September 30, 2010 |  | As of December 31, 2009 |
| *(In thousands)*                     |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value |
| Derivatives designated as            |  |  |  |  |  |  |  |  |
| hedging instruments:                 |  |  |  |  |  |  |  |  |
|                                      |  |  |  |  |  |  |  |  |
| Interest rate swaps                  |  |  Accounts payable, accrued |  |  |  |  Accounts payable, accrued |  |  |
|                                      |  |  expenses  and other liabilities |  |  $ | 130  |  |  expenses  and other liabilities |  | $ | 1,420  |
|                                      |  |  |  |  |  |  |  |  |  |  |

 

The following tables present the effect of ourderivative financial instruments on the Consolidated Statements of Operations (seeNote 6 for additional information regarding the effect of these derivativeinstruments on total comprehensive income):
| The Effect of Derivative Instruments on the  Consolidated Statements of Operations |
|------------------------------------------------------------------------------------|
|                                                                                    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|                                                                                    |  |  |  |  |  |  |  |  |  |  |  |  |  | Amount of Gain or |
|                                                                                    |  |  |  |  |  |  |  | Amount of Gain or |  |  |  | (Loss) Recognized in |
|                                                                                    |  | Amount of Gain or |  |  |  | (Loss) Reclassified |  |  |  | Income on Derivative |
|                                                                                    |  | (Loss) Recognized |  |  |  |  from Accumulated |  | Location of Gain or |  | (Ineffective Portion and |
|                                                                                    |  | in OCI on Derivative |  |  |  | OCI into Income |  | (Loss) Recognized |  | Amount Excluded from |
| *(In thousands)*                                                                   |  | (Effective Portion) |  | Location of Gain |  | (Effective Portion) |  | in Income on |  | Effectiveness Testing) |
|                                                                                    |  | Three |  | Nine |  | or (Loss) |  | Three |  | Nine |  | Derivative (Ineffective |  | Three |  | Nine |
|                                                                                    |  | Months |  | Months |  | Reclassified from |  | Months |  | Months |  | Portion and |  | Months |  | Months |
| Derivatives in Cash                                                                |  | Ended |  | Ended |  | Accumulated OCI |  | Ended |  | Ended |  | Amount Excluded |  | Ended |  | Ended |
| Flow Hedging                                                                       |  | September 30, |  | September 30, |  | into Income |  | September 30, |  | September 30, |  | from Effectiveness |  | September 30, |  | September 30, |
| Relationships                                                                      |  | 2010 |  | 2010 |  | (Effective Portion) |  | 2010 |  | 2010 |  | Testing) |  | 2010 |  | 2010 |
|                                                                                    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest rate swaps                                                                |  |  $ | (20) |  |  $ | (59) |  |  Interest expense |  |  $ | (187) |  |  $ | (571) |  |  Interest expense |  |  $                     - |  |  $ | (777) |
|                                                                                    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| The Effect of Derivative Instruments on the  Consolidated Statements of Operations |
|------------------------------------------------------------------------------------|
|                                                                                    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|                                                                                    |  |  |  |  |  |  |  |  |  |  |  |  |  | Amount of Gain or |
|                                                                                    |  |  |  |  |  |  |  | Amount of Gain or |  |  |  | (Loss) Recognized in |
|                                                                                    |  | Amount of Gain or |  |  |  | (Loss) Reclassified |  |  |  | Income on Derivative |
|                                                                                    |  | (Loss) Recognized |  |  |  |  from Accumulated |  | Location of Gain or |  | (Ineffective Portion and |
|                                                                                    |  | in OCI on Derivative |  |  |  | OCI into Income |  | (Loss) Recognized |  | Amount Excluded from |
| *(In thousands)*                                                                   |  | (Effective Portion) |  | Location of Gain |  | (Effective Portion) |  | in Income on |  | Effectiveness Testing) |
|                                                                                    |  | Three |  | Nine |  | or (Loss) |  | Three |  | Nine |  | Derivative (Ineffective |  | Three |  | Nine |
|                                                                                    |  | Months |  | Months |  | Reclassified from |  | Months |  | Months |  | Portion and |  | Months |  | Months |
| Derivatives in Cash                                                                |  | Ended |  | Ended |  | Accumulated OCI |  | Ended |  | Ended |  | Amount Excluded |  | Ended |  | Ended |
| Flow Hedging                                                                       |  | September 30, |  | September 30, |  | into Income |  | September 30, |  | September 30, |  | from Effectiveness |  | September 30, |  | September 30, |
| Relationships                                                                      |  | 2009 |  | 2009 |  | (Effective Portion) |  | 2009 |  | 2009 |  | Testing) |  | 2009 |  | 2009 |
|                                                                                    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest rate swaps                                                                |  |  $ | (440) |  |  $ | (655) |  |  Interest expense |  |  $ | 625  |  |  $ | 1,589  |  |  Interest expense |  |  $ | -  |  |  $ | -  |
|                                                                                    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Wehave an agreement with our derivative counterparty that contains a provisionwhere if we either default or are capable of being declared in default on anyof our indebtedness, then such counterparty can declare us to be in default on ourderivative obligations. 

Wehave an agreement with a derivative counterparty that incorporates the loancovenant provisions of our indebtedness with a lender affiliate of thederivative counterparty. Failure to comply with the loan covenant provisionswould result in our being in default on any derivative instrument obligationscovered by the agreement.

 As ofSeptember 30, 2010, the fair value of derivatives in a net liability position,which includes accrued interest but excludes any adjustment for nonperformancerisk, related to these agreements was $193,000. As of September 30, 2010, wehave not posted any collateral related to these agreements. If we had breachedany of these provisions at September 30, 2010, we would have been required tosettle our obligations under the agreements at their termination value of $193,000.

**Classification of Fixed Asset Additions**

 We define recurring fixedasset additions to a property to be capital expenditures made to replace wornout assets to maintain the property's value.  Revenue enhancing/non-recurringfixed asset additions are defined as capital expenditures that increase thevalue 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.

**2.         ACQUISITION, DEVELOPMENT AND DISPOSITIONACTIVITY**

**Acquisition Activity**

            On September 15, 2010, weacquired The Ashborough, a 504-unit apartment community located in Ashburn,Virginia for a purchase price of approximately $90 million.  We used cash onhand and borrowings on the Company's unsecured line of credit to fund theacquisition.  We determined that the fair value of the property was the same asthe purchase price.

On May 18, 2010, weacquired Riverside Station, a 304-unit apartment community located inWoodbridge, Virginia for a purchase price of approximately $54 million.  Wepaid cash for this acquisition, a portion of which was funded with proceedsfrom our May 12, 2010 equity offering.  We determined that the fair value ofthe property was the same as the purchase price.  See Note 12 for additionalinformation related to acquisitions.

Forthe acquisitions mentioned above during the three months and nine months ended September30, 2010, we recorded property revenue of $1.7 million and $2.3 millionrespectively and reported net (loss) income of $(51,000) and $13,000, respectively.In connection with these acquisitions for the three and nine months endedSeptember 30, 2010, we incurred $368,000 and $429,000 of costs, which areincluded in "Costs associated with acquisitions” in the ConsolidatedStatements of Operations.

The followingpro forma financial information is presented as if the 2010 acquisition hadoccurred at the beginning of each period presented.  This information ispresented for informational purposes only and is not necessarily indicative ofwhat the Company’s actual results of operations would have been had theacquisition occurred at such times:
|                                                                            |  | Three Months Ended |              | Nine Months Ended |
|----------------------------------------------------------------------------|--|--------------------|--------------|-------------------|
|                                                                            |  | September 30,      |              | September 30,     |
| *(Unaudited; in thousands,  except per share data)*                        |  | 2010               |              | 2009              |  | 2010 |  | 2009 |
|                                                                            |  |                    |              |                   |  |  |  |  |
| Pro forma revenue                                                          |  |  $            | 41,840  |                   |  $ | 35,995  |  |  $ | 115,482  |  |  $ | 107,491  |
| Pro forma net (loss) income  applicable to common shares                   |  | (1,909)            |              | (4,144)           |  | (12,098) |  | 3,109  |
|                                                                            |  |                    |              |                   |  |  |  |  |
| Earnings per common share -  basic and diluted:                            |  |                    |              |                   |  |  |  |  |
|     Proforma net (loss)  income applicable to common shares |  |  $            | (0.06)       |                   |  $ | (0.25) |  |  $ | (0.45) |  |  $ | 0.19  |

 

 

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 The purchase price allocations for the operating properties acquired during2010 were as follows:
| *(in  thousands)*                                            |   | 2010          |
|--------------------------------------------------------------|--------|---------------|
| Land                                                         |   |  $       | 33,815  |
| Buildings and improvements                                   |   | 104,594  |
| Furniture and fixtures                                       |   | 1,491    |
| Existing leases and tenant  relationships (Other Assets) (1) |   | 4,950    |
|                                                         |   |          |
|                                                         |   |  $       | 144,850  |

 
|  (1) | See Note 4 for additional  information related to intangible assets identified as existing leases and  tenant relationships. |
|-----------|------------------------------------------------------------------------------------------------------------------------------|

 

**DevelopmentActivity**

 During the quarter ended June 30, 2010, we completed a 60-unit expansionof the existing 240-unit River Forest apartment community located in theRichmond, Virginia metropolitan market area.  Total cost of development was approximately$6.8 million, which included $311,000 of capitalized interest.  Also seediscussion under “Investment in Partnership” in Note 5 for additionaldevelopment activity.

