10-Q 1 d10q.txt QUARTERLY REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-Q X Quarterly Report Pursuant to Section 13 or 15(d) --- of the Securities Exchange Act of 1934 For the quarter ended June 30, 2001 or --- Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period __________from to _________ Commission File Number: 1934 Act File Number: 1-13174 CHARLES E. SMITH RESIDENTIAL REALTY, INC. (Exact name of registrant as specified in its charter) Maryland 54-1681655 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2345 Crystal Drive Crystal City, VA 22202 (Address of principal (Zip Code) executive offices) Registrant's telephone number including area code: (703) 920-8500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Shares of Common Stock (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of June 30, 2001, there were 25,343,295 shares of Common Stock of the Registrant issued and outstanding. ================================================================================ CHARLES E. SMITH RESIDENTIAL REALTY, INC. FORM 10-Q INDEX Pages ----- PART I: FINANCIAL INFORMATION Item 1: Financial Statements Report of Independent Public Accountants 3 Charles E. Smith Residential Realty, Inc. Financial Statements as of June 30, 2001 and December 31, 2000, Filed as a Part of This Report Consolidated Balance Sheets 4 Consolidated Statements of Operations 5 Consolidated Statements of Shareholders' Equity 6 Condensed Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 18 PART II: OTHER INFORMATION 31 SIGNATURES 33 2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Charles E. Smith Residential Realty, Inc.: We have reviewed the accompanying consolidated balance sheet of Charles E. Smith Residential Realty, Inc. (a Maryland real estate investment trust) and subsidiaries as of June 30, 2001, the related consolidated statements of operations for the three-month and six-month periods ended June 30, 2001 and 2000 and the related condensed consolidated statements of cash flows for the six-month periods ended June 30, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquires of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP July 18, 2001 Vienna, Virginia 3 CHARLES E. SMITH RESIDENTIAL REALTY, INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)

~~March~~June 3130, 2001 December 31, 2000 ---------------~~-----~~ ------------------- (Unaudited) ASSETS Rental property, net $ 1,~~867~~889,~~381~~630 $ 1,850,171 Rental property under development 7794,~~518~~343 61,596 Escrow funds 67,~~873~~182 6,483 Investment in and advances to unconsolidated Property Service Businesses ~~111~~114,~~863~~015 89,244 Investment in unconsolidated properties 55,~~175~~499 32,397 Deferred charges, net 2022,~~447~~220 16,975 Security deposits 9,~~114~~457 8,807 Other assets 2228,~~415~~860 9,559 ----------- ----------- $ 2,~~170~~221,~~786~~206 $ 2,075,232 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Mortgage loans and notes payable: Mortgage loans $ 1,~~109~~107,~~088~~538 $ 1,064,845 Construction loans 2230,~~137~~046 14,859 Lines of credit ~~175~~203,000 144,000 ----------- ----------- Total mortgage loans and notes payable 1,~~306~~340,~~225~~584 1,223,704 Accounts payable and accrued expenses 4650,~~127~~946 47,387 Security deposits 9,~~114~~457 8,807 ----------- ----------- Total liabilities 1,~~361~~400,~~466~~987 1,279,898 ----------- ----------- Commitments and contingencies Minority Interest ~~235~~226,~~419~~050 239,765 Shareholders' equity Preferred stock, at liquidation value ~~251~~206,500 251,500 Common stock - $0.01 par value; 80,000,000 shares authorized; 2225,~~698~~343,~~543~~295 and 21,916,759 shares issued and outstanding at ~~March~~June 3130, 2001 and December 31, 2000, respectively ~~226~~252 219 Additional paid-in capital ~~250~~313,~~445~~229 231,021 Retained earnings 7174,~~730~~188 72,829 ----------- ----------- Total shareholders' equity ~~573~~594,~~901~~169 555,569 ----------- ----------- $ 2,~~170~~221,~~786~~206 $ 2,075,232 =========== ===========

The accompanying notes are an integral part of these consolidated statements. 4 CHARLES E. SMITH RESIDENTIAL REALTY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands, Except Per Share Data) (Unaudited)

For the Three Months For the Six Months Ended ~~March~~June ~~31,~~30 Ended June 30 ----------------------------- ----------------------------- 2001 2000 2001 2000 ------------ ----------- ----------- ------------ Revenue $~~106~~ 109,~~576~~145 $88 94,~~854~~716 $ 215,721 $ 183,570 Expenses: Operating costs (3634,~~450~~686) (27,~~933~~048) (71,136) (54,981) Real estate taxes (9,~~043~~117) (78,~~566~~036) (18,160) (15,602) Depreciation and amortization (12,~~592~~808) (10,~~567~~895) (25,400) (21,462) ---------- ---------- ---------- --------- Total expenses (5856,~~085~~611) (4645,~~066~~979) (114,696) (92,045) Equity in income of unconsolidated properties ~~895~~1,206 ~~783~~542 2,101 1,325 Equity in income of unconsolidated Property Service Businesses 24,~~983~~007 ~~519~~1,636 6,990 2,155 Corporate general and administrative expenses (3,~~856~~279) (23,~~695~~002) (7,135) (5,697) Interest income ~~119~~71 6381 190 144 Interest expense (2122,~~992~~497) (1720,~~856~~129) (44,489) (37,985) --------- ---------- ---------- --------- Income before gain on sales and merger related costs 32,042 27,865 58,682 51,467 Gain on sales - 4,161 - 4,161 --------- ---------- ---------- --------- Income before merger related costs 32,042 32,026 58,682 55,628 Merger related costs (2,901) - (2,901) - --------- ---------- ---------- --------- Net income of the Operating Partnership 2629,~~640~~141 2332,~~602~~026 55,781 55,628 Minority Interest (89,~~538~~211) (711,~~977~~200) (17,749) (19,177) --------- ---------- ---------- ---------- Net income 1819,~~102~~930 1520,~~625~~826 38,032 36,451 Less: Income attributable to preferred shares (54,~~197~~223) (5,011) (9,420) (10,022) --------- ---------- ---------- ---------- Net income attributable to common shares $12 15,~~905~~707 $10 15,~~614~~815 $ 28,612 $ 26,429 ========= ========== ========== ========= Earnings per common share - basic $ 0.5868 $ 0.5175 $ 1.26 $ 1.26 ========= ========== ========== ========= Earnings per common share - diluted $ 0.5667 $ 0.5173 $ 1.24 $ 1.24 ========= ========== ========== =========

The accompanying notes are an integral part of these consolidated statements. 5 CHARLES E. SMITH RESIDENTIAL REALTY, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in Thousands)

Common Additional Stock Preferred Common Paid-in ~~Retained~~ Outstanding Stock Stock Capital ~~Earnings Total~~ ------------------------------------------------------------------------------------------------------------------------------------ 20,673,039 Balance, December 31, 1999 $ 251,500 $ 207 $ 200,367 ~~$ 29,290 $481,364~~ Operating Partnership equity exchanged - for acquisitions - - 1,270 ~~- 1,270~~ Conversion of Operating Partnership 332,395 units to Common Stock - 3 (3) ~~- -~~ 559,802 Proceeds from issuance of Common Stock - 6 21,632 - ~~21,638 -~~ Amortization of grants - - 979 ~~- 979~~ 307,928 Exercise of options - 3 9,155 ~~- 9,158~~ 43,595 Stock grants awarded - - - - ~~- -~~ Net income - - - ~~114,939 114,939~~ - Dividends - - - ~~(71,400) (71,400)~~ - Other - - (81) - ~~(81) -~~ Adjustment for Minority Interest - - (2,298) - ~~(2,298)~~ ----------------- ------------ ------- -~~---------~~ ------------ ~~----------~~ 21,916,759 Balance, December 31, 2000 $ 251,500 $ 219 $ 231,021 ~~$ 72,829 $555,569~~ Conversion of Operating Partnership ~~289~~377,~~742~~439 units to Common Stock - 34 (34) ~~- - 100~~137,~~310~~542 Proceeds from issuance of Common Stock - 1 46,~~624~~324 -2,337,662 4Conversion of Preferred Stock to Common Stock (45,~~625~~000) 23 44,977 - Amortization of grants - - ~~275~~778 ~~- 275 323~~480,~~057~~442 Exercise of options - 35 914,~~499~~247 ~~- 9~~93,~~502~~451 ~~68,675~~ Stock grants awarded - - - - ~~- -~~ Net income - - - ~~18,102 18,102~~ - Dividends - - - ~~(19,201) (19,201)~~ - Other - - (572) - ~~(57) -~~ Adjustment for Minority Interest - - 515,~~086~~888 - ~~5,086~~ ----------------- ------------ ------- -~~---------~~ ------------ ~~---------- 22~~25,~~698~~343,~~543~~295 Balance, March 31, 2001 (unaudited) $ ~~251~~206,500 $ ~~226~~252 $ ~~250~~313,~~445~~229 ~~$ 71,730 $573,901~~ ================= =~~===========~~ ======= ===~~=======~~ ========~~====~~ ==========

