ASSOCIATED ESTATES REALTY CORPORATION

 

INDEX

 

PART 1.  FINANCIAL INFORMATION
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

  

ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

1.            BASIS OF PRESENTATION AND ACCOUNTING POLICIES

                       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 and its consolidated subsidiaries.

Business

              We are a self-administered and self-managed equity real estate investment trust ("REIT") engaged in property acquisition, advisory, development, management, disposition, operation and ownership activities.  Our main source of income is rental revenue.  Additional income is derived from property and asset management fees.

            As of June 30, 2008, our property portfolio consisted of: (i) 50 apartment communities containing 12,672 units in eight states that are wholly owned, either directly or indirectly through subsidiaries; (ii) one joint venture Affordable Housing property containing 108 units; (iii) three apartment communities that we manage for third party owners consisting of 616 units; and (iv) a 186-unit apartment community and a commercial property containing approximately 145,000 square feet that we asset manage for a government sponsored pension fund.

Basis of Presentation

            The accompanying unaudited consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and applicable rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments, consisting only of normal and recurring adjustments considered necessary for a fair statement, have been included.  The reported results of operations are not necessarily indicative of the results that may be expected for the full year.  These financial statements should be read in conjunction with the audited financial statements and accompanying notes in our Annual Report on Form 10-K for the year ended December 31, 2007.

Share-Based Compensation

            During the three months ended June 30, 2008 and 2007, we recognized total share-based compensation cost of $429,000 and $365,000, respectively, in "General and administrative expense" in the Consolidated Statements of Operations.  During the six months ended June 30, 2008 and 2007, we recognized total share-based compensation cost of $900,000 and $665,000, respectively, in "General and administrative expense" in the Consolidated Statements of Operations.

            Stock Options.  We use the Black-Scholes option pricing model to estimate the fair value of share-based awards.  There were no stock options awarded or exercised during the six months ended June 30, 2008.  During the six months ended June 30, 2007, there were 4,000 options awarded and 18,979 options exercised.

             Restricted Shares.  The following table represents restricted share activity for the six months ended June 30, 2008:           

				Weighted
				Average
		Number of		Grant-Date
		Shares		Fair Value
Nonvested at beginning of period		210,213		$      11.36
Granted		55,961		$      10.45
Vested		62,684		$      11.25
Forfeited		11,029		$        9.20
Nonvested at end of period		192,461		$      11.34

            At June 30, 2008, there was $2.4 million of unrecognized compensation cost related to nonvested restricted share awards that we expect to recognize over a weighted average period of 2.7 years.  Certain of our officers elected to defer the receipt of a portion of the restricted shares granted them during the six months ended June 30, 2008, pursuant to the terms of the Associated Estates Realty Corporation Elective Deferred Compensation Program.

Derivative Instruments and Hedging Activities

               During the six months ended June 30, 2008, we had two interest rate swaps outstanding that were used to mitigate the economic impact of changes in interest rates.  These swaps are designated as cash flow hedges and are being used to offset the risk of changes in cash flows associated with benchmark interest payments on two of our variable rate mortgage loans.  We reassess these hedges on a quarterly basis to determine if they continue to be effective.  The effective portion of the changes in the fair value of these hedges are recorded in other comprehensive income ("OCI") and the amounts in OCI will be reclassified into earnings over the term of the loan as interest payments are made.  As of June 30, 2008, there was no hedge ineffectiveness.  These swaps were reported at fair value on the Consolidated Balance Sheets as "Accounts payable, accrued expenses and other liabilities" in the amount of $1.3 million and $1.0 million at June 30, 2008 and December 31, 2007, respectively.

Restricted Cash

            Restricted cash represents legally restricted deposits with financial institutions for taxes and insurance, security deposits, and reserve funds for replacements.  The reserve funds for replacements are intended to provide cash to defray future maintenance costs for certain mortgaged properties.   

Classification of Fixed Asset Additions

            We define recurring fixed asset additions to a property to be capital expenditures made to replace worn out assets to maintain the property's value.  We define revenue enhancing/non-recurring fixed asset additions to be capital expenditures that increase the value of the property and/or enable us to increase rents.  We define acquisition fixed asset additions to be capital expenditures for the purchase or construction of new properties to be added to our portfolio, or fixed asset additions identified at the time of purchase that are not made until subsequent periods.

Recent Accounting Pronouncements

            In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 provides guidance for using fair value to measure assets and liabilities. This statement clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing the asset or liability. SFAS 157 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data. SFAS 157 applies whenever other standards require assets or liabilities to be measured at fair value. SFAS 157 also provides for certain disclosure requirements, including, but not limited to, the valuation techniques used to measure fair value and a discussion of changes in valuation techniques, if any, during the period. We adopted this statement on January 1, 2008, except for nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value on a recurring basis, for which the effective date is January 1, 2009. The adoption of this standard did not have a material effect on our financial position and results of operations.  See Note 8 for additional information on the adoption of SFAS 157.

            In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"), which gives entities the option to measure eligible financial assets, financial liabilities and firm commitments at fair value on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a firm commitment. Subsequent changes (i.e., unrealized gains and losses) in fair value must be recorded in earnings.  Additionally, SFAS 159 allows for a one-time election for existing positions upon adoption, with the transition adjustment recorded to beginning retained earnings.  We adopted this statement on January 1, 2008.  We did not elect the fair value option for any instruments.

            In December 2007, the FASB issued Statement No. 141 (revised 2007), "Business Combinations" ("SFAS 141(R)"), which establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill acquired in a business combination. This statement is effective for us for business combinations for which the acquisition date is on or after January 1, 2009.  We are currently assessing the potential impact that the adoption of SFAS 141(R) will have on our financial position and results of operations.

