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 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.

The Company is engaged in the ownership, management, acquisition, rehabilitation and development of residential apartment communities primarily in selected Northeast and Mid-Atlantic markets of the United States. As of December 31, 2012, the Company owned and operated 121 apartment communities with 42,635 apartments.

Executive Summary

The Company operated during 2012 in a recovering economic environment, where the Company's markets and the country as a whole experienced job growth of 1.1% and 1.4%, respectively. This is slightly more than the job growth in the Company's markets of 0.7% in 2011. An increase in job growth leads to household formations, which creates an increase in demand for rental housing. In addition, the credit crisis of the past recession has made it more difficult for apartment residents who may have considered purchasing a home to qualify for a mortgage. After years of home ownership being the number one reason our residents gave for moving out of our apartment communities, it dropped starting in 2007, such that it is the number five reason in 2012. The combination of steady job growth and reduced flexibility for residents to purchase homes has created an environment supporting higher rental income growth and occupancy rates.

The Company owned 107 communities with 36,214 apartment units throughout 2011 and 2012 where comparable operating results are available for the years presented (the "2012 Core Properties"). Physical occupancies at the 2012 Core Properties increased slightly, by 10 basis points, from 95.5% to 95.6%. Including bad debt in the calculation to arrive at "economic occupancy", this metric increased by 30 basis points to 94.6% for 2012 from 94.3% in 2011. The level of bad debt improved to 101 basis points in 2012 compared to 117 basis points in 2011. For 2013, we are projecting bad debt to be approximately 90 basis points of rent potential.

Executive Summary (continued)

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 end of the first week of February, 2013, our ATR was 6.2%, lower than the same time period a year ago when ATR was 6.7%. Average physical occupancy for the quarter ended December 31, 2012 was at a high level of occupancy at 95.5%, with a continuation of low resident turnover of 38.9%, only 50 basis points higher than 2011. For 2013, we are projecting physical occupancy to be 30 basis points higher than 2012, as a result of a slightly less aggressive approach to rent increases combined with the continuation of limited alternatives for our residents.

Total 2012 Core Properties rental revenue growth for 2012 was projected to be 4.6%, consisting of an increase of 4.7% in rental rate growth with economic occupancy to decrease 0.1%. Actual results were positive 4.2% in rental rate growth and 0.3% increase in economic occupancy, resulting in 4.6% total rental revenue growth, or equal to guidance.

The guidance for 2013 Core Properties (apartment units owned throughout 2012 and 2013, the "2013 Core Properties") total revenue growth is 4.0% at the midpoint of guidance. Rental rates are projected to increase 3.8%, including above-average rental increases at certain communities resulting from continued efforts to upgrade the properties. Economic occupancies are expected to increase 0.4% for the year, such that rental revenues are projected to increase 4.3%. Property other income is expected to decrease slightly at 0.3% year over year, decreasing the 4.3% rental revenue increase to 4.0% total revenue growth. Expenses for 2013 Core Properties are projected to increase 3.5% at the midpoint of guidance. The Company has experienced four straight years of negative expense growth which will be very difficult to duplicate in 2013. Some of the line items where we expect above average increases include: natural gas heating costs up 4.3%; personnel costs (specifically from health care) up 4.8%; real estate taxes up 4.7%; property insurance up over 18%; and snow removal up more than double. The Company's markets experienced extreme mild winters in 2012 which are not expected to repeat in 2013. This affects heating costs, snow removal, personnel costs and insurance.

These revenue and expense projections result in 2013 Core Properties NOI growth of 4.0% at the mid-point of 2013 guidance. Markets where the Company expects NOI results above the average include: Washington 5.5%, Philadelphia 5.3% and Boston 4.5%. Markets with below average expectations include: Florida 3.5%, Baltimore 3.1%, New York City Metro area 1.4% and Chicago 0.3%. Certain historical demographic information for these markets may be found in the tables on pages 10 and 11 of this report.

Of the two items comprising NOI, revenue and operating expenses, the operating expense component is likely to be more volatile. It is difficult to predict the weather, which can have a significant effect, and there is growing concern about real estate tax rates.

