**UNITEDSTATESSECURITIES 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 period ended March 31, 2008** |
| ** **                                              | ** ** | ** **                                                                                               |
| **o**                                                   | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

** **

**For thetransition period from                to                **

** **

**Commissionfile number 001-32290**

 

**GMHCOMMUNITIES TRUST**

(Exact Name ofRegistrant as Specified in Its Charter)

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

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  x** **   No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer x          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yeso     No x

 

On May 9, 2008, 41,669,879 of the registrant’s commonshares of beneficial interest, $0.001 par value, were outstanding.

 

 

----

 

**GMH COMMUNITIES TRUSTINDEX TO FORM 10-Q**

 
| Cautionary Note Regarding Forward-Looking Statements                                                | ii     |
|-----------------------------------------------------------------------------------------------------|--------|
|                                                                                                |   |
| **Part I — Financial Information**                                                        | 1      |
| Item 1. Financial Statements                                                                        | 21     |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 36     |
| Item 3. Quantitative and Qualitative Disclosure About  Market Risk                                  | 36     |
| Item 4. Controls and Procedures                                                                     |   |
|                                                                                                |   |
| **Part II — Other Information**                                                           | 37     |
| Item  1. Legal Proceedings                                                                          | 37     |
| Item 1A. Risk Factors                                                                               | 37     |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                | 37     |
| Item 3. Defaults Upon Senior Securities                                                             | 37     |
| Item 4. Submission of Matters to a Vote of Security  Holders                                        | 37     |
| Item  5. Other Information                                                                          | 37     |
| Item 6. Exhibits                                                                                    | 38     |
|                                                                                                |   |
| Signatures                                                                                          |   |

 

i

----

 

**CautionaryNote Regarding Forward-Looking Statements**

 

***Sale of Military Housing Division***

 

OnApril 30, 2008, GMH Communities Trust, referred to throughout this reportas “we” or “the Company,” completed the sale of our former military housingdivision, GMH Military Housing, to a U.S. subsidiary of Balfour Beatty plc, aUK-based company, referred to in this report as the “Military Housing Sale.”Under the terms of the Securities Purchase Agreement covering the saletransaction, Balfour Beatty purchased all of the issued and outstanding equityinterests in the subsidiaries representing the Company’s military housingdivision for a total cash purchase price of $350.5 million.  Approximately $62.1 million of the proceedswere used to repay and terminate the Company’s Note Facility with MerrillLynch, Pierce, Fenner & Smith Incorporated, or Merrill Lynch.  As previously announced, the Company intendsto make two separate special distributions to its shareholders and theunitholders of GMH Communities, LP, referred to as our “Operating Partnership.”  Our Board of Trustees has declared an initialspecial distribution of $3.10 per share/unit to our shareholders andunitholders of our Operating Partnership, which represents a substantialportion of the net proceeds from the Military Housing Sale.  This distribution will be payable on May 15,2008 to shareholders and unitholders of record as of the close of business on May 10,2008.  The initial distribution willtotal approximately $221.1 million in the aggregate.  The remainder of the proceeds from theMilitary Housing Sale is being retained as a reserve fund, pending the closingof our proposed merger with American Campus Communities, Inc., or ACC, andreferred to throughout this report as the “Merger.”  The Merger is currently anticipated to occurduring the second quarter of 2008, subject to approval of the Company’sshareholders and assuming that the other conditions in the merger agreement withACC are satisfied or waived.  Immediatelyprior to the proposed merger with ACC, it is currently anticipated that therewill be a second special distribution to shareholders and unitholders ofapproximately $0.98 per share/unit payable, comprised of the remaining net proceedsfrom the Military Housing Sale that were previously held in reserve.

 

The remainder of thisreport provides disclosures of our business relating to the first quarter of2008, during which time the military housing division was still part of our business.Where this report requires that we discuss historical operations prior to April 30,2008, we have included references to operations of the military housingdivision.  References to future periodsand results or expectations of the Company, however, will exclude the militaryhousing division and its activities.

 

Our disclosure andanalysis in this document and in the documents that are or will be incorporatedby reference into this document contain forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, or theSecurities Act, and Section 21E of the Securities Exchange Act of 1934, asamended, or the Exchange Act. Forward-looking statements provide our currentexpectations or forecasts of future events and are not statements of historicalfact. These forward-looking statements include information about possible orassumed future events, including, among other things, operating or financialperformance, strategic plans and objectives, or regulatory or competitiveenvironments. The disclosures contained throughout this report will refer toour business as an ongoing operation with the impact of the Merger notconsidered unless otherwise noted.

 

Statements regarding thefollowing subjects are forward-looking by their nature:

 

·the expected closing of the Merger asdescribed in the section of this report titled “*Management’sDiscussion and Analysis of Financial Condition and Results of Operations*”in Part I, Item 2;

 

·our ability to successfully implement ourcurrent business strategy, including our ability to acquire and manage studenthousing properties;

 

·our projected operating results andfinancial condition;

 

·completion of any of our targetedacquisitions or development projects, sales of assets, refinancings or joint venturetransactions within our expected timeframe or at all;

 

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

 

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

 

ii

----

 

·our ability to qualify as a REIT forfederal income tax purposes;

 

·our understanding of our competition,market opportunities and trends;

 

·projected timing and amounts of capitalexpenditures; and

 

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

 

The forward-lookingstatements are based on our beliefs, assumptions and expectations of our futureperformance, taking into account all information currently available to us.These beliefs, assumptions and expectations can change as a result of manypossible events or factors, not all of which are known to us. If a changeoccurs, our business, financial condition, liquidity and results of operationsmay vary materially from those expressed in our forward-looking statements.Factors that could cause actual results to differ materially from ourmanagement’s current expectations include, but are not limited to:

 

·failure to satisfy conditions to thecompletion of the Merger, including receipt of approval from our shareholdersrelating to the Merger; occurrence of any effect, event, development or changethat could give rise to the termination of the agreement relating to theMerger; the failure of the Merger, or any of its components, to close for anyother reason; risks that the Merger disrupts current plans and operations,including potential difficulties in employee retention; and the amount of thecosts, fees, expenses and charges related to the Merger;

 

·the factors referenced in the sections ofthis report under “*Management’s Discussionand Analysis of Financial Condition and Results of Operations*” in Part I,Item 2;

 

·changes in our business strategy,including acquisition, sales, and development activities;

 

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

 

·availability of qualified and/orsufficient personnel, including, but not limited to, within our accountingstaff;

 

·failure to effectively remediate any deficienciesor material weaknesses in our disclosure controls and procedures and internalcontrol over financial reporting, or failure to identify additional materialweaknesses and deficiencies in our disclosure controls and procedures andinternal control over financial reporting that could occur in the future;

 

·the adverse effects of pending litigationor any investigation of the Company by the SEC;

 

·unanticipated costs associated with theacquisition and integration of our student housing property acquisitions anddevelopment projects;

 

·changes in student population enrollmentat colleges and universities or adverse trends in the off-campus studenthousing market;

 

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

 

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

 

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

 

·potential liability under environmentalor other laws; and

 

·the existence of complex regulationsrelating to our status as a REIT and the adverse consequences of our failure toqualify as a REIT.

 

When we use the words “believe,”“expect,” “may,” “potential,” “anticipate,” “estimate,” “plan,” “will,” “could,”“intend” or similar expressions, we intend to identify forward-lookingstatements. You should not place undue reliance on 

 

iii

----

 

these forward-lookingstatements. We are not obligated to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise,except to the extent otherwise required by law.

 

iv

----

 

**PART I — FINANCIAL INFORMATION**

 

**Item 1.    Financial Statements**

 

**GMH COMMUNITIES TRUST****CONSOLIDATED BALANCE SHEETS**(in thousands, except par value and number of shares)

 
| ** **                                                                                                                                                                                                        | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                        | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                                        |       |                     |       |                        |       |
| Real estate investments:                                                                                                                                                                                          |       |                     |       |                        |       |
| Student housing properties                                                                                                                                                                                        |       | $                        | 1,420,396  |                        | $          | 1,419,894 |   |
| Accumulated depreciation                                                                                                                                                                                          |       | 100,712                  |       | 95,830                      |       |
|                                                                                                                                                                                                              |       | 1,319,684                |       | 1,324,064                   |       |
| Corporate assets:                                                                                                                                                                                                 |       |                     |       |                        |       |
| Corporate assets                                                                                                                                                                                                  |       | 9,983                    |       | 10,142                      |       |
| Accumulated depreciation                                                                                                                                                                                          |       | 1,636                    |       | 1,582                       |       |
|                                                                                                                                                                                                              |       | 8,347                    |       | 8,560                       |       |
|                                                                                                                                                                                                              |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                         |       | 7,017                    |       | 15,727                      |       |
| Restricted cash                                                                                                                                                                                                   |       | 21,605                   |       | 20,816                      |       |
| Accounts and other receivables, net:                                                                                                                                                                              |       |                     |       |                        |       |
| Related party                                                                                                                                                                                                     |       | 1,042                    |       | 23,288                      |       |
| Third party                                                                                                                                                                                                       |       | 4,229                    |       | 4,824                       |       |
| Investments in joint ventures:                                                                                                                                                                                    |       |                     |       |                        |       |
| Military housing projects                                                                                                                                                                                         |       | —                   |       | 70,264                      |       |
| Student Housing projects                                                                                                                                                                                          |       | 1,261                    |       | 1,284                       |       |
| Deferred contract costs                                                                                                                                                                                           |       | —                   |       | 1,883                       |       |
| Deferred financing costs, net                                                                                                                                                                                     |       | 3,841                    |       | 4,338                       |       |
| Lease intangibles, net                                                                                                                                                                                            |       | 20                       |       | 40                          |       |
| Deposits                                                                                                                                                                                                          |       | 534                      |       | 629                         |       |
| Assets held for sale                                                                                                                                                                                              |       | 97,506                   |       | —                      |       |
| Other assets                                                                                                                                                                                                      |       | 8,995                    |       | 13,129                      |       |
| Total assets                                                                                                                                                                                                      |       | $                        | 1,474,081  |                        | $          | 1,488,846 |   |
| **LIABILITIES AND BENEFICIARIES’ EQUITY**                                                                                                                                                                    |       |                     |       |                        |       |
| Mortgage notes payable                                                                                                                                                                                            |       | $                        | 960,236    |                        | $          | 961,531 |   |
| Line of credit                                                                                                                                                                                                    |       | 55,105                   |       | 53,605                      |       |
| Accounts payable                                                                                                                                                                                                  |       | 2,495                    |       | 10,263                      |       |
| Accrued expenses                                                                                                                                                                                                  |       | 22,630                   |       | 30,448                      |       |
| Dividends and distributions payable                                                                                                                                                                               |       | 11,767                   |       | 11,759                      |       |
| Liabilities related to assets held for sale                                                                                                                                                                       |       | 14,092                   |       | —                      |       |
| Other liabilities                                                                                                                                                                                                 |       | 9,542                    |       | 17,738                      |       |
| Total liabilities                                                                                                                                                                                                 |       | 1,075,867                |       | 1,085,344                   |       |
|                                                                                                                                                                                                              |       |                     |       |                        |       |
| Minority interest                                                                                                                                                                                                 |       | 134,247                  |       | 136,422                     |       |
| Commitments and contingencies (Note 9)                                                                                                                                                                            |       | —                   |       | —                      |       |
| Beneficiaries’ equity:                                                                                                                                                                                       |       |                     |       |                        |       |
| Common shares of beneficial interest, $0.01 par value; 500,000,000  shares authorized, 41,669,879 issued and outstanding at March 31, 2008,  and 41,621,594 issued and outstanding at December 31, 2007 |       | 42                       |       | 42                          |       |
| Preferred shares—100,000,000 shares authorized, no shares issued or  outstanding                                                                                                                             |       | —                   |       | —                      |       |
| Additional paid-in capital                                                                                                                                                                                        |       | 331,258                  |       | 331,155                     |       |
| Cumulative earnings                                                                                                                                                                                               |       | 36,415                   |       | 32,755                      |       |
| Cumulative dividends                                                                                                                                                                                              |       | (103,748                 | )          | (96,872                     | )          |
| Total beneficiaries’ equity                                                                                                                                                                                  |       | 263,967                  |       | 267,080                     |       |
| Total liabilities and beneficiaries’ equity                                                                                                                                                                  |       | $                        | 1,474,081  |                        | $          | 1,488,846 |   |
|                                                                                                                                                                                                                   |            |                          |            |                             |            |  |  |  |  |

 

*See accompanying notes to consolidated financial statements.*

 

1

----

 

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

 
| ** **                                                                                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                                                                                                                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Revenue:**                                                                                                                                 |       |                                                 |       |   |   |
| Rent and other property income                                                                                                               |       | $                                                    | 46,582     |   | $ | 51,464 |   |
| Expense reimbursements:                                                                                                                      |       |                                                 |       |   |   |
| Related party                                                                                                                                |       | 687                                                  |       | 64 |   |
| Third party                                                                                                                                  |       | 1,592                                                |       | 1,446 |   |
| Management fees:                                                                                                                             |       |                                                 |       |   |   |
| Related party                                                                                                                                |       | 209                                                  |       | — |   |
| Third party                                                                                                                                  |       | 609                                                  |       | 678 |   |
| Other income                                                                                                                                 |       | 71                                                   |       | 208 |   |
| Total revenue                                                                                                                                |       | 49,750                                               |       | 53,860 |   |
| **Operating Expenses:**                                                                                                                      |       |                                                 |       |   |   |
| Property operating expenses                                                                                                                  |       | 19,351                                               |       | 20,167 |   |
| Reimbursed expenses                                                                                                                          |       | 2,279                                                |       | 1,510 |   |
| Real estate taxes                                                                                                                            |       | 4,689                                                |       | 4,901 |   |
| Administrative expenses                                                                                                                      |       | 3,714                                                |       | 4,650 |   |
| Transactional expenses                                                                                                                       |       | 2,125                                                |       | — |   |
| Depreciation and amortization                                                                                                                |       | 5,051                                                |       | 11,688 |   |
| Interest                                                                                                                                     |       | 13,382                                               |       | 17,475 |   |
| Total operating expenses                                                                                                                     |       | 50,591                                               |       | 60,391 |   |
| Loss before equity in earnings of unconsolidated entities, income  taxes and minority interest from continuing operations                    |       | (841                                                 | )          | (6,531 | ) |
| Equity in earnings of unconsolidated entities                                                                                                |       | (84                                                  | )          | — |   |
| Loss before income taxes and minority interest from continuing  operations                                                                   |       | (925                                                 | )          | (6,531 | ) |
| Income tax (benefit)/expense                                                                                                                 |       | (20                                                  | )          | 68 |   |
| Loss before minority interest from continuing operations                                                                                     |       | (905                                                 | )          | (6,599 | ) |
| Minority interest (income)/loss attributable to continuing operations                                                                        |       | 313                                                  |       | 2,874 |   |
| Loss from continuing operations                                                                                                              |       | (592                                                 | )          | (3,725 | ) |
| **Discontinued Operations:**                                                                                                                 |       |                                                 |       |   |   |
| Income from discontinued operations before minority interest, net of  $1,501 and $1,458 of income tax expense in 2008 and 2007, respectively |       | 7,281                                                |       | 6,827 |   |
| Minority interest (income)/loss attributable to discontinued  operations                                                                     |       | (3,029                                               | )          | (2,973 | ) |
| Income from discontinued operations                                                                                                          |       | 4,252                                                |       | 3,854 |   |
| Net income                                                                                                                                   |       | $                                                    | 3,660      |   | $ | 129 |   |
| Earnings per common share-basic                                                                                                              |       |                                                 |       |   |   |
| Continuing operation                                                                                                                         |       | $                                                    | (0.01      | ) | $ | (0.09 | ) |
| Discontinued operations                                                                                                                      |       | 0.10                                                 |       | 0.09 |   |
|                                                                                                                                         |       | 0.09                                                 |       | $ | 0.00 |   |
| Earnings per common share-diluted                                                                                                            |       |                                                 |       |   |   |
| Continuing operations                                                                                                                        |       | $                                                    | (0.01      | ) | $ | (0.09 | ) |
| Discontinued operations                                                                                                                      |       | 0.10                                                 |       | 0.09 |   |
|                                                                                                                                         |       | $                                                    | 0.09       |   | $ | 0.00 |   |
| Weighted-average shares outstanding during the period:                                                                                       |       |                                                 |       |   |   |
| Basic                                                                                                                                        |       | 41,566,158                                           |       | 41,494,521 |   |
| Diluted                                                                                                                                      |       | 71,231,686                                           |       | 73,128,701 |   |
| Common share dividend declared per share                                                                                                     |       | $                                                    | 0.1650     |   | $ | 0.1650 |   |

 

*See accompanying notes to consolidated financial statements.*

 

