Federal Realty Investment Trust (FRT) 10-K risk factor changes: FY2007 vs FY2006

Also, documents that we “incorporate by reference” into this Annual Report on Form 10-K, including documents that we subsequently file with the Securities and Exchange Commission, which [added: we refer to as the SEC, will contain forward-looking statements.]

As of December 31, [removed: 2006,] [added: 2007,] we had approximately [removed: $1.7] [added: $1.6] billion of debt outstanding.

Of that outstanding debt, approximately [removed: $285] [added: $349.4] million was secured by [removed: 15] [added: 18] of our properties and approximately [removed: $149] [added: $76.1] million represented capital lease obligations on [removed: 12] [added: four] of our properties.

In addition, we own a 30% interest in a joint venture that had [removed: $77.4] [added: $81.5] million of debt secured by six properties as of December 31, [removed: 2006.][added: 2007.]

[removed: In total, approximately $1.6] [added: Approximately $1.4] billion [added: (87%)] of our debt as of December 31, [removed: 2006,] [added: 2007,] which includes all of our property secured debt [removed: (including the property secured debt of the joint venture)] and our capital lease obligations, is fixed rate debt.

[removed: Our organizational] documents do not limit the level or amount of debt that we may incur.

| | • | | require us to dedicate increased amounts of our cash flow from operations to payments on [added: fixed rate debt upon refinancing or on] our variable rate, unhedged [removed: debt] [added: debt,] if interest rates rise; |

As of December 31, [removed: 2006,] [added: 2007,] we were in compliance with all of our financial covenants.

| | • | | significant time lag between commencement and completion subjects us to greater risks due to [removed: fluctuation] [added: fluctuations] in the general economy; |

Of our approximately [removed: $1.7] [added: $1.6] billion of debt outstanding as of December 31, [removed: 2006,] [added: 2007,] approximately [removed: $107] [added: $209.4] million bears interest at variable rates and was unhedged.

In addition, an increase in market interest rates may lead purchasers of our debt securities and preferred shares to demand a higher annual yield, which could adversely affect the market price of our outstanding debt securities and preferred shares and the cost of [added: refinancing or] issuing additional debt securities or preferred shares.

| | • | | economic downturns in [added: general, or in] the areas where our properties are located; |

In addition, insurance [added: companies may no]

[removed: companies may no] longer offer coverage against certain types of losses, such as losses due to terrorist acts and toxic mold, or, if offered, the expense of obtaining these types of insurance may not be justified.

Our organizational documents do not limit the amount of funds that we may invest in properties and assets jointly with other persons or entities and as of February [removed: 23, 2007,] [added: 22, 2008,] excluding our joint venture with Clarion Lion Properties Fund, we hold [removed: eight shopping centers and five urban] [added: ten predominantly] retail [removed: and mixed-use properties] [added: real estate projects] jointly with other persons.

Although we hold the managing general partnership or membership interest in all of our existing co-investments as of February [removed: 23, 2007,] [added: 22, 2008,] we must obtain the consent of the co-investor or meet defined criteria to sell or to finance [removed: five] [added: three] of these properties.

In addition, on July 1, 2004, we entered into a [removed: new] joint venture with affiliates of Clarion Lion Properties Fund for purposes of acquiring properties.

As of December 31, [removed: 2006,] [added: 2007,] this joint venture owned [removed: six] [added: seven] properties.

Under various federal, state and local laws, ordinances and regulations, we and our tenants may be [added: required to investigate and clean up certain hazardous or toxic substances released on or in properties we own or]

[removed: required to investigate and clean up certain hazardous or toxic substances released on or in properties we own or] operate, and also may be required to pay other costs relating to hazardous or toxic substances.

[removed: If that] happened, either the transfer or ownership would be void or the shares would be transferred to a charitable trust and then sold to someone who can own those shares without violating the 9.8% ownership limit.

Our joint venture’s debt of $81.5 million is also fixed rate debt.

Our organizational

Our investment strategy includes the redevelopment and acquisition of community and neighborhood shopping centers in densely populated areas with high average household incomes and significant barriers to adding competitive retail supply.

If that

##### [Table of Contents](#toc)

we refer to as the SEC, will contain forward-looking statements.

We have a substantial amount of debt.

Our investment strategy is focused on the redevelopment and acquisition of community and neighborhood shopping centers that are anchored by grocery stores, drugstores or high volume, value-oriented retailers that provide consumer necessities.

| --- | --- |

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing in “Item 8.

Financial Statements and Supplementary Data” of this report.

Overview

We are an equity real estate investment trust specializing in the ownership, management, development and redevelopment of high quality retail and mixed-use properties.

As of December 31, 2006, we owned or had a majority interest in 111 community and neighborhood shopping centers and mixed-use properties comprising approximately 18.8 million square feet.

Our properties are located primarily in densely populated and affluent communities in strategic metropolitan markets in the Mid-Atlantic and Northeast regions of the United States, as well as in California.

In total, these 111 commercial properties were 96.5% leased at December 31, 2006.

A joint venture in which we own a 30% interest owned four neighborhood shopping centers totaling approximately 0.7 million square feet as of December 31, 2006.

In total, the joint venture properties in which we own an interest were 98.7% leased at December 31, 2006.

We have paid quarterly dividends to our shareholders continuously since our founding in 1962 and have increased our dividends per common share for 39 consecutive years.

##### [Table of Contents](#toc)

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, which we refer to as GAAP, requires management to make estimates and assumptions that in certain circumstances affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses.

These estimates are prepared using management’s best judgment, after considering past and current events and economic conditions.

In addition, information relied upon by management in preparing such estimates includes internally generated financial and operating information, external market information, when available, and when necessary, information obtained from consultations with third party experts.

Actual results could differ from these estimates.

A discussion of possible risks which may affect these estimates is included in “Item 1A.

Risk Factors” of this report.

Management considers an accounting estimate to be critical if changes in the estimate or accrual results could have a material impact on our consolidated results of operations or financial condition.

The most significant accounting policies, which involve the use of estimates and assumptions as to future uncertainties and, therefore, may result in actual amounts that differ from estimates, are as follows:

_Revenue Recognition and Accounts Receivable_

Leases with tenants are classified as operating leases.

Substantially all such leases contain fixed escalations which occur at specified times during the term of the lease.

Base rents are recognized on a straight-line basis from when the tenant controls the space through the term of the related lease, net of valuation adjustments, based on management’s assessment of credit, collection and other business risk.

We make estimates of the collectibility of our accounts receivable related to base rents, straight-line rents, expense reimbursements and other revenue or income taking into account our expertise in the retail sector, tenant credit information both internally and externally available, payment history, industry trends, tenant credit-worthiness and the length of remaining lease terms over which certain of these amounts will be collected.

In some cases, primarily relating to straight-line rents, the collection of these amounts extends beyond one year.

Our experience relative to unbilled straight-line rents is that a certain portion of the amounts otherwise recognizable as revenue is never billed to or collected from tenants due to early lease terminations, lease modifications, bankruptcies and other factors.

Accordingly, the extended collection period for straight-line rents along with our evaluation of tenant credit risk may result in the nonrecognition of a portion of straight-line rental income until the collection of such income is reasonably assured.

These estimates have a direct impact on our net income.

Historically, we have recognized bad debt expense between 0.5% and 1.0% of rental income and it was 0.2% in 2006.

An increase in our bad debt expense would decrease our net income.

For example, if we had experienced an increase in bad debt of 0.5% of rental income in 2006, our net income would have been reduced by approximately $2.2 million.

_Real Estate_

The nature of our business as an owner, redeveloper and operator of retail shopping centers and mixed-use properties means that we invest significant amounts of capital.

Depreciation and maintenance costs relating to our properties constitute substantial costs for us as well as the industry as a whole.

We capitalize real estate investments and depreciate them in accordance with GAAP and consistent with industry standards based on our best estimates of the assets’ physical and economic useful lives.

The cost of our real estate investments, less salvage value, if any, is charged to depreciation expense over the estimated life of the asset using straight-line rates for financial statement purposes.

We periodically review the estimated lives of our assets and implement changes, as necessary, to these estimates and, therefore, to our depreciation rates.

These reviews take into account the historical retirement and replacement of our assets, the repairs required to maintain the condition of our assets, the cost of redevelopments that may extend the useful lives of our assets and general economic and real estate factors.

We [removed: also] [added: may] enter into certain types of derivative financial instruments to further reduce interest rate risk.

As of December 31, [removed: 2006,] [added: 2007,] we were not party to any open derivative financial instruments.

The majority of our outstanding debt obligations (maturing at various times through [removed: 2028] [added: 2031] or through [removed: 2077] [added: 2106] including capital lease obligations) have fixed interest rates which limit the risk of fluctuating interest rates.

[removed: Interest] [added: However, interest] rate fluctuations may affect the fair value of our fixed rate debt [removed: instruments, however.][added: instruments.]

At December 31, [removed: 2006] [added: 2007] we had $1.4 billion of fixed-rate debt outstanding.

If interest rates on our fixed-rate debt instruments at December 31, [removed: 2006] [added: 2007] had been 1.0% higher, the fair value of those debt instruments on that date would have decreased by approximately [removed: $73.2] [added: $70.1] million.

If interest rates on our fixed-rate debt instruments at December 31, [removed: 2006] [added: 2007] had been 1.0% lower, the fair value of those debt instruments on that date would have increased by approximately [removed: $83.4] [added: $71.0] million.

At December 31, [removed: 2006,] [added: 2007,] we had [removed: $107.4] [added: $209.4] million of variable rate debt outstanding.

