UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2006

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

For the transition period from                     to                     .

ARCHSTONE-SMITH OPERATING TRUST

Maryland		90-0042860
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

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

Yes þ      No o

     Indicate by check mark whether the registrant is 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

   At October 30, 2006 there were approximately 30,338,000 of the Registrant’s Class A-1 and Class B Common Units outstanding, held by non-affiliates.

 

 

Table of Contents

				Page
Item		Description		Number
		PART 1 – Financial Information
1.		Financial Statements
		Condensed Consolidated Balance Sheets – September 30, 2006 (unaudited) and December 31, 2005			3
		Condensed Consolidated Statements of Earnings – Three and Nine Months Ended September 30, 2006 and 2005 (unaudited)			4
		Condensed Consolidated Statement of Unitholders’ Equity, Other Common Unitholders’ Interest and Comprehensive Income (Loss) –Nine months Ended September 30, 2006 (unaudited)			5
		Condensed Consolidated Statements of Cash Flows – Nine months Ended September 30, 2006 and 2005 (unaudited)			6
		Notes to Condensed Consolidated Financial Statements (unaudited)			7
		Independent Registered Public Accounting Firm Review Report			24
2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
3.		Quantitative and Qualitative Disclosures about Market Risk			35
4.		Controls and Procedures			36
		PART II – Other Information
1.		Legal Proceedings			37
1A.		Risk Factors			37
2.		Unregistered Sales of Equity Securities and Use of Proceeds			37
3.		Defaults Upon Senior Securities			37
4.		Submission of Matters to a Vote of Security Holders			37
5.		Other Information			37
6.		Exhibits			37
Computation of Ratio of Earnings to Fixed Charges
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Unit Distributions
Independent Registered Public Accounting Firm Awareness Letter
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

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Archstone-Smith Operating Trust

Condensed Consolidated Balance Sheets

(In thousands, except unit data)

		September 30,				December 31,
		2006				2005
		(Unaudited)
ASSETS
Real estate		$	13,105,946			$	11,226,114
Real estate — held-for-sale			135,939				133,150
Less accumulated depreciation			934,658				836,693
			12,307,227				10,522,571
Investments in and advances to unconsolidated entities			212,884				132,728
Net investments			12,520,111				10,655,299
Cash and cash equivalents			52,080				13,638
Restricted cash in tax-deferred exchange escrow			54,579				495,274
Other assets			480,561				302,967
Total assets		$	13,107,331			$	11,467,178
LIABILITIES AND UNITHOLDERS’ EQUITY
Liabilities:
Unsecured credit facilities		$	25,714			$	394,578
Term loan — international			272,792				—
Long-term unsecured debt			3,388,156				2,545,119
Mortgages payable			2,794,204				2,310,277
Mortgages payable — held-for-sale			83,375				83,375
Accounts payable			75,124				53,366
Accrued expenses and other liabilities			416,637				311,673
Total liabilities			7,056,002				5,698,388
Other common unitholders’ interest, at redemption value (A-1 Common Units: 30,784,610 in 2006 and 33,910,022 in 2005)			1,675,914				1,420,491
Unitholders’ equity:
Perpetual Preferred Units			50,000				50,000
Common unitholders equity (218,758,589 units in 2006 and 212,413,939 units in 2005)			4,332,448				4,300,019
Accumulated other comprehensive income (loss)			(7,033	)			(1,720	)
Total unitholders’ equity			4,375,415				4,348,299
Total liabilities and unitholders’ equity		$	13,107,331			$	11,467,178

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Archstone-Smith Operating Trust

Condensed Consolidated Statements of Earnings

(In thousands, except per unit amounts)

