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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)


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

For the fiscal year ended December 31, 2006


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

(Exact name of Registrant as Specified in Its Charter)


MARYLAND (State or other jurisdiction of incorporation or organization)		90-0042860 (IRS employer identification no.)

9200 E. Panorama Circle, Suite 400
Englewood, Colorado 80112
(Address of principal executive office)
(303) 708-5959
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A-1 Common Units
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the securities Act. Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large Accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Based on the closing price of the Archstone-Smith’s Common Shares on June 30, 2006, which are issuable upon the redemption of the A-1 Common Units, the aggregate market value of the Class A-1 Common Units held by non-affiliates of the registrant was approximately $1,699,261,000.

At February 20, 2007 there were approximately 27,281,807 Class A-1 Common Units outstanding held by non-affiliates.

DOCUMENTS INCORPORATED BY REFERENCE

None

GLOSSARY

The following abbreviations, acronyms or defined terms used in this document are defined below:


Abbreviation, Acronym or Defined Term		Definition/Description
A-1 Common Unitholders		Holders of A-1 Common Units.

A-1 Common Units		Operating Trust class A-1 common units, par value $0.01 per unit, together with any class B-1 Common Units, which are redeemable for cash or, at the option of Archstone-Smith, Common Shares. A-1 Common Units are the common units of the Operating Trust not held by Archstone-Smith and represent a minority interest of approximately 11.8% in the Operating Trust at December 31, 2006.

A-2 Common Units		Operating Trust class A-2 common units of beneficial interest, par value $0.01 per unit. Archstone-Smith is the sole holder of A-2 Common Units, which represent approximately an 88.2% interest in the Operating Trust at December 31, 2006.

ADA		Americans with Disabilities Act, as amended.

Ameriton		AMERITON Properties Incorporated, which is a taxable REIT subsidiary that engages in the opportunistic acquisition, development and eventual disposition of real estate with a shorter-term investment horizon.

Annual Report		This Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2006.

Archstone-Smith.		Archstone-Smith Trust sole holder of the A-2 Common Units and sole trustee.

B Common Units		Operating Trust class B common units of beneficial interest, par value $0.01 per unit, which are issued to persons who contribute property to the Operating Trust. B Common Units convert automatically to A-1 Common Units immediately following the distribution of income for the quarter in which the property was contributed.

Board		Collectively, refers to Archstone-Smith’s Board of Trustees or to Archstone-Smith, our sole trustee, unless the context otherwise requires..

CES		Consolidated Engineering Services, Inc. was a taxable REIT subsidiary of Archstone-Smith in the business of delivering mission critical facilities management services for corporate, government and institutional customers. CES was sold to a third party in December 2002 for $178 million.

Common Share(s)		Archstone-Smith common shares of beneficial interest, par value $0.01 per share.

Common Units		The A-1 Common Units and the A-2 Common Units.

Common Unitholders		Holders of Common Units

Convertible Debt		$575 million exchangeable senior unsecured notes that are exchangeable into Common Shares.

Convertible Preferred Units		Collectively, the Series A, H, J, K and L Preferred Units.

Declaration of Trust.		The Operating Trust’s Amended and Restated Declaration of Trust, as filed with the State of Maryland on May 31, 2006, as amended and supplemented.

DEU		Dividend Equivalent Unit; an amount credited to the account of holders of certain options and RSU’s under Archstone-Smith’s long-term incentive plan.

Distributions		Refers to dividends paid by Archstone on either Archstone common or preferred shares of beneficial interest paid prior to the UPREIT reorganization and Smith Merger. Subsequent to the Smith Merger, refers to distributions paid on Operating Trust Common Units of Preferred Units.

DeWAG		DeWAG Deutsche WohnAnlage GmbH.

DRIP		Dividend Reinvestment and Share Purchase Plan.

FASB		Financial Accounting Standards Board.

FHA		Fair Housing Act, as amended.

GAAP		Generally accepted accounting principles in the United States

High-Rise		Those communities with five or more above-ground floors.

Independent Trustees		Members of the Board meeting the NYSE definition of


Abbreviation, Acronym or Defined Term		Definition/Description
		“Independent Director.”

In Planning		Represents parcels of land owned or Under Control, which are in the development planning process, upon which construction of apartments is expected to commence subsequent to the completion of the entitlement and building permit processes.

International		Refers to our operational and investment activities in Europe. Our investments to date have been limited to Germany.

IRR		On a sold community, IRR refers to the unleveraged internal rate of return calculated by Archstone-Smith, considering the initial purchase price and all capital invested in the community, the timing and amounts of net operating income during the period owned and the net sales proceeds from the sale. The IRR calculations include property management overhead and internal disposition costs but not depreciation or allocations for corporate general and administrative expenses, interest expenses, income tax expenses (if any) or other indirect operating expenses. Therefore, an IRR calculation is not a substitute for net income as a measure of our performance. Management believes that IRRs are an important indicator of the value created during the ownership period. Historical IRRs are not necessarily indicative of IRRs that will be produced in the future. Our methodology for calculating IRRs may not be consistent with the methodology used by other companies.

Lease-Up		The phase during which newly constructed apartment units are being leased for the first time, but prior to the community becoming Stabilized.

LIBOR		London Interbank Offered Rate.

Long-Term Unsecured Debt		Collectively, the Operating Trust’s long-term unsecured senior notes payable and unsecured tax-exempt bonds.

NAREIT		National Association of Real Estate Investment Trusts.

Net Operating Income or NOI		Represents 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 period-to-period property performance. NOI is a non-GAAP financial measure. See a reconciliation of NOI to Earnings from Operations in this Annual Report in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – “Property-level operating results.”

NYSE		New York Stock Exchange.

Oakwood or Oakwood Worldwide		The terms used in reference to a group of partnerships coordinated by a common sponsor who contributed a group of apartment communities to the Operating Trust in 2005.

Oakwood Master Leases		Refers to thirteen communities acquired from Oakwood and one community we previously owned and operated that were leased in their entirety to an affiliate of Oakwood Worldwide under master lease agreements with seven year terms, subject to Oakwood’s right to terminate individual leases under certain circumstances after the one year anniversary of the acquisition.

Operating Trust		Archstone-Smith Operating Trust

Preferred Units or Perpetual Preferred Units		The Series I Preferred Units.

REIT		Real estate investment trust. This term is also used to refer to consolidated subsidiaries of Archstone-Smith, but excluding taxable and International subsidiaries unless the context indicates otherwise.

Restricted Share Unit or RSU		A unit representing an interest in one Common Share, subject to certain vesting provisions, granted to an associate through our long-term incentive plan.

Same-Store		Term used to refer to a group of operating communities in the United States that had attained Stabilization and were fully operating during the entire time two periods are being compared. Excludes communities which were not eligible for inclusion due to (i) recent acquisition or development, (ii) major redevelopment, or (iii) a significant number of non-operational units (fires, floods, etc.). Also excludes Ameriton properties, due to their short-term


Abbreviation, Acronym or Defined Term		Definition/Description
		holding periods, and International properties.

Series A Preferred Units		Operating Trust Series A Cumulative Preferred Units of Beneficial Interest, par value $0.01 per unit, which were redeemed in full in November 2003.

Series C Preferred Units		Operating Trust Series C Cumulative Perpetual Preferred Units of Beneficial Interest, par value $0.01 per unit, which were redeemed in full in August 2002.

Series D Preferred Units		Operating Trust D Cumulative Perpetual Preferred Units of Beneficial Interest, par value $0.01 per unit, which were redeemed in full in August 2004.

Series E Perpetual Preferred Units		8.375% Cumulative Perpetual Preferred Units, par value $0.01, which were redeemed in full in February 2005.

Series F Perpetual Preferred Units		8.125% Cumulative Perpetual Preferred Units, par value $0.01, which were redeemed in full in September 2004.

Series G Perpetual Preferred Units		8.625% Cumulative Perpetual Preferred Units, par value $0.01, which were redeemed in full in March 2005.

Series H Preferred Units		Operating Trust Series H Cumulative Convertible Perpetual Preferred Units of Beneficial Interest, par value $0.01 per unit, which were converted into Common Units in full in May 2003.

Series I Preferred Units		Operating Trust Series I Cumulative Perpetual Preferred Units of Beneficial Interest, par value $100,000 per unit redeemable in February 2028.

Series J Preferred Units		Operating Trust Series J Cumulative Convertible Perpetual Preferred Units of Beneficial Interest, par value $0.01 per unit, which were converted into Common Units in full in July 2002.

Series K Preferred Units		Operating Trust Series K Cumulative Convertible Perpetual Preferred Units of Beneficial Interest, par value $0.01 per unit, which were converted into Common Units in September 2004.

Series L Preferred Units		Operating Trust Series L Cumulative Convertible Perpetual Preferred Units of Beneficial Interest, par value $0.01 per unit, which were converted into Common Units in December 2004.

Series M Preferred Unit		Operating Trust Series M Preferred Unit of Beneficial Interest, par value $0.01 per unit.

Series N-1 Preferred Units		Operating Trust Series N-1 Convertible Redeemable Preferred Units of Beneficial Interest, par value $0.01 per unit.

Series N-2 Preferred Units		Operating Trust Series N-2 Convertible Redeemable Preferred Units of Beneficial Interest, par value $0.01 per unit.

SMC		Smith Management Construction, Inc. was a taxable REIT subsidiary of Archstone-Smith in the business of providing construction management and building maintenance services. SMC was sold to members of its senior management in February 2003.

Smith Merger		The series of transactions in October 2001 whereby Archstone-Smith merged with Smith Residential, and Archstone Communities Trust (now, the Operating Trust) merged with Smith Partnership.

Smith Partnership		Charles E. Smith Residential Realty L.P.

Smith Residential		Charles E. Smith Residential Realty, Inc.

SFAS		Statement of Financial Accounting Standards.

Stabilized or Stabilization		The classification assigned to an apartment community that has achieved 93% occupancy, and for which development, new management and new marketing programs (or development and marketing in the case of a newly developed community) have been completed.

Total Expected Investment		For development communities, represents the total expected investment at completion; for operating communities, represents the total expected investment plus planned capital expenditures.

Trustees		Members of the Board of Trustees of Archstone-Smith.

Under Control		A term used to identify land parcels which the Operating Trust does not own, yet has an exclusive right through contingent contract or letter of intent during a contractually agreed upon time period to acquire the land, subject to satisfaction of contingencies during the due diligence and entitlement processes.

Unitholders		The holders of the A-1 Common Units and the A-2 Common Units.

UPREIT		Umbrella Partnership Real Estate Investment Trust.

Forward-Looking Statements

Certain statements in this Annual Report 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 develop, acquire or dispose of apartment communities. Capital and credit market conditions, which affect our cost of capital, also influence operating results. See “Risk Factors” in Item 1 of this Annual Report for a complete discussion of the various risk factors that could affect our future performance.

PART I

Item 1.

Business

Archstone-Smith, an S&P 500 company, is a leader in apartment investment and operations. The company owns and operates a portfolio through the Operating Trust of High-Rise and garden apartment communities concentrated in many of the most desirable neighborhoods in the Washington, D.C. metropolitan area, Southern California, the New York City metropolitan area, the San Francisco Bay Area, Boston and Seattle. The company strives to continually upgrade the quality of its portfolio through the selective sale of assets, using proceeds to fund investments with higher anticipated growth prospects. Through our two customer-facing brands, Archstone and Charles E. Smith, we strive to provide great apartments and great service, all backed by our unconditional Seal of Service™.

As of December 31, 2006, we owned or had an ownership position in 348 communities, representing 88,011 units, including units under construction. At year-end, our operating portfolio was concentrated in protected locations in the following core markets, based on NOI for the three months ended December 31, 2006, excluding amounts owned by Ameriton, International investments and joint ventures:


Washington, D.C. metropolitan area	34.6	%
Southern California	25.8
New York City metropolitan area	12.5
San Francisco Bay Area, California	11.5
Boston, Massachusetts	5.0
Seattle, Washington	4.2
Southeast Florida	2.2
Chicago, Illinois	2.0

Total	97.8	%

The Company

We are engaged primarily in the acquisition, development, redevelopment, operation and long-term ownership of apartment communities in the United States. We are structured as an UPREIT, with all property ownership and business operations of Archstone-Smith conducted through the Operating Trust. Archstone-Smith is our sole trustee and owned 88.2% of the Operating Trust at December 31, 2006. Archstone-Smith Common Shares trade on the New York Stock Exchange (NYSE: ASN). Our principal focus is to maximize Unitholder value by:

•

Acquiring, developing, redeveloping and operating apartments in our core markets, which are characterized by: protected locations with limited land for new housing construction, expensive single-family home prices, and a strong, diversified economic base with significant employment growth potential;

	•		Generating long-term sustainable growth in operating cash flow;

	•		Increasing our Common Unit Distribution, as we have done for the last 16 consecutive years;

	•		Recruiting, training and retaining people who we believe are the best and brightest in the apartment business;

	•		Building the dominant operating platform in the apartment industry, to produce an operating franchise that we believe is more efficient, more profitable and difficult to replicate. We invest in technology to improve our operations and customer service delivery, strengthen our brand position and solidify our reputation for operational leadership; and

	•		Managing our invested capital through the selective sale of apartment communities with slower growth prospects and redeploying the proceeds to fund investments with higher anticipated growth prospects and value creation, in many of the most desirable neighborhoods in the our core markets.

2006 Accomplishments

	•		We produced Same-Store revenue growth of 6.5% and NOI growth of 7.5% for the full year of 2006.

	•		We reported Same-Store NOI outperformed our peer average by 1,002 basis points for the period from January 1, 2001 through December 31, 2006. ⁽¹⁾

	•		We dramatically increased our presence in New York City through the acquisition of five high-rise apartment communities, totaling $845.1 million and 1,382 units, and are now the largest public owner of apartments in Manhattan. At year-end 2006, our committed Total Expected Investment in the New York City metropolitan area, including joint venture developments, totaled $2.0 billion.

	•		We made significant incremental investments in the San Francisco Bay Area, which now represents almost 12% of our portfolio, acquiring five communities, totaling $655.9 million and 1,978 units.

	•		We achieved our 12-year-long goal of repositioning of our portfolio from undesirable, commodity markets, into many of the most desirable neighborhoods in our core markets. As of December 31, 2006, our portfolio was 97.8% in our core markets.

	•		In May 2006, we completed our second acquisition in Europe with the purchase of a 657-unit portfolio concentrated in Berlin, Germany, for $50.5 million. In July 2006, we completed the acquisition of DeWAG, a German company that specializes in the acquisition, long-term ownership and re-sale or “privatization” of attractive residential properties in the major metropolitan areas of Southern and Western Germany. At acquisition, the real estate portfolio consisted of approximately 6,400 units valued at $646.3 million.

	•		In July 2006, we completed a successful $575 million convertible debt offering. This offering was used to repay outstanding balances under our revolving credit facility and certain other indebtedness, to make additional investments and for general corporate purposes.

	•		On July 12, 2006, Fitch Ratings upgraded our credit rating to A- from BBB+.

	•		We increased our 2007 annualized Common Unit distribution level 4.0% to $1.81, or $0.4525 per quarter. This marks our 16^th consecutive annual Common Unit distribution increase and a total increase of 183% since 1991. Our first quarter 2007 Common Unit distribution was paid in February 2007, representing our 126^th consecutive quarterly payment.

	•		Forbes magazine ranked Archstone-Smith at 954 on the Forbes 2000 List for 2006, the magazine’s comprehensive ranking of the world’s largest corporations.

	•		Archstone-Smith was named Property Management Company of the Year by the National Association of Home Builders.


(1)		NOI performance is defined as cumulative same-store NOI growth for the period presented, relative to the average Same-Store NOI growth for our peer companies, which are Avalon Bay Communities; BRE Properties, Inc.; Camden Property Trust; Equity Residential; Essex Property Trust, Inc.; Post Properties, Inc.; and United Dominion Realty. Each company’s cumulative same-store NOI growth is


		calculated from 2001 through 2006. Results for 2001 through 2006 are per Green Street Advisors Apartment REITS: 4Q01 Review, 4Q03 Review, February ’06 Update and February ‘07 Update, except for Archstone-Smith figures, which are actual reported results.

Investment Strategy

Capital recycling program

We believe that one of our most important objectives is to improve the quality of our portfolio with every transaction we complete. In 2006, we completed the disposition of $1.5 billion of non-core assets, excluding Ameriton and International dispositions, representing 11,534 units, generating net GAAP gains of $546.3 million and an average unleveraged IRR of 20.1%. In addition, during 2006 we acquired $1.7 billion of assets, excluding Ameriton and International acquisitions, representing 4,209 units, and started development of $349.5 million of assets, representing 1,069 units, in markets that include, Southern California and the San Francisco Bay Area.

Focus on core markets

We focus our investment activities in our core markets, which are characterized by: (i) protected locations with high barriers to entry; (ii) expensive single-family home prices; and (iii) a strong, diversified economic base with significant employment growth potential.

Barriers to entry exist in areas where there is a very limited amount of land zoned and available for housing development, and where local municipalities are reluctant to zone additional land for new housing. We believe that the difficulty of developing new apartments in protected locations and the high cost of single family housing limits competition for our product. Limits on competition, together with the diverse economic base typical of our core markets, maximize our ability to keep our occupancy relatively constant while increasing rents and producing sustainable long-term cash flow growth.

Our investment professionals generally live in our core markets, allowing them to research and evaluate potential investments at the “street corner level of detail.” This locally based investment acumen guides our decisions in making investments, allowing us to continually upgrade the quality of our portfolio. As a result, our portfolio is concentrated in many of the most desirable neighborhoods in the Washington, D.C. metropolitan area, Southern California, the New York City metropolitan area, the San Francisco Bay Area, Boston and Seattle.

In late 2005 we indicated that the Operating Trust would attempt to dispose of virtually all of our remaining non-core assets in 2006 and we have achieved this goal.

Developments

We place considerable emphasis on the value created through our development of new apartment properties. At December 31, 2006, we had $3.8 billion in Total Expected Investment of assets in our development pipeline, including communities under construction and In Planning in the REIT, Ameriton and joint ventures. We completed $602.9 million of new REIT development properties during the year, representing 2,023 units, in markets that include the Washington, D.C. metropolitan area, Southern California, New York City metropolitan area and Boston.

We believe that our locally based development infrastructure creates a significant competitive advantage for identifying and completing very attractive investment opportunities in our core markets. As such, we expect our development capability to continue to be a key contributor to growth and to create significant value as properties are completed and Stabilized, producing attractive returns during the next several years. Additionally, we generally utilize guaranteed maximum price contracts, which caps our cost of construction at a guaranteed price through qualified third-party contractors to reduce our exposure to construction cost risk.

Ameriton

Ameriton, our wholly owned subsidiary, continues to be a highly profitable franchise for our company. Utilizing our development, acquisition and operating expertise, Ameriton identifies under-managed operating communities, as well as development and redevelopment opportunities with a short-term target ownership horizon of one to two years that have the potential to produce significant profits on re-sale. Ameriton sold twelve investments in 2006 (including two joint venture transactions), contributing $64.6 million or $0.25 per unit to the Operating Trust’s 2006 earnings. These transactions, excluding the two joint ventures, produced an IRR of 16.7%.

As of December 31, 2006, Ameriton had 22 communities representing 7,220 units under construction or In Planning, including joint ventures. While nearly 54.5% of Ameriton’s development pipeline is located in our core markets, they are in locations that we deem to be non-core for ownership by the Operating Trust.

A meaningful component of Ameriton’s profitable development program is attributable to its creation of a successful business as a joint venture financier of new, high-quality apartment communities that are built by other capable developers with whom we have fostered relationships over the past several years. Since 2003, Ameriton has completed nine of these transactions, realizing pre-tax gains of $46.7 million, or $0.20 per unit, at an average leveraged IRR of 30.1%.

Leveraging our relationships with third-party apartment developers, we also created a related business that offers a compelling platform for long-term value creation: mezzanine debt financing. Our Ameriton investment team sources these transactions on behalf of the REIT, as the interest income is qualifying REIT income and therefore not subject to tax. Of the $197.7 million in mezzanine loan commitments we have made through December 31, 2006, $103.4 million were originated in 2006. During the year, we had 4 loans representing $37.3 million repaid or sold. We are encouraged by the opportunities to selectively invest capital at very attractive returns in this incremental area of our business.

International

We expanded our international presence with the May 2006 acquisition of a 657-unit portfolio concentrated in Berlin, Germany, and the July 2006 acquisition of DeWAG, a German company, including its residential real estate portfolio and management team. DeWAG specializes in the acquisition, long-term ownership and re-sale or “privatization” of attractive residential properties in the major metropolitan areas of Southern and Western Germany. Collectively, the DeWAG senior management team has more than 60 years of German residential real estate expertise and extensive local market knowledge along with strong, long-term relationships with major real estate owners. As of December 31, 2006, our International apartment portfolio consists of 8,334 units generally located in attractive micro- and macro-locations in well-developed areas with access to parks, schools, shopping, employment and recreation.

The German residential real estate market is experiencing an important shift in the way that residential property is owned and operated, which creates opportunities for investors with a long-term perspective to take advantage of the positive changes expected in this market. A limited supply of new residential property, coupled with increased demand driven by an increasing number of households, sets the stage for positive developments in rental rates and occupancy. In addition, portfolio rents at existing properties that were under corporate or municipal ownership are often below market levels, as these residential owners are generally focused on providing affordable housing for their constituents, and are not driven by purely economic considerations.

Customer-focused Operations

We believe that our long-term cash flow growth is enhanced by our strong operating capability, including the benefit of the Archstone and Charles E. Smith brands, robust and scalable technology, and our continued investment in our associates.

Powerful brands

An essential component of our strategy is to consistently offer a higher level of service at our apartment communities. Through our Seal of Service ^TM, we offer our residents convenience and flexibility all backed by written guarantees. We believe we were the first public apartment REIT with an established track record of offering customers flexible lease terms from two to 12 months as standard practice – and the first apartment company in the nation to offer fully transactional online leasing through Online Lease, our proprietary automated system.

Our expansion in the New York City metropolitan area underscores the embedded value of our customer-focused operating and branding strategy. We believe we were the first apartment owner and manager in Manhattan to provide all of the following services: (i) leasing offices that are open seven days a week; (ii) showing apartments without an appointment or a broker; (iii) processing applications in 48 hours, compared to one week process time at most competitors; (iv) offering unconditional service guarantees through our Seal of Service™; and (v) providing a technology platform that makes it easy for people to do business with us through online rent payment, online service requests and our Online Lease. Customers have enthusiastically accepted this approach, allowing us to achieve an 8.9% increase in new move-in rents in our Same-Store operating communities in Manhattan in the fourth quarter of 2006 as compared to the same period in 2005.

Investing in technology

Web-based property management system. We invest in technology to improve our core operations and make it easier for our customers to do business with us. In 2005, we completed the roll-out of MRI, a web-based property management system that provides the platform for virtually all of our customer-facing technology products. In addition, MRI’s automated work order solution allows us to manage and execute service requests more efficiently, in line with our 1-day service guarantee, through which we promise to respond to service requests within 24 hours. Equally important, MRI gives us the ability to accurately track resident histories to better understand and serve our customers.

Revenue management. In 2000, we pioneered the use of a sophisticated revenue management product, Lease Rent Options (LRO). LRO brings a tremendous amount of discipline to the pricing process, enabling us to more precisely forecast demand to optimize pricing and occupancy across our portfolio, thereby increasing revenues. In 2006, we continued to refine and improve LRO to better manage pricing, occupancy and lease expirations to make us less vulnerable to seasonal shifts in customer traffic.

We believe that pricing in the apartment industry is too reliant on on-site individuals who often use “gut instinct” to make what are ultimately arbitrary pricing decisions. To bring discipline and sophistication to pricing in the apartment industry, we began to actively market LRO to other apartment owners, licensing it to five large apartment companies; several other apartment owners are currently pilot testing the software. In 2006, Archstone-Smith entered into an agreement with The Rainmaker Group, an Atlanta-based software company, to market, distribute, develop, implement and support the LRO product.

Resident websites. MRI provides a seamless online presence with our customers via resident-only websites, which we rolled out nationally in 2005, allowing customers 24/7 access to us to pay rent online, submit and track service requests, participate in periodic feedback surveys, review and update account information and more. In 2006, we collected online rent payments representing revenue of $304.6 million and 25.8% of total rent collected, which was 141% greater than the online rent payments collected in 2005. Online rent payments continued to accelerate throughout the year, with online rent payments in December 2006 totaling 32.0% of all rent collected.

Online Lease. We believe that we were the first national apartment company where customers could complete leases completely online through Online Lease, our proprietary automated system. Using Online Lease, customers can log on to any computer to search for a specific apartment, view real-time pricing and availability, select rentable amenities such as garages or additional storage, complete their credit application and finalize their lease.

Fully launched in 2005, Online Lease has been well-accepted by our customers, representing more than 17.0% of all leases transacted in 2006. Of those apartments that were leased online for the full year of 2006, 28.0% were leased sight-unseen by customers and 39.0% were leased by customers who only visited an Archstone-Smith community once. We believe Online Lease provides us with a meaningful competitive edge to better serve customers and improve our operating margins.

Internet marketing and lead management. Approximately 44% of all of our leases for the year ended December 31, 2006, were sourced through the Internet, with the vast majority of our customers beginning their apartment search online through third-party search vehicles such as Google and Yahoo! or Internet Listing Services (ILS) that include Apartments.com and Move.com as well as our branded websites, ArchstoneApartments.com and SmithApartments.com. Because the acquisition cost for customers sourced through the Internet is dramatically lower than traditional marketing channels, such as print advertising, we continue to focus our marketing efforts on improving our online presence and lead management system.

Investing in our associates

A critical component to ensuring the integrity of our brand offering is attracting, training and retaining the best professionals in our industry — and giving them the support and tools to provide an exceptional customer experience.

Associate engagement. In 2005, we contracted with Kenexa, a leading associate engagement consultancy, to measure our associates’ engagement and identify key drivers of engagement. It is our belief that associates who are fully engaged in their roles tend to contribute at a much higher level to the company and stay with us longer. Our initial results were extremely encouraging, with 75% of our associates taking part in the survey. Our results place us in the top quartile of responses among the companies with whom Kenexa works, including many of the “best in class” corporations in the United States.

Incentive-Based compensation. We made significant progress during the year on our Incentive-Based Compensation (IBC) program, through which leasing associates take on a more traditional sales role, earning the majority of their compensation through leases “sold.” Previously, approximately 20% of our leasing associates’ income was based on leasing activity; with the IBC program, approximately 65% of a leasing associate’s income is generated through leases they put in place. We believe that providing this performance-based income potential allows us to attract higher-caliber sales associates who are more vested in delivering a superior experience to our customers. Full roll out of the IBC program was completed in 2006.

Developing our leaders. In 2006, another 112 community and service managers attended Leading Teams at Archstone-Smith Operating Trust, a three-day program for our on-site management teams. This three-day program focuses on 31 leadership practices consistent with our company culture and values that we believe drive our success. To date, a total of 736 managers have participated in Leading Teams and The Practice of Leadership, our feedback-based training program for corporate and operations managers during which direct reports and peers evaluate managers to identify strengths and opportunities for improvement to enhance their effectiveness as team leaders.

Conservative Balance Sheet Management

One of our primary financial objectives is to structure our balance sheet to enhance our financial flexibility in order to have access to capital when others in the industry do not. We have a significant equity base, with equity market capitalization of $14.6 billion, including the value of the A-1 Common Units, as of December 31, 2006. Our investment-grade debt ratings from Standard & Poor’s (BBB+), Moody’s Investors Service (Baal) and Fitch, Inc. (A-) are indicative of our solid financial position.

In July 2006, Archstone-Smith closed on the funding of $575 million aggregate principal amount of exchangeable senior unsecured notes – including a 15.0% underwriters over-allotment option – due 2036, with a coupon of 4.0%. The notes are exchangeable into Archstone-Smith Common Shares at an exchange ratio, subject to adjustment, of 15.7206 shares per $1,000 principal amount of notes. The company received approximately $563 million net proceeds from this offering and used the net proceeds to repay outstanding balances under its revolving credit facility and certain other indebtedness, to make additional investments and for general corporate purposes.