The Company has anticipated acquisitions in the range of $200 million to $300 million in its budget for 2013. The Company is committed to a disciplined approach to acquisitions, and following two very successful years in acquisitions we will be prudent in underwriting. If cap rates stabilize, interest rates continue to be historically low, and NOI growth rates improve, we may take a more aggressive approach. The Company expects to dispose of between $200 million and $300 million of properties for 2013. After many years of being a net acquirer, for 2013 the Company is looking to create a better balance, with an equal range targeted of acquisitions and dispositions. Property sale proceeds add another significant source of capital, reducing reliance on debt and equity sources.

During 2013, the Company will target leverage in a range from 40% to 42% of debt-to-total market capitalization (calculated using the stock price to estimate equity value) in order to meet the goals described above. This level is the same to slightly less than at the end of 2012.

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

Comparison of year ended December 31, 2012 to year ended December 31, 2011.

The Company owned 107 communities with 36,214 apartment units throughout 2011 and 2012 where comparable operating results are available for the years presented (the "2012 Core Properties"). For the year ended December 31, 2012, the 2012 Core Properties showed an increase in total revenues of 4.5% and a net operating income increase of 8.1% over the 2011 period. Property level operating expenses decreased 1.1%. Average physical occupancy for the 2012 Core Properties was 95.6%, up from 95.5% in 2011, with average monthly rental rates of $1,239 per apartment unit, an increase of 4.2% over the 2011 period.

A summary of the 2012 Core Properties NOI is as follows:

                              2012        2011       $ Variance    % Variance
Rent                        $ 509,476   $ 487,214   $     22,262          4.6 %
Utility recovery revenue       20,471      20,753           (282 )       (1.4 )%
Rent including recoveries     529,947     507,967         21,980          4.3 %
Other income                   24,482      22,355          2,127          9.5 %
Total revenue                 554,429     530,322         24,107          4.5 %
Operating and maintenance    (202,819 )  (205,128 )        2,309          1.1 %
Net operating income        $ 351,610   $ 325,194   $     26,416          8.1 %

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. For a reconciliation of NOI to income from continuing operations, please refer to Note 15 to Consolidated Financial Statements, under Part IV, Item 15 of this Form 10-K.

During 2012, the Company acquired three apartment communities with 2,018 units and placed into service another 263 units at two development communities (the "2012 Acquisition Communities"). In addition, the Company experienced full year results for the eight apartment communities with 2,817 units acquired and 472 units placed into service at two development communities during 2011 (the "2011 Acquisition Communities"). The Company has one property with 851 units undergoing significant renovations beginning in 2011 such that the operating results are not comparable to 2012 due to units being taken out of service during the redevelopment period (the "Redevelopment Property"). The inclusion of these acquired and developed communities generally accounted for the significant changes in operating results for the year ended December 31, 2012.

Results of Operations (continued)



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



                              2012        2011       $ Variance    % Variance
Rent                        $ 591,933   $ 515,780   $     76,153         14.8 %
Utility recovery revenue       23,983      21,865          2,118          9.7 %
Rent including recoveries     615,916     537,645         78,271         14.6 %
Other income                   28,122      23,756          4,366         18.4 %
Total revenue                 644,038     561,401         82,637         14.7 %
Operating and maintenance    (235,040 )  (217,069 )      (17,971 )       (8.3 )%
Net operating income        $ 408,998   $ 344,332   $     64,666         18.8 %

During 2012, the Company disposed of six properties in six transactions with a total of 1,596 units, which had partial results for 2012 and full year results for 2011 (the "2012 Disposed Communities"). The results of these disposed properties have been reflected in discontinued operations and are not included in the tables above.

For the year ended December 31, 2012, income from continuing operations increased by $37,156 when compared to the year ended December 31, 2011. The increase was primarily attributable to the following factors: an increase in rental income of $76,153, an increase in property other income of $6,484, a decrease in interest expense of $1,809, and a decrease in other expenses of $484. These changes were partially offset by increases in operating and maintenance expense of $17,971, general and administrative expense of $5,029, and depreciation and amortization of $24,929. Each of the items are described in more detail below.

