Archstone-Smith Trust 2006 Annual Report

Archstone-Smith increases its 2007 common share dividend to $1.81, representing 16 consecutive years of dividend increases Archstone-Smith reports record earnings per share of $3.33 for 2006 Archstone-Smith acquires five Manhattan high-rises, representing 1,382 units and a total expected investment of $845 million, to become the largest public owner of apartments in Manhattan Archstone-Smith associates help build 12 homes across the country through the company’s five-year partnership with Habitat for Humanity International Archstone-Smith 2006 Annual Report Archstone-Smith completes six developments in 2006 in Washington, D.C., Boston, New York and Southern California Archstone-Smith adds 1,978 units to its San Francisco Bay Area portfolio, which now represents 12% of its national portfolio Archstone-Smith acquires DeWAG Deutsche WohnAnlage GmbH, a German residential real estate company The National Association of Home Builders recognizes Archstone-Smith as Property Management Company of the Year financial highlights (in thousands, except per-share amounts) 2006 2005 2004 Operating Performance Total Revenues Net Operating Income1 Earnings Per Share (Diluted) Funds From Operations with Gains/Losses Per Common Share (Diluted) 2 Funds From Operations Per Common Share (Diluted) 2 Cash Dividends Per Common Share Market C api tali zati on $ 1,273,043 $ 791,269 $ 3.33 $ $ $ 3.86 2.26 1.74 $ 1,073,439 $ 659,440 $ 3.00 $ $ $ 3.40 2.10 1.73 $ $ $ $ $ $ 987,262 613,966 2.69 3.26 1.98 1.723 Equity Market Capitalization Total Market Capitalization 1 $ 14,582,767 $ 21,035,194 $ 10,368,512 $ 15,696,778 $ 8,599,180 $ 12,748,817 Net Operating Income (NOI) represents rental revenues less rental expenses and real estate taxes. We rely on NOI for purposes of making decisions about resource allocations and assessing segment performance. We also believe NOI is a valuable means of comparing period-toperiod property performance. NOI is a non-GAAP financial measure. See a reconciliation of NOI to Earnings from Operations in this Quantitative Summary. 2 Funds From Operations (FFO) is a non-GAAP measure that is commonly used in the real estate industry to assist investors and analysts in comparing results of real estate companies. FFO adjusts GAAP net earnings to exclude depreciation and gains and losses from the sales of previously depreciated properties. Our calculation of FFO includes gains and losses from dispositions of properties acquired or developed by our taxable REIT subsidiaries such as Ameriton, as the fundamental purpose of these entities is to take advantage of short-term investment opportunities, gains and losses from our international subsidiaries, and promote incentive fee income resulting from the liquidation of unconsolidated joint ventures, if any. If they relate to a disposition, we exclude prepayment penalties and include the cost or benefit of unamortized purchase accounting-related debt adjustments. Our share of the FFO relating to our unconsolidated entities is calculated on the same basis. FFO is presented as a supplemental financial measure and does not fully represent our operating performance. We believe that GAAP Net Earnings remains the primary measure of operating performance and that FFO is only meaningful when it is used in conjunction with GAAP Net Earnings. FFO is not intended to be a measure of cash flow or liquidity. Please refer to our consolidated financial statements, prepared in accordance with GAAP, for purposes of evaluating our financial condition, results of operations and cash flows. A reconciliation of Net Earnings to FFO is provided in the table below. 3 Archstone-Smith also paid a $1.00 per share special dividend on December 28, 2004. (in thousands, except per-share amounts) 2006 2005 2004 Funds From Operations Reconciliation: Net Earnings Attributable to Common Shares – Diluted Depreciation on Consolidated and Unconsolidated Real Estate Investments Gains from Disposition of Consolidated and Unconsolidated Depreciable REIT Investments, net of Internal Disposition Costs Minority Interest Other Funds From Operations Attributable to Common Shares – Diluted Gross Gains on the Disposition of Real Estate Investments, net of Internal Disposition Costs Minority Interest and Other Funds From Operations with Gains/Losses Attributable to Common Shares – Diluted Diluted Weighted Average Common Shares Outstanding: $ 735,452 298,236 (564,186) 34,211 (13,076) 490,637 403,069 (40,231) $ 853,475 $ 612,693 247,606 (452,997) 25,326 (4,139) 428,489 302,357 (36,546) $ 694,300 $ 535,714 228,878 (379,104) 16,530 (6,888) 395,130 285,643 (30,657) $ 650,116 Diluted Weighted Average Common Shares Outstanding – FFO Assumed Conversion of Preferred Shares into Common Shares Diluted Weighted Average Common Shares Outstanding – Net Earnings and FFO with Gains/Losses4 4 216,943 4,210 221,153 204,492 — 204,492 199,233 — 199,233 Funds From Operations with Gain/Loss is calculated as FFO (defined above) plus Gross Gains/Losses From the Disposition of Real Estate Investments not included in FFO, as defined above. We consider FFO with Gains/Losses to be a meaningful supplemental measure of performance because the continued recycling of capital is a fundamental component of our business strategy, and Gross Gains/Losses From the Disposition of Real Estate Investments demonstrates the results of our investment activity. FFO with Gains/Losses is not intended to be a measure of cash flow or liquidity. to my fellow shareholders We had an excellent year in 2006, producing record earnings per share of $3.33, an 11% increase over 2005. Our stock also performed exceptionally well, producing a total shareholder return of 43.9%. This performance reflected our strong operating results; with our same store portfolio achieving the highest level of NOI growth, 7.5%, since 2000. We dramatically improved our portfolio during the year, adding over $845 million of outstanding properties in New York City, and over $655 million in highly desirable locations throughout the San Francisco Bay Area. We also made excellent progress on our longer-term goal of building a strong platform in Europe. To date, we have invested $1 billion to build our business there, which, as of December 31, 2006, includes more than 8,300 apartments in desirable cities in Southern and Western Germany. We take a different approach to our business than many public companies do by focusing on building long-term value – we do not emphasize quarterly results. This emphasis on the value of investments five to 10 years after we make them guides our decision-making. If a new investment has a dilutive short-term impact, but creates significant long-term value, it is an easy decision for us – we make that investment. Conversely, if an investment produces short-term accretion, but mediocre long-term returns, this is also an easy decision for us – we pass. Archstone Midtown West New York City Acquired Q1/06 Archstone Fremont Center San Francisco Bay Area Acquired Q2/06 Archstone-Smith 1 Archstone Murray Hill New York City Acquired Q2/06 Archstone Boston Common Boston Developed by Archstone-Smith Our emphasis on long-term value creation has produced what I believe is the best apartment portfolio owned by any company in the country, public or private. We are uniquely focused on owning and operating apartments in the nation’s highend housing markets, where homes typically cost $1 million or more. By comparison, our rental rates are a relative bargain, creating tremendous demand for our apartments in these neighborhoods. It has taken us 12 years to build this outstanding portfolio and our goal now is very simple: we want to make it even better each and every year. In California, we own great apartments in Santa Monica, Marina del Rey, La Jolla, downtown San Francisco, Sausalito, Redwood Shores, the Silicon Valley and many other very exclusive neighborhoods. In Manhattan, we have great apartments in Chelsea, Murray Hill, the Upper West Side and the heart of Midtown. In the Washington, D.C. metropolitan area we have outstanding locations in Dupont Circle, Friendship Heights and Crystal City, as well as exceptional locations along Connecticut Avenue. All of these locations have several consistent characteristics: it is very expensive to purchase a house or condominium; rents are a relative bargain compared to the cost of owning a home; you can walk to shopping and great amenities; thousands of jobs are within close proximity; and they are among the most desirable neighborhoods anywhere in these great 24-hour cities. We believe transparency to our investors and associates is extremely important, in both reporting as well as in articulating our strategy and direction. We want to be very clear with you: we run our company for optimal long-term value creation, not for FFO. A focus on FFO emphasizes short-term accretion at the expense of long-term value creation – a trap we choose to avoid. Virtually every one of our most profitable investments produced short-term dilution at the time we made them. In some cases, our yield on invested capital went down by as much as 150-200 basis points when selling an asset in a market like Houston, Texas, and using the capital to purchase a property in Southern California1. However, the superior longterm growth rate more than made up for the lower initial yield, and tremendous value was created in the process. 1 We define Southern California as Los Angeles, Orange County, Ventura, the Inland Empire and San Diego. 2006 Annual Report 2 It is frustrating to me that investors who understand this principle very well in the broad equity markets often get this wrong when looking at real estate. Somehow, there is a perception that real estate positions are passive, and that shortterm cash flow is the most important metric. This approach is as misguided as an equity market investor pursuing a strategy of purchasing stocks that trade at the lowest price earnings ratios, regardless of future growth prospects. It is important to remember that the future growth in cash flow is the primary driver of long-term wealth creation. Real estate company reporting isn’t transparent without a complete disclosure of unleveraged IRRs2 on all realized investments. This metric is enormously important in understanding the success of a real estate company. Just as equity market investors focus on five- and 10-year average annual returns, which include both dividends and capital appreciation, our IRRs include both the cash flow and capital appreciation on our investments. Our IRR on over $11.2 billion of realizations during the last 11 years, including our Ameriton investments3, has been 15.6%. A very impressive number. The significance of this IRR is underscored when comparing it with the average annual return of the S&P 500 during the same period of time. The average annual S&P 500 return during this period of time was 9.7%, and the approximate leverage for S&P 500 companies is in the 25% range. Leverage of this magnitude would add several hundred basis points to our 15.6% IRR, producing an even more impressive comparison. Archstone San Mateo San Francisco Bay Area Acquired Q3/06 On a sold community, IRR (internal rate of return) refers to the unleveraged IRR calculated by Archstone-Smith, considering the initial purchase price and all capital invested in the community, the timing and amounts of net operating income during the period owned and the net sales proceeds from the sale. The IRR calculations include property management overhead and internal disposition costs but not depreciation or allocations for corporate general and administrative expenses, interest expenses, income tax expenses (if any) or other indirect operating expenses. Therefore, an IRR calculation is not a substitute for net income as a measure of our performance. Management believes that IRRs are an important indicator of the value created during the ownership period. Historical IRRs are not necessarily indicative of IRRs that will be produced in the future. Our methodology for calculating IRRs may not be consistent with the methodology used by other companies. 3 Ameriton investments from 2000 – 2006. Archstone-Smith 3 2 Our locally based development infrastructure, led by Chief Development Officer Al Neely, is a very important source of long-term value creation. Al and his team are working on many outstanding new developments that we will be completing over the next several years. Our redevelopment of the former Washington, D.C. Convention Center in the heart of the city, in partnership with the highly regarded Gerald Hines Company, is one of the most exciting projects our company has undertaken in years. Together with Hines, we expect to develop over 650 residential units, 448,000 square feet of office space and 290,000 square feet of high-end retail, all in an irreplaceable location surrounded by tens of thousands of high paying jobs. As I describe the properties we own in our four largest markets, several of the other great communities we are developing will be mentioned. It is hard for me to overstate the attractiveness of the outstanding real estate we own in these four metropolitan areas. They are arguably the most dynamic and highly desirable places in which to invest in the country. The Flats at Dupont Circle Washington, D.C. Redeveloped by Archstone-Smith Wa s h i n g t o n , D . C . 4 Washington, D.C. is our largest market, representing approximately 35% of our portfolio5. We are the largest apartment owner there and have a great concentration of luxury apartments in fantastic locations. Over 65% of our Washington, D.C. portfolio is within five miles of the White House, with the majority of these assets within walking distance of the Pentagon, Embassy Row or the headquarters of key government agencies. You may remember that we purchased over $2.5 billion6 of Washington, D.C. assets when we acquired Charles E. Smith Residential in October 2001. We acquired these exceptional assets at an average purchase price of approximately $135,000 per unit. By comparison, the cost to build new apartments in these types of locations today is well in excess of $300,000 per unit. Remember, the Smith acquisition was initially dilutive, but the value creation from this investment has been exceptional. We define Washington, D.C. as the greater Washington, D.C. metropolitan area, including Northern Virginia and suburban Maryland. 5 Based on NOI as of December 31, 2006. 6 Approximate value of the D.C. portion of the Charles E. Smith portfolio as of October 31, 2001. 4 2006 Annual Report 4 Employment growth in Washington, D.C. has been among the strongest in the country, with over 205,000 new jobs created during the past three years. Our portfolio here has produced positive same store revenue growth every year for the last 9 years, averaging 5% annually. There is very little land left upon which to build any type of new product inside the Beltway7, which is why our portfolio here should continue to provide tremendous growth and value for you in the years to come. California California has been a great success story for us as well. We are the second largest apartment owner in the state of California, a very close second to The Irvine Company, which has been a large owner here for several decades. Our California portfolio is uniquely attractive, concentrated in many of the most exclusive, and most expensive, neighborhoods in the state. Southern California Southern California is our second-largest market, representing approximately 26% of our portfolio8. We entered this market in 1996, and have invested $147 million in those first communities. Our 2006 unleveraged yield on this capital was 13.5%! This is an excellent case study in value creation. If you apply what we believe is a conservative current market cap rate9 for Southern California, 4.5%, to these assets, their value has tripled during the last 10 years, creating over $290 million of value, or an average annual return of 30%. Again, repeating a familiar theme, these investments were initially dilutive when we made them. If any of you who have spent time in Southern California, you know how extraordinarily congested the area is. The benefit of living close to employment and to the Pacific Ocean is hundreds of hours of reduced commuting time each year. Neighborhoods in these desirable areas are full of multi-million-dollar houses and virtually no available land. These are the areas where we focus our investment activity. We have acquired or developed assets in such prestigious communities as Santa Monica, Marina Del Rey, La Jolla, Pasadena and Playa Del Rey. Archstone San Bruno San Francisco Bay Area Acquired Q2/06 Archstone Presidio View Southern California Developed by Archstone-Smith Joint Venture The Capital Beltway, a 64-mile-long Interstate freeway that encircles Washington, D.C., passing through Virginia and Maryland, carrying the Interstate I-495 designation throughout, and carrying the overlapping Interstate I-95 designation on the eastern portion. 8 Based on NOI as of December 31, 2006. 9 Cap rate (capitalization rate) is a measure of the ratio between the net income produced by an asset and its capital cost (the original price paid to own the asset). It is calculated as net income divided by capital cost. Cap rates vary from market to market and from period to period. There can be no assurance that the cap rate as applied to our assets is a measure of reliable value. 7 Archstone-Smith 5 The new communities we are developing in Southern California are extraordinary. Their proximity to employment, public transportation and beaches is uniquely appealing to the residents who are a part of what is essentially the largest metroplex in the country 10. Since 1986, the average price of a house in Orange County has increased by almost 390% – an increase of approximately 19% annually, compared with the national average of 9%. We believe that the track record and current market conditions in Southern California indicate that owning rental housing here should be a very attractive investment in the decades to come. Archstone Santa Monica on Main is a new development community that will be completed during 2007 and will be an exceptional new asset for us. Just two blocks from the famous Santa Monica beach, this community includes approximately 18,000 square feet of high-end, street-level retail and top-floor units with commanding views of the ocean. Our development team completed the construction of over $225 million11 of outstanding new communities in Southern California during 2006 and has over $470 million12 under construction in this market. Our portfolio here has produced positive same store revenue growth every year since we entered the market 11 years ago, averaging 5.6% annually. We expect great things from our Southern California portfolio. Archstone Del Mar Station Southern California Developed by Archstone-Smith S a n F r a n c i s c o B a y A r e a 13 The San Francisco Bay Area is one of the most beautiful metropolitan areas in the world, and is home to the world’s most influential concentration of technology companies. In addition to being a strong employment center, it is also consistently ranked among the most expensive housing markets in the country. These characteristics combine to make it a great fit with our strategy for long-term value creation. Southern California population: 20.8 million as of December 31, 2006. Archstone Del Mar Station and Archstone Presidio View (a joint venture where the costs for the entire community, before adjustment for our proportionate ownership percentage, are reflected). 12 Archstone Warner Center, Archstone Santa Monica on Main Street and Archstone Gateway. 13 We define the San Francisco Bay Area as the diverse geographical area that encompasses the counties of Alameda, Contra Costa, Marin, San Francisco, San Mateo, and Santa Clara. 10 11 2006 Annual Report 6 The San Francisco Bay Area represents 11.5% of our portfolio14, and our assets are concentrated in many of the most exclusive neighborhoods here, including Sausalito, Redwood Shores, and the Silicon Valley, as well as some of the most desirable neighborhoods in San Francisco, including the popular South of Market area and the Financial District. Archstone San Bruno is a beautiful new community we are developing, located approximately one mile from the Bay and a short commute from downtown. It is located across the street from a recently renovated mall and just minutes from thousands of jobs. We expect significant value creation from this new community as it is completed this year. We believe that a new era in technology advancements is underway, and that employment growth in the San Francisco Bay Area is likely to accelerate dramatically in coming years. With virtually no land upon which to build new housing, and home prices already among the most expensive in the country, the upward pressure on rental rates should be significant. We like the future outlook for value creation from our portfolio in the San Francisco Bay Area a great deal. N e w Yo r k C i t y 1 5 Perhaps no city symbolizes America’s world leadership like New York City. Home to the largest concentration of office space in our country and the leading financial center in the world, New York City is truly a unique and exciting place. We are proud to be the largest publicly-traded owner of apartments in Manhattan and have a great portfolio of apartment properties here. A strong market like Manhattan presents a powerful opportunity for value creation. We purchased our first apartment community in Manhattan in the spring of 2002 for $209 million. Today, less than five years later, we believe this community is worth more than twice what we paid for it. Archstone Brooklyn Heights New York City Acquired Q2/06 14 15 Based on NOI as of December 31, 2006. New York City metropolitan area, including New York City, Northern New Jersey, and Connecticut. Archstone-Smith 7 Archstone Clinton New York City Under Construction Joint Venture Our development team will add a new 627-unit property to our Manhattan portfolio in 2007 – Archstone Clinton. We opened for leasing in February, and our rental rates are more than 20% above our pro forma rents, indicating significant value creation from this new development community. As I mentioned, New York City is a very unique place. Close to 75% of its population rents their housing (almost the inverse of the national average, which is approximately 30%), and new condominiums sell for well over $1 million. It is also the most densely developed city in the country. To continue what is now a common theme, this is an outstanding recipe for success in our business. During 2006, the average new move-in rent for the Manhattan communities we owned for the entire year increased almost 9%. The future outlook for rent growth and value creation is very strong, and we plan to continue to add to our portfolio in New York City. Our business strategy – owning apartments in exclusive neighborhoods, with very expensive housing, close to huge employment centers – has been very consistent and is an enduring formula for long-term wealth creation. We intend to continue to excel in executing this strategy, so that you, our shareholders, will own the finest apartment portfolio in the country. We are blessed to have a very talented team of people who have allowed us to produce excellent value creation over the last decade. It is truly a privilege to have worked together with so many of our people for so long, and I know we all look forward to working with each other for many years to come. One of the bittersweet experiences of working with talented and committed people over an extended period of time is the process of saying goodbye to wonderful partners who choose to retire. Although we will miss them greatly, we know that they have exciting new opportunities to pursue as they begin a new phase of their lives. I would like to recognize three key leaders in our company who are retiring during 2007. Each of them has been a unique and outstanding contributor to our success over many, many years, and we will miss them a great deal. Archstone Marina del Rey Southern California Redeveloped by Archstone-Smith 2006 Annual Report 8 Lindsay Freeman joined our company in 1994. He has been an outstanding partner for me and for our entire company in every sense of the word. Since 2002, Lindsay has served as our chief operating officer and has done an exemplary job in this role. Lindsay has been a valued mentor for those around him, and because of his leadership skills, we will be able to have a very smooth transition to the next generation of leadership in our company when he retires from the chief operating officer position at the end of this year. Thank you, Lindsay, for a fabulous run together! Jack Cardwell has been a member of our Board since 1980 and has provided the wisdom and direction to help guide our company’s growth from approximately $40 million in total market capitalization when he joined, to over $21 billion today16! Jack served us for many years as chairman of our Audit Committee, a critically important job in today’s corporate governance environment, and helped us lay the groundwork for very strong practices in this area. Jack is a very successful business leader whose humility and integrity have set a great example for all of us. We will miss him a great deal, and extend our warm wishes to him for outstanding success in everything he pursues in the future. John Richman joined our Board in 1998 in connection with our merger with Security Capital Atlantic and has been an invaluable voice of wisdom and counsel. John’s former tenure as the CEO of a Fortune 500 company has provided a unique and valuable perspective to our Board during many important decisions. He has chaired our Nominating and Corporate Governance Committee for the last five years, and has also been a key member of our Compensation Committee, arguably two of the most important Board responsibilities, especially in today’s environment. John, you are a great example to all of us. We will miss you and look forward to staying in touch. We were very fortunate to add another senior executive from a Fortune 500 company to our Board during 2006. Steve Demeritt, recently retired vice chairman of General Mills Corporation, joined our Board in September 2006, and has already been extremely additive. His experience in running a large, successful business with a thorough understanding of customer needs – the heart of our business – will be a tremendous benefit for us. 16 Archstone Reading Boston Developed by Archstone-Smith As of December 31, 2006. Archstone-Smith 9 I’d like to thank our Board of Trustees for their exceptional dedication, wisdom and guidance. It is great to work with such a talented group of people. Our senior management team is very well-positioned for the future and will execute a smooth transition of responsibilities this year with regard to Lindsay’s retirement. Chaz Mueller, who has been an outstanding partner for over 13 years, and an excellent chief financial officer, will become our chief operating officer at the end of this year. Jack Callison, who joined us in 1997 and has done a wonderful job in three different senior executive roles with us, will assume the new role of president – U.S. operations later this year. Jack will do a great job of leading us to even higher levels of operational excellence. Gerry Morgan, who initially joined us in 1993 and rejoined a year ago, has served successfully as the chief financial officer of three companies during his career. Gerry will take over as our chief financial officer, as Chaz moves into the chief operating officer role. Our senior management team is very deep, highly motivated, tremendously experienced, and truly enjoys our partnership. We are committed to working together to continue to increase long-term value for you, our shareholders. Thank you for your continued support. We are very excited about the coming year, and look forward to sharing our progress with you. Sincerely, R. Scot Sellers Chairman and Chief Executive Officer 2006 Annual Report 10 Archstone-Smith 2006 Form 10K Contents 30 Management’s Discussion and Analysis of Financial Condition and Results of Operations 52 Report of Independent Registered Public Accounting Firm 54 Balance Sheets 55 Statements of Earnings 56 Statements of Shareholders’ Equity 57 Statements of Cash Flows 58 Notes to Consolidated Financial Statements UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2006 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number 1-16755 Archstone-Smith Trust (Exact name of Registrant as Specified in Its Charter) MARYLAND (State or other jurisdiction of incorporation or organization) 9200 E. Panorama Circle, Suite 400 Englewood, Colorado 80112 (Address of principal executive office) (303) 708-5959 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Title of each class Common Shares of Beneficial Interest, par value $0.01 per share Name of each exchange on which registered New York Stock Exchange 84-1592064 (IRS employer identification no.) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the securities Act. Yes Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No 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 requirements for the past 90 days. Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 Accelerated filer Non-accelerated filer Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No Based on the closing price of the registrant’s Common Shares on June 30, 2006, the aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $10,929,317,760. At February 20, 2007 there were approximately 220,379,832 of the registrant’s Common Shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive proxy statement for the 2007 annual meeting of its shareholders are incorporated by reference in Part III of this report. Table of Contents Item Description Page PART I Glossary ................................................................................................................................................ 1. Business ................................................................................................................................................ The Company ........................................................................................................................................ 2006 Accomplishments.......................................................................................................................... Investment Strategy ............................................................................................................................... Customer-focused Operations ................................................................................................................ Conservative Balance Sheet Management............................................................................................... Management .......................................................................................................................................... Biographies of Senior Officers of Archstone-Smith Trust ....................................................................... Employees ............................................................................................................................................. Insurance ............................................................................................................................................... Competition........................................................................................................................................... Available Information and Code of Ethics .............................................................................................. 1A. Risk Factors........................................................................................................................................... 1B. Unresolved Staff Comments................................................................................................................... 2. Properties .............................................................................................................................................. United States Geographic Distribution, excluding Ameriton ................................................................... Real Estate Portfolio .............................................................................................................................. 3. Legal Proceedings.................................................................................................................................. 4. Submission of Matters to a Vote of Security Holders .............................................................................. PART II Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.................................................................................................................................... 6. Selected Financial Data.......................................................................................................................... 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations...................... Results of Operations............................................................................................................................. Liquidity and Capital Resources............................................................................................................. Litigation and Contingencies.................................................................................................................. Critical Accounting Policies................................................................................................................... Off Balance Sheet Arrangements............................................................................................................ Contractual Commitments...................................................................................................................... New Accounting Pronouncements.......................................................................................................... 7A. Quantitative and Qualitative Disclosures About Market Risk .................................................................. 8. Financial Statements and Supplementary Data........................................................................................ 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..................... 9A. Controls and Procedures ........................................................................................................................ Management’s Report on Internal Control Over Financial Reporting ...................................................... 9B. Other Information .................................................................................................................................. 5. 10. 11. 12. 13. 14. 15. PART III Directors, Executive Officers and Corporate Governance ....................................................................... Executive Compensation........................................................................................................................ Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .... Certain Relationships and Related Transactions and Director Independence............................................ Principal Accounting Fees and Services ................................................................................................. 3 8 8 9 10 11 13 14 14 16 16 16 17 17 21 21 21 22 24 25 26 28 30 30 39 41 41 43 44 44 45 47 47 48 48 48 49 49 49 49 49 PART IV Exhibits, Financial Statement Schedules................................................................................................. 50 2 GLOSSARY The following abbreviations, acronyms or defined terms used in this document are defined below: Abbreviation, Acronym or Defined Term Definition/Description A-1 Common Unitholders A-1 Common Units Holders of A-1 Common Units. Operating Trust class A-1 common units, par value $0.01 per unit, together with any class B-1 Common Units, which are redeemable for cash or, at the option of Archstone-Smith, Common Shares. A-1 Common Units are the common units of the Operating Trust not held by Archstone-Smith and represent a minority interest of approximately 11.8% in the Operating Trust at December 31, 2006. Operating Trust class A-2 common units of beneficial interest, par value $0.01 per unit. Archstone-Smith is the sole holder of A-2 Common Units, which represent approximately an 88.2% interest in the Operating Trust at December 31, 2006. Americans with Disabilities Act, as amended. AMERITON Properties Incorporated, which is a taxable REIT subsidiary that engages in the opportunistic acquisition, development and eventual disposition of real estate with a shorter-term investment horizon. This Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2006. Archstone-Smith Trust. Unless indicated otherwise, financial information and references throughout this document are labeled, “Archstone-Smith” for periods before and after the Smith Merger. Operating Trust class B common units of beneficial interest, par value $0.01 per unit, which are issued to persons who contribute property to the Operating Trust. B Common Units convert automatically to A-1 Common Units immediately following the distribution of income for the quarter in which the property was contributed. Archstone-Smith’s Board of Trustees. Consolidated Engineering Services, Inc. was a taxable REIT subsidiary of Archstone-Smith in the business of delivering mission critical facilities management services for corporate, government and institutional customers. CES was sold to a third party in December 2002 for $178 million. Archstone-Smith common shares of beneficial interest, par value $0.01 per share. Holders of the Common Shares The A-1 Common Units and the A-2 Common Units. $575 million exchangeable senior unsecured notes that are exchangeable into Common Shares. Collectively, the Series A, H, J, K and L Preferred Shares. Archstone-Smith’s Amended and Restated Declaration of Trust, as filed with the State of Maryland on May 31, 2006, as amended and supplemented. A-2 Common Units ADA Ameriton Annual Report Archstone-Smith B Common Units Board CES Common Share(s) Common Shareholders Common Units Convertible Debt Convertible Preferred Shares Declaration of Trust 3 Abbreviation, Acronym or Defined Term Definition/Description DEU DeWAG DRIP EPS FASB FHA GAAP High-Rise Independent Trustees In Planning Dividend Equivalent Unit; an amount credited to the account of holders of certain options and RSU’s under our long-term incentive plan. DeWAG Deutsche WohnAnlage GmbH. Dividend Reinvestment and Share Purchase Plan. Earnings Per Share determined in accordance with GAAP. Financial Accounting Standards Board. Fair Housing Act, as amended. Generally accepted accounting principles in the United States. Those communities with five or more above-ground floors. Members of the Board meeting the NYSE definition of “Independent Director.” Represents parcels of land owned or Under Control, which are in the development planning process, upon which construction of apartments is expected to commence subsequent to the completion of the entitlement and building permit processes. Refers to our operational and investment activities in Europe. Our investments to date have been limited to Germany. On a sold community, IRR refers to the unleveraged internal rate of return calculated by Archstone-Smith, considering the initial purchase price and all capital invested in the community, the timing and amounts of net operating income during the period owned and the net sales proceeds from the sale. The IRR calculations include property management overhead and internal disposition costs but not depreciation or allocations for corporate general and administrative expenses, interest expenses, income tax expenses (if any) or other indirect operating expenses. Therefore, an IRR calculation is not a substitute for net income as a measure of our performance. Management believes that IRRs are an important indicator of the value created during the ownership period. Historical IRRs are not necessarily indicative of IRRs that will be produced in the future. Our methodology for calculating IRRs may not be consistent with the methodology used by other companies. The phase during which newly constructed apartment units are being leased for the first time, but prior to the community becoming Stabilized. London Interbank Offered Rate. Collectively, Archstone-Smith’s longterm unsecured senior notes payable and unsecured tax-exempt bonds. National Association of Real Estate Investment Trusts. Represents rental revenues less rental expenses and real estate taxes. We rely on NOI for purposes of making decisions about resource allocations and assessing segment performance. We also believe NOI is a valuable means of comparing period-to-period property performance. NOI is a non-GAAP financial measure. See a reconciliation of NOI to Earnings from Operations in this Annual Report in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — “Property-level operating results.” International IRR Lease-Up LIBOR Long-Term Unsecured Debt NAREIT Net Operating Income or NOI 4 Abbreviation, Acronym or Defined Term Definition/Description NYSE Oakwood or Oakwood Worldwide New York Stock Exchange. The terms used in reference to a group of partnerships coordinated by a common sponsor who contributed a group of apartment communities to the Operating Trust in 2005. Refers to thirteen communities acquired from Oakwood and one community we previously owned and operated that were leased in their entirety to an affiliate of Oakwood Worldwide under master lease agreements with seven year terms, subject to Oakwood’s right to terminate individual leases under certain circumstances after the one year anniversary of the acquisition. Archstone-Smith Operating Trust, the entity through which we conduct all property ownership and business operations. The Series I Preferred Shares. Real estate investment trust. This term is also used to refer to consolidated subsidiaries of Archstone-Smith, but excluding taxable and International subsidiaries unless the context indicates otherwise. A unit representing an interest in one Common Share, subject to certain vesting provisions, granted to an associate through our long-term incentive plan. Term used to refer to a group of operating communities in the United States that had attained Stabilization and were fully operating during the entire time two periods are being compared. Excludes communities which were not eligible for inclusion due to (i) recent acquisition or development, (ii) major redevelopment, or (iii) a significant number of non-operational units (fires, floods, etc.). Also excludes Ameriton properties, due to their short-term holding periods, and International properties. Archstone-Smith Series A Cumulative Preferred Shares of Beneficial Interest, par value $0.01 per share, which were redeemed in full in November 2003. Archstone-Smith Series C Cumulative Perpetual Preferred Shares of Beneficial Interest, par value $0.01 per share, which were redeemed in full in August 2002. Archstone-Smith Series D Cumulative Perpetual Preferred Shares of Beneficial Interest, par value $0.01 per share, which were redeemed in full in August 2004. 8.375% Cumulative Perpetual Preferred Units, par value $0.01, which were redeemed in full in February 2005. 8.125% Cumulative Perpetual Preferred Units, par value $0.01, which were redeemed in full in September 2004. 8.625% Cumulative Perpetual Preferred Units, par value $0.01, which were redeemed in full in March 2005. Archstone-Smith Series H Cumulative Convertible Perpetual Preferred Shares of Beneficial Interest, par value $0.01 per share, which were converted into Common Shares in full in May 2003. Oakwood Master Leases Operating Trust Preferred Shares or Perpetual Preferred Shares REIT Restricted Share Unit or RSU Same-Store Series A Preferred Shares Series C Preferred Shares Series D Preferred Shares Series E Perpetual Preferred Units Series F Perpetual Preferred Units Series G Perpetual Preferred Units Series H Preferred Shares 5 Abbreviation, Acronym or Defined Term Definition/Description Series I Preferred Shares Archstone-Smith Series I Cumulative Perpetual Preferred Shares of Beneficial Interest, par value $100,000 per share, redeemable in February 2028. Archstone-Smith Series J Cumulative Convertible Perpetual Preferred Shares of Beneficial Interest, par value $0.01 per share, which were converted into Common Shares in full in July 2002. Archstone-Smith Series K Cumulative Convertible Perpetual Preferred Shares of Beneficial Interest, par value $0.01 per share, which were converted into Common Shares in September 2004. Archstone-Smith Series L Cumulative Convertible Perpetual Preferred Shares of Beneficial Interest, par value $0.01 per share, which were converted into Common Shares in December 2004. Operating Trust Series M Preferred Unit of Beneficial Interest, par value $0.01 per unit. Operating Trust Series N-1 Convertible Redeemable Preferred Units of Beneficial Interest, par value $0.01 per unit. Operating Trust Series N-2 Convertible Redeemable Preferred Units of Beneficial Interest, par value $0.01 per unit. Smith Management Construction, Inc. was a taxable REIT subsidiary of Archstone-Smith in the business of providing construction management and building maintenance services. SMC was sold to members of its senior management in February 2003. The series of transactions in October 2001 whereby Archstone-Smith merged with Smith Residential, and Archstone Communities Trust (now, the Operating Trust) merged with Smith Partnership. Charles E. Smith Residential Realty L.P. Charles E. Smith Residential Realty, Inc. Statement of Financial Accounting Standards. The classification assigned to an apartment community that has achieved 93% occupancy, and for which development, new management and new marketing programs (or development and marketing in the case of a newly developed community) have been completed. For development communities, represents the total expected investment at completion; for operating communities, represents the total expected investment plus planned capital expenditures. Members of the Board of Trustees of Archstone-Smith. A term used to identify land parcels which the Operating Trust does not own, yet has an exclusive right through contingent contract or letter of intent during a contractually agreed upon time period to acquire the land, subject to satisfaction of contingencies during the due diligence and entitlement processes. The holders of the A-1 Common Units and the A-2 Common Units. Umbrella Partnership Real Estate Investment Trust. Series J Preferred Shares Series K Preferred Shares Series L Preferred Shares Series M Preferred Unit Series N-1 Preferred Units Series N-2 Preferred Units SMC Smith Merger Smith Partnership Smith Residential SFAS Stabilized or Stabilization Total Expected Investment Trustees Under Control Unitholders UPREIT 6 Forward-Looking Statements Certain statements in this Annual Report that are not historical facts are “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations, beliefs, assumptions, estimates and projections about the industry and markets in which we operate. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. Information concerning expected investment balances, expected funding sources, planned investments, forecasted dates and revenue and expense growth assumptions are examples of forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from what is expressed, forecasted or implied in such forward-looking statements. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Our operating results depend primarily on income from apartment communities, which is substantially influenced by supply and demand for apartment units, operating expense levels, property level operations and the pace and price at which we develop, acquire or dispose of apartment communities. Capital and credit market conditions, which affect our cost of capital, also influence operating results. See “Risk Factors” in Item 1 of this Annual Report for a complete discussion of the various risk factors that could affect our future performance. 7 PART I Item 1. Business Archstone-Smith, an S&P 500 company, is a leader in apartment investment and operations. The company owns and operates a portfolio of High-Rise and garden apartment communities concentrated in many of the most desirable neighborhoods in the Washington, D.C. metropolitan area, Southern California, the New York City metropolitan area, the San Francisco Bay Area, Boston and Seattle. The company strives to continually upgrade the quality of its portfolio through the selective sale of assets, using proceeds to fund investments with higher anticipated growth prospects. Through our two customer-facing brands, Archstone and Charles E. Smith, we strive to provide great apartments and great service, all backed by our unconditional Seal of Service™. As of December 31, 2006, we owned or had an ownership position in 348 communities, representing 88,011 units, including units under construction. At year-end, our operating portfolio was concentrated in protected locations in the following core markets, based on NOI for the three months ended December 31, 2006, excluding amounts owned by Ameriton, International investments and joint ventures: Washington, D.C. metropolitan area.......................................................................................................... Southern California................................................................................................................................... New York City metropolitan area.............................................................................................................. San Francisco Bay Area, California........................................................................................................... Boston, Massachusetts .............................................................................................................................. Seattle, Washington .................................................................................................................................. Southeast Florida ...................................................................................................................................... Chicago, Illinois ....................................................................................................................................... Total ..................................................................................................................................................... The Company Archstone-Smith is engaged primarily in the acquisition, development, redevelopment, operation and long-term ownership of apartment communities in the United States. We have elected REIT status and are structured as an UPREIT, with all property ownership and business operations conducted through the Operating Trust. We are the sole trustee and owned 88.2% of the Operating Trust at December 31, 2006. Archstone-Smith Common Shares trade on the New York Stock Exchange (NYSE: ASN). Our principal focus is to maximize shareholder value by: • Acquiring, developing, redeveloping and operating apartments in our core markets, which are characterized by: protected locations with limited land for new housing construction, expensive single-family home prices, and a strong, diversified economic base with significant employment growth potential; Generating long-term sustainable growth in operating cash flow; Increasing our Common Share dividend, as we have done for the last 16 consecutive years; Recruiting, training and retaining people who we believe are the best and brightest in the apartment business; Building the dominant operating platform in the apartment industry, to produce an operating franchise that we believe is more efficient, more profitable and difficult to replicate. We invest in technology to improve our operations and customer service delivery, strengthen our brand position and solidify our reputation for operational leadership; and Managing our invested capital through the selective sale of apartment communities with slower growth prospects and redeploying the proceeds to fund investments with higher anticipated growth prospects and value creation, in many of the most desirable neighborhoods in our core markets. 34.6% 25.8 12.5 11.5 5.0 4.2 2.2 2.0 97.8% • • • • • 8 2006 Accomplishments • Archstone-Smith produced Same-Store revenue growth of 6.5% and NOI growth of 7.5% for the full year of 2006. Archstone-Smith’s reported Same-Store NOI outperformed our peer average by 1,002 basis points for the period from January 1, 2001 through December 31, 2006. (1) We dramatically increased our presence in New York City through the acquisition of five high-rise apartment communities, totaling $845.1 million and 1,382 units, and are now the largest public owner of apartments in Manhattan. At year-end 2006, our committed Total Expected Investment in the New York City metropolitan area, including joint venture developments, totaled $2.0 billion. We made significant incremental investments in the San Francisco Bay Area, which now represents almost 12% of our portfolio, acquiring five communities, totaling $655.9 million and 1,978 units. We achieved our 12-year-long goal of repositioning of our portfolio from undesirable, commodity markets, into many of the most desirable neighborhoods in our core markets. As of December 31, 2006, our portfolio was 97.8% in our core markets. In May 2006, we completed our second acquisition in Europe with the purchase of a 657-unit portfolio concentrated in Berlin, Germany, for $50.5 million. In July 2006, we completed the acquisition of DeWAG, a German company that specializes in the acquisition, long-term ownership and re-sale or “privatization” of attractive residential properties in the major metropolitan areas of Southern and Western Germany. At acquisition, the real estate portfolio consisted of approximately 6,400 units valued at $646.3 million. In July 2006, we completed a successful $575 million convertible debt offering. This offering was used to repay outstanding balances under our revolving credit facility and certain other indebtedness, to make additional investments and for general corporate purposes. On July 12, 2006, Fitch Ratings upgraded our credit rating to A- from BBB+. We increased our 2007 annualized Common Share dividend level 4.0% to $1.81, or $0.4525 per quarter. This marks our 16th consecutive annual Common Share dividend increase and a total increase of 183% since 1991. Our first quarter 2007 Common Share dividend was paid in February 2007, representing our 126th consecutive quarterly payment. Forbes magazine ranked Archstone-Smith at 954 on the Forbes 2000 List for 2006, the magazine’s comprehensive ranking of the world’s largest corporations. • • • • • • • • • Archstone-Smith was named Property Management Company of the Year by the National Association of Home Builders. ____________ • (1) NOI performance is defined as cumulative same-store NOI growth for the period presented, relative to the average Same-Store NOI growth for our peer companies, which are Avalon Bay Communities; BRE Properties, Inc.; Camden Property Trust; Equity Residential; Essex Property Trust, Inc.; Post Properties, Inc.; and United Dominion Realty. Each company’s cumulative same-store NOI growth is calculated from 2001 through 2006. Results for 2001 through 2006 are per Green Street Advisors Apartment REITS: 4Q01 Review, 4Q03 Review, February ‘06 Update and February ‘07 Update, except for Archstone-Smith figures, which are actual reported results. 9 Investment Strategy Capital recycling program We believe that one of our most important objectives is to improve the quality of our portfolio with every transaction we complete. In 2006, we completed the disposition of $1.5 billion of non-core assets, excluding Ameriton and International dispositions, representing 11,534 units, generating net GAAP gains of $546.3 million and an average unleveraged IRR of 20.1%. In addition, during 2006 we acquired $1.7 billion of assets, excluding Ameriton and International acquisitions, representing 4,209 units, and started development of $349.5 million of assets, representing 1,069 units, in markets that include, Southern California and the San Francisco Bay Area. Focus on core markets We focus our investment activities in our core markets, which are characterized by: (i) protected locations with high barriers to entry; (ii) expensive single-family home prices; and (iii) a strong, diversified economic base with significant employment growth potential. Barriers to entry exist in areas where there is a very limited amount of land zoned and available for housing development, and where local municipalities are reluctant to zone additional land for new housing. We believe that the difficulty of developing new apartments in protected locations and the high cost of single family housing limits competition for our product. Limits on competition, together with the diverse economic base typical of our core markets, maximize our ability to keep our occupancy relatively constant while increasing rents and producing sustainable long-term cash flow growth. Our investment professionals generally live in our core markets, allowing them to research and evaluate potential investments at the “street corner level of detail.” This locally based investment acumen guides our decisions in making investments, allowing us to continually upgrade the quality of our portfolio. As a result, our portfolio is concentrated in many of the most desirable neighborhoods in the Washington, D.C. metropolitan area, Southern California, the New York City metropolitan area, the San Francisco Bay Area, Boston and Seattle. In late 2005 we indicated that Archstone-Smith would attempt to dispose of virtually all of our remaining noncore assets in 2006 and we have achieved this goal. Developments We place considerable emphasis on the value created through our development of new apartment properties. At December 31, 2006, we had $3.8 billion in Total Expected Investment of assets in our development pipeline, including communities under construction and In Planning in the REIT, Ameriton and joint ventures. We completed $602.9 million of new REIT development properties during the year, representing 2,023 units, in markets that include the Washington, D.C. metropolitan area, Southern California, New York City metropolitan area and Boston. We believe that our locally based development infrastructure creates a significant competitive advantage for identifying and completing very attractive investment opportunities in our core markets. As such, we expect our development capability to continue to be a key contributor to growth and to create significant value as properties are completed and Stabilized, producing attractive returns during the next several years. Additionally, we generally utilize guaranteed maximum price contracts, which caps our cost of construction at a guaranteed price through qualified third-party contractors to reduce our exposure to construction cost risk. Ameriton Ameriton, our wholly owned subsidiary, continues to be a highly profitable franchise for our company. Utilizing our development, acquisition and operating expertise, Ameriton identifies under-managed operating communities, as well as development and redevelopment opportunities with a short-term target ownership horizon of one to two years that have the potential to produce significant profits on re-sale. Ameriton sold twelve investments in 2006 (including two joint venture transactions), contributing $64.6 million or $0.25 per share to Archstone-Smith’s 2006 earnings. These transactions, excluding the two joint ventures, produced an IRR of 16.7%. 