**ConstructionActivity**

 Our subsidiary, Merit Enterprises, Inc., (“Merit”) is engaged as ageneral contractor and construction manager that acts as our in-houseconstruction division and also provides general contracting and constructionmanagement services to third parties.  Merit concentrates its efforts onrehabilitation and ground-up construction projects.  We account forconstruction contracts using the percentage-of-completion method.  We computethe percentage of completion for each project as the ratio of costs incurred(excluding costs that do not represent progress as of the end of the reportingperiod, such as certain material purchases) to total estimated costs based onthe most recent information.  This percentage is applied to the revenueexpected to be received by each project.  Any changes in estimates are recognizedin the period in which they are known on a prospective basis.  We recognized $5.7million and $8.4 million in revenue and $5.0 million and $7.5 million in expenseunder this method during the three and nine months ended September 30, 2010,respectively.  The remaining costs included in construction and other servicesexpenses include overhead costs, such as payroll and other fixed costs relatedto Merit. The total costs incurred in excess of amounts recognized as expense areincluded in "Other assets, net," and totaled $327,000 and $72,000 at September30, 2010 and December 31, 2009, respectively.  Accounts receivable related toconstruction activity are included in “Other accounts and notes receivable,net” and were $5.6 million at September 30, 2010 and immaterial at December 31,2009.  Funds received on uncompleted contracts in excess of revenue recognized,if any, are included in "Accounts payable, accrued expenses and otherliabilities," and were immaterial at September 30, 2010 and December 31,2009.

**DispositionActivity**

 We report the results of operations and gain/loss related to the sale ofreal estate assets as discontinued operations.  Real estate assets that areclassified as held for sale are also reported as discontinued operations.  Weclassify properties as held for sale when all significant contingenciessurrounding the closing have been resolved.  In most transactions, thesecontingencies are not satisfied until the actual closing of the transaction. Interest expense included in discontinued operations is limited to interest onmortgage debt specifically associated with properties sold or classified as heldfor sale.  

 

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  "Income from discontinued operations" in the accompanyingConsolidated Statements of Operations for the three and nine months ended September30, 2010 and 2009, includes the operating results for the properties sold in 2009,as well as the gains recognized on properties sold during each reportingperiod.  The following table summarizes "Income from discontinuedoperations:"
|                                           |  | Three Months Ended                                                                                                   |                 | Nine Months Ended                                                                                                    |
|-------------------------------------------|--|----------------------------------------------------------------------------------------------------------------------|----------------------|----------------------------------------------------------------------------------------------------------------------|
|                                           |  | September 30,                                                                                                        |                      | September 30,                                                                                                        |
| *(In thousands)*                          |  | 2010                                                                                                                 |                      | 2009                                                                                                                 |   | 2010 |  | 2009 |
| **REVENUE**                               |  |                                                                                                                      |                      |                                                                                                                      |  |  |  |  |
| Property revenue                          |  |  $                                                                                                              | -     |                                                                                                                      |  $ | -     |  |  $ | -     |  |  $ | 2,021  |
|                                           |  |                                                                                                                      |                      |                                                                                                                      |  |  |  |  |
| **EXPENSES**                              |  |                                                                                                                      |                      |                                                                                                                      |  |  |  |  |
| Property operating and  maintenance       |  |                     - |                      |                     - |  |                     - |  | 948  |
| Depreciation and  amortization            |  |                     - |                      |                     - |  |                     - |  | 474  |
| Total  expenses                           |  |                     - |                      |                     - |  |                     - |  | 1,422  |
| Operating income                          |  |                     - |                      |                     - |  |                     - |  | 599  |
| Interest expense                          |  |                     - |                      |                     - |  |                     - |  | (31) |
| (Loss) gain on disposition  of properties |  |                     - |                      | (2)                                                                                                   |  |                     - |  | 15,411  |
| **Income from discontinued  operations**  |  |  $                                                                                                              | -     |                                                                                                                      |  $ | (2)    |  |  $ | -     |  |  $ | 15,979  |

** **

**3.         DEBT**

 The following table identifies ourtotal debt outstanding and weighted average interest rates:
|                                      | September 30, 2010 |               | December 31, 2009                                                                                                                                                                            |
|--------------------------------------|--------------------|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                      | Balance            |               | Weighted Average                                                                                                                                                                             |  | Balance |  | Weighted Average |
| *(Dollar amounts in  thousands)*     | Outstanding        |               | Interest Rate                                                                                                                                                                                |  | Outstanding |  | Interest Rate |
|                                      |                    |               |                                                                                                                                                                                              |  |  |  |  |
| **FIXED RATE DEBT**                  |                    |               |                                                                                                                                                                                              |  |  |  |  |
| Mortgages payable - CMBS             |  $            | 98,717   |                                                                                                                                                                                              | 7.7% |  |  $ | 115,464  |  | 7.7% |
| Mortgages payable - other (1)        | 330,800       |               | 5.7%                                                                                                                                                                                         |  | 337,241  |  | 5.8% |
| Unsecured borrowings                 | -             |               |                                 - |  | 25,780  |  | 7.9% |
| **Total  fixed rate debt**           | 429,517       |               | 6.2%                                                                                                                                                                                         |  | 478,485  |  | 6.4% |
|                                      |                    |               |                                                                                                                                                                                              |  |  |  |  |
| **VARIABLE RATE DEBT**               |                    |               |                                                                                                                                                                                              |  |  |  |  |
| Mortgages payable                    | 34,446        |               | 4.7%                                                                                                                                                                                         |  | 34,851  |  | 4.7% |
| Unsecured revolving credit  facility | 96,200        |               | 1.8%                                                                                                                                                                                         |  | 12,500  |  | 2.6% |
| **Total  variable rate debt**        | 130,646       |               | 2.6%                                                                                                                                                                                         |  | 47,351  |  | 4.1% |
| **Total  debt**                      |  $            | 560,163  |                                                                                                                                                                                              | 5.4% |  |  $ | 525,836  |  | 6.2% |

 
| (1) | Includes $21.0 million of  variable rate debt swapped to fixed as of September 30, 2010 and $63.0  million of variable rate debt swapped to fixed as of December 31, 2009. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

** **

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**Mortgage Notes Payable**

 The following table provides information on mortgage loans repaid andobtained during 2010:
| *(Dollar amounts in  thousands)* |  | Loans Repaid |              |                     | Loans Obtained |
|----------------------------------|--|--------------|--------------|---------------------|----------------|
| Property                         |  | Amount       |              |  Interest Rate |                |  | Amount |  | Rate |  | Maturity |
|                                  |  |              |              |                     |                |  |  |  |  |  |  |
| Idlewylde                        |  |  $      | 42,000  |                     | 5.9%           |  |  |  $ | -  |  | N/A |  | N/A |
| Sterling Park                    |  | 2,910   |              | 7.9%                |                |  | -  |  | N/A |  | N/A |
| Kensington Grove                 |  | 3,172   |              | 7.9%                |                |  | -  |  | N/A |  | N/A |
| Spring Brook                     |  | 4,351   |              | 7.9%                |                |  | -  |  | N/A |  | N/A |
| Western Reserve                  |  | 4,835   |              | 7.9%                |                |  | -  |  | N/A |  | N/A |
| Riverside Station                |  | -       |              | N/A                 |                |  | 36,000  |  | 5.1% |  | September 2020 |
| Total / weighted average  rate   |  |  $      | 57,268  |                     | 6.4%           |  |  |  $ | 36,000  |  | 5.1% |  |  |

 

 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 $553,000 and $563,000 for the nine months ended September30, 2010 and 2009, respectively, which were included as a reduction to interestexpense.  It is possible that we may receive additional refunds in the future,however such amounts cannot be estimated due to the uncertainty of futurepayments, and we believe that any amounts we may receive would not be materialto our consolidated financial position, cash flow or results of operations.

