**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

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

 

**For the quarterly periodended March 31, 2006**

 
| **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**

**GMH COMMUNITIES TRUST**

(ExactName of Registrant as Specified in Its Charter)

 

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

 

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

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes  o** **   No  ý

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

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).
|  | Yes o     No x |   |
|--|---------------------------------------------------|--------|

 

On August 4, 2006,41,566,198 of the registrant’s commonshares of beneficial interest, $0.001 par value, were outstanding.

 

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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 1A. Risk Factors                                                                                |
| 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 REGARDINGFORWARD-LOOKING STATEMENTS**

Our disclosure and analysis in this document contain forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. Forward-looking statements provide our current expectationsor forecasts of future events and are not statements of historical fact. Theseforward-looking statements include information about possible or assumedfuture events, including, among other things, operating or financialperformance, strategic plans and objectives, or regulatory or competitiveenvironments. Statements regarding the following subjects are forward-lookingby their nature:

·      our ability to successfullyimplement our business strategy, including our ability to acquire and managestudent housing properties and to secure and operate military housingprivatization projects;

·      our projected operatingresults and financial condition;

·      completion of any of ourtargeted acquisitions or development projects within our expected timeframe orat all;

·      our ability to obtain futurefinancing arrangements on terms acceptable to us, or at all;

·      estimates relating to, andour ability to pay, future dividends;

·      our ability to qualify as aREIT for federal income tax purposes;

·      our understanding of ourcompetition, market opportunities and trends;

·      projected timing and amountsof capital expenditures;

·      our ability to successfully implement remedial measures that willeffectively address material weaknesses and significant deficiencies that havebeen identified with respect to our disclosure controls and internal controlsover financial reporting; and

·      the impact of technology onour properties, operations and business.

Theforward-looking statements are based on our beliefs, assumptions andexpectations of our future performance, taking into account all information currently available to us. These beliefs,assumptions and expectations can change as a result of many possible events orfactors, not all of which are known to us. If a change occurs, our business,financial condition, liquidity and results of operations may vary materiallyfrom those expressed in our forward-looking statements. Factors that couldcause actual results to differ materially from our management’s currentexpectations include, but are not limited to:

·      the factors referenced inthe sections of our Annual Report of Form 10-K for the year endedDecember 31, 2005 titled “*Risk Factors*”and “*Management’s Discussion and Analysis ofFinancial Condition and Results of Operations*;”

·      changes in our businessstrategy, including acquisition and development activities;

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

·      availability of qualifiedand/or sufficient personnel, including, but not limited, within our finance andaccounting staff;

·      failure to effectively remediate existing material weaknesses andsignificant deficiencies in our disclosure controls and internal controls overfinancial reporting, including through the implementation of such measures asdiscussed in the section of our Annual Report on Form

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10-K for the year ended December 31, 2005titled “*Controls and Procedures*”under Item 9A, or failure to identify additional material weaknesses and significant deficiencies in our disclosurecontrols and internal controls over financial reporting that could occur in thefuture;

·      the adverse effects of pending litigation or any investigation of theCompany by the United States Securities and Exchange Commission, or SEC;

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

·      the effects of military baserealignment and closures or deployments on installations covered by ourmilitary housing privatization projects;

·      high leverage on theentities that own the military housing privatization projects;

·      reductions in governmentmilitary spending;

·      changes in studentpopulation enrollment at colleges and universities or adverse trends in theoff-campus student housing market;

·      changes in the student and militaryhousing industry, interest rates or the general economy;

·      changes in local real estateconditions (including changes in rental rates and the number of competingproperties) and the degree and nature of our competition;

·      failure to lease unoccupiedspace in accordance with management’s projections;

·      potential liability underenvironmental or other laws; and

·      the existence of complexregulations relating to our status as a REIT and the adverse consequences ofour failure to qualify as a REIT.

When we use thewords “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.****    FinancialStatements**

**GMH COMMUNITIES TRUST****CONSOLIDATED BALANCE SHEETS**(in thousands, except par value and number of shares)
| ** **                                                                                                                                                                      | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                      | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Real estate investments:                                                                                                                                                        |       |                     |       |                        |       |
| Student housing  properties                                                                                                                                                     |       | $                        | 1,305,636  |                        | $          | 1,210,255 |   |
| Accumulated  depreciation                                                                                                                                                       |       | 37,521                   |       | 29,039                      |       |
|                                                                                                                                                                            |       | 1,268,115                |       | 1,181,216                   |       |
| Corporate assets:                                                                                                                                                               |       |                     |       |                        |       |
| Corporate assets                                                                                                                                                                |       | 8,597                    |       | 8,178                       |       |
| Accumulated  depreciation                                                                                                                                                       |       | 652                      |       | 565                         |       |
|                                                                                                                                                                            |       | 7,945                    |       | 7,613                       |       |
| Cash and cash  equivalents                                                                                                                                                      |       | 9,628                    |       | 2,240                       |       |
| Restricted cash                                                                                                                                                                 |       | 13,355                   |       | 11,625                      |       |
| Accounts and other  receivables, net:                                                                                                                                           |       |                     |       |                        |       |
| Related party                                                                                                                                                                   |       | 18,157                   |       | 19,191                      |       |
| Third party                                                                                                                                                                     |       | 3,061                    |       | 2,925                       |       |
| Investments in military  housing projects                                                                                                                                       |       | 38,638                   |       | 37,828                      |       |
| Deferred contracts  costs                                                                                                                                                       |       | 1,677                    |       | 1,063                       |       |
| Deferred financing  costs, net                                                                                                                                                  |       | 4,113                    |       | 4,088                       |       |
| Lease intangibles, net                                                                                                                                                          |       | 2,435                    |       | 3,201                       |       |
| Deposits                                                                                                                                                                        |       | 1,972                    |       | 2,856                       |       |
| Other assets                                                                                                                                                                    |       | 4,300                    |       | 4,105                       |       |
| Total assets                                                                                                                                                                    |       | $                        | 1,373,396  |                        | $          | 1,277,951 |   |
| **LIABILITIES AND BENEFICIARIES’  EQUITY**                                                                                                                                 | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Notes payable                                                                                                                                                                   |       | $                        | 760,338    |                        | $          | 692,069 |   |
| Line of credit                                                                                                                                                                  |       | 75,000                   |       | 36,000                      |       |
| Accounts payable                                                                                                                                                                |       | 4,306                    |       | 5,566                       |       |
| Accrued expenses                                                                                                                                                                |       | 22,930                   |       | 21,253                      |       |
| Dividends and  distributions payable                                                                                                                                            |       | 16,227                   |       | 16,227                      |       |
| Other liabilities                                                                                                                                                               |       | 23,282                   |       | 21,337                      |       |
| Total  liabilities                                                                                                                                                              |       | 902,083                  |       | 792,452                     |       |
| Minority interest                                                                                                                                                               |       | 182,347                  |       | 188,633                     |       |
| Commitments and  contingencies (Note 9)                                                                                                                                         |       | —                   |       | —                      |       |
| Beneficiaries’ equity:                                                                                                                                                     |       |                     |       |                        |       |
| Common shares of  beneficial interest, $0.001 par value; 500,000,000   shares authorized, 39,699,843 issued and outstanding at March 31,   2006 and December 31, 2005 |       | 40                       |       | 40                          |       |
| Preferred  shares—100,000,000 shares authorized, no shares issued or   outstanding                                                                                         |       | —                   |       | —                      |       |
| Additional paid-in  capital                                                                                                                                                     |       | 325,127                  |       | 325,455                     |       |
| Unearned share  compensation                                                                                                                                                    |       | —                   |       | (320                        | )          |
| Cumulative earnings                                                                                                                                                             |       | 7,450                    |       | 6,310                       |       |
| Cumulative dividends                                                                                                                                                            |       | (43,651                  | )          | (34,619                     | )          |
| Total  beneficiaries’ equity                                                                                                                                               |       | 288,966                  |       | 296,866                     |       |
| Total liabilities and  beneficiaries’ equity                                                                                                                               |       | $                        | 1,373,396  |                        | $          | 1,277,951 |   |

* *

*See accompanying notes to consolidated financial statements.*

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**GMH COMMUNITIES TRUST****CONSOLIDATED STATEMENTS OF OPERATIONS**(Unaudited and in thousands, except share and per share information)

 
| ** **                                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                                                                         | ** ** | ** **                                           | ** ** | **(Restated)** | ** ** |
| **Revenue:**                                                                                       | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Rent and other property income                                                                     |       | $                                                    | 44,037     |   | $ | 25,841 |   |
| Expense reimbursements:                                                                            |       |                                                 |       |   |   |
| Related party                                                                                      |       | 13,380                                               |       | 8,087 |   |
| Third party                                                                                        |       | 1,336                                                |       | 1,274 |   |
| Management fees:                                                                                   |       |                                                 |       |   |   |
| Related party                                                                                      |       | 2,039                                                |       | 1,867 |   |
| Third party                                                                                        |       | 1,008                                                |       | 537 |   |
| Other fee income-related party                                                                     |       | 4,680                                                |       | 3,255 |   |
| Other income                                                                                       |       | 91                                                   |       | 111 |   |
| Total revenue                                                                                      |       | 66,571                                               |       | 40,972 |   |
| **Operating  Expenses:**                                                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Property operating expenses                                                                        |       | 18,205                                               |       | 10,068 |   |
| Reimbursed expenses                                                                                |       | 14,716                                               |       | 9,361 |   |
| Real estate taxes                                                                                  |       | 4,201                                                |       | 2,012 |   |
| Administrative expenses                                                                            |       | 3,765                                                |       | 2,942 |   |
| Audit Committee special investigation expenses                                                     |       | 2,575                                                |       | — |   |
| Depreciation and amortization                                                                      |       | 10,349                                               |       | 7,725 |   |
| Interest                                                                                           |       | 10,954                                               |       | 5,357 |   |
| Total operating expenses                                                                           |       | 64,765                                               |       | 37,465 |   |
| Income before  equity in earnings of unconsolidated entities, income taxes   and minority interest |       | 1,806                                                |       | 3,507 |   |
| Equity in  earnings of unconsolidated entities                                                     |       | 1,216                                                |       | 486 |   |
| Income before  income taxes and minority interest                                                  |       | 3,022                                                |       | 3,993 |   |
| Income taxes                                                                                       |       | 973                                                  |       | 1,140 |   |
| Income before  minority interest                                                                   |       | 2,049                                                |       | 2,853 |   |
| Minority  interest                                                                                 |       | 909                                                  |       | 1,408 |   |
| Net income                                                                                         |       | $                                                    | 1,140      |   | $ | 1,445 |   |
|                                                                                               |       |                                                 |       |   |   |
| Earnings per  common share—basic                                                              |       | $                                                    | 0.03       |   | $ | 0.05 |   |
|                                                                                               |       |                                                 |       |   |   |
| Earnings per  common share—diluted                                                            |       | $                                                    | 0.03       |   | $ | 0.05 |   |
| Weighted-average  shares outstanding during the period:                                            |       |                                                 |       |   |   |
| Basic                                                                                              |       | 39,672,998                                           |       | 30,350,989 |   |
| Diluted                                                                                            |       | 73,979,690                                           |       | 61,642,027 |   |
| Common share dividend  declared per share                                                          |       | $                                                    | 0.2275     |   | $ | 0.2275 |   |

*See accompanying notes to consolidatedfinancial statements.*

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**GMH COMMUNITIES TRUST****CONSOLIDATED STATEMENTS OF CASH FLOWS**(Unaudited and in thousands)
| ** **                                                                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                                                                      | ** ** | ** **                                           | ** ** | **(Restated)** | ** ** |
|                                                                                            |       |                                                 |       |   |   |
| **Cash  flows from operating activities:**                                                      | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net income                                                                                      |       | $                                                    | 1,140      |   | $ | 1,445 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:              |       |                                                 |       |   |   |
| Depreciation                                                                                    |       | 8,569                                                |       | 5,357 |   |
| Amortization:                                                                                   |       |                                                 |       |   |   |
| Lease intangibles                                                                               |       | 1,669                                                |       | 2,333 |   |
| Investment in military housing projects                                                         |       | 111                                                  |       | 35 |   |
| Notes payable fair value adjustment                                                             |       | (622                                                 | )          | (547 | ) |
| Deferred loan costs                                                                             |       | 335                                                  |       | 349 |   |
| Restricted shares                                                                               |       | 37                                                   |       | 25 |   |
| Allowance for doubtful accounts                                                                 |       | 416                                                  |       | (47 | ) |
| Equity in earnings of unconsolidated entities in  excess of distributions received              |       | (896                                                 | )          | (486 | ) |
| Minority interest                                                                               |       | 909                                                  |       | 1,408 |   |
| Changes in operating assets and liabilities:                                                    |       |                                                 |       |   |   |
| Restricted cash                                                                                 |       | (1,730                                               | )          | (3,290 | ) |
| Accounts and other receivables                                                                  |       | 482                                                  |       | (3,427 | ) |
| Deferred contract costs                                                                         |       | (614                                                 | )          | (618 | ) |
| Deposits and other assets                                                                       |       | 689                                                  |       | 829 |   |
| Accounts payable                                                                                |       | (1,260                                               | )          | (769 | ) |
| Accrued expenses and other liabilities                                                          |       | 3,597                                                |       | 6,093 |   |
| Net cash provided by operating activities                                                       |       | 12,832                                               |       | 8,690 |   |
| **Cash  flows from investing activities:**                                                      | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Property acquisitions                                                                           |       | (66,446                                              | )          | (122,798 | ) |
| Capitalized expenditures                                                                        |       | (10,194                                              | )          | (244 | ) |
| Net cash used in investing activities                                                           |       | (76,640                                              | )          | (123,042 | ) |
| **Cash  flows from financing activities:**                                                      | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Owner distributions                                                                             |       | (16,227                                              | )          | (9,587 | ) |
| Redemption of unit holders                                                                      |       | (45                                                  | )          | — |   |
| Proceeds from line of credit                                                                    |       | 70,000                                               |       | 105,000 |   |
| Repayment of line of credit                                                                     |       | (31,000                                              | )          | (45,000 | ) |
| Proceeds from notes payable                                                                     |       | 49,912                                               |       | 40,560 |   |
| Repayment of notes payable                                                                      |       | (1,084                                               | )          | (22,041 | ) |
| Payment of financing costs                                                                      |       | (360                                                 | )          | (825 | ) |
| Net cash provided by financing activities                                                       |       | 71,196                                               |       | 68,107 |   |
| Net increase  (decrease) in cash and cash equivalents                                           |       | 7,388                                                |       | (46,245 | ) |
| Cash and cash  equivalents, beginning of period                                                 |       | 2,240                                                |       | 60,926 |   |
| Cash and cash  equivalents, end of period                                                       |       | $                                                    | 9,628      |   | 14,681 |   |
|                                                                                            |       |                                                 |       |   |   |
| **Supplemental  information:**                                                                  | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Real estate acquired by assuming debt including debt  premium                                   |       | $                                                    | 20,064     |   | $ | 47,964 |   |
| Issuance of units of limited partnership interest  for purchase of student housing   properties |       | $                                                    | —     |   | $ | 1,655 |   |
| Property distributed at net book value                                                          |       | $                                                    | —     |   | $ | 3,854 |   |
| Debt distributed at net book value                                                              |       | $                                                    | —     |   | $ | 4,208 |   |
| Cash paid for interest                                                                          |       | $                                                    | 10,685     |   | $ | 5,279 |   |
| Cash paid for  taxes                                                                            |       | $                                                    | 1,254      |   | $ | 309 |   |

*See accompanying notes to consolidatedfinancial statements.*

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**GMH COMMUNITIES TRUST**

Notesto Consolidated Financial StatementsMarch 31, 2006(Unaudited)

**1.Organization and Basis of Presentation**

***Organization***

GMH Communities Trust (the “Trust,” the “Company,” or sometimesreferred to as “we”) conducts substantially all of its operations through itsoperating partnership, GMH Communities, LP, a Delaware limited partnership (the“Operating Partnership”). As of March 31, 2006, the Operating Partnershiphad 71,327,160  units of partnershipinterest outstanding, of which the Trust owned 39,118,674  units of limited partnership interest; andthrough a wholly-owned subsidiary, GMH Communities GP Trust, the Trust owned581,169 units of general partnership interest, which represents 100% of thegeneral partnership interest in the Operating Partnership. As of March 31,2006, there were 31,627,317 units of limited partnership interest outstandingthat were not owned by the Company.