Our unencumbered asset base was $7.6 billion as of the end of the year. As of February 20, 2007, we had approximately $1.1 billion of liquidity, including cash on hand, restricted cash in escrows and capacity on unsecured credit facilities. We believe this financial flexibility allows us to act more quickly on new investment opportunities as they arise.

We have structured our long-term debt maturities in a manner designed to avoid unmanageable repayment obligations in any year. We have only $491.1 million of long-term debt maturing in 2007, representing 2.3% of our total market capitalization. The following summarizes our long-term debt maturity profile for 2007 through 2011, and thereafter, as of December 31, 2006 (dollar amounts in millions):


			% of Total Market
Year	Total		Capitalization ⁽¹⁾
2007	$	491.1		2.3	%
2008		546.8		2.6	%
2009		481.5		2.3	%
2010		404.5		1.9	%
2011		843.6		4.0	%
Thereafter and debt discount		3,364.4		16.0	%

Total	$	6,131.9		29.1	%


(1)		Total market capitalization as of December 31, 2006, represents the market capitalization based on the closing share price on the last trading day of the period for Archstone-Smith publicly traded securities, units and the liquidation value for private securities as well as the book value of total debt.

Consistent distribution growth. We raised our anticipated 2007 distribution level 4.0% to $1.81 per unit, marking our 16th consecutive annual Common Unit distribution increase and a total increase of 183% since 1991.

Management

We have several senior executives who possess the leadership, operational, investment and financial skills and experience to oversee the overall operation of our company. We believe several of our senior officers could serve as the principal executive officer and continue our strong performance. Our management team emphasizes active training and organizational development initiatives for associates at all levels of our company in order to build long-term management depth and facilitate succession planning.

Officers of the Operating Trust

Certain senior officers, including all executive officers, of the Operating Trust are:


Name		Title
R. Scot Sellers*		Chairman and Chief Executive Officer
J. Lindsay Freeman*		Chief Operating Officer
Charles E. Mueller, Jr*		Chief Financial Officer
Caroline Brower*		General Counsel and Secretary
Alfred G. Neely*		Chief Development Officer and President – Charles E. Smith Residential Division
Mark A. Schumacher*		Chief Accounting Officer
Daniel E. Amedro		Chief Information Officer
Jack R. Callison		Executive Vice President – East Operations
Dana K. Hamilton		Managing Director – Europe
Gerald R. Morgan		Senior Vice President – National Operations


*		Executive Officers

Biographies of Senior Officers

R. Scot Sellers — 50 — Chairman and Chief Executive Officer of the Operating Trust from June 1997 to July 1998 and since December 1998, with overall responsibility for the Operating Trust’s strategic direction, investments and operations; Co-Chairman and Chief Investment Officer of the Operating Trust from July 1998 to December 1998; other executive management positions within the Operating Trust and its predecessors and affiliates since 1993; Member, Executive Committee of the Board of Governors and, during 2006, Chairman, National Association of Real Estate Investment Trusts; Member, Executive Committee of the Board of Directors of the National Multi Housing Council; Director, Christian International Scholarship Foundation; Director of CEO Forum; and Director, Alliance for Choice in Education.

J. Lindsay Freeman — 61 — Chief Operating Officer of the Operating Trust since September 2002, with responsibility for managing all investment and operating activities for the Operating Trust; President – East Division of the Operating Trust, from October 2001 to September 2002, with responsibility for all investments and operations of the East Division; other executive management positions with the Operating Trust and its predecessors and affiliates since May 1994. Mr. Freeman will retire on December 31, 2007.

Charles E. Mueller, Jr. — 43 — Chief Financial Officer of the Operating Trust since December 1998, with responsibility for the planning and execution of the Operating Trust’s financial strategy, balance sheet management and corporate operations, and oversight of the company’s accounting/financial reporting, corporate finance, investor relations, corporate and property tax, due diligence, risk management, human resources, national marketing and ancillary services functions; various other management positions with the Operating Trust and its predecessors and affiliates since April 1994; Member, Executive Committee of the Board of Directors of the National Multi Housing Council Executive Committee; Member, Real Estate Roundtable President’s Council; Director, Colorado UpLIFT; Director, Denver K-Life. Mr. Mueller will assume the position of Chief Operating Officer of the Operating Trust on or before January 1, 2008.

Caroline Brower — 58 — General Counsel and Secretary of the Operating Trust since September 1999, with responsibility for legal and corporate governance; from September 1998 to September 1999, President of Ameriton Properties Incorporated; prior thereto, Ms. Brower was a partner of Mayer, Brown & Platt (now Mayer, Brown, Rowe & Maw, LLP) where she practiced transaction and real estate law.

Alfred G. Neely — 61 — President, Charles E. Smith Residential Division of the Operating Trust, since February 2005; Chief Development Officer of the Operating Trust since April 2003, with responsibility for the oversight and direction of all Operating Trust residential development projects; Executive Vice President of the Operating Trust, and, prior to November 2001, Charles E. Smith Residential Realty, Inc. (a predecessor of Archstone-Smith) from April 1989 to April 2003 with responsibility for oversight and direction of High-Rise and garden residential development projects.

Mark A. Schumacher — 48 — Chief Accounting Officer of the Operating Trust since December 2004 and Senior Vice President and Controller of the Operating Trust from January 2002 to December 2004, with principal responsibility for accounting and financial reporting; prior thereto, Vice President and Corporate Controller of Qwest Communications International (“Qwest”) from December 2000 to December 2001, where he had principal responsibility for accounting and financial reporting; from 1984 through 2000, held various managerial and senior executive level positions in the accounting and financial reporting departments of US West. On March 15, 2005, the Securities and Exchange Commission entered an administrative order and settled civil proceedings against Mr. Schumacher relating to his work at Qwest. The Securities and Exchange Commission alleged, among other things, that Mr. Schumacher was a cause of Qwest failing to properly record and report certain transactions in accordance with generally accepted accounting principles in violation of the Securities Exchange Act of 1934 (the “Exchange Act”). Pursuant to the terms of the consent decree, Mr. Schumacher settled all claims against him, agreed to cease and desist from violating various provisions of Section 13 of the Exchange Act and related rules there under, agreed not to engage in the future in any activity in violation of such provisions and paid a fine of $40,000.

Daniel E. Amedro — 50 — Chief Information Officer of the Operating Trust since May 1998, with primary responsibility for the Trust’s information technology functions and initiatives; prior thereto he held senior information officer positions at American Medical Response, the largest private ambulance operation in the United States, and Hyatt Hotels and Resorts, where he was responsible for all strategic information systems including Spirit, Hyatt’s worldwide reservation system, which supported over 50,000 users and was recognized as the leading reservations system in the hospitality industry.

Jack R. Callison — 36 — Executive Vice President — East Operations, the Operating Trust, since February 2006, with responsibility for the oversight of the company’s East Region community operations, which is comprised of more than 35,000 apartment units in the greater Washington D.C. metropolitan area, New York City, Boston, Southeast Florida and Atlanta, and represents over 55% of the company’s Net Operating Income; Executive Vice President — National Operations, the Operating Trust from July 2005 to January 2006, where he was responsible for many of the company’s operating and technology-related initiatives in addition to overseeing human resources, national marketing, and ancillary services. Since joining the company in 1997, Mr. Callison has held numerous management positions in the company’s capital markets, investor relations, real estate due diligence and accounting departments. Mr. Callison is also a certified public accountant. Mr. Callison will assume the position of President — U.S. Operations of the Operating Trust, at a time to be determined during 2007.

Dana K. Hamilton — 38 — Managing Director – Europe, the Operating Trust, since February 2005, with responsibility for research and development of European investment and operational opportunities; Executive Vice President – National Operations, the Operating Trust, from May 2001 to February 2005, with responsibility for corporate services, including human resources, training and development, marketing and corporate communications, and new business development; various other management positions with the Operating Trust and its predecessors and affiliates since August 1994.

Gerald R. Morgan — 43 — Senior Vice President — National Operations, the Operating Trust, since March 2006, with responsibility for national operations and corporate services departments including human resources, marketing and ancillary services; from January 2000 to November 2005, Mr. Morgan was a partner serving as the chief operating officer and chief financial officer of Francisco Partners, a $2.5 billion private equity fund, where he was responsible for finance, accounting, investor relations, human resources and portfolio company reporting; prior thereto, Mr. Morgan held various financial positions with Security Capital Group Incorporated, most recently as a senior vice president serving as the chief financial officer of two London-based real estate investment funds. Mr. Morgan will assume the position of chief financial officer of the Operating Trust on or before January 1, 2008.

Employees

We currently employ approximately 2,666 individuals, of whom approximately 1,958 are focused on the site-level operation of our garden communities and High-Rise properties. Of the site-level associates, approximately 123 are subject to collective bargaining agreements with four unions in Illinois and New York. The balance are professionals who manage corporate and regional operations, including our investment program, property operations, financial activities and other support functions. We consider our relationship with our employees to be very good.

Insurance

We carry comprehensive general liability coverage on our owned communities, with limits of liability customary within the industry to insure against liability claims and related defense costs. Similarly, we are insured against the risk of direct physical damage in amounts necessary to reimburse the company on a replacement cost basis for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period. Our property policies for all United States operating and development communities and certain International communities include coverage for the perils of flood and earthquake shock with limits and deductibles customary in the industry. We also obtain title insurance policies when acquiring new properties, which insure fee title to our real properties. We currently have coverage for losses incurred in connection with both domestic and foreign terrorist-related activities. The terms of our property and general liability policies may exclude certain mold-related claims or other types of claims based on the specific circumstances and allegations. Should an uninsured loss arise against the company, we would be required to use our own funds to resolve the issue, including litigation costs. In addition, for our United States communities we self-insure certain portions of our insurance program through a wholly-owned captive insurance company, and therefore use our own funds to satisfy those limits, when applicable.

Competition

There are numerous commercial developers, real estate companies and other owners of real estate that we compete with in seeking land for development, apartment communities for acquisition and disposition and residents for apartment communities. All of our apartment communities are located in developed areas that include other apartment communities. The number of competitive apartment communities in a particular area could have a material adverse effect on our ability to lease units and on the rents charged. In addition, single-family homes and other residential properties provide housing alternatives to residents and potential residents of our apartment communities.

Available Information and Code of Ethics

Our website is http://www.archstonesmith.com. We make available free of charge, on or through our website, our annual, quarterly and current reports, as well as any amendments to these reports, as soon as reasonably practicable after electronically filing these reports with the Securities and Exchange Commission. We have adopted a Code of Ethics and Business Conduct applicable to our Board and officers and employees, including our principal executive officer, principal financial officer and principal accounting officer or controller. A copy of our Code of Ethics and Business Conduct is available through our website. Any amendments to or waivers of our Code of Ethics and Business Conduct that apply to the principal executive officer, principal financial officer and principal accounting officer or controller and that relate to any matter enumerated in Item 406(b) of Regulation S-K, will be disclosed on our website. Any reference to our website in this Annual Report does not incorporate by reference the information contained in the website and such information should not be considered a part of this Annual Report. Charters of the Nominating and Corporate Governance Committee, Management Development and Executive Compensation Committee and Audit Committee, as well as the Code of Business Conduct and Ethics and our Corporate Governance Guidelines are available at no charge upon written request to Investor Relations, 9200 East Panorama Circle, Suite 400, Englewood, Colorado 80112.

Item 1A. Risk Factors

The following factors could affect our future financial performance:

We have restrictions on the sale of certain properties.

A taxable sale of any of the properties acquired in the Smith Merger prior to January 1, 2022, could result in increased costs to us in light of the tax-related obligations made to the former Smith Partnership Unitholders. Under the unit holders’ agreement between Archstone-Smith, the Operating Trust, Robert H. Smith and Robert P. Kogod, we are restricted from transferring specified high-rise properties located in the Crystal City area of Arlington, Virginia until October 31, 2016, without the consent of Messrs. Smith and Kogod, which could result in increased costs to us and our inability to sell these properties at an opportune time. However, we are permitted to transfer these properties in connection with a non-taxable sale or a sale of all of the properties in a single transaction or pursuant to a bona fide mortgage of any or all of such properties in order to secure a loan or other financing.

We have similar restrictions with respect to the properties acquired from Oakwood Worldwide in 2005. The restrictions last until the earlier of (a) such time as 99% of the contributing partners have sold, redeemed or otherwise disposed of their A-1 Common Units in a taxable event and (b) the later to occur of (x) 10 years from the closing of the contribution of such properties and (y) the last to die of Howard Ruby and Ed Broida. Mr. Broida died in 2006.

We depend on our key personnel.

Our success depends on our ability to attract and retain the services of executive officers, senior officers and company managers. There is substantial competition for qualified personnel in the real estate industry and the loss of several of our key personnel could have an adverse effect on us.

Debt financing could adversely affect our performance.

We are subject to risks associated with debt financing and preferred equity. These risks include the risks that we will not have sufficient cash flow from operations to meet required payments of principal and interest or to pay distributions on our securities at expected rates, that we will be unable to refinance current or future indebtedness, that the terms of any refinancing will not be as favorable as the terms of existing indebtedness, and that we will be unable to make necessary investments in new business initiatives due to lack of available funds. Increases in interest rates could increase interest expense, which would adversely affect net earnings and cash available for payment of obligations. If we are unable to make required payments on indebtedness that is secured by a mortgage on our property, the asset may be transferred to the lender with a consequent loss of income and value to us.

Additionally, our debt agreements contain customary covenants which, among other things, restrict our ability to incur additional indebtedness and, in certain instances, restrict our ability to engage in material asset sales, mergers, consolidations and acquisitions. These debt agreements also require us to maintain various financial ratios. Failure to comply with these covenants could result in a requirement to repay the indebtedness prior to its maturity, which could have an adverse effect on our cash flow and ability to make distributions to unitholders.

Some of our debt instruments bear interest at variable rates. Increases in interest rates would increase our interest expense under these instruments and would increase the cost of refinancing these instruments and issuing new debt. As a result, higher interest rates would adversely affect cash flow and our ability to service our indebtedness and to make distributions to our Unitholders.

We had $6.5 billion in total debt outstanding as of December 31, 2006, of which $2.8 billion was secured by real estate assets and $1.5 billion was subject to variable interest rates, including $84.7 million outstanding on our short-term credit facilities.

We may not have access to equity capital.

A prolonged period in which we cannot effectively access the public equity markets may result in heavier reliance on alternative financing sources to undertake new investment activities. These alternative sources of financing may be more costly than raising funds in the public equity markets.

We could be subject to acts of terrorism.

Periodically, we receive alerts from government agencies that apartment communities could be the target of both domestic and foreign terrorism. Although we currently have insurance coverage for losses incurred in connection with terrorist-related activities, losses could exceed our coverage limits and have a material adverse affect on our operating results.

We are subject to risks inherent in ownership of real estate.

Real estate, cash flows and values are affected by a number of factors, including changes in the general economic climate, local, regional or national conditions (such as an oversupply of communities or a reduction in rental demand in a specific area), the quality and philosophy of management, competition from other available properties and the ability to provide adequate property maintenance and insurance and to control operating costs. Real estate cash flows and values are also affected by such factors as government regulations, including zoning, usage and tax laws, caps on rent and rent increases, interest rate levels, the availability of financing, property tax rates, utility expenses, potential liability under environmental and other laws and changes in environmental and other laws. Although we seek to minimize these risks through our market research and property management capabilities, they cannot be totally eliminated.

We are subject to risks inherent in real estate development.

We have developed or commenced development on a substantial number of apartment communities and expect to develop additional apartment communities in the future. Real estate development involves risks in addition to those involved in the ownership and operation of established communities, including the risks that financing, if needed, may not be available on favorable terms, construction may not be completed on schedule, contractors may default, estimates of the costs of developing apartment communities may prove to be inaccurate, the costs and availability of materials may be adversely affected by global supply and demand, and communities may not be leased or rented on profitable terms or in the time frame anticipated. Timely construction may be affected by local weather conditions, local moratoria on construction, local or national strikes and local or national shortages in materials, building supplies or energy and fuel for equipment. These risks may cause the development project to fail to perform as expected.

Real estate investments are relatively illiquid and we may not be able to recover our investments.

Equity real estate investments are relatively illiquid, which may tend to limit our ability to react promptly to changes in economic or other market conditions. Our ability to dispose of assets in the future will depend on prevailing economic and market conditions. Furthermore, our mezzanine loans to real estate investors may not be recoverable if those investors are unable to monetize the underlying asset at underwritten amounts.

Compliance with laws and regulatory requirements may be costly.

We must comply with certain accessibility, environmental, building, and health and safety laws and regulations related to the ownership, operation, development and acquisition of apartments. Under those laws and regulations, we may be liable for, among other things, the costs of bringing our properties into compliance with the statutory and regulatory requirements. Non-compliance with certain of these laws and regulations may impose liability without regard to fault, and could give rise to actions brought against us by governmental entities and/or third parties who claim to be or have been damaged as a consequence of an apartment not being in compliance with the subject laws and regulations. As part of our due diligence procedures in connection with the acquisition of a property, whether it is an apartment community or land to be developed, we

conduct an investigation of the property’s compliance with known laws and regulatory requirements with which we must comply once we acquire a property, which investigation includes performing a Phase I environmental assessment of the property and a Phase II assessment if recommended in the Phase I report. We hire architects and general contractors to design and build our development projects, and we rely on them to design and build in accordance with all legal requirements. We cannot, however, give any assurance that our investigations and these assessments have revealed all potential non-compliance issues or related liabilities, or that our development properties have been designed and built in accordance with all applicable legal requirements.

Costs associated with moisture infiltration and resulting mold remediation may be costly.

As a general matter, concern about indoor exposure to mold continues as such exposure has been alleged to have a variety of adverse effects on health. As a result, there have been a number of lawsuits in our industry against owners and managers of apartment communities relating to moisture infiltration and resulting mold. We have implemented guidelines and procedures to address moisture infiltration and resulting mold issues if and when they arise. We believe that these measures will minimize the potential for any adverse effect on our residents. The terms of our property and general liability policies after June 30, 2002, may exclude certain mold-related claims. Should an uninsured loss arise against the company, we would be required to use our own funds to resolve the issue, including litigation costs. We can make no assurance that liabilities resulting from moisture infiltration and the presence of or exposure to mold will not have a future material impact on our financial results.

Changes in laws may result in increased cost.

We may not be able to pass on increased costs resulting from increases in real estate taxes, income taxes or other governmental requirements, such as the enactment of regulations relating to internal air quality, directly to our residents. Substantial increases in rents, as a result of those increased costs, may affect the ability of a resident to pay rent, causing increased vacancy.

Archstone-Smith’s failure to qualify as a REIT would have adverse consequences.

We believe that Archstone-Smith has qualified for taxation as a REIT under the Internal Revenue Code and it plans to continue to meet the requirements for taxation as a REIT. We cannot, however, guarantee that it will continue to qualify in the future as a REIT. We cannot give any assurance that new legislation, regulations, administrative interpretations or court decisions will not significantly change the requirements relating to Archstone-Smith’s qualification. If it fails to qualify as a REIT, it would be subject to federal income tax at regular corporate rates. Also, unless the Internal Revenue Service granted it relief, it would remain disqualified as a REIT for four years following the year in which it failed to qualify. In the event that Archstone-Smith failed to qualify as a REIT, it would be required to pay significant income taxes and would have less money available for operations and distributions to Unitholders. This would likely have a significant adverse effect on the value of our securities and its ability to raise additional capital. In order to maintain its qualification as a REIT under the Internal Revenue Code, Archstone-Smith’s Declaration of Trust limits the ownership of its shares by any person or group of related persons to 9.8%, unless special approval is granted by our Board.

We intend to qualify as a partnership, but we cannot guarantee that we will qualify.

We intend to qualify as a partnership for federal income tax purposes. However, we will be treated as an association taxable as a corporation for federal income tax purposes if we are deemed to be a publicly traded partnership, unless at least 90% of its income is qualifying income as defined in the tax code. Qualifying income for our 90% test generally includes passive income, such as real property rents, distributions and interest. The income requirements applicable to REITs and the definition of qualifying income for purposes of this 90% test are similar in most respects. We believe that we will meet this qualifying income test, but cannot guarantee that we will. If we were to be taxed as a corporation, we would incur substantial tax liabilities, Archstone-Smith would fail to qualify as a REIT for tax purposes and our ability to raise additional capital would be impaired.

We are subject to losses that may not be covered by insurance.

There are certain types of losses (such as from war) that may be uninsurable or not economically insurable. Additionally, many of our communities in California are located in the general vicinity of active earthquake fault lines, and our Southeast Florida assets are in coastal locations and subject to hurricanes. Although we maintain insurance to cover most reasonably likely risks, including earthquakes and hurricanes, if an uninsured loss or a loss in excess of insured limits occurs, we could lose both our invested capital in, and anticipated profits from, one or more communities. We may also be required to continue to repay mortgage indebtedness or other obligations related to such communities. The terms of our property and general liability policies after June 30, 2002, may exclude certain mold-related claims. We can make no assurance that liabilities

resulting from moisture infiltration and the presence of or exposure to mold will not have a future material impact on our financial results. Should an uninsured loss arise against the company, we would be required to use our own funds to resolve the issue, including litigation costs. Any such loss could materially adversely affect our business, financial condition and results of operations.

We have a concentration of investments in certain markets.

As shown in the United States Geographic Distribution table below in “Item 2. Properties,” our most significant investment concentrations are in the Washington, D.C. metropolitan area, Southern California, the New York City metropolitan area and the San Francisco Bay Area. Southern California is the geographic area comprising the Los Angeles County, San Diego, Orange County, Ventura County and the Inland Empire markets. We are, therefore, subject to increased exposure (positive or negative) from economic and other competitive factors specific to markets within these geographic areas.

Our business is subject to extensive competition.

Ownership of properties located outside of the United States subjects us to foreign currency risks which may adversely impact our ability to make distributions.

We currently own properties located outside of the United States, which subjects us to risk from fluctuations in exchange rates between foreign currencies and the U.S. dollar. We expect that our principal foreign currency exposure will be to the Euro. Changes in the relation of these currencies to U.S. dollars may affect the fair values and earnings streams of our international holdings, and therefore our revenues and operating margins on our non-dollar denominated foreign holdings. These fluctuations in foreign currency exchange rates may materially adversely impact our financial condition, results of operations, cash flow, cash available for distribution, including cash available to pay distributions to our Common Unitholders, per share trading price of our Common Shares, ability to satisfy our debt obligations and ability to qualify as a REIT.

We intend to attempt to mitigate the risk of currency fluctuation by financing our properties in the local currency denominations, although we cannot assure you that we will be able to do so or that this will be effective. We have engaged, and may continue to engage, in direct hedging activities to mitigate the risks of exchange rate fluctuations. If we do engage in foreign currency exchange rate hedging activities, any income recognized with respect to these hedges (as well as any foreign currency gain recognized with respect to changes in exchange rates) may not qualify under the 75% gross income test or the 95% gross income test that we must satisfy annually in order to qualify and maintain our status as a REIT.

Acquisition and ownership of foreign properties involve risks greater than those faced by us in the United States.

Foreign real estate investments generally involve certain risks not generally associated with investments in the United States. Our international acquisitions and operations are subject to a number of risks, including acquisition risk resulting from less knowledge of local real estate markets, economies, and business practices and customs; our limited knowledge of and relationships with sellers in these markets; higher due diligence, transaction and structuring costs than those we may face in the United States; additional accounting and control expenses; complexity and costs associated with managing international operations; difficulty in hiring qualified management, leasing personnel and service providers in a timely fashion; multiple, conflicting and changing legal, regulatory, tax and treaty environments, including land use, zoning and environmental laws, as well as the enactment of laws prohibiting or restricting the foreign ownership of property; exposure to increased taxation, confiscation or expropriation; currency transfer restrictions and limitations on our ability to distribute cash earned in foreign jurisdictions to the United States; difficulty in enforcing agreements in non-United States jurisdictions, including those entered into in connection with our acquisitions; and change in the availability, cost and terms of property financing resulting from varying national economic policies or changes in interest rates.

Our inability to overcome these risks could adversely affect our foreign operations and could harm our business and results of operations.

Item 1B. Unresolved Staff Comments

Not Applicable.

Item 2. Properties

United States Geographic Distribution, excluding Ameriton

At December 31, 2006, the geographic distribution for our eight core markets based on NOI for the three months ended December 31, 2006 was as follows:


Washington, D.C. metropolitan area	34.6	%
Southern California	25.8
New York City metropolitan area	12.5
San Francisco Bay Area, California	11.5
Boston, Massachusetts	5.0
Seattle, Washington	4.2
Southeast Florida	2.2
Chicago, Illinois	2.0

Total	97.8	%

The following table summarizes the geographic distribution for 2006, 2005 and 2004, based on NOI:


	Total Portfolio⁽¹⁾
	2006			2005			2004
Core Markets
Washington, D.C. metropolitan area		34.6	%		36.6	%		39.4	%
Southern California		25.8			24.9			18.9
New York City metropolitan area		12.5			6.8			4.9
San Francisco Bay Area, California		11.5			8.2			8.2
Boston, Massachusetts		5.0			4.7			4.7
Seattle, Washington		4.2			3.9			3.1
Southeast Florida		2.2			4.0			4.7
Chicago, Illinois		2.0			4.3			6.1

Total Core Markets		97.8	%		93.4	%		90.0	%
Non-Core Markets ⁽²⁾
Houston, Texas		—			1.3	%		1.5	%
Denver, Colorado		—			1.1			1.9
Atlanta, Georgia		—			—			2.3
Raleigh, North Carolina		—			—			1.1
Other		2.2			4.2			3.2

Total Non-Core Markets		2.2	%		6.6	%		10.0	%

Total All Markets		100	%		100	%		100	%


(1)		Based on NOI for the fourth quarter of each calendar year, excluding NOI from communities disposed of during the period. See Item 7 under the caption “Property-level operating results” for a discussion on why we believe NOI is a meaningful measure and a reconciliation of NOI to Earnings from Operations.

(2)		Markets that represent 1.0% or less of NOI in any year are included in Other for that year.

Real Estate Portfolio

We are a leading multifamily company focused primarily on the operation, development, redevelopment, acquisition, management and long-term ownership of apartment communities in protected markets throughout the United States. The following information summarizes our wholly owned real estate portfolio as of December 31, 2006 (dollar amounts in thousands). Additional information on our real estate portfolio is contained in “Schedule III, Real Estate and Accumulated Depreciation” and in our audited financial statements contained in this Annual Report:


					Operating
	Number of		Number of		Trust		Percentage
	Communities		Units		Investment		Leased⁽¹⁾
OPERATING APARTMENT COMMUNITIES:
Garden Communities:
Boston, Massachusetts⁽²⁾		9		2,044	$	474,586		86.9	%
Dallas, Texas		1		514		48,177		96.1	%
Denver, Colorado		1		156		10,549		92.9	%
El Paso, Texas		1		379		14,198		92.9	%
Houston, Texas		1		616		36,937		97.7	%
Inland Empire, California		3		1,298		84,475		96.3	%
Los Angeles County, California		20		7,483		1,454,616		92.1	%
New York City metropolitan area		1		396		89,118		97.5	%
Orange County, California		8		2,063		267,381		96.3	%
Orlando, Florida		1		312		22,100		95.2	%
Phoenix, Arizona		2		742		28,760		94.1	%
San Diego, California		8		2,803		358,793		96.7	%
San Francisco Bay Area, California		20		7,419		1,351,578		93.9	%
Seattle, Washington		9		3,408		308,999		95.1	%
Southeast Florida		5		1,924		232,675		95.4	%
Stamford, Connecticut		1		160		36,568		95.6	%
Ventura County, California		4		1,018		159,212		96.1	%
Washington, D.C. metropolitan area		17		8,152		1,111,173		94.2	%

Garden Community Subtotal/Average		112		40,887	$	6,089,895		94.2	%

High-Rise Properties:
Boston, Massachusetts⁽²⁾		5		1,207	$	376,289		72.6	%
Chicago, Illinois		2		1,113		234,813		95.2	%
Los Angeles County, California⁽³⁾		3		1,073		238,151		91.0	%
Minneapolis, Minnesota		1		250		27,107		95.6	%
New York City metropolitan area		10		2,929		1,566,026		96.9	%
Philadelphia, Pennsylvania		1		80		19,035		N/A
San Diego, California		1		387		44,358		93.5	%
San Francisco Bay Area, California		2		853		268,575		95.4	%
Seattle, Washington		2		338		62,422		N/A
Washington, D.C. metropolitan area		35		11,722		2,252,196		95.4	%

High-Rise Subtotal/Average		62		19,952	$	5,088,972		94.0	%

FHA/ADA Settlement Capital Accrual		—		—	$	29,185		N/A
Operating Apartment Communities Subtotal/Average		174		60,839	$	11,208,052		94.1	%

APARTMENT COMMUNITIES UNDER CONSTRUCTION:
Garden Communities:
Los Angeles County, California		2		655		172,783		N/A
Orange County, California		1		884		60,161		N/A
San Francisco Bay Area, California		1		185		61,695		N/A

Garden Community Subtotal/Average		4		1,724	$	294,639

High-Rise Properties:
Boston, Massachusetts		1		426	$	112,242		N/A

Apartment Communities Under Construction Subtotal/Average		5		2,150	$	406,881		N/A

APARTMENT COMMUNITIES IN PLANNING:⁽⁴⁾
Garden Communities:
Boston, Massachusetts		1		420		—
Washington, D.C. metropolitan area		1		357		—
High-Rise Communities:
Boston, Massachusetts		1		341	$	16,774
Washington, D.C. metropolitan area		2		723		58,764

Total Apartment Communities In Planning ⁽⁴⁾ Subtotal/Average		5		1,841	$	75,538

Total REIT Communities		184		64,830	$	11,690,471

AMERITON PORTFOLIO:
Operating Apartment Communities		5		1,474	$	174,983
Apartment Communities Under Construction and In Planning ⁽⁴⁾		20		6,670		308,448
Other Real Estate Assets		—		—		102,093

Subtotal/Average		25		8,144		585,524

INTERNATIONAL PORTFOLIO:
German Operating Apartment Communities		119		8,334		851,593

OTHER REAL ESTATE ASSETS⁽⁵⁾		—		—	$	60,052

Total Real Estate Owned at December 31, 2006		328		81,308	$	13,187,640

See notes on following page.


