** **

**UNITED STATES**

**SECURITIESAND 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, 2007**                                                                           |
|       |       |                                                                                                                                  |
| ** ** | ** ** | **OR**                                                                                                                                |
| ** ** | ** ** | ** **                                                                                                                            |
| ** ̈** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d)****OF THE SECURITIES EXCHANGE ACT OF 1934**                            |
| ** ** | ** ** | ** **                                                                                                                            |
|       |       | **For the transition period from         to        ** |

 

**Commission File Number 1-10272**

 

**Archstone-SmithOperating Trust**

(Exact name of registrant as specified in itscharter)

 

| **Maryland**(State or other jurisdiction of incorporation or  organization)                                                        | ** ** | **90-0042860**(I.R.S. employer identification no.) |
|------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|
| ** **                                                                                                                         | ** ** | ** **                                         |
| **9200 E. Panorama Circle,  Suite 400  Englewood, Colorado 80112**(Address of principal executive offices and zip  code) |
| ** **                                                                                                                         |
| **(303) 708-5959**(Registrant’s telephone number, including area code)                                                   |
| ** **                                                                                                                         |
| ** **                                                                                                                         |
| (Former name, former address and former  fiscal year, if changed since last report)                                                |

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and(2) has been subject to such filing for the past 90 days.

 

Yes x      No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

 

Large Accelerated filer x    Accelerated filer o    Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).

 

Yes o      No x

 

At November 1, 2007, none of the CommonUnits were held by non-affiliates.

 

 

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**Table of Contents**

 
| **Item**                                | **Description**                                                                                                                                                                               | ** ** | ** ** |
|-----------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                              | ** **                                                                                                                                                                                    | ** ** | ** ** |
| **PART I — Financial Information** |
|                                    |                                                                                                                                                                                          |       |       |
| 1.                                      | Financial Statements                                                                                                                                                                          |       |       |
|                                    | Condensed Consolidated Balance Sheets — September 30, 2007  (Unaudited) and December 31, 2006                                                                                  |       |       |
|                                    | Condensed Consolidated Statements of Earnings — Three and Nine Months  Ended September 30, 2007 and 2006 (Unaudited)                                                                |       |       |
|                                    | Condensed Consolidated Statement of Unitholders’ Equity, Other Common  Unitholders’ Interest and Comprehensive Income — Nine Months Ended  September 30, 2007 (Unaudited) |       |       |
|                                    | Condensed Consolidated Statements of Cash Flows — Nine Months Ended  September 30, 2007 and 2006 (Unaudited)                                                                        |       |       |
|                                    | Notes to Condensed Consolidated Financial  Statements (Unaudited)                                                                                                                             |       |       |
|                                    | Report of Independent Registered Public  Accounting Firm                                                                                                                                      |       |       |
| 2.                                      | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                                                   |       |       |
| 3.                                      | Quantitative and Qualitative Disclosures  about Market Risk                                                                                                                                   |       |       |
| 4.                                      | Controls and Procedures                                                                                                                                                                       |       |       |
|                                    |                                                                                                                                                                                          |       |       |
| **PART II — Other Information**    |
|                                    |                                                                                                                                                                                          |       |       |
| 1.                                      | Legal Proceedings                                                                                                                                                                             |       |       |
| 1A.                                     | Risk Factors                                                                                                                                                                                  |       |       |
| 2.                                      | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                                                                                  |       |       |
| 3.                                      | Defaults Upon Senior Securities                                                                                                                                                               |       |       |
| 4.                                      | Submission of Matters to a Vote of Security  Holders                                                                                                                                          |       |       |
| 5.                                      | Other Information                                                                                                                                                                             |       |       |
| 6.                                      | Exhibits                                                                                                                                                                                      |       |       |

 

2

----

 

**PARTI—FINANCIAL INFORMATION**

**Item 1. FinancialStatements**

 

**Archstone-Smith Operating Trust**

 

**CondensedConsolidated Balance Sheets**

 

**(In thousands, except unit data)**

 
| ** **                                                                                                                                  | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                  | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                  |       |                         |       |                        |       |
| Real estate                                                                                                                                 |       | $                            | 12,706,277 |                        | $          | 12,945,862 |   |
| Real estate — held-for-sale                                                                                                            |       | 259,711                      |       | 241,778                     |       |
| Accumulated depreciation                                                                                                                    |       | (1,004,186                   | )          | (957,146                    | )          |
|                                                                                                                                        |       | 11,961,802                   |       | 12,230,494                  |       |
| Investments in and advances to  unconsolidated entities                                                                                     |       | 562,476                      |       | 235,323                     |       |
| Net investments                                                                                                                             |       | 12,524,278                   |       | 12,465,817                  |       |
| Cash and cash equivalents                                                                                                                   |       | 14,781                       |       | 48,655                      |       |
| Restricted cash in tax-deferred exchange  and bond escrow                                                                                   |       | 317,222                      |       | 319,312                     |       |
| Other assets                                                                                                                                |       | 389,505                      |       | 425,343                     |       |
| Total assets                                                                                                                                |       | $                            | 13,245,786 |                        | $          | 13,259,127 |   |
|                                                                                                                                        |       |                         |       |                        |       |
| **LIABILITIES  AND UNITHOLDERS’ EQUITY**                                                                                               |       |                         |       |                        |       |
| Liabilities:                                                                                                                                |       |                         |       |                        |       |
| Unsecured credit facilities                                                                                                                 |       | $                            | 900,437    |                        | $          | 84,723 |   |
| Unsecured loans — International                                                                                                        |       | —                       |       | 235,771                     |       |
| Long-Term Unsecured Debt                                                                                                                    |       | 2,990,015                    |       | 3,355,699                   |       |
| Mortgages payable                                                                                                                           |       | 2,045,178                    |       | 2,758,275                   |       |
| Mortgages payable — held-for-sale                                                                                                      |       | 17,813                       |       | 17,959                      |       |
| Accounts payable                                                                                                                            |       | 71,346                       |       | 71,967                      |       |
| Accrued interest                                                                                                                            |       | 49,383                       |       | 67,135                      |       |
| Accrued expenses and other liabilities                                                                                                      |       | 308,401                      |       | 365,260                     |       |
| Total liabilities                                                                                                                           |       | 6,382,573                    |       | 6,956,789                   |       |
| Other common unitholders’ interest, at  redemption value (A-1 Common Units: 26,229,731 in 2007 and  29,514,128 in 2006) |       | 1,577,456                    |       | 1,718,017                   |       |
|                                                                                                                                        |       |                         |       |                        |       |
| Unitholders’ equity:                                                                                                                   |       |                         |       |                        |       |
| Perpetual Preferred Units                                                                                                                   |       | 50,000                       |       | 50,000                      |       |
| Common unitholders’ equity (A-2 Common  Units: 223,603,858 units in 2007 and 220,147,167 units in 2006)                 |       | 5,224,552                    |       | 4,530,801                   |       |
| Accumulated other comprehensive income                                                                                                      |       | 11,205                       |       | 3,520                       |       |
| Total unitholders’ equity                                                                                                              |       | 5,285,757                    |       | 4,584,321                   |       |
| Total liabilities and unitholders’ equity                                                                                              |       | $                            | 13,245,786 |                        | $          | 13,259,127 |   |

 

The accompanying notes are an integral partof these Condensed Consolidated Financial Statements.

 

3

----

 

**Archstone-Smith Operating Trust**

 

**CondensedConsolidated Statements of Earnings**

 

**(In thousands, except per unit amounts)**

**(Unaudited)**

 
| ** **                                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Rental revenues                                           |       | $                                                    | 282,158    |                                                | $          | 244,704 |   | $ | 827,305 |   | $ | 667,213 |   |
| Other income                                              |       | 15,243                                               |       | 27,299                                              |       | 44,406 |   | 57,100 |   |
|                                                      |       | 297,401                                              |       | 272,003                                             |       | 871,711 |   | 724,313 |   |
| Expenses:                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Rental expenses                                           |       | 68,122                                               |       | 61,032                                              |       | 198,879 |   | 152,535 |   |
| Real estate taxes                                         |       | 25,115                                               |       | 19,824                                              |       | 77,343 |   | 57,565 |   |
| Depreciation on real estate investments                   |       | 68,416                                               |       | 57,000                                              |       | 205,710 |   | 166,760 |   |
| Interest expense                                          |       | 70,744                                               |       | 60,163                                              |       | 210,360 |   | 150,402 |   |
| General and administrative expenses                       |       | 21,601                                               |       | 18,497                                              |       | 60,732 |   | 49,794 |   |
| Other expenses                                            |       | 5,578                                                |       | 4,734                                               |       | 12,571 |   | 15,923 |   |
|                                                      |       | 259,576                                              |       | 221,250                                             |       | 765,595 |   | 592,979 |   |
| Earnings from operations                                  |       | 37,825                                               |       | 50,753                                              |       | 106,116 |   | 131,334 |   |
| Income/(loss) from unconsolidated entities                |       | (4,542                                               | )          | 2,088                                               |       | (3,540 | ) | 31,484 |   |
| Other non-operating income                                |       | 26,488                                               |       | 1,718                                               |       | 28,430 |   | 2,137 |   |
| Earnings before discontinued operations                   |       | 59,771                                               |       | 54,559                                              |       | 131,006 |   | 164,955 |   |
| Earnings from discontinued operations                     |       | 339,268                                              |       | 95,552                                              |       | 661,982 |   | 321,802 |   |
| Net earnings                                              |       | 399,039                                              |       | 150,111                                             |       | 792,988 |   | 486,757 |   |
| Preferred Unit distributions                              |       | (958                                                 | )          | (957                                                | )          | (2,874 | ) | (2,872 | ) |
| Net earnings attributable to Common Units —  Basic   |       | $                                                    | 398,081    |                                                | $          | 149,154 |   | $ | 790,114 |   | $ | 483,885 |   |
| Interest on Convertible Debt                              |       | 6,345                                                |       | —                                              |       | 19,935 |   | — |   |
| Net earnings attributable to Common Units —  Diluted |       | $                                                    | 404,426    |                                                | $          | 149,154 |   | $ | 810,049 |   | $ | 483,885 |   |
| Weighted average Common Units outstanding:                |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                     |       | 250,216                                              |       | 248,695                                             |       | 250,230 |   | 247,950 |   |
| Diluted                                                   |       | 260,033                                              |       | 249,643                                             |       | 260,032 |   | 248,810 |   |
| Earnings per Common Unit — Basic:                    |       |                                                 |       |                                                |       |   |   |   |   |
| Earnings before discontinued operations                   |       | $                                                    | 0.23       |                                                | $          | 0.22 |   | $ | 0.51 |   | $ | 0.65 |   |
| Discontinued operations, net                              |       | 1.36                                                 |       | 0.38                                                |       | 2.65 |   | 1.30 |   |
| Net earnings                                              |       | $                                                    | 1.59       |                                                | $          | 0.60 |   | $ | 3.16 |   | $ | 1.95 |   |
| Earnings per Common Unit — Diluted:                  |       |                                                 |       |                                                |       |   |   |   |   |
| Earnings before discontinued operations                   |       | $                                                    | 0.23       |                                                | $          | 0.22 |   | $ | 0.51 |   | $ | 0.65 |   |
| Discontinued operations, net                              |       | 1.33                                                 |       | 0.38                                                |       | 2.61 |   | 1.29 |   |
| Net earnings                                              |       | $                                                    | 1.56       |                                                | $          | 0.60 |   | $ | 3.12 |   | $ | 1.94 |   |
| Distributions paid per Common Unit                        |       | —                                               |       | $                                                   | 0.4350     |   | $ | 0.9050 |   | $ | 1.3050 |   |

 

The accompanying notes are an integral partof these Condensed Consolidated Financial Statements.

 

4

----

 

**Archstone-Smith Operating Trust**

 

**CondensedConsolidated Statement of Unitholders’ Equity,Other Common Unitholders’ Interest and Comprehensive Income**

 

**Nine Months Ended September 30, 2007**

 

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Perpetual  Preferred  Units at  Aggregate  Liquidation  Preference** | ** ** | **Common  Unitholders’  Equity** | ** ** | **Accumulated  Other  Comprehensive  Income /(Loss)** | ** ** | **Total  Unitholders’  Equity** | ** ** | **Other  Common  Unitholders’  Interest** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Balances at December 31, 2006                                           |       | $                                                                           | 50,000     |                                  | $          | 4,530,801                                                  |       | $                                    | 3,520      |                                           | $          | 4,584,321 |       | $ | 1,718,017 |   | $ | 6,302,338 |   |
| Comprehensive income:                                                        |       |                                                                        |       |                                  |       |                                                       |       |                                 |       |                                           |       |      |       |
| Net earnings                                                                 |       | —                                                                      |       | 706,120                               |       | —                                                     |       | 706,120                              |       | 86,868                                         |       | 792,988   |       |
| Change in fair value of hedges, net                                          |       | —                                                                      |       | —                                |       | (570                                                       | )          | (570                                 | )          | —                                         |       | (570      | )          |
| Reclassification adjustment for realized  net gains on marketable securities |       | —                                                                      |       | —                                |       | (1,794                                                     | )          | (1,794                               | )          | —                                         |       | (1,794    | )          |
| Change in fair value of marketable  securities                               |       | —                                                                      |       | —                                |       | (14                                                        | )          | (14                                  | )          | —                                         |       | (14       | )          |
| Foreign currency exchange translation, net                                   |       | —                                                                      |       | —                                |       | 10,063                                                     |       | 10,063                               |       | —                                         |       | 10,063    |       |
| Comprehensive income attributable to Common  Units                           |       | —                                                                      |       | —                                |       | —                                                     |       | —                               |       |                                           |       | 800,673   |       |
| Preferred Unit dividends                                                     |       | —                                                                      |       | (2,874                                | )          | —                                                     |       | (2,874                               | )          | —                                         |       | (2,874    | )          |
| Common Unit dividends                                                        |       | —                                                                      |       | (202,471                              | )          | —                                                     |       | (202,471                             | )          | (25,397                                        | )          | (227,868  | )          |
| A-1 Common Units converted into  A-2 Common Units                  |       | —                                                                      |       | 55,378                                |       | —                                                     |       | 55,378                               |       | (55,378                                        | )          | —    |       |
| Issuance of Common Units under Dividend  Reinvestment Plan                   |       | —                                                                      |       | 20,493                                |       | —                                                     |       | 20,493                               |       | —                                         |       | 20,493    |       |
| Exercise of options                                                          |       | —                                                                      |       | 11,489                                |       | —                                                     |       | 11,489                               |       | —                                         |       | 11,489    |       |
| Equity-classified awards under Compensation  Plans                           |       | —                                                                      |       | 7,882                                 |       | —                                                     |       | 7,882                                |       | —                                         |       | 7,882     |       |
| Adjustment to redemption value                                               |       | —                                                                      |       | 88,641                                |       | —                                                     |       | 88,641                               |       | (88,641                                        | )          | —    |       |
| Common Unit redemptions                                                      |       | —                                                                      |       | —                                |       | —                                                     |       | —                               |       | (59,080                                        | )          | (59,080   | )          |
| Issuance of A-1 Common Units in  exchange for real estate               |       | —                                                                      |       | —                                |       | —                                                     |       | —                               |       | 1,067                                          |       | 1,067     |       |
| Other, net                                                                   |       | —                                                                      |       | 9,093                                 |       | —                                                     |       | 9,093                                |       | —                                         |       | 9,093     |       |
| Balances at September 30, 2007                                          |       | $                                                                           | 50,000     |                                  | $          | 5,224,552                                                  |       | $                                    | 11,205     |                                           | $          | 5,285,757 |       | $ | 1,577,456 |   | $ | 6,863,213 |   |

 

The accompanying notes are an integral partof these Condensed Consolidated Financial Statements.

