ASSOCIATED ESTATES REALTY CORPORATION
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2007

PART I

            Except as the context otherwise requires, all references to "we", "our", "us" and the "Company" in this report collectively refer to Associated Estates Realty Corporation ("AERC") and its consolidated subsidiaries.

Item 1.  Business

GENERAL DEVELOPMENT OF BUSINESS

            We are a self-administered and self-managed equity real estate investment trust ("REIT").  We are publicly traded on the New York Stock Exchange ("NYSE") under the ticker symbol "AEC".  Our headquarters is located at 1 AEC Parkway in Richmond Heights, Ohio.  The headquarters is comprised of one office building of approximately 42,000 square feet and two adjacent parcels of land containing approximately 1.1 and 3.0 acres, respectively, all of which are suitable for further development or expansion, all of which we own under a long-term lease.

            We are a fully integrated multifamily real estate company engaged in property acquisition, advisory, development, management, disposition, operation and ownership activities.  We own two taxable REIT subsidiaries that provide management and other services to us and to third parties (collectively the "Service Companies").  As of December 31, 2007, our property portfolio consisted of: (i) 64 owned apartment communities containing 14,450 units in eight states, 12 of which are Affordable Housing communities including one joint venture property containing 108 units; (ii) three apartment communities that we manage for third party owners consisting of 616 units; and (iii) a 186-unit apartment community and a commercial property containing approximately 145,000 square feet that we asset manage.  See Item 2 for a state-by-state listing of our portfolio.  Our consolidated financial statements include the accounts of all subsidiaries and qualified REIT subsidiaries, which include but are not limited to, separate legal entitles that were formed in connection with project specific, nonrecourse mortgage refinancing for which records, books of accounts and depository accounts must be maintained separately and apart from any other person or entity; the Service Companies, each of which is taxed as a Taxable REIT Subsidiary ("TRS") under the REIT Modernization Act ("RMA") implemented in 1999, certain variable interest entities of which we are the primary beneficiary and holder of a majority voting interest, and an Operating Partnership structured as a DownREIT, of which we own 97.4%.

            During the third quarter of 2007, we announced our plan to exit the Affordable Housing business.  At that time, we managed 30 Affordable Housing apartment communities for third party owners and owned directly or through a joint venture 12 other Affordable Housing properties.  As of January 1, 2008, we no longer manage 29 of the third party owned Affordable Housing properties.  The 12 Affordable Housing communities that we own, directly or through a joint venture, are under contracts to be sold and most are expected to be sold during the first half of 2008.

BUSINESS SEGMENTS

            We have four reportable segments:  (1) Acquisition/Disposition multifamily properties, (2) Same Community Market-Rate ("Market-Rate") multifamily properties, (3) Affordable Housing multifamily properties ("Affordable Housing"), and (4) Management and Service Operations.  We have identified these segments based upon types of property and services.  All of our segments are located in the United States.

            See Note 19 of the Notes to the Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K for the segment financial information.

            Acquisition/Disposition. The Acquisition/Disposition properties represent acquired or developed properties which we have owned for less than one year or have not yet reached stabilization (we consider a property stabilized when its occupancy rate reaches 93.0% and after owning the property for one year) and properties that have been sold or are classified by us as held for sale in accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."

            Market-Rate.  The Market-Rate properties are wholly owned conventional multifamily residential properties that we have owned for the entirety of the comparison periods.

            Affordable Housing.  The Affordable Housing properties are multifamily properties for which the rents are subsidized and certain aspects of the operations are regulated by U.S. Department of Housing and Urban Development ("HUD") in compliance with Section 8 of the National Housing Act of 1937.  See "General Development of Business" above for information about our plan to exit the Affordable Housing business.

            Management and Service Operations.  The Management and Service Operations provide management and other services to the Market-Rate and Affordable Housing properties that we own or have an investment in, as well as to non-owned properties that we manage. 

OPERATING STRATEGY AND BUSINESS OBJECTIVES

            See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report on Form 10-K for additional discussion of 2008 outlook and strategy.

            Acquisition/Disposition.  Our acquisition/disposition strategy is to systematically migrate portions of our Midwest portfolio to higher growth markets such as Florida, Atlanta and the Baltimore/Washington, DC/Virginia corridor, and to reduce the number of markets in which we operate.  In doing so, we expect to continue to sell non-core properties located in the Midwest while evaluating potential acquisition opportunities in the markets noted above and other markets that we believe will offer an acceptable return on our investment.  We continually monitor the profitability of all of our properties and therefore we may also consider opportunistic sales of properties in any market, including our targeted growth markets, if we determine that the proceeds from such sales would provide a greater return on equity and increased cash flow when invested in other properties or used to reduce debt or repurchase our shares.  During 2007, we sold three properties totaling 1,173 units, two located in Ohio and one in Texas.  We also acquired two properties during 2007; a 268-unit property located in Norfolk, Virginia and our partner's 51.0% ownership interest in an 843-unit joint venture partnership property located in Atlanta, Georgia.  In 2008, we anticipate selling $100.0 million of properties, including our 11 Affordable Housing properties and four Midwest properties.

            Property Operations:  Market-Rate Properties.  We operate in many different markets and submarkets.  Each of these markets may have economic characteristics that differ from other markets, and as a result, the degree to which we can increase rents varies between markets.  However, our goal is to maximize Market-Rate property net operating income in all of our markets through a combination of increasing net collected rents and by continual efforts to contain controllable operating expenses.  Strategies to increase rents include constant monitoring of our markets, providing superior resident service and desirable communities in which to live, leveraging the power of the internet through enhanced property websites, resident portals, and online leasing, and the implementation of programs such as utility and refuse reimbursements.  Our AEC Academy for Career Development provides training and support for our employees, which helps us to provide better trained, quality personnel at our communities.  We attempt to control operating expenses through strategies such as utilizing centralized purchasing contracts benefiting multiple properties and through diligent upkeep and regular maintenance at our apartment communities.

            Property Operations:  Affordable Housing Properties.  As discussed above in "General Development of Business", we plan to exit the Affordable Housing business.

            Fee Management/Advisory Business.   We apply our management approach to the manage-ment of properties for third parties, thereby affording our clients the benefit of our expertise in the management of their properties. We believe that third party property management broadens our knowledge of a market, creates opportunities for future acquisitions, enhances purchasing power and provides a network for new personnel while at the same time generating fee income.

            Financing and Capital.   Proceeds received from new debt, debt refinancing, property sales or equity issuances are invested based upon the expected return and the impact on our balance sheet.  The reduction of overall interest costs and an increase in the number of unencumbered assets are two of our principal objectives.  During 2007, we continued to focus on lowering our cost of debt through financing, refinancing and defeasing/prepaying debt.  As a result our interest expense, before defeasance and other prepayment costs, declined over 2.0% as our weighted average interest rate on our total debt declined 50 basis points from 7.2% at the end of 2006 to 6.7% at the end of 2007.  Our interest coverage ratios and fixed charge ratios were 1.73:1 and 1.54:1, respectively, in 2007, up from 1.54:1 and 1.38:1, respectively in 2006.

             During 2007 we successfully obtained a $100.0 million unsecured revolving line of credit.  This line replaced two smaller secured lines of credit totaling $31.0 million.  This new revolver provides enhanced financial flexibility in a tightening credit market and the opportunity to capitalize on strategic acquisitions with no financing contingencies.

            During 2007, we repurchased 1,021,200 of our common shares at a cost of $13.6 million and 111,500 preferred depository shares at a cost of $2.9 million.

INCOME TAXES

            See Note 1 of the Notes to the Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

COMPETITIVE CONDITIONS

            See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report on Form 10-K.

CUSTOMERS

            Our business, taken as a whole, is not dependent upon any single customer or a few customers.

EMPLOYEES

            At February 20, 2008, we employed approximately 448 people.  Satisfactory relations have generally prevailed between our employees and us.

AVAILABLE INFORMATION

            Shareholders may obtain, free of charge from our Internet site at http://www.aecrealty.com, a copy of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934, as amended, as soon as reasonably practicable after we file such material electronically with, or furnish it to, the Securities and Exchange Commission ("SEC").

REPORTS TO SECURITY HOLDERS

            We issue annual reports to our security holders that contain financial statements.

Item 1A. Risk Factors

            We are subject to certain risks and uncertainties as described below.  These risks and uncertainties are not the only ones we face and there may be additional risks that we do not presently know of or that we currently consider immaterial.  All of these risks could adversely affect our business, financial condition, results of operations and cash flows.  Our ability to pay dividends on, and the market price of, our equity securities may be adversely affected if any of such risks are realized.

            We are subject to risks inherent in the ownership of real estate.  We own and manage multifamily apartment communities that are subject to varying degrees of risk generally incident to the ownership of real estate.  Our financial condition, the value of our properties and our ability to make distributions to our shareholders will be dependent upon our ability to operate our properties in a manner sufficient to generate income in excess of operating expenses and debt service charges, which may be affected by the following risks, some of which are discussed in more detail below:

•	changes in the economic climate in the markets in which we own and manage properties, including interest rates, our ability to consummate the sale of properties pursuant to our current plan, the overall level of economic activity, the availability of consumer credit and mortgage financing, unemployment rates and other factors;
•	the ability to refinance debt on favorable terms at maturity;
•	the ability to defease or prepay debt pursuant to our current plan;
•	risks of a lessening of demand for the multifamily units that we own or manage;
•	competition from other available multifamily units and change in market rental rates;
•	increases in property and liability insurance costs;
•	unanticipated increases in real estate taxes and other operating expenses (e.g., cleaning, utilities, repair and maintenance costs, insurance and administrative costs, security, landscaping, staffing and other general costs);
•	weather conditions that adversely affect operating expenses;
•	expenditures that cannot be anticipated such as utility rate and usage increases, unanticipated repairs and real estate tax valuation reassessments or millage rate increases;
•	inability to control operating expenses or achieve increases in revenue;
•	the results of litigation filed or to be filed against us;
•	changes in tax legislation;
•	risks of personal injury claims and property damage related to mold claims because of diminished insurance coverage;
•	catastrophic property damage losses that are not covered by our insurance;
•	risks associated with property acquisitions such as environmental liabilities, among others;
•	changes in government regulations affecting our properties, the rents of which are subsidized and certain aspects of which are regulated by the United States Department of Housing and Urban Development ("HUD") and other properties that we manage;
•	inability to renew current contracts with HUD for rent subsidized properties at existing rents;
•	changes in or termination of contracts relating to third party management and advisory business;
•	risks related to our joint ventures;
•	risks related to the perception of residents and prospective residents as to the attractiveness, convenience and safety of our properties or the neighborhoods in which they are located; and
•	the ability to acquire properties at prices consistent with our investment criteria.

            We are dependent on rental income from our multifamily apartment communities.  If we are unable to attract and retain residents or if our residents are unable to pay their rental obligations, our financial condition and funds available for distribution to our shareholders may be adversely affected.

            Our multifamily apartment communities are subject to competition.  Our apartment communities are located in developed areas that include other apartment communities and compete with other housing alternatives, such as condominiums, single and multifamily rental homes and owner occupied single and multifamily homes.  In certain markets, such as Florida, failed condominium conversions are reverting back to apartment rentals creating increasing competition in those markets.  Such competition may affect our ability to attract and retain residents and to increase or maintain rental rates.

            The properties we own are primarily concentrated in Ohio, Michigan, Georgia, Florida, Indiana, Maryland, Pennsylvania, and Virginia.  As of December 31, 2007, approximately 43%, 20%, 12%, 9%, 6%, 5%, 3% and 2% of the units in properties we own were located in Ohio, Michigan, Georgia, Florida, Indiana, Maryland, Pennsylvania, and Virginia, respectively.  Our performance, therefore, is linked to economic conditions and the market for available rental housing in these states and, more importantly, their respective sub-markets.  The decline in the market for apartment housing in the various sub-markets in Ohio, or to a lesser extent, the sub-markets in the other states, may adversely affect our financial condition, results of operations and ability to make distributions to our shareholders.