~~For~~Common ~~the~~Stock ~~Three~~Retained ~~Months~~Outstanding ~~Ended~~Earnings ~~March~~Total ~~31,~~ ------------------------------- ~~2001 2000~~ --------------- ------------------------------------------------------------- ~~CASH~~20,673,039 ~~FLOWS~~Balance, ~~FROM~~December ~~OPERATING~~31, ~~ACTIVITIES~~1999 $ 2529,~~239~~290 $ 24481,~~750~~364 ~~CASH~~Operating ~~FLOWS~~Partnership ~~FROM~~equity ~~INVESTING~~exchanged ~~ACTIVITIES:~~- ~~Acquisitions~~for ~~and~~acquisitions ~~development~~- 1,270 Conversion of ~~rental~~Operating ~~property~~Partnership ~~(18~~332,~~237)~~395 ~~(103,193)~~units ~~Additions~~ to ~~rental~~Common ~~property~~Stock ~~(27,223)~~- (9- 559,~~780)~~802 ~~Increase~~Proceeds infrom ~~investment~~issuance inof ~~and~~Common ~~advances~~Stock to- ~~unconsolidated~~21,638 ~~Property~~- ~~Service~~Amortization ~~Businesses~~of ~~(22~~grants - 979 307,~~619)~~928 (Exercise of options - 9,~~433)~~158 ~~Increase~~43,595 inStock ~~investment~~grants inawarded ~~unconsolidated~~- ~~properties~~- - Net income 114,939 114,939 - Dividends (2271,~~808~~400) (271,~~443~~400) ~~Acquisition~~- ~~deposits~~Other ~~and~~- ~~other~~(81) - Adjustment for Minority Interest - (12,~~816~~298) ~~10,614~~ -------- ------------ ~~Net cash used in investing activities (92,703) (114,235)~~ --------- ------------ ~~CASH~~21,916,759 ~~FLOWS~~Balance, ~~FROM~~December ~~FINANCING~~31, ~~ACTIVITIES:~~2000 ~~Increase~~$ in72,829 ~~deferred~~$ ~~charges~~555,569 (2Conversion of Operating Partnership 377,~~210)~~439 ~~(472)~~units to Common Stock - - 137,542 Proceeds from issuance of ~~common~~Common ~~stock,~~Stock ~~net~~- 146,~~117~~325 2,~~604~~337,662 ~~Mortgage~~Conversion ~~loans,~~of ~~net~~Preferred ~~44,243~~Stock ~~48,086~~to ~~Lines~~Common Stock - - - Amortization of ~~credit,~~grants ~~net~~- ~~31,000~~778 51480,~~000~~442 ~~Construction~~Exercise ~~loans,~~of ~~net~~options 7- 14,~~278~~252 293,~~687~~451 ~~Dividends~~Stock ~~and~~grants ~~distributions~~awarded - ~~Common~~- ~~(20,818)~~- ~~(19,052)~~Net ~~Dividends~~income ~~and~~38,032 ~~distributions~~38,032 - ~~Preferred~~Dividends (636,~~099~~673) (536,~~925~~673) - Other, ~~net~~- (472) - ~~--------~~Adjustment ~~------------~~for ~~Net~~Minority ~~cash~~Interest ~~provided~~- ~~by financing activities 67~~15,~~464~~888 ~~78,928~~ -------- ------------ ~~NET DECREASE IN CASH AND CASH EQUIVALENTS~~ - ~~(10,557) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD~~ - ~~10,557~~ -------- ------------ ~~CASH~~25,343,295 ~~AND~~Balance, ~~CASH~~March ~~EQUIVALENTS~~31, ~~END~~2001 OF(unaudited) ~~PERIOD~~ $ -74,188 -$ 594,169 ======== ========== ========= SUPPLEMENTAL INFORMATION: Cash paid during the period for interest 22,981 - Capitalized interest 1,360 1,499 Purchase of property in exchange for Operating Partnership units - 14,405 Purchase of property in exchange for assumption of debt - 28,169 Proceeds from sale of rental property held in escrow - 8,127 Purchase of property with escrow proceeds - 8,127==========

The accompanying notes are an integral part of these consolidated statements. 6 CHARLES E. SMITH RESIDENTIAL REALTY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)

~~March~~For ~~31,~~the ~~December~~Six 31Months Ended June 30, ---------------------------------- 2001 2000 -------- ---- ---------- ~~(in~~CASH ~~thousands)~~FLOWS ~~Series~~FROM AOPERATING ~~Cumulative~~ACTIVITIES ~~Convertible~~$ ~~Redeemable~~63,896 ~~Preferred~~$ ~~Stock~~81,076 ~~$0.01~~CASH ~~par~~FLOWS ~~value;~~FROM ~~2,640,325~~INVESTING ~~shares~~ACTIVITIES: ~~authorized;~~Acquisitions ~~liquidation~~and ~~preference~~development of ~~$27.08;~~rental 2property (26,~~640~~526) (133,~~325~~228) ~~shares~~Additions ~~issued~~to ~~and~~rental ~~outstanding~~property at(70,543) ~~March 31~~(24,711) ~~2001~~Increase in investment in and ~~December~~advances 31to unconsolidated Property Service Businesses (24,771) ~~2000~~9,052 ~~respectively~~Increase $in ~~71,500~~investment $in 71unconsolidated properties (23,~~500~~162) ~~Series~~(7,371) CAcquisition ~~Cumulative~~deposits ~~Redeemable~~and ~~Preferred~~other ~~Stock~~(3,361) ~~$0.01~~11,627 ~~par~~---------- ~~value;~~----------- ~~500~~Net ~~shares~~cash ~~authorized;~~used ~~liquidation~~in ~~preference~~investing ofactivities ~~$100~~(148,~~000;~~363) ~~500~~(144,631) ~~shares~~---------- ~~issued~~----------- ~~and~~CASH ~~outstanding~~FLOWS atFROM ~~March~~FINANCING ~~31,~~ACTIVITIES: ~~2001~~Increase ~~and~~in ~~December~~deferred ~~31,~~charges ~~2000,~~(739) ~~respectively 50~~(3,~~000~~753) ~~50,000~~Proceeds ~~Series~~from Eissuance ~~Cumulative~~of ~~Convertible~~common ~~Redeemable~~stock, ~~Preferred~~net ~~Stock~~20,567 ~~$0.01~~8,362 ~~par~~Mortgage ~~value; 684~~loans,~~931~~ ~~shares~~net ~~authorized;~~42,693 ~~liquidation~~90,016 ~~preference~~Lines of ~~$36.50; 684~~credit,~~931~~ ~~shares~~net ~~issued~~59,000 ~~and~~2,000 ~~outstanding~~Construction atloans, ~~March~~net 3115,187 ~~2001~~6,261 Dividends and ~~December~~distributions ~~31,~~- ~~2000,~~Common ~~respectively 25~~(41,~~000~~914) 25(39,~~000~~142) ~~Series~~Dividends Fand ~~Cumulative~~distributions ~~Convertible~~- ~~Redeemable~~ Preferred ~~Stock~~(10,334) ~~$0.01~~(10,716) ~~par~~Other, ~~value;~~net ~~666,667~~7 ~~shares~~(30) ~~authorized;~~---------- ~~liquidation~~----------- ~~preference~~Net ofcash ~~$37.50;~~provided ~~666~~by financing activities 84,~~667~~467 ~~shares~~52,998 ~~issued~~---------- ~~and~~----------- ~~outstanding~~NET atDECREASE ~~March~~IN ~~31,~~CASH ~~2001~~AND ~~and~~CASH ~~December~~EQUIVALENTS ~~31,~~- ~~2000~~(10,557) ~~respectively~~CASH ~~25,000~~AND 25CASH EQUIVALENTS,~~000~~ ~~Series~~BEGINNING GOF ~~Cumulative~~PERIOD ~~Convertible~~- ~~Redeemable~~10,557 ~~Preferred~~---------- ~~Stock,~~----------- ~~$0.01~~CASH ~~par~~AND ~~value;~~CASH ~~641~~EQUIVALENTS,~~026~~ ~~shares~~END ~~authorized;~~OF ~~liquidation~~PERIOD ~~preference~~$ of- $~~39.00;~~ ~~641,026~~- ~~shares~~========== ~~issued~~=========== ~~and~~SUPPLEMENTAL ~~outstanding~~INFORMATION: atCash ~~March~~paid ~~31,~~during ~~2001~~the ~~and~~period ~~December~~for 31interest 46,684 ~~2000~~39,484 ~~respectively~~Capitalized 25interest 2,~~000~~883 252,~~000~~392 ~~Series~~Purchase Hof ~~Cumulative~~property ~~Convertible~~in ~~Redeemable~~exchange ~~Preferred~~for ~~Stock,~~Operating ~~$0.01~~Partnership ~~par~~units ~~value;~~- 41,~~040,404~~270 ~~shares~~Purchase ~~authorized;~~of ~~liquidation~~property ~~preference~~in exchange for assumption of ~~$25.00;~~debt 2- 10,~~200,000~~233 ~~shares~~Proceeds ~~issued~~from ~~and~~sale ~~outstanding~~of atrental ~~March~~property ~~31,~~held ~~2001~~in ~~and~~escrow ~~December~~- 3140,997 ~~2000,~~Purchase ~~respectively~~of ~~55,000~~property ~~55,000~~with ~~--------~~escrow proceeds -~~-------~~ ~~$251~~49,~~500 $251,500 ======== ========~~124

