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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to . Commission File Number 1-10272 ARCHSTONE-SMITH OPERATING TRUST (Exact name of registrant as specified in its charter)
 Maryland
    
    74-6056896(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification no.)
 9200 E Panorama Circle, Suite 400
Englewood, Colorado 80112
(Address of principal executive offices and zip code) (303) 708-5959
(Registrants telephone number, including area code) (Former name, former address and former fiscal year,
if changed since last report) Indicate by check mark whether the registrant (1) has filed 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   [X]   No   [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).  Yes   [X]   No   [  ] At
August 2, 2004, there were approximately 23,375,000 Class A-1 Common
Units outstanding held by non-affiliates.




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##### Table of Contents



Table of Contents PageItem
    
    Description
    
    NumberPART 11.
    
    Financial Statements
    
    
    3Condensed Consolidated Balance Sheets  June 30, 2004 (unaudited) and December 31, 2003
    
    
    3Condensed Consolidated Statements of Earnings  Three and six months ended June 30, 2004 and 2003 (unaudited)
    
    
    4Condensed
Consolidated Statement of Unitholders Equity, Other Common
Unitholders Interest and Comprehensive Income  Six months ended June 30, 2004 (unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows  Six months ended June 30, 2004 and 2003 (unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    7Independent Accountants Review Report
    
    
    182.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    193.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    324.
    
    Controls and Procedures
    
    
    32PART II1.
    
    Legal Proceedings
    
    
    332.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
    
    
    346.
    
    Exhibits and Reports on Form 8-K
    
    
    34Amendment to 2001 Long-Term Incentive PlanComputation of Ratio of Earnings to Fixed ChargesComputation of Ratio of Earnings to Combined Fixed ChargesLetter from KPMG-LLP dated July 19, 2004Certification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of CEO Pursuant to Section 906Certification of CFO 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) June 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSReal estate
    
    $
    8,560,727
    
    
    $
    8,166,131Real estate  held for sale
    
    
    907,756
    
    
    
    833,049Less accumulated depreciation
    
    
    723,412
    
    
    
    648,9828,745,071
    
    
    
    8,350,198Investments in and advances to unconsolidated entities
    
    
    77,690
    
    
    
    86,367Net investments
    
    
    8,822,761
    
    
    
    8,436,565Cash and cash equivalents
    
    
    7,939
    
    
    
    5,230Restricted cash in tax-deferred exchange escrow
    
    
    17,429
    
    
    
    180,920Other assets
    
    
    211,470
    
    
    
    298,980Total assets
    
    $
    9,059,599
    
    
    $
    8,921,695LIABILITIES AND EQUITYLiabilities:Unsecured credit facilities
    
    $
    310,633
    
    
    $
    103,790Long-Term Unsecured Debt
    
    
    1,828,218
    
    
    
    1,871,965Mortgages payable
    
    
    1,873,336
    
    
    
    1,832,861Mortgages payable  held for sale
    
    
    95,407
    
    
    
    94,764Accounts payable, accrued expenses and other liabilities
    
    
    278,356
    
    
    
    281,212Total liabilities
    
    
    4,385,950
    
    
    
    4,184,592Minority interest
    
    
    2,158
    
    
    
    11,510Other common unit holders interest, at redemption value (A-1 and B
Common Units:
23,958,972 in 2004 and 25,301,069 in 2003)
    
    
    702,717
    
    
    
    707,924Unitholders equity:Convertible Preferred Units
    
    
    50,000
    
    
    
    50,000Perpetual Preferred Units
    
    
    159,245
    
    
    
    160,120Common unitholders equity (A-2 Common Units: 195,073,827 in 2004 and
194,762,263 in 2003)
    
    
    3,759,973
    
    
    
    3,793,314Accumulated other comprehensive (loss)/income
    
    
    (444
    )
    
    
    14,235Total unitholders equity
    
    
    3,968,774
    
    
    
    4,017,669Total liabilities and unitholders equity

    
    $
    9,059,599
    
    
    $
    8,921,695
 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 Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues:Rental revenues
    
    $
    223,302
    
    
    $
    202,233
    
    
    $
    438,032
    
    
    $
    401,110Other income
    
    
    5,209
    
    
    
    4,541
    
    
    
    8,906
    
    
    
    10,857228,511
    
    
    
    206,774
    
    
    
    446,938
    
    
    
    411,967Expenses:Rental expenses
    
    
    56,618
    
    
    
    49,727
    
    
    
    111,804
    
    
    
    99,480Real estate taxes
    
    
    22,318
    
    
    
    17,293
    
    
    
    44,018
    
    
    
    37,026Depreciation on real estate investments
    
    
    53,173
    
    
    
    41,961
    
    
    
    103,307
    
    
    
    83,473Interest expense
    
    
    44,128
    
    
    
    37,311
    
    
    
    87,717
    
    
    
    76,774General and administrative expenses
    
    
    12,092
    
    
    
    12,775
    
    
    
    24,525
    
    
    
    25,642Other expenses
    
    
    1,278
    
    
    
    25,332
    
    
    
    2,614
    
    
    
    29,540189,607
    
    
    
    184,399
    
    
    
    373,985
    
    
    
    351,935Earnings from operations
    
    
    38,904
    
    
    
    22,375
    
    
    
    72,953
    
    
    
    60,032Minority interest
    
    
    
    
    
    
    2
    
    
    
    352
    
    
    
    74Income/(loss) from unconsolidated entities
    
    
    7,354
    
    
    
    (1,161
    )
    
    
    12,630
    
    
    
    (706
    )Other non-operating income
    
    
    9,951
    
    
    
    
    
    
    
    20,461
    
    
    
    Earnings before discontinued operations
    
    
    56,209
    
    
    
    21,216
    
    
    
    106,396
    
    
    
    59,400Earnings from discontinued apartment communities
    
    
    34,862
    
    
    
    53,271
    
    
    
    98,637
    
    
    
    112,945Net earnings
    
    
    91,071
    
    
    
    74,487
    
    
    
    205,033
    
    
    
    172,345Preferred Unit distributions
    
    
    (4,459
    )
    
    
    (7,251
    )
    
    
    (8,906
    )
    
    
    (15,609
    )Net earnings attributable to Common Units  Basic
    
    $
    86,612
    
    
    $
    67,236
    
    
    $
    196,127
    
    
    $
    156,736Weighted average Common Units outstanding  Basic
    
    
    219,845
    
    
    
    210,133
    
    
    
    219,962
    
    
    
    208,518Weighted average Common Units outstanding  Diluted
    
    
    220,791
    
    
    
    210,730
    
    
    
    223,481
    
    
    
    209,021Earnings per Common Unit Basic:Earnings before discontinued operations
    
    $
    0.23
    
    
    $
    0.07
    
    
    $
    0.44
    
    
    $
    0.21Discontinued operations, net
    
    
    0.16
    
    
    
    0.25
    
    
    
    0.45
    
    
    
    0.54Net earnings
    
    $
    0.39
    
    
    $
    0.32
    
    
    $
    0.89
    
    
    $
    0.75Earnings per Common Unit  Diluted:Earnings before discontinued operations
    
    $
    0.23
    
    
    $
    0.07
    
    
    $
    0.44
    
    
    $
    0.21Discontinued operations, net
    
    
    0.16
    
    
    
    0.25
    
    
    
    0.45
    
    
    
    0.54Net earnings
    
    $
    0.39
    
    
    $
    0.32
    
    
    $
    0.89
    
    
    $
    0.75Distributions paid per Common Unit
    
    $
    0.43
    
    
    $
    0.4275
    
    
    $
    0.86
    
    
    $
    0.855
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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Archstone-Smith Operating Trust 
 Condensed Consolidated Statement of Unitholders Equity, Other Common Unitholders
Interest and Comprehensive Income Six Months Ended June 30, 2004 (In thousands)
(Unaudited) Convertible
    
    PerpetualPreferred
    
    PreferredUnits at
    
    Units at
    
    
    
    
    
    Accumulated
    
    
    
    
    
    OtherAggregate
    
    Aggregate
    
    Common
    
    Other
    
    Total
    
    CommonLiquidation
    
    Liquidation
    
    Unitholders
    
    Comprehensive
    
    Unitholders
    
    UnitholdersPreference
    
    Preference
    
    Equity
    
    Income/(Loss)
    
    Equity
    
    Interest
    
    TotalBalances at December 31, 2003
    
    $
    50,000
    
    
    $
    160,120
    
    
    $
    3,793,314
    
    
    $
    14,235
    
    
    $
    4,017,669
    
    
    $
    707,924
    
    
    $
    4,725,593Comprehensive income:Net earnings
    
    
    
    
    
    
    
    
    
    
    180,234
    
    
    
    
    
    
    
    180,234
    
    
    
    24,799
    
    
    
    205,033Change in fair value of
cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,403
    
    
    
    1,403
    
    
    
    
    
    
    
    1,403Change in fair value of
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,082
    )
    
    
    (16,082
    )
    
    
    
    
    
    
    (16,082
    )Comprehensive income
attributable to Common Units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190,354Preferred Unit distributions
    
    
    
    
    
    
    
    
    
    
    (8,906
    )
    
    
    
    
    
    
    (8,906
    )
    
    
    
    
    
    
    (8,906
    )Common Units distributions
    
    
    
    
    
    
    
    
    
    
    (169,544
    )
    
    
    
    
    
    
    (169,544
    )
    
    
    (21,616
    )
    
    
    (191,160
    )A-1 Common Units converted
into A-2 Common Units
    
    
    
    
    
    
    
    
    
    
    34,064
    
    
    
    
    
    
    
    34,064
    
    
    
    (34,064
    )
    
    
    A-2 Common Unit repurchases
    
    
    
    
    
    
    
    
    
    
    (84,566
    )
    
    
    
    
    
    
    (84,566
    )
    
    
    
    
    
    
    (84,566
    )Preferred Unit repurchases
    
    
    
    
    
    
    (875
    )
    
    
    
    
    
    
    
    
    
    
    (875
    )
    
    
    
    
    
    
    (875
    )Exercise of options
    
    
    
    
    
    
    
    
    
    
    29,129
    
    
    
    
    
    
    
    29,129
    
    
    
    
    
    
    
    29,129Issuance of A-1 Common Units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,788
    
    
    
    10,788Issuance of A-2 Common Units
    
    
    
    
    
    
    
    
    
    
    4,502
    
    
    
    
    
    
    
