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 March 31, 2007

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 (State or other jurisdiction of incorporation or organization)		90-0042860 (I.R.S. employer 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 May 1, 2007, there were approximately 27,309,000 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 I – Financial Information
	1.			Financial Statements
				Condensed Consolidated Balance Sheets – March 31, 2007 (Unaudited) and December 31, 2006			3
				Condensed Consolidated Statements of Earnings – Three Months Ended March 31, 2007 and 2006 (Unaudited)			4
				Condensed Consolidated Statement of Unitholders’ Equity, Other Common Unitholders’ Interest and Comprehensive Income – Three Months Ended March 31, 2007 (Unaudited)			5
				Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2007 and 2006 (Unaudited)			6
				Notes to Condensed Consolidated Financial Statements (Unaudited)			7
				Independent Registered Public Accounting Firm Review Report			22
	2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
	3.			Quantitative and Qualitative Disclosures about Market Risk			32
	4.			Controls and Procedures			32
				PART II – Other Information
	1.			Legal Proceedings			33
	1A.			Risk Factors			33
	2.			Unregistered Sales of Equity Securities and Use of Proceeds			33
	3.			Defaults Upon Senior Securities			33
	4.			Submission of Matters to a Vote of Security Holders			33
	5.			Other Information			33
	6.			Exhibits			33
Computation of Ratio of Earnings to Fixed Charges
Computation of Ratio of Earnings to Combined Fixed Charges
Independent Registered Public Accounting Firm Awareness Letter
Certification of 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

Archstone-Smith Operating Trust

Condensed Consolidated Balance Sheets

(In thousands, except unit data)

		March 31,				December 31,
		2007				2006
		(Unaudited)
ASSETS
Real estate		$	12,101,054			$	12,214,034
Real estate – held-for-sale			975,821				973,606
Accumulated depreciation			(975,517	)			(957,146	)
			12,101,358				12,230,494
Investments in and advances to unconsolidated entities			252,014				235,323
Net investments			12,353,372				12,465,817
Cash and cash equivalents			49,270				48,655
Restricted cash in tax-deferred exchange and bond escrow			669,395				319,312
Other assets			389,464				425,343
Total assets		$	13,461,501			$	13,259,127
LIABILITIES AND UNITHOLDERS’ EQUITY
Liabilities:
Unsecured credit facilities		$	275,900			$	84,723
Unsecured loans – International			171,730				235,771
Long-Term Unsecured Debt			3,321,702				3,355,699
Mortgages payable			2,557,553				2,639,280
Mortgages payable – held-for-sale			136,738				136,954
Accounts payable			77,603				71,967
Accrued interest			47,446				67,135
Accrued expenses and other liabilities			342,403				365,260
Total liabilities			6,931,075				6,956,789
Other common unitholders’ interest, at redemption value (A-1 Common Units: 27,471,404 in 2007 and 29,514,128 in 2006)			1,491,148				1,718,017
Unitholders’ equity:
Perpetual Preferred Units			50,000				50,000
Common unitholders equity (222,754,422 units in 2007 and 220,147,167 units in 2006)			4,984,986				4,530,801
Accumulated other comprehensive income			4,292				3,520
Total unitholders’ equity			5,039,278				4,584,321
Total liabilities and unitholders’ equity		$	13,461,501			$	13,259,127

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
		March 31,
		2007				2006
Revenues:
Rental revenues		$	268,132			$	207,734
Other income			15,754				16,216
			283,886				223,950
Expenses:
Rental expenses			63,430				45,330
Real estate taxes			26,240				18,897
Depreciation on real estate investments			67,492				53,359
Interest expense			67,293				45,527
General and administrative expenses			18,998				15,385
Other expenses			955				10,354
			244,408				188,852
Earnings from operations			39,478				35,098
Income from unconsolidated entities			695				18,878
Other non-operating income			2,026				176
Earnings before discontinued operations			42,199				54,152
Earnings from discontinued operations			282,728				89,740
Net earnings			324,927				143,892
Preferred Unit distributions			(958	)			(958	)
Net earnings attributable to Common Units – Basic			323,969				142,934
Interest on Convertible Debt			7,295				—
Net earnings attributable to Common Units – Diluted		$	331,264			$	142,934
Weighted average Common Units outstanding:
Basic			249,982				246,961
Diluted			259,875				247,835
Earnings per Common Unit – Basic:
Earnings before discontinued operations		$	0.16			$	0.22
Discontinued operations, net			1.14				0.36
Net earnings $		$	1.30			$	0.58
Earnings per Common Unit – Diluted:
Earnings before discontinued operations		$	0.15			$	0.22
Discontinued operations, net			1.12				0.36
Net earnings		$	1.27			$	0.58
Distributions paid per Common Unit		$	0.4525			$	0.4350