10 As of December 31, 2006, Ameriton had 22 communities representing 7,220 units under construction or In Planning, including joint ventures. While nearly 54.5% of Ameriton’s development pipeline is located in our core markets, they are in locations that we deem to be non-core for ownership by the REIT. A meaningful component of Ameriton’s profitable development program is attributable to its creation of a successful business as a joint venture financier of new, high-quality apartment communities that are built by other capable developers with whom we have fostered relationships over the past several years. Since 2003, Ameriton has completed nine of these transactions, realizing pre-tax gains of $46.7 million, or $0.20 per share, at an average leveraged IRR of 30.1%. Leveraging our relationships with third-party apartment developers, we also created a related business that offers a compelling platform for long-term value creation: mezzanine debt financing. Our Ameriton investment team sources these transactions on behalf of the REIT, as the interest income is qualifying REIT income and therefore not subject to tax. Of the $197.7 million in mezzanine loan commitments we have made through December 31, 2006, $103.4 million were originated in 2006. During the year, we had 4 loans representing $37.3 million repaid or sold. We are encouraged by the opportunities to selectively invest capital at very attractive returns in this incremental area of our business. International We expanded our international presence with the May 2006 acquisition of a 657-unit portfolio concentrated in Berlin, Germany, and the July 2006 acquisition of DeWAG, a German company, including its residential real estate portfolio and management team. DeWAG specializes in the acquisition, long-term ownership and re-sale or “privatization” of attractive residential properties in the major metropolitan areas of Southern and Western Germany. Collectively, the DeWAG senior management team has more than 60 years of German residential real estate expertise and extensive local market knowledge along with strong, long-term relationships with major real estate owners. As of December 31, 2006, our International apartment portfolio consists of 8,334 units generally located in attractive micro- and macro-locations in well-developed areas with access to parks, schools, shopping, employment and recreation. The German residential real estate market is experiencing an important shift in the way that residential property is owned and operated, which creates opportunities for investors with a long-term perspective to take advantage of the positive changes expected in this market. A limited supply of new residential property, coupled with increased demand driven by an increasing number of households, sets the stage for positive developments in rental rates and occupancy. In addition, portfolio rents at existing properties that were under corporate or municipal ownership are often below market levels, as these residential owners are generally focused on providing affordable housing for their constituents, and are not driven by purely economic considerations. Customer-focused Operations We believe that our long-term cash flow growth is enhanced by our strong operating capability, including the benefit of the Archstone and Charles E. Smith brands, robust and scalable technology, and our continued investment in our associates. Powerful brands An essential component of our strategy is to consistently offer a higher level of service at our apartment communities. Through our Seal of Service TM , we offer our residents convenience and flexibility all backed by written guarantees. We believe we were the first public apartment REIT with an established track record of offering customers flexible lease terms from two to 12 months as standard practice — and the first apartment company in the nation to offer fully transactional online leasing through Online Lease, our proprietary automated system. Our expansion in the New York City metropolitan area underscores the embedded value of our customer-focused operating and branding strategy. We believe we were the first apartment owner and manager in Manhattan to provide all of the following services: (i) leasing offices that are open seven days a week; (ii) showing apartments 11 without an appointment or a broker; (iii) processing applications in 48 hours, compared to one week process time at most competitors; (iv) offering unconditional service guarantees through our Seal of Service™; and (v) providing a technology platform that makes it easy for people to do business with us through online rent payment, online service requests and our Online Lease. Customers have enthusiastically accepted this approach, allowing us to achieve an 8.9% increase in new move-in rents in our Same-Store operating communities in Manhattan in the fourth quarter of 2006 as compared to the same period in 2005. Investing in technology Web-based property management system. We invest in technology to improve our core operations and make it easier for our customers to do business with us. In 2005, we completed the roll-out of MRI, a web-based property management system that provides the platform for virtually all of our customer-facing technology products. In addition, MRI’s automated work order solution allows us to manage and execute service requests more efficiently, in line with our 1-day service guarantee, through which we promise to respond to service requests within 24 hours. Equally important, MRI gives us the ability to accurately track resident histories to better understand and serve our customers. Revenue management. In 2000, we pioneered the use of a sophisticated revenue management product, Lease Rent Options (LRO). LRO brings a tremendous amount of discipline to the pricing process, enabling us to more precisely forecast demand to optimize pricing and occupancy across our portfolio, thereby increasing revenues. In 2006, we continued to refine and improve LRO to better manage pricing, occupancy and lease expirations to make us less vulnerable to seasonal shifts in customer traffic. We believe that pricing in the apartment industry is too reliant on on-site individuals who often use “gut instinct” to make what are ultimately arbitrary pricing decisions. To bring discipline and sophistication to pricing in the apartment industry, we began to actively market LRO to other apartment owners, licensing it to five large apartment companies; several other apartment owners are currently pilot testing the software. In 2006, Archstone-Smith entered into an agreement with The Rainmaker Group, an Atlanta-based software company, to market, distribute, develop, implement and support the LRO product. Resident websites. MRI provides a seamless online presence with our customers via resident-only websites, which we rolled out nationally in 2005, allowing customers 24/7 access to us to pay rent online, submit and track service requests, participate in periodic feedback surveys, review and update account information and more. In 2006, we collected online rent payments representing revenue of $304.6 million and 25.8% of total rent collected, which was 141% greater than the online rent payments collected in 2005. Online rent payments continued to accelerate throughout the year, with online rent payments in December 2006 totaling 32.0% of all rent collected. Online Lease. We believe that we were the first national apartment company where customers could complete leases completely online through Online Lease, our proprietary automated system. Using Online Lease, customers can log on to any computer to search for a specific apartment, view real-time pricing and availability, select rentable amenities such as garages or additional storage, complete their credit application and finalize their lease. Fully launched in 2005, Online Lease has been well-accepted by our customers, representing more than 17.0% of all leases transacted in 2006. Of those apartments that were leased online for the full year of 2006, 28.0% were leased sight-unseen by customers and 39.0% were leased by customers who only visited an Archstone-Smith community once. We believe Online Lease provides us with a meaningful competitive edge to better serve customers and improve our operating margins. Internet marketing and lead management. Approximately 44% of all of our leases for the year ended December 31, 2006, were sourced through the Internet, with the vast majority of our customers beginning their apartment search online through third-party search vehicles such as Google and Yahoo! or Internet Listing Services (ILS) that include Apartments.com and Move.com as well as our branded websites, ArchstoneApartments.com and SmithApartments.com. Because the acquisition cost for customers sourced through the Internet is dramatically lower than traditional marketing channels, such as print advertising, we continue to focus our marketing efforts on improving our online presence and lead management system. 12 Investing in our associates A critical component to ensuring the integrity of our brand offering is attracting, training and retaining the best professionals in our industry — and giving them the support and tools to provide an exceptional customer experience. Associate engagement. In 2005, we contracted with Kenexa, a leading associate engagement consultancy, to measure our associates’ engagement and identify key drivers of engagement. It is our belief that associates who are fully engaged in their roles tend to contribute at a much higher level to the company and stay with us longer. Our initial results were extremely encouraging, with 75% of our associates taking part in the survey. Our results place us in the top quartile of responses among the companies with whom Kenexa works, including many of the “best in class” corporations in the United States. Incentive-Based Compensation. We made significant progress during the year on our Incentive-Based Compensation (IBC) program, through which leasing associates take on a more traditional sales role, earning the majority of their compensation through leases “sold.” Previously, approximately 20% of our leasing associates’ income was based on leasing activity; with the IBC program, approximately 65% of a leasing associate’s income is generated through leases they put in place. We believe that providing this performance-based income potential allows us to attract higher-caliber sales associates who are more vested in delivering a superior experience to our customers. Full roll out of the IBC program was completed in 2006. Developing our leaders. In 2006, another 112 community and service managers attended Leading Teams at Archstone-Smith, a three-day program for our on-site management teams. This three-day program focuses on 31 leadership practices consistent with our company culture and values that we believe drive our success. To date, a total of 736 managers have participated in Leading Teams and The Practice of Leadership, our feedback-based training program for corporate and operations managers during which direct reports and peers evaluate managers to identify strengths and opportunities for improvement to enhance their effectiveness as team leaders. Conservative Balance Sheet Management One of our primary financial objectives is to structure our balance sheet to enhance our financial flexibility in order to have access to capital when others in the industry do not. Archstone-Smith has a significant equity base, with equity market capitalization of $14.6 billion, including the value of the A-1 Common Units, as of December 31, 2006. Our investment-grade debt ratings from Standard & Poor’s (BBB+), Moody’s Investors Service (Baal) and Fitch, Inc. (A-) are indicative of our solid financial position. In July 2006 we closed on the funding of $575 million aggregate principal amount of exchangeable senior unsecured notes — including a 15.0% underwriters over-allotment option — due 2036, with a coupon of 4.0%. The notes are exchangeable into Archstone-Smith Common Shares at an exchange ratio, subject to adjustment, of 15.7206 shares per $1,000 principal amount of notes. The company received approximately $563 million net proceeds from this offering and used the net proceeds to repay outstanding balances under its revolving credit facility and certain other indebtedness, to make additional investments and for general corporate purposes. Our unencumbered asset base was $7.6 billion as of the end of the year. As of February 20, 2007, we had approximately $1.1 billion of liquidity, including cash on hand, restricted cash in escrows and capacity on unsecured credit facilities. We believe this financial flexibility allows us to act more quickly on new investment opportunities as they arise. 13 We have structured our long-term debt maturities in a manner designed to avoid unmanageable repayment obligations in any year. We have only $491.1 million of long-term debt maturing in 2007, representing 2.3% of our total market capitalization. The following summarizes our long-term debt maturity profile for 2007 through 2011, and thereafter, as of December 31, 2006 (dollar amounts in millions): Year Total % of Total Market Capitalization (1) 2007 ................................................................................................................... $ 491.1 2.3% 2008 ................................................................................................................... 546.8 2.6% 2009 ................................................................................................................... 481.5 2.3% 2010 ................................................................................................................... 404.5 1.9% 2011 ................................................................................................................... 843.6 4.0% Thereafter and debt discount ............................................................................... 3,364.4 16.0% Total............................................................................................................... $ 6,131.9 29.1% ____________ (1) Total market capitalization as of December 31, 2006, represents the market capitalization based on the closing share price on the last trading day of the period for common shares, Units and the liquidation value for Preferred Shares as well as the book value of total debt. Consistent dividend growth. We raised our anticipated 2007 distribution level 4.0% to $1.81 per share, marking our 16th consecutive annual Common Share dividend increase and a total increase of 183% since 1991. Management We have several senior executives who possess the leadership, operational, investment and financial skills and experience to oversee the overall operation of our company. We believe several of our senior officers could serve as the principal executive officer and continue our strong performance. Our management team emphasizes active training and organizational development initiatives for associates at all levels of our company in order to build longterm management depth and facilitate succession planning. Officers of Archstone-Smith Certain senior officers, including all executive officers, of Archstone-Smith are: Name Title R. Scot Sellers* ............................................... Chairman and Chief Executive Officer J. Lindsay Freeman*........................................ Chief Operating Officer Charles E. Mueller, Jr* .................................... Chief Financial Officer Caroline Brower* ............................................ General Counsel and Secretary Alfred G. Neely* ............................................. Chief Development Officer and President — Charles E. Smith Residential Division Mark A. Schumacher* ..................................... Chief Accounting Officer Daniel E. Amedro............................................ Chief Information Officer Jack R. Callison............................................... Executive Vice President-East Operations Dana K. Hamilton............................................ Managing Director — Europe Gerald R. Morgan ............................................ Senior Vice President-National Operations ____________ * Executive Officers Biographies of Senior Officers R. Scot Sellers — 50 — Chairman and Chief Executive Officer, Archstone-Smith, from June 1997 to July 1998 and since December 1998, with overall responsibility for Archstone-Smith’s strategic direction, investments and operations; Co-Chairman and Chief Investment Officer, Archstone-Smith, from July 1998 to December 1998; other executive management positions within Archstone-Smith and its predecessors and affiliates since 1993; Member, Executive Committee of the Board of Governors and, during 2006, Chairman, National Association of Real Estate Investment Trusts; Member, Executive Committee of the Board of Directors of the National Multi Housing Council; Director, Christian International Scholarship Foundation; Director of CEO Forum; and Director, Alliance for Choice in Education. 14 J. Lindsay Freeman — 61 — Chief Operating Officer, Archstone-Smith, since September 2002, with responsibility for managing all investment and operating activities for Archstone-Smith; President-East Division, Archstone-Smith, from October 2001 to September 2002, with responsibility for all investments and operations of the East Division; other executive management positions with Archstone-Smith and its predecessors and affiliates since May 1994. Mr. Freeman will retire on December 31, 2007. Charles E. Mueller, Jr. — 43 — Chief Financial Officer, Archstone-Smith, since December 1998, with responsibility for the planning and execution of the Company’s financial strategy, balance sheet management and corporate operations and oversight of the company’s accounting/financial reporting, corporate finance, investor relations, corporate and property tax, due diligence, risk management, human resources, national marketing and ancillary services functions; various other management positions with Archstone-Smith and its predecessors and affiliates since April 1994; Member, Executive Committee of the Board of Directors of the National Multi Housing Council Executive Committee; Member, Real Estate Roundtable President’s Council; Director, Colorado UpLIFT; Director, Denver K-Life. Mr. Mueller will assume the position of Chief Operating Officer, Archstone-Smith, on or before January 1, 2008. Caroline Brower — 58 — General Counsel and Secretary, Archstone-Smith, since September 1999, with responsibility for legal and corporate governance; from September 1998 to September 1999, President of Ameriton Properties Incorporated; prior thereto, Ms. Brower was a partner of Mayer, Brown & Platt (now Mayer, Brown, Rowe & Maw, LLP) where she practiced transaction and real estate law. Alfred G. Neely — 61 — President, Charles E. Smith Residential Division, Archstone-Smith, since February 2005; Chief Development Officer, Archstone-Smith, since April 2003, with responsibility for the oversight and direction of all Archstone-Smith residential development projects; Executive Vice President, Archstone-Smith, and, prior to November 2001, Charles E. Smith Residential Realty, Inc. (a predecessor of Archstone-Smith) from April 1989 to April 2003 with responsibility for oversight and direction of High-Rise and garden residential development projects. Mark A. Schumacher — 48 — Chief Accounting Officer, Archstone-Smith, since December 2004 and Senior Vice President and Controller, Archstone-Smith, from January 2002 to December 2004, with principal responsibility for accounting and financial reporting; prior thereto, Vice President and Corporate Controller of Qwest Communications International (“Qwest”) from December 2000 to December 2001, where he had principal responsibility for accounting and financial reporting; from 1984 through 2000, held various managerial and senior executive level positions in the accounting and financial reporting departments of US West. On March 15, 2005, the Securities and Exchange Commission entered an administrative order and settled civil proceedings against Mr. Schumacher relating to his work at Qwest. The Securities and Exchange Commission alleged, among other things, that Mr. Schumacher was a cause of Qwest failing to properly record and report certain transactions in accordance with generally accepted accounting principles in violation of the Securities Exchange Act of 1934 (the “Exchange Act”). Pursuant to the terms of the consent decree, Mr. Schumacher settled all claims against him, agreed to cease and desist from violating various provisions of Section 13 of the Exchange Act and related rules there under, agreed not to engage in the future in any activity in violation of such provisions and paid a fine of $40,000. Daniel E. Amedro — 50 — Chief Information Officer, Archstone-Smith, since May 1998, with primary responsibility for the company’s information technology functions and initiatives; prior thereto he held senior information officer positions at American Medical Response, the largest private ambulance operation in the United States, and Hyatt Hotels and Resorts, where he was responsible for all strategic information systems including Spirit, Hyatt’s worldwide reservation system, which supported over 50,000 users and was recognized as the leading reservations system in the hospitality industry. Jack R. Callison — 36 — Executive Vice President — East Operations, Archstone-Smith, since February 2006, with responsibility for the oversight of the company’s East Region community operations, which is comprised of more than 35,000 apartment units in the greater Washington D.C. metropolitan area, New York City, Boston, Southeast Florida and Atlanta, and represents over 55% of the company’s Net Operating Income; Executive Vice President — National Operations, Archstone-Smith from July 2005 to January 2006, where he was responsible for many of the company’s operating and technology-related initiatives in addition to overseeing human resources, national marketing, and ancillary services. Since joining the company in 1997, Mr. Callison has held numerous management positions in the company’s capital markets, investor relations, real estate due diligence and accounting departments. Mr. Callison is also a certified public accountant. Mr. Callison will assume the position of President — U.S. Operations, Archstone-Smith, at a time to be determined during 2007. 15 Dana K. Hamilton — 38 — Managing Director — Europe, Archstone-Smith, since February 2005, with responsibility for research and development of European investment and operational opportunities; Executive Vice President — National Operations, Archstone-Smith, from May 2001 to February 2005, with responsibility for corporate services, including human resources, training and development, marketing and corporate communications, and new business development; various other management positions with Archstone-Smith and its predecessors and affiliates since August 1994. Gerald R. Morgan — 43 — Senior Vice President — National Operations, Archstone-Smith, since March 2006, with responsibility for national operations and corporate services departments including human resources, marketing and ancillary services; from January 2000 to November 2005, Mr. Morgan was a partner serving as the chief operating officer and chief financial officer of Francisco Partners, a $2.5 billion private equity fund, where he was responsible for finance, accounting, investor relations, human resources and portfolio company reporting; prior thereto, Mr. Morgan held various financial positions with Security Capital Group Incorporated, most recently as a senior vice president serving as the chief financial officer of two London-based real estate investment funds. Mr. Morgan will assume the position of chief financial officer, Archstone-Smith, on or before January 1, 2008. Employees We currently employ approximately 2,666 individuals, of whom approximately 1,958 are focused on the sitelevel operation of our garden communities and High-Rise properties. Of the site-level associates, approximately 123 are subject to collective bargaining agreements with four unions in Illinois and New York. The balance are professionals who manage corporate and regional operations, including our investment program, property operations, financial activities and other support functions. We consider our relationship with our employees to be very good. Insurance We carry comprehensive general liability coverage on our owned communities, with limits of liability customary within the industry to insure against liability claims and related defense costs. Similarly, we are insured against the risk of direct physical damage in amounts necessary to reimburse the company on a replacement cost basis for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period. Our property policies for all United States operating and development communities and certain International communities include coverage for the perils of flood and earthquake shock with limits and deductibles customary in the industry. We also obtain title insurance policies when acquiring new properties, which insure fee title to our real properties. We currently have coverage for losses incurred in connection with both domestic and foreign terroristrelated activities. The terms of our property and general liability policies may exclude certain mold-related claims or other types of claims based on the specific circumstances and allegations. Should an uninsured loss arise against the company, we would be required to use our own funds to resolve the issue, including litigation costs. In addition, for our United States communities we self-insure certain portions of our insurance program through a wholly-owned captive insurance company, and therefore use our own funds to satisfy those limits, when applicable. Competition There are numerous commercial developers, real estate companies and other owners of real estate that we compete with in seeking land for development, apartment communities for acquisition and disposition and residents for apartment communities. All of our apartment communities are located in developed areas that include other apartment communities. The number of competitive apartment communities in a particular area could have a material adverse effect on our ability to lease units and on the rents charged. In addition, single-family homes and other residential properties provide housing alternatives to residents and potential residents of our apartment communities. 16 Available Information and Code of Ethics Our website is http://www.archstonesmith.com. We make available free of charge, on or through our website, our annual, quarterly and current reports, as well as any amendments to these reports, as soon as reasonably practicable after electronically filing these reports with the Securities and Exchange Commission. We have adopted a Code of Ethics and Business Conduct applicable to our Board and officers and employees, including our principal executive officer, principal financial officer and principal accounting officer or controller. A copy of our Code of Ethics and Business Conduct is available through our website. Any amendments to or waivers of our Code of Ethics and Business Conduct that apply to the principal executive officer, principal financial officer and principal accounting officer or controller and that relate to any matter enumerated in Item 406(b) of Regulation S-K, will be disclosed on our website. Any reference to our website in this Annual Report does not incorporate by reference the information contained in the website and such information should not be considered a part of this Annual Report. Charters of the Nominating and Corporate Governance Committee, Management Development and Executive Compensation Committee and Audit Committee, as well as the Code of Business Conduct and Ethics and our Corporate Governance Guidelines are available at no charge upon written request to Investor Relations, 9200 East Panorama Circle, Suite 400, Englewood, Colorado 80112. Item 1A. Risk Factors The following factors could affect our future financial performance: We have restrictions on the sale of certain properties. A taxable sale of any of the properties acquired in the Smith Merger prior to January 1, 2022, could result in increased costs to us in light of the tax-related obligations made to the former Smith Partnership Unitholders. Under the shareholders’ agreement between Archstone-Smith, the Operating Trust, Robert H. Smith and Robert P. Kogod, we are restricted from transferring specified high-rise properties located in the Crystal City area of Arlington, Virginia until October 31, 2016, without the consent of Messrs. Smith and Kogod, which could result in increased costs to us and our inability to sell these properties at an opportune time. However, we are permitted to transfer these properties in connection with a non-taxable sale or a sale of all of the properties in a single transaction or pursuant to a bona fide mortgage of any or all of such properties in order to secure a loan or other financing. We have similar restrictions with respect to the properties acquired from Oakwood Worldwide in 2005. The restrictions last until the earlier of (a) such time as 99% of the contributing partners have sold, redeemed or otherwise disposed of their A-1 Common Units in a taxable event and (b) the later to occur of (x) 10 years from the closing of the contribution of such properties and (y) the last to die of Howard Ruby and Ed Broida. Mr. Broida died in 2006. We depend on our key personnel. Our success depends on our ability to attract and retain the services of executive officers, senior officers and company managers. There is substantial competition for qualified personnel in the real estate industry and the loss of several of our key personnel could have an adverse effect on us. Debt financing could adversely affect our performance. We are subject to risks associated with debt financing and preferred equity. These risks include the risks that we will not have sufficient cash flow from operations to meet required payments of principal and interest or to pay distributions on our securities at expected rates, that we will be unable to refinance current or future indebtedness, that the terms of any refinancing will not be as favorable as the terms of existing indebtedness, and that we will be unable to make necessary investments in new business initiatives due to lack of available funds. Increases in interest rates could increase interest expense, which would adversely affect net earnings and cash available for payment of obligations. If we are unable to make required payments on indebtedness that is secured by a mortgage on our property, the asset may be transferred to the lender with a consequent loss of income and value to us. 17 Additionally, our debt agreements contain customary covenants which, among other things, restrict our ability to incur additional indebtedness and, in certain instances, restrict our ability to engage in material asset sales, mergers, consolidations and acquisitions. These debt agreements also require us to maintain various financial ratios. Failure to comply with these covenants could result in a requirement to repay the indebtedness prior to its maturity, which could have an adverse effect on our cash flow and ability to make distributions to shareholders. Some of our debt instruments bear interest at variable rates. Increases in interest rates would increase our interest expense under these instruments and would increase the cost of refinancing these instruments and issuing new debt. As a result, higher interest rates would adversely affect cash flow and our ability to service our indebtedness and to make distributions to our shareholders. We had $6.5 billion in total debt outstanding as of December 31, 2006, of which $2.8 billion was secured by real estate assets and $1.5 billion was subject to variable interest rates, including $84.7 million outstanding on our shortterm credit facilities. We may not have access to equity capital. A prolonged period in which we cannot effectively access the public equity markets may result in heavier reliance on alternative financing sources to undertake new investment activities. These alternative sources of financing may be more costly than raising funds in the public equity markets. We could be subject to acts of terrorism. Periodically, we receive alerts from government agencies that apartment communities could be the target of both domestic and foreign terrorism. Although we currently have insurance coverage for losses incurred in connection with terrorist-related activities, losses could exceed our coverage limits and have a material adverse affect on our operating results. We are subject to risks inherent in ownership of real estate. Real estate, cash flows and values are affected by a number of factors, including changes in the general economic climate, local, regional or national conditions (such as an oversupply of communities or a reduction in rental demand in a specific area), the quality and philosophy of management, competition from other available properties and the ability to provide adequate property maintenance and insurance and to control operating costs. Real estate cash flows and values are also affected by such factors as government regulations, including zoning, usage and tax laws, caps on rent and rent increases, interest rate levels, the availability of financing, property tax rates, utility expenses, potential liability under environmental and other laws and changes in environmental and other laws. Although we seek to minimize these risks through our market research and property management capabilities, they cannot be totally eliminated. We are subject to risks inherent in real estate development. We have developed or commenced development on a substantial number of apartment communities and expect to develop additional apartment communities in the future. Real estate development involves risks in addition to those involved in the ownership and operation of established communities, including the risks that financing, if needed, may not be available on favorable terms, construction may not be completed on schedule, contractors may default, estimates of the costs of developing apartment communities may prove to be inaccurate, the costs and availability of materials may be adversely affected by global supply and demand, and communities may not be leased or rented on profitable terms or in the time frame anticipated. Timely construction may be affected by local weather conditions, local moratoria on construction, local or national strikes and local or national shortages in materials, building supplies or energy and fuel for equipment. These risks may cause the development project to fail to perform as expected. 18 Real estate investments are relatively illiquid and we may not be able to recover our investments. Equity real estate investments are relatively illiquid, which may tend to limit our ability to react promptly to changes in economic or other market conditions. Our ability to dispose of assets in the future will depend on prevailing economic and market conditions. Furthermore, our mezzanine loans to real estate investors may not be recoverable if those investors are unable to monetize the underlying asset at underwritten amounts. Compliance with laws and regulatory requirements may be costly. We must comply with certain accessibility, environmental, building, and health and safety laws and regulations related to the ownership, operation, development and acquisition of apartments. Under those laws and regulations, we may be liable for, among other things, the costs of bringing our properties into compliance with the statutory and regulatory requirements. Non-compliance with certain of these laws and regulations may impose liability without regard to fault, and could give rise to actions brought against us by governmental entities and/or third parties who claim to be or have been damaged as a consequence of an apartment not being in compliance with the subject laws and regulations. As part of our due diligence procedures in connection with the acquisition of a property, whether it is an apartment community or land to be developed, we conduct an investigation of the property’s compliance with known laws and regulatory requirements with which we must comply once we acquire a property, which investigation includes performing a Phase I environmental assessment of the property and a Phase II assessment if recommended in the Phase I report. We hire architects and general contractors to design and build our development projects, and we rely on them to design and build in accordance with all legal requirements. We cannot, however, give any assurance that our investigations and these assessments have revealed all potential non-compliance issues or related liabilities, or that our development properties have been designed and built in accordance with all applicable legal requirements. Costs associated with moisture infiltration and resulting mold remediation may be costly. As a general matter, concern about indoor exposure to mold continues as such exposure has been alleged to have a variety of adverse effects on health. As a result, there have been a number of lawsuits in our industry against owners and managers of apartment communities relating to moisture infiltration and resulting mold. We have implemented guidelines and procedures to address moisture infiltration and resulting mold issues if and when they arise. We believe that these measures will minimize the potential for any adverse effect on our residents. The terms of our property and general liability policies after June 30, 2002, may exclude certain mold-related claims. Should an uninsured loss arise against the company, we would be required to use our own funds to resolve the issue, including litigation costs. We can make no assurance that liabilities resulting from moisture infiltration and the presence of or exposure to mold will not have a future material impact on our financial results. Changes in laws may result in increased cost. We may not be able to pass on increased costs resulting from increases in real estate taxes, income taxes or other governmental requirements, such as the enactment of regulations relating to internal air quality, directly to our residents. Substantial increases in rents, as a result of those increased costs, may affect the ability of a resident to pay rent, causing increased vacancy. Archstone-Smith’s failure to qualify as a REIT would have adverse consequences. We believe that we have qualified for taxation as a REIT under the Internal Revenue Code and we plan to continue to meet the requirements for taxation as a REIT. We cannot, however, guarantee that we will continue to qualify in the future as a REIT. We cannot give any assurance that new legislation, regulations, administrative interpretations or court decisions will not significantly change the requirements relating to Archstone-Smith’s qualification. If we fail to qualify as a REIT, we would be subject to federal income tax at regular corporate rates. Also, unless the Internal Revenue Service granted us relief, we would remain disqualified as a REIT for four years following the year in which we failed to qualify. In the event that we failed to qualify as a REIT, we would be required to pay significant income taxes and would have less money available for operations and distributions to shareholders. This would likely have a significant adverse effect on the value of our securities and our ability to raise additional capital. In order to maintain our qualification as a REIT under the Internal Revenue Code, our Declaration of Trust limits the ownership of our shares by any person or group of related persons to 9.8%, unless special approval is granted by our Board. 19 The Operating Trust intends to qualify as a partnership, but we cannot guarantee that the Operating Trust will qualify. The Operating Trust intends to qualify as a partnership for federal income tax purposes. However, the Operating Trust will be treated as an association taxable as a corporation for federal income tax purposes if it is deemed to be a publicly traded partnership, unless at least 90% of its income is qualifying income as defined in the tax code. Qualifying income for the 90% test generally includes passive income, such as real property rents, dividends and interest. The income requirements applicable to REITs and the definition of qualifying income for purposes of this 90% test are similar in most respects. We believe that the Operating Trust will meet this qualifying income test, but cannot guarantee that it will. If the Operating Trust were to be taxed as a corporation, it will incur substantial tax liabilities, Archstone-Smith would fail to qualify as a REIT for tax purposes and Archstone-Smith’s and the Operating Trust’s ability to raise additional capital would be impaired. We are subject to losses that may not be covered by insurance. There are certain types of losses (such as from war) that may be uninsurable or not economically insurable. Additionally, many of our communities in California are located in the general vicinity of active earthquake fault lines, and our Southeast Florida assets are in coastal locations and subject to hurricanes. Although we maintain insurance to cover most reasonably likely risks, including earthquakes and hurricanes, if an uninsured loss or a loss in excess of insured limits occurs, we could lose both our invested capital in, and anticipated profits from, one or more communities. We may also be required to continue to repay mortgage indebtedness or other obligations related to such communities. The terms of our property and general liability policies after June 30, 2002, may exclude certain mold-related claims. We can make no assurance that liabilities resulting from moisture infiltration and the presence of or exposure to mold will not have a future material impact on our financial results. Should an uninsured loss arise against the company, we would be required to use our own funds to resolve the issue, including litigation costs. Any such loss could materially adversely affect our business, financial condition and results of operations. We have a concentration of investments in certain markets. As shown in the United States Geographic Distribution table below in “Item 2. Properties,” our most significant investment concentrations are in the Washington, D.C. metropolitan area, Southern California, the New York City metropolitan area and the San Francisco Bay Area. Southern California is the geographic area comprising the Los Angeles County, San Diego, Orange County, Ventura County and the Inland Empire markets. We are, therefore, subject to increased exposure (positive or negative) from economic and other competitive factors specific to markets within these geographic areas. Our business is subject to extensive competition. There are numerous commercial developers, real estate companies and other owners of real estate that we compete with in seeking land for development, apartment communities for acquisition and disposition and residents for apartment communities. All of our apartment communities are located in developed areas that include other apartment communities. The number of competitive apartment communities in a particular area could have a material adverse effect on our ability to lease units and on the rents charged. In addition, single-family homes and other residential properties provide housing alternatives to residents and potential residents of our apartment communities. Ownership of properties located outside of the United States subjects us to foreign currency risks which may adversely impact our ability to make distributions. We currently own properties located outside of the United States, which subjects us to risk from fluctuations in exchange rates between foreign currencies and the U.S. dollar. We expect that our principal foreign currency exposure will be to the Euro. Changes in the relation of these currencies to U.S. dollars may affect the fair values and earnings streams of our international holdings, and therefore our revenues and operating margins on our nondollar denominated foreign holdings. These fluctuations in foreign currency exchange rates may materially adversely impact our financial condition, results of operations, cash flow, cash available for distribution, including cash available to pay distributions to our Common Shareholders, per share trading price of our Common Shares, ability to satisfy our debt obligations and ability to qualify as a REIT. 20 We intend to attempt to mitigate the risk of currency fluctuation by financing our properties in the local currency denominations, although we cannot assure you that we will be able to do so or that this will be effective. We have engaged, and may continue to engage, in direct hedging activities to mitigate the risks of exchange rate fluctuations. If we do engage in foreign currency exchange rate hedging activities, any income recognized with respect to these hedges (as well as any foreign currency gain recognized with respect to changes in exchange rates) may not qualify under the 75% gross income test or the 95% gross income test that we must satisfy annually in order to qualify and maintain our status as a REIT. Acquisition and ownership of foreign properties involve risks greater than those faced by us in the United States Foreign real estate investments generally involve certain risks not generally associated with investments in the United States. Our international acquisitions and operations are subject to a number of risks, including acquisition risk resulting from less knowledge of local real estate markets, economies, and business practices and customs; our limited knowledge of and relationships with sellers in these markets; higher due diligence, transaction and structuring costs than those we may face in the United States; additional accounting and control expenses; complexity and costs associated with managing international operations; difficulty in hiring qualified management, leasing personnel and service providers in a timely fashion; multiple, conflicting and changing legal, regulatory, tax and treaty environments, including land use, zoning and environmental laws, as well as the enactment of laws prohibiting or restricting the foreign ownership of property; exposure to increased taxation, confiscation or expropriation; currency transfer restrictions and limitations on our ability to distribute cash earned in foreign jurisdictions to the United States; difficulty in enforcing agreements in non-United States jurisdictions, including those entered into in connection with our acquisitions; and change in the availability, cost and terms of property financing resulting from varying national economic policies or changes in interest rates. Our inability to overcome these risks could adversely affect our foreign operations and could harm our business and results of operations. Item 1B. Unresolved Staff Comments Not Applicable. Item 2. Properties United States Geographic Distribution, excluding Ameriton At December 31, 2006, the geographic distribution for our eight core markets based on NOI for the three months ended December 31, 2006 was as follows: Washington, D.C. metropolitan area.......................................................................................................... Southern California................................................................................................................................... New York City metropolitan area.............................................................................................................. San Francisco Bay Area, California........................................................................................................... Boston, Massachusetts .............................................................................................................................. Seattle, Washington .................................................................................................................................. Southeast Florida ...................................................................................................................................... Chicago, Illinois ....................................................................................................................................... Total ..................................................................................................................................................... 34.6% 25.8 12.5 11.5 5.0 4.2 2.2 2.0 97.8% 21 The following table summarizes the geographic distribution for 2006, 2005 and 2004, based on NOI: Total Portfolio(1) 2006 2005 2004 Core Markets Washington, D.C. metropolitan area ........................................................... Southern California.................................................................................... New York City metropolitan area ............................................................... San Francisco Bay Area, California ............................................................ Boston, Massachusetts ............................................................................... Seattle, Washington ................................................................................... Southeast Florida ....................................................................................... Chicago, Illinois......................................................................................... Total Core Markets.............................................................................. Non-Core Markets (2) Houston, Texas .......................................................................................... Denver, Colorado....................................................................................... Atlanta, Georgia......................................................................................... Raleigh, North Carolina ............................................................................. Other ......................................................................................................... Total Non-Core Markets...................................................................... Total All Markets ............................................................................. ____________ 34.6% 25.8 12.5 11.5 5.0 4.2 2.2 2.0 97.8% — — — — 2.2 2.2% 100% 36.6% 39.4% 24.9 18.9 6.8 4.9 8.2 8.2 4.7 4.7 3.9 3.1 4.0 4.7 4.3 6.1 93.4% 90.0% 1.3% 1.5% 1.1 1.9 — 2.3 — 1.1 4.2 3.2 6.6% 10.0% 100% 100% (1) Based on NOI for the fourth quarter of each calendar year, excluding NOI from communities disposed of during the period. See Item 7 under the caption “Property-level operating results” for a discussion on why we believe NOI is a meaningful measure and a reconciliation of NOI to Earnings from Operations. (2) Markets that represent 1.0% or less of NOI in any year are included in Other for that year. Real Estate Portfolio We are a leading multifamily company focused primarily on the operation, development, redevelopment, acquisition, management and long-term ownership of apartment communities in protected markets throughout the United States. 22 The following information summarizes our wholly owned real estate portfolio as of December 31, 2006 (dollar amounts in thousands). Additional information on our real estate portfolio is contained in “Schedule III, Real Estate and Accumulated Depreciation” and in our audited financial statements contained in this Annual Report: Number of Communities Number of Units ArchstoneSmith Investment Percentage Leased(1) OPERATING APARTMENT COMMUNITIES: Garden Communities: Boston, Massachusetts(2)................................................ Dallas, Texas ................................................................ Denver, Colorado.......................................................... El Paso, Texas............................................................... Houston, Texas ............................................................. Inland Empire, California.............................................. Los Angeles County, California..................................... New York City metropolitan area .................................. Orange County, California ............................................ Orlando, Florida............................................................ Phoenix, Arizona .......................................................... San Diego, California.................................................... San Francisco Bay Area, California ............................... Seattle, Washington ...................................................... Southeast Florida .......................................................... Stamford, Connecticut................................................... Ventura County, California ........................................... Washington, D.C. metropolitan area .............................. Garden Community Subtotal/Average ....................... High-Rise Properties: Boston, Massachusetts(2)................................................ Chicago, Illinois............................................................ Los Angeles County, California(3).................................. Minneapolis, Minnesota ................................................ New York City metropolitan area .................................. Philadelphia, Pennsylvania............................................ San Diego, California.................................................... San Francisco Bay Area, California ............................... Seattle, Washington ...................................................... Washington, D.C. metropolitan area .............................. High-Rise Subtotal/Average ...................................... FHA/ADA Settlement Capital Accrual.............................. Operating Apartment Communities Subtotal /Average................................................ APARTMENT COMMUNITIES UNDER CONSTRUCTION: Garden Communities: Los Angeles County, California..................................... Orange County, California ............................................ San Francisco Bay Area, California ............................... Garden Community Subtotal/Average ....................... High-Rise Properties: Boston, Massachusetts .................................................. Apartment Communities Under Construction Subtotal /Average ................................................ APARTMENT COMMUNITIES IN PLANNING:(4) Garden Communities: Boston, Massachusetts .................................................. Washington, D.C. metropolitan area .............................. 9 1 1 1 1 3 20 1 8 1 2 8 20 9 5 1 4 17 112 5 2 3 1 10 1 1 2 2 35 62 — 174 2,044 $ 514 156 379 616 1,298 7,483 396 2,063 312 742 2,803 7,419 3,408 1,924 160 1,018 8,152 40,887 $ 1,207 $ 1,113 1,073 250 2,929 80 387 853 338 11,722 19,952 $ — $ 474,586 48,177 10,549 14,198 36,937 84,475 1,454,616 89,118 267,381 22,100 28,760 358,793 1,351,578 308,999 232,675 36,568 159,212 1,111,173 6,089,895 376,289 234,813 238,151 27,107 1,566,026 19,035 44,358 268,575 62,422 2,252,196 5,088,972 29,185 86.9% 96.1% 92.9% 92.9% 97.7% 96.3% 92.1% 97.5% 96.3% 95.2% 94.1% 96.7% 93.9% 95.1% 95.4% 95.6% 96.1% 94.2% 94.2% 72.6% 95.2% 91.0% 95.6% 96.9% N/A 93.5% 95.4% N/A 95.4% 94.0% N/A 94.1% 60,839 $ 11,208,052 2 1 1 4 1 5 1 1 655 884 185 1,724 $ 426 $ 2,150 $ 420 357 172,783 60,161 61,695 294,639 112,242 406,881 — — N/A N/A N/A N/A N/A 23 Number of Communities Number of Units ArchstoneSmith Investment Percentage Leased(1) High-Rise Communities: Boston, Massachusetts .................................................. Washington, D.C. metropolitan area .............................. Total Apartment Communities In Planning (4) Subtotal/Average..................................................... Total REIT Communities................................... AMERITON PORTFOLIO: Operating Apartment Communities............................ Apartment Communities Under Construction and In Planning (4) .............................................................. Other Real Estate Assets............................................ Subtotal /Average .............................................. INTERNATIONAL PORTFOLIO: German Operating Apartment Communities .............. OTHER REAL ESTATE ASSETS(5) Total Real Estate Owned at December 31, 2006 . ____________ 1 2 5 184 5 20 — 25 341 $ 723 16,774 58,764 1,841 $ 75,538 64,830 $ 11,690,471 1,474 $ 6,670 — 8,144 174,983 308,448 102,093 585,524 119 — 328 8,334 851,593 — $ 60,052 81,308 $ 13,187,640 See notes on following page. (1) Represents the percentage leased as of December 31, 2006. For communities in Lease-Up, the percentage leased is based on leased units divided by total number of units in the community (completed and under construction) as of December 31, 2006. The “N/A” for the Seattle and Philadelphia markets in the High-Rise operating community section indicates that the markets are entirely comprised of Oakwood Master Lease communities. Oakwood Master Leased communities have been excluded from the Percentage Leased calculation for other markets that have both Oakwood Master Leased communities and communities with traditional resident leases. A “N/A” indicates markets with communities under construction where Lease-Up has not yet commenced. (2) Lower average occupancy is due to the inclusion of certain recently completed development communities which are in Lease-Up and therefore not yet Stabilized. (3) Includes a 623-unit community which recently completed redevelopment and whose occupancy was 85.9% as of December 31, 2006. (4) As of December 31, 2006, we had two investments representing $7.1 million or 777 units and one investment representing $0.5 million or 176 units classified as In Planning and Under Control for Archstone-Smith and Ameriton, respectively. Our actual investment in these communities is reflected in the “Other assets” caption of our Balance Sheet. (5) Includes land that is not In Planning and other real estate assets. Item 3. Legal Proceedings During the second quarter of 2005, we entered into a full and final settlement in the United States District Court for the District of Maryland with three national disability organizations and agreed to make capital improvements in a number of our communities in order to make them fully compliant with the FHA and ADA. The litigation, settled by this agreement, alleged lack of full compliance with certain design and construction requirements under the two federal statutes at 71 of the company’s wholly owned or joint venture communities, of which we still own or have an interest in 45. As part of the settlement, the three disability organizations all recognized that 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 communities named in the settlement was estimated at $47.2 million and was accrued as an addition to real estate during the fourth quarter of 2005. The settlement agreement approved by the court allows us to remediate each of the designated communities over a three year period, and also provides that we are not restricted from selling any of our communities during the remediation period. We agreed to pay damages totaling $1.4 million, which included legal fees and costs incurred by the plaintiffs. We had $29.2 million of the original accrual remaining on December 31, 2006. 