UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

OR

o		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

Maryland (State or other jurisdiction of incorporation or organization)		74-6056896 (I.R.S. employer identification no.)

9200 E Panorama Circle, Suite 400
Englewood, Colorado 80112
(Address of principal executive offices and zip code)

(303) 708-5959
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year,
if changed since last report)

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

Yes þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o

     At August 1, 2005 there were approximately 32,961,000 of the Registrant’s Common Units outstanding held by non-affiliates.

 

 

Table of Contents

				Page
Item		Description		Number
		PART I
1.		Financial Statements
		Condensed Consolidated Balance Sheets — June 30, 2005 (unaudited) and December 31, 2004			3
		Condensed Consolidated Statements of Earnings — Three and Six months ended June 30, 2005 and 2004 (unaudited)			4
		Condensed Consolidated Statement of Unitholders’ Equity, Other Common Unitholders’ Interest and Comprehensive Income/(Loss) — Six months ended June 30, 2005 (unaudited)			5
		Condensed Consolidated Statements of Cash Flows — Six months ended June 30, 2005 and 2004 (unaudited)			6
		Notes to Condensed Consolidated Financial Statements (unaudited)			7
		Report of Independent Registered Public Accounting Firm			20
2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
3.		Quantitative and Qualitative Disclosures About Market Risk			33
4.		Controls and Procedures			33
		PART II
1.		Legal Proceedings			34
2.		Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities			34
6.		Exhibits			34
Computation of Ratio of Earnings to Fixed Charges
Computation of Ratio of Earnings to Combined Fixed Charges
Independent Registered Public Accounting Firm Awareness Letter
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification of Chief Executive Officer - Section 906
Certification of Chief Financial Officer - Section 906

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,
ASSETS		2005				2004
		(Unaudited)
Real estate		$	8,872,304			$	8,842,611
Real estate — held for sale			400,766				378,427
Less accumulated depreciation			841,539				763,542
			8,431,531				8,457,496
Investments in and advances to unconsolidated entities			124,598				111,481
Net investments			8,556,129				8,568,977
Cash and cash equivalents			12,765				203,255
Restricted cash in tax-deferred exchange escrow			124,041				120,095
Other assets			254,391				173,717
Total assets		$	8,947,326			$	9,066,044
LIABILITIES AND UNITHOLDERS’ EQUITY
Liabilities:
Unsecured credit facilities		$	—			$	19,000
Long-Term Unsecured Debt			2,379,209				2,099,132
Mortgages payable			1,742,872				2,013,730
Mortgages payable — held for sale			17,649				17,775
Accounts payable, accrued expenses and other liabilities			283,503				325,131
Total liabilities			4,423,233				4,474,768
Minority interest			—				2,050
Other common unitholders’ interest, at redemption value (A-1 Common Units:
24,036,384 in 2005 and 23,117,498 in 2004)			928,285				885,400
Unitholders’ equity:
Perpetual Preferred Units			50,000				69,522
Common unitholders’ equity (A-2 Common Units: 199,304,169 in 2005 and 199,577,459 in 2004)			3,551,211				3,638,729
Accumulated other comprehensive earnings (loss)			(5,403	)			(4,425	)
Total unitholders’ equity			3,595,808				3,703,826
Total liabilities and unitholders’ equity		$	8,947,326			$	9,066,044

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

Archstone-Smith Operating Trust

Condensed Consolidated Statements of Earnings

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Revenues:
Rental revenues		$	226,375			$	198,911			$	446,291			$	389,526
Other income			6,848				5,209				11,975				8,906
			233,223				204,120				458,266				398,432
Expenses:
Rental expenses			56,700				49,454				115,261				97,480
Real estate taxes			22,644				19,328				45,280				38,031
Depreciation on real estate investments			54,832				47,419				108,609				91,979
Interest expense			46,330				37,724				93,826				74,265
General and administrative expenses			13,755				12,092				28,044				24,525
Other expenses			7,390				900				28,472				2,124
			201,651				166,917				419,492				328,404
Earnings from operations			31,572				37,203				38,774				70,028
Minority interest			—				—				—				352
Equity in earnings/(loss) from unconsolidated entities			5,794				7,354				16,911				12,630
Other non-operating income			4,778				9,951				28,783				20,461
Earnings before discontinued operations			42,144				54,508				84,468				103,471
Earnings from discontinued apartment communities			20,190				36,563				51,708				101,562
Net earnings			62,334				91,071				136,176				205,033
Preferred Unit distributions			(958	)			(4,459	)			(2,656	)			(8,906	)
Net earnings attributable to Common Units — Basic		$	61,376			$	86,612			$	133,520			$	196,127
Weighted average Common Units outstanding — Basic			223,093				219,845				223,719				219,962
Weighted average Common Units outstanding — Diluted			224,199				220,791				224,757				223,481
Earnings per Common Unit — Basic:
Earnings before discontinued operations		$	0.19			$	0.23			$	0.37			$	0.43
Discontinued operations, net			0.09				0.16				0.23				0.46
Net earnings		$	0.28			$	0.39			$	0.60			$	0.89
Earnings per Common Unit — Diluted:
Earnings before discontinued operations		$	0.18			$	0.23			$	0.36			$	0.43
Discontinued operations, net			0.09				0.16				0.23				0.46
Net earnings		$	0.27			$	0.39			$	0.59			$	0.89
Distributions paid per Common Unit		$	0.4325			$	0.43			$	0.8650			$	0.86