            We own or manage properties that are subject to government programs.  As of December 31, 2007, we own directly or through subsidiaries or joint ventures 12 properties with 1,254 units which benefit from some form of interest rate or rental subsidy subject to governmental programs administered by HUD.  As a condition to the receipt of assistance under HUD programs, many of the properties must comply with various HUD requirements, which typically include maintenance of decent, safe and sanitary housing, HUD approval of rent adjustments, and HUD's approval of any assignment of HAP contracts in connection with the sale of a property.  All 12 of these properties are under contract for sale and we plan to exit the Affordable Housing business.  If current agreements with HUD expire prior to the consummation of the sale of any of these properties, we can give no assurance that we will be able to renew such agreements with HUD at existing or higher rents.  HUD requirements, and other current and future laws regarding the provision of affordable housing and any changes to existing law making it more difficult to meet such requirements, could adversely affect our results of operations, financial condition, our ability to consummate the sale of these properties and our ability to make distributions to our shareholders.

            Our insurance may not be adequate to cover certain risks.  There are certain types of risks, generally of a catastrophic nature, such as earthquakes, floods, windstorms, act of war and terrorist attacks that may be uninsurable, are not economically insurable, or are not fully covered by insurance.  Moreover, certain risks, such as mold and environmental exposures, generally are not covered by our insurance.  Other risks are subject to various sublimits, deductibles and self insurance retentions, which help to control insurance costs, but which may result in increased exposures to uninsured loss.  Any such uninsured loss could have a material adverse effect on our business, financial condition and results of operations.

            Debt financing could adversely affect our performance.  Sixty percent of our assets are encumbered by project specific, non-recourse, and except for five properties, non-cross-collateralized mortgage debt.  There is a risk that these properties may not have sufficient cash flow from operations to pay required principal and interest.  We may not be able to refinance these loans at an amount equal to the loan balance and the terms of any refinancing may not be as favorable as the terms of existing indebtedness.  If we are unable to make required payments on indebtedness that is secured by a mortgage, the property securing the mortgage may be foreclosed with a consequent loss of income and value to us.

            Real estate investments are generally illiquid, and we may not be able to sell our properties when it is economically or strategically advantageous to do so.  Real estate investments generally cannot be sold quickly, and our ability to sell properties may be affected by market conditions.  We may not be able to diversify or vary our portfolio promptly in accordance with our strategies or in response to economic or other conditions.  In addition, provisions of the Internal Revenue Code of 1986, as amended (the "Code") limit the ability of a REIT to sell its properties in some situations when it may be economically advantageous to do so, thereby potentially adversely affecting our ability to make distributions to our shareholders.

            Our access to public debt markets is limited.  Substantially all of our current debt is either secured or bank debt under our revolving credit facility because of our limited access to public debt markets.

            Litigation that may result in unfavorable outcomes.  Like many real estate operators, we are frequently involved in lawsuits involving premises liability claims, housing discrimination claims and alleged violations of landlord-tenant laws, which may give rise to class action litigation or governmental investigations.  Any material litigation not covered by insurance, such as a class action, could result in substantial costs being incurred.

            Our financial results may be adversely impacted if we are unable to sell properties and employ the proceeds in accordance with our strategic plan.  Our ability to pay down debt, reduce our interest costs, buy back stock and acquire properties is impacted by our ability to sell the properties we have selected for disposition at the prices and within the deadlines established for each respective property.  Moreover, if we are unable to acquire properties at prices consistent with our investment criteria, we may reduce or discontinue property sales.

            The costs of complying with laws and regulations could adversely affect our cash flow and ability to make distributions to our shareholders.  Our properties must comply with Title III of the Americans with Disabilities Act (the "ADA") to the extent that they are "public accommodations" or "commercial facilities" as defined in the ADA.  The ADA does not consider apartment communities to be public accommodations or commercial facilities, except for portions of such communities that are open to the public.  In addition, the Fair Housing Amendments Act of 1988 (the "FHAA") requires apartment communities first occupied after March 13, 1990, to be accessible to the handicapped.  Other laws also require apartment communities to be handicap accessible.  Noncompliance with these laws could result in the imposition of fines or an award of damages to private litigants.  We have been subject to lawsuits alleging violations of handicap design laws in connection with certain of our developments.  If compliance with these laws involves substantial expenditures or must be made on an accelerated basis, our ability to make distributions to our shareholders could be adversely affected.

            Under various federal, state and local laws, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under or in the property.  This liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of the substances.  Other law imposes on owners and operators certain requirements regarding conditions and activities that may affect human health or the environment.  Failure to comply with applicable requirements could complicate our ability to lease or sell an affected property and could subject us to monetary penalties, costs required to achieve compliance and potential liability to third parties.  We are not aware of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of our properties.  Nonetheless, it is possible that material environmental contamination or conditions exist, or could arise in the future in the apartment communities or on the land upon which they are located.

            We are subject to the risks associated with investments through joint ventures.  One of our properties is owned by a joint venture partnership in which we do not have a controlling interest.  We may enter into joint ventures, including joint ventures that we do not control, in the future.  Any joint venture investment involves risks such as the possibility that the co-venturer may seek relief under federal or state insolvency laws, or have economic or business interests or goals that are inconsistent with our business interests or goals.  While the bankruptcy or insolvency of our co-venturer generally should not disrupt the operations of the joint venture, we could be forced to purchase the co-venturer's interest in the joint venture or the interest could be sold to a third party.  We also may guarantee the indebtedness of our joint ventures.  If we do not have control over a joint venture, the value of our investment may be affected adversely by a third party that may have different goals and capabilities than ours.

            We are subject to risks associated with development, acquisition and expansion of multifamily apartment communities.  Development projects, acquisitions and expansions of apartment communities are subject to a number of risks, including:

•	availability of acceptable financing;
•	competition with other entities for investment opportunities;
•	failure by our properties to achieve anticipated operating results;
•	construction costs of a property exceeding original estimates;
•	delays in construction; and
•	expenditure of funds on, and the devotion of management time to, transactions that may not come to fruition.

            We may fail to qualify as a REIT and you may incur tax liability as a result.  Commencing with our taxable year ending December 31, 1993, we have operated in a manner so as to permit us to qualify as a REIT under the Code, and we intend to continue to operate in such a manner.  Although we believe that we will continue to operate as a REIT, no assurance can be given that we will remain qualified as a REIT.  If we were to fail to qualify as a REIT in any taxable year, we would not be allowed a deduction for distributions to our shareholders in computing our taxable income and would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates.  Unless we are entitled to relief under certain Code provisions, we also would be disqualified from treatment as a REIT for the four taxable years following the year during which REIT qualification was lost.  As a result, the cash available for distribution to our shareholders could be reduced or eliminated for each of the years involved.

            Our ownership limit, shareholders rights plan and state anti-takeover laws may discourage takeover attempts.  With certain limited exceptions, our Second Amended and Restated Articles of Incorporation, as amended and supplemented to date, prohibit the ownership of more than 4.0% of the outstanding common shares and more than 9.8% of the shares of any series of any class of our preferred shares by any person.  Our shareholder rights plan will be triggered if any person or group becomes the beneficial owner of, or announces an offer to acquire 15% or more of our common stock.  We are domiciled in the State of Ohio, where various state statutes place certain restrictions on takeover activity.  These restrictions are likely to have the effect of precluding acquisition of control of us without our consent even if a change in control is in the interests of shareholders.

            We are subject to control by our directors and officers.  Our directors and executive officers and some members of their respective families owned approximately 20.0% of our outstanding common shares as of December 31, 2007.  Accordingly, those persons have substantial influence over us and the outcome of matters submitted to our shareholders for approval.

            We depend on our key personnel.  Our success depends to a significant degree upon the continued contribution of key members of our management team, who may be difficult to replace.  The loss of services of these executives could have a material adverse effect on us.  There can be no assurance that the services of such personnel will continue to be available to us.  Our Chairman of the Board, President and Chief Executive Officer, Mr. Jeffrey I. Friedman, is a party to an employment agreement with Associated Estates Realty Corporation.  Other than Mr. Friedman, the Company does not have employment agreements with key personnel.  We do not hold key-man life insurance on any of our key personnel.

Item 1B.  Unresolved Staff Comments

            None.

Item 2.  Properties

            Our Portfolio.  The following table represents our portfolio as of December 31, 2007, which consists of properties we owned, directly or indirectly, a property in which we are a joint venture partner and properties we manage.

  

 

            Indebtedness Encumbering the Properties.  We have financed, and in many cases refinanced, the acquisition, development and rehabilitation of our properties with a variety of sources of mortgage indebtedness.  At December 31, 2007, twenty-five of the sixty-three wholly owned properties were unencumbered (eleven of which are Affordable Housing properties), thirty-three properties were encumbered by conventional mortgages and five properties were encumbered by cross-collateralized, cross-defaulted mortgage loans.

Item 3.  Legal Proceedings

            For information concerning current legal proceedings, see Note 10 of the Notes to Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

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

            No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

Executive Officers of the Registrant and Other Key Employees

            The following information regarding our executive officers is provided pursuant to Instruction 3 to Item 401(b) of Regulation S-K.

Name		Age		Position with the Company
Jeffrey I. Friedman		56		Chairman of the Board, President and Chief Executive Officer
Lou Fatica		41		Vice President, Treasurer and Chief Financial Officer
Martin A. Fishman		66		Vice President, General Counsel and Secretary
John T. Shannon		46		Senior Vice President, Operations

            Jeffrey I. Friedman has served as our Chairman of the Board and Chief Executive Officer since the Company was organized in 1993 and served as our President from the Company's organization until February 24, 2000.  In August 2002, Mr. Friedman reassumed the role of President.  Mr. Friedman joined the Company's predecessor, Associated Estates Group, ("AEG"), in 1974 and became Chief Executive Officer and President of Associated Estates Corporation, a company in the AEG group.

            Lou Fatica joined the Company in 1999 as Controller, and was promoted to Vice President-Controller during 2000.  On March 15, 2001, Mr. Fatica became Vice President, Treasurer and Chief Financial Officer of the Company.  Mr. Fatica is a Certified Public Accountant (CPA), a member of the American Institute of Certified Public Accountants (AICPA) and the Ohio Society of CPA's.

            Martin A. Fishman has been our Vice President, General Counsel and Secretary since the Company's organization.  Mr. Fishman joined AEG in 1986 as Vice President - General Counsel of Associated Estates Corporation, a position he held until the formation of the Company.

            John T. Shannon joined the Company in 2004 as Senior Vice President, Operations.  Mr. Shannon had previously held the position of Vice President of Operations at The Shelter Group and has 18 years of property management experience.

            In addition to the officers named in the table above, the following persons have been appointed as officers of the Company and hold positions in senior management as indicated:

            Patrick Duffy joined the Company in 2005 as Vice President of Strategic Marketing.  Mr. Duffy plays a key role in our diversification plan by assisting in identifying markets for asset acquisitions and dispositions.  In addition, he is responsible for developing property-specific marketing plans and strategies to assist in maximizing top line revenue growth for our Market-Rate properties, while also assisting with pricing and positioning strategies.  Mr. Duffy previously held the position of Senior Vice President of Marketing at The Shelter Group.  He graduated from Loyola College and holds a Master's Degree in Administrative Sciences from Johns Hopkins University.  Mr. Duffy has over 21 years of experience in the real estate industry and is 46 years old.