24 We are subject to various claims filed in 2002 and 2003 in connection with moisture infiltration and resulting mold issues at certain High-Rise properties we once owned in Southeast Florida. These claims generally allege that water infiltration and resulting mold contamination resulted in the claimants having personal injuries and/or property damage. Although certain of these claims continue to be in various stages of litigation, with respect to the majority of these claims, we have either settled the claims and/or we have been dismissed from the lawsuits that had been filed. With respect to the lawsuits that have not been resolved, we continue to defend these claims in the normal course of litigation. We are a party to various other claims and routine litigation arising in the ordinary course of business. We do not believe that the results of any such claims or litigation, individually or in the aggregate, will have a material adverse effect on our business, financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders None 25 PART II Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our Common Shares are listed on the NYSE under the symbol “ASN.” The following table sets forth the high and low sales prices of our Common Shares, as reported on the NYSE Composite Tape, and cash distributions per Common Share for the periods indicated. High Low Cash Distributions 2005: First Quarter ................................................................................................... Second Quarter ............................................................................................... Third Quarter .................................................................................................. Fourth Quarter ................................................................................................ 2006: First Quarter ................................................................................................... Second Quarter ............................................................................................... Third Quarter .................................................................................................. Fourth Quarter ................................................................................................ 2007: First Quarter (through February 20, 2007) $ 38.28 $ 32.76 $ 39.25 33.63 43.03 38.25 43.10 36.31 $ 50.11 $ 41.79 $ 51.38 44.81 55.31 49.66 61.00 53.81 $ 64.77 $ 56.55 $ 0.4325 0.4325 0.4325 0.4325 0.4350 0.4350 0.4350 0.4350 0.4525 As of February 20, 2007, we had approximately 220,379,832 Common Shares outstanding, approximately 2,640 record holders of Common Shares and approximately 26,148 beneficial holders of Common Shares. To qualify as a REIT, we are required to make annual shareholder distributions of 90% of our taxable income. The payment of distributions is also subject to the discretion of the Board and is dependent upon our strategy, financial condition and operating results. Our long-term objective is to increase annual distributions per Common Share while maximizing the amount of internally generated cash flow from operations to fund future investment opportunities. We announce the following year’s projected annual distribution level after the Board’s annual budget review and approval. In December 2006 the Board announced a 4.0% increase in the annual distribution level from $1.74 to $1.81 per Common Share and, in January 2007, declared the first quarter 2007 distribution of $0.4525 per Common Share payable on February 28, 2007, to shareholders of record on February 13, 2007. This dividend marks our 126th consecutive quarter of dividends declared and paid. All future Common Share distributions are subject to approval by our Board. We are restricted from declaring or paying any distribution with respect to our Common Shares unless cumulative distributions on all Preferred Shares have been paid and sufficient funds have been set aside for Preferred Share distributions that have been declared and not paid. All of our declared distributions have been paid on schedule. For federal income tax purposes, distributions may consist of ordinary income, capital gains, non-taxable return of capital or a combination thereof. Distributions that exceed our current and accumulated earnings and profits constitute a return of capital rather than ordinary income and reduce the shareholder’s basis in the Common Shares. To the extent that a distribution exceeds both current and accumulated earnings and profits and the shareholder’s basis in the Common Shares, it will generally be treated as a gain from the sale or exchange of that shareholder’s Common Shares. We notify our shareholders annually of the taxability of distributions paid during the preceding year. The following table summarizes the taxability of cash distributions paid on the Common Shares in 2006 and 2005: 2006 2005 Per Common Share: Ordinary income........................................................................................................................ $ 1.31 $ 1.12 Capital gains.............................................................................................................................. 0.43 0.61 Total...................................................................................................................................... $ 1.74 $ 1.73 26 For federal income tax purposes, the following summaries reflect the taxability of dividends paid on our Preferred Shares: Per Series I Preferred Share(1): Ordinary income .................................................................................................................... $ 5,778 $ 4,959 Capital gains.......................................................................................................................... 1,882 2,701 Total .................................................................................................................................. $ 7,660 $ 7,660 ____________ (1) The Series I Preferred Shares have a par value of $100,000 per share. Our tax return for the year ended December 31, 2006 has not been filed, and the taxability information for 2006 is based upon the best available data we have. Our tax returns for prior years have not been examined by the Internal Revenue Service and, therefore, the taxability of the dividends may be subject to change. In 2006, 2005 and 2004 we issued 1,772,673, 11,289,070 and 374,921 A-1 Common Units of the Operating Trust as partial consideration for real estate, respectively. All units were issued in transactions exempt from registration under Section 4(2) of the Securities Act of 1933 and the rules thereunder. The following table summarizes repurchases of our Common Shares (amounts in thousands): Average Price Paid per Share (1) Total Number of Shares Purchased as Part of Publicly Announced Plan Maximum Approximate Dollar Value That May Yet Be Purchased Under the Plan 2006 2005 Period Number of Shares Purchased 1/1/05 — 2/28/05...... — $ — — $ 3/1/05 — 3/31/05...... 1,210 34.27 1,210 4/1/05 — 4/30/05...... 437 34.40 437 5/1/05 — 12/31/05.... — — — Total......................... 1,647 $ 34.31 1,647 1/1/06 — 12/31/06 — $ — — $ Total......................... — — — ____________ (1) Price includes amounts paid for commissions. (2) On April 22, 2005, the Board increased the total authorized for share repurchases to $255 million. 188,633 147,083 132,137 (2) 132,137 132,137 27 Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on Common Shares against the cumulative total return of the Standard & Poor’s Composite-500 Stock Index, the NAREIT Equity REIT Index and the NAREIT Apartment REIT Index for the five-year period commencing December 31, 2001 and ended December 31, 2006.(1) The Common Share price performance shown on the graph is not necessarily indicative of future price performance. 12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 Archstone-Smith.................................... 100 96 122 182 208 299 S & P 500 100 78 100 111 117 135 NAREIT Equity REIT Index.................. 100 104 142 187 210 284 NAREIT Apartment REIT Index............ 100 94 118 159 182 254 ____________ (1) Assumes that the value of the investment in Common Shares and each index was $100.00 on December 31, 2001 and that all dividends were reinvested. Item 6. Selected Financial Data The following table provides selected financial data relating to our historical financial condition and results of operations as of and for each of the years ending December 31, 2002 to 2006. This data is qualified in its entirety by, and should be read in conjunction with, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes that have been included or incorporated by reference in this Annual Report. Prior year’s amounts have been restated for amounts classified within discontinued operations. (in thousands, except per share data): 2006 Years ended December 31, 2005 2004 2003 2002 Operations Summary(1): Total revenues(2) ................................................................ Property operating expenses (rental expenses and real estate taxes) ..................................................................... Net Operating Income(3) ..................................................... Depreciation on real estate investments .............................. Interest expense ................................................................. General and administrative expense ................................... Earnings from operations ................................................... Gains on dispositions of depreciated real estate, net(4) ......... Income from unconsolidated entities .................................. Net earnings from discontinued operations(5) Preferred Share dividends .................................................. $1,133,586 $ 833,633 $ 661,478 $ 594,374 $ 567,842 343,342 712,834 261,438 245,895 68,188 201,008 — 36,316 252,382 525,221 187,771 164,035 58,604 121,609 — 22,432 210,747 431,523 150,470 125,108 55,479 106,111 — 17,902 410,632 10,892 180,658 394,382 119,776 107,791 49,838 100,658 — 5,745 341,913 20,997 181,794 376,586 109,074 107,978 45,710 106,188 35,950 53,602 145,691 32,185 518,313 464,488 3,829 3,831 28 2006 Years ended December 31, 2005 2004 2003 2002 Net earnings attributable to Common Shares(3): — Basic......................................................................... 723,605 612,341 531,450 412,660 282,630 — Diluted...................................................................... 735,452 612,693 535,714 426,192 282,830 Common Share dividends .................................................. 377,513 353,623 539,116 245,460 306,189 Per Share Data: Net earnings attributable to Common Shares: — Basic......................................................................... $ 3.35 $ 3.01 $ 2.71 $ 2.20 $ 1.59 — Diluted...................................................................... 3.33 3.00 2.69 2.18 1.58 Common Share cash dividends paid(6) ................................ 1.74 1.73 2.72 1.71 1.70 Cash dividends paid per share: ........................................... Series A Preferred Share(7) ............................................. — — — 2.11 2.29 Series C Preferred Share(8).............................................. — — — — 1.38 Series D Preferred Share(9) ............................................. — — 1.31 2.19 2.19 Series H, J, K and L Preferred Shares(10) ......................... — — — 3.38 3.36 Series I Preferred Share(10)(11).......................................... 7,660.00 7,660.00 7,660.00 7,660.00 7,660.00 Weighted average Common Shares outstanding: — Basic......................................................................... 216,159 203,526 196,098 187,170 177,757 — Diluted...................................................................... 221,153 204,492 199,233 195,640 178,780 ____________ (1) Net earnings from discontinued operations have been reclassified to reflect communities classified as discontinued operations as of December 31, 2006 for all years presented. (2) Annual revenues and other income, inclusive of discontinued operations, for 2006, 2005, 2004, 2003 and 2002 were $1.3 billion, $1.1 billion, $1.0 billion, $1.0 billion and $1.0 billion, respectively. (3) Defined as rental revenues less rental expenses and real estate taxes. We believe that net earnings attributable to Common Shares and NOI are the most relevant measures of our operating performance and allow investors to evaluate our business against our industry peers and against all publicly traded companies as a whole. We rely on NOI for purposes of making decisions about resource allocations and assessing segment performance. We also believe NOI is a valuable means of comparing period-to-period property performance. See Item 7 of this Annual Report under Results of Operations for a reconciliation of NOI to Earnings from Operations, and to obtain the required information to recalculate NOI from continuing operations. (4) Gains on the disposition of real estate investments classified as held for sale after January 1, 2002 are included in discontinued operations. (5) Represents property-specific components of net earnings and gains/losses on the disposition of real estate classified as held for sale subsequent to January 1, 2002. (6) Includes a $1.00 per share special dividend issued to our Common Shareholders and Unitholders in December 2004. (7) The Series A Preferred Shares were called for redemption during October 2003; of the 2.9 million Preferred Shares outstanding, 2.8 million were converted to Common Shares and the remaining were redeemed. (8) All of the outstanding Series C Preferred Shares were redeemed at liquidation value plus accrued dividends in August 2002. (9) All of the outstanding Series D Preferred Shares were redeemed at liquidation value plus accrued dividends in August 2004. (10) The Series L Preferred Shares were converted into Common Shares during December 2004 and the dividend paid during 2004 prior to conversion was $3.40 per share. In September 2004, the Series K Preferred Shares were converted into Common Shares and the dividend paid during 2004 prior to conversion was $2.55 per share. The Series H Preferred Shares were converted into Common Shares during May 2003 and the dividend paid during 2003 prior to conversion was $1.27 per share. In July 2002, Series J Preferred Shares were converted into Common Shares. During the fourth quarter 2001, we paid approximately $5.8 million of dividends on the Series H, I, J, K and L Preferred Shares that were declared by Smith Residential prior to the Smith Merger. (11) Series I Preferred Shares have a par value of $100,000 per share. 29 2006 2005 Years Ended December 31, 2004 2003 2002 Financial Position: Real estate owned, at cost ........................... Real estate held for sale(1) Investments in and advances to unconsolidated entities.............................. Total assets................................................. Unsecured credit facilities........................... Long-Term Unsecured Debt........................ Mortgages Payable...................................... Total liabilities............................................ Perpetual Preferred Shares .......................... Total shareholders’ equity........................... Number of Common Shares outstanding ..... $12,858,507 $11,031,917 $ 8,972,860 $ 8,891,418 $ 9,229,398 329,133 235,323 13,259,127 84,723 3,355,699 2,776,234 6,956,789 50,000 5,563,189 220,147 2006 327,347 132,728 11,462,095 394,578 2,540,036 2,393,652 5,693,305 50,000 4,981,517 212,414 2005 249,178 111,481 9,061,280 19,000 2,094,358 2,031,505 4,469,994 50,000 4,093,178 199,577 107,762 86,367 8,916,591 103,790 1,866,861 1,960,827 4,179,488 148,940 4,144,687 194,762 68,337 116,594 9,091,647 365,578 1,771,724 2,330,533 4,699,920 294,041 3,843,818 180,706 2002 Years Ended December 31, 2004 2003 Other Data: Net cash flows provided by (used in): Operating activities .................................... $ 537,428 $ 414,019 $ 399,897 $ 343,696 $ 385,107 Investing activities ..................................... (506,264) (964,621) 528,253 428,166 (137,401) Financing activities .................................... 3,853 360,985 (730,125) (779,478) (241,887) ____________ (1) Previous years have been restated to include assets that were classified as held for sale as of December 31, 2006. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Executive Summary During the three years covered by this Annual Report, we have continued to focus on two of our most important goals: (i) managing our invested capital through the selective sale of apartment communities in non-core locations and redeploying the proceeds to fund investments with higher anticipated growth prospects in outstanding locations in our core markets; and (ii) building the dominant operating platform in the apartment industry. As it relates to the goal of managing our invested capital, in 2006 we completed a twelve year effort to reposition virtually all our portfolio from less desirable commodity markets into some of the very best apartment markets in the country. The following graphs help illustrate the dramatic shift which has occurred over that period. 30 United States Geographic Distribution — 1995 vs. 2006(1) ____________ (1) Allocation is based on the relative NOI in core versus non-core markets for the three months ended December 31, 1994 for the 1995 geographic distribution and the three months ended December 31, 2006 for the 2006 geographic distribution. Core markets are defined as the Washington D.C. metropolitan area; Southern California; the New York City metropolitan area; the San Francisco Bay Area in California; Boston, Massachusetts; Seattle, Washington; Southeast Florida and Chicago, Illinois. Non-core is defined as all other markets in the United States. Although the full measure of success related to this strategy will be more fully reflected in future results, the increase in our diluted earnings per share, which includes gains from dispositions, have been encouraging. Diluted Earnings Per Share Other major factors that influenced our operating results over the last three years include the following: • Our Same-Store NOI has increased 11.0% in 2006 as compared to 2004. We believe the improvement in our Same-Store performance has resulted from a number of factors including strengthening market fundamentals as well as benefits from the significant investments we have made in people and operating systems. The significant disposition volume resulting from the portfolio repositioning strategy mentioned above, resulted in REIT GAAP gains, net of disposition costs, of $546.3 million, $446.7 million and $372.2 million in 2006, 2005 and 2004, respectively. These gains have been a major driver of our earnings per share growth. • 31 • Utilizing the REIT’s development, acquisition and operating expertise, Ameriton has identified undermanaged operating communities, as well as development and redevelopment opportunities with a short-term ownership horizon of one to two years that have produced GAAP gains, net of dispositions costs, of $51.2 million, $75.2 million and $65.1 million in 2006, 2005 and 2004, respectively. The timing and amount of Ameriton’s contributions to our earnings will fluctuate from year to year and depend primarily on its ability to identify profitable investment opportunities, timing of completion of investments in its development pipeline and real estate market values. During 2006, we recognized a net loss of $13.1 million ($6.4 million excluding depreciation) as a result of building our International platform and our expansion efforts in Germany. We recognized $77.4 million, $56.0 million and $19.2 million in other income during 2006, 2005 and 2004, respectively, related primarily to non-recurring insurance-related reimbursement, gains from land sales (including Ameriton land sales) and interest income. We recognized $275.8 million, $217.6 million and $208.8 million in interest expense, including discontinued operations, during 2006, 2005 and 2004, respectively. The year over year increases were due primarily to financing related to the growth in our real estate portfolio and higher average interest rates. We recognized $37.5 million, $72.2 million and $29.3 million in other expense, including discontinued operations, during 2006, 2005 and 2004, respectively, related primarily to Ameriton income taxes, debt extinguishment costs and loss contingencies. Most of the costs in other expense are event-driven and will not necessarily reoccur each year. We recognized $2.3 million and $28.8 million in other non-operating income during 2006 and 2005, respectively, related primarily to gains from the sale of our Rent.com investment. • • • • • 32 Reconciliation of Quantitative Summary to Consolidated Statements of Earnings The following schedule is provided to reconcile our consolidated statements of earnings to the information presented in the “Quantitative Summary” provided in the next section: 2006 Discontinued Operations $ 139,457 — (61,022) (26,858) (29,931) — (23,805) (77,100) — — 597,572 $ 518,313 $ 2005 Discontinued Operations $ 239,806 — (105,587) (51,017) (53,533) — (22,947) (64,168) — — 521,934 $ 464,488 $ 2004 Discontinued Operations $ 325,784 — (143,341) (69,519) (83,644) — (15,739) (49,356) — — 446,447 $ 410,632 $ Continuing Operations Rental revenue .................................. $ 1,056,176 Other income .................................... Property operating expenses (rental expenses and real estate taxes) ............................................... Depreciation on real estate investments ..................................... Interest expense ................................ General and administrative expenses .......................................... Other expense ................................... Minority interest ............................... Income from unconsolidated entities ............................................. Other non-operating income............ Gains, net of disposition costs ......... Net earnings ...................................... $ 77,410 (343,342) (261,438) (245,895) (68,188) (13,715) (30,541) 36,316 2,338 — 209,121 $ Total 1,195,633 77,410 (404,364) (288,296) (275,826) (68,188) (37,520) (107,641) 36,316 2,338 597,572 727,434 Continuing Operations $ 777,603 56,030 (252,382) (187,771) (164,035) (58,604) (49,232) (21,164) 22,432 28,807 — $ 151,684 $ Total 1,017,409 56,030 (357,969) (238,788) (217,568) (58,604) (72,179) (85,332) 22,432 28,807 521,934 616,172 Continuing Operations $ 642,270 19,208 (210,747) (150,470) (125,108) (55,479) (13,563) (20,465) 17,902 28,162 — $ 131,710 $ Total 968,054 19,208 (354,088) (219,989) (208,752) (55,479) (29,302) (69,821) 17,902 28,162 446,447 542,342 Quantitative Summary This summary is provided for reference purposes and is intended to support and be read in conjunction with the narrative discussion of our results of operations. This quantitative summary includes all operating activities, including those classified as discontinued operations for GAAP reporting purposes. This information is presented to correspond with the manner in which we analyze the business. We generally reinvest disposition proceeds into new developments and operating communities and therefore believe it is most useful to analyze continuing and discontinued operations on a combined basis. The impact of communities classified as “discontinued operations” for GAAP reporting purposes is discussed separately in a later section under the caption “Discontinued Operations Analysis.” 2006 vs. 2005 Increase / (Decrease) 2005 vs. 2004 Increase / (Decrease) 2006 2005 2004 Rental revenues: Same-Store (1) ............................................. $ 637,079 $ 600,358 $ 579,358 $ 36,721 Non Same-Store.......................................... 491,668 375,712 348,668 115,956 Ameriton..................................................... 20,869 33,986 36,752 (13,117) International................................................ 34,920 — — 34,920 Non-multifamily ......................................... 11,097 7,353 3,276 3,744 Total revenues............................................. 1,195,633 1,017,409 968,054 178,224 Property operating expenses (rental expenses and real estate taxes): Same-Store (1) ............................................. Non Same-Store.......................................... Ameriton..................................................... International................................................ Non-multifamily ......................................... Total operating expenses ............................. Net Operating Income (rental revenues less property operating expenses)......................... $ 21,000 27,044 (2,766) — 4,077 49,355 201,158 173,108 10,619 16,225 3,254 404,364 791,269 193,906 145,033 17,038 — 1,992 357,969 659,440 186,512 148,224 18,884 — 468 354,088 613,966 7,252 28,075 (6,419) 16,225 1,262 46,395 131,829 7,394 (3,191) (1,846) — 1,524 3,881 45,474 33 2006 2005 2004 2006 vs. 2005 Increase / (Decrease) 2005 vs. 2004 Increase / (Decrease) Margin (NOI/rental revenues): Average occupancy during period: (2) Other income.................................................. Depreciation of real estate investments............ Interest expense .............................................. Capitalized interest ......................................... Net interest expense .................................... General and administrative expenses ............... Other expense................................................. Earnings from continuing and discontinued operations..................................................... Minority interest ............................................. Equity in earnings from unconsolidated entities.......................................................... Other non-operating income Gains on disposition of real estate investments, net of disposition costs: Taxable subsidiaries .................................... REIT .......................................................... 66.2% 93.9% 77,410 288,296 327,634 51,808 275,826 68,188 37,520 198,849 107,641 36,316 2,338 51,245 546,327 64.8% 94.6% 56,030 238,788 256,679 39,111 217,568 58,604 72,179 128,331 85,332 22,432 28,807 75,248 446,686 63.4% 94.8% 19,208 219,989 232,324 23,572 208,752 55,479 29,302 119,652 69,821 17,902 28,162 74,230 372,217 1.4% (0.7%) 21,380 49,508 70,955 12,697 58,258 9,584 (34,659) 70,518 22,309 13,884 (26,469) (24,003) 99,641 1.4% (0.2%) 36,822 18,799 24,355 15,539 8,816 3,125 42,877 8,679 15,511 4,530 645 1,018 74,469 Net earnings ................................................... $ 727,434 $ 616,172 $542,342 $ 111,262 $73,830 ____________ (1) Reflects revenues and operating expenses for Same-Store communities that were owned on December 31, 2006 and fully operating during all three years in the comparison period. (2) Does not include occupancy associated with properties owned by Ameriton, operated under the Oakwood Master Leases or International. 34 Property-level operating results — 2006 compared to 2005 We utilize NOI as the primary measure to evaluate the performance of our operating communities and for purposes of making decisions about resource allocations and assessing segment performance. We also believe NOI is a valuable means of comparing period-to-period property performance. In analyzing the performance of our operating portfolio, we evaluate Same-Store communities separately from Non Same-Store communities and other properties. Same-Store Analysis The following table reflects revenue, expense and NOI growth for Same-Store communities that were owned on December 31, 2006 and fully operating during both years. Same-Store Revenue Growth Same-Store Expense Growth Same-Store NOI Growth Garden ..................................................................................................... High-Rise ................................................................................................. Total......................................................................................................... 6.6% 6.5% 6.5% 6.2% 1.9% 4.4% 6.7% 8.8% 7.5% Same-Store revenues were up in all core markets for both the garden and the High-Rise portfolios, resulting primarily from higher rental income per unit. During 2006, we experienced substantial upward pressure on new move-in rental rates as a result of a number of factors, including: (i) employment growth; (ii) lack of new apartment supply due to limited land to build competing assets; (iii) significant increases in the values of single family homes in our protected markets; and (iv) higher interest rates, all of which have translated into significant increases in our revenue growth. In addition to strong rent increases and actively managing our lease expirations we are also continuing to make enhancements to many components of the operating platform, such as LRO, MRI, Online Lease, resident portal and internet marketing. We believe that all of these improvements have resulted in meaningful efficiencies for us. The primary drivers of our year-over-year operating expenses were higher insurance costs, real estate taxes and personnel costs. During 2006, we began passing more utility costs through to residents in our HighRise communities which helped lower our operating expenses. These revenue and expense increases resulted in overall portfolio Same-Store NOI growth of 7.5%, which was driven principally by strong NOI growth in the Washington D.C. metropolitan area, Southern California and the New York City metropolitan area — which represent more than 72% of the company’s portfolio — with year-to-date Same-Store NOI increases of 7.4%, 8.5% and 12.6%, respectively. Non Same-Store and Other Analysis The $87.9 million NOI increase in the non Same-Store portfolio is primarily attributable to (i) $86.6 million related to acquisitions; (ii) $15.6 million related to newly developed apartment communities, including Lease-Ups; (iii) $33.3 million related to the Oakwood Master Leases; and offset by (iv) $52.9 million related to community dispositions. Ameriton The $6.7 million NOI decrease from Ameriton apartment communities is primarily attributable to a $10.3 million decline related to community dispositions, including the sale of new developments, partially offset by $3.5 million increase from community acquisitions. International The increase in NOI of $18.7 million is primarily attributable to the DeWAG acquisition that occurred in July 2006. As of December 31, 2006, the International portfolio consisted of 8,334 residential units. 35 Non Multi-family The $2.5 million NOI increase is primarily attributable to commercial/retail income associated with an asset purchased by Ameriton in July, 2005. Property-level operating results — 2005 compared to 2004 Same-Store Analysis The following table reflects revenue, expense and NOI growth for Same-Store communities that were owned on December 31, 2005 and fully operating during both years. Same-Store Revenue Growth Same-Store Expense Growth Same-Store NOI Growth Garden ..................................................................................................... High-Rise ................................................................................................. Total......................................................................................................... 3.6% 3.9% 3.7% 3.5% 4.8% 4.1% 3.6% 3.4% 3.6% Same-Store revenues were up in all core markets for both the garden and the High-Rise portfolios, resulting primarily from higher rental income per unit and a slight improvement in the percentage of units occupied. We experienced revenue growth throughout 2005 as our markets strengthened and pricing power returned as new movein rents, a leading indicator, continued to rise. In addition to improving operating fundamentals across our markets, we believe LRO has also enabled us to better manage lease expirations and produce higher revenues in the slow seasonal months. The Washington D.C. metropolitan area and Southern California, our two largest markets, reported revenue growth of 3.9% and 4.3%, respectively. The drivers of our year-over-year operating expenses were higher real estate taxes and personnel costs, as well as extraordinary snow removal and utility expenses in the first quarter of 2005. These increases were realized to a greater degree in High-Rise. These revenue and expense increases resulted in overall portfolio Same-Store NOI growth of 3.6%, which was the major driver of the 1.4% margin increase recorded for the overall portfolio. Non Same-Store and Other Analysis The $30.2 million NOI increase in the non Same-Store portfolio is primarily attributable to (i) $51.5 million related to acquisitions; (ii) $16.0 million related to newly developed apartment communities, including lease-ups; (iii) $20.0 million related to the Oakwood Master Leases; and offset by (iv) $61.2 million related to community dispositions. Ameriton The $0.9 million NOI decrease from Ameriton apartment communities is primarily attributable to a $6.7 million decline related to community dispositions, including the sale of new developments, partially offset by $5.9 million increase from community acquisitions. Non Multi-family The $2.6 million NOI increase is primarily attributable to commercial/retail income associated with an asset purchased by Ameriton in 2005. Other Income The increase in other income during 2006 as compared to 2005 resulted primarily from (i) a $19.0 million increase in interest income on mortgage loans to third parties and other interest bearing instruments; (ii) a $19.6 million increase in gains on land sales, primarily in Ameriton. These increases were offset by a $21.9 million decrease in 2006 related to insurance recoveries. 36 The increase in other income during 2005 as compared to 2004 resulted primarily from (i) a $25.7 million increase from insurance recoveries related to moisture infiltration and mold litigation settlement costs associated with a previously owned community in Southeast Florida; (ii) a $9.3 million increase in interest income on mortgage loans to third parties and other interest bearing instruments; (iii) a $4.7 million increase in hurricane-related insurance reimbursements; and (iv) a $2.8 million insurance reimbursement for costs incurred in connection with our FHA and ADA settlement. These increases and other smaller insurance-related reimbursements recorded in 2005 were partially offset by a $4.7 million benefit related to the sale of CES and higher land gains in 2004. Depreciation Expense The depreciation increases in each year are primarily related to the increase in the size of the real estate portfolio. A few of the major drivers are (i) amortization of the value associated with in-place leases over the lease term on new acquisitions; (ii) disposition of assets with a lower depreciable basis at significant gains, and reinvestment of the proceeds into assets with a higher depreciable basis; partially offset by (iii) cessation of depreciation on assets sold or classified as held for sale. Interest Expense The increase in gross interest expense during 2006 as compared to 2005 is due to higher average debt levels associated with the increased size of the real estate portfolio combined with higher average interest rates on our unsecured credit facilities and other debt instruments. The International transactions were the most significant drivers of the portfolio increase in 2006. Capitalized interest also increased significantly as a result of the increase in the size and number of communities under construction and, to a lesser extent, higher average interest rates in 2006. The increase in gross interest expense during 2005 as compared to 2004 is due to higher average debt levels associated with the increased size of the real estate portfolio combined with higher average interest rates on our unsecured credit facilities and other debt instruments. The Oakwood transaction was the most significant driver of the portfolio increase in 2005. Capitalized interest also increased significantly as a result of the increase in the size and number of communities under construction and, to a lesser extent, higher average interest rates in 2005. General and Administrative Expenses The increase in the general and administrative expenses during 2006 as compared to 2005 is principally due to higher personnel-related costs related to our recent International expansion. The increase in general and administrative expenses during 2005 as compared to 2004 is due to higher employee compensation-related costs, increased recruiting and relocation expenses and higher travel costs. These costs were partially offset by a smaller charge in 2005 as compared to 2004 pertaining to executive Common Share grants related to the achievement of total shareholder return performance targets. Other Expenses The decrease in other expenses during 2006 as compared to 2005 is primarily attributable to (i) $14.3 million decrease in early debt extinguishment costs; (ii) an $8.5 million decrease in legal expenses; (iii) a $1.5 million decrease in taxes in our taxable REIT subsidiaries; (iv) a $7.8 million decrease in hurricane related charges; (v) a $2.8 million writeoff of a loan to a prior affiliate in 2005; and (vi) a $1.5 million impairment related to a non-core asset in 2005 offset by a $4.3 million impairment charge on that asset in 2006. The increase in other expenses during 2005 as compared to 2004 is primarily attributable to (i) $21.1 million increase in early debt extinguishment costs; (ii) $11.9 million in legal expenses and litigation settlement costs related to the settlement of the FHA and ADA lawsuit and other legal matters; (iii) a $4.3 million increase in hurricane related charges; (iv) a $2.8 million writeoff of a loan to a prior affiliate; and (v) a $1.5 million impairment related to a non-core asset. 37 Minority Interest Minority interest increased in each successive period as a result of higher earnings and changes in the relative number of Common Units in each period, which averaged 12.9%, 12.1% and 10.9% of net earnings for 2006, 2005 and 2004, respectively. Equity in Income from Unconsolidated Entities The increase in income from unconsolidated entities during 2006 as compared to 2005 is due primarily to more income from community dispositions and related venture liquidations. The increase in income from unconsolidated entities during 2005 as compared to 2004 is due primarily to an increase in disposition-related gains, including $6.6 million from Ameriton joint ventures and recognition of a $1.7 million incentive payment earned in connection with the final liquidation of a joint venture partnership in 2005. These increases were partially offset by recognition of $3.2 million of contingent proceeds from the expiration during the second quarter of 2004 of certain indemnifications related to the sale of CES. Other Non-Operating Income Other non-operating income during 2006 consists primarily of a $1.7 million of gain from the sale of our Rent.com investment which was recorded upon the resolution of certain contingencies.. Other non-operating income during 2005 consists primarily of $25.9 million of gains from the sale of our Rent.com investment and $2.1 million from the sale of other equity securities while 2004 other non-operating income consists of $24.9 million in gains on the sale of equity securities and a $3.3 million gain from the sale of our property management business. Gains on real estate dispositions See “Discontinued Operations Analysis” below for discussion of gains. Discontinued Operations Analysis Included in the overall results discussed above are the following amounts associated with properties which have been sold or were classified as held for sale as of December 31, 2006 (dollars in thousands). Years Ended December 31, 2006 2005 2004 Rental revenue................................................................................................. Rental expenses ............................................................................................... Real estate taxes .............................................................................................. Depreciation on real estate investments ............................................................ Interest expense (1) ........................................................................................... Income taxes from taxable REIT subsidiaries ................................................... Provision for possible loss on real estate investment ......................................... Debt extinguishment costs related to dispositions ............................................. Allocation of minority interest ......................................................................... Gains on disposition of real estate investments, net of disposition costs: Taxable subsidiaries ..................................................................................... REIT ........................................................................................................... Total discontinued operations........................................................................... Number of communities sold during period...................................................... Number of communities classified as held for sale............................................ $ 139,457 $ 239,806 $ 325,784 (44,043) (74,715) (104,023) (16,979) (30,872) (39,318) (26,858) (51,017) (69,519) (29,931) (53,533) (83,644) (9,972) (15,600) (13,975) (4,328) (9,505) (77,100) (1,500) (5,847) (64,168) — (1,764) (49,356) 51,245 75,248 62,629 546,327 446,686 383,818 $ 518,313 $ 464,488 $ 410,632 42 9 35 9 30 6 ____________ (1) The portion of interest expense included in discontinued operations that is allocated to properties based on the company’s leverage ratio was $20.9 million, $40.3 million and $62.2 million for 2006, 2005 and 2004, respectively. 38 As a result of the execution of our strategy of managing our invested capital through the selective sale of apartment communities in non-core locations and redeploying the proceeds to fund investments with higher anticipated growth prospects in our core markets, we had significant disposition activity in all three years. The resulting gains, net of disposition costs, were the biggest driver of overall earnings from discontinued operations. The REIT gains progressively increased in each successive year as communities with higher values were sold and the market for apartment communities improved. Our taxable REIT subsidiary gains are from Ameriton community dispositions, which contributed significantly to our earnings in each year. The year-to-year changes in revenues and operating expenses associated with discontinued operations is primarily attributable to the market and number of communities sold during the period or held for sale at the end of the period. Changes in direct operating expenses and allocated interest expense generally relate to the overall revenue levels for each period. Income taxes fluctuate in relation to the taxable gains associated with communities sold by our taxable REIT subsidiaries, which increased in each successive year. The portion of earnings from discontinued operations allocated to minority interest increased each year due primarily to the higher income resulting from higher gains. Preferred Share Dividend Analysis Preferred Share distributions were consistent between 2006 and 2005 and decreased by $7.1 million in 2005 as compared to 2004 This decrease was primarily due to the redemption of our Series D Preferred Shares in August 2004, the conversion of Series K Preferred Shares into Common Shares in September 2004 and the early conversion of Series L Preferred Shares into Common Shares in December 2004. These savings were partially offset by the recognition of $1.7 million of issuance costs related to the Series D Preferred Shares in 2004. The decrease in Preferred Share distributions due to conversions was offset by an increase in Common Share dividends. Liquidity and Capital Resources We are committed to maintaining a strong balance sheet and preserving our financial flexibility, which we believe enhances our ability to capitalize on attractive investment opportunities as they become available. As a result of the significant cash flow generated by our operations, current cash positions, the available capacity under our unsecured credit facilities, gains from the disposition of real estate and our demonstrated ability to access the capital markets, we believe our liquidity and financial condition are sufficient to meet all of our reasonably anticipated cash flow needs during 2007. Please refer to the Consolidated Statements of Cash Flows for detailed information of our sources and uses of cash for the years ended December 31, 2006, 2005 and 2004. Scheduled Debt Maturities and Interest Payment Requirements We have structured our long-term debt maturities in a manner designed to avoid unmanageable repayment obligations in any year, which would negatively impact our financial flexibility. We have scheduled debt maturities of $491.1 million during 2007, $546.8 million in 2008 and $481.5 million in 2009. See Note 8 in our audited financial statements in this Annual Report for additional information on outstanding debt balances and scheduled debt maturities. On February 20, 2007, we had $69.9 million borrowed on our unsecured credit facilities, $8.9 million outstanding under letters of credit and available borrowing capacity on our unsecured credit facilities of $625.4 million. Our unsecured credit facilities, Long-Term Unsecured Debt and mortgages payable had effective weighted average interest rates of 5.9%, 5.6% and 5.4%, respectively, as of December 31, 2006. All of these rates give effect to debt issuance costs, fair value hedges, the amortization of fair market value purchase adjustments and other fees and expenses, as applicable. 39 Our debt instruments generally contain covenants common to the type of facility or borrowing, including financial covenants establishing minimum debt service coverage ratios and maximum leverage ratios. We were in compliance with all financial covenants pertaining to our debt instruments as of and for the year ended December 31, 2006. Shareholder Dividend/Distribution Requirements Based on anticipated distribution levels for 2007 and the number of shares and units outstanding as of December 31, 2006, we anticipate that we will pay the following dividends/distributions in 2007 (in thousands, except per share amounts): Common Share and Common Unit distributions(1)(2): Common Shares .................................................................................................................. A-1 Common Unit distributions ........................................................................................... M Preferred Unit.................................................................................................................. N-1 Preferred Units.............................................................................................................. N-2 Preferred Units.............................................................................................................. Series I Preferred Share dividends(3) ..................................................................................... Total dividend/distribution requirements........................................................................... ____________ Per Share Total $ 1.81 $398,466 1.81 53,421 476.03 — 20.96 6 8.98 6 7,660.00 3,830 $455,729 (1) Future distributions on Common Shares and Common Units are contingent upon approval by our Board of Trustees. (2) See Note 11 in our audited financial statements in this Annual Report for more information on minority interests. (3) Series I Preferred Shares have a par value of $100,000 per share. Planned Investments Following is a summary of planned investments as of December 31, 2006, including Ameriton but excluding joint ventures. The amounts labeled “Discretionary” represent future investments that we plan to make, although there is not a contractual commitment to do so. The amounts labeled “Committed” represent the approximate amount that we are contractually committed to fund for communities under construction in accordance with construction contracts with general contractors (dollar amounts in thousands). Planned Investments Discretionary Committed Communities under redevelopment ................................................................................... $ 1,812 Communities under construction ....................................................................................... — Communities In Planning and Owned ............................................................................... 1,196,121 Communities In Planning and Under Control .................................................................... 406,336 Community acquisitions under contract............................................................................. 146,766 FHA/ADA Settlement Capital Accrual.............................................................................. — Total............................................................................................................................. $ 1,751,035 3,082 619,441 — — — 29,185 $651,708 $ In addition to the planned investments noted above, we expect to make additional investments relating to planned expenditures on recently acquired communities as well as recurring expenditures to improve and maintain our established operating communities. We anticipate completion of most of the communities that are currently under construction and the planned operating community improvements by the end of 2009. No assurances can be given that communities we do not currently own will be acquired or that planned developments will actually occur. In addition, actual costs incurred could be greater or less than our current estimates. 40 Funding Sources We anticipate financing our planned investment and operating needs primarily with cash flow from operating activities, disposition proceeds from our capital recycling, existing cash balances and borrowings under our unsecured credit facilities, prior to arranging additional long-term financing. We had $625.4 million in available capacity on our unsecured credit facilities, $465.3 million of cash in tax-deferred exchange escrow and $3.0 million of cash on hand at February 20, 2007. In addition, we expect the proceeds from REIT dispositions to approximate our investment in new REIT operating community acquisitions in 2007. We therefore do not believe that discontinued operations will have a significant adverse impact on our liquidity in the foreseeable future. We have filed registration statements to facilitate issuance of debt and equity securities on an as-needed basis subject to our ability to effect offerings on satisfactory terms based on prevailing conditions. Litigation and Contingencies During the second quarter of 2005, we entered into a full and final settlement in the United States District Court for the District of Maryland with three national disability organizations and agreed to make capital improvements in a number of our communities in order to make them fully compliant with the FHA and ADA. The litigation, settled by this agreement, alleged lack of full compliance with certain design and construction requirements under the two federal statutes at 71 of the company’s wholly owned and joint venture communities, of which we still own or have an interest in 45. As part of the settlement, the three disability organizations all recognized that 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 communities named in the settlement was estimated at $47.2 million and was accrued as an addition to real estate during the fourth quarter of 2005. The settlement agreement approved by the court allows us to remediate each of the designated communities over a three year period, and also provides that we are not restricted from selling any of our communities during the remediation period. We agreed to pay damages totaling $1.4 million, which included legal fees and costs incurred by the plaintiffs. We had $29.2 million of the original accrual remaining on December 31, 2006. We are subject to various claims filed in 2002 and 2003 in connection with moisture infiltration and resulting mold issues at certain high-rise properties we once owned in Southeast Florida. These claims generally allege that water infiltration and resulting mold contamination resulted in the claimants having personal injuries and/or property damage. Although certain of these claims continue to be in various stages of litigation, with respect to the majority of these claims, we have either settled the claims and/or we have been dismissed from the lawsuits that had been filed. With respect to the lawsuits that have not been resolved, we continue to defend these claims in the normal course of litigation. We are a party to various other claims and routine litigation arising in the ordinary course of business. We do not believe that the results of any such claims or litigation, individually or in the aggregate, will have a material adverse effect on our business, financial position or results of operations. Critical Accounting Policies We define critical accounting policies as those accounting policies that require our management to exercise their most difficult, subjective and complex judgments. Our management has discussed the development and selection of all of these critical accounting policies with our audit committee, and the audit committee has reviewed the disclosure relating to these policies. Our critical accounting policies relate principally to the following key areas: Internal Cost Capitalization We have an investment organization that is responsible for development and redevelopment of apartment communities. Consistent with GAAP, all direct and certain indirect costs, including interest and real estate taxes, incurred during development and redevelopment activities are capitalized. Interest is capitalized on real estate assets that require a period of time to get them ready for their intended use. The amount of interest capitalized is based upon the average amount of accumulated development expenditures during the reporting period. Included in capitalized costs are management’s estimates of the direct and incremental personnel costs and indirect project costs 41 associated with our development and redevelopment activities. Indirect project costs consist primarily of personnel costs associated with construction administration and development accounting, legal fees, and various office costs that clearly relate to projects under development. Because the estimation of capitalizable internal costs requires management’s judgment, we believe internal cost capitalization is a “critical accounting estimate.” If future accounting rules limit our ability to capitalize internal costs or if our development activity decreased significantly without a proportionate decrease in internal costs, there could be an increase in our operating expenses. For example, if hypothetically, we were to reduce our development and land acquisition activity by 25% with no corresponding decrease in internal costs, our diluted net earnings per Common Share could decrease by approximately 0.6% or approximately $0.019 based on 2006 amounts. Valuation of Real Estate Long-lived assets to be held and used are carried at cost and evaluated for impairment when events or changes in circumstances indicate such an evaluation is warranted. We also evaluate assets for potential impairment when we deem them to be held for sale. Valuation of real estate is considered a “critical accounting estimate” because the evaluation of impairment and the determination of fair values involve a number of management assumptions relating to future economic events that could materially affect the determination of the ultimate value, and therefore, the carrying amounts of our real estate. Furthermore, decisions regarding when a property should be classified as held for sale under SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” requires significant management judgment. There are many phases to the disposition process ranging from the initial market research to being under contract with non-refundable earnest money to closing. Deciding when management is committed to selling an asset is therefore highly subjective. When determining if there is an indication of impairment, we estimate the asset’s NOI over the anticipated holding period on an undiscounted cash flow basis and compare this amount to its carrying value. Estimating the expected NOI and holding period requires significant management judgment. If it is determined that there is an indication of impairment for assets to be held and used, or if an asset is deemed to be held for sale, we then determine the fair value of the asset. The apartment industry uses capitalization rates as the primary measure of fair value. Specifically, annual NOI for a community is divided by an estimated capitalization rate to determine the fair value of the community. Determining the appropriate capitalization rate requires significant judgment and is typically based on many factors including the prevailing rate for the market or submarket, as well as the quality and location of the properties. Further, capitalization rates can fluctuate up or down due to a variety of factors in the overall economy or within local markets. If the actual capitalization rate for a community is significantly different from our estimated rate, the impairment evaluation for an individual asset could be materially affected. For example, we would value a community with annual NOI of $10 million at $200 million using a 5.0% capitalization rate, whereas that same community would be valued at $166.7 million if the actual capitalization rate were 6.0%. Historically we have had limited and infrequent impairment charges, and the majority of our apartment community sales have produced gains. For example, we have sold approximately $4.0 billion of real estate assets based on cost over the 3 years covered by this Annual Report, which produced approximately $1.6 billion in gains. Over that same period, we have recorded $5.8 million in valuation-related impairments. Capital Expenditures and Depreciable Lives We incur costs relating to redevelopment initiatives, revenue enhancing and expense reducing capital expenditures, and recurring capital expenditures that are capitalized as part of our real estate. These amounts are capitalized and depreciated over estimated useful lives determined by management. We allocate the cost of newly acquired properties between net tangible and identifiable intangible assets. The primary intangible asset associated with an apartment community acquisition is the value of the existing lease agreements. When allocating cost to an acquired property, we first allocate costs to the estimated intangible value of the existing lease agreements and then to the estimated value of the land, building and fixtures assuming the property is vacant. We estimate the intangible value of the lease agreements by determining the lost revenue associated with a hypothetical lease-up. We depreciate the building and fixtures based on the expected useful life of the asset and amortize the intangible value of the lease agreements over the average remaining life of the existing leases. 