** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C.  20549**

** **

** **

**FORM 10-Q**

** **

** **

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

** **

**For thequarterly period ended September 30, 2004**

** **

| 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**

** **

** **

**GMH COMMUNITIES TRUST**

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

 

 

**Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes **o   No ý*

 

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

 

**On December 13, 2004, 30,350,989 of the registrant’s commonshares of beneficial interest, $0.001 par value, were outstanding.**

 

*  Theregistrant has not been subject to the filing requirements for the past 90 daysas it completed its initial public offering on November 2, 2004.  The registrant has filed all reports requiredto be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934since it became subject to such filing requirements.

 

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GMHCOMMUNITIES TRUST

INDEXTO FORM 10-Q

 

 

 

 
| PART I — FINANCIAL  INFORMATION |
|--------------------------------------|
| Item 1.                              |   | Financial Statements |
| Item  2.                             |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| Item  3.                             |   | Quantitative  and Qualitative Disclosure About Market Risk |
| Item 4.                              |   | Controls and Procedures |
| Part II — OTHER INFORMATION     |
| Item 1.                              |   | Legal Proceedings |
| Item  2.                             |   | Unregistered  Sales of Equity Securities and Use of Proceeds |
| Item 3.                              |   | Defaults Upon  Senior Securities |
| Item  4.                             |   | Submission  of Matters to a Vote of Security Holders |
| Item 5.                              |   | Other Information |
| Item 6.                              |   | Exhibits and  Reports on Form 8-K |

 

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# ** **

# **PARTI — FINANCIAL INFORMATION**

 

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

 

Separatefinancial statements for GMH Communities Trust have not been presented as GMHCommunities Trust had no operations from inception to September 30, 2004.  Operations for GMH Communities Trustcommenced upon the consummation of the initial public offering of its commonshares on October 27, 2004.  Therefore,combined financial statements for GMH Communities Trust’s predecessors entities(“The GMH Predecessor Entities”) have been presented herein as of September 30,2004 and December 31, 2003, and for the three and nine months ended September30, 2004 and 2003.

 

**THE GMHPREDECESSOR ENTITIES**

**CONDENSEDCOMBINED BALANCE SHEETS**

(In thousands)

 
| ** **                                | ** ** | **September 30,**

**2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|------------------------|------------|
| ** **                                | ** ** | **(unaudited)**             | ** ** | ** **             | ** ** |
| **ASSETS**                                |       |                        |       |                   |       |
| Real estate investments:                  |       |                        |       |                   |       |
| Student housing properties                |       | $                           | 258,279    |                   | $          | — |   |
| Accumulated depreciation                  |       | (1,012                      | )          | —                 |       |
|                                      |       | 257,267                     |       | —                 |       |
| Corporate assets:                         |       |                        |       |                   |       |
| Corporate assets                          |       | 14,598                      |       | 14,499                 |       |
| Accumulated depreciation                  |       | (3,148                      | )          | (2,707                 | )          |
|                                      |       | 11,450                      |       | 11,792                 |       |
| Cash and cash equivalents                 |       | 3,433                       |       | 515                    |       |
| Restricted cash                           |       | 1,966                       |       | —                 |       |
| Accounts and other receivables:           |       |                        |       |                   |       |
| Related party                             |       | 5,388                       |       | 610                    |       |
| Third party                               |       | 816                         |       | 470                    |       |
| Investments in joint ventures             |       | 4,377                       |       | 2,345                  |       |
| Deferred contracts costs, net             |       | 5,256                       |       | 302                    |       |
| Deferred financing costs, net             |       | 657                         |       | 30                     |       |
| Deposits                                  |       | 3,864                       |       | —                 |       |
| Lease intangibles, net                    |       | 2,565                       |       | —                 |       |
| Other assets                              |       | 7,807                       |       | 82                     |       |
| Total assets                              |       | $                           | 304,846    |                   | $          | 16,146 |   |
| **LIABILITIES AND OWNERS’ EQUITY**   |       |                        |       |                   |       |
| Notes payable                             |       | $                           | 220,801    |                   | $          | 10,977 |   |
| Accounts payable:                         |       |                        |       |                   |       |
| Related party                             |       | 123                         |       | —                 |       |
| Third party                               |       | 6,041                       |       | 1,507                  |       |
| Accrued expenses                          |       | 8,017                       |       | —                 |       |
| Accrued profits interests                 |       | 33,180                      |       | —                 |       |
| Due to owner                              |       | 4,375                       |       | 68                     |       |
| Other liabilities                         |       | 2,527                       |       | —                 |       |
| Total liabilities                         |       | 275,064                     |       | 12,552                 |       |
| Owners’ equity                       |       | 29,782                      |       | 3,594                  |       |
| Total liabilities and owners’ equity |       | $                           | 304,846    |                   | $          | 16,146 |   |

 

*See accompanying notes.*

* *

 

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**THE GMHPREDECESSOR ENTITIES**

**CONDENSEDCOMBINED STATEMENTS OF OPERATIONS**

(Unaudited, in thousands)

 
| ** **                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                     | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Revenue:**                   |       |                                  |       |                                 |       |   |   |   |   |
| Rent and other property income |       | $                                     | 6,753      |                                 | $          | 147 |   | $ | 7,023 |   | $ | 438 |   |
| Expense reimbursements:        |       |                                  |       |                                 |       |   |   |   |   |
| Related party                  |       | 8,702                                 |       | 213                                  |       | 16,669 |   | 310 |   |
| Third party                    |       | 1,906                                 |       | 1,651                                |       | 5,475 |   | 5,216 |   |
| Management fees:               |       |                                  |       |                                 |       |   |   |   |   |
| Related party                  |       | 967                                   |       | 480                                  |       | 2,683 |   | 1,557 |   |
| Third party                    |       | 752                                   |       | 549                                  |       | 3,430 |   | 2,242 |   |
| Other fee income-related party |       | 2,115                                 |       | —                               |       | 4,174 |   | — |   |
| Other income                   |       | 141                                   |       | 86                                   |       | 493 |   | 409 |   |
| Total revenue                  |       | 21,336                                |       | 3,126                                |       | 39,947 |   | 10,172 |   |
| **Operating Expenses:**        |       |                                  |       |                                 |       |   |   |   |   |
| Property operating expenses    |       | 5,808                                 |       | 1,176                                |       | 9,851 |   | 5,079 |   |
| Reimbursed expenses            |       | 10,608                                |       | 1,864                                |       | 22,144 |   | 5,526 |   |
| Real estate taxes              |       | 490                                   |       | —                               |       | 490 |   | — |   |
| Administrative expenses        |       | 2,172                                 |       | 777                                  |       | 4,488 |   | 2,695 |   |
| Profits interests expense      |       | 33,180                                |       | —                               |       | 33,180 |   | — |   |
| Depreciation and amortization  |       | 1,770                                 |       | 220                                  |       | 2,188 |   | 630 |   |
| Interest                       |       | 1,722                                 |       | 81                                   |       | 1,880 |   | 265 |   |
| Total expenses                 |       | 55,750                                |       | 4,118                                |       | 74,221 |   | 14,195 |   |
| **Net loss**                   |       | $                                     | (34,414    | )                                    | $          | (992 | ) | $ | (34,274 | ) | $ | (4,023 | ) |

 

 

 

*See accompanying notes.*

 

 

 

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**THE GHMPREDECESSOR ENTITIES**

**CONDENSEDCOMBINED STATEMENTS OF CASH FLOWS**

**(Unaudited,in thousands)**

 
| ** **                                                                | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                | ** ** | **September, 30**     | ** ** |
| ** **                                                                | ** ** | **2004**              | ** ** | **2003** | ** ** |
| **Cash flows from operating activities:**                                 |       |                  |       |   |   |
| Net loss                                                                  |       | $                     | (34,274    | ) | $ | (4,023 | ) |
| Adjustments to reconcile net loss to net cash from operating  activities- |       |                  |       |   |   |
| Depreciation and amortization                                             |       | 2,188                 |       | 615 |   |
| Amortization of deferred loan costs                                       |       | 36                    |       | — |   |
| Amortization of debt premiums                                             |       | (266                  | )          | — |   |
| Equity in income from investment in joint venture properties              |       | (70                   | )          | — |   |
| Changes in operating assets and liabilities:                              |       |                  |       |   |   |
| Accounts receivable                                                       |       | (346                  | )          | (631 | ) |
| Prepaid expenses and other assets                                         |       | (1,108                | )          | (38 | ) |
| Payment of deferred contract costs                                        |       | (4,954                | )          | (1,070 | ) |
| Due from related parties                                                  |       | (4,778                | )          | — |   |
| Other accounts receivable                                                 |       | —                |       | 252 |   |
| Accounts payable and accrued expenses                                     |       | 14,171                |       | 502 |   |
| Accrued profits interest                                                  |       | 33,180                |       | — |   |
| Accrued interest payable                                                  |       | 907                   |       | — |   |
| Due to related parties                                                    |       | 123                   |       | 487 |   |
| Net from operating activities                                             |       | 4,809                 |       | (3,906 | ) |
|                                                                      |       |                  |       |   |   |
| **Cash flows from investing activities:**                                 |       |                  |       |   |   |
| Property acquisitions                                                     |       | (120,152              | )          | — |   |
| Deposits paid on future acquisitions                                      |       | (3,864                | )          | — |   |
| Capitalized expenditures                                                  |       | (75                   | )          | — |   |
| Restricted cash                                                           |       | (1,966                | )          | — |   |
| Investments in joint ventures                                             |       | (3                    | )          | — |   |
| Purchase of management contracts                                          |       | (1,186                | )          | — |   |
| Net cash from investing                                                   |       | (127,246              | )          | — |   |
|                                                                      |       |                  |       |   |   |
| **Cash flows from financing activities:**                                 |       |                  |       |   |   |
| Owner distributions                                                       |       | (31,652               | )          | (2,622 | ) |
| Owner contributions                                                       |       | 90,688                |       | 7,306 |   |
| Proceeds from mortgage notes payable                                      |       | 69,536                |       | — |   |
| Short-term borrowings from owner                                          |       | 3,697                 |       | — |   |
| Payment of financing costs                                                |       | (663                  | )          | — |   |
| Repayment of notes payable                                                |       | (808                  | )          | (621 | ) |
| Costs related to initial public offering                                  |       | (5,443                | )          |   |   |
| Net cash from financing activities                                        |       | 125,355               |       | 4,063 |   |
|                                                                      |       |                  |       |   |   |
| Net increase in cash and cash equivalents                                 |       | 2,918                 |       | 157 |   |
|                                                                      |       |                  |       |   |   |
| Cash and cash equivalents, beginning of year                              |       | 515                   |       | 96 |   |
|                                                                      |       |                  |       |   |   |
| Cash and cash equivalents, end of period                                  |       | $                     | 3,433      |   | $ | 253 |   |
|                                                                      |       |                  |       |   |   |
| **Supplemental information**                                              |       |                  |       |   |   |
| Real estate acquired by assuming debt                                     |       | $                     | 128,622    |   | $ | — |   |
|                                                                      |       |                  |       |   |   |
| Property distributed at net book value                                    |       | $                     | (381       | ) | $ | — |   |
|                                                                      |       |                  |       |   |   |
| Furniture and computers contributed at net book value                     |       | $                     | 463        |   | $ | — |   |

 

*See accompanying notes.*

 

 

 

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The GMH Predecessor Entities

 

Notes to Condensed Combined Financial Statements

 

September30, 2004

(Unaudited)

 

**1. Organization and Basis ofPresentation**

 

The management of The GMH Predecessor Entities(defined below) prepared the condensed combined financial statements pursuantto the rules and regulations of the Securities and Exchange Commission (the “SEC”).Certain information and footnote disclosures normally included in financialstatements prepared in accordance with U.S. generally accepted accountingprinciples have been condensed or combined pursuant to such rules andregulations, although we believe that the disclosures are adequate to make theinformation presented not to be misleading. The condensed combined financialstatements should be read in conjunction with the audited financial statementsand the notes thereto of GMH Communities Trust and the audited financialstatements of The GMH Predecessor Entities and the notes thereto, referred toas we or the Company, included in the final prospectus relating to our initialpublic offering as filed with the SEC on October 29, 2004. In management’sopinion, all adjustments, consisting solely of normal recurring adjustments,necessary to present fairly the combined financial position of The GMH PredecessorEntities and the combined results of their operations and their cash flows, areincluded. The results of operations for such interim periods are notnecessarily indicative of the results for the full year.  The historical operationsprior to completion of the initial public offering that are described in thisreport refer to the operations of College Park Management, Inc., GMH MilitaryHousing, LLC, 353 Associates, L.P., Corporate Flight Services, LLC, and GMHCommunities, LP which are collectively referred to as The GMH PredecessorEntities.

