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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2005ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to .
 Commission File Number 1-10272 ARCHSTONE-SMITH OPERATING TRUST (Exact name of registrant as specified in its charter)
 Maryland
(State or other jurisdiction of
incorporation or organization)
    
    74-6056896
(I.R.S. employeridentification 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 all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing for the past 90 days. Yes    þ     No    o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes    þ     No    o At
May 2, 2005 there were approximately 21,257,000 of the Registrants Common Units
outstanding held by non-affiliates.




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Table of Contents PageItem
    
    Description
    
    NumberPART 11.
    
    Financial StatementsCondensed Consolidated Balance Sheets  March 31, 2005 (unaudited) and December 31, 2004
    
    
    3Condensed Consolidated Statements of Earnings  Three months ended March 31, 2005 and
2004 (unaudited)
    
    
    4Condensed Consolidated Statement of Unitholders Equity, Other Common Unitholders
Interest and Comprehensive Income/(Loss)  Three months ended March 31, 2005
(unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows  Three months ended March 31, 2005 and
2004 (unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    7Independent Registered Public Accounting Firm Review Report
    
    
    202.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    213.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    314.
    
    Controls and Procedures
    
    
    32PART II1.
    
    Legal Proceedings
    
    
    332.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
    
    
    336.
    
    Exhibits
    
    
    33Computation of Ratio of Earnings to Fixed ChargesComputation of Ratio of Earnings to Combined Fixed Charges and Perferred Unit DistributionsConsent of Independent Registered Public Accounting FirmCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive Officer Pursuant to Section 906Certification of Chief Financial Officer Pursuant to Section 906
  2




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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements
 Archstone-Smith Operating Trust 
 Condensed Consolidated Balance Sheets (In thousands, except unit data) March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSReal estate
    
    $
    9,099,724
    
    
    $
    9,084,001Real estate  held for sale
    
    
    188,838
    
    
    
    137,037Less accumulated depreciation
    
    
    798,025
    
    
    
    763,5428,490,537
    
    
    
    8,457,496Investments in and advances to unconsolidated entities
    
    
    99,300
    
    
    
    111,481Net investments
    
    
    8,589,837
    
    
    
    8,568,977Cash and cash equivalents
    
    
    7,043
    
    
    
    203,255Restricted cash in tax-deferred exchange escrow
    
    
    68,901
    
    
    
    120,095Other assets
    
    
    235,230
    
    
    
    173,717Total assets
    
    $
    8,901,011
    
    
    $
    9,066,044LIABILITIES AND UNITHOLDERS EQUITYLiabilities:Unsecured credit facilities
    
    $
    213,763
    
    
    $
    19,000Long-Term Unsecured Debt
    
    
    2,079,016
    
    
    
    2,099,132Mortgages payable
    
    
    1,777,618
    
    
    
    2,031,505Distributions payable
    
    
    47,104
    
    
    
    52,052Accounts payable, accrued expenses and other liabilities
    
    
    216,887
    
    
    
    273,079Total liabilities
    
    
    4,334,388
    
    
    
    4,474,768Minority interest
    
    
    
    
    
    
    2,050Other common
unitholders interest, at redemption value (A-1 Common Units: 24,143,517 in 2005 and 23,117,498 in 2004)
    
    
    823,535
    
    
    
    885,400Unitholders equity:Perpetual Preferred Units
    
    
    50,000
    
    
    
    69,522Common unitholders equity (A-2 Common Units: 199,197,964 in 2005 and
199,577,459 in 2004)
    
    
    3,696,343
    
    
    
    3,638,729Accumulated other comprehensive earnings (loss)
    
    
    (3,255
    )
    
    
    (4,425
    )Total unitholders equity
    
    
    3,743,088
    
    
    
    3,703,826Total liabilities and equity
    
    $
    8,901,011
    
    
    $
    9,066,044
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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Archstone-Smith Operating Trust 
 Condensed Consolidated Statements of Earnings (In thousands, except per unit amounts)
(Unaudited) Three Months EndedMarch 31,2005
    
    
    2004Revenues:Rental revenues
    
    $
    230,011
    
    
    $
    200,523Other income
    
    
    5,127
    
    
    
    3,697235,138
    
    
    
    204,220Expenses:Rental expenses
    
    
    61,535
    
    
    
    50,815Real estate taxes
    
    
    23,715
    
    
    
    19,708Depreciation on real estate investments
    
    
    56,031
    
    
    
    46,648Interest expense
    
    
    49,275
    
    
    
    39,432General and administrative expenses
    
    
    14,289
    
    
    
    12,433Other expenses
    
    
    20,785
    
    
    
    975225,630
    
    
    
    170,011Earnings from operations
    
    
    9,508
    
    
    
    34,209Minority interest
    
    
    
    
    
    
    352Income from unconsolidated entities
    
    
    11,117
    
    
    
    5,276Other non-operating income
    
    
    24,005
    
    
    
    10,510Earnings before discontinued operations
    
    
    44,630
    
    
    
    50,347Net earnings from discontinued operations
    
    
    29,212
    
    
    
    63,615Net earnings
    
    
    73,842
    
    
    
    113,962Preferred Unit distributions
    
    
    (1,698
    )
    
    
    (4,447
    )Net earnings attributable to Common Units  Basic
    
    $
    72,144
    
    
    $
    109,515Weighted average Common Units outstanding  Basic
    
    
    224,268
    
    
    
    220,080Weighted average Common Units outstanding  Diluted
    
    
    225,409
    
    
    
    223,619Earnings per Common Unit  Basic:Earnings before discontinued operations
    
    $
    0.19
    
    
    $
    0.22Discontinued operations, net
    
    
    0.13
    
    
    
    0.28Net earnings
    
    $
    0.32
    
    
    $
    0.50Earnings per Common Unit  Diluted:Earnings before discontinued operations
    
    $
    0.19
    
    
    $
    0.21Discontinued operations, net
    
    
    0.13
    
    
    
    0.28Net earnings
    
    $
    0.32
    
    
    $
    0.49Distributions paid per Common Unit
    
    $
    0.4325
    
    
    $
    0.43
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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##### Table of Contents



Archstone-Smith Operating Trust 
 Condensed Consolidated Statement of Unitholders Equity, Other Common Unitholders Interest and Comprehensive Income/(Loss)
 Three Months Ended March 31, 2005 (In thousands)
(Unaudited) PerpetualPreferredUnitsatAggregate
    
    
    
    
    
    
    Accumulated
    
    
    
    
    
    
    Other CommonLiquidation
    
    
    Common
    
    
    Other Comprehensive
    
    
    Total Unitholders
    
    
    UnitholdersPreference
    
    
    Unitholders Equity
    
    
    Earnings
    
    
    Equity
    
    

Interest
    
    
    TotalBalances at December 31, 2004
    
    $
    69,522
    
    
    $
    3,638,729
    
    
    $
    (4,425
    )
    
    $
    3,703,826
    
    
    $
    885,400
    
    
    $
    4,589,226Comprehensive income:Net earnings
    
    
    
    
    
    
    65,357
    
    
    
    
    
    
    
    65,357
    
    
    
    8,485
    
    
    
    73,842Change in fair value of
cash flow hedges
    
    
    
    
    
    
    
    
    
    
    1,659
    
    
    
    1,659
    
    
    
    
    
    
    
    1,659Change in fair value of
marketable securities
    
    
    
    
    
    
    
    
    
    
    (489
    )
    
    
    (489
    )
    
    
    
    
    
    
    (489
    )Comprehensive income
attributable to Common Units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,012Preferred Unit distributions
    
    
    
    
    
    
    (1,698
    )
    
    
    
    
    
    
    (1,698
    )
    
    
    
    
    
    
    (1,698
    )Common Unit distributions
    
    
    
    
    
    
    (87,042
    )
    
    
    
    
    
    
    (87,042
    )
    
    
    (9,965
    )
    
    
    (97,007
    )A-1 Common Units converted
into A-2 Common Units
    
    
    
    
    
    
    1,654
    
    
    
    
    
    
    
    1,654
    
    
    
    (1,654
    )
    
    
    Common Unit repurchases
    
    
    
    
    
    
    (41,456
    )
    
    
    
    
    
    
    (41,456
    )
    
    
    
    
    
    
    (41,456
    )Preferred Unit repurchases
    
    
    (19,522
    )
    
    
    
    
    
    
    
    
    
    
    (19,522
    )
    
    
    
    
    
    
    (19,522
    )Issuance of A-1 Common Units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,660
    
    
    
    41,660Issuance of A-2 Common Units
under LTIP
    
    
    
    
    
    
    21,125
    
    
    
    
    
    
    
    21,125
    
    
    
    
    
    
    
    21,125Adjustment to redemption value
    
    
    
    
    
    
    100,391
    
    
    
    
    
    
    
    100,391
    
    
    
    (100,391
    )
    
    
    Other, net
    
    
    
    
    
    
    (717
    )
    
    
    
    
    
    
    (717
    )
    
    
    
    
    
    
    (717
    )Balances at March 31, 2005
    
    $
    50,000
    
    
    $
    3,696,343
    
    
    $
    (3,255
    )
    
    $
    3,743,088
    
    
    $
    823,535
    
    
    $
    4,566,623
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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Archstone-Smith Operating Trust 
 Condensed Consolidated Statements of Cash Flows (In thousands)
 (Unaudited)
 Three Months EndedMarch 31,2005
    
    
    2004Operating activities:Net earnings
    
    $
    73,842
    
    
    $
    113,962Adjustments to reconcile net earnings to net cash flow provided by operating activities:Depreciation and amortization
    
    
    58,599
    
    
    
    55,382Gains on dispositions of depreciated real estate, net
    
    
    (39,920
    )
    
    
    (62,496
    )Gains on sale of marketable equity securities
    
    
    (23,785
    )
    
    
    (10,510
    )Minority interest
    
    
    
    
    
    
    (352
    )Equity in earnings (loss) from unconsolidated entities
    
    
    (11,117
    )
    
    
    (5,276
    )Change in other assets
    
    
    (9,010
    )
    
    
    2,470Change in accounts payable, accrued expenses and other liabilities
    
    
    (28,852
    )
    
    
    (34,582
    )Other, net
    
    
    (1,766
    )
    
    
    (3,623
    )Net cash flow provided by operating activities
    
    
    17,991
    
    
    
    54,975Investing activities:Real estate investments, net
    
    
    (310,994
    )
    
    
    (304,361
    )Change in investments in unconsolidated entities, net
    
    
    27,726
    
    
    
    (1,231
    )Proceeds from dispositions, net of closing costs
    
    
    297,933
    
    
    
    194,382Change in restricted cash
    
    
    51,194
    
    
    
    67,151Change in notes receivable
    
    
    (63,002
    )
    
    
    150Other, net
    
    
    28,058
    
    
    
    55,370Net cash flow provided by investing activities
    
    
    30,915
    
    
    
    11,461Financing activities:Payments on Long-Term Unsecured Debt
    
    
    (18,750
    )
    