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

***Basis of Presentation***

The consolidatedfinancial statements have been prepared by the Company without audit except asto the balance sheet as of December 31, 2005, which has been derived fromaudited data, pursuant to the rules and regulations of the United StatesSecurities and Exchange Commission. Certain information and footnotedisclosures normally included in the financial statements prepared inaccordance with accounting principles generally accepted in the United Stateshave been condensed or omitted pursuant to such rules and regulations, althoughthe Company believes that the included disclosures are adequate to make theinformation presented not misleading. In the opinion of management, alladjustments (consisting solely of normal recurring matters) necessary for afair statement of the financial position of the Company as of March 31, 2006,the results of its operations for the three-month periods ended March 31, 2006and March 31, 2005 and its cash flows for the three-month periods ended March31, 2006 and March 31, 2005 have been included. The March 31, 2005 financialstatements have been restated as disclosed in the Company’s Annual Report onForm 10-K for the year ended December 31, 2005 (see Note 13).  The results of operations for such interimperiods are not necessarily indicative of the results for a full year. Theseconsolidated financial statements should be read in conjunction with theCompany’s consolidated financial statements and notes to the financialstatements included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2005.

**2.Summary of Significant Accounting Policies**

***Useof Estimates***

The preparation of financialstatements in conformity with U.S. generally accepted accounting principlesrequires management to make estimates and assumptions that affect variousamounts reported in the financial statements and accompanying notes. Actualresults could differ from those estimates.

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***RealEstate Investments and Corporate Assets***

We carry real estate investmentsand corporate assets at cost, net of accumulated depreciation. Cost of acquiredassets includes the purchase price and related closing costs. We allocate thecost of real estate investments to net tangible and identified intangibleassets based on relative fair values in accordance with Statement of FinancialAccounting Standards (“SFAS”) 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.

The value of in-place leases isbased on the difference between (i) the property valued with existingin-place leases and (ii) the property valued as if vacant. As lease termstypically are 12 months or less, actual rates on in-place leases generallyapproximate market rental rates. Factors that we consider in the valuation ofin-place leases include an estimate of incremental carrying costs during theexpected lease-up periods considering current market conditions and nature ofthe tenancy. Purchase prices of student housing properties to beacquired are not expected to be allocated to tenant relationships consideringthe terms of the leases and the expected levels of renewals. We amortize the value of in-place leases toexpense over the remaining term of the respective leases, which is generallyone year or less. Accumulated amortization related to intangible lease costswas $4.9 million at March 31, 2006 and $3.2 million at December 31, 2005.

We expense routine repair andmaintenance expenditures that do not improve the value of an asset or extendits useful life, including turnover costs. We capitalize expenditures thatimprove the value and extend the useful life of an asset. We computedepreciation using the straight-line method over the estimated useful lives ofthe assets, which is generally 40 years for buildings including studenthousing properties and the commercial office building, and three to five yearsfor residential furniture and appliances. During the third quarter ofeach fiscal year, the Company typically will experience an increase in propertyoperating expenses over other quarters as a result of repair and maintenanceexpenditures relating to turnover of units at student housing properties. TheCompany’s student housing lease terms generally commence in August or Septemberto coincide with the beginning of the academic year. Accordingly, the Companyexpects to incur a majority of its repair and maintenance costs in the thirdquarter to prepare for new residents.

 In accordance with SFAS 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. When required, we review recoverability ofassets to be held and used through a comparison of the carrying amount of anasset to estimated undiscounted future cash flows expected to be generated bythe asset. If the carrying amount of an asset exceeds its estimatedundiscounted future cash flows, an impairment charge is recognized in an amountby which the carrying value of the asset exceeds the fair value of the assetdetermined using customary valuation techniques, such as the present value ofexpected future cash flows. Assets to be disposed of would be separatelypresented in the balance sheet and reported at the lower of the carrying amountor fair value less costs to sell, and no longer would be depreciated.

***CashEquivalents***

All highly-liquidinvestments with an original maturity of three months or less are considered tobe cash equivalents.

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***RestrictedCash***

Restricted cash consists ofsecurity deposits and cash held as escrow for real estate taxes, capitalexpenditures, and other amounts, as required by the terms of various loanagreements.

***Allowancefor Doubtful Accounts***

We estimate the collectibility ofreceivables generated by rental and other income as a result of the operationof our student housing properties. If we believe that the collectibility ofcertain amounts is questionable, we record a specific reserve for these amountsto reduce the amount outstanding to an amount we believe will be collectibleand a reserve for all other accounts based on a range of percentages applied toaging categories, which is based on historical collection and write-offexperience.

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

Accounts receivable are presentednet of the allowance for doubtful accounts of $624,000 at March 31, 2006 and$710,000 at December 31, 2005.

***DeferredContract Costs***

Deferred contractcosts include costs attributable to a specific military housing projectincurred in connection with seeking Congressional approval of a CommunityDevelopment and Management Plan, or CDMP, subsequent to the project beingawarded by the Department of Defense, or DoD. In addition, deferred contractcosts also include transition and closing costs incurred that are expected tobe reimbursed by the military housing project. Such amounts are evaluated as tothe probability of recovery and costs that are not considered probable ofrecovery are written off. Revenue is recognized and the related costs areexpensed at the time that the reimbursement for preparing the CDMP is approvedby Congress or at closing of the military housing project.

***DeferredFinancing Costs***

Costs incurred in connection withobtaining financing are deferred and amortized on a straight-line basis overthe term of the related loan, which is not materially different than theeffective interest method. Amortization of deferred financing costs is includedin interest expense. Accumulated amortization of deferred financing costs was$1.6 million at March 31, 2006 and $1.2 million at December 31, 2005.

***Deposits***

Deposits primarily consist ofamounts paid to third parties in connection with planned acquisitions andamounts paid to lenders that provide related financing or the refinancing ofexisting loans. At March 31, 2006, deposits for planned acquisitions totaled$1.3 million, deposits related to financings totaled $0.1 million, and otherdeposits not related to acquisitions or financings totaled $0.6 million. AtDecember 31, 2005, deposits for planned acquisitions totaled$2.1 million, deposits related to financings totaled $0.2 million andother deposits not related to acquisitions or financings totaled $0.6 million.

***FairValue of Financial Instruments***

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

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The carrying value and fair valueof fixed-rate notes payable at March 31, 2006 was $716.9 million and $707.9million, respectively. Fair value was estimated using rates the Companybelieved were available to it as of March 31, 2006 for debt with similar terms.The carrying value of variable-rate notes payable approximates fair valueat March 31, 2006.

***AdvertisingCosts***

Advertising costs are expensed asincurred. Advertising expense was $0.4 million and $0.3 million for the threemonths ended March 31, 2006 and March 31, 2005, respectively.

***RevenueRecognition***

*Student Housing Segment*

Rental revenue is recognizedwhen due over the lease terms, which are generally 12 months or less.

Otherproperty income, including, but not limited to, lease processing fees, move-infees, and activity fees is recognized as earned throughout the course of theyear. The timing of these fees typically fluctuates in relation to the academicyear leasing cycle.

Standardmanagement fees are based on a percentage of monthly cash receipts or grossmonthly rental and other revenues generated by the properties managed forothers. We recognize these fees on a monthly basis as the services areperformed.

Incentivemanagement fees are earned as a result of the achievement of certain operatingperformance criteria over a specified period by certain managed properties,including targeted annual debt service coverage ratios of the properties. Werecognize these fees at the amount that would be collected under the contractif the contract was terminated on the balance sheet date.

Expensereimbursements are comprised primarily of salary and related costs of certainof our employees working at certain properties we manage for others, the costof which is reimbursed by the owners of the related properties. We accrueoperating expense reimbursements as the related expenses are incurred.

*MilitaryHousing Segment*

Standard and incentive managementfees, which are based on a percentage of effective gross revenue generated bythe military housing projects from the basic allowance for housing (“BAH”)provided by the government to service members, are recognized when the revenueis earned by the military housing projects. Incentive management fees are basedupon the satisfaction of certain criteria including, among other things,satisfying designated benchmarks relating to emergency work order response,occupancy rates, home turnover and resident satisfaction surveys. Incentivemanagement fees are recognized when the various criteria stipulated in themanagement contract have been satisfied. Accrued and unbilled incentivemanagement fees of $1.2 million and $1.0 million are included in accountsreceivable — related party at March 31, 2006 and December 31, 2005,respectively.

Standardand incentive development and construction/renovation fees, which are based ona percentage of development and construction/renovation costs incurred by themilitary housing projects, including hard and soft costs and financing costs,are recognized on a monthly basis as the costs are incurred by the militaryhousing projects. Incentive development and construction/renovation fees arebased upon the satisfaction of certain criteria including, among other things,completing a number of housing units according to schedule, achieving specificsafety records and implementing small business or minority subcontractingplans.  Incentive development andconstruction/renovation fees are recognized when the various criteriastipulated in the contract have been satisfied. Accrued and unbilled incentivedevelopment and 

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construction/renovation fees of$2.0 million and $2.7 million are included in accounts receivable — relatedparty at March 31, 2006 and December 31, 2005, respectively.

In addition, in certain instances, the Company may receive fees relatingto the performance of pre-construction/renovation services. Thesepre-construction/renovation fees are determined on a project-by-project basis,and are paid in proportion to theamount of pre-construction/renovation costs incurred by us for the project, andrecognized as revenue upon performance of the pre-construction/renovationservices.

Revenues onfixed-price renovation contracts are recorded on the percentage-of-completionmethod. When the percentage-of-completion method is used, contract revenue isrecognized in the ratio that costs incurred to date bear to estimated costs atcompletion. Adjustments to cost estimates are made in the period in which thefacts requiring such revisions become known. When the revised estimatesindicate a loss, such loss is currently provided for in its entirety.

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

The Company earnsequity returns on its investments in military housing projects. During theinitial development period for a project, the equity returns are a fixedpercentage of our investment and subsequent to the initial development periodfor a project, the equity returns are based on a fixed percentage of ourinvestment and on the project’s net operating income, subject to cashdistribution caps, as defined in the operating agreements related to theparticular project. As of March 31, 2006, only the Fort Carson project hadpassed its initial development period.

Expense reimbursementsprimarily include payroll and related expenses, incurred for certain employeesengaged in the operation of certain military housing projects under management,and other operating expenses that are reimbursed to the Company by the owner ofthe related property.

***MinorityInterest***

Minority interest as initiallyreported at the date of our initial public offering represented the net equityof the Operating Partnership, including the proceeds received from the sale ofthe warrant to Vornado Realty Trust, multiplied by the ownership percentage ofholders of limited partnership units in the Operating Partnership other thanthe Company. The Operating Partnership is obligated to redeem at the request ofa holder, each unit of limited partnership interest for cash or common shareson a one-for-one basis, at the Company’s option, subject toadjustments for share splits, dividends, recapitalizations and similar events;except that Gary M. Holloway, Sr. has the right to require the OperatingPartnership to redeem his and his affiliates’ units of limited partnershipinterest for common shares, subject to his restriction from owning more than20% of the Company’s outstanding common shares. If the minority interestunitholders’ share of a current year loss would cause the minority interestbalance to be less than zero, the minority interest balance will be reported aszero unless there is an obligation of the minority interest unitholders to fundthose losses. Any losses in excess of the minority interest will be chargedagainst equity. If future earnings materialize, equity will be credited for allearnings up to the amount of those losses previously absorbed. Distributions tolimited partnership unitholders other than the Company are recorded as areduction to minority interest.

 

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

Military housingprojects are joint ventures entered into between the Company and the U.S.military to design, develop, construct/renovate and manage the military familyhousing located on or near various bases throughout the United States. TheCompany evaluates its investments in military housing project joint ventures inwhich we have a variable interest to determine if the underlying entity is avariable interest entity (“VIE”) as defined under FASB Financial InterpretationNo. 46 (as revised) (“FIN 46(R)”). The Company has concluded that each ofthe military housing project joint ventures in which it has a variable interestis a VIE and that the Company is not the primary beneficiary of any of theseVIEs. We record our investments in joint ventures under our military housingprojects in accordance with the equity method of accounting. Our investment isinitially recorded at cost, and then subsequently adjusted at each balance sheetdate to an amount equal to what we would receive from the joint venture in theevent that it were liquidated at net book value as of that date, and assumingthat the proceeds from the liquidation are distributed in accordance with theterms of, and priority of returns set forth under, the joint venture’soperating agreement. The Company has exposure to loss to the extent of itsinvestments in the military housing joint ventures, if any, and any receivablesdue from the project.

The Companyentered into a joint venture in the third quarter of 2005 to develop andconstruct two student housing properties. The Company is accounting for thetransaction as a financing arrangement because the Company originally owned theland and contributed it to the joint venture and  has the option to purchase the joint venturepartner’s interest in the joint venture within one year of completion of theproperties and because the Company has provided certain guarantees for thecompletion of construction and for a portion of the construction loans.Therefore, the Company accounts for its investment in the joint venture byincluding the joint venture’s assets and liabilities in the Company’sconsolidated financial statements.

***IncomeTaxes***

The Companyelected to be taxed as a REIT under the Code commencing with its taxable yearended December 31, 2004. To continue to qualify as a REIT, the Companymust meet a number of organizational and operational requirements, including arequirement that we currently distribute at least 90% of our adjusted taxableincome to our shareholders. We believe we are organized and operate in a mannerthat allows us to qualify for taxation as a REIT under the Code, and it is ourintention to adhere to these requirements and maintain the Company’s REIT statusin the future. Accordingly, no provision has been made for federal income taxesin the accompanying consolidated financial statements, other than with respectto the Company’s taxable REIT subsidiaries.

***Share-BasedCompensation***

On January 1,2006, the Company adopted SFAS No. 123R, as revised, “Share-Based Payment.”SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-BasedCompensation” and supersedes APB Opinion No. 25, “Accounting for StockIssued to Employees.” The scope of SFAS No. 123R includes a wide range ofshare-based compensation arrangements including stock options, restricted shareplans, performance-based awards, stock appreciation rights, and employee stockpurchase plans. SFAS No. 123R requires companies to recognize in theirfinancial statements the compensation expense relating to share-based paymenttransactions. There was no material impact as of and for the three months endedMarch 31, 2006.

InNovember 2004, the Company established an equity incentive plan (the “Plan”)that provides for the issuance of up to 2,000,000 common shares pursuant tooptions, restricted share awards, share appreciation rights, performance unitsand other equity based awards.  During the year ended December 31, 2005,the Company issued 33,854 restricted common shares under the Plan tonon-employee members of the Company’s Board of Trustees. The restricted commonshares vest over a three-year period from the grant date. The restricted commonshares are entitled to the same dividend and voting rights during the vestingperiod as the issued and outstanding common shares. The fair value of theawards was calculated based on the closing market price of the Company’s commonshares on the grant date and is expensed on a 

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straight-line basis overthe vesting period.  For the three months ended March 31, 2006 and March31, 2005, the Company recognized non-cash stock-based compensation expenserelated to the restricted common shares of $37,000 and $25,000, respectively.

**3.  Real Estate Investments and Acquisitions**

As ofMarch 31, 2006, the Company owned 60 student housing properties locatednear 43 colleges and universities in 24 states. These properties contain anaggregate of 11,230 units and 36,090 beds.TheCompany’s investment in student housing properties at March 31, 2006 andDecember 31, 2005, which includes construction in progress relating to twostudent housing properties under development pursuant to a joint venture withan institutional investor, was as follows (in thousands):

 

|                                       | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Land                                  |       | $                        | 118,676    |                        | $          | 110,634 |   |
| Building and  improvements            |       | 1,134,094                |       | 1,055,157                   |       |
| Residential  furniture and appliances |       | 28,824                   |       | 26,159                      |       |
| Construction in  progress             |       | 24,042                   |       | 18,305                      |       |
|                                  |       | $                        | 1,305,636  |                        | $          | 1,210,255 |   |

 

During the threemonths ended March 31, 2006, the Company acquired six student housingproperties located near six colleges and universities in six states with anaggregate of 994 units and 2,750 beds for an aggregate purchase price ofapproximately $82.6 million.  TheCompany estimated $904,000 of the aggregate purchase price to be the fair valueof in-place leases acquired for the properties acquired during the quarterended March 31, 2006.  The purchaseaccounting has been recorded on a preliminary basis pending results of thefinal allocation.****The results of operations ofthese properties are included in the accompanying statements of operations fromthe respective acquisition dates.

**4.  Investments in Military Housing Projects**

The acquisition ofour ownership interests in the joint venture that initially owned the rightsrelating to our Fort Carson and Fort Eustis/Fort Story military housingprojects was recorded at the fair value of the consideration paid in the amountof $31.0 million.  The underlying bookvalue of the equity on the acquisition date was approximately $11.5million.  The remaining $19.5 million ofthis investment is being amortized based on the then current fiscal yearrevenue as a percentage of the estimated revenue to be earned over theremaining lives of the projects, which are 45 years for the Fort Carson projectand 50 years for the Fort Eustis/Fort Story project. Amortization expense was$0.1 million for the three months ended March 31, 2006 and $35,000 for thethree months ended March 31, 2005.  Thecost and accumulated amortization of the excess purchase price at March 31,2006 was $19.5 million and $0.4 million, respectively, and at December 31, 2005was $19.5 million and $0.3 million, respectively.