The accompanying notes are an integral part of these consolidated statements. 7 CHARLES E. SMITH RESIDENTIAL REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying interim financial statements include all of the accounts of Charles E. Smith Residential Realty, Inc. (the "Company"), Charles E. Smith Residential Realty L.P. (the "Operating Partnership") and its subsidiary financing partnerships, and Smith Realty Company ("SRC"). The Company consolidates the Operating Partnership due to the Company's control as sole general partner. In 2001, the Company purchased all of the voting stock in SRC, and as a result began consolidating the financial results of SRC. All significant intercompany balances and transactions have been eliminated. The financial information furnished is unaudited, and in management's opinion, includes all adjustments (consisting only of normal, recurring adjustments), that are necessary for a fair presentation of financial position as of June 30, 2001 and the results of operations for the interim periods ended June 30, 2001 and 2000. Such interim results are not necessarily indicative of the operating results for a full year. The accompanying financial statements should be read in conjunction with the audited financial statements and related footnotes appearing in the Company's Annual Report on Form 10-K. The Company, through the Operating Partnership and its subsidiaries, is engaged in the ownership, operation, management, leasing, acquisition, and development of real estate properties, primarily residential multifamily properties. As of June 30, 2001, the Operating Partnership owned 59 operating multifamily properties containing 27,186 apartment units, had 480 units under construction at one owned site, had 226 units under construction at one site for which the Company owned substantially all of the economic interest, and had an agreement to purchase 383 units at one additional site. The Operating Partnership also had interests in four operating multifamily properties totaling 1,724 apartment units and in one property under construction totaling 630 units. In addition, the Operating Partnership owned one freestanding retail shopping center aggregating 205,000 square feet. The Company's properties are located in the Washington, D.C., Chicago, Boston and Southeast Florida metropolitan areas. 2. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" (effective July 1, 2001) and SFAS No. 142, "Goodwill and Other Intangible Assets" (effective for the Company on January 1, 2002). SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. The Company is in the process of evaluating the financial statement impact of adoption of SFAS No. 142. 3. MERGER ANNOUNCEMENT In May 2001, the Company announced plans to merge with Archstone Communities ("Archstone"). The combined company will operate under the name Archstone-Smith Trust and will 8 use the Smith Residential brand name for its high-rise portfolio and the Archstone brand name for all other communities. For each Company share held, a shareholder will receive 1.975 shares of Archstone-Smith. This exchange ratio is not subject to change. The merger is structured as a tax-free transaction and is expected to close in the fall of 2001, subject to shareholder and other approvals. 4. DEBT In February 2001, the Company closed on two unsecured credit facilities totaling $150 million from bank groups led by PNC Bank, N.A., as administrative agent, which refinanced existing credit facilities scheduled to mature in March 2001. Draws upon the new lines are subject to certain unencumbered asset requirements and bear interest based on London Interbank Offer Rate (LIBOR) plus an applicable margin of 85 to 125 basis points based on the leverage ratio of the Company. If the Company chooses to and obtains an Investment Grade Rating the applicable margin will be between 62.5 and 100 basis points over LIBOR based on such rating. The Company also pays a quarterly fee ranging from 0.125% to 0.20% on the full amount available under the lines of credit, depending upon the applicable leverage ratio or investment rating. The line of credit agreements contain certain restrictive covenants, including maintenance of minimum equity value, debt to equity ratios and debt service coverage requirements. In March 2001, the Company closed on two second mortgage loans totaling $31.1 million. The $23.4 million loan has a fixed interest rate of 6.795% and is collateralized by Crystal Towers. The $7.7 million loan has a fixed interest rate of 6.62% and is collateralized by 2000 Commonwealth. The loans require monthly payments of interest only and mature coterminous with their respective first mortgages in January 2006 and January 2007, respectively. In March 2001, the Company refinanced an existing $12.3 million mortgage loan on The Consulate with a $27.0 million mortgage loan. The new loan has a fixed interest rate of 6.7% and requires monthly payments of interest only through March 2011, at which time principal amortization begins using a 30-year amortization schedule with a balloon payment due March 2012. 5. INVESTMENT IN AND ADVANCES TO PROPERTY SERVICE BUSINESSES In January 2001, the Company and the Property Service Businesses ("PSB") elected to treat each PSB as a taxable REIT subsidiary. In addition, the Company began consolidating the financial results of SRC in 2001 due to the Company's acquisition of all of the voting stock of SRC. Prior to 2001, SRC was accounted for using the equity method of accounting. This had no impact to net income but simply changed the financial statement presentation of SRC's results. In February 2001, Consolidated Engineering Services, Inc. ("CES") acquired Commonwealth Air Conditioning and Heating, Inc., one of the largest independent service contractors in the metropolitan Boston, Massachusetts area. The purchase price of $19.1 million consisted of 100,310 9 shares of common stock (purchased by CES from the Company) and cash. CES funded the transaction through the Operating Partnership in exchange for a promissory note. In March 2001, CES closed on a twelve-month $50 million line of credit with PNC Bank and Commerzbank replacing an expiring facility. The line is guaranteed by the Operating Partnership and bears interest based on LIBOR plus an applicable margin of 75 to 115 basis points based on the leverage ratio of the Company. The current borrowing rate is LIBOR plus 100 basis points. CES also pays a quarterly fee of 10 basis points on the full amount available under the line. In May 2001, CES acquired Trimech Corporation of Pompton Plains, New Jersey. The purchase price of $3.2 million consisted of 37,232 shares of common stock (purchased by CES from the Company) and cash. CES funded the transaction through the Operating Partnership in exchange for a promissory note. 6. INVESTMENT IN UNCONSOLIDATED PROPERTIES In February 2001, the Company entered into and funded a $23.8 million participating loan collateralized by Plaza 440, a 457-unit luxury high-rise property in downtown Chicago. The loan, which matures September 1, 2009, provides the Company with a 90% participation in the property cash flow after debt service if certain minimum property performance thresholds are met. Otherwise, the Company will earn a fixed interest rate of 7%. The loan is subordinate to a first mortgage of $63 million at 7%. After two years, the loan agreement provides the Company the option to convert its loan to an ownership interest. Simultaneous with the loan transaction, Smith Realty Company entered into a multi-year property management agreement with the owner. The Company has accounted for this investment as an ADC arrangement in accordance with AICPA Practice Bulletin No. 1. 10 7. SHAREHOLDERS' EQUITY On June 29, 2001, 1,800,000 Series H Cumulative Convertible Redeemable Preferred Shares and 1,800,000 Series H Cumulative Convertible Redeemable Preferred Units were converted into 1,168,831 each of common shares and units, respectively. The common units were redeemed for common shares on a one-for-one basis. The following table sets forth the Company's issued and outstanding preferred shares:

~~Three~~June ~~Months~~30, ~~Ended~~December ~~March~~ 31, 2001 2000 ------------ ---------------~~------------------------------~~ (in thousands) Series A Cumulative Convertible Redeemable Preferred Stock, $0.01 par value; 2,640,325 shares authorized; liquidation preference of $27.08; 2,640,325 shares issued and outstanding at June 30, 2001 and December 31, 2000, ~~--------------------------~~respectively ~~------------------------~~$ ~~Basic~~71,500 ~~Diluted~~$ ~~Basic~~71,500 ~~Diluted~~Series ~~----------~~C ~~----------~~Cumulative ~~----------~~Redeemable ~~--------~~Preferred ~~Weighted~~Stock, ~~Average~~$0.01 ~~Common~~par ~~Shares~~value; 22500 shares authorized; liquidation preference of $100,000; 500 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively 50,000 50,000 Series E Cumulative Convertible Redeemable Preferred Stock, $0.401 23par value; 684,931 shares authorized; liquidation preference of $36.350; 20684,931 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively 25,000 25,000 Series F Cumulative Convertible Redeemable Preferred Stock, $0.801 21par value; 666,667 shares authorized; liquidation preference of $37.150; ~~Weighted~~666,667 ~~Average~~shares ~~Common~~issued ~~Operating~~and ~~Partnership~~outstanding ~~Units/1/~~at 13June 30, 2001 and December 31, 2000, respectively 25,000 25,000 Series G Cumulative Convertible Redeemable Preferred Stock, $0.201 13par value; 641,026 shares authorized; liquidation preference of $39.200; 13641,026 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively 25,000 25,000 Series H Cumulative Convertible Redeemable Preferred Stock, $0.801 13par value; 4,040,404 shares authorized; liquidation preference of $25.800; 400,000 and 2,200,000 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively 10,000 55,000 ---------- ---------- $ 206,500 $ 251,500 ========== ==========