2

----

** **

**GMH COMMUNITIES TRUSTCONSOLIDATED STATEMENTS OF CASH FLOWS**(Unaudited and in thousands)

 
| ** **                                                                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                                                                                                    | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Cash flows from operating activities:**                                                                     |       |                                                 |       |   |   |
| Net income                                                                                                    |       | $                                                    | 3,660      |   | $ | 129 |   |
| Minority interest                                                                                             |       | 2,716                                                |       | 99 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities from continuing operations: |       |                                                 |       |   |   |
| Depreciation                                                                                                  |       | 5,039                                                |       | 11,469 |   |
| Amortization:                                                                                                 |       |                                                 |       |   |   |
| Lease intangibles                                                                                             |       | 20                                                   |       | 1,125 |   |
| Investment in military housing projects                                                                       |       | 142                                                  |       | 111 |   |
| Notes payable fair value adjustment                                                                           |       | (276                                                 | )          | (1,994 | ) |
| Deferred loan costs                                                                                           |       | 475                                                  |       | 1,337 |   |
| Restricted shares                                                                                             |       | 101                                                  |       | 95 |   |
| Allowance for doubtful accounts                                                                               |       | 1,284                                                |       | 530 |   |
| Equity in earnings of unconsolidated entities in excess of  distributions received                            |       | (635                                                 | )          | (332 | ) |
| Changes in operating assets and liabilities from continuing  operations:                                      |       |                                                 |       |   |   |
| Restricted cash                                                                                               |       | (807                                                 | )          | (1,396 | ) |
| Accounts and other receivables                                                                                |       | 1,758                                                |       | 2,074 |   |
| Deferred contract costs                                                                                       |       | 1,882                                                |       | 2,209 |   |
| Deposits and other assets                                                                                     |       | (1,578                                               | )          | (2,150 | ) |
| Accounts payable                                                                                              |       | (1,987                                               | )          | (797 | ) |
| Accrued expenses and other liabilities                                                                        |       | (6,686                                               | )          | (3,004 | ) |
| Net cash provided by operating activities                                                                     |       | 5,108                                                |       | 9,505 |   |
| **Cash flows from investing activities:**                                                                     |       |                                                 |       |   |   |
| Property acquisitions                                                                                         |       | —                                               |       | (1,291 | ) |
| Capitalized expenditures                                                                                      |       | (1,404                                               | )          | (1,568 | ) |
| Distributions received in excess of earnings of unconsolidated  entities                                      |       | 48                                                   |       | 654 |   |
| Investments in military housing projects                                                                      |       | (1,100                                               | )          | (13,850 | ) |
| Investment in student housing joint ventures                                                                  |       | (84                                                  | )          | — |   |
| Net cash used in investing activities                                                                         |       | (2,540                                               | )          | (16,055 | ) |
| **Cash flows from financing activities:**                                                                     |       |                                                 |       |   |   |
| Owner distributions                                                                                           |       | (11,759                                              | )          | (12,076 | ) |
| Proceeds from line of credit                                                                                  |       | 1,500                                                |       | 12,000 |   |
| Repayment of line of credit                                                                                   |       | —                                               |       | (73,611 | ) |
| Proceeds from notes payable                                                                                   |       | —                                               |       | 90,000 |   |
| Repayment of notes payable                                                                                    |       | (1,019                                               | )          | (15,484 | ) |
| Payment of financing costs                                                                                    |       | —                                               |       | (464 | ) |
| Net cash (used)/provided by financing activities                                                              |       | (11,278                                              | )          | 365 |   |
| Net increase (decrease) in cash and cash equivalents                                                          |       | (8,710                                               | )          | (6,185 | ) |
| Cash and cash equivalents, beginning of period                                                                |       | 15,727                                               |       | 22,539 |   |
| Cash and cash equivalents, end of period                                                                      |       | $                                                    | 7,017      |   | $ | 16,354 |   |
|                                                                                                          |       |                                                 |       |   |   |
| **Supplemental information:**                                                                                 |       |                                                 |       |   |   |
| Cash paid for interest                                                                                        |       | $                                                    | 14,392     |   | $ | 17,758 |   |
| Cash paid for taxes                                                                                           |       | $                                                    | 1,167      |   | $ | 1,002 |   |

 

*See accompanying notes to consolidated financial statements.*

 

3

----

 

**GMH COMMUNITIES TRUST**

 

Notes to Consolidated Financial StatementsMarch 31, 2008(Unaudited)

 

**1.Organization and Basis of Presentation**

 

***Organization***

 

GMHCommunities Trust (the “Trust,” the “Company,” or sometimes referred toas “we”) conducts substantially all of its operations through its operatingpartnership, GMH Communities, LP, a Delaware limited partnership (the “OperatingPartnership”). As of March 31, 2008, the Operating Partnership had71,314,214 units of partnership interest outstanding, of which the Trust owned41,088,710 units of limited partnership interest; and through a wholly-ownedsubsidiary, GMH Communities GP Trust, the Trust owned 581,169 units of generalpartnership interest, which represents 100% of the general partnership interestin the Operating Partnership. As of March 31, 2008, there were 29,644,335units of limited partnership interest outstanding that were not owned by theCompany.

 

We, through the OperatingPartnership and its subsidiaries, are a self-advised, self-managed, specialtyhousing company that focuses on providing housing to college and universitystudents residing off-campus and to members of the U.S. military and theirfamilies 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”).

 

On February 11,2008, the Company entered into two definitive agreements in connection with thesale of its military and student housing divisions.  The first agreement was a Securities PurchaseAgreement with a U.S. subsidiary of Balfour Beatty plc (“Balfour Beatty”),pursuant to which Balfour Beatty agreed to purchase the Company’s militaryhousing division (the “Military Housing Sale”). This transaction was completedon April 30, 2008 (see Note 13). The second agreement was an Agreement and Plan of Merger, referred to asthe merger agreement, with American Campus Communities, Inc. (“ACC”),pursuant to which, following the close of the Military Housing Sale andcontingent upon shareholder approval and other conditions precedent, theCompany will be acquired by a subsidiary of ACC (the “Merger”).

 

Following the Military HousingSale, and upon completion of several conditions precedent, includingshareholder approval, the Company will be acquired by ACC pursuant to themerger agreement.  Under the terms of themerger agreement, each common share of the Company and each unit of the CompanyOperating Partnership will be entitled to receive at the closing of the Merger (i) 0.07642of an ACC share of common stock, and (ii) $3.36 in cash, or approximately$5.53 in value based on the closing price of ACC’s shares of common stock on February 11,2008 (the “Merger Consideration”).  Inconnection with the Merger, the Company anticipates selling its home office(the “Home Office”) immediately prior to the closing of the Merger, and willalso have the right, but not the obligation, to sell up to 10 additionalstudent housing assets (collectively with the Home Office, the “DispositionAssets”).  A percentage of the amountreceived, if any, in connection with the sale of the Disposition Assets will bepayable to the Company’s common shareholders and unitholders immediatelypreceding the closing of the Merger (“the Special Distribution”), and will bein addition to the Merger Consideration. No assurance can be given that the Company will be successful indisposing of any of the Disposition Assets or that the shareholders andunitholders will be entitled to any additional proceeds other than the MergerConsideration.

 

Completion of the Mergeris subject to the sale of the military housing division and certain otherclosing conditions, including approval of the Merger by the Company’sshareholders.  The closing of the Merger,as contemplated by the merger agreement, is not subject to a financingcondition.  The Merger is currentlyexpected to close during the second quarter of 2008. The Merger has been unanimouslyapproved by the Company’s Board of Trustees, and has been recommended forapproval by the Company’s common shareholders.

 

Based upon the foregoingtransactions, the Company has determined that there are two disposal groups, militaryhousing and student housing, and that both disposal groups arerecoverable.  As a result of thecompletion of the Military Housing Sale to Balfour Beatty on April 30,2008, the military housing division has been presented in discontinuedoperations.  The Student Housing divisionhas not been presented as discontinued operations as it would not be meaningfulto present the entire Company as discontinued operations.

 

4

----

 

***Basis of Presentation***

 

The consolidatedfinancial statements have been prepared by the Company without audit, except asto the balance sheet as of December 31, 2007, 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,although the Company believes that the included disclosures are adequate tomake the information presented not misleading. In the opinion of management,all adjustments (consisting solely of normal recurring matters) necessary for afair presentation of the financial position of the Company as of March 31,2008, the results of its operations for the three-month periods ended March 31,2008 and March 31, 2007 and its cash flows for the three-month periodsended March 31, 2008 and March 31, 2007 have been included.  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 theyear ended December 31, 2007.

 

**2.Summary of Significant Accounting Policies**

 

***Use of Estimates***

*** ***

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectvarious amounts reported in the financial statements and accompanying notes.Actual results could differ from those estimates.

 

***Real Estate Investmentsand Corporate Assets***

*** ***

We carry real estateinvestments and corporate assets at cost, net of accumulated depreciation. Costof acquired assets includes the purchase price and related closing costs. Weallocate the cost of real estate investments to net tangible and identifiedintangible assets based on relative fair values in accordance with SFAS No. 141,*Business Combinations*(“SFAS 141”).We estimate fair value based on information obtained from a number of sources,including our due diligence, marketing and leasing activities, independentappraisals that may be obtained in connection with the acquisition or financingof the respective property, and other market data.

 

The value of in-placeleases is based on the difference between (i) the property valued withexisting in-place leases and (ii) the property valued as if vacant. As leaseterms typically are 12 months or less, actual rates on in-place leasesgenerally approximate market rental rates. Factors that we consider in thevaluation of in-place leases include an estimate of incremental carrying costsduring the expected lease-up periods considering current market conditions andnature of the 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 thevalue of in-place leases to expense over the remaining term of the respectiveleases, which is generally one year or less. Accumulated amortization relatedto intangible lease costs was $40,000 at March 31, 2008 and $20,000 at December 31,2007.

 

We expense routine repairand maintenance expenditures that do not improve the value of an asset orextend its useful life, including turnover costs. We capitalize expendituresthat improve 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. Commencing towards the end of thesecond quarter and more significantly during the third quarter of each fiscalyear, the Company typically will experience an increase in property operatingexpenses over other quarters as a result of repair and maintenance expendituresrelating to turnover of units at student housing properties. The Company’sstudent housing lease terms generally commence in August or September tocoincide with the beginning of the academic year. Accordingly, the Companyexpects to incur a majority of its repair and maintenance costs in the secondand third quarters to prepare for new residents.

 

In accordance withSFAS 144, *Accounting for the Impairmentor Disposal of Long-Lived Assets*, long-lived assets, such as realestate investments and purchased intangibles subject to amortization, arereviewed for impairment whenever 

 

5

----

 

events or changes incircumstances indicate that the carrying amount may not be recoverable. Thesecircumstances may include, but are not limited to, operational performance,market conditions and competition from other off-campus properties andon-campus housing, legal and environmental concerns, and results of appraisalsor other information obtained as part of a financing or disposition strategy.When required, we review recoverability of assets to be held and used through acomparison of the carrying amount of an asset to estimated undiscounted futurecash flows expected to be generated by the asset. If the carrying amount of anasset exceeds its estimated undiscounted future cash flows, an impairmentcharge is recognized in an amount by which the carrying value of the asset exceedsthe fair value of the asset determined using customary valuation techniques,such as the present value of expected future cash flows. Assets to be disposedof are separately presented in the balance sheet as assets held for sale andreported at the lower of the carrying amount or fair value less costs to sell,and are no longer depreciated.  TheCompany ceased depreciating all the student housing properties and thecorporate building on February 11, 2008. These assets have not been included in assets held for sale along withthe military housing division assets, as it would not be meaningful to presentthe entire Company in assets and liabilities held for sale.

 

***Cash Equivalents***

*** ***

All highly-liquidinvestments with an original maturity of three months or less are considered tobe cash equivalents. The Company has substantially all of its cash andshort-term investments with one major financial institution. Such cashbalances, at times, may exceed FDIC limits.

 

***Restricted Cash***

*** ***

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

 

***Allowance for DoubtfulAccounts***

*** ***

We estimate thecollectibility of receivables generated by rental and other income as a resultof the operation of our student housing properties. If we believe that thecollectibility of certain amounts is questionable, we record a specific reservefor these amounts to reduce the amount outstanding to an amount we believe willbe collectible and a reserve for all other accounts based on a range ofpercentages applied to aging categories, which is based on historicalcollection and write-off experience.

 

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 and circumstances,and record a reserve for specific amounts, if necessary.

 

Accounts receivable arepresented net of the allowance for doubtful accounts of $277,000 and $239,000at March 31, 2008 and December 31, 2007, respectively.

 

***Deferred Financing Costs***

*** ***

Costs incurred inconnection with obtaining financing are deferred and amortized on astraight-line basis over the term of the related loan, which is not materiallydifferent than the effective interest method. Amortization of deferredfinancing costs is included in interest expense. Accumulated amortization ofdeferred financing costs was $2.6 million and $2.1 million at March 31,2008 and December 31, 2007, respectively.

 

***Deferred Contract Costs***

*** ***

Deferred contract costsinclude costs attributable to a specific military housing project incurred inconnection with seeking Congressional approval of a Community Development andManagement Plan, or CDMP, subsequent to a military housing 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.  These amounts are included in assets held forsale at March 31, 2008 on the accompanying consolidated balance sheets.

 

6

----

 

***Deposits***

*** ***

Deposits primarilyconsist of deposits paid to utility companies at March 31, 2008 and December 31,2007 respectively.

 

***Fair Value of FinancialInstruments***

*** ***

The carrying amount ofcash and cash equivalents, restricted cash, accounts and other receivables,deposits, other assets, accounts payable, accrued expenses, dividends anddistributions payable and other liabilities approximate fair value because ofthe relatively short-term nature of these instruments.

 

Debt assumed inconnection with property acquisitions is recorded at fair value at the date ofacquisition and the resulting premium or discount is amortized through interestexpense over the remaining term of the debt, resulting in a non-cash decrease(in the case of a premium) or increase (in the case of a discount) in interestexpense.

 

The carrying value andfair value of fixed-rate notes payable at March 31, 2008 was approximately$928.6 million and $917.9 million, respectively.  Fair value was estimated using rates theCompany believed were available to it as of March 31, 2008 for debt withsimilar terms. The carrying value of variable-rate notes payable approximatesfair value at March 31, 2008.

 

***Advertising Costs***

*** ***

Advertising costs areexpensed as incurred.

 

***Revenue Recognition***

*** ***

**Student HousingOwned Properties Segment**

** **

Rental revenue isrecognized when due over the lease terms, which are generally 12 months orless.

 

Other property income,including, but not limited to, lease processing fees, move-in fees,  utility reimbursements and activity fees isrecognized as earned throughout the course of the year. The timing of thesefees typically fluctuates in relation to the academic year leasing cycle.

 

**Student HousingManaged Properties Segment**

** **

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.

 

Incentive management feesare earned as a result of the achievement of certain operating performancecriteria over a specified period by certain managed properties, includingtargeted annual debt service coverage ratios of the properties. We recognizethese fees at the amount that would be due under the contract if the contractwas terminated on the balance sheet date.

 

Expense reimbursementsare comprised primarily of salary and related costs of certain of our employeesworking at certain properties we manage for others, the cost of which isreimbursed by the owners of the related properties. We accrue operating expensereimbursements as the related expenses are incurred.

 

**Military HousingSegment – Included in Discontinued Operations**

** **

Standard and incentivemanagement fees, which are based on a percentage of effective gross revenuegenerated by the military housing privatization projects from the basicallowance for housing (BAH) provided by the government to service members arerecognized when the revenue is earned by the military housing projects.Incentive management fees are based upon the satisfaction of certain criteriaincluding, among other things, satisfying designated benchmarks relating toemergency work order response, occupancy rates, home turnover and residentsatisfaction surveys. Incentive management fees are recognized when the variouscriteria stipulated in the management contract have been satisfied. Accrued andunbilled incentive management fees of $3.0 million and $2.3 million areincluded in assets held for sale at March 31, 2008 and in accountsreceivable—related party at December 31, 2007, respectively.

 

7

----

 

Standard and incentivedevelopment and construction/renovation fees, which are based on a percentageof development and construction/renovation costs incurred by the militaryhousing projects, including hard and soft costs and financing costs, arerecognized on a monthly basis as the costs are incurred by the military housingprojects. Incentive development and construction/renovation fees are based uponthe satisfaction of certain criteria including, among other things, completinga number of houses according to schedule, achieving specific safety records andimplementing small business or minority subcontracting plans. Incentivedevelopment and construction/renovation fees are recognized when the variouscriteria stipulated in the contract have been satisfied. Accrued and unbilledincentive development and construction/renovation fees of $2.8 million and $3.9million are included in assets held for sale at March 31, 2008 and inaccounts receivable-related party at December 31, 2007, respectively.

 

Revenues on ourrenovation contracts are recorded on the percentage-of-completion method. Whenthe percentage-of-completion method is used, contract revenue is recognized inthe ratio that costs incurred to date bear to estimated costs at completion.Adjustments to cost estimates are made in the period in which the factsrequiring such revisions become known. When the revised estimates indicate aloss, such loss is currently provided for in its entirety.

 

Business development feesare earned from one of the Company’s construction partners in connection withits military housing projects. The fees consist of (i) an annual base fee,and (ii) an additional fee, which is paid on a monthly basis. As ofDecember 31, 2007, payment of the additional fee has been terminated. The feesare recognized on a straight-line basis over the term of the related businessdevelopment agreement, which is generally one year.

 

In certain instances, theCompany 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 (i) paid inproportion to the amount of pre-construction/renovation costs incurred by usfor the project, and (ii) recognized as revenue upon performance of thepre-construction/renovation services.

 

The Company earns equityreturns on its investments in military housing projects. During the initialdevelopment period (“IDP”) for certain of our projects, the equity returns area fixed percentage of our investment and subsequent to the IDP for a project,the equity returns are based on a fixed percentage of our investment and on theproject’s net operating income, subject to cash distribution caps, as definedin the operating agreements related to the particular project. As of March 31,2008, only the Fort Carson project had passed its initial development period.

 

Expense reimbursementsare comprised primarily of renovation expenses and property managementexpenses, the costs of which are reimbursed by the military housing projects towhich they relate. The expenses include payments to third parties forrenovation services, and include salaries and related costs of the Company’semployees that are managing the renovation and property management services.The Company accrues expense reimbursements as the related expenses areincurred.

 

***Minority Interest***

*** ***

The Operating Partnershipis obligated to redeem, at the request of a holder, each unit of limitedpartnership interest for cash or common shares on a one-for-one basis, at theCompany’s option, subject to adjustments for share splits, dividends,recapitalizations and similar events; except that Gary M. Holloway, Sr.has the right to require the Operating Partnership to redeem his and hisaffiliates’ units of limited partnership interest for common shares, subject tohis restriction from owning more than 20% of the Company’s outstanding commonshares. If the minority interest unitholders’ share of a current year losswould cause the minority interest balance to be less than zero, the minorityinterest balance will be reported as zero unless there is an obligation of theminority interest holders 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 unitholdersother than the Company are recorded as a reduction to minority interest.