During the threemonths ended March 31, 2006, the Company received $0.3 million of equitydistributions from Fort Carson Family Housing LLC.  The carrying value ofthis investment was $26.7 million at March 31, 2006 and $26.1 million atDecember 31, 2005.  The Company earns apreferred return on its investment in Fort Carson Family Housing LLC, plus 30%of the project’s net operating income. The project began repaying the Company’sinitial investment in Fort Carson Family Housing LLC in July 2005.  The equity is expected to be completelyrepaid by 2015.

InNovember 2004, the Company and Benham Military Communities, LLC formed ajoint venture known as GMH/Benham Military Communities LLC for the purpose ofinvesting in the Navy Northeast Region military housing project. The Companycontributed $9.5 million to GMH/Benham Military Communities LLC in returnfor a 90% interest and Benham Military Communities, LLC invested$1.1 million for the remaining 10% interest. The Company consolidatesGMH/Benham Military Communities LLC as it has a 90% economic interest andcontrols a majority of the voting interests. Benham Military Communities, LLC’s10% interest is accounted for as minority interest and is included in 

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other liabilities. In November 2004, GMH/Benham Military Communities, LLC invested$10.6 million in Northeast Housing LLC, which owns and operates the NavyNortheast Region military housing project. GMH/Benham Military Communities LLCearns a preferred return on its investment in Northeast Housing LLC. Thepreferred return will accrue, but not be paid, until the end of the initialdevelopment period for the project in October 2010. The carrying value ofthis investment was $11.9 million at March 31, 2006 and $11.7 million atDecember 31, 2005.

**5.  Income Taxes**

The Company haselected taxable REIT subsidiary (“TRS”) status for certain of its corporatesubsidiaries. The Company recognized provisions for income taxes of $973,000for the three months ended March 31, 2006, which includes $823,000 of federaltaxes and $150,000 of state taxes, and $1,140,000 for the three months endedMarch 31, 2005, which includes $964,000 of federal taxes and $176,000 of statetaxes.

**6.  Notes Payable**

During the threemonths ended March 31, 2006, fixed-rate notes payable totaling$18.5 million were assumed relating to the acquisition of two studenthousing properties and fixed-rate notes payable totaling $34.5 million wereobtained in connection with the acquisition of four student housing properties.These notes require monthly payments of principal and/or interest, bear interestat fixed rates ranging from 4.41% to 8.63%, and mature at various dates throughJanuary 2017. In addition, the purchase accounting for these propertiesrequired that the net carrying value of the assumed notes payable be increasedby $1.1 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.

At March 31,2006, notes payable totaling $741.1 million were secured by 53 studenthousing properties with a cost and net book value of $1,105.5 million and$1,073.8 million, respectively. In addition, we had $13.5 million inconstruction loan indebtedness outstanding that was secured by two of studenthousing properties under development through a joint venture. This indebtednesshad a weighted average interest rate of 6.78%, matures in 2008, and requiresmonthly payments of interest only.

In 2005, theCompany repaid a note payable that maturedin the amount of $5.8 million and was secured by the corporateheadquarters.  On January 12,2006, the Company placed new mortgage debt on the corporate headquarters in theamount of $5.7 million. The new mortgage debt has a term of 10 years with afixed interest rate of 5.58%, and requires monthly payments of interest only.

**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 amended, is limited to aborrowing base amount equal to the sum of 60% of the value of an unencumberedasset pool as of the end of the previous quarter (which as of March 31,2006 consisted of seven student housing properties, and in no event may containfewer than five student housing properties) and 50% of the value of the Company’scash flow from the management, development and renovation of military housingprojects and student housing properties in the previous quarter, provided thatthe total cash flow attributable to annualized management fees does not exceed50% of the borrowing base.

The Company mayelect to have amounts outstanding under the Credit Facility bear interest at aEurodollar rate based on LIBOR or the prime rate, plus an applicable rate,ranging from 1.625% to 2.375% for Eurodollar rate loans or 0.75% to 1.75% forprime rate loans. The applicable rate is determined by the leverage ratio oftotal liabilities to total asset value of the Company, as defined in the CreditFacility. In addition, the Company pays fees for unused availability on theCredit Facility.

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The CreditFacility currently contains affirmative and negative covenants and alsocontains financial covenants which, among other things, (i) require theCompany to maintain a total leverage ratio equal to or less than 60%,(ii) limit the aggregate amount of outstanding variable-rate indebtednessto 30% of total indebtedness commencing February 8, 2005, (iii) limitthe payment of dividends by the Company to its shareholders to 95% (110% forthe year ended December 31, 2005) of funds from operations, as defined in theCredit Facility, (iv) limit the amount of recourse debt, exclusive ofamounts outstanding under the Credit Facility, to $25 million, and in noevent greater than $150 million in total, and (v) require the Companyto maintain a consolidated tangible net worth, as defined in the CreditFacility, of at least $275 million plus an amount equal to 75% of the netproceeds from any equity issuances subsequent to the closing date of the CreditFacility in November 2004. The financial covenants also require theCompany to operate in compliance with the following ratios as defined by theterms of the Credit Facility: (i) fixed charge coverage ratio equal to orgreater than 1.75x; (ii) interest coverage ratio equal to or greater than2.00x; and (iii) unsecured interest coverage ratio equal to or greaterthan 2.25x.

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

Given that theCompany’s compliance with debt covenants under the Credit Facility isdetermined as of the end of each fiscal quarter, the Company cannot determineat this time whether it will be in compliance with each of the debt covenantsthroughout 2006. If the Company is deemed to be in noncompliance with any ofits debt covenants, and the Company is unable to obtain a waiver from thesyndicate lenders and therefore is restricted from drawing additional fundsfrom the Credit Facility, it has several alternatives to it. In addition tocash flows from its operations, the Company can finance unencumbered propertiesor refinance existing debt, sell assets or reduce it dividends to shareholders.  The Company would evaluate each of thesealternatives upon an event of noncompliance with the debt covenants under theCredit Facility, and will take action necessary to ensure that the Company hasadequate financial resources available to it to operate as a going concern.

As ofMarch 31, 2006, the Company had $75.0 million outstanding under the CreditFacility, bearing interest at a Eurodollar rate based on 30-day LIBOR, 60-dayLIBOR and 90-day LIBOR ranging from 4.68% to 4.92%, plus 2.125%, resulting intotal interest rates ranging from 6.81% to 7.05 %.  As of March 31, 2006, there were noletters of credit outstanding under the Credit Facility, and the Company had anadditional $75.0 million in total borrowings available under the CreditFacility.

**8.  Transactions with Related Parties**

In the ordinarycourse of its operations, the Company has on-going business relationships withGary M. Holloway, Sr., entities affiliated with Mr. Holloway,and entities in which Mr. Holloway or the Company has an equityinvestment. These relationships and related transactions are summarized below.

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

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The Companyprovided certain functions to entities affiliated with Gary M. Holloway, Sr.,including human resources, legal and information technology.  During the three months ended March 31,2006 and March 31, 2005, such costs totaled less than $0.1 million,respectively, and are included in expense reimbursement from related parties inthe accompanying consolidated statements of operations.

The Company leasesspace in its corporate headquarters to entities wholly-owned by Gary M.Holloway, Sr.  During the threemonths ended March 31, 2006 and March 31, 2005, rental income from theseentities totaled $39,000 and $61,000, respectively, and is included in rent andother property income in the accompanying consolidated statements ofoperations.

The Companyprovided property management consulting services to GMH Capital Partners AssetServices, LP, an entity wholly-owned by Mr. Holloway, in connection withproperty management services that GMH Capital Partners Asset Services, LPperformed related to five student housing properties containing a total of2,172 beds. The Company earned consulting fees equal to 80% of the managementfees that GMH Capital Partners Asset Services, LP earned for providing theproperty management services.  For thethree months ended March 31, 2005, such fees totaled $70,000. As ofJanuary 1, 2006, the management agreements relating to four of these propertieswere assigned from GMH Capital Partners Asset Services, LP to a subsidiary ofthe Company, and the management agreement relating to the fifth property wasterminated. As a result, no such consulting fees were earned by the Companyduring the three months ended March 31, 2006. In addition, the Company earned management fees from an additionalstudent housing property in which Mr. Holloway is an investor.  During the three months ended March 31,2006 and 2005, such income totaled $20,000 and $197,000, respectively.

The Company isreimbursed by joint ventures relating to certain of its military housingprojects in which the Company has an ownership interest, as well as studenthousing properties under the Company’s management, in which Mr. Hollowaywas an investor through March 2005 for the cost of certain employees engaged inthe daily operation of those military housing projects and student housingproperties. The reimbursement of these costs is reflected as expensereimbursements from related parties in the accompanying consolidated statementsof operations.  During the three monthsended March 31, 2006 and March 31, 2005, such reimbursed costs totaled$13.4 million and $8.1 million, respectively.

Mr. Hollowayowns Bryn Mawr Abstract, Inc., an entity that provides title abstractservices to third party title insurance companies, from which we have purchasedtitle insurance with respect to certain student housing properties and militaryhousing projects that we have acquired or refinanced. In connection with thepurchase of title insurance for these student housing properties and militaryhousing projects, premiums were paid to other title insurance companies, whichfees in some cases are fixed according to statute. From these premiums, theother title insurance companies paid to Bryn Mawr Abstract, Inc. $130,000during the three months ended March 31, 2005 for the provision of titleabstract services, and no such payments were made during the three months endedMarch 31, 2006.

Mr. Hollowayowns GMH Capital Partners Commercial Realty LP, an entity that provides realestate consulting and brokerage services for real estate transactions. Duringthe three months ended March 31, 2005, GMH Capital Partners Commercial RealtyLP received aggregate commissions of $0.3 million from the sellers of studenthousing properties that the Company purchased, and no such payments were madeduring the three months ended March 31, 2006.

InFebruary 2005, the Company transferred its interest in Corporate FlightServices, LLC, including the corporate aircraft and associated debt initiallycontributed to the Operating Partnership at the time of the initial publicoffering, back to Mr. Holloway. Corporate Flight Services, LLC had a net deficit of $171,000, net of$180,000 tax expense related to the taxable gain upon the transfer toMr. Holloway, on the date it was transferred back to Mr. Holloway.This transfer was accounted for as a capital contribution to additional paid-incapital. During the three months ended March 31, 2006, the Company paid toCorporate Flight Services, LLC $234,000 in connection with use of the aircraftfor student housing and military housing related travel.

Gary M. Holloway,Sr., an executive officer of the Company, a former executive officer of theCompany, another employee of the Company, and an employee of an entity wholly-ownedby Mr. Holloway, each held an ownership interest in two student housingproperties that were acquired by the 

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Company during the first quarter of 2005 for a totalpurchase price of $38.2 million. The Company paid $36.5 in cash to investors inthe selling entity not affiliated with the Company and issued a total of141,549 units of limited partnership interest in the Operating Partnership toMr. Holloway and these individuals with an aggregate fair value of $1.7 millionin connection with the purchase.

**9.Commitments and Contingencies**

As ofMarch 31, 2006, we had agreements to acquire five student housingproperties and five undeveloped parcels of land for an aggregate purchase priceof $114.2 million and had placed deposits related to such acquisitions totaling$1.3 million.

With regard tomilitary housing projects, the Company is typically required to fund itsportion of the equity commitment to the project’s joint venture after all othersources of funding for the project have been expended. With respect to theCompany’s Navy Northeast Region project, however, the Company was required tofund the equity commitment at commencement of the project. In connection withfinalizing the agreements with the DoD for the Company’s military housingprojects, the Company has committed to contribute the following amounts as ofMarch 31, 2006 (in thousands):

| 2006                 |   | $      | 2,000  |   |
|----------------------|--------|--------|--------|--------|
| 2007                 |   | 5,900  |   |
| 2010                 |   | 3,600  |   |
| 2011 and there after |   | 14,300 |   |
| Total                |   | $      | 25,800 |   |

 

In connection withthe development, management, construction, and renovation agreements forcertain of the military housing projects, the Company guarantees the completionof its obligations under the agreements. The guarantees require the Company tofund any costs in excess of the amounts budgeted in the underlying development,management, construction, and renovation agreements. The maximum exposure tothe Company on these guarantees cannot be determined at this time. Managementbelieves that these guarantees will not have a material adverse impact on theCompany’s financial position or results of operations.

In 2004, theCompany entered into employment agreements with three of its executiveofficers. Each employment agreement is for an initial three-year term beginningon November 2, 2004 and provides for base salaries aggregating $975,000 in eachof the three years. The base salaries increase annually effectiveJanuary 1 of each year by a minimum amount equal to at least thepercentage increase in the Consumer Price Index.  On December 31, 2005, the Company andone of its executive officers entered into a separation agreement, pursuant towhich the executive resigned from his position as an officer of the Company andeffectively terminated his employment agreement with the Company.  Under the terms of the separation agreement,the executive remained eligible for an incentive bonus award for the fiscalyear 2005, which was paid to the executive in June 2006. In addition, theexecutive has agreed to remain subject to certain restrictive covenants containedin the employment agreement, including non-disclosure of confidentialinformation, non-competition and non-solicitation of employees, assignment ofintellectual property rights, and on-going cooperation with the Company inconnection with pending matters.  The Company and the executive separatelyexecuted a Consulting Agreement, dated January 1, 2006, pursuant to whichthe executive has agreed to provide consulting services to the Company for aninitial term through May 31, 2007. The Company will pay the executive $25,000 per month during the term ofthe Consulting Agreement as compensation for his services, which will becharged to expenses as incurred.

Under theprovisions of FIN 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others aninterpretation of FASB*Statements No. 5, 57, and 107 and rescission of FASB InterpretationNo. 34,”* a guarantor is torecognize, at the inception of a guarantee, a liability for the fair value ofthe obligation undertaken by issuing the guarantee. The Company enters intoindemnification agreements in the ordinary course of business that are subjectto the 

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provisions of FIN 45. Under theseagreements, the Company indemnifies, holds harmless, and agrees to reimbursethe indemnified party for losses suffered or incurred by the indemnified party.The maximum potential amount of future payments the Company could be requiredto make under these indemnification agreements is unlimited. The Company believesthe estimated fair value of these agreements is immaterial. Accordingly, therewere no liabilities recorded for these agreements as of March 31, 2006 andDecember 31, 2005.

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

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

The defendantshave not yet responded to these complaints. The outcome of this litigation isuncertain, and while the Company believes that it has valid defenses toPlaintiff’s claims and intends to defend the class action lawsuit vigorously,no assurance can be given as to the outcome of this litigation. The Company isnot presently able to reasonably estimate potential losses, if any, related tothese lawsuits. Therefore, the Company has not established a reserve for theseclaims.  An adverse outcome could have amaterial adverse effect on our consolidated financial statements and results ofoperations.

The Company issubject to routine litigation, claims and administrative proceedings arising inthe ordinary course of business. The maximum exposure to the Company relatingto these matterscannot be determined at this time. Management believes that the disposition ofthese matters will not have a material adverse impact on the Company’sfinancial position or results of operations.

**10. Segment Reporting**

The Company is managed as individual entities that comprise threereportable segments: (1) student housing (2) military housing and(3) corporate. The Company’s management evaluates each segment’sperformance based upon net income. The accounting policies of the reportablesegments are the same as those described in the summary of significantaccounting policies.