42 Determining whether expenditures meet the criteria for capitalization, the assignment of depreciable lives and determining the appropriate amounts to allocate between tangible and intangible assets for property acquisitions requires our management to exercise significant judgment and is therefore considered a “significant accounting estimate.” Total capital expenditures were 0.9% and 1.5% of weighted average gross real estate as of December 31, 2006 and 2005, respectively. Additionally, depreciation expense related to continuing operations as a percentage of depreciable real estate was 3.0%, 3.1% and 3.3% or $1.05, $1.03 and $0.99 per diluted Share for the years ended December 31, 2006, 2005 and 2004, respectively. If the actual weighted average useful life were determined to be one year shorter or longer than management’s current estimate, our annual depreciation expense would increase or decrease approximately 3.0% or $0.03 per Common Share. See Note 1 in our audited financial statements in this Annual Report for additional detail on depreciable lives. Pursuit Costs We incur costs relating to the potential acquisition of existing operating communities or land for development of new operating communities, which we refer to as pursuit costs. To the extent that these costs are identifiable with a specific property and would be capitalized if the property were already acquired, the costs are accumulated by project and capitalized in the Other Asset section of the balance sheet. If these conditions are not met, the costs are expensed as incurred. Capitalized costs include but are not limited to earnest money, option fees, environmental reports, traffic reports, surveys, photos, blueprints, direct and incremental personnel costs and legal costs. Upon acquisition, the costs are included in the basis of the acquired property. When it becomes probable that a prospective acquisition will not be acquired, the accumulated costs for the property are charged to other expense on the statement of earnings in the period such a determination is made. Because of the inherent judgment involved in evaluating whether a prospective property will ultimately be acquired, we believe capitalizable pursuit costs are a “critical accounting estimate.” If it were determined that 25% of accumulated costs relating to prospective acquisitions were deemed improbable as of December 31, 2006, net earnings for the year ended December 31, 2006 would decrease by approximately $0.027 per share, excluding refundable earnest money. Consolidation vs. Equity Method of Accounting for Ventures From time to time, we make co-investments in real estate ventures with third parties and are required to determine whether to consolidate or use the equity method of accounting for the venture. FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities” (as revised) and Emerging Issues Task Force issued EITF No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” are the two primary sources of accounting guidance in this area. Appropriate application of these relatively complex rules requires substantial management judgment, which we believe, makes the choice of the appropriate accounting method for these ventures a “critical accounting estimate.” For example, if we were to consolidate all of our equity-method joint ventures at December 31, 2006, our total assets and total liabilities would increase by approximately $1.5 billion (11.4%) and $1.2 billion (17.1%), respectively. Off Balance Sheet Arrangements Our real estate investments in entities that do not qualify as variable interest entities, variable interest entities where we are not the primary beneficiary and entities we do not control through majority economic interest are not consolidated and are reported as investments in unconsolidated entities. Our investments in and advances to unconsolidated entities at December 31, 2006, aggregated $235.3 million. Please refer to Note 6, Investments in and Advances to Unconsolidated Entities for additional information. 43 As part of the Smith Merger and the Oakwood transaction, we are required to indemnify certain Unitholders for any personal income tax expense resulting from the sale of properties identified in tax protection agreements. We do not believe that we will be required to perform under the terms of the indemnification agreements due to our ability and intent to hold and use these properties through the term of the indemnification period or our ability to dispose of assets through tax-deferred exchanges. The estimated difference in the book and tax carrying value of properties that are at least partially subject to tax protection agreements was approximately $4.3 billion at December 31, 2006. Contractual Commitments The following table summarizes information contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in our audited financial statements in this Annual Report regarding contractual commitments (amounts in millions). 2007 2008 and 2009 2010 and 2011 2012 thru 2096 Total Scheduled long-term debt maturities ............................... $ 491.1 $ 1,028.3 $ 1,248.1 $ 3,364.4 $ 6,131.9 Unsecured credit facilities(1) ............................................ — — 84.7 — 84.7 Term loan — International.............................................. 235.8 — — — 235.8 Interest on indebtedness .................................................. 335.3 590.7 481.7 188.2 1,595.9 Development and redevelopment expenditures ................ 307.9 314.6 — — 622.5 Performance bonds and guarantees.................................. 26.9 11.5 — 1.2 39.6 FHA/ADA Settlement(2) .................................................. 14.6 14.6 — — 29.2 Lease commitments and other(3) ...................................... 86.0 17.7 19.2 217.8 340.7 Total ........................................................................... $ 1,497.6 $ 1,977.4 $ 1,833.7 $ 3,771.6 $ 9,080.3 ____________ (1) The $600 million unsecured facility matures December 2010, with a one-year extension option available at our discretion. (2) Represents the estimated capital spending associated with the FHA and ADA settlement assuming the remainder will be spent evenly over the next two years. Certain communities impacted by the settlement may be sold, which could impact the ultimate timing and amounts spent. (3) Includes letters of credit and lease commitments relating principally to ground lease payments as of December 31, 2006. New Accounting Pronouncements In June 2005, the Emerging Issues Task Force issued EITF No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (EITF No. 04-5). This Issue provides a framework for evaluating whether a general partner or group of general partners or managing members controls a limited partnership or limited liability company and therefore should consolidate the entity. The presumption that the general partner or group of general partners or managing members controls a limited liability partnership or limited liability company may be overcome if the limited partners or members have (1) the substantive ability to dissolve the partnership without cause, or (2) substantive participating rights. EITF No. 04-5 became effective on June 30, 2005 for new or modified limited partnerships or limited liability companies and January 1, 2006 for all existing arrangements. The adoption of EITF No. 04-5 did not have a material impact on our financial position, net earnings or cash flows. 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. 44 In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109.” FIN 48 defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to have a material effect on our financial position, net earnings or cash flows. In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108) Topic 1N, “Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” This Bulletin provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The guidance in this Bulletin must be applied to financial reports covering the first fiscal year ending after November 15, 2006. The adoption of SAB 108 did not have a material effect on our financial position, net earnings or cash flows. Please refer to Note 12 for details regarding the implementation of SFAS No. 123R, “Share-Based Payment.” Item 7A. Quantitative and Qualitative Disclosures About Market Risk Stock Investments From time to time we make public and private investments in equity securities. The publicly traded equity securities are classified as “available for sale securities” and carried at fair value, with unrealized gains and losses reported as a separate component of shareholders’ equity. The private investments, for which we lack the ability to exercise significant influence, are accounted for at cost. Declines in the value of public and private investments that our management determines are other than temporary, are recorded as a provision for possible loss on investments. Our evaluation of the carrying value of these investments is primarily based upon a regular review of market valuations (if available), each company’s operating performance and assumptions underlying cash flow forecasts. In addition, our management considers events and circumstances that may signal the impairment of an investment. Interest Rate Hedging Activities We are exposed to the impact of interest rate changes and will occasionally utilize interest rate swaps and interest rate caps as hedges with the objective of lowering our overall borrowing costs. These derivatives are designated as either cash flow or fair value hedges. We do not use these derivatives for trading or other speculative purposes. Further, as a matter of policy, we only enter into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, we have not sustained, nor do we expect to sustain, a material loss from the use of these hedging instruments. We formally assess both at inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item. We measure hedge effectiveness by comparing the changes in the fair value or cash flows of the derivative instrument with the changes in the fair value or cash flows of the hedged item. We assess effectiveness of purchased interest rate caps based on overall changes in the fair value of the caps. If a derivative ceases to be a highly effective hedge, we discontinue hedge accounting prospectively. To determine the fair values of derivative and other financial instruments, we use a variety of methods and assumptions that are based on market value conditions and risks existing at each balance sheet date. These methods and assumptions include standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost and termination cost. All methods of assessing fair value result in a general approximation of value, and therefore, are not necessarily indicative of the actual amounts that we could realize upon disposition. 45 During the years ended December 31, 2006, 2005 and 2004 we recorded an increase/(decrease) to interest expense of $372,000, $(174,000) and $33,000, for hedge ineffectiveness caused by a difference between the interest rate index on a portion of our outstanding variable rate debt and the underlying index of the associated interest rate swap. We pursue hedging strategies that we expect will result in the lowest overall borrowing costs and least degree of earnings volatility possible. The following table summarizes the notional amount, carrying value and estimated fair value of our derivative financial instruments used to hedge interest rates, as of December 31, 2006. The notional amount represents the aggregate amount of a particular security that is currently hedged at one time, but does not represent exposure to credit, interest rate or market risks (dollar amounts in thousands). Notional Amount Maturity Date Range Carrying and Estimated Fair Value Cash flow hedges: Interest rate caps .................................................................... Interest rate swaps.................................................................. Total cash flow hedges ....................................................... Fair value hedges: Interest rate swaps.................................................................. Total rate of return swaps ....................................................... Total fair value hedges ....................................................... Total hedges ................................................................... Foreign Currency Hedging Activities $ 486,354 367,054 $ 853,408 75,055 36,346 $ 111,401 $ 964,809 $ 2007-2013 2007-2014 2007-2014 2008 2007 2007-2008 2007-2014 $ 809 7,080 $ 7,889 $ 1,185 (1,447) $ (262) $ 7,627 We are exposed to foreign-exchange related variability and earnings volatility on our foreign investments. During 2006 and 2005, we entered into foreign currency forward contracts with an aggregated notional amount of €201.5 million and designated the contracts as cash flow hedges. The fair value of these forward contracts at December 31, 2006 was ($1.2) million. Energy Contract Hedging Activities We are exposed to price risk associated with the volatility of natural gas, fuel oil and electricity rates. During 2005 and 2006, we entered into contracts with several of our suppliers to fix our payments on set quantities of natural gas, fuel oil and electricity. If the contract meets the criteria of a derivative, we designate these contracts as cash flow hedges of the overall changes in floating-rate payments made on our energy purchases. As of December 31, 2006, we had energy-related derivatives with aggregate notional amounts of $5.3 million and an estimated fair value and carrying amount of ($1.1) million. These contracts mature on or before December 31, 2007. Equity Securities Hedging Activities We are exposed to price risk associated with changes in the fair value of certain equity securities. During 2006, we entered into forward sale agreements with an aggregate notional amount, which represents the fair value of the underlying marketable securities, of approximately $6.6 million and an aggregate fair value of the forward sale agreements of approximately ($0.3) million, to protect against a reduction in the fair value of these securities. We designated this forward sale as a fair value hedge. Interest Rate Sensitive Liabilities The table below provides information about our liabilities that are sensitive to changes in interest rates as of December 31, 2006. As the table incorporates only those exposures that existed as of December 31, 2006, it does not consider those exposures or positions that could arise after that date. 46 Moreover, because there were no firm commitments to actually sell these instruments at fair value as of December 31, 2006, the information presented herein is an estimate and has limited predictive value. As a result, our ultimate realized gain or loss, if any, will depend on the exposures that arise during future periods, hedging strategies, prevailing interest rates and other market factors existing at the time. The debt classification and interest rates shown below give effect to fair value hedges and other fees or expenses, where applicable (in thousands): Total Balance $ Estimated Fair Value(1) 2007 Interest rate sensitive liabilities: Unsecured credit facilities: Average nominal interest rate(2) ...................................................... Term loan — International: ..................................................................... Average nominal interest rate(2) ...................................................... Long-Term Unsecured Debt: Fixed rate .............................................................................................. Average nominal interest rate(2)...................................................... Variable rate(3) ...................................................................................... Average nominal interest rate(2) ...................................................... Mortgages payable: Fixed rate debt...................................................................................... Average nominal interest rate(2) ...................................................... Variable rate debt ................................................................................. Average nominal interest rate(2) ...................................................... $ — $ — $ 235,771 $ 4.1% 2008 — — — — $ $ 2009 — — — — $ $ 2010 84,723 $ 5.5% — $ — 2011 — — — — $ $ Thereafter — — — — 84,723 $ 84,723 5.5% — $ 235,771 $ 235,771 4.1% — $ 386,250 $ 312,822 $ 5.4% 4.0% $ — $ 21,468 $ — 3.9% $ $ 81,250 $ 263,750 $ 625,000 $1,610,332 $3,279,404 $3,360,607 7.6% 6.0% 4.5% 5.7% 5.4% — — $ — $ — $ 54,827 $ 76,295 $ 76,295 — — — 4.0% 4.0% — 77,690 $ 196,637 $ 392,102 $ 131,931 $ 174,143 $ 820,480 $1,792,983 $1,818,091 5.8% 5.7% 6.0% 6.0% 6.1% 6.0% 6.0% — 27,235 $ 15,859 $ 8,132 $ 8,813 $ 44,446 $ 878,766 $ 983,251 $ 983,251 5.1% 2.4% 5.1% 5.1% 4.6% 4.9% 4.8% — ____________ (1) The estimated fair value for each of the liabilities listed was calculated by discounting the actual principal payment stream at prevailing interest rates (obtained from third party financial institutions) currently available on debt instruments with similar terms and features. (2) Reflects the weighted average nominal interest rate on the liabilities outstanding during each period, giving effect to principal payments and final maturities during each period, if any. The nominal rates for variable rate mortgages payable have been held constant during each period presented based on the actual variable rates as of December 31, 2006. The weighted average effective interest rate on the unsecured credit facilities, Long-Term Unsecured Debt and mortgages payable was 5.9%, 5.6% and 5.4, respectively, as of December 31, 2006. (3) Represents unsecured tax-exempt bonds. Item 8. Financial Statements and Supplementary Data Our Balance Sheets as of December 31, 2006 and 2005, and our Statements of Earnings, Shareholders’ Equity and Comprehensive Income (Loss) and Cash Flows for each of the years in the three-year period ended December 31, 2006, Schedule III — Real Estate and Accumulated Depreciation and Schedule IV — Mortgage Loans on Real Estate, together with the reports of KPMG LLP, Independent Registered Public Accounting Firm, are included under Item 15 of this Annual Report and are incorporated herein by reference. Unaudited selected quarterly financial data is presented in Note 14 of our audited financial statements in this Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 47 Item 9A. Controls and Procedures An evaluation was carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were, to the best of their knowledge, effective as of December 31, 2006, to ensure that information required to be disclosed in reports that are filed or submitted under the Securities Exchange Act are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to December 31, 2006, there were no significant changes in the company’s disclosure controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2006. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. We have concluded that, as of December 31, 2006, our internal control over financial reporting was effective based on these criteria. Our independent registered public accounting firm, KPMG LLP, has issued an audit report on our assessment of our internal control over financial reporting, which is included herein. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of their inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Archstone-Smith have been detected. We acquired DeWAG during July 2006 and have excluded the DeWAG financial reporting controls from our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006. DeWAG’s total assets were $857.0 million and total revenues were $27.7 million as of and for the year ended December 31, 2006 and are included in our consolidated financial statements. /s/ R. Scot Sellers R. Scot Sellers Chairman of the Board, Chief Executive Officer and Trustee (principal executive officer) /s/ Charles E. Mueller, Jr. Charles E. Mueller, Jr. Chief Financial Officer (principal financial officer) Item 9B. Other Information Not Applicable. 48 Part III Item 10. Directors, Executive Officers and Corporate Governance For information regarding certain senior officers, including all of our executive officers, see “Item 1. Business — Officers of Archstone-Smith.” For information on our Code of Ethics, see “Item 1. Business — Available Information and Code of Ethics.” The other information required by this Item 10 is incorporated herein by reference to the description under the captions “Nominees,” “Meetings and Committees of the Board,” and “Section 16(a) Beneficial Ownership Reporting Compliance,” in our definitive proxy statement for our annual meeting of shareholders (“2007 Proxy Statement”). Item 11. Executive Compensation Incorporated herein by reference to the description under the captions “Compensation Discussion and Analysis,” “2006 Executive Compensation,” “Post-Employment Payments,” and “Trustee Compensation” in the 2007 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Incorporated herein by reference to the description under the captions “Principal Shareholders” in the 2007 Proxy Statement. Equity Compensation Plan Information (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights (b) Weighted-average exercise price of outstanding options, warrants and rights (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) Plan Category Equity compensation plans approved by security holders....................................... Equity compensation plans not approved by security holders.................................. Total..................................................... 3,151,540 — 3,151,540 $ $ 30.72 — 30.72 10,316,885 — 10,316,885 Item 13. Certain Relationships and Related Transactions, and Director Independence Incorporated herein by reference to the description under the caption “Certain Relationships and Transactions” and “Meetings and Committees of the Board” in the 2007 Proxy Statement. Item 14. Principal Accounting Fees and Services Incorporated herein by reference to the description under the caption, “Ratification of Relationship with Independent Registered Public Accountants” in the 2007 Proxy Statement. 49 Part IV Item 15. Exhibits, Financial Statement Schedules The following documents are filed as part of this report: (a) Financial Statements and Schedules: 1. Financial Statements See Index to Financial Statements and Schedules on page 51 of this report, which is incorporated herein by reference. 2. Financial Statement Schedules: See Schedule III on page 91 of this report, which is incorporated herein by reference. See Schedule IV on page 93 of this report, which is incorporated herein by reference. All other schedules have been omitted since the required information is presented in the financial statements and the related notes or is not applicable. 3. Exhibits See Index to Exhibits on page 95 of this report, which is incorporated herein by reference. (b) Exhibits: The Exhibits required by Item 601 of Registration S-K are listed in the Index to Exhibits on page 95 of this Annual Report, which is incorporated herein by reference. 50 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Page Reports of Independent Registered Public Accounting Firm ........................................................................... Consolidated Balance Sheets as of December 31, 2006 and 2005 ................................................................... Consolidated Statements of Earnings for the years ended December 31, 2006, 2005 and 2004 ...................... Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the years ended December 31, 2006, 2005 and 2004 ............................................................................................................... Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004.................. Notes to Consolidated Financial Statements..................................................................................................... Report of Independent Registered Public Accounting Firm on Supplementary Information ........................... Schedule III — Real Estate and Accumulated Depreciation as of December 31, 2006 ................................... Schedule IV — Mortgage Loans on Real Estate as of December 31, 2006 ..................................................... Signatures ......................................................................................................................................................... Index to Exhibits............................................................................................................................................... 52-53 54 55 56 57 58-89 90 91-92 93 94 95-97 51 Report of Independent Registered Public Accounting Firm The Board of Trustees and Shareholders Archstone-Smith Trust: We have audited the accompanying consolidated balance sheets of Archstone-Smith Trust and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of earnings, shareholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of Archstone-Smith Trust’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Archstone-Smith Trust and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Archstone-Smith Trust’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 1, 2007, expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting. /s/ KPMG LLP Denver, Colorado March 1, 2007 52 Report of Independent Registered Public Accounting Firm The Board of Trustees and Shareholders Archstone-Smith Trust: We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, that Archstone-Smith Trust maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Archstone-Smith Trust’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of Archstone-Smith Trust’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assessment that Archstone-Smith Trust maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Archstone-Smith Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Archstone-Smith Trust acquired DeWAG Deutsche WohnAnlage GmbH (DeWAG) during July 2006, and has excluded from its assessment of the effectiveness of Archstone-Smith Trust’s internal control over financial reporting as of December 31, 2006, DeWAG’s internal control over financial reporting associated with total assets of $857.0 million and total revenues of $27.7 million included in the consolidated financial statements of Archstone-Smith Trust as of and for the year ended December 31, 2006. Our audit of internal control over financial reporting of Archstone-Smith Trust also excluded an evaluation of the internal control over financial reporting of DeWAG. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Archstone-Smith Trust and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of earnings, shareholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2006, and our report dated March 1, 2007, expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP Denver, Colorado March 1, 2007 53 ARCHSTONE-SMITH TRUST CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31, 2006 2005 ASSETS Real estate ................................................................................................................... Real estate — held for sale........................................................................................... Less accumulated depreciation..................................................................................... Investments in and advances to unconsolidated entities................................................. Net real estate investments ................................................................................... Cash and cash equivalents............................................................................................ Restricted cash in tax-deferred exchange and bond escrow ........................................... Other assets ................................................................................................................. Total assets .......................................................................................................... LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Unsecured credit facilities ........................................................................................ Term Loan — International...................................................................................... Long-Term Unsecured Debt ..................................................................................... Long-Term Unsecured Debt — held for sale............................................................. Mortgages payable ................................................................................................... Mortgages payable — held for sale .......................................................................... Accounts payable..................................................................................................... Accrued interest....................................................................................................... Accrued expenses and other liabilities ...................................................................... Total liabilities..................................................................................................... Minority interest .......................................................................................................... Shareholders’ equity: Perpetual Preferred Shares ....................................................................................... Common Shares (Par value $0.01; 450,000,000 shares authorized; 220,147,167 and 212,413,939 shares issued and outstanding in 2006 and 2005, respectively) ............ Additional paid-in capital......................................................................................... Accumulated other comprehensive income (loss)...................................................... Retained Earnings.................................................................................................... Total shareholders’ equity .................................................................................... Total liabilities and shareholders’ equity............................................................... $ 84,723 $ 394,578 235,771 — 3,339,462 2,523,639 16,237 16,397 2,743,081 2,360,181 33,153 33,471 71,967 53,366 67,135 50,991 365,260 260,682 6,956,789 5,693,305 739,149 787,273 50,000 50,000 $12,858,507 $11,031,917 329,133 327,347 957,146 836,693 12,230,494 10,522,571 235,323 132,728 12,465,817 10,655,299 48,655 13,638 319,312 495,274 425,343 297,884 $13,259,127 $11,462,095 2,201 2,124 4,883,164 4,652,901 3,520 (1,720) 624,304 278,212 5,563,189 4,981,517 $13,259,127 $11,462,095 The accompanying notes are an integral part of these consolidated financial statements. 54 ARCHSTONE-SMITH TRUST CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share amounts) Years Ending December 31, 2006 2005 2004 Revenues: Rental revenues.................................................................................... Other income ....................................................................................... Expenses: Rental expenses ................................................................................... Real estate taxes................................................................................... Depreciation on real estate investments ................................................ Interest expense ................................................................................... General and administrative expenses .................................................... Other expenses..................................................................................... Earnings from operations ......................................................................... Minority interest................................................................................... Income from unconsolidated entities .................................................... Other non — operating income............................................................. Net earnings before discontinued operations............................................. Net earnings from discontinued operations ........................................... Net earnings ............................................................................................ Preferred Share dividends..................................................................... Net earnings attributable to Common Shares — Basic .............................. Interest on Convertible Debt................................................................. Dividends on Convertible Preferred Shares........................................... Minority interest................................................................................... Net earnings attributable to Common Shares — Diluted ........................... Weighted average Common Shares outstanding: Basic ................................................................................................... Diluted................................................................................................. Net earnings per Common Share — Basic: Net earnings before discontinued operations......................................... Discontinued operations, net ................................................................ Net earnings......................................................................................... Net earnings per Common Share — Diluted: Net earnings before discontinued operations......................................... Discontinued operations, net ................................................................ Net earnings......................................................................................... Dividends paid per Common Share .......................................................... $ 1,056,176 77,410 1,133,586 $ 777,603 $ 642,270 56,030 19,208 833,633 661,478 182,546 69,836 187,771 164,035 58,604 49,232 712,024 121,609 (21,164) 22,432 28,807 151,684 464,488 616,172 (3,831) 612,341 — — 352 612,693 203,526 204,492 0.73 $ 2.28 3.01 $ 0.73 $ 2.27 3.00 $ 1.73 $ 155,350 55,397 150,470 125,108 55,479 13,563 555,367 106,111 (20,465) 17,902 28,162 131,710 410,632 542,342 (10,892) 531,450 — 3,755 509 535,714 196,098 199,233 0.62 2.09 2.71 0.61 2.08 2.69 2.72 $ 248,837 94,505 261,438 245,895 68,188 13,715 932,578 201,008 (30,541) 36,316 2,338 209,121 518,313 727,434 (3,829) 723,605 11,139 — 708 735,452 $ 216,159 221,153 $ $ $ $ $ 0.95 $ 2.40 3.35 $ 0.95 $ 2.38 3.33 $ 1.74 $ The accompanying notes are an integral part of these consolidated financial statements. 55 ARCHSTONE-SMITH TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) Years Ended December 31, 2006, 2005 and 2004 (In thousands) Convertible Preferred Shares at Aggregate Liquidation Preference $ 50,000 — — — — — — (50,000) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Perpetual Preferred Shares at Aggregate Liquidation Preference $ 98,940 — — — — — — — — (48,940) — — — 50,000 — — — — — — — — — — — — 50,000 — — — — — — — — — — — 50,000 Balances at December 31, 2003 ............................................................. Comprehensive income: Net earnings ......................................................................................... Change in fair value of cash flow hedges.......................................... Change in fair value/sale of marketable securities............................ Comprehensive income attributable to Common Shares...................... Preferred Share dividends....................................................................... Common Share dividends....................................................................... A-1 Common Units converted into Common Shares ........................... Conversion of Preferred Shares into Common Shares.......................... Common Share repurchases.................................................................... Preferred Share repurchases.................................................................... Exercise of Options ................................................................................. Issuance of Common Shares in exchange for real estate ...................... Other, net.................................................................................................. Balances at December 31, 2004 ............................................................. Comprehensive income: Net earnings ......................................................................................... Change in fair value of cash flow hedges.......................................... Change in fair value/sale of marketable securities............................ Foreign currency exchange translation .............................................. Comprehensive income attributable to Common Shares...................... Preferred Share dividends....................................................................... Common Share dividends....................................................................... A-1 Common Units converted into Common Shares ........................... Common Share repurchases.................................................................... Exercise of Options ................................................................................. Equity-classified awards under Compensation Plans ........................... Issuance of Common Shares................................................................... Other, net (Including Minority Interest Revaluation of $129,051) ...... Balances at December 31, 2005 ............................................................. Comprehensive income: Net earnings ......................................................................................... Change in fair value of hedges ........................................................... Change in fair value of marketable securities ................................... Foreign currency exchange translation .............................................. Comprehensive income attributable to Common Shares...................... Preferred Share dividends....................................................................... Common Share dividends....................................................................... A-1 Common Units converted into Common Shares ........................... Issuance of Common Shares under Dividend Reinvestment Plan ....... Exercise of Options ................................................................................. Equity-classified awards under Compensation Plans ........................... Other, net (Including Minority Interest Revaluation of $26,618) ........ Balances at December 31, 2006 ............................................................. Common Shares at Par Value $ 1,948 — — — — — 24 26 (35) — 31 2 — 1,996 — — — — — — 4 (16) 17 2 121 — 2,124 — — — — — — 60 5 12 — — 2,201 Additional Paid-in Capital $ 3,952,404 — — — — — 47,925 49,974 (95,633) 1,727 61,436 4,500 3,780 4,026,113 — — — — — — 8,411 (56,479) 41,549 14,668 491,277 127,362 4,652,901 — — — — — — 143,344 27,095 27,704 10,681 21,439 4,883,164 Accumulated Other Comprehensive Income (Loss) $ 14,235 — 3,750 (22,410) — — — — — — — — — (4,425) — 4,211 (1,214) (292) — — — — — — — — (1,720) — 1,058 1,638 2,544 — — — — — — — 3,520 $ Retained Earnings 27,160 542,342 — — (10,892) (539,116) — — — — — — — 19,494 616,172 — — — $ Total 4,144,687 542,342 3,750 (22,410) 523,682 (10,892) (539,116) 47,949 — (95,668) (47,213) 61,467 4,502 3,780 4,093,178 616,172 4,211 (1,214) (292) 618,877 (3,831) (353,623) 8,415 (56,495) 41,566 14,670 491,398 127,362 4,981,517 727,434 1,058 1,638 2,544 732,674 (3,829) (377,513) 143,404 27,100 27,716 10,681 21,439 5,563,189 $ $ $ $ $ $ (3,831) (353,623) — — — — — — 278,212 $ 727,434 — — — (3,829) (377,513) — — — — — 624,304 $ $ $ $ $ $ $ The accompanying notes are an integral part of these consolidated financial statements. 56 ARCHSTONE-SMITH TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) 2006 Years Ended December 31, 2005 2004 Operating activities: Net earnings ............................................................................... $ 727,434 $ 616,172 $ 542,342 Adjustments to reconcile net earnings to net cash flow provided by operating activities: Depreciation and amortization................................................. 302,495 252,174 232,990 Gains on dispositions of depreciated real estate........................ (602,915) (524,684) (451,816) Gains on sale of marketable equity securities........................... (1,673) (27,948) (28,162) Provisions for possible loss on investments.............................. 4,328 9,803 — Minority interest ..................................................................... 107,641 85,332 69,821 Equity in earnings from unconsolidated entities ....................... (6,118) 6,605 6,233 Interest accrued on Mezzanine loans........................................ (9,781) (5,224) — Change in other assets................................................................. (14,786) 7,132 526 Change in accounts payable, accrued expenses and other liabilities................................................................................... 49,067 7,663 32,113 Other, net.................................................................................... (18,264) (13,006) (4,150) Net cash flow provided by operating activities......................... 537,428 414,019 399,897 Investing activities: Real estate investments ............................................................... (2,216,598) (2,016,573) (1,423,549) Purchase of DeWAG net of cash acquired of $20,364 (252,428) — — Change in investments in unconsolidated entities, net .................. (76,366) (10,991) (21,662) Proceeds from dispositions.......................................................... 1,888,341 1,538,839 1,821,641 Change in restricted cash............................................................. 175,962 (375,179) 60,825 Change in notes receivable, net ................................................... (82,414) (98,909) (6,077) Proceeds from notes receivable ................................................... 46,081 36,654 — Other, net.................................................................................... 11,158 (38,462) 97,075 Net cash flow provided by (used in) investing activities........... (506,264) (964,621) 528,253 Financing activities: Proceeds from Long-Term Unsecured Debt ................................. 859,385 695,724 297,052 Payments on Long-Term Unsecured Debt.................................... (51,250) (251,250) (72,950) Principal repayment of mortgages payable, including prepayment penalties................................................................. (324,700) (500,963) (159,558) Regularly scheduled principal payments on mortgages payable.... (12,949) (15,067) (11,512) Proceeds from Term Loan — International.................................. 272,792 — — Principal repayments on Term Loan — International ................... (37,021) — — Proceeds from mortgage notes payable ........................................ — 33,807 51,656 Proceeds from (payments on) unsecured credit facilities, net........ (309,855) 375,578 (84,790) Proceeds from issuance of Common Shares, net .......................... — 491,398 — Proceeds from Common Shares issued under DRIP and employee stock options ............................................................. 57,773 41,566 61,467 Repurchase of Common Shares and Preferred Shares .................. — (56,495) (146,954) Repurchase of Series E and F Perpetual Preferred Units............... — (19,522) (42,712) Cash dividends paid on Common Shares ..................................... (377,513) (353,623) (539,116) Cash dividends paid on Preferred Shares ..................................... (3,829) (3,831) (9,165) Cash dividends paid to minority interests..................................... (55,079) (64,385) (69,799) Other, net.................................................................................... (13,901) (11,952) (3,744) Net cash flow provided by (used in) financing activities........... 3,853 360,985 (730,125) Net change in cash and cash equivalents.......................................... 35,017 (189,617) 198,025 Cash and cash equivalents at beginning of period ............................ 13,638 203,255 5,230 Cash and cash equivalents at end of period...................................... $ 48,655 $ 13,638 $ 203,255 These consolidated statements of cash flows combine cash flows from discontinued operations with cash flows from continuing operations. See Note 18 for supplemental information on non-cash investing and financing activities. The accompanying notes are an integral part of these consolidated financial statements. 57 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006, 2005 and 2004 (The glossary included in this Annual Report is hereby incorporated by reference) (1) Description of Business and Summary of Significant Accounting Policies Business Our business is conducted primarily through Archstone-Smith Operating Trust, our majority owned subsidiary, which we refer to herein as the “Operating Trust”. We are structured as an UPREIT under which all property ownership and business operations are conducted through the Operating Trust. We are the sole trustee and own approximately 88.2% of the Operating Trust’s outstanding A-1 Common Units; the remaining 11.8% of the Common Units are owned by minority interest holders. As used herein, “we,” “our” and the “company” refers to the Operating Trust and Archstone-Smith, collectively, except where the context otherwise requires. Archstone-Smith is an equity REIT organized under the laws of the State of Maryland. We focus on creating value for our shareholders by acquiring, developing, redeveloping and operating apartments primarily in our core markets which are characterized by protected locations with limited land for new housing construction, expensive single-family home prices, and a strong, diversified economic base with significant employment growth potential. Principles of Consolidation The accounts of Archstone-Smith and its controlled subsidiaries are consolidated in the accompanying financial statements. All significant inter-company accounts and transactions have been eliminated. We use the equity method to account for investments that do not qualify as variable interest entities, variable interest entities where we are not the primary beneficiary and entities that we do not control, or where we do not own a majority of the economic interest, but have the ability to exercise significant influence over the operating and financial policies of the investee. We also use the equity method when we function as the managing member and our partner does not have substantive participating rights or we can be replaced by a partner if we are the managing member. For an investee accounted for under the equity method, our share of net earnings or losses of the investee is reflected in income as earned and dividends are credited against the investment as received. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the financial statements and the related notes. Actual results could differ from management’s estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period they are determined to be necessary. Discontinued Operations For properties accounted for under SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” the results of operations for properties sold during the period or classified as held for sale at the end of the current period are required to be classified as discontinued operations in the current and prior periods. The propertyspecific components of net earnings that are classified as discontinued operations include rental revenue, rental expense, real estate tax, depreciation expense, minority interest and interest expense (actual interest expense for encumbered properties and a pro-rata allocation of interest expense for any unencumbered portion up to our weighted average leverage ratio). The net gain or loss and the related internal disposition costs on the eventual disposal of the held for sale properties are also classified as discontinued operations. Land sales and properties sold by our unconsolidated entities are not included in discontinued operations and related gains or losses are reported as a component of other income and income from unconsolidated entities, respectively. 58 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions and short-term, highly liquid investments. We consider all highly liquid instruments with maturities when purchased of three months or less to be cash equivalents. Restricted Cash in Tax-Deferred Exchange and Bond Escrow In most cases, disposition proceeds are set aside and designated to fund future tax-deferred exchanges of qualifying real estate investments. If these proceeds are not redeployed to qualifying real estate investments within 180 days, these funds are redesignated as cash and cash equivalents. We generally decide if we are not going to do an exchange within 45 days and it is therefore rare for cash to remain in escrow for the full 180 days. Additionally, cash proceeds from bond financings held in escrow to fund future development costs and cash held as security deposits are classified as restricted cash. Marketable Securities and Other Investments All publicly traded equity securities are classified as “available for sale” and carried at fair value, with unrealized gains and losses reported as a separate component of shareholders’ equity. Private investments, for which we do not have the ability to exercise significant influence, are accounted for at cost. Declines in the value of public and private investments that management determines are other than temporary are recorded as a provision for loss on investments. Real Estate and Depreciation Real estate, other than properties held for sale, is carried at depreciated cost. Long-lived assets designated as being held for sale are reported at the lower of their carrying amount or estimated fair value less cost to sell, and thereafter are no longer depreciated. Costs associated with acquisition efforts are recorded in other assets and the unsuccessful acquisition efforts are expensed at the time the pursuit is abandoned. We allocate the cost of newly acquired properties between net tangible and identifiable intangible assets. When allocating cost to an acquired property, we first allocate costs to the estimated intangible value of the existing lease agreements and then to the estimated value of the land, building and fixtures assuming the property is vacant. We estimate the intangible value of the lease agreements by determining the lost revenue associated with a hypothetical lease-up. We depreciate the building and fixtures based on the expected useful life of the asset and amortize the intangible value of the lease agreements over the average remaining life of the existing leases. This amortization expense is included in depreciation on real estate investments in our consolidated statements of earnings In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet. We have an investment organization that is responsible for development and redevelopment of apartment communities. Consistent with GAAP, all direct and certain indirect costs, including interest and real estate taxes, incurred during development and redevelopment activities are capitalized. Interest is capitalized on real estate assets that require a period of time to get them ready for their intended use. The amount of interest capitalized is based upon the average amount of accumulated development expenditures during the reporting period. Included in capitalized costs are management’s estimates of the direct and incremental personnel costs and indirect project costs associated with our development and redevelopment activities. Indirect project costs consist primarily of personnel costs associated with construction administration and development accounting, legal fees, and various office costs that clearly relate to projects under development. 59 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Depreciation is computed over the expected useful lives of depreciable property on a straight-line basis as follows: Building and related land improvements......................................................................................... Furniture, fixtures, equipment and other ......................................................................................... Intangible value of retail and commercial lease agreements ............................................................ Intangible value of residential lease agreements.............................................................................. Interest During 2006, 2005 and 2004, the total interest paid in cash on all outstanding debt was $315.5 million, $263.5 million and $229.6 million, respectively. We capitalize interest during the construction period as part of the cost of apartment communities under development. Interest capitalized during 2006, 2005 and 2004 aggregated $51.8 million, $39.1 million and $23.6 million, respectively. Cost of Raising Capital Costs incurred in connection with the issuance of equity securities are deducted from shareholders’ equity. Costs incurred in connection with the issuance or renewal of debt is subject to the provisions of EITF 96-19. Accordingly, if the terms of the renewed or modified debt instrument are deemed to be substantially different (i.e., a 10 percent or more difference in the present value of the remaining cash flows), all unamortized loan costs associated with the extinguished debt are charged against earnings during the current period; otherwise, costs are capitalized as other assets and amortized into interest expense over the term of the related loan or the renewal period. The balance of any unamortized loan costs associated with retired debt is expensed upon retirement. We utilize the straight-line method to amortize debt issuance costs as it approximates the effective interest method required under SFAS No. 91. Amortization of loan costs included in interest expense for 2006, 2005 and 2004 was $6.1 million, $4.2 million and $4.4 million, respectively. Moisture Infiltration and Mold Remediation Costs We estimate and accrue costs related to the correction of moisture infiltration and related mold remediation when we anticipate incurring such remediation costs because of the assertion of a legal claim or threatened litigation. When we incur remediation costs at our own discretion, the cost is recognized as incurred. Costs of addressing moisture infiltration and resulting mold remediation issues are only capitalized, subject to recoverability, when it is determined by management that such costs also extend the life, increase the capacity, or improve the safety or efficiency of the property relative to when the community was originally constructed or acquired, if later. All other related costs are expensed. Intangibles Intangible assets consist of lease-related intangibles and certain intangibles associated with the DeWAG acquisition. The market value of above and below market leases are based on our estimate of current market rents as compared to the rent that we are receiving and is recorded in either other assets or other liabilities. These assets are charged and liabilities are credited to rental income over the estimated term of the lease. We also recognize the value of our in-place residential lease agreements and amortize these assets into depreciation on real estate investments over the estimated term of the lease. 15-40 years 3-10 years 1-20 years 6-48 months 60 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following is a summary of the domestic intangibles and the corresponding amortization we expect to record (dollar amounts in thousands). See Note 3 for a summary of DeWAG-related intangibles. Gross Carrying Amount Weighted Average Useful Life (in years) Accumulated Amortization In-place leases ............................................................................................. Above-market leases.................................................................................... Total intangible assets.................................................................................. Below-market leases .................................................................................... Total intangible liabilities............................................................................. Estimated net amortization for the year ended $ 64,127 936 $ 65,063 $ 17,921 $ 17,921 $ 49,933 141 $ 50,074 $ $ 1,794 1,794 $ $ $ $ $ 5,868 440 (133) (353) (313) 2 7 6 2007 ....................................................................................................................................................... 2008 ....................................................................................................................................................... 2009 ....................................................................................................................................................... 2010 ....................................................................................................................................................... 2011 ....................................................................................................................................................... We will perform an impairment test annually, or more frequently, if events or changes in circumstances indicate impairment of our intangible assets, which are included in other assets. Insurance Recoveries We recognize insurance recovery proceeds as other income if the recovery is related to items that were originally expensed, such as, legal settlements, legal expenses and repairs that did not meet capitalization guidelines. For recoveries of property damages that were eligible for capitalization, we reduce the basis of the property or if the property has subsequently been sold, we recognize the proceeds as an additional gain on sale. We recognize insurance recoveries at such time that we believe the recovery is probable and we have sufficient information to make a reasonable estimate of proceeds, except in cases where we have to pursue recovery via litigation. In this circumstance, we recognize the recovery when we have a signed, legally binding agreement with the insurance carrier. Derivative Financial Instruments We utilize derivative financial instruments to manage our interest rate risk, foreign currency exchange risk, exposure to changes in the fair value of certain investments in equity securities and exposure to volatile energy prices. During 2003, we adopted SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” Under SFAS No. 149, the resulting assets and liabilities associated with derivative financial instruments are carried on our financial statements at estimated fair value at the end of each reporting period. The changes in the fair value of a fair value hedge and the fair value of the items hedged are generally recorded in earnings for each reporting period. The change in the fair value of effective cash flow hedges and foreign currency hedges are carried on our financial statements as a component of accumulated other comprehensive income (loss). If effective, our hedges have little or no impact on our current earnings. Revenue and Gain Recognition We generally lease our apartment units under operating leases with terms of one year or less. Communities subject to the Oakwood Master Leases entered into in 2005 have a seven year term. Rental income related to leases is recognized in the period earned over the lease term in accordance with Statement of Financial Accounting Standards SFAS No.13, “Accounting for Leases.” Rent concessions are recognized as an offset to revenues collected over the term of the underlying lease. 61 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) We use the full accrual method of profit recognition in accordance with SFAS No. 66 to record gains on sales of real estate. Accordingly, we evaluate the related GAAP requirements in determining the profit to be recognized at the date of each sale transaction (i.e., the profit is determinable and the earnings process is complete). We recognize deferred gains when a property is sold to a third party. Rental Expenses Rental expenses shown on the accompanying Statements of Earnings include costs associated with on-site and property management personnel, utilities, repairs and maintenance, property insurance, marketing, landscaping and other on-site and related administrative costs. Utility reimbursements from residents, which are recorded as offsets to utility expenses, aggregated $25.4 million, $19.2 million and $16.3 million for 2006, 2005 and 2004, respectively. Legal Fees We generally recognize legal expenses as incurred; however, if such fees are related to the accrual for an estimated legal settlement, we accrue for the related incurred and anticipated legal fees at the same time we accrue the estimated cost of settlement. 