**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**
| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------|------------|---------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended June 30, 2005**

 
| **o** | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

 

**For the transition period from                to                **

 

**Commission file number 001-32290**

 

**GMHCOMMUNITIES TRUST**

(Exact Name of Registrant as Specified in Its Charter)

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

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(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 ** **ý   No  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).** **Yes ** **o   No  ý

 

On July 31, 2005, 30,376,717of the registrant’s common shares of beneficial interest, $0.001 par value,were outstanding. This amount includes 25,728 restricted common shares that areconsidered outstanding for voting purposes and are eligible to receive dividenddistributions payable to common shareholders, but are not consideredoutstanding under generally accepted accounting principles for purposes of thefinancial statements included in this report.

 

 

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**GMH COMMUNITIES TRUST**

**INDEX TO FORM 10-Q**

 
| Cautionary Note Regarding  Forward-Looking Statements                                                |   |
|------------------------------------------------------------------------------------------------------|--------|
|                                                                                                 |   |
| **Part I — Financial Information**                                                         |   |
| Item 1. Financial Statements                                                                         |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations |   |
| Item 3.  Quantitative and Qualitative Disclosure About Market Risk                                   |   |
| Item 4. Controls  and Procedures                                                                     |   |
|                                                                                                 |   |
| **Part II — Other  Information**                                                           |   |
| Item 1. Legal  Proceedings                                                                           |   |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                 |   |
| Item 3.  Defaults Upon Senior Securities                                                             |   |
| Item 4.  Submission of Matters to a Vote of Security Holders                                         |   |
| Item 5. Other  Information                                                                           |   |
| Item 6. Exhibits                                                                                     |   |
|                                                                                                 |   |
| Signatures                                                                                           |   |

 

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**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Ourdisclosure and analysis in this report contain forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended. Forward-looking statements provide our current expectations orforecasts of future events and are not statements of historical fact. Theseforward-looking statements include information about possible or assumed futureevents, including, among other things, operating or financial performance,strategic plans and objectives, or regulatory or competitive environments.Statements regarding the following subjects are forward-looking by theirnature:

 

•                  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 targetedacquisitions or development projects within our expected timeframe or at all;

 

•                  our ability to obtain future financingarrangements on terms acceptable to us, or at all;

 

•                  estimates relating to, and our ability topay, future dividends;

 

•                  our ability to qualify as a real estateinvestment trust (“REIT”) for federal income tax purposes;

 

•                  our understanding of our competition, marketopportunities and trends;

 

•                  projected timing and amounts of capitalexpenditures; and

 

•                  the impact of technology on our properties,operations and business.

 

Theforward-looking statements are based on our beliefs, assumptions andexpectations of our future performance, taking into account all informationcurrently available to us. These beliefs, assumptions and expectations canchange as a result of many possible events or factors, not all of which areknown to us. If a change occurs, our business, financial condition, liquidityand results of operations may vary materially from those expressed in ourforward-looking statements. Factors that could cause actual results to differmaterially from our management’s current expectations include, but are notlimited to:

 

•                  the factors referenced in our most recentAnnual Report on Form 10-K, including those set forth under the sectionsof the annual report titled “Risk Factors,” “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and “Our Business;”

 

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

 

•                  availability, terms and deployment ofcapital, including equity and debt financing;

 

•                  availability of qualified personnel;

 

•                  unanticipated costs associated with theacquisition and integration of our student housing property acquisitions anddevelopment projects, and military housing privatization projects;

 

•                  the effects of military base realignment andclosures on installations covered by our military housing privatizationprojects;

 

•                  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

 

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housingmarket;

 

•                  changes in the student and military housingindustry, 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;

 

•                  our 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.

 

Whenwe use the words “believe,” “expect,” “may,” “potential,” “anticipate,” “estimate,”“plan,” “will,” “could,” “intend” or similar expressions, we intend to identifyforward-looking statements. You should not place undue reliance on theseforward-looking statements. We are not obligated to publicly update or reviseany forward-looking statements, whether as a result of new information, futureevents or otherwise, except to the extent otherwise required by law.

 

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**PART I — FINANCIAL INFORMATION**

 

**Item 1.****    ****Financial Statements**

 

**GMH COMMUNITIES TRUST**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(Unaudited and in thousands, except par value and number of shares)

 
| ** **                                                                                                                                                                   | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                   |       |                    |       |                        |       |
| Real estate  investments:                                                                                                                                                    |       |                    |       |                        |       |
| Student  housing properties                                                                                                                                                  |       | $                       | 957,348    |                        | $          | 638,635 |   |
| Accumulated  depreciation                                                                                                                                                    |       | 13,213                  |       | 3,905                       |       |
|                                                                                                                                                                         |       | 944,135                 |       | 634,730                     |       |
| Corporate  assets:                                                                                                                                                           |       |                    |       |                        |       |
| Corporate  assets                                                                                                                                                            |       | 7,589                   |       | 11,625                      |       |
| Accumulated  depreciation                                                                                                                                                    |       | 339                     |       | 241                         |       |
|                                                                                                                                                                         |       | 7,250                   |       | 11,384                      |       |
| Cash and  cash equivalents                                                                                                                                                   |       | 16,404                  |       | 60,926                      |       |
| Restricted  cash                                                                                                                                                             |       | 8,830                   |       | 2,313                       |       |
| Accounts and  other receivables, net:                                                                                                                                        |       |                    |       |                        |       |
| Related  party                                                                                                                                                               |       | 14,765                  |       | 9,309                       |       |
| Third party                                                                                                                                                                  |       | 2,496                   |       | 2,257                       |       |
| Investments  in military housing projects                                                                                                                                    |       | 37,077                  |       | 39,482                      |       |
| Deferred  contract costs                                                                                                                                                     |       | 834                     |       | 126                         |       |
| Deferred  financing costs, net                                                                                                                                               |       | 3,645                   |       | 2,820                       |       |
| Lease  intangibles, net                                                                                                                                                      |       | 3,426                   |       | 4,994                       |       |
| Deposits                                                                                                                                                                     |       | 2,643                   |       | 1,848                       |       |
| Other assets                                                                                                                                                                 |       | 4,865                   |       | 2,872                       |       |
| Total assets                                                                                                                                                                 |       | $                       | 1,046,370  |                        | $          | 773,061 |   |
| **LIABILITIES  AND BENEFICIARIES’ EQUITY**                                                                                                                              |       |                    |       |                        |       |
| Notes  payable                                                                                                                                                               |       | $                       | 551,100    |                        | $          | 370,007 |   |
| Line of  credit                                                                                                                                                              |       | 71,000                  |       | —                      |       |
| Accounts  payable:                                                                                                                                                           |       |                    |       |                        |       |
| Related party                                                                                                                                                                |       | 25                      |       | 277                         |       |
| Third party                                                                                                                                                                  |       | 777                     |       | 1,160                       |       |
| Accrued  expenses                                                                                                                                                            |       | 15,760                  |       | 9,308                       |       |
| Dividends  and distributions payable                                                                                                                                         |       | 13,664                  |       | 9,583                       |       |
| Other  liabilities                                                                                                                                                           |       | 7,130                   |       | 4,907                       |       |
| Total  liabilities                                                                                                                                                           |       | 659,456                 |       | 395,242                     |       |
| Minority  interest                                                                                                                                                           |       | 201,558                 |       | 182,118                     |       |
| Beneficiaries’  equity:                                                                                                                                                 |       |                    |       |                        |       |
| Common  shares of beneficial interest, $0.001 par value; 500,000,000 shares  authorized, 30,350,989 issued and outstanding at June 30, 2005 and December 31,  2004 |       | 30                      |       | 30                          |       |
| Preferred  shares—100,000,000 shares authorized, no shares issued or outstanding                                                                                        |       | —                  |       | —                      |       |
| Additional  paid-in capital                                                                                                                                                  |       | 200,372                 |       | 200,276                     |       |
| Cumulative  earnings                                                                                                                                                         |       | 3,630                   |       | 251                         |       |
| Cumulative  dividends                                                                                                                                                        |       | (18,676                 | )          | (4,856                      | )          |
| Total  beneficiaries’ equity                                                                                                                                            |       | 185,356                 |       | 195,701                     |       |
| Total  liabilities and beneficiaries’ equity                                                                                                                            |       | $                       | 1,046,370  |                        | $          | 773,061 |   |

 

*See accompanying notes to condensed consolidated andcombined financial statements.*

 

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**GMH COMMUNITIES TRUST AND THE GMH PREDECESSOR ENTITIES**

**CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS**

(Unaudited and in thousands, except share and per share information)

 
| ** **                                              | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                              | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | **(Company)**                        | ** ** | **(Predecessor)**                  | ** ** | **(Company)** | ** ** | **(Predecessor)** | ** ** |
|                                                    |       |                                 |       |                               |       |   |   |   |   |
| **Revenue:**                                            | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rent and  other property income                         |       | $                                    | 29,763     |                               | $          | 136 |   | $ | 55,676 |   | $ | 270 |   |
| Expense  reimbursements:                                |       |                                 |       |                               |       |   |   |   |   |
| Related  party                                          |       | 12,991                               |       | 6,525                              |       | 21,732 |   | 8,256 |   |
| Third party                                             |       | 1,303                                |       | 1,939                              |       | 2,577 |   | 3,280 |   |
| Management  fees:                                       |       |                                 |       |                               |       |   |   |   |   |
| Related  party                                          |       | 1,645                                |       | 1,304                              |       | 3,513 |   | 2,185 |   |
| Third party                                             |       | 1,011                                |       | 2,307                              |       | 1,651 |   | 3,320 |   |
| Other fee  income-related party                         |       | 3,850                                |       | 1,067                              |       | 7,543 |   | 1,211 |   |
| Other income                                            |       | 56                                   |       | 16                                 |       | 133 |   | 90 |   |
| Total  revenue                                          |       | 50,619                               |       | 13,294                             |       | 92,825 |   | 18,612 |   |
| **Operating  Expenses:**                                | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Property  operating expenses                            |       | 11,901                               |       | 3,148                              |       | 22,594 |   | 5,620 |   |
| Reimbursed  expenses                                    |       | 14,294                               |       | 8,464                              |       | 24,309 |   | 11,536 |   |
| Real estate  taxes                                      |       | 2,568                                |       | 22                                 |       | 4,575 |   | 43 |   |
| Administrative  expenses                                |       | 2,741                                |       | 472                                |       | 5,673 |   | 697 |   |
| Depreciation  and amortization                          |       | 8,070                                |       | 213                                |       | 14,844 |   | 418 |   |
| Interest                                                |       | 6,840                                |       | 68                                 |       | 12,247 |   | 157 |   |
| Total  operating expenses                               |       | 46,414                               |       | 12,387                             |       | 84,242 |   | 18,471 |   |
| Income  before minority interest and income taxes       |       | 4,205                                |       | 907                                |       | 8,583 |   | 141 | ) |
| Minority  interest                                      |       | 2,490                                |       | —                             |       | 4,263 |   | — |   |
| Income  before income taxes                             |       | 1,715                                |       | 907                                |       | 4,320 |   | 141 | ) |
| Income taxes                                            |       | 153                                  |       | —                             |       | 938 |   | — |   |
| Net income                                              |       | $                                    | 1,562      |                               | $          | 907 |   | $ | 3,382 |   | $ | 141 | ) |
|                                                    |       |                                 |       |                               |       |   |   |   |   |
| Earnings per  common share—basic                   |       | $                                    | 0.05       |                               |       |   | $ | 0.11 |   |   |   |
|                                                    |       |                                 |       |                               |       |   |   |   |   |
| Earnings per  common share—diluted                 |       | $                                    | 0.05       |                               |       |   | $ | 0.11 |   |   |   |
| Weighted-average  shares outstanding during the period: |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                   |       | 30,350,989                           |       |                               |       | 30,350,989 |   |   |   |
| Diluted                                                 |       | 32,170,083                           |       |                               |       | 32,171,712 |   |   |   |
| Common share  dividend declared per share               |       | $                                    | 0.2275     |                               |       |   | $ | 0.4550 |   |   |   |

 

*See accompanying notes to condensed consolidated andcombined financial statements.*

 

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**GMH COMMUNITIES TRUST AND THE GMH PREDECESSOR ENTITIES**

**CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS**

(Unaudited and in thousands)

 
| ** **                                                                                     | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                     | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                                                                                     | ** ** | **(Company)**                      | ** ** | **(Predecessor)** | ** ** |
|                                                                                           |       |                               |       |   |   |
| **Cash  flows from operating activities:**                                                     |       |                               |       |   |   |
| Net income                                                                                     |       | $                                  | 3,382      |   | $ | 141 |   |
| Adjustments  to reconcile net income to net cash from operating activities:                    |       |                               |       |   |   |
| Depreciation                                                                                   |       | 9,614                              |       | 418 |   |
| Amortization:                                                                                  |       |                               |       |   |   |
| Lease  intangibles                                                                             |       | 5,230                              |       | — |   |
| Notes  payable fair value adjustment                                                           |       | (1,093                             | )          | — |   |
| Deferred  loan costs                                                                           |       | 574                                |       | 5 |   |
| Restricted  shares                                                                             |       | 46                                 |       | — |   |
| Allowance  for doubtful accounts                                                               |       | 446                                |       | — |   |
| Equity in  earnings of unconsolidated entities                                                 |       | —                             |       | (47 | ) |
| Income from  investments in military housing projects                                          |       | (896                               | )          | — |   |
| Minority  interest                                                                             |       | 4,263                              |       | — |   |
| Changes in  operating assets and liabilities:                                                  |       |                               |       |   |   |
| Restricted  cash                                                                               |       | (6,517                             | )          | — |   |
| Accounts and  other receivables                                                                |       | (7,062                             | )          | (3,512 | ) |
| Deferred  contract costs                                                                       |       | (708                               | )          | (663 | ) |
| Other assets                                                                                   |       | (2,882                             | )          | (1,747 | ) |
| Accounts  payable                                                                              |       | (635                               | )          | — |   |
| Accrued  expenses                                                                              |       | 6,177                              |       | 2,365 |   |
| Other  liabilities                                                                             |       | 2,223                              |       | (22 | ) |
| Net cash  from operating activities                                                            |       | 12,162                             |       | (3,062 | ) |
| **Cash  flows from investing activities:**                                                     |       |                               |       |   |   |
| Property  acquisitions                                                                         |       | (213,697                           | )          | — |   |
| Capitalized  expenditures                                                                      |       | (903                               | )          | (27 | ) |
| Military  housing project distributions                                                        |       | 4,365                              |       | — |   |
| Net cash  from investing activities                                                            |       | (210,235                           | )          | (27 | ) |
| **Cash flows  from financing activities:**                                                     |       |                               |       |   |   |
| Common share  dividends                                                                        |       | (11,747                            | )          | — |   |
| Limited  partnership unit distributions                                                        |       | (11,453                            | )          | — |   |
| Owner  distributions                                                                           |       | —                             |       | (3,694 | ) |
| Owner  contributions                                                                           |       | —                             |       | 7,241 |   |
| Proceeds  from line of credit                                                                  |       | 329,000                            |       | — |   |
| Repayment of  line of credit                                                                   |       | (258,000                           | )          | — |   |
| Proceeds  from notes payable                                                                   |       | 129,704                            |       | — |   |
| Repayment of  notes payable                                                                    |       | (22,553                            | )          | (444 | ) |
| Payment of  financing costs                                                                    |       | (1,400                             | )          | — |   |
| Net cash  from financing activities                                                            |       | 153,551                            |       | 3,103 |   |
| Net  (decrease) increase in cash and cash equivalents                                          |       | (44,522                            | )          | 14 |   |
| Cash and  cash equivalents, beginning of period                                                |       | 60,926                             |       | 516 |   |
| Cash and  cash equivalents, end of period                                                      |       | $                                  | 16,404     |   | $ | 530 |   |
|                                                                                           |       |                               |       |   |   |
| **Supplemental  information:**                                                                 |       |                               |       |   |   |
| Real estate  acquired by assuming debt                                                         |       | $                                  | 76,768     |   | $ | — |   |
| Issuance of  units of limited partnership interest for purchase of student housing  properties |       | $                                  | 28,528     |   | $ | — |   |
| Property  distributed at net book value                                                        |       | $                                  | 4,208      |   | $ | — |   |
| Debt  distributed at net book value                                                            |       | $                                  | 3,854      |   | $ | — |   |
| Cash paid  for interest                                                                        |       | $                                  | 12,074     |   | $ | 191 |   |
| Cash paid  for taxes                                                                           |       | $                                  | 661        |   | $ | — |   |

 

*See accompanying notes to condensed consolidated andcombined financial statements.*

 

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**GMH COMMUNITIES TRUST AND THE GMH PREDECESSOR ENTITIES**

 

Notesto Condensed Consolidated and Combined Financial Statements

June 30, 2005

(Unaudited)

 

**1.Organization and Basis of Presentation**

 

***Organization***

 

Managementof both GMH Communities Trust (the “Trust,” and collectively with itssubsidiaries, “we” or the “Company) and The GMH Predecessor Entities (definedbelow) has prepared these condensed consolidated and combined financialstatements pursuant to the rules and regulations of the Securities andExchange Commission (the “SEC”). Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with U.S.generally accepted accounting principles have been condensed or combinedpursuant to such rules and regulations, although we believe that thedisclosures are adequate to make the information presented not misleading. Thecondensed consolidated and combined financial statements should be read inconjunction with the audited financial statements and the notes thereto of theTrust and The GMH Predecessor Entities included in the Trust’s Annual Report onForm 10-K as filed with the SEC on March 31, 2005. In management’sopinion, all adjustments, consisting solely of normal recurring adjustments,necessary to present fairly the consolidated financial position of the Trustand the consolidated and combined results of operations and cash flows of theTrust and The GMH Predecessor Entities are included. The results of operationsfor such interim periods are not necessarily indicative of the results for thefull year.