            Kara Florack joined the Company in 2004 as Director of Compensation, and was promoted to Director of Human Resources in November 2005.  In January 2007, she became Vice President of Human Resources.  Ms. Florack previously held the position of Assistant Manager of Compensation at Charter One Bank where she worked for three years.  Ms. Florack has a Bachelor's degree from Boston University and is 32 years old.

           

            Michael K. Lawson joined the Company in 2007 as Vice President of Investor Relations and Corporate Communications.  Prior to joining the Company, Mr. Lawson was the principal of the MKL Group, a full service corporate communications and public affairs consulting firm that advises clients on a host of investor, media and government relations strategies and tactics.  He previously served as Director of Corporate Communications for Granite Construction Incorporated, one of the largest transportation builders in the country.  Prior to joining Granite, Mr. Lawson worked as a journalist for the McGraw-Hill Companies.  Mr. Lawson has 21 years of experience in investor relations and corporate communications and is 52 years old.

            Miria C. Rabideau joined the Company in 1994 as a Property Manager, and was promoted to Regional Manager in 2003.  During 2006, she was promoted to Regional Vice President.  Ms. Rabideau is responsible for properties in Colorado, Indiana, Michigan, and Northwest Ohio.  Ms. Rabideau has 15 years of asset and property management experience. She has a Bachelor's degree from Michigan State University and is 38 years old.

            Beth L. Stoll joined the Company in 2004 as a Regional Vice President, and was promoted to Vice President of Operations during 2006.  She is responsible for the Market-Rate properties in Georgia, Maryland, Florida, Virginia, Central Ohio and Northeast Ohio.  Ms. Stoll is also responsible for the AEC Academy for Career Development, which provides training and support for our employees.  Ms. Stoll previously held the position of Regional Vice President at The Shelter Group.  Ms. Stoll has over 20 years of property management experience and is 52 years old.

 

PART II 

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

            Our common shares are traded on the New York Stock Exchange under the trading symbol "AEC".  The following table sets forth for the periods indicated the high and low closing sale prices per common share as reported on the New York Stock Exchange (composite tape) and the dividends declared per common share.

														Dividends Declared
		Price Range												Per Share
		2007						2006						2007			2006
		High			Low			High			Low
First Quarter		$	16.95		$	13.95		$	11.56		$	9.16		$	0.17		$	0.17
Second Quarter		15.74			14.14			12.40			10.42			0.17			0.17
Third Quarter		15.95			12.26			15.90			12.50			0.17			0.17
Fourth Quarter		14.06			9.44			16.49			13.59			0.17			0.17
														$	0.68		$	0.68

            On February 20, 2008, there were approximately 950 holders of record and approximately 5,250 beneficial owners of our common shares.

            For information concerning security ownership of certain beneficial owners and management and related shareholder matters, reference is made to Part III, Item 12 of this report on Form 10-K.

            We maintain a dividend reinvestment plan under which shareholders may elect to reinvest their dividends automatically in our common shares.  Under the plan, the administrator of the plan will purchase shares directly from us (either treasury shares or newly-issued common shares), in the open market, or in privately negotiated transactions with third parties on behalf of participating shareholders.

            Our Board of Directors has authorized the repurchase of up to $50.0 million of our common and/or preferred shares.  Additionally, we have a policy which allows employees to pay their portion of the payroll taxes related to restricted share vesting by surrendering a number of shares to us equal in value on the day of vesting to the amount of taxes due up to the minimum statutory withholding amount.  The following table sets forth our repurchase activities for the fourth quarter of 2007.

Issuer Purchases of Equity Securities for the Three Months Ended December 31, 2007
									Approximate
									Dollar Value of
							Total Number of		Shares That May
							Shares Purchased		Yet Be Purchased
		Total Number		Average			As Part of		Under the Plans
		of Shares		Price Paid			Publicly Announced		or Programs
Period		Purchased		Per Share			Plans or Programs		(in thousands)
October 1 through
October 31		553,200		$	13.22		553,200		$	5,949
November 1 through
November 30		208		11.54			-		5,949
December 1 through
December 31		-		-			-		5,949
Total		553,408		$	13.22		553,200

Item 6.  Selected Financial Data

            The following tables set forth selected financial and other data for us on a consolidated basis.  The historical financial information contained in the tables has been derived from and should be read in conjunction with (i) our Consolidated Financial Statements and Notes thereto and (ii) Management's Discussion and Analysis of Financial Condition and Results of Operations both included elsewhere herein.

(In thousands, except per share, unit count and net collected rent amounts)		Year Ended December 31,
		2007			2006			2005			2004			2003
Operating Data:
Revenue
Property revenue		$	138,224		$	124,926		$	116,565		$	109,423		$	107,553
Management and service company revenue:
Fees, reimbursements and other		10,914			11,689			11,723			13,400			14,310
Painting services		2,218			1,078			1,094			6,147			2,827
Total revenue		151,356			137,693			129,382			128,970			124,690
Total expenses		(120,349)			(111,386)			(104,436)			(100,903)			(100,913)
Interest income		458			680			638			309			148
Interest expense		(41,824)			(50,634)			(38,632)			(35,288)			(35,353)
(Loss) income before gain on disposition of
investment, equity in net loss of joint ventures,
gain on sale of partnership interest, minority
interest, and income from discontinued operations		(10,359)			(23,647)			(13,048)			(6,912)			(11,428)
Gain on disposition of investment		-			-			150			-			-
Equity in net loss of joint ventures		(258)			(462)			(644)			(923)			(1,157)
Gain on sale of partnership interest		-			-			-			-			1,314
Minority interest in operating partnership		(53)			(61)			(63)			(63)			(75)
(Loss) income from continuing operations		(10,670)			(24,170)			(13,605)			(7,898)			(11,346)
Income from discontinued operations:
Operating (loss) income		(29)			(2,902)			1,275			1,540			433
Gain on disposition of properties		20,864			54,093			48,536			9,682			-
Income from discontinued operations		20,835			51,191			49,811			11,222			433
Net income (loss)		10,165			27,021			36,206			3,324			(10,913)
Preferred share dividends		(4,924)			(5,046)			(5,130)			(5,805)			(5,484)
Original issuance costs related to
repurchase/redemption of preferred shares		(172)			-			(2,163)			-			-
Net income (loss) applicable to common shares		$	5,069		$	21,975		$	28,913		$	(2,481)		$	(16,397)
Earnings per common share - basic and diluted:
(Loss) income from continuing operations applicable to
common shares		$	(0.93)		$	(1.72)		$	(1.09)		$	(0.70)		$	(0.87)
Income from discontinued operations		1.23			3.01			2.60			0.57			0.02
Net income (loss) applicable to common shares		$	0.30		$	1.29		$	1.51		$	(0.13)		$	(0.85)
Weighted average number of common shares outstanding		16,871			17,023			19,162			19,519			19,401
Dividends declared per common share		$	0.68		$	0.68		$	0.68		$	0.68		$	0.68

		2007			2006			2005			2004			2003
Cash Flow Data:
Cash flow provided by operations		$	28,962		$	17,912		$	24,376		$	32,935		$	30,758
Cash flow (used for) provided by investing activity		(38,610)			73,935			4,421			(12,745)			(11,509)
Cash flow (used for) provided by financing activity		(18,813)			(101,570)			(50,798)			37,332			(15,937)
Balance Sheet Data at December 31:
Real estate assets, net		$	659,586		$	591,520		$	645,937		$	665,268		$	661,585
Total Assets		686,796			648,829			719,242			762,917			704,793
Total Debt		556,695			498,634			573,570			557,279			543,496
Total Shareholders' equity		89,786			112,051			108,980			163,590			121,428
Other Data:
Net operating income (a) (c)		$	74,702		$	66,041		$	62,770		$	62,837		$	58,294
Total properties (at end of period) - includes joint ventures		64			66			74			76			78
Total multifamily units (at end of period) - includes joint ventures		14,450			15,355			17,395			17,854			18,313
Average monthly net collected rent per unit		$	766		$	750		$	675		$	671		$	670
Physical occupancy (b)		94.5%			94.5%			92.9%			91.7%			92.7%

 

(a)	We evaluate the performance of our reportable segments based on net operating income ("NOI").  NOI is determined by deducting property operating and maintenance expenses, direct property management and service company expenses and painting service expense from total revenue.  We consider NOI to be an appropriate supplemental measure of our performance because it reflects the operating performance of our real estate portfolio and management and service companies at the property and management and service company level and is used to assess regional property and management and service company level performance.  NOI should not be considered (i) as an alternative to net income determined in accordance with accounting principles generally accepted in the United States ("GAAP"), (ii) as an indicator of financial performance, (iii) as cash flow from operating activities (determined in accordance with GAAP) or (iv) as a measure of liquidity; nor is it necessarily indicative of sufficient cash flow to fund all of our needs.  Other real estate companies may define NOI in a different manner.
(b)	Physical occupancy represents the actual number of units leased divided by the total number of units available at the end of the period.
(c)	Reconciliation of NOI to net income (loss):

		Year Ended December 31,
(In thousands)		2007			2006			2005			2004			2003
Net operating income		$	74,702		$	66,041		$	62,770		$	62,837		$	58,294
Depreciation and amortization		(33,368)			(29,894)			(29,825)			(26,999)			(28,433)
General and administrative expense		(10,327)			(9,840)			(7,999)			(7,771)			(6,084)
Interest income		458			680			638			309			148
Interest expense		(41,824)			(50,634)			(38,632)			(35,288)			(35,353)
Gain on disposition of investment		-			-			150			-			-
Equity in net loss of joint ventures		(258)			(462)			(644)			(923)			(1,157)
Gain on sale of partnership interest		-			-			-			-			1,314
Minority interest in operating partnership		(53)			(61)			(63)			(63)			(75)
Income from discontinued operations:
Operating (loss) income		(29)			(2,902)			1,275			1,540			433
Gain on disposition of properties		20,864			54,093			48,536			9,682			-
Income from discontinued operations		20,835			51,191			49,811			11,222			433
Net income (loss)		$	10,165		$	27,021		$	36,206		$	3,324		$	(10,913)

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

            The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8 of this report on Form 10-K.  This discussion may contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to vary from those projected, including but not limited to, expectations regarding our 2008 performance, which is based on certain assumptions.  Accordingly, readers are cautioned not to place undue reliance on forward-looking statements which speak only as of the dates of the document.  These forward-looking statements are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  The words "expects", "projects", "believes", "plans", "anticipates", and similar expressions are intended to identify forward-looking statements.  Investors are cautioned that our forward-looking statements involve risks and uncertainty, which could cause actual results to differ from estimates or projections contained in these forward-looking statements.  For a discussion of these risks and uncertainties, see "Risk Factors" in Item 1A.

            Overview.  We are engaged primarily in the operation of multifamily residential units that we own.  We also provide asset and property management services to third party owners of multifamily residential units for which we are paid fees.  Our primary source of cash and revenue from operations is rents from the leasing of owned apartment units.  Approximately 91.3% of our consolidated revenue was generated from the leasing of these owned units for the year ended December 31, 2007, and approximately 87.2% of the property revenue generated by these owned properties was related to the Market-Rate properties.  During the third quarter of 2007, we announced our plan to exit the Affordable Housing business.  As of December 31, 2007, we have reduced our management of properties to only three, one of which is an Affordable Housing property.  The owned Affordable Housing properties and the joint venture affordable housing property are all under contracts for sale.

            We consider property NOI to be an important indicator of our overall performance.  Property NOI (property operating revenue less property operating and maintenance expenses) is a measure of the profitability of our properties, which has the largest impact of all of our sources of income and expense on our financial condition and operating results.  See Note 19 of the Notes to Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K for additional information regarding property NOI and total NOI, in addition to a reconciliation of total NOI to consolidated net income in accordance with accounting principals generally accepted in the United States of America ("GAAP").

