**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

**FORM 10-Q**

**x        QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended September 30, 2006**

**o        TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**Forthe transition period from                to**

**Commissionfile number 001-32290**

**GMH COMMUNITIES TRUST**

(Exact Name of Registrantas Specified in Its Charter)

| **Maryland**                                                     |   | **201181390**                      |
|------------------------------------------------------------------|--------|------------------------------------|
| (State or other  Jurisdiction of  Incorporation or Organization) |   | (IRS Employer  Identification No.) |
|                                                             |   |                               |
| **10  Campus Boulevard, Newtown Square, PA**                     |   | **19073**                          |
| (Address of  Principal Executive Offices)                        |   | (Zip Code)                         |

 

Registrant’s TelephoneNumber, Including Area Code**(610) 355-8000**

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  x** **   No  o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.   (Checkone)

| Large accelerated filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|---------------------------|--------|----------------------|--------|--------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).

Yes  o     No  x

OnNovember 9, 2006, 41,567,146 of theregistrant’s common shares of beneficial interest, $0.001 par value, wereoutstanding.

 

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**GMH COMMUNITIESTRUSTINDEX TO FORM 10-Q**
| ** **                                                                                          | ** ** | **Page No.** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| Cautionary Note Regarding  Forward-Looking Statements                                               |       |              | ii         |   |   |
|                                                                                                |       |              |       |   |   |
| **Part I  — Financial Information**                                                       | ** ** | ** **        | ** ** |   |   |
| Item  1. Financial Statements                                                                       |       |              | 1          |   |   |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |       |              | 22         |   |   |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                 |       |              | 45         |   |   |
| Item 4. Controls and Procedures                                                                     |       |              | 45         |   |   |
|                                                                                                |       |              |       |   |   |
| **Part II  — Other Information**                                                          | ** ** | ** **        | ** ** |   |   |
| Item  1. Legal Proceedings                                                                          |       |              | 47         |   |   |
| Item 1A. Risk Factors                                                                               |       |              | 48         |   |   |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                |       |              | 48         |   |   |
| Item 3. Defaults Upon Senior Securities                                                             |       |              | 48         |   |   |
| Item 4. Submission of Matters to a Vote of Security  Holders                                        |       |              | 49         |   |   |
| Item  5. Other Information                                                                          |       |              | 49         |   |   |
| Item 6. Exhibits                                                                                    |       |              | 49         |   |   |
|                                                                                                |       |              |       |   |   |
| Signatures                                                                                          |       |              | 51         |   |   |

 

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**CAUTIONARY NOTEREGARDING FORWARD-LOOKING STATEMENTS**

Our disclosure and analysis in this document containforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. Forward-looking statements provide ourcurrent expectations or forecasts of future events and are not statements ofhistorical fact. These forward-looking statements include informationabout possible or assumed future events, including, among other things,operating or financial performance, strategic plans and objectives, orregulatory or competitive environments. Statements regarding the followingsubjects are forward-looking by their nature:

·  our ability to successfully implement ourbusiness strategy, including our ability to acquire and manage student housingproperties and to secure and operate military housing privatization projects;

·  our projected operating results and financialcondition;

·  completion of any of our targeted acquisitionsor development projects within our expected timeframe or at all;

·  our ability to obtainfuture financing arrangements on terms acceptable to us, or at all;

·  estimates relating to, and our ability to pay,future dividends;

·  our ability to qualify asa REIT for federal income tax purposes;

·  our understanding of ourcompetition, market opportunities and trends;

·  projected timing andamounts of capital expenditures;

·  our ability to successfullyimplement remedial measures that will effectively address material weaknessesand significant deficiencies that have been identified with respect to ourdisclosure controls and internal controls over financial reporting; and

·  the impact of technologyon our properties, operations and business.

The forward-looking statements are based on ourbeliefs, assumptions and expectations of our future performance, taking intoaccount all information currently available to us. These beliefs, assumptionsand expectations can change as a result of many possible events or factors, notall of which are known to us. If a change occurs, our business, financialcondition, liquidity and results of operations may vary materially from thoseexpressed in our forward-looking statements. Factors that could cause actualresults to differ materially from our management’s current expectationsinclude, but are not limited to:

·  the factors referenced in the section of ourAnnual Report on Form 10-K for the year ended December 31, 2005 titled “*Risk Factors*” and in the section of thisreport titled “*Management’s Discussion andAnalysis of Financial Condition and Results of Operations*;”

·  changes in our business strategy, includingacquisition and development activities;

·  availability, terms and deployment of capital,including equity and debt financing;

·  availability of qualified and/or sufficientpersonnel, including, but not limited, within our finance and accounting staff;

·  failure to effectively remediateexisting material weaknesses and significant deficiencies in our disclosurecontrols and internal controls over financial reporting, including through theimplementation of such measures as discussed in the section of our AnnualReport on Form 10-

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K for the year ended December 31, 2005titled “*Controls and Procedures*”under Item 9A of that report, or failure to identify additional materialweaknesses and significant deficiencies in our disclosure controls and internalcontrols over financial reporting that could occur in the future;

·  the adverse effects of pendinglitigation or any investigation of the Company by the United States Securitiesand Exchange Commission, or SEC;

·  unanticipated costsassociated with the acquisition and integration of our student housing propertyacquisitions and development projects, and military housing privatizationprojects;

·  the effects of military base realignment andclosures, or deployments, on installations covered by our military housingprivatization projects;

·  high leverage on the entities that own themilitary housing privatization projects;

·  reductions in government military spending;

·  changes in student population enrollment atcolleges and universities or adverse trends in the off-campus student housingmarket;

·  changes in the studentand military housing industry, interest rates or the general economy;

·  changes in local real estate conditions(including changes in rental rates and the number of competing properties) andthe degree and nature of our competition;

·  failure to lease unoccupied space inaccordance with management’s projections;

·  potential liability under environmental orother laws; and

·  the existence of complex regulations relatingto our status as a REIT and the adverse consequences of our failure to qualifyas a REIT.

When we use the words “believe,” “expect,” “may,” “potential,”“anticipate,” “estimate,” “plan,” “will,” “could,” “intend” or similarexpressions, we intend to identify forward-looking statements. You should notplace undue reliance on these forward-looking statements. We are not obligatedto publicly update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise, except to the extentotherwise required by law.

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**PART I — FINANCIAL INFORMATION**

**Item 1.****    FinancialStatements**

**GMH COMMUNITIES TRUST****CONSOLIDATED BALANCE SHEETS**(in thousands, except par value and number of shares)
| ** **                                                                                                                                                                                                         | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                         | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                                         | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Real estate investments:                                                                                                                                                                                           |       |                         |       |                        |       |
| Student housing  properties                                                                                                                                                                                        |       | $                            | 1,413,617  |                        | $          | 1,210,255 |   |
| Accumulated  depreciation                                                                                                                                                                                          |       | 55,685                       |       | 29,039                      |       |
|                                                                                                                                                                                                               |       | 1,357,932                    |       | 1,181,216                   |       |
| Corporate assets:                                                                                                                                                                                                  |       |                         |       |                        |       |
| Corporate assets                                                                                                                                                                                                   |       | 8,943                        |       | 8,178                       |       |
| Accumulated  depreciation                                                                                                                                                                                          |       | 829                          |       | 565                         |       |
|                                                                                                                                                                                                               |       | 8,114                        |       | 7,613                       |       |
| Cash and cash  equivalents                                                                                                                                                                                         |       | 7,107                        |       | 2,240                       |       |
| Restricted cash                                                                                                                                                                                                    |       | 16,416                       |       | 11,625                      |       |
| Accounts and other  receivables, net:                                                                                                                                                                              |       |                         |       |                        |       |
| Related party                                                                                                                                                                                                      |       | 15,293                       |       | 19,191                      |       |
| Third party                                                                                                                                                                                                        |       | 4,470                        |       | 2,925                       |       |
| Investments in military  housing projects                                                                                                                                                                          |       | 37,356                       |       | 37,828                      |       |
| Deferred contract costs                                                                                                                                                                                            |       | 1,743                        |       | 1,063                       |       |
| Deferred financing  costs, net                                                                                                                                                                                     |       | 3,947                        |       | 4,088                       |       |
| Lease intangibles, net                                                                                                                                                                                             |       | 713                          |       | 3,201                       |       |
| Deposits                                                                                                                                                                                                           |       | 9,865                        |       | 2,856                       |       |
| Other assets                                                                                                                                                                                                       |       | 5,243                        |       | 4,105                       |       |
| Total assets                                                                                                                                                                                                       |       | $                            | 1,468,199  |                        | $          | 1,277,951 |   |
|                                                                                                                                                                                                               |       |                         |       |                        |       |
| **LIABILITIES AND BENEFICIARIES’  EQUITY**                                                                                                                                                                    | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Notes payable                                                                                                                                                                                                      |       | $                            | 829,789    |                        | $          | 692,069 |   |
| Line of credit                                                                                                                                                                                                     |       | 128,000                      |       | 36,000                      |       |
| Accounts payable                                                                                                                                                                                                   |       | 4,178                        |       | 5,566                       |       |
| Accrued expenses                                                                                                                                                                                                   |       | 31,145                       |       | 21,253                      |       |
| Dividends and  distributions payable                                                                                                                                                                               |       | 16,571                       |       | 16,227                      |       |
| Other liabilities                                                                                                                                                                                                  |       | 28,938                       |       | 21,337                      |       |
| Total  liabilities                                                                                                                                                                                                 |       | 1,038,621                    |       | 792,452                     |       |
| Minority interest                                                                                                                                                                                                  |       | 164,218                      |       | 188,633                     |       |
| Commitments and  contingencies (Note 9)                                                                                                                                                                            |       | —                       |       | —                      |       |
| Beneficiaries’ equity:                                                                                                                                                                                        |       |                         |       |                        |       |
| Common shares of  beneficial interest, $0.001 par value; 500,000,000 shares authorized,  41,567,146 issued and outstanding at September 30, 2006, and 39,699,843  issued and outstanding at December 31, 2005 |       | 42                           |       | 40                          |       |
| Preferred  shares—100,000,000 shares authorized, no shares issued or outstanding                                                                                                                              |       | —                       |       | —                      |       |
| Additional paid-in  capital                                                                                                                                                                                        |       | 326,072                      |       | 325,455                     |       |
| Unearned share  compensation                                                                                                                                                                                       |       | (817                         | )          | (320                        | )          |
| Cumulative earnings                                                                                                                                                                                                |       | 2,617                        |       | 6,310                       |       |
| Cumulative dividends                                                                                                                                                                                               |       | (62,554                      | )          | (34,619                     | )          |
| Total  beneficiaries’ equity                                                                                                                                                                                  |       | 265,360                      |       | 296,866                     |       |
| Total liabilities and  beneficiaries’ equity                                                                                                                                                                  |       | $                            | 1,468,199  |                        | $          | 1,277,951 |   |

 

*See accompanying notes to consolidated financial statements.*

 

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**GMHCOMMUNITIES TRUST****CONSOLIDATED STATEMENTS OF OPERATIONS**(Unaudited and in thousands, except share and per share information)
| ** **                                                                                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Revenue:**                                                                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Rent and other  property income                                                                          |       | $                                                    | 45,751     |                                                | $          | 35,409 |   | $ | 133,821 |   | $ | 91,013 |   |
| Expense  reimbursements:                                                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Related party                                                                                            |       | 17,309                                               |       | 20,096                                              |       | 48,364 |   | 40,552 |   |
| Third party                                                                                              |       | 1,965                                                |       | 1,299                                               |       | 4,690 |   | 3,876 |   |
| Management fees:                                                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Related party                                                                                            |       | 2,131                                                |       | 1,755                                               |       | 6,271 |   | 5,085 |   |
| Third party                                                                                              |       | 766                                                  |       | 611                                                 |       | 2,421 |   | 2,156 |   |
| Other fee  income-related party                                                                          |       | 5,616                                                |       | 5,895                                               |       | 15,877 |   | 12,849 |   |
| Other income                                                                                             |       | 110                                                  |       | 81                                                  |       | 254 |   | 248 |   |
| Total revenue                                                                                            |       | 73,648                                               |       | 65,146                                              |       | 211,698 |   | 155,779 |   |
|                                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| **Operating Expenses:**                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Property  operating expenses                                                                             |       | 27,628                                               |       | 18,906                                              |       | 65,563 |   | 41,104 |   |
| Reimbursed  expenses                                                                                     |       | 19,274                                               |       | 21,395                                              |       | 53,054 |   | 44,428 |   |
| Real estate  taxes                                                                                       |       | 4,464                                                |       | 3,184                                               |       | 13,042 |   | 8,339 |   |
| Administrative  expenses                                                                                 |       | 3,802                                                |       | 2,992                                               |       | 12,102 |   | 8,768 |   |
| Audit Committee  and Special Committee expenses                                                          |       | 1,822                                                |       | —                                              |       | 6,698 |   | — |   |
| Depreciation and  amortization                                                                           |       | 10,276                                               |       | 8,550                                               |       | 31,340 |   | 24,958 |   |
| Interest                                                                                                 |       | 13,147                                               |       | 8,989                                               |       | 35,777 |   | 21,247 |   |
| Total operating  expenses                                                                                |       | 80,413                                               |       | 64,016                                              |       | 217,576 |   | 148,844 |   |
| (Loss) income before  equity in earnings of unconsolidated entities, income taxes and minority  interest |       | (6,765                                               | )          | 1,130                                               |       | (5,878 | ) | 6,935 |   |
| Equity in earnings of  unconsolidated entities                                                           |       | 460                                                  |       | 1,058                                               |       | 2,850 |   | 1,999 |   |
| (Loss) income before  income taxes and minority interest                                                 |       | (6,305                                               | )          | 2,188                                               |       | (3,028 | ) | 8,934 |   |
| Income taxes                                                                                             |       | 1,307                                                |       | 2,254                                               |       | 3,494 |   | 4,512 |   |
| (Loss) income before  minority interest                                                                  |       | (7,612                                               | )          | (66                                                 | )          | (6,522 | ) | 4,422 |   |
| Minority interest                                                                                        |       | (3,320                                               | )          | (34                                                 | )          | (2,829 | ) | 2,183 |   |
| Net (loss) income                                                                                        |       | $                                                    | (4,292     | )                                                   | $          | (32 | ) | $ | (3,693 | ) | $ | 2,239 |   |
|                                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Earnings (loss) per  common share—basic                                                             |       | $                                                    | (0.10      | )                                                   | $          | (0.00 | ) | $ | (0.09 | ) | $ | 0.07 |   |
|                                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Earnings (loss) per  common share—diluted                                                           |       | $                                                    | (0.10      | )                                                   | $          | (0.00 | ) | $ | (0.09 | ) | $ | 0.07 |   |
| Weighted-average shares  outstanding during the period:                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                                                                    |       | 41,491,841                                           |       | 30,350,989                                          |       | 40,678,959 |   | 30,350,989 |   |
| Diluted                                                                                                  |       | 73,116,458                                           |       | 64,413,934                                          |       | 72,304,476 |   | 64,085,950 |   |
| Common share dividend declared per share                                                                 |       | $                                                    | 0.2275     |                                                | $          | 0.2275 |   | $ | 0.6825 |   | $ | 0.6825 |   |

 

*See accompanying notes to consolidated financial statements.*

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**GMH COMMUNITIES TRUST****CONSOLIDATED STATEMENTS OF CASH FLOWS**(Unaudited and in thousands)
| ** **                                                                                     | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
|                                                                                           |       |                                                |       |   |   |
| **Cash flows from operating  activities:**                                                     | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net income                                                                                     |       | $                                                   | (3,693     | ) | $ | 2,239 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:             |       |                                                |       |   |   |
| Depreciation                                                                                   |       | 26,910                                              |       | 17,878 |   |
| Amortization:                                                                                  |       |                                                |       |   |   |
| Lease  intangibles                                                                             |       | 4,112                                               |       | 7,080 |   |
| Investment in  military housing projects                                                       |       | 318                                                 |       | — |   |
| Notes payable  fair value adjustment                                                           |       | (1,879                                              | )          | (1,637 | ) |
| Deferred loan  costs                                                                           |       | 1,027                                               |       | 905 |   |
| Restricted  shares                                                                             |       | 167                                                 |       | 78 |   |
| Allowance for  doubtful accounts                                                               |       | 2,213                                               |       | 935 |   |
| Equity in  earnings of unconsolidated entities in excess of distributions received             |       | (667                                                | )          | (716 | ) |
| Minority  interest                                                                             |       | (2,829                                              | )          | 2,183 |   |
| Changes in  operating assets and liabilities:                                                  |       |                                                |       |   |   |
| Restricted cash                                                                                |       | (4,791                                              | )          | (10,262 | ) |
| Accounts and  other receivables                                                                |       | 140                                                 |       | (16,602 | ) |
| Deferred  contract costs                                                                       |       | (680                                                | )          | (344 | ) |
| Deposits and  other assets                                                                     |       | (8,147                                              | )          | (1,782 | ) |
| Accounts payable                                                                               |       | (1,388                                              | )          | (792 | ) |
| Accrued expenses  and other liabilities                                                        |       | 17,442                                              |       | 31,756 |   |
| Net cash  provided by operating activities                                                     |       | 28,255                                              |       | 30,919 |   |
| **Cash flows from investing  activities:**                                                     | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Property  acquisitions                                                                         |       | (119,035                                            | )          | (329,160 | ) |
| Capitalized  expenditures                                                                      |       | (39,328                                             | )          | (9,898 | ) |
| Distributions  received from unconsolidated entities in excess of earnings                     |       | 871                                                 |       | 4,062 |   |
| Net cash used in  investing activities                                                         |       | (157,492                                            | )          | (334,996 | ) |
| **Cash flows from financing  activities:**                                                     | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Owner  distributions                                                                           |       | (49,177                                             | )          | (36,866 | ) |
| Redemption of  unit holders                                                                    |       | (45                                                 | )          | — |   |
| Proceeds from  line of credit                                                                  |       | 128,000                                             |       | 244,000 |   |
| Repayment of  line of credit                                                                   |       | (36,000                                             | )          | (107,000 | ) |
| Proceeds from  notes payable                                                                   |       | 95,567                                              |       | 202,228 |   |
| Repayment of  notes payable                                                                    |       | (3,355                                              | )          | (23,190 | ) |
| Payment of  financing costs                                                                    |       | (886                                                | )          | (2,149 | ) |
| Net cash  provided by financing activities                                                     |       | 134,104                                             |       | 277,023 |   |
| Net increase (decrease)  in cash and cash equivalents                                          |       | 4,867                                               |       | (27,054 | ) |
| Cash and cash  equivalents, beginning of period                                                |       | 2,240                                               |       | 60,926 |   |
| Cash and cash  equivalents, end of period                                                      |       | $                                                   | 7,107      |   | $ | 33,872 |   |
|                                                                                           |       |                                                |       |   |   |
| **Supplemental information:**                                                                  | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Real estate  acquired by assuming debt including debt premium                                  |       | $                                                   | 47,388     |   | $ | 83,341 |   |
| Issuance of  units of limited partnership interest for purchase of student housing  properties |       | $                                                   | —     |   | $ | 28,528 |   |
| Property  distributed at net book value                                                        |       | $                                                   | —     |   | $ | 3,854 |   |
| Debt distributed  at net book value                                                            |       | $                                                   | —     |   | $ | 4,208 |   |
| Cash paid for  interest, net of amounts capitalized of $1,858                                  |       | $                                                   | 37,103     |   | $ | 20,846 |   |
| Cash paid for taxes                                                                            |       | $                                                   | 3,291      |   | $ | 2,272 |   |

 

*See accompanying notes to consolidated financial statements.*

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**GMH COMMUNITIESTRUST**

Notesto Consolidated Financial StatementsSeptember 30, 2006(Unaudited)

**1. Organizationand Basis of Presentation**

***Organization***

GMH Communities Trust (the “Trust,” the “Company,” or sometimesreferred to as “we”) conducts substantially all of its operations through itsoperating partnership, GMH Communities, LP, a Delaware limited partnership (the“Operating Partnership”). As of September 30, 2006, the Operating Partnershiphad 73,191,763 units of partnership interest outstanding, of which the Trustowned 40,985,977 units of limited partnership interest; and through awholly-owned subsidiary, GMH Communities GP Trust, the Trust owned 581,169units of general partnership interest, which represents 100% of the generalpartnership interest in the Operating Partnership. As of September 30, 2006,there were 31,624,617 units of limited partnership interest outstanding thatwere not owned by the Company.

We, through theOperating Partnership and its subsidiaries, are a self-advised, self-managed,specialty housing company that focuses on providing housing to college anduniversity students residing off-campus and to members of the U.S. military andtheir families located on or near military bases throughout the United States.Through the Operating Partnership, we own and operate our student housingproperties and the interests in joint ventures that own military housingprivatization projects (“military housing projects”).

***Basis of Presentation***

The consolidated financial statements have been preparedby the Company without audit except as to the balance sheet as of December 31,2005, which has been derived from audited data, pursuant to the rules andregulations of the United States Securities and Exchange Commission. Certaininformation and footnote disclosures normally included in the financialstatements prepared in accordance with accounting principles generally acceptedin the United States have been condensed or omitted pursuant to such rules andregulations, although the Company believes that the included disclosures areadequate to make the information presented not misleading. In the opinion ofmanagement, all adjustments (consisting solely of normal recurring matters)necessary for a fair presentation of the financial position of the Company asof September 30, 2006, the results of its operations for the three-month andnine-month periods ended September 30, 2006 and September 30, 2005 and its cashflows for the nine-month periods ended September 30, 2006 and September 30,2005 have been included.  The results ofoperations for such interim periods are not necessarily indicative of theresults for a full year. These consolidated financial statements should be readin conjunction with the Company’s consolidated financial statements and notesto the financial statements included in the Company’s Annual Report on Form10-K for the year ended December 31, 2005.

**2. Summary ofSignificant Accounting Policies**

***Use of Estimates***

The preparation of financial statements in conformitywith U.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect various amounts reported in the financialstatements and accompanying notes. Actual results could differ from thoseestimates.

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***Real Estate Investments and Corporate Assets***

We carry real estate investments and corporate assetsat cost, net of accumulated depreciation. Cost of acquired assets includes thepurchase price and related closing costs. We allocate the cost of real estateinvestments to net tangible and identified intangible assets based on relativefair values in accordance with Statement of Financial Accounting Standards (“SFAS”)No. 141 (“SFAS 141”), *BusinessCombinations*. We estimate fair value based on information obtainedfrom a number of sources, including our due diligence, marketing and leasingactivities, independent appraisals that may be obtained in connection with theacquisition or financing of the respective property and other market data.

The in-place leases have been ascribed a value equalto the difference between the incremental value of acquiring a building within-place leases versus a vacant building. As lease terms typically are 12 months or less, actual rates onin-place leases generally approximate market rental rates. Factors that weconsider in the valuation of in-place leases include an estimate of incrementalcarrying costs during the expected lease-up periods considering current marketconditions and nature of the tenancy. Purchase prices of student housingproperties to be acquired are not expected to be allocated to tenantrelationships considering the terms of the leases and the expected levels ofrenewals. We amortize the value of in-place leases to expense over theremaining term of the respective leases, which is generally one year or less.Accumulated amortization related to intangible lease costs was $0.9 million atSeptember 30, 2006 and $3.2 million at December 31, 2005.

We expense routine repair and maintenance expendituresthat do not improve the value of an asset and extend its useful life, includingturnover costs. We capitalize expenditures that improve the value and extendthe useful life of an asset. We compute depreciation using the straight-linemethod over the estimated useful lives of the assets, which is generally40 years for buildings including student housing properties and thecommercial office building, and three to five years for residential furnitureand appliances. The Company’s student housing lease terms generally commence inAugust or September to coincide with the beginning of the academic year.Accordingly, the Company typically will experience an increase in propertyoperating expenses during the third quarter of each fiscal year, over otherquarters, as a result of repair and maintenance expenditures relating toturnover of units at student housing properties to prepare for new residents.