(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Revenues:
Rental revenues		$	299,366			$	222,744			$	828,065			$	604,105
Other income			27,299				25,840				57,100				37,815
			326,665				248,584				885,165				641,920
Expenses:
Rental expenses			75,665				51,707				191,611				145,805
Real estate taxes			25,748				20,037				76,806				56,208
Depreciation on real estate investments			68,708				53,916				203,073				146,605
Interest expense			72,751				46,680				186,833				123,946
General and administrative expenses			18,497				13,600				49,794				41,644
Other expenses			1,986				5,538				14,046				37,047
			263,355				191,478				722,163				551,255
Earnings from operations			63,310				57,106				163,002				90,665
Equity in earnings from unconsolidated entities			2,088				1,839				31,484				18,750
Other non-operating income			1,718				72				2,137				28,855
Net earnings before discontinued operations			67,116				59,017				196,623				138,270
Net earnings from discontinued apartment communities			82,995				129,046				290,134				185,969
Net earnings			150,111				188,063				486,757				324,239
Preferred unit distributions			(957	)			(958	)			(2,872	)			(3,614	)
Net earnings attributable to Common Units — Basic		$	149,154			$	187,105			$	483,885			$	320,625
Weighted average Common Units outstanding:
Basic			248,695				232,794				247,950				226,778
Diluted			249,643				233,996				248,810				227,803
Earnings per Common Unit — Basic:
Earnings before discontinued operations		$	0.27			$	0.25			$	0.78			$	0.59
Discontinued operations, net			0.33				0.55				1.17				0.82
Net earnings		$	0.60			$	0.80			$	1.95			$	1.41
Earnings per Common Unit — Diluted:
Earnings before discontinued operations		$	0.27			$	0.25			$	0.78			$	0.59
Discontinued operations, net			0.33				0.55				1.16				0.82
Net earnings		$	0.60			$	0.80			$	1.94			$	1.41
Distributions paid per Common Unit		$	0.435			$	0.4325			$	1.305			$	1.2975

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Archstone-Smith Operating Trust

Condensed Consolidated Statement of Unitholders’ Equity,

Nine Months Ended September 30, 2006

(In thousands)
(Unaudited)

		Perpetual
		Preferred
		Units at								Accumulated
		Aggregate				Common				Other								Other Common
		Liquidation				Unitholders’				Comprehensive				Total Unitholders’				Unitholders’
		Preference				Equity				Income (Loss)				Equity				Interest				Total
Balances at December 31, 2005		$	50,000			$	4,300,019			$	(1,720	)		$	4,348,299			$	1,420,491			$	5,768,790
Comprehensive income:
Net earnings			—				422,541				—				422,541				64,216				486,757
Change in fair value of hedges			—				—				(8,525	)			(8,525	)			—				(8,525	)
Change in fair value of marketable securities			—				—				1,415				1,415				—				1,415
Foreign currency exchange translation			—				—				1,797				1,797				—				1,797
Comprehensive income attributable to Common Units																							481,444
Preferred Unit distribution			—				(2,872	)			—				(2,872	)			—				(2,872	)
Common Unit distributions			—				(281,755	)			—				(281,755	)			(42,289	)			(324,044	)
A-1 Common Units converted into A-2 Common Units			—				107,758				—				107,758				(107,758	)			—
Exercise of Options			—				29,441				—				29,441				—				29,441
Accrual of equity-classified awards under Compensation Plans			—				5,670				—				5,670				—				5,670
Issuance of A-1 Common Units under Dividend Reinvestment Plans			—				17,472				—				17,472				—				17,472
Issuance of A-1 Common Units in exchange for real estate			—				—				—				—				81,412				81,412
Adjustment to redemption value			—				(259,842	)			—				(259,842	)			259,842				—
Other, net			—				(5,984	)			—				(5,984	)			—				(5,984	)
Balances at September 30, 2006		$	50,000			$	4,332,448			$	(7,033	)		$	4,375,415			$	1,675,914			$	6,051,329

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Archstone-Smith Operating Trust

Condensed Consolidated Statements of Cash Flows

(In thousands)
(Unaudited)