11 8. PER SHARE DATA Earnings per common share of the Company for the three and six months ended June 30, 2001 and 2000 is computed based on weighted average common shares/units outstanding during the period as follows (in millions):

~~Weighted~~Three ~~Per~~Months ~~Share~~Ended ~~Income~~June ~~Average~~30, ~~Shares Amount~~ -------------- --------------- --------------------------- ~~(In Thousands) (In Thousands) Three Months Ended March 31,~~ 2001: 2000 --------------------------------- ~~Income $26,640 Minority Interest (8,538) Income attributable to Preferred Shares (5,197)~~ ------- ~~Earnings per common share~~ ---------------- Basic ~~Income~~Diluted ~~attributable~~Basic toDiluted ~~common shareholders 12,905 22,415 $ 0.58 Effect of dilutive securities:/(1)/ Options 175 847 (0.02)~~ ------- ------- -- --- ------- ~~Earnings~~Weighted ~~per~~Average ~~common~~Common ~~share~~Shares -22.9 ~~Diluted~~23.7 ~~$13,080~~21.1 ~~23,262~~25.6 $Weighted 0Average Common Operating Partnership Units (1) 13.562 ~~=======~~13.2 ~~=========~~13.7 ~~=========~~13.7

~~Property~~Six ~~Segments Three~~ Months Ended ~~March~~June 3130, ------------------------ ~~2001 2000~~ ----------- ---------- ~~Net Operating Income~~ ------------~~--------~~ ~~Core~~2001 ~~Portfolio~~2000 ~~$ 45,412 $ 42,200 Acquisition/Disposition Portfolio 2,941 2,566 Redevelopment Portfolio 9,389 6,640 Development Portfolio 3,421 1,496 Retail Portfolio 141 453~~ ---------- ---------- ~~Consolidated total 61,304 53,355 Other (221)~~ - Depreciation and amortization (12,592) (10,567) Equity in income of unconsolidated properties 895 783 Equity in income of unconsolidated Property Service Businesses 2,983 519 Corporate general and administrative expenses (3,856) (2,695) Net interest expense (21,873) (17,793) ---------- ---------- ~~Net income of the Operating Partnership 26,640 23,602 Minority Interest (8,538) (7,977)~~ ---------- ------~~----~~ ~~Net~~Basic ~~income~~Diluted $Basic ~~18,102~~Diluted ~~$ 15,625 ========== ========== Revenues~~ -----~~---~~ ~~Core Portfolio $ 73,964 $ 68,187 Acquisition/Disposition Portfolio 4,598 4,328 Redevelopment Portfolio 17,483 12,218 Development Portfolio 5,732 3,295 Retail Portfolio 628 826~~ -------~~---~~ -----~~-----~~ ~~Consolidated total 102,405 88,854 Other 4,171~~ - ------~~----~~ ~~----------~~Weighted ~~Total~~Average ~~revenue~~Common $Shares ~~106,576~~22.7 $23.4 ~~88,854~~20.9 ~~==========~~24.0 ~~==========~~Weighted ~~Real~~Average ~~Estate~~Common ~~Assets,~~Operating ~~gross~~Partnership ~~-------------------------~~Units ~~Core Portfolio $~~(1~~,289,673~~) ~~$1,261,725~~13.2 ~~Acquisition/Disposition Portfolio 130,463 63,240 Redevelopment Portfolio 491,709 225,861 Development Portfolio 291,515 336,801 Retail Portfolio 15,183 15,135 ---------- ---------- Sub-total~~ 13.2~~,218,543~~ ~~1,902,762~~13.8 ~~Accumulated depreciation (273,644) (253,039) ---------- ---------- Consolidated total, net $1,944,899 $1,649,723 ========== ==========~~13.8

/(1)/ Represents operating partnership units not held by the Company. Operating Partnership units not held by the Company may be redeemed at the Unitholders' sole discretion. Such redemption may be made for cash at the then fair value of the Company's common stock, or, at the option of the Company, for shares of common stock of the Company on a one-for-one basis, which does not have a dilutive effect. A total of 0.4 million Operating Partnership units were redeemed for shares of common stock during the six months ended June 30, 2001. 12 A reconciliation of income and shares used to calculate basic and diluted earnings per common share for the three and six months ended June 30, 2001 and 2000 follows:

Weighted Per Share Income Average Shares Amount ------------------- -------------- ----------- (In Thousands) (In Thousands) Three Months Ended ~~March~~June 3130, 2001: --------------------------------- Income $ 29,141 Minority Interest (9,211) Income attributable to Preferred Shares (4,223) --------- Earnings per common share - Basic Income attributable to common shareholders 15,707 22,895 $ 0.68 Effect of dilutive securities: /(1)/ Options 187 831 (0.01) --------- -------- ------- Earnings per common share - Diluted $ 15,894 23,726 $ 0.67 ========= ======== ======= Six Months Ended June 30, 2001: ------------------------------- Income $ 55,781 Minority Interest (17,749) Income attributable to Preferred Shares (9,420) --------- Earnings per common share - Basic Income attributable to common shareholders 28,612 22,656 $ 1.26 Effect of dilutive securities: /(1)/ Options 322 770 (0.02) --------- -------- ------- Earnings per common share - Diluted $ 28,934 23,426 $ 1.24 ========= ======== ======= Three Months Ended June 30, 2000: --------------------------------- Income $ 32,026 Minority Interest (11,200) Income attributable to Preferred Shares (5,011) --------- ~~Funds~~Earnings ~~from~~per ~~Operations~~common share - Basic Income attributable to common shareholders 15,815 21,105 $ 0.75 Effect of dilutive securities: /(1)/ Preferred shares - Series A, E, & F 2,~~572~~607 3,992 (0.01) Options $ ~~626~~172 ~~Revenues~~499 93(0.01) --------- -------- ------- Earnings per common share - Diluted $ 18,~~776~~594 4925,~~901~~596 ~~Depreciation~~$ ~~and~~0.73 ~~Amortization~~========= 2======== ======= Six Months Ended June 30,~~450~~ 2000: ------------------------------- Income $ 55,628 Minority Interest (19,177) Income attributable to Preferred Shares (10,022) --------- Earnings per common share - Basic Income attributable to common shareholders 26,429 20,948 $ 1.26 Effect of dilutive securities: /(1)/ Preferred shares - Series A 3,~~396~~047 2,640 (0.01) Options 197 399 (0.01) --------- -------- ------- Earnings per common share - Diluted $ 29,673 23,987 $ 1.24 ========= ======== =======

/(1)/Adjustment to numerator reflects change in the Minority Interest share of income bases on ownership calculation including common stock equivalents. 13 9. SEGMENT REPORTING Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by senior management in deciding how to allocate resources and in assessing performance. Property Segments The Company's primary business is the ownership and operation of multifamily residential real estate. As such, the residential rental properties constitute the four primary operating segments -- Core, Acquisition/Disposition, Redevelopment and Development portfolios -- depending upon the maturity and nature of each property. Core consists of multifamily properties, other than Redevelopment or Development, which have been owned more than one full calendar year. Therefore, the 2001 Core represents properties owned as of December 31, 1999. Acquisition/Disposition consists of purchased properties which have not yet reflected one full calendar year of operations and disposed properties. Redevelopment includes purchased properties in which the Company is making significant renovations to reposition the property in the market place. Properties will remain in the Redevelopment Portfolio until one full calendar year of operating results is reflected subsequent to completion of the renovations. Development consists of properties which the Company has constructed or is in the process of constructing which have not yet had a full calendar year of stabilized operating results. On the first of January each year, Acquisition, Redevelopment and Development properties that meet the one-year requirement are transferred to the Core portfolio. The Company's fifth property segment is the Retail portfolio, which reflects results for the one free standing retail property. The Company evaluates performance for the Property Segments based on Net Operating Income ("NOI") which is the difference between Rental Revenue and Operating Expenses (which primarily excludes interest expense, general and administrative costs and depreciation). Property Service Business Segment The Company also evaluates the separate financial information of the Property Service Businesses. These businesses provide professional services such as property management, furnished corporate apartment rentals, engineering and technical consulting, and construction management to both Company-owned properties and properties owned by third parties. Given the similarities in the nature of services, customers and distribution methods, the Company considers the Property Service Businesses to be one segment. The Company evaluates performance for the Property Service Business segment , which includes both consolidated and unconsolidated entities, based on Funds from Operations ("FFO"), FFO is defined using the revised definition adopted by the National Association of Real Estate Investment Trusts ("NAREIT") as net income (loss) (computed in accordance with generally accepted accounting principles) excluding gains (or losses) from debt restructuring and sale of property, plus depreciation/amortization of assets unique to the real estate 14 industry. Depreciation/amortization of assets not unique to the industry, such as amortization of deferred financing costs, goodwill and non-real estate assets, is not added back. The accounting policies for all segments are the same as those described in the summary of significant accounting policies in the Company's Annual Report on Form 10-K. 15 Information concerning operations by segment for the three and six months ended June 30, 2001 and 2000 were as follows (in thousands): Property Segments