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

Archstone-Smith Operating Trust

Condensed Consolidated Statement of Unitholders’
Equity, Other Common Unitholders’ Interest and Comprehensive Income

Three Months Ended March 31, 2007

(In thousands)
(Unaudited)

		Perpetual
		Preferred
		Units at								Accumulated								Other
		Aggregate				Common				Other				Total				Common
		Liquidation				Unitholders’				Comprehensive				Unitholders’				Unitholders’
		Preference				Equity				Income				Equity				Interest				Total
Balances at December 31, 2006		$	50,000			$	4,530,801			$	3,520			$	4,584,321			$	1,718,017			$	6,302,338
Comprehensive income:
Net earnings			—				287,699				—				287,699				37,228				324,927
Change in fair value of hedges			—				—				845				845				—				845
Reclassification adjustment for realized net gains on marketable securities			—				—				(1,794	)			(1,794	)			—				(1,794	)
Foreign currency exchange translation			—				—				1,721				1,721				—				1,721
Comprehensive income attributable to Common Units			—				—				—				—				—				325,699
Preferred Unit distributions			—				(958	)			—				(958	)			—				(958	)
Common Unit distributions			—				(100,455	)			—				(100,455	)			(13,087	)			(113,542	)
A-1 Common Units converted into A-2 Common Units			—				49,351				—				49,351				(49,351	)			—
Issuance of Common Units under Dividend Reinvestment Plan			—				10,168				—				10,168				—				10,168
Exercise of options			—				5,891				—				5,891				—				5,891
Issuance of A-1 Common Units in exchange for real estate			—				—								—				1,024				1,024
Equity-classified awards under Compensation Plans			—				(1,382	)			—				(1,382	)			—				(1,382	)
Adjustment to redemption value							202,227								202,227				(202,227	)			—
Other, net			—				1,644				—				1,644				(456	)			1,188
Balances at March 31, 2007		$	50,000			$	4,984,986			$	4,292			$	5,039,278			$	1,491,148			$	6,530,426

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)

		Three Months Ended
		March 31,
		2007				2006
Operating activities:
Net earnings		$	324,927			$	143,892
Adjustments to reconcile net earnings to net cash flow provided by operating activities:
Depreciation and amortization			78,871				72,762
Gains on dispositions of depreciated real estate			(278,722	)			(82,191	)
Gains on sale of marketable equity securities			(1,867	)			—
Change in swap value – DeWAG derivatives			(258	)			—
Provision for possible loss on investments			—				2,200
Equity in earnings from unconsolidated entities			2,050				917
Interest accrued on Mezzanine loans			(1,336	)			(2,086	)
Change in other assets			(18,630	)			1,092
Change in accounts payable, accrued expenses and other liabilities			(32,755	)			(16,966	)
Other, net			4,741				6,556
Net cash flow provided by operating activities			77,021				126,176
Investing activities:
Real estate investments			(365,264	)			(435,550	)
Change in investments in unconsolidated entities, net			(18,736	)			(15,491	)
Proceeds from dispositions			689,405				280,133
Change in restricted cash			(350,083	)			315,532
Change in notes receivable, net			44,102				(54,105	)
Other, net			6,710				(34,933	)
Net cash flow provided by investing activities			6,134				55,586
Financing activities:
Proceeds from Long-Term Unsecured Debt, net			—				296,946
Payments on Long-Term Unsecured Debt			(34,750	)			(18,750	)
Proceeds from (payments on) unsecured credit facilities, net			191,177				(309,869	)
Principal repayment of mortgages payable, including prepayment penalties			(71,373	)			(49,923	)
Regularly scheduled principal payments on mortgages payable			(2,047	)			(4,406	)
Proceeds from Unsecured loans – International			88,627				—
Principal repayments on Unsecured loans – International			(152,668	)			—
Proceeds from Common Units issued under DRIP and employee stock options			16,059				22,630
Cash distributions paid on Common Units			(113,542	)			(107,952	)
Cash distributions paid on Preferred Units			(958	)			(958	)
Other, net			(3,065	)			629
Net cash flow used by financing activities			(82,540	)			(171,653	)
Net change in cash and cash equivalents			615				10,109
Cash and cash equivalents at beginning of period			48,655				13,638
Cash and cash equivalents at end of period		$	49,270			$	23,747
Significant non-cash investing and financing activities:
A-1 Common Units issued in exchange for real estate		$	1,024			$	25,191
A-1 Common Units converted to A-2 Common Units			49,351				23,552
Assumption of mortgages payable upon purchase of apartment communities			—				197,449

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

March 31, 2007 and 2006
(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 89.0% of the Operating Trust’s outstanding Common Units; the remaining 11.0% 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 markets 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, 2006 (“2006 Form 10-K”). See the glossary in our 2006 Form 10-K for definitions of all initially-capitalized 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 months ended March 31, 2007 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.