            In December 2007, the FASB issued Statement No. 160, "Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51" ("SFAS 160"), which establishes and expands accounting and reporting standards for minority interests, which will be recharacterized as noncontrolling interests, in a subsidiary and the deconsolidation of a subsidiary. SFAS 160 is effective for us beginning on January 1, 2009.  Earlier adoption is prohibited.  We are currently assessing the potential impact that the adoption of SFAS 160 will have on our financial position and results of operations.

            In March 2008, the FASB issued Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"), which amends and expands the disclosure requirements of SFAS 133.  This statement requires entities to provide enhanced disclosures about how and why it uses derivate instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  This statement requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format, and disclosure of credit risk related features.  This statement also requires cross-referencing within the footnotes to help users of financial statements locate important information about derivative instruments.  SFAS 161 is effective for us beginning on January 1, 2009.  We are currently assessing the potential impact that the adoption of SFAS 161 will have on our financial position and results of operations.

Reclassifications

            Certain reclassifications have been made to the 2007 financial statements to conform to the 2008 presentation.

2.         ACQUISITION AND DISPOSITION ACTIVITY

Acquisition Activity

            On April 21, 2008, we acquired two apartment communities located in the Richmond, Virginia metropolitan area totaling 536 units for a purchase price of $75.0 million.  The acquisition also included a 5.92 acre future development land parcel, adjacent to one of the properties.  This purchase was primarily funded by the assumption of mortgage loans on the acquired properties, by 1031 cash proceeds received from the disposition of a Same Community property that we sold on March 19, 2008, and by borrowings on our revolving credit facility.

            The following pro forma financial information is presented as if the 2008 acquisitions had occurred at the beginning of each period presented.  This information is presented for informational purposes only and is not necessarily indicative of what the Company's actual results of operations would have been had the acquisitions occurred at such times:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In thousands except per share data)	2008			2007			2008			2007
Pro forma revenue	$	34,171		$	33,720		$	68,011		$	66,083
Pro forma net (loss) income applicable to common shares	(1,473)			8,008			35,311			6,407
Earnings per common share - basic and diluted:
Pro forma net (loss) income applicable to common shares	$	(0.09)		$	0.47		$	2.18		$	0.37

            On May 25, 2007, we acquired the ground lessor's interest and accompanying land on which one of our Affordable Housing communities was located for a purchase price of $897,000.  This property was subsequently sold in March 2008, as noted below.

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

            On June 29, 2007, we acquired our joint venture partner’s 51.0% interest in Idlewylde Apartments, a multifamily 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.  This acquisition was structured as a 1031 reverse exchange and was funded with borrowings from our revolving credit facility.  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 have been included in our consolidated financial statements. 

Disposition Activity

            We report the results of operations and gain/loss related to the sale of real estate assets as discontinued operations in accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").  Real estate assets that are classified as held for sale are also reported as discontinued operations.  We classify properties as held for sale when all significant contingencies surrounding the closing have been resolved.  In many transactions, these contingencies are not satisfied until the actual closing of the transaction.  Interest expense included in discontinued operations is limited to interest on mortgage debt specifically associated with properties sold or classified as held for sale. 

            On March 19, 2008, we completed the sale of ten of our eleven formerly wholly owned Affordable Housing properties located in Northeastern Ohio.  The total sales proceeds were $41.3 million resulting in a gain of $29.0 million.  We used the sales proceeds primarily to reduce debt and for general corporate purposes.  As a condition of the sale, we acquired the ground lessor’s interest in six of those properties for a combined purchase price of $5.2 million.   On April 25, 2008, we completed the sale of our last remaining wholly owned Affordable Housing property for a sales price of $3.5 million resulting in a gain of $2.3 million.  The proceeds were primarily used to reduce debt and for general corporate purposes.

            On March 19, 2008, we also completed the sale of four Same Community properties located in Toledo, Ohio.  The total sales proceeds were $47.0 million resulting in a gain of $13.9 million.  The proceeds from one of those properties were placed in escrow to be used in connection with a 1031 exchange.  The remaining proceeds were primarily used to reduce debt and for general corporate purposes.

             On May 30, 2007, we completed the sale of a Same Community property located in Northeast Ohio.  The sales price was a net $34.6 million resulting in a gain of $12.5 million.  This property was part of a 1031 exchange.

             On February 20, 2007, we completed the sale of a congregate care property located in Northeast Ohio.  The sales price was $5.2 million resulting in a gain of $4.6 million.  The proceeds from this sale were primarily used to fund revenue enhancing/non-recurring capital expenditures and for general corporate purposes.

            "Income from discontinued operations" in the accompanying Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007, includes the operating results for the properties sold in 2008 and prior years, as well as the gains recognized on the property sales referenced above.  The following table summarizes "Income from discontinued operations" for the three and six months ended June 30, 2008 and 2007:                

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In thousands)	2008			2007			2008			2007
REVENUE
Property revenue	$	69		$	7,493		$	4,084		$	14,144
EXPENSES
Property operating and maintenance	12			3,609			2,234			7,686
Depreciation and amortization	10			1,017			764			2,163
Total expenses	22			4,626			2,998			9,849
Operating income	47			2,867			1,086			4,295
Interest income	-			9			3			15
Interest expense (1)	(5)			(359)			(2,326)			(715)
Gain on disposition of properties	2,293			12,482			45,203			17,043
Income from discontinued operations	$	2,335		$	14,999		$	43,966		$	20,638

(1)	Interest expense for the six months ended June 30, 2008, includes $2.0 million of defeasance and other prepayment costs.