 

15

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| ** **                                                                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                               | ** ** | ** **                                           | ** ** | **2006** | ** ** | ** ** | ** ** | ** ** | ** ** | **2005 (Restated)** | ** ** | ** ** | ** ** |
| ** **                                                                                               | ** ** | **Student  Housing**                                 | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                                                               | ** ** | **(dollars in thousands)**                 | ** ** |
|                                                                                                     |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Revenue:**                                                                                             |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and other  property income                                                                          |       | $                                                    | 43,998     |   | $ | — |   | $ | 39 |   | $ | 44,037 |   | $ | 25,780 |   | $ | — |   | $ | 61 |   | $ | 25,841 |   |
| Expense  reimbursements:                                                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                            |       | 86                                                   |       | 13,237 |   | 57 |   | 13,380 |   | 186 |   | 7,813 |   | 88 |   | 8,087 |   |
| Third party                                                                                              |       | 1,336                                                |       | — |   | — |   | 1,336 |   | 1,274 |   | — |   | — |   | 1,274 |   |
| Management fees:                                                                                         |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                            |       | 20                                                   |       | 2,019 |   | — |   | 2,039 |   | 197 |   | 1,670 |   | — |   | 1,867 |   |
| Third party                                                                                              |       | 1,008                                                |       | — |   | — |   | 1,008 |   | 537 |   | — |   | — |   | 537 |   |
| Other fee  income, related party                                                                         |       | —                                               |       | 4,680 |   | — |   | 4,680 |   | — |   | 3,185 |   | 70 |   | 3,255 |   |
| Other income                                                                                             |       | 51                                                   |       | 9 |   | 31 |   | 91 |   | 53 |   | 24 |   | 34 |   | 111 |   |
| Total revenue                                                                                            |       | 46,499                                               |       | 19,945 |   | 127 |   | 66,571 |   | 28,027 |   | 12,692 |   | 253 |   | 40,972 |   |
|                                                                                                     |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating  Expenses:**                                                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property  operating expense                                                                              |       | 16,666                                               |       | 1,539 |   | — |   | 18,205 |   | 9,364 |   | 704 |   | — |   | 10,068 |   |
| Reimbursed  expenses                                                                                     |       | 1,422                                                |       | 13,237 |   | 57 |   | 14,716 |   | 1,460 |   | 7,813 |   | 88 |   | 9,361 |   |
| Real estate  taxes                                                                                       |       | 4,177                                                |       | — |   | 24 |   | 4,201 |   | 2,012 |   | — |   | — |   | 2,012 |   |
| Administrative  expenses                                                                                 |       | —                                               |       | — |   | 3,765 |   | 3,765 |   | — |   | — |   | 2,942 |   | 2,942 |   |
| Audit Committee  special investigation expenses                                                          |       | —                                               |       | — |   | 2,575 |   | 2,575 |   | — |   | — |   | — |   | — |   |
| Depreciation and  amortization                                                                           |       | 10,152                                               |       | 119 |   | 78 |   | 10,349 |   | 7,479 |   | 35 |   | 211 |   | 7,725 |   |
| Interest                                                                                                 |       | 10,436                                               |       | — |   | 518 |   | 10,954 |   | 5,112 |   | — |   | 245 |   | 5,357 |   |
| Total operating expenses                                                                                 |       | 42,853                                               |       | 14,895 |   | 7,017 |   | 64,765 |   | 25,427 |   | 8,552 |   | 3,486 |   | 37,465 |   |
| Income (loss)  before equity in earnings of unconsolidated entities, income taxes and  minority interest |       | 3,646                                                |       | 5,050 |   | (6,890 | ) | 1,806 |   | 2,600 |   | 4,140 |   | (3,233 | ) | 3,507 |   |
| Equity in  earnings of unconsolidated entities                                                           |       | —                                               |       | 1,216 |   | — |   | 1,216 |   | — |   | 486 |   | — |   | 486 |   |
| Income (loss)  before income taxes and minority interest                                                 |       | 3,646                                                |       | 6,266 |   | (6,890 | ) | 3,022 |   | 2,600 |   | 4,626 |   | (3,233 | ) | 3,993 |   |
| Income taxes                                                                                             |       | —                                               |       | 973 |   | — |   | 973 |   | — |   | 1,140 |   | — |   | 1,140 |   |
| Income (loss)  before minority interest                                                                  |       | 3,646                                                |       | 5,293 |   | (6,890 | ) | 2,049 |   | 2,600 |   | 3,486 |   | (3,233 | ) | 2,853 |   |
| Minority  interest                                                                                       |       | 1,617                                                |       | 2,348 |   | (3,056 | ) | 909 |   | 1,283 |   | 1,720 |   | (1,595 | ) | 1,408 |   |
| **Net income (loss)**                                                                                    |       | $                                                    | 2,029      |   | $ | 2,945 |   | $ | (3,834 | ) | $ | 1,140 |   | $ | 1,317 |   | $ | 1,766 |   | $ | (1,638 | ) | $ | 1,445 |   |

 

 

|                                    | ** ** | **Student  Housing**    | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total**  | ** ** |
|------------------------------------|------------|-------------------------|------------|-----------------------|------------|---------------|------------|------------|------------|
| ** **                         | ** ** | **(in thousands)** | ** ** |
| **As of  March 31, 2006:**    | ** ** | ** **              | ** ** | ** **            | ** ** | ** **    | ** ** | ** ** | ** ** |
| Total assets                       |       | $                       | 1,293,965  |                  | $          | 59,064        |       | $          | 20,367     |   | $ | 1,373,396 |   |
| Total  liabilities                 |       | $                       | 846,953    |                  | $          | (6,821        | )          | $          | 61,951     |   | $ | 902,083 |   |
| **As of  December 31, 2005:** | ** ** | ** **              | ** ** | ** **            | ** ** | ** **    | ** ** | ** ** | ** ** |
| Total assets                       |       | $                       | 1,206,555  |                  | $          | 59,242        |       | $          | 12,154     |   | $ | 1,277,951 |   |
| Total liabilities                  |       | $                       | 769,469    |                  | $          | (3,682        | )          | $          | 26,665     |   | $ | 792,452 |   |

 

** **

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**11.  Earnings PerCommon Share**

The following table details the number of shares and net income used to calculate basic anddiluted earnings per share for the three months ended March 31, 2006 andMarch 31, 2005 (in thousands, except share and per share amounts):

 

|                                                                 | ** ** | **Three Months Ended  March 31, 2006** | ** ** | **Three Months Ended  March 31, 2005 (Restated)** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **Basic**                                                  | ** ** | **Diluted**                                                                | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
|                                                            |       |                                                       |       |                                                                       |       |   |   |   |   |
| Net income                                                      |       | $                                                          | 1,140      |                                                                       | $          | 1,140 |   | $ | 1,445 |   | $ | 1,445 |   |
| Minority  interest                                              |       | —                                                     |       | 909                                                                        |       | — |   | 1,408 |   |
| Income available  to common shareholders                        |       | $                                                          | 1,140      |                                                                       | $          | 2,049 |   | $ | 1,445 |   | $ | 2,853 |   |
|                                                            |       |                                                       |       |                                                                       |       |   |   |   |   |
| Weighted-average  common shares outstanding                     |       | 39,672,998                                                 |       | 39,672,998                                                                 |       | 30,350,989 |   | 30,350,989 |   |
| Warrant                                                         |       | —                                                     |       | 2,671,193                                                                  |       | — |   | 1,729,878 |   |
| Units of limited  partnership held by minority interest holders |       | —                                                     |       | 31,627,287                                                                 |       | — |   | 29,560,822 |   |
| Restricted  common shares                                       |       | —                                                     |       | 8,212                                                                      |       | — |   | 338 |   |
| Total  weighted-average shares outstanding                      |       | 39,672,998                                                 |       | 73,979,690                                                                 |       | 30,350,989 |   | 61,642,027 |   |
| Earnings per common  share                                      |       | $                                                          | 0.03       |                                                                       | $          | 0.03 |   | $ | 0.05 |   | $ | 0.05 |   |

 

In connection withthe Company’s formation transactions during 2004, the Company and its OperatingPartnership issued a warrant to Vornado Realty Trust, a portion of which wasexercised by Vornado upon the closing of the Company’s initial public offering.As of March 31, 2006, Vornado had exercised the warrant for 6,666,667 units oflimited partnership interest in our Operating Partnership at a price of $7.50per unit. As of March 31, 2006, the remaining portion of the warrant wasexercisable for up to 5,976,127 units of limited partnership interest of theOperating Partnership or common shares, at an exercise price of $8.37 per unitor common share, at any time through May 2, 2006.

On March 21,2006, the Company declared a quarterly dividend of $0.2275 per outstandingcommon share. The dividend of $9.0 million was paid on April 14, 2006to common shareholders of record on March 31, 2006.

**12. Acquisition of Real Estate Investments**

The Companyacquired 24 student housing properties and three land parcels during the yearended December 31, 2005 for an aggregate purchase price of approximately $548.5million, and six student housing properties during the three months endedMarch 31, 2006 for an aggregate purchase price of $82.6 million.  The results of operations for each of theacquired properties have been included in our statements of operations from therespective purchase dates.  All pro forma financial information presentedwithin this footnote is not necessarily indicative of the results whichactually would have occurred if the purchases had been consummated onJanuary 1, 2005, nor does the pro forma information purport to representthe results of operations for future periods.

The followingunaudited pro forma financial information for the three-month periods endedMarch 31, 2006 and March 31, 2005 gives effect to the acquisition of the30 student housing properties as if the transactions had occurred onJanuary 1, 2005 (in thousands):

 

17

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|                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
|                          |       |                                             |       |   |   |
| Pro forma revenue             |       | $                                                | 67,225     |   | $ | 50,958 |   |
| Pro forma net  income         |       | $                                                | 1,160      |   | $ | 1,808 |   |
| Pro forma EPS —  Basic   |       | $                                                | 0.03       |   | $ | 0.05 |   |
| Pro forma EPS —  Diluted |       | $                                                | 0.03       |   | $ | 0.05 |   |
|                          |       |                                             |       |   |   |

 

**13.  Restatement of Prior Results**

The Company is restating its consolidated financialstatements for the three months ended March 31, 2005 due to the discovery oferrors in revenue recognition, depreciation and operating expenses related tocertain transactions reported by the Company and to reclassify equity inearnings of unconsolidated entities. The following is a summary of previouslyreported and restated quarterly financial information for the three monthsended March 31, 2005 (in thousands, except per share data):

 

| Three Months Ended March 31, 2005 | ** ** |
|------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **As Reported** | ** ** | **As Restated** | ** ** |
| ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenue                                              |       | $ | 42,204 |   | $ | 40,972 |   |
| Net income                                                 |       | $ | 1,818 |   | $ | 1,445 |   |
| Basic earnings per common share                            |       | $ | 0.06 |   | $ | 0.05 |   |
| Diluted earnings per common share                          |       | $ | 0.06 |   | $ | 0.05 |   |

 

The following provides a more detailed reconciliation of the amounts previouslyreported on Form 10-Q for the quarter ended March 31, 2005 to the restatedamounts (in thousands).

|                                                                     | ** ** | **Three Months Ended  March 31, 2005** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Revenue:                                                            |       |                                                       |       |
| Total revenue  previously reported                                  |       | $                                                          | 42,204     |   |
| Reduction in  expense reimbursement — related party            |       | (653                                                       | )          |
| Reduction in  management fees — third party                    |       | (103                                                       | )          |
| Reduction in  other fee income — related party(a)         |       | (476                                                       | )          |
| Total  adjustments to revenues                                      |       | (1,232                                                     | )          |
| Total revenues  as restated                                         |       | $                                                          | 40,972     |   |
|                                                                |       |                                                       |       |
| Net income:                                                         |       |                                                       |       |
| Net income  previously reported                                     |       | $                                                          | 1,818      |   |
| Revenue  recognition adjustments                                    |       | (1,232                                                     | )          |
| Reduction in  property operating expenses                           |       | 625                                                        |       |
| Reduction in  reimbursed expenses                                   |       | 653                                                        |       |
| Increase in real  estate taxes                                      |       | (5                                                         | )          |
| Increase in  administrative expenses                                |       | (9                                                         | )          |
| Increase in  depreciation and amortization(b)                  |       | (951                                                       | )          |
| Reduction in  interest expense                                      |       | 50                                                         |       |
| Increase in  equity in earnings of unconsolidated entities(a)  |       | 486                                                        |       |
| Increase in  income taxes                                           |       | (355                                                       | )          |
| Decrease in  minority interest .                                    |       | 365                                                        |       |
| Net income as restated                                              |       | $                                                          | 1,445      |   |

 

18

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(a)          Includes the reclassification of$486,000 of preferred returns from military housing project joint ventures.

(b)         Based on the Company’s re-evaluation ofthe estimates used in the purchase price allocation of properties, amountsallocated to land and building have been revised. Previously, the Company’sestimate of the land allocation was 20% of the purchase price for acquiredproperties. Management has changed its estimates used in this allocation toreflect the allocation for properties acquired to correspond to appraisedvalues.  The change in estimate is beingapplied retroactively through prior periods. The Company will obtain appraisalsfor all properties to be acquired going forward. With respect to propertiesacquired for which appraisals had not been obtained prior to implementation ofthis change in estimates, the Company used appraisals for properties withsimilar characteristics.  The change inestimates has resulted in an increase in the purchase price allocation tobuildings and a decrease in the purchase price allocation to land by $126.0million for the properties acquired through 2005, and an increase in thedepreciation expense on buildings by the amounts stated above.

**14. Subsequent Events**

In April 2006, weacquired one student housing property, containing 264 units and 924 beds, fora  purchase price of approximately $36.9million. This acquisition was financed with the assumption of approximately$28.0 million in existing 10-year mortgage debt secured by the property bearinginterest at a fixed rate of 5.57%, and with borrowings from the Company’sCredit Facility.

During the secondquarter of 2006, as a result of the ongoing delay in the filing of this reportand the Company’s Annual Report on Form 10-K for the fiscal year ended December31, 2005, the Company obtained waivers of the covenant under its CreditFacility that requires the Company to deliver audited financial statements forthe 2005 fiscal year no later than 90 days after the fiscal year end, andunaudited quarterly financial statements no later than 45 days after eachfiscal quarter. These waivers extended the period by which the Company maydeliver the financial statements relating to the year ended December 31, 2005and the quarter ended March 31, 2006 through August 15, 2006, as well as forthe three months ended June 30, 2006 through September 15, 2006. The Companypaid fees of $470,000 in connection with these waivers, $240,000 of which wascharged to expense in the second quarter.

In addition, weofficially partnered with the U.S. Department of the Army, effective May 1,2006, to be the private sector partner for the design, development,construction/renovation and management of the military family housingcommunities at Fort Gordon located near Augusta, Georgia. The 50-year term ofthe Fort Gordon project includes a six-year Initial Development Period withproject costs of approximately $110.0 million.

On May 1, 2006, theCompany also acquired an ownership position and commenced property managementand maintenance services for the U.S. Department of the Army’s military familyhousing at Carlisle Barracks and Picatinny Arsenal, located in Carlisle, PA andDover, NJ, respectively. These locations currently encompass 316 family housingunits at Carlisle Barracks and 113 family housing units at Picatinny Arsenal.The Company commenced providing property management and maintenance services atthe two installations on May 1, 2006, when one of the Company’s subsidiariesentered into agreements with the Army, including a 50-year ground lease for thepurpose of owning and managing the housing inventory at the two installations.Under the agreements, the Company will receive fees for the provision ofmanagement and maintenance services at these installations.  As of July 21, 2006, financing was securedfor the Carlisle/Picatinny project and construction and renovation agreementswere in the process of being completed to permit the commencement ofconstruction/renovation activities.  Thehousing project at the two installations covers an aggregate of 348 end-statehousing units and has a five-year Initial Development Period.

19

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On May 2, 2006,the Company issued 1,817,247 common shares of beneficial interest to Vornadopursuant to the exercise of its warrant, dated July 27, 2004, as amended.Under the terms of the warrant, Vornado was entitled to exercise additionalsecurities under the warrant, in the form of common shares of the Companyor units of limited partnership interest in the Operating Partnership, atVornado’s election, at any time through May 2, 2006 (the “ExerciseExpiration Date”). In addition, under the terms of the warrant, Vornado waseligible to purchase the additional securities under the warrant for cash atthe then applicable exercise price per share/unit, or to acquire the remainingsecurities under a cashless exercise feature. The warrant provided that, to theextent that Vornado did not exercise the remainder of the securitiesexercisable thereunder prior to the Exercise Expiration Date, then the warrantwould be automatically exercised upon the Exercise Expiration Date for commonshares of the Company under the cashless exercise provision of the warrant.Vornado did not provide notice of its intent to exercise the remainder of thewarrant as of the Exercise Expiration Date, and, therefore, the warrant becameautomatically exercisable on that date for 1,817,247 common shares of theCompany under the cashless exercise provision of the warrant.

On June 19, 2006, theCompany declared a quarterly dividend of $0.2275 per outstanding common share.The dividend was paid on July 14, 2006 to common shareholders of record onJune 30, 2006.

In the third quarter of2006, the Company entered into employment agreements with John DeRiggi,President of the Student Housing Business and Chief Investment Officer, JosephM. Macchione, Executive Vice President, General Counsel and Secretary and J.Patrick O’Grady, who commenced employment as the Company’s Executive VicePresident and Chief Financial Officer effective as of July 1, 2006. Theseemployment agreements are for an initial three-year term effective as of July1, 2006 and provide for base salaries aggregating $850,000 in each of the threeyears.  The base salaries will increaseannually effective January 1 of each year by a minimum amount equal to at leastthe percentage increase in the Consumer Price Index.