Of the $76,153 increase in rental income, $32,721 is attributable to the 2011 Acquisition Communities, $21,043 is attributable to the 2012 Acquisition Communities and $127 is attributable to the Redevelopment Property. The balance, an increase of $22,262, relates to a 4.6% increase from the 2012 Core Properties as the result of a 0.3% increase in economic occupancy from 94.3% to 94.6% and a 4.2% increase in weighted average rental rates from $1,189 to $1,239 per apartment unit.

Of the $2,118 increase in utility recovery revenue, $1,898 is attributable to the 2011 Acquisition Communities, $548 is attributable to the 2012 Acquisition Communities, partially offset by a $46 reduction for the Redevelopment Property. The balance, a decrease of $282, relates to a 1.4% decrease from the 2012 Core Properties which is due primarily to warmer than normal temperatures in 2012 compared to cooler temperatures in the spring of 2011, leading to decreased energy consumption and lower heat billed through to residents, partially offset by increases in water & sewer cost increases, also billed to residents.

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 by $4,366. Of this increase, $1,325 is attributable to the 2011 Acquisition Communities, $927 is attributable to the 2012 Acquisition Communities and $2,127 is attributable to the 2012 Core Properties resulting primarily from an increase of $1,195 in cable revenue as a result of enhanced contracts with cable providers which offer services in addition to the basic cable offering in 2011. The remaining Core Properties increase of $932 primarily relates to a higher level of pet fee income, facility rental income, lower bad debt expense and incentive rebates. These increases were offset by a $13 reduction for the Redevelopment Property.

Of the $17,971 increase in operating and maintenance expenses, $12,905 is attributable to the 2011 Acquisition Communities, $7,499 is attributable to the 2012 Acquisition Communities, partially offset by a $124 decrease for the Redevelopment Property. The balance for the 2012 Core Properties, a $2,309 decrease in operating expenses or 1.1%, is primarily a result of decreases in electricity, natural gas heating costs, repairs & maintenance, personnel expense, snow removal and property management G&A. These decreases were partially offset by increases in water & sewer costs, property insurance and real estate taxes.

Results of Operations (continued)



The breakdown of operating and maintenance costs for the 2012 Core Properties by
line item is listed below:



                            2012        2011       $ Variance    % Variance
Electricity               $   7,142   $   7,720   $        578          7.5 %
Gas                          13,465      15,780          2,315         14.7 %
Water & sewer                17,000      16,473           (527 )       (3.2 )%
Repairs & maintenance        30,450      31,009            559          1.8 %
Personnel expense            46,295      47,177            882          1.9 %
Advertising                   4,373       4,276            (97 )       (2.3 )%
Legal & professional          2,002       1,866           (136 )       (7.3 )%
Office & telephone            6,042       5,720           (322 )       (5.6 )%
Property insurance            6,340       5,024         (1,316 )      (26.2 )%
Real estate taxes            51,377      49,677         (1,700 )       (3.4 )%
Snow                            378       1,537          1,159         75.4 %
Trash                         3,023       3,078             55          1.8 %
Property management G&A      14,932      15,791            859          5.4 %
Total                     $ 202,819   $ 205,128   $      2,309          1.1 %

Electricity costs were down $578, or 7.5%, from a year ago primarily as a result of reduced commodity rates and energy conservation efforts.

Natural gas heating costs were down $2,315, or 14.7%, from a year ago due to a combination of lower commodity rates and decreased consumption resulting from a significantly warmer spring heating season in 2012 as compared to 2011. For 2012, the Company's natural gas weighted average cost, including transportation of $3.00 per decatherm, was $8.34 per decatherm, compared to $8.90 per decatherm for the 2011 period, a 6.3% decrease.

As of the middle of January, 2013, the Company has fixed-price contracts covering 99.5% of its natural gas exposure for the balance of the 2012/2013 heating season. Risk is further diversified by staggering contract term expirations. For the balance of the 2012/2013 heating season, the Company estimates the average price per decatherm will be approximately $5.05, excluding transportation, which has historically approximated $3.00 per decatherm. For the 2013/2014 heating season, the Company has fixed-priced contracts covering approximately 99.1% of its natural gas exposure for an estimated weighted average cost for fixed and floating rate contracts of $4.68 per decatherm, excluding transportation.