3.         DEBT

Mortgage Notes Payable

            During the six months ended June 30, 2008, we prepaid seven fixed rate mortgage loans totaling $31.9 million that had a weighted average interest rate of 7.9% and were scheduled to mature in June 2008.  We also defeased/prepaid an $11.0 million loan that had been secured by a property that was sold on March 19, 2008 and recognized $2.0 million in defeasance/prepayment costs in connection therewith.  These costs are included in "Income from discontinued operations" in the Consolidated Statements of Operations for the six months ended June 30, 2008.  Additionally, we assumed two mortgage loans aggregating $45.0 million in connection with the two properties we acquired in April 2008; one in the amount of $18.9 million at a fixed rate of 5.7% which is secured by one property and the other in the amount of $26.1 million at a fixed rate of 5.6% which is secured by the other property.  These loans were recorded at their fair value on the date of acquisition, which approximated the amounts assumed.  Both of these loans mature in 2046.

            During the six months ended June 30, 2007, we defeased/prepaid five fixed rate mortgage loans totaling $47.2 million and we completed the refinancing of four fixed rate mortgage loans that were to mature in 2007 totaling $53.3 million.  Two of the refinanced loans totaling $35.0 million are variable rate mortgage loans that mature in 2009.  The interest rate on one of these loans is LIBOR plus 1.1% and the interest rate on the other is LIBOR plus 1.2%.  The other two refinanced loans totaling $20.0 million, are 5.4% fixed rate mortgage loans that mature in 2014.  Additionally, we prepaid two variable rate mortgage loans totaling $15.7 million with funds borrowed on our revolving credit facility.  In connection with these defeasances, other prepayments and refinancings, we recognized $4.2 million in defeasance and other prepayment costs, which are included in "Interest expense" in the Consolidated Statements of Operations.

            On June 29, 2007, we acquired our joint venture partner’s 51.0% interest in Idlewylde Apartments.  In connection with the acquisition, effective June 29, 2007, we included the results of operations, financial condition, including the existing $42.0 million non-recourse mortgage loan, and cash flows in our consolidated financial statements.  This loan has a floating interest rate of LIBOR plus 1.1%, however, in August 2007 we executed an interest rate swap that effectively fixed the interest rate at 5.9%.  This loan matures in 2010.  See Note 2 for additional information regarding this acquisition and Note 1 for additional information regarding the interest rate swap.

Revolving Credit Facility/Lines of Credit

            On March 20, 2008, we increased the borrowing capacity on our unsecured revolving credit facility up to $150.0 million from $100.0 million.  We also extended the maturity date of that facility for an additional year to March 20, 2011 and modified various financial covenants.  Currently, this facility accrues interest at a variable rate of LIBOR plus 1.6%.  The weighted average interest rate on borrowings outstanding at June 30, 2008, was 4.1%.  Our outstanding borrowings on this facility were $13.1 million and $20.0 million at June 30, 2008, and December 31, 2007, respectively.

4.         GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

            In June 1998, we recorded goodwill in connection with the MIG Realty Advisors, Inc. merger.  The goodwill was allocated fully to the Management and Service Operations Segment.

            We completed our annual review of goodwill during the three months ended March 31, 2008.  In performing this analysis, we use a multiple of revenues to the range of potential alternatives and assign a probability of the various alternatives under consideration by management.  Based on this analysis, we determined that goodwill was not impaired as of March 31, 2008.  As such, there were no changes to the carrying amount of goodwill during the six months ended June 30, 2008.  Should the estimates used to determine alternatives or the probabilities of the occurrence thereof change, impairment may result which could materially impact our results of operations for the period in which it is recorded.

Intangible Assets

            In accordance with SFAS 141, "Business Combinations", we allocate a portion of the total purchase price of a property acquisition to any intangible assets identified, such as existing leases and tenant relationships.  The intangible assets are amortized over the remaining lease terms or estimated life of the tenant relationship, which is approximately 12 to 16 months.  Due to the short term nature of residential leases, we believe that existing lease rates approximate market rates, and therefore, no allocation is made for above/below market leases.

            In connection with two property acquisitions completed during 2008, as discussed in Note 2, we recorded total intangible assets in the amount of $1.9 million related to existing leases, which are being amortized over 12 months, and $680,000 related to tenant relationships, which are being amortized over 16 months.  We are in the process of completing our valuations of the real estate and certain other assets acquired, and as a result, the purchase price allocation recorded as of June 30, 2008 is preliminary and subject to change.

            In connection with two property acquisitions completed during 2007, as discussed in Note 2, we recorded total intangible assets in the amount of $2.6 million related to existing leases, which were amortized over 12 months, and $589,000 related to tenant relationships, which are being amortized over 16 months.

5.         TRANSACTIONS WITH AFFILIATES AND JOINT VENTURES

            We provide management and other services to (and are reimbursed for certain expenses incurred on behalf of) a non-owned property in which our Chief Executive Officer ("CEO") and/or other related parties have an ownership interest.  The entity that owns this property, as well as other related parties, are referred to as "affiliates."  We also provide similar services to a joint venture property.  Property management fees and other service company revenues recognized for the three and six months ended June 30, 2008, were $27,000 and $54,000, respectively.  Property management fees and service company revenues recognized for the three and six months ended June 30, 2007 were $126,000 and $250,000, respectively.

            In the normal course of business, we have advanced funds on behalf of affiliates and joint ventures and held funds for the benefit of affiliates and joint ventures.  Funds due from affiliates were $293,000 and $452,000 at June 30, 2008 and December 31, 2007, respectively.

            Merit Enterprises, Inc., ("Merit"), a subsidiary of ours, has from time to time provided services to JAS Construction, Inc. ("JAS") related to property rehabilitation and other work.  JAS is owned by a son of our CEO.  Reported revenue related to work performed by Merit for JAS for the three and six months ended June 30, 2008 were $0 and $4,000, respectively. Reported revenue related to work performed by Merit for JAS for the three and six months ended June 30, 2007 were $405,000 and $889,000, respectively. Accounts receivable related to JAS at June 30, 2008 and December 31, 2007, was $0 and $360,000, respectively.

            In April 2008 we executed a $2.0 million contract with JAS, which was approved by our Board of Directors, under which JAS will provide general contractor services for the interior rehabilitation of one of our properties.  As of June 30, 2008, we have paid $270,000 to JAS pursuant to this contract.

6.         SHAREHOLDERS' EQUITY

            The following table provides a reconciliation of activity in Shareholders' equity accounts:           

		Six Months Ended June 30, 2008
					Accumulated
					Distributions			Accumulated
					In Excess of			Other			Treasury
		Paid-In			Accumulated			Comprehensive			Shares
(In thousands)		Capital			Net Income			Income			(at Cost)
Balance, December 31, 2007		$	281,152		$	(180,436)		$	(1,050)		$	(67,393)
Comprehensive income:
Net income		-			38,466			-			-
Other comprehensive (loss) income:
Change in fair value of hedge		-			-			(280)			-
Total comprehensive income		-			38,466			(280)			-
Share-based compensation		266			4			-			726
Purchase of common shares		-			-			-			(217)
Common share dividends declared		-			(5,594)			-			-
Preferred share dividends declared		-			(2,402)			-			-
Balance, June 30, 2008		$	281,418		$	(149,962)		$	(1,330)		$	(66,884)

            The following table identifies total comprehensive income:           

	Six Months Ended
	June 30,
(In thousands)	2008			2007
Comprehensive income:
Net income	$	38,466		$	10,679
Other comprehensive (loss) income:
Change in fair value of hedge instruments	(280)			71
Total comprehensive income	$	38,186		$	10,750

            During the six months ended June 30, 2007, we repurchased 111,500 Class B Series II Preferred Depositary Shares at a cost of $2.9 million.  These purchases were made under a $50.0 million repurchase authorization for common and preferred shares.

7.         EARNINGS PER SHARE

            Earnings per share ("EPS") has been computed pursuant to the provisions of SFAS 128, "Earnings per Share."  There were 1.6 million and 1.9 million options to purchase common shares outstanding and 192,461 and 219,207 nonvested restricted share awards outstanding at June 30, 2008 and 2007, respectively.  The dilutive effect of these options and restricted share awards were not included in the calculation of diluted earnings per share for the periods presented as their inclusion would be antidilutive to the net loss applicable to common shares from continuing operations.

            The exchange of operating partnership minority interests into common shares was also not included in the computation of diluted EPS because we plan to settle these OP units in cash. 

8.         FAIR VALUE

             On January 1, 2008, we adopted certain provisions of SFAS 157.  See "Recent accounting pronouncements" in Note 1 for information regarding additional provisions of SFAS 157 that will be effective January 1, 2009.  SFAS 157 clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing the asset or liability, and establishes the following fair value hierarchy:

•	Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access;
•	Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as interest rates and yield curves that are observable at commonly quoted intervals; and
•	Level 3 inputs are unobservable inputs for the asset or liability that are typically based on an entity’s own assumptions, as there is little, if any, related market activity.

            In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the fair value measurement will fall within the lowest level input that is significant to the fair value measurement in its entirety.

            The following table presents the financial liability that we measured at fair value on a recurring basis as of June 30, 2008: 

(In thousands)		Level 1		Level 2		Level 3		Total
Interest rate swaps		$          -		$   1,330		$          -		$   1,330

            To comply with the provisions of SFAS 157, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and that of the respective counterparty in the fair value measurements.  The credit valuation adjustments utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the either the respective counterparty or us.  However, we determined that as of June 30, 2008, the impact of the credit valuation adjustments were not significant to the overall valuation of the swaps.  See "Derivative instruments and hedging activity" in Note 1 for additional information regarding the swaps.

9.         EQUITY BASED AWARD PLANS

            On May 7, 2008, our shareholders approved the 2008 Equity Based Award Plan (the "Plan") which previously had been adopted by our Board of Directors (the "Board") on March 14, 2008, subject to shareholder approval.  Subsequent to receiving shareholder approval on May 7, 2008, the Board adopted amended language to the Plan consistent with the additional proxy materials filed by the Company on May 1, 2008.

            Under the Plan, a total of 750,000 common shares are available for awards.  The Plan provides for the grant to our officers, other employees and directors, of options to purchase our common shares, rights to receive the appreciation in value of common shares, awards of common shares subject to vesting and restrictions on transfer, awards of common shares issuable in the future upon satisfaction of certain conditions and other awards based on common shares.

10.        INTERIM SEGMENT REPORTING

            We have three reportable segments:  (1) Acquisition/Disposition Multifamily Properties; (2) Same Community Multifamily Properties; and (3) Management and Service Operations.  We previously reported a fourth segment, Affordable Housing Multifamily Properties; however, during the first half of 2008, all of our wholly owned Affordable Housing properties were sold.  Therefore, the financial information at June 30, 2008, and all prior periods for all of the wholly owned Affordable Housing properties are reported as discontinued operations in the Acquisition/Disposition Multifamily Properties segment.  We have identified our reportable segments based upon how management makes decisions regarding resource allocation and performance assessment.  The Acquisition/Disposition properties represent acquired or developed properties which have not yet reached stabilization (we consider a property stabilized when its occupancy rate reaches 93.0% and we have owned the property for one year), and properties that have been sold or are classified as held for sale in accordance with SFAS 144.  The Same Community properties are conventional multifamily residential apartments that have been owned during the entirety of the comparison periods.  The Management and Service Operations provide management and advisory services to the Acquisition/Disposition and Same Community properties that we own, as well as to third party clients and properties, both affiliate and non-affiliates.  All of our segments are located in the United States.

            The accounting policies of the reportable segments are the same as those described in the "Basis of Presentation and Significant Accounting Policies" in our Annual Report on Form 10-K for the year ended December 31, 2007.  We evaluate the performance of our reportable segments based on Net Operating Income ("NOI").  NOI is determined by deducting property operating and maintenance expenses from property revenue for the Acquisition/Disposition (excluding amounts classified as discontinued operations), and Same Community segments and deducting direct property management and service company expenses and painting service expenses from Management and Service Company revenue for the Management and Service Operations segment.  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 level performance.  NOI should not be considered (i) as an alternative to net income (determined in accordance with 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.

            Segment information for the three and six months ended June 30, 2008 and 2007 is as follows:

		Three Months Ended June 30, 2008
								Management
		Acquisition/			Same			and Service			Total
(In thousands)		Disposition			Community			Operations			Consolidated
Total segment revenue		$	4,490		$	28,950		$	2,033		$	35,473
Elimination of intersegment revenue		-			(5)			(1,448)			(1,453)
Consolidated revenue		4,490			28,945			585			34,020
Operating income from discontinued operations		42			-			-			42
*NOI		2,911			16,232			(90)			19,053
Total assets		186,539			507,935			12,158			706,632

*Intersegment revenue and expenses have been eliminated in the computation of NOI for each of the segments.

		Three Months Ended June 30, 2007
								Management
		Acquisition/			Same			and Service			Total
(In thousands)		Disposition			Community			Operations			Consolidated
Total segment revenue		$	242		$	28,041		$	5,572		$	33,855
Elimination of intersegment revenue		-			(9)			(1,803)			(1,812)
Consolidated revenue		242			28,032			3,769			32,043
Operating income from discontinued operations		2,517			-			-			2,517
*NOI		126			14,985			(423)			14,688
Total assets		165,216			526,143			15,439			706,798

*Intersegment revenue and expenses have been eliminated in the computation of NOI for each of the segments.

		Six Months Ended June 30, 2008
								Management
		Acquisition/			Same			and Service			Total
(In thousands)		Disposition			Community			Operations			Consolidated
Total segment revenue		$	7,542		$	57,330		$	4,365		$	69,237
Elimination of intersegment revenue		-			(6)			(3,090)			(3,096)
Consolidated revenue		7,542			57,324			1,275			66,141
Operating loss from discontinued operations		(1,237)			-			-			(1,237)
*NOI		4,846			32,489			(38)			37,297
Total assets		186,539			507,935			12,158			706,632

*Intersegment revenue and expenses have been eliminated in the computation of NOI for each of the segments.

		Six Months Ended June 30, 2007
								Management
		Acquisition/			Same			and Service			Total
(In thousands)		Disposition			Community			Operations			Consolidated
Total segment revenue		$	242		$	55,426		$	10,703		$	66,371
Elimination of intersegment revenue		-			(18)			(3,624)			(3,642)
Consolidated revenue		242			55,408			7,079			62,729
Operating income from discontinued operations		3,595			-			-			3,595
*NOI		125			30,673			(945)			29,853
Total assets		165,216			526,143			15,439			706,798

*Intersegment revenue and expenses have been eliminated in the computation of NOI for each of the segments.

            A reconciliation of total NOI to total consolidated net (loss) income is as follows:           

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In thousands)	2008			2007			2008			2007
Property NOI	$	19,143		$	15,111		$	37,335		$	30,798
Management and service operations NOI	(90)			(423)			(38)			(945)
Depreciation and amortization	(9,463)			(6,784)			(18,011)			(13,400)
General and administrative expense	(3,183)			(2,699)			(6,711)			(5,411)
Interest income	92			64			108			329
Interest expense (1)	(8,977)			(9,882)			(18,111)			(21,087)
Equity in net loss of joint ventures	(23)			(144)			(45)			(216)
Minority interest in operating partnership	(13)			(13)			(27)			(27)
Income from discontinued operations:
Operating income (loss)	42			2,517			(1,237)			3,595
Gain on disposition of properties	2,293			12,482			45,203			17,043
Income from discontinued operations	2,335			14,999			43,966			20,638
Consolidated net (loss) income	$	(179)		$	10,229		$	38,466		$	10,679

(1)	2007 includes defeasance and other prepayment costs of $1,520 and $4,183 for the three and six months ended June 30, respectively.

11.        CONTINGENCIES

Legal Proceedings

            We are subject to legal proceedings, lawsuits and other claims, including proceedings by government authorities (collectively "Litigation").  Litigation is subject to uncertainties and outcomes are difficult to predict.  Consequently, we are unable to estimate ultimate aggregate monetary liability or financial impact with respect to the Litigation matter described in the following paragraph as of June 30, 2008, and no accrual has been made for this matter.  We believe that other Litigation will not have a material adverse impact on us after final disposition.  However, because of the uncertainties of Litigation, one or more lawsuits could ultimately result in a material obligation.

Pending Lawsuits

            On or about April 14, 2002, Melanie and Kyle Kopp commenced an action against us in the Franklin County, Ohio Court of Common Pleas seeking undetermined damages, injunctive relief and class action certification.  This case arose out of our Suredeposit program.  This program allowed cash short prospective residents to purchase a bond in lieu of paying a security deposit.  The bond serves as a fund to pay those resident obligations that would otherwise have been funded by the security deposit.  Plaintiffs allege that the nonrefundable premium paid for the bond is a disguised form of security deposit, which is otherwise required to be refundable in accordance with Ohio's Landlord-Tenant Act.  Plaintiffs further allege that certain pet deposits and other nonrefundable deposits required by us are similarly security deposits that must be refundable in accordance with Ohio's Landlord-Tenant Act.  On or about January 15, 2004, the Plaintiffs filed a motion for class certification.  We subsequently filed a motion for summary judgment.  Both motions are pending before the Court.  We intend to vigorously defend ourselves against these claims.

12.        SUBSEQUENT EVENTS

            Dividends.  On August 1, 2008, we paid a dividend of $0.17 per common share to shareholders of record on July 11, 2008, which had been declared on June 18, 2008.

 

 

ITEM 2.  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 I, Item 1 of this report on Form 10-Q.  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 are 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 these forward-looking statements involve risks and uncertainty that could cause actual results to differ from estimates or projections contained in these forward-looking statements, including without limitation the following:

•	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;
•	our ability to refinance debt on favorable terms at maturity;
•	our 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, repairs and maintenance costs, insurance and administrative costs, security, landscaping, staffing and other general costs);
•	weather and other conditions that might 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;
•	our 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;
•	our ability to acquire properties at prices consistent with our investment criteria;
•	risks associated with property acquisitions such as environmental liabilities, among others;
•	changes in or termination of contracts relating to third party management and advisory business;
•	risks related to our joint venture; and
•	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.

 

            Overview.  We are engaged primarily in the ownership and operation of multifamily residential units.  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, which represented 98.1% of our consolidated revenue for the six months ended June 30, 2008.

            The operating performance of our properties is affected by factors such as interest rates, unemployment rates, job growth, household formation and the supply and demand of rental apartment communities and in certain markets other housing alternatives, such as condominiums, single and multifamily rental homes and owner occupied single and multifamily homes.  Rental revenue collections are a combination of rental rates, occupancy levels and rent concessions.  We attempt to adjust these factors from time to time, based on market conditions, in order to maximize rental revenue.  Indicators that we use in measuring these factors include physical occupancy and net collected rent.  These indicators are more fully described in the Results of Operations comparison.  Additionally, we consider property net operating income ("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 10 of the Notes to Consolidated Financial Statements presented in Part I, Item 1 of this report on Form 10-Q for additional information regarding property NOI and total NOI, in addition to a reconciliation of total NOI to consolidated net (loss) income in accordance with GAAP.

            In 2007, we made the decision to exit the Affordable Housing business and during the first half of 2008 we sold all eleven of our wholly owned Affordable Housing properties.  We also continued to execute on our strategy to reposition our portfolio by selling older properties with lower margins and replacing them with newer properties in higher growth submarkets by selling four older properties located in Toledo, Ohio.  In April, 2008, we acquired two newer Class A properties located in the Richmond, Virginia metropolitan area.

            Updated 2008 Expectations. 

•	Portfolio performance - We expect to increase our Same Community property NOI by approximately 4.5% to 4.9% in 2008, driven by property revenue increases of 3.0% to 3.3% and property expense increases of 1.1% to 1.6%.  However, these expectations may be adversely impacted if the economy suffers a broad and prolonged recessionary period.
•	Property acquisitions and sales – To the extent we can identify transactions that meet our strategic objectives, we plan to acquire and dispose of approximately $100.0 million of properties in 2008.  As of the date of this report, we have acquired and disposed of $75.0 million and $92.0 million of properties, respectively.
•	Defeasance and other debt prepayment costs – We have incurred $2.0 million in costs to defease/prepay or refinance debt during 2008 and, as of the date of this report, we do not expect to incur any additional defeasance/prepayment costs this year.

LIQUIDITY AND CAPITAL RESOURCES

            Cash Flows and Liquidity.  Significant sources and uses of cash in the six months ended June 30, 2008 and 2007 are summarized as follows:           

	Six Months Ended
	June 30,
(In thousands)	2008			2007
Net cash provided by operating activities	$	11,084		$	11,915
Fixed assets:
Property/land acquisitions, net	(34,310)			(70,547)
Property disposition proceeds	88,357			37,921
Recurring and non-recurring capital expenditures	(4,116)			(4,636)
Debt:
Decrease in mortgage notes	(44,258)			(62,940)
(Decrease) increase in revolver borrowings	(6,900)			75,350
Cash dividends and operating partnership distributions paid	(7,963)			(8,458)
Purchase of preferred and/or treasury shares	(217)			(3,254)

            Our primary sources of liquidity are cash flow provided by operations, short-term borrowings on our revolver and proceeds from property sales.  Cash flow provided by operations decreased during 2008 primarily as a result of changes in accounts payable and accrued expenses in 2008 when compared to 2007, which was primarily the result of the timing of the payment of such expenses.  These decreases were partially offset by an increase in cash flow from property operations in 2008 when compared with 2007 and a decrease in cash paid for interest in 2008 when compared with 2007.

            During the six months ended June 30, 2008, we received $88.4 million from the sale of 15 properties.  We placed $23.6 million of these proceeds in a 1031 escrow, which were used to partially fund the acquisition of two properties located in the Richmond, Virginia metropolitan area.  Additionally, we used $5.2 million to acquire the ground lessor’s interest in ground leases at six of the Affordable Housing properties that were sold.  The remaining proceeds were primarily used to prepay/defease $42.9 million of debt and for general corporate purposes.

            In March 2008, we increased the borrowing capacity on our unsecured revolving credit facility to $150.0 million from $100.0 million, extended the maturity date of this facility for an additional year to March 20, 2011 and modified certain financial covenants.

            We anticipate funding approximately $9.7 million for recurring, revenue enhancing and nonrecurring capital expenditures for the remainder of 2008.  These expenditures are expected to be funded from cash flow provided by operating activities and the sale of properties.

            Any future multifamily property acquisitions or developments would be financed with the most appropriate sources of capital, which may include borrowings on the revolver, 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.

            We anticipate that we will meet our liquidity requirements for the remainder of 2008 generally through cash flow provided by operations.  We believe that this and other sources, such as the revolver, should be sufficient to meet operating requirements, capital additions, mortgage amortization payments and the payment of dividends in accordance with REIT requirements.  We anticipate that we will continue paying quarterly dividends and sustain our current dividend rate of $0.17 per quarter.

            Off-Balance Sheet Investments and Financing Commitments.  At June 30, 2008, we had an investment in a joint venture that owns an Affordable Housing property.  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. 46R, "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/loss 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 June 30, 2008, was $2.1 million.

RESULTS OF OPERATIONS

Comparison of the three and six months ended June 30, 2008 to the three and six months ended June 30, 2007. 

            In the following discussion, Same Community properties represent 46 wholly owned properties that we have owned during the entirety of the comparison periods, and Acquired properties represent two properties acquired in April 2008 and two properties acquired in June 2007.

            The net loss from continuing operations decreased $2.3 million and $4.5 million during the three and six month comparison periods, respectively.  This decrease was primarily due to property NOI increases and reductions in interest expense during 2008 in both comparison periods.  Property NOI for the acquisition properties increased $2.8 million and $4.7 million during the three and six month comparison periods, respectively.  Property NOI for the Same Community properties increased $1.2 million and $1.8 million during the three and six month comparison periods, respectively, primarily as a result of increased property revenues coupled with flat property operating expenses during both comparison periods.  These reductions to net loss from continuing operations were partially offset by increases in depreciation and amortization expense during 2008 in both comparison periods.

            The following chart reflects the amount and percentage change in line items that are relevant to the changes in overall operating performance when comparing the three and six months ended June 30, 2008 to the three and six months ended June 30, 2007:

		Increase (decrease) when				Increase (decrease) when
		comparing the three months				comparing the six months
		ended June 30, 2008				ended June 30, 2008
(In thousands)		to June 30, 2007				to June 30, 2007
Property revenue		$	5,161	18.3%		$	9,216	16.6%
Property operating and maintenance		1,129		8.6%		2,679		10.8%
Property NOI		4,032		26.7%		6,537		21.2%
Fees, reimbursements and other		(2,752)		(87.4)%		(4,893)		(83.7)%
Depreciation and amortization		2,679		39.5%		4,611		34.4%
Direct property management and service company expenses		(3,231)		(89.0)%		(6,078)		(88.5)%
General and administrative		484		17.9%		1,300		24.0%
Interest expense		(905)		(9.2)%		(2,976)		(14.1)%

            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 tables for the three and six months ended June 30, 2008 and 2007:               

		Physical Occupancy
		June 30,
		2008		2007
Same Community Properties:
Midwest		97.2%		97.1%
Mid-Atlantic/Southeast		95.3%		94.6%
Total Same Community		96.7%		96.4%
Acquired Properties		95.5%		93.9%

		Average Monthly Net Collected Rent Per Unit
		Three Months Ended June 30,						Six Months Ended June 30,
		2008			2007			2008			2007
Same Community Properties:
Midwest		$	773		$	738		$	763		$	731
Mid-Atlantic/Southeast		$	1,060		$	1,065		$	1,060		$	1,056
Total Same Community		$	846		$	821		$	839		$	814
Acquired Properties		$	948		N/A			$	961		N/A

            Total property revenue increased in 2008 during both comparison periods primarily as a result of increases in revenue from the Acquired properties of $4.2 million and $7.3 million during the three and six month comparison periods, respectively.  Property revenue for the Same Community segment increased $900,000 and $1.9 million during the three and six month comparison periods, respectively, primarily as a result of stable occupancy combined with rental rate increases and an overall reduction in concessions being offered.  The Midwest portfolio, which contains 75.0% of the Same Community units, was the primary contributor as average net collected rents increased 4.7% and 4.4% for that portfolio during the three and six month comparison periods, respectively, while the Mid-Atlantic/Southeast portfolio fluctuated less than 0.5% during each comparison period.

            Property operating and maintenance expenses.  Property operating and maintenance expenses increased during 2008 primarily as a result of additional expenses relating to the Acquired properties.

            Fees, reimbursements and other revenue.  The management and service operations recognized a decrease of $559,000 and $1.1 million in fee revenue in 2008 for the three and six month comparison periods, respectively, primarily as a result of the loss of management fee revenue associated with our exit from the Affordable Housing fee management business at the end of 2007 and the resulting reduction of properties managed for third party owners.  Reimbursement of expense from managed properties decreased $2.2 million and $4.0 million in 2008 for the three and six month comparison periods, respectively, also as a result of the reduction of the number of properties managed.  This reduction had no impact to the net loss from continuing operations as these reimbursements are also included in "Direct property management expenses".

            Depreciation and amortization.  Depreciation and amortization expense increased in 2008 primarily due to the addition of the Acquired properties.  As a result of the June 2007 and April 2008 acquisitions, we recorded intangible assets totaling $3.2 million in 2007 and $2.5 million in 2008 which are being amortized over 12 to 16 month periods.

            Direct property management and service company expenses.  Direct property management and service company expenses decreased in 2008 as a result of the reduction in the number of properties managed for third party owners.  The reimbursement of expenses from the managed properties decreased, as noted above, in 2008 during both comparison periods.  However, this reduction had no impact to the net loss from continuing operations as these reimbursements are also included in "Fees, reimbursements and other" revenue.  Service company expenses, which represent the portion of general and administrative expense that relates to the management of third party owned properties, also decreased $1.0 million and $2.1 million in 2008 for the three and six month comparison periods, respectively, due to the reduction in the number of properties managed.

            General and administrative expense.  General and administrative expense increased in 2008 during both comparison periods primarily as a result of the reduction in costs allocated to "Direct property management and service company expenses" in 2008 during both comparison periods.  These increases were partially offset by decreases in payroll related costs in 2008 and a decrease in Directors' compensation resulting from valuation adjustments of their deferred compensation based upon the closing price of our common shares at the end of each period.

            Interest expense.  Interest expense decreased in 2008 during both comparison periods primarily due to defeasance/prepayment costs recognized in 2007 of $1.5 million and $4.2 million during the three and six month periods, respectively.  After removing the effect of the 2007 defeasance/prepayment costs, interest expense increased $575,000 and $1.1 million in 2008 during the three and six month comparison periods, respectively.  These increases were primarily due to interest expense for loans associated with the addition of the acquired properties.

            Income from Discontinued Operations.  Discontinued operations include the operating results of 15 properties that were sold during 2008 and three properties that were sold during 2007 and the gains related to sales completed during each of the comparison periods.  Defeasance/prepayment costs recognized in 2008 totaling $2.0 million were included in discontinued operations.  For further details on "Income from discontinued operations," see Note 2 of the Notes to Consolidated Financial Statements presented in Part I, Item 1 of this report on Form 10-Q.

CONTINGENCIES

            For a discussion of contingencies, see Note 11 of the Notes to Consolidated Financial Statements presented in Part I, Item 1 of this report on Form 10-Q.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

            We are exposed to interest rate changes associated with variable rate debt as well as refinancing risk on our fixed-rate debt.  Based on our variable rate debt outstanding at June 30, 2008 and 2007, an interest rate change of 100 basis points would impact interest expense approximately $481,000 and $1.7 million on an annual basis, respectively. We occasionally use derivative instruments to manage our exposure to interest rates.  See Note 1 of the Notes to Consolidated Financial Statements presented in Part I, Item 1 of this report on Form 10-Q for additional information regarding derivative instruments and "Item 7A Qualitative and Quantitative Disclosures About Market Risk" of our Annual Report on Form 10-K for the year ended December 31, 2007, for a more complete discussion of interest rate sensitive assets and liabilities.

ITEM 4.  CONTROLS AND PROCEDURES

            Disclosure Controls and Procedures.  We have evaluated the design and operations of our disclosure controls and procedures to determine whether they are effective in ensuring that the disclosure of required information is timely made 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 report on Form 10-Q.  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.

            Changes in Internal Control over Financial Reporting.  There were no changes in our internal control over financial reporting during the second quarter of 2008 that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

            We believe that because of its inherent limitations, internal control over financial reporting may not always 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.

PART II.     OTHER INFORMATION

ITEM 1.       LEGAL PROCEEDINGS

                  For information related to legal proceedings, see Note 11 of the Notes to Consolidated Financial Statements presented in Part I, Item 1 of this report on Form 10-Q.

ITEM 1A.    RISK FACTORS

                  See "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007.

ITEM 2.       UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities for the Six Months Ended June 30, 2008
									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)
April 1 through
April 30		3		$	12.75		-		$	5,949
May 1 through
May 31		221		11.71			-		5,949
June 1 through
June 30		-		-			-		5,949
Total		224		$	11.73		-

            On July 27, 2005, our Board of Directors authorized the repurchase of up to $50.0 million of our common shares.  On October 20, 2006, our Board of Directors expanded this authorization to include the repurchase of our Class B Series II 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.

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

                  On May 7, 2008, we held our Annual Meeting of Shareholders.  Following are the matters our shareholders voted upon and the results of the vote:

(1)	The election of the following directors:

				Withheld
		For		Authority
Albert T. Adams		10,012,050		3,919,342
James M. Delaney		13,690,647		240,745
Jeffrey I. Friedman		13,231,184		700,208
Michael E. Gibbons		13,787,447		143,945
Mark L. Milstein		13,242,812		688,580
James A. Schoff		13,754,413		176,979
Richard T. Schwarz		13,690,185		241,207

(2)	Approval of the 2008 Equity Based Award Plan.

For		Against		Abstain
7,754,254		3,233,761		42,854

(3)	Ratification of the selection of PricewaterhouseCoopers LLP as the Company's Independent Registered Public Accounting Firm.

For		Against		Abstain
13,778,804		54,897		97,690

  

ITEM 6.     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.
4.5		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.
4.13		Credit Agreement Dated As of 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.
4.14		Shareholder 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.
4.15		First Amendment to Credit Agreement dated March 20, 2008 by and among Associated Estates Realty Corporation (the Borrower), National City Bank and other banks and financial institutions (the Lenders) and National City Bank (the Administrative Agent).		Exhibit 4.15 to Form 10-Q filed May 6, 2008.
4.16		Joinder to Subsidiary Guaranty dated March 20, 2008 for the benefit of National City Bank, as agent for itself and certain other lenders, with respect to a loan from the Lenders to Associated Estates Realty Corporation.		Exhibit 4.16 to Form 10-Q filed May 6, 2008.
		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.

				Filed herewith or
				incorporated herein
Number		Title		by reference
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 Agreement dated by and among the Company and its Independent Directors.		Exhibit 10.9 to Form 10-K filed March 28, 1996.
10.5		Form of Indemnification Agreement.		Exhibit 4.2 to Form S-11 filed September 2, 1993 (File No. 33-68276 as amended).
10.6		Amended 2008 Equity-Based Award Plan.		Exhibit 10.1 to Form 8-K filed May 13, 2008.
10.8		Form of Share Option Agreement by and among the Company and its Independent 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.
10.14		Agreement of Purchase and Sale dated August 31, 2007 between River Forest Properties, LLC, and Associated Estates Realty Corporation.		Exhibit 10.14 to Form 10-Q filed herewith.
10.15		Agreement of Purchase and Sale dated August 31, 2007 between Belvedere Properties, LLC, and Associated Estates Realty Corporation.		Exhibit 10.15 to Form 10-Q filed herewith.
31		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act.		Exhibit 31 to Form 10-Q filed herewith.
31.1		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act.		Exhibit 31.1 to Form 10-Q 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-Q filed herewith.

 SIGNATURES

         Pursuant to the requirements 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.

 

		ASSOCIATED ESTATES REALTY CORPORATION
August 5, 2008		/s/ Lou Fatica
(Date)		Lou Fatica, Vice President
		Chief Financial Officer and Treasurer