On August 1, 2006, the Company acquired two studenthousing properties, containing an aggregate of 203 units and 696 beds, for anaggregate purchase price of approximately $41.4 million. These acquisitionswere financed through the placement of new mortgage debt on theproperties.  With respect to the propertylocated in San Diego, California, the Company placed $28.6 million in 10-year,interest-only mortgage debt on the property, with a fixed interest rate of5.97%. With respect to the property located in Mankato, Minnesota, the Companyplaced $3.0 million in 10-year, interest-only, mortgage debt on the property,with a fixed interest rate of 6.19%.

 

20

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

**Overview**

We are a self-advised, self-managed, specialty housingcompany that focuses on providing housing to college and university studentsresiding off-campus and to members of the U.S. military and their families. Asof March 31, 2006, we owned, or had ownership interests in, 60 studenthousing properties containing a total of 11,230 units and 36,090 beds, oneundeveloped parcel of land held for development as student housing propertiesand three partially developed parcels of land, and we owned minority equityinterests in joint ventures that own our military housing privatizationprojects. Additionally, as of March 31, 2006, our operating partnership had an ownershipinterest in, and through various wholly-owned subsidiaries operates, sevenmilitary housing privatization projects, and an additional project underexclusive negotiation, comprising an aggregate of 16,745 housing units on 19military bases.

On May 1, 2006, we officially closed on the award ofthe project that was under exclusive negotiation, comprising 887 end-statehousing units on the base of Fort Gordon located near Augusta, Georgia. On May1, 2006, we acquired an ownership interest in the Army’s Carlisle Barracks andPicatinny Arsenal project and began management and maintenance services forthis project, which covers 348 end-state units. We also are currently in thesolicitation process with the U.S. Air Force for a military housing privatizationproject that is expected to cover four bases and 2,875 end-state housing units.

Through our taxable REIT subsidiaries, we providedevelopment, construction, renovation and management services for our militaryhousing privatization projects and property management services for studenthousing properties owned by others. In order to comply with the applicablerequirements under the REIT provisions of the Code, we must limit theoperations of taxable REIT subsidiaries so that securities issued to us by ourtaxable REIT subsidiaries do not represent more than 20% of our total assets asof the close of any quarter in our taxable year and so that dividends from ourtaxable REIT subsidiaries, together with our other non-qualifying gross income,do not exceed 25% of our gross income for any taxable year.

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

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

As previously disclosed in our Annual Report on Form10-K for the year ended December 31, 2005, in the first quarter of 2006 theAudit Committee of our Board of Trustees conducted an investigation of certainaccounting and financial reporting matters. The investigation identified material weaknesses in our internal controlover financial reporting and in our disclosure controls and procedures as ofDecember 31, 2005 and March 31, 2006.  Inconnection with the investigation, we reviewed our previously reportedfinancial statements.  Through thisreview, we identified adjustments that were material to the results wepreviously reported for the quarterly periods ended March 31, 2005, June 30,2005 and September 30, 2005. Accordingly, we have restated our financial statements for the three monthsended March 31, 2005, and are in the process of restating our financialstatements for the periods ended June 30, 2005 and September 30, 2005.  Operating results for the quarterly periodended  March 31, 2005 as presented inthis report have been restated, and are provided in more detail in Note 13 tothe consolidated financial statements contained in the section entitled “FinancialStatements and Supplementary Data” in Part I, Item 1 of this report.  We expect to report the restatements andrelated information relating to the second quarter of 2005 in our QuarterlyReport on Form 10-Q for the quarter ended June 30, 2006, and with respect tothe third quarter of 2005, in an amendment to our Quarterly Report on Form 10-Qfor that period.

21

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*Student Housing*

The student housing segment acquires, owns and managesoff-campus student housing properties strategically located near college oruniversity campuses. During the period beginning July 2004 and up toMarch 31, 2006, our rental revenue increased substantially as a result ofthe acquisition of our properties, including those properties acquired in ourformation transactions. The rental payments we receive as a result of theproperties we own are reflected in our revenue. Additionally, operatingexpenses, real estate taxes and depreciation and amortization have increased asa result of these acquisitions. Further, interest expense has increased relatedto the financing of the properties we have acquired.

Historically, we have found certain property revenuesand operating expenses to be cyclical in nature, and therefore not incurredratably over the course of the year.  Asour properties are leased predominantly on an academic-year basis, certain ofour operating revenues and expenses will vary from quarter to quarter dependingon the leasing cycle. For example, we experience significant turnover costsduring the third quarter of our fiscal year, in connection with preparing ourproperties for new residents prior to commencement of the new academic-yearlease period, which typically begins in August or September.  In addition, we also typically incur higherlease-up costs during the first two quarters of our fiscal year, as this is theperiod during which we heavily target students for leases that will commencefor the next academic year.  Propertyrevenues and expenses may differ from expected results in the year ofacquisition, depending on the timing of the acquisition in relation to theleasing cycle. We expect this trend to continue as we acquire additionalproperties.  In comparing our operatingstatistics for the three months ended March 31, 2006 versus 2005, most of thekey operating metrics for the student housing segment experienced significantincreases, primarily as a result of the acquisition of additional propertiesduring 2005 and the first quarter of 2006. Most notably, for the three months ended March 31, 2006 compared to thethree months ended March 31, 2005, rent and other property income, depreciationand amortization, interest expense, real estate taxes, and property operatingexpense each increased significantly. These increases were due to a number of factors, including the increasein size of our portfolio in general, as well as the following: with respect toreal estate taxes, more aggressive assessments by local taxing authorities withrespect to certain of our student housing properties throughout 2005 and thefirst quarter of 2006; and with respect to property operating expenses dueprimarily to timing issues surrounding the dates on which we acquiredproperties, as noted above. During 2005 and the first quarter of 2006, we alsoexperienced, and expect to continue to experience going forward, increases inoperating expenses (in addition to the proportionate increase associated withthe increased number of properties owned in 2006 versus 2005) that will includeincreased utility expenses resulting from national trends in higherenergy-related costs.

We earn management fees from managing properties forrelated parties and third parties. These fees are typically equal to apercentage of cash receipts or gross rental revenues generated by the managedproperties, or equal to a fixed monthly amount, according to the managementagreements for the properties we manage. We also have the ability to earnincentive management fees by achieving specified property-level performancecriteria for certain properties we manage for third parties. Further, certainoperating expenses incurred related to properties we manage for others arereimbursed by the owners of the properties managed. We expect to continuegenerating fee income revenue and operating expense reimbursements from theproperties that we manage for others, although the amounts are expected tobecome less significant as a percentage of our overall revenues as rentalincome increases from the properties we own. During 2006, we also expect to aggressively pursue new third-partymanagement agreements by utilizing relationships in the student housing marketand providing our significant operational economies of scale as a savingsmechanism for other third party owners, including institutional owners andindividual student housing owners.

During the remainder of 2006, we expect to acquireadditional student housing properties and development projects that are locatedin our targeted markets and that meet management’s underwriting criteria forcreating long-term growth potential. During 2005, we entered into a jointventure with an institutional partner to develop and construct two studenthousing properties. Under the terms of this venture, our joint venture partneragreed to fund 90% of the equity expected to be required for development

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of theproperties, which includes acquisition costs for the properties and a portionof the development and construction costs, and we agreed to fund the remaining10% of the required equity. The joint venture then obtained a construction loanfor the properties to be developed that permits draws for up to a certainpercentage of the total cost of development. The terms of the joint ventureprovide that we manage the properties, including the development, constructionand pre-leasing of the properties, and have the option to purchase our partner’sinterest in the joint venture within one year after completion of theproperties. In an effort to conserve our capital resources, we will considerfunding future acquisitions of student housing properties and developmentprojects through joint venture structures. We may also determine that it isappropriate to purchase additional student housing properties outright, as opposedto with a joint venture partner, depending upon many factors which may include,but are not limited to, the applicable purchase price, available capital andprojected returns with respect to the property. In addition to utilizing cashfrom operations and from our line of credit, we may leverage existing studenthousing properties which are underleveraged or unencumbered by debt to generatecash to fund the purchase of additional student housing properties or ourequity investments in joint ventures. The timing of any additional acquisitionsor development projects will be dependent upon various factors, including ourability to complete satisfactory due diligence, find suitable joint venturepartners and agree upon mutually acceptable joint venture terms, obtainappropriate debt financing on the properties, and the availability of capital.

During the three months ended March 31, 2006, weacquired six student housing properties for an aggregate purchase price ofapproximately $82.6 million.  Theproperties are located near six colleges and universities in six states andcontain an aggregate of 994 units and 2,750 beds.  More specifically, these propertyacquisitions included the following:

·      astudent housing property, University Village, located in Sacramento, Californiaand serving the California State University - Sacramento. University Villagecontains 250 units and 394 beds.  Theproperty was acquired on January 12, 2006 for a purchase price of approximately$20.1 million, including the placement of $14.7 million of new 10-yearfixed-rate debt with a 5.32% interest rate;

·      astudent housing property, Jacob Heights, located in Mankato, Minnesota andserving the Minnesota State University. The property contains 42 units and 162 beds, and was acquired on January13, 2006 for a purchase price of $6.3 million, funded through the Company’scredit facility. On January 31, 2006, we placed approximately $3.9 million ofmortgage debt on the property with a fixed interest rate of 5.54% and a term of10 years;

·      astudent housing property, The Commons on Oak, located in Norman, Oklahoma andserving the University of Oklahoma.  Theproperty contains 254 units and 780 beds and was acquired on January 18, 2006for a purchase price of approximately $18.6 million, funded through the Company’scredit facility. On February 2, 2006, we placed approximately $11.7 million ofmortgage debt on the property with a fixed interest rate of 5.36% and a term of10 years;

·      astudent housing property, The Club, located in Athens, Georgia and serving theUniversity of Georgia.  The propertycontains 120 units and 480 beds and was acquired on January 26, 2006 for apurchase price of approximately $12.9 million, including the assumption ofapproximately $10.5 million in existing mortgage indebtedness with a 4.41%interest rate and maturing in April 2009;

·      astudent housing property, Brookstone Village, located in Wilmington, NorthCarolina and serving the University of North Carolina - Wilmington.  The property contains 124 units and 238 bedsand was acquired on February 1, 2006 for a purchase price of $6.1 million,including the placement of approximately $4.1 million in new 10-year fixed-ratemortgage indebtedness with a 5.38% interest rate; and

·      astudent housing property, Lion’s Crossing, located in State College,Pennsylvania and serving the Pennsylvania State University.  The property contains 204 units and 696 bedsand

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was acquired onFebruary 16, 2006 for a purchase price of approximately $18.6 million,including the assumption of approximately $8.0 million in existing mortgageindebtedness with an 8.63% interest rate and maturing in 2017.

As of March 31, 2006, with regard to our studenthousing segment, we:

·      owned60 student housing properties containing a total of 11,230 units and 36,090beds;

·      manageda total of 16 student housing properties owned by others, containing a total of3,136 units and 9,841 beds; and we provided pre-leasing services for twostudent housing properties owned by others, which were under construction and whencomplete will contain a total of 455 units and 1,938 beds;

·      owneda 10% interest in a joint venture that had two student housing properties underdevelopment, which are expected upon completion to contain a total of 288 unitsand 1,152 beds; and

·      ownedone undeveloped and one partially developed parcel of land, which currently areexpected, upon completion, to contain a total of 252 units and 870 beds.

In April 2006, we acquired an additional studenthousing property, College Park — Stadium Suites, located in Columbia, SouthCarolina and serving the University of South Carolina.  The property contains 264 units and 924 bedsand was acquired on April 20, 2006 for a purchase price of approximately $36.9million, including the assumption of approximately $28.0 million of existing10-year fixed-rate mortgage debt with an interest rate of 5.57%.  In addition, on August 1, 2006 we acquiredtwo student housing properties, College Manor located in San Diego, Californiaand serving the San Diego State University, and Jacob Heights III located inMankato, Minnesota and serving Minnesota State University. College Manorcontains a total of 179 units and 600 beds and was acquired for a purchaseprice of approximately $37.5 million, including the placement of approximately$28.6 million in new 10-year, interest-only mortgage debt on the property, witha fixed interest rate of 5.97%.  JacobHeights III contains 24 units and 96 beds and was acquired for a purchase priceof $3.8 million, including the placement of approximately $3.0 million in new10-year, interest-only, mortgage debt on the property, with a fixed interestrate of 6.19%.

*Military Housing*

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

As of March 31, 2006, we owned equity interests in thejoint ventures that owned the seven military housing privatization projectscurrently in operation, encompassing 18 military bases totaling 15,858

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housingunits. During the three months ended March 31, 2006, we earned fees forproviding development, construction/renovation and management services to theseseven military housing privatization projects.

In May 2005, the U.S. Department of the Armyselected us to be its private sector partner for the design, development,construction, renovation and management of family military housing units atFort Gordon, located near Augusta, Georgia. On May 1, 2006, we closed on theformal award of this project and officially commenced operations on thisproject.  The project will have asix-year initial development period with new construction and renovations of887 end-state housing units. The 50-year project term will involve thedevelopment, management and construction of high-quality homes, the targetedrenovation of existing homes, and the addition of community enhancingfacilities and services. In addition, we are currently in the solicitationprocess with the Air Force for a military housing privatization project that isexpected to cover four bases and 2,875 end-state housing units.

In February 2006, we entered into an agreement withAmerican Eagle Communities Northeast LLC to obtain its rights to exclusivelynegotiate with the Army with respect the Carlisle/Picatinny project located inCarlisle, Pennsylvania and Dover, New Jersey. On May 1, 2006, we acquired an ownership interest in the Carlisle/Picatinnyproject and began management and maintenance services for the project. As ofJuly 21, 2006, financing was secured for the project, and construction andrenovation agreements were in the process of being completed to permit thecommencement of construction/renovation activities. The project has a 50-yearterm and five-year initial development period, and covers the new constructionand/or renovation of 348 end-state housing units.

We and the U.S. Department of the Army continue toreview the possibility of refinancing the Fort Carson project to obtainadditional project funding. If the project is refinanced, we would expect theproceeds to be used to fund development and construction/renovation activitiesfor additional housing units, for which we would expect to earn more fees inaddition to the fees we currently earn for managing the existing housing units.

With regard to trends and uncertainties in themilitary housing market, some of the bases included in our military housingprivatization projects were targeted for closure or realignment in the currentround of the Base Realignment and Closure, or BRAC, process, which wasinitiated in 1988 and completed its fifth and, under current legislation, thefinal round in 2005. The Department of Defense (DoD) released its initialrecommendations for BRAC in May 2005, and the BRAC Commission then votedto amend the DoD’s initial list on July 19, 2005. Under the BRACCommission’s revisions, several bases were removed from the DoD’s list of basestargeted for closure, including the Submarine Base in New London, CT and thePortsmouth Naval Shipyard in Kittery, Maine. In addition, the BRAC Commissionalso proposed a less significant realignment at the Fort Eustis base under ourFort Eustis/Fort Story project in Newport News, Virginia than was proposed bythe DoD, and the BRAC Commission proposed to close the Naval Air Station inBrunswick, Maine, which had been recommended by the DoD to berealigned.   Finally, the BRAC Commission voted to uphold the DoD’srecommendation to close the Walter Reed Army Medical Center in Washington,DC.  In September 2005, the BRAC Commission sent its report to thePresident regarding its findings and recommended changes to the DoD’s initialreport, and President Bush accepted the BRAC Commission’s recommendations intheir entirety. On November 9, 2005, the BRAC round was completed whenCongress also approved the BRAC Commission’s recommendations in their entirety.Under the final BRAC list versus the original DoD recommendations, the numberof affected military housing units covered by our existing projects was reducedfrom 2,500 to approximately 700 units, with these remaining approximately 700units located at the Naval Air Station in Brunswick, Maine.  We believethat the closure of the Walter Reed Army Medical Center will not result in theloss of housing units, as these housing units are likely to be utilized bypersonnel who will be relocated from serving at Walter Reed to serving atnearby military facilities in the Washington, DC metropolitan area.

Our management team also had under review, as ofAugust 4, 2006, nine additional potential privatization project opportunities.These projects span multiple bases and total, in the aggregate, approximately 21,200housing units. Individual projects identified as opportunities range fromapproximately 1,000 units to 5,500 units per project.  We consider a project as “under review” oncea base has been identified by the DoD for privatization and our managementbegins initial due diligence and evaluation of the economic and strategic valueof the project. After further due diligence, we may decide

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not topursue any of these potential privatization projects.  We also will continue to pursue opportunitiesto acquire projects or project rights from our competitors, as well asopportunities to participate in pilot housing programs for unaccompaniedmilitary personnel.

**CriticalAccounting Policies**

Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses the Company’s consolidated financial statements, which have beenprepared in accordance with U.S. generally accepted accounting principles. Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting 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 significant judgments andestimates on our part in preparing the Company’s consolidated financialstatements. Changes in these judgments and estimates could have a materialeffect on these financial statements.