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

Archstone-Smith Operating Trust

Condensed Consolidated Statement of Unitholders’ Equity,
Other Common Unitholders’ Interest and Comprehensive Income/(Loss)

Six Months Ended June 30, 2005

(In thousands)
(Unaudited)

		Perpetual
		Preferred
		Units at								Accumulated								Other
		Aggregate				Common				Other				Total				Common
		Liquidation				Unitholders’				Comprehensive				Unitholders’				Unitholders’
		Preference				Equity				Income/(Loss)				Equity				Interest				Total
Balances at December 31, 2004.		$	69,522			$	3,638,729			$	(4,425	)		$	3,703,826			$	885,400			$	4,589,226
Comprehensive income:
Net earnings			—				121,058				—				121,058				15,118				136,176
Change in fair value of cash flow hedges			—				—				411				411				—				411
Change in fair value of marketable securities			—				—				(1,389	)			(1,389	)			—				(1,389	)
Comprehensive income attributable to Common Units																							135,198
Preferred Unit distributions			—				(2,656	)			—				(2,656	)			—				(2,656	)
Common Unit distributions			—				(173,413	)			—				(173,413	)			(20,360	)			(193,773	)
A-1 Common Units converted into A-2 Common Units			—				3,129				—				3,129				(3,129	)			—
Common Unit repurchases			—				(56,495	)			—				(56,495	)			—				(56,495	)
Preferred Unit repurchases			(19,522	)			—				—				(19,522	)			—				(19,522	)
Issuance of A-1 Common Units			—				—				—				—				41,660				41,660
Issuance of A-2 Common Units under Compensation Plans			—				31,855				—				31,855				—				31,855
Adjustment to redemption value			—				(9,596	)			—				(9,596	)			9,596				—
Other, net			—				(1,400	)			—				(1,400	)			—				(1,400	)
Balances at June 30, 2005		$	50,000			$	3,551,211			$	(5,403	)		$	3,595,808			$	928,285			$	4,524,093

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

Archstone-Smith Operating Trust

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

		Six Months Ended
		June 30,
		2005				2004
Operating activities:
Net earnings		$	136,176			$	205,033
Adjustments to reconcile net earnings to net cash flow provided by operating activities:
Depreciation and amortization			114,390				111,640
Gains on dispositions of depreciated real estate, net			(60,262	)			(93,482	)
Gains on sale of marketable equity securities and property management business			(27,948	)			(20,461	)
Minority interest			—				(352	)
Equity in earnings/(loss) from unconsolidated entities			(16,911	)			(12,630	)
Change in other assets			1,288				(8,682	)
Change in accounts payable, accrued expenses and other liabilities			(8,231	)			(16,488	)
Other, net			(4,399	)			(4,826	)
Net cash flow provided by operating activities			134,103				159,752
Investing activities:
Real estate investments, net			(457,763	)			(581,739	)
Change in investments in unconsolidated entities, net			8,312				26,958
Proceeds from dispositions, net of closing costs			465,099				272,339
Change in restricted cash			(3,946	)			163,368
Change in notes receivable, net			(73,408	)			123
Other, net			14,844				83,436
Net cash flow used in investing activities			(46,862	)			(35,515	)
Financing activities:
Payments on Long-Term Unsecured Debt			(18,750	)			(40,450	)
Proceeds from Long-Term Unsecured Debt			296,034				—
Proceeds/Repayments from unsecured credit facilities, net			(19,000	)			206,843
Principal prepayment of mortgages payable, including prepayment penalties			(263,456	)			(56,468	)
Regularly scheduled principal payments on mortgages payable			(5,321	)			(6,396	)
Proceeds from mortgage notes payable			655				32,003
Proceeds from Common Units issued under employee stock options			20,556				29,129
Repurchase of Common Units			(56,495	)			(85,441	)
Repurchase of Series E and G Perpetual Preferred Units			(19,522	)			—
Cash distributions paid on Common Units			(214,935	)			(191,160	)
Cash distributions paid on Preferred Units			(2,656	)			(8,906	)
Other, net			5,159				(682	)
Net cash flow used in financing activities			(277,731	)			(121,528	)
Net change in cash and cash equivalents			(190,490	)			2,709
Cash and cash equivalents at beginning of period			203,255				5,230
Cash and cash equivalents at end of period		$	12,765			$	7,939
Significant non-cash investing and financing activities:
A-1 Common Units issued in exchange for real estate		$	41,660			$	10,788
A-1 Common Units converted to A-2 Common Units			3,129				34,064
Assumption of mortgages payable upon purchase of apartment communities			—				74,900
A-2 Common Units issued in exchange for real estate			—				4,502

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

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements

(1) Description of the Business and Summary of Significant Accounting Policies

Business

     Archstone-Smith is structured as an UPREIT under which all property ownership and business operations are conducted through the Operating Trust. Archstone-Smith is our sole trustee and owns approximately 89.2% the Operating Trust’s outstanding Common Units; the remaining 10.8% 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 unitholders by acquiring, developing and operating apartments in markets characterized by very expensive single-family home prices, limited land on which to build new housing and a strong, diversified economic base with employment growth potential.

Interim Financial Reporting

     The accompanying condensed consolidated financial statements of the Operating Trust are unaudited and certain information and footnote disclosures normally included in financial statements have been omitted. While management believes that the disclosures presented are adequate for interim reporting, these interim financial statements should be read in conjunction with the financial statements and notes included in the Operating Trust’s 2004 Form 10-K. See the glossary in our 2004 Form 10-K for all defined terms not defined herein.