In accordance withSFAS No. 144,*Accounting for theImpairment or Disposal of Long-Lived Assets*, long-lived assets, suchas real estate investments and purchased intangibles subject to amortization,are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount may not be recoverable. These circumstancesmay include, but are not limited to, operational performance, market conditionsand competition from other off-campus properties and on-campus housing, legaland environmental concerns, and results of appraisals or other informationobtained as part of a financing or disposition strategy. When required, wereview recoverability of assets to be held and used through a comparison of thecarrying amount of an asset to estimated undiscounted future cash flowsexpected to be generated by the asset. If the carrying amount of an assetexceeds its estimated undiscounted future cash flows, an impairment charge isrecognized in an amount by which the carrying value of the asset exceeds thefair value of the asset determined using customary valuation techniques, suchas the present value of expected future cash flows. Assets to be disposed ofwould be separately presented in the balance sheet and reported at the lower ofthe carrying amount or fair value less costs to sell, and no longer would bedepreciated.

***Cash Equivalents***

All highly-liquid investments with an originalmaturity of three months or less are considered to be cash equivalents.

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***Restricted Cash***

Restricted cash consists of security deposits and cashheld as escrow for real estate taxes, capital expenditures, and other amounts,as required by the terms of various loan agreements.

***Allowance for Doubtful Accounts***

We estimate the collectibility of receivablesgenerated by rental and other income as a result of the operation of ourstudent housing properties. If we believe that the collectibility of certainamounts is questionable, we record a specific reserve for these amounts toreduce the amount outstanding to an amount we believe will be collectible and areserve for all other accounts based on a range of percentages applied to agingcategories, which is based on historical collection and write-off experience.

We also evaluate the collectibility of fee income andexpense reimbursements generated by the management of student housingproperties owned by others and through the provision of development,construction, renovation, and management services to our military housingprojects based upon the individual facts and circumstances, and record areserve for specific amounts, if necessary.

Accounts receivable are presented net of the allowancefor doubtful accounts of $1.5 million at September 30, 2006 and $710,000 atDecember 31, 2005.

***Deferred Contract Costs***

Deferred contract costs include costs attributable toa specific military housing project incurred in connection with seekingCongressional approval of a Community Development and Management Plan, or CDMP,subsequent to the project being awarded by the Department of Defense, or DoD.In addition, deferred contract costs also include transition and closing costsincurred that are expected to be reimbursed by the military housing project.Such amounts are evaluated as to the probability of recovery and costs that arenot considered probable of recovery are written off. Revenue is recognized andthe related costs are expensed at the time that the reimbursement for preparingthe CDMP is approved by Congress or at closing of the military housing project.

***Deferred Financing Costs***

Costs incurred in connection with obtaining financingare deferred and amortized on a straight-line basis over the term of therelated loan, which is not materially different than the effective interestmethod. Amortization of deferred financing costs is included in interestexpense. Accumulated amortization of deferred financing costs was $2.3 millionat September 30, 2006 and $1.2 million at December 31, 2005.

***Deposits***

Deposits primarily consist of amounts paid to thirdparties in connection with planned acquisitions and amounts paid to lendersthat provide related financing or the refinancing of existing loans. AtSeptember 30, 2006, deposits for planned acquisitions totaled $5.5 million,deposits related to financings totaled $3.9 million, and other deposits notrelated to acquisitions or financings totaled $0.5 million. AtDecember 31, 2005, deposits for planned acquisitions totaled$2.1 million, deposits related to financings totaled $0.2 million andother deposits not related to acquisitions or financings totaled $0.6 million.

***Fair Value of Financial Instruments***

The carrying amount of cash and cash equivalents,restricted cash, accounts and other receivables, deposits, other assets,accounts payable, accrued expenses, dividends and distributions payable, andother liabilities approximate fair value because of the relatively short-termnature of these instruments.

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The carrying value and fair value of fixed-rate notespayable at September 30, 2006 was $772.2 million and $762.1 million,respectively. Fair value was estimated using rates the Company believed wereavailable to it as of September 30, 2006 for debt with similar terms. Thecarrying value of variable-rate notes payable approximates fair value atSeptember 30, 2006.

***Advertising Costs***

Advertising costs are expensed as incurred.Advertising expense was $533,000 and $513,000 for the three months endedSeptember 30, 2006 and September 30, 2005, respectively, and $1.5 million and$1.4 million for the nine months ended September 30, 2006 and September 30,2005, respectively.

***Revenue Recognition***

*Student HousingSegment*

Rental revenue is recognized when due over the leaseterms, which are generally 12 months or less.

Other property income, including, but not limited to,lease processing fees, move-in fees and activity fees is recognized as earnedthroughout the course of the year. The timing of these fees typicallyfluctuates in relation to the academic year leasing cycle.

Standard management fees are based on a percentage ofmonthly cash receipts or gross monthly rental and other revenues generated bythe properties managed for others. We recognize these fees on a monthly basisas the services are performed.

Incentive management fees are earned as a result ofthe achievement of certain operating performance criteria over a specifiedperiod by certain managed properties, including targeted annual debt servicecoverage ratios of the properties. We recognize these fees at the amount thatwould be due under the contract if the contract was terminated on the balancesheet date.

Expense reimbursements are comprised primarily ofsalary and related costs of certain of our employees working at certainproperties we manage for others, the cost of which is reimbursed by the ownersof the related properties. We accrue operating expense reimbursements as therelated expenses are incurred.

*Military HousingSegment*

Standard and incentive management fees, which arebased on a percentage of effective gross revenue generated by the militaryhousing projects from the basic allowance for housing (“BAH”) provided by thegovernment to service members, are recognized when the revenue is earned by themilitary housing projects. Incentive management fees are based upon thesatisfaction of certain criteria including, among other things, satisfyingdesignated benchmarks relating to emergency work order responses, occupancyrates, home turnover and resident satisfaction surveys. Incentive managementfees are recognized when the various criteria stipulated in the managementcontract have been satisfied. Accrued and unbilled incentive management fees of$1.1 million and $1.0 million are included in accounts receivable — relatedparty at each of September 30, 2006 and December 31, 2005, respectively.

Standard and incentive development andconstruction/renovation fees, which are based on a percentage of developmentand construction/renovation costs incurred by the military housing projects,including hard and soft costs and financing costs, are recognized on a monthlybasis as the costs are incurred by the military housing projects. Incentivedevelopment and construction/renovation fees are based upon the satisfaction ofcertain criteria including, among other things, completing a number of housingunits according to schedule, achieving specific safety records and implementingsmall business or minority subcontracting plans.  Incentive development and construction/renovationfees are recognized when the various criteria stipulated in the contract havebeen satisfied. Accrued and unbilled standard and incentive development and construction/renovationfees of $3.8 million and $2.7 million are included in accounts receivable —related party at September 30, 2006 and December 31, 2005, respectively.

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In addition, in certain instances, the Company mayreceive fees relating to the performance of pre-construction/renovationservices. These pre-construction/renovation fees are determined on aproject-by-project basis, and are paid in proportion to the amount ofpre-construction/renovation costs incurred by us for the project, andrecognized as revenue upon performance of the pre-construction/renovationservices.

Revenues on fixed-price renovation contracts are recordedon the percentage-of-completion method. When the percentage-of-completionmethod is used, contract revenue is recognized in the ratio that costs incurredto date bear to estimated costs at completion. Adjustments to cost estimatesare made in the period in which the facts requiring such revisions becomeknown. When the revised estimates indicate a loss, such loss is currentlyprovided for in its entirety.

Business development fees are earned from our businesspartners that provide architectural and design or construction services for theCompany’s military housing projects. These fees are received in connection withpursuing and coordinating the completion of military housing projects. The feesconsist of (i) an annual base fee, which is a fee paid to the Company inconsideration of the Company’s ongoing pursuit of additional projects and isnot contingent upon the success of those efforts and may be cancelled at anytime, and (ii) an additional fee, which is paid over the course of anawarded project based on a percentage of revenue earned by these businesspartners for providing services to the Company’s military housingprojects.  The base fees are recognized on a straight-line basis over theterm of the related business development agreement, which is generally oneyear.  The additional fee is recognized and paid to the Company as therelated services are provided to our military housing projects by our businesspartners.

The Company earns equity returns on its investments inmilitary housing projects. During the initial development period for a project,the equity returns are a fixed percentage of our investment and subsequent tothe initial development period for a project, the equity returns are based on afixed percentage of our investment and on the project’s net operating income,subject to cash distribution caps, as defined in the operating agreementsrelated to the particular project. As of September 30, 2006, only the FortCarson project had passed its initial development period.

Expense reimbursements are comprised primarily ofrenovation expenses and property management expenses, the costs of which arereimbursed by the military privatization projects to which they relate. Theexpenses include payments to third parties for renovation services, and includesalaries and related costs of the Company’s employees that are managing therenovation and property management activities. The Company accrues expensereimbursements as the related expenses are incurred.

***Minority Interest***

Minority interest as initially reported at the date ofour initial public offering represented the net equity of the OperatingPartnership, including the proceeds received from the sale of the warrant toVornado Realty Trust, multiplied by the ownership percentage of holders oflimited partnership units in the Operating Partnership other than the Company.The Operating Partnership is obligated to redeem, at the request of a holder,each unit of limited partnership interest for cash or common shares on a one-for-onebasis, at the Company’s option, subject to adjustments for share splits,dividends, recapitalizations and similar events; except that Gary M. Holloway,Sr. has the right to require the Operating Partnership to redeem his and hisaffiliates’ units of limited partnership interest for common shares, subject tohis restriction from owning more than 20% of the Company’s outstanding commonshares. If the minority interest unitholders’ share of a current year losswould cause the minority interest balance to be less than zero, the minorityinterest balance will be reported as zero unless there is an obligation of theminority interest unit holders to fund those losses. Any losses in excess ofthe minority interest will be charged against equity. If future earningsmaterialize, equity will be credited for all earnings up to the amount of thoselosses previously absorbed. Distributions to limited partnership unitholdersother than the Company are recorded as a reduction to minority interest.

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***Investments in Military Housing Projects and StudentHousing Joint Ventures***

The Company’scurrent military housing projects are joint ventures entered into between theCompany and the U.S. military to design, develop, construct/renovate and managethe military family housing located on or near various bases throughout theUnited States. The Company evaluates its investments in military housingproject joint ventures in which we have a variable interest to determine if theunderlying entity is a variable interest entity (“VIE”) as defined under FASBFinancial Interpretation No. 46 (as revised) (“FIN 46(R)”). The Companyhas concluded that each of the military housing project joint ventures in whichit has a variable interest is a VIE and that the Company is not the primarybeneficiary of any of these VIEs. We record our investments in joint venturesunder our military housing projects in accordance with the equity method ofaccounting. Our investment is initially recorded at cost, and then subsequentlyadjusted at each balance sheet date to an amount equal to what we would receivefrom the joint venture in the event that it were liquidated at net book valueas of that date, and assuming that the proceeds from the liquidation aredistributed in accordance with the terms of, and priority of returns set forthunder, the joint venture’s operating agreement. The Company has exposure toloss to the extent of its investments, if any, and any receivables due from theproject.

The Companyentered into a joint venture in the third quarter of 2005 to develop andconstruct two student housing properties. The Company contributed land to thejoint venture in exchange for its 10% interest and cash.  In addition, the Company has the option topurchase the joint venture partner’s interest in the joint venture within oneyear of completion of the properties, and the Company has provided certainguarantees for the completion of construction and for a portion of theconstruction loans.  As such, thetransaction is being accounted for under the financing method, whereby theCompany records the real estate as an asset, depreciates the property, andrecords a financing obligation. Construction of both properties was completed in August 2006.

***IncomeTaxes***

The Companyelected to be taxed as a REIT under the Internal Revenue Code of 1986, asamended, commencing with its taxable year ended December 31, 2004. Tocontinue to qualify as a REIT, the Company must meet a number of organizationaland operational requirements, including a requirement that we currentlydistribute at least 90% of our adjusted taxable income to our shareholders. Webelieve we are organized and operate in a manner that allows us to qualify fortaxation as a REIT under the Code, and it is our intention to adhere to these requirementsand maintain the Company’s REIT status in the future. Accordingly, no provisionhas been made for federal income taxes in the accompanying consolidatedfinancial statements, other than with respect to the Company’s taxable REITsubsidiaries.

***Share-BasedCompensation***

On January 1, 2006, the Company adopted SFAS No. 123R, asrevised,*“Share-Based Payment.”*SFAS No. 123R replaces SFAS No. 123,*“Accounting for Stock-Based Compensation”* and supersedes APB OpinionNo. 25,*“Accounting for Stock Issued toEmployees.”* The scope of SFAS No. 123R includes a wide range ofshare-based compensation arrangements including stock options, restricted shareplans, performance-based awards, stock appreciation rights, and employee stockpurchase plans. SFAS No. 123R requires companies to recognize in theirfinancial statements the compensation expense relating to share-based paymenttransactions.  There was no materialimpact as of and for the three and nine-month periods ended September 30, 2006.

InNovember 2004, the Company established an equity incentive plan (the “Plan”)that provides for the issuance of up to 2,000,000 common shares pursuant tooptions, restricted share awards, share appreciation rights, performance unitsand other equity based awards. As of September 30, 2006 the Company issued83,910 restricted common shares under the Plan to non-employee members of theCompany’s Board of Trustees and to an executive officer of the Company.  The restricted common shares vest over athree-year period from the grant date. The restricted common shares areentitled to the same dividend and voting rights during the vesting period asthe issued and outstanding common shares. The fair 

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value of the awards wascalculated based on the closing market price of the Company’s common shares onthe grant date and is expensed on a straight-line basis over the vestingperiod. The Company recognized non-cash stock-based compensation expenserelated to the restricted common shares of $92,000 and $32,000, for the threemonths ended September 30, 2006 and 2005, respectively, and $167,000 and$78,000 for the nine months ended September 30, 2006 and 2005, respectively.

**3.  Real Estate Investments and Acquisitions**

As of September 30, 2006, the Company owned 63 studenthousing properties, and had ownership interests in two student housingproperties through a joint venture, located near a total of 46 colleges anduniversities in 25 states. These properties contain an aggregate of 11,991units and 38,938 beds.The Company’sinvestment in student housing properties at September 30, 2006 and December 31,2005, which includes the two joint venture properties that were underdevelopment and placed into service during the third quarter, are as follows(in thousands):

|                                       | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Land                                  |       | $                            | 142,265    |                        | $          | 110,634 |   |
| Building and  improvements            |       | 1,230,109                    |       | 1,055,157                   |       |
| Residential  furniture and appliances |       | 38,950                       |       | 26,159                      |       |
| Construction in  progress             |       | 2,293                        |       | 18,305                      |       |
|                                  |       | $                            | 1,413,617  |                        | $          | 1,210,255 |   |

 

On August 1, 2006, the Company acquired two studenthousing properties, containing a total of 203 units and 696 beds, for anaggregate purchase price of approximately $41.4 million. These acquisitionswere financed through the placement of new mortgage debt on the properties andborrowings under the Company’s credit facility. The Company estimated $325,000of the aggregate purchase price to be the fair value of in-place leases.   On August 17, 2006, the Company completedthe acquisition of five contiguous land parcels for the development of fivestudent housing properties located near Sam Houston State University inHuntsville, TX. The land parcels were acquired for an aggregate purchase priceof approximately $1.8 million, which was financed primarily from borrowingsunder the Company’s credit facility.

During the threemonths ended June 30, 2006, the Company acquired one student housing propertylocated in Columbia, South Carolina and serving the University of SouthCarolina, containing 264 units and 924 beds, for an aggregate purchase price ofapproximately $36.9 million.  TheCompany estimated $396,000 of the purchase price to be the fair value ofin-place leases.

During the threemonths ended March 31, 2006, the Company acquired six student housing propertieslocated near six colleges and universities in six states containing a total of994 units and 2,750 beds for an aggregate purchase price of approximately$82.6 million.  The Companyestimated $904,000 of the aggregate purchase price to be the fair value ofin-place leases.

The results ofoperations of these properties are included in the accompanying statements ofoperations from the respective acquisition dates.

**4.  Investments in Military Housing Projects**

The acquisition ofour ownership interests in the joint venture that initially owned the rightsrelating to our Fort Carson and Fort Eustis/Story military housing projects wasrecorded at the fair value of the consideration paid in the amount of $31.0million.  The underlying book value ofthe equity on the acquisition date was approximately $11.5 million.  The remaining $19.5 million of thisinvestment is being amortized based on the then current fiscal year revenue asa percentage of the estimated revenue to be earned over the remaining lives ofthe projects, which are 45 years for the Fort Carson project and 50 years forthe Fort Eustis/Story project. Amortization expense was $0.1 million for thethree months ended September 30, 2006, and $0.1 million for the three monthsended September 30, 2005. Amortization 

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expense was $0.3 millionand $0.2 million for the nine months ended September 30, 2006 and 2005,respectively.  The accumulatedamortization of the excess purchase price was $0.6 million and $0.3 million atSeptember 30, 2006 and December 31, 2005, respectively.

During the ninemonths ended September 30, 2006, the Company received $3.1 million of equitydistributions from Fort Carson Family Housing LLC.  The carrying value ofthis investment was $24.9 million at September 30, 2006 and $26.1 millionat December 31, 2005.  The Company earnsa preferred return on its investment in Fort Carson Family Housing LLC, plus30% of the project’s Available Cash (defined as net operating income minus debtservice and general reserves) until June 2015, and 10% of the project’sAvailable Cash thereafter. For the nine months ended September 30, 2006, thepreferred return plus 30% of Available Cash earned was $2.6 million. Theproject began repaying the Company’s initial investment in Fort Carson FamilyHousing LLC in July 2005.  The equity isexpected to be completely repaid by 2015.

InNovember 2004, the Company and Benham Military Communities, LLC formed ajoint venture known as GMH/Benham Military Communities LLC for the purpose ofinvesting in the Navy Northeast Region military housing project. The Companycontributed $9.5 million to GMH/Benham Military Communities LLC in returnfor a 90% interest and Benham Military Communities, LLC invested$1.1 million for the remaining 10% interest. The Company consolidatesGMH/Benham Military Communities LLC as it has a 90% economic interest andcontrols a majority of the voting interests. Benham Military Communities, LLC’s10% interest is accounted for as minority interest and is included in other liabilities. In November 2004, GMH/Benham Military Communities, LLC invested$10.6 million in Northeast Housing LLC, which owns and operates the NavyNortheast Region military housing project. GMH/Benham Military Communities LLCearns a preferred return on its investment in Northeast Housing LLC. Thepreferred return will accrue, but not be paid, until the end of the initialdevelopment period for the project in October 2010. The carrying value ofthis investment was $12.4 million at September 30, 2006 and $11.7 millionat December 31, 2005.

Effective May 1, 2006, the Company officiallypartnered with the U.S. Department of the Army, to be the private sectorpartner for the design, development, construction/renovation and management ofthe military family housing communities at Fort Gordon located near Augusta,Georgia. The 50-year term of the Fort Gordon project includes a six-yearInitial Development Period with estimated project costs of approximately $110.0million.

On May 1, 2006, the Company also acquired an ownershipposition and commenced property management and maintenance services for theU.S. Department of the Army’s military family housing at Carlisle Barracks andPicatinny Arsenal, located in Carlisle, PA and Dover, NJ, respectively. TheCompany commenced providing property management and maintenance services at thetwo installations on May 1, 2006, when one of the Company’s subsidiariesentered into agreements with the Army, including a 50-year ground lease for thepurpose of owning and managing the housing inventory at the two installations.Under the agreements, the Company will receive fees for the provision ofmanagement and maintenance services at these installations.  In addition, during the third quarter of2006, we continued negotiations with respect to the completion of finalrenovation and construction agreements for our Carlisle/Picatinny project, forwhich financing was secured during the second quarter of 2006. Final renovationand construction agreements are expected to be executed before the end of 2006,at which point we will commence actual renovation and construction activities.

**5.  Income Taxes**

The Company haselected Taxable REIT Subsidiary (“TRS”) status for certain of its corporatesubsidiaries. The following table summarizes the Company’s provisions forincome taxes for the three and nine month periods ended September 30, 2006 and2005 (in thousands):

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|                 | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **      | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Federal taxes   |       | $                                                    | 1,059      |                                                | $          | 1,880 |   | $ | 2,909 |   | $ | 3,790 |   |
| State taxes     |       | 248                                                  |       | 374                                                 |       | 585 |   | 722 |   |
| Total provision |       | $                                                    | 1,307      |                                                | $          | 2,254 |   | $ | 3,494 |   | $ | 4,512 |   |

 

**6.  Notes Payable**

AtSeptember 30, 2006, notes payable totaling $797.1 million were secured by56 student housing properties with a cost basis of $1,197.0 million.  These notes payable had a weighted averageinterest rate of 5.10%, a weighted average maturity of 6.56 years, mature atvarious dates between March 2007 and June 2024 and require monthly payments ofprincipal and interest or monthly payments of interest only.  In addition, as of September 30, 2006, theCompany had $27.0 million in indebtedness outstanding that was secured by twostudent housing properties through a joint venture.

OnJanuary 12, 2006, the Company placed new mortgage debt on the corporateheadquarters in the amount of $5.7 million. The new mortgage debt has a term of10 years with a fixed interest rate of 5.58%, and requires monthly payments ofinterest only.

**7.  Line of Credit**

*New Line of Credit*

On October 2, 2006 the Company entered into a $250million six month revolving line of credit with Wachovia Bank, NationalAssociation.  In connection with thistransaction, the Company incurred approximately $3.3 million of transactionalcosts that will be amortized over the term of the agreement.   Borrowings under the Wachovia line of creditwere used to (i) repay all obligations under the Former Credit Facility, asdefined below, and (ii) fund the equity portion of the purchase price for ourrecent acquisition of the Capstone portfolio that closed in October 2006. Goingforward, borrowings from the line of credit may be used to (i) acquire or fundcertain pending student housing acquisitions and military housing projects, and(ii) fund the third and fourth quarter distributions, other general workingcapital advances pursuant to the terms of the agreement, and such othertransactions as may be approved by Wachovia in its sole and absolutediscretion.  The new line of credit hasan initial term of six months, and provides for either of two extensionoptions: (i) an additional three month extension of the initial maturity date,referred to as the Option One Maturity Date, in the event that we have enteredinto a definitive agreement relating to a merger or the sale of substantiallyall of our assets, which merger/sale agreement has been (A) approved byour Board of Trustees, (B) announced publicly and (C) is not subjectto financial contingencies; and (ii) an additional six month extension option(provided notice is given no later than fifteen days prior to the later of theinitial maturity date or the Option One Maturity Date), subject to payment of afee in an amount equal to 2.00% of the outstanding principal balance of theloan as of the initial maturity date or the Option One Maturity Date, as thecase may be, referred to as the Option Two Maturity Extension. In no event,however, will the maturity date of the line of credit extend beyondOctober 2, 2007. Borrowings under this new line of credit bear interest ata Eurodollar rate based on LIBOR plus 2%, and LIBOR plus 4.5% during the OptionTwo Maturity Extension.

The new line ofcredit contains affirmative and negative covenants and also contains financialcovenants which, among other things, require that the Company maintain (i) afixed charge coverage ratio with respect to the student housing properties, asdefined in the line of credit, of at least 1.25x to 1.00x, (ii) a consolidatedtangible net worth, as defined by the line of credit agreement, of at least$455 million, (iii)

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maintain quarterlyminimum aggregate adjusted management EBITDA relating to the military housingsegment and student housing managed properties, as defined in the line ofcredit agreement, of $5 million, and (iv) the Company’s federal tax status as aREIT.

*Former Credit Facility*

InNovember 2004, the Company entered into a $150 million three-yearunsecured revolving credit facility, subject to increase to $250 million(the “Former Credit Facility”), with a consortium of banks. The Former CreditFacility was terminated and all outstanding borrowings were paid on October 2,2006 with proceeds from the new line of credit, as described above.  The Company will recognize approximately $1.1million of deferred financing costs relating to the termination of the FormerCredit Facility in the fourth quarter of 2006. The Former Credit Facility provided for the issuance of up to$20 million of letters of credit, which was included in the aggregate$150 million availability.

InJanuary 2006, the Company paid a dividend to its shareholders in excess ofthe 110% of funds from operations for the year ended December 31, 2005.  The Company received a waiver of thisinstance of noncompliance with the financial covenant under the Former CreditFacility.

