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 2009 performance which are based on certain assumptions. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements that 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 changes in market rental rates;
• increases in property and liability insurance costs;
• unanticipated increases in real estate taxes and other operating expenses;
• weather conditions that adversely affect operating expenses;
• expenditures that cannot be anticipated such as utility rate and usage increases, unanticipated repairs and real estate tax valuation reassessments or millage rate increases;
• 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; 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. Our primary source of cash and revenue from operations is rents from the leasing of owned apartment units, which represented 98.2% of our consolidated revenue for the six months ended June 30, 2009.

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 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 access to, and the 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 income. 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 and has the largest impact on our financial condition and operating results. See Note 9 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 NOI to consolidated net income (loss) attributable to AERC in accordance with GAAP.

We have three reportable segments: (1) Acquisition/Disposition Multifamily Properties; (2) Same Community Multifamily Properties; and (3) Management and Service Operations. Our Same Community portfolio consists of 46 properties containing 11,572 units and accounted for 94.7% of total property revenue and 93.8% of our property NOI during the six months ended June 30, 2009. NOI for the Same Community portfolio decreased $948,000 or 2.7% during the six months ended June 30, 2009 when compared to the six months ended June 30, 2008. This decrease was primarily attributable to a $1.7 million or 16.1% reduction in NOI at our Southeast properties, while NOI at our Midwest portfolio increased $754,000 or 3.8%.

Updated 2009 Expectations.

• Portfolio performance - Our updated guidance reflects Same Community property NOI decreasing in the range of -3.5% to -2.5% in 2009.
• Property acquisitions, sales and development - Our updated guidance reflects the acquisition of $40.0 million of properties during the second half of the year, rather than the $80.0 million we originally anticipated. We completed the disposition of two properties for $33.9 million through June 30, 2009, and we expect no further property sales during 2009. We also began construction of a 60-unit expansion of our River Forest apartment community, which is located in the Richmond, Virginia metropolitan area. The cost of this expansion project is expected to be approximately $7.0 million. We expect to incur approximately $5.0 million in costs related to this development during 2009, with the remaining $2.0 million to be expended in 2010.
• Debt repayment - We have already repaid all our loans maturing in 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.

LIQUIDITY AND CAPITAL RESOURCES

       Cash Flows and Liquidity.  Significant sources and uses of cash during
the six months ended June 30, 2009 and 2008 are summarized as follows:

                                                                       Six Months Ended
                                                                           June 30,
(In thousands)                                                         2009        2008
Net cash provided by operations                                      $ 15,315    $ 11,084
Fixed assets:
Property/land acquisitions and development expenditures, net           (1,514)    (34,310)
Net property disposition proceeds                                      32,714      88,357
Recurring, revenue enhancing and non-recurring capital expenditures    (4,563)     (4,116)
Debt:
Decrease in mortgage notes                                            (21,067)    (44,258)
Decrease in revolver borrowings                                       (11,500)     (6,900)
Cash dividends and operating partnership distributions paid            (7,752)     (7,963)

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. Four mortgage loans totaling approximately $72.2 million were scheduled to mature in 2009. During the six months ended June 30, 2009, we repaid $52.5 million of the maturing debt with funds from new mortgage loans that mature in 2016 and we utilized short term funding from our revolver for the remaining $19.7 million. The revolver borrowing was repaid with funds received from the sale of a 468-unit property located in Pennsylvania in June 2009. As of June 30, 2009, our revolver had $140.0 million available for borrowing and matures on March 11, 2011.

While we expect rental revenue to remain flat or decline due to increased concessions in some of our markets, we anticipate that cash flow provided by operations for the remainder of the year should remain consistent with current levels and should be adequate to fund our cash needs, other than the $5.0 million that we anticipate spending in 2009 to develop a 60-unit expansion of a Richmond, Virginia property, which we intend to fund with borrowings on our revolver.

Cash flow provided by operations increased during 2009 compared to 2008 primarily due to changes in accounts payable and accrued expenses and an increase in cash flow from property operations of $2.1 million.

In addition to the development costs of $5.0 million, we anticipate funding approximately $6.3 million for recurring, revenue enhancing and nonrecurring capital expenditures for the remainder of 2009. These expenditures are expected to be funded largely from cash flow provided by operations.

Any future multifamily property acquisitions or developments would be financed with the most appropriate sources of capital, which may include secured or unsecured debt financings, borrowings on the revolver, the assumption of mortgage indebtedness, bank and other institutional borrowings, the exchange of properties, undistributed earnings and debt or equity issuances under our effective shelf registration.

We anticipate that we will meet our 2009 liquidity requirements 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 our regular quarterly dividends in cash.

RESULTS OF OPERATIONS

Comparison of the three and six months ended June 30, 2009 to the three and six months ended June 30, 2008.

