Associated Estates Realty (AEC)

            Our primary sources of liquidity are cash flow provided by operations, short-term borrowings on our 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 no debt maturing in the fourth quarter of 2008.  In 2009, four mortgage loans will be maturing; one loan in the first quarter in the amount of $19.0 million and three loans in the second quarter totaling $53.3 million.  We anticipate that we will either repay these loans with funds from our revolver or refinance these loans prior to or upon their maturity at a similar average rate of 6.0%.  Our revolver does not mature until March 11, 2011.

            While we expect moderate slowing in the growth rate of the fundamentals that drive property NOI, we anticipate that cash flow provided by operations for the remainder of the year will remain nearly consistent with current levels.

            Cash flow provided by operations was basically unchanged in 2008 compared to 2007.  However, it should be noted that changes in accounts payable and accrued expenses in 2008 when compared to 2007 were primarily the result of an increase of $2.7 million in funds held for managed properties in 2007, while 2008 reflects a decrease of $1.2 million in funds held primarily due to our exiting from the affordable housing management business, for a variance of $3.9 million.  The balance of the variance was primarily due to the timing of the payment of accrued expenses and an increase in accrued real estate taxes due to the addition of the two properties acquired in April 2008.  This decrease was primarily offset by increased cash flow from property operations in 2008 when compared to 2007.

            During the nine months ended September 30, 2008, we received $88.3 million from the sale of 15 properties.  We placed $23.6 million of these proceeds in a Section 1031 escrow, which were used to partially fund the acquisition of two properties located in the Richmond, Virginia metropolitan area, and we used $5.2 million of those proceeds to acquire the ground lessor’s interest in ground leases at six of the Affordable Housing properties that we sold.  The remaining sales proceeds were primarily used to prepay/defease $42.9 million of debt and for general corporate purposes.

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

            We anticipate funding approximately $3.4 million for recurring, revenue enhancing and nonrecurring capital expenditures for the remainder of 2008.  These expenditures are expected to be funded from cash flow provided by operating activities and the sale of properties.

            Any future multifamily property acquisitions or developments would be financed with the most appropriate sources of capital, which may include borrowings on the revolver, the assumption of mortgage indebtedness, bank and other institutional borrowings, the exchange of properties, undistributed earnings, secured or unsecured debt financings, or the issuance of shares or units exchangeable into common shares.

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

Off-Balance Sheet Investments and Financing Commitments.  At September 30, 2008, we had an investment in a joint venture that owns an Affordable Housing property that we manage.  Joint venture investments enable us to exercise influence over the operations of such properties and share in their profits, while earning additional fee income.  We account for our investment in the unconsolidated joint venture under the equity method of accounting as we exercise significant influence, but do not control this entity and are not required to consolidate it in accordance with FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities" or under EITF 04-05, "Investor's Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Rights."  This investment was initially recorded at cost as investment in joint ventures and subsequently adjusted for equity in earnings/loss and cash contributions and distributions.  This joint venture property had negative cash flow during 2007 and is expected to have negative cash flow during 2008 as a result of operating expenses exceeding tenant rents and the housing assistance payments from HUD.  The joint venture partnership that owns this property has entered into a contract to sell it.  Our proportionate share of the debt on this property at September 30, 2008 was $2.1 million.

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

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

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

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

            Any future multifamily property acquisitions or developments would be financed with the most appropriate sources of capital, which may include borrowings on the revolver, the assumption of mortgage indebtedness, bank and other institutional borrowings, the exchange of properties, undistributed earnings, secured or unsecured debt financings, or the issuance of shares or units exchangeable into common shares.