Based upon this amount of variable rate debt, if interest rates increased by 1.0% our annual interest expense would increase by approximately [removed: $1.1] [added: $2.1] million, and our net income and cash flows for the year would decrease by approximately [removed: $1.1] [added: $2.1] million.

Conversely, if interest rates decreased by 1.0%, our annual interest expense would decrease by approximately [removed: $1.1] [added: $2.1] million, and our net income and cash flows for the year would increase by approximately [removed: $1.1] [added: $2.1] million.

Quoted market prices were used to estimate the fair value of our marketable senior notes and debentures and discounted cash flow analysis is generally used to estimate the fair value of our mortgages and notes payable.

Considerable judgment is necessary to estimate the fair value of financial instruments.

We were exposed to credit loss in the event of non-performance by the counter party to our interest rate swap used to fix the LIBOR portion of our $150 million term loan.

The counterparty of this swap had a long-term debt rating of “A” by Standard and Poor’s Rating Service and “A1” by Moody’s Investor Service.

We are an equity real estate investment trust (“REIT”) specializing in the ownership, management, development and redevelopment of high quality retail and mixed-use [removed: properties.][added: properties located primarily in densely populated and affluent communities in strategically selected metropolitan markets in the Northeast and Mid-Atlantic regions of the United States, as well as in California.]

A joint venture in which we own a 30% interest owned [removed: six neighborhood shopping centers] [added: seven retail real estate projects] totaling approximately [removed: 0.7] [added: 1.0] million square feet as of December 31, [removed: 2006.][added: 2007.]

In total, the joint venture properties in which we own an interest were [removed: 98.7%] [added: 98.3%] leased at December 31, [removed: 2006.][added: 2007.]

We have paid quarterly dividends to our shareholders continuously since our founding in 1962 and have increased our dividends per common share for [removed: 39] [added: 40] consecutive years.

Revenue, property operating income, [removed: total assets] and other financial information of each reportable segment are described in “Item 7.

We were founded in 1962 as a real estate investment trust under the laws of the District of Columbia and [removed: reformed] [added: re-formed] as a real estate investment trust in the state of Maryland in 1999.

Our investments primarily fall into one of the following [removed: four] [added: five] categories:

| | • | | renovating or expanding tenant spaces for tenants capable of producing higher sales, and therefore, paying higher rents, including expanding space available to an existing tenant that is performing well but is operating out of an old or otherwise inefficient store format; [removed: and] |

At [removed: December 31, 2006,] [added: February 22, 2008,] we had [removed: 221] [added: 301] full-time employees and [removed: 114] [added: 155] part-time employees.

None of our employees [removed: is] [added: are] represented by a collective bargaining unit.

We have elected to treat certain of our subsidiaries as taxable REIT subsidiaries, [removed: each of] which we refer to as a TRS.

The sales of condominiums at Santana Row, which occurred between August 2005 and August 2006, [added: and the sales of Bath Shopping Center, Key Road Plaza and Riverside Plaza in 2007] were conducted through a TRS.

[removed: As a result of these condominium sales,] [added: In 2007, 2006, and 2005,] our TRS incurred approximately [added: $1.5 million,] $2.4 million and $3.5 [removed: million] [added: million, respectively,] of income [removed: taxes in 2006 and 2005, respectively.][added: taxes.]

[removed: Such costs or liabilities] could exceed the value of the affected real estate.

Retailers at our properties also face increasing competition from outlet stores, discount shopping clubs, [added: superstores,] and other forms of marketing of goods and services, such as direct mail, electronic commerce and telemarketing.

As of December 31, 2007, we owned or had a majority interest in community and neighborhood shopping centers and mixed-use properties which are operated as 82 predominantly retail real estate projects comprising approximately 18.2 million square feet.

In total, these 82 real estate projects were 96.7% leased at December 31, 2007.

| | • | | developing the retail portions of mixed-use properties and developing other portions of mixed-use properties we already own; and |

Such costs or liabilities

| --- | --- | --- | --- |

##### [Table of Contents](#toc)

As of December 31, 2006, we owned, had a majority interest in, or controlled 111 community and neighborhood shopping centers and mixed-use properties comprising approximately 18.8 million square feet, located primarily in densely populated and affluent communities with relatively high barriers to entry throughout the Northeast and Mid-Atlantic United States, as well as in California.

In total, these 111 commercial properties were 96.5% leased at December 31, 2006.

Other than the condominium sales, our TRS activities have been limited and they did not incur any significant income taxes.

The complaint alleged that a one page document entitled “Final Proposal,” which included language that it was subject to approval of formal documentation, constituted a ground lease of a parcel of property located adjacent to our Santana Row property and gave First National Mortgage Company the option to require that we acquire the property at a price determined in accordance with a formula included in the “Final Proposal.” [removed: The plaintiff is seeking an unspecified amount of monetary damages.][added: A trial as to liability only was held in June 2006 and a jury rendered a verdict against us.]

We are also involved in a litigation matter relating to a shopping center in New Jersey where a former tenant has alleged that [removed: we, through] [added: we and] our management [removed: agent, engaged in fraud] [added: agent acted improperly] by failing to disclose a condemnation action at the property that was pending when the lease was signed.

[removed: A trial as to liability only began on February 26, 2007 and if] [added: If] we are found [removed: liable,] [added: liable once the stay has been lifted,] a trial will be held to determine the amount of damages.

Based on the [removed: evidence and] information available to us, we believe there is a reasonable possibility that [removed: a verdict may] [added: we will] be [removed: rendered against us.][added: found liable.]

If a verdict is rendered against us, we [removed: will] [added: may] seek indemnification from the third party management company that negotiated the lease on our behalf.

We cannot assess with any certainty at this time the potential damages for which we would be liable if a verdict is rendered against us or the potential amounts we [removed: would] [added: might] recover against the third party management company; however, if a verdict is rendered against us, there may be a material adverse impact on our net income in the period [removed: during] [added: in] which [removed: our indemnification claim is pending.][added: it becomes both probable that we will have to pay the damages and such damages can be reasonably estimated.]

A trial on the issue of damages has been set for April 2008.

The complaint did not specify the amount of damages claimed.

We have now received reports from our experts and the plaintiff’s experts which show potential damages ranging from $600,000 to $24 million.

We cannot make a reasonable estimate of potential damages until discovery is completed on the damages issue and the court rules on various legal issues impacting the calculation of damages.

We intend to appeal the jury verdict; however, no appeal of the judgment can be taken until the trial on damages has been completed.

If we are not successful in overturning the jury verdict, we will be liable for damages.

Depending on the amount of damages awarded, it is possible there could be a material adverse impact on our net income in the period in which it becomes both probable that we will have to pay the damages and such damages can be reasonably estimated.

In any event, management does not believe it will have a material impact on our financial position.

A trial as to liability only has been concluded and post-trial briefs have been filed, but no decision has been rendered.

One of the plaintiffs in the matter has filed for bankruptcy protection and as a result, the judge in our case has stayed further proceedings in the case.

In any event, management does not believe it will have a material impact on our financial position.

A trial as to liability only was held and on June 27, 2006, a jury rendered a verdict against us.

A case management conference has been scheduled for March 23, 2007, at which time we expect a schedule to be set for additional discovery and a trial date on the issue of damages.

The complaint did not specify the amount of damages claimed and we cannot make a reasonable estimate of potential damages until experts are retained and additional discovery is completed on the damages issue.

þ Annual report pursuant to the Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, [removed: 2006][added: 2007]

The aggregate market value of the Registrant’s common shares held by non-affiliates of the Registrant, based upon the closing sales price of the Registrant’s common shares on June 30, [removed: 2006] [added: 2007] was [removed: $3.7] [added: $4.4] billion.

The number of Registrant’s common shares outstanding on February [removed: 23, 2007] [added: 22, 2008] was [removed: 55,428,896.][added: 58,754,117.]

FISCAL YEAR ENDED DECEMBER 31, [removed: 2006][added: 2007]

Portions of the Registrant’s Proxy Statement to be filed with the Securities and Exchange Commission for Registrant’s [removed: 2007] [added: 2008] annual meeting of shareholders to be held in May [removed: 2007] [added: 2008] will be incorporated by reference into Part III hereof.

| Item 1. | | [removed: [Business](#tx53600_2)] [added: [Business](#tx20389_2)] | | 3 |

| Item 1A. | | [Risk [removed: Factors](#tx53600_3)] [added: Factors](#tx20389_3)] | | [removed: 7] [added: 8] |

| Item 1B. | | [Unresolved Staff [removed: Comments](#tx53600_4)] [added: Comments](#tx20389_4)] | | 17 |

| Item 2. | | [removed: [Properties](#tx53600_5)] [added: [Properties](#tx20389_5)] | | 17 |

| Item 3. | | [Legal [removed: Proceedings](#tx53600_6)] [added: Proceedings](#tx20389_6)] | | [removed: 26] [added: 25] |

| Item 4. | | [Submission of Matters to a Vote of [removed: Shareholders](#tx53600_7)] [added: Shareholders](#tx20389_7)] | | [removed: 26] [added: 25] |

| Item 5. | | [Market for Our Common Equity and Related Shareholder Matters and Issuer Purchases of Equity [removed: Securities](#tx53600_9)] [added: Securities](#tx20389_9)] | | [removed: 27] [added: 26] |

| Item 6. | | [Selected Financial [removed: Data](#tx53600_10)] [added: Data](#tx20389_10)] | | [removed: 29] [added: 28] |

| Item 7. | | [Management’s Discussion and Analysis of Financial Condition and Results of [removed: Operations](#tx53600_11)] [added: Operations](#tx20389_11)] | | [removed: 31] [added: 30] |