Cash paid forinterest, excluding $192,000 and $66,000 of capitalized interest, was $22.6million and $24.9 million for the nine months ended September 30, 2010 and2009, respectively.  Included in cash paid for interest are the defeasancerefunds received of $553,000 and $563,000 for the nine months ended September30, 2010 and 2009, respectively, as discussed above.  Additionally excluded inthe cash paid for interest is a one-time non cash charge to interest expense of$727,000 related to the redemption of the 7.92% Trust Preferred Securities forthe nine months ended September 30, 2010, as discussed below.

**Unsecured Debt**

 On June 30, 2010, we redeemed all of our 7.92% Trust PreferredSecurities at a cost of $26.3 million, which included accrued and unpaidinterest up to but excluding the redemption date.  In connection with theissuance of those 7.92% Trust Preferred Securities in March 2005, we incurred issuancecosts that were recorded as other assets and subsequently charged to interestexpense each period over the life of the securities.  In accordance with GAAP, werecognized the remaining balance of $727,000 of issuance costs as a one-timenon cash charge to interest expense for the  nine months ended September 30,2010.

** **

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**4.         GOODWILLAND OTHER INTANGIBLE ASSETS**

**Goodwill**

 In June 1998, we recorded goodwill in connection with the MIG RealtyAdvisors, Inc. merger.   We have a policy of completing our annual review ofgoodwill during the first quarter of each year and more frequently if events orchanges in circumstances indicate that the carrying value may not berecoverable.  The review that was completed during the three months ended March31, 2010, determined that goodwill was not impaired and no other events haveoccurred which would require that goodwill be reevaluated, as such there wereno changes to the carrying value of goodwill as of September 30, 2010.  Inperforming this analysis, we use a multiple of revenues to the range ofpotential alternatives and assign a probability of the various alternativesunder consideration by management.  Should the estimates used to determinealternatives or the probabilities of the occurrence thereof change, impairmentmay result which could materially impact our results of operations for theperiod in which it is recorded**.**

**IntangibleAssets**

 We allocate a portion of the total purchase price of a propertyacquisition to any intangible assets identified, such as existing leases andtenant relationships.  The intangible assets are amortized over the remaininglease terms or estimated life of the tenant relationship, which isapproximately 12 to 16 months.  Due to the short term nature of residentialleases, we believe that existing lease rates approximate market rates;therefore, no allocation is made for above/below market leases.

 In connection withour property acquisition completed on May 18, 2010, as discussed in Note 2, werecorded total intangible assets in the amount of $1.4 million related toexisting leases, which are being amortized over 12 months, and $300,000 relatedto tenant relationships, which are being amortized over 16 months.

In connection withour property acquisition completed on September 15, 2010, as discussed in Note2, we recorded total intangible assets in the amount of $3.2 million related toexisting leases and tenant relationships, which are being amortized over 12months.

**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%equity interest.  In accordance with GAAP, we have determined that this entityis not a variable interest entity and that we hold a controlling financialinterest in the entity.  As such, this entity is included in our consolidatedfinancial statements.  We have also determined that the noncontrolling interestin this entity meets the criterion to be classified as a component of permanentequity. 

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**6.         SHAREHOLDERS' EQUITY**

 The following table provides a reconciliation of activity in Shareholders'equity accounts:
|                                                               |        | Nine Months Ended September 30, 2010 |
|---------------------------------------------------------------|--------|--------------------------------------|
|                                                               |        |                                      |  |  |  |  Accumulated |  |  |  |  |  |  |
|                                                               |        |  Common                         |  |  |  |  Distributions |  |  Accumulated |  |  |  |  |
|                                                               |        |  Shares                         |  |  |  |  In Excess of |  |  Other |  |  Treasury |  |  |
|                                                               |        |  (at $.10                       |  |  Paid-In |  |  Accumulated |  |  Comprehensive |  |  Shares |  |  Noncontrolling |
| *(In thousands)*                                              |        |  stated value)                  |  |  Capital |  |  Net Income |  |  Income |  |   (at Cost) |  |  Interest |
|                                                          |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance, December 31, 2009                                    |        |  $                              | 2,300  |  |  $ | 283,090  |  |  $ | (168,822) |  |  $ | (1,420) |  |  $ | (63,971) |  |  $ | -  |
| Total comprehensive (loss)  income                            |        | -                               |  | -  |  | (7,277) |  | 1,290  |  | -  |  | -  |
| Noncontrolling interest                                       |        | -                               |  | -  |  | -  |  | -  |  | -  |  | 1,040  |
| Share-based compensation                                      |        | -                               |  | 1,400  |  | 7  |  | -  |  | 1,097  |  | -  |
| Reclassification of deferred  directors' compensation         |        | -                               |  | 2,233  |  | -  |  | -  |  | -  |  | -  |
| Purchase of common shares                                     |        | -                               |  | -  |  | -  |  | -  |  | (595) |  | -  |
| Issuance of common shares                                     |        | 1,437                           |  | 167,611  |  | -  |  | -  |  | -  |  | -  |
| Option exercises from  treasury shares                        |        | -                               |  | 418  |  | -  |  | -  |  | 4,987  |  | -  |
| Redemption of class B  cumulative redeemable preferred shares |        | -                               |  | 993  |  | (993) |  | -  |  | -  |  | -  |
| Common share dividends  declared                              |        | -                               |  | -  |  | (15,865) |  | -  |  | -  |  | -  |
| Preferred share dividends  declared                           |        | -                               |  | -  |  | (2,030) |  | -  |  | -  |  | -  |
| Balance, September 30, 2010                                   |        |  $                              | 3,737  |  |  $ | 455,745  |  |  $ | (194,980) |  |  $ | (130) |  |  $ | (58,482) |  |  $ | 1,040  |

 

 On September 24, 2010, we entered into a partnership in which we have acontrolling financial interest.  We have determined that the noncontrollinginterest in this entity meets the criterion to be classified as a component ofpermanent equity.  See Note 5 for additional information related to this partnership.

The following table identifies total comprehensive (loss) income:
|                                                                 | Nine Months Ended |
|-----------------------------------------------------------------|-------------------|
|                                                                 | September 30,     |
| *(In thousands)*                                                | 2010              |  | 2009 |
| Comprehensive (loss) income:                                    |                   |  |  |
| Net (loss) income attributable  to AERC                         |  $           | (7,277) |  |  $ | 9,026  |
| Other comprehensive income:                                     |                   |  |  |
| Change  in fair value and reclassification of hedge instruments | 1,290        |  | 934  |
| Total comprehensive (loss)  income                              |  $           | (5,987) |  |  $ | 9,960  |

 

**7.         COMMONAND PREFERRED SHARES**

**CommonShares**

 On January 15,2010, we sold 5,175,000 of our common shares in a public offering at a price of$11.10 per share, which resulted in total net proceeds of approximately $54.9million.

 On May 12, 2010, we sold 9,200,000 common shares in a public offering ata price of $13.00 per share, which resulted in total net proceeds ofapproximately $114.3 million.

See Note 12 for additional information related to common shares.

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**PreferredShares**

On June 7, 2010, we redeemed all of our 8.70% Class B Series II CumulativeRedeemable Preferred Shares at a cost of approximately $48.3 million, plusaccrued and unpaid dividends through the redemption date.  In connection withthe issuance of those 8.70% Class B preferred shares in December 2004, weincurred approximately $1.0 million in issuance costs and recorded such costsas a reduction to shareholders’ equity.  In accordance with GAAP, we recognizedthe $1.0 million of issuance costs as a reduction in net earnings to arrive atnet (loss) income applicable to common shares for the  nine months ended September30, 2010.

**8.         EARNINGS PER SHARE**

There were approximately750,000 and 1.4 million options to purchase common shares outstanding at September30, 2010 and 2009, 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 from continuing operations.