 

TheTrust intends to qualify as a real estate investment trust, or REIT, under theInternal Revenue Code of 1986, as amended (the “Code”). The Trust was formed asa Maryland real estate investment trust in May 2004 and prior tocompletion of our initial public offering, had no operations. We completed ourinitial public offering on November 2, 2004, pursuant to which we sold anaggregate of 30,350,989 common shares of beneficial interest at an offeringprice of $12.00 per share, and raised an aggregate of $331.7 million in netproceeds, after deducting the underwriters’ discount and other offering-relatedexpenses. We contributed the net proceeds from the offering to our operatingpartnership, GMH Communities, LP, a Delaware limited partnership (the “OperatingPartnership”), in exchange for units of partnership interest. As of June 30,2005, the Operating Partnership had 61,978,306 units of partnership interestoutstanding, of which the Trust owned 29,769,820 units of limited partnershipinterest; and through a wholly-owned subsidiary, GMH Communities GP Trust, theTrust owned 581,169 units of general partnership interest, which represents100% of the general partnership interest in the Operating Partnership. As of June 30,2005, there were 31,627,317 units of limited partnership interest outstandingthat were not owned by the Company.

 

We,through the Operating Partnership and its subsidiaries, are a self-advised,self-managed, specialty housing company that focuses on providing housing tocollege and university students residing off-campus and to members of the U.S.military and their families located on or near military bases throughout theUnited States. Through the Operating Partnership, we own and operate ourstudent housing properties and the interests in joint ventures that ownmilitary housing privatization projects (“military housing projects”).

 

***Formation Transactions***

 

The Operating Partnershipcommenced operations on July 27, 2004, when Gary M. Holloway, Sr.,our chairman, president, and chief executive officer, Vornado Realty Trust (“Vornado”),and certain entities affiliated with Mr. Holloway and Vornado, enteredinto an agreement to contribute various assets to the Operating Partnership.Under the terms of the contribution agreement, Mr. Holloway contributedequity interests relating to student housing properties and military housingprojects owned by him and by entities affiliated with him, including CollegePark Management, Inc., GMH Military Housing, LLC, other entities owning a10% interest in four student housing properties, and other related assets inexchange for 66,000 Class A partnership interests in the OperatingPartnership. Vornado agreed to contribute up to $159.0 million to theOperating Partnership in exchange for 34,000 Class B partnershipinterests. In connection with its investment in the Operating Partnership,Vornado also purchased a warrant for $1.0 million to acquire, at itsoption, a number of units of limited partnership interest in the OperatingPartnership, common shares in the Trust, or a combination of both, representinga 38.264% economic interest in the Operating Partnership or the Trust, as thecase may be, immediately prior to completion of our initial public offering.The proceeds from sale of the warrant are included in minority interest on the accompanyingconsolidated balance sheets. In addition, in connection with the closing of ourinitial public offering on November 2, 2004, Mr. Holloway furthercontributed his interests in 353 Associates, L.P. and Corporate FlightServices, LLC, a student housing property and other related assets to theOperating Partnership. We collectively refer to College Park Management, Inc.,GMH Military Housing, LLC, 353 Associates, L.P. and Corporate Flight Services,LLC, together with the Operating Partnership, as The GMH PredecessorEntities.  The exchange of contributedinterests has been accounted for as a reorganization of entities under commoncontrol. Accordingly, the contributed assets and assumed liabilities have beenrecorded at the historical cost of The GMH Predecessor Entities.

 

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The following aredescriptions of each of The GMH Predecessor Entities, other than the OperatingPartnership:

 

•             353 Associates, L.P. owns and operates a44,721 square foot commercial office building located in Newtown Square,Pennsylvania. In connection with the completion of our initial public offeringon November 2, 2004, Mr. Holloway and an entity wholly-owned by himcontributed 100% of the equity interests in 353 Associates, L.P. to theOperating Partnership. The building is currently used as the Company’scorporate headquarters. 353 Associates, L.P. historically leased the buildingto certain of The GMH Predecessor Entities and other entities owned orcontrolled by Mr. Holloway. We continue to lease a portion of the buildingto certain other entities owned or controlled by Mr. Holloway that werenot contributed to the Company in connection with our initial public offering.

 

•             College Park Management, Inc. performedproperty management and asset management services for residential apartmentproperties leased to students at colleges and universities located throughoutthe United States. In connection with the formation of the OperatingPartnership on July 27, 2004, Mr. Holloway consented to the merger ofCollege Park Management, Inc. with and into College Park Management, LLC,a wholly-owned subsidiary of the Operating Partnership. College Park ManagementTRS, Inc., a subsidiary of College Park Management, LLC, has made an electionto be treated for federal income tax purposes as a “taxable REIT subsidiary,”as defined in the Code.

 

•             GMH Military Housing, LLC, through its wholly-ownedsubsidiaries, engages in the development, construction, renovation andmanagement of family military housing units located on military basesthroughout the United States. In connection with the formation of the OperatingPartnership on July 27, 2004, Mr. Holloway contributed 100% of theoutstanding equity interests in GMH Military Housing, LLC and each of itswholly-owned subsidiaries to the Operating Partnership. GMH Military Housing,LLC has made an election to be treated as a corporation for federal income taxpurposes as a “taxable REIT subsidiary,” as defined in the Code.

 

•             Corporate Flight Services, LLC (“CorporateFlight LLC”) owned and operated a corporate aircraft that had been leased tocertain of The GMH Predecessor Entities and other entities owned or controlledby Mr. Holloway that were not contributed to the Company in connection withour initial public offering. In connection with the completion of our initialpublic offering on November 2, 2004, Mr. Holloway contributed 100% ofthe outstanding equity interests in Corporate Flight LLC to the OperatingPartnership. In February 2005, the Company transferred its interest inCorporate Flight LLC, including the corporate aircraft and associated debtinitially contributed to the Operating Partnership at the time of the initialpublic offering, back to Mr. Holloway. See Note 8.

 

***Redemption of Operating Partnership Interests***

 

Priorto our initial public offering, Vornado and Mr. Holloway were the soleequity holders of the Operating Partnership and each held, through affiliatedentities, general partnership interests in the Operating Partnership.Concurrent with the closing of the Company’s initial public offering on November 2,2004, we became the sole general partner of the Operating Partnership. Inaccordance with the terms of the limited partnership agreement of the OperatingPartnership and concurrent with the completion of our initial public offeringon November 2, 2004, we paid approximately $77.3 million to Vornadorelating to the redemption of all of Vornado’s Class B partnershipinterests in the Operating Partnership based on Vornado’s $113.8 millioncontribution to the Operating Partnership as of the date of the offering, plusa preferential return in the amount of $13.5 million, and after givingeffect to the surrender by Vornado of $50.0 million in value of its pre-offeringpartnership interest in the Operating Partnership, as payment for the portionof its warrant required to be exercised upon completion of our initial publicoffering under the terms of the warrant. Upon closing of our initial publicoffering, Vornado exercised the warrant to purchase 6,666,667 units of limitedpartnership interest in our Operating Partnership at a price of $7.50 per unit,which represented a 20.972% economic interest in the Operating Partnershipimmediately prior to our initial public offering. As of June 30, 2005, theremaining portion of the warrant was exercisable for up to 5,762,694 units oflimited partnership interest of the Operating Partnership or common shares, atan exercise price of $8.68 per unit or common share, at any time during the 18 monthsfollowing the closing of our initial public offering.

 

Inaddition, in connection with the redemption of Vornado’s interests in theOperating Partnership and amendment to the partnership agreement for theOperating Partnership on November 2, 2004, Mr. Holloway’s Class Alimited partnership interest and managing general partnership interest in theOperating Partnership were exchanged for 19,624,294 limited partnership unitsand Mr. Holloway contributed additional assets to the Operating Partnership,including interests in entities that own our corporate headquarters andaircraft and interests in an additional student housing property.

 

***Basis of Presentation***

 

Thefinancial statements of GMH Communities Trust included herein present theconsolidated financial position of the Company and its subsidiaries as of June 30,2005 and December 31, 2004 and the consolidated results of theiroperations and cash flows for the three and six months ended June 30,2005. All intercompany items and transactions have been eliminated.

 

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Thefinancial statements of The GMH Predecessor Entities included herein presentthe combined results of their operations and cash flows for the three and six monthsended June 30, 2004. All intercompany items and transactions have beeneliminated.

 

**2. Summaryof Significant Accounting Policies**

 

***Use of Estimates***

 

Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect various amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

 

***Real Estate Investments andCorporate Assets***

 

Wecarry real estate investments and corporate assets at cost, net of accumulateddepreciation. Cost of acquired assets includes the purchase price and related closingcosts. We allocate the cost of real estate investments to tangible andidentified intangible assets based on relative fair values in accordance withStatement of Financial Accounting Standards No. 141 (“SFAS 141”), *Business Combinations*. We estimate fairvalue based on information obtained from a number of sources, including our duediligence, marketing and leasing activities, independent appraisals that may beobtained in connection with the acquisition or financing of the respectiveproperty, and other market data.

 

Thevalue of in-place leases is based on the difference between (i) theproperty valued with existing in-place leases and (ii) the property valuedas if vacant. As lease terms typically are 12 months or less, 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. We amortize the value of in-place leasesto expense over the remaining term of the respective leases. Accumulatedamortization related to intangible lease costs was $7.5 million at June 30,2005 and $2.3 million at December 31, 2004.

 

Purchaseprices of student housing properties to be acquired are not expected to beallocated to tenant relationships considering the terms of the leases and theexpected levels of renewals.

 

Weexpense routine repair and maintenance expenditures that do not improve thevalue of an asset or extend its useful life, including turnover costs such ascleaning and interior painting. We capitalize expenditures that improve thevalue and extend the useful life of an asset. We compute depreciation using thestraight-line method over the estimated useful lives of the assets, which is40 years for buildings including student housing properties and thecommercial office building, and three to five years for residential furnitureand appliances.

 

Inaccordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”),*Accounting for the Impairment or Disposal ofLong-Lived Assets*, long-lived assets, such as real estateinvestments and purchased intangibles subject to amortization, are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount may not be recoverable. These circumstances may include, butare not limited to, operational performance, market conditions and competitionfrom 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. We review recoverability of assets to beheld and used through a comparison of the carrying amount of an asset toestimated undiscounted future cash flows expected to be generated by the asset.If the carrying amount of an asset exceeds its estimated undiscounted futurecash flows, an impairment charge is recognized by the amount by which thecarrying 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.

 

***Cash Equivalents***

 

Allhighly-liquid investments with an original maturity of three months or less areconsidered to be cash equivalents.

 

***Restricted Cash***

 

Restrictedcash consists of security deposits and cash held as collateral for real estatetaxes and capital expenditures as required by the terms of various loanagreements.

 

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***Allowance for Doubtful Accounts***

 

Weestimate the collectibility of receivables generated by rental and other incomeas a result of the operation of our student housing properties. If we believethat the collectibility of certain amounts is questionable, we record aspecific reserve for these amounts to reduce 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.

 

Wealso evaluate the collectibility of fee income and expense reimbursementsgenerated by the management of student housing properties owned by others andthrough the provision of development, construction, renovation and managementservices to our military housing projects based upon the individual facts andcircumstances, and record a reserve for specific amounts, if necessary.

 

Accountsreceivable are stated net of the allowance for doubtful accounts of $141,000 atJune 30, 2005 and $159,000 at December 31, 2004.

 

***Deferred Financing Costs***

 

Costsincurred in connection with obtaining financing are capitalized and amortizedon a straight-line basis over the term of the related loan, which is notmaterially different than the effective interest method. Amortization ofdeferred financing costs is included in interest expense. Accumulatedamortization of deferred financing costs was $933,000 at June 30, 2005 and$359,000 at December 31, 2004.

 

***Deferred Contract Costs***

 

Deferredcontract costs represent costs attributable to a specific military housingproject incurred in connection with seeking Congressional approval of aCommunity Development and Management Plan, or CDMP, subsequent to the projectbeing awarded by the Department of Defense, or DoD. In addition, deferredcontract costs also include transition and closing costs incurred that areexpected to be reimbursed by the military housing project. Such amounts areevaluated as to the probability of recovery and costs that are not consideredprobable of recovery are written off. Revenue is recognized and the relatedcosts are expensed at the time that the reimbursement for preparing the CDMP isapproved by Congress or at closing of the military housing project.

 

***Deposits***

 

Depositsprimarily consist of amounts paid to third parties in connection with plannedstudent housing acquisitions and amounts paid to lenders that provide the relatedfinancing or the refinancing of existing loans. At June 30, 2005, deposits for planned acquisitions totaled $1.8 million,deposits related to financings totaled $0.3 million, and other deposits notrelated to acquisitions or financings totaled $0.5 million. At December 31,2004, deposits for planned acquisitions totaled $0.8 million and depositsrelated to financings totaled $1.0 million.

 

***Fair Value of Financial Instruments***

 

Thecarrying amount of cash and cash equivalents, restricted cash, accounts andother receivables, deposits, other assets, accounts payable, accrued expenses,and other liabilities approximate fair value because of the relativelyshort-term nature of these instruments.

 

Thecarrying value of fixed-rate notes payable assumed in connection with theacquisition of student housing properties are adjusted to their estimated fairvalue based on current market rates in effect at the time the properties areacquired. The adjusted carrying amount approximates fair value at June 30,2005. The carrying value of variable-rate notes payable approximates fair valueat June 30, 2005.

 

***Advertising Costs***

 

Advertisingcosts are expensed as incurred. Advertising expense for the three and six-monthperiods ended June 30, 2005 and 2004 was $540,000, $881,000, $21,000, and$41,000, respectively.

 

***Revenue Recognition***

 

*StudentHousing Segment*

 

Rentalrevenue is recognized when due over the lease terms, which are generally12 months or less.

 

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Standard management fees are based on a percentageof monthly cash receipts or gross monthly rental and other revenues generatedby the properties managed for others. We recognize these fees when the cash isreceived by the property or the revenue is earned by the managed property,depending upon whether the management agreement relating to a student housingproperty bases the earned management fee on cash versus accrual basis revenuerecognition.

 

Incentivemanagement fees are earned as a result of the achievement of certain operatingperformance criteria over a specified period of time by certain managedproperties, including targeted annual debt service coverage ratios. Revenue isrecognized at the amount that would be due under the contract if the contractwas terminated on the balance sheet date.

 

Assetmanagement fees are based on a percentage of the gross carrying value ofcertain properties managed for related parties and are recognized when earnedin accordance with the respective management agreements.

 

Expensereimbursements are comprised primarily of salary and related costs of ouremployees working at certain properties we manage for others, the cost of whichis reimbursed by the owners of the related properties. We accrue expensereimbursements as the related expenses are incurred.

 

*Military HousingSegment*

 

Standardmanagement fees are based on a percentage of revenue generated by the militaryhousing projects from the basic allowance for housing provided by thegovernment to service members, referred to as BAH, and are recognized when therevenue is earned by the military housing projects. Incentive management feesare based upon the satisfaction of certain criteria including, among otherthings, satisfying designated benchmarks relating to emergency work orderresponse, occupancy rates, home turnover and resident satisfaction surveys.Incentive management fees are recognized when the various criteria stipulatedin the management contract have been satisfied.

 

Standarddevelopment and construction/renovation fees are based on a percentage of developmentand construction/renovation costs incurred by the military housing projectsincluding hard and soft costs and financing costs, and are recognized on amonthly basis as the costs are incurred by the military housing projects.Incentive development and construction/renovation fees are based upon thesatisfaction of certain criteria including, among other things, completing anumber of housing units according to schedule, achieving specific safetyrecords and implementing small business or minority subcontracting plans.Incentive development and construction/renovation fees are recognized when thevarious criteria stipulated in the contract have been satisfied.

 

Revenueson fixed-price renovation contracts are recorded on thepercentage-of-completion method. When the percentage-of-completion method isused, contract revenue is recognized in the ratio that costs incurred to datebear to estimated costs at completion. Adjustments to cost estimates are madein the period in which the facts requiring such revisions become known. Whenthe revised estimates indicate a loss, such loss is currently provided for inits entirety.

 

Businessdevelopment fees are earned from companies with which we have relationships inrecognition of business development efforts and expenses incurred by us inconnection with pursuing military housing projects. The fees consist of (i) abase fee, which is a fee paid to the Company in consideration of the Company’songoing pursuit of additional projects, and is paid regardless of whether aproject is awarded, and (ii) an incentive fee, which is paid over thecourse of an awarded project based on a percentage of certain development costsincurred by the project.  The base feesare recognized on a straight-line basis over the term of the related businessdevelopment agreement.  The incentivefees are recognized as the related costs are incurred by the respectivemilitary housing projects.

 

Preferredreturns are earned on our investments in military housing projects.  The preferred returns are based on a fixedpercentage of our investment in military housing projects and are recognized atthe rates specified in the agreements, subject to projected availability offunds in the underlying project.  Accruedpreferred returns are periodically evaluated for collectibility.

 

***Reimbursed Expenses***

 

Expensereimbursements include payroll and related expenses, incurred for certainemployees engaged in the operation of certain student housing properties andmilitary housing projects under management, and other operating expenses thatare reimbursed to the Company by the owner of the related student housing propertyor military housing project.

 

***Minority Interest***

 

Minorityinterest as initially recorded at the date of our initial public offeringrepresented the net equity of the Operating Partnership, including the proceedsreceived from the sale of the warrant to Vornado, multiplied by the ownershippercentage of holders of limited partnership units in the Operating Partnershipother than the Company. The Operating Partnership is obligated to redeem, atthe request of a holder, each unit of limited partnership interest for cash or commonshares on a one-for-one basis, subject to adjustments for share splits,dividends, recapitalizations or similar events. If the minority interest unitholders’ share of a current year loss would cause the minority interest balanceto be less than zero, the minority interest balance will be reported as zerounless there is an obligation of the minority interest holders to fund thoselosses. Any losses in excess of the minority interest will be charged againstequity. If future earnings materialize, equity will be credited for allearnings up to the amount of those losses previously absorbed. Distributions tolimited partnership unit holders other than the Company are recorded as areduction to minority interest.

 

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InMarch 2005 and in June 2005, the Company declared quarterlydistributions of $0.2275 per outstanding unit of limited partnership interest.The March 2005 distribution to the holders of limited partnership units inthe Operating Partnership of $6.7 million was recorded as a reduction tominority interest and was paid in April 2005. The June 2005 distributionto the holders of limited partnership units in the Operating Partnership of$6.8 million was recorded as a reduction to minority interest on the June 30,2005 balance sheet and was paid in July 2005.