 

5

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**Archstone-Smith Operating Trust**

**CondensedConsolidated Statements of Cash Flows**

 

**(In thousands)**

**(Unaudited)**

** **
| ** **                                                                                | ** ** | **Nine Months Ended  September 30,** | ** **   |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|--------------|
| ** **                                                                                | ** ** | **2007**                                            | ** **   | **2006** | ** ** |
| Operating activities:                                                                     |       |                                                |         |   |   |
| Net earnings                                                                              |       | $                                                   | 792,988      |   | $ | 486,757 |   |
| Adjustments to reconcile net earnings to  net cash flow provided by operating activities: |       |                                                |         |   |   |
| Depreciation and amortization                                                             |       | 220,614                                             |         | 222,360 |   |
| Gains on dispositions of depreciated real  estate                                         |       | (647,213                                            | )            | (314,246 | ) |
| Gains on sale of marketable equity  securities                                            |       | (1,867                                              | )            | — |   |
| Change in swap value — DeWAG derivatives                                             |       | —                                              |         | 1,407 |   |
| Provision for possible loss on investments                                                |       | —                                              |         | 4,328 |   |
| Gains on sale of International Fund shares                                                |       | (14,044                                             | )            | — |   |
| Foreign currency gains on International  investments                                      |       | (12,387                                             | )            | — |   |
| Equity in earnings from unconsolidated  entities                                          |       | 8,889                                               |         | 3,610 |   |
| Interest accrued on Mezzanine loans                                                       |       | (2,425                                              | )            | (7,814 | ) |
| Change in other assets                                                                    |       | (41,159                                             | )            | 14,757 |   |
| Change in accounts payable, accrued  expenses and other liabilities                       |       | (16,447                                             | )            | 22,854 |   |
| Other, net                                                                                |       | 5,720                                               |         | (6,733 | ) |
| Net cash flow provided by operating  activities                                           |       | 292,669                                             |         | 427,280 |   |
|                                                                                      |       |                                                |         |   |   |
| Investing activities:                                                                     |       |                                                |         |   |   |
| Real estate investments                                                                   |       | (2,034,088                                          | )            | (1,826,663 | ) |
| Purchase of DeWAG net of cash acquired of  $20,364                                        |       | —                                              |         | (252,428 | ) |
| Change in investments in unconsolidated  entities, net                                    |       | (43,981                                             | )            | (67,523 | ) |
| Proceeds from disposal of International  Fund shares                                      |       | 98,857                                              |         | — |   |
| Investment in International Fund                                                          |       | (104,924                                            | )            | — |   |
| Proceeds from dispositions                                                                |       | 1,766,241                                           |         | 1,190,054 |   |
| Change in restricted cash                                                                 |       | 2,090                                               |         | 440,695 |   |
| Change in notes receivable, net                                                           |       | 38,288                                              |         | (83,592 | ) |
| Other, net                                                                                |       | (29,858                                             | )            | 7,679 |   |
| Net cash flow used by investing activities                                                |       | (307,375                                            | )            | (591,778 | ) |
|                                                                                      |       |                                                |         |   |   |
| Financing activities:                                                                     |       |                                                |         |   |   |
| Proceeds from Long-Term Unsecured Debt, net                                               |       | —                                              |         | 859,385 |   |
| Payments on Long-Term Unsecured Debt                                                      |       | (367,397                                            | )            | (31,250 | ) |
| Proceeds from (payments on) unsecured  credit facilities, net                             |       | 921,351                                             |         | (368,864 | ) |
| Principal repayment of mortgages payable,  including prepayment penalties                 |       | (76,338                                             | )            | (220,410 | ) |
| Regularly scheduled principal payments on  mortgages payable                              |       | (9,989                                              | )            | (11,723 | ) |
| Proceeds from term loan to fund DeWAG  investment                                         |       | —                                              |         | 272,792 |   |
| Proceeds from Unsecured loans —  International                                       |       | 142,657                                             |         | — |   |
| Principal repayments on Unsecured loans —  International                             |       | (378,428                                            | )            | — |   |
| Proceeds from Common Units issued under  DRIP and employee stock options                  |       | 29,933                                              |         | 46,913 |   |
| Cash dividends paid on Common Units                                                       |       | (227,868                                            | )            | (324,044 | ) |
| Cash dividends paid on Preferred Units                                                    |       | (2,874                                              | )            | (2,872 | ) |
| Redemption of A-1 Units                                                                   |       | (59,080                                             | )            | — |   |
| Other, net                                                                                |       | 8,865                                               |         | (16,987 | ) |
| Net cash flow provided (used) by financing  activities                                    |       | (19,168                                             | )            | 202,940 |   |
| Net change in cash and cash equivalents                                                   |       | (33,874                                             | )            | 38,442 |   |
| Cash and cash equivalents at beginning of  period                                         |       | 48,655                                              |         | 13,638 |   |
| Cash and cash equivalents at end of period                                                |       | $                                                   |  14,781 |   | $ |  52,080 |   |
| Significant non-cash investing and  financing activities:                                 |       |                                                |         |   |   |
| Common Units issued in exchange for real  estate                                          |       | $                                                   | 1,067        |   | $ | 81,412 |   |
| A-1 Common Units converted to  A-2 Common Units                                 |       | 55,378                                              |         | 107,758 |   |
| Assumption of mortgages payable upon  purchase of apartment communities                   |       | 15,000                                              |         | 728,484 |   |

 

Inconnection with the formation of the International Fund, we contributed assetsand liabilities at book value. The assets consisted of real estate ofapproximately $1.0 billion and accounts receivable and other assets of$0.1 billion. The liabilities consisted of mortgages and unsecured creditfacilities of $0.7 billion and other accounts payable and accrued expensesof $0.1 billion.

 

These Condensed Consolidated Statements of Cash Flows combine cash flowsfrom discontinued operations with cash flows from continuing operations.

 

The accompanying notes are an integral part of these CondensedConsolidated Financial Statements.

 

6

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** **

**Archstone-Smith Operating Trust**

 

**Notes toCondensed Consolidated Financial Statements**

 

**September 30, 2007 and 2006**

**(Unaudited)**

 

**(1)****                                 Descriptionof the Business and Summary of Significant Accounting Policies**

 

*Business*

 

Archstone-Smith is structured as an UPREIT under which all propertyownership and business operations are conducted through Archstone-SmithOperating Trust, which we refer to herein as the “Operating Trust.” Archstone-Smithwas our sole trustee and owned approximately 89.5% of the Operating Trust’soutstanding Common Units at September 30, 2007; the remaining 10.5% of theCommon Units were owned by minority interest holders. As used herein, “we,” “our”and the “company” refers to the Operating Trust and Archstone-Smith,collectively, except where the context otherwise requires. Archstone-Smith isan equity REIT organized under the laws of the State of Maryland. We focus oncreating value for our unitholders by acquiring, developing, redeveloping andoperating apartments in markets characterized by protected locations withlimited land for new housing construction, expensive single-family home prices,and a strong, diversified economic base with significant employment growthpotential.

 

*Consummation of Agreement to be Acquired*

 

On May 29, 2007, Archstone-Smith announced it had signed a definitiveMerger Agreement, dated as of May 28, 2007 (as amended by Amendment No. 1thereto, the “Merger Agreement”), whereby both Archstone-Smith and theOperating Trust would be acquired by subsidiaries of an entity jointlycontrolled by affiliates of Tishman Speyer Real Estate Venture VII, L.P., andLehman Brothers Holdings, Inc. (the “Buyer Parties”). The transactionscontemplated by the Merger Agreement were consummated on October 4 and 5, 2007.As a result of the transactions contemplated by the Merger Agreement, the soletrustee of the Operating Trust, effective as of October 5, 2007, is TishmanSpeyer Archstone-Smith Multifamily Series I Trust (“Series I Trust”), which alongwith Tishman Speyer Archstone-Smith Multifamily Series II, L.L.C (“Series IITrust) and Tishman Speyer Archstone-Smith Multifamily Series III, L.L.C (“SeriesIII Trust) owns 100% of the Operating Trust’s outstanding Common Units.

 

Under the terms of the Merger Agreement, all outstanding Common Sharesof Archstone-Smith were acquired by the Series I Trust, the Series II Trust andthe Series III Trust for $60.75 in cash, without interest and less applicablewithholding taxes, for each Common Share issued and outstanding immediatelyprior to the effective time of the merger. With respect to the outstandingSeries I Preferred Shares, the Buyer Parties elected to replace them withsubstantially identical Series I Preferred Shares of the Series I Trust.

 

As part of the transaction, the Operating Trust merged on October 4,2007 with River Trust Acquisition (MD), LLC, a subsidiary of the Buyer Parties(“MergerSub”). Although the Operating Trust is the surviving entity, MergerSubis viewed as the acquiror for accounting purposes. Each Class A-2 Common Unitremains outstanding. Approximately 4.5 million Class A-1 Common Units, held bymore than 300 holders, were converted into the right to receive an equivalentnumber of newly issued Series O Preferred Units, whereas holders ofapproximately 21.6 million Class A-1 Common Units elected to exchange theirClass A-1 Common Units for cash consideration of $60.75 without interest andless applicable withholding taxes. Each Series O Preferred Unit has aredemption price of $60.75 and bears cumulative preferential distributionspayable quarterly at an annual rate of 6%. The distribution rate will increaseto 8% per annum under certain circumstances, including during any period whenthe ratio of total debt to total assets exceeds 0.85 to 1.00. The Series OPreferred Units, which have only limited voting rights, are redeemable by theholder or the Operating Trust under certain circumstances. The Series IPreferred Units remain outstanding and unchanged. Each Series M Preferred Unitand each Series N-1 and N-2 Convertible Preferred Unit was converted into theright to receive one newly issued Series P Preferred Unit, Series Q-1 PreferredUnit and Series Q-2 Preferred Unit, respectively, of the Operating Trust.

 

Further, immediately after the effective time of the Operating Trustmerger, the Buyer Parties caused the Operating Trust to make certain materialasset distributions to Archstone-Smith. In connection with the transaction, theOperating Trust distributed approximately $2.9 billion of real estate, based oncost, to affiliated entities.

 

7

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*Interim Financial Reporting*

 

The accompanying Condensed Consolidated Financial Statements of theOperating Trust are unaudited and certain information and footnote disclosuresnormally included in financial statements have been omitted. While managementbelieves that the disclosures presented are adequate for interim reporting,these interim financial statements should be read in conjunction with thefinancial statements and notes included in the Operating Trust’s Annual Reporton Form 10-K, for the year ended December 31, 2006 (“2006Form 10-K”). See the glossary in our 2006 Form 10-Kfor definitions of all initially-capitalized terms notdefined herein.

 

In the opinion of management, the accompanying unaudited financialstatements contain all adjustments necessary for a fair presentation of theOperating Trust’s financial statements for the interim periods presented. Theresults of operations for the three and nine months ended September 30,2007 are not necessarily indicative of the results to be expected for theentire year.

 

*Principles of Consolidation*

 

The accounts of the Operating Trust and its controlled subsidiaries areconsolidated in the accompanying financial statements. All significant inter-companyaccounts and transactions have been eliminated. We use the equity method toaccount for investments that do not qualify as variable interest entities,variable interest entities where we are not the primary beneficiary and entitiesthat we do not control, or where we do not own a majority of the economicinterest, but have the ability to exercise significant influence over theoperating and financial policies of the investee. We also use the equity methodwhen we function as the managing member and our partner does not havesubstantive participating rights or we can be replaced by a partner if we arethe managing member. For an investee accounted for under the equity method, ourshare of net earnings or losses of the investee is reflected in income asearned and dividends are credited against the investment as received.

 

*Use of Estimates*

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requires managementto make estimates and assumptions that affect amounts reported in the financialstatements and the related notes. Actual results could differ from management’sestimates. Estimates and assumptions are reviewed periodically and the effectsof revisions are reflected in the period they are determined tobe necessary.

 

*Real Estate and Depreciation*

 

We allocate the cost of newly acquired properties between net tangibleand identifiable intangible assets. When allocating cost to an acquiredproperty, we first allocate costs to the estimated intangible value of theexisting lease agreements and then to the estimated value of the land, buildingand fixtures assuming the property is vacant. We estimate the intangible valueof the lease agreements by determining the lost revenue associated with ahypothetical lease-up. We depreciate the building and fixtures based on theexpected useful life of the asset and amortize the intangible value of thelease agreements over the average remaining life of the existing leases. Thisamortization expense is included in depreciation on real estate investments inour Condensed Consolidated Statements of Earnings.

 

*Intangibles*

 

Intangible assets consist of lease-related intangibles and certainintangibles associated with the DeWAG acquisition. See Note 3. The market valueof above and below market leases are based on our estimate of current marketrents as compared to the rent that we are receiving and is recorded in eitherother assets or other liabilities. These assets are charged and liabilities arecredited to rental income over the estimated term of the lease. We alsorecognize the value of our in-place lease agreements and amortize these assetsinto depreciation on real estate investments over the estimated term of the lease.

 

We will perform an impairment test annually, or more frequently, ifevents or changes in circumstances indicate impairment of our intangibleassets, which are included in other assets.

 

8

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*Revenue and Gain Recognition*

 

We generally lease our apartment units under operating leases withterms of one year or less. Communities subject to the Oakwood Master Leasesentered into in 2005 have a seven-year term, expiring between July 2012and March 2013, subject to Oakwood’s right to terminate individual leasesunder certain circumstances. As of September 30, 2007, none of the OakwoodMaster Lease Communities has been returned to the company. The aggregate annualcontractual base rent due under these leases is $74.1 million and issubject to annual adjustments on January 1st of each year equal tothe percentage change in the average Same-Store NOI growth for certain otherspecified properties. Rental income related to leases is recognized in the periodearned over the lease term in accordance with Statement of Financial AccountingStandards SFAS No.13, “*Accounting forLeases*.” Rent concessions are recognized as an offset to revenuescollected over the term of the underlying lease. We use the full accrual methodof profit recognition in accordance with SFAS No. 66 to recordgains on sales of real estate. If we sell improvements and retain a lease onthe underlying land that covers substantially all of the economic life of theimprovements, then we defer the profit associated with the land and record theprofit ratably over the life of the lease. Accordingly, we evaluate the relatedGAAP requirements in determining the profit to be recognized at the date ofeach sale transaction (i.e., the profit is determinable and the earningsprocess is complete). We recognize deferred gains when a property is sold to athird party. Further, during periods when our ownership interests in aninvestee decrease, we will recognize gains related to previously deferredproceeds to coincide with our new ownership interest in the investee.

 

*Rental Expenses*

 

Rental expenses shown on the accompanying Condensed ConsolidatedStatements of Earnings include costs associated with on-site and propertymanagement personnel, utilities, repairs and maintenance, property insurance,marketing, landscaping and other on-site and related administrative costs.Utility reimbursements from residents, which are recorded as offsets to utilityexpenses, aggregated $5.3 million and $5.4 million for the threemonths ended September 30, 2007 and 2006, respectively, and$18.1 million and $17.4 million for the nine months endedSeptember 30, 2007 and 2006, respectively, including amounts reclassifiedto discontinued operations for the respective periods.

 

*Insurance Recoveries*

 

We recognize insurance recovery proceeds as other income if therecovery is related to items that were originally expensed, such as legalsettlements, legal expenses and repairs that did not meet capitalizationguidelines. For recoveries of property damages that were eligible forcapitalization, we reduce the basis of the property or if the property hassubsequently been sold, we recognize the proceeds as an additional gain onsale. We recognize insurance recoveries at such time that we believe the recoveryis probable and we have sufficient information to make a reasonable estimate ofproceeds, except in cases where we have to pursue recovery via litigation. Inthis circumstance, we recognize the recovery when we have a signed, legallybinding agreement with the insurance carrier.

 

*Legal Fees*

 

We generally recognize legal expenses as incurred; however, if suchfees are related to the accrual for an estimated legal settlement, we accruefor the related incurred and anticipated legal fees at the same time we accruethe estimated cost of settlement.

 

*Foreign Operations*

 

Assets and liabilities of the company’s foreign operations aretranslated into U.S. dollars at the exchange rate in effect at the balancesheet date. Revenue and expenses are translated at average rates in effectduring the period. The resulting translation adjustment on our permanentinvestment is reflected as accumulated other comprehensive income, a separatecomponent of unitholders’ equity on the Condensed Consolidated Balance Sheets,while the change in the exchange rate on our temporary investment is includedin our other non-operating income on the Condensed Consolidated Statements ofEarnings. The functional currency utilized for these entities is the Euro. Uponthe sale of our foreign operations, the gain or loss on the sale will includethe foreign currency amounts previously recorded in accumulated othercomprehensive income.

 

9

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*Derivative Financial Instruments*

 

We utilize derivative financial instruments to manage our interest raterisk, foreign currency exchange risk, exposure to changes in the fair value ofcertain investments in equity securities and exposure to volatile energyprices. The resulting assets and liabilities associated with derivativefinancial instruments are carried on our financial statements at estimated fairvalue at the end of each reporting period. The changes in fair value of a fairvalue hedge and the fair value of the items hedged are generally recorded in earningsfor each reporting period. The change in the fair value of effective cash flowhedges and foreign currency hedges are carried on our financial statements as acomponent of accumulated other comprehensive income. If effective, our hedgeshave little or no impact on our current earnings.

 

*Income Taxes*

 

We have made an election to be taxed as a partnership under theInternal Revenue Code of 1986, as amended, and we believe we qualify as apartnership and have made all required distributions of our taxable income.

 

Income taxes for our taxable REIT subsidiaries are accounted for underthe asset and liability method. Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss and tax credit carryforwards. Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in earnings in the periodthat includes the enactment date. A valuation allowance for deferredincome tax expense is provided if we believe that we will not realize the taxbenefit.

 

*Comprehensive Income*

 

Comprehensive income, which is defined as net earnings and all othernon-owner changes in equity, is displayed in the accompanying CondensedConsolidated Statement of Unitholders’ Equity, Other Common Unitholders’Interest and Comprehensive Income. Other comprehensive income reflectsunrealized holding gains and losses on the available-for-sale investments,changes in the fair value of effective cash flow hedges and gains and losses onlong-term foreign currency transactions.

 

Our accumulated other comprehensive income for the nine months endedSeptember 30, 2007 was as follows (in thousands):

 
| ** **                                                                   | ** ** | **Net Unrealized  Gains on  Marketable  Securities** | ** ** | **Cash Flow  Hedges** | ** ** | **Foreign  Currency  Translation** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------|------------|------------------------------------|------------|-----------------------------------------------|------------|
| Balance at December 31, 2006                                            |       | $                                                              | 1,822      |                       | $          | (554                               | )          | $                                             | 2,252      |   | $ | 3,520 |   |
| Change in fair value of hedges, net                                          |       | —                                                         |       | (738                       | )          | —                             |       | (738                                          | )          |
| Change in fair value of long-term debt  hedges                               |       | —                                                         |       | 168                        |       | —                             |       | 168                                           |       |
| Foreign currency exchange translation, net                                   |       | —                                                         |       | —                     |       | 10,063                             |       | 10,063                                        |       |
| Change in fair value of marketable  securities                               |       | (14                                                            | )          | —                     |       | —                             |       | (14                                           | )          |
| Reclassification adjustment for realized  net gains on marketable securities |       | (1,794                                                         | )          | —                     |       | —                             |       | (1,794                                        | )          |
| Balance at September 30, 2007                                           |       | $                                                              | 14         |                       | $          | (1,124                             | )          | $                                             | 12,315     |   | $ | 11,205 |   |

 

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*Per Unit Data*

 

Following is a reconciliation of basic net earnings per Common Unit todiluted net earnings per Common Unit for the periods indicated(in thousands):

 
| ** **                                                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Reconciliation of numerator between basic  and diluted net earnings per Common Unit(1):**   |       |                                                 |       |                                                |       |   |   |   |   |
| Net earnings attributable to Common Units —  Basic                                       |       | $                                                    | 398,081    |                                                | $          | 149,154 |   | $ | 790,114 |   | $ | 483,885 |   |
| Interest on Convertible Debt                                                                  |       | 6,345                                                |       | —                                              |       | 19,935 |   | — |   |
| Net earnings attributable to Common Units —  Diluted                                     |       | $                                                    | 404,426    |                                                | $          | 149,154 |   | $ | 810,049 |   | $ | 483,885 |   |
|                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| **Reconciliation of denominator between basic  and diluted net earnings per Common Unit(1):** |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average number of Common Units  outstanding — Basic                             |       | 250,216                                              |       | 248,695                                             |       | 250,230 |   | 247,950 |   |
| Assumed conversion of Convertible Debt into  Common Units                                     |       | 9,039                                                |       | —                                              |       | 9,039 |   | — |   |
| Incremental options                                                                           |       | 778                                                  |       | 948                                                 |       | 763 |   | 860 |   |
| Weighted average number of Common Units  outstanding — Diluted                           |       | 260,033                                              |       | 249,643                                             |       | 260,032 |   | 248,810 |   |

 

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(1)           Excludes the impactof potentially dilutive equity securities during periods in which they areanti-dilutive.