 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 |         | Nine Months Ended |
|-------------------------------------------------------------------------|--------------------|---------|-------------------|
|                                                                         | September 30,      |         | September 30,     |
| *(In thousands)*                                                        | 2010               |         | 2009              |  | 2010 |  | 2009 |
| **Numerator - basic and  diluted:**                                     |                    |         |                   |  |  |  |  |
| (Loss) income from  continuing operations                               |  $            | (1,784) |                   |  $ | (2,800) |  |  $ | (7,238) |  |  $ | (6,913) |
| Net  income attributable to noncontrolling redeemable interest          | (13)               |         | (14)              |  | (39) |  | (40) |
| Preferred  share dividends                                              | -             |         | (1,049)           |  | (2,030) |  | (3,149) |
| Preferred  share redemption costs                                       | -             |         | -            |  | (993) |  | -  |
| (Loss) income from  continuing operations applicable to common shares   |  $            | (1,797) |                   |  $ | (3,863) |  |  $ | (10,300) |  |  $ | (10,102) |
|                                                                         |                    |         |                   |  |  |  |  |
| (Loss) income from  discontinued operations                             |  $            | -  |                   |  $ | (2) |  |  $ | -  |  |  $ | 15,979  |
| Allocation to participating  securities                                 | -             |         | -            |  | -  |  | (457) |
| (Loss) income from  discontinued operations applicable to common shares |  $            | -  |                   |  $ | (2) |  |  $ | -  |  |  $ | 15,522  |
|                                                                         |               |         |              |  |   |  |   |
|                                                                         |                    |         |                   |  |  |  |  |
| **Denominator - basic and  diluted:**                                   | 31,906        |         | 16,539       |  | 26,846  |  | 16,500  |
|                                                                         |                    |         |                   |  |  |  |  |
| **Net (loss) income  applicable to common shares - basic and diluted:** |                    |         |                   |  |  |  |  |
| (Loss) income from  continuing operations applicable to common shares   |  $            | (0.06)  |                   |  $ | (0.23) |  |  $ | (0.38) |  |  $ | (0.61) |
| Income from discontinued  operations                                    | -             |         | -            |  | -  |  | 0.94  |
| Net (loss) income applicable  to common shares - basic and diluted      |  $            | (0.06)  |                   |  $ | (0.23) |  |  $ | (0.38) |  |  $ | 0.33  |

** **

**9.         FAIRVALUE**

Fair value determined   in accordance with GAAP should be based on theassumptions that market participants would use when pricing certain assets orliabilities.  Inputs used in determining fair value should be from the highestlevel available in the following hierarchy:
| • | Level 1 inputs utilize quoted  prices (unadjusted) in active markets for identical assets or liabilities  that we have the ability to access;                                                      |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • | Level 2 inputs may include  quoted prices for similar assets and liabilities in active markets, as well  as interest rates and yield curves that are observable at commonly quoted  intervals; and |
| • | Level 3 inputs are unobservable  inputs for the asset or liability that are typically based on an entity’s own  assumptions as there is little, if any, related market activity.              |

 

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 In instances where the determination of the fair value measurement isbased on inputs from different levels of the fair value hierarchy, the fairvalue measurement will fall within the lowest level input that is significantto the fair value measurement in its entirety.

 The following table presents the financial liabilities that we measuredat fair value on a recurring basis as of September 30, 2010:
| *(In thousands)*    |  | Level 1 |                     | Level 2 |   | Level 3   |  | Total |
|---------------------|--|---------|---------------------|---------|---|-----------|--|-------|
|                     |  |         |                     |         |   |           |  |       |
| Interest rate swaps |  | $       | -    |         | $ | 130  |  | $     | -    |  | $ | 130  |
|                     |  |         |                     |         |   |           |  |       |  |  |  |  |

 

We incorporate creditvaluation adjustments to appropriately reflect both our own nonperformance riskand that of the respective counterparty in the fair value measurements.  Thecredit valuation adjustments utilize Level 3 inputs, such as estimates ofcurrent credit spreads, to evaluate the likelihood of default by either therespective counterparty or us.  However, we determined that as of September 30,2010, the impact of the credit valuation adjustments were not significant tothe overall valuation of the swaps.  See "Derivative Instruments and HedgingActivities" in Note 1 for additional information regarding the swaps.

 Rents, accounts and notes receivable, other assets, accounts payable,accrued expenses 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 $560.2 million and $525.8 million at September 30,2010, and December 31, 2009, respectively, have an estimated aggregate fairvalue of $595.9 million and $520.1 million, respectively.  Estimated fair valueis based on interest rates available to us as of the dates reported forissuance of debt with similar terms and remaining maturities.  Considerablejudgment is necessary to interpret market data and develop estimated fairvalues.  Accordingly, the estimates presented herein are not necessarilyindicative of the amounts we could realize on disposition of the financialinstruments.  The use of different market assumptions and/or estimationmethodologies may have a material effect on the estimated fair value amounts.

**10.        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 outcomesare difficult to predict.  We believe any current Litigation will not have amaterial adverse impact on us after final disposition.  However, because of theuncertainties of Litigation, one or more lawsuits could ultimately result in amaterial obligation.

**11.        DIRECTORCOMPENSATION**

**Directors' Deferred Compensation Plan**

 Effective January 1, 2010, the Directors' Deferred Compensation Plan wasmodified such that all future distributions from the plan will be in the formof our common shares instead of cash, except for the scheduled distributions whichwere to commence on or before December 31, 2010, which will be made in cash. As a result, deferred compensation totaling $2.2 million that will be paid inshares was reclassified from "Accounts payable, accrued expenses and otherliabilities" to "Paid-in Capital" in the Consolidated BalanceSheets during the nine months ended September 30, 2010.  Prior to themodification the fair value of the directors' deferred compensation accountswas adjusted at the end of each reporting period based on the closing price ofour common shares.  However, as a result of the modification, no furtheradjustment to fair value will be required.

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**12.        SUBSEQUENT EVENTS**

**CommonShares**

 On October 1, 2010, we sold 9,200,000 common shares in a public offeringat a price of $13.60 per share, which resulted in total net proceeds ofapproximately $119.6 million.****

**AcquisitionActivity**

 On October 12, 2010, we acquired San Raphael Apartments, a 222-unitapartment community located in Dallas, Texas for a purchase price of approximately$21 million.  We paid cash for this acquisition, which was funded with proceedsfrom our October 1, 2010 equity offering. 

**UnsecuredRevolving Credit Facility**

On October 18, 2010, the Company closed on a $250.0 million seniorunsecured revolving credit facility.  This credit facility replaces theCompany's current $150.0 million line of credit.  This new facility has athree-year term with a one-year extension at the Company's option.

**Dividends**  

 On November 1,2010, we paid a dividend of $0.17 per common share to shareholders of record onOctober 15, 2010, which was declared on September 13, 2010. 

** **

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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 2010performance which 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; |
|----------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •     | our ability  to refinance debt on favorable terms at maturity;                                                                                                                                                                                                |
| •     | risks of a  lessening of demand for the multifamily units that we own or manage;                                                                                                                                                                              |
| •     | 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,  unanticipated repairs and real estate tax valuation reassessments or millage  rate increases;                                                                             |
| •     | 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, among others;                                                                                                           |
| •     | 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.                                                                                                                                                                                                                |

*** ***

*** ***

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**Overview.**

 We are engagedprimarily in the ownership and operation of multifamily residential units. Ourprimary source of cash and revenue from operations is rents from the leasing ofowned apartment units, which represented 91.5% of our consolidated revenue forthe nine months ended September 30, 2010.

 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 a combination of rental rates, occupancylevels and rent concessions.  We attempt to adjust these factors to adapt tochanging market conditions, thus allowing us to maximize rental revenue. Indicators that we use in measuring these factors include physical occupancyand net collected rent per unit.  These indicators are more fully described inthe Results of Operations comparison.  Additionally, we consider property NetOperating Income ("NOI") and Funds from Operations ("FFO") tobe important 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.

NOI is determinedby deducting property operating and maintenance expenses from property revenue(excluding amounts classified as discontinued operations) for our properties,deducting direct property management and service company expenses frommanagement and service company revenue for the management and serviceoperations and deducting construction and other services expenses fromconstruction and other services revenue.  We consider NOI to be an appropriatesupplemental measure of our performance because it reflects the operatingperformance of our real estate portfolio, management and service companies andconstruction services at the property, management and service company andconstruction services level and is used to assess regional property levelperformance.  NOI should not be considered (i) as an alternative to net income(determined in accordance with GAAP), (ii) as an indicator of financialperformance, (iii) as an alternative to cash flow from operating activities(determined in accordance with GAAP) or (iv) as a measure of liquidity; nor isit necessarily indicative of sufficient cash flow to fund all of our needs. Other real estate companies may define NOI in a different manner.  