 

***Investments in Military HousingProjects***

 

Weevaluate each of our investments in military housing projects to determine ifthe underlying entity is a variable interest entity (“VIE”) as defined underFASB Financial Interpretation No. 46 (as revised) (“FIN 46”). If an entityis deemed to be a VIE pursuant to FIN 46, the entity that absorbs a majority ofthe expected losses of the VIE is deemed to be the primary beneficiary and mustconsolidate the VIE. If the entity is not a VIE, it is evaluated forconsolidation based on controlling voting interests. If we have the majorityvoting interest with the ability to control operations and where no approval,veto or other important rights have been granted to other holders, the entitywould be consolidated. We are not the primary beneficiary of any VIEs, nor dowe have controlling voting interests in any of our military housing projects.We record investments in military housing projects initially at our cost andsubsequently adjust them to reflect our preferred return, and other distributions.

 

***Income Taxes***

 

GMHCommunities Trust will elect to be taxed as a REIT under the Code when it filesits tax return for the year ended December 31, 2004, which it will file inSeptember 2005 pursuant to an extension granted in March 2005. Toqualify as a REIT, the Company must meet a number of organizational andoperational requirements, including a requirement that we currently distributeat least 90% of our adjusted taxable income to our shareholders. We believe weare organized and operate in a manner that will allow us to qualify for taxationas a REIT under the Code, and it is our intention to adhere to theserequirements and maintain the Company’s REIT status 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.

 

Inconformity with the Code and applicable state and local tax statutes, taxableincome or loss of The GMH Predecessor Entities was required to be reported inthe tax returns of Gary M. Holloway Sr. and Vornado, as such entities weretreated as pass-through entities for tax purposes. Accordingly, no income taxprovision has been reflected in the accompanying combined statements ofoperations of The GMH Predecessor Entities.

 

***Recent Accounting Pronouncements***

 

InDecember 2004, the Financial Accounting Standards Board issued SFAS No. 123R,as revised, *“Share-Based Payment.”*SFASNo. 123R replaces SFAS No. 123, *“Accountingfor Stock-Based Compensation”* and supersedes APB Opinion No. 25,*“Accounting for Stock Issued to Employees.”*The scope of SFAS No. 123R includes a wide range of share-basedcompensation arrangements including stock options, restricted share plans,performance-based awards, stock appreciation rights, and employee stock purchaseplans. SFAS No. 123R requires companies to recognize in their financialstatements the compensation expense relating to share-based paymenttransactions. Prior to the effective date of this revision, SFAS No. 123permitted entities the option of applying the guidance in APB Opinion No. 25,as long as the footnotes to the financial statements disclosed what net income(loss) would have been had the company used the preferable fair-value-basedmethod. The Company will be required to implement SFAS No. 123R for theyear beginning January 1, 2006. The Company does not expect the adoptionof SFAS No. 123R to have a material impact on its financial statements.

 

InNovember 2004, the Company established an equity incentive plan (the “Plan”)that provides for the issuance of options, restricted shares, shareappreciation rights, performance units and other equity based awards.  For the three and six months ended June 30,2005, the Company issued 2,166 and 25,728 restricted common shares under thePlan to non-employee members of the Company’s Board of Trustees. The restrictedcommon shares vest over a three-year period from the grant date. The restrictedcommon shares are entitled to the same dividend and voting rights during thevesting period as the issued and outstanding common shares. The fair value ofthe awards was calculated based on the closing market price of the Company’scommon shares on the grant date and is expensed on a straight-line basis overthe vesting period.  The Companyrecognized non-cash stock-based compensation expense related to the restrictedcommon shares of $21,000 and $46,000 for the three and six months ended June 30,2005, respectively.

 

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***Reclassifications***

 

Certainamounts in the prior period financial statements have been reclassified to beconsistent with the current period presentation.

 

**3.  Real Estate Investments and Acquisitions**

 

Asof June 30, 2005, the Company owned 46 student housing properties locatednear 35 colleges and universities in 24 states. These properties contain anaggregate of 8,444 units and 28,134 beds. The Company’s investment in studenthousing properties at June 30, 2005 and December 31, 2004 was asfollows (in thousands):

 
| ** **                            | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Land                                  |       | $                       | 188,200    |                        | $          | 124,656 |   |
| Building and  improvements            |       | 750,368                 |       | 501,680                     |       |
| Residential  furniture and appliances |       | 18,780                  |       | 12,299                      |       |
|                                  |       | $                       | 957,348    |                        | $          | 638,635 |   |

 

Duringthe three months ended June 30, 2005, the Company acquired eight studenthousing properties located near six colleges and universities in five stateswith an aggregate of 1,354 units and 4,300 beds and for an aggregateacquisition cost of approximately $146.4 million.  In connection with the acquisition of two ofthese properties, the Company issued a total of 1,940,282 units of limitedpartnership interest in the Operating Partnership to the sellers with anaggregate fair value of $26.9 million. The fair value of the limited partnership units was based on the closingprice of the Company’s common shares on the acquisition date.  The fair value of the units of limitedpartnership interest was recorded as an increase to minority interest on the June 30,2005 balance sheet.

 

Duringthe three months ended March 31, 2005, the Company acquired eight studenthousing properties located near six colleges and universities in six stateswith an aggregate of 1,607 units and 4,795 beds and for an aggregateacquisition cost of approximately $172.7 million. Gary M. Holloway, Sr.,four other employees of the Company, including two executive officers of theCompany, and an employee of an entity owned by Mr. Holloway, held anownership interest in two of these properties that were acquired for a totalpurchase price of $38.2 million. The Company paid $36.6 million of cash to investors in the sellingentity not affiliated with the Company and issued a total of 138,023 units oflimited partnership interest in the Operating Partnership to Mr. Hollowayand these individuals with an aggregate fair value of $1.6 million inconnection with the purchase of the two properties.  The fair value of the limited partnershipunits was based on the closing price of the Company’s common shares on theacquisition date. The fair value of $1.6 million was recorded as an increase tominority interest on the consolidated balance sheet.

 

**4.  Investments in Military Housing Projects**

 

Investmentsin military housing projects are initially recorded at cost and aresubsequently adjusted for preferred returns earned and other distributionsreceived. Preferred returns earned on our investments in military housingprojects are accrued at the rates specified in the agreements, subject toprojected availability of funds in the underlying project. Accrued preferredreturns are periodically evaluated for collectibility.

 

InNovember 2003, GMH Military Housing, LLC and FW Military Housing LLCformed a joint venture known as GMH Military Housing-Fort Carson LLC, whichacquired the ownership interests of an unrelated bankrupt entity that was amember of Fort Carson Family Housing LLC, the entity that owns the Fort Carsonmilitary housing project. GMH Military Housing, LLC contributed approximately$2.4 million to GMH Military Housing-Fort Carson LLC in return for its 10%interest in the joint venture. The 10% ownership interest in the joint venturewas accounted for using the equity method of accounting from the acquisitiondate in November 2003 through November 1, 2004. In connection withour initial public offering on November 2, 2004, the remaining 90%interest in the joint venture was acquired in exchange for the issuance to FWMilitary Housing LLC of 2,583,334 units of limited partnership interest in theOperating Partnership having a value of $31.0 million. This acquisitionwas recorded at the fair value of the consideration paid. During the threemonths ended June 30, 2005, the Company received $4.4 million ofdistributions from Fort Carson Family Housing LLC, which included $0.5 millionof preferred returns and $3.9 million return of equity. The carrying value ofthis investment was $25.8 million at June 30, 2005 and $29.7 millionat December 31, 2004. The Company earns a preferred return on itsinvestment in Fort Carson Family Housing LLC, which is paid on a monthly basis.

 

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,

 

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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 accruedexpenses on the consolidated balance sheet at June 30, 2005 and December 31,2004.  In November 2004, GMH/BenhamMilitary Communities, LLC invested $10.6 million in Northeast Housing LLC,which owns and operates the Navy Northeast Region military housing project.GMH/Benham Military Communities LLC earns a preferred return on its investmentin Northeast Housing LLC. The preferred return will accrue, but not be paid,until the end of the initial development period for the project in October 2010.The carrying value of this investment was $11.2 million at June 30,2005 and $10.8 million at December 31, 2004.

 

**5.  Income Taxes**

 

Currentincome tax expense of the Company’s taxable REIT subsidiaries was $938,000,which includes $644,000 of federal taxes and $294,000 of state taxes, for the sixmonths ended June 30, 2005.  Thefederal statutory tax rate of the taxable REIT subsidiaries for the six monthsended June 30, 2005 was 34%.  Theeffective tax rate of the taxable REIT subsidiaries for the six months ended June 30,2005 was 32.5%. The Company’s effective tax rate is lower than the federalstatutory rate as a result of the permanent depreciation differences betweenincome subject to income tax for book and tax purposes.

 

**6.  Notes Payable**

 

Duringthe three months ended June 30, 2005, fixed-rate notes payable totaling$28.8 million were assumed relating to the acquisition of two studenthousing properties and fixed-rate notes payable totaling $58.8 million wereobtained in connection with the acquisition of five student housing properties.These notes require monthly payments of principal and/or interest, bear interestat fixed rates ranging from 4.50% to 5.46%, and mature at various dates through2015. In conjunction with the purchase accounting for these properties, the netcarrying value of the assumed notes payable was increased by $0.4 millionto record them at their estimated fair value. The fair value of the notes wascalculated as the difference between the present value of the notes using acurrent estimated market rate of interest and the outstanding principal amount.This amount is being amortized as an adjustment to interest expense over theterm of the related debt.

 

Duringthe three months ended June 30, 2005, a variable-rate note payabletotaling $6.8 million was obtained in connection with the acquisition of astudent housing property. The note requires payments of interest only at LIBORplus 2.05% (LIBOR on this loan was 3.13% at June 30, 2005) and matures in2015.

 

Duringthe three months ended March 31, 2005, fixed-rate notes payable totaling$48.0 million were assumed relating to the acquisition of four studenthousing properties and a fixed-rate note payable totaling $31.4 million wasobtained in connection with the acquisition of a student housing property.These notes require monthly payments of principal and/or interest, bearinterest at fixed rates ranging from 4.92% to 7.09%, and mature at variousdates through 2014. In conjunction with the purchase accounting for theseproperties, the net carrying value of the assumed notes payable was increasedby $2.1 million to record them at their estimated fair value. The fairvalue of the notes was calculated as the difference between the present valueof the notes using a current estimated market rate of interest and theoutstanding principal amount. This amount is being amortized as an adjustmentto interest expense over the term of the related debt.

 

Duringthe three months ended March 31, 2005, a variable-rate note payabletotaling $9.2 million was obtained in connection with the acquisition of astudent housing property. The note requires payments of interest only at LIBORplus 1.90% (LIBOR on this loan was 3.33% at June 30, 2005) and matures in2007.

 

InFebruary 2005, the Company completed the refinancing of variable-ratenotes secured by seven of its student housing properties. In connection withthe refinancing, the Company repaid approximately $20.4 million of thetotal $113.7 million of indebtedness secured by these seven properties,and replaced the remaining $93.3 million of variable-rate debt with anequal amount of fixed-rate debt with interest rates ranging from 4.24% to 4.7%and maturity terms ranging from five to seven years.

 

On June 27,2005,  we placed a total of $23.6 millionof fixed-rate mortgage indebtedness on two student housing properties locatedin State College, Pennsylvania that serve Pennsylvania State University.  The mortgage debt has a fixed interest rateof 4.70% and a term of five years.  Theproperties were acquired by the Company in March 2005 for an aggregatepurchase price of $38.2 million. Proceeds of this mortgage debt financing wereused to repay outstanding borrowings under the Company’s line of credit thatwere originally drawn to acquire these properties.

 

AtJune 30, 2005, notes payable totaling $545.4 million were secured by 39student housing properties with a cost and net book value of $780.2 million and$769.7 million, respectively. At December 31, 2004, notes payabletotaling $359.8 million were secured by 23 student housing properties witha cost and net book value of $451.9 million and $449.1 million,respectively.

 

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AtJune 30, 2005, the Company had a note payable in the amount of $5.7 millionsecured by the corporate headquarters, requiring monthly payments of principaland interest at LIBOR plus 2.25% (LIBOR on this loan was 3.13% at June 30,2005).  In July 2005, the maturitydate of the loan was extended to November 2005 from August 2005. Theremaining principal balance is due upon maturity in November 2005. The Companyexpects to refinance this property prior to the extended maturity date.

 

Priorto its contribution to the Company in connection with the completion of ourinitial public offering, Corporate Flight LLC financed the acquisition and refurbishmentsof the corporate aircraft with two notes payable. One loan required monthlypayments of principal and interest at the commercial paper rate plus 1.8%through January 2011. The second loan required monthly payments ofprincipal and interest at 9.5% through August 2006. On February 28,2005, the Company sold and transferred its ownership of 100% of the outstandingmembership interests in Corporate Flight LLC back to Gary M. Holloway, Sr.Corporate Flight LLC’s primary asset was the corporate aircraft which had a netbook value of $3.8 million at February 28, 2005 and was secured bythe two notes payable, which had an aggregate outstanding balance of$4.2 million at February 28, 2005. Corporate Flight LLC’s net deficit of $171,000, net of $180,000 taxexpense related to the taxable gain upon the transfer, was recorded as acapital distribution and allocated to additional paid-in capital and minorityinterest on the consolidated balance sheet.

 

Theaggregate annual principal payments as of June 30, 2005 due on our notespayable for the remainder of 2005, the five succeeding years and thereafter areas follows (in thousands):

 
| 2005       |   | $       | 8,171   |   |
|------------|--------|---------|---------|--------|
| 2006       |   | 5,188   |    |
| 2007       |   | 87,960  |    |
| 2008       |   | 4,708   |    |
| 2009       |   | 34,076  |    |
| 2010       |   | 65,954  |    |
| Thereafter |   | 345,043 |    |
|       |   | $       | 551,100 |   |

 

**7.  Line of Credit**

 

InNovember 2004, the Company entered into a $150 million three-yearunsecured revolving credit facility, subject to increase to $250 million(the “Credit Facility”), with a consortium of banks. The Credit Facilityprovides for the issuance of up to $20 million of letters of credit, whichis included in the $150 million available under the Credit Facility. TheCompany’s availability under the Credit Facility as of June 30, 2005 waslimited to a borrowing base amount equal to the sum of 60% of the value of anunencumbered asset pool (which as of June 30, 2005 consisted of sevenstudent housing properties, and in no event could contain fewer than fivestudent housing properties) as of the end of the previous quarter and 50% ofthe annualized value of the Company’s cash flow from the management of militaryhousing projects and student housing properties in the previous quarter,provided that the total cash flow attributable to annualized management feesdid not exceed 35% of the borrowing base.

 

TheCompany may elect to have amounts outstanding under the Credit Facility bearinterest at a Eurodollar rate based on LIBOR or the prime rate, plus anapplicable rate, ranging from 1.50% to 2.00% for Eurodollar rate loans or0.625% to 1.375% for prime rate loans. The applicable rate is determined by theleverage ratio of total liabilities to total asset value of the Company, asdefined in the Credit Facility. In addition, the Company pays fees for unusedavailability on the Credit Facility.

 

TheCredit Facility contains affirmative and negative covenants and also containsfinancial covenants that, among other things, as of June 30, 2005, (i) requiredthe Company to maintain a total leverage ratio equal to or less than 60%, (ii) limitedthe aggregate amount of outstanding variable-rate indebtedness to 30% of totalindebtedness commencing February 8, 2005, (iii) limited the paymentof dividends by the Company to its shareholders to 95% of funds from operationsas defined in the Credit Facility, (iv) limited the amount of recoursedebt, exclusive of amounts outstanding under the Credit Facility, to$25 million, and in no event greater than $150 million in total, and (v) requiredthe Company to maintain a consolidated tangible net worth, as defined in theCredit Facility, of at least $275 million plus an amount equal to 75% ofthe net proceeds from any equity issuances subsequent to the closing date ofthe Credit Facility in November 2004. The financial covenants as of June 30,2005 also required the Company to operate in compliance with the followingratios as defined by the terms of the Credit Facility: (i) fixed chargecoverage ratio equal to or greater than 1.75x; (ii) interest coverageratio equal to or greater than 2.00x; and (iii) unsecured interestcoverage ratio equal to or greater than 2.25x.

 

InJanuary 2005, the Company paid a dividend to its shareholders in excess of95% of funds from operations.  TheCompany received a formal waiver of this instance of noncompliance with thefinancial covenant. The Company and the lenders also agreed to modify thecovenant related to the payment of dividends to shareholders for the year endingDecember 31, 2005. Under the terms of the modification, the Company is nowrestricted from paying dividends to its shareholders in 2005 in excess of 110%of funds from

 

16

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operations. The dividendpayment terms of the Credit Facility will revert to the original restrictionagainst distributions in excess of 95% of funds from operations after 2005.

 

Additionally,the Company did not reduce the aggregate amount of its outstandingvariable-rate indebtedness as a percentage of its total outstandingindebtedness below 30% by February 8, 2005, as required by the terms ofthe Credit Facility. On February 24, 2005, the Company converted certainvariable-rate loans secured by seven student housing properties to fixed-rateloans. As a result of this refinancing, the Company lowered its outstandingvariable-rate indebtedness as a percentage of fixed-rate indebtedness below the30% limit. The Company received a formal waiver of this instance ofnoncompliance with the financial covenant for the period from February 8,2005 through February 23, 2005.

 

AtJune 30, 2005, the Company’s leverage ratio exceeded the 60% ceiling setforth in the Credit Facility.  TheCompany received a formal waiver of this instance of noncompliance with thefinancial covenant.

 

InAugust 2005, the Company amended the Credit Facility (the “Amendment”).  Under the Amendment, the calculation of theborrowing base was revised to include cash flow from the military housingconstruction and development fees and to increase the total cash flow attributableto annualized fees from the management, construction and development of themilitary housing projects and student housing properties from 35% to 50%.  The Amendment also increased the applicable interestrate ranges on outstanding borrowings under the Credit Facility to thefollowing: 1.625% to 2.375% for Eurodollar rate loans and 0.75% to 1.75% forprime rate loans.  In addition, theAmendment modified the calculation of the leverage ratio and increased themaximum leverage ratio from 60% to 65% through December 31, 2005.  At the end of the first quarter of 2006, themaximum leverage ratio will revert to 60%.