 

8

----

 

***Investments in MilitaryHousing Projects and Student Housing Joint Ventures***

*** ***

The Company owns equityinterests in the joint ventures that own our military housing privatizationprojects with the U.S. military to design, develop, construct/renovate andmanage the military family housing located on or near various bases throughoutthe United States. In addition, the Company also owns equity interests in twojoint ventures that own student housing properties.  The Company evaluates its investments inmilitary housing project joint ventures in which we have a variable interest todetermine if the underlying entity is a variable interest entity (“VIE”) asdefined under FASB Financial Interpretation No. 46 (as revised) (“FIN 46(R)”).The Company has concluded that each of the military housing project jointventures in which it has a variable interest is a VIE and that the Company isnot the primary beneficiary of any of these VIEs. The Company records itsinvestments in joint ventures in accordance with the equity method of accounting.The Company’s investment is initially recorded at cost, and then subsequentlyadjusted at each balance sheet date to an amount equal to what the Companywould receive from the joint venture in the event that it were liquidated atnet book value as of that date, and assuming that the proceeds from theliquidation are distributed in accordance with the terms of, and priority ofreturns set forth under, the joint venture’s operating agreement. The Companyhas exposure to loss to the extent of its investments, if any, and anyreceivables due from the military project or joint ventures.

 

***Income Taxes***

*** ***

The Company elected to betaxed as a REIT under Internal Revenue Code of 1986, as amended, or the Code,commencing with its taxable year ended December 31, 2004. To continue toqualify as a REIT, the Company must meet a number of organizational andoperational requirements, including a requirement that we currently distributeat least 90% of our adjusted taxable income to our shareholders. We believe weare organized and operate in a manner that allows us to qualify for taxation asa REIT under the Code, and it is our intention to adhere to these requirementsand maintain the Company’s REIT status in the future. Accordingly, no provisionhas been made for federal income taxes in the accompanying consolidatedfinancial statements, other than with respect to the Company’s taxable REITsubsidiaries.

 

*** Transactional Expenses***

*** ***

***During the first quarter of 2008, the Company incurred $2.1 million oflegal, investment banking and other expenses associated with the MilitaryHousing Sale and the pending Merger.***

*** ***

***Adoption of RecentAccounting Pronouncements***

*** ***

***FairValue Accounting:***

*** ***

***In 2006, the FASB issued SFAS No. 157 “Fair ValueMeasurements” (“SFAS 157”), which defines fair value, establishes amarket-based framework or hierarchy for measuring fair value, and expandsdisclosures about fair value measurements. SFAS 157 is applicable wheneveranother accounting pronouncement requires or permits assets and liabilities tobe measured at fair value.  SFAS 157 doesnot expand or require any new fair value measures, however the application ofthis statement may change current practice. The requirements of SFAS 157 are first effective for our fiscal yearbeginning January 1, 2008.  However,in February 2008, the FASB decided that an entity need not apply thisstandard to non-financial assets and liabilities that are recognized ordisclosed at fair value in the financial statements on a nonrecurring basisuntil the subsequent year.  Accordingly,our adoption of this standard on January 1, 2008 is limited to financialassets and liabilities.  The adoption ofSFAS 157 did not have an effect on our financial condition or results ofoperations.  However, we are still in theprocess of evaluating this standard with respect to its effect on non-financialassets and liabilities and therefore have not yet determined the impact that itwill have on our financial statements upon full adoption.***

*** ***

***In February 2007, the FASB issued SFAF No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities – including anAmendment of FASB Statement No. 115” (“SFAS 159”).  SFAS 159 permits entities to choose tomeasure many financial instruments and certain other items at fair value.  Entities that elect the fair value optionwill report unrealized gains and losses in earnings at each subsequentreporting date.  The fair value optionmay be elected on an instrument-by-instrument basis, with few exceptions.  FAS 159 also established presentation anddisclosure requirements to facilitate comparisons between companies that choosedifferent measurement attributes for similar assets and liabilities. Therequirements of SFAS 159 are effective for our fiscal year beginning January 1,2008.  The adoption of this statement didnot have an effect on our financial condition or results of operations.***

*** ***

***9***

----

*** ***

***Recent AccountingPronouncements***

*** ***

***BusinessCombinations:***

*** ***

***In December 2007, the FASB issued SFAS No. 141(revised 2007), “Business Combinations” (“SFAS 141(R)”).  SFAS 141(R) significantly changes theaccounting for business combinations. Under SFAS 141(R), an acquiring entity will be required to recognize allthe assets acquired and liabilities assumed in a transaction at theacquisition-date at fair value with limited exceptions.  SFAS 141(R) further changes theaccounting treatment for certain specific items, including:***

*** ***

***·***                  Acquisition costs will be expensedas incurred;

***·***                  Non-controlling interests(formerly known as “minority interest” – see SFAS 160 discussion below) will bevalued at  fair value at the acquisitiondate;

***·***                  Acquired contingent liabilitieswill be recorded at fair value at the acquisition date and subsequently measuredat either the higher of such amount or the amount determined under existingguidance for non-acquired contingencies; and

***·***                  Restructuring costs associatedwith a business combination will be generally expensed subsequent to theacquisition date.

*** ***

***The standard iseffective for annual reporting periods beginning after December 15, 2008and will be applied prospectively.  Earlyadoption is prohibited. We have not yet completed our assessment of the impactSFAS 141(R) will have on our financial condition or results of operations.***

*** ***

***NoncontrollingInterests***

*** ***

***In December 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements – an amendment of ARB No. 51”.(“SFAS 160”).***

*** ***

***SFAS 160 established new accounting and reporting standardsfor the noncontrolling interest in a subsidiary and for the deconsolidation ofa subsidiary.  Specifically, thisstatement requires the recognition of noncontrolling interests (minorityinterests) as equity in the consolidated financial statements and separate fromthe parent’s equity.  The amount of netincome attributable to noncontrolling interests will be included inconsolidated net income on the face of the statement of operations.  SFAS 160 clarifies that changes in a parent’sownership interest in a subsidiary that does not result in deconsolidation aretreated as equity transactions if the parent retains its controlling financialinterest.  In addition, this statementrequires that a parent recognize a gain or loss in net income when a subsidiaryis deconsolidated.  Such gain or losswill be measured using the fair value of the noncontrolling equity investmenton the deconsolidation date.  SFAS No. 160also includes expanded disclosure requirements regarding the interests of theparent and its noncontrolling interests.***

*** ***

***SFAS 160 is effective for our fiscal year, and interimperiods within such a year, beginning January 1, 2009.  Early adoption of SFAS 160 is prohibited. Theadoption of SFAS 160 will result in the reclassification of minority intereststo beneficiaries’ equity.  The balance atMarch 31, 2008 was $136.4 million. We are currently evaluating furtherimpacts, if any, of these standards on our financial statements.***

*** ***

***Reclassifications***

*** ***

Certain amounts in theprior period financial statements have been reclassified to be consistent withthe current period presentation.

 

**3.  Real Estate Investments**

 

Included in real estate investments are 64 studenthousing properties that the Company wholly owns, located near 41 colleges anduniversities in 23 states. These properties contain an aggregate of 12,092units and 38,510 beds.The Company’sinvestment in student housing properties at March 31, 2008 and December 31,2007 was as follows (in thousands):

 

10

----

 
| ** **                           | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Land                                 |       | $                        | 148,938    |                        | $          | 149,136 |   |
| Building and improvements            |       | 1,221,821                |       | 1,220,344                   |       |
| Residential furniture and appliances |       | 47,818                   |       | 47,340                      |       |
| Construction in progress             |       | 1,819                    |       | 3,074                       |       |
|                                 |       | $                        | 1,420,396  |                        | $          | 1,419,894 |   |

 

**4.  Assets and liabilities held for sale**

 

**On February 11, 2008, the Company entered intoa Securities Purchase Agreement in connection with the Military Housing Sale toBalfour Beatty.  The sale was consummatedon April 30, 2008, whereupon Balfour Beatty purchased all the issued andoutstanding equity interests of the subsidiaries representing the Company’smilitary housing division for a cash purchase price of $350.5 million.  The assets and liabilities held for sale asof March 31, 2008 were as follows (in thousands):**

** **
| Corporate assets                         |   | $      | 21     |   |
|------------------------------------------|--------|--------|--------|--------|
| Cash and cash equivalents                |   | 18     |   |
| Accounts receivable – Related party |   | 19,794 |   |
| Accounts receivable – Third party   |   | 5      |   |
| Investments in military housing projects |   | 71,844 |   |
| Deferred contract costs                  |   | 2,454  |   |
| Other assets                             |   | 3,370  |   |
| Total assets held for sale               |   | $      | 97,506 |   |
|                                          |        |        |        |        |  |

** **
| Accounts payable                |   | $     | 5,781  |   |
|---------------------------------|--------|-------|--------|--------|
| Accrued expenses                |   | 2,033 |   |
| Other liabilities               |   | 6,278 |   |
| Total liabilities held for sale |   | $     | 14,092 |   |

 

**5. Investments in Military Housing Projects**

 

We record our investmentsin joint ventures under our military housing projects in accordance with theequity method of accounting.  Ourinvestment is initially recorded at cost, and subsequently adjusted at each balancesheet date to an amount equal to what we would receive from the joint venturein the event that it were liquidated at net book value as of that date,assuming that the proceeds from the liquidation are distributed in accordancewith the terms of, and the priority of returns set forth under, the jointventure’s operating agreement. The terms of the various agreements generallyprovide for the payment to the Company of an agreed upon return on the Company’sinvested capital and a return of the Company’s invested capital prior to thedistribution of any amounts to the government entity that is a member of thejoint venture.

 

As of March 31,2008, of the Company’s joint venture entities in which it has ownershipinterests relating to military housing projects in operation as of that date,the Company had invested capital in the joint ventures as discussed below.

 

During the first quarterof 2008, the Company contributed $1.1 million to its joint venture GMH/BenhamMilitary Communities LLC. The joint venture used these funds to make a required$1.1 million equity contribution to Fort Hamilton Housing LLC, which operatesour Fort Hamilton military housing project. The Company has a 100% interest in GMH/Benham Military Communities LLC,investment in Fort Hamilton Housing LLC. The Company is entitled to a preferredreturn on its investment in Fort Hamilton Housing LLC after the end of the IDPfor the project.  The carrying value ofthis investment, net of minority interest, was $1.1 million at March 31,2008.

 

In October 2007, theCompany contributed $6.75 million to GMH Military Housing-Navy Southeast LLC inreturn for a 90% interest and Balfour Beatty Construction LLC contributed$750,000 for the remaining 10% interest. The Company consolidates GMH MilitaryHousing-Navy Southeast LLC as it has a 90% economic interest and controls amajority of the 

 

11

----

 

votinginterests.  Balfour Beatty ConstructionLLC’s 10% interest is accounted for as minority interest and is included inliabilities held for sale at March 31, 2008 and in other liabilities at December 31,2007, on the accompanying consolidated balance sheet.  GMH Military Housing-Navy Southeast invested$7.5 million in Southeast Housing LLC, which owns and operates the NavySoutheast Region military housing project. The Company will not accrue preferred returns for this project until theend of the IDP for the project. The carrying value of this investment, net ofminority interest, was $6.8 million at both March 31, 2008 and December 31,2007.

 

In November 2007,the Company contributed $7.0 million to GMH/Phelps Military Communities LLC inreturn for a 90% interest and Phelps Development LLC contributed $780,000 forthe remaining 10% interest. The Company consolidates GMH/Phelps MilitaryCommunities LLC as it has a 90% economic interest and controls a majority ofthe voting rights. Phelps Development LLC’s 10% interest is accounted for asminority interest and is included in liabilities held for sale at March 31,2008 and in other liabilities at December 31, 2007 on the accompanyingconsolidated balance sheet.  GMH/PhelpsMilitary Communities LLC, through its two wholly-owned subsidiaries, invested$7.8 million into Vandenberg Housing LP, which owns and operates the Vandenbergproject with the Department of the Air Force. The Company earns a preferred return on its investment in VandenbergHousing LP. The preferred returns will accrue but not be paid, until the end ofthe IDP for the project which is in 2012. The carrying value of this investment net of minority interest was $7.3million at March 31, 2008 and $7.1 million at December 31, 2007.

 

In February 2007,the Company closed on the Air Education and Training Command (“AETC”) Group Iproject with the Department of the Air Force. The Company invested $8.0 million for its 80% interest in thepartnership that owns AETC Housing LP, the entity that owns and operates theAETC Group I project.  The Companyconsolidates partnerships that own AETC Housing LP, as it has an 80% economicinterest and controls a majority of the voting interests.  The remaining 20% interest is owned 10% byHensel Phelps Construction Co. and 10% by The Benham Companies LLC, and isaccounted for as minority interest and is included in liabilities held for saleat March 31, 2008 and in other liabilities at December 31, 2007 onthe accompanying consolidated balance sheet. The Company has concluded that AETC Housing LP is a VIE as defined underFIN 46(R) and that the Company is not the primary beneficiary.  The primary beneficiary is a non-equitypartner in the joint venture that is more closely associated with the VIE.  The Company earns a preferred return on itsinvestment in the AETC Group I project.  The preferred return will accrue, but not be paid, until the end of theIDP for the project, which is projected to be in 2012.  The carrying value of this investment, net ofminority interest, was $8.9 million at March 31, 2008 and $8.7 million at December 31,2007.

 

During the first quarterof 2007, the Company contributed $5.9 million and Benham Military Communities,LLC contributed $0.6 million, through their joint venture, GMH/Benham MilitaryCommunities LLC, which used the funds to make a required $6.5 million equitycontribution commitment to FDWR Parent LLC, which operates the FortDetrick/Walter Reed Medical Center military housing project.  The Company has a 90% interest and Benham hasa 10% interest in GMH/Benham Military Communities LLC, which is entitled to apreferred return on its investment in FDWR Parent LLC commencing after the endof the IDP for the project.  The Companyconsolidates GMH/Benham Military Communities LLC as it has a 90% economicinterest and controls a majority of the voting interests.  The 10% interest held by Benham MilitaryCommunities, LLC is accounted for as minority interest and is included inliabilities held for sale at March 31, 2008 and in other liabilities at December 31,2007 on the accompanying consolidated balance sheet.  The carrying value of this investment, net ofminority interest, was $5.9 million at both March 31, 2008 and December 31,2007.

 

The acquisition of ourownership interests in the joint venture that owns a 10% interest in FortCarson Family, LLC and has the rights to exclusively negotiate the FortEustis/Fort Story military housing projects was recorded at the fair value ofthe consideration paid in the amount of $31.0 million.  The underlying book value of the equity onthe acquisition date was approximately $11.5 million.  The remaining $19.5 million of thisinvestment is being amortized based on the then current fiscal year revenue asa percentage of the estimated revenue to be earned over the remaining lives ofthe projects, which are 45 years for the Fort Carson project and 50 years forthe Fort Eustis/Story project. Amortization expense was $136,000 and $110,000for the three months ended March 31, 2008 and 2007, respectively.  The accumulated amortization of the excesspurchase price was $1.3 million and $1.2 million at March 31, 2008 and December 31,2007, respectively. The carrying value of these investments was $23.6 millionat March 31, 2008 and $23.8 million at December 31, 2007.  The Company is entitled to a preferred returnon its investment in Fort Carson Family Housing LLC, plus 50% of the project’snet operating income, which will decrease to 30% and 15% in 2012 and 2016,respectively. After 2016 and through 2025, the Company’s returns on itsinvestments are subject to an annual maximum amount of $1.75 million. Theproject began repaying the Company’s initial investment in Fort Carson FamilyHousing LLC in July 2005.  Theequity is expected to be completely repaid by 2015. During each of the threemonths ended March 31, 2008 and 2007, the Company received $0.4 million ofequity distributions from Fort Carson Family Housing LLC.

 

12

----

 

In November 2004,the Company contributed $9.5 million to GMH/Benham Military CommunitiesLLC in return for 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 inliabilities held for sale at March 31, 2008 and in other liabilities at December 31,2007, on the accompanying balance sheets.  In November 2004,GMH/Benham Military Communities, LLC invested $10.6 million in NortheastHousing LLC, which owns and operates the Navy Northeast Region military housingproject. GMH/Benham Military Communities LLC is entitled to a preferred returnon its investment in Northeast Housing LLC. The preferred return will accrue, butnot be paid, until the end of the initial development period for the project inOctober 2010. The carrying value of this investment net of minorityinterest was $12.5 million and $12.3 million at March 31, 2008 and December 31,2007, respectively.

 

The following is asummary of the unaudited financial position of the unconsolidated militaryhousing projects in which the Company had invested capital (in thousands):

 
| ** **        | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------|------------|--------------------------|------------|-----------------------------|------------|
| Net Property      |       | $                        | 1,277,851  |                        | $          | 966,334 |   |
| Other Assets      |       | $                        | 1,192,580  |                        | $          | 1,200,897 |   |
| Notes payable     |       | $                        | 1,726,620  |                        | $          | 1,674,845 |   |
| Other Liabilities |       | $                        | 279,680    |                        | $          | 84,437 |   |
| Equity            |       | $                        | 464,131    |                        | $          | 407,949 |   |

 

The following is a summaryof the results of operations of the unconsolidated military housing projects inwhich the Company has invested capital (in thousands):

 
| ** **                    | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Revenue                       |       | $                                                    | 63,957     |   | $ | 7,490 |   |
| Operating Expenses            |       | $                                                    | 34,180     |   | $ | 2,552 |   |
| Interest Expense, net         |       | $                                                    | 9,466      |   | $ | 2,475 |   |
| Depreciation and amortization |       | $                                                    | 15,669     |   | $ | 1,894 |   |
| Net Income                    |       | $                                                    | 4,642      |   | $ | 569 |   |

 

**6.  Investment in Student Housing Joint Ventures**

 

**In April 2007, the Company entered into a jointventure with Fidelity Real Estate Group, pursuant to which the Companytransferred its 100% interest in six student housing properties into the jointventure in exchange for cash and a 10% interest in the joint venture.  As part of the transaction, the Companyrecorded a deferred gain of approximately $2.4 million. The carrying value ofthis investment, net of deferred gain, is approximately $25,000 at March 31,2008 and $78,000 at December 31, 2007.**

 

**In August 2005, the Company entered into ajoint venture with an institutional investor, AEW Capital Management, todevelop and construct two student housing projects which were completed in August 2006.The Company contributed land to the joint venture in exchange for its 10%interest and cash.  The carrying value ofthis investment at both March 31, 2008 and December 31, 2007 was $1.2million. **The joint venture became in default atMarch 31, 2008 under certain debt service coverage provisions relating to themortgage indebtedness. 