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A reconciliation ofNOI to total consolidated net (loss) income attributable to AERC is as follows:
|                                                                | Three Months Ended |              | Nine Months Ended |
|----------------------------------------------------------------|--------------------|--------------|-------------------|
|                                                                | September 30,      |              | September 30,     |
| *(In thousands)*                                               | 2010               |              | 2009              |  | 2010 |  | 2009 |
|                                                                |                    |              |                   |  |  |  |  |
| Property NOI                                                   |  $            | 19,422  |                   |  $ | 18,256  |  |  $ | 55,843  |  |  $ | 54,651  |
| Service company NOI                                            | 25            |              | 22           |  | 113  |  | 139  |
| Construction and other  services NOI                           | 333           |              | (86)              |  | (237) |  | (269) |
| Depreciation and  amortization                                 | (10,126)           |              | (8,502)           |  | (27,716) |  | (26,297) |
| General and administrative  expense                            | (3,560)            |              | (3,831)           |  | (10,957) |  | (10,136) |
| Costs associated with  acquisitions                            | (368)              |              | -            |  | (429) |  | -  |
| Interest income                                                | 6             |              | 6            |  | 27  |  | 41  |
| Interest expense                                               | (7,516)            |              | (8,665)           |  | (23,882) |  | (25,586) |
| Gain on insurance recoveries                                   | -             |              | -            |  | -  |  | 544  |
| (Loss) income from  discontinued operations:                   |                    |              |                   |  |  |  |  |
| Operating  income                                              | -             |              | -            |  | -  |  | 568  |
| (Loss)  gain on disposition of properties                      | -             |              | (2)               |  | -  |  | 15,411  |
| (Loss) income from  discontinued operations                    | -             |              | (2)               |  | -  |  | 15,979  |
| Net (loss) income                                              | (1,784)            |              | (2,802)           |  | (7,238) |  | 9,066  |
| Net income attributable to  noncontrolling redeemable interest | (13)               |              | (14)              |  | (39) |  | (40) |
| Consolidated net (loss)  income attributable to AERC           |  $            | (1,797)      |                   |  $ | (2,816) |  |  $ | (7,277) |  |  $ | 9,026  |

 

We calculate Funds from Operations ("FFO") in accordance withthe definition adopted by the Board of Governors of the National Association ofReal Estate Investment Trusts ("NAREIT").  This definition includesall operating results, both recurring and non-recurring, except those resultsdefined as "extraordinary items" under GAAP, adjusted fordepreciation on real estate assets and amortization of intangible assets, gainson insurance recoveries, and gains and losses from the disposition ofproperties and land.  We calculate FFO per share using the weighted averageshares outstanding amounts used in the calculation of basic and dilutedearnings per share in accordance with GAAP.  FFO does not represent cashgenerated 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, plus the add backof refunds on previously defeased loans of $(553,000) and $(563,000) for the ninemonths ended September 30, 2010 and September 30, 2009, respectively.  Inaccordance with GAAP, these refunds on previously defeased loans are includedas interest expense in the Consolidated Statement of Operations.  Additionally,the nine months ended September 30, 2010, includes add backs of non-cashcharges of approximately $1.0 million and $727,000, respectively, associatedwith the redemption of our Series B Preferred Shares and Trust PreferredSecurities.   We provide this calculation as an alternative FFO calculation as weconsider it a more appropriate measure of comparing the operating performanceof a company's real estate between periods or as compared to 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 |             | Nine Months Ended |
|-------------------------------------------------------------------------|--|--------------------|-------------|-------------------|
|                                                                         |  | September 30,      |        | September 30,     |
| *(In thousands, except per  share amounts)*                             |  | 2010               |             | 2009              |  | 2010 |  | 2009 |
|                                                                         |  |                    |             |                   |  |  |  |  |
| Net (loss) income  attributable to AERC                                 |  |  $            | (1,797)     |                   |  $ | (2,816) |  |  $ | (7,277) |  |  $ | 9,026  |
| Depreciation - real estate  assets                                      |  | 9,032         |             | 8,071        |  | 25,622  |  | 24,571  |
| Amortization of intangible  assets                                      |  | 566           |             | 57           |  | 757  |  | 1,068  |
| Preferred share dividends                                               |  | -             |             | (1,049)           |  | (2,030) |  | (3,149) |
| Preferred share redemption  costs                                       |  | -             |             | -            |  | (993) |  | -  |
| Loss (gain) on disposition  of properties/gain on insurance recoveries  |  | -             |             | 2            |  | -  |  | (15,955) |
| Funds from Operations                                                   |  | 7,801         |             | 4,265        |  | 16,079  |  | 15,561  |
|                                                                         |  |                    |             |                   |  |  |  |  |
| Preferred share redemption  costs                                       |  | -             |             | -            |  | 993  |  | -  |
| Trust preferred redemption  costs                                       |  | -             |             | -            |  | 727  |  | -  |
| Refund of defeasance costs  for previously defeased loans               |  | -             |             | -            |  | (553) |  | (563) |
| Funds from Operations as  adjusted                                      |  |  $            | 7,801  |                   |  $ | 4,265  |  |  $ | 17,246  |  |  $ | 14,998  |
|                                                                         |  |                    |             |                   |  |  |  |  |
| Funds from Operations per  common share - basic and diluted             |  |  $            | 0.24   |                   |  $ | 0.26  |  |  $ | 0.60  |  |  $ | 0.94  |
| Funds from Operations as  adjusted per common share - basic and diluted |  |  $            | 0.24   |                   |  $ | 0.26  |  |  $ | 0.64  |  |  $ | 0.91  |
|                                                                         |  |                    |             |                   |  |  |  |  |
| Weighted average shares  outstanding - basic and diluted                |  | 31,906        |             | 16,539       |  | 26,846  |  | 16,500  |

 

**Updated 2010 Expectations.**
| •  ** ** | ***Portfolio performance*****–**Our full-year 2010 updated guidance reflects Same Community  property NOI decreasing in the range of (0.75)% to (0.25)% as compared to  2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **         | ***                       ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| •  ** ** | ***Property acquisitions,  sales and development*** – We have completed the acquisition of three operating  properties totaling 1,030 units for a total cost of approximately $165  million.  We expect total acquisitions during 2010 to total between $250  million and $300 million.  In addition, we anticipate investing approximately  $7.5 million in our Nashville, Tennessee, Germantown partnership.  Moreover, during  the first half of 2010, we completed the development of a 60-unit expansion  of our River Forest apartment community, which is located in the Richmond,  Virginia metropolitan area.  The cost of this expansion project was  approximately $6.8 million, of which approximately $5.0 million in costs  related to this development were recorded during 2009, with the balance of the  costs being incurred in 2010.  We have not and do not expect to dispose of  any assets in 2010. |
| ** **         | ***                                  ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| •  ** ** | ***Debt repayment*** – We  have repaid five mortgage loans totaling $57.3 million that matured in 2010  and redeemed unsecured trust preferred debt of $25.8 million.  We have one  additional mortgage loan maturing in 2010 in the amount of $21.0 million that  we expect to repay with the proceeds from a new mortgage loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

**Forecast Qualification.** The uncertainties caused by the current economic conditions and theunprecedented financial crisis complicate our ability to forecast futureperformance.  We believe that the apartment industry is better situated to weatherthe recession than other real estate sectors because people will normallychoose shelter over discretionary spending such as going to the mall or hotelstays and because government sponsored agencies such as Fannie Mae and FreddieMac continue to provide attractive apartment financing, which may be unavailableto other commercial real estate sectors.  Our 2010 expectations may beadversely impacted if recessionary forces accelerate or Congress curtailsFannie Mae or Freddie Mac financing support to the apartment industry.