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 shareholders’ equity on the Consolidated Balance Sheets. The functional currency utilized for these subsidiaries is the local foreign currency. Stock-Based Compensation We account for our stock based compensation using SFAS No. 123R, “Share-Based Payment” and expense the grant date fair value of the stock options and other equity based compensation issued to employees. Income Taxes We have made an election to be taxed as a 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. See Note 16 for more information on income taxes. Income taxes for our taxable REIT subsidiaries are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. Comprehensive Income Comprehensive income, which is defined as net earnings and all other non-owner changes in equity, is displayed in the accompanying consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss). Other comprehensive income (loss) reflects unrealized holding gains and losses on the available-for-sale investments, changes in the fair value of effective cash flow hedges and gains and losses on long-term foreign currency transactions (see Derivative Financial Instruments). 62 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Our accumulated other comprehensive income (loss) for the years ended December 31, 2006, 2005 and 2005 is as follows (in thousands). Net Unrealized Gains on Marketable Securities Accumulated Other Comprehensive Income/(Loss) Cash Flow Hedges Foreign Currency Translation Balance at December 31, 2003 .......................................... Change in fair value of hedges .......................................... Change in fair value of marketable securities..................... Reclassification adjustments for realized net gains............. Balance at December 31, 2004 .......................................... Change in fair value of hedges .......................................... Change in fair value of marketable securities..................... Reclassification adjustments for realized net gains............. Foreign currency exchange translation .............................. Balance at December 31, 2005 .......................................... Change in fair value of hedges .......................................... Change in fair value of marketable securities..................... Foreign currency exchange translation .............................. Balance at December 31, 2006 .......................................... Per Share Data 23,808 — 1,372 (23,782) $ 1,398 — 865 (2,079) — $ 184 — 1,638 — $ 1,822 $ $ (9,573) 3,750 — — $ (5,823) 4,211 — — — $ (1,612) 1,058 — — $ (554) — — — — $ — — — — (292) $ (292) — — 2,544 $ 2,252 $ $ 14,235 3,750 1,372 (23,782) $ (4,425) 4,211 865 (2,079) (292) $ (1,720) 1,058 1,638 2,544 $ 3,520 Following is a reconciliation of basic EPS to diluted EPS for the periods indicated (in thousands): Years Ended December 31, 2006 2005 2004 Reconciliation of numerator between basic and diluted net earnings per Common Share(1): Net earnings attributable to Common Shares — Basic ..................................... $ 723,605 $ 612,341 $ 531,450 Interest on Convertible Debt........................................................................ 11,139 — — Dividends on Convertible Preferred Shares.................................................. — — 3,755 Minority interest.......................................................................................... 708 352 509 Net earnings attributable to Common Shares — Diluted .................................. $ 735,452 $ 612,693 $ 535,714 Reconciliation of denominator between basic and diluted net earnings per Common Share(1): Weighted average number of Common Shares outstanding—Basic.................. 216,159 203,526 196,098 Assumed conversion of Convertible Debt into Common Shares ................... 4,210 — — Assumed conversion of Preferred Shares into Common Shares .................... — — 2,182 Incremental options..................................................................................... 784 966 953 Weighted average number of Common Shares outstanding— Diluted.............. 221,153 204,492 199,233 ____________ (1) Excludes the impact of potentially dilutive equity securities during periods in which they are anti-dilutive. Market Concentration Risk Approximately 34.6%, 25.8%, 12.5% and 11.5% of our apartment communities are located in the Washington, D.C. metropolitan area, Southern California, New York City metropolitan area and the San Francisco Bay Area of California, based on NOI for the three months ended December 31, 2006, exclusive of Ameriton and International properties. Southern California is the geographic area comprising Los Angeles County, San Diego, Orange County, Ventura County and the Inland Empire. We are, therefore, subject to increased exposure (positive or negative) from economic and other competitive factors specific to markets within these geographic areas. 63 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Preferred Share Redemptions When redeeming preferred shares, we recognize share issuance costs as a charge to preferred share dividends in accordance with Financial Accounting Standards Board (“FASB”) — Emerging Issues Task Force (“EITF”) Topic D-42, “The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock.” In July 2003, the Securities and Exchange Commission (“SEC”) staff issued a clarification of the SEC’s position on the application of FASB-EITF Topic D-42. The SEC staff’s position, as clarified, is that in applying Topic D-42, the carrying value of preferred shares that are redeemed should be reduced by the amount of original issuance costs, regardless of where in shareholders’ equity those costs are reflected. Reclassifications Certain prior year amounts have been reclassified to conform to the current presentation. We have corrected the presentation of the cash flows related to our unconsolidated entities which resulted in a $29.0 million and $24.1 million increase to operating cash flows for the years ended December 31, 2005 and 2004, respectively with a corresponding decrease to investing cash flows. New Accounting Pronouncements In June 2005, the Emerging Issues Task Force issued EITF No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (EITF No. 04-5). This Issue provides a framework for evaluating whether a general partner or group of general partners or managing members controls a limited partnership or limited liability company and therefore should consolidate the entity. The presumption that the general partner or group of general partners or managing members controls a limited liability partnership or limited liability company may be overcome if the limited partners or members have (1) the substantive ability to dissolve the partnership without cause, or (2) substantive participating rights. EITF No. 04-5 became effective on June 30, 2005 for new or modified limited partnerships or limited liability companies and January 1, 2006 for all existing arrangements. The adoption of EITF No. 04-5 did not have a material impact on our financial position, net earnings or cash flows. In April 2006, the FASB issued FASB Staff Position (FSP) FIN 46R-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R).” This FSP addresses certain implementation issues related to FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities.” Specifically, FSP FIN 46R-6 addresses how a reporting enterprise should determine the variability to be considered in applying FIN 46R. The variability that is considered in applying FIN 46R affects the determination of: (a) whether an entity is a variable interest entity (VIE); (b) which interests are “variable interests” in the entity; and (c) which party, if any, is the primary beneficiary of the VIE. Our assessment of variability affects any calculation of expected losses and expected residual returns, if such a calculation is necessary. The company is required to apply the guidance in this FSP prospectively to all entities (including newly created entities) with which it first becomes involved and to all entities previously required to be analyzed under FIN 46R when a “reconsideration event” has occurred, beginning July 1, 2006. The company will evaluate the impact of this FSP at the time any such “reconsideration event” occurs, and for any new entities with which the company becomes involved in future periods. In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109.” FIN 48 defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to not have a material effect on our financial position, net earnings or cash flows. 64 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108) Topic 1N, “Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” This Bulletin provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The guidance in this Bulletin must be applied to financial reports covering the first fiscal year ending after November 15, 2006. The adoption of SAB 108 did not have a material effect on our financial position, net earnings or cash flows. Please refer to Note 12 for details regarding the implementation of SFAS No. 123R, “Share-Based Payment.” (2) Real Estate Investments in Real Estate Investments in real estate, at cost, were as follows (dollar amounts in thousands): December 31, 2006 Investment Units (1) December 31, 2005 Investment Units (1) REIT Apartment Communities: Operating communities .................................. Communities under construction .................... Development communities In Planning(2)........ Total REIT apartment communities ............ Ameriton(2) ........................................................ $ 11,208,052 s 406,881 75,538 11,690,471 585,524 60,839 2,150 1,841 64,830 8,144 $ 9,966,915 575,631 24,365 10,566,911 692,269 66,487 2,754 585 69,826 7,489 International ...................................................... 851,593 8,334 44,457 822 60,052 — 55,627 — Other real estate assets(3) .................................... Total real estate .......................................... $ 13,187,640 81,308 $ 11,359,264 78,137 ____________ (1) Unit information is based on management’s estimates and has not been audited by our Independent Registered Public Accounting Firm. (2) Includes development communities In Planning — Owned and In Planning — Under Control. Our investment as of December 31, 2006 and December 31, 2005 for development communities In Planning — Under Control was $7.6 million and $145,000, respectively, and is reflected in the “Other assets” caption of our Consolidated Balance Sheets. (3) Includes land that is not In Planning and other real estate assets. Capital Expenditures In conjunction with the underwriting of each acquisition of an operating community, we prepare acquisition budgets that encompass the incremental capital needed to achieve our investment objectives. These expenditures, combined with the initial purchase price and related closing costs, are capitalized and classified as “acquisitionrelated” capital expenditures, as incurred. As part of our operating strategy, we periodically evaluate each community’s physical condition relative to established business objectives and the community’s competitive position in its market. In conducting these evaluations, we consider our return on investment in relation to our long-term cost of capital as well as our research and analysis of competitive market factors. Based on these factors, we make decisions on incremental capital expenditures, which are classified as either “redevelopment” or “recurring.” The redevelopment category includes: (i) redevelopment initiatives, which are intended to reposition the community in the marketplace and include items such as significant upgrades to the interiors, exteriors, landscaping and amenities; (ii) revenue-enhancing expenditures, which include investments that are expected to produce incremental community revenues, such as building garages, carports and storage facilities or gating a community; and (iii) expense-reducing expenditures, which include items such as water submetering systems and xeriscaping that reduce future operating costs. 65 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Recurring capital expenditures consist of significant expenditures for items having a useful life in excess of one year, which are incurred to maintain a community’s long-term physical condition at a level commensurate with our operating standards. Examples of recurring capital expenditures include roof replacements, certain make-ready expenditures, parking lot resurfacing and exterior painting. The change in investments in real estate, at cost, consisted of the following (in thousands): Years Ended December 31, 2006 2005 Balance at January 1 ............................................................................................. Acquisition-related expenditures........................................................................ Redevelopment expenditures............................................................................. Recurring capital expenditures .......................................................................... Development expenditures, excluding initial acquisition costs............................ Acquisition and improvement of land for development....................................... Dispositions...................................................................................................... Provision for possible loss on investment........................................................... Change in estimated hurricane retirements......................................................... Other ................................................................................................................ Net apartment community activity ................................................................. Change in other real estate assets....................................................................... Balance at December 31........................................................................................ $ 11,359,264 $ 9,221,038 2,530,459 2,671,112 57,414 106,264 46,354 48,311 388,502 324,740 209,916 81,340 (1,403,858) (1,175,834) (4,328) (1,500) 4,496 — 7,987 (8,303) 1,836,942 2,046,130 (8,566) 92,096 $ 13,187,640 $ 11,359,264 At December 31, 2006, we had unfunded contractual commitments of $651.7 million related to communities under construction and under redevelopment. The purchase prices of certain recent acquisitions in Germany were allocated to land, buildings and other assets based on preliminary estimates and is subject to change as we obtain more complete information regarding land, building and lease intangibles values. (3) DeWAG Acquisition On July 27, 2006, we closed on the acquisition of 94% of the shares and 94% of an outstanding shareholder loan of DeWAG for approximately $271 million, based on the exchange rate on the transaction date. We have the option to acquire the remaining 6%, owned by the Managing Directors of DeWAG, under certain circumstances. The results of DeWAG’s operations have been included in the consolidated financial statements since July 1, 2006. The purchase was funded by an international term loan, which is expected to be repaid or refinanced on or before April 27, 2007. In addition, we assumed approximately $509 million in DeWAG liabilities. DeWAG specializes in the acquisition, ownership, operation and re-sale of quality residential properties in the major metropolitan areas of Southern and Western Germany, as well as West Berlin. As of July 1, 2006, the portfolio consisted of approximately 6,400 residential units. We acquired DeWAG because we are interested in expanding our operations into the German markets which we believe have attractive fundamentals for apartment operations. The following table summarizes the estimated fair value of the assets acquired and the liabilities assumed at the date of the acquisition. We recognized goodwill in connection with the DeWAG acquisition. Goodwill represents the excess of the purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets. The goodwill associated with the transaction is primarily attributable to the people and processes which comprise the investing and the operating platform. We will perform an impairment test annually, or more frequently if events or changes in circumstances indicate impairment of our goodwill. Due to the recent closing of the transaction, we are still in the process of seeking information to finalize the valuations for our real estate, intangible assets, and certain liabilities. Therefore, the purchase price allocation is subject to change (dollar amounts in thousands). Real estate ........................................................................................................................................... Other assets ......................................................................................................................................... Intangible assets .................................................................................................................................. Goodwill ............................................................................................................................................. Total assets.......................................................................................................................................... $ 646,285 67,722 30,958 34,490 $ 779,455 66 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Mortgages payable............................................................................................................................... Other liabilities.................................................................................................................................... Deferred tax liability............................................................................................................................ Intangible liabilities ............................................................................................................................. Total liabilities..................................................................................................................................... Net assets acquired .............................................................................................................................. $ 407,933 10,759 69,327 20,514 508,533 $ 270,922 Following are preliminary values as of December 31, 2006 related to the intangible assets and liabilities we identified in connection with the DeWAG transaction and the corresponding amortization we expect to record based on the translated balances (dollar amounts in thousands). Gross Carrying Amount Weighted Average Useful Life (in years) Accumulated Amortization Non-compete agreements.............................................................................. In-place leases .............................................................................................. Total intangible assets................................................................................... Below-market leases ..................................................................................... Total intangible liabilities.............................................................................. Estimated net amortization for the year ended $ 19,672 12,765 $ 32,437 $ 21,496 $ 21,496 $ (2,459) (1,596) $ (4,055) $ (2,687) $ (2,687) $ $ $ $ 4 4 4 2007 ........................................................................................................................................................ 2008 ........................................................................................................................................................ 2009 ........................................................................................................................................................ 2010 ........................................................................................................................................................ The changes in the carrying amount of goodwill for the year ended are as follows: Balance July 1, 2006.............................................................................................................................. Change in foreign currency translation ................................................................................................... Balance December 31, 2006................................................................................................................... 2,735 2,735 2,735 1,368 $ 34,490 960 $ 35,450 Our proforma results, assuming the transaction occurred at the beginning of the year, would not have been materially different from the previously reported results. (4) Oakwood Asset Acquisition During 2005 we acquired 35 communities, comprising 12,696 units, for a total purchase price of $1.5 billion from Oakwood Worldwide. We funded the acquisitions with a combination of $362.8 million or 10.1 million A-1 Common Units, $250,000 or 1,000 N-1 and N-2 Preferred Units, $581.2 million of assumed mortgage debt and the remainder through cash. We acquired two additional communities, comprising 533 units, for a total purchase price of $69.3 million from Oakwood during 2006. We funded the acquisitions with a combination of $15.8 million or 0.4 million A-1 Common Units, $28.1 million of assumed mortgage debt and the remainder through cash. Fourteen of the communities acquired and one community we previously owned and operated were leased back to an affiliate of Oakwood Worldwide under the Oakwood Master Leases, which have seven-year terms, expiring between July 2012 and March 2013, subject to Oakwood’s right to terminate individual leases under certain circumstances after the one-year anniversary of the acquisition, with one exception for which the right to terminate exists throughout the term. As of December 31, 2006, none of the Oakwood Master Lease Communities have been returned to the Company. The aggregate contractual base rent due under these leases is $63.1 million and is subject to annual adjustments on January 1st of each year equal to the percentage change in the average same-store NOI growth for certain other specified properties. We are responsible for payment of real estate taxes, insurance and certain capital expenditures. We have engaged an affiliate of Oakwood to manage the retail portion of each community, if applicable. The real estate cost and net book value associated with the communities subject to the Oakwood Master Leases aggregated $938.6 million and $912.8 million, respectively, as of December 31, 2006. Approximately 5.8% of our total rental revenue was earned from the Oakwood Master Leases. 67 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (5) Discontinued Operations The results of operations for properties sold during the period or designated as held-for-sale at the end of the period are required to be classified as discontinued operations. The property specific components of net earnings that are classified as discontinued operations include rental revenues, rental expenses, real estate taxes, depreciation expense, 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 nine operating apartment communities, representing 3,502 units (unaudited), classified as held for sale under the provisions of SFAS No. 144, at December 31, 2006. Accordingly, we have classified the operating earnings from these nine properties within discontinued operations for the years ended December 31, 2006, 2005 and 2004. During the twelve months ended December 31, 2006, 2005 and 2004 we sold 42, 35 and 30 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, 2005 and 2004. The following is a summary of net earnings from discontinued operations (in thousands): Years Ended December 31, 2006 2005 2004 Rental revenue........................................................................................... Rental expenses ......................................................................................... Real estate taxes ........................................................................................ Depreciation on real estate investments ...................................................... Interest expense (1) ..................................................................................... Income taxes from taxable REIT subsidiaries ............................................. Provision for possible loss on real estate investment ................................... Debt extinguishment costs related to dispositions ....................................... Allocation of minority interest ................................................................... Gain from the disposition of REIT real estate investments, net.................... $ 139,457 $ 239,806 $ 325,784 (44,043) (74,715) (104,023) (16,979) (30,872) (39,318) (26,858) (51,017) (69,519) (29,931) (53,533) (83,644) (9,972) (15,600) (13,975) (4,328) (9,505) (77,100) 548,187 (1,500) (5,847) (64,168) 448,358 — (1,764) (49,356) 386,792 Internal Disposition Costs — REIT transactions (2) ..................................... (1,860) (1,672) (2,974) Gain from the dispositions of taxable REIT subsidiary real estate investments, net ....................................................................................... 54,728 76,326 65,024 Internal Disposition Costs — Taxable REIT subsidiary transactions (2) ....... (3,483) (1,078) (2,395) Total discontinued operations..................................................................... $ 518,313 $ 464,488 $ 410,632 ____________ (1) The portion of interest expense included in discontinued operations that is allocated to properties based on the company’s leverage ratio was $20.9 million, $40.2 million and $62.2 million for 2006, 2005 and 2004, respectively. (2) Represents the direct and incremental compensation and related costs associated with the employees dedicated to our significant disposition activity. The real estate, mortgage payable (if applicable) and long-term unsecured debt balances associated with operating communities classified as held for sale as of December 31, 2006 are reflected, for all periods presented, as “Real estate — held for sale”, “Mortgages payable — held for sale” and “Long-Term Unsecured Debt — held for sale” respectively, in the accompanying Consolidated Balance Sheets. The disposition proceeds associated with the sales of individual rental units by our International subsidiaries are included in continuing operations as other income as such sales do not meet the requirements under SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” to be reflected as discontinued operations. 68 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (6) Investments in and Advances to Unconsolidated Entities Real Estate Joint Ventures At December 31, 2006, the REIT had investments in eleven real estate joint ventures. Our ownership percentage of economic interests ranges from 20% to 87%. Major decisions are subject to the approval of all members, and we generally handle day-to-day operations. At December 31, 2006, Ameriton had five real estate joint ventures in which the venture partners are the development/managing members. Major investment decisions are generally subject to the approval of all members, and our venture partners handle all day-to-day operational decisions. Ameriton generally contributes a majority of the GAAP equity. Economic interest in the ventures varies depending upon the ultimate return of the venture. The REIT and Ameriton joint ventures do not qualify as variable interest entities as neither partner is deemed to individually receive substantially all the benefits from the joint venture. Accordingly, we utilize the guidance provided by SOP 78-9, “Accounting for Investments in Real Estate Ventures,” when determining the basis of accounting for these ventures. Because we do not control the voting interest of these joint ventures, we account for these entities using the equity method. In the aggregate, these ventures own 14,072 units. At December 31, 2006, the investment balance consists of $199.7 million in REIT joint ventures and $35.6 million in Ameriton joint ventures. At December 31, 2005, the investment balance consists of $102.6 million in REIT joint ventures and $30.1 million in Ameriton joint ventures. Archstone-Smith and Ameriton’s combined weighted average percentage of ownership in joint ventures based on total assets at December 31, 2006 was 37.6%. Summary Financial Information Combined summary balance sheet data for our investments in unconsolidated entities presented on a stand-alone basis follows (in thousands): 2006 2005 Assets: Real estate .............................................................................................................. $ 1,530,659 $ 1,142,921 Other assets............................................................................................................. 213,569 244,557 Total assets ......................................................................................................... $ 1,744,228 $ 1,387,478 Liabilities and owners’ equity: Inter-company debt payable to Archstone-Smith...................................................... $ 1,519 $ 2,324 Mortgages payable(1) ............................................................................................... 1,063,451 894,300 Other liabilities ....................................................................................................... 126,048 120,898 Total liabilities .................................................................................................... 1,191,018 1,017,522 Owners’ equity ....................................................................................................... 553,210 369,956 Total liabilities and owners’ equity................................................................... $ 1,744,228 $ 1,387,478 ____________ (1) The Operating Trust guarantees $292.0 million of the outstanding debt balance as of December 31, 2006 and is committed to guarantee another $16.9 million upon funding of additional debt. Selected summary results of operations for our unconsolidated investees presented on a stand-alone basis follows (in thousands): 2006 2005 2004 REIT Joint Ventures Revenues ................................................................................................... $ 132,671 $ 128,844 $ 140,390 Net Earnings(1) ........................................................................................... 69,341 57,141 29,559 Ameriton Joint Ventures Revenues ................................................................................................... $ 340 $ 4,080 $ 5,950 Net Earnings(2) ........................................................................................... 17,790 12,507 (713) Total Revenues ................................................................................................... $ 133,011 $ 132,924 $ 146,340 Net Earnings .............................................................................................. $ 87,131 $ 69,648 $ 28,846 ____________ (1) Includes gains associated with the disposition of REIT Joint Venture assets of $68.4 million, $31.6 million and $32.4 million during 2006, 2005 and 2004, respectively. (2) Includes Ameriton’s share of pre-tax gains associated with the disposition of real estate joint venture assets. These gains totaled $19.8 million, $14.2 million and $7.0 million during 2006, 2005 and 2004, respectively. 69 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Our income from unconsolidated entities differs from the stand-alone net earnings from the investees presented above due to various accounting adjustments made in accordance with GAAP. Examples of these differences include: (i) only recording our proportionate share of realizable net earnings in the unconsolidated investees; (ii) the impact of certain eliminating inter-company transactions; and (iii) timing differences in income recognition due to deferral of gains on contribution of properties to joint ventures. Additionally, we have incurred certain joint venture formation costs at the investor level which we account for as outside basis as these costs are not reflected on the stand-alone financial statements of the joint venture. These amounts are reflected on our consolidated financial statements and are amortized over the life of the underlying ventures. Except as disclosed, we generally do not guarantee third party debt incurred by our unconsolidated investees. Investee third-party debt consists principally of mortgage notes payable. Generally, mortgages on real estate assets owned by our unconsolidated investees are secured by the underlying properties. Occasionally, the investees and/or Archstone-Smith are required to guarantee the mortgages along with all other venture partners. As of December 31, 2006, we have not been required to perform under any guarantees provided to our joint ventures. During 2006, we closed a joint venture transaction with the State of Wisconsin Investment Board (“SWIB”). SWIB committed $150 million of capital for 80% of the equity and we committed $37.5 million of capital for the remaining 20%. We have invested $25.1 million and our remaining commitment as of December 31, 2006 is $12.4 million. (7) Mortgage and Other Notes Receivable The change in mortgage and other notes receivable, which are included in other assets, during the years ended December 31, 2006 and 2005 consisted of the following (in thousands): Years Ended December 31, 2006 2005 Balance at January 1 ........................................................................................................ Funding of additional notes .......................................................................................... Accrued interest ........................................................................................................... Repayments and sales of notes ..................................................................................... Balance at December 31................................................................................................... $ 74,396 $ 8,729 85,165 97,096 9,781 5,224 (46,081) (36,653) $ 123,261 $ 74,396 We have a commitment to fund an additional $22.7 million under existing agreements. Our rights to the underlying collateral on these notes in the event of default are generally subordinate to the primary mortgage lender. We evaluate the collectibility of our mezzanine and other notes receivable on a quarterly basis. We recognized interest income associated with notes receivable of $17.4 million and $7.2 million for the years ended December 31, 2006 and 2005, respectively. The weighted average interest rate on these notes as of December 31, 2006 was 10.6%, including 12.6% relating to mezzanine notes receivable. (8) Borrowings Unsecured Credit Facilities Our $600 million unsecured credit facility, which is led by JPMorgan Chase Bank, N.A. bears interest at the greater of the prime rate or the federal funds rate plus 0.50% or, at our option, LIBOR plus 0.40%. The spread over LIBOR can vary from LIBOR plus 0.325% to LIBOR plus 1.00%, based upon the rating of our long-term unsecured senior notes. The facility contains an accordion feature that allows us to increase the size of the commitment to $1.0 billion at any time during the life of the facility, subject to lenders providing additional commitments, and enables us to borrow up to $150 million in foreign currencies. The credit facility is scheduled to mature in June 2010, but may be extended for one year at our option. 70 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table summarizes our revolving credit facility borrowings under our line of credit (in thousands, except for percentages): Years Ended December 31, 2006 2005 Total unsecured revolving credit facility...................................................................... Borrowings outstanding at December 31 ..................................................................... Outstanding letters of credit under this facility............................................................. Weighted average daily borrowings ............................................................................ Maximum borrowings outstanding during the period ................................................... Weighted average daily nominal interest rate............................................................... Weighted average daily effective interest rate.............................................................. $ 600,000 $ 80,000 $ 14,880 $ 100,474 $ 360,000 5.0% 6.3% $ $ $ $ $ 600,000 360,000 37,813 183,434 580,000 4.0% 4.3% We also have a short-term unsecured borrowing agreement with JPMorgan Chase Bank, N.A. which provides for maximum borrowings of $100 million. The borrowings under the agreement bear interest at an overnight rate agreed to at the time of borrowing and ranged from 4.6% to 5.7% during 2006. There were $4.7 million and $34.6 million of borrowings outstanding under the agreement at December 31, 2006 and 2005, respectively. Term Loan — International We entered into a $272.8 million secured, short-term borrowing agreement with LaSalle Bank National Association to fund the acquisition of DeWAG. The borrowing under this agreement bears interest at EURIBOR plus 0.40%. The effective interest rate at December 31, 2006 was 4.1%. We expect this loan to be paid off or refinanced before April 27, 2007. Long-Term Unsecured Debt In July 2006 we issued $575 million of exchangeable senior unsecured notes that are due in 2036. The notes have a coupon rate of 4.0% and are exchangeable into Common Shares at an exchange ratio, subject to adjustment, of 15.7206 per $1,000 principal of notes (or an initial exchange price of $63.6108 per Common Share). No separate value is ascribed to the conversion feature. The company received approximately $563 million in net proceeds from this offering. The notes are senior unsecured obligations of the Operating Trust. The company used the net proceeds from the offering to repay outstanding balances under its revolving credit facility and certain secured debt, to make incremental investments and for general corporate purposes. Prior to July 18, 2011, the holders, at their option, may exchange the notes for Common Shares upon the occurrence of specified events. Upon tender of notes for exchange, we may pay cash, Archstone-Smith Common Shares, Units, or a combination of cash and Common Shares, at our option. The holders may require us to repurchase the notes for cash on July 18, 2011 and on July 15 of 2016, 2021, 2026 and 2031 and at any time prior to maturity upon the occurrence of a fundamental change in Archstone-Smith. On or after July 18, 2011, we may elect to redeem all or part of the notes for cash. We may redeem the notes at any time prior to maturity to the extent necessary to preserve our status as a real estate investment trust. When these notes are dilutive to our earnings per share, we add the interest to the numerator and include the shares in the denominator of the weighted average shares outstanding to compute diluted earnings per share. In March 2006, the Operating Trust issued $300 million in long-term unsecured ten-year senior notes with a coupon rate of 5.8% and an effective interest rate of 5.9%. The company used the net proceeds from the offering to repay outstanding balances under its revolving credit facility and certain secured debt, to make incremental investments and for general corporate purposes. 71 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) A summary of our Long-Term Unsecured Debt outstanding at December 31, 2006 and 2005 is as follows (dollar amounts in thousands): Effective Interest Rate(2) Balance at December 31, 2006 Balance at December 31, 2005 Average Remaining Life (Years) Type of Debt Coupon Rate(1) Long-term unsecured senior notes....................................... 5.4% 5.6% $ 3,279,404 $ 2,462,964 5.23 Unsecured tax-exempt bonds .... 4.0% 4.2% 76,295 77,072 16.60 Total/average ........................ 5.4% 5.6% $ 3,355,699 $ 2,540,036 5.54 ____________ (1) Represents a fixed rate for the long-term unsecured notes and a variable rate for the unsecured tax-exempt bonds. (2) Includes the effect of fair value hedges, loan cost amortization and other ongoing fees and expenses, where applicable. The $3.4 billion of Long-Term Unsecured Debt generally has semi-annual interest payments and either amortizing annual principal payments or balloon payments due at maturity. The unsecured tax-exempt bonds require semi-annual interest payments and are due upon maturity with $21.5 million maturing in 2008 and $54.8 million maturing in 2029. The notes are redeemable at our option, in whole or in part, and the unsecured tax-exempt bonds are redeemable at our option upon sale of the related property. The redemption price is generally equal to the sum of the principal amount of the notes being redeemed plus accrued interest through the redemption date plus a standard make-whole premium, if any. Mortgages Payable Our mortgages payable generally feature either monthly interest and principal payments or monthly interest-only payments with balloon payments due at maturity (see Scheduled Debt Maturities). Early repayment of mortgages is generally subject to prepayment penalties. A summary of mortgages payable outstanding for the years ending December 31, 2006 and 2005 follows (dollar amounts in thousands): Outstanding Balance at (1) December 31, 2006 December 31, 2005 Effective Interest Rate (2) Secured floating rate debt: Tax-exempt debt ............................................... Conventional mortgages.................................... Total Floating............................................ Secured fixed rate debt: Tax-exempt debt ............................................... Conventional mortgages.................................... Other secured debt ............................................ Total Fixed................................................ $ 935,536 167,020 1,102,556 3,086 1,651,650 18,942 1,673,678 $ 839,318 54,455 893,773 — 1,480,170 19,709 1,499,879 4.9% 4.6% 4.9% 6.4% 5.8% 3.2% 5.8% $ 2,393,652 5.4% Total debt outstanding at end of period .......... $ 2,776,234 ____________ (1) Includes the unamortized fair market value adjustment associated with assumption of fixed rate mortgages in connection with real estate acquisitions. The unamortized balance aggregated $43.9 million and $63.5 million at December 31, 2006 and 2005 respectively, and is being amortized into interest expense over the life of the underlying debt. (2) Includes the effect of fair value hedges, credit enhancement fees, the amortization of fair market value purchase adjustment, and other related costs, where applicable. 72 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The change in mortgages payable during 2006 and 2005 consisted of the following (in thousands): 2006 2005 Balance at January 1 ................................................................................................. Proceeds from mortgage notes payable .................................................................. Mortgage assumptions related to property acquisitions........................................... Proceeds from construction loans .......................................................................... Regularly scheduled principal amortization ........................................................... Prepayments, final maturities and other ................................................................. Balance at December 31............................................................................................ Scheduled Debt Maturities $ 2,393,652 $ 2,031,505 — 33,152 728,484 864,155 — 655 (12,949) (15,067) (332,953) (520,748) $ 2,776,234 $ 2,393,652 Approximate principal payments due during each of the next five calendar years and thereafter, are as follows (in thousands): Long Term Unsecured Debt Regularly Scheduled Final Principal Maturities Amortization and Other Mortgages Payable Regularly Scheduled Final Principal Maturities Amortization and Other Total 2007 ....................................................... $ 31,250 $ 355,000 $ 18,992 $ 85,933 $ 491,175 2008 ....................................................... 31,250 303,040 19,387 193,109 546,786 2009 ....................................................... 51,250 30,000 19,138 381,096 481,484 2010 ....................................................... 43,750 220,000 17,984 122,760 404,494 2011 ....................................................... 50,000 575,000 19,208 199,381 843,589 Thereafter and debt discount(1) ................ 252,500 1,412,659 499,365 1,199,881 3,364,405 Total ................................................... $ 460,000 $ 2,895,699 $ 594,074 $ 2,182,160 $ 6,131,933 ____________ (1) The average annual principal payments due from 2012 to 2040 are $116.4 million per year. Other The book value of total assets pledged as collateral for mortgage loans and other obligations at December 31, 2006 and 2005 is $5.6 billion and $4.6 billion, respectively. Our debt instruments generally contain covenants common to the type of facility or borrowing, including financial covenants establishing minimum debt service coverage ratios and maximum leverage ratios. We were in compliance with all financial covenants pertaining to our debt instruments at December 31, 2006. See Note 13 for a summary of derivative financial instruments used in connection with our debt instruments. (9) Dividends to Shareholders To maintain our status as a REIT, we are generally required to distribute at least 90% of our taxable income. The payment of dividends is subject to the discretion of the Board and is dependent upon our strategy, financial condition and operating results. In December 2006, the Board announced a 4.0% increase in the annual distribution level from $1.74 to $1.81 per Common Share and, in January 2007, declared the first quarter 2007 distribution of $0.4525 per Common Share, payable on February 28 to shareholders of record on February 13, 2007. The following table summarizes the cash dividends or distributions paid per share on Common Shares and Preferred Shares during 2006, 2005 and 2004: Common Shares and A-1 Units(1) ..................................................................... Series D Preferred Shares(2).............................................................................. Series I Preferred Shares(3) ............................................................................... Series K Preferred Shares(4).............................................................................. Series L Preferred Shares(5) .............................................................................. ____________ See notes on following page. 2006 2005 2004 $ 1.74 $ 1.73 $ 2.72 — — 1.31 7,660.00 7,660.00 7,660.00 — — 2.55 — — 3.40 73 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (1) (2) (3) (4) (5) Includes a $1.00 per share special dividend issued to our Common Shareholders in December 2004. The Series D Preferred Shares were redeemed in August 2004. The Series I Preferred Shares have a par value of $100,000. The Series K Preferred Shares were converted into Common Shares in September 2004. The Series L Preferred Shares were converted to Common Shares in December 2004. (10) Shareholders’ Equity Shares of Beneficial Interest Our Declaration of Trust authorizes us to issue 450,000,000 shares with a par value of $0.01 per share. Our Declaration of Trust allows us to issue Common Shares, Preferred Shares and such other shares of beneficial interest as the Board may create and authorize from time to time. The Board may classify or reclassify any unissued shares from time to time by setting or changing the preferences, conversion rights, voting powers, restrictions, limitations as to distributions, qualifications of terms or conditions of redemption. Preferred Share Redemption and Conversions In August 2004, the Series D Preferred Shares were redeemed at liquidation value plus distributions for a total of $47.6 million. The Series K Preferred Shares were converted to Common Shares in September 2004 and the Series L Preferred Shares were converted to Common Shares in December 2004. Common Share Repurchase and Issuances In September 2005, we sold approximately 12.1 million Common Shares in an underwritten public offering under an existing shelf registration statement filed with the Securities and Exchange Commission. The $491.4 million in net proceeds were used to pay down the balance on our unsecured credit facilities. In 2006 and 2005, we repurchased 204,877 and 1,646,800 Common Shares for an average price of $58.90 and $34.31 per share, including commissions, respectively. Preferred Shares A summary of our Perpetual Preferred Shares outstanding at December 31, 2006 and 2005, including their significant rights, preferences, and privileges follows (amounts in thousands): Redemption Date(1) Liquidation Value Annual Dividend Rate Per Share December 31, 2006 2005 Description Series I Preferred Shares; 500 shares issued and outstanding at December 31, 2006 and 2005, respectively(1)..................................................... 02/01/28 100,000 7,660 $ 50,000 $ 50,000 ____________ (1) Series I Preferred Shares may be redeemed for cash at our option, in whole or in part, at a redemption price equal to the liquidation price per share, plus accrued and unpaid dividends, if any, on or after the redemption date indicated. The holders of our Preferred Shares do not have preemptive rights over the holders of Common Shares, but do have limited voting rights under certain circumstances. The Preferred Shares have no stated maturity, are not subject to any sinking fund requirements and we are not obligated to redeem or retire the shares. Holders of the Preferred Shares are entitled to receive cumulative preferential cash distributions, when and as declared and authorized by the Board, out of funds legally available for the payment of distributions. All Preferred Share distributions are cumulative from date of original issue and all series of Preferred Shares rank equally as to distributions and liquidation proceeds. All dividends due and payable on Preferred Shares have been accrued and paid as of the end of each fiscal year. 74 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) If six quarterly dividends payable (whether or not consecutive) on any series or class of Preferred Shares that are of equal rank with respect to dividends and any distribution of assets, shall not be paid in full, the number of Independent Trustees shall be increased by two and the holders of all such Preferred Shares voting as a class regardless of series or class, shall be entitled to elect the two additional Independent Trustees. Whenever all dividends in arrears have been paid, the right to elect the two additional Independent Trustees shall cease and the terms of such Independent Trustees shall terminate. Dividend Reinvestment and Share Purchase Plan Our Dividend Reinvestment and Share Purchase Plan was designed and implemented to increase ownership in the company by private investors. Under the plan, holders of Common Shares and A-1 Common Units have the ability to receive cash dividends or automatically reinvest their cash dividends to purchase additional Common Shares. We have the option of issuing new shares or acquiring shares through open market purchases or in negotiated transactions with third parties to satisfy our obligations under the plan. Common Shares acquired under the plan may be entitled to a discount, currently 1%. Ownership Restrictions and Significant Shareholders Our governing documents restrict beneficial ownership of our outstanding shares by a single person, or persons acting as a group, to 9.8% of the Common Shares and 25% of each series of Preferred Shares. For us to qualify as a REIT under the Internal Revenue Code of 1986, as amended, not more than 50% in value of our outstanding capital shares may be owned by five or fewer individuals at any time during the last half of our taxable year. The provision permits five persons to acquire up to a maximum of 9.8% each of the Common Shares, or an aggregate of 49% of the outstanding Common Shares. Common Shares owned by a person or group of persons in excess of the 9.8% limit are subject to redemption. The provision does not apply where a majority of the Board, in its sole and absolute discretion, waives such limit after determining that our eligibility to qualify as a REIT for federal income tax purposes will not be jeopardized or the disqualification as a REIT is advantageous to shareholders. (11) Minority Interest Net earnings are allocated to minority interests based on the ownership percentage of the Operating Trust associated with Unitholders relative to Common Shareholders. Minority interest consists of the following at December 31, 2006 and 2005 (in thousands): 2006 2005 A-1 Common Units........................................................................................................... N-1 and N-2 Units ............................................................................................................ Total............................................................................................................................. The changes in the minority interest balance are as follows: $ 738,910 $ 787,023 239 250 $ 739,149 $ 787,273 Balance at December 31, 2006 2005 Beginning balance ...................................................................................................... A-1 Common Unit conversions............................................................................... A-1 Common Unit redemptions .............................................................................. Unitholders share of net earnings ............................................................................ Common Units issued for real estate ....................................................................... N-1 and N-2 Units issued for real estate .................................................................. Series E, F & G Redemptions.................................................................................. Unitholders distributions......................................................................................... A-1 revaluation ($26,618) and other........................................................................ Ending balance ........................................................................................................... $ 787,273 (143,462) $ 498,098 (8,415) $ (12,065) (3,618) 107,641 85,332 81,401 408,042 — 250 — (19,522) (55,079) (43,843) (26,560) (129,051) 739,149 $ 787,273 75 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) A-1 Common Units As of December 31, 2006 and December 31, 2005, we owned an 88.2% and 86.2% majority interest in the Operating Trust, respectively. The A-1 Common Units are redeemable at the option of the Unitholders. Except as limited by agreement, Archstone-Smith has the option of redeeming the A-1 Common Units with cash or with Common Shares. The A-1 Common Units are entitled to the same distributions as Common Shares. The A-1 Common Unitholder’s aggregate minority interest in the Operating Trust was approximately 11.8% at December 31, 2006 and 13.8% at 2005. During 2006 and 2005, respectively, we converted 5,962,697 and 401,211 A-1 Common Units and issued 1,772,673 and 11,289,070 A-1 Common Units in exchange for real estate. The Common Units issued in 2005 related primarily to the Oakwood transaction described in Note 4. We revalue A-1 minority interest each quarter to maintain a proportional relationship between the book value of equity associated with Common Shareholders relative to that of holders of A-1 Common Units since both have equivalent rights and Units are convertible into Common Shares on a one-for-one basis. Series M Preferred Unit In December 2004, the Operating Trust issued one Series M Preferred Unit in exchange for cash. This unit is redeemable at the option of the holder of such unit and/or the Operating Trust under certain circumstances. If the Operating Trust is required to redeem the Series M Preferred Unit, the redemption price will be paid in cash. If the holder of the Series M Preferred Unit requests redemption of the Series M Preferred Unit, the Operating Trust has the option of redeeming the Series M Preferred Unit with cash or with Common Shares. The redemption value under such circumstances is based on the performance of the related real estate asset, as outlined in the contribution agreement. The Series M Preferred Unit is entitled to a dividend equivalent to the same dividend paid on 263 Common Shares. The holder of the Series M Preferred Unit does not have preemptive rights over the holders of Common Shares and does not have any voting right except as required by law. The Series M Preferred Unit has no stated maturity and is not subject to any sinking fund requirements. Series N-1 and N-2 Preferred Units Three-hundred N-1 and 700 N-2 Preferred Units were issued as partial consideration for land acquired in one of the Oakwood acquisitions. If certain entitlements related to the land are obtained, the N-1 and N-2 units have the potential to convert to Common Units at a rate of $70,000 and $30,000, respectively, per entitled apartment unit. As of December 31, 2006, no entitlements have been obtained. The Series N-1 Preferred Units are entitled to a dividend equivalent to the same dividend paid on 11.58 Common Shares. The Series N-2 Preferred Units are entitled to a dividend equivalent to the same dividend paid on 4.96 Common Shares. The holders of the Series N-1 and N-2 Preferred Units do not have preemptive rights over the holders of Common Shares and do not have any voting rights except as required by law. The Series N-1 and N-2 Preferred Units have no stated maturity and are not subject to any sinking fund requirements. Perpetual Preferred Units At various dates, consolidated subsidiaries of Archstone-Smith issued Perpetual Preferred Units to limited partners in exchange for cash. During 2005, all remaining Perpetual Preferred Units were redeemed at liquidation value plus accrued dividends. (12) 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. 76 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Since we early-adopted the fair value recognition provisions of SFAS No. 123 for all awards granted after January 1, 2003, adoption of SFAS No. 123R did not have a material impact on our financial position, net earnings or cash flows. Upon the adoption of SFAS 123R, we recorded a benefit resulting from application of an anticipated forfeiture rate on existing awards of approximately $100,000 which had no effect on our reported earnings per share. With respect to options granted prior to January 1, 2003, no stock-based employee compensation expense was reflected in the financial statements for the years ended December 31, 2006. Recording this expense would have lowered net earnings by approximately $100,000. We have made an election to be taxed as a REIT under the Internal Revenue Code of 1986, as amended; therefore, there was no tax impact that was recorded as a result of the adoption of this standard. Our long-term incentive plan was approved in 1997, and was modified in connection with the Smith Merger. There have been six types of awards under the plan: (i) options with a DEU feature (only awarded prior to 2000); (ii) options without the DEU feature (generally awarded after 1999); (iii) Restricted Share Unit awards with a DEU feature (awarded prior to 2006); (iv) Restricted Share Unit awards with a cash dividend payment feature (awarded after 2005) (v) employee share purchase program with matching options without the DEU feature, granted only in 1997 and 1998; and (vi) Common Shares issued to certain named executives under our Special Long-Term Incentive Plan. No more than 20 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. The plan has a 10year term. As of December 31, 2006, Archstone-Smith had approximately 10.3 million shares available for issuance. Non-qualified options constitute an important component of compensation for officers below the level of senior vice president and for selected employees. A summary of the status of Archstone-Smith Trust’s awards under our long term incentive plans as of December 31, 2006 and changes during the years ended on those dates is presented below: Option Awards Weighted Average Exercise Price Options RSU Awards Weighted Average Grant Price Units Balance, December 31, 2005................................ Granted ............................................................... Exercised/Settled ................................................. Forfeited.............................................................. Expired................................................................ Balance, December 31, 2006................................ Options 2,702,026 426,977 1,249,089 48,559 — 1,831,355 $ 24.94 45.61 23.96 35.86 — $ 30.14 948,735 310,855 296,215 16,760 — 946,615 $ 27.77 45.85 33.23 34.31 — $ 31.82 During the years ended December 31, 2006, 2005, and 2004 the share options granted to associates had a calculated fair value of $5.52, $4.19 and $1.39 per option, respectively. The historical exercise patterns of the associate groups receiving option awards are similar, and therefore we used only one set of assumptions in calculating fair value for each period. For the year ended December 31, 2006, the calculated fair value was determined using the Black-Scholes-Merton valuation model, using a weighted average risk-free rate interest rate of 4.66%, a weighted average dividend yield of 4.57%, a volatility factor of 18.3% and a weighted average expected life of four years. For the year ended December 31, 2005, the calculated fair value was determined using the BlackScholes-Merton valuation model, using a weighted average risk-free interest rate of 3.77%, a weighted average dividend yield of 5.63%, a volatility factor of 21.97% and a weighted average expected life of five years. For the year ended December 31, 2004, the calculated fair value was determined using the Black-Scholes-Merton valuation model, using a weighted average risk-free interest rate of 3.48%, a weighted average dividend yield of 6.92%, a volatility factor of 15.33% and a weighted average expected life of five years. The options vest over a three-year period and have a contractual term of 10 years. We used an estimated forfeiture rate of 30% in recording option compensation expense for the year ended December 31, 2006, based primarily on historical experience. The unamortized compensation cost is $1.1 million, which includes all options previously granted but not yet vested. This amount will be recorded as compensation cost ratably through December 31, 2008. 77 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The total intrinsic value of the share options exercised during the years ended December 31, 2006, 2005 and 2004 were $30.7 million, $22.9 million and $28.1 million, respectively. The intrinsic value is defined as the difference between the realized fair value of the share or the quoted fair value at the end of the period, less the exercise price of the option. We have 1.4 million fully vested options outstanding at December 31, 2006 with a weighted average exercise price of $26.55. The weighted-average contractual life of the fully vested options is 6.3 years, and they have an intrinsic value of $44.7 million. In addition, we have 296,000 options outstanding that we expect to vest with a weighted average exercise price of $41.83. The weighted-average contractual life of the unvested options is 9.4 years, and they have an intrinsic value of $3.7 million. Restricted Share Units Also during the year ended December 31, 2006, we issued RSUs to senior officers and trustees of the company with a weighted average grant date fair value of $45.85 per share. The units vest over a three-year period and the related unamortized compensation cost is $9.8 million, which includes all units previously granted but not yet vested. This amount will be recorded as compensation cost ratably through December 31, 2008. We have 694,000 fully vested RSUs outstanding at December 31, 2006 with a weighted average grant date fair value of $28.18. The weighted-average contractual life for the fully vested shares is 6.2 years and the intrinsic value is $40.4 million. In addition, we have 252,600 RSUs outstanding that we expect to vest with a weighted average grant date fair value of $41.77. The weighted-average contractual life for the unvested shares is 9.3 years and the intrinsic value is $14.7 million. The total intrinsic value of the RSUs settled during the years ended December 31, 2006, 2005 and 2004 were $15.8 million, $8.5 million and $5.8 million, respectively. 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 threeyear term of the plan. The calculated fair value was determined by an independent third party using a Monte Carlo simulation approach which yielded an estimated payout percentage of 41%. The related unamortized compensation cost at December 31, 2006 is $3.2 million. Summary The compensation cost associated with all awards for the year ended December 31, 2006 was approximately $11.3 million, of which approximately $8.5 million was charged to operating expenses, and approximately $2.8 million related to dedicated investment personnel and was capitalized to development and other qualifying investment activities. The compensation cost associated with all awards for the year ended December 31, 2005 was approximately $8.5 million, of which approximately $6.5 million was charged to operating expenses, and approximately $2.0 million related to dedicated investment personnel and was capitalized to development and other qualifying investment activities. The compensation cost associated with all awards for the year ended December 31, 2004 was approximately $5.5 million, of which approximately $4.0 million was charged to operating expenses, and approximately $1.5 million related to dedicated investment personnel and was capitalized to development and other qualifying investment activities. Dividend Equivalent Units Under the modified long-term incentive plan, participants who were awarded options prior to 2000 and RSUs prior to 2006 were credited with DEUs equal to the amount of dividends paid on Common Shares with respect to such awards. The DEUs vest under substantially the same terms as the underlying share options or RSUs. 78 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) DEUs earned on options are calculated by taking the average number of options held at each record date and multiplying by the difference between the average annual dividend yield on Common Shares and the average dividend yield for the Standard & Poor’s 500 Stock Index. DEUs earned on RSUs are calculated by taking the average number of RSUs held at each record date and multiplying by the average annual dividend yield on Common Shares. DEUs earned on existing DEUs are calculated by taking the number of DEUs at December 31 and multiplying by the average annual dividend yield on Common Shares. Certain of the options and all RSUs included in the table above have a DEU feature. The aggregate number of vested DEUs outstanding as of December 31, 2006 was 354,500. During the year ended December 31, 2006, we recorded $486,800 as a charge to operating expense related to unvested DEUs and $1,680,000 of common share dividends related to vested DEUs. 401(k) Plan and Nonqualified Deferred Compensation Plan In December 1997, the Archstone-Smith Board established a 401(k) plan and a nonqualified savings plan, which both became effective on January 1, 1998. The 401(k) plan provides for matching employer contributions of fifty cents for every dollar contributed by the employee, up to 6% of the employee’s annual contribution. Contributions by employees to the 401(k) plan were subject to federal limitations of $15,000 during 2006. The matching employer contributions are made in Common Shares, which vest based on years of service at 20% per year. We also have a nonqualified deferred compensation plan which permits deferrals of compensation by eligible employees and nonemployee trustees. No employer contributions are currently being made to that plan. Amounts deferred under the deferred compensation plan are invested among a variety of investments as directed by the participants, and are generally deferred until termination of employment or service as a trustee. Deferral of Fees by Non-Employee Trustees Through December 31, 2005 and pursuant to the terms of the nonqualified deferred compensation plan, each non-employee member of our Board has had the opportunity to defer receipt of all or a portion of the service fees they otherwise would have been paid in cash. If a participant elected to have their fees deferred, the fees accrued in the form of phantom shares equal to the number of Common Shares that could have been purchased on the date the fee was credited. Dividends are calculated on the phantom shares and additional phantom shares are credited. Distribution of phantom shares may be deferred to a later date. Upon settlement, phantom shares convert into Common Shares on a one-to-one basis. Beginning in 2006 each non-employee member of our Board has the ability to defer new service fees into the Archstone-Smith Deferred Compensation Plan, rather than into phantom shares. The Trustee can elect to have his or her fees deferred and invested in one or more of the investment funds that are otherwise available under the deferred compensation plan. Upon settlement such investments are paid out in cash. The phantom shares already on account will continue to accrue additional phantom shares in lieu of dividends. 79 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (13) Financial Instruments and Hedging Activities Fair Value of Financial Instruments At December 31, 2006 and 2005, the fair values of cash and cash equivalents, restricted cash held in a taxdeferred exchange escrow accounts, receivables and accounts payable approximated their carrying values because of the short-term nature of these instruments. The estimated fair values of other financial instruments subject to fair value disclosures were determined based on available market information and valuation methodologies believed to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, therefore, are not necessarily indicative of the actual amounts that we could realize upon disposition. The following table summarizes these financial instruments (in thousands): Balance at December 31, 2006 Carrying Estimated Amounts Fair Value Balance at December 31, 2005 Carrying Estimated Amounts Fair Value Marketable equity securities........................... Borrowings: Unsecured credit facilities .......................... Term Loan — International ........................ Long-Term Unsecured Debt ....................... Mortgages payable ..................................... Interest rate contracts: Interest rate swaps...................................... Interest rate caps ........................................ Forward contracts: Forward sale agreement.............................. Foreign currency forward........................... Energy contracts: Electricity contracts.................................... Natural gas contracts.................................. Fuel oil contracts........................................ $ $ 6,600 84,723 235,771 3,355,699 2,776,234 6,818 809 (313) (1,172) (8) (1,047) — $ $ 6,600 $ 4,648 $ $ 4,648 394,578 — 2,623,056 2,393,389 3,618 339 — (15) 84,723 $ 394,578 235,771 — 3,436,902 2,540,036 2,801,342 2,393,652 6,818 $ 809 (313) (1,172) (8) $ (1,047) — 3,618 339 — (15) (26) — (6) $ $ $ $ $ $ $ $ (26) — (6) All publicly traded equity securities are classified as “available for sale securities” and carried at fair value, with unrealized gains and losses reported as a separate component of shareholders’ equity. Private investments, for which we do not have the ability to exercise significant influence, are accounted for at cost. Declines in the value of public and private investments that management determines are other than temporary, are recorded as a provision for possible loss on investments. Our evaluation of the carrying value of these investments is primarily based upon a regular review of market valuations (if available), each company’s operating performance and assumptions underlying cash flow forecasts. In addition, management considers events and circumstances that may signal the impairment of an investment. Interest Rate Hedging Activities We are exposed to the impact of interest rate changes and will occasionally utilize interest rate swaps and interest rate caps as hedges with the objective of lowering our overall borrowing costs. These derivatives are designated as either cash flow or fair value hedges. In connection with the DeWAG transaction, we assumed interest rate swaps with an aggregate notional amount of €227.0 million. The DeWAG swaps, which have an aggregate fair value of approximately $5.9 million and notional amount of $295.2 million at December 31, 2006, were put in place by DeWAG to fix the interest cost associated with certain variable rate mortgages. These derivatives were not designated as hedges for US GAAP purposes and changes in fair value are recorded as adjustments to interest expense. We have interest rate caps that are not designated as a hedge that have immaterial fair value as of December 31, 2006. These caps were required by the loan agreement. We do not use these derivatives for trading or other speculative purposes. Further, as a matter of policy, we only enter into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, we have not, nor do we expect to sustain a material loss from the use of these hedging instruments. 80 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) We formally assess all hedges, both at inception of the hedge and on an ongoing basis, as to whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item. We measure hedge effectiveness by comparing the changes in the fair value or cash flows of the derivative instrument with the changes in the fair value or cash flows of the hedged item. If a derivative ceases to be a highly effective hedge, we discontinue hedge accounting prospectively. To determine the fair values of derivative and other financial instruments, we use a variety of methods and assumptions that are based on market value conditions and risks existing at each balance sheet date. These methods and assumptions include standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost and termination cost. All methods of assessing fair value result in a general approximation of value, and therefore, are not necessarily indicative of the actual amounts that we could realize upon disposition. During the years ended December 31, 2006, 2005 and 2004 we recorded an increase/(decrease) to interest expense of $372,000, $(174,000) and $33,000, for hedge ineffectiveness caused by a difference between the interest rate index on a portion of our outstanding variable rate debt and the underlying index of the associated interest rate swap. We pursue hedging strategies that we expect will result in the lowest overall borrowing costs and least degree of earnings volatility. The following table summarizes the notional amount, carrying value and estimated fair value of our derivative financial instruments used to hedge interest rates, as of December 31, 2006 (dollar amounts in thousands). The notional amount represents the aggregate amount of a particular security that is currently hedged at one time, but does not represent exposure to credit, interest rate or market risks. Notional Amount Maturity Date Range Carrying and Estimated Fair Value Cash flow hedges: Interest rate caps ................................................................................. Interest rate swaps............................................................................... Total cash flow hedges .................................................................... Fair value hedges: Interest rate swaps............................................................................... Total rate of return swaps .................................................................... Total fair value hedges .................................................................... Total hedges ................................................................................ Foreign Currency Hedging Activities $ 486,354 367,054 $ 853,408 75,055 36,346 $ 111,401 $ 964,809 $ 2007-2013 2007-2014 2007-2014 2008 2007 2007-2008 2007-2014 $ 809 7,080 $ 7,889 $ 1,185 (1,447) $ (262) $ 7,627 We are exposed to foreign-exchange related variability and earnings volatility on our foreign investments. As such, during 2006 and 2005 we entered into foreign currency forward contracts with an aggregated notional amount of €201.5 million as a hedge against our exposure to variability in exchange rates on investment in foreign subsidiaries and designated the contract as a net investment hedge. The fair value of these forward contracts at December 31, 2006 was ($1.2) million. Energy Contract Hedging Activities We are exposed to price risk associated with the volatility of natural gas, fuel oil and electricity rates. During 2005 and 2006, we entered into contracts with several of our suppliers to fix our payments on set quantities of natural gas, fuel oil and electricity. If the contract meets the criteria of a derivative, we designate these contracts as cash flow hedges of the overall changes in floating-rate payments made on our energy purchases. As of December 31, 2006, we had energy-related derivatives with aggregate notional amounts of $5.3 million and an estimated fair value and carrying amount of ($1.1) million. These contracts mature on or before December 31, 2007. Equity Securities Hedging Activities We are exposed to price risk associated with changes in the fair value of certain equity securities. During 2006, we entered into forward sale agreements with an aggregate notional amount equal to the fair value of the underlying marketable securities of approximately $6.6 million, to protect against a reduction in the fair value of these securities. The contract had an aggregate estimated fair value of approximately ($0.3) million at December 31, 2006. We designated this forward sale as a fair value hedge. 81 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (14) Selected Quarterly Financial Data (Unaudited) Selected quarterly financial data (in thousands, except per share amounts) for 2006 and 2005 is summarized below. The sum of the quarterly earnings per Common Share amounts may not equal the annual earnings per Common Share amounts due primarily to changes in the number of Common Shares outstanding from quarter to quarter. 3-31(1) Three Months Ended 6-30(1) 9-30(1) 12-31(1) 2006: Total revenues......................................................................... Earnings from operations ........................................................ Income from unconsolidated entities ....................................... Other non—operating income ................................................. Less minority interest: Convertible operating partnership units(2)............................. Plus net earnings from discontinued operations........................ Less Preferred Share dividends................................................ Net earnings attributable to Common Shares — Basic ............. Net earnings per Common Share(2): Basic................................................................................... Diluted................................................................................ 2005: Total revenues......................................................................... $ 252,412 $ 265,145 $ 305,313 $ 310,716 41,219 18,878 176 47,159 10,518 243 58,584 2,088 1,718 54,046 4,832 201 7,598 6,944 7,337 6,977 71,780 115,873 76,129 254,531 958 957 957 957 $ 123,497 $ 165,892 $ 130,225 $ 305,676 $ $ 0.58 $ 0.58 $ 0.77 $ 0.77 $ 0.60 $ 0.60 $ 1.39 1.36 $ 177,902 $ 184,889 $ 231,778 $ 239,064 Earnings from operations ........................................................ 2,122 25,998 53,342 40,147 Income from unconsolidated entities ....................................... 11,117 5,794 1,839 3,682 Other non—operating income ................................................. 24,005 4,778 72 (48) Less minority interest: Perpetual preferred units (2) .................................................. 741 — — — Convertible operating partnership units(2)............................. 4,757 4,515 11,200 5,898 Plus net earnings from discontinued operations........................ 33,611 23,647 119,670 287,560 Less Preferred Share dividends................................................ 957 958 958 958 Net earnings attributable to Common Shares — Basic(2)........... $ 64,400 $ 54,744 $ 162,765 $ 324,485 Net earnings per Common Share(2): Basic................................................................................... $ 0.32 $ 0.28 $ 0.80 $ 1.53 Diluted................................................................................ $ 0.32 $ 0.27 $ 0.80 $ 1.52 ____________ (1) Net earnings from discontinued operations have been reclassified for all periods presented. (2) Due to the quarterly pro-rata calculation of minority interest and rounding, the sum of the quarterly per share and/or dollar amounts does not equal the year-to-date totals. (15) Segment Data We define our garden communities and High-Rise properties each as individual operating segments. We have determined that each of our garden communities and each of our High-Rise properties have similar economic characteristics and also meet the other GAAP criteria, which permit the garden communities and high-rise properties to be aggregated into two reportable segments. Additionally, we have defined the activity from Ameriton as an individual operating segment as its primary focus is the opportunistic acquisition, development and eventual disposition of real estate with a short term investment horizon. NOI is defined as rental revenues less rental expenses and real estate taxes. We rely on NOI for purposes of making decisions about resource allocations and assessing segment performance. We also believe NOI is a valuable means of comparing year-to-year property performance. 82 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Following are reconciliations, which exclude the amounts classified as discontinued operations, of each reportable segment’s (i) revenues to consolidated revenues; (ii) NOI to consolidated earnings from operations; and (iii) assets to consolidated assets, for the periods indicated (in thousands): Years Ended December 31, 2006 2005 2004 Reportable apartment communities segment rental revenues: Same-Store: Garden communities ........................................................................... High-Rise properties............................................................................ Non Same-Store: Garden communities ........................................................................... High-rise properties............................................................................. Ameriton(1) .......................................................................................... Other non-reportable operating segment revenues........................................ Total segment and consolidated rental revenues................................ $ 363,677 $ 343,476 $ 331,746 254,549 239,549 231,000 210,830 93,320 39,512 174,147 88,447 33,534 6,956 5,458 3,202 46,017 7,353 3,276 $ 1,056,176 $ 777,603 $ 642,270 Years Ended December 31, 2006 2005 2004 Reportable apartment communities segment NOI: Same-Store: Garden communities ....................................................................... High-Rise properties........................................................................ Non Same-Store: Garden communities ....................................................................... High-Rise properties........................................................................ Ameriton(1) ...................................................................................... Other non-reportable operating segment NOI .......................................... Total segment and consolidated NOI............................................ Reconciling items: Other income................................................................................... Depreciation on real estate investments............................................ Interest expense............................................................................... General and administrative expenses ............................................... $ 251,293 $ 236,606 $ 172,547 142,153 117,146 3,158 26,537 712,834 158,660 63,178 59,425 1,990 5,362 525,221 228,084 154,002 22,739 22,623 1,266 2,809 431,523 19,208 (150,470 (125,108 (55,479 77,410 56,030 (261,438) (187,771) (245,895) (164,035) (68,188) (58,604) Other expenses ................................................................................ (13,715) (49,232) (13,563 Consolidated earnings from operations ........................................ $ 201,008 $ 121,609 $ 106,111 __________________ (1) While rental revenue and NOI are the primary measures we use to evaluate the performance of our assets, management also utilizes gains from the disposition of real estate when evaluating the performance of Ameriton as its primary focus is the opportunistic acquisition, development and eventual disposition of real estate with a short term investment horizon. During 2006, 2005 and 2004, pre-tax gains, net of internal disposition costs, from the disposition of Ameriton depreciated real estate were $51.2 million, $75.2 million and $65.1 million, respectively. These gains are classified within discontinued operations. Ameriton assets are excluded from our Same-Store population as they are acquired or developed to achieve short-term opportunistic gains, and therefore, the average holding period is typically much shorter than the holding period of assets operated by the REIT. 83 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Year Ended December 31, 2006 2005 Reportable operating communities segment assets: Same-Store: Garden communities ...................................................................................... High-Rise properties....................................................................................... Non Same-Store: Garden communities ...................................................................................... High-Rise properties....................................................................................... Ameriton........................................................................................................ FHA/ADA settlement capital accrual ..................................................................... International .......................................................................................................... Other non-reportable operating segment assets ....................................................... Total segment assets ................................................................................... Real estate held for sale, net........................................................................ Total segment assets ............................................................................... Reconciling items: Investment in and advances to unconsolidated entities..................................... Cash and cash equivalents .............................................................................. Restricted cash in tax-deferred exchange escrow............................................. Other assets.................................................................................................... Consolidated total assets............................................................................. $ 2,594,681 $ 2,508,155 2,950,252 2,388,235 434,282 29,185 843,003 153,568 11,901,361 329,133 12,230,494 2,632,382 2,539,302 2,829,915 1,457,841 557,684 47,198 — 130,902 10,195,224 327,347 10,522,571 235,323 132,728 48,655 13,638 319,312 495,274 425,343 297,884 $ 13,259,127 $ 11,462,095 Total capital expenditures for garden communities excluding communities sold or held for sale, were $60.6 million and $38.1 million for the years ended December 31, 2006 and 2005, respectively. Total capital expenditures for High-Rise properties excluding communities sold or held for sale were $64.7 million and $66.1 million for the years ended December 31, 2006 and 2005, respectively. Total capital expenditures for Ameriton properties excluding communities sold or held for sale, were $1.1 million and $0.5 million for the years ended December 31, 2006 and 2005, respectively. (16) Income Taxes Substantially all of our income is derived through the Operating Trust. The Operating Trust has elected to be treated as a partnership for federal income tax purposes. Accordingly, the Operating Trust’s income is not subject to federal income taxes. We have elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, we must meet a number of ownership, organizational and operational requirements, including a requirement that we currently distribute at least 90% of our taxable income. As a REIT, we are generally not subject to corporate level federal income taxes on net income we distribute to our shareholders. Accordingly, no provision for REIT income taxes is included in the accompanying Consolidated Statements of Earnings. If we fail to qualify as a REIT in any taxable year, then we will be subject to federal income taxes at regular corporate rates. Even as a REIT, we may be subject to certain state, local and REIT-specific federal taxes on our income and property. In addition, we have certain taxable subsidiaries such as Ameriton and certain International subsidiaries for which we do record a provision for income taxes. The following table reconciles net earnings to domestic taxable income subject to dividend distribution requirement for the years ended December 31 (in thousands): For the Year Ended December 31, 2006 2005 2004 (estimated) GAAP net earnings................................................................................. Book to tax differences: Forward contracts ............................................................................... Depreciation and amortization(1) .......................................................... Gain or loss from capital transactions(2) ............................................... Reserves ............................................................................................. Other, net............................................................................................ Taxable income ...................................................................................... Less: capital gains recognized(2)........................................................... Taxable income subject to dividend distribution requirement............ $727,435 $ 616,172 $ 542,342 — — (20,067) 43,778 11,678 4,630 (389,805) (258,406) (37,173) (13,053) (3,046) 9,359 (10,690) (17,281) (21,369) 357,665 349,117 477,722 (93,150) (136,120) (299,178) $ 264,515 $ 212,997 $ 178,544 84 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) ____________ (1) We use accelerated depreciable lives for tax purposes. This results in higher depreciation expense on newly acquired assets for tax purposes relative to GAAP. This is offset by the Smith Merger in 2001 and the Oakwood transaction in 2005 as GAAP depreciation expense for the related assets is based on fair value and tax depreciation is based on a lower historical tax basis. (2) Taxable gains are smaller than book gains due primarily to tax-deferred exchanges. The following table provides a reconciliation between cash dividends paid and dividends paid deduction (in thousands): For the Year Ended December 31, 2006 2005 2004 (estimated) Taxable component of dividends paid ........................................................ $ 379,087 $ 353,572 $ 545,586 Plus: dividends designated from following year ...................................... — — — Less: dividends designated to prior year ................................................. — — (16,048) Dividends paid deduction(1) $ 379,087 $ 353,572 $ 529,538 ____________ (1) Includes a special dividend of $221 million paid in December 2004, and reflects distribution of all ordinary income and capital gains. The following table summarizes the taxability of our dividends for the past three years: For the Year Ended December 31, 2006 2005 2004 Ordinary income........................................................................................ Capital gains(1) ........................................................................................... 75% 25% 100% 65% 35% 100% 46% 54% 100% ____________ (1) Includes 11.4%, 34.3% and 22.8% of unrecaptured Section 1250 gains in 2006, 2005, and 2004, respectively. As a taxable REIT subsidiary, Ameriton is subject to state and federal income taxes. Income tax expense consists of the following for the years ended December 31, 2006, 2005, and 2004 which is included in either other expense or discontinued operations (in thousands): For the Year Ended December 31, 2006 2005 2004 Income tax expense (benefit) Current ...................................................................................................... Deferred .................................................................................................... Total expense ......................................................................................... $ 14,825 3,208 $ 18,033 $ 21,854 (2,255) $ 19,599 $ 20,119 (1,314) $ 18,805 Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 35% to pretax income as a result of the following for the years ended December 31, 2006, 2005, and 2004 (in thousands): For the Year Ended December 31, 2006 2005 2004 Computed expected tax expense................................................................. Increase (decrease) in income taxes resulting from state taxes and other ..... Income tax expense.................................................................................... $ 19,018 (985) $ 18,033 $ 19,039 560 $ 19,599 $ 17,801 1,004 $ 18,805 Deferred income taxes reflect the estimated net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the corresponding amounts for income tax purposes. Ameriton’s deferred tax assets and liabilities at December 31, 2006 and 2005 are presented below (in thousands). 85 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Years Ended December 31, 2006 2005 Deferred tax assets: Deferred compensation ....................................................................................... Reserves ............................................................................................................. Real estate, principally due to depreciation .......................................................... Other .................................................................................................................. Deferred tax assets ...................................................................................... Deferred tax liabilities: Real estate, principally due to depreciation ...................................................... Income from unconsolidated entities................................................................ Deferred tax liabilities ................................................................................. Net deferred tax asset (liability) ................................................................... International Income Taxes $ 712 560 1,211 75 2,558 — 2,603 2,603 $ 3,775 421 1,310 928 6,434 — 3,271 3,271 $ (45) $ 3,163 During the year ended December 31, 2006, we recorded a $5.6 million tax benefit and a corresponding deferred tax asset related to the net loss on our International operations. In addition, we have a $69.0 million deferred tax liability as of December 31, 2006 related primarily to built-in gains on the DeWAG real estate portfolio. (17) Commitments and Contingencies Commitments At December 31, 2006 we had eight non-cancelable ground leases for certain apartment communities and buildings that expire between 2042 and 2077. Each ground lease generally provides for a fixed annual rental payment plus additional rental payments based on the properties’ operating results. Additionally, we lease certain office space under non-cancelable operating leases with fixed annual rental payments. The future minimum lease payments payable under non-cancelable leases are as follows at December 31, 2006 (in thousands): 2007 .................................................................................................................................................... 2008 .................................................................................................................................................... 2009 .................................................................................................................................................... 2010 .................................................................................................................................................... 2011 .................................................................................................................................................... Thereafter (2012-2077) Total ................................................................................................................................................ See Note 2 for real estate-related commitments. Guarantees and Indemnifications Investee third-party debt consists principally of mortgage notes payable. Generally, mortgages on real estate assets owned by our unconsolidated investees are secured by the underlying properties. We generally do not guarantee third party debt incurred by our unconsolidated investees; however, the investees and/or Archstone-Smith are occasionally required to guarantee the mortgages along with all other venture partners. We guarantee $292.0 million of the outstanding debt balance related to an unconsolidated development joint venture and are committed to guarantee another $16.9 million upon funding of additional debt. As of December 31, 2006 we have not been required to perform under any guarantees provided to our joint ventures. 3,767 3,816 3,868 3,886 3,926 $ 215,623 $ 234,886 $ 86 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) As part of the Smith Merger and the Oakwood transaction, we are required to indemnify certain Unitholders for any personal income tax expense resulting from the sale of properties identified in tax protection agreements. We do not believe that we will be required to perform under the terms of the indemnification agreements due to our ability and intent to hold and use these properties through the term of the indemnification period or our ability to dispose of assets through tax-deferred exchanges. The estimated difference in the book and tax carrying value of properties that are at least partially subject to tax protection agreements was approximately $4.3 billion at December 31, 2006. Litigation and Contingencies During the second quarter of 2005, we entered into a full and final settlement in the United States District Court for the District of Maryland with three national disability organizations and agreed to make capital improvements in a number of our communities in order to make them fully compliant with the FHA and ADA. The litigation, settled by this agreement, alleged lack of full compliance with certain design and construction requirements under the two federal statutes at 71 of the company’s wholly-owned and joint venture communities, of which we still own or have an interest in 45. As part of the settlement, the three disability organizations all recognized that 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 communities named in the settlement was estimated at $47.2 million and was accrued as an addition to real estate during the fourth quarter of 2005. The settlement agreement approved by the court allows us to remediate each of the designated communities over a three year period, and also provides that we are not restricted from selling any of our communities during the remediation period. We agreed to pay damages totaling $1.4 million, which included legal fees and costs incurred by the plaintiffs. We had $29.2 million of the original accrual remaining on December 31, 2006. We are subject to various claims filed in 2002 and 2003 in connection with moisture infiltration and resulting mold issues at certain high-rise properties we once owned in Southeast Florida. These claims generally allege that water infiltration and resulting mold contamination resulted in the claimants having personal injuries and/or property damage. Although certain of these claims continue to be in various stages of litigation, with respect to the majority of these claims, we have either settled the claims and/or we have been dismissed from the lawsuits that had been filed. With respect to the lawsuits that have not been resolved, we continue to defend these claims in the normal course of litigation. We are a party to various other claims and routine litigation arising in the ordinary course of business. We do not believe that the results of any such claims or litigation, individually or in the aggregate, will have a material adverse effect on our business, financial position or results of operations. (18) Supplemental Cash Flow Information Significant non-cash investing and financing activities for the years ended December 31, 2006, 2005 and 2004 consisted of the following: • • • • • • Issued $81.4 million, $408.0 million and $10.8 million of A-1 Common Units as partial consideration for properties acquired during 2006, 2005 and 2004, respectively; Issued $250,000 of Series N-1 and N-2 Preferred Units ($125,000 each) as partial consideration for real estate during 2005; Converted $143.4 million, $8.4 million and $47.9 million A-1 Common Units to Common Shares during 2006, 2005 and 2004, respectively; Assumed mortgage debt of $728.5 million, $864.2 million and $113.6 million during 2006, 2005 and 2004, respectively, in connection with the acquisition of apartment communities; Recorded a $47.2 million accrual for anticipated capital spending to bring properties named in the FHA and ADA settlement into compliance in 2005; See Notes 3 and 4 for further discussion regarding the non-cash financing components of the DeWAG and Oakwood acquisitions. 87 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (19) Related Party Transactions Archstone-Smith has the following business relationships with business entities or family members of Board of Trustee members Robert H. Smith and Robert P. Kogod: On April 8, 2002, the Operating Trust entered into an Office Space Easement and Cost Sharing Arrangement with CESM, Inc. and others. CESM, Inc. is controlled by two of our trustees, Mr. Smith and Mr. Kogod. During 2006, CESM, Inc. paid to us a total of $99,355 for office services provided by us to CESM, Inc. and $32,783 for certain employee expenses. For that same period, we paid to CESM, Inc. $234,480 for a portion of the rent due for the executive suites that CESM, Inc. leases and which are utilized by Mr. Smith and Mr. Kogod while working for us, and $56,825 for certain employee expenses to support Mr. Smith and Mr. Kogod. 88 ARCHSTONE-SMITH TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Mr. Smith owns a residence within a condominium in Crystal City. Archstone-Smith staffed the property with doormen, maintenance, and administrative staff. We were reimbursed by the condominium association for payroll and benefits costs for these employees and we received a monthly management fee of $1,800 for other ArchstoneSmith management oversight. We do not have an ownership interest in this property. We discontinued management of this asset as of February 28, 2006. Prior to the termination date, we billed $32,054 for expenses incurred and management fees for this property during 2006. Mr. Smith and Mr. Kogod have a 0.33% and 4.36% ownership interest, respectively, in two apartment communities in Washington D.C. We received a management fee of 4.5% of revenues to manage the property and perform all accounting functions. We do not have an ownership interest in this property. We discontinued management of this asset as of May 31, 2006. Prior to the termination date, we billed $1,143,463 for expenses incurred and management fees for these properties during 2006. 89 Report of Independent Registered Public Accounting Firm The Board of Trustees and Shareholders Archstone-Smith Trust: Under date of March 1, 2007, we reported on the consolidated balance sheets of Archstone-Smith Trust and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of earnings, shareholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2006. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules, Schedule III — Real Estate and Accumulated Depreciation (Schedule III) and Schedule IV — Mortgage Loans on Real Estate (Schedule IV). Schedule III and Schedule IV are the responsibility of Archstone-Smith Trust’s management. Our responsibility is to express an opinion on Schedule III and Schedule IV based on our audits. In our opinion, Schedule III and Schedule IV, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. \s\ KPMG LLP Denver, Colorado March 1, 2007 90 ARCHSTONE-SMITH TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2006 (Dollar amounts in thousands) Initial Cost to Archstone-Smith Trust Encumbrances Land Land Totals Buildings & Improvements Costs Capitalized Subsequent to Acquisition Buildings & Improvements Accumulated Depreciation Gross Amount at Which Carried at Year End Construction Year(1) Year Acquired Units Apartment Communities: Garden Communities: — — 129,612 33,280 — 11,685 78,000 — — 254,461 — — 23,770 33,376 249,521 25,709 — — — 258,925 1,098,339 27,505 36,682 — — 17,803 462,066 — — — 34,360 587,896 1,166,312 499,550 2,764,201 3,329,913 6,987,209 2,492,216 3,501,002 67,518 39,837 2,323 34,402 5,002 584,270 2,229 5,963 87,664 16,279 582,947 1,428,434 161,465 172,030 188,925 — 139,613 21,768 793,256 16,741 33,789 176,474 46,041 1,420,478 3,009,115 627,144 248,983 6,051 1,410 64,136 337 218,187 65 4,606 4,437 102 248,771 797,085 62,984 78,088 40,111 2,323 34,697 5,008 649,519 2,231 6,054 87,905 16,288 597,753 1,519,977 174,403 410,443 194,702 1,410 203,454 22,099 946,194 16,804 38,304 180,670 46,134 1,654,443 3,714,657 677,190 9,308,336 24,440 4 66,944 8,912 1,030 1,307 23,211 18,965 10,436 504,186 79,497 3,110 26,363 84,916 413,676 67,521 69,856 5,775 40,210 289,655 1,740,014 — 1,158 327,909 38,550 4,596 11,802 4,058 24,307 59,147 785,620 121,417 17,620 45,809 108,480 724,210 144,561 197,603 1,225 72,232 660,646 3,350,950 59,772 33,091 79,733 715 4,923 1,089 61,849 12,300 14,892 337,594 126,627 1,370 19,347 185,750 275,421 96,917 8,269 29,568 46,770 236,150 1,632,147 24,780 4,830 75,204 8,927 1,523 1,337 23,182 19,181 12,180 507,439 89,548 3,748 26,529 91,277 420,165 74,510 74,678 6,320 40,780 300,484 1,806,622 59,432 29,423 399,382 39,250 9,026 12,861 65,936 36,391 72,295 1,119,961 237,993 18,352 64,990 287,869 993,142 234,489 201,050 30,248 118,432 885,967 4,916,489 84,212 34,253 474,586 48,177 10,549 14,198 89,118 55,572 84,475 1,627,400 327,541 22,100 91,519 379,146 1,413,307 308,999 275,728 36,568 159,212 1,186,451 6,723,111 (15) (4,712) (42,224) (1,585) (3,157) (503) (3,914) (9,764) (21,149) (76,734) (40,393) (6,298) (949) (50,957) (115,542) (56,169) (20,219) (3,595) (13,759) (113,308) (584,946) (23,298) (23,791) — (16,424) (915) (45,067) (357) (10,162) (4,106) (1,822) (229,124) (355,066) (8,590) 12,838,523 (948,602) Under Construction 2001 1898-2006 1998 1981 1974 2006 1996 1985-1990 1969-2006 1986-2002 1988 1978-1999 1973-2005 1909-2004 1976-2003 1990-2003 2002 1985-2005 1967-2003 1901-2006 1988-1999 Under Construction 1934-2004 1983 1870-2003 1945 1992 1966-1986 1992-1998 1929-2005 1903-2006 2001 2001 1999-2006 2005 1992 2005 2006 1998 1995-1997 1998-2006 1996-2005 1998 2005-2006 1996-2006 1995-2006 1997-2005 1998-2005 2002 1997-2005 1999-2006 2001-2006 2001-2005 2004 2003-2004 2005 2002-2006 2006 1999 2005-2006 2005 2001-2006 2005-2006 488,531 234,813 3,733 238,151 27,107 1,595,713 19,035 44,358 268,575 62,422 2,252,196 5,234,634 851,593 29,185 1,006 444 2,044 514 156 379 396 1,036 1,298 8,138 2,947 312 1,403 2,968 7,604 3,408 2,282 160 1,018 9,048 46,561 1,633 1,113 181 1,073 250 3,028 80 387 853 338 11,722 20,658 8,334 75,553 4,802 Atlanta, Georgia ...................................... Austin, Texas........................................... Boston, Massachusetts............................ Dallas, Texas ........................................... Denver, Colorado .................................... El Paso, Texas ......................................... Greater NYC metropolitan area ............. Houston, Texas........................................ Inland Empire, California ....................... Los Angeles, California .......................... Orange County, California...................... Orlando, Florida ...................................... Phoenix, Arizona..................................... San Diego, California.............................. Bay Area, California ............................... Seattle, Washington................................. Southeast Florida..................................... Stamford, Connecticut ............................ Ventura County, California .................... Washington, D.C. metropolitan area...... Garden Communities Total ..................... High-Rise Properties: Boston, Massachusetts............................ Chicago, Illinois ...................................... Dallas, Texas ........................................... Los Angeles, California .......................... Minneapolis, Minnesota.......................... NYC metropolitan area ........................... Philadelphia, Pennsylvania ..................... San Diego, California.............................. Bay Area, California ............................... Seattle, Washington................................. Washington, D.C. metropolitan area...... High-Rise Properties Total ...................... Germany(2) ............................................... FHA/ADA Settlement Capital accrual... Total Apartment Communities — Operating and Under Construction ..... Other: Development communities In Planning and Owned ................................................. Hotel, retail and other assets....................... Total real estate assets................................. 8,362 3,671 2,776,234 216,479 132,638 13,187,640 80,355 (8,544) (957,146) ____________ (1) Represents the date that the building structure was originally completed. For phased developments, it represents the date the earliest phase was constructed. (2) Our German portfolio is concentrated primarily in the Federal States of North-Rhine Westphalia, Hesse, Baden-Wurttemburg and Berlin. 91 SCHEDULE III The following is a reconciliation of the carrying amount and related accumulated depreciation of ArchstoneSmith’s investment in real estate, at cost (in thousands): Carrying Amounts 2006 Years Ended December 31, 2005 2004 Balance at January 1 ..................................................................... Apartment communities: Acquisition-related expenditures................................................ Redevelopment expenditures..................................................... Recurring capital expenditures .................................................. Development expenditures, excluding land acquisitions............. Acquisition and improvement of land for development............... Dispositions.............................................................................. Provision for possible loss on investment................................... Change in estimated hurricane retirements................................. Other ........................................................................................ Net apartment community activity................................................. Other: Change in other real estate assets............................................... Balance at December 31................................................................ Accumulated Depreciation $ 11,359,264 $ 9,221,038 $ 8,999,180 2,530,459 2,671,112 1,080,639 57,414 106,264 40,999 46,354 48,311 50,147 388,502 324,740 333,782 209,916 81,340 175,470 (1,403,858) (1,175,834) (1,460,046) (4,328) (1,500) — 4,496 — — 7,987 (8,303) — $ 1,836,942 $ 2,046,130 $ 220,991 (8,566) 92,096 $ 13,187,640 $ 11,359,264 $ 2006 Years Ended December 31, 2005 867 9,221,038 2004 Balance at January 1 ............................................................................$ 836,693 $ 763,542 $ 648,982 Depreciation for the year(1) ................................................................... 266,589 220,770 203,639 Accumulated depreciation on real estate dispositions............................ (146,136) (147,619) (89,079) Balance at December 31.......................................................................$ 957,146 $ 836,693 $ 763,542 ____________ (1) Depreciation is net of $21.7 million and $18.0 million for intangible assets related to the value of leases in place for real estate acquired in 2006 and 2005, respectively. 92 SCHEDULE IV ARCHSTONE-SMITH TRUST MORTGAGE LOANS ON REAL ESTATE December 31, 2006 (Dollar amounts in thousands) Principal amount of loans subject to delinquent principal or interest — — — — — — — — Description Mortgage and Other Notes Receivable: Washington, D.C. ................................................................................. Massachusetts........................................................................................ New York............................................................................................... Massachusetts........................................................................................ Washington, D.C. ................................................................................. New York............................................................................................... Maryland................................................................................................ Interest Rate 18% 18% LIBOR + 5% LIBOR + 7% 14% LIBOR + 7% 7% Final Maturity Date 7/17/07 1/01/08 9/30/10 2/07/11 6/03/09 6/22/09 3/24/07 Periodic payment term (1) (1) (1) (1) (1) (1) (1) Prior liens (3) (3) (3) (3) (3) (3) Face amount of mortgages $ 9,235 7,687 25,654 9,268 7,524 42,070 44,560 145,998 Carrying amount of mortgages $ 6,955 6,483 25,654 8,216 4,685 26,708 44,560 123,261 $ $ 2006 2005 Balance at January 1 ........................................................................................................ $ 74,396 $ 8,729 New Mortgage Loans................................................................................................... 85,165 97,096 Other(2) ........................................................................................................................ 9,781 5,224 Collections of Principal................................................................................................ (46,081) (36,653) Balance at December 31................................................................................................... $ 123,261 $ 74,396 ____________ (1) Outstanding principal plus accrued and unpaid interest is generally due on the maturity date unless specified as payable monthly in the loan agreement. Partial prepayment is required to the extent the borrower receives proceeds from the sale of constructed units in accordance with contracted terms. (2) A portion of the accrued interest amount is added to the principal amount on a monthly basis on the majority of the loans. (3) Our rights to the underlying collateral in the event of default are subordinate to a primary mortgage lender. 