    
    (40,450
    )Principal prepayment of mortgages payable, including prepayment penalties
    
    
    194,763
    
    
    
    (27,788
    )Regularly scheduled principal payments on mortgages payable
    
    
    (249,906
    )
    
    
    (3,344
    )Proceeds from mortgage notes payable
    
    
    (2,828
    )
    
    
    16,076Payments on/proceeds from unsecured credit facilities, net
    
    
    655
    
    
    
    100,253Proceeds from Common Units issued under DRIP and employee stock options
    
    
    11,475
    
    
    
    23,249Repurchase of Common Units
    
    
    (41,456
    )
    
    
    (31,917
    )Repurchase of Series E and G Perpetual Preferred Units
    
    
    (19,522
    )
    
    
    Cash distributions paid on Common Units
    
    
    (117,803
    )
    
    
    (96,066
    )Cash distributions paid on Preferred Units
    
    
    (1,698
    )
    
    
    (4,447
    )Other, net
    
    
    (48
    )
    
    
    (1,526
    )Net cash flow (used in) financing activities
    
    
    (245,118
    )
    
    
    (65,960
    )Net change in cash and cash equivalents
    
    
    (196,212
    )
    
    
    476Cash and cash equivalents at beginning of period
    
    
    203,255
    
    
    
    5,230Cash and cash equivalents at end of period
    
    
    7,043
    
    
    $
    5,706Significant non-cash investing and financing activities:A-1 Common Units issued in exchange for real estate
    
    $
    41,660
    
    
    $
    10,788A-1 Common Units converted to A-2 Common Units
    
    
    
    
    
    
    13,114Assumption of mortgages payable upon purchase of apartment communities
    
    
    1,654
    
    
    
    74,900A-2 Common Units issued in exchange for real estate
    
    
    7,875
    
    
    
    4,502
 The accompanying notes are an integral part of these condensed consolidated financial statements. 6




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Archstone-Smith Operating Trust 
 Notes to Condensed Consolidated Financial Statements March 31, 2005 and 2004 (Unaudited)
 (1) Description of the Business and Summary of Significant Accounting Policies Business Archstone-Smith is structured as an UPREIT under which all property ownership and business
operations are conducted through the Operating Trust. Archstone-Smith is our sole trustee and owns
approximately 89.2% of the Operating Trusts outstanding Common Units; the remaining 10.8% are
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 is an equity REIT organized under the laws of the State of Maryland. We focus on
creating value for our shareholders by acquiring, developing and operating apartments in markets
characterized by very expensive single-family home prices, limited land on which to build new
housing and a strong, diversified economic base with employment growth potential. Interim Financial Reporting The accompanying condensed consolidated financial statements of the Operating Trust are
unaudited and certain information and footnote disclosures normally included in financial
statements have been omitted. While management believes that the disclosures presented are
adequate for interim reporting, these interim financial statements should be read in conjunction
with the financial statements and notes included in the Operating Trusts 2004 Form 10-K. See the
glossary in our 2004 Form 10-K for all defined terms not defined herein. In the opinion of management, the accompanying unaudited financial statements contain all
adjustments necessary for a fair presentation of the Operating Trusts financial statements for the
interim periods presented. The results of operations for the three months ended March 31, 2005 are
not necessarily indicative of the results to be expected for the entire year. Use of Estimates The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect amounts reported in the financial statements and the related notes. Actual results could
differ from managements estimates. Estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the period they are determined to be necessary. Loss Contingencies We accrue for loss contingencies when it is probable that a loss will be incurred and that
loss can be reasonably estimated consistent with the criteria established in SFAS No. 5 Accounting
for Contingencies.We also record insurance recoveries up to the amount of the actual loss
contingency when the insurance recovery is both probable and can be reasonably estimated. Legal Fees We generally recognize legal expenses as incurred; however, if such fees are related to the
accrual for an estimated legal settlement, we accrue for the related incurred and anticipated legal
fees at the same time we accrue the cost of settlement. 7




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Archstone-Smith Operating Trust
Notes to Condensed Consolidated Financial Statements (Continued) Marketable Securities and Other Investments All publicly traded equity securities are classified as available for sale and carried at
fair value, with unrealized gains and losses reported as a separate component of shareholders
equity. Private investments, for which we do not have the ability to exercise significant
influence, are accounted for at cost. Declines in the value of public and private investments that
management determines are other than temporary are recorded as a provision for loss on investments.
We recognized a $23.5 million gain on the sale of marketable equity securities related to the sale
of our Rent.com investment to eBay during the three months ended March 31, 2005. Real Estate Depreciation We allocate the cost of newly acquired properties between net tangible and identifiable
intangible assets. The primary intangible asset associated with an apartment community acquisition
is the value of the existing lease agreements. When allocating cost to an acquired property, we
first allocate costs to the estimated intangible value of the existing lease agreements and then to
the estimated value of the land, building and fixtures assuming the property is vacant. We estimate
the intangible value of the lease agreements by determining the lost revenue associated with a
hypothetical lease-up. We depreciate the building and fixtures based on the expected useful life of
the asset and amortize the intangible value of the lease agreements over the average remaining life
of the existing leases. Income Taxes Archstone-Smith made an election to be taxed as a REIT under the Internal Revenue Code of
1986, as amended, and we believe we qualify as a REIT and have made all required distributions of
our taxable income. Accordingly, no provision has been made for federal income taxes at the trust
level. We primarily incur income taxes through our consolidated taxable REIT subsidiary called
Ameriton. Income taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax basis, operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the
period that includes the enactment date. Preferred Unit Redemptions When redeeming Preferred Units, we recognize unit issuance costs as a charge to earnings in
accordance with Financial Accounting Standards Board (FASB)  Emerging Issues Task Force (EITF)
Topic D-42, The Effect on the Calculation of Earnings per Share for the Redemption or Induced
Conversion of Preferred Stock. In July 2003, the Securities and Exchange Commission (SEC) staff
issued a clarification of the SECs position on the application of FASB-EITF Topic D-42. The SEC
staffs position, as clarified, is that in applying Topic D-42, the carrying value of preferred
units that are redeemed should be reduced by the amount of original issuance costs, regardless of
where in unitholders equity those costs are reflected. 8




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Archstone-Smith
Operating Trust
Notes to Condensed Consolidated Financial Statements (Continued) Stock-Based Compensation As of March 31, 2005, the company has one stock-based employee compensation plan. Effective
January 1, 2003, the company adopted the fair value recognition provision of SFAS No. 123,
Accounting for Stock-Based Compensation,prospectively to all employee awards granted, modified
or settled after January 1, 2003, which results in expensing of options. During 2005, we granted
approximately 311,000 Restricted Share Units and 506,000 stock options. During 2004, we granted
approximately 300,000 Restricted Share Units and 648,000 stock options. For employee awards granted
prior to January 1, 2003, the company accounted for this plan under the recognition and measurement
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees,and related
Interpretations. With respect to options granted under the plan prior to January 1, 2003, no
stock-based employee compensation expense is reflected in the accompanying condensed consolidated
statements of earnings, as all options granted under those plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. The following table illustrates
the effect on net earnings and earnings per unit if the fair value based method had been applied to
all outstanding and unvested awards in each period (dollar amounts in thousands, except per unit
amounts): Three Months EndedMarch 31,2005
    
    
    2004Net earnings attributable to Common Units  Basic
    
    $
    72,144
    
    
    $
    109,515Add: Stock-based employee compensation expense included
in reported net earnings
    
    
    229
    
    
    
    75Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
    
    
    (487
    )
    
    
    (508
    )Pro forma net earnings attributable to Common Units  Basic
    
    $
    71,886
    
    
    $
    109,082Net earnings per Common Unit:Basic  as reported
    
    $
    0.32
    
    
    $
    0.50Basic  pro forma
    
    $
    0.32
    
    
    $
    0.50Diluted  as reported
    
    $
    0.32
    
    
    $
    0.49Diluted  pro forma
    
    $
    0.32
    
    
    $
    0.49Weighted average risk-free interest rate
    
    
    3.77
    %
    
    
    3.48
    %Weighted average dividend yield
    
    
    5.63
    %
    
    
    6.92
    %Weighted average volatility
    
    
    21.97
    %
    
    
    15.33
    %Weighted average expected option life
    
    5.0 years
    
    5.0 years
 Comprehensive Income Comprehensive income, which is defined as net earnings and all other non-owner changes in
equity, is displayed in the accompanying Condensed Consolidated Statements of Unitholders Equity,
Other Common Unitholders Interest and Comprehensive Income/(Loss). Other comprehensive
income/(loss) reflects unrealized holding gains and losses on the available-for-sale investments
and changes in the fair value of effective cash flow hedges. 9




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Archstone-Smith
Operating Trust
Notes to Condensed Consolidated Financial Statements (Continued) Our accumulated other comprehensive income/(loss) for the three months ended March 31,
2005 was as follows (in thousands): NetUnrealized
    
    
    
    
    
    
    AccumulatedGains on
    
    
    
    
    
    
    OtherMarketable
    
    
    Cash Flow
    
    
    ComprehensiveSecurities
    
    
    Hedges
    
    
    Income/(Loss)Balance at December 31, 2004
    
    $
    1,398
    
    
    $
    (5,823
    )
    
    $
    (4,425
    )Change in fair value of cash flow hedges
    
    
    
    
    
    
    1,597
    
    
    
    1,597Fair value of long-term debt hedge
    
    
    
    
    
    
    62
    
    
    
    62Mark to market for marketable equity securities
    
    
    (198
    )
    
    
    
    
    
    
    (198
    )Reclassification adjustments for realized net gains
    
    
    (291
    )
    
    
    
    
    
    
    (291
    )Balance at March 31, 2005
    
    $
    909
    
    
    $
    (4,164
    )
    
    $
    (3,255
    )
 Per Unit Data Following is a reconciliation of basic net earnings attributable to Common Units to diluted
net earnings per Common Unit for the periods indicated (in thousands): Three Months EndedMarch 31,2005
    
    
    2004Reconciliation of numerator between basic and diluted net earnings per Common Unit(1):Net earnings attributable to Common Units  Basic
    
    $
    72,144
    
    
    $
    109,515Dividends on Convertible Preferred Units
    
    
    
    
    
    
    1,104Net earnings attributable to Common Units  Diluted
    
    $
    72,144
    
    
    $
    110,619Reconciliation of denominator between basic and diluted net earnings per Common Unit(1):Weighted average number of Common Units
outstanding  Basic
    
    
    224,268
    
    
    
    220,080Assumed conversion of Convertible Preferred Units into
Common Units
    
    
    
    
    
    
    2,583Assumed exercise of options
    
    
    1,141
    
    
    
    956Weighted average number of Common Units
outstanding  Diluted
    
    
    225,409
    
    
    
    223,619
   (1)
    
    Excludes the impact of potentially dilutive equity securities during periods in which they
are anti-dilutive. 10