During the threemonths ended September 30, 2006, as a result of the ongoing delay in the filingof the  Company’s Annual Report on Form10-K for the fiscal year ended December 31, 2005 and Quarterly Reports on Form10-Q for the fiscal quarters ended March 31, 2006 and June 30, 2006, theCompany obtained waivers of the covenant under its Credit Facility thatrequired the Company to deliver audited financial statements for the 2005fiscal year no later than 90 days after the fiscal year end, and unauditedquarterly financial statements no later than 45 days after each fiscal quarter.These waivers extended the period by which the Company may deliver thefinancial statements relating to the year ended December 31, 2005 and thequarter ended March 31, 2006 through August 15, 2006, and for the three monthsended June 30, 2006 through September 15, 2006.

As of June 30, 2006, the Company failed to comply withthe financial covenants under the Former Credit Facility that requiredmaintenance of an interest coverage ratio equal to or greater than 2.00x, and afixed charge coverage ratio equal to or greater than 1.75x. On September 1,2006, the Company entered into a Third Amendment and Waiver to Credit Agreementwith the lender syndicate under the Former Credit Facility. Under theagreement, the lender syndicate provided waivers of the Company’s noncompliancewith these financial covenants as of the end of the quarter ended June 30,2006. In addition, the agreement provided for amendments to the definitions ofthe terms “consolidated EBITDA” and “funds from operations” to permit theCompany to add back the non-recurring expenses relating to the specialinvestigation performed by the Audit Committee and to the formation andoperations of the Company’s Special Committee in connection with its review ofstrategic alternatives. In addition, the agreement included an amendment to theCompany’s total leverage ratio, commencing with the quarter ended June 30,2006, from 60% to 70%. Under the terms of the amendment, the 70% total leverageratio will be in effect through December 31, 2006, and thereafter will revertto 60%.  Commencing with the quarterended June 30, 2006 and through December 31, 2006, the applicable rate on allamounts outstanding under the credit facility, as amended, when the Company’sleverage ratio exceeds 65% will be 2.625% and 2.00% for Eurodollar rate loansand prime rate loans, respectively.  TheCompany incurred $540,000 in fees in connection with obtaining this waiver andamendment, of which $120,000 relating to the waiver was expensed during thethird quarter.

As of September30, 2006, the Company had $128 million outstanding under the Former CreditFacility, bearing interest at a Eurodollar rate based on 30-day LIBOR of 5.33%plus 1.875% resulting in a total interest rate at 7.205%.  As of September 30, 2006, there were noletters of credit outstanding under the Former Credit Facility, and the Companyhad an additional $22 million in total borrowings available under the FormerCredit Facility.

**8.  Transactions with Related Parties**

In the ordinarycourse of its operations, the Company has on-going business relationships withGary M. Holloway, Sr., entities affiliated with Mr. Holloway,and entities in which Mr. Holloway or the 

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Company has an equityinvestment. These relationships and related transactions are summarized below.

In connection withthe Company’s initial public offering, Mr. Holloway, and various entitieswholly-owned by Mr. Holloway, entered into a Contribution Agreement, datedOctober 18, 2004, with the Operating Partnership. Pursuant to theContribution Agreement, Mr. Holloway contributed to the OperatingPartnership all of the partnership interests of GH 353 Associates, L.P., whichentity’s sole asset was the corporate headquarters building located in NewtownTownship, Pennsylvania. The Commonwealth of Pennsylvania and Newtown Townshipeach impose a 1% transfer tax on the transfer of these partnership interests.Mr. Holloway paid the Company approximately $61,000 as reimbursement forone-half of the aggregate transfer tax that was originally paid by the Companyin connection with transfer tax assessed against the transfer of thepartnership interests. The amount was received by the Company in 2006 fromMr. Holloway, and was recorded as a reduction to corporate assets on theCompany balance sheet as of December 31, 2005.

The Companyprovided certain functions to entities affiliated with Gary M. Holloway, Sr.,including human resources, legal and information technology.  Such costs totaled $40,000 and $21,000 duringthe three months ended September 30, 2006 and September 30, 2005, respectively,and $124,000 and $232,000 during the nine months ended September 30, 2006 andSeptember 30, 2005, respectively, and are included in expense reimbursementfrom related parties in the accompanying consolidated statements of operations.

The Company leases space in its corporate headquartersto entities wholly-owned by Gary M. Holloway, Sr.  Rental income from these entities totaled$35,000 and $61,000 during the three and nine months ended September 30, 2006,respectively, and $113,000 and $183,000 during the three and nine months endedSeptember 30, 2005, respectively, and are included in rent and other propertyincome in the accompanying consolidated statements of operations.

The Companyprovided property management consulting services to GMH Capital Partners AssetServices, LP, an entity wholly-owned by Mr. Holloway, in connection withproperty management services that GMH Capital Partners Asset Services, LPperformed related to five student housing properties containing a total of2,172 beds. The Company earned consulting fees equal to 80% of the managementfees that GMH Capital Partners Asset Services, LP earned for providing theproperty management services.  For the threeand nine months ended September 30, 2005, such fees totaled $53,000 and$187,000, respectively. As of January 1, 2006, the management agreementsrelating to four of these properties were assigned from GMH Capital PartnersAsset Services, LP to a subsidiary of the Company, and the management agreementrelating to the fifth property was terminated. As a result, no such consultingfees were earned by the Company during the three or nine months ended September30, 2006.  In addition, the Companyearned management fees from properties in which Mr. Holloway is aninvestor.  During the three and ninemonths ended September 30, 2006, such income totaled $37,000 and $74,000,respectively, and $0.2 million during the nine months ended September 30, 2005.No such income was received during the three months ended September 30, 2005.

The Company is reimbursed by joint ventures relatingto certain military housing projects in which the Company has an ownershipinterest, as well as student housing properties under the Company’s managementin which Mr. Holloway was an investor through March 2005, for the cost ofcertain employees engaged in the daily operation of those military housingprojects and student housing properties. The reimbursement of these costs isreflected as expense reimbursements from related parties in the accompanyingconsolidated statements of operations. During the three and nine months ended September 30, 2006, suchreimbursed costs totaled $17.3 million and $48.2 million, respectively. Duringthe three and nine months ended September 30, 2005, such reimbursed coststotaled $20.1 million and $40.4 million, respectively.

Mr. Hollowayowns Bryn Mawr Abstract, Inc., an entity that provides title abstractservices to third party title insurance companies, from which we have purchasedtitle insurance with respect to certain student housing properties and militaryhousing projects that we have acquired or refinanced. In connection with thepurchase of title insurance for these student housing properties and militaryhousing projects, premiums were paid to other title insurance companies, whichfees in some cases are fixed according to 

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statute. From thesepremiums, the other title insurance companies paid to Bryn Mawr Abstract, Inc.$162,000 and $345,000 during the three and nine months ended September 30,2005, respectively, for the provision of title abstract services, and $39,000and $226,000 during the three and nine months ended September 30, 2006,respectively.

Mr. Hollowayowns GMH Capital Partners Commercial Realty LP, an entity that has providedreal estate consulting and brokerage services for real estate transactions.During the nine months ended September 30, 2005, GMH Capital PartnersCommercial Realty LP received aggregate commissions of $284,000.  No such payments were made during the threemonths ended September 30, 2005 or during the three and nine months endedSeptember 30, 2006.

InFebruary 2005, the Company transferred its interest in Corporate FlightServices, LLC, including the corporate aircraft and associated debt initiallycontributed to the Operating Partnership at the time of the initial publicoffering, back to Mr. Holloway. Corporate Flight Services, LLC had a net deficit of $171,000, net of$180,000 tax expense related to a taxable gain upon the transfer to Mr.Holloway, on the date it was transferred back to Mr. Holloway. This transferwas accounted for as a capital contribution to additional paid-in capital.  During the three and nine months endedSeptember 30, 2006, the Company paid to Corporate Flight Services, LLC $371,000and $871,000, respectively, in connection with use of the aircraft for studenthousing and military housing related travel. During the three and nine months ended September 30, 2005, the Companypaid to Corporate Flight Services LLC $32,000 and $197,000 respectively for useof the aircraft.

Gary M. Holloway,Sr., an executive officer of the Company, a former executive officer of theCompany, another employee of the Company, and an employee of an entity wholly-ownedby Mr. Holloway, each held an ownership interest in two student housingproperties that were acquired by the Company during the first quarter of 2005for a total purchase price of $38.2 million. The Company paid $36.5 million incash to investors in the selling entity not affiliated with the Company andissued a total of 141,549 units of limited partnership interest in theOperating Partnership to Mr. Holloway and these individuals with an aggregatefair value of $1.7 million in connection with the purchase.

**9.Commitments and Contingencies**

As of September30, 2006, we had agreements to acquire two student housing properties, aportfolio of 11 student housing properties, and four undeveloped parcels of land for the development of four future studenthousing properties, for an aggregate purchase price of $268.0 million,and had placed nonrefundable deposits related to such acquisitions totalingapproximately $5.5 million.

With regard tomilitary housing projects at Army bases, depending on the terms of eachrespective agreement, the Company is either required to fund its portion of theequity commitment to the project’s joint venture (i) after all other sources offunding for the project have been expended or (ii) after the initial developmentperiod is completed. With respect to the Company’s Navy Northeast Regionproject, however, the Company was required to fund the equity commitment atcommencement of the project. In connection with finalizing the agreements withthe DoD for the Company’s military housing projects, the Company has committedto contribute the following aggregate amounts as of September 30, 2006 (inthousands):

| 2006                 |   | $      | 2,000  |   |
|----------------------|--------|--------|--------|--------|
| 2007                 |   | 5,900  |   |
| 2010                 |   | 6,600  |   |
| 2011 and  thereafter |   | 18,800 |   |
| Total                |   | $      | 33,300 |   |

 

In connection with thedevelopment, management, construction, and renovation agreements for certain ofthe military housing projects, the Company guarantees the completion of itsobligations under the agreements. The guarantees require the Company to fundany costs in excess of the amounts budgeted in the underlying development,management, construction, and renovation agreements. The maximum exposure tothe Company on these guarantees cannot be determined at this time. Managementbelieves that these 

15

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guaranteeswill not have a material adverse impact on the Company’s financial position orresults of operations.

In 2004, the Company entered intoemployment agreements with three of its executive officers. Each employmentagreement is for an initial three-year term beginning on November 2, 2004 andprovides for base salaries aggregating $975,000 in each of the three years. Thebase salaries increase annually effective January 1 of each year by aminimum amount equal to at least the percentage increase in the Consumer PriceIndex.  On December 31, 2005,the Company and one of its executive officers entered into a separationagreement, pursuant to which the executive resigned from his position as anofficer of the Company and effectively terminated his employment agreement withthe Company.  Under the terms of theseparation agreement, the executive remained eligible for an incentive bonusaward for the fiscal year 2005, which was paid to the executive in June 2006.In addition, the executive has agreed to remain subject to certain restrictivecovenants contained in the employment agreement, including non-disclosure ofconfidential information, non-competition and non-solicitation of employees,assignment of intellectual property rights, and on-going cooperation with theCompany in connection with pending matters.  The Company and the executiveseparately executed a Consulting Agreement, dated January 1, 2006,pursuant to which the executive has agreed to provide consulting services tothe Company for an initial term through May 31, 2007.  The Company is paying the former executive$25,000 per month during the term of the Consulting Agreement as compensationfor his services, which is being expensed as incurred.

Under the provisions of FIN 45, *“Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others aninterpretation of FASB Statements No. 5, 57, and 107 and rescission ofFASB Interpretation No. 34,”* a guarantor is to recognize, atthe inception of a guarantee, a liability for the fair value of the obligationundertaken by issuing the guarantee. The Company enters into indemnificationagreements in the ordinary course of business that are subject to theprovisions of FIN 45. Under these agreements, the Company indemnifies, holdsharmless, and agrees to reimburse the indemnified party for losses suffered orincurred by the indemnified party. The maximum potential amount of futurepayments the Company could be required to make under these indemnificationagreements is unlimited. The Company believes the estimated fair value of theseagreements is immaterial. Accordingly, there were no liabilities recorded forthese agreements as of September 30, 2006 and December 31, 2005.

On April 5, 2006,the Company, Gary M. Holloway Sr., our Chairman, President and Chief ExecutiveOfficer, and Bradley W. Harris, our former Chief Financial Officer, were namedas defendants in a class action complaint filed in United States District Courtfor the Eastern District of Pennsylvania, or the Court. The complaint providesthat the Plaintiff has filed a federal class action on behalf of purchasers ofthe publicly traded securities of the Company between October 28, 2004 andMarch 10, 2006, referred to as the Class Period, seeking to pursue remediesunder the Securities Act of 1933 and the Securities Exchange Act of 1934.Plaintiff alleges that defendants issued a series of false and misleadingfinancial results regarding the Company to the market during the Class Period,and more specifically, failed to disclose: (1) that the Company’s earnings, netincome and revenues were materially inflated and expenses were materiallyunderstated; (2) that the Company’s funds from operations were materiallyinflated; (3) that the Company lacked adequate internal controls; (4) that theCompany’s reported financial results were in violation of generally acceptedaccounting principles, or GAAP; and (5) that as a result of the foregoing, theCompany’s financial results were materially inflated at all relevanttimes.  Plaintiff alleges claims underSection 11 of the Securities Act with respect to all of the defendants; Section12(a)(2) of the Securities Act with respect to the Company; Section 15 of theSecurities Act with respect to Mr. Holloway and Mr. Harris; Section 10(b) andRule 10b-5 of the Exchange Act with respect to all of the defendants; andSection 20(a) of the Exchange Act with respect to Mr. Holloway and Mr. Harris.

On April 11, 2006,April 20, 2006, April 27, 2006 and May 15, 2006, four additional class actioncomplaints were filed with the Court against the defendants by separate lawfirms, and the Company anticipates that additional complaints may be filed inthe near future until a class has been certified by the Court and a leadplaintiff has been named. Each of these additional filed complaints alleges thesame 

16

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claims against thedefendants as described above with respect to the complaint filed on April 5,2006, except that the complaint filed on April 20, 2006 restricts the classperiod to purchasers of the publicly traded securities of the Company to thetime period between May 5, 2005 and March 10, 2006.

On June 2, 2006 amotion for appointment of a lead plaintiff was filed with the court, and twoadditional motions were filed on June 5, 2006. To date, the court has not ruledon these motions, and the defendants have not yet responded to any of the filedcomplaints. The outcome of this litigation is uncertain, and while the Companybelieves that it has valid defenses to Plaintiff’s claims and intends to defendthe class action lawsuit vigorously, no assurance can be given as to theoutcome of this litigation. The Company has not established a reserve for theseclaims, as it has not determined that a loss is probable nor is it able to beestimated at this time.  An adverseoutcome could have a material adverse effect on our consolidated financialstatements and results of operations.

The Company is subject to routine litigation, claims and administrativeproceedings arising in the ordinary course of business. In management’sopinion, the resolutions of any such pending legal actions are not expected tohave a material adverse effect on the Company’s consolidated financial positionor results of operations.

**10. Segment Reporting**

The Company is managed asindividual entities that comprise three reportable segments: (1) studenthousing (2) military housing and (3) corporate. The Company’smanagement evaluates each segment’s performance based upon net income. Theaccounting policies of the reportable segments are the same as those describedin the summary of significant accounting policies. 
| ** **                                                                                               | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
| ** **                                                                                               | ** ** | **Student  Housing**                                     | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                                                               | ** ** | **(dollars in thousands)**                     | ** ** |
|                                                                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Revenue:**                                                                                             |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and other  property income                                                                          |       | $                                                        | 45,716     |   | — |   | $ | 35 |   | $ | 45,751 |   | $ | 35,349 |   | — |   | $ | 60 |   | $ | 35,409 |   |
| Expense  reimbursements:                                                                                 |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                            |       | 46                                                       |       | 17,273 |   | (10 | ) | 17,309 |   | — |   | 20,074 |   | 22 |   | 20,096 |   |
| Third party                                                                                              |       | 1,965                                                    |       | — |   | — |   | 1,965 |   | 1,299 |   | — |   | — |   | 1,299 |   |
| Management fees:                                                                                         |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                            |       | 37                                                       |       | 2,094 |   | — |   | 2,131 |   | — |   | 1,755 |   | — |   | 1,755 |   |
| Third party                                                                                              |       | 766                                                      |       | — |   | — |   | 766 |   | 611 |   | — |   | — |   | 611 |   |
| Other fee  income, related party                                                                         |       | —                                                   |       | 5,616 |   | — |   | 5,616 |   | (39 | ) | 5,934 |   | — |   | 5,895 |   |
| Other income                                                                                             |       | 46                                                       |       | 23 |   | 41 |   | 110 |   | 34 |   | 45 |   | 2 |   | 81 |   |
| Total revenue                                                                                            |       | 48,576                                                   |       | 25,006 |   | 66 |   | 73,648 |   | 37,254 |   | 27,808 |   | 84 |   | 65,146 |   |
|                                                                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating  Expenses:**                                                                                 |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property  operating expense                                                                              |       | 26,111                                                   |       | 1,517 |   | — |   | 27,628 |   | 17,658 |   | 1,248 |   | — |   | 18,906 |   |
| Reimbursed  expenses                                                                                     |       | 2,011                                                    |       | 17,273 |   | (10 | ) | 19,274 |   | 1,299 |   | 20,074 |   | 22 |   | 21,395 |   |
| Real estate  taxes                                                                                       |       | 4,440                                                    |       | — |   | 24 |   | 4,464 |   | 3,184 |   | — |   | — |   | 3,184 |   |
| Administrative  expenses                                                                                 |       | —                                                   |       | — |   | 3,802 |   | 3,802 |   | — |   | — |   | 2,992 |   | 2,992 |   |
| Audit Committee  and Special Committee expenses                                                          |       | —                                                   |       | — |   | 1,822 |   | 1,822 |   | — |   | — |   | — |   | — |   |
| Depreciation and  amortization                                                                           |       | 10,099                                                   |       | 93 |   | 84 |   | 10,276 |   | 8,370 |   | 78 |   | 102 |   | 8,550 |   |
| Interest                                                                                                 |       | 12,627                                                   |       | — |   | 520 |   | 13,147 |   | 8,715 |   | — |   | 274 |   | 8,989 |   |
| Total operating expenses                                                                                 |       | 55,288                                                   |       | 18,883 |   | 6,242 |   | 80,413 |   | 39,226 |   | 21,400 |   | 3.390 |   | 64,016 |   |
| Income (loss)  before equity in earnings of unconsolidated entities, income taxes and  minority interest |       | (6,712                                                   | )          | 6,123 |   | (6,176 | ) | (6,765 | ) | (1,972 | ) | 6,408 |   | (3,306 | ) | 1,130 |   |
| Equity in  earnings of unconsolidated entities                                                           |       | —                                                   |       | 460 |   | — |   | 460 |   | — |   | 1,058 |   | — |   | 1,058 |   |
| Income (loss)  before income taxes and minority interest                                                 |       | (6,712                                                   | )          | 6,583 |   | (6,176 | ) | (6,305 | ) | (1,972 | ) | 7,466 |   | (3,306 | ) | 2,188 |   |
| Income tax  (benefit) expense                                                                            |       | (140                                                     | )          | 1,447 |   | — |   | 1,307 |   | 110 |   | 2,144 |   | — |   | 2,254 |   |
|                                                                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss)  before minority interest                                                                  |       | (6,572                                                   | )          | 5,136 |   | (6,176 | ) | (7,612 | ) | (2,082 | ) | 5,322 |   | (3,306 | ) | (66 | ) |
| Minority  interest                                                                                       |       | (2,866                                                   | )          | 2,240 |   | (2,693 | ) | (3,320 | ) | (1,063 | ) | 2,716 |   | (1,687 | ) | (34 | ) |
| **Net income (loss)**                                                                                    |       | $                                                        | (3,705     | ) | $ | 2,896 |   | $ | (3,483 | ) | $ | (4,292 | ) | $ | (1,019 | ) | $ | 2,606 |   | $ | (1,619 | ) | $ | (32 | ) |
|                                                                                                          |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                                                                               | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                                                                                               | ** ** | **Student  Housing**                                    | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                                                               | ** ** | **(dollars in thousands)**                    | ** ** |
|                                                                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Revenue:**                                                                                             |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and other  property income                                                                          |       | $                                                       | 133,708    |   | — |   | $ | 113 |   | $ | 133,821 |   | $ | 90,831 |   | — |   | $ | 182 |   | $ | 91,013 |   |
| Expense  reimbursements:                                                                                 |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                            |       | 235                                                     |       | 47,967 |   | 162 |   | 48,364 |   | 186 |   | 40,134 |   | 232 |   | 40,552 |   |
| Third party                                                                                              |       | 4,690                                                   |       | — |   | — |   |   |   | 3,876 |   | — |   | — |   | 3,876 |   |
| Management fees:                                                                                         |       |                                                    |       |   |   |   |   | 4,690 |   |   |   |   |   |   |   |   |   |
| Related party                                                                                            |       | 74                                                      |       | 6,197 |   | — |   | 6,271 |   | 197 |   | 4,888 |   | — |   | 5,085 |   |
| Third party                                                                                              |       | 2,421                                                   |       | — |   | — |   | 2,421 |   | 2,156 |   | — |   | — |   | 2,156 |   |
| Other fee  income, related party                                                                         |       | —                                                  |       | 15,877 |   | — |   | 15,877 |   | (39 | ) | 12,818 |   | 70 |   | 12,849 |   |
| Other income                                                                                             |       | 129                                                     |       | 46 |   | 79 |   | 254 |   | 109 |   | 69 |   | 70 |   | 248 |   |
| Total revenue                                                                                            |       | 141,257                                                 |       | 70,087 |   | 354 |   | 211,698 |   | 97,316 |   | 57,909 |   | 554 |   | 155,779 |   |
|                                                                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating  Expenses:**                                                                                 |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property  operating expense                                                                              |       | 60,994                                                  |       | 4,569 |   | — |   | 65,563 |   | 37,866 |   | 3,238 |   | — |   | 41,104 |   |
| Reimbursed  expenses                                                                                     |       | 4,925                                                   |       | 47,967 |   | 162 |   | 53,054 |   | 4,062 |   | 40,134 |   | 232 |   | 44,428 |   |
| Real estate  taxes                                                                                       |       | 12,970                                                  |       | — |   | 72 |   | 13,042 |   | 8,339 |   | — |   | — |   | 8,339 |   |
| Administrative  expenses                                                                                 |       | —                                                  |       | — |   | 12,102 |   | 12,102 |   | — |   | — |   | 8,768 |   | 8,768 |   |
| Audit Committee  and Special Committee expenses                                                          |       | —                                                  |       | — |   | 6,698 |   | 6,698 |   | — |   | — |   | — |   | — |   |
| Depreciation and  amortization                                                                           |       | 30,758                                                  |       | 342 |   | 240 |   | 31,340 |   | 24,414 |   | 132 |   | 412 |   | 24,958 |   |
| Interest                                                                                                 |       | 34,298                                                  |       | — |   | 1,479 |   | 35,777 |   | 20,508 |   | — |   | 739 |   | 21,247 |   |
| Total operating  expenses                                                                                |       | 143,945                                                 |       | 52,878 |   | 20,753 |   | 217,576 |   | 95,189 |   | 43,504 |   | 10,151 |   | 148,844 |   |
| Income (loss)  before equity in earnings of unconsolidated entities, income taxes and  minority interest |       | (2,688                                                  | )          | 17,209 |   | (20,399 | ) | (5,878 | ) | 2,127 |   | 14,405 |   | (9,597 | ) | 6,935 |   |
| Equity in  earnings of unconsolidated entities                                                           |       | —                                                  |       | 2,850 |   | — |   | 2,850 |   | — |   | 1,999 |   | — |   | 1,999 |   |
| Income (loss)  before income taxes and minority interest                                                 |       | (2,688                                                  | )          | 20,059 |   | (20,399 | ) | (3,028 | ) | 2,127 |   | 16,404 |   | (9,597 | ) | 8,934 |   |
| Income tax  (benefit) expense                                                                            |       | (372                                                    | )          | 3,866 |   | — |   | 3,494 |   | 125 |   | 4,387 |   | — |   | 4,512 |   |
| Income (loss)  before minority interest                                                                  |       | (2,316                                                  | )          | 16,193 |   | (20,399 | ) | (6,522 | ) | 2,002 |   | 12,017 |   | (9,597 | ) | 4,422 |   |
| Minority  interest                                                                                       |       | (984                                                    | )          | 7,102 |   | (8,947 | ) | (2,829 | ) | 954 |   | 6,023 |   | (4,794 | ) | 2,183 |   |
| **Net income (loss)**                                                                                    |       | $                                                       | (1,332     | ) | $ | 9,091 |   | $ | (11,452 | ) | $ | (3,693 | ) | $ | 1,048 |   | $ | 5,994 |   | $ | (4,803 | ) | $ | 2,239 |   |
|                                                                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