 

***Organization***

GMH Communities Trust intends to qualify as areal estate investment trust, or REIT, under the Internal Revenue Code of 1986,as amended.  We completed our initialpublic offering in November 2004, pursuant to which we sold an aggregate of30,350,989 common shares of beneficial interest at an offering price of $12.00per share, and raised an aggregate of $330.9 million in net proceeds, afterdeducting the underwriters’ discount, a structuring fee relating to financialadvisory services and other offering related expenses.  We contributed the net proceeds from theoffering to GMH Communities, LP, a Delaware limited partnership that we referto as our operating partnership, in exchange for units of partnershipinterest.  As of December 13, 2004, weowned 29,769,820 units of limited partnership interest, and through awholly-owned subsidiary, GMH Communities GP Trust, owned 100% of the generalpartnership interest in our operating partnership.

 

Prior to our initial public offering, ouroperating partnership commenced operations on July 27, 2004, when Gary M.Holloway, our chairman, president and chief executive officer, Vornado RealtyTrust, and certain entities affiliated with Mr. Holloway and Vornado enteredinto a contribution agreement relating to the contribution of various assets toGMH Communities, LP.  Under the terms ofthe contribution agreement, Mr. Holloway contributed equity interests owned byhim and by entities affiliated with him in the The GMH Predecessor Entities andother related assets in exchange for Class A partnership interests in GMHCommunities, LP, and Vornado agreed to contribute up to $159.0 million to ouroperating partnership in exchange for Class B partnership interests.  In connection with its investment in ouroperating partnership, Vornado also purchased a warrant for $1.0 million toacquire, at its option, a number of units of limited partnership in ouroperating partnership, common shares in GMH Communities Trust or a combinationof both, representing a 38.24% economic interest in our partnership or GMHCommunities Trust, as the case may be, immediately prior to completion of ourinitial public offering.

 

In accordance with the terms of thepartnership agreement between Mr. Holloway and Vornado, and concurrent with thecompletion of our initial public offering on November 2, 2004, we paidapproximately $77.3 million to Vornado relating to the redemption of all ofVornado’s general and limited partnership interests in GMH Communities, LP,based on Vornado’s $113.8 million contribution to our operating partnership asof the date of the offering, plus a preferential return in the amount of $13.5million, and after giving effect to the surrender by Vornado of $50.0 millionin value of its pre-offering partnership interest in our operating partnership,as payment for the portion of its warrant required to be exercised uponcompletion of our initial public offering under the terms of the warrant.  Our historical results through September 30,2004 do not reflect the increase in minority interest expense associated withthis preferential return that will be recorded in the fourth quarter of 2004.

 

Prior to our initial public offering, Vornadoand Gary M. Holloway were the sole equity holders of our operating partnershipand each held, through affiliated entities, general partnership interests inour operating partnership.  Concurrent withthe closing of the Company’s initial public offering on November 2, 2004, webecame the sole general partner of our operating partnership.  Prior to completion of our initial publicoffering, the Company had no operations.

 

We, through our operating partnership, are aself-advised, self-managed, specialty housing company engaged in the ownership,operation, management, leasing, acquisition, expansion and renovation of 

 

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residential housing units located near majoruniversities and on or near military bases in the United States through directownership and through investments in joint ventures. We also provide realestate facility management, construction, development, renovation and otheradvisory services through subsidiaries of our operating partnership to thirdparties and to joint ventures in which the Company is invested.

 

***Basis of Presentation***

Prior to our initial public offering, Gary M.Holloway sponsored and approved a business combination plan involving certainentities and other assets owned by him, including 353 Associates, L.P., CollegePark Management, Inc., GMH Military Housing LLC, Corporate Flight Services LLC,and other entities holding a 10% interest in four student housing properties, whichwe collectively refer to, together with our operating partnership, as ourpredecessor entities or The GMH Predecessor Entities.  The financial statements of The GMHPredecessor Entities included herein present the combined financial position ofour predecessor entities as of September 30, 2004 and December 31, 2003 and thecombined results of operations during the three- and nine-month periods endedSeptember 30, 2004 and 2003, and we have described our operations as if thehistorical operations of our predecessor entities were conducted by the Companyduring such periods.  Such results ofoperations also include the operating partnership and the 10% interest in fourstudent housing properties from July 27, 2004 through September 30, 2004.

 

353 Associates, L.P. owns and operates a43,866 square foot commercial office building located in Newtown Square,Pennsylvania.  In connection with the completionof our initial public offering, Gary M. Holloway and an entity wholly-owned byhim contributed 100% of the equity interests in 353 Associates, L.P. to ouroperating partnership.  The building iscurrently used as the Company’s corporate headquarters.  353 Associates, L.P. historically leased thebuilding to certain of The GMH Predecessor 

 

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Entities and other entities owned orcontrolled by Gary M. Holloway.  We willcontinue to lease a portion of the building to certain other entities owned orcontrolled by Gary M. Holloway that were not contributed to the Company inconnection with our initial public offering.

 

College Park Management, Inc. performsproperty management and asset management services for residential apartmentproperties leased to students at colleges and universities located throughoutthe United States.  In connection withthe formation of our operating partnership on July 27, 2004, Gary M. Holloway consentedto the merger of College Park Management, Inc. with and into College ParkManagement, LLC, a wholly-owned subsidiary of our operating partnership, andcontributed 100% of the equity interests in College Park Management, Inc. toour operating partnership.  Gary M.Holloway has retained an ownership interest in certain of the properties thatwere managed by College Park Management, Inc., and which properties arecurrently managed by College Park Management, LLC through its wholly-ownedsubsidiary, College Park Management TRS, Inc.

 

GMH Military Housing LLC, through itswholly-owned subsidiaries, has engaged in the development, construction,renovation and management of family housing units located on military basesthroughout the United States.  On July27, 2004, Gary M. Holloway contributed 100% of the outstanding equity interestsin GMH Military Housing LLC to our operating partnership, which included thecontribution of the equity interests in each of the wholly-owned subsidiariesof GMH Military Housing LLC: GMH Military Housing Investments LLC, GMH MilitaryHousing Development, LLC, GMH Military Housing Construction, LLC and GMHMilitary Housing Management, LLC.  Uponcompletion of the Company’s initial public offering, GMH Military Housing, LLCtransferred 100% of the outstanding membership interests in GMH MilitaryHousing Investments LLC to our operating partnership.  GMH Military Housing, LLC will make anelection to be treated as a corporation for federal income tax purposes and asa "taxable REIT subsidiary", as defined in the Internal Revenue Codeof 1986, as amended.

 

As of September 30, 2004, GMH MilitaryHousing, LLC had finalized three projects, encompassing five bases, with the Departmentof Defense, or DoD, related to the following military housing privatizationprojects: Fort Stewart and Hunter Army Airfield in Savannah, Georgia; FortHamilton in Brooklyn, New York; and Walter Reed Army Medical Center inWashington D.C. and Montgomery County, Maryland and Fort Detrick in Frederick,Maryland. In addition, in November 2003, GMH Military Housing LLC through ajoint venture with FW Military Housing LLC, an unrelated third party, we acquiredthe ownership interests of an unrelated bankrupt entity that was a member ofFort Carson Family Housing LLC. As of September 30, 2004, GMH Military HousingLLC had been awarded the right to enter into exclusive negotiations for theaward of three military housing privatization projects, encompassing 14 basesand installations.  In November 2004, GMHMilitary Housing, LLC finalized the Navy Northeast Region military housingprivatization project with the United States Navy, encompassing eightinstallations located in Maine, New York, Rhode Island, Connecticut and NewJersey.  The two remaining militaryhousing projects, encompassing four bases, for which GMH Military Housing, LLChas been awarded the rights to exclusively negotiate are still in the processof being negotiated with the United States Army.

 

Corporate Flight Services, LLC owns andoperates a corporate aircraft that has been leased to certain of The GMHPredecessor Entities and other entities owned or controlled by Gary M. Hollowaythat were not contributed to the Company in connection with the initial publicoffering.

 

**2. Summary of SignificantAccounting Policies**

 

***Use of Estimates***

The preparation of financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect various amountsreported in the financial statements and accompanying notes. Actual resultscould differ from those estimates.

 

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***Real Estate Investments andCorporate Assets***

Realestate investments are carried at cost, net of accumulated depreciation. Costfor acquired assets includes the purchase price and closing costs.  Such cost is allocated to net tangible andidentified intangible assets based on relative fair values in accordance withStatement of Financial Accounting Standards No. 141 (“SFAS 141”), *Business Combinations*. Fair value estimates are based oninformation obtained from a number of sources, including independent appraisalsthat may be obtained in connection with the acquisition or financing of therespective property and other market data. Information obtained about eachproperty as a result of due diligence, marketing and leasing activities also isconsidered.

 

Thevalue of in-place leases is based on the difference between (i) the propertyvalued with existing in-place leases adjusted to market rental rates and (ii)the property valued as if vacant. As lease terms typically are 12 months orless, rates on in-place leases generally approximate market rental rates.Factors considered in the valuation of in-place leases include an estimate ofcarrying costs during the expected lease-up periods considering current marketconditions, and nature of the tenancy. Carrying costs include estimates of lostrentals at market rates during the expected lease-up period, as well as realestate taxes, insurance and other operating expenses. The value of in-placeleases is amortized to expense over the remaining initial term of therespective leases.  Such amortization isincluded in depreciation and amortization in the accompanying condensed combinedstatements of operations.

 

Accumulatedamortization related to intangible lease costs totaled $2.6 million as ofSeptember 30, 2004.