93 ARCHSTONE-SMITH TRUST SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARCHSTONE-SMITH TRUST By: /s/ R. Scot Sellers R. Scot Sellers Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: Signature Title Date /s/ R. Scot Sellers R. Scot Sellers /s/ Charles E. Mueller, Jr. Charles E. Mueller, Jr. /s/ Mark A. Schumacher Mark A. Schumacher /s/ James A. Cardwell. James A. Cardwell /s/ Stephen R. Demeritt Stephen R. Demeritt /s/ Ernest A. Gerardi, Jr. Ernest A. Gerardi, Jr. /s/ Ruth Ann M. Gillis Ruth Ann M. Gillis /s/ Ned S. Holmes Ned S. Holmes /s/ Robert P. Kogod Robert P. Kogod /s/ James H. Polk III James H. Polk III /s/ John M. Richman John M. Richman /s/ John C. Schweitzer John C. Schweitzer /s/ Robert H. Smith Robert H. Smith Chairman of the Board, Chief Executive Officer and Trustee (principal executive officer) Chief Financial Officer (principal financial officer) Chief Accounting Officer (principal accounting officer) Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee March 1, 2007 March 1, 2007 March 1, 2007 March 1, 2007 March 1, 2007 March 1, 2007 March 1, 2007 March 1, 2007 March 1, 2007 March 1, 2007 March 1, 2007 Trustee Trustee March 1, 2007 March 1, 2007 94 INDEX TO EXHIBITS Certain of the following documents are filed herewith. Certain other of the following documents have been previously filed with the Securities and Exchange Commission and, pursuant to Rule 12b-32, are incorporated herein by reference: Number Description 3.1 Amended and Restated Declaration of Trust of Archstone-Smith Operating Trust (incorporated by reference to Exhibit 3.1 to Archstone-Smith Trust’s Current Report of Form 8-K filed with the SEC on June 2, 2006) Restated Bylaws of Archstone-Smith Trust (incorporated by reference to Exhibit 3.2 to the ArchstoneSmith Trust’s Current Report on Form 8-K filed with the SEC on June 2, 2006) Indenture, dated as of February 1, 1994, between Archstone-Smith Operating Trust (formerly Property Trust of America) and Morgan Guaranty Trust Company of New York, as Trustee relating to ArchstoneSmith Operating Trust’s (formerly Property Trust of America) unsecured senior debt securities First Supplemental Indenture, dated February 2, 1994, among Archstone-Smith Operating Trust (formerly Property Trust of America), Morgan Guaranty Trust Company of New York and State Street Bank and Trust Company, as successor Trustee Second Supplemental Indenture, dated August 2, 2004, between Archstone-Smith Operating Trust and U.S. Bank National Association, as successor Trustee Third Supplemental Indenture, dated July 14, 2006, between Archstone-Smith Operating Trust and U.S. Bank National Association, as successor Trustee Indenture, dated as of August 14, 1997, between Security Capital Atlantic Incorporated and State Street Bank and Trust Company, as Trustee (incorporated by reference to Exhibit 4.8 to Security Capital Atlantic Incorporated’s Registration Statement on Form S-11 (File No. 333-30747)) Form of Archstone-Smith Trust common share ownership certificate (incorporated by reference to Exhibit 3.3 to Archstone-Smith Trust’s Registration Statement on Form S-4 (File No. 333-63734)) Form of Archstone-Smith Trust share certificate for Series I Preferred Shares (incorporated by reference to Exhibit 3.8 to Archstone-Smith Trust’s Registration Statement on Form S-4 (File No. 333-63734)) Amended and Restated Declaration of Trust of Archstone-Smith Operating Trust (incorporated by reference to Exhibit 4.1 to the Archstone-Smith Trust’s Current Report on Form 8-K filed with the SEC on June 2, 2006) Amended and Restated Bylaws of Archstone-Smith Operating Trust (incorporated by reference to Exhibit 4.2 to the Archstone-Smith Trust’s Current Report on Form 8-K filed with the SEC on June 2, 2006) Articles Supplementary for Series M Preferred Unit of Beneficial Interest of Archstone-Smith Operating Trust (incorporated by reference to Exhibit 3.1 to the Archstone-Smith Trust’s Current Report on Form 8-K filed with the SEC on December 16, 2004) Articles Supplementary for Series N-1 Preferred Unit of Beneficial Interest and N-2 Preferred Unit of Beneficial Interest of Archstone-Smith Operating Trust (incorporated by reference to Exhibit 3.1 to the Archstone-Smith Operating Trust’s Current Report on Form 8-K filed with the SEC on August 2, 2005) Amended and Restated Archstone-Smith Trust Equity Plan for Outside Trustee and all amendments thereto (incorporated by reference to Exhibits 10.5, 10.6 and 10.7 to Archstone-Smith Trust’s Current Report on Form 8-K filed with the SEC on December 12, 2006) 3.2 4.1 4.2 4.3 4.4 4.5 4.6 4.7 10.1 10.2 10.3 10.4 10.5 95 10.6 Archstone-Smith Trust 2001 Long-Term Incentive Plan and all amendments thereto (incorporated by reference to Exhibit 10.1, 10.2, 10.3 and 10.4 to Archstone-Smith Trust’s Current Report on Form 8-K filed with the SEC on December 12, 2006) Archstone-Smith Deferred Compensation Plan (incorporated by reference to Exhibit 10.5 to ArchstoneSmith’s Annual Report on Form 10-K for the year ended December 31, 2001) Form of Non-Qualified Share Option Agreement for Archstone-Smith Trust 2001 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of Archstone-Smith Trust’s Annual Report on Form 10Q for the Quarter Ended September 30, 2004) Form of Restricted Share Unit Agreement for Archstone-Smith Trust 2001 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 of Archstone-Smith Trust’s Annual Report on Form 10-Q for the Quarter Ended September 30, 2004) Form of Restricted Share Unit Agreement for Archstone-Smith Trust Equity Plan for Outside Trustees (incorporated by reference to Exhibit 10.3 of Archstone-Smith Trust’s Annual Report on Form 10-Q for the Quarter Ended September 30, 2004) Form of Indemnification Agreement entered into between Archstone-Smith Trust and each of its officers and Trustees (incorporated by reference to Exhibit 10.6 to Archstone-Smith Trust’s Annual Report on From 10K for the year ended December 31, 2003) Form of Change in Control Agreement between Archstone-Smith Trust and certain of its officers (incorporated by reference to Exhibit 10.7 to Archstone-Smith’s Annual Report on Form 10-K for the year ended December 31, 2002) Amended and Restated Credit Agreement, dated as of June 21, 2006, by and among Archstone-Smith Operating Trust, as borrower, and Archstone-Smith Trust as parent, and J.P. Morgan Chase Bank, as administrative agent,, J.P. Morgan Europe Limited, as administrative agent for foreign currencies, Bank of America, N.A., and Wells Fargo Bank, N.A., as syndication agents, and Suntrust Bank and Citicorp North America, Inc. as documentation agents and the various banks signatory thereto (incorporated by reference to Exhibit 10.2 to Archstone-Smith’s Current Report on Form 8-K filed with the SEC on June 27, 2006) Guaranty, dated as of June 21, 2006, by Archstone-Smith Trust, as guarantor, for the benefit of J.P. Morgan Chase Bank, as administrative agent, J.P. Morgan Europe Limited, as administrative agent for foreign currencies, Bank of America, N.A., and Wells Fargo Bank, N.A., as syndication agents, and Suntrust Bank and Citicorp North America, Inc. as documentation agents and the various banks signatory thereto (incorporated by reference to Exhibit 10.1 to Archstone-Smith’s Current Report on Form 8-K filed with the SEC on June 27, 2006) Archstone Dividend Reinvestment and Share Purchase Plan (incorporated by reference to the prospectus contained in Archstone-Smith Trust’s Registration Statement on Form S-3 (No. 333-44639-01)) 2006 and 2007 schedule of applicable dates under the Archstone Dividend Reinvestment and Share Purchase Plan (included by reference to Exhibit 99.1 to Archstone-Smith Trust’s current report on form 8-K filed with the SEC on February 14, 2006) Shareholders’ Agreement, dated as of October 31, 2001, by and among Archstone-Smith Trust, Archstone-Smith Operating Trust, Robert H. Smith and Robert P. Kogod (incorporated by reference to Exhibit 10.1 to Archstone-Smith Trust’s Current Report on Form 8-K filed with the SEC on November 1, 2001) Noncompetition Agreement by and among Charles E. Smith Residential Realty, Inc., Charles E. Smith Residential Realty L.P. and Robert P. Kogod and Robert H. Smith (incorporated by reference to Exhibit 10.1 of Charles E. Smith Residential Realty, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1994) 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 96 10.19 10.20 Registration Rights and Lock-up Agreement (incorporated by reference to Exhibit 10.2 of Charles E. Smith Residential Realty, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1994) License Agreement between Charles E. Smith Management, Inc. and Charles E. Smith Residential Realty, Inc. (incorporated by reference to Exhibit 10.35 of Charles E. Smith Residential Realty, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1994) License Agreement between Charles E. Smith Management, Inc. and Charles E. Smith Residential Realty L.P. (incorporated by reference to Exhibit 10.36 of Charles E. Smith Residential Realty, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1994) Computation of Ratio of Earnings to Fixed Charges Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividends Consent of Independent Registered Public Accounting Firm Subsidiaries of Archstone-Smith Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 10.21 12.1 12.2 15.1 21 31.1 31.2 32.1 32.2 97 (This page intentionally left blank) Archstone-Smith Notice of 2007 Meeting of Shareholders and Proxy Statement (This page intentionally left blank) Archstone-Smith Trust 9200 E. Panorama Circle Englewood, Colorado 80112 NOTICE OF 2007 ANNUAL MEETING OF SHAREHOLDERS: To our shareholders: On behalf of the Board of Trustees, I cordially invite you to attend the 2007 annual meeting of shareholders of Archstone-Smith Trust (""Archstone-Smith''). This year's meeting will be held on Wednesday, May 16, 2007 at the J.W. Marriott Denver, 150 Clayton Lane, Denver, Colorado 80206, at 11:00 a.m. (Mountain Time) for the following purposes: 1. To elect nine Trustees to serve until the annual meeting of shareholders in 2008; 2. To ratify the appointment of KPMG LLP as auditors for the current Ñscal year; 3. To consider a shareholder proposal, if presented at the meeting, which is described in the accompanying Proxy Statement; and 4. To consider any other matters that may properly come before the meeting or any adjournment thereof. The accompanying Proxy Statement provides further information regarding the business of the meeting or any adjournments. Shareholders of record at the close of business on March 26, 2007 are entitled to notice of, and to vote at, the meeting. Your vote is important. Please sign, date and promptly return the enclosed proxy card in the enclosed envelope, or vote by telephone or the Internet, in accordance with the instructions on the proxy card. If you are able to attend the meeting, you may revoke your proxy by voting your shares in person. We look forward to seeing you at the meeting. By order of the Board of Trustees, /s/ Caroline Brower CAROLINE BROWER General Counsel and Secretary April 11, 2007 (This page intentionally left blank) ARCHSTONE-SMITH TRUST PROXY STATEMENT FOR 2007 ANNUAL MEETING OF SHAREHOLDERS To Be Held May 16, 2007 GENERAL INFORMATION Our Board of Trustees is soliciting proxies to be voted at the 2007 annual meeting of shareholders to be held on May 16, 2007. This Proxy Statement, which we expect to send to our shareholders on or about April 11, 2007, provides information concerning the use of the proxy and the business to be transacted at the meeting. If you specify a choice with respect to any matter to be acted upon, the proxy holders will vote the common shares of beneÑcial interest (the ""Common Shares'') represented by your validly executed proxy in accordance with your speciÑcations. If you sign and return a proxy without specifying choices, the proxy holders will vote the Common Shares represented by your proxy in accordance with the recommendations of the Board. If you are a registered owner and plan to attend the meeting in person, please detach and retain the admission ticket, which is attached to your proxy card. If you are a beneÑcial owner whose ownership is registered under another party's name and you plan to attend the meeting in person, you may obtain an admission ticket in advance by sending a written request, along with proof of ownership, such as a bank or brokerage Ñrm account statement, to: Archstone-Smith Trust, Attn: Secretary, 9200 E. Panorama Circle, Suite 400, Englewood, Colorado 80112, or you may attend if you obtain a proxy in your name from the record owner and present such proxy at the meeting. If you want to vote in person your Common Shares held in street name, you will have to get a proxy in your name from the record owner. Record owners and beneÑcial owners who do not present admission tickets at the meeting will be admitted upon veriÑcation of ownership at the admissions counter at the annual meeting. Any shareholder giving a proxy has the right to revoke it at any time before it is voted by giving written notice to the Secretary of Archstone-Smith, by delivering to the Secretary of Archstone-Smith a duly executed proxy bearing a later date or by attending the annual meeting and voting in person. We will bear the cost of soliciting the proxies. In addition to this solicitation by mail, our oÇcers and employees may solicit proxies personally, or by telephone, facsimile transmission or other electronic means. We will also request banking institutions, brokerage Ñrms, custodians, trustees, nominees, Ñduciaries and similar parties to forward the solicitation material to the beneÑcial owners of Common Shares held of record by those persons, and we will, upon request of those record holders, reimburse forwarding charges and expenses. If you share an address with any of our other shareholders, your household might receive only one copy of our Annual Report and Proxy Statement. To request individual copies of the Annual Report and Proxy Statement for this year or in the future for each shareholder in your household, please contact Investor Relations, Archstone-Smith Trust, 9200 E. Panorama Circle, Suite 400, Englewood, Colorado 80112 (telephone: 1-800-982-9293 or e-mail: investors@archstonesmith.com). We will deliver copies of our Annual Report and Proxy Statement promptly following your oral or written request. To ask that only one set of the documents be mailed to your household in the future, multiple shareholders should contact either Mellon Investor Services, our transfer agent, at 1-866-249-2590 if they are the registered owner of the shares, or their broker if the shares are registered in street name. For purposes of this Proxy Statement, we refer to Archstone-Smith Operating Trust as the Operating Trust. As used in this proxy, ""we,'' ""us'' and ""our'' refers to Archstone-Smith and the Operating Trust collectively, unless the context otherwise requires. SHARES OUTSTANDING AND VOTE REQUIRED At the close of business on March 26, 2007, the record date for determination of shareholders entitled to notice of, and to vote at, the meeting, there were 222,115,104 Common Shares outstanding. There is no right to cumulative voting. A majority of the outstanding Common Shares represented in person or by proxy will constitute a quorum at the meeting. In any election of Trustees other than a ""contested election'' (i.e., where there are more Trustee nominees than the number of Trustees to be elected), each Trustee shall be elected by the vote of a majority of the votes cast by the shareholders entitled to vote with respect to the election of Trustees at the shareholders' meeting. For purposes of this provision, the total number of votes cast with respect to a nominee will equal the number of votes ""for'' his or her election and the number of votes withheld from his or her election. In a contested election, each Trustee shall be elected by a plurality of all votes cast by shareholders entitled to vote with respect to the election of Trustees at that meeting. Any incumbent Trustee who is not validly elected in an uncontested election because he or she did not receive a majority of the votes cast will continue to serve on the Board as a holdover Trustee under Maryland law. However, our Bylaws require that any Trustee who is not validly elected must submit his or her resignation for consideration by the Nominating and Corporate Governance Committee (the ""Nominating Committee''). The Nominating Committee will consider any tendered resignation and recommend to the Board the action to be taken. The Nominating Committee will consider all factors it deems relevant, including, without limitation, any reasons why shareholders voted as they did, the length of service and qualiÑcations of the Trustee, compliance with New York Stock Exchange listing standards for board composition, triggering defaults or other adverse consequences under material contracts and the Trustee's contributions to the Board. The Board will then consider the recommendation of the Nominating Committee and decide whether to accept or reject the resignation based on the factors considered by the Nominating Committee and such other factors and information it believes relevant. A Trustee whose resignation is being considered generally will not participate in consideration of his or her tendered resignation. If a majority of the members of the Nominating Committee have not been validly elected, then all of the independent members of the Board who were validly elected, or a committee of such Trustees designated by such members, will consider the tendered resignations. If none of the independent Trustees were validly elected, and one or more of the non-independent Trustees was validly elected, then those non-independent Trustees will consider the tendered resignations. Finally, if none of the members of the Board were validly elected, then all members of the Board will consider the tendered resignations. A tendered resignation is eÅective 90 days from the date of tender unless the Board aÇrmatively determines to (a) reject the resignation, or (b) accept the resignation on a speciÑed future date or the date upon which an individual is selected by the Board to be appointed as a replacement Trustee. The decision of the Board will be disclosed promptly in the Ñling of a Form 8-K with the Securities and Exchange Commission (""SEC'' ). The aÇrmative vote of a majority of the votes cast will be required for the election of Trustees, the shareholder proposal, if presented, and the ratiÑcation of KPMG LLP as our auditors. Withheld votes, abstentions and broker non-votes will be counted as Common Shares represented at the meeting for purposes of determining a quorum. Withheld votes will be counted as votes cast and will have an eÅect on the election of Trustees, while abstentions and broker non-votes will not be counted as votes cast and will have no eÅect on approval of the shareholder proposal, if presented, or on the ratiÑcation of the appointment of KPMG LLP as our auditors. Therefore, it is important that you vote your shares either at the meeting or by proxy. Representatives of our transfer agent will assist us in the tabulation of the votes. PRINCIPAL SHAREHOLDERS The following table sets forth, as of March 26, 2007, the beneÑcial ownership of Common Shares for (a) each person known to us to have been the beneÑcial owner of more than Ñve percent of the outstanding Common Shares, (b) each of our Trustees, (c) our Chief Executive OÇcer, our Chief Financial OÇcer and 2 our three other most highly compensated executive oÇcers during 2006 (the ""Named Executive OÇcers''), and (d) all our Trustees and executive oÇcers as a group. Unless otherwise indicated in the footnotes, all of such interests are owned directly and the indicated person or entity has sole voting and dispositive power. The following table assumes, for purposes of calculating the number and percent of Common Shares beneÑcially owned by a person, that (i) all Class A-1 Common Units of the Operating Trust (the ""Class A-1 Common Units'' ) beneÑcially owned by that person have been redeemed for Common Shares, and (ii) all options and convertible, redeemable or exchangeable securities held by that person which are exercisable or convertible, redeemable or exchangeable or will become exercisable or convertible, redeemable or exchangeable prior to May 25, 2007 have been exercised or converted, redeemed or exchanged, but that no options or convertible, redeemable or exchangeable securities held by other persons have been exercised or converted, redeemed or exchanged. The address of each Trustee and oÇcer listed below is c/o Archstone-Smith Trust, 9200 E. Panorama Circle, Suite 400, Englewood, Colorado 80112. Number of Common Shares BeneÑcially Owned Percentage of all Common Shares Name of BeneÑcial Owner The Vanguard Group, Inc. 100 Vanguard Boulevard Malvern, Pennsylvania 19355ÏÏÏÏÏÏÏÏÏÏÏ Barclays Global Investors, NA 45 Fremont Street San Francisco, California 94105 ÏÏÏÏÏÏÏÏ James A. Cardwell ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stephen R. DemerittÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ernest A. Gerardi, Jr. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ruth Ann M. Gillis ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ned S. Holmes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Robert P. Kogod ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ James H. Polk, III ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ John M. Richman ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ John C. Schweitzer ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ R. Scot SellersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Robert H. Smith ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Caroline BrowerÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ J. Lindsay FreemanÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Charles E. Mueller, Jr. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Alfred G. NeelyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ All Trustees and executive oÇcers as a group (16 persons) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ * Less than 1%. 15,354,719(1) 6.91% 12,058,235(1) 84,910(2)(3)(4)(5)(7) 1,535(3)(7) 203,689(3)(4)(8) 10,743(3)(4)(5)(7) 62,452(3)(4)(9) 3,225,442(10)(11)(13) 34,108(2)(3)(4) 56,796(2)(3)(4)(5) 45,891(3)(4)(14) 547,708(2)(3)(4)(6)(15) 2,391,659(10)(12)(13) 57,862(2)(3)(4)(6)(7) 210,044(3)(4)(6) 164,484(2)(3)(4)(6)(7) 47,037(3)(4)(6) 6,097,838 5.43% * * * * * 1.45% * * * * 1.08% * * * * 2.75% (1) Information regarding beneÑcial ownership of Common Shares by The Vanguard Group, Inc. is included herein in reliance on a Schedule 13G/A, Amendment No. 1, Ñled with the SEC on February 14, 2007. Information regarding beneÑcial ownership of Common Shares by Barclays Global Investors, NA and certain of its aÇliates, is included herein in reliance on a Schedule 13G Ñled with the SEC on January 23, 2007. 3 (2) Includes beneÑcial ownership of Common Shares which are issuable upon exercise of options, as follows: Mr. Cardwell 15,000; Mr. Polk 11,250; Mr. Richman 15,000; Mr. Sellers 218,354; Ms. Brower 32,761; and Mr. Mueller 56,962. (3) Includes beneÑcial ownership of Common Shares which are issuable upon settlement of RSU awards, as follows: Mr. Cardwell 10,000; Mr. Demeritt 1,315; Mr. Gerardi 3,999; Ms. Gillis 6,504; Mr. Holmes 9,500; Mr. Polk 3,999; Mr. Richman 3,999; Mr. Schweitzer 10,000; Mr. Sellers 216,248; Ms. Brower 13,557; Mr. Freeman 179,596; Mr. Mueller 95,654; and Mr. Neely 40,287. (4) Includes beneÑcial ownership of Common Shares which are issuable upon settlement of DEUs, as follows: Mr. Cardwell 6,891; Mr. Gerardi 179; Ms. Gillis 513; Mr. Holmes 1,450; Mr. Polk 3,376; Mr. Richman 5,555; Mr. Schweitzer 6,891; Mr. Sellers 2,313; Ms. Brower 6,444; Mr. Freeman 28,333; Mr. Mueller 530; and Mr. Neely 5,056. (5) Includes beneÑcial ownership of Common Shares which are issuable upon settlement of deferred shares accrued in lieu of trustee fees, as follows: Mr. Cardwell 14,256; Ms. Gillis 2,178 and Mr. Richman 14,914. (6) Includes beneÑcial ownership of Common Shares held in the Archstone-Smith 401(k) Plan in the following amounts: Ms. Brower 123; Mr. Freeman 2,115; Mr. Mueller 2,076; Mr. Neely 1,166 and Mr. Sellers 449. (7) Includes beneÑcial ownership of Common Shares held in the Archstone-Smith Deferred Compensation Plan by: Ms. Brower 30; Mr. Cardwell 1,057; Mr. Demeritt 220, Ms. Gillis 48 and Mr. Mueller 370. (8) Includes beneÑcial ownership of 51,350 Common Shares which are issuable upon conversion of Class A-1 Common Units held by Mr. Gerardi and 49,375 Common Shares held by Mr. Gerardi's spouse. (9) Includes 4,000 Common Shares held by family limited partnerships and 5,554 Common Shares held by Mr. Holmes' adult children, for which he has investment authority. (10) Includes for each of Messrs. Smith and Kogod beneÑcial ownership of Common Shares which are issuable upon conversion of Class A-1 Common Units as follows: Mr. Smith, 278,033 and Mr. Kogod, 192,236. Mr. Smith has shared voting and shared dispositive power with respect to 88,887 of such Class A-1 Common Units, which are owned by Mr. Smith's spouse. Mr. Kogod has shared voting and shared dispositive power with respect to 68,742 of such Class A-1 Common Units, which are owned by Mr. Kogod's spouse. (11) Includes beneÑcial ownership of 660,507 Common Shares held by Mr. Kogod's spouse. Includes beneÑcial ownership of 520,300 Common Shares for Mr. Kogod that are held by the Robert P. and Arlene R. Kogod Family Foundation, a charitable 501(c)(3) foundation for which Mr. Kogod disclaims beneÑcial ownership. Mr. Kogod has shared voting power and shared dispositive power with respect to all 520,300 of such Common Shares. (12) Includes beneÑcial ownership of 363,692 Common Shares held by Mr. Smith's spouse. Includes beneÑcial ownership of 330,800 Common Shares for Mr. Smith that are held by the Robert H. Smith Family Foundation, a charitable 501(c)(3) foundation for which Mr. Smith disclaims beneÑcial ownership. Mr. Smith has shared voting power and shared dispositive power with respect to all 330,800 of such Common Shares. (13) Includes ownership of 1,055,442 shares held by the Charles E. Smith Family Foundation, a charitable 501(c)(3) foundation for which Messrs. Kogod and Smith disclaim beneÑcial ownership. (14) Includes 6,000 Common Shares held by Mr. Schweitzer's spouse and 10,000 shares held in a family foundation; also includes 13,000 Common Shares that are pledged as collateral, along with other collateral, for a margin account. Margin loans were outstanding during the year, but no margin loan was outstanding as of December 31, 2006. (15) Includes ownership of 17,000 shares held by the Esther Foundation, a charitable 501(c)(3) foundation for which Mr. Sellers disclaims beneÑcial ownership and 25,990 shares held in a revocable trust. 4 PROPOSAL 1 Ì ELECTION OF TRUSTEES We have a Board consisting of the following eleven Trustees: James A. Cardwell; Stephen R. Demeritt, Ernest A. Gerardi, Jr.; Ruth Ann M. Gillis; Ned S. Holmes; Robert P. Kogod; James H. Polk, III; John M. Richman; John C. Schweitzer; R. Scot Sellers and Robert H. Smith. Our Corporate Governance Guidelines provide that no person is eligible to be nominated for election as a Trustee once they reach the age of 75. Each having reached the age of 75, Messrs. Cardwell and Richman are retiring from the Board as of the shareholder meeting as they are no longer eligible for nomination to the Board under our Corporate Governance Guidelines. Pursuant to a Shareholders' Agreement we entered into with Messrs. Kogod and Smith, Messrs. Kogod and Smith are to be nominated to the Board of Trustees until 2011 even though they have both reached age 75. See ""Certain Relationships and Transactions Ì Shareholders' Agreement.'' The Common Shares represented by a properly executed proxy will be voted to elect the nine nominees named below, unless you indicate otherwise on the proxy. Should any of the nominees named below become unavailable for election, which is not anticipated, the Common Shares represented by the accompanying proxy will be voted for the election of another person recommended by the Board. The Board of Trustees recommends that shareholders vote ""FOR'' the election of each nominee for Trustee. Nominees Trustee Age Business Experience Trustee Since Stephen R. Demeritt 63 Director, Eastman Chemical Company (NYSE: EMN) since February, 2003; Vice Chairman of General Mills, Inc. (NYSE: GIS) and was a member of its Board of Directors from October, 1999 until his retirement in June, 2005; Chief Executive OÇcer of Cereal Partners Worldwide, General Mills' global cereal joint venture with Nestle, from 1993 to 1999. Director, Charles E. Smith Residential Realty, Inc. (""Smith Residential'') (a predecessor of Archstone-Smith) from 1993 to October 2001; President and Chief Executive OÇcer of Smith Residential from February 2000 to July 2001; President and Chief Operating OÇcer of Smith Residential from 1993 to February 2000; Chairman of the Board and Chief Executive OÇcer of Consolidated Engineering Services, Inc. from 1994 to December 2002; and member of the American Institute of CertiÑed Public Accountants and the D.C. Institute of CertiÑed Public Accountants. 2006 Ernest A. Gerardi, Jr. 71 2001 5 Trustee Age Business Experience Trustee Since Ruth Ann M. Gillis 52 President, Exelon Business Services Company, and Senior Vice President, Exelon Corporation, since October, 2005; Executive Vice President, Commonwealth Edison Company, and Senior Vice President, Exelon Corporation, from August, 2004 to September, 2005; President, Exelon Business Services Company, and Senior Vice President, Exelon Corporation, from 2002 through August, 2004; Chief Financial OÇcer and Senior Vice President, Exelon Corporation from 2000 to 2002; Senior Vice President and Chief Financial OÇcer, Unicom Corporation from 1999 to 2000; Director, Potlatch Corporation (NYSE:PCH) since 2003; President, The University of Chicago Cancer Research Foundation Board of Trustees; Sustaining Member, The University of Chicago Cancer Research Foundation Women's Board; Trustee, The Goodman Theatre; Member, The Chicago Network; Member, The Executives Club of Chicago; Member, The Economic Club of Chicago; and Executive Sponsor of Exelon Corporation's Network of Exelon Women. Chairman, Ned S. Holmes Investments, Inc., a Houstonbased real estate investment and development company, since October 1976; Director, Seitel, Inc. since March, 2004; Member of the Board of Prosperity Bancshares, Inc. (and its predecessor Commercial Bancshares, Inc.) since 1980, serving as President from 1980 to 1985 and as Chairman from 1985 to 2006; President and Chief Executive OÇcer, Laing Properties, Inc., May 1990 through December 2005; Chairman and President, Parkway Investments/Texas, Inc., a Houston-based real estate investment and development company, from April 1984 through December 2005; Chairman Emeritus, Port Commission of the Port of Houston Authority; Director and former Chairman, Greater Houston Partnership; Trustee, Galveston Bay Foundation; Trustee, Memorial Hermann Hospital; Trustee, Baylor College of Medicine; Commissioner, Texas Parks and Wildlife; and Member, Governor's Business Council. 2004 Ned S. Holmes 62 1998 6 Trustee Age Business Experience Trustee Since Robert P. Kogod 75 Chairman of the Executive Committee of the Board, Smith Residential from February 2000 to October 2001; CoChairman of the Board and Co-Chief Executive OÇcer, Smith Residential from 1994 to February 2000; President, CoChief Executive OÇcer and a Director, CESM, Inc. (formerly Charles E. Smith Management, Inc.) since 1964, where he oversaw and directed all phases of the leasing and management of the Charles E. Smith Companies' oÇce, residential and retail real estate portfolio; aÇliated with the Charles E. Smith Companies in various capacities since joining the organization in 1959; formerly, Co-Chairman of the Board and Co-Chief Executive OÇcer, Charles E. Smith Commercial Realty, Inc. (ownership, operation and management of commercial oÇce buildings), which, in January 2002, became Charles E. Smith Commercial Realty, a Division of Vornado Realty Trust (""Vornado''); Trustee of Vornado since January 2002; Member of the Board of Regents, The Smithsonian Institution; President, Hartman Institute, Jerusalem, Israel; Member of the Board of Directors, District of Columbia College Access Program; Member of the Board of Directors, Greater Washington Jewish Community Foundation; Member of the Board of Directors, Island Foundation, Mount Desert Island, Maine; and Member of the Board of Governors, Hillel International. Mr. Kogod is employed by us and is also the brother-in-law of Robert H. Smith, one of our Trustees. Managing Director, SAMCO Capital Markets since July 2005; Partner, Rust Group, Austin, Texas (venture capital investments) from June 2000 to June 2005; Partner, Storage Investment Group, LTD., Co. (development and operation of self-storage facilities) from January 1998 to December 2002; Member of the Board of Visitors, St. Johns College, Santa Fe, New Mexico and Annapolis, Maryland; and past President and Trustee, National Association of Real Estate Investment Trusts (""NAREIT''). Director, Regency Centers (a national owner, operator and developer of grocery-anchored neighborhood retail centers) since March 1999; Trustee, former PaciÑc Retail Trust from June 1997 to February 1999; President, Westgate Corporation (real estate and investments) since 1976; Director, Chase Bank of Texas-Austin since September 2000; Director, Homestead Village Incorporated (a national owner of extended stay hotels) from 1996 until 2000; and Director, KLRU Public Television, Austin, Texas. 2001 James H. Polk, III 64 1976 John C. Schweitzer 62 1976 7 Trustee Age Business Experience Trustee Since R. Scot Sellers 50 Chairman and Chief Executive OÇcer, Archstone-Smith, from June 1997 to July 1998 and since December 1998, with overall responsibility for Archstone-Smith's strategic direction, investments and operations; Co-Chairman and Chief Investment OÇcer, Archstone-Smith, from July 1998 to December 1998; other executive management positions within Archstone-Smith and its predecessors and aÇliates since May 1993; Member, Executive Committee of the Board of Governors and, during 2006, Chairman, National Association of Real Estate Investment Trusts; Member, Executive Committee of the Board of Directors of the National Multi Housing Council; Director, Christian International Scholarship Foundation; Director of CEO Forum; and Director, Alliance for Choice in Education. Chairman, Charles E. Smith Residential Division of Archstone-Smith since November, 2001; Chairman of the Board, Smith Residential from February 2000 to October 2001; Co-Chairman of the Board and Co-Chief Executive OÇcer, Smith Residential from 1993 to February 2000; from 1962 to 1999, President, Chief Executive OÇcer and a Director, Charles E. Smith Construction, Inc. and its predecessor companies, where he directed all phases of development and construction of the Charles E. Smith Companies' oÇce, retail and residential real estate projects; aÇliated with the Charles E. Smith Companies in various capacities since joining the organization in 1950; formerly CoChairman of the Board and a Director, Charles E. Smith Commercial Realty, Inc. (ownership, operation and management of commercial oÇce buildings), which, in January 2002, became Charles E. Smith Commercial Realty, a Division of Vornado; and Trustee, Vornado and Chairman of Charles E. Smith Commercial Realty, a Division of Vornado, since January 2002. Mr. Smith is employed by us and is also the brother-in-law of Mr. Robert P. Kogod, one of our Trustees. 1998 Robert H. Smith 78 2001 MEETINGS AND COMMITTEES OF THE BOARD The Board of Trustees held 7 meetings during 2006. Archstone-Smith encourages each member of the Board to attend all shareholder meetings, but it does not have an express policy concerning attendance at the annual meeting of shareholders. Nonetheless, at the annual meeting of shareholders held on May 17, 2006, all of the then current Trustees were in attendance. Mr. Demeritt was also present at the meeting at the invitation of the Trustees. The Board undertook its annual review of Trustee independence in March 2007. In determining independence, the Board aÇrmatively determines whether Trustees have any ""material relationship'' with Archstone-Smith. When assessing the ""materiality'' of a Trustee's relationship with ArchstoneSmith, the Board considers, among other things, the independence standards set forth in the New York Stock Exchange corporate governance listing standards (including the special requirements for members of the Audit Committee) and all other relevant facts and circumstances, not merely from the Trustee's standpoint, but from that of the persons or organizations with which the Trustee has an aÇliation, including transactions and relationships between each Trustee or any member of his or her immediate family and Archstone-Smith and its subsidiaries and aÇliates, between Trustees or their aÇliates and members of Archstone-Smith's 8 senior management or their aÇliates and those items reported under ""Certain Relationships and Transactions'' in this Proxy Statement. The Board also examines the frequency or regularity of the services underlying any such transactions, whether the services are being carried out at arm's length in the ordinary course of business and whether the services are being provided substantially on the same terms to ArchstoneSmith as those prevailing at the time from unrelated parties for comparable transactions. Material relationships can include certain commercial, banking, industrial, consulting, legal, accounting, charitable and familial relationships. During the Board's review of independence of Trustees, the Board examined the relationships each of the Trustees has with Archstone-Smith and any of its aÇliates and aÇrmatively determined, based on that examination and the criteria described above, that each of Ms. Gillis and Messrs. Cardwell, Demeritt, Gerardi, Holmes, Polk, Richman and Schweitzer has no material relationship with Archstone-Smith and each is ""independent'' in accordance with the applicable corporate governance listing standards of the New York Stock Exchange. The Board also determined that Messrs. Sellers, Smith and Kogod are not ""independent'', because of their employment with Archstone-Smith. The Board has an Executive and Investment Committee (the ""Executive and Investment Committee''), which is currently composed of Messrs. Sellers, Holmes, Kogod, Schweitzer and Smith. The Executive and Investment Committee has the authority to review and make recommendations regarding strategic actions, price our securities to be issued, and review and approve proposed investments and property dispositions. The Executive and Investment Committee held 10 meetings during 2006. The Board has a Management Development and Executive Compensation Committee (the ""Compensation Committee''), which is currently composed of Messrs. Schweitzer, Polk and Richman, each of whom is ""independent'' in accordance with the applicable corporate governance listing standards of the New York Stock Exchange. The speciÑc responsibilities and functions of the Compensation Committee and scope of authority are described in the charter of the Compensation Committee. The primary responsibilities of the Compensation Committee are to (a) review, approve and make recommendations to the Board regarding our executive compensation arrangements and plans, (b) approve awards to oÇcers and employees under incentive and share plans, (c) review compensation to be paid to our Trustees for their service on the Board, (d) review disclosure in SEC Ñlings regarding executive compensation, including, without limitation, the review and discussion with management of the ""Compensation Discussion and Analysis'' section of the Proxy Statement, and (e) oversee the evaluation of management of Archstone-Smith and make recommendations to the Board as appropriate. The charter for the Compensation Committee also gives the committee the sole authority to retain and terminate compensation consultants at our expense and to obtain advice and assistance from internal or external legal or other advisors. The Compensation Committee has retained FPL Associates, L.P, (""FPL Associates'') an executive compensation Ñrm specializing in companies in the real estate industry, to assist it in establishing and implementing the compensation program for our most senior executives. FPL Associates also assists the committee in reviewing calculations provided to the committee by management for purposes of determining the annual cash bonus and annual RSU awards to be made to Messrs. Sellers, Freeman, and Mueller and Ms. Brower. See ""Compensation Discussion and Analysis.'' Mr. Sellers makes recommendations to the committee with respect to the base salary and annual cash and stock awards to be made to our other executive oÇcers. The Compensation Committee has sole authority to engage a consultant and to approve the consultant's fees and other retention terms, and the consultant reports directly to the members of the Compensation Committee. Although the committee may delegate to subcommittees any or all of such actions, it has not done so. The Compensation Committee held 5 meetings during 2006. The Board has an Audit Committee, currently composed of Ms. Gillis and Messrs. Cardwell, Demeritt, Holmes and Polk. The Board has determined that each of these Trustees is ""independent'' in accordance with the applicable corporate governance listing standards of the New York Stock Exchange and the applicable requirements of the SEC. The Board has also determined that Ms. Gillis satisÑes the requirements of an ""audit committee Ñnancial expert'', as such term is deÑned under the rules of the SEC. No member of the Audit Committee may serve on the audit committee of more than two other public companies, unless (1) the Board determines such simultaneous service will not impair the ability of such member to serve eÅectively on the Audit Committee, and (2) we disclose such determination in our annual Proxy Statement. The Audit Committee assists the Board in its oversight of the quality and integrity of the accounting, auditing, and 9 reporting practices of Archstone-Smith. The Audit Committee is primarily responsible for, among other things, (a) the appointment, replacement, compensation and oversight of independent public accountants, (b) reviewing all recommendations of the independent public accountants with respect to accounting methods and internal controls of Archstone-Smith, (c) reviewing and approving non-audit services and reviewing the scope of the audits conducted by the independent public accountants, and (d) overseeing our internal audit department. The Audit Committee's role includes discussing with management and the independent public accountants Archstone-Smith's processes to manage business and Ñnancial risk and for compliance with signiÑcant applicable legal and regulatory requirements. The Audit Committee held 9 meetings during 2006. The Board has a Nominating and Corporate Governance Committee (the ""Nominating Committee''), currently composed of Messrs. Richman, Cardwell, Demeritt and Holmes, each of whom is ""independent'' in accordance with the applicable corporate governance listing standards of the New York Stock Exchange. The Nominating Committee is responsible for (a) making recommendations to the Board on the slate of Trustees to be placed before shareholders for election at each annual meeting, (b) for identifying and proposing to the Board candidates to Ñll any Board vacancies, (c) for reviewing, evaluating, and recommending changes to Archstone-Smith's Corporate Governance Guidelines, and (d) assisting the Board in its annual evaluation of the performance of the Board and its committees. The Nominating Committee held 5 meetings during 2006. We have adopted Corporate Governance Guidelines and a Code of Business Conduct and Ethics applicable to our Board and oÇcers and employees, including our principal executive oÇcer, principal Ñnancial oÇcer and principal accounting oÇcer or controller. Any amendments to or waivers of our Code of Business Conduct and Ethics that apply to the principal executive oÇcer, principal Ñnancial oÇcer and principal accounting oÇcer or controller and that relate to any matter enumerated in Item 406(b) of Regulation S-K, will be disclosed on our website. Each Board committee has a written charter, which each committee reviews annually to determine whether revisions should be recommended to the Board for adoption. The Nominating Committee also conducts an annual review of the Corporate Governance Guidelines and the Code of Business Conduct and Ethics. Each committee charter, as well as the Corporate Governance Guidelines and the Code of Business Conduct and Ethics, were last revised on March 7, 2007. Copies of the charters for each of the Audit Committee, Nominating Committee and the Compensation Committee, as well as our Corporate Governance Guidelines and Code of Business Conduct and Ethics, are available through our website at www.archstonesmith.com. In addition, copies can be obtained, free of charge, by sending a written request to Investor Relations, Archstone-Smith Trust, 9200 East Panorama Circle, Suite 400, Englewood, Colorado 80112. Any reference to our website in this Proxy Statement does not incorporate by reference the information contained in the website and such information should not be considered a part of this Proxy Statement. During 2006, all Trustees, except Mr. Smith, attended at least 75% of the total number of meetings of the Board and at least 75% of the total number of meetings of each committee on which he or she served during the term of his or her service. Mr. Smith missed two telephonic meetings which were called on short notice, and therefore attended 5 of the 7 Board meetings, or 71% of those meetings. Mr. Schweitzer has been selected by the Board to act as the Lead Independent Trustee (the ""Lead Independent Trustee'') to preside at all executive sessions of the independent Trustees, executive sessions of the non-management Trustees and at meetings of the Board of Trustees in the absence of the Chairman. The independent Trustees and the non-management Trustees each met in executive session 4 times during 2006. INTERESTED PARTY COMMUNICATIONS WITH BOARD MEMBERS Archstone-Smith has a process for shareholders and other interested parties to communicate with the Board, a speciÑc Trustee, the non-management or independent Trustees as a group, or the Lead Independent Trustee. Written communications may be sent c/o Archstone-Smith Trust, Attn: Secretary, 9200 E. Panorama Circle, Suite 400, Englewood, Colorado 80112 (fax: 303-708-6954). The Secretary will review the communication and forward any such communication that is related to the operation of ArchstoneSmith, and is not otherwise commercial, to the full Board, the Lead Independent Trustee, or to any individual 10 Trustee or Trustees to whom the communication is directed, as appropriate. Communications to the Board may also be sent through MySafeWorkplace, a third party incident reporting system, by calling 1-800-461-9330 or through the MySafeWorkplace webpage at www.MySafeWorkplace.com. Shareholders or other interested parties who use this method of communication may elect to have their identity remain anonymous. Such communications received through MySafeWorkplace are sent directly to the Lead Independent Trustee. The head of our internal audit department and a member of our legal department, who act as the administrators of our MySafeWorkplace account, will also receive notice of, and have access to, such communications. TRUSTEE COMPENSATION During 2006, Trustees who were not also our employees (""Outside Trustees'')received an annual retainer of $25,000, prorated for service of less than one year, plus meeting fees as follows: Outside Trustees received $1,500 for each Board meeting attended and $1,000 for each committee meeting attended. In addition, each Outside Trustee is awarded 2,000 restricted stock units (""RSUs''), prorated for partial years of service, as of each annual shareholder meeting date, as discussed below. The Chairman of any committee of the Board also receives $7,500 per year per committee chaired. The Lead Independent Trustee is paid an annual fee of $7,500. Both the retainers and meeting fees are paid quarterly. Each Outside Trustee may defer compensation to be received under our Deferred Compensation Plan (as discussed below) in which certain of our employees also participate. Trustees are reimbursed for commercial airfare (or, if private air transportation is used, the cost such Trustee would have incurred for a commercial Öight) and other travel expenses incurred in connection with attendance at Board meetings. Outside Trustees Plan The purpose of the Archstone-Smith Trust Equity Plan for Outside Trustees (""Outside Trustees Plan'') is to enable the Outside Trustees to increase their ownership in us and thereby increase the alignment of their interests with those of our other shareholders. The Outside Trustees Plan provides for grants of RSUs, which convert into Common Shares on a one-to-one basis when they vest, provided the Outside Trustee has not opted to defer settlement of such units. RSUs awarded prior to 2006 are entitled to accrue dividend equivalent units (""DEUs''), which in turn may accrue further DEUs. RSUs granted in 2006 and later will no longer be entitled to earn DEUs but will instead receive a quarterly cash payment equal in amount to the dividend paid on our Common Shares. Such payments will be payable on RSUs granted in 2006 or later which are held as of each dividend record date for our Common Shares. Additionally, the Outside Trustees will continue to earn DEUs on any outstanding option grants which were made between 1999 and 2001, and DEUs will continue to be credited on these DEUs. Our Secretary (the ""Administrator'') administers the Outside Trustees Plan. The number of Common Shares reserved for issuance upon vesting or settlement of RSUs or DEUs granted under the Outside Trustees Plan, upon the exercise of options granted under the Outside Trustees Plan prior to 2002 and upon settlement of deferred fees (as discussed below) currently is 400,000. In the event of changes to the outstanding Common Shares, such as in the case of certain corporate transactions, the Administrator will make equitable adjustments to the aggregate number of Common Shares available under the Outside Trustees Plan and the shares subject to outstanding awards under the plan to preserve the value of the beneÑts under the plan. In certain cases, the Administrator may also terminate awards under the Plan, subject to certain limitations with respect to outstanding options. On the date of each annual meeting of our shareholders, each Outside Trustee is granted 2,000 RSUs. A Trustee elected other than at an annual meeting is granted a pro rata award for the period of time between the date of election and the anticipated date of the next annual meeting. The RSUs vest at the rate of 25% per year for grants made prior to July 2002 and at 33.33% per year for grants made after June 2002, with vesting beginning on the Ñrst anniversary date of the grant. DEUs may be earned on options granted between 1999 and 2001, RSUs and DEUs, and are determined as soon as practicable after each January 1. For options, the number of new DEUs earned is determined by multiplying the average of the number of options held as of each dividend record date in the prior year by the 11 diÅerence between the average annual dividend yield on Common Shares for the prior year and the average annual dividend yield for the Standard & Poor's 500 Stock Index for the prior year. For RSUs, the number of new DEUs earned is determined by multiplying the average of the number of RSUs held as of each dividend record date in the prior year by the average annual dividend yield on Common Shares for the prior year. The number of DEUs earned on previously earned DEUs is determined by multiplying the number of DEUs held as of December 31 of the prior year by the annual dividend yield on Common Shares for the prior year. The DEUs associated with any given award vest in accordance with the vesting schedule applicable to that award. Settlement of DEUs earned by Outside Trustees may be triggered by exercise of the associated options, settlement of the associated RSUs, or cessation of service as a Trustee. Upon settlement, DEUs convert to Common Shares on a one-to-one basis. The settlement of RSU awards and DEU awards under the Outside Trustees Plan may be deferred pursuant to our Deferred Compensation Plan, which is described below. Deferred Compensation Plan Under the Deferred Compensation Plan, described in more detail later in this Proxy Statement, Outside Trustees may elect to defer payment of their eligible cash fees and settlement of their RSUs and DEUs. Prior to 2006, an Outside Trustee could elect to defer eligible cash fees into phantom Common Shares. If fees were deferred into phantom Common Shares they were entitled to earn additional phantom Common Shares following each dividend payable date for Common Shares. Such additional phantom Common Shares were determined by multiplying the number of phantom Common Shares held as of the dividend record date by the amount of the dividend paid on a Common Share, and dividing by the fair market value of a share on the dividend payable date. Beginning in 2006, Outside Trustees may no longer defer fees earned in 2006 or later in the form of phantom Common Shares, but may defer such fees into another investment under the Deferred Compensation Plan, including our stock. Any phantom Common Shares remaining on account will continue to earn additional phantom Common Shares, as described above, until they are settled. Phantom Common Shares will be settled based upon the date elected by the Outside Trustee in accordance with the Deferred Compensation Plan. Upon settlement, phantom Common Shares convert to Common Shares on a one-to-one basis. Shares available under the Outside Trustees Plan are used to satisfy this obligation. Trustee Compensation Summary Total compensation received by the members of the Board for 2006 is set forth below Trustee(1) Fees Earned or Paid in Cash Stock Awards ($)(2) Option Awards($) All Other Compensation ($)(3) Total($) Mr. Mr. Mr. Ms. Mr. Mr. Mr. Mr. Mr. Mr. Cardwell ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Demeritt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gerardi ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gillis ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Holmes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Kogod(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Polk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Richman ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SchweitzerÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Smith(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 52,343 $ 12,065 $ 35,500 $ 49,157 $ 56,000 $100,000 $ 48,000 $ 53,000 $ 65,500 $459,608 $67,604 $ 5,974 $67,604 $65,460 $67,604 Ì $67,604 $67,604 $67,604 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì $770,801 $62,652 $ 572 $ 8,924 $30,534 $41,797 $ 924 $40,811 $51,879 $59,594 $ 1,182 $ 182,599 $ 18,611 $ 112,028 $ 145,151 $ 165,401 $ 100,924 $ 156,415 $ 172,483 $ 192,698 $1,231,591 (1) Mr. Sellers does not receive additional compensation for his service as a Trustee. For information on Mr. Sellers' compensation, see the ""Summary Compensation Table'' below. (2) Each Outside Trustee, other than Mr. Demeritt, was awarded 2,000 RSUs on the date of the annual shareholder meetings in 2004, 2005 and 2006; these RSUs vest over three years. On September 19, 2006 Mr. Demeritt joined the board and received a grant of 1,315 RSUs which vest over three years. On February 17, 2004, Ms. Gillis joined the board and received a grant of 504 restricted stock units which 12 vest over three years. The value shown above reÖects the amount expensed during Ñscal year 2006 for grants made to Outside Trustees. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. For more information on this calculation, see note 12 to our audited Ñnancial statements for the Ñscal year ended December 31, 2006 included in our Annual Report on Form 10-K Ñled with the SEC on March 1, 2007. The value shown below reÖects the fair market value of these grants on grant date: RSU Award Date RSU Award Grant Date Fair Value May 20, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ February 17, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ May 21, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ May 4, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ May 17, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ September 19, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,000 504 2,000 2,000 2,000 1,315 $48,580 $13,810 $54,960 $71,960 $95,400 $71,694 The outstanding phantom shares, options and RSUs, including any outstanding DEUs associated with those RSUs, held by each Trustee as of December 31, 2006 are as follows: Trustee Vested Options (#) Unvested Options (#) Vested RSUs, Related DEUs and Phantom Shares (#) Unvested RSUs, Related DEUs and Phantom Shares(#) Mr. Mr. Mr. Ms. Mr. Mr. Mr. Mr. Mr. Mr. Cardwell ÏÏ Demeritt ÏÏ Gerardi ÏÏÏ Gillis ÏÏÏÏÏ Holmes ÏÏÏ Kogod ÏÏÏÏ Polk ÏÏÏÏÏÏ Richman ÏÏ Schweitzer SmithÏÏÏÏÏ 15,000 Ì Ì Ì Ì Ì 11,250 15,000 15,000 55,750 Ì Ì Ì Ì Ì Ì Ì Ì Ì 117,166 26,198 Ì 700 4,708 22,569 469 3,211 20,048 12,055 600 4,117 1,315 4,112 4,306 4,117 Ì 4,112 4,112 4,117 Ì (3) Includes the value of DEUs earned on January 1, 2007 for 2006 as follows: Mr. Cardwell $41,854; Mr. Gerardi $7,184; Ms. Gillis $9,562; Mr. Holmes $20,651; Mr. Kogod $924; Mr. Polk $23,071; Mr. Richman $30,574; Mr. Schweitzer $41,854 and Mr. Smith $1,182. Such DEUs are earned on all RSU awards and on option awards made prior to May 2000. Includes the value of phantom shares expensed during 2006 as follows: Mr. Cardwell $19,058; Ms. Gillis $19,232; Mr. Holmes $19,406 and Mr. Richman $19,565. Such phantom shares were earned on existing phantom shares on each dividend payable date in 2006, and originally stemmed from the deferral of trustee fees. Includes a payment of $16,000 to Messrs. Schweitzer and Polk for their service on the Board of Directors of AMERITON Properties Incorporated (""Ameriton''), a wholly-owned subsidiary of the Operating Trust. Includes quarterly cash payments equal in amount to the dividend paid on Archstone-Smith Common Shares for RSUs granted in 2006 as follows: Messrs. Cardwell, Gerardi, Holmes, Polk, Richman, Schweitzer and Ms. Gillis $1,740, and Mr. Demeritt $572. (4) Mr. Kogod is an employee of Archstone-Smith. Pursuant to the Shareholders' Agreement (see ""Certain Relationships and Transactions Ì Shareholders' Agreement''), Mr. Kogod received a salary of $100,000 for his services in 2006. (5) Mr. Smith is an employee of Archstone-Smith. Pursuant to the Shareholders' Agreement (see ""Certain Relationships and Transactions Ì Shareholders' Agreement''), Mr. Smith received a salary of $309,608 and a bonus of $150,000 for his services in 2006. In addition, pursuant to the terms of the Shareholders' Agreement, Mr. Smith was awarded 119,500 options on February 15, 2006. Although Mr. Smith's options vest over a three year period, we were required to expense all of his outstanding unvested options in 2006 because Mr. Smith had reached the age of retirement, which caused all unvested options to be 13 treated as vested for accounting purposes. The grant date fair value of each of the option awards, calculated under the Black-Scholes-Merton model, included in the ""Options Awards'' column is set forth below: Grant Date Options Granted Fair Value January 22, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ January 20, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ February 15, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 115,250 112,500 119,500 $160,198 $471,375 $658,445 COMPENSATION DISCUSSION AND ANALYSIS The following compensation discussion and analysis contains statements regarding future individual and company performance targets and goals. These targets and goals are disclosed in the limited context of our compensation programs and should not be understood to be statements of management's expectations or estimates of results or other guidance. We speciÑcally caution investors not to apply these statements to other contexts. Compensation Policy Objectives and Process The Compensation Committee is committed to a compensation philosophy that places signiÑcant emphasis on rewarding our Named Executive OÇcers on the basis of our success in attaining corporate objectives and/or those oÇcers' success in attaining individual Ñnancial and qualitative performance objectives that advance the overall success of the company. The committee's compensation philosophy is intended to encourage the Named Executive OÇcers to aggressively pursue company goals in order to generate better long term returns for our shareholders relative to our peer group of multifamily real estate investment trusts and to reward, and therefore encourage, decisions that cause the company to achieve better overall levels of shareholder returns relative to our peer group. The Compensation Committee believes that an emphasis on short term quarterly results is not optimal to building a successful company and that a compensation program that combines both Ñnancial and nonÑnancial goals provides the right environment in which to provide appropriate incentives for the Named Executive OÇcers that are best linked to overall long term value creation and the long term success of the company. In addition, the committee believes that, in order to best advance the interests of the company and our shareholders, the committee needs Öexibility to consider each individual oÇcer's performance with respect to corporate goals established for that oÇcer and needs to be able to reward these oÇcers for achieving the company's long term growth goals. The Compensation Committee has, therefore, attempted to develop and implement a rational and thoughtful compensation program for the company's senior oÇcers that strikes an appropriate balance between Ñnancial and non-Ñnancial goals, objective and subjective criteria, short term results and long term value creation. The Compensation Committee also takes into account the varying responsibilities of senior oÇcers within the company when establishing compensation. The committee believes that it would be inappropriate to compensate oÇcers whose job responsibilities are more focused on a particular aspect of our business operations based on the company's performance as a whole when they do not have the ability to directly inÖuence overall company performance. The committee believes that incentives that relate directly to the oÇcer's area of responsibility and inÖuence are the most eÅective. Consequently, compensation for these senior oÇcers is more appropriately based on their ability to achieve exemplary results in those areas of the company's business that are within their control. Our compensation program is designed to: ‚ attract, reward and retain highly qualiÑed employees. ‚ align shareholder and employee interests. ‚ reward long term career contributions to Archstone-Smith. 