    4,502
    
    
    
    
    
    
    
    4,502Adjustment to redemption value
    
    
    
    
    
    
    
    
    
    
    (14,886
    )
    
    
    
    
    
    
    (14,886
    )
    
    
    14,886
    
    
    
    Other, net
    
    
    
    
    
    
    
    
    
    
    (3,368
    )
    
    
    
    
    
    
    (3,368
    )
    
    
    
    
    
    
    (3,368
    )Balances at June 30, 2004
    
    $
    50,000
    
    
    $
    159,245
    
    
    $
    3,759,973
    
    
    $
    (444
    )
    
    $
    3,968,774
    
    
    $
    702,717
    
    
    $
    4,671,491
 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) Six Months EndedJune 30,2004
    
    2003Operating activities:Net earnings
    
    $
    205,033
    
    
    $
    172,345Adjustments to reconcile net earnings to net cash flow provided by operating activities:Depreciation and amortization
    
    
    111,640
    
    
    
    105,299Gains on dispositions of depreciated real estate, net
    
    
    (93,482
    )
    
    
    (101,184
    )Gains on sale of marketable equity securities and property management business
    
    
    (20,461
    )
    
    
    Provision for possible loss on real estate investments
    
    
    
    
    
    
    3,714Minority interest
    
    
    (352
    )
    
    
    (74
    )Equity in earnings/loss from unconsolidated entities
    
    
    (12,630
    )
    
    
    706Change in other assets
    
    
    (8,682
    )
    
    
    (3,232
    )Change in accounts payable, accrued expenses and other liabilities
    
    
    (16,488
    )
    
    
    (18,870
    )Other, net
    
    
    (4,826
    )
    
    
    (2,530
    )Net cash flow provided by operating activities
    
    
    159,752
    
    
    
    156,174Investing activities:Real estate investments, net
    
    
    (581,739
    )
    
    
    (234,765
    )Advances to (distributions from) to unconsolidated entities, net
    
    
    26,958
    
    
    
    7,517Proceeds from dispositions, net of closing costs
    
    
    272,339
    
    
    
    513,302Change in tax-deferred exchange escrow
    
    
    163,491
    
    
    
    (74,140
    )Other, net
    
    
    83,436
    
    
    
    (38,129
    )Net cash flow (used in)/provided by investing activities
    
    
    (35,515
    )
    
    
    173,785Financing activities:Payments on Long-Term Unsecured Debt
    
    
    (40,450
    )
    
    
    (138,750
    )Proceeds from Long-Term Unsecured Debt
    
    
    
    
    
    
    247,225Principal prepayment of mortgages payable, including prepayment penalties
    
    
    (56,468
    )
    
    
    (64,892
    )Regularly scheduled principal payments on mortgages payable
    
    
    (6,396
    )
    
    
    (6,093
    )Proceeds from mortgage notes payable
    
    
    32,003
    
    
    
    38,432Proceeds from/(prepayment on) unsecured credit facilities, net
    
    
    206,843
    
    
    
    (241,763
    )Proceeds from Common Units issued under DRIP and employee stock options
    
    
    29,129
    
    
    
    44,705Repurchase of Common Units and Preferred Units
    
    
    (85,441
    )
    
    
    (13,402
    )Cash distributions paid on Common Units
    
    
    (191,160
    )
    
    
    (179,337
    )Cash distributions paid on Preferred Units
    
    
    (8,906
    )
    
    
    (17,837
    )Other, net
    
    
    (682
    )
    
    
    (2,167
    )Net cash flow (used in) financing activities
    
    
    (121,528
    )
    
    
    (333,879
    )Net change in cash and cash equivalents
    
    
    2,709
    
    
    
    (3,920
    )Cash and cash equivalents at beginning of period
    
    
    5,230
    
    
    
    12,846Cash and cash equivalents at end of period
    
    $
    7,939
    
    
    $
    8,926Significant non-cash investing and financing activities:A-1 Common Units issued in exchange for real estate
    
    $
    10,788
    
    
    $
    A-1 Common Units converted to A-2 Common Units
    
    
    34,064
    
    
    
    15,422Assumption of mortgages payable upon purchase of apartment communities
    
    
    74,900
    
    
    
    195,637B Common Units issued in exchange for real estate
    
    
    
    
    
    
    8,730A-2 Common Units issued in exchange for real estate
    
    
    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 June 30, 2004 and 2003
(Unaudited) (1) Description of the Business and Summary of Significant Accounting
Policies Business Archstone-Smith is structured as an UPREIT under which substantially all
property ownership and business operations are conducted through the Operating
Trust. Archstone-Smith is our sole trustee and owns approximately 89.1% of the
Operating Trusts outstanding Common Units; the remaining 10.9% 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: (i) protected locations with limited land on which to build
new housing; (ii) expensive single-family home prices; and (iii) a strong,
diversified economic base and job 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 2003 Form
10-K. See the glossary in our 2003 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 and six months ended June 30, 2004 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 those estimates. Estimates and assumptions are reviewed periodically and
the effects of revisions are reflected in the period they are determined to be
necessary. Moisture Infiltration and Resulting Mold Remediation Costs We estimate and accrue costs related to the correction of moisture
infiltration and related mold remediation when we anticipate incurring such
remediation costs because of the assertion of a legal claim or threatened
litigation. When we incur remediation costs at our own discretion, the cost is
recognized as incurred. Costs of addressing moisture infiltration and resulting
mold remediation issues are only capitalized, subject to recoverability, when
it is determined by management that such costs also extend the life, increase
the capacity, or improve the safety or efficiency of the property relative to
when the community was originally constructed or acquired, if later. All other
related costs are expensed. 7




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Archstone-Smith Operating Trust Notes to Condensed Consolidated Financial Statements  (Continued) 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. 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 estimate the
value of land, building and fixtures assuming the property is vacant, and then
allocate costs to the intangible value of the existing lease agreements. 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. Stock-Based Compensation As of June 30, 2004, the company has one stock-based employee compensation
plan. Effective January 1, 2003, the company adopted the fair value
recognition provision of FASB Statement 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
the six months ended June 30, 2004, we granted approximately 300,000 Restricted
Share Units and 647,000 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 share amounts): 8




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Archstone-Smith Operating Trust Notes to Condensed Consolidated Financial Statements  (Continued) Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net earnings attributable to Common Units  Basic
    
    $
    86,612
    
    
    $
    67,236
    
    
    $
    196,127
    
    
    $
    156,736Add: Stock-based employee compensation expense included
in reported net earnings
    
    
    71
    
    
    
    
    
    
    
    146
    
    
    
    Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
    
    
    (504
    )
    
    
    (419
    )
    
    
    (996
    )
    
    
    (916
    )Pro forma net earnings attributable to Common Units  Basic
    
    $
    86,179
    
    
    $
    66,817
    
    
    $
    195,277
    
    
    $
    155,820Net earnings per Common Unit:Basic  as reported
    
    $
    0.39
    
    
    $
    0.32
    
    
    $
    0.89
    
    
    $
    0.75Basic  pro forma
    
    $
    0.39
    
    
    $
    0.32
    
    
    $
    0.89
    
    
    $
    0.75Diluted  as reported
    
    $
    0.39
    
    
    $
    0.32
    
    
    $
    0.89
    
    
    $
    0.75Diluted  pro forma
    
    $
    0.39
    
    
    $
    0.32
    
    
    $
    0.88
    
    
    $
    0.75Weighted average risk-free interest rate
    
    
    3.48
    %
    
    
    3.54
    %
    
    
    3.48
    %
    
    
    3.54
    %Weighted average dividend yield
    
    
    6.92
    %
    
    
    6.74
    %
    
    
    6.92
    %
    
    
    6.74
    %Weighted average volatility
    
    
    15.33
    %
    
    
    19.58
    %
    
    
    15.33
    %
    
    
    19.58
    %Weighted average expected option life
    
    5.0 years
    
    5.0 years
    
    5.0 years
    
    5.0 years
 Reclassifications Certain 2003 amounts have been reclassified to conform to the 2004
presentation. Comprehensive Income Comprehensive income, which is defined as net earnings and all other
non-owner changes in equity, is displayed in the accompanying Statements of
Unitholders Equity and Comprehensive Income. Other comprehensive income
reflects unrealized holding gains and losses on the available-for-sale
investments and changes in the fair value of effective cash flow hedges. Our accumulated other comprehensive income for the six months ended June
30, 2004 was as follows (in thousands): NetUnrealized
    
    
    
    
    
    AccumulatedGains on
    
    
    
    
    
    OtherMarketable
    
    Cash Flow
    
    ComprehensiveSecurities
    
    Hedges
    
    Income/(Loss)Balance at December 31, 2003
    
    $
    23,808
    
    
    $
    (9,573
    )
    
    $
    14,235Net unrealized holding gains arising during period
    
    
    875
    
    
    
    
    
    
    
    875Change in fair value of cash flow hedges
    
    
    
    
    
    
    1,403
    
    
    
    1,403Less: reclassification adjustments for realized net gains
    
    
    (16,957
    )
    
    
    
    
    
    
    (16,957
    )Balance at June 30, 2004
    
    $
    7,726
    
    
    $
    (8,170
    )
    
    $
    (444
    )
 9




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##### Table of Contents



Archstone-Smith Operating Trust Notes to Condensed Consolidated Financial Statements  (Continued) 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 Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Reconciliation of numerator between basic
and diluted net earnings per Common Unit (1):Net earnings attributable to Common Units  Basic
    
    $
    86,612
    
    
    $
    67,236
    
    
    $
    196,127
    
    
    $
    156,736Dividends on Convertible Preferred Units
    
    
    
    
    
    
    
    
    
    
    2,208
    
    
    
    Net earnings attributable to Common Units  Diluted
    
    $
    86,612
    
    
    $
    67,236
    
    
    $
    198,335
    
    
    $
    156,736Reconciliation of denominator between basic and
diluted net earnings per Common Unit (1):Weighted average number of Common Units
outstanding  Basic
    
    
    219,845
    
    
    
    210,133
    
    
    
    219,962
    
    
    
    208,518Assumed conversion of Convertible Preferred Units into
Common Units
    
    
    
    
    
    
    
    
    
    
    2,583
    
    
    
    Assumed exercise of options
    
    
    946
    
    
    
    597
    
    
    
    936
    
    
    
    503Weighted average number of Common Units
outstanding  Diluted
    
    
    220,791
    
    
    