 

Theexchange of contributed interests has been accounted for as a reorganization ofentities under common control. Accordingly, the contributed assets and assumedliabilities including the commercial office building owned by 353Associates, L.P., the corporate aircraft owned by Corporate Flight Services LLP,and office furniture and equipment contributed by Gary M. Holloway have been recorded at the historicalcost of our predecessor entities.

 

Routinerepair and maintenance expenditures that do not improve the value of an assetor extend its useful life, including turnover costs such as cleaning, interiorpainting and carpeting of units are expensed as incurred. We capitalizeexpenditures incurred that improve the value and extend the useful life of anasset. Depreciation is computed using the straight-line method over theestimated useful lives of the assets, which is 40 years for buildings includingstudent housing properties and the commercial office building, 10 years for thecoporate aircraft and five years for furniture and equipment.

 

Inaccordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”),*Accounting for the Impairment or Disposal ofLong-Lived Assets*, long-lived assets, such as real estateinvestments and purchased intangibles subject to amortization, are reviewed forimpairment whenever events or changes in circumstances indicate that the carryingamount may not be recoverable. These circumstances may include, but are notlimited to, operational performance, market conditions and competition fromother 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. Recoverability of assets to be held and usedis measured by a comparison of the carrying amount of an asset to estimatedundiscounted future cash flows expected to be generated by the asset. If thecarrying amount of an asset exceeds its estimated future cash flows, animpairment charge is recognized by the amount by which the carrying value ofthe asset exceeds the fair value of the asset determined using customaryvaluation techniques, such as the present value of expected future cash flows.Assets to be disposed of would be separately presented in the balance sheet andreported at the lower of the carrying amount or fair value less costs to sell,and no longer would be depreciated. The assets and liabilities relating toassets classified as held-for-sale would be presented separately in theappropriate asset and liability sections of the balance sheet.

 

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***Cash Equivalents***

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

 

***Restricted Cash***

Restricted cash consists of security depositsand cash held as collateral to provide credit enhancement for  notes payable, real estate taxes and capitalexpenditures as required by the terms of various loan agreements.

 

***Allowance for Doubtful Accounts***

Weestimate the collectibility of receivables generated by rental and other incomeas a result of the operation of our student housing properties based upon thespecific identification of tenants who are delinquent in their payments, aswell as a reserve for all other amounts. If we believe that the collectibilityof certain amounts is questionable, we record a specific reserve for theseamounts to reduce the amount outstanding to an amount we believe will becollectible 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 the collectibility of feeincome generated by the management of student housing properties owned byothers and through the provision of development, construction, renovation, andmanagement services to our military housing privatization projects based uponthe individual facts and circumstances, including the contractual right toreceive such amounts in accordance with the terms of the various contracts andrecord a reserve for specific amounts, if necessary.

 

***Deferred Financing Costs***

Costs incurred in connection with obtainingfinancing are capitalized and amortized on a straight-line basis over the termof the loan, which is not materially different than the effective interestmethod. Amortization of deferred financing costs is included in interestexpense. Accumulated amortization related to these costs was $101,000 atSeptember 30, 2004 and $65,000 at December 31, 2003.

 

***Deferred Contract Costs***

Deferred contract costs represent costsattributable to specific military housing projects incurred in connection withseeking Congress’ approval of a Community Development and Management Plan, orCDMP, which is obtained upon final award by the DoD to GMH Military Housing LLCof a project after a period of exclusive negotiation, as well as transition andclosing costs that are expected to be reimbursed by the military housingproject. Such costs are expensed at the time that the expense reimbursement forpreparing the CDMP is approved by Congress, with respect to an Army militaryhousing privatization project, or at closing of the military housing project, withrespect to a Navy military housing privatization project, at which time therevenue is recognized. Prior to the time that the costs incurred are expensedin connection with the approval of the CDMP by Congress or the closing of themilitary housing project, such amounts are included in deferred contract costsand are evaluated as to the 

 

8

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probable recoverability of such amounts. Coststhat are not considered probable of recovery are written off.

 

***Fair Value of FinancialInstruments***

The carrying amount of cash and cashequivalents, restricted cash, accounts and other receivables, accounts payable,accrued expenses, and other liabilities approximate fair value because of therelatively short-term nature of these instruments.

 

The carrying value of fixed-rate notespayable assumed in connection with the acquisition of 11 student housingproperties is recorded at fair value based on current market rates.

 

The carrying amounts of variable rate notespayable approximate their fair values. The carrying amount of the fixed-ratenote obtained in connection with the refurbishments of the corporate aircraft isapproximately its fair value.

 

***Revenue Recognition***

Rental revenue is recognized when due over thelease terms, which are generally 12 months or less.  Management fees are generally based on apercentage of cash receipts of the properties managed and are recognized whenearned.

 

Asset management fees are generally based on apercentage of the cost basis of certain assets under management and arerecognized by College Park Management, Inc. when earned.

 

Development, construction/renovation andbusiness development fees are recognized when earned in accordance with theterms of the underlying contracts.

 

Expense reimbursements primarily includepayroll and related expenses, incurred for certain employees engaged in theoperation of certain properties under management, and other operating expensesthat are reimbursed to College Park Management, Inc. and GMH Military HousingLLC by the owner of the related property.

 

Rental income earned by 353 Associates, L.P.from entities owned or controlled by Gary M. Holloway that were not contributedto the Company in connection with its initial public offering are recognized ona straight-line basis over the term of the respective leases regardless of whenpayments are due.  Reimbursements fromthese tenants for common area charges and utilities are recognized as revenuesin the period the associated expense is incurred.

 

Fees earned from the use of the corporateaircraft owned by Corporate Flight Services LLC and paid by entities owned orcontrolled by Gary M. Holloway that were not be contributed to the Company inconnection with its initial public offering are recognized at the time therelated travel occurs.

 

***Income Taxes***

In conformity with the Internal Revenue Codeof 1986, as amended, and applicable state and local tax statutes, taxableincome or loss of The GMH Predecessor Entities was required to be reported inthe tax return of Gary M. Holloway, as such entities were treated aspass-through entities for tax purposes. Accordingly, no income tax provisionhas been reflected in the accompanying combined statements of operations.

 

9

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***Reclassifications***

Certain amounts in the prior period financialstatements have been reclassified to be consistent with the current periodpresentation.

 

**3. Investments in Joint Ventures**

 

The following investments are accounted forusing the equity method of accounting as the investors have significantinfluence over the investees’ operating and financial policies. Under theequity method, the investors recognize their share of the earnings or losses ofthe investees’ and record distributions received from the investees’ as areduction of their investment.

 

On July 27, 2004, Gary M. Hollowaycontributed his 10% ownership interest in four student housing properties toour operating partnership at cost.  Inconnection with our initial public offering, we acquired the remaining 90%interest in these assets at fair value.

 

College Park Management, Inc. had a 40%interest in Atrium Pacific Avenue, LLC. College Park Management, Inc. discontinuedrecording its share of the losses of Atrium Pacific Avenue, LLC prior to 2001as its investment was reduced to zero. In the third quarter of 2003, the realestate property owned by Atrium Pacific Avenue, LLC was sold and a liquidatingdistribution was paid to College Park Management, Inc.

 

In November 2003, GMH Military Housing, LLCand FW Military Housing LLC formed a joint venture known as GMH MilitaryHousing-Fort Carson LLC that acquired the ownership interests of an unrelatedbankrupt entity that was a member of Fort Carson Family Housing LLC. GMHMilitary Housing LLC contributed approximately $2,350,000 to GMH MilitaryHousing-Fort Carson LLC in return for its 10% interest in the joint venture.  As of September 30, 2004, GMH Military Housing-FortCarson LLC has no liabilities and its primary asset is its investment in FortCarson Family Housing LLC. The operations of the GMH Military Housing-FortCarson LLC during the nine-month period ended September 30, 2004 were primarilylimited to earning $1.0 million of preferred returns on its investment in FortCarson Family Housing LLC and incurring approximately $15,000 of administrativeexpenses.

 

**4. Notes Payable**

 

During the nine-month period ended September30, 2004, notes payable totaling $128.6 million were assumed relating to theacquisition of 11 properties.  Thesenotes bear interest at fixed rates ranging from 4.92% to 8.18% and mature atvarious dates through 2004.  Inconjunction with the purchase accounting for these assets, the carrying valueof these notes was increased by $12.5 million to record them at estimated fairvalue.  The fair value of the notes wascalculated as the difference between the present value of the notes using acurrent estimated market rate of interest of 4.75% and the outstandingprincipal amount.

 

During the nine-month period ended September30, 2004, variable rate notes payable totaling $69.5 million were obtainedrelating to the acquisition of four properties. These notes, requiring payments of interest only at LIBOR plus 2.05%(LIBOR on these loans was 1.69% at September 30, 2004), mature at various datesin 2007.

 

The note payable owed by 353 Associates, L.P.in the amount of $5.8 million at September 30, 2004, secured by the commercialoffice building, requires monthly payments of principal and interest. Paymentsof principal are required in an amount equal to the principal component of amonthly installment that would fully amortize the loan in 300 equal monthlyinstallments at an assumed interest rate of 8.5%. Interest accrues and is paidin arrears based on LIBOR plus 2.25% (LIBOR on this loan was 1.84% at September30, 2004). The remaining principal balance is due upon maturity in August2005.  In addition, the office furnitureat this property was financed with a note that has a remaining balance of$118,000 at September 30, 2004 and requires monthly principal payments of $13,000plus interest at LIBOR plus 2.25% (LIBOR on this loan was 1.84% at September30, 2004).  The remaining principalbalance is due upon maturity in August 2005.

 

Corporate Flight Services LLC financed theacquisition and subsequent refurbishments of the corporate aircraft with twoloans. One loan with a principal balance of $4.4 million at September 30, 2004requires monthly payments of principal and interest at the commercial paperrate plus 1.8% (1.32% at September 30, 2004) in the amount of $72,000 throughJanuary 2011. The second loan with a principal balance of 

 

10

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$68,000 at September 30, 2004 requires monthlypayments of principal and interest at 9.5% in the amount of $3,000 throughAugust 2006.

 

The aggregate annual principal payments dueon our notes payable for the remainder of this year, the five succeeding yearsand thereafter are as follows:

 

| ** ** | ** ** | **Annual  Principal  Payments** | ** ** |
|------------|------------|---------------------------------|------------|
| ** ** | ** ** | **(in thousands)**              | ** ** |
| 2004       |       | $                               | 767        |   |
| 2005       |       | 9,204                           |       |
| 2006       |       | 3,962                           |       |
| 2007       |       | 73,687                          |       |
| 2008       |       | 4,369                           |       |
| 2009       |       | 4,599                           |       |
| Thereafter |       | 124,213                         |       |
|       |       | $                               | 220,801    |   |

 

**5. Other Transactions WithRelated Parties**

 

The operating results or financial position ofThe GMH Predecessor Entities could be significantly different from those thatwould have been reported if the entities were autonomous.