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

The net loss from continuing operations decreased $1.0 million and $1.6 million during the three and six month comparison periods, respectively. The decrease in the three month comparison period was primarily due to a reduction in depreciation and amortization expense and a gain on insurance recoveries recognized during 2009. The decrease in the six month comparison period was primarily due to a reduction in interest expense, the gain on insurance recoveries and an increase in property NOI recognized during 2009. The following table presents property NOI results for both comparison periods:

                                 Three Months Ended June 30,            Six Months Ended June 30,
                                2009         2008                     2009         2008
                              Property     Property    Increase/    Property     Property    Increase/
(In thousands)                  NOI          NOI      (Decrease)       NOI         NOI      (Decrease)
Same Community Properties:
Midwest                      $   10,426    $  9,957    $     469    $  20,717    $ 19,963    $     754
Mid-Atlantic                      2,477       2,428           49        4,786       4,824          (38)
Southeast                         4,288       5,146         (858)       8,640      10,304       (1,664)
Total Same Community             17,191      17,531         (340)      34,143      35,091         (948)
Acquired Properties               1,135         924          211        2,253         922        1,331
Total Property NOI           $   18,326    $ 18,455    $    (129)   $  36,396    $ 36,013    $     383

The decrease in Same Community NOI during the three month comparison period was primarily due to a decrease in property revenue of $325,000 or 1.1%, combined with a slight increase in operating expenses. The decrease in Same Community NOI during the six month comparison period was primarily due to a decrease in property revenue of $425,000 or 0.7%, combined with an increase in operating expenses of $523,000 or 2.0%.

The following chart reflects the amount and percentage change in line items that are relevant to the changes in overall operating performance:

                                              Increase (decrease) when      Increase (decrease) when
                                             comparing the three months     comparing the six months
                                                ended June 30, 2009           ended June 30, 2009
(In thousands)                                    to June 30, 2008              to June 30, 2008

Property revenue                             $         (28)       (0.1)%   $       1,572          2.5%
Property operating and maintenance expense             101          0.7%           1,189          4.5%
Depreciation and amortization                         (580)       (6.3)%             374          2.1%
Interest expense                                       (48)       (0.5)%            (692)       (3.9)%
Gain on insurance recoveries                           544           N/A             544           N/A
Income from discontinued operations                 10,868        428.9%         (28,218)      (63.8)%

Property revenue. Property revenue is impacted by a combination of rental rates, rent concessions and occupancy levels, i.e., net collected rent per unit. 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 rent per unit (gross potential rents less concessions divided by total number of units). This information is presented in the following tables for the three and six months ended June 30, 2009 and 2008:

                               Physical Occupancy
                                    June 30,
                              2009             2008
Same Community Properties:
Midwest                       97.1%            97.1%
Mid-Atlantic                  97.6%            97.3%
Southeast                     90.4%            94.2%
Total Same Community          95.4%            96.3%
Acquired Properties           94.0%            98.9%




                                   Average Monthly Net Collected Rent Per Unit
                                    Three Months Ended             Six Months Ended
                                         June 30,                      June 30,
                                2009                    2008       2009       2008
Same Community Properties:
Midwest                      $       788               $   775    $   783    $   766
Mid-Atlantic                 $     1,270               $ 1,237    $ 1,254    $ 1,232
Southeast                    $       874               $   948    $   874    $   946
Total Same Community         $       849               $   857    $   845    $   850
Acquired Properties          $       986               $ 1,015    $   992         N/A

The following table presents property revenue results for both comparison periods:

                                  Three Months Ended June 30,              Six Months Ended June 30,
                                2009            2008                     2009        2008
                              Property        Property    Increase/    Property    Property    Increase/
(In thousands)                Revenue         Revenue    (Decrease)    Revenue     Revenue    (Decrease)
Same Community Properties:
Midwest                      $   18,785       $ 18,523    $     262    $ 37,321    $ 36,554    $     767
Mid-Atlantic                      3,632          3,530          102       7,180       7,018          162
Southeast                         8,049          8,738         (689)     16,089      17,443       (1,354)
Total Same Community             30,466         30,791         (325)     60,590      61,015         (425)
Acquired Properties               1,672          1,375          297       3,372       1,375        1,997
Total Property Revenue       $   32,138       $ 32,166    $     (28)   $ 63,962    $ 62,390    $   1,572

The increases in property revenue for the Midwest portfolio during 2009 are primarily a result of an increase in net rents (gross potential rents less concessions) combined with a reduction in the amount of vacancy losses over both comparison periods. Property revenue in the Mid-Atlantic properties increased during 2009 primarily due to net rent increases which were partially offset by an increase in the amount of vacancy losses over both comparison periods. Property revenue for the Southeast portfolio decreased during 2009 primarily because of increases in concessions being offered and increases in the amount of vacancy losses over both comparison periods.

Property operating and maintenance expenses. Property operating and maintenance expenses increased during both comparison periods primarily as a result of expenses related to the Acquired properties. Property operating and maintenance expenses in the Same Community segment were flat during the three month comparison period and increased $523,000 during the six month comparison period primarily as a result of increases in utilities expense, real estate tax expense and repairs and maintenance expense in the Southeast and Mid-Atlantic properties.

Depreciation and amortization. Depreciation and amortization expense decreased during the three month comparison period primarily due to a decrease in amortization of intangible assets in 2009 related to properties acquired in 2007, which was partially offset by an increase in depreciation and amortization of intangible assets related to the properties acquired in 2008. Depreciation and amortization expense increased during the six month comparison period primarily due to an increase in depreciation and amortization of intangible assets related to the properties acquired in 2008.

Interest expense. Interest expense decreased in 2009 during the six month comparison period primarily due to the receipt in the first quarter of 2009 of refunds totaling $563,000 in defeasance costs in connection with certain previously defeased loans and decreased interest expense of $125,000 for borrowings on our revolver.

Income from Discontinued Operations. Discontinued operations include the operating results and gains related to the sales of two properties sold in 2009 and 15 properties that were sold during 2008. 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 10 of the Notes to Consolidated Financial Statements presented in Part I, Item 1 of this report on Form 10-Q.