    210,730
    
    
    
    223,481
    
    
    
    209,021
  (1)
    
    Excludes the impact of potentially dilutive equity securities during
periods in which they are anti-dilutive. (2) Real Estate Investments in Real Estate Investments in real estate, at cost, were as follows (dollar amounts in
thousands): June 30, 2004
    
    December 31, 2003Investment
    
    Units (1)
    
    Investment
    
    Units (1)Apartment Communities:Operating communities
    
    $
    8,422,668
    
    
    
    63,954
    
    
    $
    8,067,075
    
    
    
    63,848Communities under construction
    
    
    256,188
    
    
    
    2,235
    
    
    
    301,634
    
    
    
    2,607Development communities In Planning:Owned
    

    
    72,393
    
    
    
    1,533
    
    
    
    95,911
    
    
    
    2,633Under control (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112Total development communities In Planning
    
    
    72,393
    
    
    
    1,533
    
    
    
    95,911
    
    
    
    2,745Total Operating Trust apartment communities
    
    
    8,751,249
    
    
    
    67,722
    
    
    
    8,464,620
    
    
    
    69,200Ameriton apartment communities
    
    
    637,479
    
    
    
    5,844
    
    
    
    494,338
    
    
    
    5,646Land
    
    
    39,508
    
    
    
    
    
    
    
    9,648
    
    
    
    Other
    
    
    40,247
    
    
    
    
    
    
    
    30,574
    
    
    
    Total real estate
    
    $
    9,468,483
    
    
    
    73,566
    
    
    $
    8,999,180
    
    
    
    74,846
 (1) Unit information is based on managements estimates and has not been
audited or reviewed by our independent auditors. (2) We had no developments Under Control as of June 30, 2004 and $1.1
million as of December 31, 2003, as is reflected on the Other assets
caption of our Balance Sheets. 10




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##### Table of Contents



Archstone-Smith Operating Trust Notes to Condensed Consolidated Financial Statements  (Continued) The change in investments in real estate, at cost, consisted of the
following (in thousands): Balance at December 31, 2003
    
    $
    8,999,180Acquisition-related expenditures
    
    
    496,831Redevelopment expenditures
    
    
    17,345Recurring capital expenditures
    
    
    18,625Development expenditures, excluding land acquisitions
    
    
    154,220Dispositions
    
    
    (208,045
    )Net apartment community activity
    
    
    9,478,156Change in other real estate assets
    
    
    (9,673
    )Balance at June 30, 2004
    
    $
    9,468,483
 At June 30, 2004, we had unfunded contractual commitments related to real
estate investment activities aggregating approximately $402.8 million, of which
$362.3 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 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



Consistent with our capital recycling program, we had 16 operating
apartment communities, representing 7,805 units, classified as held for sale
under the provisions of SFAS 144, at June 30, 2004. Accordingly, we have
classified the operating earnings from these 16 properties within discontinued
operations for the three and six months ended June 30, 2004 and 2003. During
the six months ended June 30, 2004, we sold eight REIT and Ameriton operating
communities. The operating results of these eight communities and the related
gain/loss on sale are also included in discontinued operations for both 2004
and 2003. During the twelve months ended December 31, 2003 we sold 48
operating communities. The operating results of these 48 operating communities
and the related gain/loss on the sale are also included in discontinued
operations for the three and six months ended June 30, 2003. The following is
a summary of net earnings from discontinued operations (in thousands): Three Months Ended
    
    Six Months EndedMarch 31,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Rental revenues
    
    $
    23,115
    
    
    $
    58,062
    
    
    $
    47,280
    
    
    $
    123,214Rental expenses
    
    
    (8,290
    )
    
    
    (22,017
    )
    
    
    (16,932
    )
    
    
    (42,446
    )Real estate taxes
    
    
    (2,931
    )
    
    
    (4,752
    )
    
    
    (6,047
    )
    
    
    (11,872
    )Depreciation on real estate investments
    
    
    (1,365
    )
    
    
    (8,095
    )
    
    
    (5,002
    )
    
    
    (18,512
    )Interest expense(1)
    
    
    (6,653
    )
    
    
    (17,031
    )
    
    
    (13,236
    )
    
    
    (33,018
    )Provision for possible loss on real estate investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,714
    )Debt extinguishment costs related to dispositions
    
    
    
    
    
    
    (1,733
    )
    
    
    (908
    )
    
    
    (1,891
    )Gains on disposition of taxable REIT subsidiary real estate
investments, net
    
    
    1,817
    
    
    
    8
    
    
    
    14,513
    
    
    
    7,619Gains on dispositions of REIT real estate investments, net.
    
    
    29,169
    
    
    
    48,829
    
    
    
    78,969
    
    
    
    93,565Earnings from discontinued apartment communities
    
    $
    34,862
    
    
    $
    53,271
    
    
    $
    98,637
    
    
    $
    112,945
  (1)
    
    The portion of interest expense included in discontinued operations that is
allocated to properties based on the companys leverage ratio was $5.1 million
and $13.0 million for the three months ended June 30, 2004 and 2003, and $9.7
million and $24.2 million for the six months ended June 30, 2004 and 2003,
respectively. (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 June 30, 2004, the investment balance consisted of $52.1 million in
our joint ventures and $25.6 million in Ameriton joint ventures. At December
31, 2003, the investment balance consisted of $42.9 million in our joint
ventures and $43.5 million in Ameriton joint ventures. (5) Borrowings Unsecured Credit Facilities The following table summarizes our $600 million unsecured revolving credit
facility borrowings (in thousands, except for percentages): As of and for the
    
    As of and for theSix Months
    
    Year EndedEnded
    
    December 31,June 30, 2004
    
    2003Total unsecured revolving credit facility
    
    $
    600,000
    
    
    $
    600,000Borrowings outstanding at end of period
    
    
    265,000
    
    
    
    97,000Outstanding letters of credit under this facility
    
    
    950
    
    
    
    1,050Weighted average daily borrowings
    
    
    107,363
    
    
    
    231,354Maximum borrowings outstanding during the period
    
    
    270,000
    
    
    
    511,500Weighted average daily nominal interest rate
    
    
    1.46
    %
    
    
    1.95
    %Weighted average daily effective interest rate
    
    
    2.16
    %
    
    
    2.55
    %
 12




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##### Table of Contents



Archstone-Smith Operating Trust Notes to Condensed Consolidated Financial Statements  (Continued) We also have a short-term unsecured borrowing agreement with JPMorgan
Chase Bank, which provides for maximum borrowings of $100 million. The
agreement bears interest at an overnight rate that ranged from 1.60% to 1.90%
during the six months ended June 30, 2004. There were $45.6 million and $6.8
million of borrowings outstanding under this agreement at June 30, 2004 and
December 31, 2003, respectively. Long-Term Unsecured Debt Following is a summary of our Long-Term Unsecured Debt (dollar amounts in
thousands): Effective
    
    Balance at
    
    Balance at
    
    AverageCoupon
    
    Interest
    
    June 30,
    
    December 31,
    
    RemainingType of Debt
    
    Rate (1)
    
    Rate (2)
    
    2004
    
    2003
    
    Life (Years)Long-term unsecured senior notes
    
    
    6.33
    %
    
    
    6.52
    %
    
    $
    1,752,263
    
    
    $
    1,771,167
    
    
    
    5.0Unsecured tax-exempt bonds
    
    
    1.62
    %
    
    
    1.88
    %
    
    
    75,955
    
    
    
    100,798
    
    
    
    18.9Total/average
    
    
    6.14
    %
    
    
    6.33
    %
    
    $
    1,828,218
    
    
    $
    1,871,965
    
    
    
    5.5
  (1)
    
    Represents a fixed rate for the long-term unsecured notes and a
variable rate for the unsecured tax-exempt bonds.  (2)
    
    Represents the effective interest rate, including interest rate
hedges, loan cost amortization and other ongoing fees and expenses,
where applicable. Mortgages payable Our mortgages payable generally feature either monthly interest and
principal payments or monthly interest-only payments with balloon payments due
at maturity. Following is a summary of our mortgages payable (dollar amounts
in thousands): Effective Interest
    
    Principal Balance (2) at
    
    AverageRemainingType of Mortgage
    
    Rate (1)
    
    June 30, 2004
    
    December 31, 2003
    
    Life (Years)Conventional fixed rate (3)
    
    
    6.45
    %
    
    $
    1,474,013
    
    
    $
    1,511,277
    
    
    
    5.6Tax-exempt floating rate
    
    
    1.91
    %
    
    
    392,893
    
    
    
    317,351
    
    
    
    19.7Conventional floating rate
    
    
    2.71
    %
    
    
    21,705
    
    
    
    21,705
    
    
    
    4.4Construction loans
    
    
    3.88
    %
    
    
    59,451
    
    
    
    56,129
    
    
    
    0.7Other
    
    
    5.02
    %
    
    
    20,681
    
    
    
    21,163
    
    
    
    19.0Total/average mortgage debt
    
    
    5.42
    %
    
    $
    1,968,743
    
    
    $
    1,927,625
    
    
    
    8.4
  (1)
    
    Includes the effect of fair value hedges, credit enhancement
fees, the amortization of fair market value purchase adjustment, and
other related costs, where applicable as of June 30, 2004.  (2)
    
    Includes net fair market value adjustment recorded in
connection with the Smith Merger of $53.2 million and $58.5 million
at June 30, 2004 and December 31, 2003, respectively.  (3)
    
    Includes a long-term secured debt agreement with Fannie Mae.
The Fannie Mae secured debt matures on dates ranging from January
2006 to July 2009, although we have the option to extend the term of
any portion of the debt for up to an additional 30-year period at
any time, subject to Fannie Maes approval. The change in mortgages payable, including properties classified as held
for sale, during the three months ended June 30, 2004 consisted of the
following (in thousands): Balance at December 31, 2003
    
    $
    1,927,625Regularly scheduled principal amortization
    
    
    (6,396
    )Prepayments, final maturities and other
    
    
    (59,389
    )Mortgage assumptions related to property acquisitions
    
    
    74,900Proceeds from mortgage notes payable
    
    
    32,003Balance at June 30, 2004
    
    $
    1,968,743
 13




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##### Table of Contents



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 June 30, 2004 and December 31, 2003 was $3.9 billion
and $3.8 billion, respectively. Our debt instruments generally contain certain
covenants common to the type of facility or borrowing, including financial
covenants establishing minimum debt service coverage ratios and maximum
leverage ratios. We were in compliance with all financial covenants pertaining
to our debt instruments during the three and six months ended June 30, 2004. For the six months ended June 30, 2004 and 2003, the total interest paid
on all outstanding debt was $114.3 million and $125.9 million, respectively.
We capitalize interest incurred during the construction period as part of the
cost of apartment communities under development. Interest capitalized during
the six months ended June 30, 2004 and 2003 was $11.3 million and $11.5
million, respectively. (6) 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 and
June 30, 2004 and the annualized distributions we expect to pay for 2004: Quarterly
    