 

Asof June 30, 2005, the Company had $71.0 million outstanding under theCredit Facility, bearing interest at a Eurodollar rate based on 30-day LIBOR at3.24% and an applicable rate of 2.00%, for a total interest rate of 5.24%.  As of June 30, 2005, there were noletters of credit outstanding under the Credit Facility.

 

**8.  Transactions with Related Parties**

 

Inthe ordinary course of its operations, the Company has on-going businessrelationships with Gary M. Holloway, Sr., entities affiliated with Mr. Holloway,and entities in which Mr. Holloway or the Company has an equityinvestment. These relationships and related transactions are summarized below.The operating results or financial position of the Company and The GMHPredecessor Entities could be significantly different from those that wouldhave been reported if the entities were autonomous.

 

Throughthe completion of the Company’s initial public offering on November 2,2004, common costs for human resources, information technology, officeequipment and furniture, and certain management personnel were allocated to thevarious entities owned or controlled by Mr. Holloway, including The GMHPredecessor Entities, using assumptions based on headcount that managementbelieved were reasonable. During the three and six months ended June 30,2004, such costs totaled $0.9 and $1.5 million, respectively, and areincluded in administrative expenses in the accompanying combined statements ofoperations.  Subsequent to November 2,2004, such costs were incurred directly by the Operating Partnership. Theallocation of such costs to other entities owned or controlled by Mr. Hollowayduring the three and six months ended June 30, 2005 totaled $93,000 and$191,000, respectively, and is reflected as expense reimbursements from relatedparties in the accompanying consolidated statements of operations.

 

The Company leases space in its corporateheadquarters to entities wholly-owned by Mr. Holloway.  During the three and six-month periods ended June 30,2005 and 2004, rental income from these entities totaled $61,000, $122,000, $136,000,and $270,000, respectively, and is included in rent and other property incomein the accompanying consolidated and combined statements of operations.

 

The Company provides property managementconsulting services to GMH Capital Partners Asset Services, LP, an entitywholly-owned by Mr. Holloway, in connection with property managementservices that GMH Capital Partners Asset Services, LP performs related to fivestudent housing properties containing a total of 2,172 beds. The Company earnsconsulting fees equal to 80% of the net management fees that GMH CapitalPartners Asset Services, LP earns for providing the property managementservices.  For the three and six monthsended June 30, 2005, such fees totaled $73,000 and $134,000, respectively.  No such fees were recognized in thecomparable periods in 2004.

 

In addition, through March 31, 2005 theCompany earned management fees from properties in which Mr. Holloway wasan investor.  As of June 30, 2005,the Company does not manage any properties in which Mr. Holloway is aninvestor and accordingly did not earn any such fees in the quarter then ended.  During the six-month period ended June 30,2005 and the three and six-month periods ended June 30, 2004, such incometotaled $197,000, $450,000 and $823,000, respectively.

 

The Company is reimbursed by the owners ofcertain military housing projects and student housing properties undermanagement, including certain student housing properties in which Mr. Hollowaywas an investor through March 31, 2005, for the cost of certain employeesengaged in the daily operation of those military housing projects and studenthousing properties. The

 

17

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reimbursement of these costs is reflected as expense reimbursementsfrom related parties in the accompanying consolidated and combined statementsof operations.

 

The GMH Predecessor Entities previously paidmanagement fees and reimbursed expenses to entities owned by Mr. Hollowaythat were not contributed to the Company in connection with its initial publicoffering. During the three and six-month periods ended June 30, 2004, themanagement fees and reimbursed expenses totaled $21,000 and $37,000, respectively.

 

Denis J. Nayden, one of the Company’strustees, is a senior vice president of General Electric Company, which is theparent company of General Electric Capital Corporation. At June 30, 2005,we had $300.0 million of indebtedness to General Electric CapitalCorporation secured by properties or other assets that we own.

 

Mr. Holloway owns Bryn Mawr Abstract, Inc.,an entity that provides title abstract services to third party title insurancecompanies, from which we have purchased title insurance with respect to studenthousing properties that we have acquired or refinanced in 2005. In connectionwith our purchase of title insurance for these student housing properties, wepaid premiums to other title insurance companies, which fees in some cases arefixed according to statute. From these premiums, the other title companies paidto Bryn Mawr Abstract $39,000 and $183,000 during the three and six-monthperiods ended June 30, 2005, respectively, for the provision of titleabstract services.

 

Mr. Holloway owns GMH Capital PartnersCommercial Realty LP, an entity that provides real estate consulting andbrokerage services for real estate transactions. During the three months ended March 31,2005, GMH Capital Partners Commercial Realty LP received aggregate commissionsof $284,000 from the sellers of two student housing properties that the Companypurchased.

 

In February 2005, the Companytransferred its interest in Corporate Flight LLC, including the corporateaircraft and associated debt initially contributed to the Operating Partnershipat the time of the initial public offering, back to Mr. Holloway.  Corporate Flight LLC had a net deficit of$171,000, net of $180,000 tax expense related to the taxable gain upon thetransfer to Mr. Holloway, on the date it was transferred back to Mr. Holloway.This transfer was accounted for as a capital contribution and recorded as an$87,000 increase to additional paid-in capital and an $84,000 increase tominority interest.  During the threemonths ended June 30, 2005, the Company paid Corporate Flight LLC $157,000for use of an aircraft owned by Corporate Flight LLC.  There were no payments to Corporate Flight LLCduring the three months ended March 31, 2005.

 

**9. Commitments and Contingencies**

 

As of June 30, 2005, we had agreementsto acquire six student housing properties and two undeveloped parcels of landfor an aggregate purchase price of $141.1 million and had placed depositsrelated to such acquisitions totaling $1.1 million.

 

In connection with finalizing the agreementswith the Department of Defense (“DoD”) for the Company’s military housingprojects, the Company has committed to contribute the following aggregateamounts as of June 30, 2005 (in thousands):

 
| 2006                 |   | $     | 2,000  |   |
|----------------------|--------|-------|--------|--------|
| 2007                 |   | 5,900 |   |
| 2010                 |   | 8,000 |   |
| 2011 and  thereafter |   | 3,600 |   |
| Total                |   | $     | 19,500 |   |

 

In connection with the development,management, construction, and renovation agreements for certain of the militaryhousing projects, the Company guarantees the completion of its obligationsunder the agreements. The guarantees require the Company to fund any costs inexcess of the amounts budgeted in the underlying development, management,construction, and renovation agreements. Management believes that theseguarantees will not have a material adverse impact on the Company’s financialposition or results of operations.

 

The Company is subject to routine litigation,claims and administrative proceedings arising in the ordinary course ofbusiness. Management believes that the disposition of these matters will not havea material adverse impact on the Company’s financial position or results ofoperations.

 

The Company has entered into employmentagreements with three of its executive officers. Each employment agreement isfor an initial three-year term beginning in November 2004 and provides forbase salaries aggregating $975,000 in each of the three years. The basesalaries are increased annually effective January 1 of each year by aminimum amount equal to at least the percentage increase in the Consumer PriceIndex.

 

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 the

 

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provisions of FIN 45. Under these agreements, the Company indemnifies,holds harmless, and agrees to reimburse the indemnified party for lossessuffered or incurred by the indemnified party. The maximum potential amount offuture payments the Company could be required to make under theseindemnification agreements is unlimited. The Company believes the estimatedfair value of these agreements is immaterial. Accordingly, there were noliabilities recorded for these agreements as of June 30, 2005 and December 31,2004.

 

**10. Segment Reporting**

 

The Company is managed as individual entitiesthat comprise two reportable segments: (1) student housing and (2) militaryhousing. The Company’s management evaluates each segment’s performance basedupon net income. The accounting policies of the reportable segments are thesame as those described in the summary of significant accounting policies.  Corporate includes the activities of certaindepartments from a corporate level, which includes personnel that service GMHCommunities Trust as a whole and support our overall operations.

 
| ** **                                               | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                               | ** ** | **2005 (Company)**                   | ** ** | **2004 (Predecessor)** | ** ** |
| ** **                                               | ** ** | **Student  Housing**                 | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                               | ** ** | **(in thousands)**                   | ** ** |
| **Revenue:**                                             |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and  other property income                          |       | $                                    | 29,702     |   | $ | — |   | $ | 61 |   | $ | 29,763 |   | $ | — |   | $ | — |   | $ | 136 |   | $ | 136 |   |
| Expense  reimbursements:                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related  party                                           |       | —                               |       | 12,869 |   | 122 |   | 12,991 |   | 283 |   | 6,193 |   | 49 |   | 6,525 |   |
| Third party                                              |       | 1,303                                |       | — |   | — |   | 1,303 |   | 1,939 |   | — |   | — |   | 1,939 |   |
| Management  fees:                                        |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related  party                                           |       | —                               |       | 1,645 |   | — |   | 1,645 |   | 450 |   | 854 |   | — |   | 1,304 |   |
| Third party                                              |       | 1,011                                |       | — |   | — |   | 1,011 |   | 1,982 |   | 325 |   | — |   | 2,307 |   |
| Other fee  income-related party                          |       | —                               |       | 3,850 |   | — |   | 3,850 |   | — |   | 948 |   | 119 |   | 1,067 |   |
| Other income                                             |       | 22                                   |       | — |   | 34 |   | 56 |   | — |   | 16 |   | — |   | 16 |   |
| Total  revenue                                           |       | 32,038                               |       | 18,364 |   | 217 |   | 50,619 |   | 4,654 |   | 8,336 |   | 304 |   | 13,294 |   |
| **Operating  Expenses:**                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property  operating expenses                             |       | 10,615                               |       | 1,286 |   | — |   | 11,901 |   | 1,566 |   | 1,582 |   | — |   | 3,148 |   |
| Reimbursed  expenses                                     |       | 1,303                                |       | 12,869 |   | 122 |   | 14,294 |   | 2,222 |   | 6,193 |   | 49 |   | 8,464 |   |
| Real estate  taxes                                       |       | 2,568                                |       | — |   | — |   | 2,568 |   | — |   | — |   | 22 |   | 22 |   |
| Administrative  expenses                                 |       | —                               |       | — |   | 2,741 |   | 2,741 |   | — |   | — |   | 472 |   | 472 |   |
| Depreciation  and amortization                           |       | 7,971                                |       | — |   | 99 |   | 8,070 |   | 13 |   | — |   | 200 |   | 213 |   |
| Interest                                                 |       | 6,620                                |       | — |   | 220 |   | 6,840 |   | — |   | — |   | 68 |   | 68 |   |
| Total  operating expenses                                |       | 29,077                               |       | 14,155 |   | 3,182 |   | 46,414 |   | 3,801 |   | 7,775 |   | 811 |   | 12,387 |   |
| Income  (loss) before minority interest and income taxes |       | 2,961                                |       | 4,209 |   | (2,965 | ) | 4,205 |   | 853 |   | 561 |   | (507 | ) | 907 |   |
| Minority  interest                                       |       | 1,853                                |       | 2,493 |   | (1,856 | ) | 2,490 |   | — |   | — |   | — |   | — |   |
| Income (loss)  before income taxes                       |       | 1,108                                |       | 1,716 |   | (1,109 | ) | 1,715 |   | 853 |   | 561 |   | (507 | ) | 907 |   |
| Income taxes                                             |       | 34                                   |       | 119 |   | — |   | 153 |   | — |   | — |   | — |   | — |   |
| **Net  income (loss)**                                   |       | $                                    | 1,074      |   | $ | 1,597 |   | $ | (1,109 | ) | $ | 1,562 |   | $ | 853 |   | $ | 561 |   | $ | (507 | ) | $ | 907 |   |

 
| ** **                                               | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                               | ** ** | **2005 (Company)**                 | ** ** | **2004 (Predecessor)** | ** ** |
| ** **                                               | ** ** | **Student  Housing**               | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                               | ** ** | **(in thousands)**                 | ** ** |
| **Revenue:**                                             |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and  other property income                          |       | $                                  | 55,554     |   | $ | — |   | $ | 122 |   | $ | 55,676 |   | $ | — |   | $ | — |   | $ | 270 |   | $ | 270 |   |
| Expense  reimbursements:                                 |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related  party                                           |       | 186                                |       | 21,335 |   | 211 |   | 21,732 |   | 1,011 |   | 7,148 |   | 97 |   | 8,256 |   |
| Third party                                              |       | 2,577                              |       | — |   | — |   | 2,577 |   | 3,280 |   | — |   | — |   | 3,280 |   |
| Management  fees:                                        |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related  party                                           |       | 197                                |       | 3,316 |   | — |   | 3,513 |   | 823 |   | 1,362 |   | — |   | 2,185 |   |
| Third party                                              |       | 1,651                              |       | — |   | — |   | 1,651 |   | 2,670 |   | 650 |   | — |   | 3,320 |   |
| Other fee  income-related party                          |       | —                             |       | 7,512 |   | 31 |   | 7,543 |   | — |   | 948 |   | 263 |   | 1,211 |   |
| Other income                                             |       | 75                                 |       | 21 |   | 37 |   | 133 |   | 44 |   | 46 |   | — |   | 90 |   |
| Total  revenue                                           |       | 60,240                             |       | 32,184 |   | 401 |   | 92,825 |   | 7,828 |   | 10,154 |   | 630 |   | 18,612 |   |
| **Operating  Expenses:**                                 |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property  operating expenses                             |       | 19,756                             |       | 2,838 |   | — |   | 22,594 |   | 2,839 |   | 2,781 |   | — |   | 5,620 |   |
| Reimbursed  expenses                                     |       | 2,763                              |       | 21,335 |   | 211 |   | 24,309 |   | 4,291 |   | 7,148 |   | 97 |   | 11,536 |   |
| Real estate  taxes                                       |       | 4,575                              |       | — |   | — |   | 4,575 |   | — |   | — |   | 43 |   | 43 |   |
| Administrative  expenses                                 |       | —                             |       | — |   | 5,673 |   | 5,673 |   | — |   | — |   | 697 |   | 697 |   |
| Depreciation  and amortization                           |       | 14,537                             |       | — |   | 307 |   | 14,844 |   | 11 |   | 8 |   | 399 |   | 418 |   |
| Interest                                                 |       | 11,782                             |       | — |   | 465 |   | 12,247 |   | — |   | — |   | 157 |   | 157 |   |
| Total  operating expenses                                |       | 53,413                             |       | 24,173 |   | 6,656 |   | 84,242 |   | 7,141 |   | 9,937 |   | 1,393 |   | 18,471 |   |
| Income  (loss) before minority interest and income taxes |       | 6,827                              |       | 8,011 |   | (6,255 | ) | 8,583 |   | 687 |   | 217 |   | (763 | ) | 141 |   |
| Minority  interest                                       |       | 3,440                              |       | 3,981 |   | (3,158 | ) | 4,263 |   | — |   | — |   | — |   | — |   |
| Income  (loss) before income taxes                       |       | 3,387                              |       | 4,030 |   | (3,097 | ) | 4,320 |   | 687 |   | 217 |   | (763 | ) | 141 |   |
| Income taxes                                             |       | 45                                 |       | 893 |   | — |   | 938 |   | — |   | — |   | — |   | — |   |
| **Net  income (loss)**                                   |       | $                                  | 3,342      |   | $ | 3,137 |   | $ | (3,097 | ) | $ | 3,382 |   | $ | 687 |   | $ | 217 |   | $ | (763 | ) | $ | 141 |   |

 

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| ** **                         | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|------------------------------------|------------|----------------------|------------|-----------------------|------------|---------------|------------|-----------|------------|
| ** **                         | ** ** | **(in thousands)**   | ** ** |
| **As of June 30,  2005:**     |       |                 |       |                  |       |          |       |      |       |
| Total assets                       |       | $                    | 966,925    |                  | $          | 56,300        |       | $         | 23,145     |   | $ | 1,046,370 |   |
| **As of December 31,  2004:** |       |                 |       |                  |       |          |       |      |       |
| Total assets                       |       | $                    | 663,980    |                  | $          | 57,856        |       | $         | 51,225     |   | $ | 773,061 |   |

 

**11. Earnings Per Common Share**

 

The following table details the number ofshares and net income used to calculate basic and diluted earnings per sharefor the three and six-month periods ended June 30, 2005 (in thousands,except share and per share amounts):

 
| ** **                                                      | ** ** | **Three months ended June 30,  2005** | ** ** | **Six months ended June 30,  2005** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                      | ** ** | **Basic**                                  | ** ** | **Diluted**                              | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
|                                                            |       |                                       |       |                                     |       |   |   |   |   |
| Net income                                                      |       | $                                          | 1,562      |                                     | $          | 1,562 |   | $ | 3,382 |   | $ | 3,382 |   |
| Minority  interest                                              |       | —                                     |       | —                                   |       | — |   | — |   |
| Income  available to common shareholders                        |       | $                                          | 1,562      |                                     | $          | 1,562 |   | $ | 3,382 |   | $ | 3,382 |   |
|                                                            |       |                                       |       |                                     |       |   |   |   |   |
| Weighted-average  common shares outstanding                     |       | 30,350,989                                 |       | 30,350,989                               |       | 30,350,989 |   | 30,350,989 |   |
| Warrant                                                         |       | —                                     |       | 1,818,030                                |       | — |   | 1,819,651 |   |
| Units of  limited partnership held by minority interest holders |       | —                                     |       | —                                   |       | — |   | — |   |
| Restricted  common shares                                       |       | —                                     |       | 1,064                                    |       | — |   | 1,072 |   |
| Total  weighted-average shares outstanding                      |       | 30,350,989                                 |       | 32,170,083                               |       | 30,350,989 |   | 32,171,712 |   |
| Earnings per  common share                                      |       | $                                          | 0.05       |                                     | $          | 0.05 |   | $ | 0.11 |   | $ | 0.11 |   |

 

The computation of diluted earnings per sharefor the three and six-month periods ended June 30, 2005 excludes theassumed conversion of the units of limited partnership interest held byminority interest holders and the related minority interest expense because theassumed conversion has an anti-dilutive effect on earnings per share.