		Nine Months Ended
		September 30,
		2006				2005
Operating activities:
Net earnings		$	486,757			$	324,239
Adjustments to reconcile net earnings to net cash flow provided by operating activities:
Depreciation and amortization			222,360				181,087
Gains on dispositions of depreciated real estate			(314,246	)			(196,549	)
Gains on sale of marketable equity securities			—				(27,948	)
Change in swap value — DeWAG hedges			1,407				—
Provision for possible loss on investments			4,328				—
Undistributed equity in earnings from unconsolidated entities			3,610				(18,750	)
Interest accrued on Mezzanine loans			(7,814	)			(3,308	)
Change in other assets			14,757				(29,022	)
Change in accounts payable, accrued expenses and other liabilities			22,854				22,721
Other, net			(6,733	)			(602	)
Net cash flow provided by operating activities			427,280				251,868
Investing activities:
Real estate investments			(1,826,663	)			(1,599,629	)
Purchase of DeWAG net of cash acquired of $20,364			(252,428	)			—
Change in investments in unconsolidated entities, net			(67,523	)			23,488
Proceeds from dispositions			1,190,054				812,206
Change in restricted cash			440,695				55,515
Change in notes receivable, net			(83,592	)			(41,826	)
Other, net			7,679				(1,735	)
Net cash flow used in investing activities			(591,778	)			(751,981	)
Financing activities:
Proceeds from Long-Term Unsecured Debt, net			859,385				495,724
Payments on Long-Term Unsecured Debt			(31,250	)			(231,250	)
Proceeds from (payments on) unsecured credit facilities, net			(368,864	)			187,007
Principal repayment of mortgages payable, including prepayment penalties			(220,410	)			(263,457	)
Regularly scheduled principal payments on mortgages payable			(11,723	)			(9,392	)
Proceeds from term loan to fund DeWAG investment			272,792				—
Proceeds from mortgage notes payable			—				655
Proceeds from Issuance of Common Units, net			—				491,440
Proceeds from Common Units issued under DRIP and employee stock options			46,913				33,275
Repurchase of Common Units and Preferred Units			—				(56,495	)
Repurchase of Series E and F Perpetual Preferred Units			—				(19,522	)
Cash distributions paid on Common Units			(324,044	)			(312,568	)
Cash distributions paid on Preferred Units			(2,872	)			(2,873	)
Other, net			(16,987	)			(2,368	)
Net cash flow provided by financing activities			202,940				310,176
Net change in cash and cash equivalents			38,442				(189,937	)
Cash and cash equivalents at beginning of period			13,638				203,255
Cash and cash equivalents at end of period		$	52,080			$	13,318
Significant non-cash investing and financing activities:
A-1 Common Units issued in exchange for real estate		$	81,412			$	400,749
N-1 and N-2 Convertible Redeemable Units issued in exchange for real estate			—				250
A-1 Common Units converted to A-2 Common Units			107,758				5,547
Assumption of mortgages payable upon purchase of apartment communities			728,484				654,727

These Condensed Consolidated Statements of Cash Flows combine cash flows from discontinued operations with cash flows from continuing operations.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements

September 30, 2006 and 2005
(Unaudited)

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

     Business

     Archstone-Smith is structured as an UPREIT under which all property ownership and business operations are conducted through the Archstone-Smith Operating Trust, which we refer to herein as the “Operating Trust”. Archstone-Smith is our sole trustee and owns approximately 87.7% of the Operating Trust’s outstanding Common Units; the remaining 12.3% 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 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.

     Interim Financial Reporting

     The accompanying Condensed Consolidated Financial Statements of the Operating Trust are unaudited and certain information and footnote disclosures normally included in financial statements have been omitted. While management believes that the disclosures presented are adequate for interim reporting, these interim financial statements should be read in conjunction with the financial statements and notes included in the Operating Trust’s Annual Report on Form 10-K, for the year ended December 31, 2005 (“2005 Form 10-K”). See the glossary in our 2005 Form 10-K for all defined terms not defined herein.

     In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary for a fair presentation of the Operating Trust’s financial statements for the interim periods presented. The results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of the results to be expected for the entire year.

     Use of Estimates

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

     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

     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

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

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 Condensed Consolidated Statements of Earnings.

     Goodwill and Other Intangibles

     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. Intangible assets consist of non-compete agreements and lease related intangibles. We will perform an impairment test annually, or more frequently, if events or changes in circumstances indicate impairment of our goodwill or 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.

     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.

     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 Condensed Consolidated Balance Sheets. The functional currency utilized for these subsidiaries is the local foreign currency.

     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 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. The most significant derivative transactions entered into during the nine months ended September 30, 2006 were the execution of forward treasury locks, which fixed the treasury rate component on $300 million of unsecured debt that we expect to refinance in 2007, and another $300 million we expect to refinance in 2008. On October 23, 2006, we settled these treasury locks. The resulting $2.0 million gain will be amortized into interest expense over the term of the debt, when issued. In connection with the DeWAG transaction, we assumed interest rate swaps with an aggregate notional amount of €227 million. These swaps, which had an aggregate fair value of approximately $4.0 million at September 30, 2006, were put in place by DeWAG to fix the interest cost associated with certain variable rate mortgages. These

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

derivatives were not designated as hedges for US GAAP purposes. Changes in fair value are recorded as adjustments to interest expense.