 

To calculate net earnings per Common Unit, we allocate the interest onthe Convertible Debt on a pro-rata basis between continuing and discontinuedoperations.

 

***New AccountingPronouncements***

 

In July 2006, the FASB issued Interpretation No. 48(FIN 48), *“Accounting for Uncertaintyin Income Taxes — An Interpretation of FASB Statement No. 109.”*FIN 48 defines a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. The provisions of FIN 48 are effectivefor fiscal years beginning after December 15, 2006. The adoption ofFIN 48 as of January 1, 2007 by us did not have a material effect onour financial position, net earnings or cash flows.

 

We recognize these tax positions and evaluate them using a two-stepprocess. First, we determine whether a tax position is more likely than not(greater than 50 percent probability) to be sustained upon examination,including resolution of any related appeals or litigation processes, based onthe technical merits of the position. Then, we measure to determine the amountof benefit to recognize and record the amount of the benefit that is morelikely than not to be realized upon ultimate settlement.

 

We or one of our subsidiaries files income tax returns in theU.S. federal jurisdiction, and various states and foreign jurisdictions.With few exceptions, we are not subject to U.S. federal, state and local,or non-U.S. income tax examinations by tax authorities for years before2001. As of September 30, 2007, no taxing authority had proposed anysignificant adjustments to our tax positions. We have no significant currenttax examinations in process.

 

A reconciliation of the beginning and ending amount of unrecognized taxbenefits is as follows (in thousands):

 
| Unrecognized Tax Benefits:         |   |   |   |
|------------------------------------|--------|--------|--------|
| Balance at January 1, 2007    |   | $      | 2,021  |   |
| Current Period Interest            |   | 111    |   |
| Balance at September 30, 2007 |   | $      | 2,132  |   |

 

We are required to recognize interest and penalties accrued related tounrecognized tax benefits in tax expense. As of the date of adoption, thecompany has accrued interest of approximately $228,000 and we have not recordedany penalties.

 

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In September 2006, the FASB issued SFAS No. 157, *“Fair Value Measurements.”*SFAS No. 157 defines fair value, establishes a framework formeasuring fair value in GAAP and expands disclosures about fair valuemeasurements. The statement does not require new fair value measurements, butis applied to the extent other accounting pronouncements require or permit fairvalue measurements. The statement emphasizes fair value as a market-basedmeasurement which should be determined based on assumptions market participantswould use in pricing an asset or liability. We will be required to disclose theextent to which fair value is used to measure assets and liabilities, theinputs used to develop the measurements, and the effect of certain of themeasurements on earnings (or changes in net assets) for the period.SFAS No. 157 is effective for fiscal years beginning afterNovember 15, 2007.

 

In February 2007, the FASB issued SFAS No. 159, *“The Fair Value Option for Financial Assets andFinancial Liabilities,”* which gives entities the option to measureeligible financial assets, financial liabilities and firm commitments at fairvalue on an instrument-by-instrument basis (i.e., the fair value option),which are otherwise not permitted to be accounted for at fair value under otheraccounting standards. The election to use the fair value option is available whenan entity first recognizes a financial asset or financial liability or uponentering into a firm commitment. Subsequent changes in fair value must berecorded in earnings. Additionally, SFAS No. 159 allows for aone-time election for existing positions upon adoption, with the transitionadjustment recorded to beginning retained earnings. This statement is effectivefor fiscal years beginning after November 15, 2007. We do not anticipatethe adoption of this statement will have a material impact on our financialposition, results of operations or cash flows.

 

**(2)****           RealEstate**

 

*Investments in Real Estate*

 

Investments in real estate, at cost, were as follows (dollar amountsin thousands):

 
| ** **                                  | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **Investment**               | ** ** | **Investment**              | ** ** |
| Operating Trust Apartment Communities:      |       |                         |       |                        |       |
| Operating communities                       |       | $                            | 11,658,490 |                        | $          | 11,208,052 |   |
| Communities under construction              |       | 297,316                      |       | 406,881                     |       |
| Development communities In Planning(1)      |       | 141,799                      |       | 75,538                      |       |
| Total Operating Trust apartment communities |       | 12,097,605                   |       | 11,690,471                  |       |
| Ameriton(1)                                 |       | 688,367                      |       | 585,524                     |       |
| International                               |       | 53,892                       |       | 851,593                     |       |
| Other real estate assets(2)                 |       | 126,124                      |       | 60,052                      |       |
| Total real estate                           |       | $                            | 12,965,988 |                        | $          | 13,187,640 |   |

 

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(1)                                  Includesdevelopment communities In Planning – Owned but excludes In Planning – UnderControl. Our investment as of September 30, 2007 and December 31,2006 for development communities In Planning – Under Control was$13.3 million and $7.6 million, respectively, and is reflected in the“Other assets” caption of our Condensed Consolidated Balance Sheets.

 

(2)                                  Includesland that is not In Planning and other non-multifamily real estate assets.

 

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

 
| Balance at December 31, 2006                              |   | $          | 13,187,640 |   |
|----------------------------------------------------------------|--------|------------|------------|--------|
| Acquisition-related expenditures                               |   | 1,420,132  |       |
| Redevelopment expenditures                                     |   | 37,328     |       |
| Recurring capital expenditures                                 |   | 30,340     |       |
| Development expenditures, including initial  acquisition costs |   | 348,793    |       |
| Acquisition of land for development                            |   | 213,261    |       |
| Dispositions                                                   |   | (1,195,068 | )          |
| International Fund formation  (See Note 3)           |   | (1,034,524 | )          |
| Other                                                          |   | 820        |       |
| Net apartment community activity                               |   | (178,918   | )          |
| Change in other real estate assets                             |   | (42,734    | )          |
| Balance at September 30, 2007                                  |   | $          | 12,965,988 |   |

 

At September 30, 2007, we had unfunded contractual commitments of$625.5 million related primarily to communities under construction andunder redevelopment. The purchase prices of certain recent acquisitions inCalifornia and Washington were allocated to land, buildings and other assetsbased on preliminary estimates and are subject to change as we obtain morecomplete information regarding land, building and lease intangibles values.

 

**(3)           DeWAGAcquisition and International Fund Formation**

 

On July 27, 2006, we acquired 94% of the shares and 94% of anoutstanding shareholder loan of DeWAG Deutsche WohnAnlage GmbH (“DeWAG”),a company that specializes in the acquisition, ownership, operation and re-saleof quality residential properties in the major metropolitan areas of Southernand Western Germany, as well as West Berlin. Our purchase price consisted ofapproximately $271 million plus the assumption of approximately $509 millionin DeWAG liabilities, based on the exchange rate on the transaction date. Wefinalized our purchase price allocation related to the acquisition and therewere no significant adjustments to the original allocation.

 

Effective June 29, 2007, we contributed our ownership in certainGerman real estate entities, including those in DeWAG, into a German realestate fund. In this report we refer to the combined group of entities in whichwe have ownership interests as the “International Fund.” The combined totalassets and third-party liabilities associated with the contribution were $1.1 billionand $0.8 billion, respectively. We recognized a gain of $14.0 million onthe shares that were sold, which is included in other non-operating income andwe have deferred a gain of $11.2 million related to the common equity that weown at September 30, 2007. As of September 30, 2007, approximately 55% ofthe International Fund’s common equity was owned by third-party investors withthe remainder owned by the Operating Trust. Although our economic interest issignificant, we do not control the International Fund. We will recognize ourproportionate share of the earnings or losses using the equity method ofaccounting. The accompanying Condensed Consolidated Balance Sheet as ofSeptember 30, 2007 reflects the International Fund on the equity method asa result of deconsolidation, whereas the Condensed Consolidated Balance Sheetas of December 31, 2006 reflects our German real estate entitiescontributed to the International Fund on a consolidated basis. The accompanyingCondensed Consolidated Statements of Earnings reflect operations associatedwith entities contributed to the International Fund on a consolidated basisthrough June 30, 2007 and on an equity method basis for the quarter endedSeptember 30, 2007. Please refer to Note 5 for further information.

 

As part of our DeWAG acquisition in 2006, we acquired a managementcompany which is now known as Archstone Management Germany (“AMG”). The assetsof AMG consist principally of the goodwill created in the DeWAG transaction andnon-compete agreements entered into with certain key officers of DeWAG. Weconcluded that the goodwill was primarily attributable to the people andprocesses which comprise the investing and the operating platform we acquired inthe DeWAG transaction, none of which were contributed to the InternationalFund. AMG will earn fees for acting as the manager of the International Fund,and is expected to earn additional fees and incentives by providing otherservices including, but not limited to asset management, acquisition,disposition, financing, accounting and administrative activities. We may alsoearn incentive performance fees if certain investor returns are achieved over aspecified period.

 

As of September 30, 2007, the non-compete agreements had a grosscarrying amount of $21.3 million and accumulated amortization of$6.7 million. We are amortizing these agreements over a three-year period.

 

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The changes in the carrying amount of goodwill are as follows (inthousands):

 
| Balance at December 31, 2006                   |   | $     | 35,450 |   |
|-----------------------------------------------------|--------|-------|--------|--------|
| Purchase accounting and fund formation  adjustments |   | 6,131 |   |
| Change in foreign currency translation              |   | 3,661 |   |
| Balance at September 30, 2007                  |   | $     | 45,242 |   |

 

**(4)           DiscontinuedOperations**

 

The results of operations for properties sold during the period ordesignated as held-for-sale at the end of the period are required to beclassified as discontinued operations. The property specific components of netearnings that are classified as discontinued operations include rentalrevenues, rental expenses, real estate taxes, depreciation expense, minorityinterest, income taxes, a pro-rata allocation of interest expense and the netgain or loss on the disposition of properties.

 

We had six operating apartment communities, representing2,031 units (unaudited), classified as held-for-sale under the provisionsof SFAS No. 144, at September 30, 2007. Accordingly, we havereclassified the operating earnings from these properties to discontinued operationsfor the three and nine months ended September 30, 2007 and 2006. Duringthe nine months ended September 30, 2007, we sold 21 REIT and fiveAmeriton operating properties. The operating results of these communities andthe related gain on sale are also included in discontinued operations for 2007and 2006.

 

The following is a summary of net earnings from discontinued operations(in thousands):

 
| ** **                                                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Rental revenues                                                                     |       | $                                                    | 14,894     |                                                | $          | 61,831 |   | $ | 77,470 |   | $ | 214,693 |   |
| Rental expenses                                                                     |       | (4,655                                               | )          | (17,984                                             | )          | (20,224 | ) | (59,694 | ) |
| Real estate taxes                                                                   |       | (1,193                                               | )          | (6,360                                              | )          | (8,119 | ) | (25,684 | ) |
| Depreciation on real estate investments                                             |       | (375                                                 | )          | (12,659                                             | )          | (8,154 | ) | (45,752 | ) |
| Interest expense(1)                                                                 |       | (3,301                                               | )          | (13,877                                             | )          | (16,973 | ) | (49,475 | ) |
| Income taxes from taxable REIT subsidiaries                                         |       | (1,244                                               | )          | 1,492                                               |       | (4,354 | ) | (9,979 | ) |
| Provision for possible loss on real estate  investment                              |       | —                                               |       | —                                              |       | — |   | (4,328 | ) |
| Debt extinguishment costs related to  dispositions                                  |       | (1,543                                               | )          | (825                                                | )          | (2,537 | ) | (7,588 | ) |
| Gains from the disposition of REIT real  estate investments, net                    |       | 332,536                                              |       | 79,984                                              |       | 629,444 |   | 258,960 |   |
| Internal disposition costs — REIT  transactions(2)                             |       | (387                                                 | )          | (267                                                | )          | (1,462 | ) | (1,094 | ) |
| Gains from the disposition of taxable REIT  subsidiary real estate investments, net |       | 4,869                                                |       | 4,631                                               |       | 17,769 |   | 55,286 |   |
| Internal disposition costs — taxable REIT  subsidiary transactions(2)          |       | (333                                                 | )          | (414                                                | )          | (878 | ) | (3,543 | ) |
| Earnings from discontinued apartment  communities                                   |       | $                                                    | 339,268    |                                                | $          | 95,552 |   | $ | 661,982 |   | $ | 321,802 |   |

 

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(1)                                  Interest expenseincluded in discontinued operations is allocated to properties based on eachasset’s cost in relation to the company’s leverage ratio and the averageeffective interest rate for each respective period.

 

(2)                                  Represents the directand incremental compensation and related costs associated with the employeesdedicated to our significant disposition activity.

 

The real estate and mortgage payable balances associated with operatingcommunities classified as held-for-sale are reflected as “Real estate –held-for-sale” and “Mortgages payable – held-for-sale” in the accompanyingCondensed Consolidated Balance Sheets.

 

The disposition proceeds associated with the sales of individual rentalunits by our foreign subsidiaries are included in continuing operations as suchsales do not meet the requirements under SFAS 144, *“Accounting for the Impairment or Disposal ofLong-Lived Assets,”* to be reflected as discontinued operations.

 

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**(5)           Investmentsin and Advances to Unconsolidated Entities**

 

We have investments in real estate entities that we account for usingthe equity method. A summary of our investments in and advances tounconsolidated entities follows (dollar amounts in thousands):

 
| ** **         | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **         | ** ** | **Investment**                   | ** ** | **Number of  Ventures**    | ** ** | **Investment** | ** ** | **Number of  Ventures** | ** ** |
| Operating Trust    |       | $                                | 210,974    |                            | 12         |   | $ | 199,705 |   | 13 |   |
| Ameriton           |       | 62,752                           |       | 7                               |       | 35,618 |   | 5 |   |
| Domestic           |       | 273,726                          |       | 19                              |       | 235,323 |   | 18 |   |
| International Fund |       | 288,750                          |       | 1                               |       | — |   | — |   |
| Total              |       | $                                | 562,476    |                            | 20         |   | $ | 235,323 |   | 18 |   |

 

Our combined weighted average percentage of ownership in unconsolidatedentities based on total assets at September 30, 2007 was 41.22%.

 

Combined summary balance sheet data for our investments inunconsolidated entities presented on a stand-alone basis follows(in thousands):

 
| ** **                                     | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Assets:                                        |       |                         |       |                        |       |
| Real estate                                    |       | $                            | 2,790,648  |                        | $          | 1,530,659 |   |
| Other assets                                   |       | 307,969                      |       | 213,569                     |       |
| Total assets                                   |       | $                            | 3,098,617  |                        | $          | 1,744,228 |   |
| Liabilities and owners’ equity:           |       |                         |       |                        |       |
| Inter-company debt payable to Operating  Trust |       | $                            | 113        |                        | $          | 1,519 |   |
| Mortgages payable(1)                           |       | 1,931,023                    |       | 1,063,451                   |       |
| Other liabilities                              |       | 321,199                      |       | 126,048                     |       |
| Total liabilities                              |       | 2,252,335                    |       | 1,191,018                   |       |
| Owners’ equity                            |       | 846,282                      |       | 553,210                     |       |
| Total liabilities and owners’ equity      |       | $                            | 3,098,617  |                        | $          | 1,744,228 |   |

 

----

(1)                                  The Operating Trustguarantees $292.0 million of the outstanding debt balance of certain ofour Archstone-Smith development ventures as of September 30, 2007 and iscommitted to guarantee another $39.9 million upon funding ofadditional debt.

 

Selected combined summary results of operations for our unconsolidatedinvestees presented on a stand-alone basis follows (in thousands):

 
| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Operating Trust Joint Venture revenues |       | $                                                    | 41,847     |                                                | $          | 35,662 |   | $ | 119,117 |   | $ | 99,634 |   |
| Net earnings(1)                        |       | 5,003                                                |       | 8,225                                               |       | 1,771 |   | 40,261 |   |
| Ameriton Joint Venture revenues        |       | $                                                    | 156        |                                                | $          | 53 |   | $ | 584 |   | $ | 276 |   |
| Net earnings/(loss)(2)                 |       | (217                                                 | )          | (136                                                | )          | 3,626 |   | 18,185 |   |
| International Fund revenues            |       | $                                                    | 19,688     |                                                | $          | — |   | $ | 19,688 |   | $ | — |   |
| Net loss(3)                            |       | (9,804                                               | )          | —                                              |       | (9,804 | ) | — |   |
| Total revenues                         |       | $                                                    | 61,691     |                                                | $          | 35,715 |   | $ | 139,389 |   | $ | 99,910 |   |
| Total net earnings                     |       | $                                                    | (5,018     | )                                                   | $          | 8,089 |   | $ | (4,407 | ) | $ | 58,446 |   |

 

15

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(1)                                  Includes gainsassociated with the disposition of Operating Trust Joint Venture assets of $4.2million and $9.3 million for the three months ended September 30, 2007 and2006, and $4.2 million and $37.1 million for the nine months ended September30, 2007 and 2006, respectively.

 

(2)                                  Includes Ameriton’sshare of pre-tax gains associated with the disposition of real estate joint ventureassets of $4.0 million and $19.7 million for the nine months endedSeptember 30, 2007 and 2006, respectively.

 

(3)                                  The InternationalFund was formed at the end of June 2007 and the related earnings/(loss)for periods prior to formation are therefore incorporated into our consolidatedresults.