 

In March 2005 and June 2005, theCompany declared quarterly dividends of $0.2275 per outstanding common share.The March dividend of $6.9 million was paid in April 2005 tocommon shareholders of record on March 30, 2005. The June dividend of$6.9 million was paid in July 2005 to common shareholders of recordon June 29, 2005.

 

**12. Acquisition of Real Estate Investments**

 

During the year ended December 31, 2004,the three months ended June 30, 2005 and the six months ended June 30,2005, the Company acquired 30, eight, and 16 student housing properties,respectively, for an aggregate acquisition cost of $953.8 million.  Theresults of operations for each of the acquired properties have been included inour statements of operations from the respective purchase dates.  All proforma financial information presented within this footnote is not necessarilyindicative of the results which actually would have occurred if the purchaseshad been consummated on January 1, 2004, nor does the pro formainformation purport to represent the results of operations for future periods.

 

The following unaudited pro forma financialinformation for the three and six month periods ended June 30, 2005 and2004 gives effect to the acquisition of the 46 student housing properties as ifthe transactions had occurred on January 1, 2004 (in thousands):

 

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| ** **           | ** ** | **Three Months Ended June  30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------|------------|----------------------------------|------------|-------------------------------------|------------|
| ** **           | ** ** | **2005**                         | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                 |       |                             |       |                                |       |   |   |   |   |
| Pro forma revenue    |       | $                                | 30,632     |                                | $          | 30,706 |   | $ | 61,264 |   | $ | 61,411 |   |
| Pro forma net income |       | 2,966                            |       | 2,640                               |       | 5,931 |   | 5,279 |   |
|                      |            |                                  |            |                                     |            |  |  |  |  |  |  |  |  |

 

**13. Subsequent Events**

 

In July 2005, we acquired two studenthousing properties and a parcel of land, containing an aggregate 396 units and 1,452beds, for a purchase price of $48.2 million. These acquisitions were partiallyfinanced with the assumption of a $6.6 million loan secured by the property andthe placement of a $20.4 million new loan.

 

In July 2005, we officially partneredwith the Department of the Army to design, build, manage and maintain themilitary family housing at Fort Bliss, located in El Paso, Texas, and the WhiteSands Missile Range near Las Cruces, New Mexico. The finalized plans include asix-year initial development period with estimated project costs of $445million.  Project financing was obtainedand the initial development project period began in July 2005.

 

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

 

*GMHCommunities Trust commenced operations on November 2, 2004, uponcompletion of its initial public offering and the simultaneous acquisition ofthe sole general partnership interest in GMH Communities, LP, referred tothroughout this report as our Operating Partnership. The historical operationsprior to completion of our initial public offering that are described in thisreport refer to the operations of College Park Management, Inc., GMHMilitary Housing, LLC, 353 Associates, L.P., and Corporate Flight Services,LLC, which are collectively referred to, together with our Operating Partnership,as The GMH Predecessor Entities or our predecessor entities.*

 

*In connection withthe formation transactions completed prior to and simultaneously withcompletion of our initial public offering, the interests in The GMH PredecessorEntities were contributed to our Operating Partnership as described in Note 1to the financial statements included in this report.  We have describedour operations in this report as if the historical operations of ourpredecessor entities were conducted by us. The following discussion and analysisshould be read in conjunction with the financial statements and notes theretoof GMH Communities Trust and The GMH Predecessor Entities appearing in Part I,Item 1of this report.*

 

**Overview**

 

We 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. Through our Operating Partnership, we own and operate ourstudent housing properties and own interests in joint ventures that own ourmilitary housing projects. Additionally, through our taxable REIT subsidiaries,we provide development, construction, renovation and management services to ourmilitary housing projects, and property management services to certain thirdparty owners of student housing properties, including colleges, universities,and other private owners, as well as certain non-customary services for ourstudent housing properties. In order to comply with the applicable requirementsunder the REIT provisions of the Internal Revenue Code, we must limit theoperations of our taxable REIT subsidiaries so that securities issued to us byour taxable REIT subsidiaries do not represent more than 20% of our 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.

 

As a result of the various transactions andacquisitions completed in anticipation of, in connection with and subsequent toour initial public offering in November 2004, we expect our future resultsof operations to include significantly higher revenues and expenses than thosereflected in our predecessor entity financial statements.

 

Currently, our operations are managed withintwo operating 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 reportthe activities of certain departments from a corporate level, which includespersonnel that service GMH Communities Trust as a whole and support our overalloperations.

 

*Student Housing*

 

The student housing segment acquires, owns andmanages premiere off-campus student housing properties strategically locatednear college or university campuses throughout the United States. Since July 2004,our rental revenue has increased substantially as a result of our acquisitionof a total of 46 properties as of June 30, 2005. While we manage theproperties we own, we do not recognize any fee income from their management.Instead, the rent payments we receive as a result of our ownership of theseproperties are reflected in our revenue. Additionally, operating expenses, realestate taxes and depreciation and amortization have increased as a result ofthese acquisitions. Further, interest expense has increased related to thefinancing of these properties acquired.

 

We earn management fees as a percentage ofcash receipts or gross rental revenues generated by the managed properties, oras a fixed monthly amount, according to the management agreements for theproperties we manage. We also have the ability to earn incentive managementfees by achieving specified property-level performance criteria for certainproperties we manage for third parties. Further, certain operating expensesincurred related to properties we manage for others are reimbursed by theowners of the properties managed. We expect to continue generating fee incomerevenue and operating expense reimbursements from the properties that we managefor others although the amounts are expected to become less significant asrental income increases from the properties we own.

 

During the three months ended June 30,2005, we acquired eight student housing properties for an aggregate acquisitioncost of approximately $146.4 million. The properties are located near six colleges and universities in fivestates and contain an aggregate of 1,354 units and 4,300 beds.  More specifically, these propertyacquisitions included the following:

 

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•  a student housing property, TheGrandMarc at Seven Corners, located in Minneapolis, Minnesota and serving theUniversity of Minnesota.  The propertycontains 183 units and 370 beds, and 14,000 square feet of commercial space,and was acquired in April 2005 for an aggregate acquisition cost of approximately$28.2 million, including the assumption of $19.0 million of indebtedness;

 

•  two student housing properties, CampusEdge I and Campus Edge II, both located in Charlotte, North Carolina andserving the University of North Carolina - Charlotte.  The properties contain an aggregate of 180units and 720 beds and were acquired in June 2005 for an aggregateacquisition cost of approximately $23.3 million, including the assumption of$9.8 million of indebtedness and the placement of $4.5 million in fixed-rate mortgagedebt;

 

•  a student housing property, Chapel View(formerly known as Brookstone Apartments), located in Chapel Hill, NorthCarolina and serving the University of North Carolina — Chapel Hill.  The property contains 224 units and 358 bedsand was acquired in June 2005 for an aggregate acquisition cost of approximately$15.5 million, including the placement of $9.7 million in fixed-rate mortgage debt;

 

•  a student housing property, UniversityCommons, located in Manhattan, Kansas and serving Kansas State University.  The property contains 229 units and 700 bedsand was acquired in June 2005 for an aggregate acquisition cost ofapproximately $18.3 million, including the placement of $11.4 million infixed-rate mortgage debt;

 

•  a portfolio of three student housingproperties and a land parcel: Campus Ridge Apartments and an adjoining landparcel, located in Johnson City, Tennessee and serving East Tennessee StateUniversity; Southview Apartments, located in Harrisonburg, Virginia and servingJames Madison University; and Stonegate Apartments, located in Harrisonburg,Virginia and serving James Madison University. The properties contain an aggregate of 538 units and 2,152 beds and wereacquired in June 2005 for an aggregate acquisition cost of $61.1 million,which consideration included the issuance of 1,940,282 units of limitedpartnership interest in the Operating Partnership, and the placement ofapproximately $33.2 million of new fixed-rate mortgage debt and $6.8 million ofnew variable-rate mortgage debt;

 

In addition tothese student housing property acquisitions, in June 2005, we placed atotal of $23.6 million of fixed-rate mortgage indebtedness on two studenthousing properties located in State College, Pennsylvania that servePennsylvania State University.  Theproperties were acquired by the Company in March 2005 for an aggregatepurchase price of $38.2 million. Proceeds of this mortgage debt financing wereused to repay outstanding borrowings under the Company’s line of credit thatwere originally drawn to acquire these properties.

 

As of June 30, 2005, with regard to ourstudent housing segment, we:

 

•  owned 46 student housing propertiescontaining a total of 8,444 units and 28,134 beds; and

 

•  managed, or provided managementconsulting services for, a total of 21 student housing properties owned by others,containing a total of 4,798 units and 13,921 beds. Specifically, we providedmanagement consulting services with respect to five of these properties to GMHCapital Partners Asset Services, LP, an entity wholly-owned by Gary M. Holloway, Sr.

 

In July 2005, we acquired two additionalstudent housing properties, referred to as Seminole Suites and The Commons, anda parcel of land located in Orono, Maine. Seminole Suites is located in Tallahassee, Florida, serves Florida StateUniversity, Tallahassee Community College, and Florida A&M University, andcontains 264 units and 924 beds.   TheCommons is located in Harrisonburg, Virginia, serves James Madison University,and contains 132 units and 528 beds.  Duringthe remainder of 2005, we expect to continue to acquire additional studenthousing properties that are located in the Company’s targeted markets and thatmeet management’s underwriting criteria for creating long-term growthpotential.  The timing of theseacquisitions will be dependent upon various factors, including the ability tocomplete satisfactory due diligence, obtain appropriate financing on theproperties and the availability of capital.

 

In the thirdquarter of 2005, we expect an increase in property operating expenses as aresult of repair and maintenance expenditures relating to turnover of our unitsat our student housing properties.  Ourstudent housing lease terms generally commence in August or September tocoincide with the beginning of the academic year.  As a result, we incur a majority of ourrepair and maintenance costs in the third quarter to prepare the units for thenew residents.

 

*Military Housing*

 

Our military housing segment develops,constructs, renovates and manages military housing projects in which we acquireinterests. Our military housing segment began generating revenue in the fourthquarter of 2003 with the initiation of our Fort Carson and Fort Stewart andHunter Army Airfield projects. Revenue grew throughout 2004 and 2005 with theaddition of various other projects. Revenue from our military housing segmentis comprised primarily of fee income for providing development,construction/renovation and management services to our military housingprojects and, to a lesser extent, from returns on the equity

 

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we invest in the projects. Inaddition, we also receive expense reimbursements, consisting primarily ofpayroll and related expenses, closing costs and transition costs we incur forthe project in the 30 to 90-day period preceding the initiation of ourmanagement of the project. Typically, at the time we initiate management on aproject, the project reimburses us for these amounts from the proceeds of thedebt issued by the project to finance its operations.

 

We owned equity interests in the jointventures that own the six military housing projects currently in operation. Duringthe three months ended June 30, 2005, we earned fees for providingdevelopment, construction/renovation and management services to six militaryhousing projects currently in operation, encompassing 16 military basestotaling 12,580 end-state housing units.

 

In May 2005, the Company was selected bythe U.S. Department of the Army to be its private sector partner for thedesign, development, construction, renovation and management of family militaryhousing units at Fort Gordon, located near Augusta, Georgia. The project isexpected to have a six-year initial development period with estimated projectcosts of $145 million and cover 1,232 end-state housing units. The 50-yearproject term will involve the development, management and construction ofhigh-quality homes, the targeted renovation of existing homes, and the additionof community enhancing facilities and services.

 

In July 2005, the Company officiallypartnered with the Department of the Army to design, build, manage and maintainthe military family housing at Fort Bliss, located in El Paso, Texas, and theWhite Sands Missile Range near Las Cruces, New Mexico. The finalized plansinclude a six-year initial development period with estimated project costs of $445million.  Project financing was obtainedand the initial development project period began in July 2005.

 

The Company and the U.S. Department of theArmy are continuing to review the possibility of refinancing the Fort Carsonproject to obtain additional project cost funding.

 

With regard to trends and uncertainties inthe military housing market, management is currently awaiting developmentsrelating to the base realignment and closure (BRAC) regulations under theDefense Base Closure and Realignment Act of 1990, as amended.  Under these regulations, the federalgovernment has previously undertaken four rounds of BRAC beginning in 1988, andagain in 1991, 1993 and 1995. The fifth round of BRAC was initiated in 2004 andhas been targeted for completion in the fourth quarter of 2005, when the finallist of additional bases recommended for realignment or closure is expected tobecome effective.  BRAC law sets out anapproximately six-month process that includes specific dates for governmentaction and the creation of an independent commission, referred to as the BRAC Commission.A detailed description of this process follows:

 

•      the Department of Defense issues alist of identified bases that are recommended for closure or realignment;

•      the BRAC Commission and variouscongressional defense committees then review the initial recommendations overthe next several months following the date the list is published. Uponconclusion of this review, the BRAC Commission then transmits a report to thePresident that contains its findings and conclusions of the initialrecommendations;

•      the President then hasapproximately one month to transmit back to the BRAC Commission and to Congressa report containing the President’s approval or disapproval of the BRAC Commission’srecommendations.   If the Presidentapproves the recommendations, then they generally become binding after 45 “legislative”days, unless Congress enacts joint resolution of disapproval. If the Presidentdisapproves the BRAC Commission’s initial recommendations, then the Commissionhas approximately one month to re-submit a revised set of recommendations tothe President; and

•      the President must approve of therevised recommendations and transmit approval to Congress by a certain date orthe process ends.  The finalrecommendations generally become binding after 45 “legislative” days, unlessCongress enacts joint resolution of disapproval.

 

On May 13, 2005, the Department of Defense(DoD) released its recommendations for BRAC. On July 19, 2005, the BRAC Commission voted to amend the DoDrelease for bases to be considered for closure and realignment. Based on thepreliminary information released by the DoD and the BRAC Commission, themilitary housing projects we manage will possibly lose approximately 2,500housing units, most of which are located at the Submarine Base in New London,CT; Portsmouth Naval Shipyard in Kittery, Maine; and Naval Air Station inBrunswick, Maine.  With regard to ourNavy Northeast project, we are currently in discussions with the Department ofthe Navy to negotiate a change order that would temporarily suspend portions ofthe development work at the New London, Portsmouth, and Brunswick locations,and reduce the number of end-state housing units to be completed for theinitial development period.  We expect toreach a favorable outcome with the Navy during the third quarter. In the eventthat a change order is implemented, we expect to continue to collectmanagement, development, and construction/renovation fees, and that our overallearnings for 2005 would not be materially impacted.

 

With respect to our other projects, realignments arealso expected at the Walter Reed Army Medical Center in Washington, DC and FortEustis in Newport News, Virginia.  We donot currently expect these realignments to have a material impact on ourfinancial statements.

 

In addition, significant increases in housingrequirements are expected at Fort Bliss in El Paso, Texas and Fort Carson inColorado Springs, Colorado; and additional restationing of troops from Europecould further boost housing requirements at our current bases.

 

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Under the BRAC regulations, the DoD recommendationsmust now be reviewed by a nine-member BRAC Commission that was appointed byPresident Bush earlier this year. After this review, the BRAC Commission willreport back to the President by September 8, 2005 regarding its findingson, and any recommended changes to, the DoD’s initial report. President Bushwill have until September 23, 2005 to decide whether to accept or rejectthe BRAC Commission’s recommendations. If the President approves the BRAC Commission’s recommendations, he mustapprove them in their entirety and may not make revisions to therecommendations without additional review by Congress. If the President acceptsthe BRAC Commission’s recommendations, Congress will have 45 “legislative” daysto reject the recommendations in their entirety or they become binding on theDoD. If the President does not approve the Commission’s recommendations intheir entirety, then the Commission will have until October 20, 2005 tosubmit revised recommendations to the President. Under this scenario, thePresident then has until November 7, 2005 to approve the revisedrecommendations. If the President rejects the revised recommendations, the BRACprocess ends and no further action takes place (i.e. no closures orrealignments will occur); and if he approves the recommendations, then Congressagain has 45 “legislative” days to block the entire package, in which case theprocess ends with no action taken.

 

**Critical Accounting Policies**

 

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations discusses the Company’s consolidatedfinancial statements and The GMH Predecessor Entities’ combined financialstatements, which have been prepared in accordance with U.S. generally acceptedaccounting principles. 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 judgments associatedwith the reported amounts are appropriate under the circumstances in which theywere made. In addition, other companies in similar businesses may utilizedifferent estimation policies and methodologies, which may impact thecomparability of our results of operations and financial condition to thosecompanies.

 

The following policies require significantjudgments and estimates on our part in preparing the consolidated financialstatements of the Company and the combined financial statements of The GMHPredecessor Entities. Changes in these judgments and estimates could have amaterial effect on these financial statements.

 

***Revenue Recognition***

 

*Student Housing*.Student housing revenue includes rental revenue and other property income,standard and incentive management fees, asset management fees and reimbursementsof certain operating expenses. These sources of revenue are described in moredetail below:

 

•  we recognize student housing rentalrevenue when due over the lease terms, which are generally 12 months orless;

 

•  standard management fees are based on apercentage of monthly cash receipts or gross monthly rental and other revenuesgenerated by the properties managed for others. We recognize these fees whencash is received by the property or when revenue is earned by the managedproperty, depending upon whether the management agreement relating to a studenthousing property calls for cash versus accrual revenue recognition;

 

•  we earn incentive management fees as aresult of the achievement of certain operating performance criteria over aspecified period by certain managed properties, including targeted annual debtservice coverage ratios, and recognize these fees at the amount that would bedue under the contract if the contract was terminated on the balance sheetdate;

 

•  asset management fees are based on apercentage of the gross carrying value of certain properties managed forrelated parties, and we recognize these fees when earned in accordance with therespective management agreements; and

 

•  expense reimbursements are comprisedprimarily of salary and related costs 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 Housing*.  We earn military housing revenues byproviding services to our military housing projects which include thefollowing:

 

•  Standard management fees, based on apercentage of revenue generated by the military housing 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.

