Overview

Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to facilitate an understanding of the Company's business and results of operations. It should be read in conjunction with the Consolidated Financial Statements, the accompanying Notes to Consolidated Financial Statements and the selected financial data included elsewhere in this Form 10-K. This Form 10-K, including the following discussion, contains forward-looking statements regarding future events or trends as described more fully under "Forward-Looking Statements" on page 56. Actual results could differ materially from those projected in such statements as a result of the risk factors described in Item 1A, "Risk Factors," of this Form 10-K.

Index to Consolidated Financial Statements

The Company is engaged in the ownership, management, acquisition, rehabilitation and development of residential apartment communities primarily in selected Northeast, Mid-Atlantic and Southeast Florida markets. As of December 31, 2008, the Company operated 112 apartment communities with 38,280 apartments. Of this total, the Company owned 110 communities, consisting of 37,130 apartments, managed as general partner one partnership that owned 868 apartments, and fee managed one property with 282 apartments for a third party.

Executive Summary

The Company operated during 2008 in a declining economic environment. For historical reference, from 2004 through 2007, both the Company's markets and the country as a whole experienced positive job growth; 1.0%, 1.1%, 1.2% and 1.0% for the Company, and 1.7%, 1.5%, 1.7% and 0.9% for the country, respectively. An increase in job growth leads to household formations, which creates an increase in demand for rental housing. In addition, during 2006 and continuing through 2008, the rising home mortgage interest rates and subsequent sub-prime lending crisis issues made it more difficult for residents who may have considered purchasing a home. After years of home ownership being the number one reason our residents gave for moving out of our apartment communities, it dropped to number two in 2007 and number three in 2008. In the three-year period from 2004 to 2006, home purchases represented, on average, over 19% of our move-outs. In 2007 and 2008, we experienced the first significant drop in years, with move out for home purchase declining to 15.5% and 12.0%, respectively. Continued uncertainty in the mortgage lending industry could push this level down further, which could positively affect our turnover rates, rental rates and occupancy, which all will all be challenged in 2009 as the recessionary environment continues. As referenced in our Market Demographics table on Page 11 of this report, job growth for our markets declined in 2008 with 1.2% negative growth over 2007, after four years of approximately 1.1% positive job growth in 2004 through 2007. As there is usually a lag between job loss and its effect on household formation, this decline did not create a measurable decreased demand for our apartments until very late in 2008. This reduced demand will put pressure on our ability in 2009 to raise rents and maintain occupancy.

The reason for using rent concessions, and the ultimate level of those concessions, has been consistent the last few years, with concessions in 2006 and 2007 at just slightly over 90 basis points. During late 2007, the Company started converting to a new property management operating system ("MRI") that wasn't fully rolled out until late spring 2008. The Company implemented a Lease Rent Options ("LRO") program that no longer uses concessions to set market rents. Concessions continued in the legacy operating system but were phased out during the year upon converting properties to the new program. Under the new program rents are set to market daily, based on apartment availability, local supply of and demand for units, and pricing. Therefore, concessions dropped considerably in 2008 to 37 basis points of rent potential. Rent concessions are still used, but sparingly, in specific locations for specific units. For comparison, rent concessions were only 15 basis points for the fourth quarter of 2008.

The Company owned 102 communities with 34,560 apartment units throughout 2007 and 2008 where comparable operating results are available for the years presented (the "2008 Core Properties"). Occupancies at the 2008 Core Properties increased slightly, by 20 basis points, from 94.8% to 95.0%. Occupancies in the fourth quarter of 2008 averaged 94.9%, compared to 94.6% a year ago. Including bad debt in the calculation to arrive at economic occupancy, this metric decreased slightly, from 93.9% in 2007 to 93.7% in 2008. The level of bad debt increased in 2008 to 125 basis points compared to 84 basis points in 2007. The Company has taken measures to reduce this level by taking a more active role in the collection of receivables instead of relying on third party providers. The addition of utility reimbursements for residents has increased receivables, which along with the recession, has put pressure on our ability to limit bad debts to historical levels. For 2009, we are projecting bad debts to be just over 130 basis points of rent potential.