13

----

 

**The following is a summary of the unauditedfinancial position of the unconsolidated student housing joint ventures inwhich the Company has an equity interest (in thousands):**

** **
| ** **        | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------|------------|--------------------------|------------|-----------------------------|------------|
| Net property      |       | $                        | 155,893    |                        | $          | 157,048 |   |
| Other assets      |       | $                        | 4,522      |                        | $          | 4,619 |   |
| Debt              |       | $                        | 124,352    |                        | $          | 124,406 |   |
| Other liabilities |       | $                        | 3,351      |                        | $          | 3,693 |   |
| Equity            |       | $                        | 32,712     |                        | $          | 33,568 |   |

 

**The following is a summary of the unaudited resultsof operations of the unconsolidated student housing joint ventures in which theCompany held a 10% equity interest for the three months ending March 31,2008 (in thousands):**

** **
| ** **                    | ** ** | **2008** | ** ** |
|-------------------------------|------------|----------|------------|
| Revenue                       |       | $        | 5,089      |   |
| Operating expenses            |       | $        | 2,802      |   |
| Interest expense              |       | $        | 1,852      |   |
| Depreciation and amortization |       | $        | 1,464      |   |
| Net income (loss)             |       | $        | (1,029     | ) |

 

**7.  Notes Payable**

 

At March 31, 2008,notes payable totaling approximately $960.0 million were secured by 62wholly-owned student housing properties and our corporate office.  The net carrying value of these encumberedproperties was $1.27 billion at March 31, 2008.  These notes payable had a weighted averageinterest rate of 5.32%, and a weighted average maturity of 6.63 years, maturingat various dates between February 2009 and April 2024, and requiremonthly payments of principal and interest or monthly payments of interestonly.

 

During the first quarterof 2008, the Company did not make its scheduled payments on mortgages coveringfive of its wholly-owned student housing properties, with outstanding principalbalances totaling $64.3 million.  TheCompany has placed the regularly required payments into a Company-controlledescrow account and is in discussions with the lenders regarding a work-out ofthe mortgage debt. All five of the properties were placed into receivershipduring the second quarter of 2008, which will not impact the Company’s abilityto close on its pending merger with ACC. At March 31, 2008, the net carrying value of the five propertiesencumbered by these mortgages was $80.1 million.

 

**8.  Transactions with Related Parties**

 

In the ordinary course ofits 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. The operating results or financial position of the Company could besignificantly different from those that would have been reported if theentities were autonomous. These relationships and related transactions aresummarized below.

 

Shared costs for humanresources, information technology, office equipment and furniture, and certainmanagement personnel were allocated to the various entities owned or controlledby Mr. Holloway, using assumptions based on headcount that managementbelieved were reasonable. The allocation of such costs to other entities ownedor controlled by Mr. Holloway during the three months ended March 31,2008 and 2007 totaled $42,000 and $64,000, respectively, and are reflected asexpense reimbursements from related parties in the accompanying consolidatedstatements of operations.

 

The Company leases spacein its corporate headquarters to entities wholly-owned by Mr. Holloway.During each of the three month periods ended March 31, 2008 and 2007,rental income from these entities totaled $39,000. These amounts are includedin other property income in the accompanying consolidated and combinedstatements of operations.  In addition,during the first quarter of 2008, the Company, through its subsidiary that ownsthe interests in the corporate headquarters, entered into a Put OptionAgreement with Mr. Holloway, pursuant to which the Company has the rightto require the sale of the corporate headquarters to Mr. Holloway for asum of $8.0 million in the event that the building cannot be sold to anunaffiliated third party prior to the pending merger with ACC.

 

14

----

 

The Company is reimbursedby the joint ventures relating to certain of its military housing projects andstudent housing properties in which the Company has an ownership interest, forthe cost of certain employees engaged in the daily operation of those militaryhousing projects and student housing properties. The reimbursement of thesecosts is included in expense reimbursements—related party with respect to thestudent housing properties and discontinued operations with respect to themilitary housing projects, in the accompanying consolidated statements ofoperations. During the three months ended March 31, 2008 and 2007, suchexpense reimbursements relating to these military housing projects and studenthousing properties totaled $24.1 million and $17.3 million, respectively.

 

Mr. Holloway ownsBryn Mawr Abstract, Inc., an entity that provides title abstract servicesto third-party title insurance companies, from which we have purchased titleinsurance 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. $23,000and $82,000 during the three months ended March 31, 2008 and 2007,respectively, for providing title abstract services.

 

Mr. Holloway ownsCorporate Flight Services, LLC, an entity that provides aircraft services.  During the three months ended March 31,2008 and 2007, the Company paid Corporate Flight Services, LLC $132,000 and$283,000, respectively for use of an aircraft owned by Corporate FlightServices, LLC.

 

**9. Commitments and Contingencies**

 

With regard to militaryhousing privatization projects at Army bases, depending on the terms of eachrespective agreement, the Company is either required to fund its portion of theequity commitment to the project’s joint venture (i) after all othersources of funding for the project have been expended or (ii) after theIDP is completed. With respect to the Company’s Navy Northeast Region projectand AETC Group I project, however, the Company was required to fund the equitycommitment at commencement of the project. With respect to the Company’s Fort Detrick/Walter Reed Army MedicalCenter project, the Company was required to fund its equity commitment duringthe first quarter of 2007. In connection with finalizing the agreements withthe DoD for the Company’s military housing projects, the Company has committedto contribute the following aggregate amounts as of March 31, 2008 (inthousands):

 
| 2008  |   | $      | 1,100  |   |
|-------|--------|--------|--------|--------|
| 2009  |   | 1,500  |   |
| 2010  |   | 20,500 |   |
| 2011  |   | 7,000  |   |
| Total |   | $      | 30,100 |   |

 

In connection with thedevelopment, management, construction and renovation agreements for certain ofthe military housing projects, the Company guarantees the completion of itsobligations under the agreements. The guarantees require the Company to fundany costs in excess of the amounts budgeted in the underlying development,management, construction and renovation agreements. The maximum exposure to theCompany 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.

 

Under the provisions ofFIN 45, *“Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers an interpretation of FASB Statements No. 5, 57, and 107 andrescission of FASB Interpretation No. 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 subject tothe provisions of FIN 45. Under these agreements, the Company indemnifies,holds harmless, and agrees to reimburse the indemnified party for lossessuffered or incurred by the indemnified party. The maximum potential amount offuture payments the Company could be required to make under theseindemnification agreements is unlimited. The Company believes the estimatedfair value of these agreements is immaterial. Accordingly, there were noliabilities recorded for these agreements as of March 31, 2008 and December 31,2007.

 

As of November 2,2007, the Company had entered into a settlement agreement with the leadplaintiffs in connection with a class action lawsuit alleging violations ofSections 11, 12(a)(2) and 15 of the Securities Act and 

 

15

----

 

Sections 10(b) and20 of the Exchange Act, and Rule 10b-5. The class action lawsuit had been filed in the United States DistrictCourt for the Eastern District of Pennsylvania, naming as defendants GMHCommunities Trust, Gary M. Holloway, Sr., and Bradley W. Harris, and wasbrought on behalf of a class of purchasers of the Company’s securities between May 5,2005 and March 10, 2006 based upon the Company’s restatement of certainfinancial results.  The Court preliminarilyapproved the settlement agreement by Order dated February 13, 2008 andscheduled a Settlement Hearing for April 25, 2008.  Under the terms of the settlement agreement,all claims against the Company and related defendants would be dismissedwithout admission or presumption of liability or wrongdoing.  An order of the Court providing grantingfinal approval of the settlement agreement was entered on April 28, 2008.Appeals relating to the settlement must be filed within 30 days of the date ofthe order. The Company can provide no assurance that an appeal will not befiled, and if an appeal, is filed and the settlement approval is reversed, thenthe Company would be required to continue to defend itself.

 

The Company also is subject to routine litigation,claims and administrative proceedings arising in the ordinary course ofbusiness. Other than the matters describedabove, we are not involved in any other material litigation nor, to ourknowledge, is any material litigation pending or threatened against us. Themaximum exposure to the Company relating to these matters cannot be determinedat this time. Management believes that the disposition of these routinelitigation matters will not have a material adverse impact on the Company’sfinancial position or results of operations.

 

**10. Segment Reporting**

 

The Company is comprisedof four reportable segments: (1) student housing – owned properties (2) studenthousing – management, (3) military housing and (4) corporate. Thecorporate segment also includes the corporate overhead and other servicedepartments. The Company’s management evaluates each segment’s performancebased upon net income. The accounting policies of the reportable segments arethe same as those described in the summary of significant accounting policies.

 

16

----

 
| ** **                                                                                                                         | ** ** | **Three Months Ended March 31, 2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                                                         | ** ** | **Student  Housing-  Owned  Properties**                       | ** ** | **Student  Housing  Management** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Elimination** | ** ** | **Total** | ** ** |
| **Revenue**                                                                                                                        |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income                                                                                                     |       | $                                                              | 46,543     |   | $ | — |   | $ | — |   | $ | 39 |   | $ | — |   | $ | 46,582 |   |
| Expense reimbursements:                                                                                                            |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                                                      |       | —                                                         |       | 645 |   | — |   | 42 |   | — |   | 687 |   |
| Third party                                                                                                                        |       | —                                                         |       | 1,592 |   | — |   | — |   | — |   | 1,592 |   |
| Management fees:                                                                                                                   |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Owned properties                                                                                                                   |       | —                                                         |       | 1,774 |   | — |   | — |   | (1,774 | ) | — |   |
| Related party                                                                                                                      |       | —                                                         |       | 209 |   | — |   | — |   | — |   | 209 |   |
| Third party                                                                                                                        |       | —                                                         |       | 609 |   | — |   | — |   | — |   | 609 |   |
| Other income                                                                                                                       |       | 11                                                             |       | 1 |   | — |   | 59 |   | — |   | 71 |   |
| Total revenue                                                                                                                      |       | 46,554                                                         |       | 4,830 |   | — |   | 140 |   | (1,774 | ) | 49,750 |   |
|                                                                                                                               |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Operating Expenses:**                                                                                                            |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Property operating expense                                                                                                         |       | 17,849                                                         |       | 1,502 |   | — |   | — |   | — |   | 19,351 |   |
| Intercompany management fee                                                                                                        |       | 1,774                                                          |       | — |   | — |   | — |   | (1,774 | ) | — |   |
| Reimbursed expenses                                                                                                                |       | —                                                         |       | 2,237 |   | — |   | 42 |   | — |   | 2,279 |   |
| Real estate taxes                                                                                                                  |       | 4,664                                                          |       | — |   | — |   | 25 |   | — |   | 4,689 |   |
| Administrative expenses                                                                                                            |       | —                                                         |       | — |   | — |   | 3,714 |   | — |   | 3,714 |   |
| Transactional expenses                                                                                                             |       | —                                                         |       | — |   | — |   | 2,125 |   | — |   | 2,125 |   |
| Depreciation and amortization                                                                                                      |       | 4,839                                                          |       | 63 |   | — |   | 149 |   | — |   | 5,051 |   |
| Interest                                                                                                                           |       | 13,241                                                         |       | — |   | — |   | 141 |   | — |   | 13,382 |   |
| Total operating expenses                                                                                                           |       | 42,367                                                         |       | 3,802 |   | — |   | 6,196 |   | (1,774 | ) | 50,591 |   |
| Income (loss) before equity in earnings of unconsolidated entities,  income taxes and minority interest from continuing operations |       | 4,187                                                          |       | 1,028 |   | — |   | (6,056 | ) | — |   | (841 | ) |
| Equity in (loss)/earnings of unconsolidated entities                                                                               |       | (84                                                            | )          | — |   | — |   | — |   | — |   | (84 | ) |
| Income (loss) before income taxes and minority interest from  continuing operations                                                |       | 4,103                                                          |       | 1,028 |   | — |   | (6,056 | ) | — |   | (925 | ) |
| Income tax benefit                                                                                                                 |       | —                                                         |       | (20 | ) | — |   | — |   | — |   | (20 | ) |
| Income (loss) before minority interest                                                                                             |       | 4,103                                                          |       | 1,048 |   | — |   | (6,056 | ) | — |   | (905 | ) |
| Minority interest loss attributable to continuing operations                                                                       |       | —                                                         |       | — |   | — |   | 313 |   | — |   | 313 |   |
| Income (loss) from continuing operations                                                                                           |       | 4,103                                                          |       | 1,048 |   | — |   | (5,743 | ) | — |   | (592 | ) |
|                                                                                                                               |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Discontinued Operations:**                                                                                                       |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from discontinued operations before minority interest,  net of $1,501 income tax expense                             |       | —                                                         |       | — |   | 8,460 |   | (1,179 | ) | — |   | 7,281 |   |
| Minority interest income                                                                                                           |       | —                                                         |       | — |   | — |   | (3,029 | ) | — |   | (3,029 | ) |
| Income (loss) from discontinued operations                                                                                         |       | —                                                         |       | — |   | 8,460 |   | (4,208 | ) | — |   | 4,252 |   |
|                                                                                                                               |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Net income(loss)                                                                                                                   |       | $                                                              | 4,103      |   | $ | 1,048 |   | $ | 8,460 |   | $ | (9,951 | ) | $ | — |   | $ | 3,660 |   |
|                                                                                                                                    |            |                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

17

----

 
| ** **                                                                                         | ** ** | **Three Months Ended March 31, 2007** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **Student  Housing-  Owned  Properties**                       | ** ** | **Student  Housing  Management** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Elimination** | ** ** | **Total** | ** ** |
| **Revenue**                                                                                        |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income                                                                     |       | $                                                              | 51,425     |   | $ | — |   | $ | — |   | $ | 39 |   | $ | — |   | $ | 51,464 |   |
| Expense reimbursements:                                                                            |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                      |       | —                                                         |       | — |   | — |   | 64 |   | — |   | 64 |   |
| Third party                                                                                        |       | —                                                         |       | 1,446 |   | — |   | — |   |   |   | 1,446 |   |
| Management fees:                                                                                   |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Owned properties                                                                                   |       | —                                                         |       | 1,914 |   | — |   | — |   | (1,914 | ) | — |   |
| Related party                                                                                      |       | —                                                         |       | — |   | — |   | — |   | — |   | — |   |
| Third party                                                                                        |       | —                                                         |       | 678 |   | — |   | — |   | — |   | 678 |   |
| Other income                                                                                       |       | 29                                                             |       | 8 |   | — |   | 171 |   |   |   | 208 |   |
| Total revenue                                                                                      |       | 51,454                                                         |       | 4,046 |   | — |   | 274 |   | (1,914 | ) | 53,860 |   |
|                                                                                               |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Operating Expenses:**                                                                            |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Property operating expense                                                                         |       | 18,114                                                         |       | 2,053 |   | — |   | — |   | — |   | 20,167 |   |
| Intercompany management fee                                                                        |       | 1,914                                                          |       | — |   | — |   | — |   | (1,914 | ) | — |   |
| Reimbursed expenses                                                                                |       | —                                                         |       | 1,446 |   |   |   | 64 |   | — |   | 1,510 |   |
| Real estate taxes                                                                                  |       | 4,877                                                          |       | — |   | — |   | 24 |   | — |   | 4,901 |   |
| Administrative expenses                                                                            |       | —                                                         |       | — |   | — |   | 4,650 |   | — |   | 4,650 |   |
| Transactional expenses                                                                             |       | —                                                         |       | — |   | — |   | — |   | — |   | — |   |
| Depreciation and amortization                                                                      |       | 11,571                                                         |       | — |   | — |   | 117 |   |   |   | 11,688 |   |
| Interest                                                                                           |       | 15,984                                                         |       | — |   | — |   | 1,491 |   |   |   | 17,475 |   |
| Total operating expenses                                                                           |       | 52,460                                                         |       | 3,499 |   | — |   | 6,346 |   | (1,914 | ) | 60,391 |   |
| (Loss)/income before income taxes and minority interest from  continuing operations                |       | (1,006                                                         | )          | 547 |   | — |   | (6,072 | ) | — |   | (6,531 | ) |
| Income tax expense                                                                                 |       | —                                                         |       | 68 |   | — |   | — |   | — |   | 68 |   |
| Income (loss) before minority interest                                                             |       | (1,006                                                         | )          | 479 |   | — |   | (6,072 | ) | — |   | (6,599 | ) |
| Minority interest loss attributable to continuing operations                                       |       | —                                                         |       | — |   | — |   | 2,874 |   | — |   | 2,874 |   |
| (Loss)/income from continuing operations                                                           |       | (1,006                                                         | )          | 479 |   | — |   | (3,198 | ) | — |   | (3,725 | ) |
|                                                                                               |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Discontinued Operations:**                                                                       |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Income from discontinued operations before minority interest, net of  $1,458 of income tax expense |       | 789                                                            |       | 201 |   | 6,057 |   | (220 | ) | — |   | 6,827 |   |
| Minority interest                                                                                  |       | —                                                         |       | — |   | — |   | (2,973 | ) | — |   | (2,973 | ) |
| Income/(loss) from discontinued operations                                                         |       | 789                                                            |       | 201 |   | 6,057 |   | (3,193 | ) | — |   | 3,854 |   |
|                                                                                               |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Net income/(loss)                                                                                  |       | $                                                              | (217       | ) | $ | 680 |   | $ | 6,057 |   | $ | (6,391 | ) | $ | — |   | $ | 129 |   |

 