 

•  Standard development andconstruction/renovation fees, based on a percentage of development andconstruction/renovation costs incurred by the military housing projectsincluding hard and soft costs and financing costs,

 

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are recognized on a monthly basis as thecosts are incurred by the military housing projects. Incentive development andconstruction/renovation fees are based upon the satisfaction of certaincriteria including, among other things, completing a number of housing unitsaccording to schedule, achieving specific safety records and implementing smallbusiness or minority subcontracting plans. Incentive development andconstruction/renovation fees are recognized when the various criteriastipulated in the contract have been satisfied.

 

•  Revenues on fixed-price renovationcontracts are 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 currently provided for in its entirety.

 

•  Business development fees are earnedfrom companies with which we have relationships in recognition of businessdevelopment efforts and expenses incurred by us in connection with pursuingmilitary housing projects. The fees consist of (i) a base fee, which is afee paid to the Company in consideration of the Company’s ongoing pursuit ofadditional projects, and paid regardless of whether a project is awarded, and (ii) anincentive fee, which is paid over the course of an awarded project based on apercentage of certain development costs incurred by the project.  The base fees are recognized on astraight-line basis over the term of the related business developmentagreement.  The incentive fees arerecognized as the related costs are incurred by the respective military housingprojects.

 

•  Preferred returns are earned on ourinvestments in military housing projects. The preferred returns are based on a fixed percentage of our investmentin military housing projects and are recognized as accrued at the ratesspecified in the agreements, subject to projected availability of funds in theunderlying project.  Accrued preferredreturns are periodically evaluated for collectibility.

 

Deferred costs are subject to estimation andjudgment. Management makes determinations as to which costs are eligible forreimbursement and at what level they will be reimbursed. Management considersvarious factors in making these estimates and judgments, including the terms ofthe specific contract and historical experience as to which costs arerecoverable. Costs that are not probable of recovery are expensed.

 

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

 

We carry real estate investments andcorporate assets at cost, net of accumulated depreciation. Cost for acquiredassets includes the purchase price and related closing costs. We allocate thecost of real estate investments to tangible and identified intangible assetsbased on relative fair values in accordance with Statement of FinancialAccounting Standards No. 141 (“SFAS 141”), *Business Combinations*. We estimate fair value based oninformation that we obtain from a number of sources, including our duediligence, marketing and leasing activities, independent appraisals that may beobtained in connection with the acquisition or financing of the respectiveproperty and other market data.

 

The value of in-place leases is based on thedifference between (i) the property valued with existing in-place leases,and (ii) the property valued as if vacant. As lease terms typically are12 months or less, rates on in-place leases generally approximate marketrental rates. Factors that we consider in the valuation of in-place leasesinclude an estimate of incremental carrying costs during the expected lease-upperiods considering current market conditions, and the nature of the tenancy.We amortize the value of in-place leases to expense over the remaining term ofthe respective leases.

 

Purchase prices of student housing propertiesto be acquired are not expected to be allocated to tenant relationshipsconsidering the terms of the leases and the expected levels of renewals.

 

We expense routine repair and maintenanceexpenditures that do not improve the value of an asset or extend its usefullife, including turnover costs such as cleaning and interior painting. Wecapitalize expenditures that improve the value and extend the useful life of anasset. We compute depreciation using the straight-line method over theestimated useful lives of the assets, which is 40 years for buildingsincluding student housing properties and the commercial office building, andthree to five years for residential furniture and appliances.

 

In accordance with Statement of FinancialAccounting Standards No. 144 (“SFAS 144”), *Accounting for the Impairment or Disposal of Long-Lived Assets*,we review long-lived assets, such as real estate investments and purchasedintangibles subject to amortization, for impairment whenever events or changesin circumstances indicate that the carrying amount may not be recoverable.These circumstances may include, but are not limited to, operationalperformance, market conditions and competition from other off-campus propertiesand on-campus housing, legal and environmental concerns, and results ofappraisals or other information obtained as part of a financing or dispositionstrategy. We review recoverability of assets to be held and used through acomparison of the carrying amount of an asset to the estimated undiscountedfuture cash flows expected to be generated by the asset. If the carrying amountof an asset exceeds its estimated undiscounted future cash flows, we recognizean impairment charge in the amount by which the carrying value of the assetexceeds the fair value of the asset determined using customary valuationtechniques, such as the present value of expected future cash flows. Assets tobe disposed of would be separately presented in the balance sheet and reportedat the lower of the carrying amount or fair value less costs to sell, and nolonger would be depreciated.

 

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***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 feeincome and expense reimbursements generated by the management of studenthousing properties 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 of each situation andrecord a reserve for specific amounts, if necessary. Accounts receivable arestated net of the allowance for doubtful accounts.

 

***Notes Payable***

 

We record notes payable that we assume inconnection with the acquisition of student housing properties at theirestimated fair value, with the corresponding difference between the estimatedfair value and assumed carrying value of the notes payable recorded as anadjustment to the purchase price of the related property. We determine fairvalue of assumed notes payable based on various assumptions related to marketconditions, including the type, age and location of the acquired property andquoted interest rates for debt with similar terms.

 

***Minority Interest***

 

Minority interest as initially recorded atthe date of our initial public offering represented the net equity of the OperatingPartnership, including the proceeds received from the sale of the warrant toVornado, multiplied by the ownership percentage of holders of limitedpartnership units in the Operating Partnership other than the Company. TheOperating Partnership is obligated to redeem, at the request of a holder, eachunit of limited partnership interest for common shares on a one-for-one basis,subject to adjustments for share splits, dividends, recapitalizations orsimilar events. If the minority interest unit holders’ share of a current yearloss would cause the minority interest balance to be less than zero, theminority interest balance will be reported as zero unless there is anobligation of the minority interest holders to fund those losses. Any losses inexcess of the minority interest will be charged against equity. If futureearnings materialize, equity will be credited for all earnings up to the amountof those losses previously absorbed. Distributions to limited partnership unitholders other than the Company are recorded as a reduction to minorityinterest.

 

***Investments in Military Housing Projects***

 

We evaluate each of our investments inmilitary housing projects to determine if the underlying entity is a variableinterest entity (“VIE”) as defined under FASB Financial Interpretation No. 46(as revised) (“FIN 46”). If an entity is deemed to be a VIE pursuant to FIN 46,the entity that absorbs a majority of the expected losses of the VIE is deemedto be the primary beneficiary and must consolidate the VIE. If the entity isnot a VIE, it is evaluated for consolidation based on controlling votinginterests. If we have the majority voting interest with the ability to controloperations and where no approval, veto or other important rights have beengranted to other holders, the entity would be consolidated. We are not theprimary beneficiary of any VIEs, nor do we have controlling voting interests inany of our military housing projects. We record investments in military housingprojects initially at our cost and subsequently adjust them to reflect ourpreferred return and other distributions.

 

***Income Taxes***

 

We intend to elect to be taxed as a REIT uponfiling of our tax return for the taxable year ending on December 31, 2004.We will file this return in September 2005 per an extension granted by theIRS in March 2005. We have elected to treat certain subsidiaries of our OperatingPartnership as taxable REIT subsidiaries, and may make such elections as toother subsidiaries in the future. In general, a taxable REIT subsidiary mayperform real estate and non-real estate-related business, except for theoperation or management of health care facilities or lodging facilities or theprovision to any person, under a franchise, license or otherwise, of rights toany brand name under which any lodging facility or health care facility isoperated.

 

If we fail to qualify as a REIT in anytaxable year, we will be subject to federal income tax, including anyapplicable alternative minimum tax, on our taxable income at regular corporatetax rates.

 

We have elected to treat GMH MilitaryHousing, LLC and College Park Management TRS, Inc. as taxable REITsubsidiaries. College Park Management TRS, Inc. is a wholly-ownedsubsidiary of College Park Management, LLC (which is a successor through mergerto College Park Management, Inc., one of The GMH Predecessor Entities).See Note 1 to the financial statements included in this report.

 

**Results of Operations**

 

Our results of operations represent theoperations of our student housing and military housing operating segments. Thefollowing significant factors affected our results of operations for the three andsix months ended June 30, 2005 as compared to the three and six monthsended June 30, 2004:

 

•  In November 2004, we completed ourinitial public offering pursuant to which we sold an aggregate of 30,350,989common shares and raised an aggregate of $331.7 million in net proceeds.

 

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•  In 2004, subsequent to the formation ofthe Trust in May 2004, we acquired 30 student housing propertiescontaining an aggregate of 5,529 units and 19,085 beds for an aggregateacquisition cost of $634.4 million. During the three months ended March 31, 2005, we acquired eightstudent housing properties with an aggregate of 1,607 units and 4,795 beds foran aggregate acquisition cost of approximately $172.7 million.  During the three months ended June 30,2005, we acquired eight student housing properties with an aggregate of 1,464units and 4,740 beds for an aggregate acquisition cost of approximately $146.4million.  These student housingproperties contributed $29.6 million and $55.4 million of rent and otherproperty revenue in the three and six months ended June 30, 2005,respectively.

 

•  The Fort Stewart and Hunter ArmyAirfield and Fort Carson military housing projects both commenced operations inthe fourth quarter of 2003; the Fort Hamilton military housing projectcommenced operations in the second quarter of 2004; the Walter Reed ArmyMedical Center and Fort Detrick military housing project commenced operationsin the third quarter of 2004; and the Fort Eustis/Fort Story and the NavyNortheast military housing projects both commenced operations in the fourthquarter of 2004.  These military housingprojects contributed $18.4 million and $32.2 million of revenue in the three andsix months ended June 30, 2005, respectively.

 

•  In November 2004, we entered intoa $150 million three-year unsecured revolving credit facility with a consortiumof banks. During the first and second quarters of 2005, the credit facility hasbeen used to fund student housing acquisitions.

 

The results of operations presented belowreflect the results of operations of The GMH Predecessor Entities for the threeand six months ended June 30, 2004, and the results of operations for theCompany for the three and six months ended June 30, 2005.

 

***Comparison of theThree Months Ended June 30, 2005 to the Three Months Ended June 30,2004***

 
| ** **                                               | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                               | ** ** | **2005 (Company)**                   | ** ** | **2004 (Predecessor)** | ** ** |
| ** **                                               | ** ** | **Student  Housing**                 | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                               | ** ** | **(in thousands)**                   | ** ** |
| **Revenue:**                                             |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income                           |       | $                                    | 29,702     |   | $ | — |   | $ | 61 |   | $ | 29,763 |   | $ | — |   | $ | — |   | $ | 136 |   | $ | 136 |   |
| Expense reimbursements:                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                            |       | —                               |       | 12,869 |   | 122 |   | 12,991 |   | 283 |   | 6,193 |   | 49 |   | 6,525 |   |
| Third party                                              |       | 1,303                                |       | — |   | — |   | 1,303 |   | 1,939 |   | — |   | — |   | 1,939 |   |
| Management fees:                                         |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                            |       | —                               |       | 1,645 |   | — |   | 1,645 |   | 450 |   | 854 |   | — |   | 1,304 |   |
| Third party                                              |       | 1,011                                |       | — |   | — |   | 1,011 |   | 1,982 |   | 325 |   | — |   | 2,307 |   |
| Other fee income-related party                           |       | —                               |       | 3,850 |   | — |   | 3,850 |   | — |   | 948 |   | 119 |   | 1,067 |   |
| Other income                                             |       | 22                                   |       | — |   | 34 |   | 56 |   | — |   | 16 |   | — |   | 16 |   |
| Total revenue                                            |       | 32,038                               |       | 18,364 |   | 217 |   | 50,619 |   | 4,654 |   | 8,336 |   | 304 |   | 13,294 |   |
| **Operating Expenses:**                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property operating expenses                              |       | 10,615                               |       | 1,286 |   | — |   | 11,901 |   | 1,566 |   | 1,582 |   | — |   | 3,148 |   |
| Reimbursed expenses                                      |       | 1,303                                |       | 12,869 |   | 122 |   | 14,294 |   | 2,222 |   | 6,193 |   | 49 |   | 8,464 |   |
| Real estate taxes                                        |       | 2,568                                |       | — |   | — |   | 2,568 |   | — |   | — |   | 22 |   | 22 |   |
| Administrative expenses                                  |       | —                               |       | — |   | 2,741 |   | 2,741 |   | — |   | — |   | 472 |   | 472 |   |
| Depreciation and amortization                            |       | 7,971                                |       | — |   | 99 |   | 8,070 |   | 13 |   | — |   | 200 |   | 213 |   |
| Interest                                                 |       | 6,620                                |       | — |   | 220 |   | 6,840 |   | — |   | — |   | 68 |   | 68 |   |
| Total operating expenses                                 |       | 29,077                               |       | 14,155 |   | 3,182 |   | 46,414 |   | 3,801 |   | 7,775 |   | 811 |   | 12,387 |   |
| Income (loss) before minority interest and  income taxes |       | 2,961                                |       | 4,209 |   | (2,965 | ) | 4,205 |   | 853 |   | 561 |   | (507 | ) | 907 |   |
| Minority interest                                        |       | 1,853                                |       | 2,493 |   | (1,856 | ) | 2,490 |   | — |   | — |   | — |   | — |   |
| Income (loss) before income taxes                        |       | 1,108                                |       | 1,716 |   | (1,109 | ) | 1,715 |   | 853 |   | 561 |   | (507 | ) | 907 |   |
| Income taxes                                             |       | 34                                   |       | 119 |   | — |   | 153 |   | — |   | — |   | — |   | — |   |
| **Net income (loss)**                                    |       | $                                    | 1,074      |   | $ | 1,597 |   | $ | (1,109 | ) | $ | 1,562 |   | $ | 853 |   | $ | 561 |   | $ | (507 | ) | $ | 907 |   |

 

***Student Housing***

 

*Revenue*.Of the 46 properties owned as of June 30, 2005, we acquired 30 of thestudent housing properties during the six months ended December 31, 2004,eight properties during the three months ended March 31, 2005, and theremaining eight properties

 

28

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during the three months ended June 30,2005. Rent from these 46 properties totaled $29.7 million for the three monthsended June 30, 2005.

 

Expense reimbursements from related parties totaled$0.3 million in 2004. There was not a corresponding amount in the three monthsended June 30, 2005 as the two student housing properties to which theexpense reimbursements related were acquired by the Company in March 2005.  In addition, we ceased managing one studenthousing property in March 2005 as it was sold to a third party.

 

Expense reimbursements from third partiesdecreased to $1.3 million in 2005 from $1.9 million in 2004 primarily due tothe Company ceasing to provide services to three third party owned studenthousing properties due to the sale of the properties. We expect expensereimbursements, which relate to properties we manage but do not own, to becomeless significant as rental revenue earned from the properties that we do owncontinues to increase.

 

Management fee income from related partieswas $0.5 million in 2004. There was not a corresponding amount in the threemonths ended June 30, 2005 as the Company acquired two student housingproperties from related parties in March 2005 that were managed by theCompany prior to purchase.  In addition,in March 2005 we ceased providing management services relating to anadditional student housing property owned by a related party due to the sale ofthe property by the third party.

 

Management fee income from third partiesdecreased to $1.0 million in 2005 from $2.0 million in 2004, due to the Companyceasing to provide management services to three student housing propertiesowned by third parties due to the sale of the properties by the third parties. Forthe remainder of 2005, 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 $10.6 million in 2005 from $1.6million in 2004, primarily due to expenses attributable to the 46 propertiesacquired from July 2004 through June 2005.  We expect expenses to increase significantlyin the future as we acquire additional properties.

 

Reimbursed expenses decreased to $1.3 millionin 2005 from $2.2 million in 2004, primarily due to the Company’s acquisitionof the two student housing properties from related parties in March 2005that were managed by the Company prior to our purchase.  In addition, in March 2005 we ceasedproviding management services relating to an additional student housingproperty owned by a third party due to the sale of the property by the thirdparty.

 

Real estate taxes amounted to $2.6 million in2005 due to the acquisition of 46 properties from July 2004 through June 2005.We expect real estate taxes to increase significantly in the future as weacquire additional properties.

 

Depreciation and amortization increased to$8.0 million in 2005 from less than $0.1 million in 2004 as a result ofacquiring 46 properties for an aggregate acquisition cost of $953.8 millionfrom July 2004 through June 2005. The $8.0 million in 2005 iscomprised of $5.1 million of depreciation and $2.9 million of lease intangibleamortization.  We expect depreciation andamortization to increase significantly in the future as we acquire additionalproperties.

 

Interest expense amounted to $6.6 million in2005 as a result of the incurring debt, including placement of new mortgagedebt and assumption of existing mortgage debt and borrowings under our line ofcredit, in connection with the acquisition of 46 properties from July 2004through June 2005. In 2005, the Company borrowed $329.0 million and repaid$258.0 million under the line of credit.  We expect interest expense toincrease in the future as we incur additional debt to fund acquisitions and ifinterest rates increase.

 

Income taxes of less than $0.1 million in2005 related to taxable income in the Company’s taxable REIT subsidiary.  There were no taxable REIT subsidiariesduring the comparable period in 2004.

 

***Military Housing***

 

*Revenue*.Expense reimbursements totaled $12.9 million in 2005 compared to $6.2 millionin 2004. Of the 2005 amount, $4.0 million related to the Fort Stewart andHunter Army Airfield project and $2.6 million related to the Fort Carsonproject, both of which commenced operations in the fourth quarter of 2003; $0.2 millionrelated to the Fort Hamilton project, which commenced operations in the secondquarter of 2004; $0.2 million related to the Walter Reed Army MedicalCenter and Fort Detrick project, which commenced operations in the thirdquarter of 2004; $0.8 million related to the Fort Eustis/Fort Storyproject and $5.1 million related to the Navy Northeast project, both ofwhich commenced operations in the fourth quarter of 2004. Of the 2004 amount,$3.8 million related to the Fort Carson project, $1.1 million related to theFort Stewart and Hunter Army Airfield project, $0.6 million related to the FortHamilton project, and $0.7 million related to costs incurred in the developmentof CDMP for the Fort Hamilton and Walter Reed Army Medical Center projects.