     Real Estate and Depreciation

     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 Condensed Consolidated Statements of Earnings.

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

     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 lease agreements and amortize these assets into depreciation on real estate investments over the estimated term of the lease.

     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.

     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 Condensed Consolidated 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 $6.8 million and $5.8 million including amounts reclassified to discontinued operations for the three months ended March 31, 2007 and 2006, respectively.

     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.

Archstone-Smith Operating Trust

Notes to Condensed 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, 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. 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. If effective, our hedges have little or no impact on our current earnings.

     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.

     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. Other comprehensive income 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 for the three months ended March 31, 2007 was as follows (in thousands):

		Net Unrealized												Accumulated
		Gains on								Foreign				Other
		Marketable				Cash Flow				Currency				Comprehensive
		Securities				Hedges				Translation				Income
Balance at December 31, 2006		$	1,822			$	(554	)		$	2,252			$	3,520
Change in fair value of hedges			—				789				—				789
Change in fair value of long-term debt hedges			—				56								56
Reclassification adjustment for realized net gains			(1,794	)			—				—				(1,794	)
Foreign currency exchange translation			—				—				1,721				1,721
Balance at March 31, 2007		$	28			$	291			$	3,973			$	4,292

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

     Per Unit Data

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

		Three Months Ended
		March 31,
		2007				2006
Reconciliation of numerator between basic and diluted net earnings per Common Unit(1):
Net earnings attributable to Common Units – Basic		$	323,969			$	142,934
Interest on Convertible Debt			7,295				—
Net earnings attributable to Common Units – Diluted		$	331,264			$	142,934
Reconciliation of denominator between basic and diluted net earnings per Common Unit(1):
Weighted average number of Common Units outstanding – Basic			249,982				246,961
Assumed conversion of Convertible Debt into Common Units			9,039				—
Incremental options			854				874
Weighted average number of Common Units outstanding – Diluted			259,875				247,835

     To calculate earnings per Common Unit, we allocate the interest on the Convertible Debt on a pro-rata basis between continuing and discontinued operations.

     Reclassifications

     Certain prior year amounts have been reclassified to conform to the current presentation.

     New Accounting Pronouncements

     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 as of January 1, 2007 did not have a material effect on our financial position, net earnings or cash flows.

     We recognize these tax positions and evaluate them using a two-step process. First, we determine whether a tax position is more likely than not (greater than 50 percent probability) to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Then, we measure to determine the amount of benefit to recognize and record the amount of the benefit that is more likely than not to be realized upon ultimate settlement.

     We or one of our subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, we are not subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2001. As of March 31, 2007, no taxing authority has proposed any significant adjustments to our tax positions. We have no significant current tax examinations in process.

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

     A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

Unrecognized Tax Benefits:
Balance at January 1, 2007		$	2,021
Current Period Interest			69
Balance at March 31, 2007.		$	2,090

We are required to recognize interest and penalties accrued related to unrecognized tax benefits in tax expense. As of the date of adoption, the Company has accrued interest of approximately $228,000 and we have not recorded any penalties.

(2) Real Estate

     Investments in Real Estate

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

		March 31,				December 31,
		2007				2006
		Investment				Investment
Operating Trust Apartment Communities:
Operating communities		$	10,899,899			$	11,208,052
Communities under construction			466,532				406,881
Development communities In Planning(1).			94,970				75,538
Total Operating Trust apartment communities			11,461,401				11,690,471
Ameriton(1)			626,191				585,524
International			929,037				851,593
Other real estate assets(2)			60,246				60,052
Total real estate		$	13,076,875			$	13,187,640

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

Balance at December 31, 2006		$	13,187,640
Acquisition-related expenditures			165,125
Redevelopment expenditures			8,873
Recurring capital expenditures			7,731
Development expenditures, including initial acquisition costs			130,665
Acquisition of land for development			41,283
Dispositions			(466,379	)
Other			500
Net apartment community activity			(112,202	)
Change in other real estate assets			1,437
Balance at March 31, 2007		$	13,076,875

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

     At March 31, 2007, we had unfunded contractual commitments of $507.6 million related to communities under construction and under redevelopment. The purchase prices of certain recent acquisitions in 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.