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Archstone-Smith Operating Trust
Notes to Condensed Consolidated Financial Statements (Continued) (2) Real Estate Investments in Real Estate Investments in real estate, at cost, were as follows (dollar amounts in thousands): March 31, 2005
    
    
    December 31, 2004Investment
    
    
    Units(1)
    
    
    Investment
    
    
    Units(1)Operating Trust Apartment Communities:Operating communities
    
    $
    8,154,013
    
    
    
    58,458
    
    
    $
    8,018,658
    
    
    
    58,486Communities under construction
    
    
    448,866
    
    
    
    2,856
    
    
    
    499,239
    
    
    
    3,237Development communities In Planning:Owned
    
    
    43,521
    
    
    
    1,011
    
    
    
    51,822
    
    
    
    1,251Under control(2)
    
    
    
    
    
    
    253
    
    
    
    
    
    
    
    593Total development communities In Planning
    
    
    43,521
    
    
    
    1,264
    
    
    
    51,822
    
    
    
    1,844Total Operating Trust apartment communities
    
    
    8,646,400
    
    
    
    62,578
    
    
    
    8,569,719
    
    
    
    63,567Ameriton apartment communities
    
    
    579,800
    
    
    
    6,620
    
    
    
    581,910
    
    
    
    6,198Other real estate assets(3)
    
    
    62,362
    
    
    
    
    
    
    
    69,409
    
    
    
    Total real estate
    
    $
    9,288,562
    
    
    
    69,198
    
    
    $
    9,221,038
    
    
    
    69,765
   (1)
    
    Unit information is based on managements estimates and has not been audited or reviewed by
our independent auditors.(2)
    
    Our investment as of March 31, 2005 and December 31, 2004 for development communities Under
Control was $0.37 million and $1.5 million, respectively, and are reflected in the Other
assets caption of our Consolidated Balance Sheets.(3)
    
    Includes land that is not In Planning and other real estate assets. The change in investments in real estate, at cost, consisted of the following (in thousands): Balance at December 31, 2004
    
    $
    9,221,038Acquisition-related expenditures
    
    
    251,956Redevelopment expenditures
    
    
    9,997Recurring capital expenditures
    
    
    5,850Development expenditures, excluding land acquisitions
    
    
    76,306Dispositions
    
    
    (279,938
    )Net apartment community activity
    
    
    64,171Change in other real estate assets
    
    
    3,353Balance at March 31, 2005
    
    $
    9,288,562
 At March 31, 2005 we had unfunded contractual commitments related to real estate investment
activities aggregating approximately $435.8 million, of which $409.5 million related to communities
under construction. (3) Discontinued Operations The results of operations for properties sold during the period or designated as held-for-sale
at the end of the period are required to be classified as discontinued operations. The property
specific components of net earnings that are classified as discontinued operations include rental
revenues, rental expenses, real estate taxes, depreciation expense, income taxes, debt
extinguishment expense and interest expense (actual interest expense for encumbered properties and
a pro-rata allocation of interest expense for any unencumbered property up to our weighted average
leverage ratio), as well as the net gain or loss on the disposition of properties. 11




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##### Table of Contents



Archstone-Smith Operating Trust
Notes to Condensed Consolidated Financial Statements (Continued) Consistent with our capital recycling program, we have five operating apartment
communities, representing 1,549 units (unaudited), classified as held for sale under the provisions
of SFAS No. 144, at March 31, 2005. Accordingly, we have classified the operating earnings from
these five properties within discontinued operations for the years ended March 31, 2005 and 2004.
During the three months ended March 31, 2005, we sold five Archstone-Smith and Ameriton operating
communities. The operating results of these five communities and the related gain/loss on sale are
also included in discontinued operations for 2005 and 2004. During the twelve months ended
December 31, 2004, we sold 30 Archstone-Smith and Ameriton operating communities. The operating
results of these 30 communities and the related gain/loss on the sale are also included in
discontinued operations for the quarter ended March 31, 2004. The following is a summary of net earnings from discontinued operations (in thousands): Three Months EndedMarch 31,2005
    
    
    2004Rental revenues
    
    $
    4,844
    
    
    $
    38,372Rental expenses
    
    
    (2,331
    )
    
    
    (13,013
    )Real estate taxes
    
    
    (180
    )
    
    
    (5,108
    )Depreciation on real estate investments
    
    
    (943
    )
    
    
    (7,123
    )Interest expense (1)
    
    
    (2,076
    )
    
    
    (10,740
    )Income taxes from taxable REIT subsidiary sales
    
    
    (4,964
    )
    
    
    (361
    )Debt extinguishment costs related to dispositions
    
    
    (5,058
    )
    
    
    (908
    )Gains on disposition of taxable REIT subsidiary real estate
investments, net
    
    
    13,766
    
    
    
    12,696Gains on dispositions of REIT real estate investments, net
    
    
    26,154
    
    
    
    49,800Earnings from discontinued apartment communities
    
    $
    29,212
    
    
    $
    63,615
   (1)
    
    The portion of interest expense included in discontinued operations that is allocated
to properties based on the companys leverage ratio was $1.3 million and $7.3 million for
the three months ended March 31, 2005 and 2004, respectively. Assets held for sale as of March 31, 2005, represented gross real estate of $188.8 million and
$137.0 million with no related mortgages payable at March 31, 2005 and December 31, 2004,
respectively. Additionally, of our investment in real estate at December 31, 2004, we disposed of
$279.9 million of real estate and paid off related mortgages of $71.9 million during the three
months ended March 31, 2005. 12




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Archstone-Smith Operating Trust
Notes to Condensed Consolidated Financial Statements (Continued) (4) Investments in and Advances to Unconsolidated Entities Real Estate Joint Ventures We have investments in entities that we account for using the equity method. At March 31,
2005, the investment balance consisted of $70.5 million in our joint ventures and $28.8 million in
Ameriton joint ventures. At December 31, 2004, the investment balance consisted of $74.1 million
in our joint ventures and $37.4 million in Ameriton joint ventures. Combined summary balance sheet data for our investments in unconsolidated entities presented
on a stand-alone basis follows (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Assets:Real estate
    
    $
    1,091,456
    
    
    $
    1,115,563Other assets
    
    
    28,471
    
    
    
    52,394Total assets
    
    $
    1,119,927
    
    
    $
    1,167,957Liabilities and owners equity:Inter-company debt payable to Operating Trust
    
    $
    4,694
    
    
    $
    4,124Mortgages payable
    
    
    736,489
    
    
    
    777,924Other liabilities
    
    
    45,193
    
    
    
    24,254Total liabilities
    
    
    786,376
    
    
    
    806,302Owners equity
    
    
    333,551
    
    
    
    361,655Total liabilities and owners equity
    
    $
    1,119,927
    
    
    $
    1,167,957
 Selected summary results of operations for our unconsolidated investees presented on a
stand-alone basis follows (in thousands): Three Months EndedMarch 31,2005
    
    
    2004Operating Trust Joint Ventures(1)Revenues
    
    $
    33,289
    
    
    $
    35,412Net Earnings
    
    
    15,488
    
    
    
    9,182Ameriton Joint Ventures(1)Revenues
    
    $
    1,089
    
    
    $
    1,623Net Earnings
    
    
    7,118
    
    
    
    (257
    )TotalRevenues
    
    $
    34,378
    
    
    $
    37,035Net Earnings
    
    $
    22,606
    
    
    $
    8,925
   (1)
    
    Includes $24.8 million and $8.0 million of gains associated with the disposition of
Operating Trust and Ameriton joint ventures during the three months ended March 31, 2005
and 2004, respectively. 13




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Archstone-Smith Operating Trust
Notes to Condensed Consolidated Financial Statements (Continued) (5) Mezzanine Notes Receivable During the first quarter of 2005, we entered
into four mezzanine note agreements as a lender to third parties. As of March 31, 2005 and December 31, 2004, we had a total of $49.0 million
and $8.7 million in mezzanine notes receivable, respectively and a commitment to fund an additional
$20.0 million on existing agreements. During the three months ended March 31, 2005, we recognized
a total of $0.9 million in interest income associated with mezzanine notes receivable. There was no
comparable interest income for the same period in 2004. (6) Borrowings Unsecured Credit Facilities The following table summarizes our revolving credit facility borrowings under our line of
credit (in thousands, except for percentages): As of and for the
    
    
    As of and for theThree Months
    
    
    Year EndedEnded
    
    
    December 31,March 31, 2005
    
    
    2004Total unsecured revolving credit facility
    
    $
    600,000
    
    
    $
    600,000Borrowings outstanding at end of period
    
    
    141,000
    
    
    
    19,000Outstanding letters of credit under this facility
    
    
    13,983
    
    
    
    13,983Weighted average daily borrowings
    
    
    57,178
    
    
    
    81,317Maximum borrowings outstanding during the period
    
    
    141,000
    
    
    
    375,000Weighted average daily nominal interest rate
    
    
    2.97
    %
    
    
    1.58
    %Weighted average daily effective interest rate
    
    
    3.06
    %
    
    
    2.62
    %
 We also have a short-term unsecured borrowing agreement with JPMorgan Chase Bank, which
provides for maximum borrowings of $100 million. The borrowings under the agreement bear interest
at an overnight rate agreed to at the time of borrowing and ranged from 2.75% to 3.10% during 2005.
There were $72.8 million borrowings outstanding under the agreement at March 31, 2005 and no
borrowings outstanding under this agreement at December 31, 2004. Long-Term Unsecured Debt A summary of our Long-Term Unsecured Debt outstanding at March 31, 2005 and December 31, 2004
follows (dollar amounts in thousands): Effective
    
    
    
    
    
    
    Balance at
    
    
    AverageCoupon
    
    
    Interest
    
    
    Balance at
    
    
    December 31,
    
    
    RemainingType of Debt
    
    Rate(1)
    
    
    Rate(2)
    
    
    March 31, 2005
    
    
    2004
    
    
    Life (Years)Long-term unsecured senior notes
    
    
    6.20
    %
    
    
    6.38
    %
    
    $
    2,000,780
    
    
    $
    2,019,607
    
    
    
    5.1Unsecured tax-exempt bonds
    
    
    2.43
    %
    
    
    2.70
    %
    
    
    78,236
    
    
    
    79,525
    
    
    
    18.4Total/average
    
    
    6.06
    %
    
    
    6.24
    %
    
    $
    2,079,016
    
    
    $
    2,099,132
    
    
    
    5.6
   (1)
    
    Represents a fixed rate for the long-term unsecured notes and a variable rate for the
unsecured tax-exempt bonds.(2)
    
    Includes the effect of fair value hedges, loan cost amortization and other ongoing fees and
expenses, where applicable. The $2.1 billion of Long-Term Unsecured Debt generally has semi-annual interest payments and
either amortizing annual principal payments or balloon payments due at maturity. The unsecured
tax-exempt bonds require semi-annual payments and are due upon maturity with $22.0 million maturing
in 2008 and $56.2 million maturing in 2029. The notes are redeemable at our option, in whole or in
part, and the unsecured tax-exempt bonds are redeemable at our option upon sale of the related
property. The redemption price is generally equal to the sum of the principal amount of the notes
being redeemed plus accrued interest through the redemption date plus a standard make-whole
premium, if any. 14