     In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary for a fair presentation of the Operating Trust’s financial statements for the interim periods presented. The results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of the results to be expected for the entire year.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the financial statements and the related notes. Actual results could differ from management’s estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period they are determined to be necessary.

Loss Contingencies

     We accrue for loss contingencies when it is probable that a loss will be incurred and that loss can be reasonably estimated consistent with the criteria established in SFAS No. 5 “Accounting for Contingencies.” We also record insurance recoveries up to the amount of the actual loss contingency when the insurance recovery is both probable and can be reasonably estimated.

Legal Fees

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

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

Marketable Securities and Other Investments

     All publicly traded equity securities are classified as “available for sale” and carried at fair value, with unrealized gains and losses reported as a separate component of unitholders’ equity. Private investments, for which we do not have the ability to exercise significant influence, are accounted for at cost. Declines in the value of public and private investments that management determines are other than temporary are recorded as a provision for loss on investments.

Real Estate Depreciation

     We allocate the cost of newly acquired properties between net tangible and identifiable intangible assets. The primary intangible asset associated with an apartment community acquisition is the value of the existing lease agreements. When allocating cost to an acquired property, we first allocate costs to the estimated intangible value of the existing lease agreements and then to the estimated value of the land, building and fixtures assuming the property is vacant. We estimate the intangible value of the lease agreements by determining the lost revenue associated with a hypothetical lease-up. We depreciate the building and fixtures based on the expected useful life of the asset and amortize the intangible value of the lease agreements over the average remaining life of the existing leases.

Income Taxes

     Archstone-Smith made an election to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and we believe we qualify as a REIT and have made all required distributions of our taxable income. Accordingly, no provision has been made for federal income taxes at the trust level.

     We primarily incur income taxes through our consolidated taxable REIT subsidiary called Ameriton. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.

Preferred Unit Redemptions

     When redeeming Preferred Units, we recognize unit issuance costs as a charge to earnings in accordance with Financial Accounting Standards Board (“FASB”) — Emerging Issues Task Force (“EITF”) Topic D-42, “The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock.” In July 2003, the Securities and Exchange Commission (“SEC”) staff issued a clarification of the SEC’s position on the application of FASB-EITF Topic D-42. The SEC staff’s position, as clarified, is that in applying Topic D-42, the carrying value of preferred units that are redeemed should be reduced by the amount of original issuance costs, regardless of where in unitholders’ equity those costs are reflected.

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

Stock-Based Compensation

     As of June 30, 2005, the company has one stock-based employee compensation plan. Effective January 1, 2003, the company adopted the fair value recognition provision of SFAS No. 123, “Accounting for Stock-Based Compensation,” prospectively to all employee awards granted, modified or settled after January 1, 2003, which results in expensing of options. During 2005, we granted approximately 325,000 Restricted Share Units and 513,000 stock options. During 2004, we granted approximately 300,000 Restricted Share Units and 648,000 stock options. For employee awards granted prior to January 1, 2003, the company accounted for this plan under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. With respect to options granted under the plan prior to January 1, 2003, no stock-based employee compensation expense is reflected in the accompanying condensed consolidated statements of earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per unit if the fair value based method had been applied to all outstanding and unvested awards in each period (dollar amounts in thousands, except per unit amounts):

		Three Months Ended June 30,								Six Months Ended June 30,
		2005				2004				2005				2004
Net earnings attributable to Common Units — Basic		$	61,376			$	86,612			$	133,520			$	196,127
Add: Stock-based employee compensation expense included in reported net earnings			219				71				448				146
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards			(360	)			(504	)			(790	)			(996	)
Pro forma net earnings attributable to Common Units — Basic		$	61,235			$	86,179			$	133,178			$	195,277
Net earnings per Common Unit:
Basic — as reported		$	0.28			$	0.39			$	0.60			$	0.89
Basic — pro forma		$	0.28			$	0.39			$	0.60			$	0.89
Diluted — as reported		$	0.27			$	0.39			$	0.59			$	0.89
Diluted — pro forma		$	0.27			$	0.39			$	0.59			$	0.88
Weighted average risk-free interest rate			3.77	%			3.48	%			3.77	%			3.48	%
Weighted average Distribution yield			5.63	%			6.92	%			5.63	%			6.92	%
Weighted average volatility			21.97	%			15.33	%			21.97	%			15.33	%
Weighted average expected option life		5.0 years				5.0 years				5.0 years				5.0 years

Comprehensive Income

     Comprehensive income, which is defined as net earnings and all other non-owner changes in equity, is displayed in the accompanying Condensed Consolidated Statements of Unitholders’ Equity, Other Common Unitholders’ Interest and Comprehensive Income/(Loss). Other comprehensive income/(loss) reflects unrealized holding gains and losses on the available-for-sale investments and changes in the fair value of effective cash flow hedges.