(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 Condensed Consolidated Financial Statements since July 1, 2006. The purchase was funded by an international term loan, which is expected to be repaid or refinanced during the second quarter of 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 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 March 31, 2007 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
										Average
		Gross								Useful
		Carrying				Accumulated				Life (in
		Amount				Amortization				years)
Non-compete agreements.		$	19,869			$	(3,725	)			4
In-place leases			12,893				(2,417	)			4
Total intangible assets		$	32,762			$	(6,142	)
Below-market leases		$	21,711			$	(4,071	)			4
Total intangible liabilities		$	21,711			$	(4,071	)

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

Estimated net amortization for the year ended
2007		$	2,763
2008		$	2,763
2009		$	2,763
2010		$	1,382

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

Balance December 31, 2006		$	35,450
Purchase accounting adjustment			(481	)
Change in foreign currency translation			355
Balance March 31, 2007		$	35,324

(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, a pro-rata allocation of interest expense and the net gain or loss on the disposition of properties.

     Consistent with our capital recycling program, we had 16 operating apartment communities, representing 6,724 units (unaudited), classified as held-for-sale under the provisions of SFAS No. 144, at March 31, 2007. Accordingly, we have reclassified the operating earnings from these properties to discontinued operations for the three months ended March 31, 2007 and 2006. During the three months ended March 31, 2007, we sold 11 REIT and one Ameriton operating community. The operating results of these communities and the related gain on sale are also included in discontinued operations for 2007 and 2006.

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

		Three Months Ended
		March 31,
		2007				2006
Rental revenues		$	31,254			$	77,504
Rental expenses			(7,997	)			(22,014	)
Real estate taxes			(3,616	)			(10,260	)
Depreciation on real estate investments			(6,654	)			(16,215	)
Interest expense(1)			(7,027	)			(16,224	)
Income taxes from taxable REIT subsidiaries			(358	)			(422	)
Provision for possible loss on real estate investment			—				(2,200	)
Debt extinguishment costs related to dispositions			(746	)			(863	)
Gains from the disposition of REIT real estate investments, net			275,197				67,467
Internal disposition costs – REIT transactions(2)			(709	)			(649	)
Gains from the disposition of taxable subsidiary real estate investments, net			3,525				14,724
Internal disposition costs – taxable subsidiary transactions(2)			(141	)			(1,108	)
Earnings from discontinued apartment communities		$	282,728			$	89,740

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

     The real estate and mortgage payable balances associated with operating communities classified as held-for-sale are reflected as “Real estate – held-for-sale” and “Mortgages payable – held-for-sale” in the accompanying Condensed Consolidated Balance Sheets.

     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 March 31, 2007, the investment balance consisted of $210.7 million in thirteen Operating Trust joint ventures and $41.3 million in five Ameriton joint ventures. At December 31, 2006, the investment balance consisted of $199.7 million in 13 Operating Trust joint ventures and $35.6 million in five Ameriton joint ventures. The Operating Trust and Ameriton’s combined weighted average percentage of ownership in joint ventures based on total assets at March 31, 2007 was 37.4%.

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

		March 31,				December 31,
		2007				2006
Assets:
Real estate		$	1,589,914			$	1,530,659
Other assets			165,946				213,569
Total assets		$	1,755,860			$	1,744,228
Liabilities and owners’ equity:
Inter-company debt payable to Operating Trust		$	512			$	1,519
Mortgages payable(1)			1,080,560				1,063,451
Other liabilities			65,932				126,048
Total liabilities			1,147,004				1,191,018
Owners’ equity			608,856				553,210
Total liabilities and owners’ equity		$	1,755,860			$	1,744,228

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

		Three Months Ended
		March 31,
		2007				2006
Operating Trust Joint Ventures
Revenues		$	37,483			$	31,008
Net Earnings(1)			(2,589	)			2,179
Ameriton Joint Ventures
Revenues		$	128			$	141
Net Earnings(2)			3,850				18,362
Total
Revenues		$	37,611			$	31,149
Net Earnings		$	1,261			$	20,541

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

(6) Mortgage and Other Notes Receivable

     The change in mortgage and other notes receivable, which are included in other assets, during the three months ended March 31, 2007 consisted of the following (in thousands):

Balance at December 31, 2006		$	123,261
Funding of additional notes			464
Accrued interest			1,336
Prepayments			(44,560	)
Balance at March 31, 2007		$	80,501

     We have a commitment to fund an additional $20.9 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 $2.7 million and $3.6 million for the three months ended March 31, 2007 and 2006, respectively. The weighted average contracted interest rate on these notes as of March 31, 2007 was approximately 11.9%.