    AnnualizedCash
    
    CashDistributions
    
    DistributionsPer Unit
    
    Per UnitCommon Units and A-1 Units
    
    $
    0.4300
    
    
    $
    1.72Series D Preferred Units (1)
    
    
    0.5475
    
    
    
    1.31Series E Preferred Units (2)
    
    
    0.5225
    
    
    
    2.09Series F Preferred Units(3)
    
    
    0.5075
    
    
    
    1.51Series G Preferred Units
    
    
    0.5400
    
    
    
    2.16Series I Preferred Units (4)
    
    
    1,915
    
    
    
    7,660Series K Preferred Units (5)
    
    
    0.8500
    
    
    
    3.40Series L Preferred Units
    
    
    0.8500
    
    
    
    3.40
  (1)
    
    In July 2004, we called the Series D Preferred
Units for redemption in the third quarter of 2004.  (2)
    
    In accordance with the terms of the securities,
we intend to repurchase the Series E Preferred Units in three
tranches: 520 units in August 2004, 400 units in November
2004 and 200 units on February 2005.  (3)
    
    In accordance with the terms of the securities,
we intend to repurchase the Series F Preferred Units in
September 2004.  (4)
    
    Series I Preferred Units have a par value of
$100,000 per share.  (5)
    
    The company intends to redeem the Series K
Preferred Units, which we anticipate will result in a
conversion into Common Units during the fourth quarter of 2004 14




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##### Table of Contents



Archstone-Smith Operating Trust Notes to Condensed Consolidated Financial Statements  (Continued) (7) 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. Net Operating Income (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 Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Reportable apartment communities segment
revenues:Same-Store:Garden communities
    
    $
    119,775
    
    
    $
    120,073
    
    
    $
    238,033
    
    
    $
    240,117High-rise properties
    
    
    76,011
    
    
    
    76,464
    
    
    
    150,611
    
    
    
    150,955Non Same-Store:Garden communities
    
    
    18,328
    
    
    
    2,552
    
    
    
    32,937
    
    
    
    4,051High-rise properties
    
    
    8,320
    
    
    
    2,372
    
    
    
    14,918
    
    
    
    4,515Other non-reportable operating segment revenues
    
    
    6,077
    
    
    
    5,313
    
    
    
    10,439
    
    
    
    12,329Total segment and consolidated revenues
    
    $
    228,511
    
    
    $
    206,774
    
    
    $
    446,938
    
    
    $
    411,967
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Reportable apartment communities segment NOI:Garden communities
    
    $
    89,610
    
    
    $
    83,205
    
    
    $
    175,800
    
    
    $
    165,060High-rise properties
    
    
    53,958
    
    
    
    51,357
    
    
    
    105,082
    
    
    
    98,338Other non-reportable operating segment NOI
    
    
    798
    
    
    
    651
    
    
    
    1,328
    
    
    
    1,206Total segment and consolidated NOI
    
    
    144,366
    
    
    
    135,213
    
    
    
    282,210
    
    
    
    264,604Reconciling items:Other income
    
    
    5,209
    
    
    
    4,541
    
    
    
    8,906
    
    
    
    10,857Depreciation on real estate investments
    
    
    (53,173
    )
    
    
    (41,961
    )
    
    
    (103,307
    )
    
    
    (83,473
    )Interest expense
    
    
    (44,128
    )
    
    
    (37,311
    )
    
    
    (87,717
    )
    
    
    (76,774
    )General and administrative expenses
    
    
    (12,092
    )
    
    
    (12,775
    )
    
    
    (24,525
    )
    
    
    (25,642
    )Other expenses
    
    
    (1,278
    )
    
    
    (25,332
    )
    
    
    (2,614
    )
    
    
    (29,540
    )Consolidated earnings from operations
    
    $
    38,904
    
    
    $
    22,375
    
    
    $
    72,953
    
    
    $
    60,032
 15




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##### Table of Contents



Archstone-Smith Operating Trust Notes to Condensed Consolidated Financial Statements  (Continued) June 30,
    
    December 31,2004
    
    2003Reportable operating communities segment assets:Same-Store:Garden communities
    
    $
    3,283,168
    
    
    $
    3,586,989High-rise properties
    
    
    2,743,048
    
    
    
    2,466,129Non Same-Store:Garden communities
    
    
    1,868,445
    
    
    
    1,195,470High-rise properties
    
    
    770,802
    
    
    
    1,072,039Other non-reportable operating segment assets
    
    
    79,608
    
    
    
    29,571Total segment assets
    
    
    8,745,071
    
    
    
    8,350,198Reconciling items:Investment in and advances to unconsolidated
entities
    
    
    77,690
    
    
    
    86,367Cash and cash equivalents
    
    
    7,939
    
    
    
    5,230Restricted cash in tax deferred exchange escrow
    
    
    17,429
    
    
    
    180,920Other assets
    
    
    211,470
    
    
    
    298,980Consolidated total assets
    
    $
    9,059,599
    
    
    $
    8,921,695
 Total capital expenditures for garden communities were $10.2 million and
$15.8 million for the three and six months ended June 30, 2004, and $10.9
million and $16.9 million for the same periods of 2003, respectively. Total
capital expenditures for high-rise properties were $13.4 million and $22.1
million for the three and six months ended June 30, 2004 and $28.8 million and
$39.1 million for the same periods of 2003, respectively. (8) Litigation and Contingencies We are party to alleged moisture infiltration and resulting mold lawsuits
at various apartment properties. We have negotiated a settlement with the named
plaintiffs in certain of these lawsuits and have recorded accruals related to
these claims based on estimated legal fees associated with known and
anticipated costs for our counsel and plaintiffs counsel. Additionally, we
have estimated costs related to the negotiated settlements, additional resident
property repair and replacement costs and temporary resident relocation
expenses. It is possible that these estimates could increase or decrease as
better information becomes available. Our accruals represent managements best
estimate of the probable and reasonably estimable costs and are based, in part,
on the status of settlement discussions, estimates obtained from third-party
contractors and actual costs incurred to date. Not all plaintiffs have accepted
the negotiated settlement, and further court proceedings and additional legal
fees and damages may be required to fully resolve these claims. We are aggressively pursuing recovery of a significant portion of these
costs from our insurance carriers. During the six months ended June 30, 2004,
we received $5.1 million in insurance recoveries pertaining to ongoing moisture
infiltration and resulting mold litigation. Of this amount, approximately $1.3
million was recorded to other income as it pertains to legal and professional
fees previously expensed; the remaining $3.8 million was a reduction of
previously capitalized costs. We are still in discussions with our insurance
providers, and therefore we have not recorded an estimate for future insurance
recoveries. In addition, we are continuing to pursue potential recoveries from
third parties whom we believe bear responsibility for a considerable portion of
the costs we have incurred. We cannot make assurances that we will obtain these
recoveries or that our ultimate liability associated with these claims will not
be material to our results of operations. 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. 16




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##### Table of Contents



Archstone-Smith Operating Trust Notes to Condensed Consolidated Financial Statements  (Concluded) (9) 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 are also exposed to
price risk associated with changes in the fair value of certain equity
securities. We have entered into forward sale agreements to protect against a
reduction in the fair value of these securities, the last of which settled in
July 2004. We have designated these forward sales as 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. 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 exclude the hedging instruments time value component when assessing hedge
effectiveness. If it is determined that a derivative is not highly effective
as a hedge or if a derivative ceases to be a highly effective hedge, we will
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 2003, we entered
into forward sale agreements with an aggregate notional amount, which
represents the fair value of the underlying marketable securities, of
approximately $128.5 million and an aggregate fair value of the forward sale
agreements of approximately $486,000. As of June 30, 2004 the remaining
forward sale agreements had an aggregate notional value of $46.1 million and an
aggregate fair value of zero. During the six months ended June 30, 2004, we
settled two of the forward sales agreements for approximately 1.8 million
shares and sold 308,200 shares of marketable securities, which were not subject
to forward sales agreements, resulting in an aggregate gain of approximately
$17.2 million. The total net proceeds from the sale were $97.0 million, with
the marketable securities basis determined using the average costs of the
securities. Settlement of the remaining forward sale agreements during July
2004 will result in additional gains of approximately $7.7 million during the
third quarter of 2004. During June 2004, we entered into swap transactions to mitigate the risk
of changes in the interest-related cash outflows on a forecasted issuance of
long-term debt. At inception, these swap transactions had an aggregate
notional amount of $144 million and a fair value of zero. As of June 30, 2004,
the aggregate fair value of the swap agreements was negative $4.6 million. (10) Subsequent Event During August 2004, we issued $300 million in long-term unsecured ten-year
senior notes with a coupon rate of 5.6% and an effective interest rate of 5.8%
from its shelf registration statement. The notes were issued pursuant to a
supplemental indenture with modified debt covenants, which are specific to
these notes. The primary change pertains to the leverage covenant, which
limits total debt to 65% of market value of total assets as defined, using a
capitalization rate of 7.5% for stabilized operating assets. 17




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED 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 June 30, 2004, and the
related condensed consolidated statements of earnings for the three and six
month periods ended June 30, 2004 and 2003, the condensed consolidated
statement of unitholders equity, other common unitholders interest and
comprehensive income for the six month period ended June 30, 2004 and the
condensed consolidated statements of cash flows for the six month periods ended
June 30, 2004 and 2003. These condensed consolidated financial statements are
the responsibility of Archstone-Smith Operating Trusts management. We conducted our review 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 review, 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, 2003, and the
related consolidated statements of earnings, unitholders equity, other common
unitholders interest and comprehensive income, and cash flows for the year
then ended (not presented herein); and in our report dated February 9, 2004, 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, 2003 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived. KPMG LLP Denver, Colorado
July 19, 2004 18