~~Monthly~~Three %Months %Ended ~~Average~~Six ~~GOI~~Months ~~Change~~ended ~~Change~~June ~~Apartment~~30, ~~Sq.~~June ~~Ft.~~30, ~~GOI Per Unit From Occupancy From Property Type Units Per Unit QTD 01 QTD 01 QTD 00 QTD 01 QTD 00~~ -------- ---- ----- -------- ------ ------ ------ ------ ------ ~~(in 000s) ACQUISITION PORTFOLIO 2000~~ ---- ~~Delaware Place (Chicago, IL) High~~-~~rise 185 706 $ 872 $ 1,571 N/A 91.7% N/A New River Village (S.E., Florida) Mid~~-~~rise 240 1,128 1,045 1,451 N/A 92.7% N/A 2201 Wilson Boulevard (Rosslyn/Ballston, VA) High~~-~~rise~~--- ~~219~~2001 ~~838~~2000 ~~1,091~~2001 ~~1,661~~2000 ~~N/A 99.0% N/A Reston Landing (Tysons/Dulles, VA) Garden 400 995 1,675 1,396 N/A 95.8% N/A~~ ------- -------- ---------- ----~~-----~~ ------ --------- --~~----~~ ~~1,044 941 $ 4,683 $ 1,495 N/A 95.3% N/A~~ ------- -------- ~~----------~~Net ~~---------~~Operating Income ------ --------- ------ ~~REDEVELOPMENT~~Core ~~PORTFOLIO~~Portfolio ~~Properties~~$ ~~held more than 1 year Buchanan House (Crystal City~~43,985 ~~VA)~~$ ~~High-rise 442 1~~40,~~173~~910 $ 284,~~086~~913 $ 178,~~573~~843 ~~3.3%~~Acquisition/Disposition ~~95.9%~~Portfolio -2~~.4% Mirador (S.E. Florida) High-rise 1~~,~~339~~976 ~~772~~ 3,~~633~~414 ~~904~~5,917 ~~13.2% 95.~~5%,980 ~~-1.9%~~Redevelopment ~~Ocean~~Portfolio ~~View~~14,677 ~~(S.E.~~12,168 ~~Florida) High-rise 1~~28,~~199~~550 123,~~080~~075 Development Portfolio 3,~~698~~693 12,~~028~~828 7~~.8%~~,114 ~~96.5%~~4,324 ~~-0.6%~~Retail Portfolio 163 312 304 765 ------- ----~~----~~ ---------- --------- --~~----~~ --------- -~~-----~~ ~~2,980~~Consolidated ~~955~~Total $65,494 959,~~417~~632 $126,798 1112,~~053~~987 ~~8.8%~~Other ~~96.0%~~(152) -~~1.4%~~ ~~-------~~(373) -~~-------~~ ~~----------~~Depreciation ~~---------~~and ~~------~~amortization ~~---------~~(12,808) ~~------~~(10,895) ~~Properties~~(25,400) ~~held~~(21,462) ~~less~~Equity ~~than~~in 1income ~~year~~of ~~Harbour~~unconsolidated ~~House~~properties ~~(S.E.~~1,206 ~~Florida)~~542 ~~High-rise 804 990 3~~2,~~001~~101 1,~~244~~325 ~~N/A~~Equity ~~92.4%~~in ~~N/A~~Income ~~Ocean~~of ~~Crest~~unconsolidated ~~Club~~Property ~~(S.E.~~Service ~~Florida)~~Businesses ~~High-rise~~4,007 ~~527 987~~ 1,~~627~~636 16,~~029~~990 ~~N/A~~2,155 ~~94.9%~~Corporate ~~N/A~~General ~~Ocean~~and ~~Crest~~Administrative ~~Beach~~Expenses (~~S.E.~~3,279) ~~Florida~~(3,002) ~~High-rise 943 995 2~~(7,~~853~~135) 1(5,~~008~~697) ~~N/A~~Net ~~92.4%~~interest ~~N/A~~expense ~~Sagamore~~(22,426) ~~Towers~~(20,048) (~~Boston~~44,299) MA(37,841) ~~High-rise~~Gain ~~225~~on ~~707~~sale ~~585~~- ~~867~~4,161 ~~N/A~~- ~~96.~~4%,161 ~~N/A~~Merger related costs (2,901) - (2,901) - ----- -------- ---------- --------- --~~----~~ --------- -~~------~~ 2Net income of the Operating Partnership 29,~~499~~141 ~~966~~32,026 $55,781 855,~~066~~628 $Minority 1Interest (9,~~076~~211) ~~N/A~~(11,200) ~~94.6%~~(17,749) ~~N/A~~(19,177) ------- ----~~----~~ ---------- --------- --~~----~~ --------- -~~------~~ ~~DEVELOPMENT~~Net ~~PORTFOLIO~~income ~~One~~$ ~~Superior~~19,930 ~~Place~~$ ~~(Chicago~~20,826 ~~IL) High-rise 809 729~~ $ 438,~~800~~032 $ 136,~~978~~451 ~~N/A~~=========== ~~97.9%~~========= ~~N/A~~=========== ~~Park~~========== ~~Connecticut~~Revenues ~~(Washington, D.C.) High~~-~~rise~~------- ~~142~~Core ~~915~~Portfolio ~~932~~$ 269,~~188~~082 ~~N/A~~$ ~~97.4%~~64,552 ~~N/A~~$ ~~Alban~~135,991 ~~Towers~~$ ~~(Washington~~126,277 ~~D.C.)~~Acquisition/~~(1)/~~Disposition ~~Mid-rise~~Portfolio ~~226~~4,709 ~~915~~5,238 ~~N/A~~9,307 ~~N/A~~9,566 ~~N/A~~Redevelopment ~~N/A~~Portfolio ~~N/A~~25,016 ~~Park~~19,815 ~~Millennium~~49,554 ~~(Chicago~~38,495 ~~IL)/(1)/~~Development ~~High-rise~~Portfolio ~~480~~5,951 ~~907~~4,420 ~~N/A~~11,683 ~~N/A~~7,715 ~~N/A~~Retail ~~N/A~~Portfolio ~~N/A~~585 691 1,213 1,517 ------- ----~~----~~ ---------- --------- --~~----~~ --------- -~~------~~ 1Consolidated total 105,~~657~~343 ~~822~~94,716 $207,748 5183,~~732~~570 ~~N/A~~Other ~~N/A~~3,802 ~~N/A~~- ~~N/A~~7,973 - ------ -----~~---~~ ---------- --------- --~~----~~ --------- -~~------~~ ~~ALL~~Total ~~RESIDENTIAL~~revenue ~~PROPERTIES~~$ 27109,~~892~~145 $ ~~101~~94,~~862~~716 $ 215,721 $ 183,570 =========== ========= =========== ~~PARTIALLY-OWNED~~========== ~~PORTFOLIO~~Real ~~Renaissance~~Estate ~~(25%~~Assets, ~~owned)~~gross ~~High~~-~~rise~~------------------------ ~~330~~Core ~~984~~Portfolio $ 1,~~355~~254,790 $ 1,~~369~~210,715 ~~8.2%~~Acquisition/Disposition ~~96.4%~~Portfolio ~~-2.0%~~131,011 ~~Springfield~~88,147 ~~Station~~Redevelopment ~~(48%~~Portfolio ~~owned)~~630,132 ~~Garden/Mid-rise~~450,609 ~~631~~Development ~~909~~Portfolio 2239,~~330~~037 1190,~~231~~750 ~~13.4%~~Retail ~~98.5%~~Portfolio ~~0.6%~~15,183 ~~Brandywine~~15,147 ~~(25%~~----------- ~~owned)~~---------- ~~High~~Sub-~~rise~~total ~~306 1~~2,~~009 1~~270,~~284~~153 1,~~399~~955,368 ~~7.4%~~Accumulated ~~93.6%~~depreciation ~~-4.4% Stoneridge at University Center~~ (~~40% owned~~286,180)~~/(1)/~~ ~~Garden 630 993 1,323 N/A N/A N/A N/A Plaza 440~~ (~~90% cash flow note~~250,725) ~~High~~-~~rise 457 869 606 N/A N/A N/A N/A~~ ------- ---~~-----~~ ---------- 2Consolidated Total,~~354~~ ~~947~~Net $ 61,~~898~~983,973 $1,704,643 ======= ====~~====~~ ==========