18

----

 
| ** **                       | ** ** | **Student  Housing  Owned  Properties** | ** ** | **Student  Housing-  Management** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|----------------------------------|------------|-----------------------------------------|------------|-----------------------------------|------------|-----------------------|------------|---------------|------------|-----------|------------|
| ** **                       | ** ** | **(in thousands)**                 | ** ** |
|                             |       |                                    |       |                              |       |                  |       |          |       |      |       |
| **As of March 31, 2008:**   |       |                                    |       |                              |       |                  |       |          |       |      |       |
| Total assets                     |       | $                                       | 1,347,596  |                              | $          | 5,826                 |       | $             | 97,506     |      | $          | 23,153 |   | $ | 1,474,081 |   |
| Total liabilities                |       | $                                       | 979,760    |                              | $          | 866                   |       | $             | 14,092     |      | $          | 81,149 |   | $ | 1,075,867 |   |
| **As of December 31, 2007** |       |                                    |       |                              |       |                  |       |          |       |      |       |
| Total assets                     |       | $                                       | 1,352,640  |                              | $          | 6,005                 |       | $             | 95,820     |      | $          | 34,381 |   | $ | 1,488,846 |   |
| Total liabilities                |       | $                                       | 983,477    |                              | $          | 1,108                 |       | $             | 16,691     |      | $          | 84,068 |   | $ | 1,085,344 |   |

 

**11. Earnings Per Common Share**

 

The following tabledetails the number of shares and net income used to calculate basic and dilutedearnings per share for the three months ended March 31, 2008 and March 31,2007 (in thousands, except share and per share amounts):

 
| ** **                                                           | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                           | ** ** | **March 31, 2008**     | ** ** | **March 31, 2007**     | ** ** |
| ** **                                                           | ** ** | **Basic**                        | ** ** | **Diluted**                      | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Net loss from continuing operation                                   |       | $                                | (592       | )                                | $          | (592 | ) | $ | (3,725 | ) | $ | (3,725 | ) |
| Minority interest in continuing operations                           |       | —                           |       | (313                             | )          | — |   | (2,874 | ) |
| Loss from continuing operations available to common shareholders     |       | (592                             | )          | (905                             | )          | (3,725 | ) | (6,599 | ) |
|                                                                 |       |                             |       |                             |       |   |   |   |   |
| Net income from discontinued operations                              |       | $                                | 4,252      |                             | $          | 4,252 |   | $ | 3,854 |   | $ | 3,854 |   |
| Minority interest in discontinued operations                         |       | —                           |       | 3,029                            |       | — |   | 2,973 |   |
| Income from discontinued operations available to common shareholders |       | $                                | 4,252      |                             | $          | 7,281 |   | $ | 3,854 |   | $ | 6,827 |   |
|                                                                 |       |                             |       |                             |       |   |   |   |   |
| Weighted-average common shares outstanding                           |       | 41,566,158                       |       | 41,566,158                       |       | 41,494,521 |   | 41,494,521 |   |
| Units of limited partnership held by minority interest holders       |       | —                           |       | 29,644,335                       |       | — |   | 31,624,617 |   |
| Restricted common shares                                             |       | —                           |       | 21,193                           |       | — |   | 9,563 |   |
| Total weighted-average shares outstanding                            |       | 41,566,158                       |       | 71,231,686                       |       | 41,494,521 |   | 73,128,701 |   |
| Earnings (loss) per common share                                     |       |                             |       |                             |       |   |   |   |   |
| Continuing operations                                                |       | $                                | (0.01      | )                                | $          | (0.01 | ) | $ | (0.09 | ) | $ | (0.09 | ) |
| Discontinued operations                                              |       | 0.10                             |       | 0.10                             |       | 0.09 |   | 0.09 |   |
|                                                                 |       | $                                | 0.09       |                             | $          | 0.09 |   | $ | 0.00 |   | $ | 0.00 |   |

 

On March 20, 2008, the Company declared aquarterly dividend of $0.165 per outstanding common share.  The aggregate amount of dividends of $11.8million was paid on April 15, 2008, of which $6.9 million and $4.9million, respectively, was paid to common shareholders and unitholders of theOperating Partnership of record on March 31, 2008.

 

**12. Discontinued Operations**

 

For the three-monthperiods ended March 31, 2008, income from discontinued operations relatesto the military housing division that the Company held for sale as of March 31,2008.

 

For the three-monthperiods March 31, 2007, income from discontinued operations relates to themilitary housing division, as well as six of the 12 student housing propertiesthat the Company held for sale as of March 31, 2007. The other six studenthousing properties have not been presented as discontinued operations becausethe Company (i) expects to receive significant continuing cash flowsgenerated by earning management fees from the Company’s ongoing management ofthe properties, in addition to the cash flows resulting from the Company’s 10%equity ownership in the joint venture that owns 

 

19

----

 

and operates theproperties, and (ii) continues to have significant involvement in theongoing operations through its continuing management of the properties and its10% equity ownership in the joint venture that owns the properties.

 

The following tablesummarizes the revenue and expense information for the three months ended March 31,2008 and 2007 (in thousands).

 
| ** **                                                                                                                    | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                    | ** ** | **March 31, 2008**     | ** ** | **March 31 ,2007** | ** ** |
| **Revenue:**                                                                                                                  |       |                             |       |   |   |
| Rent and other operating income                                                                                               |       | $                                | —     |   | $ | 5,271 |   |
| Expense reimbursements – related party                                                                                   |       | 23,463                           |       | 17,335 |   |
| Management fees – related party                                                                                          |       | 3,658                            |       | 2,421 |   |
| Other fee income – related party                                                                                         |       | 6,935                            |       | 6,138 |   |
| Other income                                                                                                                  |       | 120                              |       | 21 |   |
| Total revenue                                                                                                                 |       | 34,176                           |       | 31,186 |   |
|                                                                                                                          |       |                             |       |   |   |
| **Expenses:**                                                                                                                 |       |                             |       |   |   |
| Property operating expenses                                                                                                   |       | 2,209                            |       | 3,702 |   |
| Reimbursed expenses                                                                                                           |       | 23,463                           |       | 17,335 |   |
| Real estate taxes                                                                                                             |       | —                           |       | 595 |   |
| Administrative                                                                                                                |       | 283                              |       | 220 |   |
| Depreciation and amortization                                                                                                 |       | 150                              |       | 1,016 |   |
| Interest expense                                                                                                              |       | 896                              |       | 1,062 |   |
| Total operating expenses                                                                                                      |       | 27,001                           |       | 23,930 |   |
|                                                                                                                          |       |                             |       |   |   |
| Income from discontinued operations before equity in earnings of  unconsolidated entities, minority interest and income taxes |       | 7,175                            |       | 7,256 |   |
| Equity in earnings of unconsolidated entities                                                                                 |       | 1,607                            |       | 1,029 |   |
| Income from discontinued operations before minority interest and  income taxes                                                |       | 8,782                            |       | 8,285 |   |
| Income tax expense                                                                                                            |       | 1,501                            |       | 1,458 |   |
| Income from discontinued operations before minority interest                                                                  |       | 7,281                            |       | 6,827 |   |
| Minority interest                                                                                                             |       | (3,029                           | )          | (2,973 | ) |
| Income from discontinued operations                                                                                           |       | $                                | 4,252      |   | $ | 3,854 |   |

 

Thefollowing table summarizes the cash flow information from discontinuedoperations (in thousands):

 
|                                                 |   | **Three  months ended** |       |
|------------------------------------------------------|--------|-------------------------|------------|
|                                                 |   | **March  31, 2008**     | ** ** | **March  31, 2007** |   |
| Net cash (used in)  provided by operating activities |   | $                       | (3,165     | ) | $ | 5,237 |   |
| Net cash used in investing  activities               |   | $                       | (1,057     | ) | $ | (13,522 | ) |
| Net cash used in financing                           |   | $                       | —     |   | $ | (107 | ) |

 

 

**13. Subsequent Events**

 

On April 30, 2008, the Company completed the MilitaryHousing Sale to Balfour Beatty.  The cashpurchase price paid by Balfour Beatty at closing totaled $350.5 million. Approximately$62.1 million of the proceeds were used to repay and terminate the Company’sNote Facility with Merrill Lynch.  Aspreviously announced, the Company intends to make two separate specialdistributions its shareholders and the unitholders of the OperatingPartnership.  The Company’s Board ofTrustees has declared an initial special distribution of $3.10 per share/unitto the holders of common shares and unitholders of the Operating Partnership,which represents a substantial portion of the net proceeds from the Military HousingSale.   This distribution will be payableon May 15, 2008 to shareholders and unitholders of record as of the closeof business on May 10, 2008.  Theinitial distribution will total approximately $221.1 million in the aggregate.  The remainder of the net proceeds from thetransaction will be retained as working capital pending the closing of theproposed merger of GMH with ACC.  Theproposed merger is currently anticipated to occur during the second quarter of2008, subject to the approval of the Company’s shareholders and assuming thatthe other conditions in the merger agreement are satisfied or waived. It iscurrently anticipated that there will be an additional distribution toshareholders and unitholders of approximately $0.98 per/unit payableimmediately prior to the proposed merger with ACC, which will be comprised ofany remaining net proceeds from the Military Housing Sale.

 

OnMay 8, 2008, the Company, through its subsidiary 353 Associates, entered intoan Agreement of Sale with an entity owned by Gary M. Holloway, President andCEO of the Company, relating to a sale of the corporate headquarters to Mr.Holloway. As previously announced by the Company in connection with the pendingMerger, Mr. Holloway had entered into a Put Option agreement that allowed theCompany to exercise an option to put the sale of the building to Mr. Hollowayprior to the consummation of the Merger for a total of $8.0 million, in theevent that the Company was unable to identify an unaffiliated third-partybuyer. The terms of the agreement provides that Mr. Holloway is required toplace an initial deposit of $240,000 into escrow within three business daysafter the effective date of the agreement and that the closing on the sale ofthe building will occur immediately prior to the consummation of the Merger.The agreement also provides that either the buyer or seller may terminate theagreement upon written notice in the event that the merger agreement with ACCis terminated in accordance with Article IX thereof.

 

20

----

 

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

 

*As described above under the section of this report titled “Cautionary Note Regarding Forward-LookingStatements — Military Housing Sale,” the Company completed the MilitaryHousing Sale. In addition, the remaining operations of the Company, includingthe student housing business, are expected to be acquired through a merger withAmerican Campus Communities, Inc., or ACC, expected to be completed during the second quarter of 2008,referred to as the “Merger.”*

 

*Unless otherwise noted in this* section, *the disclosures of our businessinclude references to operations of the military housing division; however,statements relating to future periods and results or expectations of theCompany necessarily exclude the military housing division and its activities.**The disclosures contained throughout this section also refer to ourbusiness as an ongoing operation with the impact of the Merger not consideredunless otherwise noted.*

 

**Overview**

 

We are a self-advised,self-managed, specialty housing company that focuses on providing housing tocollege and university students residing off-campus and to members of the U.S.military and their families.

 

As of March 31,2008, we owned, or had ownership interests in, 72 student housing propertiescontaining a total of 13,232 units and 42,670 beds and seven undeveloped orpartially developed parcels of land held for development as student housingproperties. As of the date of this report, we held a 10% interest in jointventures that owned eight of these student housing properties, covering a totalof 1,140 units and 4,160 beds and provided management services for all of theseproperties.  In addition, we managed atotal of 12 student housing properties owned by others, containing a total of2,237 units and 7,191 beds, including 48 units and 262 beds currently underconstruction.

 

In our military housingsegment, as of March 31, 2008, our operating partnership had an ownershipinterest in, and through various wholly-owned subsidiaries operated, 12military housing privatization projects, comprising an aggregate of 25,658end-state housing units on 37 military bases. This includes our Fort Stewart unaccompanied personnel housing (UPH)project, the award of which was finalized during the first quarter of 2008, andwhich project comprises a total of 334 end-state housing units. Through ourtaxable REIT subsidiaries, we provide development, construction, renovation andmanagement services to our military housing privatization projects (other thanour AETC Group I and Vandenberg projects with the U.S. Air Force), and propertymanagement services to student housing properties owned by others. In addition,we provide consulting services with respect to the management of certainstudent housing properties owned by others, including colleges, universities,and other private owners. In order to comply with the applicable requirementsunder the REIT provisions of the Code, we must limit the operations of taxableREIT subsidiaries so that securities issued to us by our taxable REITsubsidiaries do not represent more than 20% of our total assets as of the closeof any quarter in our taxable year and so that dividends from our taxable REITsubsidiaries, together with our other non-qualifying gross income, do notexceed 25% of our gross income for any taxable year.

 

Currently, our operationsare managed within three operating segments that are separately reported: (1) studenthousing owned properties (2) student housing management and (3) militaryhousing. This structure provides an effective platform for maximizing marketpenetration and optimizing operating economies of scale. In addition, weseparately report the activities of certain departments from a corporate level,which includes personnel that service the Company as a whole and support ouroverall operations.

 

*Student Housing Owned Properties*

 

The student housing-ownedproperties segment reflects the revenues and expenses of off-campus studenthousing properties acquired and owned through the REIT ownership structurewhich are strategically located near college or university campuses. During theprior three fiscal years, our rental revenue (including continuing anddiscontinuing operations) increased substantially as a result of ouracquisition activity. Although our acquisition activity slowed during 2007, wecontinued to experience increases in operating expenses, real estate taxes anddepreciation and amortization as a result of our prior acquisitions. Further,interest expense increased related to the financing of the properties that weacquired.

 

21

----

 

Historically, we havefound certain property revenues and operating expenses to be cyclical in nature,and therefore not incurred ratably over the course of the year. As ourproperties are leased predominantly on an academic-year basis, certain of ouroperating revenues and expenses will vary from quarter to quarter depending onthe leasing cycle. For example, we experience significant turnover costscommencing towards the end of the second quarter and more significantly duringthe 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 higher lease-up costs during the first two quarters ofour fiscal year, as this is the period during which we heavily target studentsfor leases that will commence for the next academic year. Property revenues andexpenses may differ from expected results in the year of acquisition, dependingon the timing of the acquisition in relation to the leasing cycle. With respectto our lease-up and physical occupancy results for the start of the 2007/2008academic year, our occupancy levels on a portfolio-wide basis were lower thanlevels achieved for the start of the 2006/2007 academic year. While our netrental rates have increased for the 2007/2008 academic year over the prioracademic year, this revenue growth will be offset by lower occupancy levels atour properties.

 

In the event that theMerger is not consummated and we continue our operations, we expect to continueto place less emphasis on the acquisition of additional student housingproperties relative to prior years, and continue to focus on the operationalperformance of our existing student housing properties and developmentprojects. To the extent our operational performance meets or exceeds management’sexpectations going forward, and the Company has sufficient working capital orfinancing sources for additional acquisitions, we may determine that it isappropriate to place greater emphasis on acquisitions in the Company’s studenthousing segment and seek to acquire properties located in our targeted marketsthat meet management’s underwriting criteria for creating long-term growthpotential. If we seek to acquire student housing properties, we will considerfunding the acquisitions through joint venture structures similar to the jointventure terms that we have entered into with respect to our current jointventure properties. The timing of any additional acquisitions or developmentprojects will be dependent upon various factors, including the ability tocomplete satisfactory due diligence, to find suitable joint venture partnersand agree upon mutually acceptable joint venture terms, to obtain appropriatedebt financing on the properties, and the availability of capital. We havetraditionally funded at least a portion of our acquisition costs through theplacement of mortgage debt on our student housing properties. As a result ofrecent volatility in the U.S. capital markets resulting from concerns over thesub-prime mortgage debt sector, our ability to obtain mortgage debt on termsthat are as favorable to us as we have achieved in the past may be negativelyimpacted. We would consider funding our equity portion of any joint ventures byusing funds from available cash from operations or borrowings, if available. Wealso may determine that it is appropriate to purchase additional studenthousing properties outright, as opposed to with a joint venture partner,depending upon many factors which may include, but are not limited to, theapplicable purchase price, available capital, and projected returns withrespect to the property.

 

In addition, to theextent that the Merger is not consummated and we continue our operations, andin recognition of the fact that certain of our student housing properties havenot performed in line with internal projections, our management would analyzethe Company’s owned student housing portfolio as a whole, and determine whetherthere are properties in certain markets that should be positioned for sale ortransferred into a joint venture similar to the Company’s joint venturestructure with Fidelity Real Estate Group. In performing this analysis, ourmanagement would take into consideration a number of factors, including, butnot limited to, current and anticipated future supply and demand issues,projected enrollment growth at colleges and universities within the market, andan assessment of potential economies of scale in markets where the Company hasmultiple assets. In the event that management performs this analysis, we cannotprovide any assurance that we will determine to reposition any of the Company’sstudent housing properties, or that the Company would be successful in anyeffort to complete such transactions if attempted. Any such plans to sell orplace properties into a joint venture also would be subject to approval by ourBoard of Trustees.

 

***StudentHousing—Management***

*** ***

The studenthousing-management segment provides the on-site management function for, andgenerally oversees the management of, all off-campus student housing propertiesfor the Company and for properties we manage that are owned by third parties.Also included in this segment, are activities relating to development and jointventure structuring 

 

22

----

 

activities. Third partiesmay be related parties or parties unaffiliated with the Company. The propertiesare strategically located near college or university campuses. Total revenuesfrom management activities, including reimbursement of expenses, increased byapproximately 20% from the three months ended March 31, 2007 to the sameperiod in 2008, including management fees earned from the properties managedfor the Company.

 

We earn management feesfrom managing properties for 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 respectivemanagement agreements. We also have the ability to earn incentive managementfees by achieving specified property-level performance criteria for certainproperties we manage for third parties. Further, certain operating expensesincurred related to properties we manage for others are reimbursed by theowners of the properties managed.