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##### Table of Contents



Archstone-Smith Operating Trust
Notes to Condensed Consolidated Financial Statements (Continued) Mortgages payable Our mortgages payable generally feature either monthly interest and principal payments or
monthly interest-only payments with balloon payments due at maturity.A summary of mortgages
payable follows (dollar amounts in thousands): Outstanding Balance at(1)EffectiveInterestMarch 31, 2005
    
    
    December 31, 2004
    
    
    Rate(2)Secured floating rate debt:Tax-exempt debt
    
    $
    508,517
    
    
    $
    508,923
    
    
    
    2.3
    %Construction loans
    
    
    
    
    
    
    40,868
    
    
    
    Conventional mortgages
    
    
    21,705
    
    
    
    21,705
    
    
    
    3.4
    %Total Floating
    
    
    530,222
    
    
    
    571,496
    
    
    
    2.3
    %Secured fixed rate debt:Conventional mortgages
    
    
    1,227,208
    
    
    
    1,439,558
    
    
    
    6.3
    %Other secured debt
    
    
    20,188
    
    
    
    20,451
    
    
    
    4.9
    %Total Fixed
    
    
    1,247,396
    
    
    
    1,460,009
    
    
    
    6.3
    %Total debt outstanding at end of period
    
    $
    1,777,618
    
    
    $
    2,031,505
    
    
    
    5.1
    %
   (1)
    
    Includes a net fair market value adjustment recorded in connection with the Smith Merger of
$43.4 million and $48.4 million at March 31, 2005 and December 31, 2004, respectively. This
amount is amortized into interest expense over the life of the underlying debt.(2)
    
    Includes the effect of fair value hedges, credit enhancement fees, the amortization of fair
market value purchase adjustment, and other related costs, where applicable. The change in mortgages payable during the three months ended March 31, 2005 consisted of the
following (in thousands): Balance at December 31, 2004
    
    $
    2,031,505Regularly scheduled principal amortization
    
    
    (2,828
    )Prepayments, final maturities and other(1)
    
    
    (251,714
    )Proceeds from mortgage notes payable
    
    
    655Balance at March 31, 2005
    
    $
    1,777,618
   (1)
    
    We incurred $23.0 million of debt extinguishment in connection with these prepayments. 15




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Archstone-Smith Operating Trust
Notes to Condensed Consolidated Financial Statements (Continued) Other The book value of total assets pledged as collateral for mortgage loans and other obligations
at March 31, 2005 and December 31, 2004 is $3.7 billion and $3.8 billion, respectively. Our debt
instruments generally contain covenants common to the type of facility or borrowing, including
financial covenants establishing minimum debt service coverage ratios and maximum leverage ratios.
We were in compliance with all financial covenants pertaining to our debt instruments during the
three months ended March 31, 2005. For the three months ended March 31, 2005 and 2004, the total interest paid on all outstanding
debt was $84.6 and $73.8 million, respectively. We capitalize interest incurred during the
construction period as part of the cost of apartment communities under development. Interest
capitalized during the three months ended March 31, 2005 and 2004 was $8.2 and $5.9 million,
respectively. (7) Distributions to Unitholders The following table summarizes the quarterly cash distributions paid per unit on Common and
Preferred Units during the three months ended March 31, 2005 and the annualized distribution we
expect to pay for 2005: Quarterly
    
    
    AnnualizedCash
    
    
    CashDistributions
    
    
    DistributionsPer Unit
    
    
    Per UnitCommon Units and A-1 Units
    
    $
    0.4325
    
    
    $
    1.73Series E Preferred Units(1)
    
    
    0.1977
    
    
    
    0.1977Series G Preferred Units(2)
    
    
    0.3714
    
    
    
    0.3714Series I Perpetual Preferred Units(3)
    
    
    1,915
    
    
    
    7,660
   (1)
    
    The remaining 200 Series E Preferred Units were redeemed in February 2005.(2)
    
    The remaining 600 Series G Preferred Units were redeemed in March 2005.(3)
    
    Series I Preferred Units have a par value of $100,000 per unit. (8) Segment Data We define our garden communities and high-rise properties each as individual operating
segments. We have determined that each of our garden communities and each of our high-rise
properties have similar economic characteristics and also meet the other GAAP criteria, which
permit the garden communities and high-rise properties to be aggregated into two reportable
segments. Additionally, we have defined the activity from Ameriton as an individual operating
segment as its primary focus is the opportunistic acquisition, development and eventual disposition
of real estate with a short term investment horizon. NOI is defined as rental revenues less rental
expenses and real estate taxes. We rely on NOI for purposes of making decisions about resource
allocations and assessing segment performance. We also believe NOI is a valuable means of
comparing year-to-year property performance. Following are reconciliations, which exclude the amounts classified as discontinued
operations, of each reportable segments (i) revenues to consolidated revenues; (ii) NOI to
consolidated earnings from operations; and (iii) assets to consolidated assets, for the periods
indicated (in thousands): Three Months EndedMarch 31,2005
    
    
    2004Reportable apartment communities segment revenues:Same-Store:Garden communities
    
    $
    119,968
    
    
    $
    117,360High-rise properties
    
    
    73,981
    
    
    
    71,496Non Same-Store:Garden communities
    
    
    17,563
    
    
    
    6,246High-rise properties
    
    
    11,815
    
    
    
    1,963Ameriton(1)
    
    
    6,114
    
    
    
    2,794Other non-reportable operating segment revenues
    
    
    570
    
    
    
    664Total segment and consolidated rental revenues
    
    $
    230,011
    
    
    $
    200,523
 16




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Archstone-Smith Operating Trust
Notes to Condensed Consolidated Financial Statements (Continued) Three Months EndedMarch 31,2005
    
    
    2004Reportable apartment communities segment NOI:Same-Store:Garden communities
    
    $
    78,381
    
    
    $
    77,405High-rise properties
    
    
    45,039
    
    
    
    45,757Non Same-Store:Garden communities
    
    
    10,666
    
    
    
    3,703High-rise properties
    
    
    7,428
    
    
    
    1,302Ameriton(1)
    
    
    2,789
    
    
    
    1,303Other non-reportable operating segment NOI
    
    
    458
    
    
    
    530Total segment NOI
    
    
    144,761
    
    
    
    130,000Reconciling items:Other income
    
    
    5,127
    
    
    
    3,697Depreciation on real estate investments
    
    
    (56,031
    )
    
    
    (46,648
    )Interest expense
    
    
    (49,275
    )
    
    
    (39,432
    )General and administrative expenses
    
    
    (14,289
    )
    
    
    (12,433
    )Other expenses
    
    
    (20,785
    )
    
    
    (975
    )Consolidated earnings from operations
    
    $
    9,508
    
    
    $
    34,209
   (1)
    
    While rental revenue and NOI are the primary measures we use to evaluate the performance of
our assets, management also utilizes gains from the disposition of real estate when evaluating
the performance of Ameriton as its primary focus is the opportunistic acquisition, development
and eventual disposition of real estate with a short term investment horizon. During the
three months ended March 31, 2005 and 2004, pre-tax gains from the disposition of Ameriton
real estate were $13.8 million and $3.5 million, respectively. Additionally, Ameriton had
gains of $7.9 million and $3.3 million during the three months ended March 31, 2005 and 2004,
respectively from the sale of unconsolidated joint venture assets. These gains are classified
within income from unconsolidated entities. Ameriton assets are excluded from our Same-Store
population as they are acquired or developed to achieve short-term opportunistic gains, and
therefore, the average holding period is typically much shorter than the holding period of
assets operated by the REIT. Total capital expenditures for garden communities included in continuing operations were $6.7
million and $5.2 million for the three months ended March 31, 2005 and 2004, respectively. Total
capital expenditures for high-rise properties included in continuing operations were $9.4 million
and $4.5 million for the three months ended March 31, 2005 and 2004, respectively. Total capital
expenditures for Ameriton properties included in continuing operations were $163,000 and $67,000
for the three months ended March 31, 2005 and 2004, respectively. 17




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Archstone-Smith Operating Trust
Notes to Condensed Consolidated Financial Statements (Continued) March 31,
    
    
    December 31,2005
    
    
    2004Reportable operating communities segment assets:Same-Store:Garden communities
    
    $
    3,347,657
    
    
    $
    3,366,887High-rise properties
    
    
    2,584,422
    
    
    
    2,595,063Non Same-Store:Garden communities
    
    
    1,151,259
    
    
    
    1,011,049High-rise properties
    
    
    766,296
    
    
    
    834,505Ameriton
    
    
    376,923
    
    
    
    440,468Other non-reportable operating segment assets
    
    
    78,170
    
    
    
    75,281Total segment assets
    
    
    8,304,727
    
    
    
    8,323,253Real estate held for sale
    
    
    185,810
    
    
    
    134,243Total segment assets
    
    
    8,490,537
    
    
    
    8,457,496Reconciling items:Investment in and advances to unconsolidated
entities
    
    
    99,300
    
    
    
    111,481Cash and cash equivalents
    
    
    7,043
    
    
    
    203,255Restricted cash in tax-deferred exchange escrow
    
    
    68,901
    
    
    
    120,095Other assets
    
    
    235,230
    
    
    
    173,717Consolidated total assets
    
    $
    8,901,011
    
    
    $
    9,066,044
 (9) Litigation and Contingencies During 2004, we incurred estimated losses associated with multiple hurricanes in Florida. As
a result of this damage, we recorded a loss contingency net of anticipated recoveries for both
wholly owned and unconsolidated apartment communities. During the three months ended March 31,
2005, we increased the reserve for our unconsolidated apartment communities resulting in an
additional charge of $0.7 million. These estimates represent managements best estimate of the
probable and reasonably estimable costs and are based on the most current information available
from our insurance adjustors. During December 2004, a lawsuit was filed against us that alleges various violations of the
Fair Housing Act and the Americans with Disabilities Act at 112 properties currently or formerly
owned by the company. The plaintiffs are seeking injunctive relief, in the form of retrofitting
apartments and public accommodations to comply with the Fair Housing Act and the Americans with
Disabilities Act, unspecified monetary damages for the diversion of the plaintiffs resources to
address fair housing violations, punitive damages and attorneys fees. We are in the process of
evaluating the claims asserted in this litigation. Due to the preliminary nature of the
litigation, it is not possible to predict or determine the outcome of the legal proceeding, nor is
it reasonably possible to estimate the amount of loss, if any, that would be associated with an
adverse decision. We are a party to various other claims and routine litigation arising in the ordinary course
of business. We do not believe that the results of any such claims or litigation, individually or
in the aggregate, will have a material adverse effect on our business, financial position or
results of operations. (10) Derivatives and Hedging Activities We are exposed to the impact of interest rate changes and will occasionally utilize interest
rate swaps and interest rate caps as hedges with the objective of lowering our overall borrowing
costs. These derivatives are designated as either cash flow or fair value hedges. We do not use
these derivatives for trading or other speculative purposes. Further, as a matter of policy, we
only enter into contracts with major financial institutions based upon their credit ratings and
other factors. When viewed in conjunction with the underlying and offsetting exposure that the
derivatives are designed to hedge, we have not, nor do we expect to sustain a material loss from
the use of these hedging instruments. 18