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

            Off-Balance Sheet Investments and Financing Commitments.  At June 30, 2008, we had an investment in a joint venture that owns an Affordable Housing property.  Joint venture investments enable us to exercise influence over the operations of such properties and share in their profits, while earning additional fee income.  We account for our investment in the unconsolidated joint venture under the equity method of accounting as we exercise significant influence, but do not control this entity and are not required to consolidate it in accordance with FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities" or under EITF 04-05, "Investor's Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Rights".  This investment was initially recorded at cost as investment in joint ventures and subsequently adjusted for equity in earnings/loss and cash contributions and distributions.  This joint venture property had negative cash flow during 2007 and is expected to have negative cash flow during 2008 as a result of operating expenses exceeding tenant rents and the housing assistance payments from HUD.  The joint venture partnership that owns this property has entered into a contract to sell it.  Our proportionate share of the debt on this property at June 30, 2008, was $2.1 million.

            Cash Flows and Liquidity.  Significant sources and uses of cash in the three months ended March 31, 2008 and 2007 are summarized as follows:           

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

            During the three months ended March 31, 2008, we received $84.8 million from the sale of 14 properties.  We placed $23.6 million of these proceeds in escrow and used it to partially fund the acquisition in April of two properties located in the Richmond, Virginia metropolitan area.  Additionally, we used $5.2 million to reimburse ourselves for the cost of purchasing the ground lessor’s interest in ground leases at six of the Affordable Housing properties that were sold that had been subject to ground leases.  The remaining proceeds were primarily used to prepay/defease $42.9 million of debt and for general corporate purposes.

            In March 2008, we completed an amendment increasing the borrowing capacity on our unsecured revolving credit facility (the "revolver") to $150.0 million from $100.0 million.  The amendment also extended the maturity date of the revolver for an additional year to March 20, 2011 and modified certain financial covenants.

            We anticipate funding approximately $13.3 million for recurring, revenue enhancing and nonrecurring capital expenditures for the remainder of 2008.  These expenditures are expected to be funded from cash flow provided by operating activities and the sale of properties.

            Any future multifamily property acquisitions or developments would be financed with the most appropriate sources of capital, which may include borrowings on the revolver, the assumption of mortgage indebtedness, bank and other institutional borrowings, the exchange of properties, undistributed earnings, secured or unsecured debt financings, or the issuance of shares or units exchangeable into common shares.

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

            Off-Balance Sheet Investments and Financing Commitments.  At March 31, 2008, we had an investment in a joint venture that owns an Affordable Housing property.  Joint venture investments enable us to exercise influence over the operations of such properties and share in their profits, while earning additional fee income.  We account for our investment in the unconsolidated joint venture under the equity method of accounting as we exercise significant influence, but do not control this entity and are not required to consolidate it in accordance with FASB Interpretation No. 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/loss and cash contributions and distributions.  This joint venture property had negative cash flow during 2007 and is expected to have negative cash flow during 2008 as a result of operating expenses exceeding tenant rents and the housing assistance payments from HUD.  The joint venture partnership that owns this property has entered into a contract to sell it.  Our proportionate share of the debt on this property at March 31, 2008, was $2.1 million.

            Cash Flows and Liquidity.  Significant sources and uses of cash in the nine months ended September 30, 2007 and 2006 are summarized as follows:

            Our primary sources of liquidity are cash flow provided by operations, short-term borrowings on our revolver and proceeds from property sales.  Cash flow provided by operations in 2007 increased compared to 2006 primarily due to increased property revenue combined with a decrease in interest expense.  Additionally, changes in accounts payable and accounts receivable resulting from the timing of cash payments and cash receipts partially offset the favorable variance.

            During the nine months ended September 30, 2007, we received $37.9 million from the sale of two properties.  We also acquired two properties and purchased land for a total cash outlay of $70.5 million funded primarily from the sale of properties and from borrowings on the revolver.  We paid dividends and distributions of $12.6 million and paid a total of $9.1 million for recurring and non-recurring capital additions.  Additionally, we paid $9.2 million to repurchase 468,000 of our common shares and a portion of our outstanding Class B preferred depository shares under our existing repurchase authorization, and $300,000 for an additional 23,938 shares related to payroll taxes on the vesting of restricted shares.  During October 2007, we purchased an additional 553,200 common shares at a cost of $7.3 million.