14 ‚ emphasize the variable portion of total compensation (cash and equity) as an individual's level of responsibility increases. ‚ provide fully competitive compensation opportunities consistent with performance. ‚ encourage teamwork. The Compensation Committee conducts a review of its compensation objectives and the levels of compensation for Messrs. Sellers, Freeman and Mueller and Ms. Brower every three years. The Compensation Committee chose a three year period in order to focus senior management on building long term value rather than on achieving short term results, such as quarterly results and, secondarily, to minimize the frequency with which the Compensation Committee is required to conduct a thorough evaluation and benchmarking analysis. The committee believes that three years is a reasonably long period of time that allows measurement of progress, without focusing on short term metrics. The Compensation Committee last conducted its review in October 2005, at which time it set compensation levels and targets for awards to Messrs. Sellers, Freeman and Mueller and Ms. Brower for 2006 through 2008. The Compensation Committee retained FPL Associates to assist it in the review of this three year compensation program. See ""Meetings and Committees of the Board'' for a description of the role of FPL Associates. During this review, the committee determined that a more detailed study of Mr. Mueller's compensation was appropriate and, with the assistance of FPL Associates, it completed that process in mid-2006, at which time Mr. Mueller's compensation was established for 2007 and 2008, with the existing program to continue through 2006. Although Mr. Sellers participates in a majority of the meetings of the Compensation Committee and provides the committee with his thoughts on compensation matters, the Ñnal design for the three year compensation program and annual compensation decisions are made solely by the Compensation Committee. As part of its review of the compensation package for Messrs. Sellers, Freeman and Mueller and Ms. Brower, the Compensation Committee examined salaries and incentive compensation paid to equivalent oÇcers at two peer groups. The Ñrst peer group consisted of the following eight largest publicly-traded multifamily real estate investment trusts, based on total market capitalization as of June 30, 2005: Apartment Investment and Management Company, Avalon Bay Communities, Inc., BRE Properties, Inc., Camden Property Trust, Equity Residential, Essex Property Trust, Inc., Home Properties, Inc. and United Dominion Realty Trust, Inc. The second peer group consisted of ten real estate companies with total market capitalization as of June 30, 2005 similar to us, and included real estate investment companies that invested in both multifamily and non-multifamily assets. The size-based peer group companies were: Apartment Investment and Management Company, Boston Properties, Inc., Developers DiversiÑed Realty Corporation, Equity Residential, Hilton Hotels Corporation, Marriott International, Inc., Kimco Realty Corporation, The Mills Corporation, ProLogis, and Public Storage, Inc. Since most of the companies in the asset-based peer group have a signiÑcantly smaller total capitalization than us, the Compensation Committee placed a larger emphasis on the compensation paid to equivalent oÇcers at companies in the size-based peer group, where we were in the 66th percentile. The combination of base salary and annual cash bonus, and the combination of base salary, annual target level cash bonus and annual target level incentive stock award, are each designed to deliver a base level of total annual cash compensation slightly higher than the median for companies in the size-based peer group, consistent with our size being slightly larger than the median. To the extent that we outperform the NAREIT Apartment Index, the cash bonus and incentive stock award portions of compensation for certain of the Named Executive OÇcers increase as described in more detail below and may result in overall compensation being higher than the median for the size-based peer group. If we underperform the NAREIT Apartment Index, then the annual incentive stock award will be at less than the target amount. The committee believes that this approach to compensation fosters achievement by the executives of the company's objectives. Awards earned under the program may be further adjusted up or down at the discretion of the Compensation Committee based on the quality of the results, extraordinary circumstances, and other factors that the Compensation Committee deems relevant. As discussed below, Mr. Sellers' cash bonus may be reduced by the Compensation Committee if it determines that he has not fully met his performance goals. A portion of the performance units that Mr. Sellers may earn under the special long term incentive program 15 discussed below is discretionary. Because a portion of the cash bonus for Messrs. Freeman and Mueller and Ms. Brower, and a portion of the annual stock award for Messrs. Sellers, Freeman and Mueller and Ms. Brower are based on achievement of individually-established goals, the Compensation Committee also exercises some discretion in determining the extent to which the speciÑc goals for an oÇcer have been attained or exceeded and, consequently, the determination of the portion of the cash bonus and annual stock award to be made. The Compensation Committee's basis for exercising discretion for 2006 awards is discussed in the notes to the Summary Compensation Table below and in the section below entitled ""Criteria for Awards Ì Annual and Long Term Incentives Ì Performance Units Ì Special Long Term Incentive Program''. Because the cash bonuses and/or RSU awards for Messrs. Sellers, Freeman and Mueller and Ms. Brower are based on our performance compared with the NAREIT Apartment Index, the Compensation Committee does not meet until January or February of the following year to evaluate the Named Executive OÇcers' performance during the previous year and to determine the cash bonus and stock award to be made for the previous year. The actual date of this meeting is determined by the availability of information about peer company performance and is not a set date. The Compensation Committee met on February 23, 2007 to evaluate the performance of Messrs. Sellers, Freeman and Mueller and Ms. Brower during 2006 and to determine the cash bonuses and RSU awards to be made for 2006. The actual cash bonuses and RSU awards granted to these oÇcers on such date are included in the Summary Compensation Table or the notes to the Summary Compensation Table, as appropriate. Mr. Neely is principally responsible for overseeing the company's nationwide development activities. His compensation is based upon the extent to which we have the opportunity to evaluate appropriate development opportunities available in our markets, obtain approvals on those land parcels the company is working to entitle, and are successful in building high quality properties on time and on budget given variations in the market. Consequently, his compensation program is designed to foster and reward achievement in these areas, although the same objectives regarding compensation and the compensation policies described above are applied by management and the Compensation Committee to Mr. Neely's compensation. Mr. Neely's base salary and his target cash bonus and target annual RSU award are established annually. No benchmarking has been performed with respect to Mr. Neely's compensation during the past Ñve years. The committee believes that an annual evaluation is appropriate because the development goals for the company, and all of the employees reporting to Mr. Neely on those projects, are determined and reviewed on an annual basis. Each year Messrs. Sellers and Freeman review Mr. Neely's performance of the goals and objectives established for him for the year by Messrs. Sellers and Freeman with respect to the company's development activities, as well as with respect to personnel development within these areas of the company. Also taken into consideration are events and circumstances that arose during the year, but which had not been anticipated in determining the goals and objectives for the year. Based on this evaluation, Messrs. Sellers and Freeman make a recommendation to the Compensation Committee with respect to the base salary to be paid Mr. Neely for the following year and the target bonus and target RSU award for the following year, as well as the actual cash bonus and RSU award to be made for the previous year. The Compensation Committee met on December 5, 2006 and on February 23, 2007 to approve the cash bonus and RSU award for Mr. Neely. The actual cash bonus and RSU award granted to Mr. Neely are included in the Summary Compensation Table or the notes to the Summary Compensation Table, as appropriate. As noted above, the Compensation Committee completed the three year compensation package for Mr. Mueller in mid-2006. In December 2006, the committee approved Mr. Neely's 2006 cash bonus and established his compensation for 2007, and took action to change the date upon which the fair market value of options and RSUs granted is priced from the closing price on the business day immediately preceding the date of grant to the closing price on the date of grant. In March 2007, the committee adopted amendments to its charter. Elements of Compensation The key elements of our executive compensation program consist of base salary, annual incentives and long term incentives. 16 Base Salary Base salaries are based on an overall assessment of the executive's responsibilities and contribution to our success. Base salaries are set at a level which, together with the target level annual cash bonus, is suÇcient to provide the oÇcer with a competitive level of basic income. Cash Bonus Our Named Executive OÇcers are eligible for an annual cash bonus based on their individual and/or our performance. The combination of base salary and cash bonus are paid to provide rewards to these oÇcers for achievement of speciÑc personal and corporate goals during the relevant period of measurement and are not tied to future retention of a given oÇcer, beyond a given calendar year. Long Term Incentive Awards Our Named Executive OÇcers are eligible for an annual stock award under our Long Term Incentive Plan (the ""LTIP''). These types of awards provide the Named Executive OÇcers with incentives for achievement by linking these oÇcers to shareholders' goals through stock ownership and encouraging oÇcer retention through the three year vesting. The incentive stock awards, which are described in more detail below, have included options coupled with an annual award of DEUs, options without a DEU component, RSUs with a DEU component, and RSUs with a quarterly cash payment instead of a DEU component. Since January 1, 2002, Messrs. Sellers, Freeman and Mueller and, since January 1, 2005, Ms. Brower, have also been eligible for special long term incentive awards. These awards, which are described in more detail below, have taken the form of performance units, which, if earned, are convertible on a one-for-one basis in Archstone-Smith common shares. Options Our Named Executive OÇcers have not been awarded options to purchase Common Shares since January 1, 2003. The decision to stop awarding options to the Named Executive OÇcers, and other senior oÇcers, was made to reduce the dilution to shareholders resulting from the larger number of shares used for incentive compensation with option grants over RSU awards. Prior to January 1, 2000, options granted to Messrs. Sellers, Freeman and Mueller and Ms. Brower earned DEUs, plus DEUs on any DEUs previously earned. DEUs earned on an option may be deferred under our Deferred Compensation Plan, as discussed below. Beginning January 1, 2007 the purchase price of Common Shares under options awarded to employees of the company will be based on the closing price of a Common Share on the New York Stock Exchange as of the date of the award. Prior to January 1, 2007 the purchase price of Common Shares under options awarded to employees, including the Named Executive OÇcers, was based on the closing price of a Common Share on the New York Stock Exchange as of the close of business on the day immediately preceding the date of the award. All of the options granted to our Named Executive OÇcers have vested. The full purchase price of each Common Share purchased upon the exercise of any option must be paid at the time of exercise. Except as otherwise determined by the Compensation Committee, the purchase price is payable in cash or in Common Shares (valued at fair market value as of the day of exercise), or in any combination thereof. Restricted Stock Units Our Named Executive OÇcers are eligible to receive an annual RSU award. As noted above, RSU awards are less dilutive than option grants, and they also encourage the Named Executive OÇcers, and other of our senior oÇcers, to increase their share ownership, thereby more closely aligning their goals with those of other shareholders. RSU awards also encourage retention through the three year vesting of each RSU award. For awards made prior to January 1, 2006, RSUs earn DEUs, plus DEUs on any DEUs previously earned. For awards made after January 1, 2006, RSUs earn a quarterly cash payment equal to the dividend paid on the equivalent number of our Common Shares for that quarter. RSUs, DEUs earned on RSUs or DEUs, and the quarterly cash payment on RSUs, or any of the foregoing, may be deferred under our Deferred Compensation Plan, as discussed below. 17 RSUs vest over a three year period, with one third of each award generally vesting in December of the year of grant and in December of the two succeeding years. At the discretion of the Compensation Committee, an RSU award may be settled in cash rather than Common Shares. The Compensation Committee, however, has not agreed to a settlement in cash since the program was approved in 1997. Performance Units Ì Special Long Term Incentive Program Messrs. Sellers, Freeman and Mueller and Ms. Brower are eligible to receive an award of performance units through a special long term incentive program established under the LTIP based on our performance over the period January 1, 2006 through December 31, 2008. Mr. Neely is not a participant in this program. Our Special Long Term Incentive Program is designed to incentivize exceptional value creation over and above base level performance and to allow these oÇcers to share in a small portion of the value so created. The number of performance units that vest can range from zero to the entire number of performance units awarded to the oÇcer. The actual number of performance units that vest will be determined by the Compensation Committee in January or February 2009 based upon the performance measures described below under ""Criteria for Awards Ì Annual and Long Term Incentives Ì Performance Units Ì Special Long Term Incentive Program''. The vested performance units will be exchanged for an equal number of Common Shares immediately upon vesting, unless deferred under our Deferred Compensation Plan. Any performance units that do not vest will be cancelled. Senior Executive OÇcers have no right to vote, receive dividends or transfer the performance units until Common Shares are issued in exchange for the vested performance units. Criteria for Awards A signiÑcant portion of the total compensation for Messrs. Sellers, Freeman and Mueller and Ms. Brower is based on annual and long term performance-based incentive compensation and less on salary and employee beneÑts, creating the potential for greater variability in the individual's compensation level from year to year. The mix, level and structure of performance-based incentive elements reÖect market industry practices as well as the executive's role and relative impact on business results consistent with our variable pay-for-performance philosophy. Base Salary As noted above, base salaries for Messrs. Sellers, Freeman and Mueller and Ms. Brower are established as part of the three year program described above, though salaries are reviewed annually if there are material changes in circumstances. As noted above, Mr. Neely's base salary is adjusted annually in line with adjustments for our other senior oÇcers. Annual and Long Term Incentives Incentive levels for the annual cash bonuses for Messrs. Freeman, Mueller and Ms. Brower and for the annual stock awards for Messrs. Sellers, Freeman and Mueller and Ms. Brower, are established as part of the three year program described above. The determination of Mr. Sellers' annual cash bonus, as well as Mr. Neely's annual cash bonus and annual incentive stock award, are discussed below. Cash Bonus and RSU Grants The actual annual cash bonus paid to Messrs. Freeman and Mueller and Ms. Brower, and the annual RSU awards granted to Messrs. Sellers, Freeman and Mueller and Ms. Brower, are each based on four criteria: (1) achievement of speciÑc corporate goals articulated in writing at the beginning of each year, (2) our compounded annualized total shareholder return (""TSR'') for the three preceding calendar years, compared to the TSR for companies in the NAREIT Apartment Index for the same period, (3) our funds from operation (""FFO'') growth for the calendar year, compared to the weighted average FFO growth for the companies included in the NAREIT Apartment Index for the same period, and (4) our absolute FFO growth for the year compared to the long term growth targets established by the Compensation Committee and the Board. The Compensation Committee has selected the NAREIT Apartment Index as the appropriate peer 18 group index because all of the multifamily real estate investment trusts used by the Compensation Committee for benchmarking are included in this index, it measures performance of real estate investment trusts that invest in multifamily residential apartment projects, and it is weighted based on size of the companies included. The Compensation Committee believes that total shareholder return is the most important factor in determining incentive compensation for oÇcers with overall corporate responsibilities since it most eÅectively aligns the interests of these oÇcers with the interests of our shareholders. TSR is determined by comparing our daily TSR on the last trading day of December of the second prior calendar year to our daily TSR on the last trading day of December of the current compensation calendar year (e.g., to determine TSR for 2006, the comparison was December 31, 2003 to December 29, 2006). The Compensation Committee looks at a three year average in order to reduce the impact of one-time events. To the extent that these oÇcers have provided a better overall return for our shareholders, compared to the shareholder return of comparable companies in the real estate industry, as measured by the NAREIT Apartment Index, they should be rewarded for those accomplishments. The committee's use of TSR measured over three years as a metric also focuses these oÇcers on long term value creation rather than short term earnings. Because of its importance, 50% of the cash bonus for Messrs. Freeman and Mueller and Ms. Brower and 50% of the RSU grants for Messrs. Sellers, Freeman and Mueller and Ms. Brower for the year is based on this TSR calculation. For the cash bonus allocable to this metric for Messrs. Freeman and Mueller and Ms. Brower, three levels of achievement are deÑned: ‚ Target: Performance up to the 50th percentile At or above the 65th percentile ‚ Target Plus: ‚ High: At or above the 80th percentile If our performance is between speciÑed levels, the amount of the cash bonus for the TSR component would equal the interpolated amount based on the actual percentile achieved as compared to the bonus amount for the speciÑed target levels directly above and below the actual percentile achieved (e.g., assuming the bonus based on TSR for the Target level is $100,000 and the bonus for the Target Plus level is $150,000, the actual bonus payout for the TSR component would equal $126,667, if the actual percentile achieved were 58%). The committee believes that Messrs. Sellers, Freeman and Mueller and Ms. Brower should receive an RSU award each year Ì since these awards align the oÇcers' interests to shareholders' goals through stock ownership and they encourage oÇcer retention through the three year vesting Ì but the amounts should be lower if target performance relative to the NAREIT Apartment Index and the other corporate and individual performance metrics are not achieved. However, since the Compensation Committee does not consider the RSU award to be part of base compensation, it has incorporated two lower levels of performance Ì Threshold and Threshold Plus Ì so that performance at lower than the target level will result in a lower RSU award. For the RSU award allocable to this metric for Messrs. Sellers, Freeman and Mueller and Ms. Brower, the criteria for TSR relative to the NAREIT Apartment Index are as follows: ‚ Threshold: Up to the 20th percentile ‚ Threshold Plus: At or above the 35th percentile ‚ Target: At or above the 50th percentile At or above the 65th percentile ‚ Target Plus: ‚ High: At or above the 80th percentile If our performance is between speciÑed levels, the amount of the RSU award for the TSR component would equal the interpolated amount based on the actual percentile achieved as compared to the amount of the RSU award for the speciÑed levels directly above and below the actual percentile achieved (e.g., assuming 19 the RSU award based on TSR for the Target level is $100,000 and the RSU award for the Target Plus level is $150,000, the actual RSU award for the TSR component would equal $126,667, if the actual percentile achieved were 58%). A second measure commonly used in the real estate industry to measure performance is FFO growth. FFO is a non-GAAP measure that is commonly used in the real estate industry to assist investors and analysts in comparing results of real estate companies. FFO adjusts GAAP net earnings to exclude depreciation and gains and losses from the sales of previously depreciated properties. Our calculation of FFO includes (i) gains and losses from dispositions of properties acquired or developed by our taxable REIT subsidiaries such as Ameriton, as the fundamental purpose of these entities is to take advantage of short-term investment opportunities, (ii) gains and losses from our international subsidiaries, and (iii) promote incentive fee income resulting from the liquidation of unconsolidated joint ventures, if any. If they relate to a disposition, we exclude prepayment penalties and include the cost or beneÑt of unamortized purchase accounting-related debt adjustments. Our share of the FFO relating to our unconsolidated entities is calculated on the same basis. The Compensation Committee used two measures of FFO growth, each applicable to 15% of the cash bonus for Messrs. Freeman and Mueller and Ms. Brower, and 15% of the RSU award for Messrs. Sellers, Freeman and Mueller and Ms. Brower. First, the Compensation Committee looks at our FFO growth compared to the FFO growth of our peers, using the NAREIT Apartment Index. As with TSR, the Compensation Committee believes that these oÇcers should be rewarded for outperforming our peers in this area. The second FFO measurement looks at our absolute FFO growth for the year compared to the long term growth targets established by the Compensation Committee and the Board. To the extent that these oÇcers exceed the long term FFO growth targets, they should be rewarded for that achievement. Like the TSR calculation described above, the FFO growth measurements include Target, Target Plus, and High thresholds for the cash bonus, and Threshold, Threshold Plus, Target, Target Plus and High thresholds for the RSU awards. Achievement of the FFO-based performance criteria in any given year will depend on a number of factors. However, since the same metrics will be used over a three year period, we believe that an analysis of how often the various target levels were achieved during the past three years will provide guidance as to the likelihood that a particular target level will be met in future years. The charts below set forth in which years each level of achievement was paid for the FFO-based performance metrics for the cash bonus for Messrs. Freeman and Mueller and Ms. Brower and the RSU awards for Messrs. Sellers, Freeman and Mueller and Ms. Brower, respectively, during 2004 through 2006: Years in Which Each Achievement Level was Paid Target Target Plus High Cash Bonus Metric Comparative FFO Growth ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Absolute FFO Growth ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ RSU Award Metric 2005, 2006 2005 2006 2004 2004 High Years in Which Each Achievement Level was Paid Threshold Threshold Plus Target Target Plus Comparative FFO Growth ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Absolute FFO GrowthÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 2006 2005 2006 2004 2004 The Ñnal 20% of the cash bonus for Messrs. Freeman and Mueller and Ms. Brower, and the Ñnal 20% of the RSU award for Messrs. Sellers, Freeman and Mueller, and Ms. Brower, is determined based on the individual oÇcer's accomplishment of speciÑc written goals established in cooperation with the Compensation Committee for that oÇcer at the beginning of each calendar year. This portion of each award is designed to award each individual oÇcer to the extent the oÇcer achieves those speciÑc goals. Because many of these goals are not deÑned by meeting speciÑc Ñnancial goals, the committee exercises some discretion in determining the extent to which the speciÑc goals for an oÇcer have been attained and, consequently, the portion of the bonus and RSU award allocated to this metric that will be awarded. The Compensation Committee will award the target amount allocated to this metric provided that the oÇcer has performed at the appropriate level and to the satisfaction of the Committee, including achievement in all material respects of 20 the goals established for that oÇcer. To the extent that an oÇcer's performance during the year exceeds the goals established for a speciÑc oÇcer, then the committee will consider an award at a higher level. We believe that the allocation described above creates the proper incentives for Messrs. Sellers, Freeman and Mueller and Ms. Brower. A signiÑcant portion of the cash bonus and/or RSU award of Messrs. Sellers, Freeman and Mueller and Ms. Brower is based on achievement of individual goals and the ability of the company, under the leadership of these oÇcers, to meet the TSR and FFO growth goals established by the Compensation Committee. Sixty-Ñve percent of the cash bonus for Messrs. Freeman and Mueller and Ms. Brower, and 65% of the RSU award for these oÇcers and for Mr. Sellers, is based on how well our company performs with respect to these metrics compared to other companies in the multifamily real estate industry, as measured by the NAREIT Apartment Index, and, therefore, rewards these oÇcers based on performance relative to those peer companies. Based on the foregoing criteria, the maximum cash bonus that Messrs. Freeman and Mueller and Ms. Brower can earn, subject to the discretion of the Compensation Committee to modify an award for unusual circumstances or extraordinary performance, for each of 2006, 2007 and 2008 is as follows: Executive Target Target Plus High Mr. Mr. Mr. Ms. Freeman ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mueller (2006) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mueller (2007-2008)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Brower ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $360,000 $280,000 $315,000 $180,000 $480,000 $420,000 $475,000 $245,000 $640,000 $560,000 $635,000 $310,000 The target level is intended to be the minimum amount Messrs. Freeman and Mueller and Ms. Brower will receive as long as he or she is doing a good job in his or her role consistent with the goals agreed to by the Compensation Committee. Messrs. Freeman and Mueller and Ms. Brower can earn above the target level based on the company's performance under their leadership. Based on the foregoing criteria, the RSU award that Messrs. Sellers, Freeman and Mueller and Ms. Brower can earn, subject to the discretion of the Compensation Committee to modify an award for unusual circumstances or extraordinary performance, for each of 2006, 2007 and 2008 is as follows: Executive Threshold Threshold Plus Target Target Plus High Mr. Sellers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mr. Freeman ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mr. Mueller ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2006) Mr. Mueller ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2007-2008) Ms. Brower ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,207,500 $ 525,000 $ 315,000 $ 355,000 $ 157,500 $1,811,250 $ 682,500 $ 472,500 $ 534,000 $ 210,000 $2,415,000 $ 840,000 $ 630,000 $ 710,000 $ 262,500 $3,018,750 $ 997,500 $ 787,500 $ 890,000 $ 315,000 $3,622,500 $1,155,000 $ 945,000 $1,070,000 $ 367,500 The annual cash bonus paid to Mr. Sellers is set at $1,750,000 per year provided he executes in an appropriate and exemplary manner, and to the satisfaction of the Compensation Committee, his managerial responsibilities as the company's chief executive oÇcer, including developing and executing the company's strategic plans, overseeing personnel and fostering good morale and retention, succession planning for key positions within the company, providing technology leadership, creating an atmosphere that encourages innovation, maintaining the company's outstanding development capability, creating value through development activity in our core markets, overseeing our acquisition activity and the repositioning of our portfolio, and creating long term value. The Compensation Committee recognizes that the appropriate and exemplary execution of these goals will not necessarily be immediately reÖected in the company's comparative performance metrics, but believes that they are essential to the long term success of the company. Because we expect our chief executive oÇcer to focus on all aspects of the company's performance, including the cultural and subjective elements of success as well as objective Ñnancial performance, the Compensation Committee believes it is appropriate and in the best interests of our company and our shareholders to consider all of these 21 elements in determining Mr. Sellers' total compensation. If the Compensation Committee determines that Mr. Sellers has not fully met these goals, then the committee may reduce the bonus by up to $400,000, for a minimum annual cash bonus of $1,350,000. Mr. Neely's target cash bonus and target annual RSU award is set annually in line with those awarded to our other senior oÇcers. As noted above, the amount actually awarded to him by the Compensation Committee is based on the review of his performance undertaken by Messrs. Sellers and Freeman and their recommendation to the Compensation Committee. Mr. Neely's target cash bonus for 2006 was $275,000, and his target cash bonus for 2007 is $286,000. The target RSU award for Mr. Neely for 2006 was $500,000, and his target RSU award for 2007 is $500,000. As discussed above, the actual amount of the award is based on Mr. Neely's performance in overseeing and directing the development activities of the company. Performance Units Ì Special Long Term Incentive Program The table set forth below identiÑes the number of performance units awarded under our Special Long Term Incentive Program to Messrs. Sellers, Freeman and Mueller and Ms. Brower for the 2006-2008 performance period. As noted above, Mr. Neely is not a participant in this program. As described below, these units will vest only if certain performance targets are met. If none of the targets are met, none of the units will vest. Performance Unit Awarded for 2006-2008 (#)(1) Name Mr. Mr. Mr. Ms. Sellers(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Freeman ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mueller ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Brower ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 170,908 50,633 39,878 15,000 (1) Performance units that vest will be exchangeable for Common Shares on a one-for-one basis, but the number of performance units that will vest, if any, will be determined in January or February 2009, and will depend on the company's performance. (2) 25% of the performance units awarded to Mr. Sellers for the 2006-2008 performance period are subject to vesting based on the Compensation Committee's evaluation of Mr. Sellers' progress in achieving speciÑc long term goals, including improving the company's operating platform, progress on succession planning, creating signiÑcant incremental value through the company's acquisition, disposition and development activities, maintaining high morale and a strong culture within the company, and continued execution of the company's key goals and objectives during the performance period. The actual number of performance units that vest will be determined by the Compensation Committee in January or February 2009. The vested performance units are exchanged for an equal number of Common Shares immediately upon vesting, unless deferred under our Deferred Compensation Plan. Any performance units that do not vest are cancelled. The holders of performance units have no right to vote, receive dividends or transfer the performance units until Common Shares are able to be issued in exchange for the vested performance units. The number of performance units that vest can range from zero to the entire number of performance units awarded to the oÇcer. With the exception of Mr. Sellers, vesting for one half of the performance units depends on our average annual compounded TSR for the applicable performance period on an absolute basis (""Absolute TSR'') and vesting for the remaining half of the performance units depends on the percentile our average annual compounded TSR over the applicable period puts us in relation to the companies in the NAREIT Apartment Index, as set forth in the chart below. With respect to Mr. Sellers, 25% of the performance units awarded to him for the 2006-2008 performance period are contingent upon the subjective evaluation of his performance during the performance period by the Compensation Committee based on the criteria described in note (2) to the chart above. Vesting of the remaining 75% of the performance units for 22 the three-year performance period will be determined in the same manner as vesting with respect to the other oÇcers (i.e., 37.5% of the total units awarded to Mr. Sellers will be based on Absolute TSR and the remaining 37.5% will be based on performance relative to the companies in the NAREIT Apartment Index). The following chart describes the percentage of performance units that would vest based on the Company's average annual compounded TSR during the applicable performance period: 50% of Units Awarded % of These Absolute TSR Units Vested 50% of Units Awarded TSR vs. NAREIT Apartment Index % of These Units vested Less than 11% 11.0% 11.5% 12.0% 12.5% 13.0% 13.5% 14.0% 0% 40% 50% 60% 70% 80% 90% 100% Below 60th Percentile 60th Percentile 65th Percentile 70th Percentile 75th Percentile 80th Percentile 85th Percentile 90th Percentile 0% 40% 50% 60% 70% 80% 90% 100% For the three-year performance period, TSR will be determined by comparing the average of the daily TSR from October 1, 2005 through December 31, 2005 to the average of the daily TSR from October 1, 2008 through December 31, 2008. Other Compensation Features Employment and Change in Control Arrangements We do not have employment agreements with any of our Named Executive OÇcers or with any of our other employees. On August 12, 2002, we entered into change in control agreements with each of the Named Executive OÇcers other than Mr. Neely, with whom we entered into such an agreement on December 8, 2003. Each change in control agreement has a term of one year, which is automatically renewed unless the Board of Trustees elects to terminate it. To avoid an unintended windfall to management upon a friendly change in control, the Named Executive OÇcers would each be entitled to a payment only if there is a change in control and thereafter the Named Executive OÇcer's employment is terminated, or eÅectively terminated, without cause. For more detailed information on the conditions to payments and regarding the payments that could be made under each change in control agreement, see ""Post-Employment Payments'' below. Deferred Compensation Each of our Named Executive OÇcers is eligible to participate in our 401(k) plan (the ""401(k) Plan'') and our deferred compensation plan (the ""Deferred Compensation Plan''). Under the 401(k) Plan, each employee, including the Named Executive OÇcers, could contribute up to $15,000 of his or her salary in 2006. Contributions equal to 6% of a contributing employee's salary (not to exceed $15,000), including contributions by the Named Executive OÇcers, receive a matching contribution by Archstone-Smith in Common Shares. Each year, we test the 401(k) Plan to ensure that our highly compensated employees, which include all of the Named Executive OÇcers, do not receive more beneÑts than our non-highly compensated employees. If the beneÑts to the highly compensated employees exceed the beneÑts to the non-highly compensated employees by more than 2%, then a portion of the contributions made by the highly compensated employees is returned to those highly compensated employees until the beneÑts meet the test. At the election of the highly compensated employee, these excess contributions are either returned to the employee or contributed to the Deferred Compensation Plan. Under the Deferred Compensation Plan, the Named Executive OÇcers may elect to defer payment of up to 75 percent of their base salary, 90 percent of their cash bonuses and certain amounts which cannot be contributed to our 401(k) Plan due to limitations of the Internal Revenue Code. The minimum deferral for 23 any calendar year is generally $5,000. The Deferred Compensation Plan is funded into a ""rabbi trust'' and participants in the Deferred Compensation Plan are treated as our unsecured general creditors. Each of our Named Executive OÇcers participates in the Deferred Compensation Plan. Amounts deferred under the Deferred Compensation Plan earn a rate of return based on a hypothetical investment in investment choices selected by the Named Executive OÇcer from alternatives we provide. Although we are not required to do so, our Deferred Compensation Plan does actually invest in the selected investments. Any actual investment we make, in our discretion, is treated as part of our general assets. Participants in the Deferred Compensation Plan receive payment of deferred amounts as of the date selected by the participant, which generally must be at least three years after the date on which the amount would otherwise have been payable to the individual. (This does not apply to settlements of RSUs or DEUs deferred into the Deferred Compensation Plan, which are described below.) All amounts are paid upon a participant's termination of employment (although delayed payment may be provided in certain cases). Payments are made in the form of a lump sum or installments over a period not exceeding 5 years (15 years in the case of a participant whose employment terminates after the sum of his or her age and years of service equals at least 55). If the value of a participant's account balance is less than $10,000, it will be paid in a lump sum. Payment prior to the deferred date elected by a participant (or prior to termination of employment) is permitted only in limited circumstances. Except as described below (or as discussed above with respect to Outside Trustees), all payments from the Deferred Compensation Plan are made in cash. Certain beneÑts under the Deferred Compensation Plan may be subject to Section 409A of the Internal Revenue Code. We intend to administer the plan in a manner that complies with section 409A and to amend the plan as and when needed in order to conform to the requirements of Section 409A, all as set forth in applicable IRS guidance when it is issued. Prior to 2002, a Named Executive OÇcer receiving an award of RSUs under the LTIP could elect to defer settlement of such RSUs to a future date so that upon vesting, the RSUs would remain deferred under the Deferred Compensation Plan rather than being settled in the form of Common Shares. Such deferred RSUs would continue to earn DEUs in accordance with a formula applicable to the award under the LTIP. Options granted to Senior Executive OÇcers prior to 2000 also earned DEUs. DEUs thus earned also earned DEUs in accordance with the LTIP. Upon the settlement date selected by the Named Executive OÇcer in accordance with the Deferred Compensation Plan, the RSUs and/or DEUs would convert to Common Shares on a one-to-one basis. Common Shares available under the LTIP Plan are used to satisfy this obligation. With respect to awards granted after January 1, 2002, an individual receiving an award of RSUs could either elect to defer the vesting of such units as described above, or upon vesting elect to have the cash value of the RSUs deferred into the Deferred Compensation Plan. POST-EMPLOYMENT PAYMENTS We have not entered into an employment contract with any Named Executive OÇcer, nor are our Named Executive OÇcers subject to our Severance Plan. Upon a termination of employment, whether voluntary or involuntary (but excluding a termination following a change in control, which is discussed below) or the result of retirement, death or disability, the company has no contractual obligation to give a Named Executive OÇcer anything over and above what he or she has contributed previously to accounts under the 401(k) Plan (including vested matching contributions) and the Deferred Compensation Plan, earnings on the amounts contributed, and his or her already vested options, RSUs and DEUs. The Compensation Committee may, however, in its discretion, grant the Named Executive OÇcer additional severance amounts and/or beneÑts or additional payments and/or beneÑts upon the retirement, death or disability of the Named 24 Executive OÇcer should the committee consider it appropriate under the circumstances. As of December 31, 2006, the value of the currently vested accounts for each Named Executive OÇcer was: Value of 401(k) Plan, Deferred Compensation Plan and Vested Stock Awards as of December 31, 2006 (1) OÇcer Mr. Mr. Mr. Ms. Mr. Sellers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Freeman ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mueller ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Brower ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Neely ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $28,589,881 $13,384,758 $ 7,792,335 $ 3,912,160 $ 2,158,449 (1) All stock awards are valued based on our common share closing price on December 29, 2006 of $58.21. On March 13, 2007, we Ñled a Form 8-K with the SEC outlining the payments that we would make to Mr. Freeman upon his retirement on December 31, 2007. All arrangements and payments are conditioned upon Mr. Freeman's entering into a non-competition agreement in connection with his retirement on December 31, 2007. We will pay Mr. Freeman a base salary of $450,000 for the period from January 1, 2008 through December 31, 2008, in consideration for which Mr. Freeman will be available as a consultant and advisor to us upon our request. There will be no written consulting agreement relating to these services. Mr. Freeman will not be eligible for any cash bonus or stock award for his services performed during 2008. We will provide Mr. Freeman with health insurance coverage in accordance with our policy for full-time employees. None of the unvested RSUs granted to Mr. Freeman, including RSUs to be granted in February 2008 as part of his 2007 compensation, will be forfeited upon the termination of his services on December 31, 2008, but will continue to vest over a three year period from the date of grant. Mr. Freeman is eligible to receive an award of performance units through the special long term incentive program described above. The Compensation Committee will determine how many performance units Mr. Freeman will earn under this program in early 2009. The Board has determined that Mr. Freeman will be entitled to receive two-thirds of any performance units which would otherwise have been granted to him by the Compensation Committee under this program in 2009. On August 12, 2002, we entered into change in control agreements with each of the Named Executive OÇcers other than Mr. Neely, with whom we entered into such an agreement on December 8, 2003. Each change in control agreement has a term of one year, which is automatically renewed unless the Board of Trustees elects to terminate it. The Named Executive OÇcers would each be entitled to a payment only if there is both a change in control and thereafter the Named Executive OÇcer's employment is terminated, or eÅectively terminated, without cause, as more fully described below. Under these agreements, a ""change in control'' occurs if our shareholders approve (a) the merger of Archstone-Smith or of Archstone-Smith Operating Trust with or into another entity, (b) the sale by Archstone-Smith Operating Trust of substantially all of its assets, or (c) a plan of liquidation of either Archstone-Smith or the Archstone-Smith Operating Trust and, following the consummation of the approved transaction, the original shareholders of Archstone-Smith do not constitute 75% of the shareholders of the resulting entity. A change of control also occurs if (i) a third party acquires over 25% of the outstanding Common Shares of Archstone-Smith, other than in a transaction where Archstone-Smith issues the shares to such third party, or (ii) there is a change in a majority of the trustees of Archstone-Smith during any period of two consecutive years, other than as a result of the election, or nomination for election by Archstone-Smith's shareholders, of a person whose nomination was approved by a two-thirds majority of the Trustees who were in oÇce at the beginning of such two year period. A protective period has been established for each of our Named Executive OÇcers: thirty-six (36) months in the case of Mr. Sellers, twenty-four (24) months in the case of Messrs. Freeman and Mueller and Ms. Brower, and twelve (12) months in the case of Mr. Neely. The applicable protective period was set based on the oÇcer's level of responsibility. During the protective period, if the Named Executive OÇcer's 25 employment is terminated without cause, other than as a result of the oÇcer's death or disability, or if the oÇcer resigns as a result of, among other matters, a material adverse change in the nature or scope of the oÇcer's duties or authority, then the oÇcer will be entitled to receive a lump-sum payment. In addition, the oÇcer will be entitled to the continuation during the applicable protective period following the date of termination of medical insurance, disability income protection, life insurance and death beneÑts, and perquisites, or personal beneÑts, equivalent to those available to the oÇcer on the date of termination. The terminated oÇcer will also receive outplacement services of up to $20,000 in the case of Mr. Sellers, $15,000 in the case of Messrs. Freeman and Mueller and Ms. Brower, and $10,000 in the case of Mr. Neely. Finally, all unvested share awards previously granted to the Named Executive OÇcer will vest. The severance payment will be equal to a multiple Ì 3 in the case of Mr. Sellers, 2 in the case of Messrs. Freeman and Mueller and Ms. Brower, and 1 in the case of Mr. Neely (the ""Multiple'') Ì of base salary for the year in which termination occurs plus the Multiple times the greater of (i) the oÇcer's target cash bonus for the year in which termination occurs, based on the highest applicable performance targets having been met, or (ii) the actual cash bonus awarded to the oÇcer for the year immediately preceding the year in which termination occurs. Each Named Executive OÇcer will also receive, if terminated within the protective period, an amount equal to the oÇcer's unpaid pro-rated salary through the date of termination, the pro-rated target bonus that would be paid to the oÇcer if the highest applicable performance targets were met for the year of termination, and an additional payment required to compensate the oÇcer for any excise taxes imposed upon the severance payments made under the oÇcer's agreement. The payments that would be made to each Named Executive OÇcer under his or her change in control agreement, assuming that a triggering event had occurred and that the Named Executive OÇcer's employment was terminated as of December 31, 2006, are as follows: Mr. Sellers, $23,750,501, which amount includes personal beneÑts (described above) of approximately $18,000 and the remainder of which is comprised primarily of the value of accelerated stock awards; Mr. Freeman, $10,921,516, which amount includes personal beneÑts of approximately $11,000 and the remainder of which is comprised primarily of the value of accelerated stock awards and coverage of excise tax payments; Mr. Mueller, $8,938,898, which amount includes personal beneÑts of $6,000 and the remainder of which is comprised primarily of the value of accelerated stock awards and coverage of excise tax payments; Ms. Brower, $4,478,800, which amount includes personal beneÑts of $8,000; and Mr. Neely, $1,819,903, which amount includes personal beneÑts of $5,000. None of our Named Executive OÇcers received personal beneÑts in excess of $10,000 in 2006. For purposes of calculating the personal beneÑts that would be paid following a change in control and termination, we used the approximate value of the personal beneÑts received in 2006 multiplied by the Multiple. All accelerated stock awards were valued using our December 29, 2006 common share closing price of $58.21. TAX IMPLICATIONS OF COMPENSATION In making compensation decisions, the Compensation Committee takes into account the applicability of and the limitations imposed by Section 162(m) of the Internal Revenue Code on the deductibility of compensation paid to certain executives to the extent such compensation exceeds $1 million per executive. The law exempts compensation paid under plans that relate compensation to performance. Although our plans are designed to relate compensation to performance, certain elements of the plans may not meet the tax law's requirements because they allow the Compensation Committee to exercise discretion in setting compensation. The Compensation Committee is of the opinion that it is better to retain discretion in determining executive compensation. However, the Compensation Committee monitors the requirements of the Internal Revenue Code on an ongoing basis to determine what actions, if any, should be taken with respect to Section 162(m). 2006 EXECUTIVE COMPENSATION The following table sets forth the information required by Item 402 of Regulation S-K, promulgated by the SEC. The amounts shown represent a summary of all compensation paid to our Named Executive OÇcers for the Ñscal year ended December 31, 2006. In accordance with Item 402, the Summary Compensation Table below does not include the equity awards that were granted on February 23, 2007 as part of 2006 26 compensation. Information regarding the 2007 awards is included in Note (2). The cash bonuses awarded to the Named Executive OÇcer, also determined on February 23, 2007, are included in the Summary Compensation Table below, under the ""Bonus'' or ""Non-Equity Incentive Plan Compensation'' column, as appropriate. The basis for making both the RSU awards and the cash bonus awards to these oÇcers is detailed in Notes (1), (2) and (3) to this table. SUMMARY COMPENSATION TABLE Stock Awards ($)(2) Non-Equity Incentive Plan All Other Compensation Compensation ($)(3) ($)(4) Name and Principal Position Year Salary ($) Bonus ($)(1) Total ($) R. Scot Sellers ÏÏÏÏÏÏÏÏÏÏÏÏÏ Chairman & Chief Executive OÇcer J. Lindsay FreemanÏÏÏÏÏÏÏÏÏ Chief Operating OÇcer Charles E. Mueller, Jr. ÏÏÏÏÏ Chief Financial OÇcer Caroline Brower ÏÏÏÏÏÏÏÏÏÏÏÏ General Counsel Alfred G. Neely, President Ì Charles E. Smith Residential Division & Chief Development OÇcer 2006 $750,000 $1,750,000 $2,937,500 Ì $602,034 $6,039,534 2006 $450,000 Ì $ 969,572 $554,000 $409,738 $2,383,310 2006 $380,000 Ì $ 765,536 $475,300 $212,690 $1,833,526 2006 $335,000 Ì $ 304,933 $276,075 Ì $ 90,721 $102,185 $1,006,729 $1,439,697 2006 $375,000 $ 412,500 $ 550,012 (1) Includes amounts earned in 2006 that were paid in 2007. The bonus amount for Mr. Sellers was based on the Compensation Committee's determination that, as detailed in ""Compensation Discussion and Analysis Ì Criteria for Awards Ì Annual and Long Term Incentives Ì Cash Bonus and RSU Grants'', he had executed his managerial responsibilities as the company's chief executive oÇcer in an appropriate and exemplary manner. Mr. Neely was awarded a cash bonus of $412,500, or $137,500 over the target amount, based on his excellent accomplishments with respect to the company's development projects. (2) Consists of the compensation expense recognized by the company in 2006 related to long term equity incentive awards computed in accordance with FAS 123R. The amounts include the expense recorded in 2006 relating to the amortization of awards made in earlier years as well as the expense relating to the amortization of awards granted in 2006. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. For more information on this calculation, see note 12 to the company's audited Ñnancial statements for the Ñscal year ended December 31, 2006 included in the company's Annual Report on Form 10-K Ñled with the SEC on March 1, 2007. The following awards were made on February 23, 2007 for Ñscal year 2006. The value is based on the number of RSUs granted multiplied by $58.62, the closing price of Archstone-Smith Common Shares on the date of grant. RSUs Granted (#) RSUs Granted($) Mr. Mr. Mr. Ms. Mr. Sellers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ FreemanÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mueller ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Brower ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Neely ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55,839 18,284 14,495 5,844 11,088 $3,273,282 $1,071,808 $ 849,697 $ 342,575 $ 649,979 RSU awards for Messrs. Sellers, Freeman and Mueller and Ms. Brower were based on our achieving TSR placing us in the 81st percentile, compared to the NAREIT Apartment Index, FFO growth relative 27 to the NAREIT Apartment Index that resulted in an award at slightly below the target amount, and absolute FFO growth slightly above the target plus amount. The Compensation Committee also determined that each of these oÇcers satisÑed or exceeded, in some instances by very large margins, the corporate goals established for such oÇcer Ì meeting budgeted revenue and growth in net operating income, adding a speciÑc volume of new development transactions to the pipeline, meeting the budget for Ameriton performance, completing the disposition of the majority of our non-core assets during 2006, maintaining a high level of corporate morale, and maintaining an industry-leading position in innovation and continuous improvements in our operating platform Ì which resulted in the portion of the RSU awards tied to the achievement of each oÇcer's individual corporate goals at slightly above the target plus level for each oÇcer. Mr. Neely was awarded RSUs with a value of $650,000, or $150,000 over the target amount, based on his excellent accomplishments with respect to the company's development projects. (3) Includes amounts earned in 2006 that were paid in 2007. Bonus amounts for Messrs. Freeman and Mueller and Ms. Brower were based on our achieving TSR placing us in the 81st percentile, compared to the NAREIT Apartment Index, FFO growth relative to the NAREIT Apartment Index that resulted in an award at the target amount, and absolute FFO growth slightly above the target plus amount. As noted in Note (2) above, the Compensation Committee also determined that each of these oÇcers satisÑed or exceeded, in some instances by very large margins the goals established for such oÇcer, which resulted in awards based on individual corporate goals at slightly above the target plus level for each oÇcer. (4) Includes the following amounts: 401(k) Company Match Life Insurance Quarterly Cash Payments on RSUs(a) DEUs Earned(b) OÇcer Total Mr. Mr. Mr. Ms. Mr. (a) Sellers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,537 $ 810 $119,307 $477,380 $602,034 FreemanÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,537 $3,564 $ 60,992 $340,645 $409,738 Mueller ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,537 $ 540 $ 31,120 $176,493 $212,690 Brower ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,537 $2,322 $ 12,380 $ 71,482 $ 90,721 Neely ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,537 $3,564 $ 24,814 $ 69,270 $102,185 Quarterly cash payments equal in amount to the dividend paid on Archstone-Smith Common Shares were earned on outstanding RSUs granted in 2006. (b) DEUs were earned on January 1, 2007 on outstanding RSUs granted prior to 2006, DEUs previously earned and options granted between 1997 and 1999 as follows: OÇcer DEUs Earned on Vested RSUs and DEUs(#) DEUs Earned on Unvested RSUs and DEUs(#) DEUs Earned on Vested Options(#) Total DEUs Earned(#) Mr. Mr. Mr. Ms. Mr. Sellers ÏÏÏÏÏÏÏÏÏÏ FreemanÏÏÏÏÏÏÏÏÏ Mueller ÏÏÏÏÏÏÏÏÏ Brower ÏÏÏÏÏÏÏÏÏÏ Neely ÏÏÏÏÏÏÏÏÏÏÏ 6,650 4,729 2,765 372 988 1,020 333 267 105 202 531 790 Ì 751 Ì 8,201 5,852 3,032 1,228 1,190 28 Grants of Plan Based Awards The following table sets forth information with respect to plan-based awards granted in or for 2006 to the Named Executive OÇcers. The ""Estimated Possible Payouts under Non-Equity Incentive Plan Awards'' column in the table reÖects the threshold, target and high amounts that Messrs. Freeman and Mueller and Ms. Brower were eligible to earn as an annual cash bonus for 2006. See ""Compensation Discussion and Analysis Ì Criteria for Awards Ì Annual and Long Term Incentives Ì Cash Bonus and RSU Grants.'' The ""All Other Stock Awards'' column reÖects the RSUs awarded on February 15, 2006 as part of each oÇcer's compensation for 2005. Information regarding RSU awards made on February 23, 2007 as part of each oÇcer's 2006 compensation is included in Note (2) to the ""Summary Compensation Table''. Information regarding the performance units awarded under our special long term incentive program on October 4, 2005 is included in ""Compensation Discussion and Analysis Ì Criteria for Awards Ì Annual and Long Term Incentives Ì Performance Units Ì Special Long Term Incentive Program.'' Estimated Possible Payouts Under Non-Equity Incentive Plan Awards(1) Target($) Target Plus($) High($) All Other Stock Awards: Number of Shares of Stock or Units(#)(2) Grant Date Fair Value of Awards (3) Name Grant Date Mr. Mr. Mr. Ms. Mr. Mr. Mr. Ms. SellersÏÏÏÏÏÏÏÏ Freeman ÏÏÏÏÏÏ MuellerÏÏÏÏÏÏÏ Brower ÏÏÏÏÏÏÏ Neely ÏÏÏÏÏÏÏÏ Freeman ÏÏÏÏÏÏ MuellerÏÏÏÏÏÏÏ Brower ÏÏÏÏÏÏÏ 2/15/06 2/15/06 2/15/06 2/15/06 2/15/06 2/23/07 2/23/07 2/23/07 68,567 22,492 17,885 7,115 14,261 $360,000 $280,000 $180,000 $480,000 $420,000 $245,000 $640,000 $560,000 $310,000 $3,125,284 $1,025,185 $ 815,198 $ 324,302 650,016 (1) Represents the range for cash bonuses that could be earned based on our 2006 performance. See ""Compensation Discussion and Analysis'' for more information on the criteria upon which cash bonuses will be awarded and ""Summary Compensation Table'' for information on the actual bonuses awarded for 2006. (2) The RSU awards made on February 15, 2006 vest ratably on December 4, 2006, December 4, 2007 and December 4, 2008. (3) Through 2006, the grant date fair value on grants made under the Long Term Incentive Plan was deÑned as the closing price of Archstone-Smith Common Shares on the New York Stock Exchange on the business day immediately preceding the grant date. Beginning January 1, 2007, the grant date fair value was deÑned as the closing price of Archstone-Smith Common Shares on the New York Stock Exchange on the date of grant. The relevan