 

As of March 31,2008, we managed a total of 12 student housing properties owned byothers, containing a total of 2,237 units and 7,191 beds, including 48 unitsand 262 beds currently under construction. One of these management contracts was terminated duringthe second quarter, representing 51 units and 239 beds. We expect ourthird-party management income to decline during 2008 unless we are able toenter new management contracts. In addition, to the extent that we continue toobtain fee revenue and operating expense reimbursements from the propertiesthat we manage for others, these amounts are expected to become lesssignificant as a percentage of our overall revenues as rental income increasesfrom the properties we own and to the extent our managed property portfoliodoes not correspondingly increase. In the event that the Merger is notconsummated and we continue our operations, we expect to continue to pursue newthird-party management agreements during 2008 by utilizing relationships in thestudent housing market and providing our significant operational economies ofscale as a savings mechanism for other third-party owners, includinginstitutional owners and individual student housing owners.

 

*Military Housing*

 

Our military housingsegment develops, constructs, renovates and manages military housingprivatization projects in which we acquire equity interests. Revenue from ourmilitary housing segment is comprised primarily of fee income for providingdevelopment, construction/renovation and management services to our militaryhousing privatization projects. We also are entitled to returns on the equitywe invest in the projects. In addition, we earn business development fees fromcertain of our business partners in connection with our military housingprivatization projects, such as our construction and architectural/engineeringpartners. We seek these fees as payment for our business development effortsincurred by us in connection with pursuing and coordinating the completion ofmilitary housing privatization projects that benefit these business partners.We also receive expense reimbursements, consisting primarily of payroll andrelated expenses, closing costs and transition costs we incur for the projectin the periods preceding the initiation of our management of the project.Typically, at the time we initiate management on a project, the projectreimburses us for these amounts from the proceeds of the debt securities issuedby the military housing privatization project.

 

During the first quarterof 2008, we finalized the plans and financing for the Fort Stewart UPH project,pursuant to which the Army selected the Company to be the private sectordeveloper for UPH for soldiers in the ranks of SSG (E-6) and above at FortStewart located in Hinesville, Georgia. The project is coterminous with theexisting 50-year ground lease relating to the Company's Fort Stewart/Hunterfamily housing project and commences with a two-year IDP that includes design,construction, management, maintenance and operational responsibilities for anestimated 334 end-state housing units with project costs of approximately $37.0million.

 

As of March 31,2008, we owned equity interests in the joint ventures that owned 12 militaryhousing privatization projects, comprising an aggregate of 25,658 end-statehousing units on 37 military bases. During the three months ended March 31,2008, we earned fees for providing development, construction/renovation andmanagement services to these 12 military housing privatization projects.

 

**Critical Accounting Policies**

 

Our “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”discusses 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 financial statementsand the reported amounts of revenues and expenses during the reporting periods.While the estimates and judgments associated with the application of theseaccounting principles may be affected by different assumptions or conditions,we believe the estimates and judgments associated with the reported amounts areappropriate under the circumstances in which they were made. In addition, othercompanies in similar businesses may utilize different estimation policies andmethodologies, which may impact the comparability of our results of operationsand financial condition to those companies.

 

23

----

 

The following policiesrequire significant judgments and estimates on our part in preparing theCompany’s consolidated financial statements. Changes in these judgments andestimates could have a material effect on these financial statements.

 

**RevenueRecognition**

 

***Student Housing—Owned Properties Segment***

 

Rental revenue isrecognized when due over the lease terms, which are generally 12 months orless.

 

Other property income,including, but not limited to, lease processing fees, move-in fees, andactivity fees is recognized as earned throughout the course of the year. Thetiming of these fees typically fluctuates in relation to the academic yearleasing cycle.

 

***Student Housing Managed Properties Segment***

 

Standard management feesare based on a percentage of monthly cash receipts or gross monthly rental andother revenues generated by the properties managed for others. We recognizethese fees on a monthly basis as the services are performed.

 

Incentive management feesare earned as a result of the achievement of certain operating performancecriteria over a specified period by certain managed properties, includingtargeted annual debt service coverage ratios of the properties. We recognizethese fees at the amount that would be due under the contract if the contractwas terminated on the balance sheet date.

 

Expense reimbursementsare comprised primarily of salary and related costs of certain of our employeesworking at certain properties we manage for others, the cost of which isreimbursed by the owners of the related properties. We accrue operating expensereimbursements as the related expenses are incurred.

 

***Military Housing***

 

We earn military housingrevenues for providing services to our military housing privatization projects,including the following:

 

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

 

·standard and incentive development andconstruction/renovation fees, which are based on a percentage of developmentand construction/renovation costs incurred by the military housingprivatization projects, including hard and soft costs and financing costs, arerecognized on a monthly basis as the costs are incurred by the military housingprojects. Incentive development and construction/renovation fees are based uponthe satisfaction of certain criteria including, among other things, completinga number of housing units according to schedule, achieving specific safetyrecords and implementing small business or minority subcontracting plans. Theincentive development and construction/renovation fees are recognized when thevarious criteria stipulated in the contract have been satisfied. In addition,in certain 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 the project andrecognized as revenue upon performance of the pre-construction/renovationservices;

 

·revenues on our renovation contracts arerecorded on the percentage-of-completion method. When thepercentage-of-completion method is used, contract revenue is recognized in theratio that costs incurred to date bear to estimated costs at completion. Adjustmentsto cost estimates are made in the period in which the facts requiring suchrevisions become known. When the revised estimates indicate a loss, such lossis provided for currently in its entirety.

 

24

----

 

·business development fees are earned froma construction partner in connection with our military housing projects. Thesefees consist of an (i) annual base fee, and (ii) additional fee whichis paid on a monthly basis. As of December 31, 2007, payment of the additional feehas been terminated. The fees are recognized on a straight-line basis over theterm of the agreement, which is generally one year.

 

·equity returns are earned on ourinvestments in military housing projects. During the initial development periodfor a project, the equity returns are a fixed percentage of our investment andsubsequent to the initial development period for a project, the equity returnsare based on a fixed percentage of our investment and on the project’s netoperating income, subject to cash distribution caps, as defined in theoperating agreements related to the particular project. As of December 31,2007, only the Fort Carson project had passed its initial development period.

 

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

 

We carry real estateinvestments and corporate assets at cost, net of accumulated depreciation. Costof acquired assets includes the purchase price and related closing costs. Weallocate the cost of real estate investments to net tangible and identifiedintangible assets based on relative fair values in accordance with Statement ofFinancial Accounting Standards No. 141 (“SFAS 141”), *Business Combinations*. We estimate fairvalue based on information obtained from a number of sources, including our duediligence, marketing and leasing activities, independent appraisals that may beobtained in connection with the acquisition or financing of the respectiveproperty, and other market data.

 

The value of in-placeleases is based on the difference between (i) the property valued withexisting in-place leases and (ii) the property valued as if vacant. Aslease terms typically are 12 months or less, actual rates on in-placeleases generally approximate market rental rates. Factors that we consider inthe valuation of in-place leases include an estimate of incremental carryingcosts during the expected lease-up periods considering current marketconditions and nature of the tenancy. Purchase prices of student housingproperties to be acquired are not expected to be allocated to tenantrelationships considering the terms of the leases and the expected levels ofrenewals. We amortize the value of in-place leases to expense over theremaining term of the respective leases, which is generally one year or less.

 

We expense routine repairand maintenance costs that do not improve the value of an asset or extend itsuseful life, including turnover costs. We capitalize expenditures that improvethe value and extend the useful life of an asset. We compute depreciation usingthe straight-line method over the estimated useful lives of the assets, whichis generally 40 years for buildings including student housing propertiesand the commercial office building, and three to five years for residentialfurniture and appliances. Commencing towards the end of the second quarter andmore significantly during the third quarter of each fiscal year, we typicallywill experience an increase in property operating expenses over other quartersas a result of repair and maintenance expenditures relating to turnover ofunits at student housing properties. Our student housing lease terms generallycommence in August or September to coincide with the beginning of theacademic year. Accordingly, we expect to incur a majority of the repair andmaintenance costs during the second and third quarters to prepare for newresidents.

 

In accordance withStatement of Financial Accounting Standards No. 144 (“SFAS 144”), *Accounting for the Impairment or Disposal ofLong-Lived Assets*, long-lived assets, such as real estateinvestments and purchased intangibles subject to amortization, are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount may not be recoverable. These circumstances may include, butare not limited to, operational performance, market conditions and competitionfrom other off-campus properties and on-campus housing, legal and environmentalconcerns, and results of appraisals or other information obtained as part of afinancing or disposition strategy. When required, we review the recoverabilityof assets 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.

 

***Allowance for Doubtful Accounts***

 

We estimate thecollectibility of receivables generated by rental and other income as a resultof the operation of our student housing properties. If we believe that thecollectibility of certain amounts is questionable, we record a specific reservefor these amounts to reduce the amount outstanding to an amount we believe willbe collectible and a reserve for all other 

 

25

----

 

accounts based on a rangeof percentages applied to aging categories, which is based on historicalcollection and write-off experience.

 

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 privatization projects based upon the individual facts andcircumstances, and record a reserve for specific amounts, if necessary.

 

***Minority Interest***

 

Minority interest asinitially recorded at the date of our initial public offering represented thenet equity of our operating partnership, including the proceeds received fromthe sale of the warrant to Vornado, multiplied by the ownership percentage ofholders of limited partnership units in our operating partnership other thanthe Company. Our operating partnership is obligated to redeem, at the requestof a holder, each unit of limited partnership interest for cash or commonshares on a one-for-one basis, at our option, subject to adjustments for sharesplits, dividends, recapitalizations or similar events; except that Gary M.Holloway, Sr. has the right to require our operating partnership to redeemhis and his affiliates’ units of limited partnership interest for commonshares, subject to his restriction from owning more than 20% of our outstandingcommon shares. If the minority interest unit holders’ share of a current yearloss would cause the minority interest balance to be less than zero, theminority interest balance will be reported as zero unless there is anobligation of the minority interest holders to fund those losses. Any losses inexcess of the minority interest will be charged against equity. If futureearnings materialize, equity will be credited for all earnings up to the amountof those losses previously absorbed. Distributions to limited partnership unitholders other than us are recorded as a reduction to minority interest.

 

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

 

The Company owns equityinterests in the joint ventures that own our military housing projects with theU.S. military to design, develop, construct/renovate and manage the militaryhousing located on or near various bases throughout the United States. Inaddition the Company also owns equity interests in two joint ventures that ownstudent housing properties. The Company evaluates its investments in thesejoint ventures in which we have a variable interest to determine if theunderlying entity is a variable interest entity (“VIE”) as defined under FASBFinancial Interpretation No. 46 (as revised) (“FIN 46(R)”). TheCompany has concluded that each of the joint ventures in which it has avariable interest is a VIE and that the Company is not the primary beneficiaryof any of these VIEs. The Company records its investments in joint ventures inaccordance with the equity method of accounting. The Company’s investment isinitially recorded at cost, and then subsequently adjusted at each balancesheet date to an amount equal to what the Company would receive from the jointventure in the event that the project were liquidated at net book value as ofthat date, and assuming that the proceeds from the liquidation are distributedin accordance with the terms of, and priority of returns set forth under, thejoint venture’s operating agreement. The Company has exposure to loss to theextent of its investments, if any, and any receivables due from the militaryprojects or joint ventures.

 

***Income Taxes***

 

Weelected to be taxed as a REIT under the Code commencing with our taxable yearended December 31, 2004. To continue to qualify as a REIT, we must meet anumber of organizational and operational requirements, including a requirementthat we currently distribute at least 90% of our adjusted taxable income to ourshareholders. We believe we are organized and operate in a manner that allowsus to qualify for taxation as a REIT under the Code, and it is our intention toadhere to these requirements and maintain our REIT status in the future.Accordingly, no provision has been made for federal income taxes in theaccompanying consolidated financial statements, other than with respect to ourtaxable REIT subsidiaries.

 

26

----

 

**Resultsof Operations**

** **

The results of operationsfor the three months ended March 31, 2008 and 2007 presented below reflectthe results of operations of the Company. The eliminations column representsthe management fees that are charged to our student housing—owned segment fromour student housing management segment. Such amounts have been eliminated inconsolidation.

 

27

----

 

***Comparison of the Three Months Ended March 31, 2008 tothe Three Months Ended March 31, 2007***

 
| ** **                                                                                                                         | ** ** | **Three Months Ended March 31, 2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                                                         | ** ** | **Student  Housing-  Owned  Properties**                       | ** ** | **Student  Housing  Management** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Elimination** | ** ** | **Total** | ** ** |
| **Revenue**                                                                                                                        |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income                                                                                                     |       | $                                                              | 46,543     |   | $ | — |   | $ | — |   | $ | 39 |   | $ | — |   | $ | 46,582 |   |
| Expense reimbursements:                                                                                                            |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                                                      |       | —                                                         |       | 645 |   | — |   | 42 |   | — |   | 687 |   |
| Third party                                                                                                                        |       | —                                                         |       | 1,592 |   | — |   | — |   | — |   | 1,592 |   |
| Management fees:                                                                                                                   |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Owned properties                                                                                                                   |       | —                                                         |       | 1,774 |   | — |   | — |   | (1,774 | ) | — |   |
| Related party                                                                                                                      |       | —                                                         |       | 209 |   | — |   | — |   | — |   | 209 |   |
| Third party                                                                                                                        |       | —                                                         |       | 609 |   | — |   | — |   | — |   | 609 |   |
| Other income                                                                                                                       |       | 11                                                             |       | 1 |   | — |   | 59 |   | — |   | 71 |   |
| Total revenue                                                                                                                      |       | 46,554                                                         |       | 4,830 |   | — |   | 140 |   | (1,774 | ) | 49,750 |   |
|                                                                                                                               |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Operating Expenses:**                                                                                                            |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Property operating expense                                                                                                         |       | 17,849                                                         |       | 1,502 |   | — |   | — |   | — |   | 19,351 |   |
| Intercompany management fee                                                                                                        |       | 1,774                                                          |       | — |   | — |   | — |   | (1,774 | ) | — |   |
| Reimbursed expenses                                                                                                                |       | —                                                         |       | 2,237 |   | — |   | 42 |   | — |   | 2,279 |   |
| Real estate taxes                                                                                                                  |       | 4,664                                                          |       | — |   | — |   | 25 |   | — |   | 4,689 |   |
| Administrative expenses                                                                                                            |       | —                                                         |       | — |   | — |   | 3,714 |   | — |   | 3,714 |   |
| Transactional expenses                                                                                                             |       | —                                                         |       | — |   | — |   | 2,125 |   | — |   | 2,125 |   |
| Depreciation and amortization                                                                                                      |       | 4,839                                                          |       | 63 |   | — |   | 149 |   | — |   | 5,051 |   |
| Interest                                                                                                                           |       | 13,241                                                         |       | — |   | — |   | 141 |   | — |   | 13,382 |   |
| Total operating expenses                                                                                                           |       | 42,367                                                         |       | 3,802 |   | — |   | 6,196 |   | (1,774 | ) | 50,591 |   |
| Income (loss) before equity in earnings of unconsolidated entities,  income taxes and minority interest from continuing operations |       | 4,187                                                          |       | 1,028 |   | — |   | (6,056 | ) | — |   | (841 | ) |
| Equity in (loss)/earnings of unconsolidated entities                                                                               |       | (84                                                            | )          | — |   | — |   | — |   | — |   | (84 | ) |
| Income (loss) before income taxes and minority interest from  continuing operations                                                |       | 4,103                                                          |       | 1,028 |   | — |   | (6,056 | ) | — |   | (925 | ) |
| Income tax benefit                                                                                                                 |       | —                                                         |       | (20 | ) | — |   | — |   | — |   | (20 | ) |
| Income (loss) before minority interest from continuing operations                                                                  |       | 4,103                                                          |       | 1,048 |   | — |   | (6,056 | ) | — |   | (905 | ) |
| Minority interest loss attributable to continuing operations                                                                       |       | —                                                         |       | — |   | — |   | 313 |   | — |   | 313 |   |
| Income (loss) from continuing operations                                                                                           |       | 4,103                                                          |       | 1,048 |   | — |   | (5,743 | ) | — |   | (592 | ) |
|                                                                                                                               |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Discontinued Operations:**                                                                                                       |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from discontinued operations before minority interest,  net of $1,501 income tax expense                             |       | —                                                         |       | — |   | 8,460 |   | (1,179 | ) | — |   | 7,281 |   |
| Minority interest income                                                                                                           |       | —                                                         |       | — |   | — |   | (3,029 | ) | — |   | (3,029 | ) |
| Income (loss) from discontinued operations                                                                                         |       | —                                                         |       | — |   | 8,460 |   | (4,208 | ) | — |   | 4,252 |   |
|                                                                                                                               |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Net income(loss)                                                                                                                   |       | $                                                              | 4,103      |   | $ | 1,048 |   | $ | 8,460 |   | $ | (9,951 | ) | $ | — |   | $ | 3,660 |   |
|                                                                                                                                    |            |                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