     Income Taxes

     We have made an election to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and we believe we qualify as a REIT and have made all required distributions of our taxable income.

     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 Condensed Consolidated Statement 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.

     Our accumulated other comprehensive income (loss) for the nine months ended September 30, 2006 was 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, 2005		$	184			$	(1,612	)		$	(292	)		$	(1,720	)
Change in fair value of hedges			—				(8,525	)			—				(8,525	)
Foreign currency exchange translation and other			—				—				1,797				1,797
Mark to market for marketable equity securities			1,415				—				—				1,415
Balance at September 30, 2006		$	1,599			$	(10,137	)		$	1,505			$	(7,033	)

     Per Unit Data

     Following is a reconciliation of basic EPS to diluted EPS for the periods indicated (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Net earnings attributable to Common Units — Basic and Diluted		$	149,154			$	187,105			$	483,885			$	320,625
Weighted average number of Common Units
Outstanding — Basic			248,695				232,794				247,950				226,778
Assumed exercise of options			948				1,202				860				1,025
Weighted average number of Common Units
Outstanding — Diluted			249,643				233,996				248,810				227,803

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

     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 whether they 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. 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 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 is not expected to have a material effect on our financial position, net earnings or cash flows.

     Please refer to Note 9 for details regarding the implementation of SFAS No. 123R, “Share-Based Payment.”

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

(2) Real Estate

     Investments in Real Estate

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

		September 30,				December 31,
		2006				2005
		Investment				Investment
Operating Trust Apartment Communities:
Operating communities		$	11,163,224			$	9,966,915
Communities under construction			683,330				575,631
Development communities In Planning(1)			72,948				24,365
Total Operating Trust apartment communities			11,919,502				10,566,911
Ameriton(1)			503,887				692,269
International and other real estate assets(2)			818,496				100,084
Total real estate		$	13,241,885			$	11,359,264

(1)  In Planning is defined as those parcels of land owned or Under Control, which are in the development planning process, upon which construction is expected subsequent to the completion of the entitlement and building permit processes. Under Control is the term we use to identify land parcels which we do not own, yet have an exclusive right to purchase through contingent contract or letter of intent during a contractually agreed upon time period, subject to approval of contingencies during the due diligence and entitlement processes. Our investment as of September 30, 2006 and December 31, 2005 for development communities In Planning – Under Control was $8.2 million and $145,000, respectively, and is reflected in the “Other assets” caption of our Condensed Consolidated Balance Sheets.

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

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

Balance at December 31, 2005		$	11,359,264
Acquisition-related expenditures (including DeWAG)			2,313,142
Redevelopment expenditures			38,937
Recurring capital expenditures			32,677
Development expenditures, including initial acquisition costs			270,514
Acquisition of land for development			193,451
Dispositions			(981,345	)
Provision for possible loss on investment			(4,328	)
Change in estimated hurricane retirements			4,496
Other			6,875
Net apartment community activity			1,874,419
Change in other real estate assets			8,202
Balance at September 30, 2006		$	13,241,885

     At September 30, 2006, we had unfunded contractual commitments of $588.0 million related to communities under construction and under redevelopment. The purchase prices of certain recent acquisitions in Northern California, New York, and 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.

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

(3) DeWAG Acquisition

     On July 27, 2006, we acquired 94% of the shares and 94% of an outstanding shareholder loan of DeWAG Deutsche WohnAnlage GmbH (“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 the consolidated financial statements since July 1, 2006. The purchase was funded by an international term loan, which is expected to be repaid 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 were 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. The goodwill associated with the transaction is primarily attributable to the people and processes which comprise the investing and the operating platform. 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 September 30, 2006 related to the intangible assets and liabilities we identified in connection with the DeWAG transaction and the corresponding amortization we expect to record (dollar amounts in thousands).