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

     Our accumulated other comprehensive income/(loss) for the six months ended June 30, 2005 was as follows (in thousands):

		Net
		Unrealized
		Gains on								Accumulated Other
		Marketable				Cash Flow				Comprehensive
		Securities				Hedges				Income/(Loss)
Balance at December 31, 2004		$	1,398			$	(5,823	)		$	(4,425	)
Change in fair value of cash flow hedges			—				2,270				2,270
Fair value of long-term debt hedge			—				(1,859	)			(1,859	)
Mark to market for marketable equity securities			690				—				690
Reclassification adjustments for realized net gains			(2,079	)			—				(2,079	)
Balance at June 30, 2005		$	9			$	(5,412	)		$	(5,403	)

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 Ended
		June 30,								June 30,
		2005				2004				2005				2004
Reconciliation of numerator between basic and diluted net earnings per Common Unit (1):
Net earnings attributable to Common Units — Basic		$	61,376			$	86,612			$	133,520			$	196,127
Distributions on Convertible Preferred Units			—				—				—				2,208
Net earnings attributable to Common Units — Diluted		$	61,376			$	86,612			$	133,520			$	198,335
Reconciliation of denominator between basic and diluted net earnings per Common Unit (1):
Weighted average number of Common Units outstanding — Basic			223,093				219,845				223,719				219,962
Assumed conversion of Convertible Preferred Units into Common Units			—				—				—				2,583
Assumed exercise of options			1,106				946				1,038				936
Weighted average number of Common Units outstanding — Diluted			224,199				220,791				224,757				223,481

New Accounting Pronouncements

     In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”. This Statement is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”, and supercedes APB No. 25, “Accounting for Stock Issued to Employees”. The Statement requires companies to recognize, in the income statement, the grant-date fair value of stock options and other equity based compensation issued to employees. This Statement is effective as of the beginning of the first interim or annual period that commences after January 1, 2006. We do not believe that the adoption of SFAS No. 123R will have a material impact on our financial position, net earnings or cash flows.

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

     In June 2005, the Emerging Issues Task Force issued EITF No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” (EITF No. 04-5) This Issue provides a framework for evaluating whether a general partner or group of general partners or managing members controls a limited partnership or limited liability company and therefore should consolidate the entity. EITF No. 04-5 is effective for general partners or managing members of all new limited partnerships formed and for existing limited partnerships for which the partnership agreements are modified, the guidance in this Issue is effective after June 29, 2005. For general partners or managing members in all other limited partnerships, the guidance in this Issue is effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. Although we have yet to complete our analysis, we do not believe that the adoption of EITF No. 04-5 will have a material impact on our financial position, net earnings or cash flows.

(2) Real Estate

Investments in Real Estate

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

		June 30, 2005								December 31, 2004
		Investment				Units (1)				Investment				Units (1)
Operating Trust Apartment Communities:
Operating communities		$	8,097,273				57,730			$	8,018,658				58,486
Communities under construction			537,345				3,282				499,239				3,237
Development communities In Planning			22,360				585				51,822				1,251
Total Operating Trust apartment communities			8,656,978				61,597				8,569,719				62,974
Ameriton apartment communities (2)			533,189				7,200				581,910				6,791
Other real estate assets(3)			82,903				—				69,409				—
Total real estate		$	9,273,070				68,797			$	9,221,038				69,765

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

Balance at December 31, 2004		$	9,221,038
Acquisition-related expenditures			286,311
Redevelopment expenditures			23,465
Recurring capital expenditures			16,676
Development expenditures, excluding land acquisitions			152,895
Dispositions			(435,284	)
Net apartment community activity			44,063
Change in other real estate assets			7,969
Balance at June 30, 2005		$	9,273,070

     At June 30, 2005 we had unfunded contractual commitments related to real estate investment activities aggregating approximately $563.0 million, of which $540.9 million related to communities under construction.

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

(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, estimated income taxes (for Ameriton properties), debt extinguishment expense and interest expense (actual interest expense for encumbered properties and a pro-rata allocation of interest expense for any unencumbered property up to our weighted average leverage ratio), as well as the net gain or loss on the disposition of properties.

     Consistent with our capital recycling program, we have ten operating apartment communities, representing 3,868 units (unaudited), classified as held for sale under the provisions of SFAS No. 144, at June 30, 2005. Accordingly, we have classified the operating earnings from these ten properties within discontinued operations for the three and six months ended June 30, 2005 and 2004. During the six months ended June 30, 2005, we sold nine Operating Trust and Ameriton operating communities. The operating results of these nine communities and the related gain/loss on sale are also included in discontinued operations for 2005 and 2004. During the twelve months ended December 31, 2004, we sold 30 Operating Trust and Ameriton operating communities. The operating results of these 30 communities and the related gain/loss on the sale are also included in discontinued operations for the three and six months ended June 30, 2004.

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Rental revenues		$	12,322			$	47,506			$	27,261			$	95,786
Rental expenses			(4,046	)			(15,454	)			(9,351	)			(31,256	)
Real estate taxes			(1,264	)			(5,921	)			(2,523	)			(12,034	)
Depreciation on real estate investments			(1,699	)			(7,119	)			(4,896	)			(16,330	)
Interest expense (1)			(3,681	)			(13,057	)			(7,536	)			(26,688	)
Estimated income taxes (Ameriton properties)			(1,453	)			(166	)			(6,120	)			(278	)
Debt extinguishment costs related to dispositions			(331	)			(212	)			(5,389	)			(1,120	)
Gains on disposition of taxable REIT subsidiary real estate investments, net			6,937				1,817				20,703				14,513
Gains on dispositions of REIT real estate investments, net.			13,405				29,169				39,559				78,969
Earnings from discontinued apartment communities		$	20,190			$	36,563			$	51,708			$	101,562

     Assets held for sale as of June 30, 2005 and December 31, 2004, represented gross real estate of $400.8 million and $378.4 million with $17.6 million and $17.8 million related mortgages payable at June 30, 2005 and December 31, 2004, respectively. Additionally, of our investment in real estate at December 31, 2004, we disposed of $435.3 million of real estate and paid off related mortgages of $85.5 million during the six months ended June 30, 2005.