28

----

 
| ** **                                                                                         | ** ** | **Three Months Ended March 31, 2007** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **Student  Housing-  Owned  Properties**                       | ** ** | **Student  Housing  Management** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Elimination** | ** ** | **Total** | ** ** |
| **Revenue**                                                                                        |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income                                                                     |       | $                                                              | 51,425     |   | $ | — |   | $ | — |   | $ | 39 |   | $ | — |   | $ | 51,464 |   |
| Expense reimbursements:                                                                            |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                      |       | —                                                         |       | — |   | — |   | 64 |   | — |   | 64 |   |
| Third party                                                                                        |       | —                                                         |       | 1,446 |   | — |   | — |   |   |   | 1,446 |   |
| Management fees:                                                                                   |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Owned properties                                                                                   |       | —                                                         |       | 1,914 |   | — |   | — |   | (1,914 | ) | — |   |
| Related party                                                                                      |       | —                                                         |       | — |   | — |   | — |   | — |   | — |   |
| Third party                                                                                        |       | —                                                         |       | 678 |   | — |   | — |   | — |   | 678 |   |
| Other income                                                                                       |       | 29                                                             |       | 8 |   | — |   | 171 |   |   |   | 208 |   |
| Total revenue                                                                                      |       | 51,454                                                         |       | 4,046 |   | — |   | 274 |   | (1,914 | ) | 53,860 |   |
|                                                                                               |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Operating Expenses:**                                                                            |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Property operating expense                                                                         |       | 18,114                                                         |       | 2,053 |   | — |   | — |   | — |   | 20,167 |   |
| Intercompany management fee                                                                        |       | 1,914                                                          |       | — |   | — |   | — |   | (1,914 | ) | — |   |
| Reimbursed expenses                                                                                |       | —                                                         |       | 1,446 |   |   |   | 64 |   | — |   | 1,510 |   |
| Real estate taxes                                                                                  |       | 4,877                                                          |       | — |   | — |   | 24 |   | — |   | 4,901 |   |
| Administrative expenses                                                                            |       | —                                                         |       | — |   | — |   | 4,650 |   | — |   | 4,650 |   |
| Transactional expenses                                                                             |       | —                                                         |       | — |   | — |   | — |   | — |   | — |   |
| Depreciation and amortization                                                                      |       | 11,571                                                         |       | — |   | — |   | 117 |   |   |   | 11,688 |   |
| Interest                                                                                           |       | 15,984                                                         |       | — |   | — |   | 1,491 |   |   |   | 17,475 |   |
| Total operating expenses                                                                           |       | 52,460                                                         |       | 3,499 |   | — |   | 6,346 |   | (1,914 | ) | 60,391 |   |
| (Loss)/income before income taxes and minority interest from  continuing operations                |       | (1,006                                                         | )          | 547 |   | — |   | (6,072 | ) | — |   | (6,531 | ) |
| Income tax expense                                                                                 |       | —                                                         |       | 68 |   | — |   | — |   | — |   | 68 |   |
| Income (loss) before minority interest                                                             |       | (1,006                                                         | )          | 479 |   | — |   | (6,072 | ) | — |   | (6,599 | ) |
| Minority interest loss attributable to continuing operations                                       |       | —                                                         |       | — |   | — |   | 2,874 |   | — |   | 2,874 |   |
| (Loss)/income from continuing operations                                                           |       | (1,006                                                         | )          | 479 |   | — |   | (3,198 | ) | — |   | (3,725 | ) |
|                                                                                               |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Discontinued Operations:**                                                                       |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Income from discontinued operations before minority interest, net of  $1,458 of income tax expense |       | 789                                                            |       | 201 |   | 6,057 |   | (220 | ) | — |   | 6,827 |   |
| Minority interest                                                                                  |       | —                                                         |       | — |   | — |   | (2,973 | ) | — |   | (2,973 | ) |
| Income/(loss) from discontinued operations.                                                        |       | 789                                                            |       | 201 |   | 6,057 |   | (3,193 | ) | — |   | 3,854 |   |
|                                                                                               |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Net income/(loss)                                                                                  |       | $                                                              | (217       | ) | $ | 680 |   | $ | 6,057 |   | $ | (6,391 | ) | $ | — |   | $ | 129 |   |

 

29

----

 

***Student Housing***

 

*Student Housing—Owned Properties*

 

*Revenue.*  Asof March 31, 2008, we had 64 wholly-owned student housingproperties that are included in our results from continuing operations.  Rent and other property income decreased to$46.5 million during the three months ended March 31, 2008 from $5l.4million during the three months ended March 31, 2007.  The decrease in rent and other propertyincome experienced during the three months ended March 31, 2008 relates tolower economic occupancy levels achieved for the 2007-2008 academic year forour portfolio versus the prior year. Although we generally seek rent increasesthat will exceed projected increases in property operating expenses, increasesin our property operating expenses exceeded our rent increases from 2007 to2008, primarily as a result of increases in payroll and utility expensesincurred during the first quarter of 2008 and the fact that rental rate growthwas offset by lower occupancy levels. In future periods, our net income will benegatively affected to the extent property operating expenses are higher thanthose projected by our management for such period prior to lease execution forthe applicable academic year.

 

We owned 63 propertieswhich are included in our results from continuing operations during both thethree months ended March 31, 2008 and 2007, referred to herein as our samestore properties. Our revenues at the same store properties were $46.2 millionduring the three months ended March 31, 2008 as compared to $47.4 millionduring the three months ended March 31, 2007.

 

Other income remained relatively consistent during thethree months ended March 31, 2008 compared to the same period in theprevious year.  Other income consistsprimarily of interest income on invested cash.

 

*Expenses.***Property operating expenses fromcontinuing operations decreased to $17.8 million during the first quarter of2008 from $18.1 million for the first quarter of 2007. The decrease of $0.3million is attributable to a $0.2 million decrease in utilities expense and a$0.5 million decrease in insurance expense. The decreases were offset by a $0.1 million increase in repairs andmaintenance expense; a $0.2 million increase in other taxes; and a $0.1 millionincrease in security services.

 

With respect to our samestore properties, we experienced an increase in property operating expenses ofapproximately $1.2 million for first quarter of 2008, as compared to 2007. Thisincrease was primarily attributable to an increase in payroll expense of $0.6million, an increase in utilities expense of $0.3 million, an increase insecurity expense of $0.2 million, and an increase in property marketingexpenses of $0.1 million.

 

Real estate taxes fromcontinuing operations decreased to $4.7 million in 2008 from $4.9 millionin 2007.  Real estate taxes relating toour same store properties remained relatively consistent during the threemonths ended March 31, 2008 as compared to the same period in the previousyear.  We may see an increase in realestate taxes to the extent that local authorities continue to aggressivelypursue higher real estate tax assessments on properties that we currently own.

 

Depreciation andamortization from continuing operations decreased to $4.8 million as comparedto $11.6 million in 2007.   Thesignificant decrease is due to the fact that our student housing propertieswere classified as held for sale upon the announcement of our pending mergerwith ACC and, therefore, we ceased depreciation of our student housingproperties on February 12, 2008.

 

Interest expense fromcontinuing operations decreased to $13.2 million for the first quarter of 2007from $16.0 million in 2007.  Weexpect interest expense to decrease during the remainder of 2008, since the Companypaid down the remaining outstanding balance on its note facility with MerrillLynch in connection with the Military Housing Sale effected on April 30,2008.

 

*Student Housing Management*

 

*Revenue. **Expense reimbursements from relatedparties increased to $0.6 million for the first quarter of 2008 from zero in2007, as a result of the commencement of management services during 2007 forsix properties that we transferred into a joint venture with Fidelity RealEstate Group, as well as two properties in our joint venture with AEW Capital Management,LP.*

 

30

----

 

Expense reimbursementsfrom third parties remained relatively consistent during the three months endedMarch 31, 2008, as compared to the same period in the prior year.  Reimbursed expenses are comprised of payrollexpenses for on-site employees.  Weexpect expense reimbursements to decrease in 2008 as a result of thetermination of the management contracts we maintained with SCI Real EstateInvestments relating to five student housing properties sold during 2007.

 

Management fee incomefrom third parties remained relatively consistent during the three months endedMarch 31, 2008, as compared to that same period in the prior year.

 

*Expenses.***Propertyoperating expenses decreased from $2.1 million during the three months ended March 31,2007 to $1.5 million during the three months ended March 31, 2008,primarily due to the termination of the management contracts we maintained withSCI Real Estate Investment relating to five properties that we sold during2007. These expenses are comprised of payroll and general and administrativeexpenses directly associated with the operations of the Company’s owned andmanaged portfolios. While those employees who are directly responsible for theoversight of specific properties are charged directly to the StudentHousing-Owned segment, this segment staffs a full operations department. Thisdepartment includes those employees responsible for portfolio oversight, whichincludes regional vice presidents, regional property managers, regional leasingspecialists and the associated expenses such as travel directly related tothose employees who perform this function. Such expenses are considered part ofour student housing management operation.

 

Reimbursed expenses,which includes related party and third party managed properties remainedrelatively consistent during the three months ended March 31, 2008, ascompared to the same period in the prior year. Reimbursed expenses are comprised mostly of payroll expenses for on-siteemployees.

 

Income taxes for thethree months ended March 31, 2008 amounted to a $20,000 tax benefit versusno income tax expense for the same period in the prior year. Income taxesconsist primarily of taxes associated with the operations of our studenthousing taxable REIT subsidiary, which manages properties for third parties.

 

*Military Housing - Discontinued Operations*

 

The following tablesummarizes the revenue and expense information related to the military housingsegment, which is included in discontinued operations for the three monthsended March 31, 2008 and 2007 (in thousands).

 
| ** **                                                                                                                    | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                    | ** ** | **March 31, 2008**     | ** ** | **March 31 ,2007** | ** ** |
| **Revenue:**                                                                                                                  |       |                             |       |   |   |
| Expense reimbursements – related party                                                                                   |       | $                                | 23,463     |   | $ | 17,335 |   |
| Management fees – related party                                                                                          |       | 3,658                            |       | 2,421 |   |
| Other fee income – related party                                                                                         |       | 6,935                            |       | 6,138 |   |
| Other income                                                                                                                  |       | 120                              |       | 20 |   |
| Total revenue                                                                                                                 |       | 34,176                           |       | 25,914 |   |
|                                                                                                                          |       |                             |       |   |   |
| **Expenses:**                                                                                                                 |       |                             |       |   |   |
| Property operating expenses                                                                                                   |       | 2,209                            |       | 1,975 |   |
| Reimbursed expenses.                                                                                                          |       | 23,463                           |       | 17,335 |   |
| Depreciation and amortization                                                                                                 |       | 150                              |       | 118 |   |
| Total operating expenses                                                                                                      |       | 25,822                           |       | 19,428 |   |
|                                                                                                                          |       |                             |       |   |   |
| Income from discontinued operations before equity in earnings of  unconsolidated entities, minority interest and income taxes |       | 8,354                            |       | 6,486 |   |
| Equity in earnings of unconsolidated entities                                                                                 |       | 1,607                            |       | 1,029 |   |
| Income from discontinued operations before minority interest and  income taxes                                                |       | 9,961                            |       | 7,515 |   |
| Income tax expense                                                                                                            |       | 1,501                            |       | 1,458 |   |
| Income from military housing division                                                                                         |       | $                                | 8,460      |   | $ | 6,057 |   |

 

*Revenue.***Expensereimbursements increased to $23.5 million for the three months ended March 31,2008, as compared to $17.3 million for the three months ended March 31,2007. The increase is due primarily to the reimbursement of 

 

31

----

 

closingand transition expenses from our Navy Southeast Region and Vandenberg projects,both of which commenced operations during the fourth quarter of 2007; andincreases in the reimbursement of renovation expenses at our Fort Hamilton,Fort Eustis/Story, Navy Northeast, Fort Bliss/White Sands, Fort Carson, FortGordon, Navy Southeast Region and Vandenberg projects, offset by declines inreimbursement of renovation expenses at our Fort Stewart/Hunter, AETC Group Iand Carlisle Picatinny projects. The table below sets forth certain informationregarding the revenue from expense reimbursements for each of our militaryhousing projects for the three months ended March 31, 2008 and 2007.

 
| **Project**                                              | ** ** | **2008**               | ** ** | **2007**   | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                               | ** ** | **(in millions)** | ** ** |
| **Expense Reimbursements**                               | ** ** | ** **             | ** ** | ** ** | ** ** |
| Fort Stewart and Hunter Army Airfield Project            |       | $                      | 1.0        |       | $          | 2.1 |   |
| Fort Carson Project                                      |       | 1.5                    |       | 0.9        |       |
| Fort Hamilton Project                                    |       | 0.4                    |       | 0.1        |       |
| Walter Reed Army Medical Center and Fort Detrick Project |       | 0.2                    |       | 0.2        |       |
| Fort Eustis/Fort Story  Project                          |       | 1.2                    |       | 0.8        |       |
| Navy Northeast Region Project                            |       | 6.8                    |       | 4.8        |       |
| Fort Bliss/White Sands Missile Range Project             |       | 4.5                    |       | 1.9        |       |
| Fort Gordon Project                                      |       | 0.7                    |       | 0.4        |       |
| Carlisle/Picatinny Project.                              |       | 0.5                    |       | 1.3        |       |
| AETC Group I (1)                                         |       | 2.8                    |       | 4.8        |       |
| Navy Southeast Region Project (2)                        |       | 3.3                    |       | —     |       |
| Vandenberg Project (2)                                   |       | 0.6                    |       | —     |       |
| Total expense reimbursements                             |       | $                      | 23.5       |       | $          | 17.3 |   |

 

----

| (1)    | The AETC Group I project commenced operations in the  first quarter of 2007 and included $4.1 million of transition cost  reimbursements for the three months ending March 31, 2007. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                      |
| (2)    | The Navy Southeast Region and Vandenberg projects  commenced operations in the fourth quarter of 2007.                                                                                    |

 

Management fees fromrelated parties increased to $3.7 million for the three months ended March 31,2008, compared to $2.4 million for the three months ended March 31, 2007.The amount of management fees from related parties that we receive during afiscal period is affected by the number of housing units that we manage underour military housing projects during that period, which fluctuates based on thenumber of housing units that we construct/renovate or demolish during thatperiod.  Management fees from relatedparties increased during the three months ended March 31, 2008, ascompared to the three months ended March 31, 2007, due to the commencementof our AETC Group I project in the first quarter of 2007 and the commencementof our Navy Southeast Region and Vandenberg projects in the fourth quarter of2007.  The table below sets forth certaininformation regarding our revenue from management fees from related parties foreach of our military housing projects for the three months ended March 31,2008 and 2007.

 
| **Project**                                              | ** ** | **2008**               | ** ** | **2007** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                                               | ** ** | **(in millions)** | ** ** |
| Fort Stewart and Hunter Army Airfield Project            |       | $                      | 0.4        |     | $          | 0.4 |   |
| Fort Carson Project                                      |       | 0.3                    |       | 0.3      |       |
| Fort Hamilton Project                                    |       | 0.1                    |       | 0.1      |       |
| Walter Reed Army Medical Center and Fort Detrick Project |       | 0.1                    |       | 0.1      |       |
| Fort Eustis/Fort Story  Project                          |       | 0.2                    |       | 0.1      |       |
| Navy Northeast Region Project                            |       | 0.8                    |       | 0.8      |       |
| Fort Bliss/White Sands Missile Range Project             |       | 0.3                    |       | 0.3      |       |
| Fort Gordon Project                                      |       | 0.1                    |       | 0.1      |       |
| Carlisle/Picatinny Project                               |       | 0.1                    |       | 0.1      |       |
| AETC Group I Project (1)                                 |       | 0.3                    |       | 0.1      |       |
| Navy Southeast Region Project (2)                        |       | 0.8                    |       | —   |       |
| Vandenberg Project (2)                                   |       | 0.2                    |       | —   |       |
| Total                                                    |       | $                      | 3.7        |     | $          | 2.4 |   |

 

32

----

 

----

|        |                                                                                                  |
|--------|-------------------------------------------------------------------------------------------------------|
| (1)    | The AETC Group I project commenced in the first  quarter of 2007.                                     |
|   |                                                                                                  |
| (2)    | The Navy Southeast Region and Vandenberg projects  commenced operation in the fourth quarter of 2007. |

 

Other fee income fromrelated parties, which includes development and construction/renovation feesand business development fees, totaled $6.9 million for the three months ended March 31,2008, as compared to $6.1 million for the same period in 2007.  Of the 2008 amount, $6.7 million related todevelopment and construction/renovation fees, and $0.2 million related tobusiness development fees.  The amount ofother fee income from related parties that we receive during a fiscal period isaffected by the number of housing units that we construct or renovate under ourmilitary housing projects during that period, which will fluctuate based on thepoint at which we are during the initial development period for the project.  Generally, the majority of new constructionwork is completed during the beginning years of an initial development period,while construction/renovation work is completed throughout the initialdevelopment period. Other fee income from related parties increased during thethree months ended March 31, 2008, as compared to the three months ended March 31,2007, primarily due to increases in construction activities at our FortBliss/White Sands, Fort Carson, Fort Hamilton, Navy Northeast Region andCarlisle Picatinny projects; and the commencement of our AETC I project in thefirst quarter of 2007 and our Navy Southeast Region and Vandenberg projects inthe fourth quarter of 2007, offset by decreases in construction activity at ourFort Detrick and Walter Reed Army Medical Center, our Fort Eustis/Fort Storyproject and our Fort Gordon projects. Business development fees decreased to $0.2million for the three months ended March 31, 2008, as compared to $1.0million for the same period in 2007, primarily due to the expiration of one ofour business development agreements at December 31, 2007.  The table below sets forth certaininformation regarding the revenue from other fee income from related partiesfor each of our military housing projects for the three months ended March 31,2008 and 2007.

 
| **Project**                                              | ** ** | **2008**               | ** ** | **2007**   | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                               | ** ** | **(in millions)** | ** ** |
| **Development and Construction/Renovation Fees**         | ** ** | ** **             | ** ** | ** ** | ** ** |
| Fort Stewart and Hunter Army Airfield Project            |       | $                      | 0.2        |       | $          | 0.2 |   |
| Fort Carson Project                                      |       | 0.6                    |       | 0.2        |       |
| Fort Hamilton Project                                    |       | 0.1                    |       | —     |       |
| Walter Reed Army Medical Center and Fort Detrick Project |       | —                 |       | 0.2        |       |
| Fort Eustis/Fort Story  Project                          |       | 0.4                    |       | 0.7        |       |
| Navy Northeast Region Project                            |       | 1.2                    |       | 1.0        |       |
| Fort Bliss/White Sands Missile Range Project             |       | 1.8                    |       | 1.0        |       |
| Fort Gordon Project                                      |       | 0.2                    |       | 0.6        |       |
| Carlisle/Picatinny Project                               |       | 0.3                    |       | 0.1        |       |
| AETC I (1)                                               |       | 1.7                    |       | 1.1        |       |
| Navy Southeast Region Project (2)                        |       | 0.1                    |       | —     |       |
| Vandenberg Project (2)                                   |       | 0.1                    |       | —     |       |
| **Total Development and Construction Fees**              |       | $                      | 6.7        |       | $          | 5.1 |   |
| Business Development Fees                                |       | $                      | 0.2        |       | $          | 1.0 |   |
| **Total Other Fee Income – Related Parties**        |       | $                      | 6.9        |       | $          | 6.1 |   |

 

----

| (1)    | The AETC Group I project commenced operations in the  first quarter of 2007.                           |
|--------|--------------------------------------------------------------------------------------------------------|
|   |                                                                                                   |
| (2)    | The Navy Southeast Region and Vandenberg projects  commenced operations in the fourth quarter of 2007. |

 

Equity in earnings ofunconsolidated entities, consisting of equity income and preferred returns fromour military housing project joint ventures, totaled $1.6 million for the threemonths ended March 31, 2008, as compared to $1.0 million for the threemonths ended March 31, 2007.   Theincrease was primarily due to preferred returns earned on our AETC Group I andVandenberg projects, and an increase in preferred returns earned on our FortCarson project due to an increase in rental revenue and net operatingincome.  The table below sets forthcertain information regarding equity in earnings of unconsolidated entities forthe three months ended March 31, 2008 and 2007.