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##### Table of Contents



Archstone-Smith Operating Trust
Notes to Condensed Consolidated Financial Statements (Continued) We formally assess, both at inception of the hedge and on an ongoing basis, whether each
derivative is highly effective in offsetting changes in fair values or cash flows of the hedged
item. We measure hedge effectiveness by comparing the changes in the fair value or cash flows of
the derivative instrument with the changes in the fair value or cash flows of the hedged item. We
assess effectiveness of purchased interest rate caps based on overall changes in the fair value of
the caps. If a derivative ceases to be a highly effective hedge, we discontinue hedge accounting
prospectively. To determine the fair values of derivative and other financial instruments, we use a variety
of methods and assumptions that are based on market value conditions and risks existing at each
balance sheet date. These methods and assumptions include standard market conventions and
techniques such as discounted cash flow analysis, option pricing models, replacement cost and
termination cost. All methods of assessing fair value result in a general approximation of value,
and therefore, are not necessarily indicative of the actual amounts that we could realize upon
disposition. During the three months ended March 31, 2005 and 2004 we recorded an increase/(decrease) to
interest expense of $(36,000) and $23,000, respectively, for hedge ineffectiveness caused by a
difference between the interest rate index on a portion of our outstanding variable rate debt and
the underlying index of the associated interest rate swap. We pursue hedging strategies that we
expect will result in the lowest overall borrowing costs and least degree of earnings volatility
possible under the new accounting standards. (11) Subsequent Events In April 2005, the Operating Trust filed a shelf registration statement on Form S-3 to
register an additional $300 million (for a total of $1 billion) in unsecured debt securities. This
registration statement was declared effective in May 2005. In April 2005, we filed a registration statement on Form S-3 registering 1,120,806 Common
Units to be issued upon redemption of certain A-1 Common Units. This registration statement was
declared effective in May 2005. 19




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##### Table of Contents



Report of Independent Registered Public Accounting Firm The Trustee and Unitholders
Archstone-Smith Operating Trust: We have reviewed the accompanying condensed consolidated balance sheet of Archstone-Smith
Operating Trust and subsidiaries as of March 31, 2005, and the related condensed consolidated
statements of earnings for the three-month periods ended March 31, 2005 and 2004, the condensed
consolidated statement of unitholders equity, other common unitholders interest and comprehensive
income/(loss) for the three-month period ended March 31, 2005 and the condensed consolidated
statements of cash flows for the three-month periods ended March 31, 2005 and 2004. These condensed
consolidated financial statements are the responsibility of Archstone-Smith Operating Trusts
management. We conducted our reviews in accordance with standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to
the condensed consolidated financial statements referred to above for them to be in conformity with
U.S. generally accepted accounting principles. We have previously audited, in accordance with standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Archstone-Smith Operating Trust
as of December 31, 2004, and the related consolidated statements of earnings, unitholders equity,
other common unitholders interest and comprehensive income/(loss), and cash flows for the year then ended
(not presented herein); and in our report dated February 28, 2005, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2004 is fairly stated, in
all material respects, in relation to the consolidated balance sheet from which it has been
derived. /s/ KPMG LLP Denver, Colorado
May 3, 2005 20




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with Archstone-Smith Operating Trusts
2004Form 10-Kas well as the financial statements and notes included in Item 1 of this report. Forward-Looking Statements Certain statements in thisForm 10-Qthat are not historical facts are forward-looking
statements as that term is defined under the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on our current expectations, beliefs, assumptions,
estimates and projections about the industry and markets in which we operate. Words such as
expects, anticipates, intends, plans, believes, seeks, estimates and variations of
such words and similar expressions are intended to identify such forward-looking statements.
Information concerning expected investment balances, expected funding sources, planned investments,
forecasted dates and revenue and expense growth assumptions are examples of forward-looking
statements. These statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions, which are difficult to predict and many of which are beyond our
control. Therefore, actual outcomes and results may differ materially from what is expressed,
forecasted or implied in such forward-looking statements. We undertake no obligation to update
publicly any forward-looking statements, whether as a result of new information, future events or
otherwise, except as required by applicable law. Our operating results depend primarily on income from apartment communities, which is
substantially influenced by supply and demand for apartment units, operating expense levels,
property level operations and the pace and price at which we can develop, acquire or dispose of
apartment communities. Capital and credit market conditions, which affect our cost of capital,
also influence operating results. See Archstone-Smith Operating Trusts 2004Form 10-KItem 1. Business for a
more complete discussion of risk factors that could impact our future financial performance. The Company We are engaged primarily in the operation, development, redevelopment, acquisition, management
and long-term ownership of apartment communities throughout the United States. Archstone-Smith is
structured as an UPREIT, with all property ownership and business operations conducted through the
Operating Trust and our subsidiaries and affiliates. Archstone-Smith is our sole trustee and owns
89.2% of our Common Units as of March 31, 2005. Results of Operations Executive Summary We produced diluted net earnings per unit of $0.32 for the quarter ending March 31, 2005,
compared with $0.49 per unit for the same period in 2004. Our earnings this quarter are lower than
one year ago principally due to reduced gains from the sale of assets. Our core business continues
to improve, with Same-Store revenue growth accelerating for each of the last four quarters. Our Same-Store revenues increased 2.7% in the first quarter of 2005, representing the third
consecutive quarter we have produced positive quarterly same-store revenue growth in both the
high-rise and garden divisions. The Washington, D.C. metropolitan area and Southern California,
which collectively represent 59% of our portfolio, produced first quarter Same-Store revenue growth
of 3.5% and 2.9%, respectively. First quarter Same-Store operating expenses increased 7.3% from
last year due to the one-time impact of a ground-lease accrual true-up in the first quarter of
2004, as well as higher real estate taxes and weather-related costs resulting from the severe
winter in Washington, D.C., New York and Boston. Our Same-Store net operating income (rental
revenues less rental expenses and real estate taxes) is up 0.2% in the first quarter of 2005
compared to 2004. We repurchased 1.2 million common units at an average price of $34.23 per unit during the
first quarter of 2005, representing a total investment of $41.5 million. We have approximately
$147.1 million remaining on our unit repurchase authorization as of March 31, 2005 and we continue
to repurchase additional units based on market conditions. 21




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##### Table of Contents



First quarter 2005 results include a one-time gain of $23.5 million, or $0.105 per unit,
resulting from the positive impact of selling our interest in Rent.com to eBay in February 2005.
This gain is partially offset by $23.0 million, or $0.10 per unit for EPS, of prepayment penalties
associated with the early repayment of secured debt, $5.1 million of which related to an asset
disposition. We also incurred approximately $1.5 million in legal fees associated with cost
recovery litigation against insurance providers, and approximately $0.7 million of additional
hurricane costs from our joint venture properties. In conjunction with our capital recycling strategy, rental revenues and rental expenses,
including real estate taxes, will fluctuate based upon the timing and volume of dispositions,
acquisitions and development lease-ups. Accordingly, our results are not only driven by the
performance of our operating portfolio, but also by gains/losses from the disposition of real
estate, the corresponding loss of ongoing income from assets sold, and increased income generated
from acquisitions and new developments. These factors all contribute to the overall financial
performance of the company. Basic net earnings attributable to Common Units decreased $37.4 million, or 34.1%, for the
three months ended March 31, 2005 as compared to the same period in 2004. This decrease is
primarily attributable to:  
    A $22.6 million decrease in gains from the sale of operating communities, which
includes gains from the sale of assets by Ameriton for the three months ended March 31,
2005 as compared to the same period in 2004;
    A $23.0 million expense for early extinguishment of debt related to the payoff of
$208.4 million of mortgages in the latter part of the first quarter of 2005, $5.1
million of which related to an asset disposition. The elimination of these mortgages
will reduce future interest expense;
    The loss of rental revenues and a corresponding decrease in rental expenses due to
$279.9 million and $1.8 billion in total REIT and Ameriton dispositions in the first
three months of 2005 and the twelve months ended December 31, 2004, respectively;
    A 7.3% increase in Same-Store expenses during the first quarter of 2005 as compared
to 2004 primarily due to the one-time impact of a ground-lease accrual true-up in the
first quarter of 2004 as well as higher real estate taxes and extraordinary
weather-related cost resulting from the severe winter in Washington DC, New York and
Boston (our Same-Store population excludes Ameriton properties, as they are acquired or
developed to achieve short-term opportunistic gains, and therefore, the average holding
period is typically much shorter than the holding period of assets operated by the
REIT); and,
    Higher interest expense related to a $300 million issuance of long-term debt during
August of 2004. These decreases were partially offset by:  
    Increased revenues partially offset by a corresponding increase in operating
expenses associated with $151.3 million and $1.1 billion in REIT and Ameriton operating
asset acquisitions in the first three months of 2005 and the twelve months ended
December 31, 2004, respectively;
    Increased income from the continued lease-up of new development projects;
    A 2.7% increase in Same-Store revenues during the first quarter of 2005 as compared
to 2004 due in part to a 2.2% increase in rental rates per unit for the combined garden
and high-rise portfolios;
    A $5.8 million increase in income from unconsolidated entities due to higher gains
on the disposition of joint venture properties during the three months ended March 31,
2005 compared to the same period in 2004;
    A $23.5 million gain on the sale of our Rent.com investment to eBay during the first
quarter of 2005, compared to a $10.5 million gain on the sale of marketable equity
securities during the same period in 2004; and,
    A $2.2 million reduction in Preferred Unit distributions due to the redemption of
Series D Preferred Units in August 2004, the conversion of Series K Preferred Units in
September 2004 and the early conversion of Series L Preferred Units in December 2004.
These conversions and the redemption also eliminated the impact of the related
Preferred Unit distributions on our fixed charge coverage ratio. 22




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##### Table of Contents



Apartment Community Operations We utilize NOI as the primary measure to evaluate the performance of our operating
communities. NOI is defined as rental revenues less rental expenses and real estate taxes for each
of our operating properties. We rely on NOI for purposes of making decisions about resource
allocations and assessing segment performance. We also believe NOI is a valuable means of
comparing period-to-period property performance. The following is a reconciliation of NOI to
earnings from operations (in thousands): Three months ended March 31,2005
    
    
    2004Net operating income
    
    $
    144,761
    
    
    $
    130,000Other income
    
    
    5,127
    
    
    
    3,697Depreciation of real estate investments
    
    
    (56,031
    )
    
    
    (46,648
    )Interest expense
    
    
    (49,275
    )
    
    
    (39,432
    )General and administrative expenses
    
    
    (14,289
    )
    
    
    (12,433
    )Other expense
    
    
    (20,785
    )
    
