UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 30, 2004

OR

For the transition period from                    to                    .

Commission File Number 1-10272

ARCHSTONE-SMITH OPERATING TRUST

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.

Table of Contents

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PART I – FINANCIAL INFORMATION

Archstone-Smith Operating Trust

Condensed Consolidated Balance Sheets

(In thousands, except unit data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Archstone-Smith Operating Trust

Condensed Consolidated Statements of Earnings

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

The accompanying notes are an integral part of these condensed consolidated financial statements.

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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)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Archstone-Smith Operating Trust

Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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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.

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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):

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Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements – (Continued)

     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):

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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):

(2) Real Estate

   Investments in Real Estate

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

(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.

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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):

     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.

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     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):

(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):

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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):

   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):

     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):

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Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements – (Continued)

   Other

     The book value of total assets pledged as collateral for mortgage loans and other obligations at 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:

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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):

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Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements – (Continued)

     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.

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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.

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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

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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 2003 Form 10-K as well as the financial statements and notes included in Item 1 of this report.

   Forward-Looking Statements

     Certain statements in this Form 10-Q that 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 2003 Form 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:

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     These increases were partially offset by:

     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:

     These increases were partially offset by:

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   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):

     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):