| Item 7A. | | [Quantitative and Qualitative Disclosures about Market [removed: Risk](#tx53600_12)] [added: Risk](#tx20389_12)] | | 57 |

| Item 8. | | [Financial Statements and Supplementary [removed: Data](#tx53600_13)] [added: Data](#tx20389_13)] | | 58 |

| Item 9. | | [Changes In and Disagreements with Accountants on Accounting and Financial [removed: Disclosure](#tx53600_14)] [added: Disclosure](#tx20389_14)] | | 58 |

| Item 9A. | | [Controls and [removed: Procedures](#tx53600_15)] [added: Procedures](#tx20389_15)] | | 58 |

| Item 9B. | | [Other [removed: Information](#tx53600_16)] [added: Information](#tx20389_16)] | | 60 |

| [PART [removed: III](#tx53600_17)] [added: III](#tx20389_17)] | | | | |

| Item 10. | | [Trustees, Executive Officers and Corporate [removed: Governance](#tx53600_18)] [added: Governance](#tx20389_18)] | | 61 |

| Item 11. | | [Executive [removed: Compensation](#tx53600_19)] [added: Compensation](#tx20389_19)] | | 61 |

| Item 12. | | [Security Ownership of Certain Beneficial Owners and Management and Related Shareholder [removed: Matters](#tx53600_20)] [added: Matters](#tx20389_20)] | | 61 |

| Item 13. | | [Certain Relationships and Related Transactions, and Trustee [removed: Independence](#tx53600_21)] [added: Independence](#tx20389_21)] | | 61 |

| Item 14. | | [Principal Accountant Fees and [removed: Services](#tx53600_22)] [added: Services](#tx20389_22)] | | 61 |

| Item 15. | | [Exhibits and Financial Statement [removed: Schedules](#tx53600_24)] [added: Schedules](#tx20389_24)] | | 62 |

| [PART I](#tx20389_1) | | | | |

| [PART II](#tx20389_8) | | | | |

| [PART IV](#tx20389_23) | | | | |

| [SIGNATURES](#tx20389_25) | | | | 63 |

| [PART I](#tx53600_1) | | | | |

| [PART II](#tx53600_8) | | | | |

| [PART IV](#tx53600_23) | | | | |

| [SIGNATURES](#tx53600_25) | | | | 63 |

As of December 31, [removed: 2006,] [added: 2007,] we owned or had a majority ownership interest in [removed: 111] community and neighborhood shopping centers and [removed: retail] mixed-used properties [added: which are operated as 82 predominantly retail real estate projects] comprising approximately [removed: 18.8] [added: 18.2] million square [added: feet.]

[removed: feet,] [added: These properties are] located primarily in densely populated and affluent communities [removed: throughout] [added: in strategic metropolitan markets in] the Northeast and Mid-Atlantic [added: regions of the] United States, as well as California.

No single property accounted for over 10% of our [removed: 2006] [added: 2007] total [removed: revenue or net income.][added: revenue.]

We operate our business on an asset management model, where [removed: small, focused] [added: asset management] teams are responsible for a portfolio of assets.

We [removed: have divided] [added: manage] our portfolio [removed: of properties into] [added: as] two operating regions: the East and West.

As of December 31, [removed: 2006,] [added: 2007,] we had approximately [removed: 2,300] [added: 2,400] leases, [added: with tenants] ranging from sole proprietors to major national retailers.

No one tenant or affiliated group of tenants accounted for more than 2.5% of our annualized base rent as of December 31, [removed: 2006.][added: 2007.]

Our [removed: 112 properties (including our one apartment complex)] [added: 82 real estate projects] are located in [removed: 14] [added: 12] states and the District of Columbia.

The following table shows, by region and state within the region, the number of [removed: properties,] [added: projects,] the gross leasable area of commercial space and the percentage of total portfolio gross leasable area of commercial space in each state as of December 31, [removed: 2006.][added: 2007.]

| Region and State | | Number of [removed: Properties] [added: Projects] | | Gross Leasable Area | | Percentage of Gross Leasable Area | |

| | | [removed: | |] (In square feet) | | | | [added: | |]

| New Jersey | | [removed: 10] [added: 4] | | [removed: 2,679,000] [added: 1,384,000] | | [removed: 14.3] [added: 7.6] | % |

| New York | | [removed: 7] [added: 5] | | [removed: 1,148,000] [added: 1,110,000] | | 6.1 | % |

| Illinois | | 4 | | 757,000 | | [removed: 4.0] [added: 4.2] | % |

| Connecticut | | [removed: 3] [added: 2] | | [removed: 317,000] [added: 315,000] | | 1.7 | % |

| North Carolina | | 1 | | [removed: 159,000] [added: 156,000] | | 0.8 | % |

| Total East region | | [removed: 78] [added: 69] | | [removed: 16,195,000] [added: 15,568,000] | | [removed: 86.2] [added: 85.5] | % |

| Total West region | | [removed: 34] [added: 13] | | [removed: 2,605,000] [added: 2,627,000] | | [removed: 13.8] [added: 14.5] | % |

| Total all [removed: regions(2)] [added: regions] | | [removed: 112] [added: 82] | | [removed: 18,800,000] [added: 18,195,000] | | 100.0 | % |

| (1) | [removed: We also] [added: Additionally, we] own two participating mortgages totaling approximately $28.3 million secured by multiple buildings in Manayunk, Pennsylvania. |

These features in our leases reduce our exposure to higher costs [removed: caused by inflation] and allow us to participate in improved tenant sales.

Leases on residential units are generally for a period of one year or less and, in [removed: 2006,] [added: 2007,] represented approximately [removed: 2.8%] [added: 3.3%] of total [added: rental] revenues.

The following table sets forth the schedule of lease expirations for our commercial leases in place as of December 31, [removed: 2006] [added: 2007] for each of the 10 years beginning with [removed: 2007] [added: 2008] and after [removed: 2016] [added: 2017] in the aggregate, in both cases, assuming that none of the tenants exercise future renewal options.

Annualized base rents reflect in-place contractual rents as of December 31, [removed: 2006.][added: 2007.]

| Year of Lease Expiration | | Leased Square Footage Expiring | | Percentage of Leased Square Footage Expiring | | | Annualized Base Rent Represented by Expiring Leases | | | Percentage of [removed: Annualized Base] [added: Annualized Base] Rent Represented by Expiring Leases | |

The following table sets forth information concerning all [removed: properties] [added: real estate projects] in which we owned an equity interest, had a leasehold interest, or controlled and are consolidated as of December 31, [removed: 2006.][added: 2007.]

Except as otherwise noted, we are the sole owner of our retail [removed: properties.][added: real estate projects.]

Principal tenants are the largest tenants in the [removed: property] [added: project] based on square feet leased or are tenants important to a [removed: property’s] [added: project’s] success due to their ability to attract retail customers.

| Andorra Philadelphia, PA 19128 | | 1953 | | 1988 | | 267,000 | | [removed: 100%] [added: 99%] | | Acme Markets Kohl’s Staples L.A. Fitness |

| Assembly Square/Sturtevant [added: Street] Somerville, MA 02145 | | 2005 | | [removed: 2005] [added: 2005-2007] | | 554,000 | | 100% | | Bed, Bath & Beyond Christmas Tree Shops Kmart Staples TJ Maxx A.C. Moore Sports Authority |

| Bethesda Row Bethesda, MD 20814(7) | | 1945-1991 2001 | | 1993-2006 | | 477,000 | | [removed: 94%] [added: 92%] | | Barnes & Noble Giant Food Landmark Theater [removed: Washington Sports Club] |

| Brick Plaza Brick Township, NJ 08723(6) | | 1958 | | 1989 | | 409,000 | | 100% | | A&P Supermarket Barnes & Noble [added: AMC] Loews [removed: Theatres] Sports Authority |

| Bristol Bristol, CT 06010 | | 1959 | | 1995 | | [removed: 275,000] [added: 273,000] | | [removed: 97%] [added: 98%] | | Stop & Shop TJ Maxx |

| Chelsea Commons [removed: I & II] Chelsea, MA 02150 | | [removed: 1962] [added: 1962-1969] | | [removed: 2006] [added: 2006-2007] | | [removed: 179,000] [added: 196,000] | | [removed: 99%] [added: 91%] | | Sav-A-Lot Home Depot |

| Congressional Plaza Residential Rockville, MD 20852(4) | | 2003 | | 1965 | | 146 units | | [removed: 96%] [added: 90%] | | |

| Courthouse Center Rockville, MD 20852(5) | | 1970 | | 1997 | | [removed: 38,000] [added: 37,000] | | [removed: 97%] [added: 81%] | | |

| Crossroads Highland Park, IL 60035 | | 1959 | | 1993 | | 173,000 | | [removed: 95%] [added: 89%] | | [removed: Comp USA] Golfsmith Guitar Center |

| Dedham Dedham, MA 02026 | | 1959 | | 1993 | | [removed: 241,000] [added: 242,000] | | [removed: 94%] [added: 91%] | | [removed: Pier 1 Imports] Star Market |

| Eastgate Chapel Hill, NC 27514 | | 1963 | | 1986 | | [removed: 159,000] [added: 156,000] | | [removed: 90%] [added: 97%] | | [removed: Earth Fare] Stein Mart |

| Ellisburg Circle Cherry Hill, NJ 08034 | | 1959 | | 1992 | | [removed: 267,000] [added: 268,000] | | [removed: 89%] [added: 99%] | | Genuardi’s Stein Mart |

Property management teams consist of asset managers, leasing agents, development staff and financial personnel each of whom has responsibility for a distinct portfolio.