    
    (975
    )Earnings from operations
    
    $
    9,508
    
    
    $
    34,209
 At March 31, 2005, investments in operating apartment communities comprised over 99% of our
total real estate portfolio, based on NOI. The following table summarizes the performance of our
operating portfolio (in thousands, except for percentages): Three months ended March 31,2005
    
    
    2004
    
    
    VarianceRental revenues:Garden communities
    
    $
    137,531
    
    
    $
    123,606
    
    
    $
    13,925High-rise properties
    
    
    85,796
    
    
    
    73,459
    
    
    
    12,337Ameriton
    
    
    6,114
    
    
    
    2,794
    
    
    
    3,320Non-multifamily
    
    
    570
    
    
    
    664
    
    
    
    (94
    )Total revenues
    
    
    230,011
    
    
    
    200,523
    
    
    
    29,488Operating expenses (rental expenses and
real estate taxes):Garden communities
    
    
    48,484
    
    
    
    42,498
    
    
    
    5,986High-rise properties
    
    
    33,329
    
    
    
    26,400
    
    
    
    6,929Ameriton
    
    
    3,325
    
    
    
    1,491
    
    
    
    1,834Non-multifamily
    
    
    112
    
    
    
    134
    
    
    
    (22
    )Total operating expenses
    
    
    85,250
    
    
    
    70,523
    
    
    
    14,727Net operating income:Garden communities
    
    
    89,047
    
    
    
    81,108
    
    
    
    7,939High-rise properties
    
    
    52,467
    
    
    
    47,059
    
    
    
    5,408Ameriton
    
    
    2,789
    
    
    
    1,303
    
    
    
    1,486Non-multifamily
    
    
    458
    
    
    
    530
    
    
    
    (72
    )Total net operating income
    
    
    144,761
    
    
    
    130,000
    
    
    
    14,761NOI classified as discontinued operations
    
    
    2,333
    
    
    
    20,251
    
    
    
    (17,918
    )NOI including discontinued operations
    
    $
    147,094
    
    
    $
    150,251
    
    
    $
    (3,157
    )Margin (NOI/rental revenues):Garden communities
    
    
    64.8
    %
    
    
    65.6
    %High-rise properties
    
    
    61.2
    %
    
    
    64.1
    %Average occupancy during period (1):Garden communities
    
    
    94.3
    %
    
    
    95.4
    %High-rise properties
    
    
    94.2
    %
    
    
    95.1
    %
 23




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##### Table of Contents



(1)
    
    Does not include occupancy at Ameriton properties. The following table reflects revenue, expense and NOI growth/(decline) for Same-Store
communities that were fully operating during each respective comparison period: Same-Store
    
    
    Same-StoreRevenue
    
    
    Expense
    
    
    Same-StoreGrowth/(Decline)
    
    
    Growth/(Decline)
    
    
    NOI Growth/(Decline)Q1 2005 vs. Q1 2004Garden
    
    
    2.2
    %
    
    
    4.1
    %
    
    
    1.3
    %High-Rise
    
    
    3.5
    %
    
    
    12.4
    %
    
    
    (1.6
    %)Total
    
    
    2.7
    %
    
    
    7.3
    %
    
    
    0.2
    %
 Quarter-to-date NOI Analysis NOI increased by $14.8 million, or 11.4%, during the three months ended March 31, 2005 as
compared to the same period in 2004. Of this increase, $7.9 million was produced by our garden
communities, $5.4 million by our high-rise portfolio and $1.5 million by Ameriton. The $7.9 million increase in garden NOI during the first quarter of 2005 as compared to 2004
was primarily attributable to the acquisition of seven garden communities subsequent to March 31,
2004 for a total of $508.2 million and the ongoing lease-up and stabilization of development
communities since March 31, 2004, which significantly increased both rental revenues and rental
expenses. Additionally, Same-Store revenue growth increased by 2.2% compared to prior year. This
increase was partially offset by a 4.1% increase in Same-Store operating expenses primarily due to
increases in utilities associated with a severe winter in the Northeast and site and regional
personnel costs. The $5.4 million increase in high-rise NOI during the first quarter of 2005 compared to 2004
was primarily attributable to the acquisition of one high-rise property in the New York area and
one in the Washington D.C. metropolitan market subsequent to March 31, 2004 for a total of $183.5
million since March 31, 2004, which significantly increased both rental revenues and rental
expenses. Additionally, Same-Store revenues increased by 3.5% compared to prior year. This
increase was partially offset by a 12.4% increase in Same-Store operating expenses primarily
attributable to higher utilities associated with a severe winter in the Northeast, real estate
taxes and the benefit of a ground-lease accrual true-up in the first quarter of 2004. The $1.5 million increase in Ameriton NOI during the first quarter of 2005 as compared to 2004
was primarily attributable to three more stabilized properties in the first quarter of 2005
compared to 2004 and the ongoing lease-up and stabilization of Ameriton developments since March
31, 2005. NOI for our entire portfolio, including properties classified within discontinued operations,
decreased by $3.2 million, or 2.1%, for the three months ended March 31, 2005 as compared to the
same period in 2004. This net decrease in NOI was primarily attributable to:  
    The loss of NOI from the disposition of $279.9 million and $1.8 billion in operating
assets, including Ameriton, for the three months ended March 31, 2004 and the twelve
months ended December 31 2004, respectively;
    An increase in Same-Store operating expenses of 7.3% primarily due to the one-time
impact of a ground-lease accrual true-up in the first quarter of 2004, as well as
higher real estate taxes and extraordinary weather-related costs resulting from the
severe winter in Washington, D.C., New York and Boston. This decrease was partially offset by increased NOI from the acquisitions, lease-ups and
redevelopments described previously. 24




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##### Table of Contents



Other Income Other income increased $1.4 million, or 38.7%, for the three months ended March 31, 2005 as
compared to the same period in 2004. The increase is due to $1.4 million of pre-tax gains from the
sale of land and $1.3 million higher interest income on notes receivable during 2005. The
increases are offset by $0.7 million lower insurance recoveries in the first quarter of 2005
compared to 2004 and the benefit of $0.6 million related to the sale of CES in the first quarter of
2004. Depreciation Expense Depreciation expense increased $9.4 million, or 20.1%, for the three months ended March 31,
2005 as compared to the same period in 2004. This increase is primarily due to a greater number of
operating assets classified within discontinued operations during 2004, resulting in a $6.2 million
higher depreciation allocation to discontinued operations for the first quarter of 2004 compared to
the first quarter of 2005. Including depreciation expense on properties classified within discontinued operations,
depreciation expense increased $3.2 million (comprised of a $9.4 million increase from continuing
operations offset by a $6.2 million decrease from discontinued operations), or 6.0%, for the three
months ended March 31, 2005 as compared to the same period in 2004. This increase is principally
attributable to a higher average balance of short lived capital items and a higher average real
estate balance being depreciated during the first quarter of 2005 compared to the same period in
2004. Interest Expense Interest expense increased $9.8 million, or 25.0%, for the three months ended March 31, 2005
as compared to the same period in 2004. This increase is primarily due to a greater number of
operating assets classified within discontinued operations during 2004, resulting in $8.7 million
higher interest allocated to discontinued operations for the first quarter of 2004 compared to the
first quarter of 2005. Including interest expense on properties reflected in discontinued operations, interest
expense increased $1.2 million (comprised of a $9.8 million increase from continuing operations
offset by a $8.7 million decrease from discontinued operations), or 2.3%, for the three months
ended March 31, 2005 as compared to the same period in 2004. This increase is primarily due to
increased weighted average long-term debt outstanding during the first quarter of 2005 as compared
with 2004, consistent with the additional $300 million of long-term debt that was issued in August
of 2004; partially offset by a lower average line of credit balance in the first quarter of 2005 as
compared to 2004. General and Administrative Expenses The $1.9 million, or 14.9%, increase in general and administrative expenses for the three
months ended March 31, 2005 as compared to the same period in 2004 is primarily due to higher legal
fees, salaries and benefits in the first quarter of 2005. Other Expenses The $19.8 million increase in other expense for the three months ended March 31, 2005 as
compared to the same period in 2004 is primarily due to a $17.9 million expense for early
extinguishment of debt related to the payoff of $136.5 million of mortgages on currently owned
properties during the first quarter of 2005. Additionally, we incurred $1.5 million in legal fees
associated with cost-recovery litigation against our insurance carriers. Income from Unconsolidated Entities Income from unconsolidated entities increased $5.8 million, or 110.7%, for the three months
ended March 31, 2005 as compared to the same period in 2004, primarily due to increased gains from
the sale of joint venture operating communities. Gains were partially offset by an additional
charge of $0.7 million for hurricane damages to unconsolidated Florida communities. 25




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##### Table of Contents



Other Non-Operating Income Other non-operating income increased by $13.5 million for the three months ended March 31,
2005 as compared to the same period in 2004 primarily due to the recognition of a $23.5 million
gain from the sale of our Rent.com investment to eBay as compared to $10.5 million of gains from
the sale of marketable equity securities in the first quarters of 2005 and 2004, respectively. Preferred Unit Distributions Preferred Unit distributions decreased by $2.7 million, or 61.8%, for the three months ended
March 31, 2005 as compared to the same period in 2004. This decrease was primarily due to the
redemption of our Series D Preferred Units in August 2004, the conversion of Series K Preferred
Units into Common Units in September 2004 and the early conversion of Series L Preferred Units into
Common Units in December 2004. The decrease in Preferred Unit distributions due to conversions is
offset by an increase in Common Unit distributions. Discontinued Operations The results of operations for properties sold during the period or designated as held-for-sale
at the end of the period are required to be classified as discontinued operations. The property
specific components of net earnings that are classified as discontinued operations include rental
revenues, rental expenses, real estate taxes, depreciation expense, income taxes, debt
extinguishment expense and interest expense (actual interest expense for encumbered properties and
a pro-rata allocation of interest expense for any unencumbered property up to our weighted average
leverage ratio), as well as the net gain or loss on the disposition of properties. Consistent with our capital recycling program, we have five operating apartment communities,
representing 1,549 units (unaudited), classified as held for sale under the provisions of SFAS No.
144, at March 31, 2005. Accordingly, we have classified the operating earnings from these five
properties within discontinued operations for the three months ended March 31, 2005 and 2004.
During the three months ended March 31, 2005, we sold five Operating Trust and Ameriton operating
communities. The operating results of these five communities and the related gain/loss on sale are
also included in discontinued operations for 2005 and 2004. During the twelve months ended
December 31, 2004, we sold 30 Operating Trust and Ameriton operating communities. The operating
results of these 30 communities and the related gain/loss on the sale are also included in
discontinued operations for the quarter ended March 31, 2004. The following is a summary of net earnings from discontinued operations (in thousands): Three Months EndedMarch 31,2005
    
    
    2004Rental revenues
    
    $
    4,844
    
    
    $
    38,372Rental expenses
    
    
    (2,331
    )
    
    
    (13,013
    )Real estate taxes
    
    
    (180
    )
    