Water & sewer costs were up $527, or 3.2%, from a year ago and are attributable to general rate increases being assessed by local municipalities. The water & sewer recovery program enabled the Company to recapture much of these rate increases from our residents.

Repairs & maintenance expenses were down $559, or 1.8%, primarily due to accounting for involuntary conversions related to fires and floods and the associated insurance claims at certain properties. Without the impact of these insurance recoveries, the recurring repairs & maintenance expenses decreased $8, which reflects the diligent efforts of property management to control costs through the renegotiation of service contracts permitted by the competitive economic environment, coupled with a higher level of apartment upgrades in 2012 compared to 2011, which result in lower repairs expenditures. The Company has provided guidance for 2013 which anticipates a 1.3% increase in repairs and maintenance.

Personnel expenses were down $882, or 1.9%, primarily due to $734 lower health and workers' compensation insurance costs in 2012 as compared to 2011, which reflects the ongoing efforts towards the proactive settlement of prior year claims earlier in their life cycle and the positive impacts of the Company's safety in the workplace initiatives. Without the impacts of the insurance savings, personnel costs decreased $148, or 0.3% reflecting the $559 lower incentive compensation for property management personnel, partially offset by the annual wage increase of 2.6%.

Results of Operations (continued)

Legal & professional expenses were up $136, or 7.3%, primarily due to legal costs incurred in connection with successful tax assessment challenges.

Office & telephone expenses were up $322, or 5.6%, primarily due to $249 non-recurring refunds of certain resident fees from prior years. Without the impact of this non-recurring expense, office & telephone expense increased $73, or 1.3%.

Property insurance costs increased by $1,316, or 26.2%, primarily due to the non-recurring impact in 2011 of $2,082 in favorable close outs of significant prior year general liability claims compared to $338 of close-outs in 2012. Both property and general liability losses in 2012 were lower by $111, or 7.3%, and $36, or 2.0% respectively, due to continued emphasis on preventing losses at the communities through safety training programs and the Company's continued focus on settling claims earlier in their life cycle. Without the impact of the major items above, recurring property and general liability insurance costs were up $281, or 6.0%.

On October 29, 2012 Hurricane Sandy hit the Mid-Atlantic and Northeast regions of the United States, causing wide-spread flooding and wind damage. Numerous communities owned by the Company were directly affected by this storm. The most severe damage occurred at properties in New Jersey and on Long Island. Property losses, estimated to be $2,225, are covered under various property and flood insurance policies. The Company's estimated net expense included in the 2012 results, after insurance reimbursement, is less than $100.

Real estate taxes were up $1,700, or 3.4%, primarily due to tax increases being offset by $1,306 in refunds received in 2012 from successful tax assessment appeals compared to $1,678 of refunds in the 2011 period. After removing the effects of the non-recurring refunds, real estate taxes were up $1,327, or 2.6%, reflecting increased assessments and typical rate increases in our markets.

Snow removal costs were down $1,159, or 75.4%, as most of our Northeast and Mid-Atlantic properties experienced the mildest winter on record in 2012.

Property management general & administrative costs decreased $859, or 5.4%. Despite increases in the number of apartment communities and units, the Company has been able to offset costs of growth due to its scalable operating platform, including efficiencies enabled by key application software investments.