| Maryland | | 17 | | 3,809,000 | | 20.9 | % |

| Virginia | | 15 | | 3,607,000 | | 19.8 | % |

| Pennsylvania(1) | | 11 | | 2,394,000 | | 13.2 | % |

| Massachusetts | | 7 | | 1,651,000 | | 9.1 | % |

| California | | 12 | | 2,450,000 | | 13.5 | % |

| Texas | | 1 | | 177,000 | | 1.0 | % |

| 2008 | | 1,273,000 | | 7 | % | | $ | 21,948,000 | | 6 | % |

| 2009 | | 2,050,000 | | 12 | % | | | 39,036,000 | | 11 | % |

| 2010 | | 1,623,000 | | 9 | % | | | 33,002,000 | | 9 | % |

| 2011 | | 1,788,000 | | 10 | % | | | 43,408,000 | | 12 | % |

| 2012 | | 1,995,000 | | 12 | % | | | 43,926,000 | | 12 | % |

| 2013 | | 1,532,000 | | 9 | % | | | 30,912,000 | | 9 | % |

| 2014 | | 1,148,000 | | 7 | % | | | 26,387,000 | | 8 | % |

| 2015 | | 809,000 | | 5 | % | | | 17,209,000 | | 5 | % |

| 2016 | | 822,000 | | 5 | % | | | 20,448,000 | | 6 | % |

| 2017 | | 1,027,000 | | 6 | % | | | 23,194,000 | | 7 | % |

| Thereafter | | 3,221,000 | | 18 | % | | | 53,580,000 | | 15 | % |

| Total | | 17,288,000 | | 100 | % | | $ | 353,050,000 | | 100 | % |

| The Shoppes at Nottingham Square Baltimore, MD 21236 | | 2005-2006 | | 2007 | | 186,000 | | 100% | | Lowes’ Home Center |

| Rockville Town Square Rockville, MD 20852 | | 2006-2007 | | 2006-2007 | | 182,000 | | 100% | | CVS Gold’s Gym |

| Shoppers’ World Charlottesville, VA 23230 | | 1975-2001 | | 2007 | | 170,000 | | 96% | | Whole Foods Staples |

| THE AVENUE at White Marsh Baltimore, MD 21236(5) | | 1997 | | 2007 | | 298,000 | | 98% | | AMC Loews Old Navy Barnes & Noble A.C. Moore |

| White Marsh Plaza Baltimore, MD 21236 | | 1987 | | 2007 | | 80,000 | | 98% | | Giant Food |

| White Marsh Other Baltimore, MD 21236 | | 1985 | | 2007 | | 52,000 | | 100% | | |

| (11) | A portion of this property is subject to a capital lease obligation. |

##### [Table of Contents](#toc)

In addition, we own one apartment complex in Maryland.

Each region is operated under the direction of one or more asset managers, with dedicated leasing, property management and financial staff, and operates largely autonomously with respect to day-to-day operating decisions.

| Virginia | | 17 | | 3,348,000 | | 17.8 | % |

| Maryland | | 12 | | 3,033,000 | | 16.1 | % |

| Pennsylvania(1) | | 11 | | 2,397,000 | | 12.8 | % |

| Massachusetts | | 7 | | 1,577,000 | | 8.4 | % |

| New Hampshire | | 2 | | 294,000 | | 1.6 | % |

| Maine | | 1 | | 101,000 | | 0.5 | % |

| California | | 25 | | 2,434,000 | | 12.9 | % |

| Texas | | 9 | | 171,000 | | 0.9 | % |

| --- | --- |

| (2) | These 112 properties are operated as 86 real estate projects. |

| --- | --- |

| 2007 | | 1,219,000 | | 7 | % | | | 23,325,000 | | 6.9 | % |

| 2008 | | 1,910,000 | | 11 | % | | | 30,702,000 | | 9.1 | % |

| 2009 | | 2,270,000 | | 13 | % | | | 40,989,000 | | 12.1 | % |

| 2010 | | 1,586,000 | | 9 | % | | | 32,106,000 | | 9.5 | % |

| 2011 | | 1,761,000 | | 10 | % | | | 42,903,000 | | 12.7 | % |

| 2012 | | 1,734,000 | | 10 | % | | | 29,966,000 | | 8.8 | % |

| 2013 | | 995,000 | | 5 | % | | | 19,772,000 | | 5.8 | % |

| 2014 | | 1,112,000 | | 6 | % | | | 24,893,000 | | 7.3 | % |

| 2015 | | 840,000 | | 5 | % | | | 16,360,000 | | 4.8 | % |

| 2016 | | 922,000 | | 5 | % | | | 19,617,000 | | 5.8 | % |

| Thereafter | | 3,518,000 | | 19 | % | | | 58,220,000 | | 17.2 | % |

| Total | | 17,867,000 | | 100 | % | | $ | 338,853,000 | | 100.0 | % |

| | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| EAST REGION | | Year Completed | | Year Acquired | | Square Feet(1) /Apartment Units | | Percentage Leased(2) | | Principal Tenant(s) |

| 7770 Richmond Highway Alexandria, VA 22036 | | 1974 | | 2006 | | 61,000 | | 100% | | Gold’s Gym |

| Allwood Clifton, NJ 07013(3) | | 1958 | | 1988 | | 50,000 | | 100% | | Stop & Shop |

| Bath Shopping Center Bath, ME 04530 | | 1978 | | 2006 | | 101,000 | | 96% | | Shaw’s Supermarket CVS |

| Blue Star Watchung, NJ 07060(3) | | 1959 | | 1988 | | 410,000 | | 99% | | Shop Rite Kohl’s Michaels Toys R Us Marshalls |

| Brunswick North Brunswick, NJ 08902(3) | | 1957 | | 1988 | | 303,000 | | 99% | | A&P Supermarket A.J.Wright L.A. Fitness |

Retail and Residential Properties—continued

| | | | | | | | | | | |

| Clifton Clifton, NJ 07013(3) | | 1959 | | 1988 | | 80,000 | | 100% | | Drug Fair Dollar Express |

| Falls Plaza – East Falls Church, VA 22046 | | 1960 | | 1972 | | 71,000 | | 100% | | CVS Staples |

| | | | | | | | | | | |

| Hamilton Hamilton, NJ 08690(3) | | 1961 | | 1988 | | 190,000 | | 93% | | Shop Rite Stevens Furniture A.C. Moore |

No matters were submitted to a vote of our shareholders during the fourth quarter of the fiscal year ended December 31, [removed: 2006.][added: 2007.]

On February [removed: 23, 2007,] [added: 22, 2008,] there were [removed: 4,449] [added: 4,385] holders of record of our common shares.

We have paid quarterly dividends to our shareholders continuously since our founding in 1962 and have increased our [added: regular] annual dividend rate for [removed: 39] [added: 40] consecutive years.

Our total annual dividends paid per common share for [removed: 2006] [added: 2007] and [removed: 2005] [added: 2006] were [removed: $2.440] [added: $2.335] per share and [removed: $2.320] [added: $2.440] per [removed: share,] [added: share (including a $0.20 special dividend),] respectively.

No assurances can be given regarding what portion, if any, of distributions in [removed: 2007] [added: 2008] or subsequent years will constitute a return of capital for federal income tax purposes.

| | | Year Ended December 31, | | | | | [added: |]

| Ordinary dividend | | $ | [removed: 1.813] [added: 2.174] | | $ | [removed: 1.601] [added: 1.813] | [added: |]

| Ordinary dividend eligible for 15% tax rate | | | [removed: 0.066] [added: 0.044] | | | [removed: 0.093] [added: 0.066] | [added: |]

| Return of capital | | | [removed: 0.561] [added: —] | | | [removed: —] [added: 0.561] | [added: |]

| Capital gain | | | [removed: —] [added: 0.117] | | | [removed: 0.626] [added: —] | [added: |]

All equity securities sold by us during [removed: 2006] [added: 2007] that were not registered have been previously reported in a Quarterly Report on Form 10-Q.

No equity securities were purchased by us during [removed: 2006.][added: 2007.]

However, [removed: 4,919] [added: 2,326] common shares were placed into treasury as a result of restricted shares forfeited by former employees.

| 2007 | | | | | | | | | | |

| Fourth quarter | | $ | 95.19 | | $ | 78.58 | | $ | 0.610 | |

| Third quarter | | $ | 88.92 | | $ | 73.82 | | $ | 0.610 | |

| Second quarter | | $ | 92.59 | | $ | 75.27 | | $ | 0.575 | |

| First quarter | | $ | 97.12 | | $ | 81.93 | | $ | 0.575 | |

| | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- |

| | | 2007 | | | 2006 | | |

| | | | | | | | |

| | | $ | 2.335 | | $ | 2.440 | (1) |

| | | | | | | | |

| (1) | Includes a special dividend of $0.20 resulting from the sales of condominiums at Santana Row. |

| --- | --- |

Distributions on our 5.417% Series 1 Cumulative Convertible Preferred Shares were paid at the rate of $1.354 per share per annum commencing on the issuance date of March 8, 2007.

| 2005 | | | | | | | | | | |

| Fourth quarter | | $ | 65.55 | | $ | 56.62 | | $ | 0.755 | (1) |

| Third quarter | | $ | 65.73 | | $ | 58.19 | | $ | 0.555 | |

| Second quarter | | $ | 60.82 | | $ | 47.91 | | $ | 0.555 | |

| First quarter | | $ | 51.98 | | $ | 46.50 | | $ | 0.505 | |

For 2005, a portion of our distributions was designated as capital gain dividend.