 

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**LIQUIDITY AND CAPITALRESOURCES**

 Cash Flows and Liquidity.  Significant sources and uses of cash duringthe nine months ended September 30, 2010 and 2009 are summarized as follows:
|                                                                      | Nine Months Ended |
|----------------------------------------------------------------------|-------------------|
|                                                                      | September 30,     |
| *(In thousands)*                                                     | 2010              |  | 2009 |
| Net cash provided by  operations                                     |  $           | 20,601  |  |  $ | 22,877  |
| Fixed assets:                                                        |                   |  |  |
| Acquisition  and development expenditures, net                       | (154,533)         |  | (1,939) |
| Net  property disposition proceeds                                   | -            |  | 32,714  |
| Recurring,  revenue enhancing and non-recurring capital expenditures | (12,388)          |  | (9,305) |
| Debt:                                                                |                   |  |  |
| Decrease  in mortgage notes                                          | (23,593)          |  | (21,832) |
| Increase  (decrease) in revolving credit facility borrowings         | 83,700       |  | (9,500) |
| Redemption  of trust preferred securities                            | (25,780)          |  | -  |
| Common share issuance  proceeds                                      | 169,199      |  | -  |
| Preferred share redemption                                           | (48,263)          |  | -  |
| Cash dividends and operating  partnership distributions paid         | (13,989)          |  | (11,641) |

 

 Our primary sources ofliquidity are cash flow provided by operations, short-term borrowings on the unsecuredrevolver, our secured credit facility, project specific loans and the sale ofdebt or equity securities.  We believe that we are well positioned to weatherthe recent turmoil in the financial markets.  Six mortgage loans totalingapproximately $78.3 million were scheduled to mature in 2010.  We have repaidfive of those debt obligations totaling $57.3 million and expect to repay theremaining $21.0 million obligation with proceeds from a project specificsecured loan.

 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.  In August 2010, we used this facility to borrow $36.0million at a fixed rate of 5.1% for a term of 10 years leaving $64.0 million ofavailability under this facility.  Our unsecured revolver provides us additionalfinancial flexibility.  On October 1, 2010, we used proceeds from our commonshare issuance to repay the $96.2 million outstanding balance on our unsecuredrevolver.  On October 18, 2010, we entered into an Amended and Restated CreditAgreement that among other things increases the maximum amount of loansavailable under the revolver to $250.0 million, extends the maturity date toOctober 18, 2013 and provides for a one year extension option. 

 Our ability to access thecapital markets affords us additional liquidity as demonstrated by ouryear-to-date sales of 23,575,000 of our common shares in three separateunderwritten offerings to the public markets.  The net proceeds from theseofferings, which totaled $288.8 million, were used to repay maturing debt,redeem all our outstanding 8.70% Class B Series II Preferred Shares, redeem allof our Trust Preferred Securities, partially pay for three operating properties,acquire a parcel of land that we are developing in a partnership, to repayborrowings on our unsecured revolver, and for general corporate purposes. 

 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.

 

| 23 |
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  Cash flow provided byoperations decreased during the nine months ended September 30, 2010, comparedto the nine months ended September 30, 2009, primarily due to an increase inaccounts receivable during the nine months ended September 30, 2010. Additionally, general and administrative expenses increased approximately $821,000. See the discussion under “General and administrative expense” under Results ofOperations regarding increases in general and administrative costs.

During the remainder of2010, we anticipate incurring an additional $4.0 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.

**RESULTS OF OPERATIONS**

***Comparison of the three and nine monthsended September 30, 2010 to the three and nine months ended September 30, 2009:***

****** Our SameCommunity portfolio represents operating properties that we have owned for allof the comparison periods.  For the nine months ended September 30, 2010 and2009, the Same Community portfolio consisted of 48 owned properties containing12,108 units.  Acquired properties represent the operating properties that weacquired in May and September 2010, while the development property represents60 newly-constructed units on the land adjacent to River Forest Apartmentswhich are in the lease-up process.  

The net loss fromcontinuing operations decreased $1.0 million for the three month comparisonperiod and increased $325,000 during the nine month comparison period.  The decreasein the three month comparison period was primarily due to the net of thefollowing:  an increase in property revenue, an increase in property operatingand maintenance expense, an increase in depreciation and amortization expenseand a decrease in interest expense and general and administrative expense.  Theincrease in the nine month comparison period was primarily due to an increase inproperty revenue, an increase in property operating and maintenance expense, anincrease in depreciation and amortization expense, a decrease in interestexpense and an increase in general and administrative expense.  See thefollowing discussion for a detailed description of the changes in these lineitems.

The following table reflects the amount and percentage change in lineitems that are relevant to the changes in overall operating performance:
|                                             |  | Increase (decrease) when   |             | Increase (decrease) when  |
|---------------------------------------------|--|----------------------------|-------------|---------------------------|
|                                             |  | comparing the three months |             | comparing the nine months |
|                                             |  | ended September 30, 2010   |             | ended September 30, 2010  |
| *(In thousands)*                            |  | to September 30, 2009      |             | to September 30, 2009     |
|                                             |  |                            |             |                           |  |  |
| Property revenue                            |  |  $                    | 2,101  | 6.5%                      |  | $ | 2,746  | 2.9% |
| Property operating and  maintenance expense |  | 935                   | 6.7%        |                           | 1,554  | 3.7% |
| Depreciation and  amortization              |  | 1,624                 | 19.1%       |                           | 1,419  | 5.4% |
| Interest expense                            |  | (1,149)                    | (13.3)%     |                           | (1,704) | (6.7)% |
| General and administrative                  |  | (271)                      | (7.1)%      |                           | 821  | 8.1% |
| Construction and other  services            |  |                            |             |                           |  |  |
|      Revenue            |  | 5,338                 | 1408.4%     |                           | 7,718  | 1057.3% |
|      Expenses           |  | 4,919                 | 1057.8%     |                           | 7,686  | 769.4% |
| Income from discontinued  operations        |  | 2                     | (100.0)%    |                           | (15,979) | (100.0)% |
|                                             |  |                            |             |                           |  |  |  |  |

 

PropertyNOI increased for both the three month and nine month comparisonperiods primarily due to the contributions by the acquired properties. Property NOI for the Same Community properties during the three monthcomparison period increased slightly primarily due to increased revenues at theSoutheast properties.  During the nine month comparison period, Same CommunityProperty NOI decreased primarily due to a decrease in revenue and an increasein expenses at the Mid-Atlantic properties.

 

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The following table presents property NOI results by region:
|                            |  | Three Months Ended September 30, |              |              |         | Nine Months Ended September 30, |  |              |
|----------------------------|--|----------------------------------|--------------|--------------|---------|---------------------------------|--|--------------|
|                            |  | 2010                             |              | 2009         |         |                                 |  | 2010         |  | 2009 |  |  |
|                            |  | Property                         |              | Property     |         | Increase/                       |  | Property     |  | Property |  | Increase/ |
| *(In thousands)*           |  | NOI                              |              | NOI          |         | (Decrease)                      |  | NOI          |  | NOI |  | (Decrease) |
| Same Community Properties: |  |                                  |              |              |         |                                 |  |              |  |  |  |  |
| Midwest                    |  |  $                          | 10,452  |              |  $ | 10,506                     |  |  $      | (54) |  |  $ | 31,080  |  |  $ | 31,221  |  |  $ | (141) |
| Mid-Atlantic               |  | 3,485                       |              | 3,462   |         | 23                         |  | 10,240  |  | 10,503  |  | (263) |
| Southeast                  |  | 4,361                       |              | 4,288   |         | 73                         |  | 12,994  |  | 12,927  |  | 67  |
| Total Same Community       |  | 18,298                      |              | 18,256  |         | 42                         |  | 54,314  |  | 54,651  |  | (337) |
| Acquired Properties        |  | 1,096                       |              | -       |         | 1,096                      |  | 1,507   |  | -  |  | 1,507  |
| Development                |  | 28                          |              | -       |         | 28                         |  | 22      |  | -  |  | 22  |
| Total Property NOI         |  |  $                          | 19,422  |              |  $ | 18,256                     |  |  $      | 1,166  |  |  $ | 55,843  |  |  $ | 54,651  |  |  $ | 1,192  |

 

*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 |
|----------------------------|--|--------------------|
|                            |  | at                 |
|                            |  | September 30,      |
|                            |  | 2010               |  | 2009 |
| Same Community Properties: |  |                    |  |  |
| Midwest                    |  | 96.8%              |  | 96.0% |
| Mid-Atlantic               |  | 95.9%              |  | 94.0% |
| Southeast                  |  | 93.8%              |  | 91.3% |
| Total Same Community       |  | 96.0%              |  | 94.6% |
| Acquired Properties        |  | 97.4%              |  |  N/A |
| Development                |  | 78.3%              |  |  N/A |

 
|                            |  | Average Monthly Net Collected Rent Per Unit |
|----------------------------|--|---------------------------------------------|
|                            |  | Three Months Ended                          |  | Nine Months Ended |
|                            |  | September 30,                               |  | September 30, |
|                            |  | 2010                                        |  | 2009 |  | 2010 |  | 2009 |
| Same Community Properties: |  |                                             |  |  |  |  |  |  |
| Midwest                    |  | $                                           | 794  |  |  $ | 790  |  |  $ | 783  |  |  $ | 785  |
| Mid-Atlantic               |  | $                                           | 1,167  |  |  $ | 1,165 |  |  $ | 1,162 |  |  $ | 1,161 |
| Southeast                  |  | $                                           | 901  |  |  $ | 880  |  |  $ | 893  |  |  $ | 876  |
| Total Same Community       |  | $                                           | 866  |  |  $ | 858  |  |  $ | 856  |  |  $ | 853  |
| Acquired Properties        |  | $                                           | 1,512  |  |  N/A |  |  $ | 1,493  |  |  N/A |
| Development                |  |  N/A                                   |  |  N/A |  |  N/A |  |  N/A |