(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):

		March 31, 2007				December 31, 2006
Total unsecured revolving credit facility		$	600,000			$	600,000
Borrowings outstanding at end of period			228,552				80,000
Outstanding letters of credit under this facility			9,211				14,880
Weighted average daily borrowings			160,160				100,474
Maximum borrowings outstanding during the period			242,417				360,000
Weighted average daily nominal interest rate			5.4	%			5.0	%
Weighted average daily effective interest rate			5.6	%			6.3	%

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

     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 5.6% to 5.8% during 2007. There were $47.3 million of borrowings outstanding under the agreement at March 31, 2007, and $4.7 million of borrowings outstanding at December 31, 2006.

     Unsecured Loans – International

     We entered into a $272.8 million short-term loan agreement with LaSalle Bank National Association to fund the acquisition of DeWAG. We also entered into a separate $129.6 million short-term revolving loan agreement with LaSalle Bank National Association to fund acquisitions by DeWAG. The borrowings under these loans bear interest at EURIBOR plus 0.40%. The effective interest rate at March 31, 2007 was 4.3%. The unpaid balance on our Unsecured loans – International at March 31, 2007 was $171.7 million. We expect the balances of these loans to be paid off or refinanced during the second quarter of 2007.

     Long-Term Unsecured Debt

     A summary of our Long-Term Unsecured Debt outstanding at March 31, 2007 and December 31, 2006 follows (dollar amounts in thousands):

						Effective												Average
		Coupon				Interest				Balance at				Balance at				Remaining
Type of Debt		Rate(1)				Rate(1) (2)				March 31, 2007				December 31, 2006				Life (Years)
Long-term unsecured senior notes			5.4	%			5.6	%		$	3,261,759			$	3,279,404				5.3
Unsecured tax-exempt bonds			4.0	%			4.3	%			59,943				76,295				14.8
Total/Weighted average			5.4	%			5.5	%		$	3,321,702			$	3,355,699				5.3

     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
		March 31, 2007				December 31, 2006				Rate(2)
Secured floating rate debt:
Tax-exempt debt		$	866,720			$	935,536				5.1	%
Conventional mortgages			157,377				167,020				4.7	%
Total Floating			1,024,097				1,102,556				5.0	%
Secured fixed rate debt:
Tax-exempt debt			3,085				3,086				6.4	%
Conventional mortgages			1,648,448				1,651,650				5.8	%
Other secured debt			18,661				18,942				4.6	%
Total Fixed			1,670,194				1,673,678				5.8	%
Total mortgages payable		$	2,694,291			$	2,776,234				5.5	%

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

The change in mortgages payable during the three months ended March 31, 2007 consisted of the following (in thousands):

Balance at December 31, 2006		$	2,776,234
Regularly scheduled principal amortization			(2,047	)
Prepayments, final maturities and other			(79,896	)
Balance at March 31, 2007		$	2,694,291

     Other

     The book value of total assets pledged as collateral for mortgage loans and other obligations at March 31, 2007 and December 31, 2006 was $5.6 billion. 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 March 31, 2007.

     The total interest paid on all outstanding debt was $106.4 million and $82.0 million for the three months ended March 31, 2007 and 2006. We capitalize interest incurred during the construction period as part of the cost of apartment communities under development. Capitalized interest was $12.9 million and $12.8 million for the three months ended March 31, 2007 and 2006, respectively.

(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 March 31, 2007 and the annualized distribution we expect to pay for 2007:

		Quarterly				Annualized
		Cash				Cash
		Distribution				Distribution
		Per Unit				Per Unit
Common Units		$	0.4525			$	1.81
Series I Perpetual Preferred Units(1)			1,915				7,660

(9) Benefit Plans and Implementation of SFAS 123R

     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) RSU awards with a DEU feature (awarded prior to 2006); (iv) RSU 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, which are convertible into Common Shares upon vesting, issued to certain named executives under a Special Long-Term Incentive Program.