(1)		Represents the percentage leased as of December 31, 2006. For communities in Lease-Up, the percentage leased is based on leased units divided by total number of units in the community (completed and under construction) as of December 31, 2006. The “N/A” for the Seattle and Philadelphia markets in the High-Rise operating community section indicates that the markets are entirely comprised of Oakwood Master Lease communities. Oakwood Master Leased communities have been excluded from the Percentage Leased calculation for other markets that have both Oakwood Master Leased communities and communities with traditional resident leases. A “N/A” indicates markets with communities under construction where Lease-Up has not yet commenced.

(2)		Lower average occupancy is due to the inclusion of certain recently completed development communities which are in Lease-Up and therefore not yet Stabilized.

(3)		Includes a 623-unit community which recently completed redevelopment and whose occupancy was 85.9% as of December 31, 2006.

(4)		As of December 31, 2006, we had two investments representing $7.1 million or 777 units and one investment representing $0.5 million or 176 units classified as In Planning and Under Control for Archstone-Smith and Ameriton, respectively. Our actual investment in these communities is reflected in the “Other assets” caption of our Balance Sheet.

(5)		Includes land that is not In Planning and other real estate assets.

Item 3. Legal Proceedings

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 FHA and 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 wholly owned or joint venture communities, of which we still own or have an interest in 45. As part of the settlement, the three disability organizations all recognized that the Operating Trust had no intention to build any of its 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 was estimated at $47.2 million and was accrued as an addition to real estate during the fourth quarter of 2005. The settlement agreement approved by the court allows us to remediate each of the designated communities over a three year period, 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 included legal fees and costs incurred by the plaintiffs. We had $29.2 million of the original accrual remaining on December 31, 2006.

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

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.

Item 4. Submission of Matters to a Vote of Security Holders

None

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

There is no established market for the Common Units of the Operating Trust. Archstone-Smith’s Common Shares are listed on the New York Stock Exchange (NYSE:ASN). The following table sets forth the distributions on units made by the Operating Trust during the past two years ended December 31:


	2006		2005
Per Common Unit⁽¹⁾:
Ordinary income	$	1.31	$	1.12
Capital gains		0.43		0.61

Total	$	1.74	$	1.73

For federal income tax purposes, the following summary reflects the taxability of distributions paid on our Preferred Units:


	2006		2005
Per Series I Preferred Unit⁽¹⁾:
Ordinary income	$	5,778	$	4,959
Capital gains		1,882		2,701

Total	$	7,660	$	7,660


(1)		The Series I Preferred Units have a par value of $100,000 unit.

Our tax return for the year ended December 31, 2006 has not been filed, and the taxability information for 2006 is based upon the best available data we have. Our tax returns for prior years have not been examined by the Internal Revenue Service and, therefore, the taxability of the distributions may be subject to change.

In 2006, 2005 and 2004 we issued 1,772,673, 11,289,070 and 374,921 A-1 Common Units of the Operating Trust as partial consideration for real estate, respectively. All units were issued in transactions exempt from registration under Section 4(2) of the Securities Act of 1933 and the rules thereunder.

Item 6. Selected Financial Data

The following table provides selected financial data relating to our historical financial condition and results of operations as of and for each of the years ending December 31, 2002 to 2006. This data is qualified in its entirety by, and should be read in conjunction with, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes that have been included or incorporated by reference in this Annual Report. Prior year’s amounts have been restated for amounts classified within discontinued operations. (in thousands, except per unit data):


	Years ended December 31,
	2006		2005		2004		2003		2002

Operations Summary⁽¹⁾:
Total revenues⁽²⁾	$	1,133,586	$	833,633	$	661,478	$	594,374	$	567,842
Property operating expenses (rental expenses and real estate taxes)		343,342		252,382		210,747		180,658		181,794
Net Operating Income⁽³⁾		712,834		525,221		431,523		394,382		376,586
Depreciation on real estate investments		261,438		187,771		150,470		119,776		109,074
Interest expense		245,895		164,035		125,108		107,791		107,978
General and administrative expense		68,188		58,604		55,479		49,838		45,710
Earnings from operations		201,008		121,609		106,111		100,658		106,188
Gains on dispositions of depreciated real estate, net⁽⁴⁾		—		—		—		—		35,950
Income from unconsolidated entities		36,316		22,432		17,902		5,745		53,602

Net earnings from discontinued operations⁽⁵⁾		595,413		528,656		459,988		387,788		166,200
Preferred Unit distributions		3,829		4,572		16,254		26,153		34,309
Net earnings attributable to Common Units⁽³⁾:
— Basic		831,246		696,932		596,369		468,038		322,416
— Diluted		842,385		696,932		600,124		480,910		322,416
Common Unit distributions		432,592		397,466		603,553		277,035		347,971
Per Unit Data:
Net earnings attributable to Common Units:
— Basic	$	3.35	$	3.01	$	2.71	$	2.20	$	1.59


	Years ended December 31,
	2006		2005		2004		2003		2002

— Diluted		3.33		3.00		2.69		2.18		1.58
Common Unit cash distributions paid⁽⁶⁾		1.74		1.73		2.72		1.71		1.70
Cash distributions paid per unit:
Series A Preferred Unit⁽⁷⁾		—		—		—		2.11		2.29
Series C Preferred Unit⁽⁸⁾		—		—		—		—		1.38
Series D Preferred Unit⁽⁹⁾		—		—		1.31		2.19		2.19
Series E Preferred Unit⁽¹⁰⁾		—		2.09		2.09		2.09		.70
Series F Preferred Unit⁽¹⁰⁾		—		—		1.50		2.03		.68
Series G Preferred Unit⁽¹⁰⁾		—		2.16		2.16		2.16		.72
Series H, J, K, and L Preferred Units^(10)(11)		—		—		—		3.38		3.36
Series I Preferred Unit^(10)(11)		7,660.00		7,660.00		7,660.00		7,660.00		7,660.00
Weighted average Common Units outstanding:
— Basic		248,314		231,642		220,053		212,288		202,781
— Diluted		253,308		232,608		223,187		220,758		203,804


(1)		Net earnings from discontinued operations have been reclassified to reflect communities classified as discontinued operations as of December 31, 2006 for all years presented.

(2)		Annual revenues and other income, inclusive of discontinued operations, for 2006, 2005, 2004, 2003 and 2002 were $1.3 billion, $1.1 billion, $1.0 billion, $1.0 billion and $1.0 billion, respectively.

(3)		Defined as rental revenues less rental expenses and real estate taxes. We believe that net earnings attributable to Common Units and NOI are the most relevant measures of our operating performance and allow investors to evaluate our business against our industry peers and against all publicly traded companies as a whole. 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. See Item 7 of this Annual Report under Results of Operations for a reconciliation of NOI to Earnings from Operations, and to obtain the required information to recalculate NOI from continuing operations.

(4)		Gains on the disposition of real estate investments classified as held for sale after January 1, 2002 are included in discontinued operations.

(5)		Represents property-specific components of net earnings and gains/losses on the disposition of real estate classified as held for sale subsequent to January 1, 2002.

(6)		Includes a $1.00 per unit special distribution issued to our Common Unitholders in December 2004.

(7)		The Series A Preferred Units were called for redemption during October 2003; of the 2.9 million Preferred Units outstanding, 2.8 million were converted to Common Units and the remaining were redeemed.

(8)		All of the outstanding Series C Preferred Units were redeemed at liquidation value plus accrued distributions in August 2002.

(9)		All of the outstanding Series D Preferred Units were redeemed at liquidation value plus accrued distributions in August 2004.

(10)		The Series L Preferred Units were converted into Common Units during December 2004 and the distribution paid during 2004 prior to conversion was $3.40 per unit. In September 2004, the Series K Preferred Units were converted into Common Units and the distribution paid during 2004 prior to conversion was $2.55 per unit. The Series H Preferred Units were converted into Common Units during May 2003 and the distribution paid during 2003 prior to conversion was $1.27 per unit. In July 2002, Series J Preferred Units were converted into Common Units. During the fourth quarter 2001, we paid approximately $5.8 million of distributions on the Series H, I, J, K and L Preferred Shares that were declared by Smith Residential prior to the Smith Merger.

(11)		Series I Preferred Units have a par value of $100,000 per unit.


	Years Ended December 31,
	2006		2005		2004		2003		2002
Financial Position:
Real estate owned, at cost	$	12,858,507	$	11,031,917	$	8,972,860	$	8,891,418	$	9,229,398

Real estate held for sale⁽¹⁾		329,133		327,347		249,178		107,762		68,337
Investments in and advances to unconsolidated entities		235,323		132,728		111,481		86,367		116,594
Total assets		13,259,127		11,462,095		9,061,280		8,916,591		9,091,647
Unsecured credit facilities		84,723		394,578		19,000		103,790		365,578
Long-Term Unsecured Debt		3,355,699		2,540,036		2,094,358		1,866,861		1,771,724
Mortgages Payable		2,776,234		2,393,652		2,031,505		1,960,827		2,330,533
Total liabilities		6,956,789		5,693,305		4,469,994		4,179,488		4,699,920
Other Common Unitholders’ interest (at redemption value)		1,718,017		1,420,491		885,400		707,924		579,598
Perpetual Preferred Units		50,000		50,000		69,522		210,120		355,221
Total unitholders’ equity		4,584,321		4,348,299		3,703,826		4,017,669		3,799,141
Number of Common Units outstanding		249,661		246,324		222,694		220,063		205,328


	Years Ended December 31,
	2006			2005			2004			2003			2002
Other Data:
Net cash flows provided by (used in):
Operating activities	$	537,428		$	414,019		$	399,897		$	343,696		$	392,043
Investing activities		(506,264	)		(964,621	)		528,253			428,166			(137,401	)
Financing activities		3,853			360,985			(730,125	)		(779,478	)		(248,823	)


(1)		Previous years have been restated to include assets that were classified as held for sale as of December 31, 2006.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Executive Summary

During the three years covered by this Annual Report, we have continued to focus on two of our most important goals: (i) managing our invested capital through the selective sale of apartment communities in non-core locations and redeploying the proceeds to fund investments with higher anticipated growth prospects in outstanding locations in our core markets; and (ii) building the dominant operating platform in the apartment industry.

As it relates to the goal of managing our invested capital, in 2006 we completed a twelve year effort to reposition virtually all our portfolio from less desirable commodity markets into some of the very best apartment markets in the country. The following graphs help illustrate the dramatic shift which has occurred over that period.

Other major factors that influenced our operating results over the last three years include the following:

	•		Our Same-Store NOI has increased 11.0% in 2006 as compared to 2004. We believe the improvement in our Same-Store performance has resulted from a number of factors, including strengthening market fundamentals as well as benefits from the significant investments we have made in people and operating systems.

	•		The significant disposition volume resulting from the portfolio repositioning strategy mentioned above, resulted in REIT GAAP gains, net of disposition costs, of $546.3 million, $446.7 million and $372.2 million in 2006, 2005 and 2004, respectively. These gains have been a major driver of our earnings per share growth.

	•		Utilizing the REIT’s development, acquisition and operating expertise, Ameriton has identified under-managed operating communities, as well as development and redevelopment opportunities with a short-term ownership horizon of one to two years that have produced GAAP gains, net of dispositions costs, of $51.2 million, $75.2 million and $65.1 million in 2006, 2005 and 2004, respectively. The timing and amount of Ameriton’s contributions to our earnings will fluctuate from year to year and depend primarily on its ability to identify profitable investment opportunities, timing of completion of investments in its development pipeline and real estate market values.

	•		During 2006, we recognized a net loss of $13.1 million ($6.4 million excluding depreciation) as a result of building our International platform and our expansion efforts in Germany.

	•		We recognized $77.4 million, $56.0 million and $19.2 million in other income during 2006, 2005 and 2004, respectively, related primarily to non-recurring insurance-related reimbursement, gains from land sales (including Ameriton land sales) and interest income.

	•		We recognized $275.8 million, $217.6 million and $208.8 million in interest expense, including discontinued operations, during 2006, 2005 and 2004, respectively. The year over year increases were due primarily to financing related to the growth in our real estate portfolio and higher average interest rates.

	•		We recognized $37.5 million, $72.2 million and $29.3 million in other expense, including discontinued operations, during 2006, 2005 and 2004, respectively, related primarily to Ameriton income taxes, debt extinguishment costs and loss contingencies. Most of the costs in other expense are event-driven and will not necessarily reoccur each year.

	•		We recognized $2.3 million and $28.8 million in other non-operating income during 2006 and 2005, respectively, related primarily to gains from the sale of our Rent.com investment.

Reconciliation of Quantitative Summary to Consolidated Statements of Earnings

The following schedule is provided to reconcile our consolidated statements of earnings to the information presented in the “Quantitative Summary” provided in the next section:


	2006									2005									2004
	Continuing			Discontinued						Continuing			Discontinued						Continuing			Discontinued
	Operations			Operations			Total			Operations			Operations			Total			Operations			Operations			Total
Rental revenue	$	1,056,176		$	139,457		$	1,195,633		$	777,603		$	239,806		$	1,017,409		$	642,270		$	325,784		$	968,054

Other income		77,410			—			77,410			56,030			—			56,030			19,208			—			19,208
Property operating expenses (rental expenses and real estate taxes)		(343,342	)		(61,022	)		(404,364	)		(252,382	)		(105,587	)		(357,969	)		(210,747	)		(143,341	)		(354,088	)

Depreciation on real estate investments		(261,438	)		(26,858	)		(288,296	)		(187,771	)		(51,017	)		(238,788	)		(150,470	)		(69,519	)		(219,989	)

Interest expense		(245,895	)		(29,931	)		(275,826	)		(164,035	)		(53,533	)		(217,568	)		(125,108	)		(83,644	)		(208,752	)

General and administrative expenses		(68,188	)		—			(68,188	)		(58,604	)		—			(58,604	)		(55,479	)		—			(55,479	)

Other expense		(13,715	)		(23,805	)		(37,520	)		(49,232	)		(22,947	)		(72,179	)		(13,563	)		(15,739	)		(29,302	)

Minority interest		—			—			—			—			—			—			460			—			460

Income from unconsolidated entities		36,316			—			36,316			22,432			—			22,432			17,902			—			17,902

Other non-operating income		2,338			—			2,338			28,807			—			28,807			28,162			—			28,162

Gains, net of disposition costs		—			597,572			597,572			—			521,934			521,934			—			446,447			446,447


Net earnings	$	239,662		$	595,413		$	835,075		$	172,848		$	528,656		$	701,504		$	152,635		$	459,988		$	612,623

Quantitative Summary

This summary is provided for reference purposes and is intended to support and be read in conjunction with the narrative discussion of our results of operations. This quantitative summary includes all operating activities, including those classified as discontinued operations for GAAP reporting purposes. This information is presented to correspond with the manner in which we analyze the business. We generally reinvest disposition proceeds into new developments and operating communities and therefore believe it is most useful to analyze continuing and discontinued operations on a combined basis. The impact of communities classified as “discontinued operations” for GAAP reporting purposes is discussed separately in a later section under the caption “Discontinued Operations Analysis.”


										2006 vs. 2005			2005 vs. 2004
										Increase /			Increase /
	2006			2005			2004			(Decrease)			(Decrease)
Rental revenues:
Same-Store ⁽¹⁾	$	637,079		$	600,358		$	579,358		$	36,721		$	21,000
Non Same-Store		491,668			375,712			348,668			115,956			27,044
Ameriton		20,869			33,986			36,752			(13,117	)		(2,766	)
International		34,920			—			—			34,920			—
Non-multifamily		11,097			7,353			3,276			3,744			4,077

Total revenues		1,195,633			1,017,409			968,054			178,224			49,355


Property operating expenses (rental expenses and real estate taxes):
Same-Store ⁽¹⁾		201,158			193,906			186,512			7,252			7,394
Non Same-Store		173,108			145,033			148,224			28,075			(3,191	)
Ameriton		10,619			17,038			18,884			(6,419	)		(1,846	)
International		16,225			—			—			16,225			—
Non-multifamily		3,254			1,992			468			1,262			1,524


Total operating expenses		404,364			357,969			354,088			46,395			3,881


Net Operating Income (rental revenues less property operating expenses)		791,269			659,440			613,966			131,829			45,474

Margin (NOI/rental revenues):		66.2	%		64.8	%		63.4	%		1.4	%		1.4	%
Average occupancy during period: ⁽²⁾		93.9	%		94.6	%		94.8	%		(0.7	%)		(0.2	%)

Other income		77,410			56,030			19,208			21,380			36,822
Depreciation of real estate investments		288,296			238,788			219,989			49,508			18,799
Interest expense		327,634			256,679			232,324			70,955			24,355
Capitalized interest		51,808			39,111			23,572			12,697			15,539

Net interest expense		275,826			217,568			208,752			58,258			8,816
General and administrative expenses		68,188			58,604			55,479			9,584			3,125
Other expense		37,520			72,179			29,302			(34,659	)		42,877

Earnings from continuing and discontinued operations		198,849			128,331			119,652			70,518			8,679


Minority interest		—			—			460			—			(460	)
Equity in earnings from unconsolidated entities		36,316			22,432			17,902			13,884			4,530
Other non-operating income Gains on disposition of real estate investments, net of disposition costs:		2,338			28,807			28,162			(26,469	)		645
Taxable subsidiaries		51,245			75,248			74,230			(24,003	)		1,018
REIT		546,327			446,686			372,217			99,641			74,469


Net earnings	$	835,075		$	701,504		$	612,623		$	133,571		$	88,881


(1)		Reflects revenues and operating expenses for Same-Store communities that were owned on December 31, 2006 and fully operating during all three years in the comparison period.

(2)		Does not include occupancy associated with properties owned by Ameriton, operated under the Oakwood Master Leases or International.

Property-level operating results – 2006 compared to 2005

We utilize NOI as the primary measure to evaluate the performance of our operating communities and 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. In analyzing the performance of our operating portfolio, we evaluate Same-Store communities separately from Non Same-Store communities and other properties.

Same-Store Analysis

The following table reflects revenue, expense and NOI growth for Same-Store communities that were owned on December 31, 2006 and fully operating during both years.


	Same-Store			Same-Store
	Revenue			Expense			Same-Store
	Growth			Growth			NOI Growth
Garden		6.6	%		6.2	%		6.7	%
High-Rise		6.5	%		1.9	%		8.8	%

Total		6.5	%		4.4	%		7.5	%

Same-Store revenues were up in all core markets for both the garden and the High-Rise portfolios, resulting primarily from higher rental income per unit. During 2006, we experienced substantial upward pressure on new move-in rental rates as a result of a number of factors, including: (i) employment growth; (ii) lack of new apartment supply due to limited land to build competing assets; (iii) significant increases in the values of single family homes in our protected markets; and (iv) higher interest rates, all of which have translated into significant increases in our revenue growth. In addition to strong rent increases and actively managing our lease expirations we are also continuing to make enhancements to many components of the operating platform, such as LRO, MRI, Online Lease, resident portal and internet marketing. We believe that all of these improvements have resulted in meaningful efficiencies for us. The primary drivers of our year-over-year operating expenses were higher insurance costs, real estate taxes and personnel costs. During 2006, we began passing more utility costs through to residents in our High-Rise communities which helped lower our operating expenses. These revenue and expense increases resulted in overall portfolio Same-Store NOI growth of 7.5%, which was driven principally by strong NOI growth in the Washington D.C. metropolitan area, Southern California and the New York City metropolitan area – which represent more than 72% of the company’s portfolio – with year-to-date Same-Store NOI increases of 7.4%, 8.5% and 12.6%, respectively.

Non Same-Store and Other Analysis

The $87.9 million NOI increase in the non Same-Store portfolio is primarily attributable to (i) $86.6 million related to acquisitions; (ii) $15.6 million related to newly developed apartment communities, including Lease-Ups; (iii) $33.3 million related to the Oakwood Master Leases; and offset by (iv) $52.9 million related to community dispositions.

Ameriton

The $6.7 million NOI decrease from Ameriton apartment communities is primarily attributable to a $10.3 million decline related to community dispositions, including the sale of new developments, partially offset by $3.5 million increase from community acquisitions.

International

The increase in NOI of $18.7 million is primarily attributable to the DeWAG acquisition that occurred in July 2006. As of December 31, 2006, the International portfolio consisted of 8,334 residential units.

Non Multi-family

The $2.5 million NOI increase is primarily attributable to commercial/retail income associated with an asset purchased by Ameriton in July, 2005.

Property-level operating results – 2005 compared to 2004

Same-Store Analysis

The following table reflects revenue, expense and NOI growth for Same-Store communities that were owned on December 31, 2005 and fully operating during both years.


	Same-Store			Same-Store
	Revenue			Expense			Same-Store
	Growth			Growth			NOI Growth
Garden		3.6	%		3.5	%		3.6	%
High-Rise		3.9	%		4.8	%		3.4	%

Total		3.7	%		4.1	%		3.6	%

Same-Store revenues were up in all core markets for both the garden and the High-Rise portfolios, resulting primarily from higher rental income per unit and a slight improvement in the percentage of units occupied. We experienced revenue growth throughout 2005 as our markets strengthened and pricing power returned as new move-in rents, a leading indicator, continued to rise. In addition to improving operating fundamentals across our markets, we believe LRO has also enabled us to better manage lease expirations and produce higher revenues in the slow seasonal months. The Washington D.C. metropolitan area and Southern California, our two largest markets, reported revenue growth of 3.9% and 4.3%, respectively. The drivers of our year-over-year operating expenses were higher real estate taxes and personnel costs, as well as extraordinary snow removal and utility expenses in the first quarter of 2005. These increases were realized to a greater degree in High-Rise. These revenue and expense increases resulted in overall portfolio Same-Store NOI growth of 3.6%, which was the major driver of the 1.4% margin increase recorded for the overall portfolio.

Non Same-Store and Other Analysis

The $30.2 million NOI increase in the non Same-Store portfolio is primarily attributable to (i) $51.5 million related to acquisitions; (ii) $16.0 million related to newly developed apartment communities, including lease-ups; (iii) $20.0 million related to the Oakwood Master Leases; and offset by (iv) $61.2 million related to community dispositions.

Ameriton

The $0.9 million NOI decrease from Ameriton apartment communities is primarily attributable to a $6.7 million decline related to community dispositions, including the sale of new developments, partially offset by $5.9 million increase from community acquisitions.

Non Multi-family

The $2.6 million NOI increase is primarily attributable to commercial/retail income associated with an asset purchased by Ameriton in 2005.

Other Income

The increase in other income during 2006 as compared to 2005 resulted primarily from (i) a $19.0 million increase in interest income on mortgage loans to third parties and other interest bearing instruments; (ii) a $19.6 million increase in gains on land sales, primarily in Ameriton. These increases were offset by a $21.9 million decrease in 2006 related to insurance recoveries.

The increase in other income during 2005 as compared to 2004 resulted primarily from (i) a $25.7 million increase from insurance recoveries related to moisture infiltration and mold litigation settlement costs associated with a previously owned community in Southeast Florida; (ii) a $9.3 million increase in interest income on mortgage loans to third parties and other interest bearing instruments; (iii) a $4.7 million increase in hurricane-related insurance reimbursements; and (iv) a $2.8 million insurance reimbursement for costs incurred in connection with our FHA and ADA settlement. These increases and other smaller insurance-related reimbursements recorded in 2005 were partially offset by a $4.7 million benefit related to the sale of CES and higher land gains in 2004.

Depreciation Expense

The depreciation increases in each year are primarily related to the increase in the size of the real estate portfolio. A few of the major drivers are (i) amortization of the value associated with in-place leases over the lease term on new acquisitions; (ii) disposition of assets with a lower depreciable basis at significant gains, and reinvestment of the proceeds into assets with a higher depreciable basis; partially offset by (iii) cessation of depreciation on assets sold or classified as held for sale.

Interest Expense

The increase in gross interest expense during 2006 as compared to 2005 is due to higher average debt levels associated with the increased size of the real estate portfolio combined with higher average interest rates on our unsecured credit facilities and other debt instruments. The International transactions were the most significant drivers of the portfolio increase in 2006. Capitalized interest also increased significantly as a result of the increase in the size and number of communities under construction and, to a lesser extent, higher average interest rates in 2006.

The increase in gross interest expense during 2005 as compared to 2004 is due to higher average debt levels associated with the increased size of the real estate portfolio combined with higher average interest rates on our unsecured credit facilities and other debt instruments. The Oakwood transaction was the most significant driver of the portfolio increase in 2005. Capitalized interest also increased significantly as a result of the increase in the size and number of communities under construction and, to a lesser extent, higher average interest rates in 2005.

General and Administrative Expenses

The increase in the general and administrative expenses during 2006 as compared to 2005 is principally due to higher personnel-related costs related to our recent International expansion.

The increase in general and administrative expenses during 2005 as compared to 2004 is due to higher employee compensation-related costs, increased recruiting and relocation expenses and higher travel costs. These costs were partially offset by a smaller charge in 2005 as compared to 2004 pertaining to executive Common Unit grants related to the achievement of total Unitholder return performance targets.

Other Expenses

The decrease in other expenses during 2006 as compared to 2005 is primarily attributable to (i) $14.3 million decrease in early debt extinguishment costs; (ii) an $8.5 million decrease in legal expenses; (iii) a $1.5 million decrease in taxes in our taxable REIT subsidiaries; (iv) a $7.8 million decrease in hurricane related charges; (v) a $2.8 million writeoff of a loan to a prior affiliate in 2005; and (vi) a $1.5 million impairment related to a non-core asset in 2005 offset by a $4.3 million impairment charge on that asset in 2006.

The increase in other expenses during 2005 as compared to 2004 is primarily attributable to (i) $21.1 million increase in early debt extinguishment costs; (ii) $11.9 million in legal expenses and litigation settlement costs related to the settlement of the FHA and ADA lawsuit and other legal matters; (iii) a $4.3 million increase in hurricane related charges; (iv) a $2.8 million writeoff of a loan to a prior affiliate; and (v) a $1.5 million impairment related to a non-core asset.

Equity in Income from Unconsolidated Entities

The increase in income from unconsolidated entities during 2006 as compared to 2005 is due primarily to more income from community dispositions and related venture liquidations.