The Company uses a measurement referred to as Available to Rent, or ATR. This is a leading indicator of future occupancy rates and refers to units which will be available for rent, based upon leases signed or termination notices received relating to future move in/move out dates. As of the middle of February, 2009, our ATR was 6.8%, compared to the same time period a year ago when ATR was 6.1%. This suggests that occupancy could decline as we expect to have more units available to rent in the near future. For 2009, we are projecting physical occupancy averaging 0.6% below 2008.

Index to Consolidated Financial Statements

The guidance for 2009 Core Properties (apartment units owned throughout 2008 and 2009, the "2009 Core Properties") revenue growth is 1.6%. Rental rates are projected to increase 2.3%, including above-average rental increases at certain communities resulting from continued efforts to upgrade the properties. Economic occupancies are expected to decrease 0.9% for the year, such that rental revenues are projected to increase 1.4%. Property other income is expected to rise year over year, increasing the 1.4% rental revenue growth to 1.6% total revenue growth. Driving the property other income growth is a $1.2 million increase from utility recovery income.

Expenses for 2009 Core Properties are projected to increase 3.5%. See below under "Results of Operations" for more details on expense comparisons.

These revenue and expense projections result in 2009 Core Properties net operating income ("NOI") growth of 0.3% at the mid-point of 2009 guidance. Markets where the Company expects above average NOI growth include:
Washington, D.C. 1.7%; New York City Metro area 1.1%; and Baltimore 0.4%. Markets with below average expectations include: Philadelphia -0.5%; Maine -1.2%; Chicago -1.5%; Boston -2.8%; and Florida -5.0%. Certain historical demographic information for these markets may be found in the tables on Pages 11 and 12 of this report.

Of the two items comprising NOI, revenue and operating expenses, the revenue component is likely to be more volatile. It is difficult to predict how much worse the present economy could become or when the ultimate recovery will commence, factors in determining job growth (loss) and housing demand. A worsening economic recession could put pressure on the Company's ability to reach the mid-point of guidance. An economic recovery sooner than anticipated could allow the Company to achieve results above the mid-point of guidance. The Company has given FFO guidance for 2009 with a range of $3.04 to $3.28 per share.

The Company has anticipated no new acquisitions in its budget for 2009. The Company is committed to a disciplined approach to acquisitions, and with rising cap rates and lack of confidence in underwriting positive NOI growth, coupled with a difficult credit market, we believe that this is a time to conserve capital, keep our powder dry, and wait for a better day to continue our long-term growth strategy. The Company is also targeting $110 million in dispositions from properties that have reached their potential.

During 2009, the Company will target leverage of approximately 53.5% (equal to the level at year end 2008) of debt-to-total market capitalization (calculated using NAV to estimate equity value) in order to meet the goals described above.

Results of Operations (dollars in thousands, except unit and per unit data)

Comparison of year ended December 31, 2008 to year ended December 31, 2007.

The Company owned 102 communities with 34,560 apartment units throughout 2007 and 2008 where comparable operating results are available for the years presented (the "2008 Core Properties"). For the year ended December 31, 2008, the 2008 Core Properties showed an increase in total revenues of 3.4% and a net operating income increase of 3.3% over the 2007 period. Property level operating expenses increased 3.6%. Average physical occupancy for the 2008 Core Properties increased from 94.8% to 95.0%, with average monthly rental rates increasing 2.7% to $1,135 per apartment unit.

Index to Consolidated Financial Statements

A summary of the 2008 Core Properties NOI is as follows:
2008 2007 $ Change % Change Rent $ 441,266 $ 430,377 $ 10,889 2.5 % Utility recovery revenue 20,197 17,360 2,837 16.3 % Rent including recoveries 461,463 447,737 13,726 3.1 % Other income 20,477 18,332 2,145 11.7 % Total revenue 481,940 466,069 15,871 3.4 % Operating and maintenance (200,684 ) (193,779 ) (6,905 ) (3.6 %) Net operating income $ 281,256 $ 272,290 $ 8,966 3.3 %

Net operating income ("NOI") may fall within the definition of "non-GAAP financial measure" set forth in Item 10(e) of Regulation S-K and, as a result, the Company may be required to include in this report a statement disclosing the reasons why management believes that presentation of this measure provides useful information to investors. The Company believes that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it is a direct measure of the actual operating results of the Company's apartment communities. In addition, the apartment communities are valued and sold in the market by using a multiple of NOI. The Company also uses this measure to compare its performance to that of its peer group.