18

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|                                    | ** ** | **Student  Housing**    | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-------------------------|------------|-----------------------|------------|---------------|------------|-----------|------------|
| ** **                         | ** ** | **(in thousands)** | ** ** |
| **As of  September 30, 2006:**     |       |                    |       |                  |       |          |       |      |       |
| Total assets                       |       | $                       | 1,395,742  |                  | $          | 55,493        |       | $         | 16,964     |   | $ | 1,468,199 |   |
| Total liabilities                  |       | $                       | 931,446    |                  | $          | (16,952       | )          | $         | 124,127    |   | $ | 1,038,621 |   |
| **As of  December 31, 2005:** |       |                    |       |                  |       |          |       |      |       |
| Total assets                       |       | $                       | 1,206,555  |                  | $          | 59,242        |       | $         | 12,154     |   | $ | 1,277,951 |   |
| Total liabilities                  |       | $                       | 769,469    |                  | $          | (3,682        | )          | $         | 26,665     |   | $ | 792,452 |   |

 

**11.  Earnings PerCommon Share**

The following table details the number of shares andnet income used to calculate basic and diluted earnings per share for the threeand nine months ended September 30, 2006 and September 30, 2005 (in thousands,except share and per share amounts):

|                                                                 | ** ** | **Three Months Ended  September 30, 2006** | ** ** | **Three Months Ended  September 30, 2005** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **Basic**                                                      | ** ** | **Diluted**                                                    | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
|                                                            |       |                                                           |       |                                                           |       |   |   |   |   |
| Net loss                                                        |       | $                                                              | (4,292     | )                                                              | $          | (4,292 | ) | $ | (32 | ) | $ | (32 | ) |
| Minority  interest                                              |       | —                                                         |       | (3,320                                                         | )          | — |   | (34 | ) |
| Income available  to common shareholders                        |       | $                                                              | (4,292     | )                                                              | $          | (7,612 | ) | $ | (32 | ) | $ | (66 | ) |
|                                                            |       |                                                           |       |                                                           |       |   |   |   |   |
| Weighted-average  common shares outstanding                     |       | 41,491,841                                                     |       | 41,491,841                                                     |       | 30,350,989 |   | 30,350,989 |   |
| Warrant                                                         |       | —                                                         |       | —                                                         |       | — |   | 2,435,628 |   |
| Units of limited  partnership held by minority interest holders |       | —                                                         |       | 31,624,617                                                     |       | — |   | 31,627,317 |   |
| Restricted  common shares                                       |       | —                                                         |       | —                                                         |       | — |   | — |   |
| Total  weighted-average shares outstanding                      |       | 41,491,841                                                     |       | 73,116,458                                                     |       | 30,350,989 |   | 64,413,934 |   |
| Earnings (loss)  per common share                               |       | $                                                              | (0.10      | )                                                              | $          | (0.10 | ) | $ | (0.00 | ) | $ | (0.00 | ) |

 

 

|                                                                 | ** ** | **Nine Months Ended  September 30, 2006** | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                      | ** ** | **Basic**                                                     | ** ** | **Diluted**                                              | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
|                                                            |       |                                                          |       |                                                     |       |   |   |   |   |
| Net income  (loss)                                              |       | $                                                             | (3,693     | )                                                        | $          | (3,693 | ) | $ | 2,239 |   | $ | 2,239 |   |
| Minority  interest                                              |       | —                                                        |       | (2,829                                                   | )          | — |   | 2,183 |   |
| Income available  to common shareholders                        |       | $                                                             | (3,693     | )                                                        | $          | (6,552 | ) | $ | 2,239 |   | $ | 4,422 |   |
|                                                            |       |                                                          |       |                                                     |       |   |   |   |   |
| Weighted-average  common shares outstanding                     |       | 40,678,959                                                    |       | 40,678,959                                               |       | 30,350,989 |   | 30,350,989 |   |
| Warrant                                                         |       | —                                                        |       | —                                                   |       | — |   | 2,107,644 |   |
| Units of limited  partnership held by minority interest holders |       | —                                                        |       | 31,625,517                                               |       | — |   | 31,627,317 |   |
| Restricted  common shares                                       |       | —                                                        |       | —                                                   |       | — |   | — |   |
| Total  weighted-average shares outstanding                      |       | 40,678,959                                                    |       | 72,304,476                                               |       | 30,350,989 |   | 64,085,950 |   |
| Earnings (loss) per  common share                               |       | $                                                             | (0.09      | )                                                        | $          | (0.09 | ) | $ | 0.07 |   | $ | 0.07 |   |

 

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The computation of diluted earnings per share excludesthe warrants for the nine-month period ended September 30, 2006, and excludesthe restricted common shares for both the three and nine-month periods becausethey have an anti-dilutive effect on earnings per share.

In connection with the Company’s formationtransactions during 2004, the Company and its Operating Partnership issued awarrant to Vornado Realty Trust, a portion of which was exercised by Vornadoupon the closing of the Company’s initial public offering. On November 2, 2004,in connection with the closing of the Company’s initial public offering,Vornado exercised the warrant for 6,666,667 units of limited partnershipinterest in our Operating Partnership at a price of $7.50 per unit. OnMay 2, 2006, the Company issued 1,817,247 common shares of beneficialinterest to Vornado pursuant to the exercise of its warrant, datedJuly 27, 2004, as amended. Under the terms of the warrant, Vornado wasentitled to exercise additional securities under the warrant, in theform of common shares of the Company or units of limited partnershipinterest in the Operating Partnership, at Vornado’s election, at any timethrough May 2, 2006 (the “Exercise Expiration Date”). In addition, underthe terms of the warrant, Vornado was eligible to purchase the additionalsecurities under the warrant for cash at the then applicable exercise price pershare/unit, or to acquire the remaining securities under a cashless exercisefeature. The warrant provided that, to the extent that Vornado did not exercisethe remainder of the securities exercisable thereunder prior to the ExerciseExpiration Date, then the warrant would be automatically exercised upon theExercise Expiration Date for common shares of the Company under the cashlessexercise provision of the warrant. Vornado did not provide notice of its intentto exercise the remainder of the warrant as of the Exercise Expiration Date,and, therefore, the warrant became automatically exercisable on that date for1,817,247 common shares of the Company under the cashless exercise provision ofthe warrant.

On September 15, 2006, the Company declared aquarterly dividend of $0.2275 per outstanding common share. The dividend of$16.6 million was paid on October 13, 2006, of which $9.4 million and $7.2million was paid to common shareholders and unitholders of the OperatingPartnership, respectively, of record on September 29, 2006.

**12. Acquisition of Real Estate Investments**

The Company acquired 24 student housing properties andthree land parcels during the year ended December 31, 2005 for anaggregate purchase price of approximately $548.5 million; two studenthousing properties and five contiguous land parcels during the three monthsended September 30, 2006 for an aggregate purchase price of $43.2 million,and nine student housing properties and five contiguous land parcels during thenine months ended September 30, 2006, for an aggregate purchase price of$162.6 million.  During the threeand nine months ended September 30, 2005, the Company acquired six and 22student housing properties, respectively, for an aggregate purchase price of$119.6 million and $437.5 million. The results of operations for eachof the acquired properties have been included in our statements of operationsfrom the respective purchase dates. All pro forma financial informationpresented within this footnote is not necessarily indicative of the resultswhich actually would have occurred if the purchases had been consummated onJanuary 1, 2005, nor does the pro forma information purport to representthe results of operations for future periods.

The following unaudited pro forma financialinformation for the three- and nine- month periods ended September 30,2006 and September 30, 2005 gives effect to the acquisition of the 49 studenthousing properties as if the transactions had occurred on January 1, 2005(in thousands):

|                              | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                                   | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                         |       |                                                       |       |                                                |       |   |   |   |   |
| Pro forma  revenue           |       | $                                                          | 75,866     |                                                | $          | 75,660 |   | $ | 216,057 |   | $ | 197,116 |   |
| Pro forma net  income (loss) |       | (4,345                                                     | )          | (280                                                | )          | (3,737 | ) | 2,740 |   |
| Pro forma EPS —  Basic  |       | $                                                          | (0.11      | )                                                   | $          | (0.01 | ) | $ | (0.09 | ) | $ | 0.09 |   |
| Pro forma EPS — Diluted |       | $                                                          | (0.11      | )                                                   | $          | (0.01 | ) | $ | (0.09 | ) | $ | 0.09 |   |

 

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**13. SubsequentEvents**

On October 2, 2006, the Company terminated theFormer Credit Facility and entered into a new line of credit with WachoviaBank, National Association. For a discussion of these events, see Note 7.

In October 2006, the Company completed the acquisitionof a portfolio of 11 student housing properties containing a total of 2,214units and 7,194 beds, for an aggregate purchase price of approximately$223.0 million. These acquisitions were financed through the placement ofnew mortgage debt totaling approximately $173.4 million and borrowingsunder the new line of credit. Each mortgage loan has a term of 10-years, isinterest-only and bears a fixed interest rate of 5.84%.

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**Item 2.****    Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

**Overview**

We are a self-advised, self-managed, specialty housingcompany that focuses on providing housing to college and university studentsresiding off-campus and to members of the U.S. military and their families. Asof September 30, 2006, we owned 63 and had ownership interests in 2 studenthousing properties containing a total of 11,991 units and 38,938 beds, seven******undeveloped or partially developedparcels of land held for development as student housing properties.

We owned minority equity interests in joint venturesthat own our military housing privatization projects. Additionally, as ofSeptember 30, 2006, our operating partnership had an ownership interest in, andthrough various wholly-owned subsidiaries operates, nine military housingprivatization projects, comprising an aggregate of approximately 17,093end-state housing units on 21 military bases. In addition, on July 21, 2006, financing was secured for ourCarlisle/Picatinny project, which we were officially awarded during the secondquarter of 2006. As of the filing of this report, construction and renovationagreements are in the process of being completed to permit the commencement ofconstruction/renovation activities for this project, and are expected to befinalized during the fourth quarter of 2006. We also are currently in the solicitation process with the U.S. AirForce for a military housing privatization project that is expected to cover fourbases and 2,875 end-state housing units. During the fourth quarter of 2006, wewere selected by the Department of the Army to design, construct and managesingle soldier housing at the Army’s Fort Bliss and Fort Stewart bases. Thesetwo projects are among the first of unaccompanied personnel housingprivatization awards targeted by the Army, and are expected to cover up to 470and 370 apartments, respectively.

Through our taxable REIT subsidiaries, we providedevelopment, construction, renovation and management services for our militaryhousing privatization projects and property management services for studenthousing properties owned by others. In order to comply with the applicablerequirements under the REIT provisions of the Code, we must limit the operationsof taxable REIT subsidiaries so that securities issued to us by our taxableREIT subsidiaries do not represent more than 20% of the fair value of totalassets as of the close of any quarter in our taxable year and so that dividendsfrom our taxable REIT subsidiaries, together with our other non-qualifyinggross income, do not exceed 25% of our gross income for any taxable year.

Currently, our operations are managed within twooperating segments: (1) student housing and (2) military housing.This structure provides an effective platform for maximizing market penetrationand optimizing operating economies of scale. In addition, we separately reporta third segment with the activities of certain departments from a corporatelevel, which includes personnel that service GMH Communities Trust as a wholeand support our overall operations.

***Restatementof 2005 quarterly financial statements and identification of materialweaknesses in internal control over financial reporting and disclosure controlsand procedures***

As previously disclosed in our Annual Report on Form10-K for the year ended December 31, 2005, in the first quarter of 2006 theAudit Committee of our Board of Trustees commenced an investigation of certainaccounting and financial reporting matters. The investigation identified material weaknesses in our internal controlover financial reporting and in our disclosure controls and procedures as ofDecember 31, 2005. While we have initiated a remediation plan designed toaddress these material weaknesses, we cannot provide assurance that such planwill effect complete remediation of all of the identified material weaknessesas of the end of the 2006 fiscal year. In connection with the investigation, we reviewed our previouslyreported financial statements.  Throughthis review, we identified adjustments that were material to the results wepreviously reported for the quarterly periods ended March 31, 2005, June 30,2005 and September 30, 2005. Accordingly, we have previously restated our financial statements foreach of these quarterly periods.

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*Student Housing*

The student housing segment acquires, owns and managesoff-campus student housing properties strategically located near college oruniversity campuses. During the period beginning July 2004 and up toSeptember 30, 2006, our rental revenue increased substantially as a result ofthe acquisition of our properties, including those properties acquired in ourformation transactions. The rental payments we receive as a result of theproperties that we own are reflected in our revenue. Additionally, operatingexpenses, real estate taxes and depreciation and amortization have increased asa result of these acquisitions. Further, interest expense has increased relatedto the financing of the properties we have acquired.

Historically, we have found certain property revenuesand operating expenses to be cyclical in nature, and therefore not incurredratably over the course of the year.  Asour properties are leased predominantly on an academic-year basis, certain ofour operating revenues and expenses will vary from quarter to quarter dependingon the leasing cycle. For example, we typically experience significant turnovercosts during the third quarter of our fiscal year, in connection with preparingour properties for new residents prior to commencement of the new academic-yearlease period, which typically begins in August or September.  In addition, we also typically incur higherlease-up costs during the first two quarters of our fiscal year, as this is theperiod during which we heavily target students for leases that will commencefor the next academic year.  Propertyrevenues and expenses may differ from expected results in the year ofacquisition, depending on the timing of the acquisition in relation to theleasing cycle. We expect this trend to continue as we acquire additionalproperties.  In comparing our operatingstatistics for the three months ended September 30, 2006 versus the same periodin 2005, most of the key operating metrics for the student housing segment inthe aggregate experienced significant increases, primarily as a result of theacquisition of additional properties during 2005 and the first nine months of2006.  Most notably, for the three monthsended September 30, 2006 as compared to the three months ended September 30,2005, rent and other property income, depreciation and amortization, interestexpense, real estate taxes, and property operating expense each increasedsignificantly.  These increases were dueto a number of factors, including the increase in size of our portfolio ingeneral, as well as the following: with respect to real estate taxes, moreaggressive assessments by local taxing authorities with respect to certain ofour student housing properties throughout 2005 and the first half of 2006; andwith respect to property operating expenses due primarily to timing issuessurrounding the dates on which we acquired properties in relation to thestudent housing leasing cycle, as noted above. With respect to properties ownedduring both of the three and nine months ended September 30, 2006 versus thecomparable periods in 2005, revenues remained relatively flat over thecomparable periods as a result of lower than anticipated occupancy levels atcertain properties; and property operating expenses increased as a result ofincreased utilities expenses, bad debt expenses relating to uncollected rents,and increased repair and maintenance activities. During 2005 and the ninemonths ended September 30, 2006, we also expect to continue to experience goingforward, increases in operating expenses (in addition to the proportionateincrease associated with the increased number of properties owned in 2006versus 2005) that will include increased utility expenses resulting fromnational trends in higher energy-related costs and higher insurance costs.

We earn management fees from managing properties forrelated parties and third parties. These fees are typically equal to apercentage of cash receipts or gross rental revenues generated by the managedproperties, or equal to a fixed monthly amount, according to the managementagreements for the properties we manage. We also have the ability to earnincentive management fees by achieving specified property-level performance criteriafor certain properties we manage for third parties. Further, certain operatingexpenses incurred related to properties we manage for others are reimbursed bythe owners of the properties managed. We expect to continue generating feeincome revenue and operating expense reimbursements from the properties that wemanage for others, although the amounts are expected to become less significantas a percentage of our overall revenues as rental income increases from theproperties we own.  We expect to continueto pursue new third-party management agreements by utilizing relationships inthe student housing market and providing our significant operational economiesof scale as a savings mechanism for other third party owners, includinginstitutional owners and individual student housing owners.  We currently do not expect, however, that anygrowth from new third-party management business within the next 12 months willcontribute to our student housing segment as significantly as growth fromacquisition and development of new owned student housing assets.

We expect to continue to acquire additional studenthousing properties and development projects that are located in our targetedmarkets and that meet management’s underwriting criteria for creating long-termgrowth potential. During 2005, we entered into a joint venture with aninstitutional partner to develop 

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andconstruct two student housing properties. Under the terms of this venture, ourjoint venture partner agreed to fund 90% of the equity expected to be requiredfor development of the properties, which includes acquisition costs for theproperties and a portion of the development and construction costs, and weagreed to fund the remaining 10% of the required equity. The joint venture thenobtained construction loans for the properties to be developed that permitsdraws for up to a certain percentage of the total cost of development.  Development of both properties was completedin August 2006.  The terms of the jointventure provide that we manage the properties, including the development,construction and pre-leasing of the properties, and have the option to purchaseour partner’s interest in the joint venture within one year after completion ofthe properties. In an effort to conserve our capital resources, we willconsider, at least through the remainder of 2006, funding future acquisitionsof student housing properties and development projects through joint venturestructures. We also may determine that it is appropriate to purchase additionalstudent housing properties outright, as opposed to with a joint venturepartner, depending upon many factors which may include, but are not limited to,the applicable purchase price, available capital and projected returns withrespect to the property. In addition to utilizing cash from operations and fromour line of credit, we may leverage existing student housing properties whichare underleveraged or unencumbered by debt to generate cash to fund thepurchase of additional student housing properties or our equity investments injoint ventures. The timing of any additional acquisitions or developmentprojects will be dependent upon various factors, including our ability tocomplete satisfactory due diligence, find suitable joint venture partners andagree upon mutually acceptable joint venture terms, obtain appropriate debtfinancing on the properties, and the availability of capital. In addition, thetiming of, or decision to continue to pursue, additional acquisitions ordevelopments projects could be affected by the outcome of the strategicevaluation process that is currently being performed by the Special Committeeof our Board of Trustees. To the extent that we seek to acquire or developadditional properties within the next six to twelve months, our main source offinancing would be borrowings from our new line of credit with Wachovia Bank,National Association. We are required to obtain approval from Wachovia withrespect to the uses of any funds borrowed under the line of credit, andcurrently only have two pending student housing acquisitions pre-approved forfinancing under the line. As a result, we could be limited in the number ortiming of any additional student housing acquisitions or development projectsbased on this approval requirement with Wachovia.

During the three months ended June 30, 2006, weexecuted agreements of sale relating to, in the aggregate, the purchase of aportfolio of 13 student housing properties from Capstone Properties for anaggregate purchase price of $247.0 million; and on July 26, 2006, we gavenotice to the seller that we were terminating agreements relating to two of theproperties in the portfolio, in accordance with the terms of those agreements.On July 27, 2006, we entered into a first amendment to the agreements of saleto (i) formally terminate the agreement relating to those two properties, (ii)reduce the aggregate purchase price of the remaining 11 properties toapproximately $223.0 million, and (iii) extend the due diligence period underthe agreements through August 5, 2006. On August 2, 2006, our Board of Trusteesapproved of the acquisition of the portfolio, subject to the Company’s receiptof appropriate financing. We closed on this acquisition in October 2006.

On August 1, 2006, the Company acquired two studenthousing properties, containing a total of 203 units and 696 beds, for anaggregate purchase price of approximately $41.4 million. These acquisitionswere financed through the placement of new mortgage debt on the properties andborrowing under our original credit facility with Bank of America asadministrative agent.  With respect tothe property located in San Diego, California, we placed $28.6 million in10-year, interest-only mortgage debt on the property, with a fixed interestrate of 5.97%. With respect to the property located in Mankato, Minnesota, weplaced $3.0 million in 10-year, interest-only, mortgage debt on the property,with a fixed interest rate of 6.19%.

On August 17, 2006, we completed the acquisition offive contiguous land parcels for the development of a student housing propertylocated near Sam Houston State University in Huntsville, TX. The land parcelswere acquired for an aggregate purchase price of approximately $1.8 million,which was financed primarily from borrowings under the Company’s creditfacility.

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As of September 30, 2006, with regard to our studenthousing segment, we:

·  owned63 student housing properties, and held ownership interests in two studenthousing properties through a joint venture, containing a total of 11,991 unitsand 38,938 beds;

·  manageda total of 18 student housing properties owned by others, containing a totalof  3,293 units and 10,752 beds; andprovided consulting services for one property owned by others, which whencompleted is expected to contain a total of 421 units and 1,658 beds;

·  ownedseven undeveloped parcels of land, which currently are projected, uponcompletion to contain a total of 570 units and 1,764 beds.

*Military Housing*

Our military housing segment develops, constructs,renovates and manages military housing privatization projects in which weacquire interests. Our military housing segment began generating revenue in thefourth quarter of 2003 with the initiation of our Fort Carson and Fort Stewartand Hunter Army Airfield projects. Revenue grew throughout 2005 and the firstnine months of 2006 with the addition of other projects. We receive income fromour military housing segment which is comprised primarily of fee income forproviding development, construction/renovation and management services to ourmilitary housing privatization projects and from returns on the equity weinvest in the projects. In addition, we earn business development fees fromcertain of our business partners in connection with our military housingprivatization projects, such as our construction and architectural/engineeringpartners. We seek these fees as payment for our business development effortsincurred by us in connection with pursuing and coordinating the completion ofmilitary housing privatization projects that benefit these business partners.We also receive expense reimbursements, consisting primarily of payroll andrelated expenses, and closing costs and transition costs we incur for theproject in the 60 to 90-day period preceding the initiation of our managementof the project. Typically, at the time we initiate management on a project, theproject reimburses us for these amounts from the proceeds of the debt issued bythe joint venture that owns the project.

As of September 30, 2006, we owned equity interests inthe joint ventures that owned the nine military housing privatization projectscurrently in operation, encompassing 21 military bases totaling 17,093end-state housing units. During the three and nine months ended September 30,2006, we earned fees for providing development, construction/renovation andmanagement services to nine military housing privatization projects.

During the third quarter of 2006, we continuednegotiations under the solicitation process with the Air Force for the militaryhousing privatization project referred to as the AETC Group I project. Thisproject is expected to cover four bases and 2,875 end-state housing units.  In addition, during the third quarter of2006, we continued negotiations with respect to the completion of finalrenovation and construction agreements for our Carlisle/Picatinny project, forwhich financing was secured during the second quarter of 2006. Final renovationand construction agreements are expected to be executed before the end of 2006,at which point we will commence actual renovation and construction activities.

Also in the third quarter of 2006, we, together withthe Army as our joint venture partner for our Fort Carson project, submitted aplan to Congress to expand the Fort Carson project. The expansion is expectedto have a four-year initial development period covering approximately 400 newhousing units. If the proposed expansion plan is approved by Congress,financing is expected to be completed shortly thereafter. With the proposedexpansion, the Fort Carson project would cover in excess of 3,000 end-statehousing units.