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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 2003Form 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 2003Form 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,
under which all property ownership and business operations are conducted
through the Operating Trust and our subsidiaries and affiliates.
Archstone-Smith is our sole trustee and owns 89.1% of our Common Units at June
30, 2004. Results of Operations Overview 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 developments. These factors
all contribute to the overall financial performance of the company. Quarter-to-Date Net Earnings Analysis Basic net earnings attributable to Common Units increased $19.4 million,
or 28.8%, for the three months ended June 30, 2004 as compared to the same
period in 2003. This increase is primarily attributable to:  
    
    Non-operating income of $10.0 million, from the settlement of
a forward contract on marketable equity securities resulting in a
gain of $6.7 million, and a gain of $3.3 million from the
disposition of our property management business during the three
months ended June 30, 2004;
    
    The collection and recognition of $3.1 million related to the
settlement of an ongoing Consolidated Engineering Services (CES)
lawsuit during the three months ended June 30, 2004;
    
    An $8.5 million increase in income from unconsolidated
entities, primarily related to the recognition of contingent
proceeds associated with the expiration of certain indemnifications
related to the sale of CES, which was sold in 2002, and increased
gains from the sale of joint venture operating assets during the
three months ended June 30, 2004;
    
    A $24.1 million decrease in other expenses primarily due to
moisture infiltration and resulting mold- related expenses
recognized during 2003; 19




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##### Table of Contents




    
    Increased revenues partially offset by a corresponding
increase in operating expenses associated with $438.2 million and
$508.9 million in asset acquisitions that occurred during the six
months ended June 30, 2004 and the twelve months ended December 31,
2003, respectively, as well as the continued lease-up of new
development projects; and
    
    A $2.8 million reduction in Preferred Unit distributions due
to the conversion of Series A and H Preferred Units during 2003.
These conversions eliminated the impact of the related preferred
unit distributions on our fixed charge coverage ratio. These increases were partially offset by:  
    
    A $17.9 million decrease in gains from the sale of
depreciable real estate during the three months ended June 30, 2004,
consistent with an overall reduction in our disposition activity;
    
    A 0.4% decrease in Same-Store rental revenues primarily due
to lower effective rent per unit and other income during the second
quarter of 2004 primarily due to revenue declines in non-core
markets in addition to the San Francisco Bay area, Boston and
Chicago;
    
    A 6.1% increase in expenses from our Same-Store portfolio for
the three months ended June 30, 2004, primarily due to increases in
real estate taxes and insurance; and
    
    The loss of rental revenues and a corresponding decrease in
rental expenses due to $265.5 million and $1.6 billion in total
dispositions, by the REIT and Ameriton, in the six months ended June
30, 2004 and the twelve months ended December 31, 2003,
respectively. Year-to-Date Net Earnings Analysis Basic net earnings attributable to Common Shares increased $39.4 million,
or 25.1%, during the six months ended June 30, 2004 as compared to the same
period in 2003. This increase is primarily attributable to:  
    
    Non-operating income of $20.5 million, from the sale and
settlement of forward contracts on marketable equity securities
resulting in a gain of $17.2 million, and a $3.3 million gain from
the disposition of our property management business during the six
months ended June 30, 2004;
    
    The collection and recognition of $3.1 million related to the
settlement of an ongoing CES lawsuit during 2004;
    
    A $13.3 million increase in income from unconsolidated
entities, primarily related to the recognition of contingent
proceeds associated with the expiration of certain indemnifications
related to the sale of CES, which was sold in 2002, and increased
gains from the sale of joint venture operating assets during the six
months ended June 30, 2004;
    
    A $26.9 million decrease in other expenses primarily due to
moisture infiltration and resulting mold- related expenses
recognized during 2003;
    
    Increased revenues partially offset by a corresponding
increase in operating expenses associated with $438.2 million and
$508.9 million in asset acquisitions that occurred during the six
months ended June 30, 2004 and the twelve months ended December 31,
2003, respectively, as well as the continued lease-up of new
development projects; and
    
    A $6.7 million reduction in Preferred Unit distributions due to
the conversion of Series A and H Preferred Units during 2003. These
conversions eliminated the impact of the related preferred unit
distributions on our fixed charge coverage ratio. These increases were partially offset by:  
    
    A $7.7 million decrease in gains from the sale of depreciable
real estate during the three months ended June 30, 2004, consistent
with an overall reduction in our disposition activity;
    
    A 0.6% decrease in Same-Store rental revenues primarily due
to lower effective rent per unit and other income during the six
months ended June 30, 2004 primarily due to revenue declines in
non-core markets in addition to the San Francisco Bay area, Boston
and Chicago;
    
    A 4.1% increase in expenses from our Same-Store portfolio for
the six months ended June 30, 2004, primarily due to increases in
real estate taxes and insurance; and
    
    The loss of rental revenues and a corresponding decrease in
rental expenses due to $265.5 million and $1.6 billion in total
dispositions, by the REIT and Ameriton, in the six months ended June
30, 2004 and the twelve months ended December 31, 2003,
respectively. 20




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##### Table of Contents



Apartment Community Operations We utilize net operating income (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
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net operating income
    
    $
    144,366
    
    
    $
    135,213
    
    
    $
    282,210
    
    
    $
    264,604Other income
    
    
    5,209
    
    
    
    4,541
    
    
    
    8,906
    
    
    
    10,857Depreciation on real estate investments
    
    
    (53,173
    )
    
    
    (41,961
    )
    
    
    (103,307
    )
    
    
    (83,473
    )Interest expense
    
    
    (44,128
    )
    
    
    (37,311
    )
    
    
    (87,717
    )
    
    
    (76,774
    )General and administrative expenses
    
    
    (12,092
    )
    
    
    (12,775
    )
    
    
    (24,525
    )
    
    
    (25,642
    )Other expense
    
    
    (1,278
    )
    
    
    (25,332
    )
    
    
    (2,614
    )
    
    
    (29,540
    )Earnings from operations
    
    $
    38,904
    
    
    $
    22,375
    
    
    $
    72,953
    
    
    $
    60,032
 At June 30, 2004, 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 June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    Variance
    
    2004
    
    2003
    
    VarianceRental revenues:Garden communities
    
    $
    138,103
    
    
    $
    122,625
    
    
    $
    15,478
    
    
    $
    270,970
    
    
    $
    244,168
    
    
    $
    26,802High-rise properties
    
    
    84,331
    
    
    
    78,836
    
    
    
    5,495
    
    
    
    165,529
    
    
    
    155,470
    
    
    
    10,059Non-multifamily
    
    
    868
    
    
    
    772
    
    
    
    96
    
    
    
    1,533
    
    
    
    1,472
    
    
    
    61Total revenues
    
    
    223,302
    
    
    
    202,233
    
    
    
    21,069
    
    
    
    438,032
    
    
    
    401,110
    
    
    
    36,922Operating expenses:Garden communities
    
    
    48,493
    
    
    
    39,420
    
    
    
    9,073
    
    
    
    95,170
    
    
    
    79,108
    
    
    
    16,062High-rise properties
    
    
    30,373
    
    
    
    27,479
    
    
    
    2,894
    
    
    
    60,447
    
    
    
    57,132
    
    
    
    3,315Non-multifamily
    
    
    70
    
    
    
    121
    
    
    
    (51
    )
    
    
    205
    
    
    
    266
    
    
    
    (61
    )Total operating expenses
    
    
    78,936
    
    
    
    67,020
    
    
    
    11,916
    
    
    
    155,822
    
    
    
    136,506
    
    
    
    19,316Net operating income:Garden communities
    
    
    89,610
    
    
    
    83,205
    
    
    
    6,405
    
    
    
    175,800
    
    
    
    165,060
    
    
    
    10,740High-rise properties
    
    
    53,958
    
    
    
    51,357
    
    
    
    2,601
    
    
    
    105,082
    
    
    
    98,338
    
    
    
    6,744Non-multifamily
    
    
    798
    
    
    
    651
    
    
    
    147
    
    
    
    1,328
    
    
    
    1,206
    
    
    
    122Total net operating income
    
    
    144,366
    
    
    
    135,213
    
    
    
    9,153
    
    
    
    282,210
    
    
    
    264,604
    
    
    
    17,606NOI classified as discontinued
operations
    
    
    11,894
    
    
    
    31,293
    
    
    
    (19,399
    )
    
    
    24,301
    
    
    
    68,896
    
    
    
    (44,595
    )NOI including discontinued operations
    
    $
    156,260
    
    
    $
    166,506
    
    
    $
    (10,246
    )
    
    $
    306,511
    
    
    $
    333,500
    
    
    $
    (26,989
    )Operating margin (NOI/rental
revenues):Garden communities
    
    
    64.9
    %
    
    
    67.9
    %
    
    
    (3.0
    )%
    
    
    64.9
    %
    
    
    67.6
    %
    
    
    (2.7
    )%High-rise properties
    
    
    64.0
    %
    
    
    65.1
    %
    
    
    (1.1
    )%
    
    
    63.5
    %
    
    
    63.3
    %
    
    
    0.2
    %Average occupancy during period:Garden communities
    
    
    94.4
    %
    
    
    95.1
    %
    
    
    (0.7
    )%
    
    
    94.6
    %
    
    
    95.1
    %
    
    
    (0.5
    )%High-rise properties
    
    
    95.1
    %
    
    
    92.4
    %
    
    
    2.7
    %
    
    
    95.1
    %
    
    
    92.5
    %
    
    
    2.6
    %
 21




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##### Table of Contents



The following table reflects revenue, expense and NOI growth/(decline) for
Same-Store communities that were fully operating during the three and six
months ended June 30 for each respective comparison period (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): Same-Store
    
    Same-Store
    
    Same-StoreRevenue
    
    Expense
    
    NOIGrowth/(Decline)
    
    Growth/(Decline)
    
    Growth/(Decline)Q2 2004 vs. Q2 2003
    
    
    (0.4
    %)
    
    
    6.1
    %
    
    
    (3.5
    %)YTD 2004 vs. YTD 2003
    
    
    (0.6
    %)
    
    
    4.1
    %
    
    
    (3.0
    %)
 Quarter-to-Date NOI Analysis NOI increased by $9.2 million, or 6.8%, during the three months ended June
30, 2004 as compared to the same period during 2003. Of this increase, $6.4
million was derived from our garden communities and $2.6 million resulted from
our high-rise portfolio. The $6.4 million increase in garden NOI during the three months ended June
30, 2004 as compared to June 30, 2003 was primarily attributable to:  
    