 

Through July 27, 2004, common costs for humanresources, information technology, office equipment and furniture, and certainmanagement personnel were allocated to the various entities owned or controlledby Gary M. Holloway, including The GMH Predecessor Entities using assumptionsbased on headcount that management believed were reasonable and approximatedthe costs if such services had been received from third parties.  During the three- and nine-month periodsending September 30, 2004 and 2003, such costs totaled $1.4 million and $2.9million in 2004 and $0.5 million and $1.6 million in 2003 and are included inadministrative expenses on the accompanying condensed combined statements ofoperations.  Subsequent to July 27, 2004,such costs were incurred directly by our operating partnership.  The allocation of such costs to other entitiesowned or controlled by Gary M. Holloway subsequent to July 27, 2004 isreflected as expense reimbursements from related parties in the accompanyingcondensed combined statements of operations.

 

College Park Management, Inc. and GMH MilitaryHousing LLC are reimbursed by the owners of certain rental properties undermanagement, including some in which Gary M. Holloway is an investor, for thecost of certain employees engaged in the daily operation of those properties.The reimbursement of these costs is reflected as expense reimbursements in theaccompanying condensed combined statements of operations.

 

353 Associates, L.P. pays management fees to amanagement company owned by Gary M. Holloway that was not contributed to theCompany in connection with its initial public offering, at a rate of 3% of cashreceipts.  During the three- andnine-month periods ending September 30, 2004 and 2003, management fees totaled$5,000 and $23,000 in 2004 and $9,000 and $27,000 in 2003 and are included inadministrative expenses in the accompanying condensed combined statements ofoperations.

 

353 Associates, L.P. reimburses an entityowned by Gary M. Holloway that was not contributed to the Company in connectionwith its initial public offering for the cost of services provided by one ofits employees who serves as a day porter for the commercial officebuilding.  During the three- andnine-month periods ending September 30, 2004 and 2003, such costs totaled$17,000 and $54,000 in 2004 and $15,000 and $49,000 in 2003 and are included inadministrative expenses in the accompanying condensed combined statements ofoperations.

 

11

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In addition to management and asset managementfees, College Park Management, Inc. earned certain other amounts in connectionwith the provision of services to properties under management in which Gary M.Holloway is an investor.  During thethree- and nine-month periods ending September 30, 2004 and 2003, such incometotaled $1,000 and $4,000 in 2004 and $4,000 and $14,000 in 2003 and areincluded in other income in the accompanying condensed combined statements ofoperations.

 

**6. Profits Interests**

 

In recognition of past service, certainemployees of The GMH Predecessor Entities and other entities affiliated withGary M. Holloway were awarded profits interests by Gary M. Holloway. Theseemployees were eligible to participate in the net proceeds or value received byGary M. Holloway upon the sale or disposition of certain student housingproperties and the military housing business in excess of Mr. Holloway’s equityinvestments in such assets.  Theseemployees rendered all services and satisfied all conditions necessary to earnthe right to benefit from these profits interests as of the date that suchprofits interests were awarded.  Inaccordance with Financial Accounting Standards Statement No.5, *Accounting for Contingencies*, compensation expense relatingto the award of these profits interests is required to be recognized by The GMHPredecessor Entities when the sale or disposition of the assets resulting inproceeds received by Gary M. Holloway in an amount in excess of his equityinvestment in such assets becomes probable. This amount became probable during the third quarter of 2004 when, inconnection with the contribution of the ownership interests in GMH MilitaryHousing LLC, College Park Management, Inc. and other assets by Mr. Holloway toour operating partnership in anticipation of the initial public offering of theCompany, the remaining profits interests awards were amended to fix the valueof such awards at $33.2 million to be paid to these employeesunconditionally.  Accordingly, thisamount was recognized in the third quarter of 2004 and Mr. Holloway’s obligationsregarding the profits interests were satisfied upon the transfer of $33.2million of units of limited partnership in our operating partnership to theseemployees on November 2, 2004, the closing date of our initial public offering.

 

**7. Commitments and Contingencies**

 

As of September 30, 2004, we had agreementsto acquire 16 student housing properties for an aggregate purchase price of $373.8million and had placed deposits related to such acquisitions totaling $3.9million.

 

In connection with finalizing the agreementswith the DoD for the military privatization housing projects, GMH MilitaryHousing, LLC committed to contribute equity totaling $5.9 million in 2005, $2.0million in 2007 and $8.0 million in 2011.

 

The GMH Predecessor Entities are subject toroutine litigation, claims and administrative proceedings arising in theordinary course of business. Management believes that such routine litigation,claims and administrative proceedings would not have a material adverse impacton The GMH Predecessor Entities’ combined financial position or combinedresults of operations.

 

**8. Segment Reporting**

 

The GMH Predecessor Entities have been managedas individual entities that comprise two reportable segments: (1) studenthousing and (2) military housing. Corporate reflects the operations of 353 Associates,L.P., Corporate Flight Services LLC, and GMH Communities, LP. The management ofThe GMH Predecessor Entities evaluates each segment’s performance based uponnet operating income. The accounting policies of the reportable segments arethe same as those described in the summary of significant accounting policies.

 

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| ** **                     | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------|------------|--------------------------------------|------------|
| ** **                     | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **                     | ** ** | **Student  Housing**                 | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                     | ** ** | **(in  thousands)**                  | ** ** |
| **Revenue:**                   |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income |       | $                                    | 6,683      |   | $ | — |   | $ | 70 |   | $ | 6,753 |   | $ | — |   | $ | — |   | $ | 147 |   | $ | 147 |   |
| Expense reimbursements:        |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                  |       | 367                                  |       | 7,697 |   | 638 |   | 8,702 |   | 164 |   | — |   | 49 |   | 213 |   |
| Third party                    |       | 1,906                                |       | — |   | — |   | 1,906 |   | 1,651 |   | — |   | — |   | 1,651 |   |
| Management fees:               |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                  |       | 348                                  |       | 619 |   | — |   | 967 |   | 480 |   | — |   | — |   | 480 |   |
| Third party                    |       | 752                                  |       | — |   | — |   | 752 |   | 549 |   | — |   | — |   | 549 |   |
| Other fee income-related party |       | —                               |       | 2,115 |   | — |   | 2,115 |   | — |   | — |   | — |   | — |   |
| Other income                   |       | 14                                   |       | 24 |   | 103 |   | 141 |   | 7 |   | — |   | 79 |   | 86 |   |
| Total revenue                  |       | 10,070                               |       | 10,455 |   | 811 |   | 21,336 |   | 2,851 |   | 0 |   | 275 |   | 3,126 |   |
| **Operating Expenses:**        |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property operating expenses    |       | 4,773                                |       | 1,035 |   | — |   | 5,808 |   | 554 |   | 622 |   | — |   | 1,176 |   |
| Reimbursed expenses            |       | 2,273                                |       | 7,697 |   | 638 |   | 10,608 |   | 1,815 |   | — |   | 49 |   | 1,864 |   |
| Real estate taxes              |       | 490                                  |       | — |   | — |   | 490 |   | — |   | — |   | — |   | — |   |
| Administrative expenses        |       |                                 |       | — |   | 2,172 |   | 2,172 |   | — |   | — |   | 777 |   | 777 |   |
| Profits interest expense       |       | —                               |       | — |   | 33,180 |   | 33,180 |   | — |   | — |   | — |   |   |   |
| Depreciation and amortization  |       | 1,526                                |       | 10 |   | 234 |   | 1,770 |   | 6 |   | — |   | 214 |   | 220 |   |
| Interest                       |       | 1,627                                |       | — |   | 95 |   | 1,722 |   | — |   | — |   | 81 |   | 81 |   |
| Total expenses                 |       | 10,689                               |       | 8,742 |   | 36,319 |   | 55,750 |   | 2,375 |   | 622 |   | 1,121 |   | 4,118 |   |
| **Net (loss) income**          |       | $                                    | (619       | ) | $ | 1,713 |   | $ | (35,508 | ) | $ | (34,414 | ) | $ | 476 |   | $ | (622 | ) | $ | (846 | ) | $ | (992 | ) |

 
| ** **                     | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------|------------|-------------------------------------|------------|
| ** **                     | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| ** **                     | ** ** | **Student  Housing**                | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                     | ** ** | **(in thousands)**                  | ** ** |
| **Revenue:**                   |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income |       | $                                   | 6,683      |   | $ | — |   | $ | 340 |   | $ | 7,023 |   | $ | — |   | $ | — |   | $ | 438 |   | $ | 438 |   |
| Expense reimbursements:        |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                  |       | 1,089                               |       | 14,845 |   | 735 |   | 16,669 |   | 164 |   | — |   | 146 |   | 310 |   |
| Third party                    |       | 5,475                               |       | — |   | — |   | 5,475 |   | 5,216 |   | — |   | — |   | 5,216 |   |
| Management fees:               |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                  |       | 1,163                               |       | 1,520 |   | — |   | 2,683 |   | 1,557 |   | — |   | — |   | 1,557 |   |
| Third party                    |       | 3,430                               |       | — |   | — |   | 3,430 |   | 2,242 |   | — |   | — |   | 2,242 |   |
| Other fee income-related party |       | —                              |       | 4,174 |   | — |   | 4,174 |   | — |   | — |   | — |   | — |   |
| Other income                   |       | 58                                  |       | 70 |   | 365 |   | 493 |   | 91 |   | — |   | 318 |   | 409 |   |
|                           |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenue                  |       | 17,898                              |       | 20,609 |   | 1,440 |   | 39,947 |   | 9,270 |   | — |   | 902 |   | 10,172 |   |
| **Operating Expenses:**        |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property operating expenses    |       | 6,683                               |       | 3,168 |   | — |   | 9,851 |   | 2,400 |   | 2,679 |   | — |   | 5,079 |   |
| Reimbursed expenses            |       | 6,564                               |       | 14,845 |   | 735 |   | 22,144 |   | 5,380 |   | — |   | 146 |   | 5,526 |   |
| Real estate taxes              |       | 490                                 |       | — |   | — |   | 490 |   | — |   | — |   | — |   | — |   |
| Administrative expenses        |       | —                              |       | — |   | 4,488 |   | 4,488 |   | — |   | — |   | 2,695 |   | 2,695 |   |
| Profits interest expense       |       | —                              |       | — |   | 33,180 |   | 33,180 |   | — |   | — |   | — |   |   |   |
| Depreciation and amortization  |       | 1,537                               |       | 18 |   | 633 |   | 2,188 |   | 17 |   | — |   | 613 |   | 630 |   |
| Interest                       |       | 1,627                               |       | — |   | 253 |   | 1,880 |   | — |   | — |   | 265 |   | 265 |   |
| Total expenses                 |       | 16,901                              |       | 18,031 |   | 39,289 |   | 74,221 |   | 7,797 |   | 2,679 |   | 3,719 |   | 14,195 |   |
| **Net (loss) income**          |       | $                                   | 997        |   | $ | 2,578 |   | $ | (37,849 | ) | $ | (34,274 | ) | $ | 1,473 |   | $ | (2,679 | ) | $ | (2,817 | ) | $ | (4,023 | ) |

 

 

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| ** **                    | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|-------------------------------|------------|----------------------|------------|-----------------------|------------|---------------|------------|-----------|------------|
| ** **                    | ** ** | **(in thousands)**   | ** ** |
| **As of September 30, 2004:** |       |                 |       |                  |       |          |       |      |       |
| Total assets                  |       | $                    | 272,199    |                  | $          | 12,592        |       | $         | 20,055     |   | $ | 304,846 |   |
| **As of December 31, 2003:**  |       |                 |       |                  |       |          |       |      |       |
| Total assets                  |       | $                    | 891        |                  | $          | 3,454         |       | $         | 11,801     |   | $ | 16,146 |   |

** **

**9. Acquisition of Real EstateInvestments (Unaudited)**

 

During the three month period ended September30, 2004, the Company acquired 15 student housing properties containing 8,845beds for an aggregate purchase price of $263.3 million.  The properties acquired were accounted for bythe purchase method.  The results ofoperations for each of the acquired properties have been included in ourstatements of operations from the respective purchase dates.  All pro forma financial information presentedwithin this footnote is unaudited and is not necessarily indicative of theresults which actually would have occurred if the purchases had beenconsummated on January 1, 2003, nor does the pro forma information purport torepresent the results of operations for future periods.