										Weighted
		Gross								Average
		Carrying				Accumulated				Useful Life
		Amount				Amortization				(in years)
Non-compete agreements		$	18,776			$	(1,174	)			4
In-place leases			12,182				(761	)			4
Total intangible assets		$	30,958			$	(1,935	)
Below-market leases		$	20,514			$	(1,282	)			4
Total intangible liabilities		$	20,514			$	(1,282	)

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

Estimated net amortization for the year ended
2006		$	1,305
2007		$	2,611
2008		$	2,611
2009		$	2,611
2010		$	1,306

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) 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, minority interest, 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 4 operating apartment communities, representing 2,136 units (unaudited), classified as held-for-sale under the provisions of SFAS No. 144, at September 30, 2006. Accordingly, we have classified the operating earnings from these 4 properties within discontinued operations for the three and nine months ended September 30, 2006 and 2005. During the nine months ended September 30, 2006 and 2005, we sold 28 and 16 Archstone-Smith 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 and 2005.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Rental revenues		$	7,169			$	41,766			$	53,841			$	133,957
Rental expenses			(3,351	)			(14,064	)			(20,618	)			(44,578	)
Real estate taxes			(436	)			(5,584	)			(6,443	)			(17,216	)
Depreciation on real estate investments			(951	)			(7,321	)			(9,439	)			(28,137	)
Interest expense(1)			(1,289	)			(10,143	)			(13,044	)			(34,239	)
Estimated income taxes (Ameriton properties)			(1,256	)			(9,990	)			(11,855	)			(13,206	)
Provision for possible loss on real estate investment			—				—				(4,328	)			—
Debt extinguishment costs related to dispositions			(825	)			(8	)			(7,589	)			(5,264	)
Gains from the disposition of Ameriton real estate investments, net			4,631				39,940				55,286				61,597
Internal Disposition Costs — Ameriton transactions(2)			(414	)			(93	)			(3,543	)			(1,047	)
Gains from the disposition of Operating Trust real estate investments, net			79,984				94,755				258,960				134,952
Internal Disposition Costs — Operating Trust transactions(2)			(267	)			(212	)			(1,094	)			(850	)
Earnings from discontinued apartment communities		$	82,995			$	129,046			$	290,134			$	185,969

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

     The disposition proceeds associated with the sales of individual rental units by our foreign subsidiaries are included in continuing operations 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.

(5) Investments in and Advances to Unconsolidated Entities

     Real Estate Joint Ventures

     We have investments in entities that we account for using the equity method. At September 30, 2006, the investment balance consisted of $179.4 million in twelve Operating Trust joint ventures and $33.5 million in five Ameriton joint ventures. At December 31, 2005, the investment balance consisted of $102.6 million in thirteen Operating Trust joint ventures and $30.1 million in six Ameriton joint ventures. The Operating Trust and Ameriton’s combined weighted average percentage of ownership in joint ventures based on total assets at September 30, 2006 was 38.8%.

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

		September 30,				December 31,
		2006				2005
Assets:
Real estate		$	1,372,103			$	1,142,921
Other assets			249,006				244,557
Total assets		$	1,621,109			$	1,387,478
Liabilities and owners’ equity:
Inter-company debt payable to Operating Trust		$	273			$	2,324
Mortgages payable(1)			999,438				894,300
Other liabilities			202,907				120,898
Total liabilities			1,202,618				1,017,522
Owners’ equity			418,491				369,956
Total liabilities and owners’ equity		$	1,621,109			$	1,387,478

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Operating Trust Joint Ventures Revenues		$	35,662			$	30,723			$	99,634			$	96,875
Net Earnings(1)			8,225				9,547				40,261				36,279
Ameriton Joint Ventures Revenues		$	53			$	793			$	276			$	3,056
Net Earnings(2)			(136	)			(595	)			18,185				11,339
Total Revenues		$	35,715			$	31,516			$	99,910			$	99,931
Net Earnings		$	8,089			$	8,952			$	58,446			$	47,618

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

million during the three months ended September 30, 2005, and $19.7 million and $13.2 million for the nine months ended September 30, 2006 and 2005, respectively.

In June 2006, we closed a joint venture transaction with the State of Wisconsin Investment Board (“SWIB”). SWIB committed $100 million of capital for 80% of the equity and we committed $25 million of capital for the remaining 20%. We invested $11 million during the quarter ended September 30, 2006 and our remaining commitment as of September 30, 2006 is $14.0 million.

(6) Mortgage and Other Notes Receivable

     The change in mortgage and other notes receivable, which are included in other assets, during the nine months ended September 30, 2006 consisted of the following (in thousands):

Balance at December 31, 2005		$	74,396
Funding of additional notes			85,077
Accrued interest			7,814
Balance at September 30, 2006		$	167,287

     We have a commitment to fund an additional $30.4 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 recognized interest income associated with notes receivable of $5.5 million and $2.1 million for the three months ended September 30, 2006 and 2005, respectively, and $13.4 million and $4.6 million for the nine months ended September 30, 2006 and 2005, respectively. The weighted average interest rate on these notes as of September 30, 2006 was approximately 12.4%, including 14.3% relating to mezzanine notes receivable.