During 2008, the Company acquired and developed a total of 861 apartment units in three communities (the "2008 Acquisition Communities"). In addition, the Company experienced full-year results for the 1,709 apartment units in six apartment communities (the "2007 Acquisition Communities") acquired and developed during 2007. The inclusion of these acquired and developed communities generally accounted for the significant changes in operating results for the year ended December 31, 2008. In addition, the reported income from operations include the consolidated results of one investment where the Company is the managing general partner that has been determined to be a Variable Interest Entity ("VIE").

A summary of the NOI from continuing operations for the Company as a whole is as follows:

                               2008           2007        $ Change       % Change
Rent                        $  466,620     $  448,919     $  17,701            3.9 %
Utility recovery revenue        20,703         17,563         3,140           17.9 %
Rent including recoveries      487,323        466,482        20,841            4.5 %
Other income                    22,061         19,061         3,000           15.7 %
Total revenue                  509,384        485,543        23,841            4.9 %
Operating and maintenance     (214,485 )     (203,106 )     (11,379 )         (5.6 %)
Net operating income        $  294,899     $  282,437     $  12,462            4.4 %

During 2008, the Company disposed of fifteen properties in six transactions with a total of 1,227 units, which had partial results for 2008 and full year results for 2007 (the "2008 Disposed Communities"). During 2007, the Company disposed of five properties with a total of 1,084 units, which had partial results for 2007 and full year results for 2006 (the "2007 Disposed Communities"). The results of these disposed properties have been reflected in discontinued operations and are not included in the table above.

Index to Consolidated Financial Statements

For the year ended December 31, 2008, income from operations (income before minority interest, and discontinued operations) increased by $8,763 when compared to the year ended December 31, 2007. The increase was primarily attributable to the following factors: an increase in rental income of $17,701, an increase in property other income of $6,140, and a gain on early extinguishment of debt of $13,884. These changes were partially offset by a decrease in interest and other income of $2,521, an increase in operating and maintenance expense of $11,379, an increase in general and administrative expense of $2,078, an increase in interest expense of $1,001, an increase in depreciation and amortization of $7,983, and an impairment of assets held as general partner of $4,000. Each of the items are described in more detail below.

Of the $20,841 increase in rental income including utility recoveries, $5,003 is attributable to the 2007 Acquisition Communities, $2,137 is attributable to the 2008 Acquisition Communities partially offset by a $25 decrease attributable to the consolidation of the VIE. The balance of $13,726 relates to a 3.1% increase from the 2008 Core Properties due primarily to an increase of 2.7% in weighted average rental rates, accompanied by a decrease in economic occupancy from 93.9% to 93.7%, resulting in 2.5% rental growth before utility recovery revenue. Included in the Core increase is $2,837 which represents increased utility recovery revenue compared to 2007 attributable to the Company's water & sewer, heat, and electric recovery programs, which were initiated in the second quarter of 2005 and phased in through the early part of the third quarter of 2007.

In the current economic environment, it is very difficult to project rental rate and occupancy results. The Company has provided guidance for 2009, which, at the mid-point of the range, anticipates 2009 Core Properties revenue growth of 1.6%, including utility recovery and above-average rental increases from the continued efforts to upgrade the properties. Physical occupancy levels are expected to decline from the level at the end of the fourth quarter of 2008, producing an expected average for 2009 Core Properties of 94.3%, 60 basis points lower than all of 2008. In addition, bad debts are expected to increase with the result of decreasing rental revenue growth by 30 basis points.

The remaining property other income, which consists primarily of income from operation of laundry facilities, late charges, administrative fees, garage and carport rentals, revenue from corporate apartments, cable revenue, pet charges, and miscellaneous charges to residents, increased in 2008 by $3,000. Of this increase, $330 is attributable to the 2007 Acquisition Communities and $572 is attributable to the 2008 Acquisition Communities; partially offset by a $47 decrease attributable to the VIE. The balance of $2,145 relates to an 11.7% increase from the 2008 Core Properties resulting from increased emphasis on charging early termination fees and late charges as compared to 2007.

Interest income decreased $1,797 due to a lower level of invested excess cash on hand. The 2007 period realized higher interest income from proceeds of the fourth quarter 2006 and third and fourth quarter 2007 property dispositions and proceeds from exchangeable senior notes awaiting reinvestment into replacement and development property.