 

The following unaudited pro forma financialinformation for the three- and nine-month periods ended September 30, 2004 and2003 gives effect to the acquisition of the 15 student housing properties as ifthe transactions had occurred on January 1, 2003 (in thousands):

 
| ** **           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **           | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                 |       |                                  |       |                                 |       |   |   |   |   |
| Pro forma revenue    |       | $                                     | 9,655      |                                 | $          | 9,088 |   | $ | 27,507 |   | $ | 23,446 |   |
| Pro forma net income |       | 3,302                                 |       | 2,142                                |       | 9,848 |   | 6,557 |   |
|                      |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |

 

**10. Subsequent Events**

 

Subsequentto September 30, 2004, we completed the following transactions in addition to ourinitial public offering and the redemption of Vornado’s interest in ouroperating partnership:

 

•                  acquired 11 student housing properties foran aggregate purchase price of $297.8 million, containing 7,348 beds, includingone student housing property containing 544 beds that we previously managed,and one undeveloped parcel of land that will contain, when developed, 534 beds.  These acquisitions were financed by obtainingnew loans of $92.1 million, and equity contributions totaling $206.2 million;

 

•                  acquired the remaining 90% interests inthe four student housing properties containing 2,892 beds, for which wepreviously held a 10% interest for $17.6 million of cash and $8.1 million ofpartnership units in our operating partnership;

 

•                  acquired the remaining 90% interest in GMH MilitaryHousing - Fort Carson LLC for $31.0 million of partnership units in ouroperating partnership;

 

•                  secured a final agreement for our NavyNortheast Region military privatization project, encompassing eight military basestotaling 4,264 end-state housing units, under which fees will be earned forproviding development, construction, renovation and management services; and

 

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•                  secured an interim agreement for our FortEustis/Fort Story military housing privatization project, encompassing twomilitary bases totaling 1,124 housing units, for which we previously hadobtained rights to exclusively negotiate, under which fees will be earned forproviding management services and limited development services, and under whichwe own, through a subsidiary of our operating partnership, equity interest inthe joint venture relating to the project; and

 

•                  maintain exclusive rights to negotiateagreements under which fees will be earned for development, construction,renovation and managment services for, and invest through a subsidiary of ouroperating partnership in, the Fort Bliss/White Sands military housing privatizationproject, encompassing two military bases totaling in the aggregate 2,752military housing units upon the placement of permanent financing on theproject, if such financing is implemented.

 

•     obtained a revolving credit facility totaling $150million.  Availability under the creditfacility is limited to a borrowing base amount equal to the sum 60% of thevalue of an unencumbered asset pool (which in no event may contain fewer than five student housingproperties) and 50% of student and military housing management fees for themost recently completed fiscal quarter on an annualized basis.

 

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**Item 2****.****           ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

*The following discussionand analysis should be read in conjunction with the financial statements andnotes thereto of The GMH Predecessor Entities appearing elsewhere herein.  This Quarterly Report on Form 10-Q containsforward-looking statements for the purposes of the Securities Act of 1933 andthe Securities Exchange Act of 1934 and as such may involve known and unknownrisks, uncertainties and other factors that may cause the actual results,performance or achievements of the Company to be materially different from theresults, performance or achievements expressed or implied by suchforward-looking statements.  Although webelieve that the expectations reflected in such forward-looking statements arebased on reasonable assumptions, there can be no assurance that theseexpectations will be realized.  We assumeno obligation to update or supplement forward-looking statements that becomeuntrue because of subsequent events. Factors that could cause actual results to differ materially from ourmanagement’s current expectations include, but are not limited to, changes ingeneral economic conditions, including changes in government spending relatingto the U.S. military, changes in local real estate conditions (includingchanges in rental rates and the number of competing properties), our failure tolease unoccupied space in accordance with management’s projections, changes inprevailing interest rates, the unavailability of equity and debt financing,unanticipated costs associated with the acquisition and integration of ourproperty acquisitions, potential liability under environmental or other laws,the existence of complex regulations relating to the Company’s status as a REITand the Company’s acquisition, disposition and development activities, theadverse consequences of our failure to qualify as a REIT, and other risksidentified in the section entitled “Risk Factors” in the Company’s finalprospectus relating to its initial public offering S-11 filed with theSecurities and Exchange Commission on October 29, 2004.*

* *

*Our operatingpartnership, GMH Communities, LP, commenced operations on July 27, 2004, and,upon completion of our initial public offering on November 2, 2004, GMHCommunities Trust, through a wholly-owned subsidiary, became the sole generalpartner of GMH Communities, LP. GMH Communities Trust did not commenceoperations until completion of our initial public offering. The historicaloperations prior to completion of the initial public offering that aredescribed in this report refer to the operations of College Park Management,Inc., GMH Military Housing, LLC, 353 Associates, L.P., and Corporate FlightServices, LLC, which are collectively referred to as, and together with ouroperating partnership, The GMH Predecessor Entities.*

* *

*In connection with theformation transactions completed prior to and simultaneously with completion ofour initial public offering, the interests in The GMH Predecessor Entities werecontributed to our operating partnership as described in Note 1 to thefinancial statements of The GMH Predecessor Entities included in thisreport.  We have described our operationsin this report as if the historical operations of our predecessor entities wereconducted by us. Our operating partnership currently owns and operates theassets we acquired upon becoming its sole general partner upon completion ofour initial public offering, and which were owned by The GMH PredecessorEntities prior to our formation transactions as described in Note 1 to thefinancial statements of The GMH Predecessor Entities included in thisreport.  Where appropriate, the followingdiscussion includes an analysis of completion of our initial public offeringand certain matters that have occurred following the completion of our initialpublic offering.*

* *

## **Overview**

## ** **

We area self-advised, self-managed, specialty housing company that focuses onproviding housing to college and university students residing off-campus and tomembers of the U.S. military and their families. Through our operatingpartnership, we own and operate our student housing properties, provideproperty management services to certain other owners of student housingproperties, including colleges, universities and other private owners, and ownminority interests in joint ventures that own our military

 

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housingprivatization projects. Additionally, through our taxable REIT subsidiaries subsidiaries,we provide development, construction, renovation and management services to ourmilitary housing privatization projects, and property management services tocertain other owners of student housing properties, including colleges,universities, and other private owners, as well as certain non-customary servicesfor our student housing properties. In order to comply with the applicablerequirements under the REIT provisions of the Internal Revenue Code, we mustlimit the operations of our military housing business and our student housingmanagement business 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, does notexceed 25% of our gross income for any taxable year.

 

As aresult of the various transactions and acquisitions completed in anticipationof, in connection with, and subsequent to our recent initial public offering,our results of operations in future periods will reflect significantly higherrevenues and expenses than those reflected in our predecessor entity financialstatements.

 

**OperatingSegments**

 

Currently,our operations are managed within two segments: (1) student housing and (2)military housing, which provides an effective platform for maximizing marketpenetration and optimizing operating economies of scale. In addition, we reportthe activities of certain of our corporate departments separately because theyprovide services that support our overall operations.

 

*Student Housing*

 

Thestudent housing segment acquires, owns and manages premium off-campus studenthousing properties strategically located in close proximity to college oruniversity campuses throughout the United States.  As of September 30, 2004, with regard to ourstudent housing segment, we, through our operating partnership:

 

•       owned 15 student housing propertiescontaining a total of 8,845 beds;

 

•       owned a 10% interest in four studenthousing properties containing 2,892 beds; and

 

•       managed 19 student housing propertiesowned by others containing a total of 13,807 beds.

 

Subsequentto September 30, 2004 and through December 10, 2004, with regard to our studenthousing segment, we:

 

•       acquired 11 student housing propertiescontaining 7,348 beds, including one student housing property containing 544beds that we previously managed, and one undeveloped parcel of land that willcontain, when developed, 534 beds; and

 

•       acquired the remaining 90% interests inthe four student housing properties containing 2,892 beds, for which wepreviously held a 10% interest prior to completion of our initial publicoffering.

 

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Historically,revenues generated by our student housing segment related primarily to severaltypes of fee income we earned by managing properties for related parties andthird parties. We earn management fees as a percentage of cash receipts orgross rental revenues generated by the managed properties, or as a fixedmonthly amount, according to the management agreements for the properties wemanage.   We also have the ability toearn incentive management fees by achieving specified property-levelperformance criteria for certain properties we manage for third parties.  In addition, we earn asset management fees,which are a fixed annual amount, for certain managed properties owned byrelated parties. Further, certain operating expenses incurred related toproperties we manage for others are reimbursed by the owners of the propertiesmanaged. We expect to continue generating fee income revenue and operatingexpense reimbursements from the 18 properties containing a total of 13,273 bedsthat we manage for others.

 

Throughour acquisition of properties, and interests in student housing properties,that we acquired in connection with and subsequent to our initial publicoffering, our rental revenue has increased substantially. While we manage theproperties we own, we do not recognize any fee income from their management.Instead, the rent payments we receive as a result of our ownership of theseproperties is reflected in our revenue. Additionally, operating expenses, realestate taxes and depreciation and amortization have increased as a result ofthese acquisitions. Further, interest expense has increased as a result ofadditional debt assumed or new debt obtained.

 

*Military Housing*

 

Ourmilitary housing segment develops, constructs, renovates and manages militaryhousing projects in which we acquired interests. As of September 30, 2004, withregard to our military housing segment, we, through our operating partnership:

 

•       earned fees for providing development,construction/renovation and management services to four military housingprivatization projects currently in operation, encompassing six military basestotaling in the aggregate 7,192 military housing units; and

 

•       owned, through a subsidiary of ouroperating partnership, equity interests in the joint ventures that own fourmilitary housing projects currently in operation; and

 

Subsequentto September 30, 2004 and through December 10, 2004, with regard to ourmilitary housing segment, we:

 

•       secured a final agreement for our NavyNortheast Region military housing privatization project, encompassing eightmilitary installations totaling 4,264 end-state housing units, under which feeswill be earned for providing development, construction, renovation andmanagement services;

 

•       secured an interim agreement for our FortEustis/Fort Story military housing privatization project encompassing twomilitary bases totaling 1,124 housing units, for which we previously had theright to exclusively negotiate, under which fees will be earned for providingmanagement services and limited development services, and under which we own,through a subsidiary of our operating partnership, equity interest in the jointventure relating to the project, upon placement of permanent financing on theproject, if such financing is implemented; and

 

•       maintain exclusive rights to negotiate agreementsunder which fees will be earned for development, construction, renovation and managementservices for, and invest through a subsidiary of our operating partnership in,the Fort Bliss/White Sands military housing privatization project, encompassingtwo military bases totaling 2,752 military housing units;

 

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Ourmilitary housing segment began generating revenue in the fourth quarter of2003. Revenue from our military housing segment is comprised primarily of feeincome for providing development, construction/renovation and management servicesto our military housing privatization projects and, to a lesser extent, fromreturns on the equity we invest in a particular project.  In addition, we also receive expensereimbursements, consisting primarily of payroll and related expenses, closingcosts and transition costs we incur for the project in the 30 to 90-day periodpreceding the initiation of our management of the project. Typically, at thetime we initiate management, our project reimburses us for these amounts fromthe proceeds of the debt financing the project raises to finance itsoperations.