With regard to trends and uncertainties in themilitary housing market, some of the bases included in our military housingprivatization projects were targeted for closure or realignment in the latestround of the Base Realignment and Closure, or BRAC, process, which wasinitiated in 1988 and completed its fifth and, under current legislation, finalround in 2005.  The Department of Defense(DoD) released its initial recommendations for BRAC in May 2005, and theBRAC Commission then voted to amend the DoD’s 

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initiallist on July 19, 2005. Under the BRAC Commission’s revisions, severalbases were removed from the DoD’s list of bases targeted for closure, includingthe Submarine Base in New London, CT and the Portsmouth Naval Shipyard inKittery, Maine. In addition, the BRAC Commission also proposed a lesssignificant realignment at the Fort Eustis base under our Fort Eustis/Fort Storyproject in Newport News, Virginia than was proposed by the DoD, and the BRACCommission proposed to close the Naval Air Station in Brunswick, Maine, whichhad been recommended by the DoD to be realigned.   Finally, the BRACCommission voted to uphold the DoD’s recommendation to close the Walter ReedArmy Medical Center in Washington, DC.  In September 2005, the BRACCommission sent its report to the President regarding its findings andrecommended changes to the DoD’s initial report, and President Bush acceptedthe BRAC Commission’s recommendations in their entirety. On November 9,2005, the BRAC round was completed when Congress also approved the BRACCommission’s recommendations in their entirety. Under the final BRAC listversus the original DoD recommendations, the number of affected militaryhousing units covered by our existing projects was reduced from 2,500 toapproximately 700 units, with these remaining approximately 700 units locatedat the Naval Air Station in Brunswick, Maine.  As of the filing of thisreport, no dates had been formally approved for closure of the Naval AirStation or the Walter Reed Army Medical Center; however, it is anticipated thatsuch closures would occur no later than 2011 in accordance with applicable BRAClegislation.

We are in the process of finalizing plans with theNavy to restructure the terms and debt financing for the Navy NortheastRegion project as a result of (i) the anticipated closure of theNaval Air Station, which covers approximately 723 end-state housing unitsand (ii) the need to further reduce the number of end-state housingunits for the project overall by approximately 620 units due to changes inarea housing market conditions that are affecting occupancy rates for theproject. As part of the anticipated plan to reduce the scope of the NavyNortheast Region project, the joint venture entity that we own together withthe Navy is in the process of restructuring the outstanding bonds that wereoriginally issued to finance the project. We currently expect the restructuringto be completed during the fourth quarter of 2006.

With respect to the BRAC-related closure of the WalterReed Army Medical Center, we do not expect the closure to result in the loss ofhousing units, as these housing units are likely to be utilized by personnelwho will be relocated from serving at Walter Reed to serving at nearby militaryfacilities in the Washington, DC metropolitan area.

During the fourth quarter of 2006, we were selected bythe Department of the Army to design, construct and manage single soldierhousing at the Army’s Fort Bliss and Fort Stewart bases. These two projects areamong the first of unaccompanied personnel housing privatization awardstargeted by the Army, and are expected to cover up to 470 and 370 apartments,respectively. In addition, our management team also had under review, as ofOctober 30, 2006, nine additional potential privatization projectopportunities. These projects span multiple bases and total, in the aggregate,approximately 21, 200 housing units. Individual projects identified asopportunities range from approximately 1,000 units to 5,500 units per project.**** We consider aproject as “under review” once a base has been identified by the DoD forprivatization and our management begins initial due diligence and evaluation ofthe economic and strategic value of the project. After further due diligence,we may decide not to pursue any of these potential privatization projects.  We also will continue to pursue opportunitiesto acquire projects or project rights from our competitors, as well asopportunities to participate in pilot housing programs for unaccompaniedmilitary personnel.

**CriticalAccounting Policies**

Management’s Discussion andAnalysis of Financial Condition and Results of Operations discusses the Company’sconsolidated financial statements,which have been prepared in accordance with U.S. generally accepted accountingprinciples. The preparation of these financial statements requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and the disclosure of contingent liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. While the estimates and judgments associated with theapplication of these accounting principles may be affected by differentassumptions or conditions, we believe the estimates and 

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judgments associated with the reported amounts areappropriate under the circumstances in which they were made. In addition, othercompanies in similar businesses may utilize different estimation policies andmethodologies, which may impact the comparability of our results of operationsand financial condition to those companies.

The following policies requiresignificant judgments and estimates on our part in preparing the Company’s consolidated financial statements. Changes in these judgmentsand estimates could have a material effect on these financial statements.

**RevenueRecognition**

*Student Housing*

Student housing revenue includesrental revenue and other property income, standard and incentive managementfees, and reimbursements of certainoperating expenses. These sources of revenue are described in greater detailbelow:

·  werecognize student housing rental revenue when due over the lease terms, whichare generally 12 months or less;

·  werecognize other property income, including, but not limited to, leaseprocessing fees, move-in fees andactivity fees as received and earned throughout the course of the year. Thetiming of thesefees typicallyfluctuates in relation to the academic year leasing cycle;

·  standardmanagement fees are based on a percentage of monthly cash receipts or grossmonthly        rental and other revenuesgenerated by the properties managed for others. We recognize these fees on amonthly basis as the services are performed;

·  we earnincentive management fees as a result of the achievement of certain operating performance criteria over a specifiedperiod by certain managed properties, including targeted annual debt servicecoverage ratios of the properties. We recognize these fees at the amount thatwould be due under the contract if the contract was terminated on the balancesheet date; and

·  we accrueoperating expense reimbursements as the related expenses are incurred. Expense reimbursementsare comprised primarily of salary and related costs of certain of our employeesworking at certain properties we manage for others, the cost of which isreimbursed by the owners of the related properties.

*MilitaryHousing*

We earn military housing revenues and income forproviding services and capital to our military housing privatization projects,including the following:

·  standardand incentive management fees, which are based on a percentage of effective grossrevenue generated by the military housing privatization projects from the basicallowance for housing provided by the government to service members, referredto as BAH, are recognized when the revenue is earned by the military housingprojects. Incentive management fees are based upon the satisfaction of certaincriteria including, among other things, satisfying designated benchmarksrelating to emergency work order response, occupancy rates, home turnover andresident satisfaction surveys. Incentive management fees are recognized whenthe various criteria stipulated in the management contract have been satisfied.

·  standardand incentive development and construction/renovation fees, which are based ona percentage of development and construction/renovation costs incurred by themilitary housing 

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privatizationprojects, including hard and soft costs and financing costs are recognized on amonthly basis as the costs are incurred by the military housing projects.  Incentive development and construction/renovationfees are based upon the satisfaction of certain criteria including, among otherthings, completing a number of housing units according to schedule, achievingspecific safety records and implementing small business or minoritysubcontracting plans. These fees are recognized when the various criteriastipulated in the contract have been satisfied.

·  incertain instances, we may receive fees relating to the performance ofpre-construction/renovation services. These pre-construction/renovation feesare determined on a project-by-project basis, and are paid in proportion to theamount of pre-construction/renovationcosts incurred by us for the project. These pre-construction/renovation fees are determined on aproject-by-project basis, and are recognized as revenue upon performance of thepre-construction/renovation services.

·  revenueson fixed-price renovation contractsare recorded on the percentage-of-completion method. When thepercentage-of-completion method is used, contract revenue is recognized in theratio that costs incurred to date bear to estimated costs at completion.Adjustments to cost estimates are made in the period in which the factsrequiring such revisions become known. When the revised estimates indicate aloss, such loss is provided for currently in its entirety.

·  businessdevelopment fees are earned from our business partners that providearchitectural and design or construction services for our military housing privatization projects. These fees areearned in connection with pursuing and coordinating the completion of militaryhousing projects. The fees consist of (i) an annual base fee, which is afee paid to the Company in consideration of the Company’s ongoing pursuit ofadditional projects and is not contingent upon the success of those efforts andmay be cancelled at any time, and (ii) an additional fee, which is paidover the course of an awarded project based on a percentage of revenue earnedby these business partners for providing services to our military housing projects. The base fees are recognized on a straight-line basis over the term of therelated business development agreement, which is generally one year.  Theadditional fee is recognized and paid to us as the related services areprovided to our military housing projects by our business partners.

·  equityreturns are earned on our investments in military housing projects. During theinitial development period for a project, the equity returns are a fixedpercentage of our investment and subsequent to the initial development periodfor a project, the equity returns are based on a fixed percentage of ourinvestment and on the project’s net operatingincome, subject to cash distribution caps, as defined in the operatingagreements related to the particular project. As of September 30, 2006, onlythe Fort Carson project had passed its initial development period.

·  expensereimbursements are comprised primarily of renovation expenses and propertymanagement expenses, the costs of which are reimbursed by the military privatizationprojects to which they relate. The expenses include payments to third partiesfor renovation services, and include salaries and related costs of ouremployees that are managing the renovation and property management activities.We accrue expense reimbursements as the related expenses are incurred.

***RealEstate Investments and Corporate Assets***

We carry real estate investments and corporate assetsat cost, net of accumulated depreciation. Cost of acquired assets includes thepurchase price and related closing costs. We allocate the cost of real estateinvestments to net tangible and identified intangible assets based on relativefair values in accordance with SFAS 141. We estimate fair value based oninformation obtained from a number of sources, including our due diligence,marketing and leasing activities, independent appraisals that may be obtainedin connection with the acquisition or financing of the respective property, andother market data.

In-place leases are ascribed avalue equal to the difference between the incremental value of acquiring abuilding with in-place leases versus a vacant building.  As lease terms typically are12 months or 

28

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less,actual rates on in-place leases generally approximate market rental rates.Factors that we consider in the valuation of in-place leases include anestimate of incremental carrying costs during theexpected lease-up periods considering current market conditions and nature ofthe tenancy. Purchase prices of student housing properties to be acquired are notexpected to be allocated to tenant relationships considering the terms of theleases and the expected levels of renewals. We amortize the value of in-placeleases to expense over the remaining term of the respective leases, which isgenerally one year or less.

We expense routine repair and maintenance costs thatdo not improve the value of an asset or extend its useful life, includingturnover costs. We capitalize expenditures that improve the value and extendthe useful life of an asset. We compute depreciation using the straight-line method over the estimateduseful lives of the assets, which is generally 40 years for buildingsincluding student housing properties and the commercial office building, andthree to five years for residential furniture and appliances. During the thirdquarter of each fiscal year, we typically will experience an increase inproperty operating expenses over other quarters as a result of repair andmaintenance expenditures relating to turnover of units at student housing properties.The Company’s student housing lease terms generally commence in August orSeptember to coincide with the beginning of the academic year. Accordingly, theCompany expects to incur a majority of its repair and maintenance costs in thethird quarter to prepare for new residents.

In accordance with SFAS 144, long-lived assets,such as real estate investments and purchased intangibles subject toamortization, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable. Thesecircumstances may include, but are not limited to, operational performance,market conditions and competition from other off-campus properties and on-campus housing, legal and environmentalconcerns, and results of appraisals or other information obtained as part of afinancing or disposition strategy. When required, we review recoverability ofassets to be held and used through a comparison of the carrying amount of anasset to estimated undiscounted future cash flows expected to be generated bythe asset. If the carrying amount of an asset exceeds its estimatedundiscounted future cash flows, an impairment charge is recognized in an amountby which the carrying value of the asset exceeds the fair value of the asset determinedusing customary valuation techniques, such as the present value of expectedfuture cash flows. Assets to be disposed of would be separately presented inthe balance sheet and reported at the lower of the carrying amount or fairvalue less costs to sell, and no longer would be depreciated.

***Allowancefor Doubtful Accounts***

We estimate the collectibility of receivablesgenerated by rental and other income as a result of the operation of ourstudent housing properties. If we believe that the collectibility of certainamounts is questionable, we record a specific reserve for these amounts toreduce the amount outstanding to anamount we believe will be collectible and a reserve for all other accountsbased on a range of percentages applied to aging categories, which is based onhistorical collection and write-off experience.

We also evaluate the collectibility of fee income andexpense reimbursements generated by the management of student housing properties owned by others and through theprovision of development, construction, renovation and management services toour military housing privatization projects based upon the individual facts andcircumstances, and record a reserve for specific amounts, if necessary.

***MinorityInterest***

Minority interest as initially recorded at the date ofour initial public offering represented the net equity of our operatingpartnership, including the proceeds received from the sale of the warrant toVornado Realty Trust, multiplied by the ownership percentage of holders of limitedpartnership units in our operating partnership other than the Company. Ouroperating partnership is obligated to redeem, at the request of a holder, eachunit of limited partnership interest for cash or common shares on a one-for-onebasis, at the Company’s option, subject to adjustments for share splits,dividends, recapitalizations or similar events; except that Gary M. Holloway,Sr. has the right to require that our operating partnership redeem his and hisaffiliates’ units of limited partnership interest for common shares, subject tohis 

29

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restrictionfrom owning of more than 20% of the Company’s outstanding common shares. If theminority interest unit holders’ share of a current year loss would cause theminority interest balance to be less than zero, the minority interest balancewill be reported as zero unless there is an obligation of the minority interestholders to fund those losses. Any losses in excess of the minority interestwill be charged against equity. If future earnings materialize, equity will becredited for all earnings up to the amount of those losses previously absorbed.Distributions to limited partnership unit holders other than the Company arerecorded as a reduction to minority interest.

***Investments in Military Housing Projects and Student HousingJoint Ventures***

Military housing projects are joint ventures enteredinto between the Company and the U.S. military to design, develop,construct/renovate and manage the military family housing located on or nearvarious bases throughout the United States. The Company evaluates itsinvestments in military housing project joint ventures in which we have avariable interest to determine if the underlying entity is a variable interestentity (“VIE”) as defined under FASB Financial Interpretation No. 46 (asrevised) (“FIN 46(R)”). The Company has concluded that each of the militaryhousing project joint ventures in which it has a variable interest is a VIE andthat the Company is not the primary beneficiary of any of these VIEs. We recordour investments in joint venturesunder our military housing projects in accordance with the equity method ofaccounting. Our investment is initially recorded at cost, and then subsequentlyadjusted at each balance sheet date to an amount equal to what we would receivefrom the joint venture in the event that it were liquidated at net book valueas of that date, and assuming that the proceeds from the liquidation aredistributed in accordance with the terms of, and priority of returns set forthunder, the joint venture’s operating agreement. The Company has exposure toloss to the extent of its investments, if any, and any receivables due from theproject.

The Company entered into a joint venture in the thirdquarter of 2005 to develop and construct two student housing properties. TheCompany contributed land to the joint venture in exchange for its 10% interestand cash.  In addition, the Company hasthe option to purchase the joint venture partner’s interest in the jointventure within one year of completion of the properties, and the Company hasprovided certain guarantees for the completion of construction and for aportion of the construction loans.  Assuch, the transaction is being accounted for under the financing method,whereby the Company records the real estateas an asset, depreciates the property, and records a financing obligation.  Construction of both properties was completedin August 2006.

***Income Taxes***

The Company elected to betaxed as a REIT under the Code commencing with its taxable year endedDecember 31, 2004. To continue to qualify as a REIT, the Company must meeta number of organizational and operational requirements, including arequirement that we currently distribute at least 90% of our adjusted taxableincome to our shareholders. We believe we are organized and operate in a mannerthat allows us to qualify for taxation as a REIT under the Code, and it is ourintention to adhere to these requirements and maintain the Company’s REITstatus in the future. Accordingly, no provision has been made for federal income taxes in the accompanyingconsolidated financial statements, other than with respect to the Company’staxable REIT subsidiaries.

30

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***Comparisonof the Three Months Ended September 30, 2006***

***to the Three Months Ended September 30, 2005***
| ** **                                                                                               | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
| ** **                                                                                               | ** ** | **Student  Housing**                                     | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                                                               | ** ** | **(dollars in thousands)**                     | ** ** |
| **Revenue:**                                                                                             |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and other property  income                                                                          |       | $                                                        | 45,716     |   | — |   | $ | 35 |   | $ | 45,751 |   | $ | 35,349 |   | — |   | $ | 60 |   | $ | 35,409 |   |
| Expense reimbursements:                                                                                  |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                            |       | 46                                                       |       | 17,273 |   | (10 | ) | 17,309 |   | — |   | 20,074 |   | 22 |   | 20,096 |   |
| Third party                                                                                              |       | 1,965                                                    |       | — |   | — |   | 1,965 |   | 1,299 |   | — |   | — |   | 1,299 |   |
| Management fees:                                                                                         |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                            |       | 37                                                       |       | 2,094 |   | — |   | 2,131 |   | — |   | 1,755 |   | — |   | 1,755 |   |
| Third party                                                                                              |       | 766                                                      |       | — |   | — |   | 766 |   | 611 |   | — |   | — |   | 611 |   |
| Other fee income,  related party                                                                         |       | —                                                   |       | 5,616 |   | — |   | 5,616 |   | (39 | ) | 5,934 |   | — |   | 5,895 |   |
| Other income                                                                                             |       | 46                                                       |       | 23 |   | 41 |   | 110 |   | 34 |   | 45 |   | 2 |   | 81 |   |
| Total revenue                                                                                            |       | 48,576                                                   |       | 25,006 |   | 66 |   | 73,648 |   | 37,254 |   | 27,808 |   | 84 |   | 65,146 |   |
|                                                                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating Expenses:**                                                                                  |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property operating  expense                                                                              |       | 26,111                                                   |       | 1,517 |   | — |   | 27,628 |   | 17,658 |   | 1,248 |   | — |   | 18,906 |   |
| Reimbursed expenses                                                                                      |       | 2,011                                                    |       | 17,273 |   | (10 | ) | 19,274 |   | 1,299 |   | 20,074 |   | 22 |   | 21,395 |   |
| Real estate taxes                                                                                        |       | 4.440                                                    |       | — |   | 24 |   | 4,464 |   | 3,184 |   | — |   | — |   | 3,184 |   |
| Administrative expenses                                                                                  |       | —                                                   |       | — |   | 3,802 |   | 3,802 |   | — |   | — |   | 2,992 |   | 2,992 |   |
| Audit Committee and  Special Committee expenses                                                          |       | —                                                   |       | — |   | 1,822 |   | 1,822 |   | — |   | — |   | — |   | — |   |
| Depreciation and  amortization                                                                           |       | 10,099                                                   |       | 93 |   | 84 |   | 10,246 |   | 8,370 |   | 78 |   | 102 |   | 8,550 |   |
| Interest                                                                                                 |       | 12,627                                                   |       | — |   | 520 |   | 13,147 |   | 8,715 |   | — |   | 274 |   | 8,989 |   |
| Total operating  expenses                                                                                |       | 55,288                                                   |       | 18,883 |   | 6,242 |   | 80,413 |   | 39,226 |   | 21,400 |   | 3,390 |   | 64,016 |   |
|                                                                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before  equity in earnings of unconsolidated entities, income taxes and minority  interest |       | (6,712                                                   | )          | 6,123 |   | (6,176 | ) | (6,765 | ) | (1,972 | ) | 6,408 |   | (3,306 | ) | 1,130 |   |
| Equity in earnings of  unconsolidated entities                                                           |       | —                                                   |       | 460 |   | — |   | 460 |   | — |   | 1,058 |   | — |   | 1,058 |   |
| Income (loss) before  income taxes and minority interest                                                 |       | (6,712                                                   | )          | 6,583 |   | (6,176 | ) | (6,305 | ) | (1,972 | ) | 7,466 |   | (3,306 | ) | 2,188 |   |
| Income tax (benefit)  expense                                                                            |       | (140                                                     | )          | 1,447 |   | — |   | 1,307 |   | 110 |   | 2,144 |   | — |   | 2,254 |   |
| Income (loss) before  minority interest                                                                  |       | (6,572                                                   | )          | 5,136 |   | (6,176 | ) | (7,,612 | ) | (2,082 | ) | 5,322 |   | (3,306 | ) | (66 | ) |
| Minority interest                                                                                        |       | (2,866                                                   | )          | 2,240 |   | (2,693 | ) | (3,320 | ) | (1,063 | ) | 2,716 |   | (1,687 | ) | (34 | ) |
| **Net (loss) income**                                                                                    |       | $                                                        | (3,705     | ) | $ | 2,896 |   | $ | (3,483 | ) | $ | (4,292 | ) | $ | (1,019 | ) | $ | 2,606 |   | $ | (1,619 | ) | $ | (32 | ) |
|                                                                                                          |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Student Housing***

*Revenue*. Of the 63properties owned as of September 30, 2006, we acquired 24 of the studenthousing properties during 2005, and nine properties during the nine monthsended September 30, 2006, of which two were acquired during the threemonths ended September 30, 2006. Rent and other property income totaled $45.7million for the three months ended September 30, 2006. As of September 30,2005,

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weowned 52 student housing properties, with rent and other property incometotaling $35.3 million for the three months ended September 30, 2005.

With respect to the properties we owned during boththe three months ended September 30, 2006 and the three months ended September30, 2005, referred to herein as our same store properties, our revenuesincreased $0.3 million and 0.9% over the comparable periods.  Our revenues were adversely affected by eightof these same store properties that did not achieve the economic occupancylevels we had targeted upon commencement of the 2006/2007 academic year. Webelieve that these lower than anticipated leasing results are temporary innature at all of these eight same store properties, and we have committedresources dedicated to improving their occupancy levels going forward.  We anticipate that these efforts will resultin improved occupancy levels for the 2007/2008 academic year.  Our same store revenues, excluding the eightsame store properties referred to above, have increased $1.6 million and 6.3%over the comparable period in the prior year.

Expense reimbursements from related parties increasedto $46,000 for the three months ended September 30, 2006. There were no expensereimbursements from related parties during the three months ended September 30,2005. This increase was due to one student housing property, partially owned byan affiliate of Gary M. Holloway, Sr., that we began managing as of January 1,2006. Expense reimbursements from third parties increased to $2.0 million forthe three months ended September 30, 2006 from $1.3 million for the threemonths ended September 30, 2005 primarily due to three additional propertiesunder management in 2006 over 2005.  Weexpect expense reimbursements, which relate to properties we manage but do notown, to continue to become a less significant portion of our student housing revenuesas rental revenues earned from additional properties that we acquire continuesto increase.

Management feeincome from related parties was $37,000 for the three months ended September30, 2006. There were no management fees earned during the three months endedSeptember 30, 2005. This increase was due to one student housing property,partially owned by an affiliate of Gary M. Holloway, Sr., that we beganmanaging as of January 1, 2006. Management fee income from third partiesremained relatively consistent for the three months ended September 30, 2006and September 30, 2005. We will continue to focus on growing our third partymanaged properties; however, we expect management fees to contribute lesssignificantly to total revenues in the future given the expected growth inrental revenue from the operations of properties we own.

*Expenses. *Property operating expenses increased to$26.1 million for the three months ended September 30, 2006 from $17.7 millionfor the three months ended September 30, 2005, primarily due to expensesattributable to the 11 properties acquired from October 1, 2005 throughSeptember 30, 2006.  The increase of $8.4million is attributable to the following: a $2.2 million increase in utilitiesexpenses; a $1.4 million increase in repairs and maintenance expenses; a $1.6million increase in payroll expenses at the property level; a $0.8 millionincrease in bad debt expense relating to uncollected rents and other income; anda $2.4 million increase in other property expenses, consisting of marketing,insurance, landscaping and other similar property operating expenses as well asunreimbursed expenses relating to our managed properties.  We expect that total property operatingexpenses will continue to increase in the future as we acquire additionalproperties. Property operating expenses also include compensation and operatingcosts with respect to the acquisitions department of our student housingsegment.

With respect to our same store properties, weexperienced an increase in property operating expenses of approximately $2.8million.  Of this increase, $0.8 millionrelates to utilities; $0.4 million relates to repairs and maintenance costs;$0.5 million relates to payroll expenses associated with the hiring ofadditional staff at the property level; $0.7 million relates to bad debtexpense associated with uncollected rents; and $0.4 million relates to anincrease in other property operating expenses. 

We are in the process of implementing new policies andprocedures relating to capital spending and maintenance, as well as purchasingactivities, that are designed to assist with cost containment of future repairsand maintenance expenditures at our same store and other properties.  We also recently have placed a renewedemphasis on our rent collections, which we believe should result in lower baddebt expense in future periods.

Reimbursed expenses increased to $2.0 million for thethree months ended September 30, 2006 from $1.3 million for the three monthsended September 30, 2005, primarily due to the reimbursable expenses of the 11properties acquired from October 1, 2005 through September 30, 2006.

Real estate taxesincreased to $4.4 million for the three months ended September 30, 2006 from$3.2 million for the three months ended September  30, 2005, primarily due to the acquisitionof  11 properties and five contiguousland parcels since the end the third quarter of 2005, and due to increasedassessments and millage rates imposed by local taxing authorities.  We expect real estate taxes to continue toincrease significantly in the future as we acquire additional properties, andto the extent that local authorities continue to aggressively pursue higherreal estate tax assessments and millage rates on properties that we currentlyown.