The increase in income from unconsolidated entities during 2005 as compared to 2004 is due primarily to an increase in disposition-related gains, including $6.6 million from Ameriton joint ventures and recognition of a $1.7 million incentive payment earned in connection with the final liquidation of a joint venture partnership in 2005. These increases were partially offset by recognition of $3.2 million of contingent proceeds from the expiration during the second quarter of 2004 of certain indemnifications related to the sale of CES.

Other Non-Operating Income

Other non-operating income during 2006 consists primarily of a $1.7 million of gain from the sale of our Rent.com investment which was recorded upon the resolution of certain contingencies..

Other non-operating income during 2005 consists primarily of $25.9 million of gains from the sale of our Rent.com investment and $2.1 million from the sale of other equity securities while 2004 other non-operating income consists of $24.9 million in gains on the sale of equity securities and a $3.3 million gain from the sale of our property management business.

Gains on real estate dispositions

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

Discontinued Operations Analysis

Included in the overall results discussed above are the following amounts associated with properties which have been sold or were classified as held for sale as of December 31, 2006 (dollars in thousands).


	Years Ended December 31,
	2006			2005			2004
Rental revenue	$	139,457		$	239,806		$	325,784
Rental expenses		(44,043	)		(74,715	)		(104,023	)
Real estate taxes		(16,979	)		(30,872	)		(39,318	)
Depreciation on real estate investments		(26,858	)		(51,017	)		(69,519	)
Interest expense⁽¹⁾		(29,931	)		(53,533	)		(83,644	)
Income taxes from taxable REIT subsidiaries		(9,972	)		(15,600	)		(13,975	)

Provision for possible loss on real estate investment		(4,328	)		(1,500	)		—
Debt extinguishment costs related to dispositions		(9,505	)		(5,847	)		(1,764	)

Gains on disposition of real estate investments, net of disposition costs:
Taxable subsidiaries		51,245			75,248			62,629
REIT		546,327			446,686			383,818

Total discontinued operations	$	595,413		$	528,656		$	459,988


Number of communities sold during period		42			35			30
Number of communities classified as held for sale		9			9			6


(1)		The portion of interest expense included in discontinued operations that is allocated to properties based on the company’s leverage ratio was $20.9 million, $40.3 million and $62.2 million for 2006, 2005 and 2004, respectively.

As a result of the execution of our strategy of managing our invested capital through the selective sale of apartment communities in non-core locations and redeploying the proceeds to fund investments with higher anticipated growth prospects in our core markets, we had significant disposition activity in all three years. The resulting gains, net of disposition costs, were the biggest driver of overall earnings from discontinued operations. The REIT gains progressively increased in each successive year as communities with higher values were sold and the market for apartment communities improved. Our taxable REIT subsidiary gains are from Ameriton community dispositions, which contributed significantly to our earnings in each year. The year-to-year changes in revenues and operating expenses associated with discontinued operations is primarily attributable to the market and number of communities sold during the period or held for sale at the end of the period. Changes in direct operating expenses and allocated interest expense generally relate to the overall revenue levels for each period. Income taxes fluctuate in relation to the taxable gains associated with communities sold by our taxable REIT subsidiaries, which increased in each successive year.

Preferred Unit Distribution Analysis

Preferred Unit distributions were consistent between 2006 and 2005 and decreased by $7.1 million in 2005 as compared to 2004. This decrease was primarily due to the redemption of our Series D Preferred Units in August 2004, the conversion of Series K Preferred Units into Common Units in September 2004 and the early conversion of Series L Preferred Units into Common Units in December 2004. In August and November 2004, 520,000 and 400,000 Series E Perpetual Preferred Units were redeemed at liquidation value, respectively, plus accrued distributions. In February 2005, the remaining 200,000 Series E Preferred Units were redeemed at liquidation value plus accrued distributions. In March 2005, 600,000 Series G Preferred Units were redeemed at liquidation value plus accrued distributions. These savings were partially offset by the recognition of $1.7 million of issuance costs related to the Series D Preferred Units in 2004. The decrease in Preferred Unit distributions due to conversions was offset by an increase in Common Unit distributions.

Liquidity and Capital Resources

We are committed to maintaining a strong balance sheet and preserving our financial flexibility, which we believe enhances our ability to capitalize on attractive investment opportunities as they become available. As a result of the significant cash flow generated by our operations, current cash positions, the available capacity under our unsecured credit facilities, gains from the disposition of real estate and our demonstrated ability to access the capital markets, we believe our liquidity and financial condition are sufficient to meet all of our reasonably anticipated cash flow needs during 2007. Please refer to the Consolidated Statements of Cash Flows for detailed information of our sources and uses of cash for the years ended December 31, 2006, 2005 and 2004.

Scheduled Debt Maturities and Interest Payment Requirements

We have structured our long-term debt maturities in a manner designed to avoid unmanageable repayment obligations in any year, which would negatively impact our financial flexibility. We have scheduled debt maturities of $491.1 million during 2007, $546.8 million in 2008 and $481.5 million in 2009. See Note 8 in our audited financial statements in this Annual Report for additional information on outstanding debt balances and scheduled debt maturities.

On February 20, 2007, we had $69.9 million borrowed on our unsecured credit facilities, $8.9 million outstanding under letters of credit and available borrowing capacity on our unsecured credit facilities of $625.4 million.

Our unsecured credit facilities, Long-Term Unsecured Debt and mortgages payable had effective weighted average interest rates of 5.9%, 5.6% and 5.4%, respectively, as of December 31, 2006. All of these rates give effect to debt issuance costs, fair value hedges, the amortization of fair market value purchase adjustments and other fees and expenses, as applicable.

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 as of and for the year ended December 31, 2006.

Unitholder Distribution Requirements

Based on anticipated distribution levels for 2007 and the number of units outstanding as of December 31, 2006, we anticipate that we will pay the following distributions in 2007 (in thousands, except per unit amounts):


	Per Unit		Total
Common Unit distributions⁽¹⁾:
Common Units	$	1.81	$	398,466
A-1 Common Unit distributions		1.81		53,421
M Preferred Unit		476.03		—
N-1 Preferred Units		20.96		6
N-2 Preferred Units		8.98		6
Series I Preferred Unit distributions⁽²⁾		7,660.00		3,830

Total dividend/distribution requirements			$	455,729


(1)		Future distributions on Common Units are contingent upon approval by our Board of Trustees

(2)		Series I Preferred Units have a par value of $100,000 per unit.

Planned Investments

Following is a summary of planned investments as of December 31, 2006, including Ameriton but excluding joint ventures. The amounts labeled “Discretionary” represent future investments that we plan to make, although there is not a contractual commitment to do so. The amounts labeled “Committed” represent the approximate amount that we are contractually committed to fund for communities under construction in accordance with construction contracts with general contractors (dollar amounts in thousands).


	Planned Investments
	Discretionary		Committed
Communities under redevelopment	$	1,812	$	3,082
Communities under construction		—		619,441
Communities In Planning and Owned		1,196,121		—
Communities In Planning and Under Control		406,336		—
Community acquisitions under contract		146,766		—
FHA/ADA Settlement Capital Accrual		—		29,185

Total	$	1,751,035	$	651,708

In addition to the planned investments noted above, we expect to make additional investments relating to planned expenditures on recently acquired communities as well as recurring expenditures to improve and maintain our established operating communities.

We anticipate completion of most of the communities that are currently under construction and the planned operating community improvements by the end of 2009. No assurances can be given that communities we do not currently own will be acquired or that planned developments will actually occur. In addition, actual costs incurred could be greater or less than our current estimates.

Funding Sources

We anticipate financing our planned investment and operating needs primarily with cash flow from operating activities, disposition proceeds from our capital recycling, existing cash balances and borrowings under our unsecured credit facilities, prior to arranging additional long-term financing. We had $625.4 million in available capacity on our unsecured credit facilities, $465.3 million of cash in tax-deferred exchange escrow and $3.0 million of cash on hand at February 20, 2007. In addition, we expect the proceeds from REIT dispositions to approximate our investment in new REIT operating community acquisitions in 2007. We therefore do not believe that discontinued operations will have a significant adverse impact on our liquidity in the foreseeable future. We have filed registration statements to facilitate issuance of debt and equity securities on an as-needed basis subject to our ability to effect offerings on satisfactory terms based on prevailing conditions.

Litigation and Contingencies

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 FHA and 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 wholly owned and joint venture communities, of which we still own or have an interest in 45. As part of the settlement, the three disability organizations all recognized that the Operating Trust had no intention to build any of its communities in a manner inconsistent with the FHA or ADA.

We are subject to various claims filed in 2002 and 2003 in connection with moisture infiltration and resulting mold issues at certain high-rise properties we once owned in Southeast Florida. These claims generally allege that water infiltration and resulting mold contamination resulted in the claimants having personal injuries and/or property damage. Although certain of these claims continue to be in various stages of litigation, with respect to the majority of these claims, we have either settled the

claims and/or we have been dismissed from the lawsuits that had been filed. With respect to the lawsuits that have not been resolved, we continue to defend these claims in the normal course of litigation.

Critical Accounting Policies

We define critical accounting policies as those accounting policies that require our management to exercise their most difficult, subjective and complex judgments. Our management has discussed the development and selection of all of these critical accounting policies with our audit committee, and the audit committee has reviewed the disclosure relating to these policies. Our critical accounting policies relate principally to the following key areas:

Internal Cost Capitalization

We have an investment organization that is responsible for development and redevelopment of apartment communities. Consistent with GAAP, all direct and certain indirect costs, including interest and real estate taxes, incurred during development and redevelopment activities are capitalized. Interest is capitalized on real estate assets that require a period of time to get them ready for their intended use. The amount of interest capitalized is based upon the average amount of accumulated development expenditures during the reporting period. Included in capitalized costs are management’s estimates of the direct and incremental personnel costs and indirect project costs associated with our development and redevelopment activities. Indirect project costs consist primarily of personnel costs associated with construction administration and development accounting, legal fees, and various office costs that clearly relate to projects under development. Because the estimation of capitalizable internal costs requires management’s judgment, we believe internal cost capitalization is a “critical accounting estimate.”

If future accounting rules limit our ability to capitalize internal costs or if our development activity decreased significantly without a proportionate decrease in internal costs, there could be an increase in our operating expenses. For example, if hypothetically, we were to reduce our development and land acquisition activity by 25% with no corresponding decrease in internal costs, our diluted net earnings per Common Unit could decrease by approximately 0.6% or approximately $0.019 based on 2006 amounts.

Valuation of Real Estate

Long-lived assets to be held and used are carried at cost and evaluated for impairment when events or changes in circumstances indicate such an evaluation is warranted. We also evaluate assets for potential impairment when we deem them to be held for sale. Valuation of real estate is considered a “critical accounting estimate” because the evaluation of impairment and the determination of fair values involve a number of management assumptions relating to future economic events that could materially affect the determination of the ultimate value, and therefore, the carrying amounts of our real estate. Furthermore, decisions regarding when a property should be classified as held for sale under SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” requires significant management judgment. There are many phases to the disposition process ranging from the initial market research to being under contract with non-refundable earnest money to closing. Deciding when management is committed to selling an asset is therefore highly subjective.

When determining if there is an indication of impairment, we estimate the asset’s NOI over the anticipated holding period on an undiscounted cash flow basis and compare this amount to its carrying value. Estimating the expected NOI and holding period requires significant management judgment. If it is determined that there is an indication of impairment for assets to be held and used, or if an asset is deemed to be held for sale, we then determine the fair value of the asset.

The apartment industry uses capitalization rates as the primary measure of fair value. Specifically, annual NOI for a community is divided by an estimated capitalization rate to determine the fair value of the community. Determining the appropriate capitalization rate requires significant judgment and is typically based on many factors including the prevailing rate for the market or submarket, as well as the quality and location of the properties. Further, capitalization rates can fluctuate up or down due to a variety of factors in the overall economy or within local markets. If the actual capitalization rate for a community is significantly different from our estimated rate, the impairment evaluation for an individual asset could be materially affected. For example, we would value a community with annual NOI of $10 million at $200 million using a 5.0% capitalization rate, whereas that same community would be valued at $166.7 million if the actual capitalization rate were 6.0%. Historically we have had limited and infrequent impairment charges, and the majority of our apartment community sales have produced gains. For example, we have sold approximately $4.0 billion of real estate assets based on cost over the 3 years

covered by this Annual Report, which produced approximately $1.6 billion in gains. Over that same period, we have recorded $5.8 million in valuation-related impairments.

Capital Expenditures and Depreciable Lives

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

Determining whether expenditures meet the criteria for capitalization, the assignment of depreciable lives and determining the appropriate amounts to allocate between tangible and intangible assets for property acquisitions requires our management to exercise significant judgment and is therefore considered a “significant accounting estimate.”

Total capital expenditures were 0.9% and 1.5% of weighted average gross real estate as of December 31, 2006 and 2005, respectively. Additionally, depreciation expense related to continuing operations as a percentage of depreciable real estate was 3.0%, 3.1% and 3.3% or $1.05, $1.03 and $0.99 per diluted Unit for the years ended December 31, 2006, 2005 and 2004, respectively. If the actual weighted average useful life were determined to be one year shorter or longer than management’s current estimate, our annual depreciation expense would increase or decrease approximately 3.0% or $0.03 per Common Unit. See Note 1 in our audited financial statements in this Annual Report for additional detail on depreciable lives.

Pursuit Costs

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

Because of the inherent judgment involved in evaluating whether a prospective property will ultimately be acquired, we believe capitalizable pursuit costs are a “critical accounting estimate.” If it were determined that 25% of accumulated costs relating to prospective acquisitions were deemed improbable as of December 31, 2006, net earnings for the year ended December 31, 2006 would decrease by approximately $0.027 per Common Unit, excluding refundable earnest money.

Consolidation vs. Equity Method of Accounting for Ventures

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

For example, if we were to consolidate all of our equity-method joint ventures at December 31, 2006, our total assets and total liabilities would increase by approximately $1.5 billion (11.4%) and $1.2 billion (17.1%), respectively.

Off Balance Sheet Arrangements

Our real estate investments in entities that do not qualify as variable interest entities, variable interest entities where we are not the primary beneficiary and entities we do not control through majority economic interest are not consolidated and are reported as investments in unconsolidated entities. Our investments in and advances to unconsolidated entities at December 31, 2006, aggregated $235.3 million. Please refer to Note 6, Investments in and Advances to Unconsolidated Entities for additional information.

As part of the Smith Merger and the Oakwood transaction, we are required to indemnify certain Unitholders for any personal income tax expense resulting from the sale of properties identified in tax protection agreements. We do not believe that we will be required to perform under the terms of the indemnification agreements due to our ability and intent to hold and use these properties through the term of the indemnification period or our ability to dispose of assets through tax-deferred exchanges. The estimated difference in the book and tax carrying value of properties that are at least partially subject to tax protection agreements was approximately $4.3 billion at December 31, 2006.

Contractual Commitments

The following table summarizes information contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in our audited financial statements in this Annual Report regarding contractual commitments (amounts in millions).


			2008		2010		2012
	2007		and 2009		and 2011		thru 2096		Total
Scheduled long-term debt maturities	$	491.1	$	1,028.3	$	1,248.1	$	3,364.4	$	6,131.9
Unsecured credit facilities⁽¹⁾		—		—		84.7		—		84.7
Term loan — International		235.8		—		—		—		235.8
Interest on indebtedness		335.3		590.7		481.7		188.2		1,595.9
Development and redevelopment expenditures		307.9		314.6		—		—		622.5
Performance bonds and guarantees		26.9		11.5		—		1.2		39.6
FHA/ADA Settlement⁽²⁾		14.6		14.6		—		—		29.2
Lease commitments and other⁽³⁾		86.0		17.7		19.2		217.8		340.7

Total	$	1,497.6	$	1,977.4	$	1,833.7	$	3,771.6	$	9,080.3


(1)		The $600 million unsecured facility matures December 2010, with a one-year extension option available at our discretion.

(2)		Represents the estimated capital spending associated with the FHA and ADA settlement assuming the remainder will be spent evenly over the next two years. Certain communities impacted by the settlement may be sold, which could impact the ultimate timing and amounts spent.

(3)		Includes letters of credit and lease commitments relating principally to ground lease payments as of December 31, 2006.

New Accounting Pronouncements

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. The presumption that the general partner or group of general partners or managing members controls a limited liability partnership or limited liability company may be overcome if the limited partners or members have (1) the substantive ability to dissolve the partnership without cause, or (2) substantive participating rights. EITF No. 04-5 became effective on June 30, 2005 for new or modified limited partnerships or limited liability companies and January 1, 2006 for all existing arrangements. The adoption of EITF No. 04-5 did not have a material impact on our financial position, net earnings or cash flows.

“variable interests” in the entity; and (c) which party, if any, is the primary beneficiary of the VIE. Our assessment of variability affects any calculation of expected losses and expected residual returns, if such a calculation is necessary. The company is required to apply the guidance in this FSP prospectively to all entities (including newly created entities) with which it first becomes involved and to all entities previously required to be analyzed under FIN 46R when a “reconsideration event” has occurred, beginning July 1, 2006. The company will evaluate the impact of this FSP at the time any such “reconsideration event” occurs, and for any new entities with which the company becomes involved in future periods.

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109.” FIN 48 defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to have a material effect on our financial position, net earnings or cash flows.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108) Topic 1N, “Financial Statements – Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” This Bulletin provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The guidance in this Bulletin must be applied to financial reports covering the first fiscal year ending after November 15, 2006. The adoption of SAB 108 did not have a material effect on our financial position, net earnings or cash flows.

Please refer to Note 11 for details regarding the implementation of SFAS No. 123R, “Share-Based Payment.”

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Stock Investments

From time to time we make public and private investments in equity securities. The publicly traded equity securities are classified as “available for sale securities” and carried at fair value, with unrealized gains and losses reported as a separate component of Unitholders’ equity. The private investments, for which we lack the ability to exercise significant influence, are accounted for at cost. Declines in the value of public and private investments that our management determines are other than temporary, are recorded as a provision for possible loss on investments. Our evaluation of the carrying value of these investments is primarily based upon a regular review of market valuations (if available), each company’s operating performance and assumptions underlying cash flow forecasts. In addition, our management considers events and circumstances that may signal the impairment of an investment.

Interest Rate 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 sustained, 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 the years ended December 31, 2006, 2005 and 2004 we recorded an increase/(decrease) to interest expense of $372,000, $(174,000) and $33,000, for hedge ineffectiveness caused by a difference between the interest rate index on a portion of our outstanding variable rate debt and the underlying index of the associated interest rate swap. We pursue hedging strategies that we expect will result in the lowest overall borrowing costs and least degree of earnings volatility possible.

The following table summarizes the notional amount, carrying value and estimated fair value of our derivative financial instruments used to hedge interest rates, as of December 31, 2006. The notional amount represents the aggregate amount of a particular security that is currently hedged at one time, but does not represent exposure to credit, interest rate or market risks (dollar amounts in thousands).


					Carrying and
	Notional		Maturity		Estimated
	Amount		Date Range		Fair Value
Cash flow hedges:
Interest rate caps	$	486,354		2007-2013	$	809
Interest rate swaps		367,054		2007-2014		7,080

Total cash flow hedges	$	853,408		2007-2014	$	7,889

Fair value hedges:
Interest rate swaps	$	75,055		2008	$	1,185
Total rate of return swaps		36,346		2007		(1,447	)

Total fair value hedges	$	111,401		2007-2008	$	(262	)

Total hedges	$	964,809		2007-2014	$	7,627

Foreign Currency Hedging Activities

We are exposed to foreign-exchange related variability and earnings volatility on our foreign investments. During 2006 and 2005, we entered into foreign currency forward contracts with an aggregated notional amount of €201.5 million and designated the contracts as cash flow hedges. The fair value of these forward contracts at December 31, 2006 was ($1.2) million.

Energy Contract Hedging Activities

We are exposed to price risk associated with the volatility of natural gas, fuel oil and electricity rates. During 2005 and 2006, we entered into contracts with several of our suppliers to fix our payments on set quantities of natural gas, fuel oil and electricity. If the contract meets the criteria of a derivative, we designate these contracts as cash flow hedges of the overall changes in floating-rate payments made on our energy purchases. As of December 31, 2006, we had energy-related derivatives with aggregate notional amounts of $5.3 million and an estimated fair value and carrying amount of ($1.1) million. These contracts mature on or before December 31, 2007.

Equity Securities Hedging Activities

We are exposed to price risk associated with changes in the fair value of certain equity securities. During 2006, we entered into forward sale agreements with an aggregate notional amount, which represents the fair value of the underlying marketable securities, of approximately $6.6 million and an aggregate fair value of the forward sale agreements of approximately ($0.3) million, to protect against a reduction in the fair value of these securities. We designated this forward sale as a fair value hedge.

Interest Rate Sensitive Liabilities

The table below provides information about our liabilities that are sensitive to changes in interest rates as of December 31, 2006. As the table incorporates only those exposures that existed as of December 31, 2006, it does not consider those exposures or positions that could arise after that date.

Moreover, because there were no firm commitments to actually sell these instruments at fair value as of December 31, 2006, the information presented herein is an estimate and has limited predictive value. As a result, our ultimate realized gain or loss, if any, will depend on the exposures that arise during future periods, hedging strategies, prevailing interest rates and other market factors existing at the time. The debt classification and interest rates shown below give effect to fair value hedges and other fees or expenses, where applicable (in thousands):


																						Estimated
																			Total			Fair
	2007			2008			2009			2010			2011			Thereafter			Balance			Value⁽¹⁾
Interest rate sensitive liabilities:

Unsecured credit facilities:	$	—		$	—		$	—		$	84,723		$	—		$	—		$	84,723		$	84,723

Average nominal interest rate⁽²⁾		—			—			—			5.5	%		—			—			5.5	%		—
Term loan — International:	$	235,771		$	—		$	—		$	—		$	—		$	—		$	235,771		$	235,771

Average nominal interest rate⁽²⁾		4.1	%		—			—			—			—			—			4.1	%		—
Long-Term Unsecured Debt:

Fixed rate	$	386,250		$	312,822		$	81,250		$	263,750		$	625,000		$	1,610,332		$	3,279,404		$	3,360,607

Average nominal interest rate⁽²⁾		5.4	%		4.0	%		7.6	%		6.0	%		4.5	%		5.7	%		5.4	%		—
Variable rate⁽³⁾	$	—		$	21,468		$	—		$	—		$	—		$	54,827		$	76,295		$	76,295

Average nominal interest rate⁽²⁾		—			3.9	%		—			—			—			4.0	%		4.0	%		—
Mortgages payable:

Fixed rate debt	$	77,690		$	196,637		$	392,102		$	131,931		$	174,143		$	820,480		$	1,792,983		$	1,818,091

Average nominal interest rate⁽²⁾		5.8	%		5.7	%		6.0	%		6.0	%		6.1	%		6.0	%		6.0	%		—
Variable rate debt	$	27,235		$	15,859		$	8,132		$	8,813		$	44,446		$	878,766		$	983,251		$	983,251

Average nominal interest rate⁽²⁾		5.1	%		2.4	%		5.1	%		5.1	%		4.6	%		4.9	%		4.8	%		—


(1)		The estimated fair value for each of the liabilities listed was calculated by discounting the actual principal payment stream at prevailing interest rates (obtained from third party financial institutions) currently available on debt instruments with similar terms and features.

(2)		Reflects the weighted average nominal interest rate on the liabilities outstanding during each period, giving effect to principal payments and final maturities during each period, if any. The nominal rates for variable rate mortgages payable have been held constant during each period presented based on the actual variable rates as of December 31, 2006. The weighted average effective interest rate on the unsecured credit facilities, Long-Term Unsecured Debt and mortgages payable was 5.9%, 5.6% and 5.4, respectively, as of December 31, 2006.

(3)		Represents unsecured tax-exempt bonds.

Item 8. Financial Statements and Supplementary Data

Our Balance Sheets as of December 31, 2006 and 2005, and our Statements of Earnings, Unitholders’ Equity. Other Common Unitholders’ Interest and Comprehensive Income (Loss) and Cash Flows for each of the years in the three-year period ended December 31, 2006, Schedule III — Real Estate and Accumulated Depreciation and Schedule IV – Mortgage Loans on Real Estate, together with the reports of KPMG LLP, Independent Registered Public Accounting Firm, are included under Item 15 of this Annual Report and are incorporated herein by reference. Unaudited selected quarterly financial data is presented in Note 14 of our audited financial statements in this Annual Report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

An evaluation was carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were, to the best of their knowledge, effective as of December 31, 2006, to ensure that information required to be disclosed in reports that are filed or submitted under the Securities Exchange Act are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to December 31, 2006, there were no significant changes in the company’s disclosure controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2006. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Our management has concluded that, as of December 31, 2006, our internal control over financial reporting was effective based on these criteria. Our independent registered public accounting firm, KPMG LLP, has issued an audit report on our assessment of our internal control over financial reporting, which is included herein.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of their inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Archstone-Smith Operating Trust have been detected.

We acquired DeWAG during July 2006 and have excluded the DeWAG financial reporting controls from our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006. DeWAG’s total assets were $857.0 million and total revenues were $27.7 million as of and for the year ended December 31, 2006 and are included in our consolidated financial statements.


/s/ R. Scot Sellers
R. Scot Sellers
Chairman of the Board, Chief Executive Officer and Trustee (principal executive officer)

/s/ Charles E. Mueller, Jr.
Charles E. Mueller, Jr.
Chief Financial Officer (principal financial officer)

Item 9B. Other Information

Not Applicable.

Part III

Item 10. Directors, Executive Officers and Corporate Governance

Archstone-Smith is our sole trustee and is responsible for the oversight and management of the Operating Trust. All of the property ownership and business operations of Archstone-Smith are conducted through the Operating Trust. For information regarding our senior officers, see “Item 1. Business – Officers of the Operating Trust.” For information regarding our Code of Ethics, including all of our executive officers, see “Item 1. Business – Available Information and Code of Ethics.” Information regarding the trustees of Archstone-Smith will be contained in Archstone-Smith’s definitive proxy statement relating to our annual meeting of shareholders (the “2007 Archstone-Smith Proxy Statement”), which is incorporated herein by reference. Please see the 2007 Archstone-Smith Proxy Statement for further information. Our sole trustee, Archstone-Smith, has not determined that at least one trustee is an “audit committee financial expert” as no individuals serve as trustee. However, Archstone-Smith has determined that one member of its Audit Committee qualifies as an “audit committee financial expert.” See the 2007 Archstone-Smith Proxy Statement for further information.

Section 16(a) of the Securities Exchange Act of 1934 requires the Operating Trust to report whether or not, based on its review of reports to the SEC filed by beneficial owners of more than 10% of any class of equity securities registered under Section 12 of the Securities Act of 1933, whether any such required reports were not filed or were filed untimely. There was no untimely report.

Item 11. Executive Compensation

Our sole trustee is responsible for the oversight and management of the Operating Trust and performs the day-to-day management of the Operating Trust through its officers. No compensation is paid to Archstone-Smith for acting as trustee. Each officer of our sole trustee holds the same officer position with the Operating Trust and is compensated for his or her service to Archstone-Smith and the Operating Trust, considered as a single enterprise. Information concerning the compensation of the executive officers of Archstone-Smith will be contained in the 2007 Archstone-Smith Proxy Statement, which is incorporated herein by reference. The members of the Archstone-Smith Management Development and Executive Compensation Committee (the “Compensation Committee”) will be provided in the 2007 Archstone-Smith Proxy Statement. The Compensation Committee has no interlocks or insider participation.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Archstone-Smith owned 220,221,425 A-2 Common Units as of February 20, 2007, which represents all of the outstanding voting securities of the Operating Trust. The following table sets forth information as of February 20, 2007, regarding beneficial ownership of A-1 Common Units by each person known by us to be beneficial owners of more than 5% of the A-1 Common Units, by each of Archstone-Smith’s trustees, by each of Archstone-Smith’s five most highly compensated executive officers and by all of the Operating Trust’s executive officers as a group. Each person named in the table has sole voting and investment power with respect to all A-1 Common Units shown as beneficially owned by such person, except as otherwise set forth in the notes to the table. The address of each person listed below is c/o Archstone-Smith Operating Trust, 9200 E. Panorama Circle, Suite 400, Englewood, Colorado 80112.