 

**(6)           Mortgageand Other Notes Receivable**

 

The change in mortgage and other notes receivable, which are includedin other assets, during the nine months ended September 30, 2007 consistedof the following (in thousands):

 
| Balance at December 31, 2006  |   | $       | 123,261 |   |
|------------------------------------|--------|---------|---------|--------|
| Funding of additional notes        |   | 13,097  |    |
| Accrued interest                   |   | 5,074   |    |
| Prepayments                        |   | (52,128 | )       |
| Balance at September 30, 2007 |   | $       | 89,304  |   |

 

We have a commitment to fund an additional $49.9 million underexisting agreements. Our rights to the underlying collateral on these notes inthe event of default are generally subordinate to the primary mortgage lender.We evaluate the collectibility of our mezzanine and other notes receivable on aquarterly basis. We recognized interest income associated with notes receivableof $2.9 million and $5.5 million for the three months endedSeptember 30, 2007 and 2006, respectively, and $9.1 million and$13.4 million for the nine months ended September 30, 2007 and 2006,respectively. The weighted average contracted interest rate on these notes asof September 30, 2007 was approximately 12.2%.

 

**(7)           Borrowings**

 

*Unsecured Credit Facilities*

 

Our $600 million unsecured credit facility, which is led byJPMorgan Chase Bank, N.A., bears interest at the greater of the prime rate orthe federal funds rate plus 0.50% or, at our option, LIBOR plus 0.40%. Thespread over LIBOR can vary from LIBOR plus 0.325% to LIBOR plus 1.00%, basedupon the rating of our long-term unsecured senior notes. The facility containsan accordion feature that allows us to increase the size of the commitment to$1.0 billion at any time during the life of the facility, subject tolenders providing additional commitments, and enables us to borrow up to $150 millionin foreign currencies. The credit facility was scheduled to mature inJune 2010 and was paid off at the time of the merger.

 

On May 29, 2007, we entered into an agreement with Morgan StanleySenior Funding, Inc., that provides for a $500 million unsecured revolvingline of credit. This facility bears interest at the greater of the prime rateor the federal funds rate plus 0.50% or, at our option, LIBOR plus 0.40%. Thespread over LIBOR can vary from LIBOR plus 0.325% to LIBOR plus 1.00%, basedupon the rating of our long-term unsecured senior notes. The credit facilitywas scheduled to mature in December 2007 and was paid off in connectionwith the merger.

 

16

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The following table summarizes our revolving credit facility borrowingsunder our lines of credit (in thousands, except for percentages):

 
| ** **                                                            | ** ** | **September 30,  2007** | ** **      | **December 31,  2006** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------|-----------------|-----------------------------|------------|
| Total unsecured revolving credit facilities                           |       | $                            |  1,100,000 |                        | $          | 600,000 |   |
| Borrowings outstanding at end of period                               |       | 871,000                      |            | 80,000                      |       |
| Outstanding letters of credit under the  JPMorgan Chase Bank facility |       | 13,977                       |            | 14,880                      |       |
| Weighted average daily borrowings                                     |       | 485,095                      |            | 100,474                     |       |
| Maximum borrowings outstanding during the  period                     |       | 965,427                      |            | 360,000                     |       |
| Weighted average daily nominal interest  rate                         |       | 5.5                          | %               | 5.0                         | %          |
| Weighted average daily effective interest  rate                       |       | 5.8                          | %               | 6.3                         | %          |
|                                                                       |            |                              |                 |                             |            |  |  |

 

We also have a short-term unsecured borrowing agreement with JPMorganChase Bank, N.A., which provides for maximum borrowings of $100 million.The borrowings under the agreement bear interest at an overnight rate agreed toat the time of borrowing and ranged from 5.6% to 6.2% during the nine-monthperiod ended September 30, 2007. There were $29.4 million ofborrowings outstanding under the agreement at September 30, 2007, and$4.7 million of borrowings outstanding at December 31, 2006. Thecredit facility was paid off in connection with the merger.

 

*Long-Term Unsecured Debt*

 

A summary of our Long-Term Unsecured Debt outstanding atSeptember 30, 2007 and December 31, 2006 follows (dollar amountsin thousands):

 
| **Type of Debt**       | ** ** | **Coupon  Rate(1)** | ** ** | **Effective  Interest  Rate(1)(2)** | ** ** | **Balance at  September 30, 2007** | ** ** | **Balance at  December 31, 2006** | ** ** | **Average  Remaining  Life (Years)** | ** ** |
|----------------------------------|------------|---------------------|------------|-------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------|------------|
| Long-term unsecured senior notes |       | 5.4                 | %          | 5.7                                 | %          | $                                                 | 2,930,366  |                                             | $          | 3,279,404                                 |       | 5.3 |   |
| Unsecured tax-exempt bonds       |       | 4.0                 | %          | 4.9                                 | %          | 59,649                                            |       | 76,295                                           |       | 14.3                                      |       |
| Total/Weighted average           |       | 5.4                 | %          | 5.6                                 | %          | $                                                 | 2,990,015  |                                             | $          | 3,355,699                                 |       | 5.5 |   |

 

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(1)                                  Represents a fixedrate for the long-term unsecured notes and a variable rate for the unsecuredtax-exempt bonds.

 

(2)                                  Includes the effectof fair value hedges, loan cost amortization and other ongoing fees andexpenses, where applicable.

 

*Mortgages Payable*

 

Our mortgages payable generally feature either monthly interest andprincipal payments or monthly interest-only payments with balloon payments dueat maturity. Early repayment of mortgages is generally subject to prepaymentpenalties.

 

17

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A summary of mortgages payable follows (dollar amounts in thousands):

 
| ** **                  | ** ** | **Outstanding Balance at(1)** | ** ** | **Effective**               | ** ** |
|-----------------------------|------------|-----------------------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | **September 30,  2007**            | ** ** | **December 31,  2006** | ** ** | **Interest  Rate(2)** | ** ** |
| Secured floating rate debt: |       |                                    |       |                        |       |   |   |
| Tax-exempt debt             |       | $                                       | 837,238    |                        | $          | 935,536 |   | 5.5 | % |
| Conventional mortgages      |       | 47,925                                  |       | 167,020                     |       | 5.9 | % |
| Total Floating              |       | 885,163                                 |       | 1,102,556                   |       | 5.5 | % |
| Secured fixed rate debt:    |       |                                    |       |                        |       |   |   |
| Tax-exempt debt             |       | 84                                      |       | 3,086                       |       | 6.4 | % |
| Conventional mortgages      |       | 1,159,643                               |       | 1,651,650                   |       | 6.1 | % |
| Other secured debt          |       | 18,101                                  |       | 18,942                      |       | 4.6 | % |
| Total Fixed                 |       | 1,177,828                               |       | 1,673,678                   |       | 6.0 | % |
| Total mortgages payable     |       | $                                       | 2,062,991  |                        | $          | 2,776,234 |   | 5.8 | % |

 

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(1)                                  Includes theunamortized fair market value adjustment associated with assumption of fixedrate mortgages in connection with real estate acquisitions. The unamortizedbalance aggregated $33.3 million and $43.9 million atSeptember 30, 2007 and December 31, 2006, respectively, and is beingamortized as a credit to interest expense over the life of the underlying debt.

 

(2)                                  Includes the effectof fair value hedges, credit enhancement fees, the amortization of fair marketvalue purchase adjustment, and other related costs, where applicable.

 

The change in mortgages payable during the nine months endedSeptember 30, 2007 consisted of the following (in thousands):

 
| Balance at December 31, 2006                         |   | $        | 2,776,234 |   |
|-----------------------------------------------------------|--------|----------|-----------|--------|
| Regularly scheduled principal amortization                |   | (9,989   | )         |
| Borrowings, prepayments, final maturities  and other, net |   | (78,924  | )         |
| International Fund formation  (See Note 3)      |   | (624,330 | )         |
| Balance at September 30, 2007                        |   | $        | 2,062,991 |   |

 

*Other*

 

The majority of our debt was paid off in connection with the merger andreplaced with new debt to finance a significant portion of the transaction.

 

The book value of total assets pledged as collateral for mortgage loansand other obligations at September 30, 2007 and December 31, 2006 was$4.3 billion and $5.6 billion, respectively. Our debt instrumentsgenerally contain covenants common to the type of facility or borrowing,including financial covenants establishing minimum debt service coverage ratiosand maximum leverage ratios. We were in compliance with all financial covenantspertaining to our debt instruments at September 30, 2007.

 

The total interest paid on all outstanding debt was $120.0 millionand $96.5 million for the three months ended September 30, 2007 and2006, respectively, and $283.6 million and $244.8 million for thenine months ended September 30, 2007 and 2006, respectively. We capitalizeinterest incurred during the construction period as part of the cost ofapartment communities under development. Capitalized interest was$12.2 million and $13.3 million for the three months endedSeptember 30, 2007 and 2006, respectively, and $37.6 million and$39.6 million for the nine months ended September 30, 2007 and 2006,respectively.

 

18

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**(8)           Distributionsto Unitholders**

 

The following table summarizes the quarterly cash distributions paidper unit on Common and Preferred Units during the three and nine months endedSeptember 30, 2007. We will not pay any additional distributions on CommonUnits and will continue to pay $7,660 per year related to the Series IPerpetual Preferred Units in accordance with the terms of the Merger Agreement.Please see Note 1 for a discussion of the merger of Archstone-Smith.

 
| ** **                                 | ** ** | **Quarterly  Cash  Distribution  Per Unit** | ** ** | **Cash Distribution Per Unit  for the Nine Months Ended  September 30, 2007** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| Common Units                               |       | —                                           |       | $                                                                                                                          | 0.905      |   |
| Series I Perpetual Preferred Units(1) |       | $                                                | 1,915      |                                                                                                                       | $          | 5,745 |   |
|                                            |            |                                                  |            |                                                                                                                            |            |  |  |

 

----

(1)           Series IPreferred Units have a par value of $100,000 per unit.

 

**(9)           BenefitPlans and Implementation of SFAS 123R**

 

Our long-term incentive plan was approved in 1997 and was modified inconnection with the Smith merger. There have been seven types of awards underthe plan: (i) options with a DEU feature (only awarded prior to 2000);(ii) options without the DEU feature (generally awarded after 1999);(iii) RSU awards with a DEU feature (awarded prior to 2006); (iv) RSUawards with a cash dividend payment feature (awarded after 2005);(v) employee share purchase program with matching options without the DEUfeature, granted only in 1997 and 1998; (vi) performance units, which areconvertible into Common Shares upon vesting, issued to certain named executivesunder a Special Long-Term Incentive Program; and (vii) stock appreciationrights.

 

No more than 20.0 million share or option awards in the aggregatemay be granted under the plan, and no individual may be awarded more than1.0 million share or option awards in any one-year period. As ofSeptember 30, 2007, Archstone-Smith had approximately 9.6 millionshares available for future issuance. Non-qualified options constitute animportant component of compensation for officers below the level of senior vicepresident and for selected employees.

 

A summary of share option activity for the options and RSUs ispresented below:

 
| ** **                       | ** ** | **Option Awards** | ** ** | **RSU Awards**                        | ** ** |
|----------------------------------|------------|------------------------|------------|--------------------------------------------|------------|
| ** **                       | ** ** | **Options**            | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Units** | ** ** | **Weighted  Average  Grant Price** | ** ** |
| Balance, December 31, 2006  |       | 1,831,355              |       | $                                          | 30.14      |   | 946,615 |   | $ | 31.82 |   |
| Granted                          |       | 388,017                |       | $                                          | 58.62      |   | 175,176 |   | $ | 58.62 |   |
| Exercised/Settled                |       | (165,369               | )          | $                                          | 33.70      |   | (99,532 | ) | $ | 28.86 |   |
| Forfeited                        |       | (22,306                | )          | $                                          | 42.63      |   | — |   |   | — |   |
| Expired                          |       | —                 |       |                                       | —     |   | — |   |   | — |   |
| Balance, March 31, 2007     |       | 2,031,697              |       | $                                          | 35.16      |   | 1,022,259 |   | $ | 36.72 |   |
| Granted                          |       | 4,102                  |       | $                                          | 53.05      |   | 12,000 |   | $ | 53.05 |   |
| Exercised/Settled                |       | (135,537               | )          | $                                          | 27.09      |   | (39,248 | ) | $ | 27.77 |   |
| Forfeited                        |       | (26,935                | )          | $                                          | 49.61      |   | (23,633 | ) | $ | 48.61 |   |
| Expired                          |       | —                 |       | —                                     |       | — |   | — |   |
| Balance, June 30, 2007      |       | 1,873,327              |       | $                                          | 35.57      |   | 971,378 |   | $ | 36.99 |   |
| Granted                          |       | —                 |       | —                                     |       | — |   | — |   |
| Exercised/Settled                |       | (28,316                | )          | $                                          | 22.78      |   | — |   | — |   |
| Forfeited                        |       | (1,570                 | )          | $                                          | 56.19      |   | — |   | — |   |
| Expired                          |       | —                 |       | —                                     |       | — |   | — |   |
| Balance, September 30, 2007 |       | 1,843,441              |       | $                                          | 34.92      |   | 971,378 |   | 36.99 |   |

 

Certain of the options and RSUs, included in the table above, have aDEU feature. The aggregate number of vested DEUs outstanding as ofSeptember 30, 2007 was approximately 240,000. During the nine months endedSeptember 30, 2007, we recorded $185,000 as a charge to operating expenserelated to unvested DEUs and $1,620,000 of Common Share dividends related tovested DEUs.

 

19

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*Options*

 

During the nine months ended September 30, 2007 and 2006, theshare options granted to associates had a calculated fair value of $8.44 and$5.52 per option, respectively. The historical exercise patterns of theassociate groups receiving option awards are similar, and therefore we usedonly one set of assumptions in calculating fair value for each period. For thethree and nine months ended September 30, 2007, the calculated fair valuewas determined using the Black-Scholes-Merton valuation model, using a weightedaverage risk-free interest rate of 4.44%, a weighted average dividend yield of3.39%, a volatility factor of 18.62% and a weighted average expected life offour years. For the three and nine months ended September 30, 2006, thecalculated fair value was determined using the Black-Scholes-Merton valuationmodel, using a weighted average risk-free interest rate of 4.66%, a weightedaverage dividend yield of 4.57%, a volatility factor of 18.30% and a weightedaverage expected life of four years. The options vest over a three-year periodand have a contractual term of 10 years. We used an estimated forfeiturerate of 10% in recording option compensation expense for the three and ninemonths ended September 30, 2007, based primarily on historical experience.The unamortized compensation cost is $2.9 million, which includes all optionspreviously granted but not yet vested. This amount will be recorded ascompensation cost on the merger date.

 

The total intrinsic value of the share options exercised during thenine-month periods ended September 30, 2007 and 2006 were$9.9 million and $26.0 million, respectively. The intrinsic value isdefined as the difference between the realized fair value of the share or thequoted fair value at the end of the period, less the exercise price of theoption. We had 1.1 million fully vested options outstanding atSeptember 30, 2007 with a weighted average exercise price of $26.86. Theweighted-average contractual life of the fully vested options is5.18 years, and they have an intrinsic value of $37.6 million. Inaddition, we have 657,100 options outstanding that we expect to vest witha weighted average exercise price of $51.80. The weighted-average contractuallife of the unvested options is 9.23 years, and they have an intrinsicvalue of $5.5 million.

 

*Restricted Share Units*

 

Also during the nine months ended September 30, 2007 and 2006, weissued RSUs to senior officers and trustees of the company with an averagegrant date fair value of $58.26 and $45.77, respectively per share. The unitsvest over a three-year period and the related unamortized compensation cost is$13.4 million, which includes all units previously granted but not yetvested. This amount will be recorded as compensation cost on the merger date.

 

We had 576,318 fully vested RSUs outstanding at September 30,2007 with a weighted average grant date fair value of $28.53. The weighted-averagecontractual life for the fully vested shares is 5.12 years and theintrinsic value is $34.7 million. In addition, we have 390,685 RSUsoutstanding that we expect to vest with a weighted average grant date fairvalue of $49.40. The weighted-average contractual life for the unvested sharesis 9.04 years and the intrinsic value is $19.3 million. The totalintrinsic value of the RSUs settled during the nine-month periods endedSeptember 30, 2007 and 2006 were $8.3 million and $3.5 million,respectively.

 

*Special Long-Term Incentive Program*

 

Effective January 1, 2006, a special long-term incentive programrelated to the achievement of total shareholder return performance targets wasestablished for certain of our executive officers. We would issue approximately300,000 performance units if all performance targets are ultimately met asof December 31, 2008. The calculated grant date fair value ofapproximately $4.8 million is being charged to compensation expenseratably over the three-year term of the plan. The calculated fair value wasdetermined by an independent third party using a Monte Carlo simulationapproach which yielded an estimated payout percentage of 41%. The relatedunamortized compensation cost at September 30, 2007 is $1.3 millionand will be recorded as compensation cost on the merger date.

 

*Summary*

 

The compensation cost associated with all awards for the nine monthsended September 30, 2007 was approximately $10.0 million, of whichapproximately $7.9 million was charged to operating expenses, andapproximately $2.1 million related to dedicated investment personnel wascapitalized with respect to development and other qualifying investmentactivities. The compensation cost associated with all awards for the ninemonths ended September 30, 2006 was approximately $8.9 million, of whichapproximately $6.7 million was charged to operating expenses, andapproximately $2.2 million

 

20

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related to dedicated investment personnel was capitalized with respectto development and other qualifying investment activities. The unamortizedcompensation cost of $16.4 million will be recorded as compensation cost on themerger date.

 

**(10)         SegmentData**

 

We have determined that our garden communities and our High-Risecommunities have similar economic characteristics and meet the other GAAPcriteria, which permit the garden communities and High-Rise communities to beaggregated into two reportable segments. Additionally, we have defined theactivity from Ameriton as an individual operating segment, as its primary focusis the opportunistic acquisition, development and eventual disposition of realestate with a short-term investment horizon. NOI is defined as rental revenuesless rental expenses and real estate taxes. We rely on NOI for purposes ofmaking decisions about resource allocations and assessing segment performance.We also believe NOI is a valuable means of comparing year-to-year operatingperformance.