    The acquisition of 12 garden communities for approximately $750
million since the second quarter of 2003; and
    
    The ongoing lease-up and stabilization of eight development
communities. This increase was partially offset by a 3.1% decline in our garden
Same-Store NOI on a quarter-to-date basis primarily due to:  
    
    Lower effective rent per unit resulting from continued weakness
primarily in non-core markets in addition to the San Francisco Bay
area, Boston and Chicago; and
    
    A decline in garden operating margins, resulting from a 5.7%
increase in Same-Store operating expenses. This increase resulted
principally from higher real estate taxes and insurance. The $2.6 million increase in high-rise NOI during the three months ended
June 30, 2004 as compared to June 30, 2003 was caused by:  
    
    The acquisition of two high-rise properties for approximately $200
million since the second quarter of 2003;
    
    The continued lease-up and stabilization of a new Chicago high-rise
development property in the prior year; and
    
    Increased NOI contributions from certain Southeast Florida assets,
which were undergoing redevelopment /remediation during the prior year. This increase was partially offset by a 4.3% decline in high-rise
Same-Store NOI on a quarter-to-date basis primarily due to:  
    
    Lower effective rent per unit resulting from ongoing market
weakness in Chicago and Boston; and
    
    A decline in high-rise operating margins resulting from a 6.7%
increase in Same-Store operating expenses primarily due to higher real
estate taxes and insurance expense. Year-to-Date NOI Analysis NOI increased by $17.6 million, or 6.7%, during the six months ended June
30, 2004 as compared to the same period during 2003. Of this increase, $10.7
million was derived from our garden communities and $6.7 million resulted from
our high-rise portfolio. 22




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##### Table of Contents



The $10.7 million increase in garden NOI during the six months ended June
30, 2004 as compared to June 30, 2003 was primarily attributable to the garden
acquisitions and lease-ups described above, partially offset by a 3.8% decline
in garden Same-Store NOI. This decline in Same-Store NOI was due to:  
    
    Lower effective rent per unit resulting from continued weakness in
non-core markets in addition to the San Francisco Bay area, Boston and
Chicago; and
    
    A 5.3% increase in Same-Store operating expenses primarily due to
higher real estate taxes and insurance expense. The $6.7 million increase in high-rise NOI during the six months ended
June 30, 2004 as compared to June 30, 2003 was attributable to the high-rise
acquisitions, lease-ups and redevelopments described above, partially offset by
a 1.7% decline in high-rise Same-Store NOI. This decline in Same-Store NOI was
due to:  
    
    Lower effective rent per unit resulting from continued weakness in
Chicago and Boston; and
    
    A 2.5% increase in Same-Store operating expenses primarily due to
higher real estate taxes and personnel expense. NOI including Discontinued Operations NOI for our entire portfolio, including properties classified within
discontinued operations, decreased by $10.2 million and $27.0 million during
the three and six months ended June 30, 2004 as compared to the same periods
during 2003, respectively. This net decrease in NOI was primarily attributable
to:  
    
    The loss of NOI from the disposition of $265.5 million in operating
assets, by the REIT and Ameriton, during the six months ended June 30,
2004;
    
    The loss of NOI from the disposition of $1.6 billion of operating
assets, by the REIT and Ameriton, during the twelve months ended
December 31, 2003; and
    
    A decline in Same-Store NOI of 3.5% and 3.0% for the three and six
months ended June 30, 2004 compared to the same periods in prior year,
respectively. This decrease was partially offset by increased NOI from the acquisitions,
lease-ups and redevelopments described above, as well as an increase in NOI
associated with assets classified as held-for-sale, as certain of these assets
were either under redevelopment or in lease-up during the prior year. Other Income Other income increased $0.7 million, or 14.7%, for the three months ended
June 30, 2004 as compared to the same period in 2003, principally due to the
collection and recognition of $3.1 million from the settlement of an ongoing
CES lawsuit during the three months ended June 30, 2004. This was partially
offset by a decrease in the collection of indemnified CES accounts receivable
over 120 days during 2004 as compared to 2003, and the loss of dividend income
on stock investments recognized during the three months ended June 30, 2003. The $2.0 million, or 18.0%, decrease during the six months ended June 30,
2004 as compared to the same period in 2003 is principally attributable to a
decrease in the collection of indemnified CES accounts receivable over 120 days
during 2004 as compared to 2003, and the loss of dividend income on stock
investments recognized during the six months ended June 30, 2003. This was
partially offset by the collection and recognition of $3.1 million from the
settlement of an ongoing CES lawsuit and $1.3 million in insurance recoveries
which were recognized during the six months ended June 30, 2004. Depreciation Expense Depreciation expense increased $11.2 million, or 26.7%, and $19.8 million,
or 23.8%, during the three and six months ended June 30, 2004 as compared to
the same periods in 2003, respectively. These increases are principally
attributable to a greater number of operating assets classified within
discontinued operations during the prior year, which resulted in a greater
allocation of depreciation expense to discontinued operations during 2003 as
compared to 2004. 23




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##### Table of Contents



Including depreciation expense on properties classified within
discontinued operations, depreciation expense increased $4.5 million and $6.3
million during the three and six months ended June 30, 2004, as compared to the
same period in 2003, respectively. These increases are principally
attributable to the amortization of the intangible value of lease agreements
obtained in connection with apartment community acquisitions, which are
amortized over the average life of the underlying lease. Depreciation expense
also increased due to an increase in our overall depreciable basis due to the
disposition of real estate assets with lower depreciable basis and the
reinvestment of these proceeds into assets with higher basis. Interest Expense Interest expense increased $6.8 million, or 18.3%, and $10.9 million, or
14.3%, for the three and six months ended June 30, 2004 as compared to the same
period in 2003, respectively. These increases are principally attributable to
a greater number of operating assets classified within discontinued operations
during the prior year, which resulted in a greater allocation of interest
expense to discontinued operations during 2003 as compared to 2004. The portion
of interest allocated to discontinued operations is based on the companys
leverage ratio. Including interest expense on properties reflected in discontinued
operations, interest expense decreased $3.6 million, or 6.6%, and $8.8 million,
or 8.1%, during the three and six months ended June 30, 2004, as compared to
the same period in 2003, respectively. These decreases are primarily the
result of a reduction in the weighted average debt rates during the three and
six months ended June 30, 2004 and a reduction in our average debt balances
during 2004 as compared to 2003 consistent with an overall reduction our
leverage ratio. General and Administrative Expenses General and administrative expenses decreased $0.7 million, or 5.3%, and
$1.1 million, or 4.4%, for the three and six months ended June 30, 2004 as
compared to the same periods in 2003, respectively. These decreases are
primarily attributable to lower payroll related costs due to severance paid in
2003 and the resulting lower headcount during 2004. Other Expenses The $24.1 million, or 95.0%, and $26.9 million, or 91.2%, decrease in
other expenses for the three and six months ended June 30, 2004, as compared to
the same period in 2003, respectively, is primarily due to lower moisture
infiltration and resulting mold related expenses during the three and six
months ended June 30, 2004, as well as a decrease in Ameriton income taxes. Income from Unconsolidated Entities Income from unconsolidated entities increased $8.5 million and $13.3
million during the three and six months ended June 30, 2004 as compared to the
same periods during 2003, respectively, primarily due to the recognition of
contingent proceeds from the expiration of certain indemnifications related to
the sale of CES and gains from the sale of joint venture operating communities
recognized during the three and six months ended June 30, 2004. Other Non-Operating Income Other non-operating income increased by $10.0 million and $20.5 million
during the three and six months ended June 30, 2004 as compared to the same
periods in 2003 due to the recognition of $6.7 million and $17.2 million in
gains from the sale and settlement of marketable securities during the three
and six months ended June 30, 2004, respectively. The three and six months
ended June 30, 2004 also include a $3.3 million gain from the sale of our
property management business. We had no non-operating income during the six
months ended June 30, 2003. 24




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##### Table of Contents



Preferred Unit Distributions The $2.8 million and $6.7 million decrease in Preferred Unit distributions
for the three and six months ended June 30, 2004, respectively, is primarily
due to the conversion of Series H Preferred Units into Common Units in May
2003, and the conversion of Series A Preferred Units into Common Units in
December 2003. We expect our Preferred Unit distributions to further decrease
as a result of the planned redemption of our Series D and Series F Preferred
Units in the third quarter 2004, a portion of our Series E Preferred Units
during the third and fourth quarters of 2004, and the redemption of our Series
K Preferred Units, which we anticipate will result in a conversion into Common
Units during the fourth quarter of 2004. 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 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 had 16 operating
apartment communities, representing 7,805 units, classified as held for sale
under the provisions of SFAS 144, as of June 30, 2004. Accordingly, we have
classified the operating earnings from these 16 properties within discontinued
operations for the three and six months ended June 30, 2004 and 2003. During
the six months ended June 30, 2004, we sold eight REIT and Ameriton operating
communities. The operating results of these eight communities and the related
gain/loss on sale are also included in discontinued operations for both 2004
and 2003. During the twelve months ended December 31, 2003, we sold 48
operating communities. The operating results of these 48 operating communities
and the related gain/loss on the sale are also included in discontinued
operations for the three and six months ended June 30, 2003. The following is
a summary of earnings from discontinued operations (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Rental revenues
    
    $
    23,115
    
    
    $
    58,062
    
    
    $
    47,280
    
    
    $
    123,214Rental expenses
    
    
    (8,290
    )
    
    
    (22,017
    )
    
    
    (16,932
    )
    
    
    (42,446
    )Real estate taxes
    
    
    (2,931
    )
    
    
    (4,752
    )
    
    
    (6,047
    )
    
    
    (11,872
    )Depreciation on real estate investments
    
    
    (1,365
    )
    
    
    (8,095
    )
    
    
    (5,002
    )
    
    
    (18,512
    )Interest expense (1)
    
    
    (6,653
    )
    
    
    (17,031
    )
    
    
    (13,236
    )
    
    
    (33,018
    )Provision for possible loss on real estate investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,714
    )Debt extinguishment costs related to dispositions
    
    
    
    
    
    
    (1,733
    )
    
    
    (908
    )
    
    
    (1,891
    )Gains on disposition of taxable REIT subsidiary real
estate investments, net
    
    
    1,817
    
    
    
    8
    
    
    
    14,513
    
    
    
    7,619Gain on dispositions of REIT real estate
investments, net
    
    
    29,169
    
    
    
    48,829
    
    
    
    78,969
    
    
    