Other income, which is comprised of management and other real estate service fees recognized by the Company, decreased by $724, primarily due to a $612 reduction in post closing consultation fees recognized between periods. The first half of 2007 realized higher fees as a result of the significant fourth quarter 2006 property dispositions.

Of the $11,379 increase in operating and maintenance expenses, $3,023 is attributable to the 2007 Acquisition Communities, $699 is attributable to the 2008 Acquisition Communities and a $752 increase attributable to the consolidation of the VIE reflecting an increase in repairs & maintenance that occurred in 2008. The balance for the 2008 Core Properties, a $6,905 increase in operating expenses or 3.6%, is primarily a result of increases in repairs and maintenance, property insurance and real estate taxes. These increases were offset in part by reductions in gas heating and snow removal costs.

Index to Consolidated Financial Statements

The breakdown of operating and maintenance costs for the 2008 Core Properties by line item is listed below:

                            2008          2007         $ Variance       % Variance
Electricity               $   8,427     $   7,988     $       (439 )           (5.5 %)
Gas                          19,115        20,059              944              4.7 %
Water & sewer                13,372        12,956             (416 )           (3.2 %)
Repairs & maintenance        29,367        27,304           (2,063 )           (7.6 %)
Personnel expense            43,935        43,059             (876 )           (2.0 %)
Advertising                   4,319         4,545              226              5.0 %
Legal & professional          1,763         1,378             (385 )          (27.9 %)
Office & telephone            5,434         5,518               84              1.5 %
Property insurance           12,007        10,143           (1,864 )          (18.4 %)
Real estate taxes            44,482        42,283           (2,199 )           (5.2 %)
Snow                            724         1,101              377             34.2 %
Trash                         3,380         2,907             (473 )          (16.3 %)
Property management G&A      14,359        14,538              179              1.2 %
Total                     $ 200,684     $ 193,779     $     (6,905 )           (3.6 %)

Natural gas heating costs were down $944, or 4.7%, from a year ago, due mostly from decreases in natural gas pricing as a direct result of the Company's natural gas purchasing program. For 2008, our natural gas weighted average cost was $8.36 per decatherm compared to $8.89 for the 2007 period, a 6.0% decrease. The savings on the commodity was partially offset by a slight increase in consumption during 2008.

As of January 31, 2009, the Company had fixed-price contracts covering approximately 95.3% of its natural gas exposure for the balance of the 2008/2009 heating season. Risk is further diversified by staggering contract term expirations. For the balance of the 2008/2009 heating season, the Company estimates the average price per decatherm will be approximately $8.42. For calendar year 2009, where the Company has coverage for 85% of its exposure, the Company's negotiated average price per decatherm was approximately $8.29, with an all-in weighted expectation of $7.87 including an estimate for the 15% variable portion. The Company has provided guidance for 2009 which anticipates a 7.5% increase in natural gas heating costs. This is based on the thirty-year average for the number of degrees days for 2009. Even though the cost per decatherm is expected to go down slightly, usage is expected to increase to normal levels as the first quarter of 2008 was unseasonably mild. For guidance, the portion of the calendar year not covered by fixed price contracts (15%) is assumed to be priced at a level that reflects twelve month strip pricing as of January, 2009.

Water & sewer costs were up $416, or 3.2% from a year ago due primarily to two properties realizing refunds of $223 during 2007 relating to the correction of metering issues that did not reoccur in 2008 with the balance of the increase, $193, or 1.5%, attributable to general cost increases being assessed by local municipalities; however, the water & sewer recovery program, which became fully phased in during 2006, enables the Company to recapture much of these cost increases from our residents. The guidance for 2009 reflects an increase of 2.9%.

Repairs & maintenance expenses were up $2,063, or 7.6%, primarily due to the 2007 period including $602 more in recoveries from insurance claims. Without the impacts of these insurance recoveries, the recurring repairs & maintenance expenses increased $1,461, or 5.4%, mostly in contract repairs and cleaning. The Company has provided guidance for 2009 which anticipates a 5.8% increase in repairs and maintenance.