(7) 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):

		As of and for the
		Nine Months				As of and for the
		Ended				Year Ended
		September 30,				December 31,
		2006				2005
Total unsecured revolving credit facility		$	600,000			$	600,000
Borrowings outstanding at end of period			21,000				360,000
Outstanding letters of credit under this facility			44,945				37,813
Weighted average daily borrowings			36,541				183,434
Maximum borrowings outstanding during the period			360,000				580,000
Weighted average daily nominal interest rate			5.47	%			3.95	%
Weighted average daily effective interest rate			5.68	%			4.25	%

     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

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

agreed to at the time of borrowing and ranged from 4.6% to 5.7% during 2006. There were $4.7 million of borrowings outstanding under the agreement at September 30, 2006, and $34.6 million of borrowings outstanding at December 31, 2005.

     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 September 30, 2006 was 3.50%. The loan is scheduled to mature in January 2007 and may be extended for three months, at our option. We expect this loan to be paid off on or before April 27, 2007.

     Long-Term Unsecured Debt

     A summary of our Long-Term Unsecured Debt outstanding at September 30, 2006 and December 31, 2005 follows (dollar amounts in thousands):

						Effective												Average
		Coupon				Interest				Balance at				Balance at				Remaining
Type of Debt		Rate (1)				Rate (1) (2)				September 30, 2006				December 31, 2005				Life (Years)
Long-term unsecured senior notes			5.44	%			5.60	%		$	3,311,565			$	2,468,047				11.46
Unsecured tax-exempt bonds			4.01	%			4.25	%			76,591				77,072				16.85
Total/Weighted average			5.40	%			5.57	%		$	3,388,156			$	2,545,119				11.58

(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.

     On March 16, 2006, the Operating Trust issued $300 million in long-term unsecured ten-year senior notes with a coupon rate of 5.75% and an effective interest rate of 5.89%.

     On July 14, 2006 the Operating Trust issued $575 million of exchangeable senior unsecured notes that are due in 2036 with a coupon rate of 4.0%. The notes are exchangeable into common shares at an initial exchange ratio 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, and intends to use the remainder to repay additional secured debt, 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 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. If these notes are dilutive to our earnings per share, we will 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.

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

Mortgages payable

     Our mortgages payable generally feature either monthly interest and principal payments or monthly interest-only payments with balloon payments due at maturity. Early repayment of mortgages is generally subject to prepayment penalties.

     A summary of mortgages payable follows (dollar amounts in thousands):

		Outstanding Balance at (1)
										Effective Interest
		September 30, 2006				December 31, 2005				Rate (2)
Secured floating rate debt:
Tax-exempt debt		$	1,010,466			$	839,318				4.7	%
Conventional mortgages			184,703				54,455				5.5	%
Total Floating			1,195,169				893,773				4.8	%
Secured fixed rate debt:
Tax-exempt debt			3,086				—				6.3	%
Conventional mortgages			1,660,350				1,480,170				6.0	%
Other secured debt			18,974				19,709				4.1	%
Total Fixed			1,682,410				1,499,879				6.0	%
Total mortgages payable		$	2,877,579			$	2,393,652				5.52	%

(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 $47.0 million and $63.5 million at September 30, 2006 and December 31, 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.

The change in mortgages payable during the nine months ended September 30, 2006 consisted of the following (in thousands):

Balance at December 31, 2005		$	2,393,652
Mortgage assumptions related to property acquisitions			728,484
Regularly scheduled principal amortization			(11,723	)
Prepayments, final maturities and other			(232,834	)
Balance at September 30, 2006		$	2,877,579

     Other

     The book value of total assets pledged as collateral for mortgage loans and other obligations at September 30, 2006 and December 31, 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 September 30, 2006.

     The total interest paid on all outstanding debt was $96.5 million and $83.2 million for the three months ended September 30, 2006 and 2005, respectively and $244.8 million and $203.3 million for the nine months ended September 30, 2006 and 2005, respectively. We capitalize interest incurred during the construction period as part of the cost of apartment communities under development. Capitalized interest was $13.3 million and $9.9 million for the three months ended September 30, 2006 and 2005, respectively and $39.6 million and $27.3 million for the nine months ended September 30, 2006 and 2005, respectively.