 

Following are reconciliations, which exclude the amounts classified asdiscontinued operations, of each reportable segment’s (i) revenues toconsolidated revenues; (ii) NOI to consolidated earnings from operations;and (iii) assets to consolidated assets, for the periods indicated(in thousands):

 
| ** **                                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Reportable apartment communities segment  revenues:                |       |                                                 |       |                                                |       |   |   |   |   |
| Same-Store:                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Garden communities                                                 |       | $                                                    | 125,665    |                                                | $          | 118,861 |   | $ | 356,391 |   | $ | 334,579 |   |
| High-Rise communities                                              |       | 98,945                                               |       | 93,606                                              |       | 254,710 |   | 242,440 |   |
| Non Same-Store and other:                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Garden communities                                                 |       | 24,489                                               |       | 4,334                                               |       | 65,495 |   | 16,774 |   |
| High-Rise communities                                              |       | 25,865                                               |       | 11,155                                              |       | 97,843 |   | 50,312 |   |
| Ameriton communities(1)                                            |       | 3,042                                                |       | 348                                                 |       | 6,084 |   | (460 | ) |
| International and other non-reportable  operating segment revenues |       | 4,152                                                |       | 16,400                                              |       | 46,782 |   | 23,568 |   |
| Total segment and consolidated rental  revenues                    |       | $                                                    | 282,158    |                                                | $          | 244,704 |   | $ | 827,305 |   | $ | 667,213 |   |
|                                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Reportable apartment communities segment  NOI:                     |       |                                                 |       |                                                |       |   |   |   |   |
| Same-Store:                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Garden communities                                                 |       | $                                                    | 86,576     |                                                | $          | 81,618 |   | $ | 248,741 |   | $ | 234,409 |   |
| High-Rise communities                                              |       | 68,066                                               |       | 63,756                                              |       | 175,165 |   | 168,180 |   |
| Non Same-Store and other:                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Garden communities                                                 |       | 13,491                                               |       | 2,086                                               |       | 35,637 |   | 9,194 |   |
| High-Rise communities                                              |       | 16,539                                               |       | 5,310                                               |       | 62,904 |   | 30,976 |   |
| Ameriton communities(1)                                            |       | 1,391                                                |       | 136                                                 |       | 2,915 |   | (446 | ) |
| International and other non-reportable  operating segment revenues |       | 2,858                                                |       | 10,942                                              |       | 25,721 |   | 14,800 |   |
| Total segment NOI                                                  |       | 188,921                                              |       | 163,848                                             |       | 551,083 |   | 457,113 |   |
| Reconciling items:                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Other income                                                       |       | 15,243                                               |       | 27,299                                              |       | 44,406 |   | 57,100 |   |
| Depreciation on real estate investments                            |       | (68,416                                              | )          | (57,000                                             | )          | (205,710 | ) | (166,760 | ) |
| Interest expense                                                   |       | (70,744                                              | )          | (60,163                                             | )          | (210,360 | ) | (150,402 | ) |
| General and administrative expenses                                |       | (21,601                                              | )          | (18,497                                             | )          | (60,732 | ) | (49,794 | ) |
| Other expenses                                                     |       | (5,578                                               | )          | (4,734                                              | )          | (12,571 | ) | (15,923 | ) |
| Consolidated earnings from operations                              |       | $                                                    | 37,825     |                                                | $          | 50,753 |   | $ | 106,116 |   | $ | 131,334 |   |

 

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(1)           Whilerental revenue and NOI are the primary measures we use to evaluate theperformance of our assets, management also utilizes gains from the dispositionof real estate when evaluating the performance of Ameriton, as its primaryfocus is the opportunistic acquisition, development and eventual disposition ofreal estate with a short-term investment horizon. Pre-tax net gains from thedisposition of Ameriton operating communities were $4.5 million and$4.2 million for the three months ended September 30, 2007 and 2006,respectively, and $16.9 million and $51.7 million for the nine monthsended September 30, 2007 and 2006, respectively. These gains areclassified within discontinued operations. Additionally, Ameriton had gainsfrom the sale of unconsolidated joint venture assets that are classified withinincome from unconsolidated entities and gains from land sales that areclassified within other income. Ameriton assets are excluded from ourSame-Store population as they are acquired or developed to achieve short-termopportunistic gains, and therefore, the average holding period is typicallymuch shorter than the holding period of assets operated by the Operating Trust.

 
| ** **                                                                     | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Reportable operating communities segment assets, net: |       |                         |       |                        |       |
| Same-Store:                                                                    |       |                         |       |                        |       |
| Garden communities                                                             |       | $                            | 3,580,569  |                        | $          | 3,610,111 |   |
| High-Rise properties                                                           |       | 2,993,519                    |       | 3,028,995                   |       |
| Non Same-Store:                                                                |       |                         |       |                        |       |
| Garden communities                                                             |       | 2,116,288                    |       | 2,760,786                   |       |
| High-Rise properties                                                           |       | 2,095,779                    |       | 1,818,834                   |       |
| Ameriton                                                                       |       | 600,145                      |       | 461,276                     |       |
| FHA/ADA settlement accrual                                                     |       | 16,103                       |       | 29,185                      |       |
| International                                                                  |       | 51,811                       |       | 48,438                      |       |
| Other non-reportable operating segment  assets                                 |       | 283,133                      |       | 264,246                     |       |
| Total segment assets                                                           |       | 11,737,347                   |       | 12,021,871                  |       |
| Real estate held-for-sale, net                                                 |       | 224,455                      |       | 208,623                     |       |
| Total segment assets                                                           |       | 11,961,802                   |       | 12,230,494                  |       |
|                                                                           |       |                         |       |                        |       |
| Reconciling items:                                                             |       |                         |       |                        |       |
| Investment in and advances to  unconsolidated entities                         |       | 562,476                      |       | 235,323                     |       |
| Cash and cash equivalents                                                      |       | 14,781                       |       | 48,655                      |       |
| Restricted cash in tax-deferred exchange  escrow                               |       | 317,222                      |       | 319,312                     |       |
| Other assets                                                                   |       | 389,505                      |       | 425,343                     |       |
| Consolidated total assets                                                      |       | $                            | 13,245,786 |                        | $          | 13,259,127 |   |

 

Total capital expenditures for garden communities included incontinuing operations were $18.3 million and $15.7 million for thethree months ended September 30, 2007 and 2006, respectively, and$47.0 million and $38.5 million for the nine months endedSeptember 30, 2007 and 2006, respectively. Total capital expenditures forHigh-Rise properties included in continuing operations were $15.9 millionand $15.7 million for the three months ended September 30, 2007 and2006, respectively, and $33.0 million and $43.8 million for the ninemonths ended September 30, 2007 and 2006, respectively. Total capitalexpenditures for Ameriton properties included in continuing operations were$0.7 million and $0.2 million for the three months endedSeptember 30, 2007 and 2006, respectively, and $1.3 million and$0.8 million for the nine months ended September 30, 2007 and 2006,respectively.

 

**(11)         Litigationand Contingencies**

 

On May 30, 2007, two separate purported shareholder class-actionlawsuits related to the Merger Agreement and the transactions contemplatedthereby were filed naming the company and each of the company’s trustees asdefendants. One of these lawsuits, *SeymourSchiff v. James A. Cardwell, et al*. (Case No. 2007cv1135),was filed in the United States District Court for the District ofColorado. The other, *Mortimer J. Cohen v.Archstone-Smith Trust, et al*. (Case No. 2007cv1060), wasfiled in the District Court, County of Arapahoe, Colorado. On May 31,2007, two additional purported shareholder class-action lawsuits related to theMerger Agreement and the transactions contemplated thereby were filed in theDistrict Court, County of Arapahoe, Colorado. The first, *Howard Lasker v. R. Scot Sellers, et al.*(CaseNo. 2007cv1073), names the

 

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company, each of the company’s trustees and one of the company’s seniorofficers as defendants. The second, *SteamshipTrade Association/International Longshoremen’s Association Pension Fund v.Archstone-Smith Trust, et al.* (Case No. 2007cv1070), namesthe company, each of the company’s trustees, Tishman Speyer and Lehman Brothersas defendants. On June 11, 2007, an additional purported shareholderclass-action lawsuit related to the Merger Agreement, *Doris Staehr v. Archstone-Smith Trust, et al.*(Case No. 2007cv1081), was filed in the District Court, County ofArapahoe, Colorado, naming the company and each of the company’s trustees asdefendants. All five lawsuits allege, among other things, that the company’strustees violated their fiduciary duties to the company’s shareholders inapproving the mergers.

 

On June 21, 2007, the District Court, County of Arapahoe, Coloradoentered an order consolidating the *Lasker,Steamship Trade Association/International Longshoremen’s Association PensionFund* and *Staehr*actions into the *Cohen* action,under the caption *In re Archstone-SmithTrust Shareholder Litigation*.

 

On August 17, 2007, we and the other defendants entered into amemorandum of understanding with the plaintiffs regarding the settlement ofboth the *Schiff* and the consolidated actioncaptioned *In re Archstone-Smith Trust Shareholder Litigation.*In connection with the settlement, we agreed to make certain additionaldisclosures to our shareholders. Subject to the completion of certainconfirmatory discovery by counsel to the plaintiffs, the memorandum ofunderstanding contemplates that the parties will enter into a stipulation ofsettlement. The stipulation of settlement will be subject to customaryconditions, including court approval following notice to our shareholders andconsummation of the merger. In the event that the parties enter into astipulation of settlement, a hearing will be scheduled at which the court willconsider the fairness, reasonableness and adequacy of the settlement, which, iffinally approved by the court, will resolve all of the claims that were orcould have been brought in the actions being settled, including all claimsrelating to the merger, the merger agreement and any disclosure made inconnection therewith. In addition, in connection with the settlement, theparties contemplate that plaintiffs’ counsel will petition the court for anaward of attorneys’ fees and expenses to be paid by us, up to an agreed-uponlimit. There can be no assurance that the parties will ultimately enter into astipulation of settlement or that the court will approve the settlement even ifthe parties were to enter into such stipulation. In such event, the proposedsettlement as contemplated by the memorandum of understanding may beterminated. The settlement will not affect the amount of the mergerconsideration that the plaintiffs are entitled to receive in the merger. We andthe other defendants vigorously deny all liability with respect to the factsand claims alleged in the lawsuits, and specifically deny that any modificationsto the Merger Agreement or any further supplemental disclosure was requiredunder any applicable rule, statute, regulation or law. However, to avoid therisk of delaying or adversely affecting the merger and the relatedtransactions, to minimize the expense of defending the lawsuits, and to provideadditional information to our shareholders at a time and in a manner that wouldnot cause any delay of the merger, we and our trustees agreed to the settlementdescribed above. We and the other defendants further considered it desirablethat the actions be settled to avoid the substantial burden, expense, risk,inconvenience and distraction of continued litigation and to fully and finallyresolve the settled claims.

 

During the second quarter of 2005, we entered into a full and finalsettlement in the United States District Court for the District ofMaryland with three national disability organizations and agreed to makecapital improvements in a number of our communities in order to make them fullycompliant with the FHA and ADA. The litigation, settled by this agreement,alleged lack of full compliance with certain design and constructionrequirements under the two federal statutes at 71 of the company’s wholly-ownedand joint venture communities, of which we still own or have an interest in 40.As part of the settlement, the three disability organizations all recognizedthat the Operating Trust had no intention to build any of its communities in amanner inconsistent with the FHA or ADA.

 

The amount of the capital expenditures required to remediate thecommunities named in the settlement was estimated at $47.2 million and wasaccrued as an addition to real estate during the fourth quarter of 2005. Thesettlement agreement approved by the court allows us to remediate each of thedesignated communities over a three-year period, and also provides that we arenot restricted from selling any of our communities during the remediationperiod. We agreed to pay damages totaling $1.4 million, which includedlegal fees and costs incurred by the plaintiffs. We had $16.1 million ofthe original accrual remaining on September 30, 2007.

 

We are subject to various claims filed in 2002 and 2003 in connectionwith moisture infiltration and resulting mold issues at certain High-Riseproperties we once owned in Southeast Florida. These claims generally allegethat water infiltration and resulting mold contamination resulted in theclaimants having personal injuries and/or property damage. Although certain ofthese claims continue to be in various stages of litigation, with respect tothe majority of these claims, we

 

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have either settled the claims and/or we have been dismissed from thelawsuits that had been filed. With respect to the lawsuits that have not beenresolved, we continue to defend these claims in the normal courseof litigation.

 

We are a party to various other claims and routine litigation arisingin the ordinary course of business. We do not believe that the results of anysuch claims or litigation, individually or in the aggregate, will have amaterial adverse effect on our business, financial position or resultsof operations.

 

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Trustee and Unitholders

Archstone-Smith Operating Trust:

 

We have reviewed the accompanying condensed consolidated balance sheetof Archstone-Smith Operating Trust and subsidiaries as of September 30,2007, and the related condensed consolidated statements of earnings for thethree and nine months ended September 30, 2007 and 2006, condensedconsolidated statement of unitholders’ equity, other common unitholders’interest and comprehensive income for the nine months ended September 30,2007, and condensed consolidated statements of cash flows for the nine monthsended September 30, 2007 and 2006. These condensed consolidated financialstatements are the responsibility of Archstone-Smith Operating Trust’smanagement.

 

We conducted our reviews in accordance with standards of the PublicCompany Accounting Oversight Board (United States). A review of interimfinancial information consists principally of applying analytical proceduresand making inquiries of persons responsible for financial and accountingmatters. It is substantially less in scope than an audit conducted inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the objective of which is the expression of an opinionregarding the financial statements taken as a whole. Accordingly, we do notexpress such an opinion.

 

Based on our reviews, we are not aware of any material modificationsthat should be made to the Condensed Consolidated Financial Statements referredto above for them to be in conformity with U.S. generally acceptedaccounting principles.

 

We have previously audited, in accordance with standards of the PublicCompany Accounting Oversight Board (United States), the consolidatedbalance sheet of Archstone-Smith Operating Trust as of December 31, 2006,and the related consolidated statements of earnings, unitholders’ equity, othercommon unitholders’ interest and comprehensive income (loss), and cash flowsfor the year then ended (not presented herein); and in our report dated March 1,2007, we expressed an unqualified opinion on those consolidated financialstatements. In our opinion, the information set forth in the accompanyingcondensed consolidated balance sheet as of December 31, 2006 is fairlystated, in all material respects, in relation to the consolidated balance sheetfrom which it has been derived.

 

/s/ KPMG LLP

 

Denver, Colorado

November 9, 2007

 

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**Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**The following information should be read inconjunction with Archstone-Smith Operating Trust’s 2006 Form 10-K as wellas the financial statements and notes included in Item 1 ofthis report.**

 

*Forward-Looking Statements*

 

*This Form 10-Q contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934. These statementsare based on current expectations, estimates and projections about theindustry, markets in which Archstone-Smith operates, management’s beliefs,assumptions made by management and the transactions described in thisForm 10-Q. While Archstone-Smith management believes the assumptionsunderlying its forward-looking statements and information are reasonable, suchinformation is necessarily subject to uncertainties and may involve certainrisks, many of which are difficult to predict and are beyond management’scontrol. These risks include, but are not limited to: (1) the ability torecognize the benefits of the merger; (2) the amount of the costs, fees,expenses and charges related to the merger and the actual terms of certainfinancings that will be obtained for the merger; and (3) the impact of thesubstantial indebtedness incurred to finance the consummation of the merger;and other risks that are set forth under “Risk Factors” in the Operating Trust’s2006 Form 10-K. All forward-looking statements speak only as of the dateof this filing or, in the case of any document incorporated by reference, thedate of that document. All subsequent written and oral forward-lookingstatements attributable to us or any person acting on our behalf are qualifiedby the cautionary statements in this section. We undertake no obligation toupdate or publicly release any revisions to forward-looking statements toreflect events, circumstances or changes in expectations after the date of thisForm 10-Q.*

 

*Consummation of Agreement to be Acquired*

 

*On May 29, 2007, Archstone-Smith announced ithad signed the Merger Agreement, whereby both Archstone-Smith and the OperatingTrust would be acquired by the Buyer Parties. The transactions contemplated bythe Merger Agreement were consummated on October 4 and 5, 2007. As a result ofthe transactions contemplated by the Merger Agreement, the sole trustee of theOperating Trust, effective as of October 5, 2007, is the Series I Trust, which alongwith Series II Trust and Series III Trust owns 100% of the Operating Trust’soutstanding Common Units.*

 

*Under the terms of the Merger Agreement, alloutstanding Common Shares of Archstone-Smith were acquired by the Series ITrust, the Series II Trust and the Series III Trust for $60.75 in cash, withoutinterest and less applicable withholding taxes, for each Common Share issuedand outstanding immediately prior to the effective time of the merger. Withrespect to the outstanding Series I Preferred Shares, the Buyer Parties electedto replace them with substantially identical Series I Preferred Shares of theSeries I Trust.*

 

*As part of the transaction, the OperatingTrust merged on October 4, 2007 with River Trust Acquisition (MD), LLC, asubsidiary of the Buyer Parties (“MergerSub”). Although the Operating Trust isthe surviving entity, MergerSub is viewed as the acquiror for accountingpurposes. Each Class A-2 Common Unit remains outstanding. Approximately 4.5million Class A-1 Common Units, held by more than 300 holders, were convertedinto the right to receive an equivalent number of newly issued Series OPreferred Units, whereas holders of approximately 21.6 million Class A-1 CommonUnits elected to exchange their Class A-1 Common Units for cash considerationof $60.75 without interest and less applicable withholding taxes. Each Series OPreferred Unit has a redemption price of $60.75 and bears cumulativepreferential distributions payable quarterly at an annual rate of 6%. Thedistribution rate will increase to 8% per annum under certain circumstances,including during any period when the ratio of total debt to total assetsexceeds 0.85 to 1.00. The Series O Preferred Units, which have only limitedvoting rights, are redeemable by the holder or the Operating Trust undercertain circumstances. The Series I Preferred Units remain outstanding andunchanged. Each Series M Preferred Unit and each Series N-1 and N-2 ConvertiblePreferred Unit was converted into the right to receive one newly issued SeriesP Preferred Unit, Series Q-1 Preferred Unit and Series Q-2 Preferred Unit,respectively, of the Operating Trust.*

 

*Further, immediately after the effective timeof the Operating Trust merger, the Buyer Parties caused the Operating Trust tomake certain material asset distributions to Archstone-Smith. In connectionwith the transaction, the Operating Trust distributed approximately $2.9 billionof real estate and the corresponding liabilities to affiliated entities.*

 

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*                The Company*

 

We are engaged primarily in the acquisition, development,redevelopment, operation and long-term ownership of apartment communities inthe United States. Archstone-Smith is structured as an UPREIT, with allproperty ownership and business operations conducted through the OperatingTrust. Archstone-Smith was the sole trustee and owned approximately 89.5% ofour Common Units at September 30, 2007. Archstone-Smith Common Sharestraded on the New York Stock Exchange (NYSE: ASN) through October 5,2007. As a result of the consummation of the transactions contemplated by theMerger Agreement, the sole trustee of the Operating Trust is now the Series ITrust, which together with Series II Trust and Series III Trust owns 100% ofthe Operating Trust Common Units.