             

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The following tablepresents property revenue results:
|                            |  | Three Months Ended September 30, |              |              |         | Nine Months Ended September 30, |  |              |
|----------------------------|--|----------------------------------|--------------|--------------|---------|---------------------------------|--|--------------|
|                            |  | 2010                             |              | 2009         |         |                                 |  | 2010         |  | 2009 |  |  |
|                            |  | Property                         |              | Property     |         | Increase/                       |  | Property     |  | Property |  | Increase/ |
| *(In thousands)*           |  | Revenue                          |              | Revenue      |         | (Decrease)                      |  | Revenue      |  | Revenue |  | (Decrease) |
| Same Community Properties: |  |                                  |              |              |         |                                 |  |              |  |  |  |  |
| Midwest                    |  |  $                          | 19,006  |              |  $ | 18,860                     |  |  $      | 146  |  |  $ | 56,162  |  |  $ | 56,181  |  |  $ | (19) |
| Mid-Atlantic               |  | 5,273                       |              | 5,288   |         | (15)                            |  | 15,735  |  | 15,840  |  | (105) |
| Southeast                  |  | 8,316                       |              | 8,107   |         | 209                        |  | 24,679  |  | 24,196  |  | 483  |
| Total Same Community       |  | 32,595                      |              | 32,255  |         | 340                        |  | 96,576  |  | 96,217  |  | 359  |
| Acquired Properties        |  | 1,677                       |              | -       |         | 1,677                      |  | 2,300   |  | -  |  | 2,300  |
| Development                |  | 84                          |              | -       |         | 84                         |  | 87      |  | -  |  | 87  |
| Total Property Revenue     |  |  $                          | 34,356  |              |  $ | 32,255                     |  |  $      | 2,101  |  |  $ | 98,963  |  |  $ | 96,217  |  |  $ | 2,746  |

 

For the three and nine month comparison periods, the increase in propertyrevenue was primarily due to an increase in the revenue in the Southeast regionand the acquisition properties.

*Property operating and maintenance expenses.*  Property operatingand maintenance expenses increased in both the three month and nine monthcomparison periods.  For both comparison periods, the increase was primarilydue to the acquisition properties.  

*Depreciation and amortization. *Depreciation and amortizationexpense increased for the three and nine month comparison periods.  For bothcomparison periods, the increase was primarily due to the commencement ofdepreciation for the May and September 2010 acquisitions and the amortizationof intangible assets recorded in connection with these acquisitions.  

*General and administrative expense. *General and administrativeexpenses for the three month comparison period decreased primarily due to theresult of valuation adjustments in 2009 that increased directors' deferredcompensation expense which was offset by expenses related to our due diligenceinvestigations of possible acquisitions that were never consummated andadjustments to various payroll related accruals.  For the nine month comparisonperiod, the increase was primarily due to an increase in expenses related toproposed acquisitions that were not consummated and adjustments to variouspayroll related accruals.  Prior to January 1, 2010, the fair value of thedirectors' deferred compensation was adjusted based upon the closing price ofour common shares at the end of each period.  Effective January 1, 2010, thisplan was modified to provide that all distributions under the plan will be inthe form of our common shares instead of cash.  As a result, the fair value ofthe deferred compensation is no longer adjusted based upon the closing price ofour common shares.  Additionally, we anticipate recording a one time charge togeneral and administrative expense of approximately $400,000 during the fourthquarter of 2010 related to the transition of our Vice President and GeneralCounsel to a senior advisory role. 

*Construction and other services*.  Effective October 2009, MeritEnterprises, Inc. (“Merit”), our wholly owned subsidiary, changed itsconcentration from a subcontractor and painting company to a general contractorthat acts as our in-house construction division and also provides generalcontracting and construction management services to third parties.  Merit’s2010 revenues and expenses, which represent construction supervision for thirdparties and are recorded on the percentage of completion method, exceed Merit’spainting and subcontracting revenues and expenses recorded during both periodsin 2009.

*Income from Discontinued Operations.*  Discontinued operations includethe operating results of two properties sold in 2009 and the gain related to thosesales.  For further details on "Income from discontinued operations,"see Note 2 of the Notes to Consolidated Financial Statements presented in PartI, Item 1 of this report on Form 10-Q.

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**Critical AccountingEstimates**

 The preparation of the consolidated financial statements in conformitywith GAAP requires us to make estimates and assumptions in certaincircumstances that affect amounts reported in the consolidated financialstatements and related notes.  In preparing these consolidated financialstatements, we have utilized information available including industry practiceand our own past history in forming estimates and judgments of certain amountsincluded in the consolidated financial statements, giving due consideration tomateriality.  It is possible that the ultimate outcome that we anticipated informulating the estimates inherent in these consolidated financial statementsmay not materialize.  However, application of the accounting policies belowinvolves the exercise of judgment and use of assumptions as to futureuncertainties and, as a result, actual results could differ from theseestimates.  In addition, other companies may utilize different estimates that mayimpact comparability of our results of operations to those of companies insimilar businesses.  Our critical accounting estimates are discussed in detailin Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2009.  In addition to these critical accounting estimates, webelieve that our contracting and construction management services required usto make estimates that could have a material impact on our results ofoperations and financial statements.

 We account forgeneral contracting and construction management services that we provide tothird parties using the percentage completion method.  Under this method, theamount of revenue and expense to be recognized for each project that we areengaged in at the end of each reporting period is estimated based on thepercentage of work completed on that date.  The use of judgment and/orestimates is required in determining the percentage of work completed, theexpected total cost of a project in process, and in certain circumstances thetotal amount of revenue for a project in process.  If we had used differentestimates, different amounts would have been recognized in revenue and expensewhich may have resulted in a material impact to our results of operations.  Ifactual costs or revenue differ from estimates, it may require us to make amaterial adjustment to our results of operations.

**CONTINGENCIES**

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

** **

| 27 |
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**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 September30, 2010 and 2009, an interest rate change of 100 basis points would impactinterest expense approximately $1.3 million and $470,000 on an annual basis,respectively. We occasionally use derivative instruments to manage our exposureto interest rates.  See Note 1 of the Notes to Consolidated FinancialStatements presented in Part I, Item 1 of this report on Form 10-Q foradditional information regarding derivative instruments and "Item 7AQualitative and Quantitative Disclosures About Market Risk" of our AnnualReport on Form 10-K for the year ended December 31, 2009, for a more completediscussion of interest 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 whether they are effectivein ensuring 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 third quarterof 2010 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.

**PART II.     OTHER INFORMATION**

**ITEM 1.       LEGAL PROCEEDINGS**

For informationrelated to legal proceedings, see Note 10 of the Notes to ConsolidatedFinancial Statements 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, 2009.

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**ITEM 2.       UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**
| Issuer Purchases of Equity Securities for the Three  Months Ended September 30, 2010 |
|--------------------------------------------------------------------------------------|
|                                                                                      |  |  |  |  |  |  |  |  |
|                                                                                      |  |  |  |  |  |  |  | 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) |
| July 1 through                                                                       |  |  |  |  |  |  |  |  |
| July  31                                                                             |  | -    |  |  $ | -    |  |                                  -   |  |  $ | 26,288  |
| August 1 through                                                                     |  |  |  |  |  |  |  |  |
| August  31                                                                           |  | 53  |  | 13.27  |  |                                 -   |  | 26,288  |
| September 1 through                                                                  |  |  |  |  |  |  |  |  |
| September  30                                                                        |  | -  |  | -  |  |                                  -   |  | 26,288  |
| Total                                                                                |  | 53  |  |  $ | 13.27  |  |                                  -   |  |  |

 

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.  