            Our four reportable segments are based upon types of property and services and consist of our Market-Rate properties (87.2% of total property revenue), properties we acquired or developed within the prior year and properties that have been sold or are classified as held for sale, which segment is referred to as Acquisition/Disposition, our Affordable Housing properties and Management and Service Operations.

            Our Same Community Market-Rate portfolio consists of 50 properties containing 12,085 units and accounted for 87.2% of total property revenue in 2007 and 86.6% of our property NOI.  During 2007 our net collected rents for the Market-Rate portfolio increased 4.0%.  This growth was due to an increase of 4.6% for our Midwest portfolio and 3.0% for our Mid-Atlantic/Southeast portfolio.  The growth rate in our Midwest portfolio is similar to the growth we recognized in 2006, while the growth rate for our Mid-Atlantic/Southeast portfolio was much less than the 9.5% growth rate we recognized in 2006.  We anticipate that for 2008 the net collected rents for the Same Community Market-Rate portfolio will grow at approximately 3.0% to 3.3%.

            In 2008, we intend to continue with our strategy of reducing our Midwest presence by selling non-core properties.  We will also continue to evaluate potential property acquisitions in higher growth markets that we have identified.  However, recent limited transactional activity in these markets may hinder our ability to find suitable replacement properties that satisfy our investment criteria.  We may also consider selling assets in any market, including the Mid-Atlantic and Southeast markets, where market conditions are such that the reinvestment of cash proceeds derived from a sale are expected to provide a significantly greater return on equity and an increase in cash flow.

            We are also focused on reducing overall interest rate charges on our borrowings which, at December 31, 2007, had a weighted average rate of 6.7%.  We plan to accomplish this goal by using a portion of any sale proceeds to pay off debt or refinance existing debt with new debt at lower interest rates.

            In order to increase property NOI, we plan to continue to focus our efforts on improving revenue, controlling costs and realizing operational efficiencies at the property level, both regionally and portfolio-wide.  In 2007, we updated all of our property websites to offer prospective tenants virtual property tours, and the ability to check availability and reserve an apartment unit online.  In 2008, we plan to offer online leasing and a resident portal feature that gives residents the ability to pay rent, sign up for utilities, request maintenance services and create their own personal web home page.  Also in 2007, we introduced a product standardization initiative designed to reduce costs in certain areas and in 2008, we plan to expand this program into other areas to provide additional savings.

            2008 Expectations:

•	Portfolio performance - We expect to increase our Market-Rate property NOI by approximately 3.3% to 3.7% in 2008, driven by property revenue increases of 3.0% to 3.3%.  However, these expectations may be adversely impacted if the economy suffers a broad and prolonged recessionary period.
•	Property acquisitions and sales - We plan to acquire approximately $100.0 million of properties, while disposing of approximately $100.0 million of properties.  Included in these dispositions are the 11 Affordable Housing properties, which contributed income of approximately $0.13 per common share from property operations and $0.09 per common share relating to the settlement of a lawsuit in 2007 pertaining to the collection of past due rents.  These properties are expected to be disposed of during the first half of 2008.
•	Defeasance and other prepayment costs - We expect to incur approximately $2.0 million in costs to defease/prepay or refinance debt during 2008.

            Federal Income Taxes.  We have elected to be taxed as a Real Estate Investment Trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with our taxable year ending December 31, 1993.  REITs are subject to a number of organizational and operational requirements including a requirement that 90.0% of the income that would otherwise be considered as taxable income be distributed to shareholders.  Providing we continue to qualify as a REIT, we will generally not be subject to federal income tax on net income.  However, our Service Companies are subject to federal income tax.

            A REIT is precluded from owning more than 10.0% of the outstanding voting securities of any one issuer, other than a wholly owned subsidiary or another REIT, and more than 10.0% of the value of all securities of any one issuer.  As an exception to this prohibition, a REIT is allowed to own up to 100% of the securities of a Taxable REIT Subsidiary ("TRS") that can provide non-customary services to REIT tenants and others without disqualifying the rents that a REIT receives from its tenants.  However, no more than 20.0% of the value of a REIT's total assets can be represented by securities of one or more TRS's.  The amount of intercompany interest and other expenses between a TRS and a REIT are subject to arms length allocations.  We have elected TRS status for all of our Service Companies.

            LIQUIDITY AND CAPITAL RESOURCES

            Cash Flows and Liquidity.  Significant sources and uses of cash in the past three years are summarized as follows:

            Significant Cash Sources (Uses):

	Year Ended December 31,
(In thousands)	2007			2006			2005
Net cash provided by operating activities	$	28,962		$	17,912		$	24,376
Fixed assets:
Property acquisitions, net	(70,547)			(256)			(65,320)
Property disposition proceeds, net	46,478			87,038			78,739
Recurring and non-recurring capital expenditures	(12,300)			(12,526)			(8,998)
Debt:
(Decrease) increase in mortgage notes	(3,939)			(74,937)			27,007
Increase (decrease) in revolver or line of credit borrowings	20,000			-			(10,000)
Issuance of unsecured trust preferred securities	-			-			25,780
Cash dividends and operating partnership distributions paid	(16,554)			(16,872)			(18,742)
Purchase of preferred and/or treasury shares	(16,861)			(10,258)			(73,677)

            Our primary sources of liquidity are cash flow provided by operations, short-term borrowings on the revolver and proceeds from property sales.  The increase in cash provided by operations in 2007 compared to 2006 was primarily due to an increase in property revenues provided mainly by the two properties acquired in June 2007 and a reduction in defeasance and other prepayment costs incurred in 2007 compared to 2006.  This increase in cash flow was partially offset by changes in accounts payable and accounts receivable resulting from the timing of cash payments.

            The decrease in cash provided by operations in 2006 compared to 2005 was primarily due to the payment of $14.4 million of defeasance and other prepayment costs, which were funded by property sales and secured borrowings.  Excluding these costs, cash flow from operations would have increased $7.9 million primarily due to changes in accounts payable and accounts receivable resulting from the timing of cash payments.

            During 2007, cash on hand, funds received from the sale of properties and funds borrowed on the revolver were primarily used to acquire two operating properties and repurchase our common and preferred shares pursuant to our stock repurchase plan.

            Revolving Credit Facility.  In April 2007, we obtained a $100.0 million unsecured revolving credit facility which is being used for the refinancing of existing debt, the acquisition of properties and general corporate purposes.  The revolver provides for, without limitation, a maximum debt limitation and other financial covenants related to net worth, leverage, fixed charge coverage, unencumbered interest coverage, and dividend payments.  We terminated our $17.0 million and $14.0 million secured lines of credit simultaneously with obtaining the revolver.  At December 31, 2007, there were borrowings of $20.0 million outstanding on the revolver.  We are currently in negotiation with our lenders to increase this credit facility.

            Shelf Availability.  We have a shelf registration statement on file with the Securities and Exchange Commission relating to a possible offering, from time to time, of debt securities, preferred shares, depositary shares, common shares and common share warrants.  The remaining availability under the shelf registration at December 31, 2007, is $214.7 million.  However, it is unlikely that we could issue debt securities under this shelf registration without first making major modifications to the shelf registration debt covenants.

            Liquidity:  Normal Business Operations.  We anticipate that we will meet our business operations and liquidity requirements for the upcoming year generally through net cash provided by operations.  We believe that if net cash provided by operations is below projections, other sources, such as the revolver, secured and unsecured borrowings, and property sales proceeds are or can be made available and should be sufficient to meet our business operations and liquidity requirements.

           Liquidity:  Non-Operational Activities.  Sources of cash available for paying down debt, acquiring properties or buying back our shares are expected to be provided primarily by property sale proceeds, refinancings and from the revolver.

Long-Term Contractual Obligations.  The following table summarizes our long-term contractual obligations at December 31, 2007, as defined by Item 303(a) 5 of Regulation S-K of the Securities and Exchange Act of 1934.

		Payments Due In
(In thousands)														2013 and
Contractual Obligations		Total			2008			2009-2010			2011-2012			Later Years
Debt payable - principal		$	556,695		$	34,635		$	174,891		$	144,642		$	202,527
Debt payable - interest		199,828			37,079			63,600			41,176			57,973
Operating leases		877			144			146			75			512
Purchase obligations		83,485			83,112			373			-			-
Total		$	840,885		$	154,970		$	239,010		$	185,893		$	261,012

Debt Payable-Principal.  Debt payable-principal includes principal payments on all property specific mortgages, the revolving credit facility and unsecured debt.  For detailed information about our debt, see Note 6 of the Notes to Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

Debt Payable-Interest.   Debt payable-interest includes accrued interest at December 31, 2007 and interest payments as required based upon the terms of the debt in existence at December 31, 2007.  Interest related to floating rate debt is calculated based on applicable rates as of December 31, 2007.

            Operating Leases.  We lease certain equipment and facilities under operating leases.  For detailed information about our lease obligations, see Note 10 of the Notes to Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

            Purchase Obligations.  Purchase obligations represent agreements to purchase goods or services and contracts for the acquisition of properties that are legally binding and enforceable and that specify all significant terms of the agreement.  Our purchase obligations include, but are not limited to, vendor contracts for property operations entered into in the normal course of operations, such as for landscaping, snow removal, elevator maintenance, security, trash removal and electronically generated services. Obligations included in the above table represent agreements dated December 31, 2007, or earlier.

            Dividends.  On December 10, 2007, we declared a dividend of $0.17 per common share, which was paid on February 1, 2008, to shareholders of record on January 15, 2008.  We anticipate that we will continue paying quarterly dividends and that we will sustain our current dividend rate of $0.17 per quarter.  Additionally, on January 29, 2008, we declared a quarterly dividend of $0.54375 per Depositary Share on our Class B Cumulative Redeemable Preferred Shares, which will be paid on March 14, 2008, to shareholders of record on February 29, 2008.

Capital Expenditures.  We anticipate incurring approximately $14.0 million in capital expenditures for 2008.  This includes replacement of worn carpet and appliances, parking lots, roofs and similar items in accordance with our current property expenditure plan, as well as commitments for investment/revenue enhancing and non-recurring expenditures.  These commitments are expected to be funded largely with cash provided by operating activities and proceeds from property sales.

            Financing and Other Commitments.  The following table identifies our total debt outstanding and weighted average interest rates as of December 31, 2007 and 2006:
 

(Dollar amounts in thousands)	Balance			Weighted		Balance			Weighted
	Outstanding			Average		Outstanding			Average
	December 31, 2007			Interest Rate		December 31, 2006			Interest Rate
FIXED RATE DEBT
Mortgages payable - CMBS	$	200,168		7.7%		$	303,945		7.7%
Mortgages payable - other	275,747			5.8%		132,209			6.1%
Unsecured borrowings	25,780			7.9%		25,780			7.9%
Total fixed rate debt	501,695			6.7%		461,934			7.3%
VARIABLE RATE DEBT
Mortgages payable	35,000			6.2%		36,700			6.6%
Revolver / lines of credit borrowings	20,000			6.7%		-			0.0%
Total variable rate debt	55,000			6.4%		36,700			6.6%
TOTAL DEBT	$	556,695		6.7%		$	498,634		7.2%

            The following table provides information on loans defeased/prepaid and loans obtained during 2007:

(Dollar amounts in thousands)		Loans prepaid/defeased						Loans obtained
Property		Amount			Rate			Amount			Rate
Chestnut Ridge		$	14,632		7.5%			$	19,000		6.2%	(a)
Residence at White River		8,284			7.5%			9,221			5.4%
Spring Valley Apartments		11,008			7.5%			10,817			5.4%
Georgetown Park Apartments		19,379			7.9%			16,000			6.2%	(a)
Muirwood Village at Bennell		3,773			7.9%			-			N/A
Waterstone Apartments		15,729			7.5%			16,500			5.8%
Lake Forest		5,764			7.9%			-			N/A
The Landings at the Preserve		6,740			7.9%			-			N/A
Residence at Barrington		15,152			7.9%			19,500			5.8%
The Alexander at Ghent		-			N/A			24,500			5.8%
Cambridge at Buckhead		11,800			7.1%	(a)		-			N/A
Aspen Lakes		3,900			7.1%	(a)		-			N/A
		$	116,161		7.6%	(b)		$	115,538		5.8%	(b)

(a)	Denotes variable rate loan.  Variable rates on loans obtained are as of December 31, 2007.
(b)	Represents weighted average interest rate for the loans listed.