 

**Results of Operations**

 

*Executive Summary*

 

The major factors that influenced our operating results for the quarterended September 30, 2007 as compared to the quarter endedSeptember 30, 2006 were as follows:

 

•                  NOI decreased due primarily to net dispositions andthe formation of the International Fund. These decreases were partially offsetby a 6.1% increase in NOI from our Same-Store communities and an increase inlease-up activity.

 

•                  Other income decreased in 2007 due to Ameriton landsale gains recorded in 2006.

 

•                  General and administrative expenses increasedprincipally as a result of our international expansion, higher payroll-relatedcosts and professional expenses.

 

•                  Other expense was higher in 2007 due principally totransaction costs related to the merger that were incurred in 2007.

 

•                  Earnings from unconsolidated entities were lower in2007 primarily due to gains on sale of joint venture assets in 2006 andinitial formation costs for the International Fund.

 

•                  Other non-operating income increased due to foreigncurrency gains recognized on our international investments and a $14.0 milliongain recognized on the sale of International Fund shares.

 

•                  The increase in gains on disposition of real estatewas driven principally by higher transaction volume and significantly largeraverage gains per transaction in REIT dispositions in 2007.

 

The major factors that influenced our operating results for the ninemonths ended September 30, 2007 as compared to the nine months endedSeptember 30, 2006 were as follows:

 

•                  NOI increased due primarily to a 5.1% increase inNOI for our Same-Store communities as well as the DeWAG transaction thatoccurred in July 2006. These increases were partially offset by netdispositions of operating communities and formation of the International Fundeffective July 1, 2007.

 

•                  Other income decreased in 2007 due to gains on thesale of land in 2006 and higher recoveries from moisture infiltration andhurricane damage claims in 2006.

 

•                  Interest expense increased due to the interestcharge related to our international business that began material operations inJuly 2006, as well as higher borrowings on our lines of credit which carry ahigher effective interest rate as compared to our long-term debt and mortgages.These increases were partially offset by the impact of deconsolidation of ourinternational operations effective July 1, 2007.

 

•                  General and administrative expenses increasedprincipally as a result of our international expansion, higher payroll-relatedcosts and professional expenses.

 

•                  Other expense was lower in 2007 due principally tohigher income tax expenses in 2006 relating to Ameriton dispositions. Thesedecreases were partially offset by a $10.1 million charge for transactioncosts related to the proposed merger that were incurred in 2007.

 

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•      Earnings fromunconsolidated entities were lower in 2007 primarily due to gains on the saleof a joint venture asset in 2006 and initial formation costs for theInternational Fund.

 

•      Othernon-operating income increased due to foreign currency gains recognized on ourinternational investments and gains recognized on the sale of InternationalFund shares.

 

•      The increase ingains on disposition of real estate was driven principally by larger averagegains per transaction on REIT dispositions partially offset by lower Ameritongains in 2007.

 

*Reconciliation of Quantitative Summary toCondensed Consolidated Statements of Earnings*

 

The following schedules are provided to reconcile our CondensedConsolidated Statements of Earnings to the information presented in the “QuantitativeSummary” provided in the next section (in thousands):

 
| ** **                                                           | ** ** | **Three Months Ended  September 30, 2007** | ** ** | **Three Months Ended  September 30, 2006** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **Continuing  Operations**                                     | ** ** | **Discontinued  Operations**                                   | ** ** | **Total** | ** ** | **Continuing  Operations** | ** ** | **Discontinued  Operations** | ** ** | **Total** | ** ** |
| Rental revenue                                                       |       | $                                                              | 282,158    |                                                           | $          | 14,894 |   | $ | 297,052 |   | $ | 244,704 |   | $ | 61,831 |   | $ | 306,535 |   |
| Other income                                                         |       | 15,243                                                         |       | —                                                         |       | 15,243 |   | 27,299 |   | — |   | 27,299 |   |
| Property operating expenses (rental  expenses and real estate taxes) |       | (93,237                                                        | )          | (5,848                                                         | )          | (99,085 | ) | (80,856 | ) | (24,344 | ) | (105,200 | ) |
| Depreciation on real estate investments                              |       | (68,416                                                        | )          | (375                                                           | )          | (68,791 | ) | (57,000 | ) | (12,659 | ) | (69,659 | ) |
| Interest expense                                                     |       | (70,744                                                        | )          | (3,301                                                         | )          | (74,045 | ) | (60,163 | ) | (13,877 | ) | (74,040 | ) |
| General and administrative expenses                                  |       | (21,601                                                        | )          | —                                                         |       | (21,601 | ) | (18,497 | ) | — |   | (18,497 | ) |
| Other income/(expense)                                               |       | (5,578                                                         | )          | (2,787                                                         | )          | (8,365 | ) | (4,734 | ) | 667 |   | (4,067 | ) |
| Income/(loss) from unconsolidated entities                           |       | (4,542                                                         | )          | —                                                         |       | (4,542 | ) | 2,088 |   | — |   | 2,088 |   |
| Other non-operating income                                           |       | 26,488                                                         |       | —                                                         |       | 26,488 |   | 1,718 |   | — |   | 1,718 |   |
| Gains, net of disposition costs                                      |       | —                                                         |       | 336,685                                                        |       | 336,685 |   | — |   | 83,934 |   | 83,934 |   |
| Net earnings                                                         |       | $                                                              | 59,771     |                                                           | $          | 339,268 |   | $ | 399,039 |   | $ | 54,559 |   | $ | 95,552 |   | $ | 150,111 |   |

 
| ** **                                                           | ** ** | **Nine Months Ended  September 30, 2007** | ** ** | **Nine Months Ended  September 30, 2006** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **Continuing  Operations**                                    | ** ** | **Discontinued  Operations**                                  | ** ** | **Total** | ** ** | **Continuing  Operations** | ** ** | **Discontinued  Operations** | ** ** | **Total** | ** ** |
| Rental revenue                                                       |       | $                                                             | 827,305    |                                                          | $          | 77,470 |   | $ | 904,775 |   | $ | 667,213 |   | $ | 214,693 |   | $ | 881,906 |   |
| Other income                                                         |       | 44,406                                                        |       | —                                                        |       | 44,406 |   | 57,100 |   | — |   | 57,100 |   |
| Property operating expenses (rental  expenses and real estate taxes) |       | (276,222                                                      | )          | (28,343                                                       | )          | (304,565 | ) | (210,100 | ) | (85,378 | ) | (295,478 | ) |
| Depreciation on real estate investments                              |       | (205,710                                                      | )          | (8,154                                                        | )          | (213,864 | ) | (166,760 | ) | (45,752 | ) | (212,512 | ) |
| Interest expense                                                     |       | (210,360                                                      | )          | (16,973                                                       | )          | (227,333 | ) | (150,402 | ) | (49,475 | ) | (199,877 | ) |
| General and administrative expenses                                  |       | (60,732                                                       | )          | —                                                        |       | (60,732 | ) | (49,794 | ) | — |   | (49,794 | ) |
| Other expense                                                        |       | (12,571                                                       | )          | (6,891                                                        | )          | (19,462 | ) | (15,923 | ) | (21,895 | ) | (37,818 | ) |
| Income/(loss) from unconsolidated entities                           |       | (3,540                                                        | )          | —                                                        |       | (3,540 | ) | 31,484 |   | — |   | 31,484 |   |
| Other non-operating income                                           |       | 28,430                                                        |       | —                                                        |       | 28,430 |   | 2,137 |   | — |   | 2,137 |   |
| Gains, net of disposition costs                                      |       | —                                                        |       | 644,873                                                       |       | 644,873 |   | — |   | 309,609 |   | 309,609 |   |
| Net earnings                                                         |       | $                                                             | 131,006    |                                                          | $          | 661,982 |   | $ | 792,988 |   | $ | 164,955 |   | $ | 321,802 |   | $ | 486,757 |   |

 

*Quantitative Summary*

 

This summary is provided for reference purposes and is intended tosupport and be read in conjunction with the narrative discussion of our resultsof operations. This quantitative summary includes all operating activities, includingthose classified as discontinued operations for GAAP reporting purposes. Thisinformation is presented to correspond with the manner in which we analyze thebusiness. We generally reinvest disposition proceeds into new operating communitiesand developments and therefore believe it is most useful to analyze continuingand discontinued operations on a combined basis. The impact of communitiesclassified as “discontinued operations” for GAAP reporting purposes isdiscussed separately in a later section under the caption “DiscontinuedOperations Analysis” (dollar amounts in thousands).

 

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| ** **                                                                 | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **Increase/  (Decrease)** | ** ** | **2007** | ** ** | **2006** | ** ** | **Increase/  (Decrease)** | ** ** |
| Rental revenues:                                                           |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Same-Store(1)                                                              |       | $                                                        | 232,071    |                                                    | $          | 219,855 |   | $ | 12,216 |   | $ | 633,004 |   | $ | 598,361 |   | $ | 34,643 |   |
| Non Same-Store and other                                                   |       | 57,535                                                   |       | 65,848                                                  |       | (8,313 | ) | 214,198 |   | 238,535 |   | (24,337 | ) |
| Ameriton                                                                   |       | 3,294                                                    |       | 3,293                                                   |       | 1 |   | 9,758 |   | 16,959 |   | (7,201 | ) |
| Non-multifamily                                                            |       | 2,505                                                    |       | 2,848                                                   |       | (343 | ) | 6,025 |   | 9,378 |   | (3,353 | ) |
| International                                                              |       | 1,647                                                    |       | 14,691                                                  |       | (13,044 | ) | 41,790 |   | 18,673 |   | 23,117 |   |
| Total rental revenues                                                      |       | 297,052                                                  |       | 306,535                                                 |       | (9,483 | ) | 904,775 |   | 881,906 |   | 22,869 |   |
| Property operating expenses (rental  expenses and real estate taxes):      |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Same-Store(1)                                                              |       | 72,542                                                   |       | 69,511                                                  |       | 3,031 |   | 194,401 |   | 181,214 |   | 13,187 |   |
| Non Same-Store and other                                                   |       | 23,256                                                   |       | 27,951                                                  |       | (4,695 | ) | 84,166 |   | 95,612 |   | (11,446 | ) |
| Ameriton                                                                   |       | 1,994                                                    |       | 1,641                                                   |       | 353 |   | 4,861 |   | 8,672 |   | (3,811 | ) |
| Non-multifamily                                                            |       | 257                                                      |       | 1,243                                                   |       | (986 | ) | 603 |   | 2,845 |   | (2,242 | ) |
| International                                                              |       | 1,036                                                    |       | 4,854                                                   |       | (3,818 | ) | 20,534 |   | 7,135 |   | 13,399 |   |
| Total property operating expenses                                          |       | 99,085                                                   |       | 105,200                                                 |       | (6,115 | ) | 304,565 |   | 295,478 |   | 9,087 |   |
| Net operating income (rental revenues less  property operating expenses)   |       | 197,967                                                  |       | 201,335                                                 |       | (3,368 | ) | 600,210 |   | 586,428 |   | 13,782 |   |
| Margin (NOI/rental revenues):                                              |       | 66.6                                                     | %          | 65.7                                                    | %          | 1.0 | % | 66.3 | % | 66.5 | % | (0.2 | )% |
| Average occupancy during period:(2)                                        |       | 93.0                                                     | %          | 95.0                                                    | %          | (2.0 | )% | 93.0 | % | 94.9 | % | (1.9 | )% |
| Other income                                                               |       | 15,243                                                   |       | 27,299                                                  |       | (12,056 | ) | 44,406 |   | 57,100 |   | (12,694 | ) |
| Depreciation of real estate investments                                    |       | 68,791                                                   |       | 69,659                                                  |       | (868 | ) | 213,864 |   | 212,512 |   | 1,352 |   |
| Interest expense                                                           |       | 86,248                                                   |       | 87,370                                                  |       | (1,122 | ) | 264,908 |   | 239,515 |   | 25,393 |   |
| Capitalized interest                                                       |       | 12,203                                                   |       | 13,330                                                  |       | (1,127 | ) | 37,575 |   | 39,638 |   | (2,063 | ) |
| Net interest expense                                                       |       | 74,045                                                   |       | 74,040                                                  |       | 5 |   | 227,333 |   | 199,877 |   | 27,456 |   |
| General and administrative expenses                                        |       | 21,601                                                   |       | 18,497                                                  |       | 3,104 |   | 60,732 |   | 49,794 |   | 10,938 |   |
| Other expense                                                              |       | 8,365                                                    |       | 4,067                                                   |       | 4,298 |   | 19,462 |   | 37,818 |   | (18,356 | ) |
| Earnings from continuing and discontinued  operations                      |       | 40,408                                                   |       | 62,371                                                  |       | (21,963 | ) | 123,225 |   | 143,527 |   | (20,302 | ) |
| Equity in earnings/(loss) from  unconsolidated entities                    |       | (4,542                                                   | )          | 2,088                                                   |       | (6,630 | ) | (3,540 | ) | 31,484 |   | (35,024 | ) |
| Other non-operating income (expense).                                      |       | 26,488                                                   |       | 1,718                                                   |       | 24,770 |   | 28,430 |   | 2,137 |   | 26,293 |   |
| Gains on disposition of real estate  investments, net of disposition costs |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Taxable subsidiaries                                                       |       | 4,536                                                    |       | 4,217                                                   |       | 319 |   | 16,891 |   | 51,743 |   | (34,852 | ) |
| REIT                                                                       |       | 332,149                                                  |       | 79,717                                                  |       | 252,432 |   | 627,982 |   | 257,866 |   | 370,116 |   |
| Net earnings                                                               |       | $                                                        | 399,039    |                                                    | $          | 150,111 |   | $ | 248,928 |   | $ | 792,988 |   | $ | 486,757 |   | $ | 306,231 |   |

 

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(1)                                  Reflects revenues andoperating expenses for Same-Store communities that were owned onSeptember 30, 2007 and fully operating during both of the comparisonperiods.

 

(2)                                  Does not includeoccupancy associated with properties owned by Ameriton, located in Germany oroperated under the Oakwood Master Leases.

 

*Property-level operating results*

 

We utilize NOI as the primary measure to evaluate our operatingperformance and for purposes of making decisions about resource allocations andassessing segment performance. We also believe NOI is a valuable means ofcomparing period-to-period operating performance. In analyzing the performanceof our operating portfolio, we evaluate Same-Store communities separately fromNon Same-Store communities and other properties.

 

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*Same-Store Analysis*

 

The following table reflects revenue, expense and NOI growth forSame-Store communities that were owned on September 30, 2007 and fullyoperating during each of the respective comparison periods.

 
| ** ** | ** ** | **Same-Store  Revenue Growth** | ** ** | **Same-Store  Expense Growth**       | ** ** | **Same-Store  NOI Growth**     | ** ** |
|------------|------------|-------------------------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|
| ** ** | ** ** | **Q3 2007  vs.  Q3 2006** | ** ** | **YTD 2007 vs.  YTD 2006** | ** ** | **Q3 2007  vs.  Q3 2006** | ** ** | **YTD 2007 vs.  YTD 2006** | ** ** | **Q3 2007  vs.  Q3 2006** | ** ** | **YTD 2007 vs.  YTD 2006** | ** ** |
| Garden     |       | 5.5                                 | %          | 6.3                                       | %          | 5.0                                 | %          | 7.4 | % | 5.7 | % | 5.9 | % |
| High-Rise  |       | 5.7                                 | %          | 5.0                                       | %          | 3.6                                 | %          | 7.1 | % | 6.7 | % | 4.1 | % |
| Average    |       | 5.6                                 | %          | 5.8                                       | %          | 4.4                                 | %          | 7.3 | % | 6.1 | % | 5.1 | % |

 

Same-Store revenues were up 5.6% for the quarter endedSeptember 30, 2007 as compared to the same period in 2006 due primarily toan increase in average rental revenue per unit, partially offset by loweroccupancy. Same-Store expenses were up 4.4% for the quarter endedSeptember 30, 2007 as compared to the same period in 2006, primarily dueto higher real estate taxes and increased personnel costs. These changes inrevenues and expenses resulted in an increase in Same-Store NOI of 6.1%, drivenprincipally by strong growth in Seattle, the San Francisco Bay Area and the NewYork City Metropolitan Area, which collectively represent 34.0% of the company’sportfolio.

 

Same-Store revenues were up 5.8% for the nine months endedSeptember 30, 2007 as compared to the same period in 2006 due primarily toan increase in average rental revenue per unit. Same-Store expenses were up7.3% for the nine months ended September 30, 2007 as compared to the sameperiod in 2006, primarily due to higher insurance costs, real estate taxes andpersonnel costs. These changes in revenues and expenses resulted in an increasein Same-Store NOI of 5.1% driven principally by strong growth in Seattle, theSan Francisco Bay Area, Southern California and the New York City MetropolitanArea which collectively represent 61.8% of the company’s portfolio.