16 Property Service Business Segment

Three Months Ended ~~March~~Six 31Months Ended June 30, June 30, -------------------- ~~2001 2000/(2)/~~ -------- --------- ~~Core Portfolio/(1)/ Revenues $ 73,964 $ 68,187 Expenses (28,552) (25,987)~~ -------- -------- ~~Income before depreciation $ 45,412 $ 42,200 ======== ======== Acquisition/Disposition Portfolio Revenues $ 4,598 $ 4,328 Expenses (1,657) (1,762)~~ -------- -------- ~~Income~~2001 ~~before~~2000 ~~depreciation~~2001 $2000 ~~2,941 $ 2,566 ======== ======== Redevelopment Portfolio Revenues $ 17,483 $ 12,218 Expenses (8,094) (5,578)~~ -------- ------ -- ~~Income before depreciation $ 9,389 $ 6,640 ======== ======== Development Portfolio Revenues $ 5,732 $ 3,295 Expenses (2,311) (1,799)~~ -------- ----- --- ~~Income before depreciation $ 3,421 $ 1,496 ======== ======== Retail Portfolio Revenues $ 628 $ 826 Expenses (487) (373)~~ ----------- ------------- ~~Income~~Funds ~~before~~from ~~depreciation~~Operations $ ~~141~~3,656 $ ~~453~~1,744 ~~========~~$ ~~========~~6,228 ~~Total~~$ ~~Rental~~2,370 ~~Properties~~ Revenues ~~$102~~108,~~405~~100 ~~$ 88~~58,~~854~~025 ~~Expenses (41~~201,~~101)~~876 ~~(35~~107,~~499)~~926 Depreciation/Amortization ~~(12~~2,~~384)~~688 ~~(10~~1,~~567)~~444 ~~-------- -------- Income from Rental Properties $ 48~~5,~~920~~138 ~~$ 42~~2,~~788 ======== ========~~840

10. SUBSEQUENT EVENTS In July 2001, the $33.6 million Mirador mortgage matured. The loan was paid off through a draw on the Company's line of credit. In addition, the Company repaid the $11.8 million Bennington mortgage and the $32.0 million Stonegate mortgage through draws on its lines of credit. The Company paid prepayment penalties totaling $0.4 million. As a result of the proposed merger with Archstone Communities, the Company obtained a $100 million loan from Archstone in order to avoid encumbering additional assets and to avoid incurring third party financing fees. Proceeds were used to pay down the Company's lines of credit. The loan matures on the earlier of the completion of the merger or 180 days after the merger agreement is terminated. The Company will pay a minimum interest rate equal to LIBOR plus 100 basis points until 60 days after the termination of the merger agreement, if applicable, and thereafter will pay interest at LIBOR plus 200 basis points. The loan is unsecured but may become secured at Archstone's option upon an event of default. The loan may be prepaid at anytime in whole or in part. 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with the accompanying financial statements and notes thereto. The results of operations for the three and six months ended June 30, 2001 and 2000 presented in the Consolidated Statements of Operations and discussed below represent the operations of Charles E. Smith Residential Realty, Inc. (the "Company"), Charles E. Smith Residential Realty L.P. (the "Operating Partnership") and its subsidiary financing partnerships and Smith Realty Company ("SRC"). The Company consolidates the Operating Partnership due to its control as sole general partner. In 2001, the Company began consolidating Smith Realty Company due to the acquisition of its voting stock by the Operating Partnership. FORWARD-LOOKING STATEMENTS When used throughout this report, the words "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. Such statements indicate that assumptions have been used that are subject to a number of risks and uncertainties which could cause actual financial results or management plans and objectives to differ materially from those projected or expressed herein, including: the effect of national and regional economic conditions, particularly with regard to the levels of multifamily property occupancy and rental growth in the Washington, D.C., southeast Florida, Chicago, and Boston metropolitan areas; the Company's ability to identify and secure additional properties and sites that meet its criteria for acquisition or development; the acceptance of the Company's financing plans by the capital markets, and the effect of prevailing market interest rates and the pricing of the Company's stock; and other risks described from time to time in the Company's filings with the Securities and Exchange Commission. Given these uncertainties, readers are cautioned not to place undue reliance on such statements. The registrant undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. Merger In May 2001, the Company announced plans to merge with Archstone Communities ("Archstone"). The combined company will operate under the name Archstone-Smith Trust. For each Company share held, a shareholder will receive 1.975 shares of Archstone-Smith. This exchange ratio is not subject to change. The merger is structured as a tax-free transaction and is expected to close in the fall of 2001, subject to shareholder and other approvals. Rental Revenue Average revenue per apartment unit for the Company's core multifamily properties increased approximately 7.0% in the second quarter of 2001 as compared with 2000. A schedule of portfolio statistics follows: 18

~~Three~~CHARLES ~~Months~~E. ~~Ended~~SMITH ~~March~~RESIDENTIAL 31REALTY, INC. ------------------------------------------------------------------------------------------------------------------------------------ Residential Portfolio Statistics For the Quarter Ended June 30, 2001 ~~2000~~Monthly % % Average GOI Change Change Apartment Sq. Ft. GOI Per Unit From Occupancy From Property Type Units Per Unit QTD 01 QTD 01 QTD 00 QTD 01 QTD 00 -------- ---- ----- -------- ~~Total~~------ ~~Property~~------ ~~Service~~------ ~~Businesses~~------ ~~Revenues~~------ (in 000s) CORE RESIDENTIAL PORTFOLIO Washington, D.C. 1841 Columbia Road Mid-rise 115 635 $ 404 $ 1,171 4.3% 97.4% -2.4% 2501 Porter Street High-rise 202 757 1,020 1,683 -1.9% 92.7% -5.1% Albemarle High-rise 235 1,122 1,096 1,555 8.6% 95.8% -2.1% Calvert-Woodley High-rise 136 909 598 1,466 7.4% 96.1% -2.8% Car Barn Garden 196 959 650 1,105 6.8% 94.5% -4.6% Cleveland House High-rise 216 897 1,001 1,545 12.6% 97.5% -0.3% Connecticut Heights High-rise 519 656 1,850 1,188 11.5% 99.0% 0.9% The Consulate High-rise 269 828 1,132 1,403 8.5% 93.7% -2.4% Corcoran House High-rise 138 528 447 1,~~776~~080 14.4% 96.4% 0.1% Statesman High-rise 281 593 887 1,052 11.4% 98.1% 0.5% Van Ness South High-rise 625 957 2,573 1,372 7.9% 97.0% -1.2% The Kenmore High-rise 376 715 1,130 1,002 11.2% 97.6% 0.6% Tunlaw Gardens Garden 167 850 543 1,084 14.5% 98.5% 0.7% Tunlaw Park Mid-rise 120 855 503 1,397 9.6% 95.9% -2.0% ------ ----- -------- ------- ----- ---- ----- 3,595 809 $ 4913,~~901~~834 ~~Expenses~~$ ~~(88~~1,~~754)~~283 ~~(47~~8.8% 96.6% -1.2% Northern Virginia Crystal City ------------ The Bennington High-rise 348 798 1,~~986)~~291 ~~Amortization~~1,237 of6.5% ~~Goodwill~~96.2% (-1.6% Crystal House I High-rise 426 896 1,585 1,240 7.1% 96.3% -2.3% Crystal House II High-rise 402 896 1,426 1,182 7.1% 97.4% -1.3% Crystal Square High-rise 378 1,080 1,584 1,397 7.2% 98.6% -0.3% Crystal Place High-rise 180 915 812 1,504 6.1% 95.7% -2.5% Gateway Place High-rise 162 828 983) ~~(491)~~2,023 ~~Depreciation~~0.3% (95.7% -1.2% Water Park Towers High-rise 360 959 1,~~467)~~831 ~~(905)~~1,695 4.5% 95.7% -1.3% Crystal Plaza High-rise 540 1,124 2,386 1,473 4.8% 96.9% -2.4% Parc Vista High-rise 299 770 1,407 1,569 2.6% 92.7% -2.5% ------ ----- -------- ~~Income~~------- ~~from~~----- ~~Property~~---- ~~Service~~----- ~~Businesses~~3,095 2940 $ 13,~~572~~305 ~~519~~$ ~~Deduct~~1,433 ~~SRC~~5.2% ~~results~~96.3% -1.7% Rosslyn/(Ballston ---------------- Courthouse Plaza High-rise 396 838 1),947 1,639 8.4% 97.3% -4.2% Courthouse Place High-rise 564 850 2,664 1,574 8.1% 98.6% -0.3% Lincoln Towers High-rise 714 878 3,505 1,636 11.0% 97.2% 1.5% ------ ----- -------- ------- ----- ---- ----- 1,674 859 $ 8,116 $ 1,616 9.4% 97.7% -0.4% Tysons/Dulles ~~411~~------------- Charter Oak Garden 262 1,098 891 1,134 6.6% 95.6% -1.5% Patriot Village Garden 1,065 1,149 3,627 1,135 9.2% 96.9% -1.9% Westerly at Worldgate Garden 320 921 1,222 1,273 2.8% 93.3% -4.3% ------ ----- -------- ~~Equity~~------- in----- ~~income~~---- ----- 1,647 1,097 $ 5,740 $ 1,162 7.4% 96.0% -2.3% Other ----- Arlington Overlook Mid-rise 711 877 2,139 1,003 9.1% 95.9% -0.3% Boulevard of ~~unconsolidated~~Old ~~Property~~Town ~~Service~~Garden ~~Businesses~~159 672 498 1,044 11.9% 97.3% -0.6% Columbia Crossing Garden 247 977 1,030 1,390 7.4% 98.2% -1.1% Concord Village Garden 531 925 1,585 995 7.4% 96.4% -1.2% Newport Village Garden 937 1,060 3,127 1,112 10.1% 97.3% -0.9% Skyline Towers High-rise 940 1,107 3,271 1,160 5.2% 95.4% -2.9% ------ ----- -------- ------- ----- ---- ----- 3,525 992 $ 11,650 $ 1,102 8.0% 96.5% -1.4% Boston Cronin's Landing Mid-rise 281 1,062 2,~~983~~034 2,413 12.4% 99.6% 0.6% 2000 Commonwealth High-rise 188 862 1,160 2,057 5.9% 98.9% -0.1% ------ ----- -------- ------- ----- ---- ----- 469 982 $ ~~519~~3,194 ~~========~~$ ~~========~~2,270 10.0% 99.4% 0.4% Chicago Stonegate Garden 1,158 581 2,572 740 2.7% 93.9% 1.3% Park Lincoln High-rise 139 581 533 1,278 6.5% 97.3% 1.9% Terrace Garden 427 814 1,091 852 -2.1% 92.8% -3.1% Countryside Garden 720 872 2,119 981 3.6% 93.9% -0.2% McClurg Court High-rise 1,075 732 4,852 1,504 6.5% 93.3% -2.8% One East Delaware High-rise 306 704 2,076 2,261 3.1% 98.2% 0.1% ------ ----- -------- ------- ----- ---- ----- 3,825 714 $ 13,243 $ 1,154 4.0% 94.2% -0.9% ------ ----- -------- ------- ----- ---- ----- 17,830 865 $ 69,082 $ 1,291 7.0% 96.2% -1.3% ------ ----- -------- ------- ----- ---- -----