| | | | | | | |

| --- | --- | --- | --- | --- | --- | --- |

| | | 2006 | | | 2005 | |

| | | | | | | |

| | | $ | 2.440 | | $ | 2.320 |

| | | | | | | |

Financial Statements and Supplementary Data.” Our selected operating data, other data and balance sheet data for the years ended [removed: 2002] [added: 2003] through [removed: 2005] [added: 2006] has been reclassified to conform to the presentation for the year ended [removed: 2006.][added: 2007.]

| | | [removed: 2006] [added: 2007] | | | | [removed: 2005] [added: 2006] | | | | [removed: 2004] [added: 2005] | | | | [removed: 2003] [added: 2004] | | | | [removed: 2002] [added: 2003] | | |

| Gain on sale of real estate | | $ | [removed: 23,956] [added: 94,768] | | | $ | [removed: 30,748] [added: 23,956] | | | $ | [removed: 14,052] [added: 30,748] | | | $ | [removed: 20,053] [added: 14,052] | | | $ | [removed: 19,101] [added: 20,053] | |

| Net income | | $ | [removed: 118,712] [added: 195,537] | | | $ | [removed: 114,612] [added: 118,712] | | | $ | [removed: 84,156] [added: 114,612] | | | $ | [removed: 94,497] [added: 84,156] | | | $ | [removed: 55,287] [added: 94,497] | |

| Net income available for common shareholders | | $ | [removed: 103,514] [added: 195,095] | | | $ | [removed: 103,137] [added: 103,514] | | | $ | [removed: 72,681] [added: 103,137] | | | $ | [removed: 75,990] [added: 72,681] | | | $ | [removed: 35,862] [added: 75,990] | |

| Net cash provided by operating activities(2) | | $ | [removed: 184,401] [added: 214,209] | | | $ | [removed: 174,941] [added: 186,654] | | | $ | [removed: 174,148] [added: 174,941] | | | $ | [removed: 136,393] [added: 174,148] | | | $ | [removed: 131,372] [added: 136,393] | |

| Net cash used in investing activities(2) | | $ | [removed: (317,429] [added: (151,439] | ) | | $ | [removed: (152,730] [added: (317,429] | ) | | $ | [removed: (157,611] [added: (152,730] | ) | | $ | [removed: (98,166] [added: (157,611] | ) | | $ | [removed: (185,983] [added: (98,166] | ) |

| Net cash (used [removed: in )] [added: in)] provided by financing activities(2) | | $ | [removed: 135,884] [added: (23,574] | [added: )] | | $ | [removed: (44,047] [added: 133,631] | [removed: )] | | $ | [removed: (21,030] [added: (44,047] | ) | | $ | [removed: (26,382] [added: (21,030] | ) | | $ | [removed: 60,171] [added: (26,382] | [added: )] |

| Dividends declared on common shares | | $ | [removed: 133,066] [added: 135,102] | | | $ | [removed: 124,928] [added: 133,066] | | | $ | [removed: 101,969] [added: 124,928] | | | $ | [removed: 93,889] [added: 101,969] | | | $ | [removed: 82,273] [added: 93,889] | |

| Basic | | | [removed: 53,469] [added: 56,108] | | | | [removed: 52,533] [added: 53,469] | | | | [removed: 51,008] [added: 52,533] | | | | [removed: 47,379] [added: 51,008] | | | | [removed: 41,624] [added: 47,379] | |

| Diluted | | | [removed: 53,962] [added: 56,543] | | | | [removed: 53,050] [added: 53,962] | | | | [removed: 51,547] [added: 53,050] | | | | [removed: 48,619] [added: 51,547] | | | | [removed: 42,882] [added: 48,619] | |

| Discontinued operations | | | [removed: 0.44] [added: 1.77] | | | | [removed: 0.57] [added: 0.39] | | | | [removed: 0.39] [added: 0.60] | | | | [removed: 0.57] [added: 0.40] | | | | [removed: 0.40] [added: 0.56] | |

| Total | | $ | [removed: 1.94] [added: 3.48] | | | $ | [removed: 1.96] [added: 1.94] | | | $ | [removed: 1.42] [added: 1.96] | | | $ | [removed: 1.60] [added: 1.42] | | | $ | [removed: 0.86] [added: 1.60] | |

| Total | | $ | [removed: 1.92] [added: 3.45] | | | $ | [removed: 1.94] [added: 1.92] | | | $ | [removed: 1.41] [added: 1.94] | | | $ | [removed: 1.59] [added: 1.41] | | | $ | [removed: 0.85] [added: 1.59] | |

| Dividends declared per common [removed: share] [added: share(3)] | | $ | [removed: 2.46] [added: 2.37] | | | $ | [removed: 2.37] [added: 2.46] | | | $ | [removed: 1.99] [added: 2.37] | | | $ | [removed: 1.95] [added: 1.99] | | | $ | [removed: 1.93] [added: 1.95] | |

| Funds from operations available to common [removed: shareholders(3)(4)] [added: shareholders(4)(5)] | | $ | [removed: 177,113] [added: 206,762] | | | $ | [removed: 163,544] [added: 177,113] | | | $ | [removed: 148,671] [added: 163,544] | | | $ | [removed: 131,257] [added: 148,671] | | | $ | [removed: 80,856] [added: 131,257] | |

| [removed: EBITDA(5)] [added: EBITDA(6)] | | $ | [removed: 316,783] [added: 417,560] | | | $ | [removed: 292,465] [added: 316,783] | | | $ | [removed: 258,143] [added: 292,465] | | | $ | [removed: 243,956] [added: 258,143] | | | $ | [removed: 183,488] [added: 243,956] | |

| Adjusted [removed: EBITDA(5)] [added: EBITDA(6)] | | $ | [removed: 292,827] [added: 322,792] | | | $ | [removed: 261,717] [added: 292,827] | | | $ | [removed: 244,091] [added: 261,717] | | | $ | [removed: 223,903] [added: 244,091] | | | $ | [removed: 174,034] [added: 223,903] | |

| Ratio of EBITDA to combined fixed charges and preferred share [removed: dividends(5)(6)] [added: dividends(6)(7)] | | | [removed: 2.6x] [added: 3.3x] | | | | [removed: 2.7x] [added: 2.6x] | | | | [removed: 2.5x] [added: 2.7x] | | | | [removed: 2.2x] [added: 2.5x] | | | | [removed: 1.7x] [added: 2.2x] | |

| Ratio of Adjusted EBITDA to combined fixed charges and preferred share [removed: dividends(5)(6)] [added: dividends(6)(7)] | | | [removed: 2.4x] [added: 2.5x] | | | | 2.4x | | | | 2.4x | | | | [removed: 2.1x] [added: 2.4x] | | | | [removed: 1.6x] [added: 2.1x] | |

| | | [added: 2007 | | |] 2006 | | | 2005 | | | 2004 | | | 2003 | | [removed: | 2002 | |]

| Real estate at cost | | $ | [removed: 3,204,258] [added: 3,452,847] | | $ | [removed: 2,829,321] [added: 3,204,258] | | $ | [removed: 2,666,276] [added: 2,829,321] | | $ | [removed: 2,470,149] [added: 2,666,276] | | $ | [removed: 2,306,826] [added: 2,470,149] |

| Total assets | | $ | [removed: 2,688,606] [added: 2,989,297] | | $ | [removed: 2,350,852] [added: 2,688,606] | | $ | [removed: 2,266,896] [added: 2,350,852] | | $ | [removed: 2,141,185] [added: 2,266,896] | | $ | [removed: 1,996,662] [added: 2,141,185] |

| Mortgage, construction loans and capital lease obligations | | $ | [removed: 460,398] [added: 450,084] | | $ | [removed: 419,713] [added: 460,398] | | $ | [removed: 410,885] [added: 419,713] | | $ | [removed: 414,357] [added: 410,885] | | $ | [removed: 383,812] [added: 414,357] |

| Notes payable | | $ | [removed: 109,024] [added: 210,820] | | $ | [removed: 316,755] [added: 109,024] | | $ | [removed: 325,051] [added: 316,755] | | $ | [removed: 361,323] [added: 325,051] | | $ | [removed: 207,711] [added: 361,323] |

| Senior notes and debentures | | $ | [removed: 1,127,508] [added: 977,556] | | $ | [removed: 653,675] [added: 1,127,508] | | $ | [removed: 568,121] [added: 653,675] | | $ | [removed: 532,750] [added: 568,121] | | $ | [removed: 532,284] [added: 532,750] |

| Shareholders’ equity | | $ | [removed: 784,078] [added: 1,114,632] | | $ | [removed: 774,847] [added: 784,078] | | $ | [removed: 790,534] [added: 774,847] | | $ | [removed: 691,374] [added: 790,534] | | $ | [removed: 644,287] [added: 691,374] |

| Number of common shares outstanding | | | [added: 58,646 | | |] 55,321 | | | 52,891 | | | 52,137 | | | 49,201 | [removed: | | 43,535 |]

| [removed: (3)] [added: (4)] | Funds from Operations (“FFO”) is a supplemental non-GAAP financial measure of real estate companies’ operating [removed: performance.] [added: performances.] The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as follows: net income, computed in accordance with the U.S. GAAP, plus depreciation and amortization of real estate assets and excluding extraordinary items and gains on the sale of real estate. We compute FFO in accordance with the NAREIT definition, and we have historically reported our FFO available for common shareholders in addition to our net income. |

| | | [removed: 2006] [added: 2007] | | | | [removed: 2005] [added: 2006] | | | | [removed: 2004] [added: 2005] | | | | [removed: 2003] [added: 2004] | | | | [removed: 2002] [added: 2003] | | |