 

*Non Same-Store and Other Analysis*

 

The $3.6 million decrease in NOI in the Non Same-Store portfoliofor the quarter ended September 30, 2007 as compared to the same period in2006 is primarily attributable to a $26.4 million decrease related tocommunity dispositions, offset by a $15.6 million increase related toacquisitions and a $7.1 million increase related to recently stabilizeddevelopment communities and communities in lease-up.

 

The $12.9 million decrease in NOI in the Non Same-Store portfoliofor the nine months ended September 30, 2007 as compared to the sameperiod in 2006 is primarily attributable to a $70.7 million decreaserelated to community dispositions, offset by a $39.9 million increaserelated to acquisitions and a $17.7 million increase related to recentlystabilized development communities and communities in lease-up.

 

*Ameriton*

 

The decrease in NOI from Ameriton apartment communities for the ninemonths ended September 30, 2007 as compared to the comparable period inthe prior year is primarily attributable to dispositions.

 

*International*

 

The decrease in NOI of $9.2 million for the quarter ended September 30,2007 is attributable to the contribution of the majority of our internationaloperations to the International Fund on June 29, 2007. The results of thoseoperations are now included in income from unconsolidated entities.

 

NOI for the nine months ended September 30, 2007 increased $9.7million as compared to the same period in the prior year due to the DeWAGacquisition that occurred in July 2006. The increase was partially offset by adecrease related to the contribution of the majority of our internationaloperations to the International Fund on June 29, 2007. The results of thoseoperations are included in income from unconsolidated entities in the thirdquarter of 2007.

 

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*Other Income*

 

Other income was lower for the quarter ended September 30, 2007 ascompared to the same period in the prior year due to a decrease of $11.8million related to higher 2006 land sales gains and a reduction of $5.1 millionin interest income that resulted from lower cash balances in 2007, offset by$5.2 million in management fee income from the German management company.

 

Other income was lower for the nine months ended September 30, 2007 ascompared to the same period in the prior year due to an $11.9 million decreaserelated to higher 2006 land sales gains and a $7.9 million decrease ininsurance recoveries offset by a $5.2 million management fee increase from theGerman management company.

 

*Interest Expense*

 

Gross interest expense for the quarter ended September 30, 2007decreased due to the interest charge related to our international operationsthat is now included in our equity in earnings from unconsolidated entities,offset by higher borrowings on our line of credit which carries a higher effectiveinterest rate, as compared to our long-term debt and mortgages.

 

Gross interest expense for the nine months ended September 30, 2007increased due to the interest charge related to our international operationsthat began material operations in July 2006 as well as higher borrowings on ourlines of credit which carry a higher effective interest rate as compared to ourlong-term debt and mortgages. These increases were partially offset by theimpact of the deconsolidation of the majority of our international operationsas of July 1, 2007.

 

*General and Administrative Expenses*

 

General and administrative expenses were higher for the three and ninemonths ended September 30, 2007 as compared to the same periods in 2006due primarily to higher personnel-related costs associated with ourinternational expansion that began material operations in July 2006 andhigher payroll-related costs and professional fees.

 

*Other Expense*

 

Other expense for the quarter ended September 30, 2007 increased$4.3 million as compared to the same period in 2006 due principally to mergerrelated costs.

 

Other expense for the nine months ended September 30, 2007 waslower as compared to the same period in 2006 due principally to$20.2 million in tax expense in 2006 related to Ameriton dispositions,$4.8 million in debt extinguishment costs related primarily to prior yeardispositions and a $4.3 million impairment charge related to an asset thatwe sold in 2006. These decreases were partially offset by a $10.1 millioncharge for transaction costs related to the merger.

 

*Equity in Earnings from UnconsolidatedEntities*

 

Earnings from unconsolidated entities were lower for the three monthsended September 30, 2007 as compared to the same period in 2006 primarilydue to a $1.5 million decrease in gains on the sale of jointventure assets and initial formation costs for the International Fund.

 

Earnings from unconsolidated entities were lower for the nine monthsended September 30, 2007 as compared to the same period in 2006 primarilydue to a $22.9 million decrease in gains on the sale of jointventure assets and initial formation costs for the International Fund.

 

*Other Non-Operating Income*

 

Non-operating income was higher for the quarter and nine months endedSeptember 30, 2007 due to foreign currency gains on our internationalinvestments and gains recognized on the sale of International Fund shares.

 

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*Gains on Real Estate Dispositions*

 

See “Discontinued Operations Analysis” below for a discussion of gains.

 

*Discontinued Operations Analysis*

 

Included in the overall results discussed above are the followingamounts associated with properties which have been sold or were classified asheld-for-sale as of September 30, 2007 (dollar amounts in thousands):

 
| ** **                                                                                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                    | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Rental revenues                                                                                                               |       | $                                                    | 14,894     |                                                | $          | 61,831 |   | $ | 77,470 |   | $ | 214,693 |   |
| Rental expenses                                                                                                               |       | (4,655                                               | )          | (17,984                                             | )          | (20,224 | ) | (59,694 | ) |
| Real estate taxes                                                                                                             |       | (1,193                                               | )          | (6,360                                              | )          | (8,119 | ) | (25,684 | ) |
| Depreciation on real estate investments                                                                                       |       | (375                                                 | )          | (12,659                                             | )          | (8,154 | ) | (45,752 | ) |
| Interest expense(1)                                                                                                           |       | (3,301                                               | )          | (13,877                                             | )          | (16,973 | ) | (49,475 | ) |
| Income taxes from taxable REIT subsidiaries                                                                                   |       | (1,244                                               | )          | 1,492                                               |       | (4,354 | ) | (9,979 | ) |
| Provision for possible loss on real estate  investment                                                                        |       | —                                               |       | —                                              |       | — |   | (4,328 | ) |
| Debt extinguishment costs related to  dispositions                                                                            |       | (1,543                                               | )          | (825                                                | )          | (2,537 | ) | (7,588 | ) |
| Gains on disposition of real estate  investments, net of disposition costs:                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Taxable subsidiaries                                                                                                          |       | 4,536                                                |       | 4,217                                               |       | 16,891 |   | 51,743 |   |
| REIT                                                                                                                          |       | 332,149                                              |       | 79,717                                              |       | 627,982 |   | 257,866 |   |
| Total discontinued operations                                                                                                 |       | $                                                    | 339,268    |                                                | $          | 95,552 |   | $ | 661,982 |   | $ | 321,802 |   |
| Number of communities sold during the  period                                                                                 |       | 8                                                    |       | 5                                                   |       | 26 |   | 28 |   |
| Number of sold communities included in  discontinued operations NOI                                                           |       | 8                                                    |       | 43                                                  |       | 26 |   | 67 |   |
| Number of communities classified as  held-for-sale and included in discontinued operations NOI as of  September 30, 2007 |       | 6                                                    |       | 5                                                   |       | 6 |   | 5 |   |

 

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(1)                                  Interest expenseincluded in discontinued operations is allocated to properties based on eachasset’s cost in relation to the company’s leverage ratio and the averageeffective interest rate for each respective period.

 

As a result of the execution of our strategy of managing our investedcapital through the selective sale of apartment communities and redeploying theproceeds to fund investments with higher anticipated growth prospects, we hadsignificant disposition activity in both 2007 and 2006. The resulting gains,net of disposition costs, including those from Ameriton, were the biggest driversof overall earnings from discontinued operations. NOI related to communitiessold or classified as held-for-sale was higher in 2006 as compared to 2007 asassets we sold were owned longer in 2006 than 2007. Direct operating expenses,depreciation and allocated interest expense are generally proportional to thenet operating income of communities included in discontinued operations foreach period. For the quarter ended September 30, 2007, the number of REITdispositions and the relative size of the corresponding gain were significantlyhigher than the same period in 2006. For the nine months endedSeptember 30, 2007, although the number of REIT dispositions was lower,the relative size of the gains was significantly higher than the same period in2006.

 

**Liquidity and Capital Resources**

 

We generally finance a portion of our long-term investing and operatingactivities with long-term debt. In connection with the recent merger, we paidoff most of our debt and entered into several new credit agreements to financea significant portion of the transaction. The leverage ratios and interestrates on the new credit facilities are generally higher. As a result of thesignificant cash flow generated by our operations, the available capacity undernew or existing credit facilities and other new term loans, available cashbalances, proceeds from the disposition of real estate or from joint ventureformations and our demonstrated ability to secure financing, we believe ourliquidity and financial condition are sufficient to meet all of our reasonablyanticipated cash flow needs during the next 12 months. Please refer to theCondensed Consolidated Statements of Cash Flows for detailed information of oursources and uses of cash for the nine months ended September 30, 2007and 2006.

 

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*Scheduled Debt Maturities and InterestPayment Requirements*

 

On October 5, 2007 weborrowed approximately $13.7 billion under various credit facilities with thirdparty lenders to, among other things, finance a portion of the cost of theMerger and refinance a portion of our existing indebtedness.

 

One of the creditfacilities, with Lehman Brothers Inc., Banc of America Securities LLC, Bank ofAmerica, N.A., Barclays Capital Real Estate Inc., and Lehman Commercial PaperInc., contains a $750 million revolving facility thatcan be used by us or certain of our affiliates, with a $75million swing line and a letter of credit commitment with a maximum of $425million for the first year, which decreases thereafter. The revolving creditfacility bears interest at LIBOR plus 3.00% and has a maturity date of October5, 2011.  This facility also includes a $1.75 billion term loan maturingon October 5, 2011, bearing interest at LIBOR plus 3.00% and a $3.029 billionterm loan maturing on October 5, 2012, bearing interest at LIBOR plus 3.25%.The swing line bears interest at 2.00% plus the greater of (a) the prime rateor (b) the federal funds rate plus 1/2%. The credit agreement for this facilityhas not been finalized and is therefore subject to change. We expect that thefinal agreement will contain customary terms, including customary financial andother covenant requirements, including specific leverage ratios and debtservice coverage ratios as well as minimum levels of tangible net worth.

 

Additionally, we have a $7.1billion facility provided by the Federal National Mortgage Association (“FannieMae”), which is secured by 105 of our properties. This facility is divided into9 loan pools. Pools 1 through 3, totaling $2.5 billion, mature on November 1,2017 and bear interest at 6.256%. Pool 4, totaling $963.5 million, matures onNovember 1, 2014, and bears interest at 5.883%. Pools 5 through 7, totaling$2.3 billion, matures on November 1, 2012 and bears interest at 6.193%. Pools 8and 9, totaling $1.3 billion, matures on November 1, 2009 and bears interest atLIBOR plus 1.265%. In addition to the Fannie Mae facility, Lehman BrothersInc., Bank of America, N.A., and Barclays Capital Real Estate Inc.(collectively, the “Fannie Mae Mezzanine Lenders”), have provided $768.9million of mezzanine loans subordinate to each of the nine Fannie Mae pools.The anticipated interest rates on these mezzanine loans range from 7.350% to7.860%. The Fannie Mae Mezzanine Lenders intend to distribute these mezzanineloans post-closing to various other debt providers. We also have an $847million facility provided by the Federal Home Loan Mortgage Corporation(“Freddie Mac”), which is secured by 13 of our properties.  Thisfacility matures on November 1, 2012 and bears interest at LIBOR plus 1.01%. Inaddition to the Freddie Mac facility, Lehman Brothers Inc., Bank of America,N.A., and Barclays Capital Real Estate Inc. (collectively, the “Freddie MacMezzanine Lenders”), have provided $135.4 million of mezzanine loanssubordinate to the Freddie Mac facility. The anticipated interest rate on thismezzanine loan is 7.75%. The Freddie Mac Mezzanine Lenders intend to distributethis mezzanine loan post-closing to various other debt providers.

 

On November 1, 2007, the revolver portion of our unsecured creditfacilities was undrawn, and we had $151 million outstanding under letters ofcredit, leaving available borrowing capacity on the revolving portion of ourunsecured credit facilities of $599 million. We also had cash invested of $158million, which combined with our revolving credit capacity provided for $757million in available liquidity. On November 1, 2007, we had $7.1 billionborrowed under the Fannie Mae facility and $847 million borrowed under theFreddie facility.

 

Our debt instruments generally contain covenants common to the type offacility or borrowing, including financial covenants establishing minimum debtservice coverage ratios and maximum leverage ratios. We were in compliance withall financial covenants pertaining to our debt instruments as of and for thenine-month period ended September 30, 2007.

 

*Unitholder Distribution Requirements*

 

From January 1, 2007 to September 30, 2007, we paiddistributions and dividends of $230.7 million. This amount representsdistributions on our Common and Preferred Units. Pursuant to the MergerAgreement, we did not declare any regular dividends or distributions on CommonUnits after May 16, 2007.

 

*Planned Investments*

 

Following is a summary of planned investments as of September 30,2007, including Ameriton, but excluding joint ventures. The amounts labeled “Discretionary”represent future investments that we plan to make, although there is not acontractual commitment to do so. The amounts labeled “Committed” represent theapproximate amount that we are contractually committed to fund for communitiesunder construction in accordance with construction contracts with generalcontractors.

 
| ** **                                | ** ** | **Planned Investments  (in thousands)** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **Discretionary**                                 | ** ** | **Committed** | ** ** |
| Communities under redevelopment           |       | $                                                 | 1,149      |   | $ | 2,642 |   |
| Communities under construction            |       | —                                            |       | 606,783 |   |
| Communities In Planning and owned         |       | 1,743,240                                         |       | — |   |
| Communities In Planning and Under Control |       | 813,296                                           |       | — |   |
| Community acquisitions under contract     |       | 205,500                                           |       | — |   |
| FHA/ADA settlement capital accrual        |       | —                                            |       | 16,103 |   |
| Total                                     |       | $                                                 | 2,763,185  |   | $ | 625,528 |   |

 

In addition to the planned investments noted above, we expect to makeadditional investments relating to planned expenditures on recently acquiredcommunities as well as recurring expenditures to improve and maintain ourestablished operating communities.

 

We anticipate completion of most of the communities that are currentlyunder construction and the planned operating community improvements by the endof 2010. No assurances can be given that communities we do not currently ownwill be acquired or that planned developments will actually occur. In addition,actual costs incurred could be greater or less than our current estimates.

 

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*Funding Sources*

 

We anticipate financing our planned investment and operating needsprimarily with cash flow from operating activities, disposition proceeds, jointventure formations and borrowings under new or existing credit facilities andterm loans. At November 1, 2007, we had $750 million in available capacity onour revolving facilities. In addition, we expect the proceeds from REITdispositions to approximate or exceed our investment in new Operating Trustoperating community acquisitions in 2007. We therefore do not believe thatdiscontinued operations will have an adverse impact on our liquidity in theforeseeable future.

 

*Litigation and Contingencies*

 

On May 30, 2007, two separate purported shareholder class-actionlawsuits related to the Merger Agreement and the transactions contemplatedthereby were filed naming the company and each of the company’s trustees asdefendants. One of these lawsuits, *SeymourSchiff v. James A. Cardwell, et al*. (Case No. 2007cv1135),was filed in the United States District Court for the District ofColorado. The other, *Mortimer J. Cohen v.Archstone-Smith Trust, et al*. (Case No. 2007cv1060), wasfiled in the District Court, County of Arapahoe, Colorado. On May 31,2007, two additional purported shareholder class-action lawsuits related to theMerger Agreement and the transactions contemplated thereby were filed in theDistrict Court, County of Arapahoe, Colorado. The first, *Howard Lasker v. R. Scot Sellers, et al.*(Case No. 2007cv1073), names the company, each of the company’s trusteesand one of the company’s senior officers as defendants. The second, *Steamship Trade Association/InternationalLongshoremen’s Association Pension Fund v. Archstone-Smith Trust, et al.*(Case No. 2007cv1070), names the company, each of the company’s trustees,Tishman Speyer and Lehman Brothers as defendants. On June 11, 2007, anadditional purported shareholder class-action lawsuit related to the MergerAgreement, *Doris Staehr v. Archstone-SmithTrust, et al.* (Case No. 2007cv1081), was filed in theDistrict Court, County of Arapahoe, Colorado, naming the company and each ofthe company’s trustees as defendants. All five lawsuits allege, among otherthings, that the company’s trustees violated their fiduciary duties to thecompany’s shareholders in approving the mergers.

 

On June 21, 2007, the District Court, County of Arapahoe, Coloradoentered an order consolidating the *Lasker,Steamship Trade Association/International Longshoremen’s Association PensionFund* and *Staehr*actions into the *Cohen* action,under the caption *In re Archstone-Smith TrustShareholder Litigation*.

 

On August 17, 2007, we and the other defendants entered into amemorandum of understanding with the plaintiffs regarding the settlement ofboth the *Schiff* and the consolidated actioncaptioned *In re Archstone-Smith Trust Shareholder Litigation.*In connection with the settlement, we agreed to make certain additionaldisclosures to our shareholders. Subject to the completion of certainconfirmatory discovery by counsel to the plaintiffs, the memorandum ofunderstanding contemplates that the parties will enter into a stipulation ofsettlement. The stipulation of settlement will be subject to customaryconditions, including court approval following notice to our shareholders andconsummation of the merger. In the event that the parties enter into astipulation of settlement, a hearing will be scheduled at which the court willconsider the fairness, reasonableness and adequacy of the settlement, which, iffinally approved by the court, will resolve all of the claims that were orcould have been brought in the actions being settled, including all claimsrelating to the merger, the merger agreement and any disclosure made inconnection therewith. In addition, in connection with the settlement, theparties contemplate that plaintiffs’ counsel will petition the court for anaward of attorneys’ fees and expenses to be paid by us, up to an agreed-uponlimit. There can be no assurance that the parties will ultimately enter into astipulation of settlement or that the court will approve the settlement even ifthe parties were to enter into such stipulation. In such event, the proposedsettlement as contemplated by the memorandum of understanding may beterminated. The settlement will not affect the amount of the mergerconsideration that the plaintiffs are entitled to receive in the merger. We andthe other defendants vigorously deny all liability with respect to the factsand claims alleged in the lawsuits, and specifically deny that anymodifications to the Merger Agreement or any further supplemental disclosurewas required under any applicable rule, statute, regulation or law. However, toavoid the risk of delaying or adversely affecting the merger and the relatedtransactions, to minimize the expense of defending the lawsuits, and to provideadditional information to our shareholders at a time and in a manner that wouldnot cause any delay of the merger, we and our trustees agreed to the settlementdescribed above. We and the other defendants further considered it desirablethat the actions be settled to avoid the substantial burden, expense, risk,inconvenience and distraction of continued litigation and to fully and finallyresolve the settled claims.