~~Three~~CHARLES ~~Months~~E. SMITH RESIDENTIAL REALTY, INC. ------------------------------------------------------------------------------------------------------------------------------ Residential Portfolio Statistics For the Quarter Ended ~~March~~June 3130, 2001 Monthly % Average GOI Change Apartment Sq. Ft. GOI Per Unit From Property Type Units Per Unit QTD 01 QTD 01 QTD 00 ----------------------- ~~2001~~------ ~~2000~~----- -------- ------ -------- ~~Net~~------ ~~income~~(in of000s) ~~the~~ACQUISITION ~~Operating~~PORTFOLIO ~~Partnership~~2000 ---- Reston Landing (Tysons/Dulles, VA) Garden 400 995 $ 261,~~640~~653 $ 231,~~602~~378 ~~Preferred~~N/A ~~dividends~~New River Village (~~989~~S.E. Florida) Mid-rise 240 1,128 1,038 1,442 N/A 2201 Wilson Boulevard (Rosslyn/Ballston, VA) High-rise 219 838 1,121 1,706 N/A Delaware Place (Chicago, IL) High-rise 185 706 881 1,587 N/A ------ ----- --------- ------- ----- 1,044 941 $ 4,~~473~~693 $ 1,498 N/A ------ ----- --------- ------- ----- REDEVELOPMENT PORTFOLIO Properties held more than 1 year Buchanan House (Crystal City, VA) ~~Depreciation~~High-rise 442 1,173 2,123 1,601 1.0% Mirador (S.E. Florida) High-rise 1,339 772 3,700 921 15.2% Crystal Towers (Crystal City, VA) High-rise 912 1,118 3,840 1,404 9.5% Oaks of ~~rental~~Tysons ~~property~~(Dulles/Tysons, VA) Garden 218 967 728 1,113 0.6% Bedford Village (Dulles/Tysons, VA) Garden 752 1,098 2,696 1,195 12.1% Ocean View (S.E. Florida) High-rise 1,~~384~~199 101,~~567~~080 ~~Depreciation~~3,791 of1,054 ~~unconsolidated~~8.6% ~~properties~~------ ~~323~~----- ~~239~~--------- ~~Amortization~~------- of----- ~~goodwill~~4,862 1,008 $ 16,878 $ 1,157 9.3% ------ ~~107~~----- --------- ------- ----- ~~Funds~~Properties ~~from~~held ~~Operations~~less ofthan ~~the~~1 ~~Operating~~year ~~Partnership~~Harbour 38House (S.E. Florida) High-rise 804 990 2,~~358~~906 301,~~042~~205 ~~Minority~~N/A ~~Interest~~Ocean Crest Club (12S.E. Florida) High-rise 527 987 1,~~891~~650 1,044 N/A Ocean Crest Beach (S.E. Florida) High-rise 943 995 2,956 1,045 N/A Sagamore Towers (11Boston,~~153~~ MA) High-rise 225 707 626 927 N/A ------ ----- --------- ~~Attributable~~------- to----- ~~Shareholders~~2,499 966 $ 8,138 $ 1,086 N/A ------ ----- --------- ------- ----- DEVELOPMENT PORTFOLIO Alban Towers (Washington, D.C.)/(1)/ Mid-rise 226 915 N/A N/A N/A One Superior Place (Chicago, IL) High-rise 809 729 4,992 2,057 N/A Park Connecticut (Washington, D.C.) High-rise 142 915 915 2,148 N/A Park Millennium (Chicago, IL)/(1)/ High-rise 480 907 N/A N/A N/A ------ ----- --------- ------- ----- 1,657 822 $ 5,907 $ 1,188 N/A ------ ----- --------- ------- ----- ALL RESIDENTIAL PROPERTIES 27,892 $ 104,698 ====== ========= PARTIALLY-OWNED PORTFOLIO ------------------------- Renaissance (25% owned) High-rise 330 984 $ 1,~~467~~374 $ 181,~~889~~388 6.8% Springfield Station (48% owned) Garden/Mid-rise 631 909 2,351 1,242 7.8% Brandywine (25% owned) High-rise 306 1,009 1,306 1,423 5.4% Plaza 440 (90% cash flow note) High-rise 457 869 2,809 2,049 N/A Stoneridge at University Center (40% owned)/(1)/ Garden 630 993 1,512 N/A N/A ------ ----- --------- 2,354 947 $ 9,352 ====== ===== =========

~~Number~~% ~~Units~~Change ~~Initial~~Occupancy ~~Estimated~~From ~~Estimated~~Property ~~Estimated~~QTD Of01 ~~Units~~QTD ~~Delivered~~00 ~~Delivery Completion Stabilization Cost~~ -------- --------- ------ ------ ------ ACQUISITION PORTFOLIO 2000 ---- Reston Landing (Tysons/Dulles, VA) 93.0% N/A New River Village (S.E. Florida) 91.9% N/A 2201 Wilson Boulevard (Rosslyn/Ballston, VA) 98.8% N/A Delaware Place (Chicago, IL) 90.1% N/A ------ ------- 93.1% N/A ------ ------ REDEVELOPMENT PORTFOLIO Properties held more than 1 year Buchanan House (Crystal City, VA) 94.5% -3.3% Mirador (inS.E. ~~millions~~Florida) ~~Stoneridge~~93.7% at-1.1% ~~University~~Crystal ~~Center~~Towers (Crystal City, VA) 97.8% -0.7% Oaks of Tysons/ (Dulles/Tysons, VA) 86.4% -10.6% Bedford Village (Dulles/Tysons, VA) 97.6% -0.3% Ocean View (S.E. Florida) 95.5% 0.4% ------ ------ 95.4% -1.3% ------ ------ Properties held less than 1 year Harbour House (S.E. Florida) 90.1% N/A ~~630~~Ocean ~~401~~Crest ~~June~~Club ~~2000~~(S.E. ~~Q3,~~Florida) ~~2001~~92.6% Q4N/A Ocean Crest Beach (S.E. Florida) 90.9% N/A Sagamore Towers (Boston, ~~2001~~MA) $96.6% 66N/A ------ ------ 94.0% N/A ------ ------ DEVELOPMENT PORTFOLIO Alban Towers (Washington, D.C.)/(21)/ ~~226~~N/A N/A ~~Q2,~~One ~~2001~~Superior Q4Place (Chicago, ~~2001~~IL) Q197.2% N/A Park Connecticut (Washington, ~~2002~~D.C.) 6392.6% N/A Park ~~Millenium~~Millennium (Chicago, IL)/(1)/ ~~480~~N/A N/A ~~Q2,~~------ ~~2002~~------ ~~Q4,~~N/A ~~2002~~N/A ~~Q2,~~------ ~~2003~~------ ~~106~~ALL RESIDENTIAL PROPERTIES PARTIALLY-OWNED PORTFOLIO --- ---- ------------------ Renaissance (25% owned) 94.6% -3.6% Springfield Station (48% owned) 96.3% -1~~,336~~.8% ~~401~~Brandywine ~~$235~~(25% ~~=====~~owned) ~~====~~94.4% ~~====~~-5.1% Plaza 440 (90% cash flow note) 91.8% N/A Stoneridge at University Center (40% owned)(1) N/A N/A

(1) Property is currently under construction. 20 RENTAL PROPERTIES Revenues, expenses and income from the multifamily and retail properties for the three and six months ended June 30, 2001 and 2000 were as follows (in thousands):