            During the nine months ended September 30, 2007, we defeased/prepaid five fixed rate mortgage loans, prepaid two variable rate mortgage loans, and made three new fixed rate mortgage loans.  We refinanced four fixed rate mortgage loans that were to mature in 2007 with two variable rate mortgage loans that mature in 2009 and two fixed rate mortgage loans that mature in 2014.  Additionally, in connection with our June 29, 2007 acquisition of our joint venture partner's 51.0% interest in Idlewylde Apartments, the existing $42.0 million variable rate, non-recourse mortgage loan that matures in 2010 is now included in our consolidated financial statements.

            In April 2007, we obtained a $100.0 million revolving credit facility ("revolver") to be used for the refinancing of existing debt, general corporate purposes, and/or the acquisition of properties.  In connection with the revolver, we terminated our $17.0 million and $14.0 million secured lines of credit.  At September 30, 2007, there were borrowings of $25.0 million outstanding on the revolver.

            We anticipate funding approximately $3.8 million for recurring, investment/revenue enhancing and nonrecurring capital expenditures for the remainder of 2007.  These expenditures are expected to be funded from cash flow provided by operating activities and the sale of properties.

            Any future multifamily property acquisitions or developments would be financed with the most appropriate sources of capital, which may include borrowings on the revolver, the assumption of mortgage indebtedness, bank and other institutional borrowings, the exchange of properties, undistributed earnings, secured or unsecured debt financings, or the issuance of shares or units exchangeable into common shares.

            We anticipate that we will meet our liquidity requirements for the remainder of 2007 generally through cash flow provided by operations.  We believe that this and other sources, such as the revolver, should be sufficient to meet operating requirements, capital additions, mortgage amortization payments and the payment of dividends in accordance with REIT requirements.  We anticipate that we will continue paying quarterly dividends and that we will sustain our current dividend rate.

            Off-Balance Sheet Investments and Financing Commitments.  At September 30, 2007, we had an investment in one joint venture that owns an Affordable Housing multifamily apartment community.  The operation of this property is similar to the operations of our wholly owned portfolio.  Joint venture investments enable us to exercise influence over the operations of such properties and share in their profits, while earning additional fee income.  We account for our investment in the unconsolidated joint venture under the equity method of accounting as we exercise significant influence, but do not control this entity and are not required to consolidate it in accordance with FASB Interpretation No. 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 and cash contributions and distributions.  This joint venture property had negative cash flow during 2006 and is expected to have negative cash flow during 2007 as a result of operating expenses exceeding tenant rents and the housing assistance payments from HUD.  We are pursuing a request to HUD for an increase in housing assistance payments in order to address the deficit.  The joint venture partnership that owns this property has entered into a contract to sell it.  It is anticipated that additional cash contributions may be required of the joint venture partners to fund deficits.  Our proportionate share of the debt on this property at September 30, 2007, was $2.1 million.

            Management and Service Operations.  At September 30, 2007, we managed 30 affordable housing properties for third party owners.  During the third quarter of 2007, we announced our plan to exit the Affordable Housing business.  The owner of 23 of the 30 managed properties notified us that it intends to self-manage those properties effective January 1, 2008.  Additionally, we expect to transition management of the remaining third party owned affordable housing properties by June 2008.  The impact on net income related to the third party owned affordable housing properties is approximately $500,000 annually.  We expect to incur approximately $125,000 in severance costs associated with the elimination of certain corporate positions during the fourth quarter of 2007.  For 2008, we expect to identify cost savings to offset the impact on net income related to the third party owned affordable housing contracts.

            Cash Flows and Liquidity.  Significant sources and uses of cash in the six months ended June 30, 2007 and 2006, are summarized as follows:
 

            Our primary sources of liquidity are cash flow provided by operations, short-term borrowings on our revolver and proceeds from property sales.  Cash provided by operations in 2007 increased compared to 2006 primarily due to increased property revenue and decreased interest expense in 2007, which was partially offset by changes in accounts payable and accounts receivable resulting from the timing of cash payments and cash receipts.