     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 March 31, 2007, Archstone-Smith had approximately 9.7 million shares available for future issuance. Non-qualified options

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

constitute an important component of compensation for officers below the level of senior vice president and for selected employees.

     A summary of share option activity for the options and RSUs is presented below:

		Option Awards								RSU Awards
						Weighted								Weighted
						Average								Average
		Options				Exercise Price				Units				Grant Price
Balance, December 31, 2006			1,831,355			$	30.14				946,615			$	31.82
Granted			388,017			$	58.62				175,176			$	58.62
Exercised/Settled			(165,369	)		$	33.70				(99,532	)		$	28.86
Forfeited			(22,306	)		$	42.63				0			$	0
Expired			0			$	0				0			$	0
Balance, March 31, 2007			2,031,697			$	35.16				1,022,259			$	36.72

     Certain of the options and RSUs, included in the table above, have a DEU feature. The aggregate number of vested DEUs outstanding as of March 31, 2007 was approximately 267,000. During the three months ended March 31, 2007, we recorded $97,000 as a charge to operating expense related to unvested DEUs and $415,000 of Common Share dividends related to vested DEUs.

     Options

     During the three months ended March 31, 2007 and 2006, the share options granted to associates had a calculated fair value of $8.44 and $5.52 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 months ended March 31, 2007, the calculated fair value was determined using the Black-Scholes-Merton valuation model, using a weighted average risk-free rate interest rate of 4.44%, a weighted average dividend yield of 3.39%, a volatility factor of 18.62% and a weighted average expected life of four years. For the three months ended March 31, 2006, the calculated fair value was determined using the Black-Scholes-Merton valuation model, using a weighted average risk-free interest rate of 4.66%, a weighted average dividend yield of 4.57%, a volatility factor of 18.30% and a weighted average expected life of four years. The options vest over a three-year period and have a contractual term of 10 years. We used an estimated forfeiture rate of 10% in recording option compensation expense for the three months ended March 31, 2007, based primarily on historical experience. The unamortized compensation cost is $2.2 million, which includes all options previously granted but not yet vested. This amount will be recorded as compensation cost ratably through December 31, 2009.

     The total intrinsic value of the share options exercised during the three-month periods ended March 31, 2007 and 2006 were $4.5 million and $21.9 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 1.2 million fully vested options outstanding at March 31, 2007 with a weighted average exercise price of $25.64. The weighted-average contractual life of the fully vested options is 6.75 years, and they have an intrinsic value of $35.7 million. In addition, we have 627,342 options outstanding that we expect to vest with a weighted average exercise price of $51.15. The weighted-average contractual life of the unvested options is 9.5 years, and they have an intrinsic value of $2.0 million.

     Restricted Share Units

     Also during the three months ended March 31, 2007 and 2006, we issued RSUs to senior officers and trustees of the company with an average grant date fair value of $58.62 and $45.58, respectively per share. The units vest over a three-year period and the related unamortized compensation cost is $17.5 million, which includes all units previously granted but not yet vested. This amount will be recorded as compensation cost ratably through December 31, 2009.

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

     We have 595,732 fully vested RSUs outstanding at March 31, 2007 with a weighted average grant date fair value of $36.72. The weighted-average contractual life for the fully vested shares is 6.74 years and the intrinsic value is $32.3 million. In addition, we have 426,527 RSUs outstanding that we expect to vest with a weighted average grant date fair value of $48.68. The weighted-average contractual life for the unvested shares is 9.1 years and the intrinsic value is $23.1 million. The total intrinsic value of the RSUs settled during the three-month periods ended March 31, 2007 and 2006 were $6.1 million and $4.3 million, respectively.

     Special Long-Term Incentive Program

     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 March 31, 2007 is $2.8 million.

     Summary

     The compensation cost associated with all awards for the three months ended March 31, 2007 was approximately $3.0 million, of which approximately $2.1 million was charged to operating expenses, and approximately $.9 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 three months ended March 31, 2006 was approximately $3.0 million, of which approximately $2.3 million was charged to operating expenses, and approximately $0.7 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 our garden communities and our High-Rise properties have similar economic characteristics and 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 operating performance.