**RevenueRecognition**

*Student Housing*

Student housing revenue includes rental revenue and otherproperty income, standard and incentive management fees, and reimbursements ofcertain operating expenses. These sources of revenue are described in greaterdetail below:

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

·      werecognize other property income, including, but not limited to, leaseprocessing fees, move-in fees and activity fees as earned throughout the courseof the year. The timing of these fees typically fluctuates in relation to theacademic year leasing cycle;

·      standardmanagement fees are based on a percentage of monthly cash receipts or grossmonthly rental and other revenues generated by the properties managed forothers. We recognize these fees on a monthly basis as the services areperformed;

·      we earnincentive management fees as a result of the achievement of certain operatingperformance criteria over a specified period by certain managed properties,including targeted annual debt service coverage ratios of the properties. Werecognize these fees at the amount that would be collected under the contractif the contract was terminated on the balance sheet date; and

·      expensereimbursements are comprised primarily of salary and related costs of certainof our employees working at certain properties we manage for others, the costof which is reimbursed by the owners of the related properties. We accrueoperating expense reimbursements as the related expenses are incurred.

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*MilitaryHousing*

We earn military housing revenues for providing servicesto our military housing privatization projects, including the following:

·     standardand incentive management fees, which are based on a percentage of effectivegross revenue generated by the military housing privatization projects from thebasic allowance for housing provided by the government to service members,referred to as BAH, are recognized when the revenue is earned by the militaryhousing projects. Incentive management fees are based upon the satisfaction ofcertain criteria including, among other things, satisfying designatedbenchmarks relating to emergency work order response, occupancy rates, hometurnover and resident satisfaction surveys. Incentive management fees arerecognized when the various criteria stipulated in the management contract havebeen satisfied.

·     standardand incentive development and construction/renovation fees, which are based ona percentage of development and construction/renovation costs incurred by themilitary housing privatization projects, including hard and soft costs andfinancing costs, are recognized on a monthly basis as the costs are incurred bythe military housing projects.  Incentivedevelopment and construction/renovation fees are based upon the satisfaction ofcertain criteria including, among other things, completing a number of housingunits according to schedule, achieving specific safety records and implementingsmall business or minority subcontracting plans. These fees are recognized whenthe various criteria stipulated in the contract have been satisfied.

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

·     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 provided for currently inits entirety.

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

·     equityreturns are earned on our investments in military housing projects. During theinitial development period for a project, the equity returns are a fixedpercentage of our investment and subsequent to the initial development periodfor a project, the equity returns are based on a fixed percentage of ourinvestment and on the project’s net operating income, subject to cashdistribution caps, as defined in the operating agreements related to theparticular project. As of March 31, 2006, only the Fort Carson project hadpassed its initial development period.

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***RealEstate Investments and Corporate Assets***

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

The value of in-place leases is based on thedifference between (i) the property valued with existing in-place leasesand (ii) the property valued as if vacant. As lease terms typically are12 months or less, actual rates on in-place leases generally approximatemarket rental rates. Factors that we consider in the valuation of in-placeleases include an estimate of incremental carrying costs during the expectedlease-up periods considering current market conditions and nature of thetenancy. Purchase prices of student housing properties to be acquired are notexpected to be allocated to tenant relationships considering the terms of theleases and the expected levels of renewals. We amortize the value of in-placeleases to expense over the remaining term of the respective leases, which isgenerally one year or less.

We expense routine repair and maintenance costs thatdo not improve the value of an asset or extend its useful life, includingturnover costs. We capitalize expenditures that improve the value and extendthe useful life of an asset. We compute depreciation using the straight-linemethod over the estimated useful lives of the assets, which is generally40 years for buildings including student housing properties and thecommercial office building, and three to five years for residential furnitureand appliances. During the third quarter of each fiscal year, we typically willexperience an increase in property operating expenses over other quarters as aresult of repair and maintenance expenditures relating to turnover of units atstudent housing properties. The Company’s student housing lease terms generallycommence in August or September to coincide with the beginning of the academicyear. Accordingly, the Company expects to incur a majority of its repair andmaintenance costs in the third quarter to prepare for new residents.

In accordance with 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. When required, we review recoverability ofassets to be held and used through a comparison of the carrying amount of anasset to estimated undiscounted future cash flows expected to be generated bythe asset. If the carrying amount of an asset exceeds its estimatedundiscounted future cash flows, an impairment charge is recognized in an amountby which the carrying value of the asset exceeds the fair value of the assetdetermined using customary valuation techniques, such as the present value ofexpected future cash flows. Assets to be disposed of would be separatelypresented in the balance sheet and reported at the lower of the carrying amountor fair value less costs to sell, and no longer would be depreciated.

***Allowancefor Doubtful Accounts***

We estimate the collectibility of receivablesgenerated by rental and other income as a result of the operation of ourstudent housing properties. If we believe that the collectibility of certainamounts is questionable, we record a specific reserve for these amounts toreduce the amount outstanding to 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.

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

***MinorityInterest***

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

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

Military housing projects are joint ventures enteredinto between the Company and the U.S. military to design, develop,construct/renovate and manage the military family housing located on or nearvarious bases throughout the United States. The Company evaluates itsinvestments in military housing project joint ventures in which we have avariable interest to determine if the underlying entity is a VIE as definedunder FIN 46(R). The Company has concluded that each of the military housingproject joint ventures in which it has a variable interest is a VIE and thatthe Company is not the primary beneficiary of any of these VIEs. We record ourinvestments in joint ventures under our military housing projects in accordancewith the equity method of accounting. Our investment is initially recorded atcost, and then subsequently adjusted at each balance sheet date to an amount equalto what we would receive from the joint venture in the event that it wereliquidated at net book value as of that date, and assuming that the proceedsfrom the liquidation are distributed in accordance with the terms of, andpriority of returns set forth under, the joint venture’s operating agreement.The Company has exposure to loss to the extent of its investments, if any, andany receivables due from the project.

The Company entered into a joint venture in the thirdquarter of 2005 to develop and construct two student housing properties. TheCompany is accounting for the transaction as a financing arrangement becausethe Company originally owned the land and contributed it to the joint ventureand  has the option to purchase the jointventure partner’s interest in the joint venture within one year of completionof the properties, and because the Company has provided certain guarantees forthe completion of construction and for a portion of the construction loans.Therefore, the Company accounts for its investment in the joint venture byincluding its assets and liabilities in the Company’s consolidated financialstatements.

***Income Taxes***

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

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been madefor federal income taxes in the accompanying consolidated financial statements,other than with respect to the Company’s taxable REIT subsidiaries.

***Comparison of the Three Months Ended March 31, 2006to the Three Months Ended March 31, 2005***

 
| ** **                                                                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2006**                                             | ** ** | **2005 (Restated)** | ** ** |
| ** **                                                                                               | ** ** | **Student  Housing**                                 | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                                                               | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenue:**                                                                                             | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rent and other  property income                                                                          |       | $                                                    | 43,998     |   | $ | — |   | $ | 39 |   | $ | 44,037 |   | $ | 25,780 |   | $ | — |   | $ | 61 |   | $ | 25,841 |   |
| Expense  reimbursements:                                                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                            |       | 86                                                   |       | 13,237 |   | 57 |   | 13,380 |   | 186 |   | 7,813 |   | 88 |   | 8,087 |   |
| Third party                                                                                              |       | 1,336                                                |       | — |   | — |   | 1,336 |   | 1,274 |   | — |   | — |   | 1,274 |   |
| Management fees:                                                                                         |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                            |       | 20                                                   |       | 2,019 |   | — |   | 2,039 |   | 197 |   | 1,670 |   | — |   | 1,867 |   |
| Third party                                                                                              |       | 1,008                                                |       | — |   | — |   | 1,008 |   | 537 |   | — |   | — |   | 537 |   |
| Other fee  income-related party                                                                          |       | —                                               |       | 4,680 |   | — |   | 4,680 |   | — |   | 3,185 |   | 70 |   | 3,255 |   |
| Other income                                                                                             |       | 51                                                   |       | 9 |   | 31 |   | 91 |   | 53 |   | 24 |   | 34 |   | 111 |   |
| Total revenue                                                                                            |       | 46,499                                               |       | 19,945 |   | 127 |   | 66,571 |   | 28,027 |   | 12,692 |   | 253 |   | 40,972 |   |
| **Operating  Expenses:**                                                                                 | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Property  operating  expenses                                                                            |       | 16,666                                               |       | 1,539 |   | — |   | 18,205 |   | 9,364 |   | 704 |   | — |   | 10,068 |   |
| Reimbursed  expenses                                                                                     |       | 1,422                                                |       | 13,237 |   | 57 |   | 14,716 |   | 1,460 |   | 7,813 |   | 88 |   | 9,361 |   |
| Real estate  taxes                                                                                       |       | 4,177                                                |       | — |   | 24 |   | 4,201 |   | 2,012 |   | — |   | — |   | 2,012 |   |
| Administrative  expenses                                                                                 |       | —                                               |       | — |   | 3,765 |   | 3,765 |   | — |   | — |   | 2,942 |   | 2,942 |   |
| Audit Committee  special investigation expenses                                                          |       | —                                               |       | — |   | 2,575 |   | 2,575 |   | — |   | — |   | — |   | — |   |
| Depreciation and  amortization                                                                           |       | 10,152                                               |       | 119 |   | 78 |   | 10,349 |   | 7,479 |   | 35 |   | 211 |   | 7,725 |   |
| Interest                                                                                                 |       | 10,436                                               |       | — |   | 518 |   | 10,954 |   | 5,112 |   | — |   | 245 |   | 5,357 |   |
| Total operating  expenses                                                                                |       | 42,853                                               |       | 14,895 |   | 7,017 |   | 64,765 |   | 25,427 |   | 8,552 |   | 3,486 |   | 37,465 |   |
| Income (loss)  before equity in earnings of unconsolidated entities, income taxes and  minority interest |       | 3,646                                                |       | 5,050 |   | (6,890 | ) | 1,806 |   | 2,600 |   | 4,140 |   | (3,233 | ) | 3,507 |   |
| Equity in  earnings of unconsolidated entities                                                           |       | —                                               |       | 1,216 |   | — |   | 1,216 |   | — |   | 486 |   | — |   | 486 |   |
| Income (loss)  before  income taxes and  minority interest                                               |       | 3,646                                                |       | 6,266 |   | (6,890 | ) | 3,022 |   | 2,600 |   | 4,626 |   | (3,233 | ) | 3,993 |   |
| Income taxes                                                                                             |       | —                                               |       | 973 |   | — |   | 973 |   | — |   | 1,140 |   | — |   | 1,140 |   |
| Income (loss)  before minority interest                                                                  |       | 3,646                                                |       | 5,293 |   | (6,890 | ) | 2,049 |   | 2,600 |   | 3,486 |   | (3,233 | ) | 2,853 |   |
| Minority  interest                                                                                       |       | 1,617                                                |       | 2,348 |   | (3,056 | ) | 909 |   | 1,283 |   | 1,720 |   | (1,595 | ) | 1,408 |   |
| **Net income (loss)**                                                                                    |       | $                                                    | 2,029      |   | $ | 2,945 |   | $ | (3,834 | ) | $ | 1,140 |   | $ | 1,317 |   | $ | 1,766 |   | $ | (1,638 | ) | $ | 1,445 |   |

 

***Student Housing***

*Revenue*. Of the 60properties owned as of March 31, 2006, we acquired 24 of the studenthousing properties during the twelve months ended December 31, 2005 andsix properties during the three months ended March 31, 2006. Rent andother property income totaled $44.0 million for the three months endedMarch 31, 2006. As of March 31, 2005, we owned 38 student housingproperties, with rent and other property income from these properties totaling$25.8 million for the three months ended March 31, 2005. For the most part, theincrease relates to the increased number of properties owned during the firstquarter of 2006.

Expense reimbursements from related parties decreasedto $0.1 million for the three months ended March 31, 2006 from $0.2 million forthe three months ended March 31, 2005, primarily due to the Company’sacquisition of two student housing properties from related parties inMarch 2005, which were managed by the Company prior to purchase.  In addition, we ceased managing another  student housing

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propertyin March 2005 as it was sold to a third party.  Expense reimbursements from third partiesremained at $1.3 million for the three months ended March 31, 2006 and March31, 2005.  We expect expensereimbursements, which relate to properties we manage but do not own, tocontinue to become a less significant portion of our student housing revenuesas rental revenues earned from additional properties that we acquire continuesto increase.

Management fee income from related parties decreasedto $20,000 for the three months ended March 31, 2006 compared to $0.2 millionfor the three months ended March 31, 2005. The management fee income fromrelated parties in 2006 consisted entirely of standard management fees, ascompared to $0.1 million of standard management fee income and $0.1 million ofasset management fee income in 2005. This decrease in standard management feeswas primarily due to our acquisition of two student housing properties fromrelated parties in March 2005, which we previously managed prior to thepurchase. Management fee income from third parties increased to $1.0 millionfor the three months ended March 31, 2006 from $0.5 million for the threemonths ended March 31, 2005. This increase was primarily due to the receipt ofa management fee incentive payment that we received in connection with the saleof one of our managed properties during the first quarter of 2006, as well asthe transfer to the Company on January 1, 2006 of management contracts relatingto four properties for which we previously provided consulting managementservices to GMH Asset Services Capital Partners, LP. (*See*Note 8 of the accompanying financial statements).  For the remainder of 2006, we expectmanagement fee income to contribute less significantly to total revenue giventhe expected growth in rental revenue from the operations of properties we own.

Expenses.  Property operating expenses increasedto $16.7 million for the three months ended March 31, 2006 from $9.4 millionfor the three months ended March 31, 2005, primarily due to expensesattributable to the 22 properties acquired from April 1, 2005 throughMarch 31, 2006.  Property operatingexpenses also include compensation and operating costs with respect to ourstudent housing acquisitions department. We expect property operating expensesto continue to increase in the future as we acquire additional properties. Withrespect to properties that we currently own, we also expect to continue toexperience increases in utility expenses resulting from national trends inhigher energy-related costs.

Reimbursed expenses decreased to $1.4 million for thethree months ended March 31, 2006 from $1.5 million for the three months endedMarch 31, 2005, primarily due to our acquisition of two student housingproperties from related parties in March 2005, which we previously managedprior to the purchase.

Real estate taxes increased to $4.2 million for thethree months ended March 31, 2006 from $2.0 million for the three months endedMarch 31, 2005, primarily due to the acquisition of 22 properties since the endthe first quarter of 2005. We expect real estate taxes to continue to increasesignificantly in the future as we acquire additional properties, and to theextent that local authorities continue to aggressively pursue higher realestate tax assessments on properties that we currently own.

Depreciation and amortization increased to $10.2million for the three months ended March 31, 2006 from $7.5 million for thethree months ended March 31, 2005 as a result of acquiring 22 properties for anaggregate acquisition cost of $456.8 million from April 1, 2005 throughMarch 31, 2006. The $10.2 million in 2006 is comprised of $8.5 million ofdepreciation and $1.7 million of lease intangible amortization, and the $7.5million in 2005 is comprised of $5.1 million of depreciation and $2.4 millionof lease intangible amortization.

Interest expense increased to $10.4 million for thethree months ended March 31, 2006, from $5.1 million for the three months endedMarch 31, 2005. This increase was a result of the issuance and assumption of $298.1 millionof debt, including borrowing under our line of credit, in connection with theacquisition of 22 properties from April 1, 2005 through March 31, 2006.During the three months ended March 31, 2006, the Company borrowed $70.0million and repaid $31.0 million under the line of credit, and during the threemonths ended March 31, 2005, the Company borrowed $105.0 million and repaid$45.0 million under the line of credit.  We expect interest expense toincrease in the future as we incur additional debt to fund acquisitions. Formore information regarding the amount of fixed-rate and variable-rateindebtedness we held as of December 31, 2005 and March 31, 2006, see thesection titled *Quantitative and Qualitative DisclosuresAbout Market Risk* under Part I, Item 3 of this report.

 

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***Military Housing***

*Revenue*.Expense reimbursements totaled $13.2 million for the three months endedMarch 31, 2006 as compared to $7.8 million for the three months endedMarch 31, 2005. This increase was primarily due to payroll and renovationexpenses related to the seven military housing projects in operation as ofMarch 31, 2006 as compared with the six military housing projects in operationas of March 31, 2005. The table below sets forth certain information regardingthe revenue from expense reimbursements for each of our military housingprojects for the three months ended March 31, 2006 and March 31, 2005.