	Number of A-1			Percentage of
	Common Units			All
	Beneficially			A-1 Common
Name of Beneficial Owner	Owned			Units
Robert P. Kogod		1,647,094	⁽¹⁾		6.04	%
R. Scot Sellers		—			—
Robert H. Smith		1,732,801	⁽¹⁾		6.35	%
Caroline Brower		—			—
J. Lindsay Freeman		—			—
Charles E. Mueller, Jr.		—			—
Alfred G. Neely		—			—
All Operating Trust executive officers as a group (6 persons)		1,925,127	⁽¹⁾		7.06	%


(1)		Includes for each of Messrs. Smith and Kogod beneficial ownership of Class A-1 Common Units as follows: Mr. Smith, 1,732,801 and Mr. Kogod, 1,647,094. Mr. Smith has shared voting and shared dispositive power with respect to 1,543,665 of such Class A-1 Common Units. Of the 1,543,665 Class A-1 Common Units for which Mr. Smith shares voting power and dispositive power, 88,887 are owned by Mr. Smith’s spouse and 1,454,768 are owned by CESM, Inc., of which Mr. Smith is a director, secretary and treasurer. Mr. Kogod has shared voting and shared


		dispositive power with respect to 1,523,510 of such Class A-1 Common Units. Of the 1,523,510 Class A-1 Common Units for which Mr. Kogod shares voting power and dispositive power, 68,742 are owned by Mr. Kogod’s spouse and 1,454,768 are owned by CESM, Inc., of which Mr. Kogod is a director and the president. The Class A-1 Common Units that are owned by CESM, Inc. are reported twice, once as beneficially owned by Mr. Smith and again as beneficially owned by Mr. Kogod.

Item 13. Certain Relationships and Related Transactions, and Director Independence

All of the property ownership and business operations of Archstone-Smith are conducted through the Operating Trust. In the normal course of business, because of its structure as an UPREIT, Archstone-Smith conducts all of its operations through the Operating Partnership and, as a result, engages in a significant number of transactions with and on behalf of the Operating Trust. Information concerning certain relationships and related transactions between the Operating Trust and Archstone-Smith, its executive officers, the holders of more than 10% of the Common Shares of Archstone-Smith and related persons of Archstone-Smith, will be contained in the 2007 Archstone-Smith Proxy Statement, which is incorporated herein by reference. Information concerning Archstone-Smith’s trustees will be contained in the 2007 Archstone-Smith Proxy Statement, which is incorporated herein by reference. Please see the 2007 Archstone-Smith Proxy Statement for further information.

Item 14. Principal Accounting Fees and Services

Subject to ratification by the shareholders of Archstone-Smith, the Archstone-Smith Audit Committee has selected KPMG LLP, Independent Registered Public Accountants, to serve as the auditors of the Operating Trust’s books and records for the coming year. KPMG LLP has served as our auditors since 1980. A representative of KPMG LLP is expected to be present at the Archstone-Smith annual meeting, and will be given an opportunity to make a statement if that representative desires to do so and will be available to respond to appropriate questions. The fees billed by KPMG LLP in 2006 and 2005 for services provided to Archstone-Smith and the Operating Trust as a whole were as follows:


	2006		2005

Audit Fees⁽¹⁾	$	1,459,722	$	1,363,205
Audit-Related Fees⁽²⁾		202,421		331,400
Tax Fees⁽³⁾		93,508		111,693
All Other Fees⁽⁴⁾		—		—

TOTAL	$	1,755,651	$	1,806,298


(1)		“Audit Fees” are the aggregate fees billed by KPMG LLP for professional services rendered for the audit of Archstone-Smith’s annual financial statements for the years ended December 31, 2006 and December 31, 2005 and the reviews of the financial statements included in Archstone-Smith’s quarterly reports on Form 10-Q during 2006 and 2005. These fees include fees billed in connection with KPMG LLP’s analysis of the effectiveness of our internal controls. “Audit Fees” for 2006 also includes amounts billed relating to our international operations, which totaled $96,622. In addition, “Audit Fees” includes amounts billed for registration statements filed and related comfort letters and consents amounting to $96,300 and $147,205 in 2006 and 2005, respectively.

(2)		“Audit-related fees” include fees billed for assurance and related services that are reasonably related to the performance of the audit and not included in the “audit fees” described above, including audits of joint ventures and unconsolidated and consolidated subsidiaries and in 2005, $178,200 for Rule 3-14 audits.

(3)		“Tax Fees” are fees billed by KPMG LLP in either 2006 or 2005 for tax services, including tax compliance, tax advice or tax planning.

(4)		“All Other Fees” are fees billed by KPMG LLP in 2006 or 2005 that are not included in the above classifications.

Pre-Approval Process

All services provided by KPMG LLP in 2006 were, and all services to be provided by KPMG LLP in 2007 will be, permissible under applicable laws and regulations and have been, and will continue to be, pre-approved by the Audit Committee. In accordance with applicable law, the Operating Trust is required to disclose the non-audit services approved by the Audit Committee performed by KPMG LLP. Non-audit services are defined as services other than those provided in connection with an audit or a review of the financial statements of a company. The Audit Committee approved the engagement of KPMG LLP for non-audit services, consisting of certain specified tax-related services during 2006 and 2007.

Report of Independent Registered Public Accounting Firm

The Trustee and Unitholders
Archstone-Smith Operating Trust:

We have audited the accompanying consolidated balance sheets of Archstone-Smith Operating Trust and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of earnings, unitholders’ equity, other common unitholders’ interest and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of Archstone-Smith Operating Trust’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Archstone-Smith Operating Trust and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Archstone-Smith Operating Trust’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 1, 2007, expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Denver, Colorado
March 1, 2007

Report of Independent Registered Public Accounting Firm

The Trustee and Unitholders
Archstone-Smith Operating Trust:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, that Archstone-Smith Operating Trust maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Archstone-Smith Operating Trust’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of Archstone-Smith Operating Trust’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Archstone-Smith Operating Trust maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Archstone-Smith Operating Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Archstone-Smith Operating Trust acquired DeWAG Deutsche WohnAnlage GmbH (DeWAG) during July 2006, and has excluded from its assessment of the effectiveness of Archstone-Smith Operating Trust's internal control over financial reporting as of December 31, 2006, DeWAG’s internal control over financial reporting associated with total assets of $857.0 million and total revenues of $27.7 million included in the consolidated financial statements of Archstone-Smith Operating Trust as of and for the year ended December 31, 2006. Our audit of internal control over financial reporting of Archstone-Smith Operating Trust also excluded an evaluation of the internal control over financial reporting of DeWAG.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Archstone-Smith Operating Trust and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of earnings, unitholders’ equity, other common unitholders’ interest and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2006, and our report dated March 1, 2007, expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP
Denver, Colorado
March 1, 2007

ARCHSTONE-SMITH OPERATING TRUST

CONSOLIDATED BALANCE SHEETS
(In thousands, except unit data)


	December 31,
	2006		2005
ASSETS

Real estate	$	12,858,507	$	11,031,917
Real estate — held for sale		329,133		327,347
Less accumulated depreciation		957,146		836,693

		12,230,494		10,522,571
Investments in and advances to unconsolidated entities		235,323		132,728

Net real estate investments		12,465,817		10,655,299
Cash and cash equivalents		48,655		13,638
Restricted cash in tax-deferred exchange escrow		319,312		495,274
Other assets		425,343		297,884

Total assets	$	13,259,127	$	11,462,095


LIABILITIES AND UNITHOLDERS’ EQUITY

Liabilities:
Unsecured credit facilities	$	84,723	$	394,578
Term Loan – International		235,771		—
Long-Term Unsecured Debt		3,339,462		2,523,639
Long-Term Unsecured Debt – held for sale		16,237		16,397
Mortgages payable		2,743,081		2,360,181
Mortgages payable — held for sale		33,153		33,471
Accounts payable		71,967		53,366
Accrued interest		67,135		50,991
Accrued expenses and other liabilities		365,260		260,682

Total liabilities		6,956,789		5,693,305
Minority interest		—		—

Other common unitholders’ interest, at redemption value (A-1 Common Units: 29,514,128 in 2006 and 33,910,022 in 2005)		1,718,017		1,420,491

Unitholders’ equity:
Perpetual Preferred Units		50,000		50,000
Common unitholders’ equity (A-2 Common Units: 220,147,167 units in 2006 and 212,413,939 units in 2005)		4,530,801		4,300,019
Accumulated other comprehensive income (loss)		3,520		(1,720	)

Total unitholders’ equity		4,584,321		4,348,299

Total liabilities and unitholders’ equity	$	13,259,127	$	11,462,095

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

ARCHSTONE-SMITH OPERATING TRUST

CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per unit amounts)


	Years Ending December 31,
	2006			2005			2004
Revenues:
Rental revenues	$	1,056,176		$	777,603		$	642,270
Other income		77,410			56,030			19,208

		1,133,586			833,633			661,478


Expenses:
Rental expenses		248,837			182,546			155,350
Real estate taxes		94,505			69,836			55,397
Depreciation on real estate investments		261,438			187,771			150,470
Interest expense		245,895			164,035			125,108
General and administrative expenses		68,188			58,604			55,479
Other expenses		13,715			49,232			13,563

		932,578			712,024			555,367


Earnings from operations		201,008			121,609			106,111
Minority interest		—			—			460
Income from unconsolidated entities		36,316			22,432			17,902
Other non-operating income		2,338			28,807			28,162

Net earnings before discontinued operations		239,662			172,848			152,635
Net earnings from discontinued operations		595,413			528,656			459,988

Net earnings		835,075			701,504			612,623
Preferred Unit Distributions		(3,829	)		(4,572	)		(16,254	)

Net earnings attributable to Common Units — Basic		831,246			696,932			596,369
Interest on Convertible Debt		11,139			—			—

Dividends on Convertible Preferred Units		—			—			3,755

Net earnings attributable to Common Units — Diluted	$	842,385		$	696,932			600,124

Weighted average Common Units outstanding:
Basic		248,314			231,642			220,053

Diluted		253,308			232,608			223,187


Net earnings per Common Units — Basic:
Net earnings before discontinued operations	$	0.95		$	0.73		$	0.62
Discontinued operations, net		2.40			2.28			2.09

Net earnings	$	3.35		$	3.01		$	2.71


Net earnings per Common Unit — Diluted:
Net earnings before discontinued operations	$	0.95		$	0.73		$	0.61
Discontinued operations, net		2.38			2.27			2.08

Net earnings	$	3.33		$	3.00		$	2.69


Distributions paid per Common Unit	$	1.74		$	1.73		$	2.72

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

ARCHSTONE-SMITH OPERATING TRUST

CONSOLIDATED STATEMENTS OF UNITHOLDERS’ EQUITY, OTHER COMMON
UNITHOLDERS’ INTEREST AND COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 2006, 2005 and 2004
(In thousands)


	Convertible			Perpetual
	Preferred			Preferred						Accumulated
	Units at			Units at						Other						Other
	Aggregate			Aggregate			Common			Comprehensive			Total			Common
	Liquidation			Liquidation			Unitholders’			Earnings			Unitholders’			Unitholders’
	Preference			Preference			Equity			(Loss)			Equity			Interest			Total
Balances at December 31, 2003		50,000			160,120			3,793,314			14,235			4,017,669			707,924			4,725,593
Comprehensive income:
Net earnings		—			—			542,342			—			542,342			70,281			612,623
Change in fair value of cash flow hedges		—			—			—			3,750			3,750			—			3,750
Change in fair value of marketable securities		—			—			—			(22,410	)		(22,410	)		—			(22,410	)

Comprehensive income attributable to Common Units																				593,963

Preferred Unit distribution		—			—			(16,254	)		—			(16,254	)		1,726			(14,528	)
Common Unit distributions		—			—			(539,116	)		—			(539,116	)		(64,437	)		(603,553	)
A-1 Common Units converted into A-2 Common Units		—			—			47,949			—			47,949			(47,949	)		—
A-2 Common Unit repurchases		—			—			(95,668	)		—			(95,668	)		—			(95,668	)
Conversion of Preferred Units into Common Units		(50,000	)		—			50,000			—			—			—			—
Preferred Unit repurchases		—			(90,598	)		—			—			(90,598	)		—			(90,598	)
Exercise of Options		—			—			61,467			—			61,467			—			61,467
Issuance of A-1 Common Units in exchange for real estate		—			—			—			—			—			10,788			10,788
Issuance of A-2 Common Units in exchange for real estate		—			—			4,502			—			4,502			—			4,502
Adjustment to redemption value		—			—			(207,067	)		—			(207,067	)		207,067			—
Other, net		—			—			(2,740	)		—			(2,740	)		—			(2,740	)

Balances at December 31, 2004	$	¾		$	69,522		$	3,638,729		$	(4,425	)	$	3,703,826		$	885,400		$	4,589,226
Comprehensive income:
Net earnings		—			—			616,172			—			616,172			85,332			701,504
Change in fair value of cash flow hedges		—			—			—			4,211			4,211			—			4,211
Change in fair value of marketable securities		—			—			—			(1,214	)		(1,214	)		—			(1,214	)
Foreign currency exchange translation		—			—			—			(292	)		(292	)		—			(292	)

Comprehensive income attributable to Common Units																				704,209

Preferred Unit distribution		—			—			(4,572	)		—			(4,572	)		—			(4,572	)
Common Unit distributions		—			—			(353,623	)		—			(353,623	)		(43,843	)		(397,466	)
A-1 Common Units converted into A-2 Common Units		—			—			8,415			—			8,415			(8,415	)		—
A-2 Common Unit repurchases		—			—			(56,495	)		—			(56,495	)		—			(56,495	)
Preferred Unit repurchases		—			(19,522	)		—			—			(19,522	)		—			(19,522	)
Exercise of Options		—			—			41,566			—			41,566			—			41,566
Issuance of A-1 Common Units under Compensation Plans		—			—			14,670			—			14,670			—			14,670
Issuance of A-1 Common Units in exchange for real estate		—			—			—			—			—			408,292			408,292
Issuance of A-2 Common Units		—			—			491,398			—			491,398			—			491,398
Adjustment to redemption value		—			—			(93,725	)		—			(93,725	)		93,725			—
Other, net		—			—			(2,516	)		—			(2,516	)		—			(2,516	)

Balances at December 31, 2005	$	¾		$	50,000		$	4,300,019		$	(1,720	)	$	4,348,299		$	1,420,491		$	5,768,790
Comprehensive income:
Net earnings		—			—			727,434			—			727,434			107,641			835,075
Change in fair value of cash flow hedges		—			—			—			1,058			1,058			—			1,058
Change in fair value of marketable securities		—			—			—			1,638			1,638			—			1,638
Foreign currency exchange translation		—			—			—			2,544			2,544			—			2,544

Comprehensive income attributable to Common Units																				840,315

Preferred Unit distribution		—			—			(3,829	)		—			(3,829	)		—			(3,829	)
Common Unit distributions		—			—			(377,513	)		—			(377,513	)		(55,079	)		(432,592	)
A-1 Common Units converted into A-2 Common Units		—			—			143,404			—			143,404			(143,404	)		—
Issuance of Common Units under Dividend Reinvestment Plan		—			—			27,100			—			27,100			—			27,100
Exercise of Options		—			—			27,716			—			27,716			—			27,716
Issuance of A-1 Common Units in exchange for real estate		—			—			—			—			—			81,401			81,401
Accrual of equity-classified awards under Compensation Plans		—			—			10,681			—			10,681			—			10,681
Adjustment to redemption value		—			—			(306,967	)		—			(306,967	)		306,967			—
Other, net		—			—			(17,244	)		—			(17,244	)		—			(17,244	)

Balances at December 31, 2006	$	¾		$	50,000		$	4,530,801		$	3,520		$	4,584,321		$	1,718,017		$	6,302,338

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

ARCHSTONE-SMITH OPERATING TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


	Years Ended December 31,
	2006			2005			2004
Operating activities:
Net earnings	$	835,075		$	701,504		$	612,623
Adjustments to reconcile net earnings to net cash flow provided by operating activities:
Depreciation and amortization		302,495			252,174			232,990
Gains on dispositions of depreciated real estate		(602,915	)		(524,684	)		(451,816	)
Gains on sale of marketable equity securities		(1,673	)		(27,948	)		(28,162	)
Provisions for possible loss on investments		4,328			9,803			¾
Minority interest		¾			¾			(460	)
Equity in earnings from unconsolidated entities		(6,118	)		6,605			6,233
Interest accrued on Mezzanine loans		(9,781	)		(5,224	)		¾
Change in other assets		(14,786	)		7,132			526
Change in accounts payable, accrued expenses and other liabilities		49,067			7,663			32,113
Other, net		(18,264	)		(13,006	)		(4,150	)

Net cash flow provided by operating activities		537,428			414,019			399,897

Investing activities:
Real estate investments, net		(2,216,598	)		(2,016,573	)		(1,423,549	)
Purchase of DeWAG net of cash acquired of $20,364		(252,428	)		¾			¾
Change in investments in unconsolidated entities, net		(76,366	)		(10,991	)		(21,662	)
Proceeds from dispositions		1,888,341			1,538,839			1,821,641
Change in restricted cash		175,962			(375,179	)		60,825
Change in notes receivable, net		(82,414	)		(98,909	)		(6,077	)
Proceeds from notes receivable		46,081			36,654			¾
Other, net		11,158			(38,462	)		97,075

Net cash flow provided by (used in) investing activities		(506,264	)		(964,621	)		528,253

Financing activities:
Proceeds from Long-Term Unsecured Debt		859,385			695,724			297,052
Payments on Long-Term Unsecured Debt		(51,250	)		(251,250	)		(72,950	)
Principal repayment of mortgages payable, including prepayment penalties		(324,700	)		(500,963	)		(159,558	)
Regularly scheduled principal payments on mortgages payable		(12,949	)		(15,067	)		(11,512	)
Proceeds from Term Loan — International		272,792			¾			¾
Principal repayments on Term Loan – International		(37,021	)		¾			¾
Proceeds from mortgage notes payable		—			33,807			51,656
Proceeds from (payments on) unsecured credit facilities, net		(309,855	)		375,578			(84,790	)
Proceeds from issuance of A-2 Common Units, net		¾			491,398			¾
Proceeds from Common Units issued under DRIP and employee stock options		57,773			41,566			61,467
Repurchase of Common Units and Preferred Units		—			(56,495	)		(146,954	)
Repurchase of Series E and F Perpetual Preferred Units		—			(19,522	)		(42,712	)
Cash distributions paid on Common Units		(432,592	)		(417,267	)		(603,553	)
Cash distributions paid on Preferred Units		(3,829	)		(4,572	)		(14,527	)
Other, net		(13,901	)		(11,952	)		(3,744	)

Net cash flow provided by (used in) financing activities		3,853			360,985			(730,125	)

Net change in cash and cash equivalents		35,017			(189,617	)		198,025
Cash and cash equivalents at beginning of period		13,638			203,255			5,230

Cash and cash equivalents at end of period	$	48,655		$	13,638		$	203,255

These consolidated statements of cash flows combine cash flows from discontinued operations with cash flows from continuing operations. See Note 17 for supplemental information on non-cash investing and financing activities.

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

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(The glossary included in this Annual Report is hereby incorporated by reference)

(1) Description of 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 Archstone-Smith Operating Trust, which we refer to herein as the “Operating Trust”. Archstone-Smith is our sole trustee and owns approximately 88.2% of the Operating Trust’s outstanding A-1 Common Units; the remaining 11.8% of the Common Units 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 Unitholders by acquiring, developing, redeveloping and operating apartments primarily in our core markets which are characterized by protected locations with limited land for new housing construction, expensive single-family home prices, and a strong, diversified economic base with significant employment growth potential.

Principles of Consolidation

The accounts of the Operating Trust and its controlled subsidiaries are consolidated in the accompanying financial statements. All significant inter-company accounts and transactions have been eliminated. We use the equity method to account for investments that do not qualify as variable interest entities, variable interest entities where we are not the primary beneficiary and entities that we do not control, or where we do not own a majority of the economic interest, but have the ability to exercise significant influence over the operating and financial policies of the investee. We also use the equity method when we function as the managing member and our partner does not have substantive participating rights or we can be replaced by a partner if we are the managing member. For an investee accounted for under the equity method, our share of net earnings or losses of the investee is reflected in income as earned and distributions are credited against the investment as received.

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.

Discontinued Operations

For properties accounted for under SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” the results of operations for properties sold during the period or classified as held for sale at the end of the current period are required to be classified as discontinued operations in the current and prior periods. The property-specific components of net earnings that are classified as discontinued operations include rental revenue, rental expense, real estate tax, depreciation expense and interest expense (actual interest expense for encumbered properties and a pro-rata allocation of interest expense for any unencumbered portion up to our weighted average leverage ratio). The net gain or loss and the related internal disposition costs on the eventual disposal of the held for sale properties are also classified as discontinued operations. Land sales and properties sold by our unconsolidated entities are not included in discontinued operations and related gains or losses are reported as a component of other income and income from unconsolidated entities, respectively.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions and short-term, highly liquid investments. We consider all highly liquid instruments with maturities when purchased of three months or less to be cash equivalents.

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Restricted Cash in Tax-Deferred Exchange and Bond Escrow

In most cases, disposition proceeds are set aside and designated to fund future tax-deferred exchanges of qualifying real estate investments. If these proceeds are not redeployed to qualifying real estate investments within 180 days, these funds are redesignated as cash and cash equivalents. We generally decide if we are not going to do an exchange within 45 days and it is therefore rare for cash to remain in escrow for the full 180 days. Additionally, cash proceeds from bond financings held in escrow to fund future development costs and cash held as security deposits are classified as restricted cash.

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 and Depreciation

Real estate, other than properties held for sale, is carried at depreciated cost. Long-lived assets designated as being held for sale are reported at the lower of their carrying amount or estimated fair value less cost to sell, and thereafter are no longer depreciated. Costs associated with acquisition efforts are recorded in other assets and the unsuccessful acquisition efforts are expensed at the time the pursuit is abandoned.

We allocate the cost of newly acquired properties between net tangible and identifiable intangible assets. 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. This amortization expense is included in depreciation on real estate investments in our consolidated statements of earnings

In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet.

Depreciation is computed over the expected useful lives of depreciable property on a straight-line basis as follows:


Building and related land improvements		15-40 years
Furniture, fixtures, equipment and other		3-10 years
Intangible value of retail and commercial lease agreements		1-20 years
Intangible value of residential lease agreements		6-48 months

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Interest

During 2006, 2005 and 2004, the total interest paid in cash on all outstanding debt was $315.5 million, $263.5 million and $229.6 million, respectively.

We capitalize interest during the construction period as part of the cost of apartment communities under development. Interest capitalized during 2006, 2005 and 2004 aggregated $51.8 million, $39.1 million and $23.6 million, respectively.

Cost of Raising Capital

Costs incurred in connection with the issuance of equity securities are deducted from Unitholders’ equity. Costs incurred in connection with the issuance or renewal of debt is subject to the provisions of EITF 96-19. Accordingly, if the terms of the renewed or modified debt instrument are deemed to be substantially different (i.e., a 10 percent or more difference in the present value of the remaining cash flows), all unamortized loan costs associated with the extinguished debt are charged against earnings during the current period; otherwise, costs are capitalized as other assets and amortized into interest expense over the term of the related loan or the renewal period. The balance of any unamortized loan costs associated with retired debt is expensed upon retirement. We utilize the straight-line method to amortize debt issuance costs as it approximates the effective interest method required under SFAS No. 91. Amortization of loan costs included in interest expense for 2006, 2005 and 2004 was $6.1 million, $4.2 million and $4.4 million, respectively.

Moisture Infiltration and 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.

Intangibles

Intangible assets consist of lease-related intangibles and certain intangibles associated with the DeWAG acquisition. The market value of above and below market leases are based on our estimate of current market rents as compared to the rent that we are receiving and is recorded in either other assets or other liabilities. These assets are charged and liabilities are credited to rental income over the estimated term of the lease. We also recognize the value of our in-place residential lease agreements and amortize these assets into depreciation on real estate investments over the estimated term of the lease.

The following is a summary of the domestic intangibles and the corresponding amortization we expect to record (dollar amounts in thousands). See Note 3 for a summary of DeWAG-related intangibles.


					Weighted
	Gross Carrying		Accumulated		Average Useful Life
	Amount		Amortization		(in years)

In-place leases	$	64,127	$	49,933		2
Above-market leases		936		141		7

Total intangible assets	$	65,063	$	50,074


Below-market leases	$	17,921	$	1,794		6

Total intangible liabilities	$	17,921	$	1,794

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Estimated net amortization for the year ended

2007	$	5,868
2008	$	440
2009	$	(133	)
2010	$	(353	)
2011	$	(313	)

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

Insurance Recoveries

We recognize insurance recovery proceeds as other income if the recovery is related to items that were originally expensed, such as, legal settlements, legal expenses and repairs that did not meet capitalization guidelines. For recoveries of property damages that were eligible for capitalization, we reduce the basis of the property or if the property has subsequently been sold, we recognize the proceeds as an additional gain on sale. We recognize insurance recoveries at such time that we believe the recovery is probable and we have sufficient information to make a reasonable estimate of proceeds, except in cases where we have to pursue recovery via litigation. In this circumstance, we recognize the recovery when we have a signed, legally binding agreement with the insurance carrier.

Derivative Financial Instruments

We utilize derivative financial instruments to manage our interest rate risk, foreign currency exchange risk, exposure to changes in the fair value of certain investments in equity securities and exposure to volatile energy prices. During 2003, we adopted SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” Under SFAS No. 149, the resulting assets and liabilities associated with derivative financial instruments are carried on our financial statements at estimated fair value at the end of each reporting period. The changes in the fair value of a fair value hedge and the fair value of the items hedged are generally recorded in earnings for each reporting period. The change in the fair value of effective cash flow hedges and foreign currency hedges are carried on our financial statements as a component of accumulated other comprehensive income (loss). If effective, our hedges have little or no impact on our current earnings.

Revenue and Gain Recognition

We generally lease our apartment units under operating leases with terms of one year or less. Communities subject to the Oakwood Master Leases entered into in 2005 have a seven year term. Rental income related to leases is recognized in the period earned over the lease term in accordance with Statement of Financial Accounting Standards SFAS No.13, “Accounting for Leases.” Rent concessions are recognized as an offset to revenues collected over the term of the underlying lease.

We use the full accrual method of profit recognition in accordance with SFAS No. 66 to record gains on sales of real estate. Accordingly, we evaluate the related GAAP requirements in determining the profit to be recognized at the date of each sale transaction (i.e., the profit is determinable and the earnings process is complete). We recognize deferred gains when a property is sold to a third party.

Rental Expenses

Rental expenses shown on the accompanying Statements of Earnings include costs associated with on-site and property management personnel, utilities, repairs and maintenance, property insurance, marketing, landscaping and other on-site and related administrative costs. Utility reimbursements from residents, which are recorded as offsets to utility expenses, aggregated $25.4 million, $19.2 million and $16.3 million for 2006, 2005 and 2004, respectively.

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 estimated cost of settlement.

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Foreign Currency Translation

Assets and liabilities of the company’s foreign operations are translated into U. S. dollars at the exchange rate in effect at the balance sheet date. Revenue and expenses are translated at average rates in effect during the period. The resulting translation adjustment is reflected as accumulated other comprehensive income (loss), a separate component of Unitholders’ equity on the Consolidated Balance Sheets. The functional currency utilized for these subsidiaries is the local foreign currency.

Stock-Based Compensation

We account for our stock based compensation using SFAS No. 123R, “Share-Based Payment” and expense the grant date fair value of the stock options and other equity based compensation issued to employees.

Income Taxes

We have made an election to be taxed as a partnership under the Internal Revenue Code of 1986, as amended, and we believe we qualify as a partnership and have made all required distributions of our taxable income. See Note 15 for more information on income taxes.

Income taxes for our taxable REIT subsidiaries 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 bases and operating loss and tax credit carryforwards. 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.

Comprehensive Income

Comprehensive income, which is defined as net earnings and all other non-owner changes in equity, is displayed in the accompanying 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, changes in the fair value of effective cash flow hedges and gains and losses on long-term foreign currency transactions (see Derivative Financial Instruments).