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

(4) Investments in and Advances to Unconsolidated Entities

Real Estate Joint Ventures

     We have investments in entities that we account for using the equity method. At June 30, 2005, the investment balance consisted of $92.5 million in our joint ventures and $32.1 million in Ameriton joint ventures. At December 31, 2004, the investment balance consisted of $74.1 million in our joint ventures and $37.4 million in Ameriton joint ventures.

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

		June 30,				December 31,
		2005				2004
Assets:
Real estate		$	1,118,018			$	1,115,563
Other assets			189,962				52,394
Total assets		$	1,307,980			$	1,167,957
Liabilities and owners’ equity:
Inter-company debt payable to the Operating Trust		$	3,125			$	4,124
Mortgages payable(1)			903,774				777,924
Other liabilities			30,971				24,254
Total liabilities			937,870				806,302
Owners’ equity			370,110				361,655
Total liabilities and owners’ equity		$	1,307,980			$	1,167,957

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Operating Trust Joint Ventures
Revenues		$	32,863			$	35,424			$	66,152			$	70,836
Net Earnings(1)			11,244				916				26,732				10,098
Ameriton Joint Ventures
Revenues		$	1,174			$	1,697			$	2,263			$	3,320
Net Earnings(2)			4,816				7,417				11,934				7,160
Total
Revenues		$	34,037			$	37,121			$	68,415			$	74,156
Net Earnings		$	16,060			$	8,333			$	38,666			$	17,258

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

(5) Mezzanine Notes Receivable

     During the six months ended June 30, 2005, we entered into six mezzanine note agreements as a lender to third parties to fund certain real estate projects. As of June 30, 2005 and December 31, 2004, we had a total of $60.9 million and $8.7 million in mezzanine notes receivable, respectively and a commitment to fund an additional $23.8 million under existing agreements. Our rights to the underlying collateral in the event of default are subordinate to the primary mortgage lender. During the six months ended June 30, 2005, we recognized a total of $2.6 million in interest income associated with mezzanine notes receivable. There was no comparable interest income for the same period in 2004.

(6) Borrowings

Unsecured Credit Facilities

     The following table summarizes our revolving credit facility borrowings under our line of credit (in thousands, except for percentages):

		As of and for the				As of and for the
		Six Months				Year Ended
		Ended				December 31,
		June 30, 2005				2004
Total unsecured revolving credit facility		$	600,000			$	600,000
Borrowings outstanding at end of period			—				19,000
Outstanding letters of credit under this facility			5,329				13,983
Weighted average daily borrowings			63,486				81,317
Maximum borrowings outstanding during the period.			141,000				375,000
Weighted average daily nominal interest rate			3.06	%			1.58	%
Weighted average daily effective interest rate			3.14	%			2.62	%

     We also have a short-term unsecured borrowing agreement with JPMorgan Chase Bank, which provides for maximum borrowings of $100 million. The borrowings under the agreement bear interest at an overnight rate agreed to at the time of borrowing and ranged from 2.75% to 3.60% during 2005. There were no borrowings outstanding under the agreement at June 30, 2005 and December 31, 2004.

Long-Term Unsecured Debt

     A summary of our Long-Term Unsecured Debt outstanding at June 30, 2005 and December 31, 2004 follows (dollar amounts in thousands):

						Effective								Balance at				Average
		Coupon				Interest				Balance at				December 31,				Remaining
Type of Debt		Rate (1)				Rate (2)				June 30, 2005				2004				Life (Years)
Long-term unsecured senior notes			6.08	%			6.25	%		$	2,300,707			$	2,019,607				5.5
Unsecured tax-exempt bonds			2.88	%			3.14	%			78,502				79,525				18.1
Total/average			5.97	%			6.15	%		$	2,379,209			$	2,099,132				5.9

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

     During May 2005, the Operating Trust issued $300 million in long-term unsecured ten-year senior notes with a coupon rate of 5.25% and an effective interest rate of 5.4% from its shelf registration statement.

Mortgages payable

     Our mortgages payable generally feature either monthly interest and principal payments or monthly interest-only payments with balloon payments due at maturity. A summary of mortgages payable follows (dollar amounts in thousands):

		Outstanding Balance at (1)
										Effective
										Interest
		June 30, 2005				December 31, 2004				Rate (2)
Secured floating rate debt:
Tax-exempt debt		$	495,381			$	508,923				2.7	%
Construction loans			—				40,868				N/A
Conventional mortgages			21,705				21,705				3.5	%
Total Floating			517,086				571,496				2.7	%
Secured fixed rate debt:
Conventional mortgages			1,223,510				1,439,558				6.3	%
Other secured debt			19,925				20,451				5.0	%
Total Fixed			1,243,435				1,460,009				6.3	%
Total debt outstanding at end of period		$	1,760,521			$	2,031,505				5.2	%

     The change in mortgages payable during the six months ended June 30, 2005 consisted of the following (in thousands):

Balance at December 31, 2004		$	2,031,505
Regularly scheduled principal amortization			(5,321	)
Prepayments, final maturities and other(1)			(266,318	)
Proceeds from mortgage notes payable			655
Balance at June 30, 2005		$	1,760,521

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, 2005 and December 31, 2004 is $3.4 billion and $3.8 billion, respectively. Our debt instruments generally contain covenants common to the type of facility or borrowing, including financial covenants establishing minimum debt service coverage ratios and maximum leverage ratios. We were in compliance with all financial covenants pertaining to our debt instruments during the three and six months ended June 30, 2005.