 

|                                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Project**                                                  | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                                   | ** ** | **(in millions)**                               | ** ** |
| Fort Stewart and Hunter  Army Airfield Project               |       | $                                                    | 1.2        |   | $ | 2.1 |   |
| Fort Carson Project                                          |       | 0.6                                                  |       | 1.7 |   |
| Fort Hamilton Project(1)                                     |       | 0.1                                                  |       | 0.1 |   |
| Walter Reed Army  Medical Center and Fort Detrick Project(2) |       | 0.2                                                  |       | 0.3 |   |
| Fort Eustis/Fort Story Project(3)                            |       | 1.2                                                  |       | 0.6 |   |
| Navy Northeast Region  Project(3)                            |       | 7.3                                                  |       | 3.0 |   |
| Fort Bliss/White Sands  Missile Range Project(4)             |       | 2.6                                                  |       | — |   |
| Total                                                        |       | $                                                    | 13.2       |   | $ | 7.8 |   |

______________

(1) Commenced operations in the second quarter of2004.

(2) Commenced operations in the third quarter of2004.

(3) Commenced operations in the fourth quarter of2004.

(4) Commenced operations in the third quarter of2005.

 

Management feesfrom related parties totaled $2.0 million for the three months ended March 31,2006 compared to $1.7 million for the three months ended March 31, 2005. Theamount of management fees from related parties that we receive during a fiscalperiod is affected by the number of housing units that we manage under ourmilitary housing projects during that period, which number will fluctuate basedon the number of housing units that we construct/renovate or demolish duringthat period. Management fees from related parties increased during the threemonths ended March 31, 2006 as compared to the three months ended March 31,2005, primarily due to commencement of operations relating to our Fort Bliss/WhiteSands Missile Range project during the third quarter of 2005.  The table below sets forth certaininformation regarding the revenue from management fees from related parties foreach of our military housing projects for the three months ended March 31, 2006and March 31, 2005.

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|                                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Project**                                                    | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                                     | ** ** | **(in millions)**                               | ** ** |
| Fort Stewart and Hunter  Army Airfield Project                 |       | $                                                    | 0.3        |   | $ | 0.2 |   |
| Fort Carson Project                                            |       | 0.4                                                  |       | 0.4 |   |
| Fort Hamilton Project(1)                                       |       | *                                                    |       | 0.1 |   |
| Walter Reed Army  Medical Center

and Fort Detrick  Project(2) |       | 0.1                                                  |       | 0.1 |   |
| Fort Eustis/Fort Story Project(3)                              |       | 0.1                                                  |       | 0.1 |   |
| Navy Northeast Region  Project(3)                              |       | 0.8                                                  |       | 0.8 |   |
| Fort Bliss/White Sands  Missile   Range Project(4)             |       | 0.3                                                  |       | — |   |
| Total                                                          |       | $                                                    | 2.0        |   | $ | 1.7 |   |
|                                                                |            |                                                      |            |  |  |  |  |  |

 

        * Amount constitutes lessthan $0.1 million.

__________________

(1) Commenced operationsin the second quarter of 2004.

(2) Commenced operationsin the third quarter of 2004.

(3) Commenced operationsin the fourth quarter of 2004.

(4) Commenced operationsin the third quarter of 2005.

 

Other feeincome-related parties, which includes development and construction fees andbusiness development fees, totaled $4.7 million for the three months endedMarch 31, 2006, as compared to $3.2 million for the same period in 2005. Of the2006 amount, $3.6 million related to development and construction/renovationfees, and $1.1 million related to business development fees.  The amount of other fee income-relatedparties that we receive during a fiscal period is affected by the number ofhousing units that we develop or construct/renovate under our military housingprojects during that period, which number will fluctuate based upon the pointat which we are in during the initial development period of the project. Otherfee income-related parties increased during the three months ended March 31,2006 as compared to the three months ended March 31, 2005, primarily due tocommencement of operations relating to our Fort Bliss/White Sands Missile Rangeproject during the third quarter of 2005, and due to business development feesfor projects that were not in operation during the first quarter of 2005 andprojects we anticipate closing later in 2006. The table below sets forthcertain information regarding the revenue from other fee income from relatedparties for each of our military housing projects for the three months endedMarch 31, 2006 and March 31, 2005.

 

|                                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Project**                                                  | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                                   | ** ** | **(in millions)**                               | ** ** |
| **Development and Construction Fees**         | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Fort Stewart and  Hunter Army Airfield Project               |       | $                                                    | 0.5        |   | $ | 0.8 |   |
| Fort Carson  Project                                         |       | 0.1                                                  |       | 0.1 |   |
| Fort Hamilton  Project(1)                                    |       | 0.2                                                  |       | 0.2 |   |
| Walter Reed Army  Medical Center and Fort Detrick Project(2) |       | 0.1                                                  |       | 0.2 |   |
| Fort Eustis/Fort Story Project(3)                            |       | 0.4                                                  |       | 0.2 |   |
| Navy Northeast  Region Project(3)                            |       | 1.5                                                  |       | 0.9 |   |
| Fort Bliss/White  Sands Missile   Range Project(4)           |       | 0.8                                                  |       | — |   |
| Total development and 

construction/renovation fees         |       | $                                                    | 3.6        |   | $ | 2.4 |   |

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| **Business development fees**                    |   | $      | 1.1    |   | $      | 0.8 |   |
|--------------------------------------------------|--------|--------|--------|--------|--------|-----|--------|
| ** **                                       |   |   |   |   |   |
| **Total Other Fee Income From  Related Parties** |   | $      | 4.7    |   | $      | 3.2 |   |

______________

(1)  Commenced operations in the second quarter of2004.

(2)  Commenced operations in the third quarter of2004.

(3)  Commenced operations in the fourth quarter of2004.

(4)  Commenced operations in the third quarter of2005.

 

*Equity inEarnings of Unconsolidated Entities. *Equityin earnings of unconsolidated entities, consisting of preferred returns fromour military housing project joint ventures, totaled $1.2 million for the threemonths ended March 31, 2006 as compared to $0.5 million for the three monthsended March 31, 2005. Of the amount for 2006, $0.2 million related to preferredreturns from our Navy Northeast Region project, and $1.0 million related to ourinvestment in Fort Carson Family Housing LLC. Of the 2005 amount, $0.2 million related to preferred returns from ourNavy Northeast Region project and $0.3 million related to our investment inFort Carson Family Housing LLC. The increase is primarily due to equity incomereceived from net operating income distributions in connection with our FortCarson project, which entered into its post-initial development period in 2005.

*Expenses*. Property operating expenses include costs related to operating the militaryhousing segment of our business, such as the compensation expense related toour military housing personnel stationed in our corporate headquarters. Thesecosts totaled $1.5 million for the three months ended March 31, 2006 comparedto $0.7 million in the same period of 2005. Due to the reversal of anover-accrual relating to the prior fiscal year, costs at March 31, 2005 werereduced by approximately $0.8 million. As a result, actual property operatingexpenses remained flat between the two quarterly periods.

Reimbursedexpenses increased to $13.2 million for the three months ended March 31, 2006from $7.8 million for the three months ended March 31, 2005, primarily due topayroll and renovation expenses related to the military housing projects inoperation as of March 31, 2006 and transition, payroll and renovationexpenses for the Fort Bliss/White Sands Missile Range project, which commencedoperations in the third quarter of 2005.

***Corporate***

Rental revenue andexpense reimbursements, which were recognized with respect to the portions ofour corporate headquarters leased to entities affiliated with Gary M. Holloway,Sr., and payroll and related expenses reimbursed by entities affiliated withMr. Holloway for the provision of common services, decreased to $0.1 millionfor the three months ended March 31, 2006 from $0.2 million for the threemonths ended March 31, 2005. This decrease was primarily the result ofdecreases in common services provided by the Company and a decrease in rentalrevenue due to a reduction of office space leased by the entities affiliatedwith Mr. Holloway.

Other fee income —related party for the three months ended March 31, 2005 related to consultingmanagement fees paid to the Company in connection with the provision ofconsulting management services for five student housing properties. On January1, 2006, four of the management agreements relating to these properties weretransferred to the Company from GMH Asset Services Capital Partners, LP.  As a result, the management fee income forthese properties was recorded in the Company’s student housing segment. Thefifth management agreement was terminated by the counterparty. There was noother fee income — related party for the three months ended March 31, 2006.

Administrativeexpenses, primarily relating to management of our corporate office, accounting,legal, human resources and information technology, and corporate aircraft,increased to $3.8 million for the three months ended March 31, 2006 from $2.9million for the three months ended March 31, 2005, primarily due to increasedstaffing and additional costs incurred in connection with becoming a publiccompany and growth in our operating segments.

 In addition, Audit Committee specialinvestigation expenses were $2.6 million for the three months ended March 31,2006, which included legal and accounting-related costs incurred in connection 

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with the investigation performed by our AuditCommittee and related matters associated with the audit of our financialstatements for the year ended December 31, 2005.  We expect to incur additionallegal and accounting-related costs relating to this matter throughout theremainder of 2006.

Depreciation,relating primarily to our corporate headquarters and corporate aircraft,decreased to $0.1 million for the three months ended March 31, 2006 from $0.2million for the three months ended March 31, 2005. This decrease was primarilythe result of the disposition of the corporate aircraft during the firstquarter of 2005.

Interest expenseincreased to $0.5 million for the three months ended March 31, 2006 from $0.2million for the three months ended March 31, 2005.  This increase was primarily the result of anincrease in overall interest rates under the Company’s credit facility alongwith an increase in borrowings outstanding under the line of credit as of March31, 2006 over March 31, 2005.

**Liquidityand Capital Resources**

Short-termliquidity requirements consist primarily of funds necessary to pay operatingexpenses and other costs. These expenses and costs include (i) recurringmaintenance and capital expenditures to maintain and lease our properties,(ii) interest expense and scheduled principal payments on outstandingindebtedness, (iii) real estate taxes and insurance, (iv) corporate salaries,employee benefits and other corporate overhead and administrative expenses, (v)equity contributions to our investments in military housing projects, and(vi) distributions to shareholders and unitholders of our operatingpartnership. Our existing working capital and cash provided by operations,together with amounts available to us under our $150.0 million revolvingcredit facility are expected to be sufficient to meet our short-term liquidityrequirements. Availability under the credit facility as of March 31, 2006was limited to a borrowing base amount equal to the sum of 60% of the value ofan unencumbered asset pool as of the end of the previous quarter (which in noevent may contain fewer than five student housing properties) and 50% of theannualized value of our cash flow from our management of military housingprivatization projects and student housing properties in the previous quarter.The credit facility was obtained by our operating partnership inNovember 2004, and GMH Communities Trust serves as guarantor for thecredit facility. Advances under the credit facility bear interest, at theelection of the borrower, at a Eurodollar rate based on LIBOR or a base ratebased on the prime rate announced by Bank of America, N.A., as theadministrative agent of the facility, plus an interest rate spread on bothEurodollar and prime rate loans that varies depending upon the Company’sleverage ratio. The credit facility also requires that we maintain certaincorporate level financial covenants.

As of March 31,2006, we had availability under the credit facility equal to$150.0 million, of which $75.0 million in borrowings was outstanding, andbearing interest at a Eurodollar rate based on 30-day LIBOR, 60-day LIBOR and90-day LIBOR ranging from 4.68% to 4.92%, plus 2.125%, resulting in totalinterest rates ranging from 6.81% to 7.05%. As of March 31, 2006, there were noletters of credit outstanding under the credit facility.

In January 2005,we paid a distribution to our shareholders that caused us to violate a covenantunder our credit facility that restricted us from making distributions greaterthan 95% of our funds from operations. We received a waiver of this instance ofnoncompliance from our lenders. We and the lenders also agreed to modify thecovenant related to the payment of dividends to shareholders for the year endedDecember 31, 2005. Under the terms of the modification, we were restricted frompaying distributions to our shareholders with respect to 2005 in excess of 110%of our funds from operations. In January 2006, we paid a dividend distributionto our shareholders that, when aggregated with distributions paid toshareholders during 2005, exceeded this 110% threshold for the year endedDecember 31, 2005.  We also received awaiver of this instance of noncompliance with the financial covenant from ourlenders. As of January 1, 2006, the financial covenant restriction relating tothese dividend payments reverted to the original terms under the creditfacility, such that we are now restricted from paying aggregate distributionsto our shareholders for any given year in excess of 95% of our funds fromoperations for that year.  In addition,the credit facility also contains an affirmative covenant requiring us toprovide audited financial statements within 90 days after the end of eachfiscal year, and unaudited quarterly financial statements 

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within 45 days after the end of each fiscal quarter.As a result of the delay in filing of our Annual Report on Form 10-K for theyear ended December 31, 2005 and the delay in filing of this report, weobtained a waiver of this covenant from the lender syndicate that permits us todeliver our audited financial statements for the 2005 fiscal year and quarterlyfinancial statements for the first quarter of 2006 no later than August 15,2006, and to deliver our quarterly financial statements for the second quarterof 2006 no later than September 15, 2006. As of June 30, 2006, we have paidfees totaling approximately $470,000 in connection with the above-referencedwaivers obtained during 2006.

Given that theCompany’s compliance with debt covenants under the credit facility isdetermined as of the end of each fiscal quarter, the Company cannot determineat this time whether it will be in compliance with each of the debt covenantsthroughout 2006. If the Company is deemed to be in noncompliance with any ofits debt covenants, and the Company is unable to obtain a waiver from thesyndicate lenders and therefore is restricted from drawing additionalborrowings from the credit facility, it has several alternatives to accessingcash in addition to cash flows from its operations, the Company can financeunencumbered properties or refinance existing debt, sell assets or reduce itdividends to shareholders.  The Companywould evaluate each of these alternatives upon an event of noncompliance withthe debt covenants under the credit facility.

We elected to betreated as a REIT for federal income tax purposes commencing with our taxableyear ended December 31, 2004. As a REIT, we are required to distribute atleast 90% of our REIT taxable income to our shareholders on an annual basis.Therefore, except as discussed below, as a general matter, a substantialportion of cash generated by our operations will be used to fund distributionsto shareholders and holders of limited partnership interests in our operatingpartnership, and will not be available to satisfy our liquidity needs.

Future dividends will be declared at the discretion ofour board of trustees and will depend on our actual cash flow, our financialcondition, capital requirements, the annual distribution requirements under theREIT provisions of the Code and other such factors as our board of trusteesdeems relevant. For the first quarter of2006, we declared a quarterly dividend distribution of $0.2275 per commonshare, payable to shareholders of record on March 31, 2006. We distributed thisdividend on April 14, 2006, and at the same time, our operating partnershippaid a distribution of $0.2275 per unit to holders of limited partnershipinterest in our operating partnership. For the second quarter of 2006, wedeclared a quarterly dividend distribution of $0.2275 per common share, payableto shareholders of record on June 30, 2006. We distributed this dividend onJuly 14, 2006, and at the same time, our operating partnership paid adistribution of $0.2275 per unit to holders of limited partnership interest inour operating partnership. We cannot assure you that we will continue to havecash available for distributions at historical levels or at all. Anydistributions we pay in the future will depend upon our actual results ofoperations, economic conditions and other factors that could differ materiallyfrom our current expectations. We expect that during most of 2006, ourcash flow from operations will be insufficient to fund our anticipated dividenddistributions. Therefore, we expect to rely on amounts available under ourcredit facility or through other third party debt financing to fund thesedistributions and other capital needs. Inaddition, our ability to maintain our quarterly dividend payment at its currentrate may be affected by the current restriction under the terms of our creditfacility that preclude us from making distributions to our shareholders inexcess of 95% of funds from operations for the fiscal year. Our actual resultsof operations will be affected by a number of factors, including: the revenuewe receive from our student housing properties; revenues from management feesin connection with management services that we will provide for student housingproperties owned by others; revenues from our military housing projects; ouroperating expenses; interest expense; legal and accounting costs related to theinvestigation of the Audit Committee of our Board and related matters; costsrelated to our pending class action lawsuits and the activities of the SpecialCommittee of our Board; expenses in connection with the implementation ofremedial measures to address the material weaknesses identified in our internalcontrol over financial reporting and disclosure controls and procedures; andany unanticipated expenditures. For more information regarding risk factorsthat could materially adversely affect our actual results of operations, pleasesee the section entitled “Risk Factors” in Part I, Item 1A of our Annual Reporton Form 10-K for the year ended December 31, 2005. Our Board may chooseto pay a lower distribution in the event we are unable to 

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obtain financing to pay our dividend at historicallevels, or in order to assure compliance with applicable restrictive covenantson distributions under the terms of the credit facility.

As of March 31, 2006, 53 of our student housingproperties were encumbered by security interests relating to notes payableaggregating $741.1 million and secured by first liens on the individual assetswith an aggregate cost basis of approximately $1,105.5 million beforeaccumulated depreciation. These notes payable had a weighted-average interestrate of 5.03%, mature at various dates between March 2007 andJune 2024 and require monthly payments of principal and interest ormonthly payments of interest only. In addition, we had $13.5 million inconstruction loan indebtedness outstanding that was secured by two of thestudent housing properties under development through a joint venture. Thisindebtedness had a weighted average interest rate of 6.78%, matures in 2008,and requires monthly payments of interest only. On January 12, 2006, theCompany placed new mortgage debt on the corporate headquarters in the amount of$5.7 million. The new mortgage debt has a term of 10 years with a fixedinterest rate of 5.58%, and requires monthly payments of interest only.