            At December 31, 2007, we had 25 unencumbered properties, 11 of which are Affordable Housing properties.  These 25 properties had net income of $8.8 million for the year ended December 31, 2007, and a net book value of $156.1 million at December 31, 2007.  Twelve of these unencumbered properties are scheduled for disposition during the first half of 2008.

             We own six of the Affordable Housing unencumbered properties pursuant to ground lease agreements which, upon expiration of the applicable lease, require reversion of the land and building to the ground lessor.  These ground leases expire at various dates from 2021 to 2036.  Total revenue derived from these properties was $6.8 million, $5.2 million and $4.9 million for the years ended December 31, 2007, 2006 and 2005, respectively.  Furthermore, at the end of the term of each ground lease, any remaining replacement reserves applicable to four of those properties revert to the ground lessor.  Such replacement reserves included in restricted cash were $558,000 and $565,000 at December 31, 2007 and 2006, respectively.  With respect to such leases, we paid ground rent of $33,000 for each the years ended December 31, 2007, 2006 and 2005.

            One of the unencumbered properties is subject to a right of reverter.  This provision requires that the land and real estate assets revert at expiration back to the original grantor from whom we acquired this property or its successors and assignees, which is in September 2037.  The net book value of this property was $678,000 at December 31, 2007.  This property generated revenue of $1.0 million, $997,000, and $934,000 for the years ended December 31, 2007, 2006 and 2005, respectively, and net income of $299,000, $318,000, and $344,000 for 2007, 2006, and 2005 respectively.

             We lease certain equipment and facilities under operating leases.  Future minimum lease payments under all noncancellable-operating leases in which we are the lessee, principally for ground leases, are included in the previous table of contractual obligations.

             Off-Balance Sheet Investments and Financing Commitments.  We have an investment in a joint venture that owns an Affordable Housing property.  The operation of this property is similar to the operations of our wholly owned portfolio.  Joint venture investments enable us to exercise influence over the operations of such properties and share in their profits, while earning additional fee income.  We account for our investment in the unconsolidated joint venture under the equity method of accounting as we exercise significant influence, but do not control this entity and are not required to consolidate it in accordance with FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" or under EITF 04-05, "Investor's Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Rights".  This investment was initially recorded at cost as investment in joint ventures and subsequently adjusted for equity in earnings and cash contributions and distributions.  This joint venture property had negative cash flow during 2007 and is expected to have negative cash flow during 2008 as a result of operating expenses exceeding tenant rents and the housing assistance payments from HUD.  The joint venture partnership that owns this property has entered into a contract to sell it.  Our proportionate share of the debt on this property at December 31, 2007, was $2.1 million.

            For summarized financial information for this joint venture, see Note 7 of the Notes to the Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

            Operating Partnership.  As provided in the AERC HP Investors Limited Partnership Agreement ("DownREIT Partnership"), we, as general partner, have guaranteed the obligation of the DownREIT Partnership to redeem OP units held by the limited partners.  The DownREIT Partnership was formed in 1998.  Under the terms of the DownREIT Partnership Agreement, the DownREIT Partnership is obligated to redeem OP units for our common shares or cash, at our discretion, at a price per OP unit equal to the 20 day trailing price of our common shares for the immediate 20 day period preceding a limited partner's redemption notice.  During 2007, we redeemed 942 OP units.  As of December 31, 2007, there were 78,335 OP units remaining having a carrying value of $1.8 million, and 443,697 of the original 522,032 OP units had been redeemed.  These transactions had the effect of increasing our interest in the DownREIT Partnership from 85.0% to 97.4%.  For additional information regarding the OP units, see Note 1 of the Notes to the Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

            Acquisitions and Development.  On June 29, 2007, we acquired our joint venture partner's 51.0% interest in Idlewylde Apartments, an 843-unit Market-Rate property located in Atlanta, Georgia.  We previously owned a 49.0% interest in this partnership and had accounted for this investment under the equity method of accounting.  We paid our partner $21.6 million in cash and assumed responsibility for the entire mortgage debt encumbering the property.  Commencing June 29, 2007, the results of operations, financial condition (including the existing $42.0 million non-recourse mortgage loan), and cash flows of this property are included in our consolidated financial statements.

            On June 8, 2007, we acquired a 268-unit Market-Rate property located in Norfolk, Virginia for a purchase price of $48.3 million.  The purchase was funded primarily by 1031 proceeds from the disposition of a Market-Rate property, which we sold on May 30, 2007, and with borrowings from our revolving credit facility.

            On May 25, 2007, we acquired the land on which one of our Affordable Housing properties is located for a purchase price of $897,000.  We had been leasing this land pursuant to a ground lease which was scheduled to mature in 2021.

            We intend to continue to evaluate potential property acquisitions in higher growth markets that we previously identified.  Any future property acquisitions or developments would be financed with the most appropriate sources of capital, which may include the assumption of mortgage indebtedness, bank and other institutional borrowings, the exchange of properties, undistributed earnings, secured or unsecured debt financings, or the issuance of shares or units exchangeable into common shares.

            Dispositions.  During 2007, we sold three Market-Rate properties for net cash proceeds of $46.9 million.  These proceeds were used to partially fund the acquisition of one property, fund capital expenditures and for general corporate purposes.  The operating results of these properties, along with the gains of $20.9 million that we recognized, are included in "Income from discontinued operations".

            During 2006, we sold eight properties (seven Market-Rate properties and one Affordable Housing property) for net cash proceeds of $87.0 million.  These proceeds were used primarily to defease/prepay debt, repurchase $10.2 million of our common shares and partially fund capital expenditures.  The operating results of these properties, along with the gains of $54.1 million that we recognized, are included in "Income from discontinued operations".

             Management and Service Operations.  Revenues from our management and service operations will be significantly reduced in 2008 as a result of our exit from the affordable housing business.  At the end of 2007, the management contracts related to 29 affordable housing properties were terminated.  As of December 31, 2007, we managed one affordable housing property for an affiliated third party, two market rate properties for third party owners, and the joint venture affordable housing property.  Additionally, we asset managed one residential property and one commercial property.  We expect revenues generated by third party management operations to decrease by $2.1 million due to our decision to exit this business.  Net income received from this business in 2007 was approximately $500,000, and during 2008 we expect to offset this loss of net income with cost savings that we have identified.

RESULTS OF OPERATIONS FOR 2007 COMPARED WITH 2006 AND 2006 COMPARED WITH 2005

            In the following discussion of the comparison of the year ended December 31, 2007 to the year ended December 31, 2006 and the year ended December 31, 2006 to the year ended December 31, 2005, Market-Rate properties refers to the Same Community Market-Rate property portfolio.  Market-Rate properties represent 50 wholly owned properties.  Acquired/Disposed properties represent two acquired properties.  Affordable Housing properties represent 11 properties.

           During the 2007 to 2006 comparison period, operating income increased $4.7 million primarily as a result of increased property revenue.  Interest expense decreased $8.8 million when comparing 2007 to 2006, primarily due to decreased debt defeasement/prepayment costs.  Losses from continuing operations decreased by $13.5 million during the 2007 to 2006 comparison period.  During the 2006 to 2005 comparison period, operating income increased $1.4 million primarily as a result of increased property revenue. Interest expense during the 2006 to 2005 comparison period increased, primarily due to debt defeasement/prepayment costs, resulting in an increase in the loss from continuing operations.

            The following chart is intended to reflect the amount and percentage change in line items that are relevant to the changes in overall operating performance when comparing the years ended December 31, 2007 to 2006 and 2006 to 2005:

		Increase (decrease) when comparing
		the years ended December 31,
(Dollar amounts in thousands)		2007 to 2006				2006 to 2005
Property revenue		$	13,298	10.6%		$	8,361	7.2%
Property operating and maintenance expense items:
Personnel		1,856		12.3%		1,226		8.8%
Real estate taxes and insurance		788		4.3%		1,535		9.2%
Other operating expenses		877		20.0%		322		7.9%
Depreciation and amortization		3,474		11.6%		69		0.2%
General and administrative		487		4.9%		1,841		23.0%
Interest expense		(8,810)		(17.4)%		12,002		31.1%

            Property Revenue.  Property revenue is impacted by a combination of rental rates, rent concessions and occupancy levels.  We measure these factors using indicators such as physical occupancy (number of units occupied divided by total number of units at the end of the period) and average monthly net collected rent per unit (gross potential rents less vacancies and concessions divided by total number of units).  This information is presented in the following table for the years ended December 31, 2007, 2006 and 2005:

		Physical Occupancy
		For the year ended December 31,
		2007		2006		2005
Market-Rate Properties:
Midwest		94.6%		95.2%		92.1%
Mid-Atlantic/Southeast		93.8%		93.4%		96.4%
Total Market-Rate		94.4%		94.8%		93.1%
Affordable Housing		99.0%		99.6%		99.2%
Acquisition Properties		90.5%		N/A		N/A

		Average Monthly Net Collected
		Rent Per Unit
		For the year ended December 31,
		2007			2006			2005
Market-Rate Properties:
Midwest		$	729		$	697		$	671
Mid-Atlantic/Southeast		$	1,058		$	1,027		$	762
Total Market-Rate		$	805		$	774		$	692
Affordable Housing		$	659		$	648		$	640
Acquisition Properties		$	944		N/A			N/A

           

            Property revenue increased in 2007 compared to 2006 primarily as a result of $6.5 million contributed by two properties acquired in 2007 and an increase of $5.0 million in our Market-Rate properties.  Revenue increases in our Market-Rate properties were primarily due to stable occupancy combined with rental rate increases and an overall reduction in concessions.  Property revenues increased in 2006 compared to 2005, primarily due to an increase of $8.2 million in the Market-Rate properties driven by increased occupancy, increased rental rates, fewer concessions, and from increases in revenue related to utility and refuse reimbursement programs that were initiated in late 2004 and 2005.  Additionally, two properties acquired in 2005 contributed $2.5 million in rental revenue during 2006.

            Property revenue for the Affordable Housing properties increased $1.8 million in 2007 compared to 2006 primarily due to non-recurring rental revenue of $1.6 million received as a result of a settlement of a lawsuit with HUD relating to the collection of past due rents at some of our Affordable Housing properties.  Property revenue for the Affordable Housing properties also increased approximately $200,000 in both comparison periods primarily due to HUD approved rent increases during 2007 and 2006.  Affordable Housing revenue is primarily dependent upon the receipt of rental assistance subsidies from HUD via monthly housing assistance payments ("HAP Payments").  The amount of each monthly HAP Payment is equal to the rent amount (the "Contract Rent") stated in the HAP Contract with HUD, less the amount payable by the eligible resident for such month.  In accordance with our plan to exit the Affordable Housing business, we expect to sell all 11 of our owned Affordable Housing properties in 2008.  Total revenue from these properties was $11.1 million, which includes the aforementioned $1.6 million nonrecurring settlement, $9.4 million, and $9.2 million for the years ended December 31, 2007, 2006, and 2005, respectively.

 

            Below is a table setting forth the expiration dates of the HAP Contracts and the HAP Payments revenue recognized for our Affordable Housing properties as of December 31, 2007.