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Depreciation andamortization increased to $10.1 million for the three months ended September30, 2006 from $8.4 million for the three months ended September 30, 2005 as aresult of acquiring 11 properties for an aggregate purchase price of $269.0million from October 1, 2005 through September 30, 2006. The $10.1 million in2006 is comprised of $9.4 million of depreciation and $0.7 million of leaseintangible amortization, and the $8.4 million in 2005 is comprised of $6.7million of depreciation and $1.7 million of lease intangible amortization.Depreciation expense increased primarily due to the acquisition of 11properties since the end of the third quarter of 2005, and lease intangibleamortization decreased primarily due to the timing and amount of acquisitions.

Interest expenseincreased to $12.6 million for the three months ended September 30, 2006, from$8.7 million in 2005. This increase was a result of the issuance and assumptionof $179.2 million of debt, including borrowings under our line of credit, inconnection with the acquisition of 11 properties from October 1, 2005 throughSeptember 30, 2006, as well as an overall increase in interest rates over thisperiod. During the three months ended September 30, 2006, the Company borrowed$35.0 million and had no repayments and during the three months ended September30, 2005, the Company borrowed $101.0 million and repaid $35.0 million underthe line of credit.  We expect interest expense to increase in the futureas we incur additional debt to fund acquisitions. For more informationregarding the amount of fixed-rate and variable-rate indebtedness we held as ofDecember 31, 2005 and September 30, 2006, see the section titled *Quantitative and Qualitative Disclosures About Market Risk*under Part I, Item 3 of this report.

***Military Housing***

*Revenue*.Expense reimbursements totaled $17.3 million for the three months endedSeptember 30, 2006 as compared to $20.1 million for the three months endedSeptember 30, 2005.  The decrease is dueprimarily to the anticipated decline in renovation activities at the FortStewart/Hunter, Fort Detrick/Walter Reed, Fort Eustis/Story, and Navy NortheastRegion projects, as well as decrease at the Fort Carson project due to changesto the terms of the management contract in December 2005, which resulted infewer reimbursed expenses being incurred directly by the project, offset byincreases at Fort Gordon and Carlisle/Picatinny for development activity, andfor closing and transition expenses at Carlisle/Picatinny.  The table below sets forth certaininformation regarding the revenue from expense reimbursements for each of ourmilitary housing projects for the three months ended September 30, 2006 and2005.

 

|                                                          | ** ** | **Three Months Ended   September 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------|------------|
| **Project**                                              | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(in millions)**                                     | ** ** |
| Fort Stewart and  Hunter Army Airfield Project           |       | $                                                          | 1.1        |   | $ | 1.9 |   |
| Fort Carson  Project                                     |       | 0.8                                                        |       | 1.7 |   |
| Fort Hamilton  Project                                   |       | 0.2                                                        |       | 0.1 |   |
| Walter Reed Army  Medical Centerand Fort Detrick Project |       | 0.2                                                        |       | 1.2 |   |
| Fort Eustis/Fort  Story Project                          |       | 1.2                                                        |       | 1.9 |   |
| Navy Northeast  Region Project                           |       | 9.5                                                        |       | 10.5 |   |
| Fort Bliss/White  Sands Missile Range Project(1)         |       | 2.9                                                        |       | 2.8 |   |
| Fort Gordon  Project(2)                                  |       | 0.5                                                        |       | — |   |
| Carlisle/Picatinny  Project(2)                           |       | 0.9                                                        |       | — |   |
| Total                                                    |       | $                                                          | 17.3       |   | $ | 20.1 |   |

 

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(1)    Commenced operations in the third quarter of2005.

(2)    Commenced operations in the second quarterof 2006.

Management feesfrom related parties totaled $2.1 million for the three months ended September30, 2006 compared to $1.8 million for the three months ended September 30,2005. The amount of management fees from related parties that we receive duringa fiscal period is affected by the number of housing units that we manage underour military housing projects during that period, which will fluctuate based onthe number of housing units that we construct/renovate or demolish during thatperiod. Management fees from related parties increased during the three monthsended September 30, 2006 as compared to the three months ended September 30,2005, primarily due to increased occupancy and rental activity at our Fort Bliss/WhiteSands and Fort Stewart/Hunter projects, and the commencement of our Fort Gordonproject in the second quarter of 2006. The table below sets forth certaininformation regarding the revenue from management fees from related parties foreach of our military housing projects for the three months ended September 30,2006 and 2005.

 

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|                                                           | ** ** | **Three Months Ended   September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------------|------------|
| **Project**                                               | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **(in millions)**                                     | ** ** |
| Fort Stewart and Hunter  Army Airfield Project            |       | $                                                          | 0.3        |   | $ | 0.2 |   |
| Fort Carson Project                                       |       | 0.3                                                        |       | 0.3 |   |
| Fort Hamilton Project                                     |       | 0.1                                                        |       | 0.1 |   |
| Walter Reed Army Medical  Center and Fort Detrick Project |       | 0.1                                                        |       | 0.1 |   |
| Fort Eustis/Fort Story  Project                           |       | 0.1                                                        |       | 0.1 |   |
| Navy Northeast Region  Project                            |       | 0.8                                                        |       | 0.8 |   |
| Fort Bliss/White Sands  Missile Range Project(1)          |       | 0.3                                                        |       | 0.2 |   |
| Fort Gordon Project(2)                                    |       | 0.1                                                        |       | — |   |
| Carlisle/Picatinny                                        |       | —                                                     |       | — |   |
| Total                                                     |       | $                                                          | 2.1        |   | $ | 1.8 |   |

----

(1)    Commenced operations in the third quarter of2005.

(2)    Commenced operations in the second quarterof 2006.

Other fee incomefrom related parties, which includes development and construction/renovationfees and business development fees, totaled $5.6 million for the three monthsended September 30, 2006, as compared to $5.9 million for the same period in2005. Of the 2006 amount, $4.4 million related to development andconstruction/renovation fees, and $1.2 million related to business developmentfees.  The amount of other fee incomefrom related parties that we receive during a fiscal period is affected by thenumber of housing units that we construct or renovate under our militaryhousing projects during that period, which will fluctuate based on the point atwhich we are during the initial development period for the project. Other feeincome from related parties decreased during the three months ended September30, 2006 as compared to the three months ended September 30, 2005 primarily dueto previously expected decline in construction activities at our FortStewart/Hunter project, our Fort Hamilton project, our Walter Reed Army MedicalCenter and Fort Detrick project, and our Fort Bliss/White Sands project,******offset by increased constructionactivity at our Navy Northeast project, and the commencement of our Fort Gordonand Carlisle/Picatinny projects. The table below sets forth certain informationregarding the revenue from other fee income from related parties for each ofour military housing projects for the three months ended September 30, 2006 and2005.

|                                                           | ** ** | **Three Months Ended   September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------------|------------|
| **Project**                                               | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **(in millions)**                                     | ** ** |
| **Development and  Construction/Renovation Fees**         |       |                                                       |       |   |   |
| Fort Stewart and Hunter  Army Airfield Project            |       | $                                                          | 0.4        |   | $ | 1.0 |   |
| Fort Carson Project                                       |       | 0.1                                                        |       | 0.1 |   |
| Fort Hamilton Project                                     |       | 0.1                                                        |       | 0.2 |   |
| Walter Reed Army  Medical Center and Fort Detrick Project |       | 0.1                                                        |       | 0.3 |   |
| Fort Eustis/Fort Story  Project                           |       | 0.4                                                        |       | 0.3 |   |
| Navy Northeast Region  Project                            |       | 2.0                                                        |       | 1.4 |   |
| Fort Bliss/White Sands  Missile Range Project(1)          |       | 1.0                                                        |       | 1.4 |   |
|                                                           |            |                                                            |            |  |  |  |  |

 

 

34

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|                                                     |   |   |   |   |   |
|-----------------------------------------------------|--------|--------|--------|--------|--------|
| Fort Gordon Project(2)                              |   | 0.1    |   | — |   |
| Carlisle/Picatinny(2)                               |   | 0.2    |   | — |   |
| Total development and  construction/renovation fees |   | $      | 4.4    |   | $      | 4.7 |   |
|                                                |   |   |   |   |   |
| **Business development fees**                       |   | 1.2    |   | 1.2    |   |
| ** **                                          |   |   |   |   |   |
| **Total Other Fee Income From  Related Parties**    |   | $      | 5.6    |   | $      | 5.9 |   |

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(1)    Commenced operations in the third quarter of2005.

(2)    Commenced operations in the second quarterof 2006.

Equity in earningsof unconsolidated entities, consisting of equity income and preferred returnsfrom our military housing project joint ventures, totaled $0.5 million for thethree months ended September 30, 2006 as compared to $1.1 million for the threemonths ended September 30, 2005. Of the amount for 2006, $0.2 million relatedto preferred returns from our Navy Northeast Region project, and $0.3 millionrelated to our investment in Fort Carson Family Housing LLC.  Of the 2005 amount, $0.2 million related topreferred returns from our Navy Northeast Region project and $0.9 millionrelated to our investment in Fort Carson Family Housing LLC. Our Fort Carsonproject, which passed into its post-IDP phase in 2005, experienced a decreasein equity income received from net operating income distributions as a result of(i) lower occupancy levels relating to Army deployments and re-stationing of servicemembers and (ii) increases in labor-related costs.

*Expenses*. Property operating expenses include costs related to operating the militaryhousing segment of our business, such as the compensation expense related toour military housing personnel stationed in our corporate headquarters. Thesecosts totaled $1.5 million for the three months ended September 30, 2006 ascompared to $1.2 million in the same period of 2005.

Reimbursedexpenses decreased to $17.3 million for the three months ended September 30,2006 from $20.1 million for the three months ended September 30, 2005,primarily due to anticipated decline in renovation expenses related to themilitary housing projects in operation as of September 30, 2006, offset byincreased activity at Fort Gordon as well as closing costs and transitionexpenses for the Carlisle/Picatinny, which commenced operation in July 2006.

***Corporate***

Rental revenue andexpense reimbursements, which were recognized with respect to the portions ofour corporate headquarters leased to entities affiliated with Gary M. Holloway,Sr., and payroll and related expenses reimbursed by entities affiliated withMr. Holloway for the provision of common services, decreased to $25,000 for thethree months ended September 30, 2006 from $82,000 for the three months endedSeptember 30, 2005.   The decrease wasprimarily a result of a decrease in the level of common services and rentalspace utilized by affiliated entities.

Other incomeconsists of interest income, which was $41,000 for the three months endedSeptember 30, 2006, as compared to $2,000 for the three months ended September30, 2005.

Administrativeexpenses, primarily relating to management of our corporate office, accounting,legal, human resources and information technology, increased to $3.8 millionfor the three months ended September 30, 2006 from $3.0 million for the threemonths ended September 30, 2005, primarily due to increased staffing andadditional costs incurred in connection with the transition of financialmanagement and an increase in professional fees.

Audit Committeeand Special Committee expenses consist of legal fees, forensic accounting feesand waiver fees associated with waivers of covenants under our credit facility,incurred in connection with the special investigation performed by our AuditCommittee and its independent counsel that commenced in the first quarter of2006 and legal, financial advisory and Special Committee fees associated withthe formation of the Special Committee to explore strategic alternatives forthe Company. During the three months ended September 30, 2006, these feestotaled $1.8 million.

Depreciation,relating primarily to our corporate headquarters, remained relativelyconsistent for the three months ended September 30, 2006 as compared to thecomparable period in 2005.

35

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Interest expenseincreased to $520,000 for the three months ended September 30, 2006 from$274,000 for the three months ended September 30, 2005.  This increase was primarily the result of anincrease in overall interest rates under the Company’s credit facility.

***Comparison of theNine Months Ended September 30, 2006***

***to the Nine Months Ended September 30, 2005***

 
| ** **                                                                                               | ** ** | ** **                           | ** ** | ** **            | ** ** | ** **    | ** ** | **Nine Months Ended  September 30,** | ** ** | ** **           | ** ** | ** **            | ** ** | ** **    | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|---------------|------------|-----------------------------------------------------|------------|----------------------|------------|-----------------------|------------|---------------|------------|
| ** **                                                                                               | ** ** | ** **                           | ** ** | **2006**              | ** ** | ** **    | ** ** | ** **                                          | ** ** | **2005**             | ** ** | ** **            | ** ** |
| ** **                                                                                               | ** ** | **Student  Housing**                 | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total**                                           | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                                                               | ** ** | **(dollars in thousands)** | ** ** |
| ** **                                                                                               | ** ** | ** **                           | ** ** | ** **            | ** ** | ** **    | ** ** | ** **                                          | ** ** | ** **           | ** ** | ** **            | ** ** | ** **    | ** ** | ** ** | ** ** |
| **Revenue:**                                                                                             |       |                                 |       |                  |       |          |       |                                                |       |                 |       |                  |       |          |       |   |   |
| Rent and other property  income                                                                          |       | $                                    | 133,708    |                  | —     |          | $          | 113                                                 |       | $                    | 133,821    |                  | $          | 90,831        |       | — |   | $ | 182 |   | $ | 91,013 |   |
| Expense reimbursements:                                                                                  |       |                                 |       |                  |       |          |       |                                                |       |                 |       |                  |       |          |       |   |   |
| Related party                                                                                            |       | 235                                  |       | 47,967                |       | 162           |       | 48,364                                              |       | 186                  |       | 40,134                |       | 232           |       | 40,552 |   |
| Third party                                                                                              |       | 4,690                                |       | —                |       | —        |       | 4,690                                               |       | 3,876                |       | —                |       | —        |       | 3,876 |   |
| Management fees:                                                                                         |       |                                 |       |                  |       |          |       |                                                |       |                 |       |                  |       |          |       |   |   |
| Related party                                                                                            |       | 74                                   |       | 6,197                 |       | —        |       | 6,271                                               |       | 197                  |       | 4,888                 |       | —        |       | 5,085 |   |
| Third party                                                                                              |       | 2,421                                |       | —                |       | —        |       | 2,421                                               |       | 2,156                |       | —                |       | —        |       | 2,156 |   |
| Other fee income,  related party                                                                         |       | —                               |       | 15,877                |       | —        |       | 15,877                                              |       | (39                  | )          | 12,818                |       | 70            |       | 12,849 |   |
| Other income                                                                                             |       | 129                                  |       | 46                    |       | 79            |       | 254                                                 |       | 109                  |       | 69                    |       | 70            |       | 248 |   |
|                                                                                                     |       |                                 |       |                  |       |          |       |                                                |       |                 |       |                  |       |          |       |   |   |
| Total revenue                                                                                            |       | 141,257                              |       | 70,087                |       | 354           |       | 211,698                                             |       | 97,316               |       | 57,909                |       | 554           |       | 155,779 |   |
| ** **                                                                                               |       |                                 |       |                  |       |          |       |                                                |       |                 |       |                  |       |          |       |   |   |
| **Operating Expenses:**                                                                                  |       |                                 |       |                  |       |          |       |                                                |       |                 |       |                  |       |          |       |   |   |
| Property operating  expense                                                                              |       | 60,994                               |       | 4,569                 |       | —        |       | 65,563                                              |       | 37,866               |       | 3,238                 |       | —        |       | 41,104 |   |
| Reimbursed expenses                                                                                      |       | 4,925                                |       | 47,967                |       | 162           |       | 53,054                                              |       | 4,062                |       | 40,134                |       | 232           |       | 44,428 |   |
| Real estate taxes                                                                                        |       | 12,970                               |       | —                |       | 72            |       | 13,042                                              |       | 8,339                |       | —                |       | —        |       | 8,339 |   |
| Administrative expenses                                                                                  |       | —                               |       | —                |       | 12,102        |       | 12,102                                              |       | —               |       | —                |       | 8,768         |       | 8,768 |   |
| Audit Committee and Special  Committee expenses                                                          |       | —                               |       | —                |       | 6,698         |       | 6,698                                               |       | —               |       | —                |       | —        |       | — |   |
| Depreciation and  amortization                                                                           |       | 30,758                               |       | 342                   |       | 240           |       | 31,340                                              |       | 24,414               |       | 132                   |       | 412           |       | 24,958 |   |
| Interest                                                                                                 |       | 34,298                               |       | —                |       | 1,479         |       | 35,777                                              |       | 20,508               |       | —                |       | 739           |       | 21,247 |   |
|                                                                                                     |       |                                 |       |                  |       |          |       |                                                |       |                 |       |                  |       |          |       |   |   |
| Total operating  expenses                                                                                |       | 143,945                              |       | 52,878                |       | 20,753        |       | 217,576                                             |       | 95,189               |       | 43,504                |       | 10,151        |       | 148,844 |   |
|                                                                                                     |       |                                 |       |                  |       |          |       |                                                |       |                 |       |                  |       |          |       |   |   |
| Income (loss) before  equity in earnings of unconsolidated entities, income taxes and minority  interest |       | (2,688                               | )          | 17,209                |       | (20,399       | )          | (5,878                                              | )          | 2,127                |       | 14,405                |       | (9,597        | )          | 6,935 |   |
| Equity in earnings of  unconsolidated entities                                                           |       | —                               |       | 2,850                 |       | —        |       | 2,850                                               |       | —               |       | 1,999                 |       | —        |       | 1,999 |   |
| Income (loss) before  income taxes and minority interest                                                 |       | (2,688                               | )          | 20,059                |       | (20,399       | )          | (3,028                                              | )          | 2,127                |       | 16,404                |       | (9,597        | )          | 8,934 |   |
|                                                                                                     |       |                                 |       |                  |       |          |       |                                                |       |                 |       |                  |       |          |       |   |   |
| Income tax (benefit)  expense                                                                            |       | (372                                 | )          | 3,866                 |       | —        |       | 3,494                                               |       | 125                  |       | 4,387                 |       | —        |       | 4,512 |   |
|                                                                                                     |       |                                 |       |                  |       |          |       |                                                |       |                 |       |                  |       |          |       |   |   |
| Income (loss) before  minority interest                                                                  |       | (2,316                               | )          | 16,193                |       | (20,399       | )          | (6,,522                                             | )          | 2,002                |       | 12,017                |       | (9,597        | )          | 4,422 |   |
| Minority interest                                                                                        |       | (984                                 | )          | 7,102                 |       | (8,947        | )          | (2,829                                              | )          | 954                  |       | 6,023                 |       | (4,794        | )          | 2,183 |   |
|                                                                                                     |       |                                 |       |                  |       |          |       |                                                |       |                 |       |                  |       |          |       |   |   |
| **Net income (loss)**                                                                                    |       | $                                    | (1,332     | )                     | $          | 9,091         |       | $                                                   | (11,452    | )                    | $          | (3,693                | )          | $             | 1,048      |   | $ | 5,994 |   | $ | (4,803 | ) | $ | 2,239 |   |
|                                                                                                          |            |                                      |            |                       |            |               |            |                                                     |            |                      |            |                       |            |               |            |  |  |  |  |  |  |  |  |  |  |

 

***Student Housing***

*Revenue*. Of the 63properties owned as of September 30, 2006, we acquired 24 of the studenthousing properties during 2005, and nine properties during the nine monthsended September 30, 2006.

36

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Rentfrom all of these properties totaled $133.7 million for the nine months endedSeptember 30, 2006. As of September 30, 2005, we owned 52 student housingproperties, with rents from these properties totaling $90.8 million for thenine months ended September 30, 2005.

With respect to our same store properties for the ninemonths ended September 30, 2006, our revenues decreased $1.2 million over thecomparable nine-month periods.  Thedecrease was attributable to six of these same store properties that did notachieve economic occupancy levels that we had targeted upon commencement of the2006/2007 academic year. We believe that these lower than anticipated leasingresults are temporary in nature at a majority of these six same storeproperties, and we have committed resources dedicated to improving theiroccupancy levels going forward.  Weanticipate that these efforts will result in improved occupancy levels for the2007/2008 academic year.

Expense reimbursements from related parties remainedat approximately $0.2 million for the nine months ended September 30, 2006 andthe nine months ended September 30, 2005. Expense reimbursements from third parties increased to $4.7 million forthe nine months ended September 30, 2006 from $3.9 million for the nine monthsended September 30, 2005.  We expectexpense reimbursements, which relate to properties we manage but do not own, tocontinue to become a less significant portion of our student housing revenuesas rental revenues earned from additional properties that we acquire continuesto increase.

Management feeincome from related parties decreased to $0.1 million for the nine months endedSeptember 30, 2006 compared to $0.2 million for the nine months ended September30, 2005. The management fee income from related parties in 2006 consistedentirely of standard management fees, as compared to $0.1 million of standardmanagement fee income and $0.1 million of asset management fee income in 2005.This decrease in standard management fees was primarily due to the Company’sacquisition of two student housing properties from related parties in March2005, which were managed by the Company prior to the acquisition. In addition,we ceased managing another student housing property in March 2005 as it wassold to a third party. Management fee income from third parties increased to$2.4 million for the nine months ended September 30, 2006 from $2.2 million forthe nine months ended September 30, 2005, primarily due to the transfer to theCompany on January 1, 2006 of management contracts relating to four propertiesfor which we previously provided consulting management services to GMH AssetServices Capital Partners, LP.

We will continueto focus on growing our third party management business however for theremainder of 2006, we expect management fees to contribute less significantlyto total revenues in the future given the expected growth in rental revenuefrom the operations of properties we own.

*Expenses.  **Property operating expenses increasedto $61.0 million for the nine months ended September 30, 2006 from $37.9million for the nine months ended June 30, 2005, primarily due to expensesattributable to the 11 properties acquired from October 1, 2005 throughSeptember 30, 2006.  The $23.1million increase in expenses was comprised of the following: a $7.9 millionincrease in utilities expenses; a $2.2 million increase in repairs andmaintenance expenses; a $4.7 million increase in payroll expenses at theproperty level; a $1.4 million increase in bad debt expense relating touncollected rents; and a $6.9 million increase in other property operatingexpenses, consisting of marketing, insurance, landscaping and other similarproperty operating expenses as well as unreimbursed expenses relating to ourmanaged properties. We expect that total property operating expenses willcontinue to increase in the future as we acquire additional properties.Property operating expenses also include compensation and operating costs withrespect to the acquisitions department of our student housing segment.*

With respect to same store properties for the ninemonths ended September 30, 2006, we experienced an increase in propertyoperating expenses of approximately $3.3 million.  Of this increase, $1.4 million relates toutilities; $0.1 million relates to repairs and maintenance costs; $0.4 millionrelates to payroll expenses associated with the hiring of additional staff atthe property level; $0.6 million relates to bad debt expense associated withuncollected rents and other income; and $0.8 million relates to an increase inother similar property operating expenses. 

We are in the process of implementing new policies andprocedures relating to capital spending and maintenance, as well as purchasingactivities, that are designed to assist with cost containment of future repairsand maintenance expenditures at our same store and other properties.  We also recently have placed a renewedemphasis on our rent collections, which we believe should result in lower baddebt expense in future periods.

Reimbursed expenses increased to $4.9 million for thenine months ended September 30, 2006 from $4.1 million for the nine monthsended September 30, 2005, primarily due to expenses attributable to the 11properties acquired from October 1, 2005 through September 30, 2006.

Real estate taxesincreased to $13.0 million for the nine months ended September 30, 2006 from$8.3 million for the nine months ended September 30, 2005, primarily due to theacquisition of 11 properties since the end the second quarter of 2005, and dueto increased assessments and millage rates imposed by local taxingauthorities.  We expect real estate taxesto continue to increase significantly in the future as we acquire additionalproperties, and to the extent that local authorities continue to aggressivelypursue higher real estate tax assessments and millage rates on properties thatwe currently own.

 

37

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Depreciation andamortization increased to $30.8 million for the nine months ended September 30,2006 from $24.4 million for the nine months ended September 30, 2005 as aresult of acquiring 11 properties for an aggregate purchase price of $269.0million from October 1, 2005 through September 30, 2006. The $30.8 million in2006 is comprised of $26.7 million of depreciation and $4.1 million of leaseintangible amortization, and the $24.4 million in 2005 is comprised of $17.4million of depreciation and $7.0 million of lease intangible amortization.  Depreciation expenses increased primarily dueto the acquisition of 11 properties since the end of the third quarter of 2005,and lease intangible amortization decreased primarily due to the timing andamount of acquisitions.