Our accumulated other comprehensive income (loss) for the years ended December 31, 2006, 2005 and 2004 is as follows (in thousands).


	Net
	Unrealized									Accumulated
	Gains on						Foreign			Other
	Marketable			Cash Flow			Currency			Comprehensive
	Securities			Hedges			Translation			Income/(Loss)
Balance at December 31, 2003	$	23,808		$	(9,573	)	$	—		$	14,235
Change in fair value of hedges		—			3,750			—			3,750
Change in fair value of marketable securities		1,372			—			—			1,372
Reclassification adjustments for realized net gains		(23,782	)		—			—			(23,782	)

Balance at December 31, 2004	$	1,398		$	(5,823	)	$	—		$	(4,425	)
Change in fair value of hedges		—			4,211			—			4,211
Change in fair value of marketable securities		865			—			—			865
Reclassification adjustments for realized net gains		(2,079	)		—			—			(2,079	)
Foreign currency exchange translation		—			—			(292	)		(292	)

Balance at December 31, 2005	$	184		$	(1,612	)	$	(292	)	$	(1,720	)
Change in fair value of hedges		—			1,058			—			1,058
Change in fair value of marketable securities		1,638			—			—			1,638
Foreign currency exchange translation		—			—			2,544			2,544

Balance at December 31, 2006	$	1,822		$	(554	)	$	2,252		$	3,520

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Per Unit Data

Following is a reconciliation of basic net earnings attributable to Common Units to diluted net earnings attributable to Common Units for the periods indicated (in thousands):


	Years Ended December 31,
	2006		2005		2004
Reconciliation of numerator between basic and diluted net earnings per Common Unit⁽¹⁾:
Net earnings attributable to Common Units — Basic	$	831,246	$	696,932	$	596,369

Interest on Convertible Debt		11,139		—		—
Distributions on Convertible Preferred Units		—		—		3,755
Net earnings attributable to Common Units — Diluted	$	842,385	$	696,932	$	600,124


Reconciliation of denominator between basic and diluted net earnings per Common Unit⁽¹⁾:
Weighted average number of Common Units outstanding — Basic		248,314		231,642		220,053
Assumed conversion of Convertible Debt into Common Units		4,210		—		—
Assumed conversion of Preferred Units into Common Units		—		—		2,182
Incremental options		784		966		952

Weighted average number of Common Units outstanding — Diluted		253,308		232,608		223,187


(1)		Excludes the impact of potentially dilutive equity securities during periods in which they are anti-dilutive.

Market Concentration Risk

Approximately 34.6%, 25.8%, 12.5% and 11.5% of our apartment communities are located in the Washington, D.C. metropolitan area, Southern California, New York City metropolitan area and the San Francisco Bay Area of California, based on NOI for the three months ended December 31, 2006, exclusive of Ameriton and International properties. Southern California is the geographic area comprising Los Angeles County, San Diego, Orange County, Ventura County and the Inland Empire. We are, therefore, subject to increased exposure (positive or negative) from economic and other competitive factors specific to markets within these geographic areas.

Preferred Unit Redemptions

When redeeming preferred units, we recognize share issuance costs as a charge to preferred unit distributions 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.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current presentation. We have corrected the presentation of the cash flows related to our unconsolidated entities which resulted in a $29.0 million and $24.1 million increase to operating cash flows for the years ended December 31, 2005 and 2004, respectively, with a corresponding decrease to investing cash flows.

New Accounting Pronouncements

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

dissolve the partnership without cause, or (2) substantive participating rights. EITF No. 04-5 became effective on June 30, 2005 for new or modified limited partnerships or limited liability companies and January 1, 2006 for all existing arrangements. The adoption of EITF No. 04-5 did not have a material impact on our financial position, net earnings or cash flows.

In April 2006, the FASB issued FASB Staff Position (FSP) FIN 46R-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R).” This FSP addresses certain implementation issues related to FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities.” Specifically, FSP FIN 46R-6 addresses how a reporting enterprise should determine the variability to be considered in applying FIN 46R. The variability that is considered in applying FIN 46R affects the determination of: (a) whether an entity is a variable interest entity (VIE); (b) which interests are “variable interests” in the entity; and (c) which party, if any, is the primary beneficiary of the VIE. Our assessment of variability affects any calculation of expected losses and expected residual returns, if such a calculation is necessary. The company is required to apply the guidance in this FSP prospectively to all entities (including newly created entities) with which it first becomes involved and to all entities previously required to be analyzed under FIN 46R when a “reconsideration event” has occurred, beginning July 1, 2006. The company will evaluate the impact of this FSP at the time any such “reconsideration event” occurs, and for any new entities with which the company becomes involved in future periods.

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109.” FIN 48 defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to not have a material effect on our financial position, net earnings or cash flows.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108) Topic 1N, “Financial Statements – Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” This Bulletin provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The guidance in this Bulletin must be applied to financial reports covering the first fiscal year ending after November 15, 2006. The adoption of SAB 108 did not have a material effect on our financial position, net earnings or cash flows.

Please refer to Note 11 for details regarding the implementation of SFAS No. 123R, “Share-Based Payment.”

(2) Real Estate

Investments in Real Estate

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


	December 31, 2006				December 31, 2005
	Investment		Units ⁽¹⁾		Investment		Units ⁽¹⁾
REIT Apartment Communities:
Operating communities	$	11,208,052		60,839	$	9,966,915		66,487
Communities under construction		406,881		2,150		575,631		2,754
Development communities In Planning⁽²⁾		75,538		1,841		24,365		585

Total REIT apartment communities		11,690,471		64,830		10,566,911		69,826
Ameriton⁽²⁾		585,524		8,144		692,269		7,489

International		851,593		8,334		44,457		822
Other real estate assets⁽³⁾		60,052		—		55,627		—

Total real estate	$	13,187,640		81,308	$	11,359,264		78,137


(1)		Unit information is based on management’s estimates and has not been audited by our Independent Registered Public Accounting Firm.

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(2)		Includes development communities In Planning – Owned and In Planning – Under Control. Our investment as of December 31, 2006 and December 31, 2005 for development communities In Planning – Under Control was $7.6 million and $145,000, respectively, and is reflected in the “Other assets” caption of our Consolidated Balance Sheets.

(3)		Includes land that is not In Planning and other real estate assets.

Capital Expenditures

In conjunction with the underwriting of each acquisition of an operating community, we prepare acquisition budgets that encompass the incremental capital needed to achieve our investment objectives. These expenditures, combined with the initial purchase price and related closing costs, are capitalized and classified as “acquisition-related” capital expenditures, as incurred.

As part of our operating strategy, we periodically evaluate each community’s physical condition relative to established business objectives and the community’s competitive position in its market. In conducting these evaluations, we consider our return on investment in relation to our long-term cost of capital as well as our research and analysis of competitive market factors. Based on these factors, we make decisions on incremental capital expenditures, which are classified as either “redevelopment” or “recurring.”

The redevelopment category includes: (i) redevelopment initiatives, which are intended to reposition the community in the marketplace and include items such as significant upgrades to the interiors, exteriors, landscaping and amenities; (ii) revenue-enhancing expenditures, which include investments that are expected to produce incremental community revenues, such as building garages, carports and storage facilities or gating a community; and (iii) expense-reducing expenditures, which include items such as water submetering systems and xeriscaping that reduce future operating costs.

Recurring capital expenditures consist of significant expenditures for items having a useful life in excess of one year, which are incurred to maintain a community’s long-term physical condition at a level commensurate with our operating standards. Examples of recurring capital expenditures include roof replacements, certain make-ready expenditures, parking lot resurfacing and exterior painting.

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


	Years Ended December 31,
	2006			2005
Balance at January 1	$	11,359,264		$	9,221,038
Acquisition-related expenditures		2,530,459			2,671,112
Redevelopment expenditures		57,414			106,264
Recurring capital expenditures		46,354			48,311
Development expenditures, excluding initial acquisition costs		388,502			324,740
Acquisition and improvement of land for development		209,916			81,340
Dispositions		(1,403,858	)		(1,175,834	)
Provision for possible loss on investment		(4,328	)		(1,500	)
Change in estimated hurricane retirements		4,496			—
Other		7,987			(8,303	)

Net apartment community activity		1,836,942			2,046,130
Change in other real estate assets		(8,566	)		92,096

Balance at December 31	$	13,187,640		$	11,359,264

At December 31, 2006, we had unfunded contractual commitments of $651.7 million related to communities under construction and under redevelopment. The purchase prices of certain recent acquisitions in Germany were allocated to land, buildings and other assets based on preliminary estimates and is subject to change as we obtain more complete information regarding land, building and lease intangibles values.

(3) DeWAG Acquisition

On July 27, 2006, we closed on the acquisition of 94% of the shares and 94% of an outstanding shareholder loan of DeWAG for approximately $271 million, based on the exchange rate on the transaction date. We have the option to acquire the remaining 6%, owned by the Managing Directors of DeWAG, under certain circumstances. The results of DeWAG’s operations have been included in

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the consolidated financial statements since July 1, 2006. The purchase was funded by an international term loan, which is expected to be repaid or refinanced on or before April 27, 2007. In addition, we assumed approximately $509 million in DeWAG liabilities. DeWAG specializes in the acquisition, ownership, operation and re-sale of quality residential properties in the major metropolitan areas of Southern and Western Germany, as well as West Berlin. As of July 1, 2006, the portfolio consisted of approximately 6,400 residential units. We acquired DeWAG because we are interested in expanding our operations into the German markets which we believe have attractive fundamentals for apartment operations.

The following table summarizes the estimated fair value of the assets acquired and the liabilities assumed at the date of the acquisition. We recognized goodwill in connection with the DeWAG acquisition. Goodwill represents the excess of the purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets. The goodwill associated with the transaction is primarily attributable to the people and processes which comprise the investing and the operating platform. We will perform an impairment test annually, or more frequently if events or changes in circumstances indicate impairment of our goodwill. Due to the recent closing of the transaction, we are still in the process of seeking information to finalize the valuations for our real estate, intangible assets, and certain liabilities. Therefore, the purchase price allocation is subject to change (dollar amounts in thousands).


Real estate	$	646,285
Other assets		67,722
Intangible assets		30,958
Goodwill		34,490

Total assets	$	779,455


Mortgages payable	$	407,933
Other liabilities		10,759
Deferred tax liability		69,327
Intangible liabilities		20,514

Total liabilities		508,533

Net assets acquired	$	270,922

Following are preliminary values as of December 31, 2006 related to the intangible assets and liabilities we identified in connection with the DeWAG transaction and the corresponding amortization we expect to record based on the translated balances (dollar amounts in thousands).


						Weighted
	Gross					Average
	Carrying		Accumulated			Useful Life
	Amount		Amortization			(in years)

Non-compete agreements		19,672	$	(2,459	)		4
In-place leases		12,765		(1,596	)		4

Total intangible assets		32,437	$	(4,055	)

Below-market leases		21,496	$	(2,687	)		4

Total intangible liabilities		21,496	$	(2,687	)


Estimated net amortization for the year ended
2007	$	2,735
2008	$	2,735
2009	$	2,735
2010		1,368

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The changes in the carrying amount of goodwill for the year ended are as follows:


Balance July 1, 2006	$	34,490
Change in foreign currency translation		960

Balance December 31, 2006	$	35,450

Our proforma results, assuming the transaction occurred at the beginning of the year, would not have been materially different from the previously reported results.

(4) Oakwood Asset Acquisition

During 2005 we acquired 35 communities, comprising 12,696 units, for a total purchase price of $1.5 billion from Oakwood Worldwide. We funded the acquisitions with a combination of $362.8 million or 10.1 million A-1 Common Units, $250,000 or 1,000 N-1 and N-2 Preferred Units, $581.2 million of assumed mortgage debt and the remainder through cash. We acquired two additional communities, comprising 533 units, for a total purchase price of $69.3 million from Oakwood during 2006. We funded the acquisitions with a combination of $15.8 million or 0.4 million A-1 Common Units, $28.1 million of assumed mortgage debt and the remainder through cash.

Fourteen of the communities acquired and one community we previously owned and operated were leased back to an affiliate of Oakwood Worldwide under the Oakwood Master Leases, which have seven-year terms, expiring between July 2012 and March 2013, subject to Oakwood’s right to terminate individual leases under certain circumstances after the one-year anniversary of the acquisition, with one exception for which the right to terminate exists throughout the term. As of December 31, 2006, none of the Oakwood Master Lease Communities have been returned to the Company. The aggregate contractual base rent due under these leases is $63.1 million and is subject to annual adjustments on January 1st of each year equal to the percentage change in the average same-store NOI growth for certain other specified properties. We are responsible for payment of real estate taxes, insurance and certain capital expenditures. We have engaged an affiliate of Oakwood to manage the retail portion of each community, if applicable. The real estate cost and net book value associated with the communities subject to the Oakwood Master Leases aggregated $938.6 million and $912.8 million, respectively, as of December 31, 2006. Approximately 5.8% of our total rental revenue was earned from the Oakwood Master Leases.

(5) Discontinued Operations

The results of operations for properties sold during the period or designated as held-for-sale at the end of the period are required to be classified as discontinued operations. The property specific components of net earnings that are classified as discontinued operations include rental revenues, rental expenses, real estate taxes, depreciation expense, income taxes and interest expense (actual interest expense for encumbered properties and a pro-rata allocation of interest expense for any unencumbered property up to our weighted average leverage ratio), as well as the net gain or loss on the disposition of properties.

Consistent with our capital recycling program, we had nine operating apartment communities, representing 3,502 units (unaudited), classified as held for sale under the provisions of SFAS No. 144, at December 31, 2006. Accordingly, we have classified the operating earnings from these nine properties within discontinued operations for the years ended December 31, 2006, 2005 and 2004. During the twelve months ended December 31, 2006, 2005 and 2004 we sold 42, 35 and 30 REIT and Ameriton operating communities, respectively. The operating results of these communities and the related gain/loss on sale are also included in discontinued operations for 2006, 2005 and 2004.

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


	Years Ended December 31,
	2006			2005			2004
Rental revenue	$	139,457		$	239,806		$	325,784
Rental expenses		(44,043	)		(74,715	)		(104,023	)
Real estate taxes		(16,979	)		(30,872	)		(39,318	)
Depreciation on real estate investments		(26,858	)		(51,017	)		(69,519	)
Interest expense⁽¹⁾		(29,931	)		(53,533	)		(83,644	)
Income taxes from taxable REIT subsidiaries		(9,972	)		(15,600	)		(13,975	)

Provision for possible loss on real estate investment		(4,328	)		(1,500	)		—
Debt extinguishment costs related to dispositions		(9,505	)		(5,847	)		(1,764	)
Gain from the disposition of REIT real estate investments, net		548,187			448,358			386,792
Internal Disposition Costs — REIT transactions ⁽²⁾		(1,860	)		(1,672	)		(2,974	)
Gain from the dispositions of taxable REIT subsidiary real estate investments, net		54,728			76,326			65,024

Internal Disposition Costs — Taxable REIT subsidiary transactions ⁽²⁾		(3,483	)		(1,078	)		(2,395	)

Total discontinued operations	$	595,413		$	528,656		$	459,988


(1)		The portion of interest expense included in discontinued operations that is allocated to properties based on the company’s leverage ratio was $20.9 million, $40.2 million and $62.2 million for 2006, 2005 and 2004, respectively.

(1)		Represents the direct and incremental compensation and related costs associated with the employees dedicated to our significant disposition activity.

The real estate, mortgage payable (if applicable) and long-term unsecured debt balances associated with operating communities classified as held for sale as of December 31, 2006 are reflected, for all periods presented, as “Real estate — held for sale”, “Mortgages payable — held for sale” and “Long-Term Unsecured Debt — held for sale” respectively, in the accompanying Consolidated Balance Sheets.

The disposition proceeds associated with the sales of individual rental units by our International subsidiaries are included in continuing operations as other income as such sales do not meet the requirements under SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” to be reflected as discontinued operations.

(6) Investments in and Advances to Unconsolidated Entities

Real Estate Joint Ventures

At December 31, 2006, the REIT had investments in eleven real estate joint ventures. Our ownership percentage of economic interests ranges from 20% to 87%. Major decisions are subject to the approval of all members, and we generally handle day-to-day operations. At December 31, 2006, Ameriton had five real estate joint ventures in which the venture partners are the development/managing members. Major investment decisions are generally subject to the approval of all members, and our venture partners handle all day-to-day operational decisions. Ameriton generally contributes a majority of the GAAP equity. Economic interest in the ventures varies depending upon the ultimate return of the venture. The REIT and Ameriton joint ventures do not qualify as variable interest entities as neither partner is deemed to individually receive substantially all the benefits from the joint venture. Accordingly, we utilize the guidance provided by SOP 78-9, “Accounting for Investments in Real Estate Ventures,” when determining the basis of accounting for these ventures. Because we do not control the voting interest of these joint ventures, we account for these entities using the equity method. In the aggregate, these ventures own 14,072 units. At December 31, 2006, the investment balance consists of $199.7 million in Operating Trust joint ventures and $35.6 million in Ameriton joint ventures. At December 31, 2005, the investment balance consists of $102.6

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

million in Operating Trust joint ventures and $30.1 million in Ameriton joint ventures. The Operating Trust and Ameriton’s combined weighted average percentage of ownership in joint ventures based on total assets at December 31, 2006 was 37.6%.

Summary Financial Information

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


	2006		2005
Assets:
Real estate	$	1,530,659	$	1,142,921
Other assets		213,569		244,557

Total assets	$	1,744,228	$	1,387,478

Liabilities and owners’ equity:
Inter-company debt payable to the Operating Trust	$	1,519	$	2,324
Mortgages payable⁽¹⁾		1,063,451		894,300
Other liabilities		126,048		120,898

Total liabilities		1,191,018		1,017,522

Owners’ equity		553,210		369,956

Total liabilities and owners’ equity	$	1,744,228	$	1,387,478


(1)		The Operating Trust guarantees $292.0 million of the outstanding debt balance as of December 31, 2006 and is committed to guarantee another $16.9 million upon funding of additional debt.

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


	2006		2005		2004
Operating Trust Joint Ventures Revenues	$	132,671	$	128,844	$	140,390
Net Earnings⁽¹⁾		69,341		57,141		29,559
Ameriton Joint Ventures Revenues	$	340	$	4,080	$	5,950
Net Earnings⁽²⁾		17,790		12,507		(713	)
Total Revenues	$	133,011	$	132,924	$	146,340

Net Earnings	$	87,131	$	69,648	$	28,846


(1)		Includes gains associated with the disposition of REIT Joint Venture assets of $68.4 million, $31.6 million and $32.4 million during 2006, 2005 and 2004, respectively.

(2)		Includes Ameriton’s share of pre-tax gains associated with the disposition of real estate joint venture assets. These gains totaled $19.8 million, $14.2 million and $7.0 million during 2006, 2005 and 2004, respectively.

Our income from unconsolidated entities differs from the stand-alone net earnings from the investees presented above due to various accounting adjustments made in accordance with GAAP. Examples of these differences include: (i) only recording our proportionate share of realizable net earnings in the unconsolidated investees; (ii) the impact of certain eliminating inter-company transactions; and (iii) timing differences in income recognition due to deferral of gains on contribution of properties to joint ventures. Additionally, we have incurred certain joint venture formation costs at the investor level which we account for as outside basis as these costs are not reflected on the stand-alone financial statements of the joint venture. These amounts are reflected on our consolidated financial statements and are amortized over the life of the underlying ventures.

Except as disclosed, we generally do not guarantee third party debt incurred by our unconsolidated investees. Investee third-party debt consists principally of mortgage notes payable. Generally, mortgages on real estate assets owned by our unconsolidated investees are secured by the underlying properties. Occasionally, the investees and/or Archstone-Smith Operating Trust are required to guarantee the mortgages along with all other venture partners. As of December 31, 2006, we have not been required to perform under any guarantees provided to our joint ventures.

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During 2006, we closed a joint venture transaction with the State of Wisconsin Investment Board (“SWIB”). SWIB committed $150 million of capital for 80% of the equity and we committed $37.5 million of capital for the remaining 20%. We have invested $25.1 million and our remaining commitment as of December 31, 2006 is $12.4 million.

(7) Mortgage and Other Notes Receivable

The change in mortgage and other notes receivable, which are included in other assets, during the years ended December 31, 2006 and 2005 consisted of the following (in thousands):


	Years Ended
	December 31,
	2006			2005

Balance at January 1	$	74,396		$	8,729
Funding of additional notes		85,165			97,096
Accrued interest		9,781			5,224
Repayments and sales of notes		(46,081	)		(36,653	)

Balance at December 31	$	123,261		$	74,396

We have a commitment to fund an additional $22.7 million under existing agreements. Our rights to the underlying collateral on these notes in the event of default are generally subordinate to the primary mortgage lender. We evaluate the collectibility of our mezzanine and other notes receivable on a quarterly basis. We recognized interest income associated with notes receivable of $17.4 million and $7.2 million for the years ended December 31, 2006 and 2005, respectively. The weighted average interest rate on these notes as of December 31, 2006 was 10.6%, including 12.6% relating to mezzanine notes receivable.

(8) Borrowings

Unsecured Credit Facilities

Our $600 million unsecured credit facility, which is led by JPMorgan Chase Bank, N.A. bears interest at the greater of the prime rate or the federal funds rate plus 0.50% or, at our option, LIBOR plus 0.40%. The spread over LIBOR can vary from LIBOR plus 0.325% to LIBOR plus 1.00%, based upon the rating of our long-term unsecured senior notes. The facility contains an accordion feature that allows us to increase the size of the commitment to $1.0 billion at any time during the life of the facility, subject to lenders providing additional commitments, and enables us to borrow up to $150 million in foreign currencies. The credit facility is scheduled to mature in June 2010, but may be extended for one year at our option.

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


	Years Ended
	December 31,
	2006			2005
Total unsecured revolving credit facility	$	600,000		$	600,000
Borrowings outstanding at December 31	$	80,000		$	360,000
Outstanding letters of credit under this facility	$	14,880		$	37,813
Weighted average daily borrowings	$	100,474		$	183,434
Maximum borrowings outstanding during the period	$	360,000		$	580,000
Weighted average daily nominal interest rate		5.0	%		4.0	%
Weighted average daily effective interest rate		6.3	%		4.3	%

We also have a short-term unsecured borrowing agreement with JPMorgan Chase Bank, N.A. 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 4.6% to 5.7% during 2006. There were $4.7 million and $34.6 million of borrowings outstanding under the agreement at December 31, 2006 and 2005, respectively.

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Term Loan — International

We entered into a $272.8 million secured, short-term borrowing agreement with LaSalle Bank National Association to fund the acquisition of DeWAG. The borrowing under this agreement bears interest at EURIBOR plus 0.40%. The effective interest rate at December 31, 2006 was 4.1%. We expect this loan to be paid off or refinanced before April 27, 2007.

Long-Term Unsecured Debt

In July 2006 we issued $575 million of exchangeable senior unsecured notes that are due in 2036. The notes have a coupon rate of 4.0% and are exchangeable into Common Shares at an exchange ratio, subject to adjustment, of 15.7206 per $1,000 principal of notes (or an initial exchange price of $63.6108 per Common Share). No separate value is ascribed to the conversion feature. The company received approximately $563 million in net proceeds from this offering. The notes are senior unsecured obligations of the Operating Trust. The company used the net proceeds from the offering to repay outstanding balances under its revolving credit facility and certain secured debt, to make incremental investments and for general corporate purposes. Prior to July 18, 2011, the holders, at their option, may exchange the notes for Common Shares upon the occurrence of specified events. Upon tender of notes for exchange, we may pay cash, Archstone-Smith Common Shares, Operating Trust A-1 units, or a combination of cash and Common Shares, at our option. The holders may require us to repurchase the notes for cash on July 18, 2011 and on July 15 of 2016, 2021, 2026 and 2031 and at any time prior to maturity upon the occurrence of a fundamental change in Archstone-Smith. On or after July 18, 2011, we may elect to redeem all or part of the notes for cash. We may redeem the notes at any time prior to maturity to the extent necessary to preserve our status as a real estate investment trust. When these notes are dilutive to our earnings per share, we add the interest to the numerator and include the shares in the denominator of the weighted average shares outstanding to compute diluted earnings per share.

In March 2006, the Operating Trust issued $300 million in long-term unsecured ten-year senior notes with a coupon rate of 5.8% and an effective interest rate of 5.9%. The company used the net proceeds from the offering to repay outstanding balances under its revolving credit facility and certain secured debt, to make incremental investments and for general corporate purposes.

A summary of our Long-Term Unsecured Debt outstanding at December 31, 2006 and 2005 is as follows (dollar amounts in thousands):


							Balance at		Balance at		Average
				Effective			December 31,		December 31,		Remaining Life
Type of Debt	Coupon Rate⁽¹⁾			Interest Rate⁽²⁾			2006		2005		(Years)
Long-term unsecured senior notes		5.4	%		5.6	%	$	3,279,404	$	2,462,964		5.23
Unsecured tax-exempt bonds		4.0	%		4.2	%		76,295		77,072		16.60


Total/average		5.4	%		5.6	%	$	3,355,699	$	2,540,036		5.54


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

(2)		Includes the effect of fair value hedges, loan cost amortization and other ongoing fees and expenses, where applicable.

The $3.4 billion of Long-Term Unsecured Debt generally has semi-annual interest payments and either amortizing annual principal payments or balloon payments due at maturity. The unsecured tax-exempt bonds require semi-annual interest payments and are due upon maturity with $21.5 million maturing in 2008 and $54.8 million maturing in 2029. The notes are redeemable at our option, in whole or in part, and the unsecured tax-exempt bonds are redeemable at our option upon sale of the related property. The redemption price is generally equal to the sum of the principal amount of the notes being redeemed plus accrued interest through the redemption date plus a standard make-whole premium, if any.

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Mortgages Payable

Our mortgages payable generally feature either monthly interest and principal payments or monthly interest-only payments with balloon payments due at maturity (see Scheduled Debt Maturities). Early repayment of mortgages is generally subject to prepayment penalties. A summary of mortgages payable outstanding for the years ending December 31, 2006 and 2005 follows (dollar amounts in thousands):


	Outstanding Balance at ⁽¹⁾
					Effective Interest
	December 31, 2006		December 31, 2005		Rate ⁽²⁾
Secured floating rate debt:
Tax-exempt debt	$	935,536	$	839,318		4.9	%
Conventional mortgages		167,020		54,455		4.6	%


Total Floating		1,102,556		893,773		4.9	%
Secured fixed rate debt:
Tax-exempt debt		3,086		—		6.4	%
Conventional mortgages		1,651,650		1,480,170		5.8	%
Other secured debt		18,942		19,709		3.2	%

Total Fixed		1,673,678		1,499,879		5.8	%


Total debt outstanding at end of period	$	2,776,234	$	2,393,652		5.4	%


(1)		Includes the unamortized fair market value adjustment associated with assumption of fixed rate mortgages in connection with real estate acquisitions. The unamortized balance aggregated $43.9 million and $63.5 million at December 31, 2006 and 2005 respectively, and is being amortized into interest expense over the life of the underlying debt.

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

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The change in mortgages payable during 2006 and 2005 consisted of the following (in thousands):


	2006			2005
Balance at January 1	$	2,393,652		$	2,031,505
Proceeds from mortgage notes payable		—			33,152
Mortgage assumptions related to property acquisitions		728,484			864,155
Proceeds from construction loans		—			655
Regularly scheduled principal amortization		(12,949	)		(15,067	)
Prepayments, final maturities and other		(332,953	)		(520,748	)

Balance at December 31	$	2,776,234		$	2,393,652

Scheduled Debt Maturities

Approximate principal payments due during each of the next five calendar years and thereafter, are as follows (in thousands):


	Long Term Unsecured Debt				Mortgages Payable
	Regularly				Regularly
	Scheduled		Final		Scheduled		Final
	Principal		Maturities		Principal		Maturities
	Amortization		and Other		Amortization		and Other		Total
2007	$	31,250	$	355,000	$	18,992	$	85,933	$	491,175
2008		31,250		303,040		19,387		193,109		546,786
2009		51,250		30,000		19,138		381,096		481,484
2010		43,750		220,000		17,984		122,760		404,494
2011		50,000		575,000		19,208		199,381		843,589
Thereafter and debt discount⁽¹⁾		252,500		1,412,659		499,365		1,199,881		3,364,405

Total	$	460,000	$	2,895,699	$	594,074	$	2,182,160	$	6,131,933


(1)		The average annual principal payments due from 2012 to 2040 are $116.4 million per year.