 

33

----

 
| **Project**                   | ** ** | **2008**               | ** ** | **2007** | ** ** |
|-------------------------------|------------|------------------------|------------|----------|------------|
| ** **                    | ** ** | **(in millions)** | ** ** |
| Fort Carson Project           |       | $                      | 1.0        |     | $          | 0.7 |   |
| Navy Northeast Region Project |       | 0.2                    |       | 0.2      |       |
| AETC Group I Project (1)      |       | 0.2                    |       | 0.1      |       |
| Vandenberg Project (2)        |       | 0.2                    |       | —   |       |
| Total                         |       | $                      | 1.6        |     | $          | 1.0 |   |

 

----

(1)    TheAETC Group I project commenced operations in the first quarter of 2007.

(2)    TheVandenberg Project commenced operations in the fourth quarter of 2007.

 

*Expenses.***Propertyoperating expenses include costs related to operating the military housingsegment of our business, such as the compensation expense related to ourmilitary housing personnel located in our corporate headquarters. These costsincreased to $2.2 million in for the three months ended March 31, 2008,from $2.0 million in the three months ended March 31, 2007. The increasewas due to increases in (i) our renovation company operations and (ii) managementand administrative expenses related to our overall expansion of our business.

 

Reimbursed expensesincreased to $23.5 million for the three months ended March 31, 2008 from$17.3 million for the three months ended March 31, 2007, primarilydue to payroll and renovation expenses related to the 12 military housingprojects in operation as of March 31, 2008, as compared with the sevenmilitary housing projects in operation as of March 31, 2007, offset byanticipated declines in construction and renovation activity at certainprojects.

 

*Income Taxes.***The effective tax rate on income taxes resulting from theportion of income that is earned in our Military Housing taxable REITsubsidiary remained relatively constant at 35.7% in 2008 versus 36.0% in 2007.

 

***Corporate***

*** ***

Rental revenue andexpense reimbursements, which were recognized with respect to the portion ofour corporate headquarters leased to entities affiliated with Gary M. Holloway, Sr.,and payroll and related expenses reimbursed by entities affiliated with Mr. Hollowayfor the provision of common services, remained relatively constant during thethree months ended March 31, 2008 and 2007.

 

Other income, consistingprimarily of interest income, decreased by $112,000 primarily due to decreasedovernight cash investments.

 

Administrative expenses,primarily relating to management of our corporate office, accounting, legal,human resources, information technology and acquisition departments, decreasedto $3.7 million for the three months ended March 31, 2008 from $4.7million in 2007, primarily due to decreases in professional fees, as well astraining costs incurred during 2007 associated with implementation of newleasing software relating to our Student Housing division as well as other onetime software licensing costs, and a decrease in other taxes.

 

Transactional expenses of$2.1 million consisted of legal, investment banking and other expensesassociated with the Military Housing Sale and the pending Merger.

 

Interest expensedecreased to $0.1 million for the three months ended December31, 2008 from$1.5 million in 2007, primarily due to the presentation of interest on ournote facility presented in discontinued operations in 2008, as the facility wasterminated in connection with the Military Housing Sale.  This note facility was not in place duringthe first quarter of 2007.

 

**Liquidity and Capital Resources**

 

Short-term liquidityrequirements consist primarily of funds necessary to pay operating expenses andother costs. These expenses and costs include (i) recurring maintenanceand capital expenditures to maintain and lease our properties, (ii) interestexpense and scheduled principal payments on outstanding indebtedness, (iii) realestate taxes and insurance, (iv) corporate salaries, employee benefits andother corporate overhead and administrative expenses, and (v) distributionsto shareholders and unitholders of our operating partnership. During the firstquarter of 2008, our short-term liquidity needs 

 

34

----

 

were funded primarilythrough our three-year $100.0 million revolving note facility with MerrillLynch, Pierce, Fenner & Smith Incorporated. In connection withconsummation of the Military Housing Sale, we terminated this facility on April 30,2008. We currently expect that any of our short-term and long-term liquidityneeds may be met through our working capital on hand, including approximately $67.0million in proceeds from the Military Housing Sale that we have retained as areserve fund through the anticipated Merger that is expected to occur in thesecond quarter of 2008. In the event that the Merger is not consummated,management may seek to obtain a replacement credit line/facility to be securedby the Company’s student housing operations and properties in order to fundoperations going forward. While management expects the $67.0 million ofretained proceeds from the Military Housing Sale to provide sufficientliquidity through the anticipated closing of the Merger or until a new creditfacility can be established if the Merger is not completed, there can be noassurance that we will be able to obtain a replacement credit line/facility onterms that are favorable to us or at all.

 

We elected to be treatedas a REIT for federal income tax purposes commencing with our taxable yearended December 31, 2004. As a REIT, we are required to distribute at least90% 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. Futuredividends will be declared at the discretion of our Board of Trustees and willdepend on our actual cash flow, our financial condition, capital requirements,the annual distribution requirements under the REIT provisions of the Code andother such factors as our Board of Trustees deems relevant. For the firstquarter of 2008, we declared a quarterly dividend distribution of $0.165 percommon share, and at the same time, our operating partnership paid adistribution of $0.165 per unit to holders of limited partnership interests inour operating partnership. Under the terms of the Merger Agreement, we areprohibited from making quarterly distributions to our shareholders goingforward. To the extent we do not complete the Merger, we cannot assure you thatwe will continue to have cash available for distributions at historical levelsor at all. Any distributions we pay in the future will depend upon our actualresults of operations, economic conditions and other factors that could differmaterially from our current expectations. To the extent that our cash flow fromoperations is insufficient to fund our anticipated dividend distributions, wemay seek to borrow funds through other third-party debt financing or we maylower our dividend distribution. Our available cash for distributions will beaffected by a number of factors, including: the revenue we receive from ourstudent housing properties; revenues from management fees in connection withmanagement services that we will provide for student housing properties ownedby others; our operating expenses; interest expense; costs related to ourpending litigation; and any unanticipated expenditures. For more informationregarding risk factors that could materially adversely affect our ability topay dividend distributions to our shareholders and our results of operations,please see the section of our Annual Report on Form 10-K for the yearended December 31, 2007 titled “Risk Factors” under Part I,Item 1A thereof.

 

With regard to ourcurrently owned student housing properties, we do not have any materialshort-term capital commitments, other than with respect to our short-termcapital needs relating to the general expenses and costs associated withoperating and managing these properties, including anticipated third quarterturnover costs. Since the beginning of 2007, our management has placed lessemphasis on the acquisition of additional student housing properties, and hascontinued to focus on the operational performance of our existing studenthousing properties and development projects. In the event that the Merger withACC is not completed and we continue our student housing operations, however,we will require funds in connection with any future acquisitions of studenthousing properties. See the section above titled “*Overview—Student Housing—Owned Properties*” for a moredetailed discussion of management’s expectations regarding funding sources forany future property acquisitions. During the first quarter of 2008, we did notmake scheduled debt service payments on mortgage debt relating to five of ourwholly-owned student housing properties, which collectively have outstandingprincipal balances totaling $64.3 million. These properties had previously been identified as having insufficientcash flow to fund debt service, and as a result, were placed on the market forsale.  Since we have been unable tosecure buyers at purchase prices above the existing mortgage debt on theseproperties, and the mortgage debt is non-recourse to the Company, we initiateddiscussions with the lenders to reach a work-out of the debt and/or surrenderthe properties to receivership.  Inaddition, as of March 31, 2008, we were in default under certain debtservice coverage provisions relating to the mortgage indebtedness covering ourtwo student housing properties owned through a joint venture with AEW CapitalManagement, LP (“AEW”).  The totalmortgage debt on these properties is approximately $32.0 million, and we alsohave an existing guaranty with the lender for $8.0 million. We are indiscussions with both the lender and AEW to effectuate a short-term relief ofthe covenants and an acquisition of our joint venture interests and theassumption of the guaranty by AEW.  Inthe event we are unable to negotiate a favorable outcome with the lender forthese properties, then the lender could, in addition to other remedies,exercise its right to accelerate the debt and call the guaranty.

 

35

----

 

Neither the non-paymentof mortgage debt relating to the five wholly-owned student housing properties,nor our default relating to the two joint venture student housing properties,each referenced above will affect the requirement that ACC effect the Merger(assuming all other closing conditions are met). In the event that the Mergeris not consummated, then we would continue to work with the lenders and AEW tonegotiate a work-out of the debt and/or seek to amend the ongoing debt-servicecovenant requirements and effectuate the acquisition of our interests.

 

Long-termliquidity requirements with respect to our student housing segment consistsprimarily of amounts necessary to fund scheduled debt maturities, renovationsand other non-recurring capital expenditures that need to be made periodicallyat our properties, and the costs associated with acquisitions of studenthousing properties and awards or acquisitions of military housing privatizationprojects that we pursue. Historically, we have satisfied our long-term liquidityrequirements through various sources of capital, including existing workingcapital, cash provided by operations, and long-term mortgage indebtedness.During the first quarter of 2008, our long-term liquidity requirements weresatisfied primarily through cash generated by operations and not used to funddistributions and the additional external financing sources discussed above. Wealso would expect to fund our long-term liquidity requirements primarilythrough cash generated by operations and sales and not used to funddistributions and the additional external financing sources discussed above.

 

**Item3.****           ****Quantitativeand Qualitative Disclosure About Market Risk**

 

Givencurrent market conditions, our strategy favors fixed-rate, secured debt overvariable-rate debt to minimize our exposure to increases in interest rates. Asof March 31, 2008, 96.7% of the outstanding principal amount of our notespayable secured by properties we owned had fixed interest rates with aweighted-average rate of 5.32%. The remaining 3.3% of outstanding principalamount of our notes payable and our Merrill Lynch Note Facility at March 31,2008, had variable interest rates primarily equal to LIBOR plus 1.90%.

 

As of March 31,2008, we had $55.1 million in funds drawn from our Merrill Lynch Note Facility,bearing a variable interest rate of 4.46%.

 

As of March 31,2008, based on our variable rate debt balances described above, if interestrates were to increase by 1.0%, our interest expense would have increased byapproximately $1.0 million on an annual basis.

 

**Item4.****         ****Controls andProcedures**

 

*(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 Exchange Act isrecorded, processed, summarized and reported within the time period specifiedin the Securities and Exchange Commission’s rules and regulations and thatsuch information is accumulated and communicated to management, including ourprincipal executive officer and principal financial officer, as appropriate, toallow timely decisions regarding required disclosure.

 

As required by Rule 13a-15(b) promulgatedunder the Exchange Act, our management, with the participation of our chiefexecutive officer and chief financial officer, evaluated the design andoperating effectiveness as of March 31, 2008 of our disclosure controlsand procedures, as defined in Rule 13a-15(e) promulgated under theExchange Act.  Based on this evaluation,our chief executive officer and chief financial officer concluded that ourdisclosure controls and procedures were effective as of March 31,2008.  We believe that a controls system,no matter how well designed and operated, cannot provide absolute assurancethat the objectives of the controls system are met, and no evaluation ofcontrols can provide absolute assurance that all control issues and instancesof fraud, if any, within a company have been detected.

 

*(b)**         **Change inInternal Control over Financial Reporting.*

 

There have been nochanges in our internal control over financial reporting during our most recentfiscal quarter that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

36

----

 

**PART II — OTHER INFORMATION**

 

**Item1.****           ****LegalProceedings**

 

As of November 2,2007, the Company had entered into a settlement agreement with the leadplaintiffs in connection with a class action lawsuit alleging violations ofSections 11, 12(a)(2) and 15 of the Securities Act and Sections 10(b) and20 of the Exchange Act, and Rule 10b-5. The class action lawsuit had been filed in the United States DistrictCourt for the Eastern District of Pennsylvania, naming as defendants GMHCommunities Trust, Gary M. Holloway, Sr., and Bradley W. Harris, and wasbrought on behalf of a class of purchasers of the Company’s securities between May 5,2005 and March 10, 2006 based upon the Company’s restatement of certainfinancial results.  The Courtpreliminarily approved the settlement agreement by Order dated February 13,2008 and scheduled a Settlement Hearing for April 25, 2008.  Under the terms of the settlement agreement,all claims against the Company and related defendants would be dismissedwithout admission or presumption of liability or wrongdoing.  An order of the Court providing grantingfinal approval of the settlement agreement was entered on April 28, 2008.Appeals relating to the settlement must be filed within 30 days of the date ofthe order. The Company can provide no assurance that an appeal will not befiled, and if an appear is filed and the settlement approval is reversed, thenthe Company would be required to continue to defend itself.

 

The Company also issubject to routine litigation, claims and administrative proceedings arising inthe ordinary course of business. Other than the matters described above, we arenot involved in any other material litigation nor, to our knowledge, is anymaterial litigation pending or threatened against us.

 

**Item 1A.Risk Factors**

 

In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2007, which could materially affect ourbusiness, 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.

 

**Item2.****           ****UnregisteredSales of Equity Securities and Use of Proceeds**

 

None.

 

**Item3.****           ****Defaults UponSenior Securities**

 

None.

 

**Item4.****           ****Submission ofMatters to a Vote of Security Holders**

 

None.

 

**Item5.****           ****OtherInformation**

 

On May 8, 2008, theCompany, through its subsidiary 353 Associates, entered into an Agreement ofSale with an entity owned by Gary M. Holloway, President and CEO of theCompany, relating to a sale of the corporate headquarters to Mr. Holloway. Aspreviously announced by the Company in connection with the pending Merger, Mr.Holloway had entered into a Put Option agreement that allowed the Company toexercise an option to put the sale of the building to Mr. Holloway prior to theconsummation of the Merger for a total of $8.0 million, in the event that theCompany was unable to identify an unaffiliated third-party buyer. The terms ofthe agreement provide that Mr. Holloway is required to place an initial depositof $240,000 into escrow within three business days after the effective date ofthe agreement and that the closing on the sale of the building will occurimmediately prior to the consummation of the Merger. The agreement alsoprovides that either the buyer or seller may terminate the agreement uponwritten notice in the event that the merger agreement with ACC is terminated inaccordance with Article IX thereof.

** **

**37**

----

** **

**Item6.****           ****Exhibits**

** **
| Exhibit | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|---------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1    |       | Agreement and Plan of Merger, dated as of  February 11, 2008, by and among GMH Communities Trust, GMH  Communities, Inc., GMH Communities, LP, American Campus  Communities, Inc., American Campus Communities Operating Partnership LP,  American Campus Communities Acquisition LLC and American Campus Communities  Acquisition Limited Partnership LP. (Incorporated by reference from the  Registrant’s Current Report on Form 8-K, as filed with the Securities  and Exchange Commission on February 14, 2008). |
| 10.2    |       | Securities Purchase  Agreement, dated as of February 11, 2008, by and among GMH Communities  Trust, GMH Communities, Inc., Balfour Beatty, Inc. and, solely for  purposes of Article 8 therein, Balfour Beatty plc(Incorporated by  reference from the Registrant’s Current Report on Form 8-K, as filed  with the Securities and Exchange Commission on February 14, 2008).                                                                                                                                     |
| 10.3    |       | Put Option to Sell  Agreement, dated as of February 11, 2008, by and between GMH  Communities, LP and Gary M. Holloway, Sr. (Incorporated by reference  from the Registrant’s Current Report on Form 8-K, as filed with the  Securities and Exchange Commission on February 14, 2008).                                                                                                                                                                                                                                     |
| 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).            |

 

38

----

 

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: May 12,  2008 | /s/ Gary M. Holloway, Sr.                                                      |
|                     | Gary M. Holloway, Sr.                                                          |
|                     | President and Chief Executive Officer                                               |
|                     |                                                                                |
|                     |                                                                                |
|                     | /s/ J. Patrick O’Grady                                                         |
|                     | J. Patrick O’Grady                                                             |
|                     | Executive Vice President and Chief Financial Officer  (Principal Financial Officer) |

 

39

----

 

EXHIBIT INDEX

 
| Exhibit  | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|----------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **10.1** | ** ** | **Agreement  and Plan of Merger, dated as of February 11, 2008, by and among GMH  Communities Trust, GMH Communities, Inc., GMH Communities, LP, American  Campus Communities, Inc., American Campus Communities Operating  Partnership LP, American Campus Communities Acquisition LLC and American  Campus Communities Acquisition Limited Partnership LP. (Incorporated by  reference from the Registrant’s Current Report on Form 8-K, as filed  with the Securities and Exchange Commission on February 14, 2008).** |
| **10.2** | ** ** | **Securities  Purchase Agreement, dated as of February 11, 2008, by and among GMH  Communities Trust, GMH Communities, Inc., Balfour Beatty, Inc. and,  solely for purposes of Article 8 therein, Balfour Beatty  plc(Incorporated by reference from the Registrant’s Current Report on Form 8-K,  as filed with the Securities and Exchange Commission on February 14,  2008).**                                                                                                                                    |
| **10.3** | ** ** | **Put  Option to Sell Agreement, dated as of February 11, 2008, by and between  GMH Communities, LP and Gary M. Holloway, Sr. (Incorporated by reference  from the Registrant’s Current Report on Form 8-K, as filed with the  Securities and Exchange Commission on February 14, 2008).**                                                                                                                                                                                                                                     |
| **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).**            |

 

40

----