(In thousands)	Final	Revenue Recognized During
Property	Expiration Date	2007		2006		2005
Ellet	December 2017	$	384	$	401	$	415
Lakeshore Village (50.0% joint venture)(1)	July 2024	600		585		581
Puritas Place	September 2011	669		673		692
St. James (Riverview)	November 2009	441		454		466
Shaker Park Gardens II	June 2008	859		718		716
State Road Apartments	December 2016	459		440		413
Statesman II	November 2008	353		318		320
Sutliff Apartments	November 2019	737		758		767
Tallmadge Acres	March 2008	838		812		796
Twinsburg Apartments	June 2009	425		437		439
Village Towers	November 2009	402		416		427
West High Apartments	November 2008	623		608		596

(1)	Amounts shown represent 100% payment.

            The eleven wholly owned properties shown in the above table had positive cash flow during 2007 and are anticipated to have positive cash flow for the remaining contract terms.  Therefore, none of these HAP contracts are considered to be loss contracts.  Lakeshore Village had negative cash flow during 2007 as a result of increased operating expenditures related to increased repair and maintenance expenses that exceeded the mark-to-market modeled expectations.  Our request for a budget-based increase in monthly HAP payments sufficient to support a positive cash flow at this property was denied by HUD.  We anticipate that additional cash requirements resulting from the negative cash flow, if any, will be funded by our joint venture partner and us.  The joint venture partnership that owns this property has entered into a contract to sell the property that is not expected to close until late 2008 or early 2009.

            Contract Rents may be adjusted at least annually for some of the properties in accordance with the annual adjustment factor method.  Generally, these types of adjustments are only permitted if current rents are below the HUD published Fair Market Rent ("FMR") threshold.  If current rents exceed FMRs, a rent comparability study must be completed to demonstrate that the property's rents are below "market."

            "Contract Renewal Request Forms" must be submitted to HUD (or its corresponding contract agent) not less than 120 days prior to the applicable HAP anniversary date in order to renew an existing HAP contract.  We understand that the following options are available to us for expiring HAP contracts:  (i) for properties without mortgages, we may renew at the lesser of current rents plus an operating cost adjustment factor ("OCAF") that is set by HUD on an annual basis; or a budget based rent increase; (ii) for properties encumbered by a mortgage, we may renew at the lesser of (x) current rents plus an OCAF or (y) comparable market rents; or, (iii) opt out of the Section 8 program.  Opting out of the Section 8 program requires an additional one-year notice to HUD (or the contract agent) and the affected residents.

            As previously indicated, we anticipate that these Affordable Housing properties will be sold during 2008.  However, if the sale of a property has not been consummated prior to the expiration of a HUD contract, we believe that the contract will be renewed or we will enter into another government subsidized or mortgage restructuring program.

            The following represents our current expectations concerning those HAP contracts that expire in 2008, if the properties are not sold by the time the respective contracts expire:

            Shaker Park Gardens II.  In April 2007, we requested a renewal of the current contract for a one-year term with a budget based rent increase of 10.2%.  HUD denied our request. Subsequently, we applied for a 4.7% increase, as calculated, using the OCAF published on October 2, 2006.  Our request for an OCAF increase was granted and the contract was renewed for a one-year term through June 30, 2008.  Prior to expiration of the current contract, we intend to request a renewal for an additional one-year period.

            Statesman II.  In July 2007, we requested a renewal of the current contract for a one-year term with an increase in rents of 2.6%, as calculated, using the OCAF published on October 2, 2006.  Our request for an OCAF increase was granted and the contract was renewed for a one-year term through November 30, 2008.  Prior to expiration of the current contract, we intend to request a renewal for an additional one-year period.

            Tallmadge Acres.  In November 2007, we requested a renewal of the current contract for a one-year term with an increase in rents of 2.6%, as calculated, using the OCAF published on October 17, 2007.  Our request for an OCAF increase was granted and we expect the contract to be renewed for a one-year term effective March 17, 2008.

            West High Apartments.  In July 2007, we requested a renewal of the current contract for a one-year term with an increase in rents of 2.6%, as calculated, using the OCAF published on October 2, 2006.  Our request for an OCAF increase was granted and the contract was renewed for a one-year term through November 30, 2008.  Prior to expiration of the current contract, we intend to request a renewal for an additional one-year period.

            Fees, Reimbursements and Other.  Fee revenue and expense reimbursements for the management and service operations will be significantly reduced during 2008 as a result of our exit from the Affordable Housing business.  During the fourth quarter of 2007, management contracts for 29 properties that we managed during 2007 were transferred to either the third party owner or to other management companies.  As of January 1, 2008, we manage three properties for third party owners and the joint venture property, and we asset manage one residential and one commercial property.  One of the three managed properties is an Affordable Housing property and is expected to be sold during 2008 or 2009.  The joint venture property is also expected to be sold during 2008 or 2009.  Upon the sale of these properties, we will no longer receive the management fee or reimbursement revenue associated with these properties.  Management and advisory fees attributed to properties owned by non-affiliated third party owners and advisory clients are earned pursuant to contracts that are generally terminable upon 30 days notice.

            Property Operating and Maintenance Expenses.  Property operating and maintenance expenses increased when comparing 2007 to 2006 primarily as a result of increases in personnel expense, real estate tax expense and other operating expenses.  Personnel expense increased due to increased salary and benefit costs.  Real estate taxes increased due to taxes related to the two properties acquired during 2007 and assessed property value and millage rate increases.  Other operating expenses increased as a result of increases in the write off of uncollectible tenant rent receivables and associated collection costs.  These increases were partially offset by a credit recorded during 2007 resulting from favorable property insurance loss experiences and a renegotiation of the self-insured retention amounts.  Property operating and maintenance expenses increased when comparing 2006 to 2005 primarily as a result of increases in real estate tax expense, personnel expense, and repairs and maintenance expenses.  The increase in real estate taxes was due to assessed property value and millage rate increases and a decrease in refunds related to prior year taxes received in 2006.  The increase in repairs and maintenance expense was due to increases in maintenance project costs, unit preparation costs, landscaping costs, and trash removal costs.

            Interest Expense.  Interest expense decreased in 2007 compared to 2006 primarily due to a reduction of $8.2 million in defeasance/prepayment costs that were included in income from continuing operations in 2007.  Interest expense increased in 2006 compared to 2005 primarily due to $12.4 million in defeasance/prepayment costs that were included in income from continuing operations in 2006.  Interest expense associated with mortgage and revolving debt in income from continuing operations decreased $800,000 in 2007 compared to 2006 and $400,000 in 2006 compared to 2005 primarily as a result of reduced weighted average interest rates.  "Income from discontinued operations", as discussed below, includes no defeasance/prepayments costs or interest expense in 2007, and $5.2 million in interest expense, of which $3.2 million is defeasance/prepayment costs, in 2006.

            Depreciation and Amortization.  Depreciation and amortization expenses increased in 2007 compared to 2006 primarily as a result of the acquisition of two properties in 2007.

            General and Administrative Expenses.  General and administrative expenses increased in 2007 compared to 2006 primarily due to increases in corporate payroll, bonus, and share-based payment costs in 2007.  These increases were partially offset by a reduction of $876,000 in Directors' compensation in 2007 compared to 2006, as a result of valuation adjustments in deferred compensation based on common share units which are valued using the closing price of our common shares at the end of each period.  General and administrative expenses increased when comparing 2006 to 2005 primarily due to salary, benefit and share-based payment costs and an increase of $585,000 in Directors' compensation, resulting from a valuation adjustment in deferred compensation in 2006.  Additionally, during 2006, we recorded an estimated loss contingency in connection with the out of court settlement reached with Montgomery County, Maryland.  See Note 10 of the Notes to Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K for further information concerning this settlement.

            Income From Discontinued Operations.  Included in discontinued operations for the years ended December 31, 2007, 2006 and 2005, are the operating results and the gains related to three wholly owned properties that were sold in 2007, eight wholly owned properties that were sold in 2006, and three wholly owned properties that were sold in 2005.  The operating loss from discontinued operations in 2006 was primarily due to costs incurred to defease four loans that were secured by the properties that were sold.  For further details on "Income from discontinued operations," see Note 2 of the Notes to the Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

            Inflation.  It is our belief that the effects of inflation would be minimal on the operational performance of our portfolio as a result of the short-term nature of our leases that are typically for terms of one year or less.

Critical Accounting Estimates

            Our consolidated financial statements include accounts of all subsidiaries, the Service Companies and the Operating Partnership structured as a DownREIT.  The preparation of the consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the consolidated financial statements and related notes.  In preparing these consolidated financial statements, we have utilized information available including industry practice and our own past history in forming estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality.  It is possible that the ultimate outcome that we anticipated in formulating the estimates inherent in these consolidated financial statements may not materialize.  However, application of the accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.  In addition, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses.

            SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," requires us to assess the recoverability of the carrying value of long-lived assets when an event of impairment has occurred.  In performing this analysis, we estimate holding periods of the assets, changes in fair market value of the assets and cash flows related to the operations of the assets to determine the range of potential alternatives and assign a probability to the various alternatives under consideration by management.  Should the estimates used to determine alternatives or the probabilities of the occurrence thereof change, an impairment may result which could materially impact our results of operations.

            SFAS No. 142, "Goodwill and Other Intangible Assets," requires us to review goodwill annually and whenever there is an impairment indicator.  In performing this analysis, we use a multiple of revenues to the range of potential alternatives and assign a probability to the various alternatives we consider.  Should estimates used to determine the alternatives considered or the probabilities of the occurrence thereof change, an impairment may result which could materially impact our results of operations.

            SFAS No. 123(R), "Share-Based Payment," requires us to estimate the fair value of stock options awarded.  We use the Black-Scholes option-pricing model to estimate the fair value of the stock options, and the Monte Carlo method to estimate the fair value of awards in which the number of shares that will ultimately vest are subject to market conditions.  The use of judgment and/or estimates is required in determining certain of the assumptions used by these valuation models.  If we had used different judgment and/or estimates, different valuations would have been produced that may have resulted in a material change to our results of operations.  SFAS No. 123(R) also requires us to estimate future performance results related to certain share-based awards.  If the results vary from our estimate, it may require us to make a material adjustment to our results of operations.

            We estimate the amount of real estate taxes for which we will be liable based upon assumptions relating to possible changes in millage rates and property value reassessments.  In certain circumstances, it is possible that the actual millage rates or reassessment values are not available until the following reporting period and that these rates or values could differ from assumptions and require material adjustments to the liabilities recorded.

Quantitative and Qualitative Disclosures About Market Risk

            Interest Rate Risk.  At December 31, 2007, we had $55.0 million of variable rate debt.  Based on this amount of variable rate debt, an interest rate change of 100 basis points would impact interest expense approximately $550,000 on an annual basis.  Additionally, we have interest rate risk associated with fixed rate debt at maturity.  We have, and will continue to manage, interest rate risk as follows:  (i) maintain what we believe to be a conservative ratio of fixed rate, long-term debt to total debt such that variable rate exposure is kept at an acceptable level; (ii) consider hedges for certain long term variable and/or fixed rate debt through the use of interest rate swaps or interest rate caps; and (iii) consider the use of treasury locks where appropriate to hedge rates on anticipated debt transactions.  We use various financial models and advisors to assist us in analyzing opportunities to achieve those objectives.  For additional information related to interest rate hedge agreements, see "Derivative Instruments and Hedging Activities" in Note 1 of the Notes to Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.  The table below provides information about our financial instruments that are sensitive to change in interest rates.  For debt obligations, the table below presents principal cash flows and related weighted average interest rates based on expected amortization and maturity dates.