 

**CapitalTransaction**

 

Priorto our initial public offering, our operating partnership commenced operationson July 27, 2004, when Gary M. Holloway, our chairman, president and chiefexecutive officer, Vornado Realty Trust, and certain entities affiliated withMr. Holloway and Vornado entered into a contribution agreement relating to thecontribution of various assets to GMH Communities, LP.  Under the terms of the contributionagreement, Mr. Holloway contributed equity interests owned by him and byentities affiliated with him in the The GMH Predecessor Entities and otherrelated assets in exchange for Class A partnership interests in GMHCommunities, LP, and Vornado agreed to contribute up to $159.0 million to ouroperating partnership in exchange for Class B partnership interests.  In connection with its investment in ouroperating partnership, Vornado also purchased a warrant for $1.0 million toacquire, at its option, a number of units of limited partnership in ouroperating partnership, common shares in GMH Communities Trust or a

 

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combinationof both, representing a 38.24% economic interest in our partnership or GMHCommunities Trust, as the case may be, immediately prior to completion of our initialpublic offering.

 

Inaccordance with the terms of the partnership agreement between Mr. Holloway andVornado, and concurrent with the completion of our initial public offering onNovember 2, 2004, we paid approximately $77.3 million to Vornado relating tothe redemption of all of Vornado’s general and limited partnership interests inGMH Communities, LP, based on Vornado’s $113.8 million contribution to ouroperating partnership as of the offering, plus a preferential return in theamount of $13.5 million, and after giving effect to the surrender by Vornado of$50.0 million in value of its pre-offering partnership interest in ouroperating partnership, as payment for the portion of its warrant required to beexercised upon completion of our initial public offering under the terms of thewarrant.  Our historical results throughSeptember 30, 2004 do not reflect the increase in minority interest expenseassociated with this preferential return that will be recorded in the fourthquarter of 2004.

 

## **Critical Accounting Policies**

## ** **

Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses The GMH Predecessor Entities’ combined financial statements, whichhave been prepared in accordance with U.S. generally accepted accountingprinciples. The preparation of these financial statements requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and the disclosure of contingent liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. While the estimates and judgments associated with theapplication of these accounting principles may be affected by differentassumptions or conditions, we believe the estimates and judgments associatedwith the reported amounts are appropriate under the circumstances in which theywere made. In addition, other companies in similar businesses may utilizedifferent estimation policies and methodologies, which may impact the comparabilityof our results of operations and financial condition to those companies.

 

Thefollowing policies require significant judgment and estimates on our part inpreparing the combined financial statements of our predecessor entities.Changes in these judgments and estimates could have a material effect on thesefinancial statements.

 

**Revenue Recognition**

 

#### *StudentHousing*

#### * *

Studenthousing revenue includes rental revenue and other property income, standard andincentive management fees, asset management fees and reimbursements of certainoperating expenses. These sources of revenue are described in greater detailbelow:

 

•       student housing rental revenue isrecognized when due over the lease terms, which are generally 12 months orless;

 

•       standard management fees are based on apercentage of monthly cash receipts or gross monthly rental and other revenuesgenerated by the properties managed for others and are recognized when therevenue is recorded by the property;

 

•       incentive management fees are earned as aresult of the achievement of certain operating performance criteria by themanaged properties, including targeted annual debt service coverage ratios andare recognized when the performance criteria has been deemed satisfied;

 

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•       asset management fees are based on apercentage of the gross carrying value of the properties managed and are earnedon a monthly basis; and

 

•       expense reimbursements are comprisedprimarily of salary and related costs of property-level employees working atcertain properties we manage for others, the cost of which is reimbursed by theowners of the related properties. Operating expense reimbursements are accruedas the related expenses are incurred.

 

##### ***Military Housing***

##### *** ***

Militaryhousing revenues are earned from the provision of services to our militaryhousing privatization projects and include the following:

 

•       standard and incentive monthly managementfees 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. 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. Weaccrue our estimate of incentive management fees earned on a monthly basisbased on our determination that we believe we have satisfied the variouscriteria stipulated in the management contract.

 

•       standard and incentive development andconstruction/renovation fees based on a percentage of development andconstruction/renovation costs incurred by the military housing privatizationprojects including hard and soft costs and financing costs. Incentivedevelopment and construction/renovation fees are based upon the satisfaction ofcertain criteria including, among other things, completing a number of housesaccording to schedule, achieving specific safety records and implementing smallbusiness or minority subcontracting plans. We accrue our estimate of incentivedevelopment and construction/renovation fees to be paid on a quarterly andannual basis based on our determination that we have satisfied the variouscriteria stipulated in the contract.

 

•       business development fees paid to us bycompanies with which we have joint venture relationships in recognition ofbusiness development efforts and expenses incurred in connection with pursuingmilitary housing privatization projects, and calculated as a fixed feecomponent and a component based on a percentage of certain development costsincurred by the military housing projects.

 

•       expense reimbursements include thereimbursement of expenses incurred in connection with the transition phase of beginningthe operations of military housing projects in accordance with an approvedbudget and closing costs incurred in connection with finalizing agreements forthe military housing privatization projects. These amounts are reimbursed bythe DoD at the time of closing the project. In addition, salary and relatedcosts of our employees who work at the military housing projects are reimbursedby the projects.  The costs are accruedas reimbursements as the related expenses are incurred.

 

•       preferred returns on our equitycontributions to the military housing privatization projects are recognized asearned.

 

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***Real Estate Investments andCorporate Assets***

Realestate investments are carried at cost, net of accumulated depreciation. Costfor acquired assets includes the purchase price and closing costs.  Such cost is allocated to net tangible andidentified intangible assets based on relative fair values in accordance withStatement of Financial Accounting Standards No. 141 (“SFAS 141”), *Business Combinations*. Fair value estimates are based oninformation obtained from a number of sources, including independent appraisalsthat may be obtained in connection with the acquisition or financing of therespective property and other market data. Information obtained about eachproperty as a result of due diligence, marketing and leasing activities also isconsidered.

 

Thevalue of in-place leases is based on the difference between (i) the propertyvalued with existing in-place leases adjusted to market rental rates and (ii)the property valued as if vacant. As lease terms typically are 12 months orless, rates on in-place leases generally approximate market rental rates.Factors considered in the valuation of in-place leases include an estimate ofcarrying costs during the expected lease-up periods considering current marketconditions, and nature of the tenancy. Carrying costs include estimates of lostrentals at market rates during the expected lease-up period, as well as realestate taxes, insurance and other operating expenses. The value of in-placeleases is amortized to expense over the remaining initial term of therespective leases.

 

Accumulatedamortization related to intangible lease costs totaled $2.6 million as ofSeptember 30, 2004.

 

Theexchange of contributed interests has been accounted for as a reorganization ofentities under common control. Accordingly, the contributed assets and assumedliabilities including the commercial office building owned by 353Associates, L.P., the corporate aircraft owned by Corporate Flight Services LLP,and office furniture and equipment contributed by Gary M. Holloway have been recorded at the historicalcost of our predecessor entities.

 

Routinerepair and maintenance expenditures that do not improve the value of an assetor extend its useful life, including turnover costs such as cleaning, interiorpainting and carpeting of units are expensed as incurred. We capitalizeexpenditures incurred that improve the value and extend the useful life of anasset. Depreciation is computed using the straight-line method over theestimated useful lives of the assets, which is 40 years for buildings includingstudent housing properties and the commercial office building, 10 years for thecorporate aircraft and five years for furniture and equipment.

 

Inaccordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”),*Accounting for the Impairment or Disposal ofLong-Lived Assets*, long-lived assets, such as real estateinvestments and purchased intangibles subject to amortization, are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount may not be recoverable. These circumstances may include, butare not limited to, operational performance, market conditions and competitionfrom other off-campus properties and on-campus housing, legal and environmentalconcerns, and results of appraisals or other information obtained as part of afinancing or disposition strategy. Recoverability of assets to be held and usedis measured by a comparison of the carrying amount of an asset to estimatedundiscounted future cash flows expected to be generated by the asset. If thecarrying amount of an asset exceeds its estimated future cash flows, animpairment charge is recognized by the amount by which the carrying value ofthe asset exceeds the fair value of the asset determined using customaryvaluation techniques, such as the present value of expected future cash flows.Assets to be disposed of would be separately presented in the balance sheet andreported at the lower of the carrying amount or fair value less costs to sell,and no longer would be depreciated. The assets and liabilities relating toassets classified as held-for-sale would be presented separately in theappropriate asset and liability sections of the balance sheet.

 

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##### ***Allowancefor Doubtful Accounts***

##### *** ***

Weestimate the collectibility of receivables generated by rental and other incomeas a result of the operation of our student housing properties based upon thespecific identification of tenants who are delinquent in their payments, aswell as a reserve for all other amounts. If we believe that the collectibilityof certain amounts is questionable, we record a specific reserve for theseamounts to reduce the amount outstanding to an amount we believe will becollectible 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 alsoevaluate the collectibility of fee income generated by the management ofstudent housing properties owned by others and through the provision ofdevelopment, construction, renovation, and management services to our militaryhousing privatization projects based upon the individual facts and circumstances,including the contractual right to receive such amounts in accordance with theterms of the various contracts and record a reserve for specific amounts, ifnecessary.

 

##### ***NotesPayable***

##### *** ***

Notespayable assumed in connection with the acquisitions of properties are recordedat fair value with the corresponding difference between the estimated fairvalue and assumed carrying value of the mortgage notes payable as an adjustmentto the purchase price of the related property. Fair value of assumed notes payableis determined based on various assumptions related to market conditionsincluding the type, age, and location of the mortgaged building and quotedinterest rates for debt with similar terms.

 

##### ***MinorityInterest***

##### *** ***

We willaccount for distributions to limited partnership unitholders as a reduction inminority interest.

 

Minorityinterest as initially reported will represent the net equity of our operatingpartnership, including the Vornado warrant, after contributions by the holdersof limited partnership units and the REIT, multiplied by the ownershippercentage of holders of limited partnership units in our operatingpartnership. If the minority interest’s share of a current year loss wouldcause the minority interest balance to be less than zero, the minority interestbalance will be reported as zero unless there is an obligation of the minorityinterest to make good on those losses. Any losses in excess of the minorityinterest will be charged against equity. If future earnings materialize, equitywill be credited for all earnings up to the amount of those losses previouslyabsorbed.