 

Management fees from related parties totaled$1.6 million in 2005 compared to $0.9 million in 2004.  Of the 2005amount, $0.2 million related to the Fort Stewart and Hunter Army Airfieldproject and $0.3 million related to the Fort Carson project, both of whichcommenced operations in the fourth quarter of 2003; $0.1 million related to theFort Hamilton project, which commenced operations in the second quarter of2004; $0.1 million related to the Walter Reed Army Medical Center and FortDetrick project which commenced operations in the third quarter of 2004; $0.1million related to the Fort Eustis/Fort Story project and $0.8 millionrelated to the Navy Northeast project, both of which commenced operations inthe fourth quarter of 2004. Of the 2004 amount, $0.4 million related to theFort Carson project and $0.5 million related to the Fort Stewart and HunterArmy Airfield project.

 

29

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Other fee income totaled $3.9 million in 2005compared to $0.9 million in 2004. Of the 2005 amount, $2.6 million related todevelopment and construction/renovation fees, $0.8 million related to business developmentfees, and $0.5 million related to preferred returns on the military housinginvestments. Of the $2.6 million development and construction/renovation fees,$1.1 million related to the Fort Stewart and Hunter Army Airfield project,which commenced operations in the fourth quarter of 2003; $0.3 million relatedto the Fort Hamilton project, which commenced operations in the second quarterof 2004; $0.3 million related to the Walter Reed Army Medical Center and FortDetrick project which commenced operations in the third quarter of 2004;$0.1 million related to the Fort Eustis/Fort Story project and $0.8 millionrelated to the Navy Northeast project, both of which commenced operations inthe fourth quarter of 2004.  Of the $0.5million of preferred returns, $0.2 million related to the Navy Northeastinvestment and $0.3 million related to the Fort Carson investment.  Of the $0.9 million development andconstruction/renovation fees in 2004, $0.1 million related to the Fort Carsonproject, $0.5 million related to the Fort Stewart and Hunter Army Airfieldproject, and $0.3 million related to the Fort Hamilton project.

 

*Expenses*. Property operating expenses include costs related to operating the militaryhousing segment of our business. These costs decreased to $1.3 million in 2005from $1.6 million in 2004, primarily due to costs incurred in 2004 related tothe commencement of the Fort Hamilton project in June 2004.

 

Reimbursed expenses increased to $12.9million in 2005 from $6.2 million in 2004 primarily due to increases in payrollexpenses related to the six military housing projects in operation as of June 30,2005; closing costs and transition expenses for the Fort Hamilton, Walter Reed,Fort Detrick, Fort Eustis/Fort Story, and Navy Northeast projects; and expensesrelating to the Fort Carson project’s management and renovation contracts.

 

***Corporate***

 

Rental revenue and expense reimbursements,which were recognized with respect to the portions of our corporateheadquarters leased to entities affiliated with Gary M. Holloway, Sr., andpayroll and related expenses reimbursed by entities affiliated with Mr. Hollowayfor the provision of common services, remained unchanged at $0.2 million in 2005and 2004.

 

Other fee income-related party and otherincome, consisting of income earned from entities affiliated with Gary M.Holloway, Sr. for use of the corporate aircraft and interest income, was$0.1 million in 2004.  No such fees wererecognized in comparable period of 2005.

 

Other income, consisting primarily ofinterest income and fees earned from entities affiliated with Gary M. Holloway, Sr.,remained consistent at $0.1 million in 2005 and 2004.

 

Administrative expenses, primarily relatingto management of our corporate office, accounting, legal, human resources andinformation technology, and corporate aircraft, increased to $2.8 million in2005 from $0.5 million in 2004 primarily due to increased staffing andadditional costs incurred in connection with becoming a public company andgrowth in our operating segments**.**

 

Depreciation, relating primarily to ourcorporate headquarters, decreased slightly to $0.1 million in 2005 from $0.2million in 2004 primarily due to the sale and transfer of an interest in acorporate aircraft in February 2005.

 

Interest expense increased to $0.2 million in2005 from $0.1 million in 2004 primarily due to an increase in the interestrate on our corporate headquarters loan.

 

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***Comparison of theSix Months Ended June 30, 2005 to the Six Months Ended June 30, 2004***

 
| ** **                                               | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                               | ** ** | **2005 (Company)**                 | ** ** | **2004 (Predecessor)** | ** ** |
| ** **                                               | ** ** | **Student  Housing**               | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                               | ** ** | **(in thousands)**                 | ** ** |
| **Revenue:**                                             |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income                           |       | $                                  | 55,554     |   | $ | — |   | $ | 122 |   | $ | 55,676 |   | $ | — |   | $ | — |   | $ | 270 |   | $ | 270 |   |
| Expense reimbursements:                                  |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                            |       | 186                                |       | 21,335 |   | 211 |   | 21,732 |   | 1,011 |   | 7,148 |   | 97 |   | 8,256 |   |
| Third party                                              |       | 2,577                              |       | — |   | — |   | 2,577 |   | 3,280 |   | — |   | — |   | 3,280 |   |
| Management fees:                                         |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                            |       | 197                                |       | 3,316 |   | — |   | 3,513 |   | 823 |   | 1,362 |   | — |   | 2,185 |   |
| Third party                                              |       | 1,651                              |       | — |   | — |   | 1,651 |   | 2,670 |   | 650 |   | — |   | 3,320 |   |
| Other fee income-related party                           |       | —                             |       | 7,512 |   | 31 |   | 7,543 |   | — |   | 948 |   | 263 |   | 1,211 |   |
| Other income                                             |       | 75                                 |       | 21 |   | 37 |   | 133 |   | 44 |   | 46 |   | — |   | 90 |   |
| Total revenue                                            |       | 60,240                             |       | 32,184 |   | 401 |   | 92,825 |   | 7,828 |   | 10,154 |   | 630 |   | 18,612 |   |
| **Operating Expenses:**                                  |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property operating expenses                              |       | 19,756                             |       | 2,838 |   | — |   | 22,594 |   | 2,839 |   | 2,781 |   | — |   | 5,620 |   |
| Reimbursed expenses                                      |       | 2,763                              |       | 21,335 |   | 211 |   | 24,309 |   | 4,291 |   | 7,148 |   | 97 |   | 11,536 |   |
| Real estate taxes                                        |       | 4,575                              |       | — |   | — |   | 4,575 |   | — |   | — |   | 43 |   | 43 |   |
| Administrative expenses                                  |       | —                             |       | — |   | 5,673 |   | 5,673 |   | — |   | — |   | 697 |   | 697 |   |
| Depreciation and amortization                            |       | 14,537                             |       | — |   | 307 |   | 14,844 |   | 11 |   | 8 |   | 399 |   | 418 |   |
| Interest                                                 |       | 11,782                             |       | — |   | 465 |   | 12,247 |   | — |   | — |   | 157 |   | 157 |   |
| Total operating expenses                                 |       | 53,413                             |       | 24,173 |   | 6,656 |   | 84,242 |   | 7,141 |   | 9,937 |   | 1,393 |   | 18,471 |   |
| Income (loss) before minority interest and  income taxes |       | 6,827                              |       | 8,011 |   | (6,255 | ) | 8,583 |   | 687 |   | 217 |   | (763 | ) | 141 |   |
| Minority interest                                        |       | 3,440                              |       | 3,981 |   | (3,158 | ) | 4,263 |   | — |   | — |   | — |   | — |   |
| Income (loss) before income taxes                        |       | 3,387                              |       | 4,030 |   | (3,097 | ) | 4,320 |   | 687 |   | 217 |   | (763 | ) | 141 |   |
| Income taxes                                             |       | 45                                 |       | 893 |   | — |   | 938 |   | — |   | — |   | — |   | — |   |
| **Net income (loss)**                                    |       | $                                  | 3,342      |   | $ | 3,137 |   | $ | (3,097 | ) | $ | 3,382 |   | $ | 687 |   | $ | 217 |   | $ | (763 | ) | $ | 141 |   |

 

***Student Housing***

 

*Revenue*.Of the 46 properties owned as of June 30, 2005, we acquired 30 of thestudent housing properties during the six months ended December 31, 2004,and the remaining 16 properties during the six months ended June 30, 2005.Rent from these 46 properties totaled $55.6 million for the six months ended June 30,2005.

 

Expense reimbursements from related partiesdecreased to $0.2 million in 2005 from $1.0 million in 2004, primarily due tothe Company’s acquisition of two student housing properties from relatedparties in March 2005, which were managed by the Company prior topurchase.  In addition, we ceasedmanaging one student housing property in March 2005 as it was sold to athird party.

 

Expense reimbursements from third partiesdecreased to $2.6 million in 2005 from $3.3 million in 2004 primarily due tothe Company ceasing to provide services to a student housing property owned bya third party due to the sale of the property. We expect expense reimbursements, which relate to properties we managebut do not own, to become less significant as rental revenue earned from theproperties that we do own continues to increase.

 

Management fee income from related partiesdecreased to $0.2 million in 2005 from $0.8 million in 2004. The decrease inmanagement fee income was primarily due to the Company’s acquisition of twostudent housing properties from related parties in March 2005 that weremanaged by the Company prior to purchase. In addition, in March 2005 we ceased providing management servicesrelating to an additional student housing property owned by a related party dueto the sale of the property.

 

Management fee income from third partiesdecreased to $1.7 million in 2005 from $2.7 million in 2004, primarily due to theCompany ceasing to manage three student housing properties owned by thirdparties due to the sale of the properties. For the remainder of 2005, 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 $19.8 million in 2005 from $2.8million in 2004, primarily due to expenses attributable to the 46 propertiesacquired from July 2004 through June 2005.  We expect expenses to increase significantlyin the future as we acquire additional properties.

 

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Reimbursed expenses decreased to $2.8 millionin 2005 from $4.3 million in 2004, primarily due to the Company’s acquisitionof the two student housing properties from related parties in March 2005that were managed by the Company prior to our purchase.  In addition, during the six months ended June 30,2005, we ceased providing management services relating to three student housingproperties owned by third parties and a student housing property owned by arelated party due to the sale of the properties.

 

Real estate taxes amounted to $4.6 million in2005 due to the acquisition of 46 properties from July 2004 through June 2005.We expect real estate taxes to increase significantly in the future as weacquire additional properties.

 

Depreciation and amortization increased to$14.5 million in 2005 from less than $0.1 million in 2004 as a result ofacquiring 46 properties for an aggregate acquisition cost of $953.8 millionfrom July 2004 through June 2005. The $14.5 million in 2005 iscomprised of $9.3 million of depreciation and $5.2 million of lease intangibleamortization. We expect depreciation and amortization to increase significantlyin the future as we acquire additional properties.

 

Interest expense amounted to $11.8 million in2005 as a result of incurring debt, including placement of new mortgage debtand assumption of existing mortgage debt, and borrowings under our line ofcredit, in connection with the acquisition of 46 properties from July 2004through June 2005. In 2005, the Company borrowed $329.0 million and repaid$258.0 million under the line of credit.  We expect interest expense toincrease in the future as we incur additional debt to fund acquisitions and ifinterest rates increase.

 

Income taxes amounted to less than $0.1million in 2005 as a result of taxable income in the Company’s taxable REITsubsidiary. There were no taxable REIT subsidiaries during the comparableperiod in 2004.

 

***Military Housing***

 

*Revenue*.Expense reimbursements totaled $21.3 million in 2005 compared to $7.1 millionin 2004. Of the 2005 amount, $6.0 million related to the Fort Stewart andHunter Army Airfield project and $5.0 million related to the Fort Carsonproject, both of which commenced operations in the fourth quarter of 2003; $0.3 millionrelated to the Fort Hamilton project, which commenced operations in the secondquarter of 2004; $0.5 million related to the Walter Reed Army MedicalCenter and Fort Detrick project, which commenced operations in the thirdquarter of 2004; $1.4 million related to the Fort Eustis/Fort Storyproject; and $8.1 million related to the Navy Northeast project, both ofwhich commenced operations in the fourth quarter of 2004. Of the 2004 amount,$4.8 million related to the Fort Carson project, $1.1 million related to theFort Stewart and Hunter Army Airfield project, $0.6 million related to the FortHamilton project, and $0.6 million related to costs incurred in the developmentof CDMP for the Fort Hamilton and Walter Reed Army Medical Center projects.

 

Management fees from related parties totaled$3.3 million in 2005 compared to $1.4 million in 2004.  Of the 2005amount, $0.5 million related to the Fort Stewart and Hunter Army Airfieldproject and $0.7 million related to the Fort Carson project, both of whichcommenced operations in the fourth quarter of 2003; $0.1 million related to theFort Hamilton project, which commenced operations in the second quarter of2004; $0.1 million related to the Walter Reed Army Medical Center and FortDetrick project which commenced operations in the third quarter of 2004; $0.3million related to the Fort Eustis/Fort Story project and $1.6 millionrelated to the Navy Northeast project, both of which commenced operations inthe fourth quarter of 2004.  Of the 2004amount, $0.6 million related to the Fort Carson project and $0.8 millionrelated to the Fort Stewart and Hunter Army Airfield project.

 

Other fee income totaled $7.5 million in 2005compared to $0.9 million in 2004. Of the 2005 amount, $5.1 million related todevelopment and construction/renovation fees earned from related parties, $1.5million related to business development fees, and $0.9 million related topreferred returns on the military housing investments. Of the $5.1 million of developmentand construction/renovation fees, $2.0 million related to the Fort Stewart andHunter Army Airfield project, which commenced operations in the fourth quarterof 2003; $0.5 million related to the Fort Hamilton project, which commencedoperations in June 2004; $0.6 million related to the Walter Reed ArmyMedical Center and Fort Detrick project which commenced operations in July 2004;$0.3 million related to the Fort Eustis/Fort Story project and $1.7 millionrelated to the Navy Northeast project, both of which commenced operations inthe fourth quarter of 2004.  Of the $0.9million of preferred returns, $0.4 million related to the Navy Northeastinvestment and $0.5 million related to the Fort Carson investment.  Of the $0.9 million development andconstruction/renovation fees in 2004, $0.1 million related to the Fort Carson project,$0.3 million related to the Fort Hamilton project, and $0.5 million related tothe Fort Stewart Hunter Army Airfield project.

 

*Expenses*. Property operating expenses include costs related to operating the militaryhousing segment of our business. These costs were unchanged at $2.8 million in2005 and 2004.

 

Reimbursed expenses increased to $21.3million in 2005 from $7.1 million in 2004 primarily due to payroll expenses relatedto the six military housing projects in operation as of June 30, 2005;closing costs and transition expenses for the Fort Hamilton, Walter Reed, FortDetrick, Fort Eustis/Fort Story, and Navy Northeast projects; and expensesrelating to the Fort Carson project’s management and renovation contracts.

 

***Corporate***

 

Rental revenue and expense reimbursements,which were recognized with respect to the portions of our corporateheadquarters leased to entities affiliated with Gary M. Holloway, Sr., andpayroll and related expenses reimbursed by entities affiliated with Mr. Hollowayfor the provision of common services, remained unchanged at $0.3 million in2005 and 2004.

 

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Other fee income-related party and otherincome, consisting primarily of interest income and fees earned from entitiesaffiliated with Gary M. Holloway, Sr., decreased slightly to $0.1 millionin 2005 from $0.3 million in 2004.

 

Administrative expenses, primarily relatingto management of our corporate office, accounting, legal, human resources andinformation technology, and corporate aircraft, increased to $5.7 million in2005 from $0.7 million in 2004 primarily due to increased staffing and additionalcosts incurred in connection with becoming a public company and growth in ouroperating segments**.**

 

Depreciation, relating primarily to ourcorporate headquarters, decreased slightly to $0.3 million in 2005 from $0.4million in 2004 primarily due to the sale and transfer of an interest in acorporate aircraft in February 2005.

 

Interest expense increased to $0.5 million in2005 from $0.2 million in 2004 primarily due to an increase in the interestrate on our corporate headquarters loan and the corporate aircraft loan.

 

**Liquidity and Capital Resources**

 

Short-term liquidity requirements consistprimarily of funds necessary to pay operating expenses and other costs. Theseexpenses and costs may include (i) recurring maintenance and capitalexpenditures to maintain and lease our properties, (ii) interest expenseand scheduled principal payments on outstanding indebtedness, (iii) realestate taxes and insurance, (iv) corporate salaries, employee benefits andother corporate overhead and administrative expenses and (v) futuredistributions to shareholders and partners of our Operating Partnership. Ourexisting working capital and cash provided by operations, together with amountsavailable to us under our $150.0 million revolving credit facility are expectedto be sufficient to meet our short-term liquidity requirements.   Availability under the credit facility as ofJune 30, 2005 was limited to a borrowing base amount equal to the sum of60% of the value of an unencumbered asset pool as of the end of the previousquarter (which in no event may contain fewer than five student housingproperties) and 50% of the annualized value of our cash flow from ourmanagement of military housing projects and student housing properties in theprevious quarter. The credit facility was obtained by our Operating Partnershipin November 2004, and the Trust serves as guarantor for the creditfacility. Advances under the credit facility bear interest, at the election ofthe borrower, at a Eurodollar rate based on LIBOR or a base rate based on theprime rate announced by Bank of America, N.A., as the administrative agent ofthe facility, plus an “Applicable Rate,” ranging from 1.50% to 2.00% forEurodollar rate loans or 0.625% to 1.375% for base rate loans. The ApplicableRate is determined by the ratio of all liabilities to the total asset value ofthe Company, as defined in the credit facility. The credit facility alsorequires that we maintain certain corporate level financial covenants.

 

As of June 30, 2005, we had availabilityunder the credit facility equal to $150.0 million, of which $71.0 million inborrowings was outstanding, and bearing interest at a Eurodollar rate based on30-day LIBOR of 3.24% and an Applicable Rate of 2.00%, for a total interestrate of 5.24%.  As of July 31, 2005,the interest rate was 5.41%.  In July 2005,we borrowed an additional $27.0 million under the credit facility to finance acquisitionsand to pay the second quarter dividend distribution with respect to ouroutstanding common shares and units of limited partnership interest of ourOperating Partnership.  The interest rateon the $27.0 million borrowing was 5.38% as of July 31, 2005.  In addition, in July 2005, we repaid $5.0million on the credit facility. As of June 30, 2005 and July 31,2005, there were no letters of credit outstanding under the credit facility.

 

AtJune 30, 2005, the Company’s leverage ratio exceeded the 60% ceiling setforth in the Credit Facility.  TheCompany received a formal waiver of this instance of noncompliance with thefinancial covenant.