Personnel expenses were up $876 or 2.0% over 2007. Of the increase, $798 is reflective of changes in health and workers compensation reserves between periods. In 2007, reserves were increased by $779 as compared to 2008, where we were able to decrease these reserves by $19. The swing in the reserves between periods reflects the variable nature of health and workers compensation claims. The balance of the increase in personnel costs after reserve changes was $1,674, or 3.9%, which includes a 2.7% salary and wage increase between periods. The guidance for 2009 reflects an increase of 3.9%.

Advertising expenses were down $226, or 5.0% in 2008 and is reflective of the resident marketing program which places less emphasis and spending on print media and more focus on referrals and internet based methods which have resulted in a 10% increase in traffic in 2008 as compared to 2007.

Index to Consolidated Financial Statements

Legal & professional expenses were up $385, or 27.9%, primarily due to a specific reserve for pending litigation.

Property insurance costs increased $1,864, or 18.4%, primarily attributed to a change in how the Company is exposed to the self-insurance portion of the November 1, 2008 policy renewal. Historically, we had a $250 deductible per occurrence, so we were responsible for the first $250 on a large fire loss. For the new policy year, we are responsible for an aggregate retention amount of $2,250 for all losses before a smaller deductible of $100 on each occurrence thereafter. In looking at the year from an actuarial perspective, the new pricing should produce similar results over the 12-month policy period, but could produce volatility for the year. Less than two months into the policy period, we suffered a $1,300 loss from a large fire on Christmas night, or almost 60% of the aggregate retention for the year. As we are 100% responsible for this loss, the entire $1,300 loss was recognized in December, 2008. During 2009, we expect this volatility to reverse out as we use up the retention and kick into a smaller deductible. The guidance for 2009 reflects a decrease of 14.7% in insurance expense.

Real estate taxes were up $2,199, or 5.2%. The contributing factor was $1,081 in refunds received in 2007 from successful tax assessment appeals compared to $590 in the 2008 period. Without the impact of refunds, recurring taxes were up $1,708, or 4.0%. The Company expects real estate taxes to increase 7.3% in 2009 as additional assessment reductions are not anticipated, although the Company will continue initiatives to challenge assessments and obtain cost reductions.

Snow removal costs were down $377, or 34.2%. The year 2007 produced above normal snowfalls compared to below normal snowfalls in 2008. Snow removal costs are anticipated to increase to normal levels in 2009, and the guidance reflects a 7.0% increase

Trash removal costs were up $473, or 16.3%, driven by higher costs, including fuel surcharges, being passed through to the Company by trash haulers.

The operating expense ratio (the ratio of operating and maintenance expense compared to rental and property other income) for the 2008 Core Properties was 41.6% for both 2008 and 2007. The consistent performance resulted from the 3.4% increase in total revenue achieved through ongoing efforts to upgrade and reposition properties for maximum potential and a full year impact of the Company's roll out of its heating cost recovery program, which began in 2005; partially offset by the 3.6% increase in operating and maintenance expense. In general, the Company's operating expense ratio is higher than that experienced in other parts of the country due to relatively high real estate taxes and heating costs in its markets.

General and administrative expenses ("G&A") increased in 2008 by $2,078 or 8.9% from $23,413 in 2007 to $25,491 in 2008. G&A as a percentage of total revenues
(including discontinued operations and gain on early extinguishment of debt)
were 4.8% for 2008 as compared to 4.6% for 2007. If not for $520 in one-time uncompleted transaction costs expensed in the third quarter of 2007, the G&A as a percentage of total revenues would have been 4.5% in 2007. Stock-based compensation expenses were up $1,016 in 2008 as compared to 2007. The 2008 stock plan contained vesting conditions that triggered a $388 increase in director restricted stock compensation recognized in the second quarter of 2008 as compared to the terms in the prior plans. It is important to note that this is a timing difference only and that the total value of the stock awards was similar between years. Also, the change in estimated forfeitures from the 2003 grant year added $195 more expense in the current period. Incentive bonus expense was up $835 in 2008 as compared to 2007, which was driven by the increases in the Company's operating performance and increases in base salaries as compared to prior year. The rollout, training and support of the new property management systems accounted for staff and consulting increases of $328 within the information systems department. Additionally, the ramp-up of the development department accounted for a $285 increase. A decrease of $312, or 21.0%, was realized in the external costs incurred for auditing, tax and consultation . . .