The operating expense ratio (the ratio of operating and maintenance expense compared to rental and property other income) for the 2012 Core Properties was 36.6% and 38.7% for 2012 and 2011, respectively. The 2.1% favorable improvement in 2012 is due in part to deliberate cost savings and safety initiatives implemented at the communities, a decrease in natural gas heating costs and rental income growth. In general, the Company's operating expense ratio is higher than that experienced by apartment owners 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 2012 by $5,029, or 17.3%, from $29,145 in 2011 to $34,174 in 2012. G&A as a percentage of total revenues (including discontinued operations) was 5.0% for 2011 as compared to 5.2% for 2012, indicating that the G&A growth is consistent with revenue growth. The 2012 costs include $1,580 in connection with the departure of an executive and represent acceleration of previously granted stock-based compensation as well as future payments for salary continuation. Stock-based compensation expenses were up $3,565, or 42.5%, in 2012, of which $2,937 is due to the new three year performance restricted stock unit grants issued in 2012. The remaining $628 stock-based compensation increase is primarily due to the impact of executives at, or near retirement age, resulting in the current year restricted stock awards and stock option grants being expensed over a one-year shorter time period in 2012 as compared to 2011. These increases were partially offset by $116 lower 2012 spending in other general and administrative areas.

Interest expense decreased by $1,809, or 1.4%, in 2012 primarily as a result of paying off $39,000 in maturing loans on several Core Properties over the past year and the redemption of the $140,000 Senior Notes. In addition, all 2011 Acquisition Communities were acquired without secured mortgage debt and only one 2012 Acquisition Community with assumed secured mortgage debt of $7,284. These decreases were partially offset by $450,000 of unsecured term and senior notes at a lower average interest rate than the Senior Notes and maturing loans.

Results of Operations (continued)

Depreciation and amortization expense increased $24,929, or 17.7%, due to a full year of depreciation expense for the 2011 Acquisition Communities, incremental depreciation on the capital expenditures for additions and improvements to the Core Properties of $129,045 and $113,779 in 2012 and 2011, respectively, as well as a partial year of depreciation expense for the 2012 Acquisition Communities.

Other expenses of $2,741 in 2012 and $3,225 in 2011 are property acquisition costs from the Acquisition Communities. These costs, which are primarily transfer taxes and title fees, represent 0.92% and 0.64% of the total purchase price of the 2012 and 2011 Acquisition Communities, respectively.

Net income increased $115,958 in 2012 primarily due to a gain on disposition of property of $80,532, an increase of $37,156 due to a partial year impact of the operating results of the 2012 Acquisition Communities and the full year results of the 2011 Acquisition Communities plus improved operating results from the 2012 Core Properties. This is partially offset by $1,730 lower income from discontinued operation in 2012 compared to 2011.

Comparison of year ended December 31, 2011 to year ended December 31, 2010.

The Company owned 97 communities with 33,354 apartment units throughout 2010 and 2011 where comparable operating results are available for the years presented (the "2011 Core Properties"). For the year ended December 31, 2011, the 2011 Core Properties showed an increase in total revenues of 4.3% and a net operating income increase of 7.7% over the 2010 period. Property level operating expenses decreased 0.7%. Average physical occupancy for the 2011 Core Properties was 95.5%, up from 95.2% in 2010, with average monthly rental rates of $1,184 per apartment unit, an increase of 3.7% over the 2010 period.

A summary of the 2011 Core Properties NOI is as follows:

                              2011        2010       $ Variance    % Variance
Rent                        $ 446,628   $ 428,955   $     17,673          4.1 %
Utility recovery revenue       20,090      18,803          1,287          6.8 %
Rent including recoveries     466,718     447,758         18,960          4.2 %
Other income                   20,832      19,875            957          4.8 %
Total revenue                 487,550     467,633         19,917          4.3 %
Operating and maintenance    (189,311 )  (190,610 )        1,298          0.7 %
Net operating income        $ 298,239   $ 277,024   $     21,215          7.7 %

The inclusion of the 2011 Acquisition Communities generally accounted for the significant changes in operating results for the year ended December 31, 2011.

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

                              2011        2010       $ Variance    % Variance
Rent                        $ 515,780   $ 457,819   $     57,961         12.7 %
Utility recovery revenue       21,865      19,775          2,090         10.6 %
Rent including recoveries     537,645     477,594         60,051         12.6 %
Other income                   23,756      21,089          2,667         12.6 %
Total revenue                 561,401     498,683         62,718         12.6 %
Operating and maintenance    (217,069 )  (203,421 )      (13,648 )       (6.7 )%
Net operating income        $ 344,332   $ 295,262   $     49,070         16.6 %

. . .