    
    (5,108
    )Depreciation on real estate investments
    
    
    (943
    )
    
    
    (7,123
    )Interest expense (1)
    
    
    (2,076
    )
    
    
    (10,740
    )Income taxes from taxable REIT subsidiary sales
    
    
    (4,964
    )
    
    
    (361
    )Debt extinguishment costs related to dispositions
    
    
    (5,058
    )
    
    
    (908
    )Gains on disposition of taxable REIT subsidiary real estate
investments, net
    
    
    13,766
    
    
    
    12,696Gains on dispositions of REIT real estate investments, net
    
    
    26,154
    
    
    
    49,800Earnings from discontinued apartment communities
    
    $
    29,212
    
    
    $
    63,615
   (1)
    
    The portion of interest expense included in discontinued operations that is allocated to
properties based on the companys leverage ratio was $1.3 million and $7.3 million for the
three months ended March 31, 2005 and 2004, respectively. 26




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##### Table of Contents



Gains from the disposition of REIT assets are the result of our capital recycling strategy,
which redeploys capital from non-core assets to more desirable locations within our core markets.
Gains or losses associated with REIT dispositions can vary significantly from quarter-to-quarter
given overall real estate market conditions. Our gains from taxable REIT subsidiaries were from Ameriton, which is a wholly owned taxable
REIT subsidiary that engages in the opportunistic acquisition, development and eventual disposition
of real estate with a short-term investment horizon. While Ameriton has established a consistent
track record of producing significant gains, which contribute to our overall net earnings, these
gains or losses can fluctuate significantly on a quarter-to-quarter basis depending on the timing
of disposition closings. Assets held for sale as of March 31, 2005, represented gross real estate of $188.8 million and
$137.0 million with no related mortgages payable at March 31, 2005 and December 31, 2004,
respectively. Additionally, of our investment in real estate at December 31, 2004, we disposed of
$279.9 million of real estate and paid off related mortgages of $71.9 million during the three
months ended March 31, 2005. Liquidity and Capital Resources We are committed to maintaining a strong balance sheet and preserving our financial
flexibility, which we believe enhances our ability to capitalize on attractive investment
opportunities as they become available. As a result of the significant cash flow generated by our
operations, current cash positions, the available capacity under our unsecured credit facilities,
gains from the disposition of real estate and ready access to the capital markets by issuing
securities under our existing shelf registrations, we believe our liquidity and financial condition
are sufficient to meet all of our reasonably anticipated cash flow needs during 2005. Operating Activities Net cash flow provided by operating activities decreased $37.0 million, or 67.3%, for the
three months ended March 31, 2005 as compared to the same period in 2004. This decrease was
primarily due to a decrease in net operating income associated with $279.9 million and $1.8 billion
in dispositions in the three months ended March 31, 2005 and the twelve months ended December 31,
2004, respectively. See Results of Operations for a more complete discussion of the factors
impacting our operating performance. Investing and Financing Activities Net cash flows provided by investing activities increased by $19.5 million, or 169.7%, for the
three months ended March 31, 2005 as compared to the same period in 2004, primarily due to $230
million more cash received from disposition activity in the first quarter of 2005 as compared to
the same period in 2004, as well as a one-time gain of $23.5 million resulting from the positive
impact of selling our interest in Rent.com to eBay in February 2005. The increase is partially
offset by $107.8 million more invested in acquisitions and developments, as well as lower proceeds
from the sale of marketable equity securities during the first quarter of 2005 as compared to 2004.
Additionally, we used $63.2 million to fund mezzanine and other loans extended to third parties
during the first quarter of 2005. The disposition, acquisition and development amounts above
exclude transactions funded by tax-deferred exchange proceeds. Net cash flows used in financing activities increased by $179.2 million, or 271.6%, for the
three months ended March 31, 2005 as compared to the same period in 2004, due to $222.1 million
more cash used to repay mortgage debt and $29.1 million more used to repurchase common units and
preferred units during the three months ended March 31, 2005 compared to the same period in 2004.
This increase was partially offset by $94.5 million in higher proceeds from the line of credit
during the first quarter of 2005 as compared to 2004. Significant non-cash investing and financing activities for the three months ended March 31,
2005 and 2004 consisted of the following:  
    Issued $41.7 and $10.8 million of A-1 Common Units as partial consideration for
acquired properties during the three months ended March 31, 2005 and 2004,
respectively;
    Issued $4.5 million of Common Units as partial consideration for real estate during
the first quarter of 2004;
    Redeemed $1.7 million and $13.1 million A-1 Common Units for A-2 Common Units during
the three months ended March 31, 2005 and 2004, respectively; and,
    Assumed mortgage debt of $74.9 million during the first quarter of 2004. 27




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##### Table of Contents



Scheduled Debt Maturities and Interest Payment Requirements We have structured the repayments of our long-term debt to create a relatively level principal
maturity schedule and to avoid significant repayment obligations in any year which would impact our
financial flexibility. We have $247.0 million in scheduled maturities during 2005, and we have
$285.0 million and $540.0 million of long-term debt maturing during 2006 and 2007, respectively. At May 2, 2005, we had $505.0 million of liquidity, including cash, restricted cash in
tax-deferred escrows and capacity on our unsecured credit facilities. Our unsecured credit
facilities, Long-Term Unsecured Debt and mortgages payable had effective average interest rates of
3.04%, 6.24% and 5.11%, respectively, during the three months ended March 31, 2005. These rates
give effect to the impact of interest rate swaps and caps, as applicable. We were in compliance with all financial covenants pertaining to our debt instruments during
the period ended March 31, 2005. Unitholder Distribution Requirements Based on anticipated distribution levels for 2005 and the number of units outstanding as of
March 31, 2005, we anticipate that we will pay distributions of $390.5 million in the aggregate
during 2005, which includes $0.3 million of distributions for the remaining Series E Preferred
Units and remaining Series G Preferred Units that were redeemed during the first quarter of 2005.
This amount represents distributions on our Common Units and all of our Preferred Units. Planned Investments Following is a summary of planned investments as of March 31, 2005, including amounts for
Ameriton (dollar amounts in thousands). The amounts labeled Discretionary represent future
investments that we plan to make, although there is not a contractual commitment to do so. The
amounts labeled Committed represent the approximate amount that we are contractually committed to
fund for communities under construction in accordance with construction contracts with general
contractors. Planned InvestmentsUnits
    
    
    Discretionary
    
    
    CommittedCommunities under redevelopment
    
    
    623
    
    
    $
    4,677
    
    
    $
    26,235Communities under construction
    
    
    4,117
    
    
    
    
    
    
    
    409,518Communities In Planning and owned
    
    
    3,617
    
    
    
    596,065
    
    
    
    Communities In Planning and Under Control
    
    
    253
    
    
    
    25,450
    
    
    
    Total
    
    
    8,610
    
    
    $
    626,192
    
    
    $
    435,753
 In addition to the planned investments noted above, we expect to make additional investments
relating to planned expenditures on recently acquired communities as well as recurring expenditures
to improve and maintain our established operating communities. We are under agreement with various property-owning partnerships affiliated with Oakwood
Worldwide, the largest global provider of corporate housing, to acquire 37 apartment communities
for a purchase price of approximately $1.6 billion. The closing may occur in several stages,
which are expected to close during 2005, subject to completion of our due diligence review and
customary closing conditions. We anticipate completion of most of the communities that are currently under construction and
the planned operating community improvements during 2005 and 2006. We expect to start construction
on approximately $300-$400 million, based on Total Expected Investment, of new development
communities in 2005. We expect to fund the costs of these development projects over a two-to-three
year period following the date construction commences. No assurances can be given that communities
we do not currently own will be acquired or that planned developments will actually occur. In
addition, actual costs incurred could be greater or less than our current estimates. 28




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Funding Sources We anticipate financing our planned investment and operating needs, other than the Oakwood
transaction, primarily with cash flow from operating activities, disposition proceeds from our
capital redeployment program and borrowings under our unsecured credit facilities, prior to
arranging long-term financing. We plan to finance the Oakwood transaction with assumed debt, cash,
issuance of unsecured debt, proceeds from asset sales and issuance of units of the Operating Trust.
We anticipate that net cash flow from operating activities and gains on dispositions during 2005
will be sufficient to fund anticipated distribution requirements and debt principal amortization
payments. To fund planned investment activities, we had $438.0 million in available capacity on
our unsecured credit facilities, no cash in tax-deferred exchange escrow and $67.0 million of cash
on hand at May 2, 2005. In April 2005, the Operating Trust filed a shelf registration statement on Form S-3 to
register an additional $300 million (for a total of $1 billion) in unsecured debt securities. This
registration statement was declared effective in May 2005. Collectively, Archstone-Smith and the
Operating Trust have $1.2 billion available in shelf registration securities. In April 2005, we
filed a registration statement on Form S-3 registering 1,120,806 Common Units to be issued upon
redemption of certain A-1 Common Units. This registration statement was declared effective in May
2005. Other Contingencies and Hedging Activities During 2004, we incurred estimated losses associated with multiple hurricanes in Florida. As
a result of this damage, we recorded a loss contingency net of anticipated recoveries for both
wholly owned and unconsolidated apartment communities. During the three months ended March 31,
2005, we increased the reserve for our unconsolidated apartment communities resulting in an
additional charge of $0.7 million. These reserves represent managements best estimate of the
probable and reasonably estimable costs and are based on the most current information available
from our insurance adjustors. During December 2004, a lawsuit was filed against us that alleges various violations of the
Fair Housing Act and the Americans with Disabilities Act at 112 properties currently or formerly
owned by the company. The plaintiffs are seeking injunctive relief, in the form of retrofitting
apartments and public accommodations to comply with the Fair Housing Act and the Americans with
Disabilities Act; unspecified monetary damages for the diversion of the plaintiffs resources to
address fair housing violations, punitive damages and attorneys fees. We are in the process of
evaluating the claims asserted in this litigation. Due to the preliminary nature of the
litigation, it is not possible to predict or determine the outcome of the legal proceeding, nor is
it reasonably possible to estimate the amount of loss, if any, that would be associated with an
adverse decision. We are a party to various other claims and routine litigation arising in the ordinary course
of business. We do not believe that the results of any such claims or litigation, individually or
in the aggregate, will have a material adverse effect on our business, financial position or
results of operations. Critical Accounting Policies We define critical accounting policies as those accounting policies that require our
management to exercise their most difficult, subjective and complex judgments. Our management has
discussed the development and selection of all of these critical accounting policies with our audit
committee, and the audit committee has reviewed the disclosure relating to these policies. Our
critical accounting policies relate principally to the following key areas: Internal Cost Capitalization We have an investment organization that is responsible for development and redevelopment of
apartment communities. Consistent with GAAP, all direct and certain indirect costs, including
interest and real estate taxes, incurred during development and redevelopment activities are
capitalized. Interest is capitalized on real estate assets that require a period of time to get
them ready for their intended use. The amount of interest capitalized is based upon the average
amount of accumulated development expenditures during the reporting period. Included in capitalized
costs are managements estimates of the direct and incremental personnel costs and indirect project
costs associated with our development and redevelopment activities. Indirect project costs consist
primarily of personnel costs associated with construction administration and development
accounting, legal fees, and various office costs that clearly relate to projects under development.
Because the estimation of capitalizable internal costs requires managements judgment, we believe
internal cost capitalization is a critical accounting estimate. 29