	December 31, 2007																								December 31, 2006
(Dollar amounts in thousands)																						Fair Market						Fair Market
Long term debt	2008			2009			2010			2011			2012			Thereafter			Total			Value			Total			Value
Fixed:
Fixed rate mortgage debt	$	34,635		$	39,422		$	80,469		$	64,799		$	79,843		$	202,527		$	501,695		$	526,817		$	461,934		$	504,182
Weighted average interest rate	7.8%			7.5%			6.0%			7.6%			6.9%			6.2%			6.7%
Variable:
Variable rate mortgage debt	-			35,000			-			-			-			-			35,000			35,000			36,700			36,700
Weighted average interest rate	-			6.2%			-			-			-			-			6.2 %
LIBOR based revolving credit facility (a)	-			-			20,000			-			-			-			20,000			20,000			-			-
Total variable rate debt	-			35,000			20,000			-			-			-			55,000			55,000			36,700			36,700
Total long term debt	$	34,635		$	74,422		$	100,469		$	64,799		$	79,843		$	202,527		$	556,695		$	581,817		$	498,634		$	540,882

(a)	Our revolving credit facility matures in April 2010 and had a weighted average interest rate of 6.7% at December 31, 2007.

CONTINGENCIES

            Environmental.  We have reviewed tangible long-lived assets and other agreements for associated asset retirement obligations ("AROs"), in accordance with FASB Statement No. 143, "Accounting for Asset Retirement Obligations" and FIN 47 "Accounting for Conditional Asset Retirement Obligations".  Based on that analysis, we do not have any material AROs that would require recognition as a liability or disclosure in our financial statements at December 31, 2007.  Phase I environmental audits were obtained at the time of the IPO, property acquisition or property refinancing, as the case may be, on all of our wholly owned and joint venture properties.

            Future claims for environmental liabilities are not measurable given the uncertainties surrounding whether there exists a basis for any such claims to be asserted and, if so, whether any claims will, in fact, be asserted.

            Pending Litigation.  For a discussion of pending litigation, see Note 10 of the Notes to Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

            For a discussion of the Quantitative and Qualitative Disclosures about Market Risk, see "Quantitative and Qualitative Disclosures about Market Risk" in Item 7.

Item 8.  Consolidated Financial Statements and Supplementary Data

            The response to this item is included in Item 15 of this report.

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

            None.

Item 9A.  Controls and Procedures

            Disclosure Controls and Procedures.  We have evaluated the design and operation of our disclosure controls and procedures to determine whether they are effective in ensuring that the disclosure of required information is made timely in accordance with the Securities Exchange Act of 1934 ("Exchange Act") and the rules and forms of the Securities and Exchange Commission.  This evaluation was made under the supervision and with the participation of management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") as of the end of the period covered by this annual report on Form 10-K.  The CEO and CFO have concluded, based on their review, that our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), are effective to ensure that information required to be disclosed in reports that we file under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate, to allow timely decisions regarding disclosure.

            Management's Report on Internal Control Over Financial Reporting.  We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act.  We assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control - Integrated Framework".  Based on that assessment and those criteria, we concluded that our internal control over financial reporting is effective as of December 31, 2007.  Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has issued an audit report on management's assessment of our internal control over financial reporting, which is included in the "Report of Independent Registered Public Accounting Firm" in Part II, Item 8 of this annual report on Form 10-K.

            Changes in Internal Control over Financial Reporting.  There were no changes in our internal control over financial reporting during the fourth quarter of 2007 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

            We believe that 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.

Item 9B.  Other Information

            None.

PART III

Item 10.  Directors, Executive Officers and Corporate Governance

            The information regarding our Directors, including information regarding the audit committee's financial expert, contained in the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2008, is incorporated by reference in this report on Form 10-K.  Such information will be filed with the SEC no later than 120 days after the year covered by this report.

            The information regarding executive officers and other key employees is set forth in Part I of this report on Form 10-K under the heading "Executive Officers of the Registrant and Other Key Employees."

            We adopted a formal Code of Ethics that applies to our Chief Executive Officer, Chief Financial Officer and Director of Financial Reporting.  The Code of Ethics is posted on our website, www.aecrealty.com.  Any future amendments to, or waivers from, the Code of Ethics that apply to these individuals will be posted on the website also.

Item 11.  Executive Compensation

            The information on Executive Compensation contained in the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2008, is incorporated by reference in this report on Form 10-K.  Such information will be filed with the SEC no later than 120 days after the year covered by this report.

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

            The following table summarizes information about our common stock that may be issued upon exercise of options outstanding and the total number of securities available for future issuance under all of the existing compensation plans as of December 31, 2007.  On May 4, 2005, our shareholders approved the Amended and Restated 2001 Equity-Based Award Plan which is currently the only plan under which grants of options to employees and directors can be made.  Also, certain options previously granted to outside Directors, which were not made under any of those plans, were not approved by shareholders, as shareholder approval for these grants was not required at the time the grants were made.  For more information regarding all of our plans, see Note 17 of the Notes to Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

            Previously, we had three equity compensation plans, two of which, the AERC Share Option Plan and the Equity-Based Incentive Compensation Plan, had been approved by shareholders; and one, the Year 2001 Equity Incentive Plan, that had not been approved by shareholders, as there was no requirement for this plan to be approved by shareholders when it was formed.  As previously stated, this plan was amended and approved by shareholders in 2005.

						Number of Securities Remaining
		Number of				Available for Future Issuance
		Securities to be		Weighted Average		Under Equity Compensation
		Issued Upon Exercise		Exercise Price of		Plans (Excluding Securities
Plan Category		of Outstanding Options		Outstanding Options		Reflected in the First Column)
Equity compensation plans
approved by security holders		1,532,385		$             9.50		517,069
Equity compensation plans not
approved by security holders		30,000		$          10.44		-
		1,562,385				517,069

            Additionally, the information on Security Ownership of Certain Beneficial Owners and Management contained in the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2008 is incorporated by reference in this report on Form 10-K.  Such information will be filed with the SEC no later than 120 days after the year covered by this report.

Item 13.  Certain Relationships and Related Transactions and Director Independence

            The information on Certain Relationships and Related Transactions contained in the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2008, is incorporated by reference in this report on Form 10-K.  Such information will be filed with the SEC no later than 120 days after the year covered by this report.

Item 14. Principal Accountant Fees and Services

            The information on Principal Accountant Fees and Services contained in the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2008, is incorporated by reference in this report on Form 10-K.  Such information will be filed with the SEC no later than 120 days after the year covered by this report.

PART IV

 

Item 15.  Exhibits and Financial Statement Schedules 

            The following documents are filed as part of this Report.

1.	Consolidated Financial Statements:
	Report of Independent Registered Public Accounting Firm.
	Consolidated Balance Sheets at December 31, 2007 and 2006.
	Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005.
	Consolidated Statements of Shareholders' Equity for the years ended December 31, 2007, 2006 and 2005.
	Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005.
	Notes to Consolidated Financial Statements.
2.	Financial Statement Schedules:  The following financial statement schedules of Associated Estates Realty Corporation are filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Associated Estates Realty Corporation.
	Schedules			Page
		II	Valuation and Qualifying Accounts	F-45
		III	Real Estate and Accumulated Depreciation	F-46
	Schedules not listed above have been omitted because they are not applicable or not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.
3.	Exhibits:  The Exhibits listed on the accompanying Index to Exhibits are filed as part of, or incorporated by reference into, this Report.

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, on the 27th day of February, 2008.

ASSOCIATED ESTATES REALTY CORPORATION

By: /s/ Jeffrey I. Friedman

Jeffrey I. Friedman, 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 indicated on the 27th day of February, 2008.

Signature	Title	Date
/s/ Jeffrey I. Friedman	Chairman of the Board and Chief Executive	February 27, 2008
Jeffrey I. Friedman	Officer (Principal Executive Officer)
/s/ Lou Fatica	Chief Financial Officer (Principal Financial	February 27, 2008
Lou Fatica	Officer and Principal Accounting Officer)
/s/ Albert T. Adams	Director	February 27, 2008
Albert T. Adams
/s/ James M. Delaney	Director	February 27, 2008
James M. Delaney
/s/ Michael E. Gibbons	Director	February 27, 2008
Michael E. Gibbons
/s/ Mark L. Milstein	Director	February 27, 2008
Mark L. Milstein
/s/ James A. Schoff	Director	February 27, 2008
James A. Schoff
/s/ Richard T. Schwarz	Director	February 27, 2008
Richard T. Schwarz

INDEX TO EXHIBITS

		Filed herewith or
		incorporated herein
Number	Title	by reference
3.1	Amendment to Second Amended and Restated Articles of Incorporation.	Exhibit 3.1 to Form 8-K filed December 8, 2004.
3.2	Second Amended and Restated Articles of Incorporation.	Exhibit 3.2 to Form 10-Q filed July 31, 2007.
3.3	Amended and Restated Code of Regulations of the Company.	Exhibit 3.3 to Form 10-Q filed August 1, 2006.
4.1	Specimen Common Share Certificate.	Exhibit 3.1 to Form S-11 filed September 2, 1993 (File No. 33-68276 as amended)
4.2	Specimen 8.70% Class B Series II Cumulative Redeemable Preferred Shares.	Exhibit 4.3 to Form 8-A filed December 8, 2004.
4.3	Deposit Agreement by and among Associated Estates Realty Corporation and National City Bank and Depositary Receipts.	Exhibit 4.5 to Form 8-A filed December 8, 2004.
4.4	Form of Indemnification Agreement.	Exhibit 4.2 to Form S-11 filed September 2, 1993 (File No. 33-68276 as amended).
4.5	Form of Promissory Note and Form of Mortgage and Security Agreement dated May 10, 1999 from AERC to The Chase Manhattan Bank.	Exhibit 4.5 to Form 10-Q filed August 13, 1999.
4.5a	Form of Promissory Note and Form of Mortgage and Security Agreement dated September 10, 1999 from AERC to The Chase Manhattan Bank.	Exhibit 4.5a to Form 10-Q filed November 12, 1999.
4.5b	Form of Promissory Note and Form of Mortgage and Security Agreement dated November 18, 1999 from AERC to The Chase Manhattan Bank.	Exhibit 4.5b to Form 10-K filed March 15, 2000.
4.9	Second Amended and Restated Loan Agreement dated April 19, 2002 between Associated Estates Realty Corporation and National City Bank.	Exhibit 4.13a to Form 10-Q filed August 13, 2002.
4.9a	Third Amended and Restated Loan Agreement dated November 1, 2005 between Associated Estates Realty Corporation and National City Bank.	Exhibit 4.9a to From 10-K filed March 1, 2006.
4.9a(i)	Amendment No. 1 to Third Amended and Restated Loan Agreement dated May 15, 2006 between Associated Estates Realty Corporation and National City Bank.	Exhibit 4.9a(i) to Form 10-Q filed August 1, 2006.
4.9b	First Amendment to Second Amended and Restated Loan Agreement dated May 14, 2002 between Associated Estates Realty Corporation and National City Bank.	Exhibit 4.13b to Form 10Q filed August 13, 2002.
4.9c	Second Amendment to Second Amended and Restated Loan Agreement dated April 17, 2003 between Associated Estates Realty Corporation and National City Bank.	Exhibit 4.13c to Form 10-Q filed August 1, 2003.
4.11	Loan Agreement dated July 22, 2003 between The Huntington National Bank and MIG/Orlando Development, Ltd.	Exhibit 4.15 to Form 10-Q filed November 20, 2003.
4.12	Amended and Restated Loan Agreement dated February 20, 2006 between The Huntington National Bank and MIG/Orlando Development Ltd.	Exhibit 4.12 to Form 10-Q filed May 2, 2006.
4.13	Credit Agreement Dated April 24, 2007 among Associated Estates Realty Corporation, as Borrower and National City Bank as Administrative Agent, Lead Arranger, and Book Manager and The Several Lenders From Time To Time Parties Hereto, as Lenders.	Exhibit 4.13 to Form 10-Q filed July 31, 2007.