 

##### ***JointVentures***

##### *** ***

Weevaluate each of our joint ventures to determine if the underlying entity is avariable interest entity (“VIE”) as defined under FASB Interpretation No. 46 (“FIN46”). If an entity is deemed to be a VIE pursuant to FIN 46, the venturepartner that absorbs a majority of the expected losses of the VIE is deemed tobe the primary beneficiary and must consolidate the VIE. If the entity is not aVIE, the entity is evaluated for consolidation based on controlling votinginterests. If the Company has the majority voting interest with the ability tocontrol operations and where no approval, veto or other important rights havebeen granted to other holders, the entity would be consolidated. We are not theprimary beneficiary of any VIEs, nor do we have controlling voting interests inany of our joint ventures. Therefore, we account for all our current jointventures under the equity method of accounting. Under the equity method, theinvestments are recorded initially at our cost and subsequently adjusted forour net equity in income and cash contributions and distributions.

 

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##### ***IncomeTaxes***

##### *** ***

We willelect to treat certain subsidiaries of our operating partnership as taxableREIT subsidiaries. In general, a taxable REIT subsidiary may perform realestate and non-real estate-related business, except for the operation ormanagement of health care facilities or lodging facilities or the provision toany person, under a franchise, license or otherwise, rights to any brand nameunder which any lodging facility or health care facility is operated.  If we fail to qualify as a REIT in anytaxable year, we will be subject to federal income tax, including anyapplicable alternative minimum tax, on our taxable income at regular corporatetax rates.

 

We willelect to treat GMH Military Housing, LLC and College Park Management TRS, Inc.as taxable REIT subsidiaries. College Park Management TRS, Inc. is wholly-ownedsubsidiary of College Park Management, LLC (which is a successor through mergerto College Park Management, Inc., one of The GMH Predecessor Entities).  See Note 1 to The GMH Predecessor Entitiesfinancial statements included in this report.

 

##### ***Results of Operations***

##### *** ***

Through2003, our student housing business focused primarily on providing propertymanagement services to related parties and others. A number of the propertiesmanaged were disposed of by their owners due to the investment criteria ofcertain equity partners, resulting in contraction in this segment of ourbusiness. In 2003, we redirected our focus in the student housing business andnow are an owner/operator of student housing in addition to being a provider ofmanagement services. While our student housing segment was managed throughoutthe periods presented, profitability was declining due to the reduced number ofproperties. We acquired properties in July 2004 that significantly expanded ourportfolio and believe that the improving trend in profitability will continueand improve significantly.

 

Through2003, we invested significant resources to pursue military housing contracts.We increased our planning, execution and management teams to address the needsof this segment. While we were awarded numerous contracts, no income wasrecognized until the fourth quarter of 2003. As of September 30, 2004, fourprojects are operational and this segment of our business is generating income.While we continued to invest significant resources to pursue militarycontracts, the net income generated by the operational projects in 2004exceeded the costs of pursuing new contracts.

 

 

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##### *** ***

##### ***Comparisonof the Three Months Ended September 30, 2004to the Three Months Ended September 30, 2003***

 
| ** **                      | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **Student  Housing**                 | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                      | ** ** | **(in thousands)**                   | ** ** |
| **Revenue:**                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and other  property income |       | $                                    | 6,683      |   | $ | — |   | $ | 70 |   | $ | 6,753 |   | $ | — |   | $ | — |   | $ | 147 |   | $ | 147 |   |
| Expense  reimbursements:        |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                   |       | 367                                  |       | 7,697 |   | 638 |   | 8,702 |   | 164 |   | — |   | 49 |   | 213 |   |
| Third party                     |       | 1,906                                |       | — |   | — |   | 1,906 |   | 1,651 |   | — |   | — |   | 1,651 |   |
| Management fees:                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                   |       | 348                                  |       | 619 |   | — |   | 967 |   | 480 |   | — |   | — |   | 480 |   |
| Third party                     |       | 752                                  |       | — |   | — |   | 752 |   | 549 |   | — |   | — |   | 549 |   |
| Other fee income                |       | —                               |       | 2,115 |   | — |   | 2,115 |   | — |   | — |   | — |   | — |   |
| Other income-related  party     |       | 14                                   |       | 24 |   | 103 |   | 141 |   | 7 |   | — |   | 79 |   | 86 |   |
| Total revenue                   |       | 10,070                               |       | 10,455 |   | 811 |   | 21,336 |   | 2,851 |   | 0 |   | 275 |   | 3,126 |   |
| **Operating  Expenses:**        |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property  operating expenses    |       | 4,773                                |       | 1,035 |   | — |   | 5,808 |   | 554 |   | 622 |   | — |   | 1,176 |   |
| Reimbursed  expenses            |       | 2,273                                |       | 7,697 |   | 638 |   | 10,608 |   | 1,815 |   | — |   | 49 |   | 1,864 |   |
| Real estate taxes               |       | 490                                  |       | — |   | — |   | 490 |   | — |   | — |   | — |   | — |   |
| Administrative  expenses        |       | —                               |       | — |   | 2,172 |   | 2,172 |   | — |   | — |   | 777 |   | 777 |   |
| Profits interest  expense       |       | —                               |       | — |   | 33,180 |   | 33,180 |   | — |   | — |   | — |   |   |   |
| Depreciation and  amortization  |       | 1,526                                |       | 10 |   | 234 |   | 1,770 |   | 6 |   | — |   | 214 |   | 220 |   |
| Interest                        |       | 1,627                                |       | — |   | 95 |   | 1,722 |   | — |   | — |   | 81 |   | 81 |   |
| Total expenses                  |       | 10,689                               |       | 8,742 |   | 36,319 |   | 55,750 |   | 2,375 |   | 622 |   | 1,121 |   | 4,118 |   |
| **Net  (loss) income**          |       | $                                    | (619       | ) | $ | 1,713 |   | $ | (35,508 | ) | $ | (34,414 | ) | $ | 476 |   | $ | (622 | ) | $ | (846 | ) | $ | (992 | ) |

 

 

##### ***StudentHousing***

##### *** ***

*Revenue*. We acquired all of the 15 studenthousing properties owned as of September 30, 2004 during the three-month periodended September 30, 2004.  Rent fromthese properties totaled $6.7 million for the period. Going forward, we expectrental revenue from the properties we own to contribute more significantly toour operating results.

 

Historically,fee income has related primarily to management fees. Our standard managementfees are typically based on a percentage of monthly cash receipts or grossmonthly rental revenues generated by the properties managed for others. Inaddition, we earn asset management fees based on the historical cost of certainproperties we manage for related parties. For certain properties we manage forthird parties, we also have the ability to earn incentive management fees,which like our standard management fees, are based on the gross rental revenueof these properties.

 

Expensereimbursements consist primarily of reimbursements for payroll expenses relatedto personnel providing on-site management services for certain properties wemanage, but do not own, as well as other reimbursable costs relating tospecific transactions. We recognize revenue from reimbursements for payrollexpenses as incurred and typically receive payments of these amounts currentlyfrom the cash receipts or gross rental revenue of the managed properties.

 

Expensereimbursements from related parties increased to $0.4 million in thethree-month period ended September 30, 2004 from $0.2 million in the comparableperiod of 2003, primarily due to payroll reimbursements attributable to threeproperties acquired by related parties in February 2004. Expense reimbursementsfrom third parties increased to $1.9 million in the three-month period endedSeptember 30, 2004 from $1.7 million in the comparable period of 2003,primarily due to payroll reimbursements attributable to new managementagreements entered into with third parties since September 30, 2003. We expectexpense reimbursements, which relate to properties we manage but do not own, tobecome less significant as rental revenue earned from the properties that we doown increases.

 

Managementfee income from related parties was $0.3 million in the three-month periodended September 30, 2004, consisting of $0.2 million of standard managementfees and $0.1 million of asset management 

 

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fees ascompared to $0.5 million in the three-month period ended September 30, 2003,consisting of $0.4 million of the standard management fees and $0.1 million ofasset management fees. The decrease in standard management fees was the resultof the disposition of three properties owned by related parties during theperiod from November 2003 through January 2004 due to the investment criteriaof certain equity partners in these properties. Management fee income fromthird parties increased to $0.8 million for the three-month period endedSeptember 30, 2004 from $0.5 million in the comparable period of 2003,primarily due to the commencement of new management agreements with thirdparties since September 30, 2003.

 

Weexpect management and asset management fees to contribute less significantly tototal revenues in the future given the expected growth in rental revenue fromthe operations of properties we own.

 

*Expenses*. Property operating expenses increased to $4.8 million in the three-monthperiod ended September 30, 2004 from $0.6 million in the comparable period of2003, primarily due to expenses attributable to the 15 properties acquiredduring the three-month period ended September 30, 2004.

 

Reimbursedexpenses increased to $2.3 million in the three-month period ended September30, 2004 from $1.8 million in the comparable period in 2003, primarily due to anincrease in payroll costs associated with the management of three properties acquiredby related parties in February 2004.

 

Realestate taxes amounted to $0.5 million in the three-month period ended September30, 2004 due to the acquisition of 15 properties during this period.

 

Depreciationand amortization increased to $1.5 million in the three-month period endedSeptember 30, 2004 from less than $0.1 million in the comparable period in 2003as a result of acquiring 15 properties for an aggregate purchase price of $254million during the three-month period ended September 30, 2004.

 

Interestexpense amounted to $1.6 million in the three-month period ended September 30,2004 as a result of incurring $206.2 million of debt in connection with theacquisition of 15 properties in the three-month period ended September 30,2004.

 

###### ***Military Housing***

###### * *

*Revenue*. We began operating the Fort Stewart andHunter Army Airfield military housing privatization project in early November2003 and purchased an ownership interest in the Fort Carson project inlate-November 2003. Our Fort Hamilton project began operating in June 2004, andour Walter Reed Army Medical Center and Fort Detrick project began operating inJuly 2004. We generate revenue from our military housing privatization projectsprimarily from fees we earn that are paid to us by the projects and, to alesser extent after the completion of the initial development period, fromreturns on the equity we invest in a project.

 

Formanaging a military housing privatization project, we earn a standardmanagement fee, typically 2% to 3% of the project’s revenues derived from BAH.We have the ability to earn an incentive-based subordinated management fee,typically 2% to 3% of the project’s revenue derived from BAH, if the projectsatisfies its debt service obligations and achieves certain performancebenchmarks. We also earn development fees, typically 4% of total developmentcosts, including architectural, engineering and construction costs. Inaddition, we earn fees from a project for the construction/renovation serviceswe provide, typically up to 4% of the total construction/renovation costs,respectively.

 

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Expensereimbursements totaled $7.7 million in the three-month period ended September30, 2004. Of this amount, $0.9 million related to the Fort Stewart and HunterArmy Airfield project and $5.7 million related to the Fort Carson project, bothof which commenced operations in the fourth quarter of 2003, $0.1 millionrelated to the Fort Hamilton project, which commenced operations in June 2004,$0.6 million related to the Walter Reed Army Medical Center and Fort Detrickproject, which commenced operations in July 2004 and $0.4 million related tocosts incurred in the development of the CDMP for the Forts Eustis and Storyproject.