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Valuation of Real Estate Long-lived assets to be held and used are carried at cost and evaluated for impairment when
events or changes in circumstances indicate such an evaluation is warranted. We also evaluate
assets for potential impairment when we deem them to be held for sale. Valuation of real estate is
considered a critical accounting estimate because the evaluation of impairment and the
determination of fair values involve a number of management assumptions relating to future economic
events that could materially affect the determination of the ultimate value, and therefore, the
carrying amounts of our real estate. When determining if there is an indication of impairment, we estimate the assets NOI over the
anticipated holding period on an undiscounted cash flow basis and compare this amount to its
carrying value. Estimating the expected NOI and holding period requires significant management
judgment. If it is determined that there is an indication of impairment for assets to be held and
used, or if an asset is deemed to be held for sale, we then determine the assets fair value. The apartment industry uses capitalization rates as the primary measure of fair value.
Specifically, annual NOI for a community is divided by an estimated capitalization rate to
determine the fair value of the community. Determining the appropriate capitalization rate requires
significant judgment and is typically based on many factors including the prevailing rate for the
market or submarket. Further, capitalization rates can fluctuate up or down due to a variety of
factors in the overall economy or within local markets. If the actual capitalization rate for a
community is significantly different from our estimated rate, the impairment evaluation for an
individual asset could be materially affected. Historically we have had limited and infrequent
impairment charges, and the majority of our apartment community sales have produced gains. We
evaluate a real estate asset for potential impairment when events or changes in circumstances
indicate that its carrying amount may not be recoverable. Capital Expenditures and Depreciable Lives We incur costs relating to redevelopment initiatives, revenue enhancing and expense reducing
capital expenditures, and recurring capital expenditures that are capitalized as part of our real
estate. These amounts are capitalized and depreciated over estimated useful lives determined by
management. We allocate the cost of newly acquired properties between net tangible and identifiable
intangible assets. The primary intangible asset associated with an apartment community acquisition
is the value of the existing lease agreements. When allocating cost to an acquired property, we
first allocate costs to the estimated intangible value of the existing lease agreements and then to
the estimated value of the land, building and fixtures assuming the property is vacant. We estimate
the intangible value of the lease agreements by determining the lost revenue associated with a
hypothetical lease-up. We depreciate the building and fixtures based on the expected useful life of
the asset and amortize the intangible value of the lease agreements over the average remaining life
of the existing leases. Determining whether expenditures meet the criteria for capitalization, the assignment of
depreciable lives and determining the appropriate amounts to allocate between tangible and
intangible assets for property acquisitions requires our management to exercise significant
judgment and is therefore considered a significant accounting estimate. Pursuit Costs We incur costs relating to the potential acquisition of real estate which we refer to as
pursuit costs. To the extent that these costs are identifiable with a specific property and would
be capitalized if the property were already acquired, the costs are accumulated by project and
capitalized in the Other Asset section of the balance sheet. If these conditions are not met, the
costs are expensed as incurred. Capitalized costs include but are not limited to earnest money,
option fees, environmental reports, traffic reports, surveys, photos, blueprints, direct and
incremental personnel costs and legal costs. Upon acquisition, the costs are included in the basis
of the acquired property. When it becomes probable that a prospective acquisition will not be
acquired, the accumulated costs for the property are charged to other expense on the statement of
earnings in the period such a determination is made. Because of the inherent judgment involved in
evaluating whether a prospective property will ultimately be acquired, we believe capitalizable
pursuit costs are a critical accounting estimate. 30




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Off Balance Sheet Arrangements Investments in entities that do not qualify as a variable interest entity and are not
controlled through majority economic interest are not consolidated and are reported as investments
in unconsolidated entities. Our investments in unconsolidated entities at March 31, 2005, consisted
of $99.3 million in real estate joint ventures, which generally consist of our percentage ownership
in the equity of the joint ventures. Contractual Commitments The following table summarizes information contained in Managements Discussion and Analysis
of Financial Condition and Results of Operations and in our financial statements in this Form 10-Q
regarding contractual commitments (amounts in millions): 2006
    
    
    2008
    
    
    2010 thru2005
    
    
    and 2007
    
    
    and 2009
    
    
    2096
    
    
    TotalScheduled long-term debt maturities
    
    $
    247.2
    
    
    $
    825.1
    
    
    $
    717.0
    
    
    $
    2,067.3
    
    
    $
    3,856.6Unsecured credit facilities (1)
    
    
    
    
    
    
    213.8
    
    
    
    
    
    
    
    
    
    
    
    213.8Interest on indebtedness
    
    
    175.0
    
    
    
    363.3
    
    
    
    272.6
    
    
    
    277.3
    
    
    
    1,088.2Development and redevelopment expenditures
    
    
    313.2
    
    
    
    122.6
    
    
    
    
    
    
    
    
    
    
    
    435.8Performance bond guarantees (2)
    
    
    15.5
    
    
    
    25.4
    
    
    
    
    
    
    
    2.4
    
    
    
    43.3Lease commitments and other (3)
    
    
    53.4
    
    
    
    18.8
    
    
    
    13.7
    
    
    
    353.2
    
    
    
    439.1Total
    
    $
    804.3
    
    
    $
    1,569.0
    
    
    $
    1,003.3
    
    
    $
    2,700.2
    
    
    $
    6,076.8
   (1)
    
    The $600 million unsecured facility matures December 2007, with a one-year extension option
available at our discretion.(2)
    
    The Operating Trust, our subsidiaries and investees have not been required to perform on
these guarantees, nor do we anticipate being required to perform on such guarantees. Since we
believe that our risk of loss under these contingencies is remote, no accrual for potential
loss has been made in the accompanying financial statements. We are still obligated for
certain performance bond guarantees for SMC subsequent to their sale, but there are recourse
provisions available to us to recover any potential future payments from the new owners of
SMC.(3)
    
    Lease commitments relate principally to ground lease payments as of March 31, 2005. As part of the Smith Merger, we are required to indemnify the former Smith Partnership
unitholders for any personal income tax expense resulting from the sale of properties acquired in
the merger as identified in the unitholders agreement between Archstone-Smith, the Operating
Trust, Robert H. Smith and Robert P. Kogod until October 31, 2021. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Our capital structure includes the use of both fixed and floating rate debt and we are exposed
to the impact of changes in interest rates. We also use interest rate swap and interest rate cap
derivative financial instruments in order to modify interest rate characteristics of our debt in an
effort to minimize our overall borrowing costs. We do not utilize these derivative financial
instruments for speculative purposes. To assist us in evaluating our interest rate risk and
counter-party credit risk, we use the services of third party consultants. As a result of our balance sheet management philosophy, we have managed our debt maturities to
create a relatively level principal maturity schedule, without significant repayment obligations in
any year. If current market conditions do not permit us to replace maturing debt at comparable
interest rates, we are not exposed to significant portfolio level interest rate volatility due to
the management of our maturity schedules. There have been no material changes to our market risk
profile since December 31, 2004. See Item 7a in our 2004 Form 10-K for detailed information about
the qualitative and quantitative disclosures about our market risk. 31




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Item 4. Controls and Procedures An evaluation was carried out under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
internal control over financial reporting (as defined in Rule 13a-14(c) under the Securities
Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our internal control over financial reporting were, to the best of
their knowledge, effective as of March 31, 2005, to ensure that information required to be
disclosed in reports that are filed or submitted under the Securities Exchange Act are recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange
Commission rules and forms. Subsequent to March 31, 2005, there were no significant changes in the
Trusts internal controls over financial reporting or in other factors that could significantly
affect these controls, including any corrective actions with regard to significant deficiencies and
material weaknesses. 32




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PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings Equal Rights Center, et al. v. Archstone-Smith Trust, et al., was filed on December 20, 2004,
in the federal district court in the State of Maryland by three organizations that advocate on
behalf of disabled individuals. This case alleges various violations of the Fair Housing Act and
the Americans with Disabilities Act at 112 properties currently or formerly owned by the company.
The plaintiffs are seeking injunctive relief, in the form of retrofitting apartments and public
accommodations to comply with the Fair Housing Act and the Americans with Disabilities Act,
unspecified monetary damages for the diversion of the plaintiffs resources to address fair housing
violations, punitive damages and attorneys fees. We are in the process of evaluating the claims
asserted in this litigation. Due to the preliminary nature of the litigation, it is not possible
to predict or determine the outcome of the legal proceeding, nor is it reasonably possible to
estimate the amount of loss, if any, that would be associated with an adverse decision. We are party to various other claims and routine litigation arising in the ordinary course of
business. We do not believe that the results of any such claims and litigation, individually or in
the aggregate, will have a material adverse effect on our business, financial position or results
of operations. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities The following table summarizes the A-1 Common Units that were repurchased for either cash or
A-2 Units: Total Numberof Units
    
    
    MaximumPurchased as
    
    
    Approximate DollarNumber of
    
    
    Average
    
    
    Part of Publicly
    
    
    Value That MayUnits
    
    
    Price Paid
    
    
    Announced
    
    
    Yet Be PurchasedPeriod
    
    Purchased
    
    
    per Unit
    
    
    Plan
    
    
    Under the Plan1/1/05  1/31/05
    
    
    82,249
    
    
    $
    35.52
    
    
    
    
    
    
    $
    2/1/05  2/28/05
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3/1/05  3/31/05
    
    
    12,538
    
    
    
    34.88
    
    
    
    
    
    
    
    Total
    
    
    94,787
    
    
    
    
    
    
    
    
 
 Item 6. Exhibits (a) Exhibits: 12.1
    
    Computation of Ratio of Earnings to Fixed Charges12.2
    
    Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Unit Distributions15.1
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    Certification of Chief Executive Officer31.2
    
    Certification of Chief Financial Officer32.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 33




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##### Table of Contents



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 the undersigned thereunto duly authorized. ARCHSTONE-SMITH OPERATING TRUSTBY
    
    /s/ R. SCOT SELLERSR. Scot SellersChief Executive Officer
 BY:
    
    /s/ CHARLES E. MUELLER, JR.Charles E. Mueller, Jr.Chief Financial Officer

(Principal Financial Officer)
 BY:
    
    /s/ MARK A. SCHUMACHERMark A. SchumacherSenior Vice-President and
Chief Accounting Officer

(Principal Accounting Officer)
 Date: May 3, 2005 34




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Index to Exhibits 12.1
    
    Computation of Ratio of Earnings to Fixed Charges12.2
    
    Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Unit Distributions15.1
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    Certification of Chief Executive Officer31.2
    
    Certification of Chief Financial Officer32.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 35