     The total interest paid on all outstanding debt was $35.5 million and $40.5 million for three months ended June 30, 2005 and 2004 and $120.1 million and $114.3 million for the six months ended June 30, 2005 and 2004, respectively. We capitalize interest incurred during the construction period as part of the cost of apartment communities under development. Interest capitalized was $9.3 million and $5.4 million during the three months ended June 30, 2005 and 2004, respectively and $17.5 million and $11.3 million during the six months ended June 30, 2005 and 2004, respectively.

(7) Distributions to Unitholders

     The following table summarizes the quarterly cash distributions paid per unit on Common and Preferred Units during the three months ended June 30, 2005 and the annualized distribution we expect to pay for 2005:

		Quarterly				Annualized
		Cash Distributions				Cash Distributions
		Per Unit				Per Unit
Common Units and A-1 Units		$	0.4325			$	1.73
Series E Preferred Units (1)			—				0.1977
Series G Preferred Units (2)			—				0.3714
Series I Perpetual Preferred Units (3)			1,915				7,660

(8) Segment Data

     We have determined that each of our garden communities and each of our high-rise properties have similar economic characteristics and also meet the other GAAP criteria, which permit the garden communities and high-rise properties to be aggregated into two reportable segments. Additionally, we have defined the activity from Ameriton as an individual operating segment as its primary focus is the opportunistic acquisition, development and eventual disposition of real estate with a short-term investment horizon. NOI is defined as rental revenues less rental expenses and real estate taxes. We rely on NOI for purposes of making decisions about resource allocations and assessing segment performance. We also believe NOI is a valuable means of comparing year-to-year property performance.

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

     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 Ended
		June 30,								June 30,
		2005				2004				2005				2004
Reportable apartment communities segment revenues:
Same-Store:
Garden communities		$	115,394			$	112,118			$	227,969			$	222,330
High-rise properties			76,711				74,577				144,673				140,275
Non Same-Store:
Garden communities			17,008				6,233				32,532				11,040
High-rise properties			10,236				1,380				28,069				8,463
Ameriton(1)			6,169				3,735				11,622				5,882
Other non-reportable operating segment revenues			857				868				1,426				1,536
Total segment and consolidated rental revenues		$	226,375			$	198,911			$	446,291			$	389,526

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Reportable apartment communities segment NOI:
Same-Store:
Garden communities		$	76,828			$	74,868			$	150,534			$	147,699
High-rise properties			49,319				48,434				90,477				90,336
Non Same-Store:
Garden communities			11,126				3,429				20,776				6,402
High-rise properties			5,813				813				17,072				5,531
Ameriton(1)			3,161				1,787				5,648				2,727
Other non-reportable operating segment NOI			784				798				1,243				1,320
Total segment NOI			147,031				130,129				285,750				254,015
Reconciling items:
Other income			6,848				5,209				11,975				8,906
Depreciation on real estate investments			(54,832	)			(47,419	)			(108,609	)			(91,979	)
Interest expense			(46,330	)			(37,724	)			(93,826	)			(74,265	)
General and administrative expenses			(13,755	)			(12,092	)			(28,044	)			(24,525	)
Other expenses			(7,390	)			(900	)			(28,472	)			(2,124	)
Consolidated earnings from operations		$	31,572			$	37,203			$	38,774			$	70,028

(1)

While rental revenue and NOI are the primary measures we use to evaluate the performance of our assets, management also utilizes gains from the disposition of real estate when evaluating the performance of Ameriton as its primary focus is the opportunistic acquisition, development and eventual disposition of real estate with a short term investment horizon. During the six months ended June 30, 2005 and 2004, pre-tax gains from the disposition of Ameriton real estate were $20.7 million and $5.4 million, respectively. Additionally, Ameriton had gains of $12.9 million and $7.0 million during the six months ended June 30, 2005 and 2004, respectively from the sale of unconsolidated joint venture assets. These gains are classified within income from unconsolidated entities. Ameriton assets are excluded from our Same-Store population as they are acquired or developed to achieve short-term opportunistic gains, and therefore, the average holding period is typically much shorter than the holding period of assets operated by the REIT.

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

		June 30,				December 31,
		2005				2004
Reportable operating communities segment assets:
Same-Store:
Garden communities		$	3,123,171			$	3,186,395
High-rise properties			2,516,184				2,534,774
Non Same-Store:
Garden communities			1,150,619				1,053,259
High-rise properties			833,547				869,379
Ameriton			403,038				483,712
Other non-reportable operating segment assets			76,268				69,942
Total segment assets			8,102,827				8,197,461
Real estate held for sale, net			328,704				260,035
Total segment assets			8,431,531				8,457,496
Reconciling items:
Investment in and advances to unconsolidated entities			124,598				111,481
Cash and cash equivalents			12,765				203,255
Restricted cash in tax-deferred exchange escrow			124,041				120,095
Other assets			254,391				173,717
Consolidated total assets		$	8,947,326			$	9,066,044

     Total capital expenditures for garden communities included in continuing operations were $15.9 million and $12.4 million for the six months ended June 30, 2005 and 2004, respectively. Total capital expenditures for high-rise properties included in continuing operations were $24.3 million and $12.0 million for the six months ended June 30, 2005 and 2004, respectively. Total capital expenditures for Ameriton properties included in continuing operations were $0.5 million and $1.0 million for the six months ended June 30, 2005 and 2004, respectively.