    93,565$
    34,862
    
    
    $
    53,271
    
    
    $
    98,637
    
    
    $
    112,945
  (1)
    
    The portion of interest expense included in discontinued operations
that is allocated to properties based on the companys leverage ratio
was $5.1 million and $13.0 million for the three months ended June 30,
2004 and 2003, and $9.7 million and $24.2 million for the three months
ended June 30, 2004 and 2003, respectively. 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 proceeds from the July 2004 settlement of
marketable equity securities, we believe our liquidity and financial condition
are sufficient to meet all of our reasonably anticipated cash flow needs during
2004. 25




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##### Table of Contents



Operating Activities Net cash flow provided by operating activities increased $3.6 million, or
2.3%, for the six months ended June 30, 2004 as compared to the same period of
2003. This increase was principally due to: (i) lower moisture infiltration
and resulting mold-related expenses during the six months ended June 30, 2004
and (ii) lower interest expense due to a reduction in the weighted average debt
rates and a reduction in the average debt balances during the six months ended
June 30, 2004. See Results of Operations for a more complete discussion of the
factors impacting our operating performance. Investing and Financing Activities For the six months ended June 30, 2004, cash flows from investing
activities decreased by $209.3 million, as compared to the same period in 2003.
This was due to a $137.3 million decrease in net proceeds from the disposition
of real estate assets during 2004 as compared to the same period of 2003.
Additionally, we spent an additional $213.0 million for acquisitions and
development activity during 2004 as compared to 2003. The disposition,
acquisition and development amounts are net of tax-deferred exchange proceeds.
The decrease is partially offset by proceeds from the sale of marketable
securities during the six months ended June 30, 2004, which is included in
Other, net in the accompanying Condensed Consolidated Statement of Cash
Flows. Cash flows used in financing activities decreased by $212.4 million, or
63.6%, as compared to the same period in 2003. This decrease is primarily due
to increased borrowings to finance a net increase in real estate investments
during the six months ended June 30, 2004 as compared to the prior year,
partially offset by a an increase in cash used to repurchase Common Units. Our most significant non-cash investing and financing activities during
the six months ended June 30, 2004 and 2003 included: (i) the issuance of A-1
Common Units in exchange for real estate in 2004, (ii) the conversion of A-1
Common Units to A-2 Common Units in both 2004 and 2003, (iii) the assumption of
mortgages payable upon the purchase of apartment communities in 2004 and 2003,
and (iv) the issuance of A-2 Common Units in exchange for real estate in 2004. 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. As of
June 30, 2004, we have approximately $66.4 million of long-term debt maturing
during the remainder of 2004, $313.6 million maturing during 2005 and $356.4
million maturing during 2006. At August 2, 2004, we had $583.2 million of liquidity, including cash,
restricted cash in 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 2.08%, 6.33% and 5.42%, respectively,
during the three months ended June 30, 2004. These rates give effect to the
impact of interest rate swaps and caps, as applicable. We were in compliance will all financial covenants pertaining to our debt
instruments during the period ended June 30, 2004. Unitholder Distribution Requirements Based on anticipated distribution levels for 2004 and the number of units
outstanding as of June 30, 2004, we anticipate that we will pay distributions
of $391.8 million in the aggregate during 2004, which includes the planned
redemption of our Series D Preferred Units, Series F Preferred Units, and a
portion of our Series E Preferred Units, during the third and fourth quarter of
2004. This amount represents distributions on our Common Units and all our
Preferred Units. 26




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##### Table of Contents



Planned Investments Following is a summary of unfunded planned investments as of June 30,
2004, 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 properties under construction. Planned InvestmentsUnits
    
    Discretionary
    
    CommittedCommunities under redevelopment
    
    
    3,144
    
    
    $
    10,493
    
    
    $
    40,487Communities under construction
    
    
    4,138
    
    
    
    
    
    
    
    362,335Communities In Planning and owned
    
    
    2,282
    
    
    
    388,639
    
    
    
    Communities In Planning and Under Control
    
    
    128
    
    
    
    15,994
    
    
    
    Community acquisitions under contract
    
    
    1,285
    
    
    
    300,152
    
    
    
    Total
    
    
    10,977
    
    
    $
    715,278
    
    
    $
    402,822
 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 anticipate completion of most of the communities that are currently
under construction and the planned operating community improvements during the
remainder of 2004 and 2005. We expect to start construction on approximately
$100  $250 million, based on Total Expected Investment, of REIT communities
that are currently classified as In Planning during the remainder of 2004. We
expect to fund the costs of these development projects over a two-to-three year
period following the date construction commences. No assurances can be given
that communities we do not currently own will be acquired or that planned
developments will actually occur. In addition, actual costs incurred could be
greater or less than our current estimates. Funding Sources We anticipate financing our planned investment and operating needs
primarily with cash flow from operating activities, disposition proceeds from
our capital redeployment program and borrowings under our unsecured credit
facilities, prior to arranging long-term financing. We anticipate that net
cash flow from operating activities and gains on dispositions during 2004 will
be sufficient to fund anticipated distribution requirements and debt principal
amortization payments. To fund planned investment activities, we had $324.0
million in available capacity on our unsecured credit facilities, $27.2 million
in tax-deferred exchange escrow and $232.0 million of cash on hand at August 2,
2004.In addition, we expect to complete the disposition of $700- $900 million
of REIT operating communities during 2004. In April 2004, the Operating Trust filed a shelf registration statement on
Form S-3 to register an additional $450 million in unsecured debt securities.
This registration statement was declared effective in April 2004. At August 2,
2004, Archstone-Smith and the Operating Trust had $1.2 billion available in
shelf registered debt and equity securities which can be issued subject to our
ability to affect offerings on satisfactory terms based on prevailing market
conditions. Other Contingencies and Hedging Activities We are party to alleged moisture infiltration and resulting mold lawsuits
at various apartment properties. We have negotiated a settlement with the named
plaintiffs in certain of these lawsuits and have recorded accruals related to
these claims based on estimated legal fees associated with known and
anticipated costs for our counsel and plaintiffs counsel. Additionally, we
have estimated costs related to the negotiated settlements, additional resident
property repair and replacement costs and temporary resident relocation
expenses. It is possible that these estimates could increase or decrease as
better information becomes available. Our accruals represent managements best
estimate of the probable and reasonably estimable costs and are based, in part,
on the status of settlement discussions, estimates obtained from third-party
contractors and actual costs incurred to date. Not all plaintiffs have accepted
the negotiated settlement, and further court proceedings and additional legal
fees and damages may be required to fully resolve these claims. 27




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##### Table of Contents



We are aggressively pursuing recovery of a significant portion of these
costs from our insurance carriers. During the six months ended June 30, 2004,
we received $5.1 million in insurance recoveries pertaining to ongoing moisture
infiltration and resulting mold litigation. Of this amount, approximately $1.3
million was recorded to other income as it pertains to legal and professional
fees previously expensed; the remaining $3.8 million was a reduction of
previously capitalized costs. We are still in discussions with our insurance
providers, and therefore we have not recorded an estimate for future insurance
recoveries. In addition, we are continuing to pursue potential recoveries from
third parties whom we believe bear responsibility for a considerable portion of
the costs we have incurred. We cannot make assurances that we will obtain these
recoveries or that our ultimate liability associated with these claims will not
be material to our results of operations. 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. As a general matter, concern about indoor exposure to mold has been
increasing, as such exposure has been alleged to have a variety of adverse
effects on health. There has been an increasing number of lawsuits in our
industry against owners and managers of apartment communities relating to
moisture infiltration and resulting mold. Whenever we receive a resident
complaint concerning moisture infiltration, condensation or mold problems
and/or become aware that an air quality concern exists, we implement corrective
measures in accordance with guidelines and protocols we have developed with the
assistance of indoor air quality experts. We are working proactively with all
of our residents to resolve all moisture infiltration and mold-related issues.
However, we can make no assurance that additional material legal claims
relating to moisture infiltration and the presence of, or exposure to, mold
will not arise in the future. The terms of our property and general liability policies after June 30,
2002, may exclude certain mold-related claims. Should an uninsured loss arise
against the company, we may be required to use our own funds to resolve the
issue, including litigation costs. 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 are also exposed to
price risk associated with changes in the fair value of certain equity
securities. We have entered into forward sale agreements to protect against a
reduction in the fair value of these securities, the last of which settled in
July 2004. We have designated these forward sales as 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. 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 exclude the hedging instruments time value component when assessing hedge
effectiveness. If it is determined that a derivative is not highly effective
as a hedge or if a derivative ceases to be a highly effective hedge, we will
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 2003, we entered
into forward sale agreements with an aggregate notional amount, which
represents the fair value of the underlying marketable securities, of
approximately $128.5 million and an aggregate fair value of the forward sale
agreements of approximately $486,000. As of June 30, 2004 the remaining
forward sale agreements had an aggregate notional value of $46.1 million and an
aggregate fair value of zero. During the six months ended June 30, 2004, we
settled two of the forward sales agreements for approximately 1.8 million shares and sold
308,200 shares of marketable securities, which were not subject to forward
sales agreements, resulting in an aggregate gain of approximately $17.2
million. The total net proceeds from the sale were $97.0 million, with the
marketable securities basis determined using the average costs of the
securities. Settlement of the remaining forward sale agreements during July
2004 will result in additional gains of approximately $7.7 million during the
third quarter of 2004. 28




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During June 2004, we entered into swap transactions to mitigate the risk
of changes in the interest-related cash outflows on a forecasted issuance of
long-term debt. At inception, these swap transactions had an aggregate
notional amount of $144 million and a fair value of zero. As of June 30, 2004,
the aggregate fair value of these swap agreements was negative $4.6 million. 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 prepare them
for their intended use. The amount of interest capitalized is based upon the
average amount of accumulated development expenditures 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. 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 as well as the asset type, age, and quality. 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. 29