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

(8) Distributions to Unitholders

     The following table summarizes the quarterly cash distributions paid per unit on Common and Preferred Units during the three months ended September 30, 2006 and the annualized distribution we expect to pay for 2006:

		Quarterly				Annualized
		Cash				Cash
		Distribution				Distribution
		Per Unit				Per Unit
Common Units and A-1 Units		$	0.435			$	1.74
Series I Perpetual Preferred Units(1)			1,915				7,660

(9) 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 nine months ended September 30, 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 program with matching options without the DEU feature, granted only in 1997 and 1998; and (vi) performance units issued to certain named executives under our Special Long-Term Incentive Plan.

     No more than 20.0 million share or option awards in the aggregate may be granted under the plan, and no individual may be awarded more than 1.0 million share or option awards in any one-year period. As of September 30, 2006, Archstone-Smith had approximately 9.8 million shares available for future grants. Non-qualified options constitute an important component of compensation for officers below the level of senior vice president and for selected employees.

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

     A summary of share option activity for the options and restricted share units 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			424,523				45.58				226,666				45.58
Exercised/Settled			942,485				23.28				35,905				24.56
Forfeited			21,895				34.29				4,712				31.84
Expired			—				—				—				—
Balance, March 31, 2006			2,162,169			$	29.56				1,134,784			$	31.42
Granted			1,048				47.70				18,193				47.70
Exercised/Settled			89,307				24.35				23,129				25.16
Forfeited			18,633				34.49				12,048				35.00
Expired			—				—				—				—
Balance, June 30, 2006			2,055,277			$	29.80				1,117,800			$	31.76
Granted			1,406				53.36				1,315				54.52
Exercised/Settled			69,231				27.82				10,673				19.16
Forfeited			4,598				43.85				—				—
Expired			—				—				—				—
Balance, September 30, 2006			1,982,854			$	29.87				1,108,442			$	31.80

     Certain of the options and restricted share units, included in the table above, have a DEU feature. The aggregate number of vested DEUs outstanding as of September 30, 2006 was 323,000. During the nine months ended September 30, 2006, we recorded $370,000 as a charge to operating expense related to unvested DEUs and $1,210,000 of common share dividends related to vested DEUs.

     Options

     During the nine months ended September 30, 2006 and 2005, the share options granted to associates had a calculated fair value of $5.52 and $4.19 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 three and nine months ended September 30, 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 three and nine months ended September 30, 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. 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 three and nine months ended September 30, 2006, based primarily on historical experience. The unamortized compensation cost is $1.4 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 nine-month periods ended September 30, 2006 and 2005 were $26.0 million and $19.7 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 1.1 million fully vested options outstanding at September 30, 2006 with a weighted average exercise price of $23.47. The weighted-average contractual life of the fully vested options is 5.3 years, and they have an intrinsic value of $34.9 million. In addition, we have 589,000 options outstanding that we expect

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

to vest with a weighted average exercise price of $38.58. The weighted-average contractual life of the unvested options is 9.3 years, and they have an intrinsic value of $9.3 million.

     Restricted Share Units

     Also during the nine months ended September 30, 2006, we issued RSUs to senior officers and trustees of the company with an average grant date fair value of $45.77 per share. The units vest over a three-year period and the related unamortized compensation cost is $11.9 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 630,000 fully vested RSUs outstanding at September 30, 2006 with a weighted average grant date fair value of $26.65. The weighted-average contractual life for the fully vested shares is 5.6 years and the intrinsic value is $34.4 million. In addition, we have 478,000 RSUs outstanding that we expect to vest with a weighted average grant date fair value of $38.59. The weighted-average contractual life for the unvested shares is 9.2 years and the intrinsic value is $26.0 million. The total intrinsic value of the RSUs settled during the nine-month periods ended September 30, 2006 and 2005 were $3.5 million and $3.0 million, respectively.

     Special Long Term Incentive Plan

     Effective January 1, 2006, a special long-term incentive program related to the achievement of total shareholder 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 September 30, 2006 is $3.6 million.

     Summary

     The compensation cost associated with all awards for the nine months ended September 30, 2006 was approximately $8.9 million, of which approximately $6.7 million was charged to operating expenses, and approximately $2.2 million related to dedicated investment personnel and was capitalized with respect to development and other qualifying investment activities. The compensation cost associated with all awards for the nine months ended September 30, 2005 was approximately $6.5 million, of which approximately $5.0 million was charged to operating expenses, and approximately $1.5 million related to dedicated investment personnel and was capitalized with respect to development and other qualifying investment activities.