 

InAugust 2005, the Company amended the Credit Facility (the “Amendment”).  Under the Amendment, the calculation of theborrowing base was revised to include cash flow from the military housingconstruction and development fees and to increase the total cash flow attributableto annualized fees from the management, construction and development of themilitary housing projects and student housing properties from 35% to 50%.  The Amendment also increased the applicable interestrate ranges on outstanding borrowings under the Credit Facility to thefollowing: 1.625% to 2.375% for Eurodollar rate loans or 0.75% to 1.75% forprime rate loans. In addition, the Amendment modified the calculation of theleverage ratio and increased the maximum leverage ratio from 60% to 65% throughDecember 31, 2005.  At the end ofthe first quarter of 2006, the maximum leverage ratio will revert to 60%.

 

We will elect to be treated as a REIT forfederal income tax purposes when we file our tax return relating to the fiscalyear ended December 31, 2004. The tax return will be filed with the IRS inSeptember 2005 pursuant to an extension granted to us in March 2005.As a REIT, we are required to distribute at least 90% of our REIT taxableincome to our shareholders on an annual basis. Therefore, except as discussedbelow, as a general matter, a substantial portion of cash generated by ouroperations will be used to fund distributions to shareholders and holders oflimited partnership interests in our Operating Partnership, and will not beavailable to satisfy our liquidity needs.

 

Future dividends and distributions will bedeclared at the discretion of our board of trustees and will depend on ouractual cash flow, our financial condition, capital requirements, the annualdistribution requirements under the REIT provisions of the Code and other suchfactors as our board of trustees deems relevant. We expect that during most of2005, our cash flow from operations will be insufficient to fund ouranticipated dividend distributions. Therefore, we expect to rely on amountsavailable under our credit facility or through other third party debt financingin order to fund these distributions and other capital needs.  In addition, our board of trustees may chooseto pay a lower distribution in the event we are unable to obtain suchfinancing. Any indebtedness we incur will increase our leverage and decreaseour ability to borrow money for other needs, such as for the acquisition ordevelopment of

 

33

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additional student housingproperties or investments relating to additional military housing projects.

 

As of June 30, 2005, 39 of our studenthousing properties, our corporate headquarters, and other assets wereencumbered by notes payable aggregating $551.1 million and secured by firstliens on the individual assets with an aggregate cost basis of approximately $787.1million before accumulated depreciation. Our notes payable have a weighted-average interest rate of 4.90% andmature at various dates between August 2005 and June 2015 and requiremonthly payments of principal and interest or monthly payments of interestonly. The table below sets forth for the five succeeding years and thereafterthe aggregate annual principal payments of our notes payable and creditfacility (in thousands):

 

| 2005                |   | $       | 8,171   |   |
|---------------------|--------|---------|---------|--------|
| 2006                |   | 5,188   |    |
| 2007                |   | 158,960 |    |
| 2008                |   | 4,708   |    |
| 2009                |   | 34,076  |    |
| 2010                |   | 65,954  |    |
| 2010 and thereafter |   | 345,043 |    |
|                |   | $       | 622,100 |   |

 

With regard toour military housing projects, we made a $10.6 million equity contribution in November 2004relating to our Navy Northeast project and have contractually committed tocontribute an aggregate 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, $8.0million in 2011 for our Fort Stewart and Hunter Army Airfield project, and $7.0million in 2011 for our Fort Bliss/White Sands project. These equity contributionshelp to fund the development, construction and renovation of housing units atthese bases during their respective initial development periods.

 

Typically, we are reimbursed for certainpayroll expenses relating to the student housing properties we manage for thirdparties, for certain costs we incur after we are awarded 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 with transitionand exclusive negotiations, depending on the size of the project. Theexpenditures typically begin 12 months prior to closing the military housingproject. Accordingly, these timing differences add to our short-term liquidityneeds.

 

If cash flows from any of our militaryhousing projects are insufficient to meet the coverage ratios or benchmarksentitling us to receive fee payments, any unpaid fees will accumulate and besubsequently paid from operations or upon dissolution of the projects to theextent that funds are available and the applicable thresholds are met. If thesethresholds are not met, we will not have access to certain of the fees we haveearned. The unavailability of these funds would materially impact our abilityto meet our short-term and long-term liquidity needs. We will be required tomake equity contributions at the beginning of the initial development periodfor typical Navy transactions and at the end of the initial development periodfor typical Army transactions. If cash flow is insufficient, any unpaid equityreturns will accumulate as specified in the applicable project agreement andsubsequently be paid from operations or upon dissolution of the projects to theextent the funds are available. Based on our current expectations regarding theterms of the debt funding for our military projects, we expect that theprojects will generate sufficient cash flows to fund the reinvestment accountand pay anticipated equity returns.

 

With regard to our currently owned studenthousing properties, we do not have any short-term capital commitments; however,we will require funds in connection with our anticipated acquisitions ofadditional student housing properties. We intend to fund the equity portion ofthe purchase price for these additional student housing properties by usingfunds from our credit facility or from available cash from operations. Inaddition, we may leverage our existing student housing properties in order tohave cash available to fund the purchase price of additional student housingproperties. Depending upon the size of the Company’s student housingacquisition pipeline and the timing of closings on our properties undercontract and non-binding letter of intent, the amount of cash required to fundplanned student housing acquisitions during 2005 may exceed the maximumcapacity available under our existing credit facility. We also may pursueadditional financing as opportunities arise. Future financings may include a range of different sizes or types offinancing, including the sale of additional debt or equity securities.  While we believe we will be able to obtainsuch funds, these funds may not be available on favorable terms or at all. Ourability to obtain additional financing depends on several factors, includingfuture market conditions, our success or lack of success in penetrating ourmarkets, our future creditworthiness, and restrictions contained in agreementswith our investors or lenders, including the restrictions contained in theagreement governing our revolving credit facility.  These financings could increase our level ofindebtedness or result in dilution to our equity holders.

 

Long-term liquidity requirements with respectto our student housing and military housing segments consist primarily of

 

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amounts necessary to fundscheduled debt maturities, renovations and other non-recurring capitalexpenditures that need to be made periodically at our properties, and the costsassociated with acquisitions of student housing properties and awards or acquisitionsof military housing projects that we pursue. Historically, we have satisfiedour long-term liquidity requirements through various sources of capital,including existing working capital, cash provided by operations, long-termmortgage indebtedness, and owner contributions. We now expect our long-term liquidity requirements to be satisfiedprimarily through cash generated by operations that is not used to funddistributions and the additional external financing sources discussed above.

 

*Inflation*

 

As a majority of the Company’s studenthousing leases are 12 months or less, rates on in-place leases generallyapproximate market rental rates.  TheCompany believes that inflationary increases in expenses will be significantlyoffset by rent increases upon renewal.  Amajority of the Company’s military housing management fees,construction/renovation fees and business development fees are based on apercentage of revenue or expenses generated by the Company or the militaryhousing projects.  The Company believesthat inflationary increases in expenses will be significantly offset byincreases in revenue.

 

**Item 3.****          Quantitative and Qualitative Disclosure About MarketRisk**

 

Given current market conditions, our strategyfavors fixed-rate, secured debt over variable-rate debt to minimize ourexposure to increases in interest rates. As of June 30, 2005, 76% of theoutstanding principal amount of our notes payable secured by properties weowned as of such date had fixed interest rates with a weighted-average rate of4.85%. The remaining 24% of outstanding principal amount of our notes payableand line of credit, as of June 30, 2005, had variable interest ratesprimarily equal to LIBOR plus 1.75% to 2.25%.

 

Based on our variable rate debt balance as ofJune 30, 2005, if interest rates were to increase by 1.0%, our interestexpense would increase by approximately $0.8 million on an annual basis.

 

As of June 30, 2005, we had $71.0 millionin funds drawn from our credit facility, bearing an interest rate at aEurodollar rate based on a 30-day LIBOR at 3.24% and an applicable rate of 2.00%,for a total interest rate of 5.24%.

 

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

 

*(a)**          Evaluation of Disclosure Controls andProcedures. *Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of our disclosure controls and procedures as of theend of the period covered by this report. Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures as of the end of the period covered by this report havebeen designed and are functioning effectively to provide reasonable assurancethat the information required to be disclosed by us in reports filed under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms. We believethat a controls system, no matter how well designed and operated, cannotprovide absolute assurance that the objectives of the controls system are met,and no evaluation of controls can provide absolute assurance that all controlissues and instances of fraud, if any, within a company have been detected.

 

*(b)**          Change in Internal Control over Financial Reporting. *There have been no changes in ourinternal control over financial reporting during our most recent fiscal quarterthat have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

**PART II — OTHER INFORMATION**

 

**Item1.****          Legal Proceedings**

 

None.

 

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

 

None.

 

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

 

None.

 

**Item 4.****          Submission of Matters to a Vote of Security Holders**

 

We held our Annual Meeting of Shareholders on June 8,2005. The number of votes represented at the annual meeting, in person or byproxy, was 27,992,557. At the meeting, our shareholders voted on the electionof trustees.

 

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Election of Trustees. The results of the vote on theelection of eight trustees are set forth as follows, opposite their respectivenames:

 
| **Name**                     | ** ** | **For**    | ** ** | **Withheld** | ** ** | **Broker Non-votes** | ** ** |
|------------------------------|------------|------------|------------|--------------|------------|----------------------|------------|
| Gary M. Holloway, Sr.   |       | 26,187,526 |       | 1,805,031    |       | 0                    |       |
| Bruce F. Robinson            |       | 26,189,526 |       | 1,803,031    |       | 0                    |       |
| Frederick F. Buchholz        |       | 26,200,329 |       | 1,792,228    |       | 0                    |       |
| RADM James W. Eastwood (Ret) |       | 26,191,779 |       | 1,800,778    |       | 0                    |       |
| Steven J. Kessler            |       | 22,897,642 |       | 5,094,915    |       | 0                    |       |
| Denis J. Nayden              |       | 22,903,642 |       | 5,088,915    |       | 0                    |       |
| Dennis J. O’Leary       |       | 22,895,289 |       | 5,097,268    |       | 0                    |       |
| Richard A. Silfen            |       | 22,432,813 |       | 5,559,744    |       | 0                    |       |

 

**Item5.****          Other Information**

 

*Entry Into a Material DefinitiveAgreement*

 

On August 11, 2005, the Company entered into anAircraft Lease Agreement with Corporate Flight Services, LLC, an entity that iswholly-owned by Gary M. Holloway, Sr. Pursuant to this agreement, theOperating Partnership, College Park Management, LLC and GMH Military HousingManagement, LLC have the right to lease a corporate aircraft owned by CorporateFlight Services, LLC under the terms and conditions set forth in the agreement.Specifically, the lease agreement has an initial term of 12 months, withautomatically renewing terms for successive one-year periods unless either aparty provides notice of termination to the other at least 60 days prior to theend of the applicable term.  In addition,there is no requirement that the corporate aircraft be used for any minimumamount of time, and each lessee agrees to pay $2,850 per hour for actual use ofthe aircraft (“Aircraft Hourly Fixed Rent Rate”), plus other related flightexpenses. Corporate Flight Services, LLC may, from time to time, propose tochange the Aircraft Hourly Fixed Rent Rate by written notice to the lessees atleast 30 days prior to the proposed effective date of the change, and thelessees then will have the right to terminate the lease agreement by providingwritten notice to Corporate Flight Services, LLC.  A copy of the executed lease agreement isattached as Exhibit 10.1 to this Quarterly Report on Form 10-Q forthe period ended June 30, 2005.  Theform of lease agreement was approved by the Audit Committee of the Company’sBoard of Trustees, in accordance with the Company’s Code of Business Conductand Ethics.

 

OnAugust 9, 2005, the Company amended the Credit Facility (the “Amendment”).  Under the Amendment, the calculation of theborrowing base was revised to include cash flow from the military housingconstruction and development fees and to increase the total cash flowattributable to annualized fees from the management, construction anddevelopment of the military housing projects and student housing propertiesfrom 35% to 50%.  The Amendment alsoincreased the applicable interest rate ranges on outstanding borrowings underthe Credit Facility to the following: 1.625% to 2.375% for Eurodollar rateloans and 0.75% to 1.75% for prime rate loans. In addition, the Amendment modified the calculation of the leverageration and increased the maximum leverage ratio from 60% to 65% through December 31,2005.  At the end of the first quarter of2006, the maximum leverage ratio will revert to 60%. A copy of theAmendment is filed as an exhibit with this report.

 

*Election of Trustees*

 

On August 10, 2005, the Company’s Board ofTrustees approved an increase in the number of trustees to serve on the Boardfrom eight to nine members, and appointed Michael D. Fascitelli to fill thevacancy created by such increase.  Mr. Fascitelliwas selected in connection with the Company’s receipt of notice from VornadoRealty, LP (“Vornado”) that it wished to exercise an option to appoint atrustee to the Board in accordance with the terms of its Second Amended andRestated Warrant, dated as of July 27, 2004, as amended, issued by us andour operating partnership in connection with our formation transactions.  Under the warrant, so long as Vornado holdscommon shares or operating partnership units acquired at a price of not lessthan $10 million, Vornado has the right to appoint Michael D. Fascitelli orsuch other executive officer of Vornado that would be reasonably acceptable tothe Company, to our

 

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Board of Trustees.  In accordance with the Company’s bylaws, Mr. Fascitellihas been appointed to serve on the Company’s Board until the next annualmeeting of shareholders.  At this time, Mr. Fascitellihas not been appointed to serve on any committees of the Company’s Board ofTrustees, and he is not expected to be appointed to any of the standingcommittees of the Board.  Mr. Fascitelliis the President of Vornado Realty Trust.

 

Priorto our initial public offering, Vornado and Mr. Holloway were the soleequity holders of our operating partnership and each held, through affiliatedentities, general partnership interests in our operating partnership.Concurrent with the closing of our initial public offering on November 2, 2004, we became the solegeneral partner of our operating partnership. In accordance with the terms ofthe limited partnership agreement of our operating partnership and concurrentwith the completion of our initial public offering on November 2, 2004, wepaid approximately $77.3 million to Vornado relating to the redemption ofall of Vornado’s Class B partnership interests in our operatingpartnership, based on Vornado’s $113.8 million contribution to theoperating partnership as of the date of the initial public offering, plus apreferential return in the amount of $13.5 million, and after givingeffect to the surrender by Vornado of $50.0 million in value of itspre-offering partnership interest in the operating partnership, as payment forthe portion of the Warrant required to be exercised upon completion of ourinitial public offering under the terms of the warrant. Upon closing of ourinitial public offering, Vornado exercised the warrant to purchase 6,666,667units of limited partnership interest in our operating partnership at a priceof $7.50 per unit, which represented a 20.972% economic interest in theoperating partnership immediately prior to our initial public offering. As of June 30,2005, the remaining portion of the warrant was exercisable for up to 5,762,694units of limited partnership interest of the operating partnership or commonshares, at an exercise price of $8.68 per unit or common share, at any timeduring the 18 months following the closing of our initial public offering.

 

During the period in whichit may be exercised, Vornado is entitled to broad anti-dilution rights underthe terms of the warrant. Among other things, these rights entitle Vornado, orany other permitted transferees of the warrant, to anti-dilution protection inthe case of issuances by GMH Communities Trust or the operating partnership ofequity securities at a price below the greater of (i) the fair marketvalue of such securities, and (ii) the then applicable exercise price ofthe warrant, as well as in the case of payments by GMH Communities Trust or theoperating partnership of distributions on equity securities, in cash orotherwise, including our regular quarterly distributions; however, certainlimited issuances of equity securities under our equity incentive plan will beexcluded from this anti-dilution protection. In the event that theanti-dilution provisions of the warrant are triggered, the then effective exerciseprice of the warrant, and in certain circumstances the number of common sharesor units of limited partnership interest in the operating partnership for whichit may be exercised, will be adjusted for the dilution to the warrant holder asa result of these issuances and distributions.

 

Vornado and an affiliate of Vornado, which alsocontributed interests in a student housing property to the operatingpartnership in connection with our initial public offering, also haveregistration rights with respect to the common shares issuable under thewarrant or upon redemption of limited partnership units in the operatingpartnership, which rights require that we register these shares for resale. Seethe section entitled “Shares Eligible for Future Sale” in our finalprospectus as filed with the Securities and Exchange Commission on October 28,2004, for a description of these registration rights.

 

**Item 6.****                         Exhibits**

 
| **Exhibit** | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1        |       | Aircraft Lease Agreement, effective as of August 11, 2005, by  and among Corporate Flight Services, LLC, College Park Management, LLC, GMH  Military Housing Management, LLC and GMH Communities, LP.                                                                                                                                                                                                                                                                                                                           |
| 10.2        |       | Second Amendment and Waiver to Credit Agreement, dated  August 10, 2005, by and among GMH Communities, LP, GMH Communities Trust  (“Trust”), each subsidiary of the Trust that becomes a borrower, Bank of  America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer and  the following lenders: Eurohypo AG, New York Branch, JPMorgan Chase Bank,  Deutsche Bank Trust Company Americas, Merrill Lynch Bank USA, Morgan Stanley  Bank, and Bank Midwest.                                            |
| 31.1        |       | Certifications of Chief Executive Officer Required by  Rule 13a-14(a) of the Securities Exchange Act of 1934, as  amended.(furnished herewith)                                                                                                                                                                                                                                                                                                                                                                             |
| 31.2        |       | Certifications of Chief Financial Officer Required by  Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.  (furnished herewith)                                                                                                                                                                                                                                                                                                                                                                            |
| 32.1        |       | Certifications of Chief 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        |       | Certifications of Chief 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 Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|                       | GMH COMMUNITIES TRUST                 |
|----------------------------|---------------------------------------|
|                       |                                  |
|                       |                                  |
| Date: August 12, 2005 | /s/ Gary M. Holloway, Sr.        |
|                       | Gary M. Holloway, Sr.            |
|                       | President and Chief Executive Officer |
|                       |                                  |
|                       |                                  |
|                       | /s/ Bradley W. Harris                 |
|                       | Bradley W. Harris                     |
|                       | Senior Vice President                 |
|                       | and Chief Financial Officer           |

 

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