Interest expenseincreased to $34.3 million for the nine months ended September 30, 2006, from$20.5 million in 2005. This increase was a result of the issuance andassumption of $179.2 million of debt, including borrowings under our line ofcredit, in connection with the acquisition of 11 properties from October 1,2005 through September 30, 2006. During the nine months ended September 30,2006, the Company borrowed $128.0 million and repaid $36.0 million under theline of credit, and during the nine months ended September 30, 2005, theCompany borrowed $244.0 million and repaid $107.0 million under the line ofcredit.  We expect interest expense to increase in the future as we incuradditional debt to fund acquisitions. For more information regarding the amountof fixed-rate and variable-rate indebtedness we held as of December 31, 2005and September 30, 2006, see the section titled *Quantitativeand Qualitative Disclosures About Market Risk* under Part I, Item 3of this report.

***Military Housing***

*Revenue*.Expense reimbursements totaled $48.0 million for the nine months endedSeptember 30, 2006 as compared to $40.1 million for the nine months endedSeptember 30, 2005. This increase was primarily due to payroll and renovationexpenses related to the nine military housing projects in operation as ofSeptember 30, 2006, as compared with the number of military housing projects inoperation as of September 30, 2005; and closing costs and transition expensesfor our Fort Gordon project, which commenced operations in May 2006 and closingcosts and transition expenses for our Carlisle/Picatinny project. Although weexperienced a decrease in expense reimbursements for the three months endedSeptember 30, 2006, expense reimbursements increased for the nine monthsended September 30, 2006 as a result of greater renovation activitiesoccurring during the first two quarters of 2006. This increase was offset bydecreases at our Fort Stewart/Hunter, Walter Reed Army Medical Center and FortDetrick projects caused by anticipated declines in construction and renovationactivities, as well as by decreases at our Fort Carson project due to changesin the terms of the management contract in December 2005, which resulted infewer reimbursable expenses being incurred directly by the project.  The table below sets forth certaininformation regarding the revenue from expense reimbursements for each of ourmilitary housing projects for the nine months ended September 30, 2006 and2005.

 

|                                                          | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Project**                                              | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(in millions)**                                  | ** ** |
| Fort Stewart and  Hunter Army Airfield Project           |       | $                                                       | 3.5        |   | $ | 8.0 |   |
| Fort Carson  Project                                     |       | 2.1                                                     |       | 5.3 |   |
| Fort Hamilton  Project                                   |       | 0.9                                                     |       | 0.3 |   |
| Walter Reed Army  Medical Centerand Fort Detrick Project |       | 0.5                                                     |       | 1.7 |   |
| Fort Eustis/Fort  Story Project                          |       | 3.7                                                     |       | 3.1 |   |
| Navy Northeast  Region Project                           |       | 25.6                                                    |       | 18.8 |   |
| Fort Bliss/White  Sands Missile Range Project(1)         |       | 8.8                                                     |       | 2.9 |   |
| Fort Gordon  Project(2)                                  |       | 1.8                                                     |       | — |   |
| Carlisle/Picatinny  Project(2)                           |       | 1.1                                                     |       | — |   |
| Total                                                    |       | $                                                       | 48.0       |   | $ | 40.1 |   |

----

(1)    Commenced operations in the third quarter of2005.

(2)    Commenced operations in the second quarterof 2006.

38

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Management feesfrom related parties totaled $6.2 million for the nine months ended September30, 2006 compared to $4.9 million for the nine months ended September 30, 2005.The amount of management fees from related parties that we receive during afiscal period is affected by the number of housing units that we manage underour military housing projects during that period, which number will fluctuate basedon the number of housing units that we construct/renovate or demolish duringthat period. Management fees from related parties increased during the ninemonths ended September 30, 2006 as compared to the nine months ended September30, 2005, primarily due to commencement of operations relating to our FortBliss/White Sands Missile Range project during the third quarter of 2005, aswell as due to increased occupancy and rental activity at our FortStewart/Hunter project and the commencement of our Fort Gordon project in thesecond quarter of 2006 and commencement for our Carlisle/Picatiny project.  The table below sets forth certaininformation regarding the revenue from management fees from related parties foreach of our military housing projects for the nine months ended September 30,2006 and 2005.

 

|                                                          | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Project**                                              | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(in millions)**                                  | ** ** |
| Fort Stewart and  Hunter Army Airfield Project           |       | $                                                       | 1.0        |   | $ | .7 |   |
| Fort Carson  Project                                     |       | 0.9                                                     |       | 1.0 |   |
| Fort Hamilton  Project                                   |       | 0.2                                                     |       | 0.2 |   |
| Walter Reed Army  Medical Centerand Fort Detrick Project |       | 0.2                                                     |       | 0.1 |   |
| Fort Eustis/Fort  Story Project                          |       | 0.4                                                     |       | 0.4 |   |
| Navy Northeast  Region Project                           |       | 2.4                                                     |       | 2.3 |   |
| Fort Bliss/White  Sands Missile Range Project(1)         |       | 0.9                                                     |       | 0.2 |   |
| Fort Gordon  Project (2)                                 |       | 0.1                                                     |       | — |   |
| Carlisle/Picatinny(2)                                    |       | 0.1                                                     |       | — |   |
| Total                                                    |       | $                                                       | 6.2        |   | $ | 4.9 |   |

----

(1)    Commenced operations in the third quarter of2005.

(2)    Commenced operations in the second quarterof 2006.

Other fee incomefrom related parties, which includes development and construction/renovationfees and business development fees, totaled $15.9 million for the nine monthsended September 30, 2006, as compared to $12.8 million for the same period in2005. Of the 2006 amount, $12.5 million related to development and construction/renovationfees, and $3.4 million related to business development fees.  The amount of other fee income from relatedparties that we receive during a fiscal period is affected by the number ofhousing units that we construct or renovate under our military housing projectsduring that period, which number will fluctuate based on the point at which weare during the initial development period for the project. Other fee incomefrom related parties increased during the nine months ended September 30, 2006as compared to the nine months ended September 30, 2005, primarily due toincreased construction/renovation activity relating to our Navy NortheastRegion and Fort Eustis/Fort Story projects, and due to commencement ofoperations relating to our Fort Bliss/White Sands Missile Range project duringthe third quarter of 2005 and  relatingto our Fort Gordon and Carlisle/Picatinny project during the second and thirdquarters of 2006, offset by previously expected declines in activities at ourFort Stewart/Hunter project and our Walter Reed Army Medical Center and FortDetrick project. The table below sets forth certain information regarding therevenue from other fee income from related parties for each of our militaryhousing projects for the nine months ended September 30, 2006 and 2005.

39

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|                                                          | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Project**                                              | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(in millions)**                                  | ** ** |
| **Development  and Construction/Renovation Fees**        | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Fort Stewart and  Hunter Army Airfield Project           |       | $                                                       | 1.3        |   | $ | 3.1 |   |
| Fort Carson Project                                      |       | 0.3                                                     |       | 0.3 |   |
| Fort Hamilton  Project                                   |       | 0.4                                                     |       | 0.6 |   |
| Walter Reed Army  Medical Centerand Fort Detrick Project |       | 0.4                                                     |       | 0.9 |   |
| Fort Eustis/Fort  Story Project                          |       | 1.2                                                     |       | 0.6 |   |
| Navy Northeast  Region Project                           |       | 5.3                                                     |       | 3.0 |   |
| Fort Bliss/White  Sands Missile Range Project(1)         |       | 2.7                                                     |       | 1.4 |   |
| Fort Gordon  Project(2)                                  |       | 0.7                                                     |       | — |   |
| Carlisle/Picatinny  Project                              |       | 0.2                                                     |       | — |   |
| Total  development and construction/renovation fees      |       | $                                                       | 12.5       |   | $ | 9.9 |   |
|                                                     |       |                                                    |       |   |   |
| **Business  development fees**                           |       | 3.4                                                     |       | 2.9 |   |
| ** **                                               |       |                                                    |       |   |   |
| **Total Other Fee Income From  Related Parties**         |       | $                                                       | 15.9       |   | $ | 12.8 |   |

----

(1)    Commenced operations in the third quarter of2005.

(2)    Commenced operations in the second quarterof 2006.

Equity in earningsof unconsolidated entities, consisting of equity income and preferred returnsfrom our military housing project joint ventures, totaled $2.9 million for thenine months ended September 30, 2006 as compared to $2.0 million for the ninemonths ended September 30, 2005. Of the amount for 2006, $0.6 million relatedto preferred returns from our Navy Northeast Region project, and $2.3 millionrelated to our investment in Fort Carson Family Housing LLC.  Of the 2005 amount, $0.6 million related topreferred returns from our Navy Northeast Region project and $1.4 millionrelated to our investment in Fort Carson Family Housing LLC. The increase isprimarily due to equity income distributions received from the project’sAvailable Cash (defined as net operating income minus debt service and generalreserves) in connection with our Fort Carson project, which passed into itspost-IDP phase in 2005.

*Expenses*. Property operating expenses include costs related to operating the militaryhousing segment of our business, such as the compensation expense related toour military housing personnel stationed in our corporate headquarters. Thesecosts totaled $4.6 million for the nine months ended September 30, 2006 ascompared to $3.2 million in the same period of 2005.

Reimbursedexpenses increased to $48.0 million for the nine months ended September 30,2006 from $40.1 million for the nine months ended September 30, 2005, primarilydue to payroll and renovation expenses related to the military housing projectsin operation as of September 30, 2006, offset by anticipated declines inconstruction and renovation activity at certain projects as well as bydecreases at our Fort Carson project due to changes in the terms of themanagement contract in December 2005.

***Corporate***

Rental revenue andexpense reimbursements, which were recognized with respect to the portions ofour corporate headquarters leased to entities affiliated with Gary M. Holloway,Sr., and payroll and related expenses reimbursed by entities affiliated withMr. Holloway for the provision of common services, decreased for the nine monthperiods ended September 30, 2006 to $0.3 million as compared to $0.4 millionfor the same period ended September 30, 2005. The decrease was a result of a decrease in the level of common servicesand rental space utilized by affiliated entities.

40

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Other income,consisting primarily of interest income remained substantially the same for thenine months ended September 30, 2006, as compared to the nine months endedSeptember 30, 2005.

Administrativeexpenses, primarily relating to management of our corporate office, accounting,legal, human resources and information technology, and corporate aircraft,increased to $12.1 million for the nine months ended September 30, 2006 from$8.8 million for the nine months ended September 30, 2005, primarily due toincreased staffing, additional costs incurred in connection with the transitionof financial management and an increase in professional fees.

Audit Committeeand Special Committee expenses consist of legal fees, forensic accounting feesand waiver fees associated with waivers of the covenants under our creditfacility, incurred in connection with the special investigation performed byour Audit Committee and its independent counsel that commenced in the firstquarter of 2006, and legal, financial advisory and Special Committee feesassociated with the formation of the Special Committee to explore strategicalternatives for the Company. During the nine months ended September 30, 2006,these fees totaled $6.7 million.

Depreciation,relating primarily to our corporate headquarters and corporate aircraft,decreased to $240,000 for the nine months ended September 30, 2006 from$410,000 for the nine months ended September 30, 2005. This decrease wasprimarily the result of the disposition of the corporate aircraft during thefirst quarter of 2005.

Interest expenseincreased to $1.5 million for the nine months ended September 30, 2006 from$739,000 for the nine months ended September 30, 2005.  This increase was primarily the result of anincrease in borrowings and overall interest rates under the Company’s creditfacility.

**Liquidityand Capital Resources**

Short-term liquidity requirements consist primarily offunds necessary to pay operating expenses and other costs. These expenses andcosts include (i) recurring maintenance and capital expenditures tomaintain and lease our properties, (ii) interest expense and scheduledprincipal payments on outstanding indebtedness, (iii) real estate taxesand insurance, (iv) corporate salaries, employee benefits and othercorporate overhead and administrative expenses, (v) equity contributions to ourinvestments in military housing projects, and (vi) distributions toshareholders and unitholders of our operating partnership. Our existing workingcapital and cash provided by operations, together with amounts available to usunder our new $250 million six month revolving line of credit with WachoviaBank, National Association, which we entered into on October 2, 2006, areexpected to be sufficient to meet our short-term liquidity requirements.  Borrowings under the Wachovia line of creditwere used to (i) repay all obligations under the Company’s original CreditFacility with Bank of America as administrative agent, and (ii) fund the equityportion of the purchase price for our recent acquisition of the Capstoneportfolio that closed in October 2006. Going forward, borrowings from the lineof credit may be used to (i) acquire or fund certain pending student housingacquisitions and military housing projects, and (ii) fund the third and fourthquarter distribution, other general working capital advances pursuant to theterms of the agreement, and such other transactions as may be approved byWachovia in its sole and absolute discretion. The new line of credit has an initial term of six months, and providesfor either of two extension options: (i) an additional three month extension ofthe initial maturity date, referred to as the Option One Maturity Date, in theevent that we have entered into a definitive agreement relating to a merger orthe sale of substantially all of our assets, which merger/sale agreement (A)has been approved by our Board of Trustees , (B) has been announced publiclyand (C) is not subject to financial contingencies; and (ii) an additional sixmonth extension option (provided notice is given no later than 15 days prior tothe later of the initial maturity date or the Option One Maturity Date),subject to payment of a fee in an amount equal to 2.00% of the outstandingprincipal balance of the loan as of the initial maturity date or the Option OneMaturity Date, as the case may be, referred to as the Option Two MaturityExtension. In no event, however, will the maturity date of the line of creditextend beyond October 2, 2007. Borrowings under this new line of creditbear interest at a Eurodollar rate based on LIBOR plus 2%, and LIBOR plus 4.5%during the Option Two Maturity Extension.

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      The new line of credit contains affirmativeand negative covenants and also contains financial covenants which, among otherthings, require that we maintain (i) a fixed charge coverage ratio with respectto the student housing properties, as defined in the line of credit, of atleast 1.25x to 1.00x, (ii) a consolidated tangible net worth, as defined by theline of credit agreement, of at least $455 million, (iii) maintain quarterlyminimum aggregate adjusted management EBITDA relating to the military housing segmentand student housing managed properties, as defined in the line of creditagreement, of $5.0 million, and (iv) our federal tax status as a REIT. Asof November 3, 2006, we had outstanding borrowings under our new line of creditwith Wachovia equal to $194.4 million, which borrowings bear interest at a rateof 7.32%, and we had $55.6 million remaining as available borrowings under theline.

        Asof September 30, 2006, we had availability under our original credit facilitywith Bank of America as administrative agent equal to $150.0 million, ofwhich $128.0 million in borrowings was outstanding, and bearing interest at aEurodollar rate based on 30-day LIBOR of 5.33% plus 1.875%, resulting in atotal interest rate of 7.205%. As of September 30, 2006, there were no lettersof credit outstanding under the credit facility.   The credit facility was terminated and alloutstanding borrowings were paid on October 2, 2006 in connection with theclosing on our new line of credit with Wachovia Bank. In connection with thetermination of the former credit facility, we will recognize $1.1 million ofdeferred financing costs during the fourth quarter of 2006.

        Our former credit facility contained anaffirmative covenant requiring that we provide audited financial statementswithin 90 days after the end of each fiscal year, and unaudited quarterlyfinancial statements within 45 days after the end of each fiscal quarter. As aresult of the delay in filing of our Annual Report on Form 10-K for the yearended December 31, 2005, as well as the delay in filing of our QuarterlyReports on Form 10-Q for the three months ended March 31, 2006 and the threemonths ended June 30, 2006, we obtained a waiver of this covenant from thelender syndicate that permitted us to deliver our audited financial statementsfor the 2005 fiscal year and quarterly financial statements for the firstquarter of 2006 no later than August 15, 2006, and to deliver our quarterlyfinancial statements for the second quarter of 2006 no later than September 15,2006.

On September 1,2006, we entered into a Third Amendment and Waiver to Credit Agreement with thelender syndicate under our former credit facility. Under the agreement, thelender syndicate provided waivers of our financial covenants relating to therequirement to maintain an interest coverage ratio equal to or greater than2.00x, and a fixed charge coverage ratio equal to or greater than 1.75x, eachas of the end of the quarter ended June 30, 2006. In addition, the agreementprovided for amendments to the definitions of the terms “consolidated EBITDA”and “funds from operations” to permit us to add back the non-recurring expensesrelating to the special investigation performed by the Audit Committee and tothe formation and operations of our Special Committee in connection with itsreview of strategic alternatives. In addition, the agreement included anamendment to our total leverage ratio, commencing with the quarter ended June30, 2006, from 60% to 70%.

       We elected to be treated as a REIT for federal income tax purposescommencing with our taxable year ended December 31, 2004. As a REIT, weare required to distribute at least 90% of our REIT taxable income to ourshareholders on an annual basis. Therefore, except as discussed below, as ageneral matter, a substantial portion of cash generated by our operations willbe used to fund distributions to shareholders and holders of limitedpartnership interests in our operating partnership, and will not be availableto satisfy our liquidity needs.

        Futuredividends will be declared at the discretion of our board of trustees and willdepend on our actual cash flow, our financial condition, capital requirements,the annual distribution requirements under the REIT provisions of the Code andother such factors as our board of trustees deems relevant. For the second quarter of 2006, we declared aquarterly dividend distribution of $0.2275 per common share, payable toshareholders of record on September 30, 2006. We distributed this dividend onOctober 13, 2006, and at the same time, our operating partnership paid adistribution of $0.2275 per unit to holders of limited partnership

 

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interest in our operatingpartnership. We cannot assure you that we will continue to have cash availablefor distributions at historical levels or at all. Any distributions we pay inthe future will depend upon our actual results of operations, economic conditionsand other factors that could differ materially from our current expectations.We expect that during the second half of 2006, our cash flow from operationswill be insufficient to fund our anticipated dividend distributions. Therefore,we expect to rely on amounts available under our credit facility or throughother third party debt financing to fund these distributions and other capitalneeds. In addition, our ability to maintainour quarterly dividend payment at its current rate may be affected by thecurrent restriction under the terms of our credit facility that preclude usfrom making distributions to our shareholders in excess of 95% of funds fromoperations for the fiscal year. Our actual results of operations will beaffected by a number of factors, including: the revenue we receive from ourstudent housing properties; revenues from management fees in connection withmanagement services that we will provide for student housing properties ownedby others; revenues from our military housing projects; our operating expenses;interest expense; legal and accounting costs related to the investigation ofthe Audit Committee of our Board and related matters; costs related to ourpending class action lawsuits and the activities of the Special Committee ofour Board; expenses in connection with the implementation of remedial measuresto address the material weaknesses identified in our internal control overfinancial reporting and disclosure controls and procedures; and anyunanticipated expenditures. For more information regarding risk factors thatcould materially adversely affect our actual results of operations, please seethe section entitled “Risk Factors” in Part I, Item 1A of our Annual Report onForm 10-K for the year ended December 31, 2005. Our board of trusteesmay choose to pay a lower distribution in the event we are unable to obtainfinancing to pay our dividend at historical levels, or in order to assurecompliance with applicable restrictive covenants on distributions under theterms of the credit facility.

As of September 30, 2006,56 of our student housing properties were encumbered by security interestsrelating to notes payable aggregating $797.1 million and secured by first lienson the individual assets with an aggregate cost basis of approximately$1,197.0 million before accumulated depreciation. These notes payable hada weighted-average interest rate of 5.10%, mature at various dates betweenMarch 2007 and June 2024 and require monthly payments of principal and interestor monthly payments of interest only.  OnJanuary 12, 2006, the Company placed new mortgage debt on its corporateheadquarters building in the amount of approximately $5.7 million. The newmortgage debt has a term of 10 years with a fixed-interest rate of 5.58%, andrequires monthly payments of interest only.

With regard to ourmilitary housing privatization projects, we made a $9.5 million equitycontribution in November 2004 relating to our Navy Northeast Regionproject and, as of September 30, 2006, had contractually committed to makeequity contributions of $2.0 million in 2006 to our Fort Hamilton project;$5.9 million in 2007 to our Walter Reed Army Medical Center/Fort Detrickproject; $3.6 million in 2010 for our Fort Eustis/Fort Story project; $3.0million in 2010 to our Carlisle/Picatinny project; $8.0 million in 2011for our Fort Stewart and Hunter Army Airfield project; $6.3 million in2011 for our Fort Bliss/White Sands project; and $4.5 million in 2011 for ourFort Gordon project.****These equitycontributions help to fund the development, construction and renovation ofhousing units at these bases during the respective terms of the projects.  The timing of our equity contributions tothese projects may be sooner or later than the years referenced above, dependingupon when other project funds are available to the project from othersources.  In addition, in the event thatwe close the AETC Group I project, which is currently still in the solicitationphase, we would expect to provide an equity contribution equal to approximately$8.0 million and provide for a letter of credit for approximately $2.5 million.

Typically, we arereimbursed for certain payroll expenses relating to the student housingproperties we manage for third parties, for certain costs we incur after we areawarded the right to exclusively negotiate agreements for a military housingproject until we enter into agreements for the project and for transition costswe incur shortly before initiation of our management of a military housingproject. However, we are required to fund these costs prior to the time wereceive the reimbursements. Typically, Army and Navy projects requireapproximately $1.0 million to $7.0 million in costs associated withtransition and exclusive negotiations, depending on the size of the project.The expenditures typically begin 12 months prior to executing an agreementfor the military housing project. Accordingly, the timing between our paymentsand reimbursements for projects may add to our short-term liquidity needs.

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If cash flows from any ofour military housing privatization projects are insufficient to meet thecoverage ratios or benchmarks entitling us to receive fee payments, any unpaidfees will accumulate and be subsequently paid from operations or upondissolution of the projects to the extent that funds are available and theapplicable thresholds are met. If these thresholds are not met, we will nothave access to or receive certain of the fees we have earned. Theunavailability of these funds would materially impact our ability to meet ourshort-term and long-term liquidity needs. We will be required to make equitycontributions at the beginning of the initial development period for typicalNavy transactions and at the end of the initial development period for typicalArmy transactions. Based on our current expectations regarding the terms of thedebt funding for our military housing projects, we expect that the projectswill generate sufficient cash flows to fund the reinvestment account and payanticipated equity returns.

With regard to ourcurrently owned student housing properties, we do not have any materialshort-term capital commitments, other than with respect to our short-termcapital needs relating to the general expenses and costs associated withoperating and managing these properties. We will require, however, funds inconnection with our anticipated acquisitions of additional student housingproperties.  During the next twelvemonths, we currently expect to acquire additional student housing propertiesand development projects that are located in our targeted markets and that meetmanagement’s underwriting criteria for creating long-term growth potential. Inan effort to conserve our available capital resources during 2006 andpotentially for sometime thereafter, we will consider funding the acquisitionof many of our future student housing properties and development projectsthrough joint venture structures similar to the joint venture terms that weentered into with respect to our Orono, Maine and Bowling Green, Ohiodevelopment properties. The timing of any additional acquisitions ordevelopment projects will be dependent upon various factors, including theability to complete satisfactory due diligence, to find suitable joint venturepartners and agree upon mutually acceptable joint venture terms, to obtainappropriate debt financing on the properties, and the availability ofcapital.  We intend to fund our equityportion of these joint ventures by using funds from our credit facility or fromavailable cash from operations. We may also determine that it is appropriate topurchase additional student housing properties outright, as opposed to with ajoint venture partner, depending upon many factors which may include, but arenot limited to, the applicable purchase price, available capital, and projectedreturns with respect to the property.  Weexpect that our primary source of funding for the equity associated with theacquisition of student housing properties and development projects during the nextsix months, whether done through joint venture structures or not, will be ournew line of credit with Wachovia Bank and the placement of mortgage debt on theassets acquired (to the extent such mortgage debt is approved by Wachovia Bankin accordance with the terms of the line of credit agreement). We are requiredto obtain approval from Wachovia with respect to the uses of any funds borrowedunder the line of credit, and currently only have two pending student housingacquisitions pre-approved for financing under the line. As a result, we couldbe limited in the number or timing of any additional student housingacquisitions or development projects based on this approval requirement withWachovia.  In addition, the timing of, ordecision to continue to pursue, additional acquisitions or developmentsprojects could be affected by the outcome of the strategic evaluation processthat is currently being performed by the Special Committee of our Board ofTrustees.