| Net income | | $ | [removed: 118,712] [added: 195,537] | | | $ | [removed: 114,612] [added: 118,712] | | | $ | [removed: 84,156] [added: 114,612] | | | $ | [removed: 94,497] [added: 84,156] | | | $ | [removed: 55,287] [added: 94,497] | |

| Gain on sale of real estate | | | [removed: (23,956] [added: (94,768] | ) | | | [removed: (30,748] [added: (23,956] | ) | | | [removed: (14,052] [added: (30,748] | ) | | | [removed: (20,053] [added: (14,052] | ) | | | [removed: (19,101] [added: (20,053] | ) |

| Depreciation and amortization of real estate assets | | | [removed: 88,649] [added: 95,565] | | | | [removed: 82,752] [added: 88,649] | | | | [removed: 81,649] [added: 82,752] | | | | [removed: 68,202] [added: 81,649] | | | | [removed: 58,605] [added: 68,202] | |

| Amortization of initial direct costs of leases | | | [removed: 7,390] [added: 8,473] | | | | [removed: 6,972] [added: 7,390] | | | | [removed: 7,151] [added: 6,972] | | | | [removed: 5,801] [added: 7,151] | | | | [removed: 4,750] [added: 5,801] | |

| Depreciation of joint venture real estate assets | | | [removed: 768] [added: 1,241] | | | | [removed: 630] [added: 768] | | | | [removed: 187] [added: 630] | | | | [removed: —] [added: 187] | | | | — | |

| Funds from operations | | | [removed: 191,563] [added: 206,048] | | | | [removed: 174,218] [added: 191,563] | | | | [removed: 159,091] [added: 174,218] | | | | [removed: 148,447] [added: 159,091] | | | | [removed: 99,541] [added: 148,447] | |

| Dividends on preferred stock | | | [removed: (10,423] [added: (442] | ) | | | [removed: (11,475] [added: (10,423] | ) | | | (11,475 | ) | | | [removed: (15,084] [added: (11,475] | ) | | | [removed: (19,425] [added: (15,084] | ) |

| Income attributable to operating partnership units | | | [removed: 748] [added: 1,156] | | | | [removed: 801] [added: 748] | | | | [removed: 1,055] [added: 801] | | | | [removed: 1,317] [added: 1,055] | | | | [removed: 740] [added: 1,317] | |

| Preferred stock redemption costs | | | [added: — | | | |] (4,775 | ) | | | — | | | | — | | | | (3,423 | ) | [removed: | | — | |]

| Funds from operations available for common shareholders | | $ | [removed: 177,113] [added: 206,762] | | | $ | [removed: 163,544] [added: 177,113] | | | $ | [removed: 148,671] [added: 163,544] | | | $ | [removed: 131,257] [added: 148,671] | | | $ | [removed: 80,856] [added: 131,257] | |

| Rental income | | $ | 468,498 | | | $ | 414,979 | | | $ | 375,927 | | | $ | 351,101 | | | $ | 318,549 | |

| Property operating income(1) | | $ | 338,269 | | | $ | 301,574 | | | $ | 272,304 | | | $ | 245,253 | | | $ | 219,675 | |

| Income from continuing operations | | $ | 96,380 | | | $ | 90,552 | | | $ | 83,247 | | | $ | 63,755 | | | $ | 67,716 | |

| Continuing operations | | $ | 1.71 | | | $ | 1.41 | | | $ | 1.36 | | | $ | 1.02 | | | $ | 1.04 | |

| Gain on sale of real estate | | | — | | | | 0.14 | | | | — | | | | — | | | | — | |

| Continuing operations | | $ | 1.70 | | | $ | 1.40 | | | $ | 1.35 | | | $ | 1.01 | | | $ | 1.04 | |

| Discontinued operations | | | 1.75 | | | | 0.38 | | | | 0.59 | | | | 0.40 | | | | 0.55 | |

| Gain on sale of real estate | | | — | | | | 0.14 | | | | — | | | | — | | | | — | |

| Preferred stock | | $ | 9,997 | | $ | — | | $ | 135,000 | | $ | 135,000 | | $ | 135,000 |

| (3) | The 2006 and 2005 dividends declared per common share each include a special dividend of $0.20 resulting from the sales of condominiums at Santana Row. |

| --- | --- |

| ITEM 7. MANAGEMENT’S | DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |

| --- | --- |

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing in “Item 8.

Financial Statements and Supplementary Data” of this report.

Overview

We are an equity real estate investment trust specializing in the ownership, management, development and redevelopment of high quality retail and mixed-use properties.

As of December 31, 2007, we owned or had a majority interest in community and neighborhood shopping centers and mixed-use properties which are operated as 82 predominantly retail real estate projects comprising approximately 18.2 million square feet.

These properties are located primarily in densely populated and affluent communities in strategic metropolitan markets in the Mid-Atlantic and Northeast regions of the United States, as well as in California.

In total, these 82 real estate projects were 96.7% leased at December 31, 2007.

A joint venture in which we own a 30% interest owned seven retail real estate projects totaling approximately 1.0 million square feet as of December 31, 2007.

In total, the joint venture properties in which we own an interest were 98.3% leased at December 31, 2007.

We have paid quarterly dividends to our shareholders continuously since our founding in 1962 and have increased our dividends per common share for 40 consecutive years.

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Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, which we refer to as GAAP, requires management to make estimates and assumptions that in certain circumstances affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses.

These estimates are prepared using management’s best judgment, after considering past and current events and economic conditions.

In addition, information relied upon by management in preparing such estimates includes internally generated financial and operating information, external market information, when available, and when necessary, information obtained from consultations with third party experts.

Actual results could differ from these estimates.

A discussion of possible risks which may affect these estimates is included in “Item 1A.

Risk Factors” of this report.

Management considers an accounting estimate to be critical if changes in the estimate or accrual results could have a material impact on our consolidated results of operations or financial condition.

The most significant accounting policies, which involve the use of estimates and assumptions as to future uncertainties and, therefore, may result in actual amounts that differ from estimates, are as follows:

_Revenue Recognition and Accounts Receivable_

Leases with tenants are classified as operating leases.

Substantially all such leases contain fixed escalations which occur at specified times during the term of the lease.

Base rents are recognized on a straight-line basis from when the tenant controls the space through the term of the related lease, net of valuation adjustments, based on management’s assessment of credit, collection and other business risk.

We make estimates of the collectibility of our accounts receivable related to base rents, straight-line rents, expense reimbursements and other revenue or income taking into account our expertise in the retail sector, tenant credit information both internally and externally available, payment history, industry trends, tenant credit-worthiness and the length of remaining lease terms over which certain of these amounts will be collected.

In some cases, primarily relating to straight-line rents, the collection of these amounts extends beyond one year.

Our experience relative to unbilled straight-line rents is that a certain portion of the amounts otherwise recognizable as revenue is never billed to or collected from tenants due to early lease terminations, lease modifications, bankruptcies and other factors.

| Rental income | | $ | 438,201 | | | $ | 393,548 | | | $ | 368,299 | | | $ | 334,865 | | | $ | 297,286 | |

| Property operating income(1) | | $ | 317,994 | | | $ | 284,361 | | | $ | 256,321 | | | $ | 229,810 | | | $ | 203,361 | |

| Income from continuing operations | | $ | 95,076 | | | $ | 84,433 | | | $ | 64,041 | | | $ | 67,500 | | | $ | 38,648 | |

| Income before gain on sale of real estate | | $ | 94,756 | | | $ | 83,864 | | | $ | 70,104 | | | $ | 74,444 | | | $ | 45,833 | |

| Loss on abandoned developments held for sale | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (9,647 | ) |

| Income from continuing operations | | $ | 1.50 | | | $ | 1.39 | | | $ | 1.03 | | | $ | 1.03 | | | $ | 0.46 | |

| Income from continuing operations | | $ | 1.48 | | | $ | 1.37 | | | $ | 1.02 | | | $ | 1.03 | | | $ | 0.46 | |

| Discontinued operations | | | 0.44 | | | | 0.57 | | | | 0.39 | | | | 0.56 | | | | 0.39 | |

| Convertible subordinated debentures | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 75,000 |

| Redeemable preferred shares | | $ | — | | $ | 135,000 | | $ | 135,000 | | $ | 135,000 | | $ | 235,000 |

| Loss on abandoned developments held for sale | | | — | | | | — | | | | — | | | | — | | | | 9,647 | |

| ITEM 9. CHANGES | IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |

Not applicable.

| ITEM 9A. CON TROLS | AND PROCEDURES |

| --- | --- |

Quarterly Assessment

We carried out an assessment as of December 31, 2007 of the effectiveness of the design and operation of our disclosure controls and procedures and our internal control over financial reporting.

This assessment was done under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer.

Rules adopted by the SEC require that we present the conclusions of our principal executive officer and our principal financial officer about the effectiveness of our disclosure controls and procedures and the conclusions of our management about the effectiveness of our internal control over financial reporting as of the end of the period covered by this annual report.

Principal Executive Officer and Principal Financial Officer Certifications

Included as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K are forms of “Certification” of our principal executive officer and our principal financial officer.

The forms of Certification are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.

This section of this Annual Report on Form 10-K that you currently are reading is the information concerning the assessment referred to in the Section 302 certifications and this information should be read in conjunction with the Section 302 certifications for a more complete understanding of the topics presented.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports, such as this report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

These controls and procedures are based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e) promulgated under the Exchange Act.

Rules adopted by the SEC require that we present the conclusions of the Chief Executive Officer and Chief Financial Officer about the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report.