Other

The book value of total assets pledged as collateral for mortgage loans and other obligations at December 31, 2006 and 2005 is $5.6 billion and $4.6 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 at December 31, 2006. See Note 12 for a summary of derivative financial instruments used in connection with our debt instruments.

(9) Distributions to Unitholders

The payment of distributions is subject to the discretion of the Board and is dependent upon our strategy, financial condition and operating results. In December 2006, the Board announced a 4.0% increase in the annual distribution level from $1.74 to $1.81 per Common Unit and, in January 2007, declared the first quarter 2007 distribution of $0.4525 per Common Unit, payable on February 28 to Unitholders of record on February 13, 2007.

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the cash distributions paid per unit on Common Units and Preferred Units during 2006, 2005 and 2004:


	2006		2005		2004
Common Units and A-1 Units⁽¹⁾	$	1.74	$	1.73	$	2.72
Series D Preferred Units⁽²⁾		—		—		1.31
Series E Preferred Units⁽³⁾		—		0.20		2.09
Series F Preferred Units⁽³⁾		—		—		1.50
Series G Preferred Units⁽³⁾		—		0.37		2.16
Series I Preferred Units⁽⁴⁾		7,660.00		7,660.00		7,660.00
Series K Preferred Units⁽⁵⁾		—		—		2.55
Series L Preferred Units⁽⁶⁾		—		—		3.40
Series M Preferred Units		457.62		364.74		—
Series N-1 Preferred Units		5.04		3.54		—
Series N-2 Preferred Units		2.16		1.52		—


(1)		Includes a $1.00 per unit special distribution issued to our Common Unitholders in December 2004.

(2)		The Series D Preferred Units were redeemed in August 2004.

(3)		The company redeemed the Series F Preferred Units in September 2004, 520,000 and 400,000 of the Series E Preferred Units in August 2004 and November 2004. The remaining 200 Series E Preferred Units were redeemed in February 2005. The Series G Preferred Units were redeemed in March 2005.

(4)		The Series I Preferred Units have a par value of $100,000.

(5)		The Series K Preferred Units were converted into Common Units in September 2004.

(6)		The Series L Preferred Units were converted to Common Units in December 2004.

(10) Unitholders’ Equity

A-1 Common Units

As of December 31, 2006 and December 31, 2005, Archstone-Smith owned an 88.2% and 86.2% majority interest in the Operating Trust, respectively. The A-1 Common Units are redeemable at the option of the Unitholders. Except as limited by agreement, Archstone-Smith has the option of redeeming the A-1 Common Units with cash or with Archstone-Smith Common Shares. The A-1 Common Units are entitled to the same distribution as Common Shares. The A-1 Common Unitholder’s aggregate minority interest in the Operating Trust was approximately 11.8% at December 31, 2006 and 13.8% at 2005.

During 2006 and 2005, respectively, we converted 5,962,697 and 401,211 A-1 Common Units and issued 1,772,673 and 11,289,070 A-1 Common Units in exchange for real estate. The Common Units issued in 2005 related primarily to the Oakwood transaction described in Note 4.

Units of Beneficial Interest

Our Declaration of Trust authorizes us to issue 450,000,000 units with a par value of $0.01 per unit. Our Declaration of Trust allows us to issue Common Units, Preferred Units and such other units of beneficial interest as the Board may create and authorize from time to time. The Board may classify or reclassify any unissued units from time to time by setting or changing the preferences, conversion rights, voting powers, restrictions, limitations as to distributions, qualifications of terms or conditions of redemption.

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Preferred Unit Redemption and Conversions

In August 2004, the Series D Preferred Units were redeemed at liquidation value plus distributions for a total of $47.6 million. The Series K Preferred Units were converted to Common Units in September 2004 and the Series L Preferred Units were converted to Common Units in December 2004.

Common Unit Repurchase and Issuances

In September 2005, Archstone-Smith sold approximately 12.1 million Common Shares in an underwritten public offering under an existing shelf registration statement filed with the Securities and Exchange Commission. The $491.4 million in net proceeds were used to pay down the balance on our unsecured credit facilities.

In 2006 and 2005, we repurchased 204,877 and 1,646,800 Common Units for an average price of $58.90 and $34.31 per unit, including commissions, respectively.

Preferred Units

A summary of our Perpetual Preferred Units outstanding at December 31, 2006 and 2005, including their significant rights, preferences, and privileges follows (amounts in thousands):


					Annual
	Redemption		Liquidation		Distribution Rate		December 31,
Description	Date⁽¹⁾		Value		Per Unit		2006		2005
Series I Preferred Units; 500 units issued and outstanding at December 31, 2006 and 2005, respectively⁽¹⁾		02/01/28		100,000		7,660	$	50,000	$	50,000
Series M Preferred Unit; 1 unit issued and outstanding at December 31, 2006 and 2005, respectively		N/A		10,000		458	$	10	$	10
Series N-1 Preferred Unit; 300 units issued and outstanding at December 31, 2006 and 2005, respectively		N/A		416.67		20.16	$	120	$	125
Series N-2 Preferred Unit; 700 units issued and outstanding at December 31, 2006 and 2005, respectively		N/A		178.57		8.64	$	120	$	125


(1)		Series I Preferred Units may be redeemed for cash at our option, in whole or in part, at a redemption price equal to the liquidation price per unit, plus accrued and unpaid distributions, if any, on or after the redemption date indicated.

The holders of our Preferred Units do not have preemptive rights over the holders of Common Units, but do have limited voting rights under certain circumstances. The Preferred Units have no stated maturity, are not subject to any sinking fund requirements and we are not obligated to redeem or retire the units. Holders of the Preferred Units are entitled to receive cumulative preferential cash distributions, when and as declared and authorized by the Board, out of funds legally available for the payment of distributions. All Preferred Unit distributions are cumulative from date of original issue and all series of Preferred Units rank equally as to distributions and liquidation proceeds. All distributions due and payable on Preferred Units have been accrued and paid as of the end of each fiscal year.

If six quarterly distributions payable (whether or not consecutive) on any series or class of Preferred Units that are of equal rank with respect to distributions and any distribution of assets, shall not be paid in full, the number of Independent Trustees shall be increased by two and the holders of all such Preferred Units voting as a class regardless of series or class, shall be

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

entitled to elect the two additional Independent Trustees. Whenever all distributions in arrears have been paid, the right to elect the two additional Independent Trustees shall cease and the terms of such Independent Trustees shall terminate.

Dividend Reinvestment and Share Purchase Plan

Our Dividend Reinvestment and Share Purchase Plan was designed and implemented to increase ownership in the company by private investors. Under the plan, holders of Common Shares and A-1 Common Units have the ability to receive cash dividends and distributions or automatically reinvest their cash dividends or distributions to purchase additional Common Shares or Units. We have the option of issuing new Shares or Units or acquiring Shares or Units through open market purchases or in negotiated transactions with third parties to satisfy our obligations under the plan. Common Shares acquired under the plan may be entitled to a discount, currently 1%.

Series M Preferred Unit

In December 2004, the Operating Trust issued one Series M Preferred Unit in exchange for cash. This unit is redeemable at the option of the holder of such unit and/or the Operating Trust under certain circumstances. If the Operating Trust is required to redeem the Series M Preferred Unit, the redemption price will be paid in cash. If the holder of the Series M Preferred Unit requests redemption of the Series M Preferred Unit, the Operating Trust has the option of redeeming the Series M Preferred Unit with cash or with Common Units. The redemption value under such circumstances is based on the performance of the related real estate asset, as outlined in the contribution agreement. The Series M Preferred Unit is entitled to a distribution equivalent to the same distribution paid on 263 Common Units. The holder of the Series M Preferred Unit does not have preemptive rights over the holders of Common Units and does not have any voting right except as required by law. The Series M Preferred Unit has no stated maturity and is not subject to any sinking fund requirements.

Series N-1 and N-2 Preferred Units

Three-hundred N-1 and 700 N-2 Preferred Units were issued as partial consideration for land acquired in one of the Oakwood acquisitions. If certain entitlements related to the land are obtained, the N-1 and N-2 units have the potential to convert to Common Units at a rate of $70,000 and $30,000, respectively, per entitled apartment unit. As of December 31, 2006, no entitlements have been obtained. The Series N-1 Preferred Units are entitled to a distribution equivalent to the same distribution paid on 11.58 Common Units. The Series N-2 Preferred Units are entitled to a distribution equivalent to the same distribution paid on 4.96 Common Units. The holders of the Series N-1 and N-2 Preferred Units do not have preemptive rights over the holders of Common Units and do not have any voting rights except as required by law. The Series N-1 and N-2 Preferred Units have no stated maturity and are not subject to any sinking fund requirements.

(11) Benefit Plans and Implementation of SFAS 123R

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 supersedes 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. We used the modified prospective method in adopting the Statement, which became effective January 1, 2006.

Since we early-adopted the fair value recognition provisions of SFAS No. 123 for all awards granted after January 1, 2003, adoption of SFAS No. 123R did not have a material impact on our financial position, net earnings or cash flows. Upon the adoption of SFAS 123R, we recorded a benefit resulting from application of an anticipated forfeiture rate on existing awards of approximately $100,000 which had no effect on our reported earnings per share. With respect to options granted prior to January 1, 2003, no stock-based employee compensation expense was reflected in the financial statements for the years ended December 31, 2006. Recording this expense would have lowered net earnings by approximately $100,000. We have made an election to be taxed as a REIT under the Internal Revenue Code of 1986, as amended; therefore, there was no tax impact that was recorded as a result of the adoption of this standard.

Our long-term incentive plan was approved in 1997, and was modified in connection with the Smith Merger. There have been six types of awards under the plan: (i) options with a DEU feature (only awarded prior to 2000); (ii) options without the DEU feature (generally awarded after 1999); (iii) Restricted Share Unit awards with a DEU feature (awarded prior to 2006); (iv) Restricted Share Unit awards with a cash dividend payment feature (awarded after 2005); (v) employee share purchase

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the status of Archstone-Smith Trust’s awards under our long term incentive plans as of December 31, 2006 and changes during the years ended on those dates is presented below:


	Option Awards				RSU Awards
			Weighted				Weighted
			Average				Average Grant
	Options		Exercise Price		Units		Price

Balance, December 31, 2005		2,702,026	$	24.94		948,735	$	27.77
Granted		426,977		45.61		310,855		45.85
Exercised/Settled		1,249,089		23.96		296,215		33.23
Forfeited		48,559		35.86		16,760		34.31
Expired		—		—		—		—
Balance, December 31, 2006		1,831,355	$	30.14		946,615	$	31.82

Options

During the years ended December 31, 2006, 2005, and 2004 the share options granted to associates had a calculated fair value of $5.52, $4.19 and $1.39 per option, respectively. The historical exercise patterns of the associate groups receiving option awards are similar, and therefore we used only one set of assumptions in calculating fair value for each period. For the year ended December 31, 2006, the calculated fair value was determined using the Black-Scholes-Merton valuation model, using a weighted average risk-free rate interest rate of 4.66%, a weighted average dividend yield of 4.57%, a volatility factor of 18.3% and a weighted average expected life of four years. For the year ended December 31, 2005, the calculated fair value was determined using the Black-Scholes-Merton valuation model, using a weighted average risk-free interest rate of 3.77%, a weighted average dividend yield of 5.63%, a volatility factor of 21.97% and a weighted average expected life of five years. For the year ended December 31, 2004, the calculated fair value was determined using the Black-Scholes-Merton valuation model, using a weighted average risk-free interest rate of 3.48%, a weighted average dividend yield of 6.92%, a volatility factor of 15.33% and a weighted average expected life of five years. The options vest over a three-year period and have a contractual term of 10 years. We used an estimated forfeiture rate of 30% in recording option compensation expense for the year ended December 31, 2006, based primarily on historical experience. The unamortized compensation cost is $1.1 million, which includes all options previously granted but not yet vested. This amount will be recorded as compensation cost ratably through December 31, 2008.

The total intrinsic value of the share options exercised during the years ended December 31, 2006, 2005 and 2004 were $30.7 million, $22.9 million and $28.1 million, respectively. The intrinsic value is defined as the difference between the realized fair value of the share or the quoted fair value at the end of the period, less the exercise price of the option. We have 1.4 million fully vested options outstanding at December 31, 2006 with a weighted average exercise price of $26.55. The weighted-average contractual life of the fully vested options is 6.3 years, and they have an intrinsic value of $44.7 million. In addition, we have 296,000 options outstanding that we expect to vest with a weighted average exercise price of $41.83. The weighted-average contractual life of the unvested options is 9.4 years, and they have an intrinsic value of $3.7 million.

Restricted Share Units

Also during the year ended December 31, 2006, we issued RSUs to senior officers and trustees of the company with a weighted average grant date fair value of $45.85 per unit. The units vest over a three-year period and the related unamortized compensation cost is $9.8 million, which includes all units previously granted but not yet vested. This amount will be recorded as compensation cost ratably through December 31, 2008.

We have 694,000 fully vested RSUs outstanding at December 31, 2006 with a weighted average grant date fair value of $28.18. The weighted-average contractual life for the fully vested shares is 6.2 years and the intrinsic value is $40.4 million. In addition, we have 252,600 RSUs outstanding that we expect to vest with a weighted average grant date fair value of $41.77. The weighted-average contractual life for the unvested shares is 9.3 years and the intrinsic value is $14.7 million. The total intrinsic value of the RSUs settled during the years ended December 31, 2006, 2005 and 2004 were $15.8 million, $8.5 million and $5.8 million, respectively.

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Special Long Term Incentive Plan

Effective January 1, 2006, a special long-term incentive program related to the achievement of total unitholder return performance targets was established for certain of our executive officers. We would issue approximately 300,000 performance units if all performance targets are ultimately met as of December 31, 2008. The calculated grant date fair value of approximately $4.8 million is being charged to compensation expense ratably over the three-year term of the plan. The calculated fair value was determined by an independent third party using a Monte Carlo simulation approach which yielded an estimated payout percentage of 41%. The related unamortized compensation cost at December 31, 2006 is $3.2 million.

Summary

The compensation cost associated with all awards for the year ended December 31, 2006 was approximately $11.3 million, of which approximately $8.5 million was charged to operating expenses, and approximately $2.8 million related to dedicated investment personnel and was capitalized to development and other qualifying investment activities. The compensation cost associated with all awards for the year ended December 31, 2005 was approximately $8.5 million, of which approximately $6.5 million was charged to operating expenses, and approximately $2.0 million related to dedicated investment personnel and was capitalized to development and other qualifying investment activities. The compensation cost associated with all awards for the year ended December 31, 2004 was approximately $5.5 million, of which approximately $4.0 million was charged to operating expenses, and approximately $1.5 million related to dedicated investment personnel and was capitalized to development and other qualifying investment activities.

Dividend Equivalent Units

Under the modified long-term incentive plan, participants who were awarded options prior to 2000 and RSUs prior to 2006 were credited with DEUs equal to the amount of distributions paid on Common units with respect to such awards. The DEUs vest under substantially the same terms as the underlying share options or RSUs.

DEUs earned on options are calculated by taking the average number of options held at each record date and multiplying by the difference between the average annual distribution yield on Common Units and the average dividend yield for the Standard & Poor’s 500 Stock Index. DEUs earned on RSUs are calculated by taking the average number of RSUs held at each record date and multiplying by the average annual distribution yield on Common Units. DEUs earned on existing DEUs are calculated by taking the number of DEUs at December 31 and multiplying by the average annual distribution yield on Common Units.

Certain of the options and all RSUs included in the table above have a DEU feature. The aggregate number of vested DEUs outstanding as of December 31, 2006 was 354,500. During the year ended December 31, 2006, we recorded $486,800 as a charge to operating expense related to unvested DEUs and $1,680,000 of common unit distributions related to vested DEUs.

401(k) Plan and Nonqualified Deferred Compensation Plan

In December 1997, the Archstone-Smith Board established a 401(k) plan and a nonqualified savings plan, which both became effective on January 1, 1998. The 401(k) plan provides for matching employer contributions of fifty cents for every dollar contributed by the employee, up to 6% of the employee’s annual contribution. Contributions by employees to the 401(k) plan were subject to federal limitations of $15,000 during 2006. The matching employer contributions are made in Common Units, which vest based on years of service at 20% per year. We also have a nonqualified deferred compensation plan which permits deferrals of compensation by eligible employees and non-employee trustees. No employer contributions are currently being made to that plan. Amounts deferred under the deferred compensation plan are invested among a variety of investments as directed by the participants, and are generally deferred until termination of employment or service as a trustee.

Deferral of Fees by Non-Employee Trustees

Through December 31, 2005 and pursuant to the terms of the nonqualified deferred compensation plan, each non-employee member of the Archstone-Smith Board has had the opportunity to defer receipt of all or a portion of the service fees they otherwise would have been paid in cash. If a participant elected to have their fees deferred, the fees accrued in the form of phantom units equal to the number of Common Units that could have been purchased on the date the fee was credited. Distributions are calculated on the phantom units and additional phantom units are credited. Distribution of phantom units may be deferred to a later date. Upon

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

settlement, phantom units convert into Common Units on a one-to-one basis.

Beginning in 2006 each non-employee member of our Board has the ability to defer new service fees into the Archstone-Smith Deferred Compensation Plan, rather than into phantom units. The Trustee can elect to have his or her fees deferred and invested in one or more of the investment funds that are otherwise available under the deferred compensation plan. Upon settlement such investments are paid out in cash. The phantom units already on account will continue to accrue additional phantom units in lieu of distributions.

(12) Financial Instruments and Hedging Activities

Fair Value of Financial Instruments

At December 31, 2006 and 2005, the fair values of cash and cash equivalents, restricted cash held in a tax-deferred exchange escrow accounts, receivables and accounts payable approximated their carrying values because of the short-term nature of these instruments. The estimated fair values of other financial instruments subject to fair value disclosures were determined based on available market information and valuation methodologies believed to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, therefore, are not necessarily indicative of the actual amounts that we could realize upon disposition. The following table summarizes these financial instruments (in thousands):


	Balance at December 31, 2006						Balance at December 31, 2005
	Carrying			Estimated			Carrying			Estimated
	Amounts			Fair Value			Amounts			Fair Value
Marketable equity securities	$	6,600		$	6,600		$	4,648		$	4,648
Borrowings:
Unsecured credit facilities	$	84,723		$	84,723		$	394,578		$	394,578
Term Loan — International		235,771			235,771			—			—
Long-Term Unsecured Debt		3,355,699			3,436,902			2,540,036			2,623,056
Mortgages payable		2,776,234			2,801,342			2,393,652			2,393,389
Interest rate contracts:
Interest rate swaps	$	6,818		$	6,818		$	3,618		$	3,618
Interest rate caps		809			809			339			339
Forward contracts:
Forward sale agreement	$	(313	)	$	(313	)		—			—
Foreign currency forward		(1,172	)		(1,172	)		(15	)		(15	)
Energy contracts:
Electricity contracts	$	(8	)	$	(8	)	$	(26	)	$	(26	)
Natural gas contracts		(1,047	)		(1,047	)		—			—
Fuel oil contracts		—			—			(6	)		(6	)

All publicly traded equity securities are classified as “available for sale securities” 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 possible loss on investments. Our evaluation of the carrying value of these investments is primarily based upon a regular review of market valuations (if available), each company’s operating performance and assumptions underlying cash flow forecasts. In addition, management considers events and circumstances that may signal the impairment of an investment.

Interest Rate 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. In connection with the DeWAG transaction, we assumed interest rate swaps with an aggregate notional amount of €227.0 million. The DeWAG swaps, which have an aggregate fair value of approximately $5.9 million and notional amount of $295.2 million at December 31, 2006, were put in place by DeWAG to fix the interest cost associated with certain variable rate mortgages. These derivatives were not designated as hedges for US GAAP purposes and changes in fair value are recorded as adjustments to interest expense. We have interest rate caps that are not designated as a hedge that have immaterial

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

fair value as of December 31, 2006. These caps were required by the loan agreement. 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 all hedges, both at inception of the hedge and on an ongoing basis as to 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. If a derivative ceases to be a highly effective hedge, we discontinue hedge accounting prospectively.

The following table summarizes the notional amount, carrying value and estimated fair value of our derivative financial instruments used to hedge interest rates, as of December 31, 2006 (dollar amounts in thousands). The notional amount represents the aggregate amount of a particular security that is currently hedged at one time, but does not represent exposure to credit, interest rate or market risks.


					Carrying and
	Notional		Maturity		Estimated
	Amount		Date Range		Fair Value
Cash flow hedges:
Interest rate caps	$	486,354		2007-2013	$	809
Interest rate swaps		367,054		2007-2014		7,080

Total cash flow hedges	$	853,408		2007-2014	$	7,889

Fair value hedges:
Interest rate swaps	$	75,055		2008	$	1,185
Total rate of return swaps		36,346		2007		(1,447	)

Total fair value hedges	$	111,401		2007-2008	$	(262	)

Total hedges	$	964,809		2007-2014	$	7,627

Foreign Currency Hedging Activities

We are exposed to foreign-exchange related variability and earnings volatility on our foreign investments. As such, during 2006 and 2005 we entered into foreign currency forward contracts with an aggregated notional amount of €201.5 million as a hedge against our exposure to variability in exchange rates on investment in foreign subsidiaries and designated the contract as a net investment hedge. The fair value of these forward contracts at December 31, 2006 was ($1.2) million.

Energy Contract Hedging Activities

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Equity Securities Hedging Activities

We are exposed to price risk associated with changes in the fair value of certain equity securities. During 2006, we entered into forward sale agreements with an aggregate notional amount equal to the fair value of the underlying marketable securities of approximately $6.6 million, to protect against a reduction in the fair value of these securities. The contract had an aggregate estimated fair value of approximately ($0.3) million at December 31, 2006. We designated this forward sale as a fair value hedge.

(13) Selected Quarterly Financial Data (Unaudited)

Selected quarterly financial data (in thousands, except per share amounts) for 2006 and 2005 is summarized below. The sum of the quarterly earnings per Common Unit amounts may not equal the annual earnings per Common Unit amounts due primarily to changes in the number of Common Units outstanding from quarter to quarter.


	Three Months Ended
	3-31⁽¹⁾		6-30⁽¹⁾		9-30⁽¹⁾		12-31⁽¹⁾
2006:
Total revenues	$	252,412	$	265,145	$	305,313	$	310,716


Earnings from operations		41,219		47,159		58,584		54,046
Income from unconsolidated entities		18,878		10,518		2,088		4,832
Other non-operating income		176		243		1,718		201
Plus net earnings from discontinued operations		83,619		134,834		87,721		289,239
Less Preferred Unit distributions		958		957		957		957

Net earnings attributable to Common Units — Basic	$	142,934	$	191,797	$	149,154	$	347,361

Net earnings per Common Unit⁽²⁾: Basic	$	0.58	$	0.77	$	0.60	$	1.39

Diluted	$	0.58	$	0.77	$	0.60	$	1.36

2005:
Total revenues	$	177,902	$	184,889	$	231,778	$	239,064


Earnings from operations		2,122		25,998		53,342		40,147
Income from unconsolidated entities		11,117		5,794		1,839		3,682
Other non-operating income		24,005		4,778		72		(48	)
Plus net earnings from discontinued operations		36,598		25,764		132,810		333,484

Less Preferred Unit distributions		1,698		958		958		958

Net earnings attributable to Common Units — Basic⁽²⁾	$	72,144	$	61,376	$	187,105	$	376,307

Net earnings per Common Unit⁽²⁾: Basic	$	0.32	$	0.28	$	0.80	$	1.53

Diluted	$	0.32	$	0.27	$	0.80	$	1.52


(1)		Net earnings from discontinued operations have been reclassified for all periods presented.

(2)		Due to the independent calculations of quarterly and annual earnings per unit and rounding, the sum of the quarterly per unit amounts may not equal the year-to-date totals.

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(14) Segment Data

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

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


	Years Ended December 31,
	2006		2005		2004

Reportable apartment communities segment rental revenues:
Same-Store:
Garden communities	$	363,677	$	343,476	$	331,746
High-Rise properties		254,549		239,549		231,000
Non Same-Store:
Garden communities		210,830		93,320		39,512
High-Rise properties		174,147		88,447		33,534
Ameriton⁽¹⁾		6,956		5,458		3,202
Other non-reportable operating segment revenues		46,017		7,353		3,276

Total segment and consolidated rental revenues	$	1,056,176	$	777,603	$	642,270


	Years Ended December 31,
	2006			2005			2004
Reportable apartment communities segment NOI:
Same-Store:
Garden communities	$	251,293		$	236,606		$	228,084

High-Rise properties		172,547			158,660			154,002
Non Same-Store:
Garden communities		142,153			63,178			22,739

High-Rise properties		117,146			59,425			22,623
Ameriton⁽¹⁾		3,158			1,990			1,266

Other non-reportable operating segment NOI		26,537			5,362			2,809


Total segment and consolidated NOI		712,834			525,221			431,523

Reconciling items:
Other income		77,410			56,030			19,208
Depreciation on real estate investments		(261,438	)		(187,771	)		(150,470	)
Interest expense		(245,895	)		(164,035	)		(125,108	)
General and administrative expenses		(68,188	)		(58,604	)		(55,479	)

Other expenses		(13,715	)		(49,232	)		(13,563	)

Consolidated earnings from operations	$	201,008		$	121,609		$	106,111

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


(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 2006, 2005 and 2004, pre-tax gains, net of internal disposition costs, from the disposition of Ameriton depreciated real estate were $51.2 million, $75.2 million and $65.1 million, respectively. These gains are classified within discontinued operations. 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.


	Year Ended December 31,
	2006		2005
Reportable operating communities segment assets:
Same-Store:
Garden communities	$	2,594,681	$	2,632,382
High-Rise properties		2,508,155		2,539,302
Non Same-Store:
Garden communities		2,950,252		2,829,915
High-Rise properties		2,388,235		1,457,841
Ameriton		434,282		557,684
FHA/ADA settlement capital accrual		29,185		47,198
International		843,003		—
Other non-reportable operating segment assets		153,568		130,902

Total segment assets		11,901,361		10,195,224
Real estate held for sale, net		329,133		327,347

Total segment assets		12,230,494		10,522,571
Reconciling items:
Investment in and advances to unconsolidated entities		235,323		132,728
Cash and cash equivalents		48,655		13,638
Restricted cash in tax-deferred exchange escrow		319,312		495,274
Other assets		425,343		297,884

Consolidated total assets	$	13,259,127	$	11,462,095

Total capital expenditures for garden communities excluding communities sold or held for sale, were $60.6 million and $38.1 million for the years ended December 31, 2006 and 2005, respectively. Total capital expenditures for High-Rise properties excluding communities sold or held for sale were $64.7 million and $66.1 million for the years ended December 31, 2006 and 2005, respectively. Total capital expenditures for Ameriton properties excluding communities sold or held for sale, were $1.1 million and $0.5 million for the years ended December 31, 2006 and 2005, respectively.

(15) Income Taxes

The Operating Trust is a Maryland real estate investment trust that has filed a federal tax election to be treated as a partnership. For income tax purposes, the company was subject to regulations under the Internal Revenue Code pertaining to REITs through October 31, 2001 and to partnerships subsequent to that date. In either case, as a REIT or a partnership, our income is not generally subject to federal income taxes. In addition, the Operating Trust has certain taxable subsidiaries such as Ameriton and certain International subsidiaries for which we do record a provision for taxes.

As a partnership, we make distributions to our partners and allocate our taxable income to our partners. The major portion of distributions and income are paid/allocated to Archstone-Smith Trust with the remainder paid/allocated to third-party unitholders.