		Filed herewith or
		incorporated herein
Number	Title	by reference
4.14	Shareholders Rights Agreement dated January 6, 1999 between Associated Estates Realty Corporation, an Ohio corporation (the "Company") and National City Bank, a national banking association (the "Rights Agent").	Exhibit 1 to Form 8-A filed January 26, 1999.
	Certain of the Registrant's assets are subject to mortgage obligations each of which individually relates to indebtedness totaling less than 10.0% of the total assets of the Registrant.  The Registrant hereby agrees to furnish a copy of such agreements to the Commission upon its request.
	The Registrant issued unsecured debt in the form of Trust Preferred Securities on March 15, 2005 in a private placement in an amount less than 10.0% of the total assets of the Registrant.  The Registrant hereby agrees to furnish a copy of the Purchase Agreement dated March 15, 2005 between Associated Estates Realty Corporation, AERC Delaware Trust and Taberna Preferred Funding 1, Ltd. and a specimen Preferred Securities Certificate to the Commission upon its request.
10	Associated Estates Realty Corporation Directors' Deferred Compensation Plan.	Exhibit 10 to Form 10-Q filed November 14, 1996.
10.1	Stock Option Plan.	Exhibit 10.2 to Form S-11 filed September 2, 1993 (File No. 33-68276 as amended).
10.2	Amended and Restated Employment Agreement between the Company and Jeffrey I. Friedman.	Exhibit 10.1 to Form 10-Q filed May 13, 1996.
10.3	Equity-Based Incentive Compensation Plan.	Exhibit 10.4 to Form 10-K filed March 29, 1995.
10.4	Form of Restricted Stock Agreement dated by and among the Company and its Non-Management Directors.	Exhibit 10.9 to Form 10-K filed March 28, 1996.
10.8	Form of Share Option Agreement by and among the Company and its Non-Management Directors.	Exhibit 10.14 to Form 10-K filed March 30, 1993.
10.10	Associated Estates Realty Corporation Amended and Restated 2001 Equity-Based Plan (as amended on May 4, 2005).  Incorporated by reference to Appendix 1 to the Definitive Proxy Statement filed March 28, 2005.	Exhibit 99.01 to Form S-8 filed May 26, 2005.
10.11	Form of Equity Award Agreement.	Exhibit 10.11 to Form 10-Q filed August 2, 2005.
10.12	Long Term Incentive Compensation Plan.	Exhibit 10.12 to Form 10-Q filed November 1, 2005.
10.13	Associated Estates Realty Corporation Elective Deferred Compensation Plan	Exhibit 10.13 to Form 10-Q filed July 31, 2007.
21.1	List of Subsidiaries	Exhibit 21.1 to Form
		10-K filed herewith.
23.1	Consent of Independent Accountants.	Exhibit 23.1 to Form10-K filed herewith.
31	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act.	Exhibit 31 to Form 10-K filed herewith.
31.1	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act.	Exhibit 31.1 to Form 10-K filed herewith.
32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act.	Exhibit 32 to Form 10-K filed herewith.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

ASSOCIATED ESTATES REALTY CORPORATION

Consolidated Financial Statements:	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets at December 31, 2007 and 2006	F-4
Consolidated Statements of Operations for the
years ended December 31, 2007, 2006 and 2005	F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2007, 2006 and 2005	F-6
Consolidated Statements of Cash Flows for the
years ended December 31, 2007, 2006 and 2005	F-7
Notes to Consolidated Financial Statements	F-8
Financial Statement Schedules:
II - Valuation and Qualifying Accounts	F-45
III - Real Estate and Accumulated Depreciation at December 31, 2007	F-46

 

      All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of Associated Estates Realty Corporation:

In our opinion, the consolidated financial statements listed in the accompanying Item 15 present fairly, in all material respects, the financial position of Associated Estates Realty Corporation and its subsidiaries at December 31, 2007 and December 31, 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedules listed in the accompanying Item 15 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company's management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included under item 9A.  Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company's internal control over financial reporting based on our integrated 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 17 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in 2006 in accordance with guidance provided in Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment".

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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.

/s/ PricewaterhouseCoopers LLP

Cleveland, Ohio

February 27, 2008

 

ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)	December 31,			December 31,
ASSETS	2007			2006
Real estate assets
Land	$	107,912		$	92,341
Buildings and improvements	826,226			751,393
Furniture and fixtures	30,154			28,126
	964,292			871,860
Less:  accumulated depreciation	(305,427)			(281,994)
	658,865			589,866
Construction in progress	721			1,323
Real estate associated with property held for sale, net	-			331
Real estate, net	659,586			591,520
Cash and cash equivalents	1,549			30,010
Restricted cash	6,730			7,279
Accounts and notes receivable, net
Rents	1,128			1,582
Affiliates	1,875			322
Other	820			1,955
Investments in joint ventures, net	-			5,247
Goodwill	1,725			1,725
Other assets, net	13,383			9,155
Other assets associated with property held for sale, net	-			34
Total assets	$	686,796		$	648,829
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage notes payable	$	510,915		$	472,854
Unsecured revolving credit facility	20,000			-
Unsecured debt	25,780			25,780
Total debt	556,695			498,634
Accounts payable, accrued expenses and other liabilities	25,909			24,568
Dividends payable	2,848			2,934
Resident security deposits	3,826			3,601
Funds held on behalf of managed properties - affiliates	344			200
Funds held on behalf of managed properties - other	1,476			1,978
Accrued interest	2,737			2,992
Accumulated losses in excess of investments in joint ventures	1,346			-
Other liabilities associated with property held for sale	-			20
Total liabilities	595,181			534,927
Operating partnership minority interest	1,829			1,851
Shareholders' equity
Preferred shares, without par value; 9,000,000 shares authorized; 8.70% Class B Series II
cumulative redeemable, $250 per share liquidation preference, 232,000 issued and
220,850 and 232,000 outstanding at December 31, 2007 and December 31, 2006, respectively	55,213			58,000
Common shares, without par value, $.10 stated value; 41,000,000 authorized; 22,995,763
issued and 16,353,700 and 17,261,224 outstanding at December 31, 2007 and
December 31, 2006, respectively	2,300			2,300
Paid-in capital	281,152			280,369
Accumulated distributions in excess of accumulated net income	(180,436)			(173,962)
Accumulated other comprehensive loss	(1,050)			(71)
Less:  Treasury shares, at cost, 6,642,063 and 5,734,539 shares
at December 31, 2007 and December 31, 2006, respectively	(67,393)			(54,585)
Total shareholders' equity	89,786			112,051
Total liabilities and shareholders' equity	$	686,796		$	648,829
The accompanying notes are an integral part of these consolidated financial statements.

ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

		Year Ended December 31,
(In thousands, except per share amounts)		2007			2006			2005
Revenue
Property revenue		$	138,224		$	124,926		$	116,565
Management and service company revenue:
Fees, reimbursements and other		10,914			11,689			11,723
Painting services		2,218			1,078			1,094
Total revenue		151,356			137,693			129,382
Expenses
Property operating and maintenance		61,627			57,590			52,959
Depreciation and amortization		33,368			29,894			29,825
Direct property management and service company expenses		12,863			12,695			12,503
Painting services		2,164			1,367			1,150
General and administrative		10,327			9,840			7,999
Total expenses		120,349			111,386			104,436
Operating income		31,007			26,307			24,946
Interest income		458			680			638
Interest expense		(41,824)			(50,634)			(38,632)
(Loss) income before gain on disposition of investment,
equity in net loss of joint ventures, minority interest
and income from discontinued operations		(10,359)			(23,647)			(13,048)
Gain on disposition of investment		-			-			150
Equity in net loss of joint ventures		(258)			(462)			(644)
Minority interest in operating partnership		(53)			(61)			(63)
(Loss) income from continuing operations		(10,670)			(24,170)			(13,605)
Income from discontinued operations:
Operating (loss) income		(29)			(2,902)			1,275
Gain on disposition of properties		20,864			54,093			48,536
Income from discontinued operations		20,835			51,191			49,811
Net income		10,165			27,021			36,206
Preferred share dividends		(4,924)			(5,046)			(5,130)
Preferred share repurchase costs		(172)			-			(2,163)
Net income applicable to common shares		$	5,069		$	21,975		$	28,913
Earnings per common share - basic and diluted:
(Loss) income from continuing operations applicable
to common shares		$	(0.93)		$	(1.72)		$	(1.09)
Income from discontinued operations		1.23			3.01			2.60
Net income applicable to common shares		$	0.30		$	1.29		$	1.51
Dividends declared per common share		$	0.68		$	0.68		$	0.68
Weighted average number of common shares
outstanding - basic and diluted		16,871			17,023			19,162
The accompanying notes are an integral part of these consolidated financial statements.

  

ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

	Year Ended December 31,
(In thousands, except share data)	2007			2006			2005
Common shares outstanding
Balance outstanding at beginning of period	17,261,224			17,950,326			19,653,187
Shares purchased	(1,045,346)			(992,423)			(1,823,265)
Shares issued from treasury for stock option exercises	22,479			236,599			61,300
Restricted share activity, net	115,343			66,722			59,104
Balance outstanding at end of period	16,353,700			17,261,224			17,950,326
Preferred shares outstanding
Balance outstanding at beginning of period	232,000			232,000			457,000
Redemption of Class A Cumulative Redeemable Preferred Shares	-			-			(225,000)
Purchase and retirement of Class B Cumulative Redeemable Preferred Shares	(11,150)			-			-
Balance outstanding at end of period	220,850			232,000			232,000
Preferred shares
Balance outstanding at beginning of period	$	58,000		$	58,000		$	114,250
Redemption of Class A Cumulative Redeemable Preferred Shares	-			-			(56,250)
Purchase and retirement of Class B Cumulative Redeemable Preferred Shares	(2,787)			-			-
Balance outstanding at end of period	55,213			58,000			58,000
Common shares (at $.10 stated value)
Balance outstanding at beginning and end of period	2,300			2,300			2,300
Treasury shares (at cost)
Balance outstanding at beginning of period	(54,585)			(45,877)			(29,800)
Purchase of common shares	(13,959)			(10,269)			(17,427)
Share based compensation	890			(1,091)			668
Shares issued from treasury for stock option exercises	261			2,652			682
Balance outstanding at end of period	(67,393)			(54,585)			(45,877)
Paid-in capital
Balance outstanding at beginning of period	280,369			278,885			277,117
Share based compensation	786			2,099			(220)
Shares issued from treasury for stock option exercises	(60)			(615)			(189)
Adjustment to 2004 issuance of Class B Series II Cumulative
Redeemable Preferred Shares	-			-			14
Redemption of Class A Cumulative Redeemable Preferred Shares							2,163
Purchase and retirement of Class B Cumulative Redeemable Preferred Shares	57			-			-
Balance outstanding at end of period	281,152			280,369			278,885
Accumulated distributions in excess of accumulated net income
Balance outstanding at beginning of period	(173,962)			(184,303)			(200,277)
Net income	10,165			27,021			36,206
Share based compensation	10			14			-
Redemption of Class A Cumulative Redeemable Preferred Shares	-			-			(2,163)
Purchase and retirement of Class B Cumulative Redeemable Preferred Shares	(172)			-			-
Common share dividends declared	(11,553)			(11,648)			(12,939)
Preferred share dividends declared	(4,924)			(5,046)			(5,130)
Balance outstanding at end of period	(180,436)			(173,962)			(184,303)
Accumulated other comprehensive income
Balance outstanding at beginning of period	(71)			(25)			-
Change in fair value of hedge instruments	(979)			(46)			(25)
Balance outstanding at end of period	(1,050)			(71)			(25)
Total Shareholders' Equity	$	89,786		$	112,051		$	108,980
The accompanying notes are an integral part of these consolidated financial statements.

<