For the remainder of2006, we also expect to incur significant fees in connection with theinvestigation performed by the Audit Committee of our Board and relatedmatters, such as pending class action litigation, as well as the activities ofthe Special Committee of our Board. These fees primarily include additionallegal and accounting expenses, as well as costs associated with implementingremedial measures to address the material weaknesses in our internal controlover financial reporting that are described in more detail in Part I, Item 4 ofthis report titled “*Controls and Procedures*.”  These fees will impact the level of cash fromoperations that we would otherwise expect to be available for the acquisitionof additional student housing properties, and therefore could affect the numberof acquisitions that we seek to complete during the next six to twelve months.

Long-term liquidityrequirements with respect to our student housing and military housing segmentsconsist primarily of amounts necessary to fund scheduled debt maturities,renovations and other non-recurring capital expenditures that need to be madeperiodically at our properties, and the costs associated with acquisitions ofstudent housing properties and awards or acquisitions of military housing privatization

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projects that we pursue.Historically, we have satisfied our long-term liquidity requirements throughvarious sources of capital, including existing working capital, cash providedby operations, and long-term mortgage indebtedness. We now expect our long-termliquidity requirements to be satisfied primarily through cash generated byoperations that is not used to fund distributions and the additional externalfinancing sources discussed above.

**Item 3.****            Quantitative and Qualitative Disclosures AboutMarket Risk**

The Company has exposureto market risk through fluctuations in market interest rates.  Market interest rates are highly sensitive tomany factors that are beyond our control. The Company’s market risk relates to its Line of Credit, variable ratedebt obligations secured by properties and other obligations utilized fordevelopment related activities.  As ofSeptember 30, 2006, the outstanding balance under the Line of Credit andvariable rate debt obligations secured by properties totaled $128.0 million and$30.6, respectively.  These variable rateobligations totaling $158.6 million represent approximately 17.04% of theCompany’s consolidated debt outstanding as of September 30, 2006.   The weighted average interest rate andmaturity for variable rate debt was 7.48% and 1.41 years, respectively atSeptember 30, 2006. The Company does not utilize interest rate hedgingstrategies or other related tools to mitigate interest rate risk for any ofthese obligations.

The Company obtains fixedrate mortgage debt upon acquisition or refinance as a funding source.  As of September 30, 2006, the Company had$772.2 million, or approximately 82.96% of its total outstanding balanceclassified as fixed rate debt.  Fixedrate debt assumed with the purchase of properties is recorded at fair value andmarked-to-market at the acquisition date based on prevailing interest rates atthe time of acquisition.  The weightedaverage interest rate and maturity for fixed rate debt, on a fair value basiswas, 5.02% and 6.74 years, respectively at September 30, 2006. As these debtinstruments mature, the Company typically refinances such debt at the existingmarket interest rates, which may be more or less than the interest rates on thematuring debt.

Regarding variable ratedebt, interest rate changes generally do not affect the fair market value butdo impact interest expense and cash flows, assuming other factors are heldconstant.  A 100 basis point increase ordecrease in market interest rates would result in an increase or decrease ofapproximately $1.6 million in interest expense on an annual basis.

A change in marketinterest rates on the fixed rate debt portfolio impacts the fair value, but ithas no impact on interest incurred or cash flows.  The fair value of the debt as ofSeptember 30, 2006 is approximately $766.4million.

As of September 30, 2006,we had $128.0 million in funds drawn from our credit facility, bearing avariable interest rate at a Eurodollar rate based on a 30-day LIBOR of 5.33%plus 1.875% resulting in a total interest rate of 7.205%.

**Item 4.****            Controls and Procedures**

*(a)**          Evaluationof Disclosure Controls and Procedures.*

We maintain disclosurecontrols and procedures that are designed to provide reasonable assurance thatinformation required to be disclosed in our reports under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime period specified in the Securities and Exchange Commission’s rules andregulations and that such information is accumulated and communicated tomanagement, including our principal executive officer and principal financialofficer, as appropriate, to allow timely decisions regarding requireddisclosure.

As required by Rule13a-15(b) promulgated under the Exchange Act, our management, with theparticipation of our chief executive officer and chief financial officer,evaluated the design and operating effectiveness as of September 30, 2006 ofour disclosure controls and procedures, as defined in Rule 13a-15(e)promulgated under the Exchange Act. Based on this evaluation, our chief executive officer and chief 

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financial officerconcluded that our disclosure controls and procedures were effective as ofSeptember 30, 2006.  We believe that acontrols system, no matter how well designed and operated, cannot provideabsolute assurance that the objectives of the controls system are met, and no evaluationof controls can provide absolute assurance that all control issues andinstances of fraud, if any, within a company have been detected.

*(b)**          Changein Internal Control over Financial Reporting.*

As reported in Item 9A ofour Annual Report on Form 10-K for the year ended December 31, 2005, as filedwith the Securities and Exchange Commission on July 31, 2006, managementconcluded that our internal control over financial reporting was not effectiveas of December 31, 2005. Such conclusion resulted from the identification ofdeficiencies that were determined to be material weaknesses. Specifically, wedid not have appropriate internal control over financial reporting as describedin Item 9A of our Annual Report on Form 10-K for the year ended December 31,2005.  During the nine months ended September30, 2006, we completed various remediation initiatives, and will continue toundertake extensive work to remedy the material weaknesses as described in Item9A of our Annual Report on Form 10-K for the year ended December 31, 2005.  While management believes progress has beenmade regarding the implementation of these initiatives as of the date of thisreport, additional procedures and further evaluation are on-going. Remediationof the material weaknesses identified at December 31, 2005 remains a priorityfor us during the remainder of 2006.

Except for theremediation initiatives with respect to the material weaknesses described aboveand in the Company’s Annual Report on Form 10-K for the year ended December 31,2005, there have been no changes in our internal control over financialreporting that occurred during the period covered by this report, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting. As described in that report, our Audit Committee initiated aninvestigation in the first quarter of 2006, which was not completed until afterthe end of that quarter. As a result, many of the remediation efforts describedin that report did not commence until the second and third quarters of 2006.During the third quarter of 2006, we initiated the following remediationefforts:

• Effective as of July 1, 2006, J. Patrick O’Grady commencedemployment as our Executive Vice President and Chief Financial Officer.Mr. O’Grady has been a certified public accountant since 1985, and from1990 to 2002 he was employed by Arthur Andersen LLP, where he served as apartner from 1997 to 2002. Since 2002, Mr. O’Grady has been a partner withKPMG, LLP. We believe Mr. O’Grady’s extensive experience in publicaccounting, serving multiple publicly traded companies in the real estateindustry, is enabling him to assist us to develop the systems, controls andprocedures that are customary in the industry and have enabled us to addressour “tone at the top” material weakness and other deficiencies. We also believethat Mr. O’Grady’s lack of any prior connections to or relationships withour company has had, and will continue to have, the positive effect ofproviding us with a fresh, outside voice in senior management. Furthermore, webelieve that Mr. O’Grady’s background as a partner with a “Big Four”accounting firm is enabling him to effectively communicate management’spositions to our independent registered public accounting firm, and to workwith management and the independent auditors to reach the accurate conclusionsregarding the application of appropriate accounting policies, which are oftencomplex, to the Company’s transactions going forward.

During the third quarter, Mr. O’Grady has worked toward fosteringbetter communication, cooperation and coordination among our operationalmanagement and accounting personnel, and he will continue to identify andimplement additional procedures to enhance interaction and assure that(i) our operational management is confident that the advice they receivefrom accounting personnel reflects a full and accurate understanding on thepart of the accounting personnel of the operational and related matters towhich the advice relates, thereby eliminating any question of whether a morecomplete and accurate understanding of these underlying matters might result ina different, and in the eyes of operational management a more desirable,accounting conclusion, and (ii) our accounting personnel are comfortablethat they have received from operational

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management a detailed and complete description of the matters for whichthey are considering the appropriate accounting.

• During the third quarter of 2006, we distributed a formal “tone atthe top” survey to a wide group of employees involved in operations, includingall accounting personnel, which survey was designed to elicit comments fromthose employees regarding communications from management since completion ofthe Audit Committee’s investigation. The survey permitted employees to submittheir responses anonymously, and will be used by our Board of Trustees, theAudit Committee and Chief Executive Officer to assure that the proper “tone” isset to achieve accurate financial results, and will serve as a tool for theChief Executive Officer and other senior management personnel to use in orderto effectively measure their progress in addressing the issue going forward andto identify and remediate problems in a timely manner. Completed surveys werenot required to be submitted until shortly after the end of the third quarterof 2006, at which time the surveys were received and reviewed by theindependent counsel of the Audit Committee. During the fourth quarter of 2006, the Audit Committee reviewed theresults from the survey. The Audit Committee determined that, based on thesurvey responses and the advice of its independent counsel, no “tone-at-the-top”concerns were present as of the survey date. Accordingly, the Audit Committeedid not recommend any additional remediation actions at this time, but agreedto continue to monitor possible “tone-at-the-top” issues going forward, and torequire that management continue to perform additional surveys of employees onan annual basis.

• In an effort to address previously identified material weaknessesrelating to lack of adequate accounting personnel, a new corporate controller,military housing segment controller and military housing segment assistantcontroller each commenced employment during the third quarter of 2006.  In addition, upon the commencement of hisemployment during the third quarter, Mr. O’Grady began the process ofevaluating the competency of our accounting staff and will work to designtraining and other programs as he determines necessary to remedy the conditionsthat caused material weaknesses relating to our accounting departmentfunctions. After year-end, Mr. O’Grady is expected to recommend anyadditional staffing needs and changes to further remedy any existingconditions. In addition, throughout the remainder of 2006, our Audit Committeeplans to work with Mr. O’Grady to enhance the integration of ourmanagement’s involvement with our internal audit function in order to moreeffectively review, inspect and investigate transactions so as to facilitateaccurate reporting of our financial results and to implement necessary trainingfor additional personnel as they are hired.

• With the commencement of employment of Mr. O’Grady and our newcorporate controller during the third quarter of 2006, both began a process toidentify and document formal written procedures that will be designed tofurther implement better communications and monitoring of compliance with ouraccounting policies relating to process controls, such as revenue recognition,purchasing and accounts payable, capital spending and maintenance, real estateacquisitions and period-end financial reporting.

• During the third quarter of 2006, Mr. O’Grady and our newcorporate controller initiated a process with our internal auditors to completea form of written internal control charter, which is expected to be approvedduring the fourth quarter of 2006. This charter, among other things, willdocument the internal control process and formally assign responsibilities inoverseeing various internal controls to the relevant operational and accountingpersonnel. This charter will be reviewed and approved by our Audit Committee.

**PART II— OTHER INFORMATION**

**Item 1.****            Legal Proceedings**

On April 5, 2006, theCompany, Gary M. Holloway Sr., our Chairman, President and Chief ExecutiveOfficer, and Bradley W. Harris, our former Chief Financial Officer, were namedas defendants in a class 

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action complaint filed inUnited States District Court for the Eastern District of Pennsylvania, or theCourt. The complaint provides that the Plaintiff has filed a federal classaction on behalf of purchasers of the publicly traded securities of the Companybetween October 28, 2004 and March 10, 2006, referred to as the Class Period,seeking to pursue remedies under the Securities Act of 1933 and the SecuritiesExchange Act of 1934. Plaintiff alleges that defendants issued a series offalse and misleading financial results regarding the Company to the marketduring the Class Period, and more specifically, failed to disclose: (1) thatthe Company’s earnings, net income and revenues were materially inflated andexpenses were materially understated; (2) that the Company’s funds fromoperations were materially inflated; (3) that the Company lacked adequateinternal controls; (4) that the Company’s reported financial results were inviolation of generally accepted accounting principles, or GAAP; and (5) that asa result of the foregoing, the Company’s financial results were materiallyinflated at all relevant times. Plaintiff alleges claims under Section 11 of the Securities Act withrespect to all of the defendants; Section 12(a)(2) of the Securities Act withrespect to the Company; Section 15 of the Securities Act with respect to Mr.Holloway and Mr. Harris; Section 10(b) and Rule 10b-5 of the Exchange Act withrespect to all of the defendants; and Section 20(a) of the Exchange Act withrespect to Mr. Holloway and Mr. Harris.

On April 11, 2006, April20, 2006, April 27, 2006 and May 15, 2006, four additional class actioncomplaints were filed with the Court against the defendants by separate lawfirms, and the Company anticipates that additional complaints may be filed inthe near future until a class has been certified by the Court and a leadplaintiff has been named. Each of these additional filed complaints alleges thesame claims against the defendants as described above with respect to thecomplaint filed on April 5, 2006, except that the complaint filed on April 20,2006 restricts the class period to purchasers of the publicly traded securitiesof the Company to the time period between May 5, 2005 and March 10, 2006.

On June 2, 2006 a motionfor appointment of a lead plaintiff was filed with the court, and twoadditional motions were filed on June 5, 2006. To date, the court has not ruledon these motions, and the defendants have not yet responded to any of the filedcomplaints.  The outcome of this litigation is uncertain, and while theCompany believes that it has valid defenses to Plaintiff’s claims and intendsto defend the class action lawsuit vigorously, no assurance can be given as tothe outcome of this litigation. An adverse outcome could have a materialadverse effect on our consolidated financial statements and results ofoperations.

The Company also is subject to routine litigation, claims andadministrative proceedings arising in the ordinary course of business. Other than the matters described above, we are notinvolved in any other material litigation nor, to our knowledge, is anymaterial litigation pending or threatened against us.

**Item 1A. Risk Factors**

In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2005, which could materially affect our business,financial condition or future results. The risks described in our Annual Reporton Form 10-K are not the only risks facing our Company. Additional risks anduncertainties not currently known to us or that we currently deem to beimmaterial also may materially adversely affect our business, financialcondition and/or operating results.

**Item 2.****            Unregistered Sales of Equity Securities and Use ofProceeds**

None.

**Item 3.****            Defaults Upon Senior Securities**

None.

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**Item 4.****            Submission of Matters to a Vote of SecurityHolders**

We held our AnnualMeeting of Shareholders on September 6, 2006. The number of votesrepresented at the annual meeting, in person or by proxy, was 32,026,975. Atthe meeting, our shareholders voted on the election of trustees.

*Electionof Trustees*. The results of the vote on the election of ninetrustees are set forth as follows, opposite their respective names:
| **Name**                      | ** ** | **For**    | ** ** | **Withheld** | ** ** | **Broker  Non-votes** | ** ** |
|-------------------------------|------------|------------|------------|--------------|------------|-----------------------|------------|
| Gary M.  Holloway, Sr.   |       | 28,296,277 |       | 3,730,698    |       | 0                     |       |
| Bruce F.  Robinson            |       | 31,733,257 |       | 293,718      |       | 0                     |       |
| Frederick F.  Buchholz        |       | 31,753,826 |       | 273,149      |       | 0                     |       |
| RADM James W.  Eastwood (Ret) |       | 28,307,237 |       | 3,719,738    |       | 0                     |       |
| Michael D.  Fascitelli        |       | 28,312,708 |       | 3,714,267    |       |                  |       |
| Steven J.  Kessler            |       | 28,302,137 |       | 3,724,838    |       | 0                     |       |
| Denis J. Nayden               |       | 31,757,430 |       | 269,545      |       | 0                     |       |
| Dennis J. O’Leary        |       | 31,732,161 |       | 294,814      |       | 0                     |       |
| Richard A. Silfen             |       | 28,292,502 |       | 3,734,473    |       | 0                     |       |

 

**Item 5.****            Other Information**

None.

**Item 6.****            Exhibits**
| Exhibit | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|---------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1    |       | Form of Agreement of Sale between College Park  Investments, LLC and entities affiliated with Capstone Properties.  (Incorporated by reference to Quarterly Report on Form 10-Q for the quarter  ended June 30, 2006).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.2    |       | First Amendment of Agreements of Sale and Deposit  and Escrow Agreement, entered into as of July 27, 2006, by and among College  Park Investments, LLC, each of University Commons-East Lansing, Ltd.,  Capstone Commons-Athens, Ltd., University Commons-Baton Rouge, Ltd.,  University Commons-Bloomington, IN., Ltd., University Commons-Columbia, S.C.,  L.P., University Commons-Eugene, OR., Ltd., University Commons-Lexington,  KY., Ltd., University Commons-Ohio, Ltd., University Commons-Starkville,  Ltd., University Commons-Tuscaloosa, Ltd., University Commons-Urbana, IL.,  Ltd. (Incorporated by reference to Quarterly Report on Form 10-Q for the  quarter ended June 30, 2006). |
| 10.3    |       | Second Amendment of Agreements of Sale, by and among  College Park Investments, LLC and each of University Commons-East Lansing,  Ltd., Capstone Commons-Athens, Ltd., University Commons-Baton Rouge, Ltd.,  University Commons-Bloomington, IN., Ltd., University Commons-Columbia, S.C.,  L.P., University Commons-Eugene, OR., Ltd., University Commons-Lexington,  KY., Ltd., University Commons-Ohio, Ltd., University Commons-Starkville,  Ltd., University Commons-Tuscaloosa, Ltd., University Commons-Urbana, IL.,  Ltd. (Incorporated by reference to Quarterly Report on Form 10-Q for the  quarter ended June 30, 2006).                                                                 |
| 10.4    |       | Third Amendment and Waiver to Credit Agreement,  dated September 1, 2006, by and among GMH Communities, LP, the Registrant,  each subsidiary of the Registrant that becomes a borrower, Bank of America,  N.A., as Lender, Administrative Agent, Swing Line Lender and L/C Issuer and  each lender party to the Credit Agreement (Incorporated by reference to Quarterly  Report on Form 10-Q for the quarter ended June 30, 2006).                                                                                                                                                                                                                                                                   |
| 10.5    |       | Employment Agreement by and between the Registrant  and John DeRiggi. (Incorporated by reference to Annual Report on Form 10-K  for the fiscal year ended December 31 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.6    |       | Employment Agreement by and between the Registrant  and Joseph M. Macchione (Incorporated by reference to Annual Report on Form  10-K for the fiscal year ended December 31 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.7    |       | First Amendment to Employment Agreement, dated as of  July 23, 2006, by and between GMH Communities Trust and Bruce F.  Robinson. (Incorporated by reference to Annual Report on Form 10-K for the  fiscal year ended December 31 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

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| 10.8 |   | Employment Agreement by and between the Registrant  and J. Patrick O’Grady (Incorporated by reference to Annual Report on Form  10-K for the fiscal year ended December 31 2005).                                                                                                                                                                                                                                                                                                                                                   |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1 |   | Certification of Principal Executive Officer  Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,  as amended.(furnished herewith).                                                                                                                                                                                                                                                                                                                                                                             |
| 31.2 |   | Certification of Principal Financial Officer  Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,  as amended. (furnished herewith).                                                                                                                                                                                                                                                                                                                                                                            |
| 32.1 |   | Certification of Principal Executive Officer  Required by Rule 13a-14(b) of the Securities Exchange Act of 1934,  as amended. (This exhibit shall not be deemed “filed” for purposes of  Section 18 of the Securities Exchange Act of 1934, as amended, or  otherwise subject to the liability of that section. Further, this exhibit  shall not be deemed to be incorporated by reference into any filing under the  Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,  as amended). |
| 32.2 |   | Certification of Principal Financial Officer  Required by Rule 13a-14(b) of the Securities Exchange Act of 1934,  as amended. (This exhibit shall not be deemed “filed” for purposes of  Section 18 of the Securities Exchange Act of 1934, as amended, or  otherwise subject to the liability of that section. Further, this exhibit  shall not be deemed to be incorporated by reference into any filing under the  Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,  as amended). |

 

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SIGNATURES

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                         | GMH COMMUNITIES TRUST                                                               |
|-------------------------|-------------------------------------------------------------------------------------|
|                    |                                                                                |
|                    |                                                                                |
| Date: November 14, 2006 | /s/ Gary M. Holloway, Sr.                                                      |
|                    | Gary M. Holloway, Sr.                                                          |
|                    | President and Chief Executive Officer                                               |
|                    |                                                                                |
|                    |                                                                                |
|                    | /s/ J. Patrick O’Grady                                                         |
|                    | J. Patrick O’Grady                                                             |
|                    | Executive Vice President and Chief Financial Officer  (Principal Financial Officer) |
|                    |                                                                                |

 

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EXHIBIT INDEX
| Exhibit | ** ** | **Description  of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|---------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1    |       | Form of Agreement of Sale between College Park  Investments, LLC and entities affiliated with Capstone Properties.  (Incorporated by reference to Quarterly Report on Form 10-Q for the quarter  ended June 30, 2006).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.2    |       | First Amendment of Agreements of Sale and Deposit  and Escrow Agreement, entered into as of July 27, 2006, by and among College  Park Investments, LLC, each of University Commons-East Lansing, Ltd.,  Capstone Commons-Athens, Ltd., University Commons-Baton Rouge, Ltd.,  University Commons-Bloomington, IN., Ltd., University Commons-Columbia, S.C.,  L.P., University Commons-Eugene, OR., Ltd., University Commons-Lexington,  KY., Ltd., University Commons-Ohio, Ltd., University Commons-Starkville,  Ltd., University Commons-Tuscaloosa, Ltd., University Commons-Urbana, IL.,  Ltd. (Incorporated by reference to Quarterly Report on Form 10-Q for the  quarter ended June 30, 2006). |
| 10.3    |       | Second Amendment of Agreements of Sale, by and among  College Park Investments, LLC and each of University Commons-East Lansing,  Ltd., Capstone Commons-Athens, Ltd., University Commons-Baton Rouge, Ltd.,  University Commons-Bloomington, IN., Ltd., University Commons-Columbia, S.C.,  L.P., University Commons-Eugene, OR., Ltd., University Commons-Lexington,  KY., Ltd., University Commons-Ohio, Ltd., University Commons-Starkville,  Ltd., University Commons-Tuscaloosa, Ltd., University Commons-Urbana, IL.,  Ltd. (Incorporated by reference to Quarterly Report on Form 10-Q for the  quarter ended June 30, 2006).                                                                 |
| 10.4    |       | Third Amendment and Waiver to Credit Agreement,  dated September 1, 2006, by and among GMH Communities, LP, the Registrant,  each subsidiary of the Registrant that becomes a borrower, Bank of America,  N.A., as Lender, Administrative Agent, Swing Line Lender and L/C Issuer and  each lender party to the Credit Agreement (Incorporated by reference to  Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).                                                                                                                                                                                                                                                                   |
| 10.5    |       | Employment Agreement by and between the Registrant  and John DeRiggi. (Incorporated by reference to Annual Report on Form 10-K  for the fiscal year ended December 31 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.6    |       | Employment Agreement by and between the Registrant  and Joseph M. Macchione (Incorporated by reference to Annual Report on Form  10-K for the fiscal year ended December 31 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.7    |       | First Amendment to Employment Agreement, dated as of  July 23, 2006, by and between GMH Communities Trust and Bruce F.  Robinson. (Incorporated by reference to Annual Report on Form 10-K for the  fiscal year ended December 31 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.8    |       | Employment Agreement by and between the Registrant  and J. Patrick O’Grady (Incorporated by reference to Annual Report on Form  10-K for the fiscal year ended December 31 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.1    |       | Certification of Principal Executive Officer  Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,  as amended.(furnished herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 31.2    |       | Certification of Principal Financial Officer  Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,  as amended. (furnished herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 32.1    |       | Certification of Principal Executive Officer  Required by Rule 13a-14(b) of the Securities Exchange Act of 1934,  as amended. (This exhibit shall not be deemed “filed” for purposes of  Section 18 of the Securities Exchange Act of 1934, as amended, or  otherwise subject to the liability of that section. Further, this exhibit  shall not be deemed to be incorporated by reference into any filing under the  Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,  as amended).                                                                                                                                                              |
| 32.2    |       | Certification of Principal Financial Officer  Required by Rule 13a-14(b) of the Securities Exchange Act of 1934,  as amended. (This exhibit shall not be deemed “filed” for purposes of  Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise  subject to the liability of that section. Further, this exhibit shall not be  deemed to be incorporated by reference into any filing under the Securities  Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended).                                                                                                                                                               |

 

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