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table reconciles net earnings to taxable income subject to distribution requirement for the years ended December 31 (in thousands):


	For the Year Ended December 31,
	2006			2005			2004
	(estimated)
GAAP net earnings	$	835,075		$	701,504		$	612,623
Book to tax differences:
Depreciation and amortization⁽¹⁾		41,771			14,927			12,165
Gain or loss from capital transactions		(451,673	)		(303,550	)		(67,889	)
Deferred compensation and other reserves		(649	)		8,846			3,177
Other, net		(20,292	)		(33,665	)		(8,111	)

Taxable income, including capital gains	$	404,232		$	388,062		$	551,965


(1)		We use accelerated depreciable lives for tax purposes. This results in higher depreciation expense on newly acquired assets for tax purposes relative to GAAP. This is offset by the Smith Merger in 2001 and the Oakwood transaction in 2005 as GAAP depreciation expense for the related assets is based on fair value and tax depreciation is based on a lower historical tax basis.

Distributions have been made as follows:


	For the Year Ended December 31,
	2006		2005		2004
	(estimated)
Distributions to Archstone-Smith Trust	$	379,087	$	353,572	$	545,586
Distributions to unitholders		54,798		44,472		68,311

Total Distributions	$	433,885	$	398,044	$	613,897

The following table summarizes the taxability of our distributions for the past three years:


	For the Year Ended December 31,
	2006			2005			2004
Ordinary income		75	%		65	%		46	%
Capital gains⁽¹⁾		25	%		35	%		54	%

		100	%		100	%		100	%


(1)		Includes 11.4%, 34.3% and 22.8% of unrecaptured Section 1250 gains in 2006, 2005, and 2004, respectively.

As a taxable REIT subsidiary, Ameriton is subject to state and federal income taxes. Income tax expense consists of the following for the years ended December 31, 2006, 2005, and 2004 which is included in either other expense or discontinued operations (in thousands):


	For the Year Ended December 31,
	2006		2005			2004
Income tax expense (benefit)
Current	$	14,825	$	21,854		$	20,119
Deferred		3,208		(2,255	)		(1,314	)

Total expense	$	18,033	$	19,599		$	18,805

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 35% to pretax income as a result of the following for the years ended December 31, 2006, 2005, and 2004 (in thousands):


	For the Year Ended December 31,
	2006			2005		2004
Computed expected tax expense	$	19,018		$	19,039	$	17,801
Increase (decrease) in income taxes resulting from state taxes and other		(985	)		560		1,004

Income tax expense	$	18,033		$	19,599	$	18,805

Deferred income taxes reflect the estimated net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the corresponding amounts for income tax purposes. Ameriton’s deferred tax assets and liabilities at December 31, 2006 and 2005 are presented below (in thousands).


	Years Ended December 31,
	2006			2005

Deferred tax assets:
Deferred compensation	$	712		$	3,775
Reserves		560			421
Real estate, principally due to depreciation		1,211			1,310
Other		75			928

Deferred tax assets		2,558			6,434

Deferred tax liabilities:
Real estate, principally due to depreciation		—			—
Income from unconsolidated entities		2,603			3,271

Deferred tax liabilities		2,603			3,271


Net deferred tax asset (liability)	$	(45	)	$	3,163

International Income Taxes

During the year ended December 31, 2006, we recorded a $5.6 million tax benefit and a corresponding deferred tax asset related to the net loss on our International operations. In addition, we have a $69.0 million deferred tax liability as of December 31, 2006 related primarily to built-in gains on the DeWAG real estate portfolio.

(16) Commitments and Contingencies

Commitments

At December 31, 2006 we had eight non-cancelable ground leases for certain apartment communities and buildings that expire between 2042 and 2077. Each ground lease generally provides for a fixed annual rental payment plus additional rental payments based on the properties’ operating results. Additionally, we lease certain office space under non-cancelable operating leases with fixed annual rental payments.

The future minimum lease payments payable under non-cancelable leases are as follows at December 31, 2006 (in thousands):


2007	$	3,767
2008		3,816
2009		3,868
2010		3,886
2011		3,926
Thereafter (2012-2077)	$	215,623

Total	$	234,886

See Note 2 for real estate-related commitments.

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Guarantees and Indemnifications

Investee third-party debt consists principally of mortgage notes payable. Generally, mortgages on real estate assets owned by our unconsolidated investees are secured by the underlying properties. We generally do not guarantee third party debt incurred by our unconsolidated investees; however, the investees and/or the Operating Trust are occasionally required to guarantee the mortgages along with all other venture partners. We guarantee $292.0 million of the outstanding debt balance related to an unconsolidated development joint venture and are committed to guarantee another $16.9 million upon funding of additional debt. As of December 31, 2006 we have not been required to perform under any guarantees provided to our joint ventures.

Litigation and Contingencies

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 FHA and 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 wholly-owned and joint venture communities, of which we still own or have an interest in 45. As part of the settlement, the three disability organizations all recognized that the Operating Trust had no intention to build any of its communities in a manner inconsistent with the FHA or ADA.

ARCHSTONE-SMITH OPERATING TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(17) Supplemental Cash Flow Information

Significant non-cash investing and financing activities for the years ended December 31, 2006, 2005 and 2004 consisted of the following:

	•		Issued $81.4 million, $408.0 million and $10.8 million of A-1 Common Units as partial consideration for properties acquired during 2006, 2005 and 2004, respectively;

	•		Issued $250,000 of Series N-1 and N-2 Preferred Units ($125,000 each) as partial consideration for real estate during 2005;

	•		Converted $143.4 million, $8.4 million and $47.9 million A-1 Common Units to A-2 Common Units during 2006, 2005 and 2004, respectively;

	•		Assumed mortgage debt of $728.5 million, $864.2 million and $113.6 million during 2006, 2005 and 2004, respectively, in connection with the acquisition of apartment communities;

	•		Recorded a $47.2 million accrual for anticipated capital spending to bring properties named in the FHA and ADA settlement into compliance in 2005;

	•		See Notes 3 and 4 for further discussion regarding the non-cash financing components of the DeWAG and Oakwood acquisitions.

(18) Related Party Transactions

The Operating Trust has the following business relationships with business entities or family members of Board of Trustee members Robert H. Smith and Robert P. Kogod:

On April 8, 2002, the Operating Trust entered into an Office Space Easement and Cost Sharing Arrangement with CESM, Inc. and others. CESM, Inc. is controlled by two of our trustees, Mr. Smith and Mr. Kogod. During 2006, CESM, Inc. paid to us a total of $99,355 for office services provided by us to CESM, Inc. and $32,783 for certain employee expenses. For that same period, we paid to CESM, Inc. $234,480 for a portion of the rent due for the executive suites that CESM, Inc. leases and which are utilized by Mr. Smith and Mr. Kogod while working for us, and $56,825 for certain employee expenses to support Mr. Smith and Mr. Kogod.

Mr. Smith owns a residence within a condominium in Crystal City. We staffed the property with doormen, maintenance, and administrative staff. We were reimbursed by the condominium association for payroll and benefits costs for these employees and we received a monthly management fee of $1,800 for other management oversight. We do not have an ownership interest in this property. We discontinued management of this asset as of February 28, 2006. Prior to the termination date, we billed $32,054 for expenses incurred and management fees for this property during 2006.

Mr. Smith and Mr. Kogod have a 0.33% and 4.36% ownership interest, respectively, in two apartment communities in Washington D.C. We received a management fee of 4.5% of revenues to manage the property and perform all accounting functions. We do not have an ownership interest in this property. We discontinued management of this asset as of May 31, 2006. Prior to the termination date, we billed $1,143,463 for expenses incurred and management fees for these properties during 2006.

ARCHSTONE-SMITH OPERATING TRUST

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2006
(Dollar amounts in thousands)


					Initial Cost to						Gross Amount at Which
					Archstone-Smith Operating Trust				Costs		Carried at Year End
									Capitalized
			Encum-				Buildings &		Subsequent to				Buildings &				Accumulated			Construction		Year
	Units		brances		Land		Improvements		Acquisition		Land		Improvements		Totals		Depreciation			Year⁽¹⁾		Acquired

Apartment Communities:
Garden Communities:

Atlanta, Georgia		1,006		—		24,440		—		59,772		24,780		59,432		84,212		(15	)	Under Construction			2001
Austin, Texas		444		—		4		1,158		33,091		4,830		29,423		34,253		(4,712	)		2001		2001
Boston, Massachusetts		2,044		129,612		66,944		327,909		79,733		75,204		399,382		474,586		(42,224	)		1898-2006		1999-2006
Dallas, Texas		514		33,280		8,912		38,550		715		8,927		39,250		48,177		(1,585	)		1998		2005
Denver, Colorado		156		—		1,030		4,596		4,923		1,523		9,026		10,549		(3,157	)		1981		1992
El Paso, Texas		379		11,685		1,307		11,802		1,089		1,337		12,861		14,198		(503	)		1974		2005
Greater NYC metropolitan area		396		78,000		23,211		4,058		61,849		23,182		65,936		89,118		(3,914	)		2006		2006
Houston, Texas		1,036		—		18,965		24,307		12,300		19,181		36,391		55,572		(9,764	)		1996		1998
Inland Empire, California		1,298		—		10,436		59,147		14,892		12,180		72,295		84,475		(21,149	)		1985-1990		1995-1997
Los Angeles, California		8,138		254,461		504,186		785,620		337,594		507,439		1,119,961		1,627,400		(76,734	)		1969-2006		1998-2006
Orange County, California		2,947		—		79,497		121,417		126,627		89,548		237,993		327,541		(40,393	)		1986-2002		1996-2005
Orlando, Florida		312		—		3,110		17,620		1,370		3,748		18,352		22,100		(6,298	)		1988		1998
Phoenix, Arizona		1,403		23,770		26,363		45,809		19,347		26,529		64,990		91,519		(949	)		1978-1999		2005-2006
San Diego, California		2,968		33,376		84,916		108,480		185,750		91,277		287,869		379,146		(50,957	)		1973-2005		1996-2006
San Francisco Bay Area, California		7,604		249,521		413,676		724,210		275,421		420,165		993,142		1,413,307		(115,542	)		1909-2004		1995-2006
Seattle, Washington		3,408		25,709		67,521		144,561		96,917		74,510		234,489		308,999		(56,169	)		1976-2003		1997-2005
Southeast Florida		2,282		—		69,856		197,603		8,269		74,678		201,050		275,728		(20,219	)		1990-2003		1998-2005
Stamford, Connecticut		160		—		5,775		1,225		29,568		6,320		30,248		36,568		(3,595	)		2002		2002
Ventura County, California		1,018		—		40,210		72,232		46,770		40,780		118,432		159,212		(13,759	)		1985-2005		1997-2005
Washington, D.C. metropolitan area		9,048		258,925		289,655		660,646		236,150		300,484		885,967		1,186,451		(113,308	)		1967-2003		1999-2006

Garden Communities Total		46,561		1,098,339		1,740,014		3,350,950		1,632,147		1,806,622		4,916,489		6,723,111		(584,946	)

High-Rise Properties:
Boston, Massachusetts		1,633		27,505		67,518		172,030		248,983		78,088		410,443		488,531		(23,298	)		1901-2006		2001-2006
Chicago, Illinois		1,113		36,682		39,837		188,925		6,051		40,111		194,702		234,813		(23,791	)		1988-1999		2001-2005
Dallas, Texas		181		—		2,323		—		1,410		2,323		1,410		3,733		—		Under Construction			2004
Los Angeles, California		1,073		—		34,402		139,613		64,136		34,697		203,454		238,151		(16,424	)		1934-2004		2003-2004
Minneapolis, Minnesota		250		17,803		5,002		21,768		337		5,008		22,099		27,107		(915	)		1983		2005
NYC metropolitan area		3,028		462,066		584,270		793,256		218,187		649,519		946,194		1,595,713		(45,067	)		1870-2003		2002-2006
Philadelphia, Pennsylvania		80		—		2,229		16,741		65		2,231		16,804		19,035		(357	)		1945		2006
San Diego, California		387		—		5,963		33,789		4,606		6,054		38,304		44,358		(10,162	)		1992		1999
San Francisco Bay Area, California		853		—		87,664		176,474		4,437		87,905		180,670		268,575		(4,106	)		1966-1986		2005-2006
Seattle, Washington		338		34,360		16,279		46,041		102		16,288		46,134		62,422		(1,822	)		1992-1998		2005
Washington, D.C. metropolitan area		11,722		587,896		582,947		1,420,478		248,771		597,753		1,654,443		2,252,196		(229,124	)		1929-2005		2001-2006




High-Rise Properties Total		20,658		1,166,312		1,428,434		3,009,115		797,085		1,519,977		3,714,657		5,234,634		(355,066	)

Germany⁽²⁾		8,334		499,550		161,465		627,144		62,984		174,403		677,190		851,593		(8,590	)		1903-2006		2005-2006
FHA/ADA Settlement Capital Accrual																29,185
Total Apartment Communities — Operating and Under Construction		75,553		2,764,201		3,329,913		6,987,209		2,492,216		3,501,002		9,308,336		12,838,523		(948,602	)

Other:
Development communities In Planning and Owned		4,802		8,362												216,479
Hotel, retail and other assets				3,671												132,638		(8,544	)

Total real estate assets		80,355		2,776,234												13,187,640		(957,146	)


(1)		Represents the date that the building structure was originally completed. For phased developments, it represents the date the earliest phase was constructed.

(2)		Our German portfolio is concentrated primarily in the Federal States of North-Rhine Westphalia, Hesse, Baden-Wurttemburg and Berlin.

SCHEDULE III

The following is a reconciliation of the carrying amount and related accumulated depreciation of Archstone-Smith’s Operating Trust’s investment in real estate, at cost (in thousands):


	Years Ended December 31,
	2006			2005			2004
Carrying Amounts
Balance at January 1	$	11,359,264		$	9,221,038		$	8,999,180

Apartment communities:
Acquisition-related expenditures		2,530,459			2,671,112			1,080,639
Redevelopment expenditures		57,414			106,264			40,999
Recurring capital expenditures		46,354			48,311			50,147
Development expenditures, excluding land acquisitions		388,502			324,740			333,782
Acquisition and improvement of land for development		209,916			81,340			175,470
Dispositions		(1,403,858	)		(1,175,834	)		(1,460,046	)
Provision for possible loss on investment		(4,328	)		(1,500	)		¾
Change in estimated hurricane retirements		4,496			¾			¾
Other		7,987			(8,303	)		¾

Net apartment community activity	$	1,836,942		$	2,046,130		$	220,991

Other:
Change in other real estate assets		(8,566	)		92,096			867

Balance at December 31	$	13,187,640		$	11,359,264		$	9,221,038


	Year s Ended December 31,
	2006			2005			2004
Accumulated Depreciation
Balance at January 1	$	836,693		$	763,542		$	648,982
Depreciation for the year⁽¹⁾		266,589			220,770			203,639
Accumulated depreciation on real estate dispositions		(146,136	)		(147,619	)		(89,079	)

Balance at December 31	$	957,146		$	836,693		$	763,542


(1)		Depreciation is net of $21.7 million and $18.0 million for intangible assets related to the value of leases in place for real estate acquired in 2006 and 2005, respectively.

SCHEDULE IV

ARCHSTONE-SMITH OPERATING TRUST
MORTGAGE LOANS ON REAL ESTATE

December 31, 2006
(Dollar amounts in thousands)


														Principal
														amount of
														loans
														subject to
														delinquent
						Periodic payment				Face amount of		Carrying amount of		principal or
Description	Interest Rate			Final Maturity Date		term		Prior liens		mortgages		mortgages		interest
Mortgage and Other Notes Receivable:
Washington, D.C.		18	%		7/17/07		⁽¹⁾		⁽³⁾	$	9,235	$	6,955		—
Massachusetts		18	%		1/01/08		⁽¹⁾		⁽³⁾		7,687		6,483		—
New York	LIBOR + 5%				9/30/10		⁽¹⁾		⁽³⁾		25,654		25,654		—
Massachusetts	LIBOR + 7%				2/07/11		⁽¹⁾		⁽³⁾		9,268		8,216		—
Washington, D.C.		14	%		6/03/09		⁽¹⁾		⁽³⁾		7,524		4,685		—
New York	LIBOR + 7%				6/22/09		⁽¹⁾		⁽³⁾		42,070		26,708		—
Maryland		7	%		3/24/07		⁽¹⁾				44,560		44,560		—

										$	145,998	$	123,261		—


	2006			2005
Balance at January 1	$	74,396		$	8,729
New Mortgage Loans		85,165			97,096
Other⁽²⁾		9,781			5,224
Collections of Principal		(46,081	)		(36,653	)

Balance at December 31	$	123,261		$	74,396


(1)		Outstanding principal plus accrued and unpaid interest is generally due on the maturity date unless specified as payable monthly in the loan agreement. Partial prepayment is required to the extent the borrower receives proceeds from the sale of constructed units in accordance with contracted terms.

(2)		A portion of the accrued interest amount is added to the principal amount on a monthly basis on the majority of the loans.

(3)		Our rights to the underlying collateral in the event of default are subordinate to a primary mortgage lender.

INDEX TO EXHIBITS

Certain of the following documents are filed herewith. Certain other of the following documents have been previously filed with the Securities and Exchange Commission and, pursuant to Rule 12b-32, are incorporated herein by reference:


Number		Description
3.1		Amended and Restated Declaration of Trust of Archstone-Smith Operating Trust (incorporated by reference to Exhibit 3.1 to Archstone-Smith Trust’s Current Report of Form 8-K filed with the SEC on June 2, 2006)

3.2		Restated Bylaws of Archstone-Smith Trust (incorporated by reference to Exhibit 3.2 to the Archstone-Smith Trust’s Current Report on Form 8-K filed with the SEC on June 2, 2006)

4.1		Indenture, dated as of February 1, 1994, between Archstone-Smith Operating Trust (formerly Property Trust of America) and Morgan Guaranty Trust Company of New York, as Trustee relating to Archstone-Smith Operating Trust’s (formerly Property Trust of America) unsecured senior debt securities

4.2		First Supplemental Indenture, dated February 2, 1994, among Archstone-Smith Operating Trust (formerly Property Trust of America), Morgan Guaranty Trust Company of New York and State Street Bank and Trust Company, as successor Trustee

4.3		Second Supplemental Indenture, dated August 2, 2004, between Archstone-Smith Operating Trust and U.S. Bank National Association, as successor Trustee

4.4		Third Supplemental Indenture, dated July 14, 2006, between Archstone-Smith Operating Trust and U.S. Bank National Association, as successor Trustee

4.5		Indenture, dated as of August 14, 1997, between Security Capital Atlantic Incorporated and State Street Bank and Trust Company, as Trustee (incorporated by reference to Exhibit 4.8 to Security Capital Atlantic Incorporated’s Registration Statement on Form S-11 (File No. 333-30747))

4.6		Form of Archstone-Smith Trust common share ownership certificate (incorporated by reference to Exhibit 3.3 to Archstone-Smith Trust’s Registration Statement on Form S-4 (File No. 333-63734))

4.7		Form of Archstone-Smith Trust share certificate for Series I Preferred Shares (incorporated by reference to Exhibit 3.8 to Archstone-Smith Trust’s Registration Statement on Form S-4 (File No. 333-63734))

10.1		Amended and Restated Declaration of Trust of Archstone-Smith Operating Trust (incorporated by reference to Exhibit 4.1 to the Archstone-Smith Trust’s Current Report on Form 8-K filed with the SEC on June 2, 2006)

10.2		Amended and Restated Bylaws of Archstone-Smith Operating Trust (incorporated by reference to Exhibit 4.2 to the Archstone-Smith Trust’s Current Report on Form 8-K filed with the SEC on June 2, 2006)

10.3		Articles Supplementary for Series M Preferred Unit of Beneficial Interest of Archstone-Smith Operating Trust (incorporated by reference to Exhibit 3.1 to the Archstone-Smith Trust’s Current Report on Form 8-K filed with the SEC on December 16, 2004)

10.4		Articles Supplementary for Series N-1 Preferred Unit of Beneficial Interest and N-2 Preferred Unit of Beneficial Interest of Archstone-Smith Operating Trust (incorporated by reference to Exhibit 3.1 to the Archstone-Smith Operating Trust’s Current Report on Form 8-K filed with the SEC on August 2, 2005)

10.5		Amended and Restated Archstone-Smith Trust Equity Plan for Outside Trustee and all amendments thereto (incorporated by reference to Exhibits 10.5, 10.6 and 10.7 to Archstone-Smith Trust’s Current Report on Form 8-K filed with the SEC on December 12, 2006)

10.6		Archstone-Smith Trust 2001 Long-Term Incentive Plan and all amendments thereto (incorporated by reference to Exhibit 10.1, 10.2, 10.3 and 10.4 to Archstone-Smith Trust’s Current Report on Form 8-K filed with the SEC on December 12, 2006)

10.7		Archstone-Smith Deferred Compensation Plan (incorporated by reference to Exhibit 10.5 to Archstone-Smith’s Annual Report on Form 10-K for the year ended December 31, 2001)

10.8		Form of Non-Qualified Share Option Agreement for Archstone-Smith Trust 2001 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of Archstone-Smith Trust’s Annual Report on Form 10-Q for the Quarter Ended September 30, 2004)

10.9		Form of Restricted Share Unit Agreement for Archstone-Smith Trust 2001 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 of Archstone-Smith Trust’s Annual Report on Form 10-Q for the Quarter Ended September 30, 2004)

10.10		Form of Restricted Share Unit Agreement for Archstone-Smith Trust Equity Plan for Outside Trustees (incorporated by reference to Exhibit 10.3 of Archstone-Smith Trust’s Annual Report on Form 10-Q for the Quarter Ended September 30, 2004)


Number		Description
10.11		Form of Indemnification Agreement entered into between Archstone-Smith Trust and each of its officers and Trustees (incorporated by reference to Exhibit 10.6 to Archstone-Smith Trust’s Annual Report on From 10K for the year ended December 31, 2003)

10.12		Form of Change in Control Agreement between Archstone-Smith Trust and certain of its officers (incorporated by reference to Exhibit 10.7 to Archstone-Smith’s Annual Report on Form 10-K for the year ended December 31, 2002)

10.13		Amended and Restated Credit Agreement, dated as of June 21, 2006, by and among Archstone-Smith Operating Trust, as borrower, and Archstone-Smith Trust as parent, and J.P. Morgan Chase Bank, as administrative agent,, J.P. Morgan Europe Limited, as administrative agent for foreign currencies, Bank of America, N.A., and Wells Fargo Bank, N.A., as syndication agents, and Suntrust Bank and Citicorp North America, Inc. as documentation agents and the various banks signatory thereto (incorporated by reference to Exhibit 10.2 to Archstone-Smith’s Current Report on Form 8-K filed with the SEC on June 27, 2006)

10.14		Guaranty, dated as of June 21, 2006, by Archstone-Smith Trust, as guarantor, for the benefit of J.P. Morgan Chase Bank, as administrative agent, J.P. Morgan Europe Limited, as administrative agent for foreign currencies, Bank of America, N.A., and Wells Fargo Bank, N.A., as syndication agents, and Suntrust Bank and Citicorp North America, Inc. as documentation agents and the various banks signatory thereto (incorporated by reference to Exhibit 10.1 to Archstone-Smith’s Current Report on Form 8-K filed with the SEC on June 27, 2006)

10.15		Archstone Dividend Reinvestment and Share Purchase Plan (incorporated by reference to the prospectus contained in Archstone-Smith Trust’s Registration Statement on Form S-3 (No. 333-44639-01))

10.16		2006 and 2007 schedule of applicable dates under the Archstone Dividend Reinvestment and Share Purchase Plan (included by reference to Exhibit 99.1 to Archstone-Smith Trust’s current report on form 8-K filed with the SEC on February 14, 2006)

10.17		Shareholders’ Agreement, dated as of October 31, 2001, by and among Archstone-Smith Trust, Archstone-Smith Operating Trust, Robert H. Smith and Robert P. Kogod (incorporated by reference to Exhibit 10.1 to Archstone-Smith Trust’s Current Report on Form 8-K filed with the SEC on November 1, 2001)

10.18		Noncompetition Agreement by and among Charles E. Smith Residential Realty, Inc., Charles E. Smith Residential Realty L.P. and Robert P. Kogod and Robert H. Smith (incorporated by reference to Exhibit 10.1 of Charles E. Smith Residential Realty, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1994)

10.19		Registration Rights and Lock-up Agreement (incorporated by reference to Exhibit 10.2 of Charles E. Smith Residential Realty, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1994)

10.20		License Agreement between Charles E. Smith Management, Inc. and Charles E. Smith Residential Realty, Inc. (incorporated by reference to Exhibit 10.35 of Charles E. Smith Residential Realty, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1994)

10.21		License Agreement between Charles E. Smith Management, Inc. and Charles E. Smith Residential Realty L.P. (incorporated by reference to Exhibit 10.36 of Charles E. Smith Residential Realty, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1994)

12.1		Computation of Ratio of Earnings to Fixed Charges

12.2		Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividends

15.1		Consent of Independent Registered Public Accounting Firm

21		Subsidiaries of Archstone-Smith

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


	Page
Reports of Independent Registered Public Accounting Firm		46
Consolidated Balance Sheets as of December 31, 2006 and 2005		47
Consolidated Statements of Earnings for the years ended December 31, 2006, 2005 and 2004		48
Consolidated Statements of Unitholders’ Equity, Other Common Unitholders’ Interest and Comprehensive Income (Loss) for the years ended December 31, 2006, 2005 and 2004		49
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004		50
Notes to Consolidated Financial Statements		51
Report of Independent Registered Public Accounting Firm on Supplementary Information		82
Schedule III — Real Estate and Accumulated Depreciation as of December 31, 2006		83
Schedule IV – Mortgage Loans on Real Estate as of December 31, 2006		85
Signatures		86
Index to Exhibits		87


Item	Description	Page
PART I
	Glossary	3
1	Business	6
	The Company	6
	2006 Accomplishments	7
	Investment Strategy	8
	Customer-focused Operations	9
	Conservative Balance Sheet Management	11
	Management	12
	Biographies of Senior Officers of the OperatingTrust	12
	Employees	13
	Insurance	13
	Competition	13
	Available Information and Code of Ethics	14
1A.	Risk Factors	14
1B.	Unresolved Staff Comments	18
2.	Properties	18
	United States Geographic Distribution, excluding Ameriton	18
	Real Estate Portfolio	18
3.	Legal Proceedings	20
4.	Submission of Matters to a Vote of Security Holders	20

PART II
5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
6.	Selected Financial Data	21
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
	Results of Operations	23
	Liquidity and Capital Resources	32
	Litigation and Contingencies	33
	Critical Accounting Policies	34
	Off Balance Sheet Arrangements	36
	Contractual Commitments	36
	New Accounting Pronouncements	36
7A.	Quantitative and Qualitative Disclosures About Market Risk	37
8.	Financial Statements and Supplementary Data	39
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	39
9A.	Controls and Procedures	40
	Management’s Report on Internal Control Over Financial Reporting	40
9B.	Other Information	40

PART III
10.	Directors, Executive Officers and Corporate Governance	41
11.	Executive Compensation	41
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	41
13.	Certain Relationships and Related Transactions and Director Independence	42
14.	Principal Accounting Fees and Services	42

PART IV
15.	Exhibits, Financial Statement Schedules	43
Indenture
First Supplemental Indenture
Second Supplemental Indenture
Third Supplemental Indenture
Computation of Ratios of Earnings to Fixed Charges
Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Share Dividends
Consent of Independent Registered Public Accounting Firm
Subsidiaries
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906


(1)		Allocation is based on the relative NOI in core versus non-core markets for the three months ended December 31, 1994 for the 1995 geographic distribution and the three-months ended December 31, 2006 for the 2006 geographic distribution. Core markets are defined as the Washington D.C. metropolitan area; Southern California; the New York City metropolitan area; the San Francisco Bay Area in California; Boston, Massachusetts; Seattle, Washington; Southeast Florida and Chicago, Illinois. Non-core is defined as all other markets in the United States.


Signature	Title	Date

/s/ R. Scot Sellers R. Scot Sellers	Chairman of the Board, Chief Executive Officer (principal executive officer)	March 1, 2007

/s/ Charles E. Mueller, Jr. Charles E. Mueller, Jr.	Chief Financial Officer (principal financial officer)	March 1, 2007

/s/ Mark A. Schumacher Mark A. Schumacher	Chief Accounting Officer (principal accounting officer)	March 1, 2007

ARCHSTONE-SMITH TRUST



By: /s/ R. Scot Sellers Chairman and Chief Executive Officer	Trustee	March 1, 2007