 

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**ITEM 6.            EXHIBITS**

** **
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | **Filed herewith or**                               |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | **incorporated herein**                             |
| **Number** | **                                                        Title                                                          ** | **by reference**                                    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                |
| 3.1        | Second Amended and Restated  Articles of Incorporation, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Exhibit 3.1 to Form 10-Q  filed August 3, 2010.     |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                |
| 3.2        | Amended and Restated Code of  Regulations of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Exhibit 3.3 to Form 10-Q  filed August 1, 2006.     |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                |
| 4.1        | Specimen Common Share  Certificate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Exhibit 4.1 to Form 10-Q  filed November 3, 2009.   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                |
| 4.1a       | Amended and Restated  Shareholders Rights Agreement dated December 30, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Exhibit 4.1 to Form 8-K  filed December 30, 2008.   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                |
| 4.2        | Specimen 8.70% Class B  Series II Cumulative Redeemable Preferred Shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Exhibit 4.2 to Form 10-Q  filed November 3, 2009.   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                |
| 4.2a       | Specimen Depositary Share  representing 1/10 of one share of 8.70% Class B Series II Cumulative  Redeemable Preferred Shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Exhibit 4.2a to Form 10-Q  filed November 3, 2009.  |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                |
| 4.3        | Deposit Agreement by and  among Associated Estates Realty Corporation and National City Bank and  Depositary Receipts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Exhibit 4.5 to Form 8-A  filed December 8, 2004.    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                |
| 4.5        | Form  of Promissory Note and Form of Mortgage and Security Agreement dated May 10,  1999 from AERC to The Chase Manhattan Bank.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Exhibit 4.5 to Form 10-Q  filed August 13, 1999.    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                |
| 4.5a       | Form  of Promissory Note and Form of Mortgage and Security Agreement dated September  10, 1999 from AERC to The Chase Manhattan Bank.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Exhibit 4.5a to Form 10-Q  filed November 12, 1999. |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                |
| 4.5b       | Form  of Promissory Note and Form of Mortgage and Security Agreement dated November  18, 1999 from AERC to The Chase Manhattan Bank.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Exhibit 4.5b to Form 10-K  filed March 15, 2000.    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                |
| 4.12       | Amended  and Restated Credit Agreement Dated October 18, 2010 among Associated Estates  Realty Corporation, as Borrower and PNC Bank, National Association as  Administrative Agent and PNC Capital Markets, LLC, as Co-Lead Arranger and  Book Manager and Wells Fargo Bank, N.A., as Syndication Agent and Wells Fargo  Securities, LLC, as Co-Lead Arranger and U.S. Bank National Association, as  Documentation Agent and The Several Lenders From Time To Time Parties Hereto,  as Lenders.                                                                                                                                                                                                                | Exhibit 4.12 to Form 10-Q  filed herewith.          |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                |
| 4.13       | Credit  Agreement Dated April 24, 2007 among Associated Estates Realty Corporation,  as Borrower and National City Bank as Administrative Agent, Lead Arranger,  and Book Manager and The Several Lenders From Time To Time Parties Hereto, as  Lenders.                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Exhibit 4.13 to Form 10-Q  filed July 31, 2007.     |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                |
| 4.15       | First  Amendment to Credit Agreement dated March 20, 2008, by and among Associated  Estates Realty Corporation (the Borrower), National City Bank and other banks  and financial institutions (the Lenders) and National City Bank (the  Administrative Agent).                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Exhibit 4.15 to Form 10-Q  filed May 6, 2008.       |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                |

 

| 30 |
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| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | **Filed herewith or**                                                              |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | **incorporated herein**                                                            |
| **Number** | **                                                        Title                                                          ** | **by reference**                                                                   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                               |
| 4.16       | Joinder  to Subsidiary Guaranty dated March 20, 2008, for the benefit of National City  Bank, as Agent for itself and certain other lenders, with respect to a loan  from the Lenders to Associated Estates Realty Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Exhibit 4.16 to Form 10-Q  filed May 6, 2008.                                      |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                               |
| 4.17       | Agreement  regarding Master Financing Agreement dated December 22, 2009 by and between  Wells Fargo Bank, National Association and Associated Estates Realty  Corporation and Master Financing Agreement dated December 22, 2009 by and  between Wells Fargo Bank, National Association and Federal Home Loan Mortgage  Corporation.                                                                                                                                                                                                                                                                                                                                                                             | Exhibit 4.17 to Form 10-Q  filed May 4, 2010.                                      |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                               |
|       | Certain  of the Registrant's assets are subject to mortgage obligations each of which  individually relates to indebtedness totaling less than 10.0% of the total  assets of the Registrant.  The Registrant hereby agrees to furnish a copy of  such agreements to the Commission upon its request.                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                               |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                               |
|       | The  Registrant issued unsecured debt in the form of Trust Preferred Securities on  March 15, 2005 in a private placement in an amount less than 10.0% of the  total assets of the Registrant.  The Registrant hereby agrees to furnish a  copy of the Purchase Agreement dated March 15, 2005 between Associated  Estates Realty Corporation, AERC Delaware Trust and Taberna Preferred Funding  1, Ltd. and a specimen Preferred Securities Certificate to the Commission  upon its request.                                                                                                                                                                                                              |                                                                               |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                               |
| 10         | Associated  Estates Realty Corporation Directors' Deferred Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Exhibit 10 to Form 10-K  filed February 25, 2010.                                  |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                               |
| 10.1       | Stock  Option Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Exhibit 10.2 to Form S-11  filed September 2, 1993 (File No. 33-68276 as amended). |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                               |
| 10.2       | Amended  and Restated Employment Agreement between the Company and Jeffrey I.  Friedman.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Exhibit 10.1 to Form 10-Q  filed May 13, 1996.                                     |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                               |
| 10.2a      | Employment  Agreement between Associated Estates Realty Corporation and Martin A. Fishman  dated October 25, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Exhibit 10.1 to Form 8-K  filed October 25, 2010.                                  |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                               |
| 10.3       | Equity-Based  Incentive Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Exhibit 10.4 to Form 10-K  filed March 29, 1995.                                   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                               |
| 10.4       | Form  of Restricted Stock Agreement dated by and among the Company and its  Non-Management Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Exhibit 10.9 to Form 10-K  filed March 28, 1996.                                   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                               |
| 10.5       | Form  of Indemnification Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Exhibit 4.2 to Form S-11  filed September 2, 1993 (File No. 33-68276 as amended).  |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                               |
| 10.6       | Amended  2008 Equity-Based Award Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Exhibit 10.1 to Form 8-K  filed May 13, 2008.                                      |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                               |
| 10.7       | Amendment  to Associated Estates Realty Corporation 2008 Equity-Based Award                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Exhibit 10.7 to Form 10-K                                                          |
|       | Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | filed February 25, 2009.                                                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                               |
| 10.7a      | Amendment  to Associated Estates Realty Corporation Amended and Restated                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Exhibit 10.7a to Form 10-K                                                         |
|       | Equity-Based  Award Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | filed February 25, 2009.                                                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                               |
| 10.7b      | Associated  Estates Realty Corporation Supplemental Executive Retirement Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Exhibit 10.7b to Form 10-K                                                         |
|       | (Restated).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | filed February 25, 2009.                                                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                               |
| 10.8       | Form  of Share Option Agreement by and among the Company and its Non-Management Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Exhibit 10.14 to Form 10-K  filed March 30, 1993.                                  |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                               |
| 10.10      | Associated  Estates Realty Corporation Amended and Restated 2001 Equity-Based Plan (as  amended on May 4, 2005).  Incorporated by reference to Appendix 1 to the  Definitive Proxy Statement filed March 28, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Exhibit 99.01 to Form S-8  filed May 26, 2005.                                     |

 

 

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|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | **Filed herewith or**                               |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | **incorporated herein**                             |
| **Number** | **                                                        Title                                                       ** | **by reference**                                    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                |
| 10.11      | Form  of Equity Award Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Exhibit 10.11 to Form 10-Q  filed August 2, 2005.   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                |
| 10.12      | Long Term Incentive  Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Exhibit 10.12 to Form 10-Q  filed November 1, 2005. |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                |
| 10.13      | Associated Estates Realty  Corporation Elective Deferred Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Exhibit 10.13 to Form 10-Q  filed July 31, 2007.    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                |
| 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                                   |
|--------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|
|                  |   |                        |
|                                      |   |              |
| November 2, 2010                                                                                 |   | /s/ Lou Fatica                                                           |
| (Date)                                                                                           |   | Lou Fatica, Vice President                                               |
|                                                                                             |   | Chief Financial Officer and  Treasurer                                   |

 

 

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