            During the six months ended June 30, 2007, we received $37.9 million from the sale of two properties.  We also acquired two properties and purchased land for a total cash outlay of $70.5 million primarily with funds from sold properties and from borrowings on the revolver.  We paid dividends and distributions of $8.4 million and paid a total of $4.6 million for recurring and non-recurring capital additions.  Additionally, we paid $2.9 million to repurchase a portion of our outstanding Class B preferred depository shares.

            During the six months ended June 30, 2007, we defeased/prepaid five fixed rate mortgages and prepaid two variable rate mortgage loans with borrowings on the revolver.  We refinanced four fixed rate mortgages that were to mature in 2007 with two variable rate mortgages that mature in 2009 and two fixed rate mortgages that mature in 2014.  Additionally, in connection with our June 29, 2007 acquisition of our joint venture partner's 51.0% interest in Idlewylde Apartments, the existing $42.0 million variable rate, non-recourse mortgage loan that matures in 2010, is now included in our consolidated financial statements.

            In April 2007, we obtained a $100.0 million revolver to be used for the refinancing of existing debt, general corporate purposes, and/or the acquisition of properties.  In connection with the revolver, we terminated our $17.0 million and $14.0 million secured lines of credit.  At June 30, 2007, there were borrowings of $75.4 million outstanding on the revolver leaving $24.6 million available for additional borrowings.

            We anticipate funding approximately $9.4 million for recurring, investment/revenue enhancing and nonrecurring capital expenditures for the remainder of 2007.  These expenditures are expected to be funded from cash flow provided by operating activities and the sale of properties.

            Any future multifamily property acquisitions or developments would be financed with the most appropriate sources of capital, which may include borrowings on the revolver, the assumption of mortgage indebtedness, bank and other institutional borrowings, the exchange of properties, undistributed earnings, secured or unsecured debt financings, or the issuance of shares or units exchangeable into common shares.

            We anticipate that we will meet our liquidity requirements for the remainder of 2007 generally through net cash provided by operations and property sales' proceeds.  We believe that these and other sources, such as the revolver, should be sufficient to meet operating requirements, capital additions, mortgage amortization payments and the payment of dividends in accordance with REIT requirements.  We anticipate that we will continue paying quarterly dividends and that we will sustain our current dividend rate.

            Guarantees.  We routinely guaranty mortgage debt of our wholly owned subsidiaries.  In the normal course of business, we may enter into contractual arrangements under which we may agree to indemnify the third party to such arrangement from any losses incurred related to the services they perform on our behalf or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance.  Such indemnification obligations may not be subject to maximum loss clauses.  Historically, payments made related to these indemnifications have not been material.

            Off-Balance Sheet Investments and Financing Commitments.  At June 30, 2007, we had an investment in one joint venture that owns an Affordable Housing multifamily apartment community.  The operation of this property is similar to the operations of our wholly owned portfolio.  Joint venture investments enable us to exercise influence over the operations of such properties and share in their profits, while earning additional fee income.  We account for our investment in the unconsolidated joint venture under the equity method of accounting as we exercise significant influence, but do not control this entity and are not required to consolidate it in accordance with FASB Interpretation No. 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 and cash contributions and distributions.  This joint venture property had negative cash flow during 2006 and is expected to have negative cash flow during 2007 as a result of operating expenses exceeding tenant rents and the housing assistance payments from HUD.  We are pursuing a request to HUD for an increase in housing assistance payments in order to address the deficit.  The joint venture partnership that owns this property intends to sell it.  Additional cash contributions that may be required of us to pay deficits, if any, are not expected to be material.  Our proportionate share of the debt on this property at June 30, 2007, was $2.1 million.

Management and Service Operations.  In January 2007, we entered into a management contract for a property located in Pennsylvania for which we anticipate receiving approximately $64,000 in annual fee revenue.

            In June 2007, we were notified that a management contract for a property located in Northeast Ohio was to be terminated effective July 31, 2007.  Annual fees received in connection with this contract were approximately $35,000.