With regard to ourmilitary housing privatization projects, we made a $9.5 million equity contributionin November 2004 relating to our Navy Northeast project and, as of March31, 2006, had contractually committed to contribute $2.0 million in 2006to our Fort Hamilton project; $5.9 million in 2007 to our Walter Reed ArmyMedical Center/Fort Detrick project; $3.6 million in 2010 for our FortEustis/Fort Story project; $8.0 million in 2011 for our Fort Stewart andHunter Army Airfield project; and $6.3 million in 2011 for our FortBliss/White Sands project. In addition, as of May 1, 2006, we contractuallycommitted to contribute, in multiple phases that commence in 2011 and end in2012, an aggregate of $4.5 million to our Fort Gordon project, and also tocontribute $3.0 million to our Carlisle/Picatinny project.****Theseequity contributions help to fund the development, construction and renovationof housing units at these bases during the respective terms of the projects.

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

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

With regard to ourcurrently owned student housing properties, we do not have any short-termcapital commitments; however, we will require funds in connection with ouranticipated acquisitions of additional student housing properties. During 2006,we expect to acquire additional student housing properties and developmentprojects that are located in our targeted markets and that meet management’sunderwriting criteria for creating long-term growth potential. In an effort toconserve our available capital resources for during 2006 and potentially forsometime thereafter, we will consider funding acquisitions of future student 

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housing properties and development projects throughjoint venture structures similar to the joint venture terms that we enteredinto with respect to our Orono, Maine and Bowling Green, Ohio developmentproperties. The timing of any additional acquisitions or development projectswill be dependent upon various factors, including the ability to completesatisfactory due diligence, to find suitable joint venture partners and agreeupon mutually acceptable joint venture terms, to obtain appropriate debtfinancing on the properties, and the availability of capital.  We intend to fund the equity portion of ouracquisitions by using funds from our credit facility or from available cashfrom operations. We also may consider increasing the maximum borrowing capacityunder our credit facility or incurring other indebtedness, which wouldnecessitate that we obtain relief from the current covenant restrictions underour credit facility. We may also determine that it is appropriate to purchaseadditional student housing properties outright, as opposed to with a jointventure partner, depending upon many factors which may include, but are notlimited to, the applicable purchase price, available capital, and projectedreturns with respect to the property. In addition to utilizing cash fromoperations and from our line of credit, we may leverage existing studenthousing properties which are underleveraged or unencumbered by debt to generatecash to fund the purchase of additional student housing properties. We expectthat our primary source of funding for the equity associated with theacquisition of student housing properties and development projects during theremainder of 2006, whether done through joint venture structures or not, willbe our credit facility and the placement of mortgage debt on the assetsacquired. Depending upon the size of our student housing acquisition pipelinefor the next 12 months, the timing of closings on our properties, and theamount of cash required to fund planned student housing acquisitions, we mayexceed the maximum capacity available under our existing credit facility. Inthat event, we may pursue additional financing as opportunities arise. Futurefinancings may include a range of different sizes or types of financing,including the sale of additional debt or equity securities. While we believe wewill be able to obtain such funds, these funds may not be available onfavorable terms or at all. Our ability to obtain additional financing dependson several factors, including future market conditions, the outcome of theongoing investigation by our Audit Committee, the outcome of our currentlitigation, our success or lack of success in penetrating our markets, ourfuture creditworthiness, and restrictions contained in agreements with ourinvestors or lenders, including the restrictions contained in the agreementgoverning our credit facility. These financings could increase our level ofindebtedness or result in dilution to our equity holders.

For the remainderof 2006, we also expect to incur significant costs in connection with theinvestigation performed by the Audit Committee of our Board and related matters,such as pending class action litigation, as well as the activities of theSpecial Committee of our Board. These costs primarily include additional legaland accounting expenses, as well as amounts associated with implementingremedial measures to address the material weaknesses in our internal controlover financial reporting that are described in more detail in Part I, Item 4 ofthis report titled “*Controls and Procedures*.”  These fees will impact the level of cash fromoperations that we would otherwise expect to be available for the acquisitionof additional student housing properties, and therefore could affect the numberof acquisitions that we seek to complete during 2006.

Long-termliquidity requirements with respect to our student housing and military housingsegments consist primarily of amounts necessary to fund scheduled debtmaturities, renovations and other non-recurring capital expenditures that needto be made periodically at our properties, and the costs associated with acquisitionsof student housing properties and awards or acquisitions of military housingprivatization projects that we pursue. Historically, we have satisfied ourlong-term liquidity requirements through various sources of capital, includingexisting working capital, cash provided by operations, and long-term mortgageindebtedness. We now expect our long-term liquidity requirements to besatisfied primarily through cash generated by operations that is not used tofund distributions and the additional external financing sources discussedabove.

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

Given current market conditions, our strategy favorsfixed-rate, secured debt over variable-rate debt to minimize our exposure toincreases in interest rates. As of March 31, 2006, 94% of the outstandingprincipal amount of our notes payable secured by properties we owned had fixedinterest rates with a weighted-average rate of 4.94%. The remaining 6% ofoutstanding principal amount of our notes payable 

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and our line of credit, at March 31, 2006, hadvariable interest rates primarily equal to LIBOR plus 1.90% to 2.25%.

As of March 31, 2006, we had $75.0 million infunds drawn from our credit facility, bearing a variable interest rate at aEurodollar rate based on a 30-day LIBOR, 60-day LIBOR and 90-day LIBOR rangingfrom 4.68% to 4.92%, plus 2.125%, resulting in total interest rates rangingfrom 6.81% to 7.05%.

As of March 31, 2006, based on our variable rate debtbalances described above, if interest rates were to increase by 1.0%, ourinterest expense would increase by approximately $1.2 million on an annualbasis.

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

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

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

As require by Rule13a-15(b) promulgated under the Exchange Act, our management, with theparticipation of our chief executive officer and chief financial officer,evaluated the design and operating effectiveness as of March 31, 2006 of ourdisclosure controls and procedures, as defined in Rule 13a-15(e) promulgatedunder the Exchange Act.  Based on thisevaluation, our chief executive officer and chief financial officer concludedthat our disclosure controls and procedures were not effective as of March 31,2006.  Such conclusion resulted from theidentification of deficiencies that were determined to be material weaknessesas reported in Item 9A of our Annual Report on Form 10-K for the year endedDecember 31, 2005.

Notwithstanding management’sevaluation that our disclosure controls and procedures were not effective as ofMarch 31, 2006, we believe that the consolidated financial statements includedin this Quarterly Report on Form 10-Q correctly present our financialcondition, results of operations and cash flows for the periods covered therebyin all material respects.

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

As reported in Item 9A ofour Annual Report on Form 10-K for the year ended December 31, 2005, as filedwith the Securities and Exchange Commission on July 31, 2006, managementconcluded that its internal control over financial reporting was not effectiveas of December 31, 2005. Such conclusion resulted from the identification ofdeficiencies that were determined to be material weaknesses. Specifically, wedid not have appropriate internal control as described in Item 9A of our AnnualReport on Form 10-K for the year ended December 31, 2005.  During the first quarter ended March 31,2006, and subsequent thereto, we completed various remediation initiatives, andwill continue to undertake extensive work to remedy the material weaknesses asdescribed in Item 9A of our Annual Report on Form 10-K for the year endedDecember 31, 2005.  While managementbelieves progress has been made regarding the implementation of theseinitiatives as of the date of this report, additional procedures and furtherevaluation are on-going. Remediation of the material weaknesses identified atDecember 31, 2005 remains a priority for us during the remainder of 2006.

Except for the remediationinitiatives with respect to the material weaknesses described above and in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2005,there have been no changes in our internal control over financial reportingthat occurred during our fiscal quarter ended March 31, 2006, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting. As described in that report, ourAudit Committee initiated an investigation in the 

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first quarter of 2006. The Audit Committee’sactivities with respect to the matters giving rise to the investigation,including work performed by the forensic accounting firm engaged by theCommittee’s independent legal counsel, continued beyond the end of thatquarter. As a result, many of the remediation efforts described in that reportdid not commence until after the end of the first quarter of 2006. During thefirst quarter of 2006, we initiated the following remediation efforts:

·                  Withrespect to the material weakness relating to “tone at the top,” throughout thefirst and second quarters of 2006, members of the Audit Committee and our Boardof Trustees have had extensive discussions with Gary M. Holloway, Sr., ourChairman, President and Chief Executive Officer, and other senior members ofmanagement regarding the Company’s control environment and the need toestablish an appropriate “tone at the top.” In addition, following the termination of Mr. Harris’ employment asour Chief Financial Officer on March 31, 2006, which termination wasprecipitated by events separate and apart from his letter to the AuditCommittee, we appointed Dennis J. O’Leary as our interim Chief FinancialOfficer. Mr. O’Leary has been a certified public accountant since 1974,and worked for two of the “Big Four” accounting firms, or their predecessors,for an aggregate of 15 years, including six years as a partner. Mr. O’Learyserved as our interim Chief Financial Officer through June 30, 2006, untilour new Chief Financial Officer, J. Patrick O’Grady, commenced employment. Mr.O’Leary has served as Executive Vice President and principal financial officerthrough the filing of this Quarterly Report on Form 10-Q for the quarterended March 31, 2006.

·                  Inaddition, during March 2006, we retained temporary accounting personnel toreplace our former corporate controller. Our new accounting personnel wereactively involved in the preparation of our 2005 year-end financial statementsand the additional audit procedures relating to our 2005 year-endfinancial statements, as well as the preparation of restatements of financialstatements for the first three quarters of 2005 and our first quarter 2006financial statements. Therefore, we believe we have been able to effectivelyprocess the restatements relating to our financial statements for the firstthree quarters of 2005, and the closing of our books and records for 2005 andthe first quarter of 2006.

**PART II— OTHER INFORMATION**

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

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

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

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

The defendantshave not yet responded to these complaints. The outcome of this litigation isuncertain, and while the Company believes that it has valid defenses toPlaintiff’s claims and intends to defend the class action lawsuit vigorously,no assurance can be given as to the outcome of this litigation. An adverseoutcome could have a material adverse effect on our consolidated financialstatements and results of operations.

The Company also issubject to routine litigation, claims and administrative proceedings arising inthe ordinary course of business. Otherthan the matters described above, we are not involved in any other materiallitigation nor, to our knowledge, is any material litigation pending orthreatened against us.

**Item 1A. Risk Factors**

In addition to theother information set forth in this report, you should carefully consider thefactors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report onForm 10-K for the year ended December 31, 2005, which could materially affectour business, financial condition or future results. The risks described in ourAnnual Report on Form 10-K are not the only risks facing our Company.Additional risks and uncertainties not currently known to us or that wecurrently deem to be immaterial also may materially adversely affect ourbusiness, financial condition and/or operating results.

**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 SecurityHolders**

None.

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

On June 16, 2006, the Company announced in a Form 8-Kfiling with the Securities and Exchange Commission that it had entered intoseveral agreements of sale relating to, in the aggregate, the purchase of aportfolio of 13 student housing properties from Capstone Properties for an aggregatepurchase price of $247.0 million. On July 26, 2006, the Company gavenotice to the seller that it was terminating agreements relating to two of theproperties in the portfolio, in accordance with the terms of those agreements.On July 27, 2006, the Company entered into a first amendment to the agreementsof sale (i) to reallocate the Company’s initial deposits among the remaining 11properties, (ii) to reduce the aggregate purchase price of the remaining11 properties to approximately $223.0 million, and to extend the due diligenceperiod under the agreements through August 4, 2006. On August 2, 2006, theCompany’s Board of Trustees approved the Company’s acquisition of the portfolio,subject to the Company’s receipt of appropriate financing. On August 4,2006, the Company entered into a second amendment to the agreements of sale toextend the closing date for the transactions to on or before October 2,2006, or such other date as may be mutually agreed upon by the parties. Underthe terms of these agreements, as amended to date, the Company has made a $5.0million non-refundable deposit to the title company to be held in escrowpending closing.  The agreements containcustomary representations and warranties of, and prorations of property-relatedexpenses and rents between, the buyer and seller, and also provide for standardclosing conditions, including but not limited to, the execution of all closingdocuments; delivery of title and title insurance documents relating to theproperties, assignments of leases, contracts, licenses and permits to buyer;and termination of contracts not being assigned to the buyer.

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

| Exhibit | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|---------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1    |       | Consulting Agreement, as of January 1, 2006, by and  between GMH Communities Trust and Joseph M. Coyle d/b/a Joseph M. Coyle  Enterprises, Inc. (Incorporated by  reference from the Registrant’s Annual Report on Form 10-K for the  year ended December 31, 2005).                                                                                                                                                                                                                                                           |
| 10.2    |       | Confidential Separation Agreement and General  Release, as of December 31, 2005, by and between GMH Communities Trust and  Joseph M. Coyle. (Incorporated by  reference from the Registrant’s Annual Report on Form 10-K for the  year ended December 31, 2005).                                                                                                                                                                                                                                                               |
| 31.1    |       | Certification of Principal Executive Officer  Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,  as amended.(furnished herewith)                                                                                                                                                                                                                                                                                                                                                                              |
| 31.2    |       | Certification of Principal Financial Officer  Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,  as amended. (furnished herewith)                                                                                                                                                                                                                                                                                                                                                                             |
| 32.1    |       | Certification of Principal Executive Officer  Required by Rule 13a-14(b) of the Securities Exchange Act of 1934,  as amended. (This exhibit shall not be deemed “filed” for purposes of  Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise  subject to the liability of that section. Further, this exhibit shall not be  deemed to be incorporated by reference into any filing under the Securities  Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)  |
| 32.2    |       | Certification of Principal Financial Officer  Required by Rule 13a-14(b) of the Securities Exchange Act of 1934,  as amended. (This exhibit shall not be deemed “filed” for purposes of  Section 18 of the Securities Exchange Act of 1934, as amended, or  otherwise subject to the liability of that section. Further, this exhibit  shall not be deemed to be incorporated by reference into any filing under the  Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,  as amended.) |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

 

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SIGNATURES

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                      |   | GMH COMMUNITIES TRUST                 |
|----------------------|--------|---------------------------------------|
|                 |   |                                  |
|                 |   |                                  |
| Date: August 7, 2006 |   | /s/ Gary M. Holloway, Sr.        |
|                 |   | Gary M. Holloway, Sr.            |
|                 |   | President and Chief Executive Officer |
|                 |   |                                  |
|                 |   |                                  |
|                 |   | /s/ Dennis J. O’Leary            |
|                 |   | Dennis J. O’Leary                |
|                 |   | Executive Vice President              |
|                 |   | (Principal Financial Officer)         |

 

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EXHIBIT INDEX
| Exhibit | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|---------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1    |       | Consulting Agreement, as of January 1, 2006, by and  between GMH Communities Trust and Joseph M. Coyle d/b/a Joseph M. Coyle  Enterprises, Inc. (Incorporated by  reference from the Registrant’s Annual Report on Form 10-K for the  year ended December 31, 2005).                                                                                                                                                                                                                                                           |
| 10.2    |       | Confidential Separation Agreement and General  Release, as of December 31, 2005, by and between GMH Communities Trust and  Joseph M. Coyle. (Incorporated by reference  from the Registrant’s Annual Report on Form 10-K for the year  ended December 31, 2005).                                                                                                                                                                                                                                                               |
| 31.1    |       | Certification of Principal Executive Officer  Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,  as amended.(furnished herewith)                                                                                                                                                                                                                                                                                                                                                                              |
| 31.2    |       | Certifications of Principal Financial Officer  Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,  as amended. (furnished herewith)                                                                                                                                                                                                                                                                                                                                                                            |
| 32.1    |       | Certification of Principal Executive Officer  Required by Rule 13a-14(b) of the Securities Exchange Act of 1934,  as amended. (This exhibit shall not be deemed “filed” for purposes of  Section 18 of the Securities Exchange Act of 1934, as amended, or  otherwise subject to the liability of that section. Further, this exhibit  shall not be deemed to be incorporated by reference into any filing under the  Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,  as amended.) |
| 32.2    |       | Certification of Principal Financial Officer  Required by Rule 13a-14(b) of the Securities Exchange Act of 1934,  as amended. (This exhibit shall not be deemed “filed” for purposes of  Section 18 of the Securities Exchange Act of 1934, as amended, or  otherwise subject to the liability of that section. Further, this exhibit  shall not be deemed to be incorporated by reference into any filing under the  Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,  as amended.) |

 

 

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