~~Number~~Three ~~Estimated~~Months ~~Purchase~~Ended ~~Estimated~~Six ofMonths ~~Units~~Ended ~~Completion~~June ~~Date~~30, ~~Cost~~June 30, ------------------------------ -------------------------- 2001 2000/(2)/ 2001 2000 ------------- ------------- ----------- ----------- Core Portfolio(in1) ~~millions~~Revenues $ 69,082 $ 64,552 $ 135,991 $ 126,277 Expenses (25,097) ~~Ballston~~(23,642) ~~Place~~(51,078) ~~383~~(47,434) Q2----------- ----------- ---------- ----------- Income before depreciation $ 43,985 ~~2001~~$ Q440,910 ~~2001~~$ 84,913 $54 ~~(Rosslyn~~78,843 =========== =========== ========== =========== Acquisitions/~~Ballston~~Disposition Portfolio Revenues $ 4,709 VA$ 5,238 $ 9,307 $ 9,566 Expenses (1,733) (1,824) (3,390) (3,586) ----------- ----------- ---------- ----------- Income before depreciation $ 2,976 $ 3,414 $ 5,917 $ 5,980 =========== =========== ========== =========== Redevelopment Portfolio Revenues $ 25,016 $ 19,815 $ 49,554 $ 38,495 Expenses (10,339) (7,647) (21,004) (15,420) ----------- ------------ ---------- ----------- Income before depreciation $ 14,677 $ 12,168 $ 28,550 $ 23,075 =========== =========== ========== =========== Development Portfolio Revenues $ 5,951 $ 4,420 $ 11,683 $ 7,715 Expenses (2,258) (1,592) (4,569) (3,391) ----------- ----------- ---------- ----------- Income before depreciation $ 3,693 $ 2,828 $ 7,114 $ 4,324 =========== =========== ========== =========== Retail Portfolio Revenues $ 585 $ 691 $ 1,213 $ 1,517 Expenses (422) (379) (909) (752) ----------- ----------- ---------- ----------- Income before depreciation $ 163 $ 312 $ 304 $ 765 =========== =========== ========== =========== Total Rental Properties Revenues $ 105,343 $ 94,716 $ 207,748 $ 183,570 Expenses (39,849) (35,084) (80,950) (70,583) Depreciation (12,586) (10,895) (24,970) (21,462) ----------- ----------- ---------- ----------- Income from Rental Properties $ 52,908 $ 48,737 $ 101,828 $ 91,525 =========== =========== ========== ===========

/(1)/ Represents properties owned as of December 31, 1999 (other than Redevelopment of Development properties). /(2)/ Prior year amounts have been reclassified to conform with current year presentation. 21 PROPERTY SERVICE BUSINESSES Revenues, expenses and income from the Property Service Businesses for the three and six months ended June 30, 2001 and 2000 were as follows (in thousands):

~~Dollars~~Three inMonths %Ended ofSix ~~Thousands~~Months ~~Total~~Ended June 30, June 30, -------------------------------- ---------------------------- ~~Fixed~~2001 ~~Rate~~2000 ~~Debt:~~2001 ~~Mortgages~~2000 -------------- --------------- ------------- ------------ Total Property Service Businesses Revenues $1 108,~~109,088~~100 ~~84.9%~~$ ~~Variable~~58,025 ~~Rate~~$ ~~Debt:~~201,876 $~~300M~~ ~~Line~~107,926 ofExpenses ~~Credit~~(101,756) ~~134~~(54,~~000~~945) ~~10.3%~~(190,510) ~~$100M~~(102,931) ~~Line~~Amortization of ~~Credit~~Goodwill 41(1,~~000~~048) 3.(514) (2,031) (1%,005) ~~$50M~~Depreciation ~~Line~~(1,640) of(930) ~~Credit~~(3,107) (1,835) ----------- ~~0.0%~~----------- ~~Construction~~---------- ~~Loans~~------------- 22Income from Property Service Businesses 3,~~137~~656 1~~.7%~~,636 6,228 2,155 Adjust for SRC results /(1)/ 351 - 762 - ----------- ----------- ---------- ------------- Equity in income of unconsolidated Property Service Businesses $ 4,007 $ 1,~~306~~636 $ 6,~~225~~990 ~~100.0%~~$ 2,155 =========== =========== ========= =============

/(1)/SRC is consolidated in 2001 due to change in voting control. RESULTS OF OPERATIONS Comparison of Three Months Ended June 30, 2001 to Three Months Ended June 30, 2000. Summary. Net income of the Operating Partnership decreased $2.9 million, or 9.0%, from $32.0 million for the three months ended June 30, 2000 to $29.1 million for the three months ended June 30, 2001. This was due primarily to a $4.2 million gain on the sale of property during 2000 versus a $2.9 million expense in 2001 related to merger costs. Funds from Operations ("FFO") of the Operating Partnership increased $8.4 million, or 23.6%, from $35.6 million to $44.0 million during the same period. Net income of the Company decreased from $15.8 million ($0.73 per diluted common share) for the three months ended June 30, 2000 to $15.7 million ($0.67 per diluted common share) for the three months ended June 30, 2001 due to the prior year gain offset by merger costs. FFO of the Company increased 27.7%, from $23.1 million to $29.4 million during the same period. The increase in FFO is primarily attributable to net operating income growth of 7.5% on the core portfolio and contributions from acquired and developed properties. Revenue increased $14.4 million, or 15.2%, from $94.7 million for the three months ended June 30, 2000 to $109.1 million for the three months ended June 30, 2001. Operating expenses increased $8.7 million, or 24.9%, from $35.1 million during the second quarter of 2000 to $43.8 million during the current quarter. Core Portfolio. Revenue from the core portfolio increased $4.5 million, or 7.0%, over the prior year period resulting in average monthly revenue per apartment unit of $1,291. The Company 22 continued its selective kitchen and/or bath renovation program, which has significantly enhanced its ability to increase rents. Management estimates the return on such investments is approximately 12% to 15%. Overall, rent potential increased 7.6% during the quarter as compared to the prior year. This was partially offset by a decrease in occupancy. Average economic occupancy for the core portfolio was 96.2% for the three months ended June 30, 2001 compared to 97.5% for the comparable prior year quarter. Expenses for the core portfolio increased $1.5 million, or 6.2%, due primarily to a significant increase in utility costs over the prior year's quarter. A combination of higher usage and significantly higher gas rates resulted in a $0.8 million increase over the prior year. Acquisition/Disposition Portfolio. The acquisition properties are defined as properties acquired subsequent to December 31, 1999. Results for the second quarter of 2000 reflect two acquisition properties, two residential dispositions totaling 989 apartment units, and one retail disposition. Results for the second quarter of 2001 reflect four acquisition properties and no dispositions totaling 1,044 apartment units. Total capitalized cost of the acquisition portfolio at June 30, 2001 was $131.0 million. Redevelopment Portfolio. The redevelopment portfolio includes purchased properties in which the Company is making significant renovations to reposition the property in the market place. The redevelopment portfolio consists of ten properties totaling 7,361 units and contributed approximately 36%, or $5.2 million, of the total revenue increase. Total capitalized cost of the redevelopment portfolio at June 30, 2001 was $630.1 million. The total spent on renovations for the second quarter of 2001 was $22.3 million. Development Portfolio. One Superior Place reached stabilized occupancy in June 2000 and produced net operating income of $3.3 million for current quarter, compared to $2.8 million in the prior year quarter. Total capitalized cost at June 30, 2001 was $116.2 million, which does not reflect an earnout payment expected to be paid to the developer in early 2002. Park Connecticut reached stabilized occupancy in October 2000 and produced net operating income of $0.6 million for the current quarter compared to $0.1 million in the prior year quarter. Total capitalized cost at June 30, 2001 was $28.5 million. Alban Towers delivered initial units in May 2001 and had 100 units delivered as of June 30, 2001. The project had a net operating loss of $0.2 million for the current quarter. As of June 30, the property was 27% leased and 10% occupied. Stabilization is expected in the first quarter of 2002. Total capitalized cost at June 30, 2001 was $56.8 million. Property Service Businesses. Recent tax legislation which became effective January 1, 2001 allows the direct ownership and control by REITs of Taxable REIT Subsidiaries ("TRS"). Such TRS's may engage in activities which were previously considered impermissible for REITs in terms of qualifying income for purposes of maintaining REIT qualification. Effective January 1, 2001, the Company and all of its Property Service Businesses have elected TRS status in accordance with the new legislation. No changes have been made, however, to the ownership structure of CES or SMC. The Company continues to maintain its 99%, non-voting interest as it has in the past. However, SRC has changed. In 2001, the Company purchased the remaining 1% voting interest in 23

Total $ Average $ Spent Per (In Thousands) Core Unit -------------- --------- Expenditure Type ---------------- Kitchen/Bath $ 5,566 $282 Washer/Dryer 300 15 Other/(1)/ 1,144 58 ------- ---- Core Repositioning 7,010 355 Recurring Improvements 5,236 266 ------- ---- Total Capital Expenditures -Core Portfolio $12,246 $621 ======= ====

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