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

		Three Months Ended
		March 31,
		2007				2006
Reportable apartment communities segment revenues:
Same-Store:
Garden communities		$	116,538			$	108,760
High-Rise properties			84,436				79,598
Non Same-Store and other:
Garden communities			15,110				2,812
High-Rise communities			29,257				11,368
Ameriton communities(1)			2,193				430
International and other non-reportable operating segment revenues			20,598				4,766
Total segment and consolidated rental revenues		$	268,132			$	207,734

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

		Three Months Ended
		March 31
		2007				2006
Reportable apartment communities segment NOI:
Same-Store:
Garden communities		$	82,350			$	76,656
High-Rise communities			58,155				55,089
Non Same-Store and other:
Garden communities			7,672				1,399
High-Rise communities			17,929				6,931
Ameriton communities(1)			1,114				(2	)
International and other non-reportable operating segment			11,242				3,434
Total segment NOI		$	178,462			$	143,507
Reconciling items:
Other income			15,754				16,216
Depreciation on real estate investments			(67,492	)			(53,359	)
Interest expense			(67,293	)			(45,527	)
General and administrative expenses			(18,998	)			(15,385	)
Other expenses			(955	)			(10,354	)
Consolidated earnings from operations		$	39,478			$	35,098

		March 31,				December 31,
		2007				2006
Reportable operating communities segment assets, net:
Same-Store:
Garden communities		$	3,598,470			$	3,610,111
High-Rise properties			3,055,678				3,070,712
Non Same-Store:
Garden communities			1,330,053				1,527,922
High-Rise properties			1,692,038				1,699,610
Ameriton			446,426				412,030
FHA/ADA settlement accrual			22,701				29,185
International			915,661				843,003
Other non-reportable operating segment assets			154,709				153,567
Total segment assets			11,215,736				11,346,140
Real estate held-for-sale, net			885,622				884,354
Total segment assets			12,101,358				12,230,494
Reconciling items:
Investment in and advances to unconsolidated entities			252,014				235,323
Cash and cash equivalents			49,270				48,655
Restricted cash in tax-deferred exchange escrow			669,395				319,312
Other assets			389,464				425,343
Consolidated total assets		$	13,461,501			$	13,259,127

Archstone-Smith Operating Trust

Notes to Condensed Consolidated Financial Statements (Continued)

     Total capital expenditures for garden communities included in continuing operations were $12.4 million and $7.3 million for the three months ended March 31, 2007 and 2006, respectively. Total capital expenditures for High-Rise properties included in continuing operations were $7.0 million and $10.2 million for the three months ended March 31, 2007 and 2006, respectively. Total capital expenditures for Ameriton properties included in continuing operations were $0.5 million and $0.7 million for the three months ended March 31, 2007 and 2006, 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 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 42. 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 $22.7 million of the original accrual remaining on March 31, 2007.

     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

The Trustee and Unitholders

Archstone-Smith Operating Trust:

     We have reviewed the accompanying condensed consolidated balance sheet of Archstone-Smith Operating Trust and subsidiaries as of March 31, 2007, and the related condensed consolidated statements of earnings for the three months ended March 31, 2007 and 2006, the condensed consolidated statement of unitholders’ equity, other common unitholders’ interest and comprehensive income for the three months ended March 31, 2007, and the condensed consolidated statements of cash flows for the three months ended March 31, 2007 and 2006. These condensed consolidated financial statements are the responsibility of Archstone-Smith Operating Trust’s management.

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

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

     We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Archstone-Smith Operating Trust as of December 31, 2006, and the related consolidated statements of earnings, unitholders’ equity, other common unitholders’ interest and comprehensive income (loss), and cash flows for the year then ended (not presented herein); and in our report dated March 1, 2007, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2006 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG LLP

Denver, Colorado
May 9, 2007

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following information should be read in conjunction with Archstone-Smith Operating Trust’s 2006 Form 10-K as well as the financial statements and notes included in Item 1 of this report.

     Forward-Looking Statements

     Certain statements in this Form 10-Q that are not historical facts are “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations, beliefs, assumptions, estimates and projections about the industry and markets in which we operate. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. Information concerning expected investment balances, expected funding sources, planned investments, forecasted dates and revenue and expense growth assumptions are examples of forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from what is expressed, forecasted or implied in such forward-looking statements. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

     Our operating results depend primarily on income from apartment communities, which is substantially influenced by supply and demand for apartment units, operating expense levels, property level operations and the pace and price at which we can develop, acquire or dispose of apartment communities. Capital and credit market conditions, which affect our cost of capital, also influence operating results. See Archstone-Smith Operating Trust’s 2006 Form 10-K, “Item 1. Business,” for a more complete discussion of risk factors that could impact our future financial performance.