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##### Table of Contents



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 estimate value of the land,
building and fixtures assuming the property is vacant and then allocate costs
to the intangible value of the existing lease agreements. 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. Moisture Infiltration and Resulting Mold Remediation Costs Accounting for correction of moisture infiltration and mold remediation
costs is considered a critical accounting estimate because significant
judgment is required by management to determine when to record a liability, how
much should be accrued as a liability, and whether such costs meet the criteria
for capitalization. We estimate and accrue costs related to correcting the moisture
infiltration and remediating resulting mold when we anticipate incurring costs
because of the threat of litigation or the assertion of a legal claim. When we
incur costs at our own discretion, the cost is recognized as incurred. Moisture
infiltration and resulting mold remediation costs are only capitalized when it
is determined by management that such remediation costs also extend the life,
increase the capacity, or improve the safety or efficiency of the property
relative to when the community was originally constructed or acquired, if
later. All other related costs are expensed. There are considerable uncertainties that affect our ability to estimate
the ultimate cost of correction and remediation efforts. These uncertainties
include, but are not limited to, assessing the exact nature and extent of the
issues, the extent of required remediation efforts and the varying costs of
alternative strategies for addressing the issues. Any accrual represents
managements best estimate of the probable and reasonably estimable costs and
is based, in part, on estimates obtained from third-party environmental
contractors and actual costs incurred to date. It is possible that these
estimates could increase or decrease as better information becomes available. We accrue for litigation settlement costs when a loss contingency is both
probable and the amount of loss can be reasonably estimated. Estimating the
likelihood and amount of a loss contingency requires significant judgment by
management and is therefore considered a critical accounting estimate. We
base these estimates on the best information available as of the end of the
period, which includes, but is not limited to, estimates obtained from
third-party contractors as well as actual costs incurred to date. It is
possible that these estimates could increase or decrease as better information
becomes available. We generally recognize legal expenses as incurred; however,
if such fees are related to the accrual for a known legal settlement, we accrue
for the related incurred and anticipated legal fees at the same time we accrue
the cost of settlement. 30




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##### Table of Contents



Off Balance Sheet Arrangements Investments in entities that are not controlled through majority economic
interest are not consolidated and are reported as investments in unconsolidated
entities. Our investments in unconsolidated entities consist of $77.7 million
in real estate joint ventures, which generally consist of our percentage
ownership in the equity of the joint ventures. CES is a service business that we acquired during the Smith Merger in
2001, which prior to its sale had been reported as an unconsolidated entity in
our financial statements. CES provides engineering services for commercial and
residential real estate across the country. On December 19, 2002, CES was sold
to a third party for $178 million in cash, and we recorded a $35.4 million net
gain on the sale of the business or $0.16 per share on a fully diluted basis.
Excluded from the gain was approximately $6.7 million in contingent proceeds
related to indemnification of accounts receivable over 120 days. Also excluded
from the gain were liabilities for certain indemnifications that expired during
June 2004. During the six months ended June 30, 2004 and 2003, we recognized
$923,000 and $4.1 million related to the collection of accounts receivable over
120 days, respectively. During the six months ended June 30, 2004, we also
recognized $3.2 million related to the expiration of certain indemnified
liabilities recorded as part of the CES sale. SMC is a service business that we acquired in the Smith Merger during
2001. We sold SMC during February 2003 to former members of SMCs senior
management. Prior to the sale, we reported SMC as an unconsolidated entity in
our financial statements. We received two notes receivable totaling $5.8
million and bearing an interest rate of 7.0% as consideration for the sale.
The first note for $3.5 million has principal payments beginning in August 2003
with payment in full by February 2008. The second note for $2.3 million was
fully repaid along with all accrued interest due during May 2003. During the
second quarter of 2004, we recognized the divestiture since our
responsibilities under the majority of outstanding performance guarantees,
which pertain to ongoing construction projects at the time of sale, expired. 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): 2005
    
    2007
    
    2009 thru2004
    
    and 2006
    
    and 2008
    
    2095
    
    TotalScheduled long-term debt maturities
    
    $
    66.4
    
    
    $
    670.0
    
    
    $
    976.7
    
    
    $
    2,083.9
    
    
    $
    3,797.0Unsecured credit facilities (1)
    
    
    45.6
    
    
    
    265.0
    
    
    
    
    
    
    
    
    
    
    
    310.6Development and redevelopment expenditures
    
    
    148.1
    
    
    
    254.7
    
    
    
    
    
    
    
    
    
    
    
    402.8Performance bond guarantees (2)
    
    
    17.0
    
    
    
    16.4
    
    
    
    
    
    
    
    1.2
    
    
    
    34.6Lease commitments and other (3)
    
    
    7.3
    
    
    
    6.8
    
    
    
    12.9
    
    
    
    202.5
    
    
    
    229.5Total
    
    $
    284.4
    
    
    $
    1,212.9
    
    
    $
    989.6
    
    
    $
    2,287.6
    
    
    $
    4,774.5
  (1)
    
    The $600 million unsecured facility matures on October 30, 2006, 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 performance bond guarantees for CES and SMC subsequent to
their sale, but there are recourse provisions available to us to recover
any potential future payments from the new owners of CES and SMC.(3)
    
    Lease commitments relate principally to ground lease payments as of
December 31, 2003. There have been no material changes since that date. 31




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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, 2003. See Item
7a in our 2003 Form 10-K for detailed information about the qualitative and
quantitative disclosures about our market risk. 
 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 disclosure controls and
procedures (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 disclosure controls and procedures
were, to the best of their knowledge, effective as of June 30, 2004, 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 June 30, 2004, there were no
significant changes in the Operating Trusts disclosure controls 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 We are subject to the following claims in connection with moisture
infiltration and resulting mold issues at high-rise properties in Southeast
Florida. Henriques, et al. v. Archstone-Smith Operating Trust, et al.,filed on
August 27, 2002 (the Henriques Claim), in the Circuit Court of the Eleventh
Judicial Circuit in and for Miami-Dade County, Florida, on behalf of a class of
residents at Harbour House. We have reached a court-approved settlement with
the plaintiffs in this matter. The case alleged that water infiltration and
resulting mold contamination at the property had been caused by faulty
air-conditioning and had resulted in both personal injuries to the plaintiffs
and damage to their property. Based on the settlement, we have recorded a
liability for estimated legal fees associated with known and anticipated costs
for our counsel and plaintiffs counsel, as well as estimated settlement costs.
Not all plaintiffs have accepted the court-approved settlement, and some of
these individuals have filed separate lawsuits. We are in the process of
determining the merits of their claims and therefore, potential legal fees and
damages associated with these claims are not contemplated in our current
accrual. See Managements Discussion and Analysis of Financial Conditions and
Results of Operations in this Quarterly Report for further discussion regarding
this accrual. Santos, et al. v. Archstone-Smith Operating Trust, et al.,filed on
February 13, 2003, in the Circuit Court of the Eleventh Judicial Circuit in and
for Miami-Dade County, Florida, on behalf of a class of residents at Harbour
House. The plaintiffs in this case make substantially the same allegations as
those made in the Henriquesclaim and seek both injunctive relief and
unspecified monetary and punitive damages. Although we believe this case to be
without merit, we are currently in settlement discussions with the individuals
who have retained counsel. Based on the status of these discussions, we have
recorded a liability for estimated legal fees associated with known and
anticipated costs for our counsel and plaintiffs counsel, as well as estimated
settlement costs. See Managements Discussion and Analysis of Financial
Conditions and Results of Operations in this Quarterly Report for further
discussion regarding this accrual. Michel, et al., v. Archstone-Smith Operating Trust, et al.,was filed on
May 9, 2003, in the Circuit Court of the Eleventh Judicial Circuit in and for
Miami-Dade County, Florida, on behalf of the class of residents at the
property. The plaintiffs in this case make substantially the same allegations
as those made in the Henriquesclaim and seek both injunctive relief and
unspecified monetary and punitive damages. We believe this suit is without
merit, and intend to vigorously contest the claims asserted in this litigation.
No assurances can be given that this lawsuit, if adversely determined, will not
have a material adverse effect on the company. Semidey, et al., v. Archstone-Smith Operating Trust, et al.,was filed on
June 9, 2003, in the Circuit Court of the Eleventh Judicial Circuit in and for
Miami-Dade County, Florida, on behalf of the class of residents at the
property. The plaintiffs in this case made substantially the same allegations
as those made in the Henriquesclaim and sought both injunctive relief and
unspecified monetary and punitive damages. Although we were never served with
this complaint, we have reached a settlement with a majority of the represented
residents and therefore this complaint was dismissed without prejudice. We
have recorded a liability consistent with the settlement reached in this claim. Although we are in continued discussions with the remaining represented
residents in the Semideycase, plaintiffs counsel elected to re-file a class
action suit on behalf of these individuals (Sullivan, et al., v.
Archstone-Smith Operating Trust, et al.) on July 6, 2004 in the Circuit Court
of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida. This
is based upon the same allegation as the Semideyaction and seeks the same
relief, with the exception of damages for bodily injury, which are excluded.
Plaintiffs counsel has advised us that they intend to seek recovery for any
bodily injury claims through individual lawsuits. We have recorded a liability
consistent with the settlement agreed to in the Semideycase; however, no
assurances can be given that this lawsuit, if adversely determined, will not
have a material adverse effect on the company. 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. 33




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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 May YetUnits
    
    Price Paid
    
    Announced
    
    Be Purchased UnderPeriod
    
    Purchased
    
    per Unit
    
    Plan
    
    the Plan4/1/044/30/04
    
    
    21,461
    
    
    $
    28.71
    
    
    
    
    
    
    
    5/1/045/31/04
    
    
    1,015,788
    
    
    
    28.55
    
    
    
    
    
    
    
    6/1/046/30/04
    
    
    24,059
    
    
    
    29.00
    
    
    
    
    
    
    
    Total
    
    
    1,061,308
    
    
    
    
    
    
    
    
 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits:  10.1
    
    Amendment to Archstone-Smith Operating Trust 2001 Long-Term Incentive Plan12.1
    
    Computation of Ratio of Earnings to Fixed Charges12.2
    
    Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Unit Distributions.15.1
    
    Letter from KPMG LLP dated July 19, 2004, regarding unaudited financial information31.1
    
    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 (b) Reports on Form 8-K:  None 34




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. ARCHSTONE-SMITH OPERATING TRUSTBY:
    
    /S/ R. SCOT SELLERSR. Scot SellersChief Executive OfficerBY:
    
    /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 Controller(Principal Accounting Officer)
 Date: August 6, 2004 35




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EXHIBIT INDEX (a) Exhibits:  10.1
    
    Amendment to Archstone-Smith Operating Trust 2001 Long-Term Incentive Plan12.1
    
    Computation of Ratio of Earnings to Fixed Charges12.2
    
    Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Unit Distributions.15.1
    
    Letter from KPMG LLP dated July 19, 2004, regarding unaudited financial information31.1
    
    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