Internal Control over Financial Reporting

Establishing and maintaining internal control over financial reporting is a process designed by, or under the supervision of, our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, as appropriate, and effected by our employees, including management and our Board of Trustees, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

This process includes policies and procedures that:

| | • | | pertain to the maintenance of records that accurately and fairly reflect the transactions and dispositions of our assets in reasonable detail; |

| --- | --- | --- | --- |

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| | • | | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are made only in accordance with the authorization procedures we have established; and |

| --- | --- | --- | --- |

| | • | | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of any of our assets in circumstances that could have a material adverse effect on our financial statements. |

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Limitations on the Effectiveness of Controls

Management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud.

In designing and evaluating our control system, management recognized that any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.

Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, that may affect our operation have been or will be detected.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.

Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Over time, controls may become inadequate because of changes in conditions that cannot be anticipated at the present time, or the degree of compliance with the policies or procedures may deteriorate.

Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Scope of the Evaluations

The evaluation by our Chief Executive Officer and our Chief Financial Officer of our disclosure controls and procedures and our internal control over financial reporting included a review of procedures and our internal audit, as well as discussions with our Disclosure Committee, independent public accountants and others in our organization, as appropriate.

In conducting this evaluation, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in _Internal Control—Integrated Framework._ In the course of the evaluation, we sought to identify data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken.

The evaluation of our disclosure controls and procedures and our internal control over financial reporting is done on a quarterly basis, so that the conclusions concerning the effectiveness of such controls can be reported in our Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.

Certain information required in Part III is omitted from this Report but is incorporated herein by reference from our Proxy Statement for the [removed: 2007] [added: 2008] Annual Meeting of Shareholders (the “Proxy Statement”).

Our financial statement schedules are included in a separate section of this Annual Report on Form 10-K commencing on page [removed: F-32.][added: F-35.]

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized this [removed: 27] [added: 25] day of February, [removed: 2007.][added: 2008.]

| /s/ DONALD C. WOOD Donald C. Wood | | Chief Executive Officer, Trustee (Principal Executive Officer) | | February [removed: 27, 2007] [added: 25, 2008] |

| /s/ [removed: LARRY E. FINGER Larry E. Finger] [added: JOSEPH M. SQUERI Joseph M. Squeri] | | Executive Vice President, Chief Financial Officer and Treasurer [removed: (principal financial] [added: (Principal Financial] and [removed: accounting officer)] [added: Accounting Officer)] | | February [removed: 27, 2007] [added: 25, 2008] |

| /s/ JOSEPH S. VASSALLUZZO Joseph S. Vassalluzzo | | Non-Executive Chairman | | February [removed: 27, 2007] [added: 26, 2008] |

| /s/ JON E. BORTZ Jon Bortz | | Trustee | | February [removed: 27, 2007] [added: 25, 2008] |

| /s/ DAVID W. FAEDER David W. Faeder | | Trustee | | February [removed: 27, 2007] [added: 25, 2008] |

| /s/ KRISTIN GAMBLE Kristin Gamble | | Trustee | | February [removed: 27, 2007] [added: 26, 2008] |

| /s/ GAIL P. STEINEL Gail P. Steinel | | Trustee | | February [removed: 27, 2007] [added: 25, 2008] |

| [Management Assessment Report on Internal Control over Financial [removed: Reporting](#fin53600_51)] [added: Reporting](#fin20389_1)] | | F-2 |

| [Report of Independent Registered Public Accounting [removed: Firm](#fin53600_52)] [added: Firm](#fin20389_2)] | | F-3 |

| [Report of Independent Registered Public Accounting [removed: Firm](#fin53600_53)] [added: Firm](#fin20389_3)] | | F-4 |

| [Consolidated Balance [removed: Sheets](#fin53600_54)] [added: Sheets](#fin20389_4)] | | F-5 |

| [Consolidated Statements of [removed: Operations](#fin53600_55)] [added: Operations](#fin20389_5)] | | F-6 |

[removed: | [Consolidated Statements of Common Shareholders’ Equity](#fin53600_56) | | F-7 |][added: CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY]

| [Consolidated Statements of Cash [removed: Flows](#fin53600_57)] [added: Flows](#fin20389_7)] | | F-8 |

| [Notes to Consolidated Financial [removed: Statements](#fin53600_58)] [added: Statements](#fin20389_8)] | | [removed: F-9-F-32] [added: F-9-F-34] |

| [Schedule III—Summary of Real Estate and Accumulated [removed: Depreciation](#fin53600_59)] [added: Depreciation](#fin20389_9)] | | [removed: F-33-F-39] [added: F-35-F-41] |

| [Schedule IV—Mortgage Loans on Real [removed: Estate](#fin53600_60)] [added: Estate](#fin20389_10)] | | [removed: F-40-F-41] [added: F-42-F-43] |

Management conducted an assessment of the effectiveness of the Trust’s internal control over financial reporting as of December 31, [removed: 2006.][added: 2007.]

In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in _Internal Control – Integrated Framework._ Based on this assessment, management concluded that our internal control over financial reporting is [removed: effective] [added: effective,] based on those criteria, as of [removed: the end of our most recent fiscal year.][added: December 31, 2007.]

We have audited [removed: management’s assessment, included in the accompanying Management Assessment Report on Internal Control over Financial Reporting, that] Federal Realty Investment Trust (a Maryland real estate investment trust) [removed: maintained effective] [added: and subsidiaries’ (the Trust)] internal control over financial reporting as of December 31, [removed: 2006,] [added: 2007,] based on criteria established in _Internal Control—Integrated Framework_ issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

[removed: The] [added: Federal Realty Investment] Trust’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial [removed: reporting.][added: reporting, included in the accompanying Management Assessment Report on Internal Control over Financial Reporting.]

Our responsibility is to express an opinion on [removed: management’s assessment and an opinion on the effectiveness of the company’s] [added: Federal Realty Investment Trust’s] internal control over financial reporting based on our audit.

Our audit included obtaining an understanding of internal control over financial reporting, [removed: evaluating management’s assessment,] [added: assessing the risk that a material weakness exists,] testing and evaluating the design and operating effectiveness of internal [removed: control,] [added: control based on the assessed risk,] and performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our [removed: opinions.][added: opinion.]

In our opinion, [removed: management’s assessment that the] [added: Federal Realty Investment] Trust [removed: maintained] [added: and subsidiaries maintained, in all material respects,] effective internal control over financial reporting as of December 31, [removed: 2006, is fairly stated, in all material respects,] [added: 2007,] based on criteria established in _Internal Control—Integrated Framework_ issued by [removed: the Committee of Sponsoring Organizations of the Treadway Commission (COSO).][added: COSO_._]

[removed: Also] [added: We also have audited,] in [removed: our opinion,] [added: accordance with] the [removed: Trust maintained, in all material respects, effective] [added: standards of the Public Company Accounting Oversight Board (United States), the Trust’s] internal control over financial reporting as of December 31, [removed: 2006,] [added: 2007,] based on criteria established in _Internal Control—Integrated Framework_ issued by the Committee of Sponsoring Organizations of the Treadway Commission [removed: (COSO)_._][added: (COSO) and our report dated February 25, 2008 expressed an unqualified opinion.]

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Federal Realty Investment Trust [removed: (a Maryland real estate investment trust)] and subsidiaries [removed: (the Trust)] as of December 31, [removed: 2006] [added: 2007] and [removed: 2005,] [added: 2006,] and the related consolidated statements of operations, [removed: common] shareholders’ equity, and cash flows for each of the three years in the period ended December 31, [removed: 2006,] [added: 2007] and our report dated February [removed: 26, 2007] [added: 25, 2008] expressed an unqualified [removed: opinion on those financial statements.][added: opinion.]

We have audited the accompanying consolidated balance sheets of Federal Realty Investment Trust (a Maryland real estate investment trust) and subsidiaries (the Trust) as of December 31, [removed: 2006] [added: 2007] and [removed: 2005,] [added: 2006,] and the related consolidated statements of operations, [removed: common] shareholders’ equity, and cash flows for each of the three years in the period ended December 31, [removed: 2006.][added: 2007.]

These financial statements [added: and financial statement schedules] are the responsibility of the Trust’s management.

Our responsibility is to express an opinion on these financial statements [added: and financial statement schedules] based on our [removed: audit.][added: audits.]

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Trust as of December 31, [removed: 2006] [added: 2007] and [removed: 2005,] [added: 2006,] and the results of its operations and its cash flows for each of the three years in the period ended December 31, [removed: 2006] [added: 2007] in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the Notes to Consolidated Financial Statements, the [removed: Company] [added: Trust] adopted SFAS No. [removed: 123R,] [added: 123R] “_Share-Based [removed: Payment_,”] [added: Payment”_,] effective January 1, 2006.

| | | [added: 2007 | | | |] 2006 | | | | 2005 | | |

| Construction-in-progress | | | [removed: 99,774] [added: 147,925] | | | | [removed: 50,593] [added: 99,774] | |

| Discontinued [removed: operations] [added: operations—income] | | | — | | | | [removed: 47,034] [added: —] | | [added: | | 4,389 | | | | 4,389 | |]

| Less accumulated depreciation and amortization | | | [removed: (740,507] [added: (756,703] | ) | | | [removed: (663,750] [added: (740,507] | ) |

| Net real estate | | | [removed: 2,463,751] [added: 2,696,144] | | | | [removed: 2,165,571] [added: 2,463,751] | |

| Cash and cash equivalents | | | [removed: 11,495] [added: 50,691] | | | | [removed: 8,639] [added: 11,495] | |

| /s/ WARREN M. THOMPSON Warren M. Thompson | | Trustee | | February 25, 2008 |

February 25, 2008

Our audits of the basic financial statements included the financial statement schedules listed in the index appearing under Item 15(a) (1) and (2).