     The Company

     We are engaged primarily in the acquisition, development, redevelopment, operation and long-term ownership of apartment communities in the United States. Archstone-Smith is structured as an UPREIT, with all property ownership and business operations conducted through the Operating Trust. Archstone-Smith is the sole trustee and owned approximately 89.0% of our Common Units at March 31, 2007. Archstone-Smith Common Shares trade on the New York Stock Exchange (NYSE: ASN).

     Results of Operations

Executive Summary

     The major factors that influenced our operating results for the quarter ended March 31, 2007 as compared to the quarter ended March 31, 2006 were as follows:

	•		NOI increased due primarily to an increase of 6.8% in NOI for our Same-Store communities as well as the DeWAG transaction.
	•		Other income was lower due primarily to lower insurance recoveries offset by an increase in interest income resulting from higher restricted cash balances attributable to our 1031 exchange disposition transactions.
	•		Higher depreciation and interest expense was due to the increase in the size of the real estate portfolio and the related financing activities, respectively. Rising interest rates also influenced the increase in interest expense.
	•		General and administrative expenses increased principally as a result of our international expansion.
	•		Other expenses were lower in 2007 due principally to $8.4 million of Ameriton income tax expense recorded in 2006 related primarily to disposition gains.
	•		Earnings from unconsolidated entities was higher in 2006 primarily due to higher gains on the sale of Ameriton joint venture assets.
	•		The increase in gains on disposition of real estate was driven principally by significantly higher volume of REIT dispositions in 2007.

Reconciliation of Quantitative Summary to Condensed Consolidated Statements of Earnings

     The following schedules are provided to reconcile our Condensed Consolidated Statements of Earnings to the information presented in the “Quantitative Summary” provided in the next section (dollar amounts in thousands).

		Three Months Ended March 31, 2007												Three Months Ended March 31, 2006
		Continuing				Discontinued								Continuing				Discontinued
		Operations				Operations				Total				Operations				Operations				Total
Rental revenue		$	268,132			$	31,254			$	299,386			$	207,734			$	77,504			$	285,238
Other income			15,754				—				15,754				16,216				—				16,216
Property operating expenses (rental expenses and real estate taxes)			89,670				11,613				101,283				64,227				32,274				96,501
Depreciation on real estate investments			67,492				6,654				74,146				53,359				16,215				69,574
Interest expense			67,293				7,027				74,320				45,527				16,224				61,751
General and administrative expenses			18,998				—				18,998				15,385				—				15,385
Other expense			955				1,104				2,059				10,354				3,485				13,839
Income from unconsolidated entities			695				—				695				18,878				—				18,878
Other non-operating income			2,026				—				2,026				176				—				176
Gains, net of disposition costs			—				277,872				277,872				—				80,434				80,434
Net earnings		$	42,199			$	282,728			$	324,927			$	54,152			$	89,740			$	143,892

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 operating communities and developments 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” (dollar amounts in thousands).

		Three Months Ended March 31,
										Increase/
		2007				2006				(Decrease)
Rental revenues:
Same-Store(1)		$	226,827			$	213,201			$	13,626
Non Same-Store and other			48,581				59,559				(10,978	)
Ameriton			3,380				7,712				(4,332	)
Non-multifamily			1,608				3,002				(1,394	)
International			18,990				1,764				17,226
Total rental revenues			299,386				285,238				14,148
Property operating expenses (rental expenses and real estate taxes):
Same-Store(1)			68,922				65,392				3,530
Non Same-Store and other			21,378				25,851				(4,473	)
Ameriton			1,628				3,927				(2,299	)
Non-multifamily			216				541				(325	)
International			9,139				790				8,349
Total property operating expenses			101,283				96,501				4,782
Net operating income (rental revenues less property operating expenses).			198,103				188,737				9,366
Margin (NOI/rental revenues):			66.2	%			66.2	%			0.0	%
Average occupancy during period:(2)			93.2	%			95.2	%			(2.0	%)
Other income			15,754				16,216				(462	)
Depreciation of real estate investments			74,146				69,574				4,572
Interest expense			87,207				74,522				12,685
Capitalized interest			12,887				12,771				116
Net interest expense			74,320				61,751				12,569
General and administrative expenses			18,998				15,385				3,613
Other expense			2,059				13,839				(11,780	)
Earnings from continuing and discontinued operations.......			44,334				44,404				(70	)
Equity in earnings from unconsolidated entities			695				18,878				(18,183	)
Other non-operating income			2,026				176				1,850
Gains on disposition of real estate investments, net of disposition costs
Taxable subsidiaries			3,384				13,616				(10,232	)
REIT			274,488				66,818				207,670
Net earnings			324,927				143,892				181,035