(9) Litigation and Contingencies

     During 2004, we incurred estimated losses associated with multiple hurricanes in Florida. As a result of this damage, we recorded a loss contingency for both wholly owned and unconsolidated apartment communities. During the first quarter of 2005, we increased the reserve for our unconsolidated apartment communities by $0.7 million. Based on currently available information from our insurance adjustors during the second quarter of 2005, we accrued an estimated insurance recovery of $2.5 million, $1.3 million of which related to our unconsolidated apartment communities.

     During the second quarter of 2005, we entered into a full and final settlement in the United States District Court for the District of Maryland with three national disability organizations and agreed to make capital improvements in a number of our communities in order to make them fully compliant with the Fair Housing Act (FHA) and Americans with Disabilities Act (ADA). The litigation, settled by this agreement, alleged lack of full compliance with certain design and construction requirements under the two federal statutes at 71 of the company’s communities. As part of the settlement, the three disability organizations all recognized that we had no intention to build any of our communities in a manner inconsistent with the FHA or ADA.

     The amount of the capital expenditures required to remediate the communities named in the settlement is not quantifiable at the present time. These expenditures will generally be capitalized as they are incurred. The settlement agreement approved by the court allows us to remediate the designated communities over the next three years, and also provides that we are not restricted from selling any of our communities during the remediation period. We agreed to pay damages totaling $1.4 million, which include legal fees and costs incurred by the plaintiffs. In addition to the settlement, we incurred $1.0 million for legal and consulting fees during the first six months of 2005 related to this lawsuit and have accrued an estimate of $1.6 million for legal, consulting and other expenses, most of which are expected to be incurred during the remainder of 2005.

     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.

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

(10) Derivatives and Hedging Activities

     We are exposed to the impact of interest rate changes and will occasionally utilize interest rate swaps and interest rate caps as hedges with the objective of lowering our overall borrowing costs. These derivatives are designated as either cash flow or fair value hedges. We do not use these derivatives for trading or other speculative purposes. Further, as a matter of policy, we only enter into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, we have not, nor do we expect to sustain a material loss from the use of these hedging instruments.

     We formally assess, both at inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item. We measure hedge effectiveness by comparing the changes in the fair value or cash flows of the derivative instrument with the changes in the fair value or cash flows of the hedged item. We assess effectiveness of purchased interest rate caps based on overall changes in the fair value of the caps. If a derivative ceases to be a highly effective hedge, we discontinue hedge accounting prospectively.

     To determine the fair values of derivative and other financial instruments, we use a variety of methods and assumptions that are based on market value conditions and risks existing at each balance sheet date. These methods and assumptions include standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost and termination cost. All methods of assessing fair value result in a general approximation of value, and therefore, are not necessarily indicative of the actual amounts that we could realize upon disposition.

     During June 2005, we entered into two forward-starting swap transactions to mitigate the risk of changes in the interest-related cash outflows on a forecasted issuance of long-term unsecured debt. At inception, these swap transactions had an aggregate notional amount of $143.0 million and a fair value of zero. The long-term unsecured debt these swap transactions related to was issued in July 2005 (see Note 11). At the time of the debt issuance, the fair value of the cash flow hedge was a benefit of approximately $587,000. The benefit associated with these cash flow hedges will be included in comprehensive income and amortized over the term of the underlying debt as a reduction to interest expense.

     During the six months ended June 30, 2005 and 2004 we recorded an increase/(decrease) to interest expense of $(36,000) and $72,000, respectively, for hedge ineffectiveness caused by a difference between the interest rate index on a portion of our outstanding variable rate debt and the underlying index of the associated interest rate swap. We pursue hedging strategies that we expect will result in the lowest overall borrowing costs under the accounting standards.

(11) Subsequent Events

     During July 2005, we issued $200 million in long-term unsecured ten-year senior notes with a coupon rate of 5.25% and an effective interest rate of 5.26% from its shelf registration statement. The notes were issued under a re-opening of the long-term unsecured ten-year senior notes issued in May 2005.

     During July 2005, we redeemed $200 million of long-term unsecured ten-year senior notes with a coupon rate of 8.2% and an effective interest rate of 8.4%.

     On July 29, 2005, we closed the first round of apartment community acquisitions from various partnerships of Oakwood Worldwide, comprising 25 communities, 8,228 units, and a total expected investment of $1.1 billion. We funded this initial tranche of the acquisition with a combination of operating partnership units, assumed mortgage debt and cash. Operating partnership units represented $319 million, or 8.9 million units, of the total. In addition, we assumed $372 million of mortgage debt, which has an all-in rate of approximately 5.1%. The cash component of the transaction was $438 million, with $195 million used to pay off of existing Oakwood mortgage debt. In total, we expect to acquire 36 communities from Oakwood; with the remaining communities, representing 4,548 units and a total expected investment of $412.0 million, anticipated to close later this year or during 2006.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Trustees 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, 2005, and the related condensed consolidated statements of earnings for the three and six-month periods ended June 30, 2005 and 2004, the condensed consolidated statement of unitholders’ equity, other common unitholders’ interest and comprehensive income/(loss) for the six-month period ended June 30, 2005 and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2005 and 2004. These condensed consolidated financial statements are the responsibility of Archstone-Smith Operating Trust’s management.