(10) Segment Data

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

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Reportable apartment communities segment revenues:
Same-Store:
Garden communities		$	119,798			$	111,457			$	338,297			$	317,532
High-rise properties			76,863				71,729				220,857				207,707
Non Same-Store and other:
Garden communities			45,810				19,599				137,067				36,718
High-rise communities			36,398				15,527				96,594				33,418
Ameriton communities(1)			2,958				1,564				7,199				4,435
International and other non-reportable operating segment revenues			17,539				2,868				28,051				4,295
Total segment and consolidated rental revenues		$	299,366			$	222,744			$	828,065			$	604,105

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Reportable apartment communities segment NOI:
Same-Store:
Garden communities		$	80,814			$	76,826			$	232,862			$	216,317
High-rise communities			51,675				48,260				150,524				137,102
Non Same-Store and other:
Garden communities			29,622				13,468				91,073				23,583
High-rise communities			22,913				9,788				63,672				19,993
Ameriton communities(1)			1,487				546				3,446				1,742
International and other non-reportable operating segment NOI			11,442				2,112				18,071				3,355
Total segment NOI			197,953				151,000				559,648				402,092
Reconciling items:
Other income			27,299				25,840				57,100				37,815
Depreciation on real estate investments			(68,708	)			(53,916	)			(203,073	)			(146,605	)
Interest expense			(72,751	)			(46,680	)			(186,833	)			(123,946	)
General and administrative expenses			(18,497	)			(13,600	)			(49,794	)			(41,644	)
Other expenses			(1,986	)			(5,538	)			(14,046	)			(37,047	)
Consolidated earnings from operations		$	63,310			$	57,106			$	163,002			$	90,665

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

		September 30,				December 31,
		2006				2005
Reportable operating communities segment assets, net:
Same-Store:
Garden communities		$	3,034,848			$	3,067,033
High-rise communities			2,542,689				2,572,512
Non Same-Store, Under Development and other:
Garden communities			2,866,398				2,570,585
High-rise communities			2,408,715				1,419,177
Ameriton communities			407,967				599,404
ADA settlement accrual			35,439				47,198
International and other non-reportable operating segment assets			883,784				121,812
Total segment assets			12,179,840				10,397,721
Real estate held-for-sale			127,387				124,850
Total segment assets			12,307,227				10,522,571
Reconciling items:
Investment in and advances to unconsolidated entities			212,884				132,728
Cash and cash equivalents			52,080				13,638
Restricted cash in tax-deferred exchange escrow			54,579				495,274
Other assets			480,561				302,967
Consolidated total assets		$	13,107,331			$	11,467,178

     Total capital expenditures for garden communities included in continuing operations were $17.9 million and $9.6 million for the three months ended September 30, 2006 and 2005, and $43.8 million and $23.3 million for the nine months ended September 30, 2006 and 2005, respectively. Total capital expenditures for high-rise properties included in continuing operations were $15.9 million and $18.6 million for the three months ended September 30, 2006 and 2005, and $44.2 million and $42.1 million for the nine months ended September 30, 2006 and 2005, respectively. Total capital expenditures for Ameriton properties included in continuing operations were $0.7 million and $0.3 million for the three months ended September 30, 2006 and 2005, and $2.3 million and $0.4 million for the nine months ended September 30, 2006 and 2005, respectively.

(11) 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 Fair Housing Act and Americans with Disabilities Act. The litigation, settled by this agreement, alleged lack of full compliance with certain design and construction requirements under the two federal statutes at 71 communities. As part of the settlement, the three disability organizations all recognized that Archstone-Smith 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 remaining communities named in the settlement is estimated at $47.2 million and was accrued as an addition to real estate, of which $35.4 remains accrued at September 30, 2006. 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 paid a settlement totaling $1.4 million, which included legal fees and costs incurred by the plaintiffs.

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

     During 2004 and 2005, we incurred losses associated with multiple hurricanes in Florida. As a result of this damage, we recorded charges for actual or estimated losses associated with both wholly owned and unconsolidated apartment communities and benefits for collected or estimated insurance recoveries. These estimates represent management’s best estimate of the probable and reasonably estimable costs and related recoveries and are based on the most current information available from our insurance adjustors.

     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.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM