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 2009 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 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 97.9% of our consolidated revenue for the year ended December 31, 2008.

The operating performance of our properties is affected by general economic trends including but not limited to factors such as household formation, job growth, unemployment rates, population growth, immigration, the supply of new multifamily rental communities and in certain markets the supply of other housing alternatives, such as condominiums, single and multifamily rental homes and owner occupied single and multifamily homes. Additionally, our performance may be affected by the access to and cost of capital.

Rental revenue collections are a combination of rental rates, occupancy levels and rent concessions. We attempt to adjust these factors to adapt to changing market conditions, thus allowing us to maximize rental revenue. Indicators that we use in measuring these factors include physical occupancy and net rents. These indicators are more fully described in the Results of Operations comparison. Additionally, 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 16 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").

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 December 31, 2008, and all prior periods for all of the previously 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.

Our Same Community portfolio consists of 45 properties containing 10,929 units and accounted for 86.9% of total property revenue in 2008 and 85.6% of our property NOI. During 2008 NOI for the Same Community portfolio increased 5.4%. This growth was due to an increase of 8.6% for our Midwest portfolio, while our Mid-Atlantic/Southeast portfolio decreased 0.4%. In 2009, at the midpoint of our guidance, we expect Same Community NOI to decline approximately 1.8% compared to 2008.

We intend to continue divesting non-core Midwest properties so long as we can do so at our target prices. We also intend to continue to evaluate potential property acquisitions in higher growth markets that we have identified and to acquire properties when our investment criteria warrant a new acquisition. 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 over time a significantly greater return on equity or an increase in cash flow.

We are also focused on reducing overall interest charges on our borrowings, which at December 31, 2008, had a weighted average rate of 6.1%. 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 maximize 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.

• Portfolio performance - At the midpoint of our guidance, we expect Same Community property NOI to decrease 1.8% in 2009 and we expect property revenue to remain relatively flat while property operating expenses increase 2.5% compared to 2008.

• Property acquisitions and sales - We plan to acquire approximately $80.0 million of properties, while disposing of approximately $80.0 million of properties. We also plan to develop 60 units on land adjacent to one of our properties in the Richmond, Virginia metropolitan area, for an approximate cost of $7.0 million.

• Defeasance and other prepayment costs - We expect net defeasance/prepayment costs to be approximately $1.4 million to defease/prepay or refinance debt during 2009.

Forecast Qualification. The uncertainties caused by the current economic turndown and the unprecedented financial crisis complicate our ability to forecast future performance and disposition/acquisition activity. We believe that the apartment industry is better situated to weather the recession and financial crisis than other real estate sectors, because people will normally choose shelter over discretionary spending such as going to the mall or hotel stays and because government sponsored agencies such as Fannie Mae and Freddie Mac continue to provide needed financing and refinancing credit facilities, which are otherwise unavailable to other commercial real estate sectors. However, our 2009 expectations may be adversely impacted if recessionary forces accelerate or Congress curtails Fannie Mae or Freddie Mac financing support to the apartment industry.

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 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)                                                         2008        2007        2006
Net cash provided by operating activities                            $ 24,665    $ 28,962    $ 17,912
Fixed assets:
Property/land acquisitions, net                                       (34,604)    (70,547)       (256)
Net property disposition proceeds                                      88,347      46,478      87,038
Recurring, revenue enhancing and non-recurring capital expenditures   (12,692)    (12,300)    (12,526)
Debt:
Decrease in mortgage notes                                            (45,716)     (3,939)    (74,937)
Increase in revolver borrowings                                         1,500      20,000          -
Cash dividends and operating partnership distributions paid           (15,813)    (16,554)    (16,872)
Purchase of preferred and/or treasury shares                           (4,882)    (16,861)    (10,258)

Our primary sources of liquidity are cash flow provided by operations, short-term borrowings on the revolver and proceeds from property sales. We believe that we are well positioned to weather the recent turmoil in the financial markets. Our debt repayment obligations are relatively modest. We have four mortgage loans totaling approximately $72.2 million maturing in 2009.
In February 2009, we repaid two of those loans totaling $45.0 million with $35.2 million of proceeds from two new mortgage loans and $9.8 million of borrowings on our revolver. We have a mortgage loan commitment in the amount of $17.3 million which we plan to use toward the refinancing of a third loan maturing this year. We will utilize our revolver to repay all other debt maturing in 2009. Our revolver matures March 11, 2011.

We anticipate that cash flow provided by operations for 2009 will be adequate to fund our cash needs other than the debt repayments described above and $7.0 million required to develop our 60-unit expansion of one of our Richmond, Virginia properties. We intend to fund the development with borrowings on our revolver.

Cash flow provided by operations decreased in 2008 compared to 2007 primarily due to a reduction in accrued real estate taxes and funds held for managed properties in 2008 compared to 2007. This decrease was partially offset by increased cash flow from property operations in 2008 when compared to 2007.

The increase in cash provided by operations in 2007 compared to 2006 was primarily due to an increase in property revenues provided mainly by 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.

During 2008, we received net proceeds of $88.3 million from the sale of 15 properties. $30.5 million of those proceeds were used to partially fund the acquisition of two properties located in the Richmond, Virginia metropolitan area and $5.2 million of those proceeds were used to acquire the ground lessor's interest in ground leases at six Affordable Housing properties, which ground leases we needed to acquire in order to complete the sale of those properties. $42.9 million of these proceeds were used to repay and/or defease debt, $3.8 million was used to fund revenue enhancing/non-recurring fixed asset additions, and the remaining $5.9 million was used for other 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.

Shelf Availability. In November 2008, we filed a new shelf registration statement with the Securities and Exchange Commission relating to possible offerings, from time to time, of debt securities, preferred shares, depositary shares, common shares and common share warrants. This registration statement replaced the shelf registration statement that expired in December 2008. Securities offerings up to $214.7 million would be available under the new shelf registration statement once approved by the SEC. The new shelf registration would expire three years from its effective date. However, until the capital markets improve, it is unlikely that we will be in a position to issue securities under this registration statement. Moreover, major modifications to the shelf registration debt covenants contained in the indenture, currently in place, would be necessary before the issuance of any debt securities under the shelf registration.

Liquidity: Normal Business Operations. We anticipate that we will meet our normal 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 normal 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, 2008, as defined by Item 303(a) 5 of Regulation S-K of the Securities and Exchange Act of 1934.

                                                  Payments Due In
(In thousands)                                                                  2014 and
Contractual Obligations      Total        2009       2010-2011    2012-2013   Later Years
Debt payable - principal   $ 557,481    $  74,587    $ 156,919    $ 212,945    $  113,030
Debt payable - interest      220,528       33,890       55,871       35,584        95,183
Operating leases                 165           87           78            -             -
Purchase obligations           9,759        8,698          718          280            63
Total                      $ 787,933    $ 117,262    $ 213,586    $ 248,809    $  208,276

Debt Payable-Principal. Debt payable-principal includes principal payments on all property specific mortgages, the revolving credit facility and unsecured debt based on amounts and terms of debt in existence at December 31, 2008. For detailed information about our debt, see Note 5 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, 2008 and interest payments as required based upon the terms of the debt in existence at December 31, 2008. Interest related to floating rate debt is calculated based on applicable rates as of December 31, 2008.

Operating Leases. We lease certain equipment and facilities under operating leases. For detailed information about our lease obligations, see Note 8 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, 2008, or earlier.

Dividends. On December 10, 2008, we declared a dividend of $0.17 per common share, which was paid on February 2, 2009, to shareholders of record on January 16, 2009. We anticipate that we will continue paying quarterly regular dividends in cash and that our Board of Directors will sustain our current dividend rate of $0.17 per quarter. Additionally, on January 29, 2009, 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 13, 2009, to shareholders of record on February 27, 2009.

Capital Expenditures. We anticipate incurring approximately $9.9 million in capital expendi-tures for 2009. 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.

Financing and Other Commitments. The following table identifies our total debt outstanding and weighted average interest rates as of December 31, 2008 and 2007:

                                    December 31, 2008               December 31, 2007
                                Balance     Weighted Average    Balance     Weighted Average
(Dollar amounts in thousands) Outstanding    Interest Rate    Outstanding    Interest Rate
FIXED RATE DEBT
Mortgages payable - CMBS       $  154,685         7.7%         $  200,168         7.7%
Mortgages payable - other         320,516         5.8%            275,747         5.8%
Unsecured borrowings               25,780         7.9%             25,780         7.9%
Total fixed rate debt             500,981         6.5%            501,695         6.7%

VARIABLE RATE DEBT
Mortgages payable                  35,000         1.6%             35,000         6.2%
Revolver borrowings                21,500         3.7%             20,000         6.7%
Total variable rate debt           56,500         2.4%             55,000         6.4%
TOTAL DEBT                     $  557,481         6.1%         $  556,695         6.7%

The following table provides information on loans repaid at par or defeased as well as loans assumed during 2008:

(Dollar amounts in thousands)       Loans Repaid/Defeased            Loans Assumed
          Property                  Amount                Rate        Amount    Rate
Hawthorne Hills Apartments      $         2,432           7.9%       $      -   N/A
Bay Club                                  3,086           7.9%              -   N/A
St. Andrews at Little Turtle              3,729           7.9%              -   N/A
The Woodlands                             4,362           7.9%              -   N/A
Bedford Commons                           5,363           7.9%              -   N/A
Westchester Townhouses                    5,583           7.9%              -   N/A
Steeplechase                              7,310           7.9%              -   N/A
Country Club Apartments                  10,985           7.6%              -   N/A
The Belvedere                                 -           N/A          26,099   5.6%
River Forest                                  -           N/A          18,903   5.7%
                                $        42,850           7.8% (a)   $ 45,002   5.6% (a)

(a) Represents weighted average interest rate for the loans listed.

At December 31, 2008, we had 18 unencumbered properties. These properties had net income of $9.2 million for the year ended December 31, 2008, and a net book value of $142.5 million at December 31, 2008. One of these unencumbered properties was sold in January 2009 and three are currently being marketed for sale.

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

Off-Balance Sheet Investments and Financing Commitments. On December 31, 2008, the joint venture in which we were a 50.0% partner sold the Affordable Housing property that it owned. We accounted for our investment in this unconsolidated joint venture under the equity method of accounting as we exercised significant influence, but did not control this entity and were 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, cash contributions and distributions, and the gain recognized upon the sale of the property. The debt associated with this property was assumed by the buyer and we have no continuing involvement with the property or the assumed debt.

For summarized financial information related to our joint venture investments, see Note 6 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. As of December 31, 2008, 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 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 and additional closing costs of $540,000. The acquisition also included a 5.92 acre future development land parcel, adjacent to one of the properties. This purchase was funded by the assumption of mortgage loans encumbering the acquired properties, Section 1031 exchange cash proceeds and borrowings on our revolving credit facility.

We intend to continue to evaluate potential property acquisitions in historically 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 2008, we sold 15 properties, including our entire Affordable Housing portfolio of 11 properties, for net cash proceeds of $88.3 million. The operating results of these properties, along with the gains of $45.2 million that we recognized, are included in "Income from discontinued operations."

Management and Service Operations. Revenues from our management and service operations were significantly reduced in 2008 as a result of our exit from the Affordable Housing business at the end of 2007. As of December 31, 2008, we managed one Affordable Housing property for an affiliated third party and two market rate properties for third party owners. The Affordable Housing property is expected to be sold during 2009, after which we will no longer manage this property and therefore not receive management fees. We are also the asset manager for one residential property and one commercial property.

RESULTS OF OPERATIONS FOR 2008 COMPARED WITH 2007 AND 2007 COMPARED WITH 2006

In the following discussion of the comparison of the year ended December 31, 2008 to the year ended December 31, 2007 and the year ended December 31, 2007 to the year ended December 31, 2006, Same Community properties represent 45 wholly owned properties. Acquired/Disposed properties represent two properties acquired in June 2007, two properties acquired in April 2008, and one property classified as held for sale at December 31, 2008.

During the 2008 to 2007 comparison period, operating income increased $1.7 million primarily as a result of increased property revenue, which was partially offset by increases in property operating and maintenance expenses and depreciation and amortization expense. Losses from continuing operations decreased by $6.8 million during this comparison period as a result of the increase in operating income, a decrease in interest expense of $3.6 million, which was primarily due to decreased debt defeasance/prepayment costs, and an increase in equity in net income (loss) of joint ventures of $1.8 million, which was primarily due to the gain recognized on the sale of a joint venture property. During the 2007 to 2006 comparison period, operating income increased $3.0 million primarily as a result of increased property revenue, which was partially offset by increases in property operating and maintenance expenses and depreciation and amortization expense. Losses from continuing operations during this comparison period decreased by $9.7 million primarily as a result of an interest expense reduction of $6.7 million, attributable to decreased debt defeasance/prepayment costs, and the $3.0 million increase in operating income.

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, 2008 to 2007 and 2007 to 2006:

                                                            Increase (decrease) when comparing
                                                               the years ended December 31,
(In thousands)                                               2008 to 2007         2007 to 2006

. . .