 

During the second quarter of 2005, we entered into a full and finalsettlement in the United States District Court for the District ofMaryland with three national disability organizations and agreed to makecapital improvements in a number of our communities in order to make them fullycompliant with the FHA and ADA. The litigation, settled by this agreement,alleged lack of full compliance with certain design and constructionrequirements under the two federal statutes at 71 of the company’s wholly-ownedand joint venture communities, of which we still own or have an interest in 40.As part of the

 

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settlement, the three disability organizations all recognized that theOperating Trust had no intention to build any of its communities in a mannerinconsistent with the FHA or ADA.

 

The amount of the capital expenditures required to remediate the communitiesnamed in the settlement was estimated at $47.2 million and was accrued asan addition to real estate during the fourth quarter of 2005. The settlementagreement approved by the court allows us to remediate each of the designatedcommunities over a three-year period, and also provides that we are notrestricted from selling any of our communities during the remediation period.We agreed to pay damages totaling $1.4 million, which included legal feesand costs incurred by the plaintiffs. We had $16.1 million of the originalaccrual remaining on September 30, 2007.

 

We are subject to various claims filed in 2002 and 2003 in connectionwith moisture infiltration and resulting mold issues at certain High-Riseproperties we once owned in Southeast Florida. These claims generally allegethat water infiltration and resulting mold contamination resulted in theclaimants having personal injuries and/or property damage. Although certain ofthese claims continue to be in various stages of litigation, with respect tothe majority of these claims, we have either settled the claims and/or we havebeen dismissed from the lawsuits that had been filed. With respect to thelawsuits that have not been resolved, we continue to defend these claims in thenormal course of litigation.

 

We are a party to various other claims and routine litigation arisingin the ordinary course of business. We do not believe that the results of anysuch claims or litigation, individually or in the aggregate, will have amaterial adverse effect on our business, financial position or resultsof operations.

 

**Critical Accounting Policies**

 

We define critical accounting policies as those accounting policiesthat require our management to exercise their most difficult, subjective andcomplex judgments. Our management has discussed the development and selectionof all of these critical accounting policies with our audit committee, and theaudit committee has reviewed the disclosure relating to these policies. Ourcritical accounting policies relate principally to the followingkey areas:

 

*Internal Cost Capitalization*

 

We have an investment organization that is responsible for developmentand redevelopment of apartment communities. Consistent with GAAP, all directand certain indirect costs, including interest and real estate taxes, incurredduring development and redevelopment activities are capitalized. Interest iscapitalized on real estate assets that require a period of time to get themready for their intended use. The amount of interest capitalized is based uponthe average amount of accumulated development expenditures during the reportingperiod. Included in capitalized costs are management’s estimates of the directand incremental personnel costs and indirect project costs associated with ourdevelopment and redevelopment activities. Indirect project costs consistprimarily of personnel costs associated with construction administration and developmentaccounting, legal fees, and various office costs that clearly relate to projectsunder development. Because the estimation of capitalizable internal costsrequires management’s judgment, we believe internal cost capitalization is a “criticalaccounting estimate.”

 

If future accounting rules limit our ability to capitalize internalcosts or if our development activity decreased significantly without aproportionate decrease in internal costs, there could be an increase in ouroperating expenses.

 

*Valuation of Real Estate*

 

Long-lived assets to be held and used are carried at cost and evaluatedfor impairment when events or changes in circumstances indicate such anevaluation is warranted. We also evaluate assets for potential impairment whenwe deem them to be held-for-sale. Valuation of real estate is considered a “criticalaccounting estimate” because the evaluation of impairment and the determinationof fair values involve a number of management assumptions relating to futureeconomic events that could materially affect the determination of the ultimatevalue, and therefore, the carrying amounts of our real estate. Furthermore,decisions regarding when a property should be classified as held-for-sale underSFAS No. 144 requires significant management judgment. There are manyphases to the disposition process ranging from the initial market research to beingunder contract with non-refundable earnest money to closing. Deciding whenmanagement is committed to selling an asset is therefore highly subjective.

 

When determining if there is an indication of impairment for assetsintended to be held and used, we estimate the asset’s NOI over the anticipatedholding period on an undiscounted cash flow basis and compare this amount toits carrying value. Estimating the expected NOI and holding period requiressignificant management judgment. If it is determined that

 

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there is an indication of impairment for assets to be held and used, orif an asset is deemed to be held-for-sale, we then determine the fair value ofthe asset.

 

The apartment industry uses capitalization rates as the primary measureof fair value. Specifically, annual NOI for a community is divided by anestimated capitalization rate to determine the fair value of the community.Determining the appropriate capitalization rate requires significant judgmentand is typically based on many factors including the prevailing rate for themarket or submarket, as well as the quality and location of the properties.Further, capitalization rates can fluctuate up or down due to a variety offactors in the overall economy or within local markets. If the actualcapitalization rate for a community is significantly different from ourestimated rate, the impairment evaluation for an individual asset could bematerially affected.

 

*Capital Expenditures and Depreciable Lives*

 

We incur costs relating to redevelopment initiatives, revenue-enhancingand expense-reducing capital expenditures, and recurring capital expendituresthat are capitalized as part of our real estate. These amounts are capitalizedand depreciated over estimated useful lives determined by management. Weallocate the cost of newly acquired properties between net tangible andidentifiable intangible assets. The primary intangible asset associated with anapartment community acquisition is the value of the existing lease agreements.When allocating cost to an acquired property, we first allocate costs to theestimated intangible value of the existing lease agreements and then to theestimated value of the land, building and fixtures assuming the property isvacant. We estimate the intangible value of the lease agreements by determiningthe lost revenue associated with a hypothetical lease-up. We depreciate thebuilding and fixtures based on the expected useful life of the asset andamortize the intangible value of the lease agreements over the average remaininglife of the existing leases.

 

Determining whether expenditures meet the criteria for capitalization,the assignment of depreciable lives and determining the appropriate amounts toallocate between tangible and intangible assets for property acquisitionsrequires our management to exercise significant judgment and is thereforeconsidered a “critical accounting estimate.”

 

*Pursuit Costs*

 

We incur costs relating to the potential acquisition of existingoperating communities or land for development of new operating communities,which we refer to as pursuit costs. To the extent that these costs areidentifiable with a specific property and would be capitalized if the propertywere already acquired, the costs are accumulated by project and capitalized inthe Other Asset section of the balance sheet. If these conditions are not met,the costs are expensed as incurred. Capitalized costs include but are notlimited to earnest money, option fees, environmental reports, traffic reports,surveys, photos, blueprints, direct and incremental personnel costs and legalcosts. Upon acquisition, the costs are included in the basis of the acquiredproperty. When it becomes probable that a prospective acquisition will not beacquired, the accumulated costs for the property are charged to Other Expenseon the statement of earnings in the period such a determination is made.

 

Because of the inherent judgment involved in evaluating whether aprospective property will ultimately be acquired, we believe capitalizablepursuit costs are a “critical accounting estimate.”

 

*Consolidation vs. Equity Method of Accountingfor Ventures*

 

From time to time, we make co-investments in real estate ventures withthird parties and are required to determine whether to consolidate or use theequity method of accounting for the venture. FASB Interpretation No. 46R, “*Consolidation of Variable Interest Entities,”*(as revised) and Emerging Issues Task Force issued EITF No. 04-5, “*Determining Whether a General Partner, or the GeneralPartners as a Group, Controls a Limited Partnership or Similar Entity When theLimited Partners Have Certain Rights,”* are the two primary sourcesof accounting guidance in this area. Appropriate application of theserelatively complex rules requires substantial management judgment, which webelieve, makes the choice of the appropriate accounting method for theseventures a “critical accounting estimate.”

 

**Off Balance Sheet Arrangements**

 

Our real estate investments in entities that do not qualify as variableinterest entities, variable interest entities where we are not the primarybeneficiary and entities we do not control through majority economic interestare not consolidated and are reported as investments in unconsolidatedentities. Our investments in and advances to unconsolidated entities atSeptember 30, 2007 aggregated $562.5 million. Please refer toNote 5 to the financial statements included in this report, *Investments in and Advances to UnconsolidatedEntities,* for additional information.

 

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**Contractual Commitments**

 

Please refer to “Scheduled Debt Maturities and Interest PaymentRequirements” and “Planned Investments” above for further discussion ofsignificant contractual commitments.

 

**Item 3.****    Quantitative and QualitativeDisclosures about Market Risk**

 

During the quarter ended September 30, 2007, there was no materialchange in the qualitative or quantitative disclosures regarding our marketrisk. For detailed information about the qualitative and quantitativedisclosures of our market risk, see Item 7A in our 2006 Form 10-K.

 

**Item 4.****    Controls and Procedures**

 

*Disclosure Controls and Procedures*

 

An evaluation was carried out under the supervision and with theparticipation of management, including our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934). Based on their evaluation, our Chief Executive Officerand Chief Financial Officer have concluded that our disclosure controls and procedureswere effective, to the best of their knowledge, as ofSeptember 30, 2007.

 

*Changes in Internal Control over FinancialReporting*

 

There has been no change to our internal control over financialreporting during the quarter ended September 30, 2007 that has materiallyaffected or is reasonably likely to materially affect our internal control overfinancial reporting.

 

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**PART II —OTHER INFORMATION**

 

**Item 1.****    Legal Proceedings**

 

We are party to various claims and routine litigation arising in the ordinarycourse of business. We do not believe that the results of any such claims andlitigation, individually or in the aggregate, will have a material adverseeffect on our business, financial position or results of operations. SeeNote 11 to the financial statements included in this report.

 

**Item 1A. Risk Factors**

 

See the factors discussed in Part 1, “Item 1.A. Risk Factors”in our 2006 Form 10-K.

 

**Item 2.****    Unregistered Sales of EquitySecurities and Use of Proceeds**

 

During the nine months ended September 30, 2007, we issued18,081 Common Units in reliance upon the exemption provided bySection 4(2) of the Securities Act of 1933.

 

**Item 3.****    Defaults Upon SeniorSecurities**

 

None.

 

**Item 4.****    Submission of Matters to aVote of Security Holders**

 

Archstone-Smith, as sole trustee of the Operating Trust and themajority Common Unitholder, approved the consummation of the transactionscontemplated by the Merger Agreement by written consent.

 

**Item 5.****    Other Information**

 

No other information is required to be disclosed for the period endedSeptember 30, 2007 that has not been disclosed in a Current Report onForm 8-K. There has been no change to the procedures by which securityholders may recommend nominees to our Board of Trustees.

 

**Item 6.****    Exhibits**

 

See Exhibits.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                   | ARCHSTONE-SMITH OPERATING TRUST |                                                                  |
|------------------------|---------------------------------|-----------------------------------------------------------------------|
|                   |                            |                                                                  |
|                   |                            |                                                                  |
|                   | BY:                             | /s/ R.  SCOT SELLERS                                                  |   |
|                   |                            | R. Scot Sellers                                                       |   |
|                   |                            | *Chief Executive Officer*                                             |   |
|                   |                            | * *                                                              |   |
|                   |                            |                                                                  |
|                   | BY:                             | /s/ CHARLES E. MUELLER, JR.                                           |   |
|                   |                            | Charles E. Mueller, Jr.                                               |   |
|                   |                            | *Chief Financial Officer  (Principal Financial Officer)*              |   |
|                   |                            |                                                                  |
|                   |                            |                                                                  |
|                   | BY:                             | /s/ ASH  K. ATWOOD                                                    |   |
|                   |                            | Ash K. Atwood                                                         |   |
|                   |                            | *Group Vice President and Controller  (Principal Accounting Officer)* |   |
|                   |                            |                                                                  |
|                   |                            |                                                                  |
| Date: November 9, 2007 |                            |                                                                  |

 

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**Item 6.    Exhibits**

 
| 2.1    |   | Agreement and Plan of Merger, dated as of May 28, 2007, by and  among Archstone-Smith Trust, Archstone-Smith Operating Trust, River Holding, LP,  River Acquisition (MD), LP, and River Trust Acquisition (MD), LLC  (incorporated by reference to Exhibit 2.1 to the Current Report on  Form 8-K filed by Archstone-Smith Trust with the SEC on June 1,  2007)                                                                                                                                                                |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.2    |   | Amendment No. 1, dated as of August 5, 2007, to Agreement  and Plan of Merger dated as of May 28, 2007, by and among  Archstone-Smith Trust, Archstone-Smith Operating Trust, River  Holding, LP, River Acquisition (MD), LP, and River Trust  Acquisition (MD), LLC (incorporated by reference to Exhibit 2.1  to the Current Report on Form 8-K filed by Archstone-Smith Trust  with the SEC on August 6, 2007)                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3.1    |   | Amended and Restated Declaration of Trust of Archstone-Smith  Operating Trust (incorporated by reference to Exhibit 3.1 to the  Archstone-Smith Operating Trust’s Current Report on Form 8-K filed with  the SEC on October 5, 2007)                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3.2    |   | Bylaws of Archstone-Smith Operating Trust (incorporated by reference  to Exhibit 4.2 to Archstone-Smith Trust’s Current Report on  Form 8-K filed with the SEC on June 2, 2006)                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3.4    |   | Amendment No. 1 to Bylaws of Archstone-Smith Operating Trust  (incorporated by reference to Exhibit 3.1 to the Archstone-Smith  Trust’s Current Report on Form 8-K filed with the SEC on June 1,  2007)                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.1    |   | Fourth Supplemental Indenture, dated as of October 5, 2007, to the  Indenture, dated as of February 1, 1994, by and between the Archstone-Smith  Operating Trust and the U.S. Bank National Association, as supplemented by  the First Supplemental Indenture, dated as of February 2, 1994, the Second  Supplemental Indenture, dated as of August 2, 2004, and the Third  Supplemental Indenture, dated as of July 14, 2006 (incorporated by reference  to Exhibit 4.1 to Archstone-Smith Operating Trust’s Current Report on Form  8-K, dated October 5, 2007) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1   |   | Amended and Restated Declaration of Trust of Archstone-Smith Trust  (incorporated by reference to Exhibit 3.1 to Archstone-Smith  Trust’s Current Report of Form 8-K filed with the SEC on June 2,  2006)                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.2   |   | Restated Bylaws of Archstone-Smith Trust (incorporated by reference  to Exhibit 3.2 to the Archstone-Smith Trust’s Current Report on  Form 8-K filed with the SEC on June 2, 2006)                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.3   |   | Master Credit Facility Agreement, dated as of October 5, 2007, by and  among certain subsidiaries of Archstone-Smith Operating Trust, as borrowers,  and Lehman Brothers Holdings Inc., Bank of America, N.A., and Barclays  Capital Real Estate Inc., as initial lender, and assigned to the Federal  National Mortgage Association.                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.4   |   | Multifamily  Note, dated as of October 5, 2007, by Tishman Speyer Archstone-Smith Woodland  Park, L.P. for the benefit of Lehman Brothers Holdings Inc., Bank of America,  N.A., and Barclays Capital Real Estate Inc., as initial lender, and assigned  to the Federal Home Loan Mortgage Corporation.                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.5   |   | Cross-Collateralization  Agreement, dated as of October 5, 2007, between Tishman Speyer  Archstone-Smith Woodland Park, L.P. and Lehman Brothers Holdings Inc., Bank  of America, N.A., and Barclays Capital Real Estate Inc., as initial lender,  and the trustee named therein, and assigned to the Federal Home Loan Mortgage  Corporation.                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.6   |   | Schedule of  Cross-Collateralized Agreements and Promissory Notes (pursuant to Instruction  2 to Item 601 of Regulation S-K).                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.7   |   | Mezzanine Loan  A Agreement (Freddie Pool), dated as of October 5, 2007, by and among certain  subsidiaries of Archstone-Smith Operating Trust, as borrowers, and Lehman  Brothers Holdings Inc., Bank of America, N.A., and Barclays Capital Real  Estate Inc., as lender.                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.8   |   | Mezzanine  Loan B Agreement (Freddie Pool), dated as of October 5, 2007, by and among  certain subsidiaries of Archstone-Smith Operating Trust, as borrowers, and  Lehman Brothers Holdings Inc., Bank of America, N.A., and Barclays Capital  Real Estate Inc., as lender.                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.9   |   | Mezzanine  Loan A Agreement (Fannie Bucket 1), dated as of October 5, 2007, by and among  certain subsidiaries of Archstone-Smith Operating Trust, as borrowers, and  Lehman Brothers Holdings Inc., Bank of America, N.A., and Barclays Capital  Real Estate Inc., as lender.                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.10  |   | Mezzanine  Loan B Agreement (Fannie Bucket 1), dated as of October 5, 2007, by and among  certain subsidiaries of Archstone-Smith Operating Trust, as borrowers, and  Lehman Brothers Holdings Inc., Bank of America, N.A., and Barclays Capital  Real Estate Inc., as lender.                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.11  |   | Schedule of  Additional Mezzanine Loans for the Fannie Portfolio (pursuant to Instruction  2 to Item 601 of Regulation S-K).                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 12.1   |   | Computation of Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 12.2   |   | Computation of Ratio of Earnings to Combined Fixed Charges and  Preferred Unit Distributions                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 31.1   |   | Certification of Chief Executive Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 31.2   |   | Certification of Chief Financial Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 32.1   |   | Certification of Chief Executive Officer pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 32.2   |   | Certification of Chief Financial Officer pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

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