     We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

     Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

     We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Archstone-Smith Operating Trust as of December 31, 2004, and the related consolidated statements of earnings, unitholders’ equity, other common unitholders’ interest and comprehensive income/(loss), and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG LLP

Denver, Colorado
August 5, 2005

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 2004 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 the Archstone-Smith Operating Trust’s 2004 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. The company is structured as an UPREIT, with all property ownership and business operations conducted through the Operating Trust and its subsidiaries and affiliates. Archstone-Smith is our sole trustee and owns 89.2% of our common units as of June 30, 2005

Results of Operations

Executive Summary

     We produced diluted net earnings per unit of $0.27 for the quarter ending June 30, 2005, compared with $0.39 per unit for the same period in 2004. Our earnings this quarter were lower than one year ago principally due to lower profits from the sale of assets.

     Most markets continue to improve, with year over year Same-Store revenue growth accelerating in each of the last five quarters. Our Same-Store revenues increased 2.9% in the second quarter of 2005. The New York City metropolitan area, Southeast Florida, Southern California and the Washington, D.C. metropolitan area produced second quarter same-store revenue growth of 6.9%, 4.5%, 3.0% and 2.9%, respectively. Additionally, our Same-Store net operating income (rental revenues less rental expenses and real estate taxes) was up 2.2% in the second quarter.

     Year-to-date through July 26, 2005, the Operating Trust acquired $250 million in apartment communities, including Archstone Fox Plaza, a 444-unit high-rise in downtown San Francisco. In addition, we began our first development in Manhattan, a joint venture: The Mosaic, a 627-unit community in the very desirable Clinton neighborhood. As of July 26, 2005, we have 5,393 units, representing a total expected investment of $1.6 billion, under construction, including Ameriton and joint ventures, in markets that include midtown Manhattan, downtown Boston, downtown Washington, D.C. and coastal Southern California. As of July 26, 2005, our current pipeline totals $2.5 billion, including Ameriton and joint venture communities under construction and in planning.

     Earlier this year, we announced that we would acquire a $1.6 billion portfolio of apartment communities from various partnerships of Oakwood Worldwide. We closed on 25 communities in the portfolio, representing a total expected investment of $1.1 billion, on July 29, 2005, with the remaining communities expected to close later this year or in 2006. This acquisition is consistent with our objective to improve the quality of our portfolio with every investment we make. We funded this initial tranche of the acquisition with a combination of operating partnership units, assumed mortgage debt and cash. Operating partnership units represented $319 million, or 8.9 million units, of the total. In addition, we assumed $372 million of mortgage debt, which has an all-in rate of approximately 5.1%. The cash component of the transaction was $438 million, with $195 million used to pay off of existing Oakwood mortgage debt.

     We completed a $300 million unsecured debt offering in May, which was recently re-opened during July and increased by $200 million to a total of $500 million. The notes mature in May 2015, and have an all-in cost of approximately 5.3%. Proceeds from the offerings provide a portion of the financial capacity to close the Oakwood acquisition.

     Our second quarter 2005 results include the following items: (i) operating community sales gains from Ameriton, the company’s wholly owned subsidiary, which contributed $7.7 million, or $0.034 per unit, to second quarter net earnings attributable to common units; (ii) a positive adjustment of $2.4 million, or $0.011 per unit, to the gain from the sale of our interest in Rent.com to eBay, which closed in February 2005; (iii) a $1.8 million realized gain, or $0.008 per unit, from the sale of previously acquired stock in another real estate company; and (iv) accrued insurance recoveries of $2.5 million, or $0.011 per unit, associated with hurricane damage in 2004. In addition, we incurred total expenses of $4.5 million, or $0.020 per unit, related to the settlement of the Fair Housing Act (FHA) and American with Disabilities Act (ADA) lawsuit and other litigation costs. We believe that a substantial portion of these costs will be recovered from our insurance carriers, although the amount is not quantifiable at this time.

     We will pay a distribution of $0.4325 per common unit payable on August 31, 2005 to unitholders of record as of August 17, 2005. On an annualized basis, this represents a distribution of $1.73 per common unit.

     In conjunction with our capital recycling strategy, rental revenues and rental expenses, including real estate taxes, will fluctuate based upon the timing and volume of dispositions, acquisitions and development lease-ups. Accordingly, our results are not only driven by the performance of our operating portfolio, but also by gains/losses from the disposition of real estate, the corresponding loss of ongoing income from assets sold, and increased income generated from acquisitions and new developments. These factors all contribute to the overall financial performance of the company.

Quarter-to-Date Earnings Analysis

     Basic net earnings attributable to Common Units decreased $25.3 million, or 29.1%, for the three months ended June 30, 2005 as compared to the same period in 2004. This decrease is primarily attributable to:

	•		A $10.7 million decrease in gains from the sale of operating communities, which includes gains from the sale of assets by Ameriton for the three months ended June 30, 2005 as compared to the same period in 2004;
	•		A $4.5 million charge related to the settlement of the Fair Housing Act (FHA) and American with Disabilities Act (ADA) lawsuit and other litigation costs;
	•		A $3.3 million gain from the disposition of our property management business during the three months ended June 30, 2004;
	•		The recognition of $7.4 million related to the sale of Consolidated Engineering Services (“CES”), including contingent proceeds associated with the expiration of certain indemnifications and collection and recognition of the settlement of an ongoing CES lawsuit during the three months ended June 30, 2004;
	•		A $2.3 million decrease in gains related to the sale of marketable equity securities; and,
	•		The loss of rental revenues and a corresponding decrease in operating expenses due to $435.3 million and $1.5 billion in total REIT and Ameriton dispositions in the first six months of 2005 and the twelve months ended December 31, 2004, respectively.

These decreases were partially offset by:

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The accrual of $2.5 million for anticipated insurance recoveries during the three months ended June 30, 2005 related to 2004 hurricane damage in South Florida;