Also in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

February 25, 2008

| | | 2007 | | | | 2006 | | |

| Operating | | $ | 3,304,922 | | | $ | 2,931,391 | |

| Assets held for sale (discontinued operations) | | | — | | | | 173,093 | |

| | | | 3,452,847 | | | | 3,204,258 | |

| Capital lease obligations | | | 76,109 | | | | 95,116 | |

| Capital lease obligations of assets held for sale | | | — | | | | 54,245 | |

| Rental income | | $ | 468,498 | | | $ | 414,979 | | | $ | 375,927 | |

| Other property income | | | 12,834 | | | | 7,461 | | | | 9,511 | |

| Total revenue | | | 485,892 | | | | 427,535 | | | | 390,808 | |

| Rental | | | 100,389 | | | | 84,763 | | | | 82,055 | |

| Real estate taxes | | | 47,234 | | | | 41,198 | | | | 36,449 | |

| Depreciation and amortization | | | 101,675 | | | | 92,793 | | | | 84,521 | |

| Total operating expenses | | | 274,873 | | | | 240,094 | | | | 222,934 | |

| OPERATING INCOME | | | 211,019 | | | | 187,441 | | | | 167,874 | |

| Other interest income | | | 921 | | | | 2,042 | | | | 1,731 | |

| Interest expense | | | (111,365 | ) | | | (95,234 | ) | | | (81,617 | ) |

| INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS | | | 101,970 | | | | 94,905 | | | | 88,481 | |

| Discontinued operations—income | | | 4,389 | | | | 4,204 | | | | 617 | |

| Discontinued operations—gain on sale of real estate | | | 94,768 | | | | 16,515 | | | | 30,748 | |

| INCOME BEFORE GAIN ON SALE OF REAL ESTATE | | | 195,537 | | | | 111,271 | | | | 114,612 | |

| Continuing operations | | $ | 1.71 | | | $ | 1.41 | | | $ | 1.36 | |

| Discontinued operations | | | 1.77 | | | | 0.39 | | | | 0.60 | |

| Continuing operations | | $ | 1.70 | | | $ | 1.40 | | | $ | 1.35 | |

| Discontinued operations | | | 1.75 | | | | 0.38 | | | | 0.59 | |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | Preferred Stock | | | | | | | Common Shares | | | | | Additional Paid-in Capital | | | | Accumulated Dividends In Excess of Net Income | | | | Treasury Shares | | | | | | | Deferred Compensation On Restricted Shares | | | | Notes Receivable From the Issuance of Common Shares | | | | Accumulated Other Comprehensive Income (Loss) | | | | Total Shareholders’ Equity | | |

| BALANCE AT DECEMBER 31, 2004 | | 5,400 | | | $ | 135,000 | | | 53,616,827 | | $ | 536 | | $ | 1,108,213 | | | $ | (416,026 | ) | | (1,480,202 | ) | | $ | (28,786 | ) | | $ | (8,641 | ) | | $ | (2,083 | ) | | $ | 2,321 | | | $ | 790,534 | |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| Shares issued under dividend reinvestment plan | | — | | | | — | | | 62,579 | | | 1 | | | 3,424 | | | | — | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,425 | |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| BALANCE AT DECEMBER 31, 2005 | | 5,400 | | | $ | 135,000 | | | 54,371,057 | | $ | 544 | | $ | 1,114,732 | | | $ | (437,817 | ) | | (1,480,360 | ) | | $ | (28,794 | ) | | $ | (9,704 | ) | | $ | (1,792 | ) | | $ | 2,678 | | | $ | 774,847 | |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| Dividends declared to common shareholders | | — | | | | — | | | — | | | — | | | — | | | | (133,066 | ) | | — | | | | — | | | | — | | | | — | | | | — | | | | (133,066 | ) |

| Dividends declared to preferred shareholders | | — | | | | — | | | — | | | — | | | — | | | | (10,423 | ) | | — | | | | — | | | | — | | | | — | | | | — | | | | (10,423 | ) |

| | | |

| --- | --- | --- |

| | | |

| | | | | |

| /s/ WALTER F. LOEB Walter F. Loeb | | Trustee | | February 27, 2007 |

| | | |

| | | |

Our independent registered public accounting firm has issued an attestation report on management’s assessment of our internal control over financial reporting.

This report appears on page F-3.

February 26, 2007

Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole.

The Schedules III and IV are presented for the purposes of additional analysis and are not a required part of the basic consolidated financial statements.

These schedules have been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Trust’s internal control over financial reporting as of December 31, 2006, based on criteria established in _Internal Control—Integrated Framework_ issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February _26_, 2007 expressed an unqualified opinion.

February 26, 2007

| | | | | | | | | |

| Operating | | $ | 3,104,484 | | | $ | 2,731,694 | |

| | | | | | | | | |

| | | | 3,204,258 | | | | 2,829,321 | |

| | | | | | | | | |

| | | | | | | | | |

| Obligations under capital leases | | | 149,361 | | | | 148,815 | |

| Deferred compensation on restricted shares | | | — | | | | (9,704 | ) |

| Rental income | | $ | 438,201 | | | $ | 393,548 | | | $ | 368,299 | |

| Other property income | | | 7,726 | | | | 9,551 | | | | 10,398 | |

| | | | 451,022 | | | | 408,469 | | | | 383,612 | |

| Rental | | | 88,130 | | | | 84,736 | | | | 89,940 | |

| Real estate taxes | | | 44,898 | | | | 39,372 | | | | 37,351 | |

| Depreciation and amortization | | | 97,618 | | | | 88,927 | | | | 86,597 | |

| | | | 251,986 | | | | 232,944 | | | | 232,052 | |

| OPERATING INCOME | | | 199,036 | | | | 175,525 | | | | 151,560 | |

| Other interest income | | | 2,545 | | | | 2,215 | | | | 1,504 | |

| Interest expense | | | (102,808 | ) | | | (88,566 | ) | | | (85,058 | ) |

| (Loss) income from discontinued operations | | | (320 | ) | | | (569 | ) | | | 6,063 | |

| Income from continuing operations available for common shareholders | | $ | 1.48 | | | $ | 1.37 | | | $ | 1.02 | |

| (Loss) income from discontinued operations | | | (0.01 | ) | | | (0.01 | ) | | | 0.12 | |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| Balance, beginning of year | | 54,371,057 | | | $ | 544 | | | $ | 1,114,732 | | | 53,616,827 | | | $ | 536 | | | $ | 1,108,213 | | | 50,670,851 | | | $ | 507 | | | $ | 980,227 |

| Issuance of shares in public offering | | 2,002,670 | | | | 20 | | | | 149,077 | | | — | | | | — | | | | — | | | 2,186,749 | | | | 22 | | | | 99,011 |

| Shares issued to purchase partnership interests | | — | | | | — | | | | — | | | — | | | | — | | | | — | | | 40,201 | | | | — | | | | 1,862 |

| --- | --- |

Not applicable.

| --- | --- |

Quarterly Assessment

We carried out an assessment as of December 31, 2006 of the effectiveness of the design and operation of our disclosure controls and procedures and our internal control over financial reporting.

This assessment was done under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer.

Rules adopted by the SEC require that we present the conclusions of our principal executive officer and our principal financial officer about the effectiveness of our disclosure controls and procedures and the conclusions of our management about the effectiveness of our internal control over financial reporting as of the end of the period covered by this annual report.

Principal Executive Officer and Principal Financial Officer Certifications

Included as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K are forms of “Certification” of our principal executive officer and our principal financial officer.

The forms of Certification are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.

This section of this Annual Report on Form 10-K that you currently are reading is the information concerning the assessment referred to in the Section 302 certifications and this information should be read in conjunction with the Section 302 certifications for a more complete understanding of the topics presented.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports, such as this report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

These controls and procedures are based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e) promulgated under the Exchange Act.

Rules adopted by the SEC require that we present the conclusions of the Chief Executive Officer and Chief Financial Officer about the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report.

Internal Control over Financial Reporting

Establishing and maintaining internal control over financial reporting is a process designed by, or under the supervision of, our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, as appropriate, and effected by our employees, including management and our Board of Trustees, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

This process includes policies and procedures that:

| | • | | pertain to the maintenance of records that accurately and fairly reflect the transactions and dispositions of our assets in reasonable detail; |

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| | • | | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are made only in accordance with the authorization procedures we have established; and |

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| | • | | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of any of our assets in circumstances that could have a material adverse effect on our financial statements. |

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Limitations on the Effectiveness of Controls

Management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud.

In designing and evaluating our control system, management recognized that any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.

Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, that may affect our operation have been or will be detected.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.

Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Over time, controls may become inadequate because of changes in conditions that cannot be anticipated at the present time, or the degree of compliance with the policies or procedures may deteriorate.

Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Scope of the Evaluations

The evaluation by our Chief Executive Officer and our Chief Financial Officer of our disclosure controls and procedures and our internal control over financial reporting included a review of procedures and our internal audit, as well as discussions with our Disclosure Committee, independent public accountants and others in our organization, as appropriate.

In conducting this evaluation, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in _Internal Control—Integrated Framework._ In the course of the evaluation, we sought to identify data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken.

The evaluation of our disclosure controls and procedures and our internal control over financial reporting is done on a quarterly basis, so that the conclusions concerning the effectiveness of such controls can be reported in our Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.

Our internal control over financial reporting is also assessed on an ongoing basis by personnel in our Accounting department and by our independent auditors in connection with their audit and review activities.

The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures and our internal control over financial reporting and to make modifications as necessary.

Our intent in this regard is that the disclosure controls and procedures and internal control over financial reporting will be maintained and updated (including with improvements and corrections) as conditions warrant.