 

Managementfees from related parties totaled $0.6 million in the three-month period endedSeptember 30, 2004.  Of these fees, $0.2million related to the Fort Stewart and Hunter Army Airfield project and $0.3million related to the Fort Carson project, both of which commenced operationsin the fourth quarter of 2003, and $0.1 million related to the Fort Hamiltonproject, which commenced operations in June 2004, and the Walter Reed ArmyMedical Center and Fort Detrick project which commenced operations in July2004.

 

Otherfee income of $2.1 million in the three-month period ended September 30, 2004consisted of $1.8 million of development and construction/renovation feesearned from related parties and $0.3 million of business development fees. Ofthe development and construction/renovation fees, $0.7 million related to theFort Stewart and Hunter Army Airfield project and $0.3 million related to theFort Carson project, both of which commenced operations in the fourth quarterof 2003, $0.1 million related to the Fort Hamilton project, which commencedoperations in June 2004, and $0.7 million related to the Walter Reed ArmyMedical Center and Fort Detrick project which commenced operations in July2004.

 

*Expenses*. Property operating expenses include costs related to operating themilitary housing segment of our business. These costs increased to $1.0 millionin the three-month period ended September 30, 2004 from $0.6 million in thecomparable period of 2003, primarily due to staffing increases related toexpansion of the planning, execution and management teams to address the needsof the military housing segment.

 

Reimbursedexpenses increased to $7.7 million in the three-month period ended September30, 2004 primarily due to payroll expenses for Fort Stewart and Hunter ArmyAirfield, Fort Carson, Fort Hamilton, Walter Reed Army Medical Center and FortDetrick; closing costs and transition expenses for Fort Hamilton and WalterReed and Fort Detrick, and expenses relating to Fort Carson’s management andrenovation contracts.

 

###### ***Corporate***

###### * *

Wereport the activities of certain of our corporate departments separatelybecause they provide services that support our overall operations. We own ourcorporate headquarters and lease portions of it to related parties that are notincluded in our predecessor entities. Accordingly, we report the operations andother elements of our ownership of our corporate headquarters together with ourcorporate departments. We also include with our corporate departmentsunallocated portions of the cost of administrative and other personnel; such assenior executives responsible for our overall management, accounting, legal,human resources and information technology; that provide services in support ofour overall operations as well as the cost of operating our corporate aircraft.

 

Rentalrevenue and expense reimbursements, recognized with respect to the portions ofour corporate headquarters leased to related parties and payroll and relatedexpenses reimbursed by related parties for providing common services, increasedto $0.7 million in the three-month period ended 

 

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September30, 2004 from $0.2 million in the comparable period of 2003.  The $0.5 million increase is primarily the resultof increased payroll and related expenses. The increase in the reimbursement is in direct correlation to theincrease in related expenses.

 

Otherincome, consisting primarily of fees earned from related parties for use of ourcorporate aircraft, totaled $0.1 million in the three-month period endedSeptember 30, 2004 and the comparable period of 2003.

 

Reimbursedexpenses increased from to $0.6 million from less than $0.1 million, due to theinclusion of the corporate departments in overall operations noted above.

 

Administrativeexpenses, primarily relating to our corporate office overall management,accounting, legal, human resources and information technology, and corporateaircraft, increased to $2.2 million in the three-month period ended September30, 2004 from $0.8 million in the comparable period of 2003, primarily due toincreased staffing and additional costs incurred in connection with preparationfor becoming a public company**.**

 

Depreciation,relating primarily to our headquarters and our corporate aircraft, of $0.2million in the three-month period ended September 30, 2004 was comparable tothe three-month period ended September 30, 2003.

 

Interestexpense of $0.1 million in the three-month period ended September 30, 2004 wascomparable to the three-month period ended September 30, 2003.

 

Compensationexpense was recorded in the three-month period ended September 30, 2004 relatedto profits interests awarded to certain employees.  These employees were eligible to participatein the net proceeds or value received in excess of the equity investments insuch assets upon their sale or disposition.  These assets included certain student housing properties and themilitary business included in The GMH Predecessor Entities.  These employees rendered all services andsatisfied all conditions necessary to earn the right to benefit from theseprofits interests prior to September 30, 2004. In accordance with Financial Accounting Standards Statement No.5, *Accounting for Contingencies*, compensation expense relatingto the award of these profits interests is required to be recognized by The GMHPredecessor Entities when the sale or disposition of the assets resulting inproceeds received by Gary M. Holloway in an amount in excess of his equityinvestment in such assets becomes probable. This amount became probable during the third quarter of 2004 when, inconnection with the contribution of the ownership interests in GMH MilitaryHousing LLC, College Park Management, Inc. and other assets by Mr. Holloway toour operating partnership in anticipation of the initial public offering of theCompany, the remaining profits interests awards were amended to fix the valueof such awards at $33.2 million to be paid to these employeesunconditionally.  Accordingly, thisamount was recognized in the third quarter of 2004 and Mr. Holloway’sobligations regarding the profits interests were satisfied upon the transfer of$33.2 million of units of limited partnership in our operating partnership tothese employees on November 2, 2004, the closing date of our initial publicoffering.

 

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##### ***Comparison of the Nine Months Ended September30, 2004 to the Nine Months Ended September 30, 2003***

 
| ** **                      | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------|------------|-------------------------------------|------------|
| ** **                      | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **Student  Housing**                | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                      | ** ** | **(in thousands)**                  | ** ** |
| **Revenue:**                    |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and other  property income |       | $                                   | 6,683      |   | $ | — |   | $ | 340 |   | $ | 7,023 |   | $ | — |   | $ | — |   | $ | 438 |   | $ | 438 |   |
| Expense  reimbursements:        |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                   |       | 1,089                               |       | 14,845 |   | 735 |   | 16,669 |   | 164 |   | — |   | 146 |   | 310 |   |
| Third party                     |       | 5,475                               |       | — |   | — |   | 5,475 |   | 5,216 |   | — |   | — |   | 5,216 |   |
| Management fees:                |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                   |       | 1,163                               |       | 1,520 |   | — |   | 2,683 |   | 1,557 |   | — |   | — |   | 1,557 |   |
| Third party                     |       | 3,430                               |       | — |   | — |   | 3,430 |   | 2,242 |   | — |   | — |   | 2,242 |   |
| Other fee income-related  party |       | —                              |       | 4,174 |   | — |   | 4,174 |   | — |   | — |   | — |   | — |   |
| Other income                    |       | 58                                  |       | 70 |   | 365 |   | 493 |   | 91 |   | — |   | 318 |   | 409 |   |
| Total revenue                   |       | 17,898                              |       | 20,609 |   | 1,440 |   | 39,947 |   | 9,270 |   | — |   | 902 |   | 10,172 |   |
| **Operating  Expenses:**        |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property  operating expenses    |       | 6,683                               |       | 3,168 |   | — |   | 9,851 |   | 2,400 |   | 2,679 |   | — |   | 5,079 |   |
| Reimbursed  expenses            |       | 6,564                               |       | 14,845 |   | 735 |   | 22,144 |   | 5,380 |   | — |   | 146 |   | 5,526 |   |
| Real estate taxes               |       | 490                                 |       | — |   | — |   | 490 |   | — |   | — |   | — |   | — |   |
| Administrative  expenses        |       | —                              |       | — |   | 4,488 |   | 4,488 |   | — |   | — |   | 2,695 |   | 2,695 |   |
| Profits interest  expense       |       | —                              |       | — |   | 33,180 |   | 33,180 |   | — |   | — |   | — |   |   |   |
| Depreciation and  amortization  |       | 1,537                               |       | 18 |   | 633 |   | 2,188 |   | 17 |   | — |   | 613 |   | 630 |   |
| Interest                        |       | 1,627                               |       | — |   | 253 |   | 1,880 |   | — |   | — |   | 265 |   | 265 |   |
| Total expenses                  |       | 16,901                              |       | 18,031 |   | 39,289 |   | 74,221 |   | 7,797 |   | 2,679 |   | 3,719 |   | 14,195 |   |
| **Net  (loss) income**          |       | $                                   | 997        |   | $ | 2,578 |   | $ | (37,849 | ) | $ | (34,274 | ) | $ | 1,473 |   | $ | (2,679 | ) | $ | (2,817 | ) | $ | (4,023 | ) |

 

 

###### *StudentHousing*

###### * *

*Revenue*. We acquired all of the 15 studenthousing properties owned as of September 30, 2004 during the nine-month periodended September 30, 2004.  Rent fromthese properties totaled $6.7 million for the period.

 

Expensereimbursements from related parties increased to $1.1 million in the nine-monthperiod ended September 30, 2004 from $0.2 million in the comparable period of2003, primarily due to payroll reimbursements attributable to the propertiesacquired by related parties during the period from May 2003 through February2004.  Expense reimbursements from thirdparties increased to $5.5 million in the nine-month period ended September 30,2004 from $5.2 million in the comparable period in 2003, primarily due to newmanagement agreements entered into since September 30, 2003.

 

Managementfee income from related parties was $1.2 million in the nine-month period endedSeptember 30, 2004, consisting of $0.9 million of standard management fees and$0.3 million of asset management fees, as compared to $1.6 million in thecomparable period of 2003, consisting of $1.1 million of standard managementfees and $0.5 million of asset management fees. The $0.2 million decrease instandard management fees and the $0.2 million decrease in asset management feesresulted primarily from the disposition of three properties owned by relatedparties during the period from February 2003 through January 2004 due to theinvestment criteria of certain equity partners in these properties. Managementfee income from third parties increased to $3.4 million for the nine-monthperiod ended September 30, 2004 from $2.2 million in the comparable period of2003, primarily due to a successful property tax appeal by a certain thirdparty owner. The successful outcome of this appeal enabled us to collect $1.1million in fees related to prior periods for which recovery was previouslydeemed uncertain.

 

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*Expenses*. Property operating expenses increased to $6.7 million in the nine-monthperiod ended September 30, 2004 from $2.4 million in the comparable period of2003, primarily due to expenses attributable to the 15 properties acquiredduring the nine-month period ended September 30, 2004.

 

Reimbursedexpenses increased to $6.6 million in the nine-month period ended September 30,2004 from $5.4 million in the comparable period in 2003, primarily due to anincrease in payroll costs associated with the acquisition of the properties byrelated parties during the period from May 2003 to February 2004.

 

Realestate taxes amounted to $0.5 million in the nine-month period ended September30, 2004 due to the acquisition of 15 properties during this period.

 

Depreciationand amortization increased to $1.5 million in the nine-month period endedSeptember 30, 2004 from less than $.1 million in the comparable period in 2003as a result of acquiring 15 properties for an aggregate purchase price ofapproximately $254 million during the nine-month period ended September 30,2004.

 

Interestexpense amounted to $1.7 million in the nine-month period ended September 30,2004 as a result of incurring $206.2 million of debt in connection with theacquisition of 15 properties in the nine-month period ended September 30, 2004.

 

###### *MilitaryHousing*

###### * *

*Revenue*. Expense reimbursements totaled $14.8 million in the nine-month periodended September 30, 2004. Of this amount, $2.0 million related to the FortStewart and Hunter Army Airfield project and $10.5 million related to the FortCarson project, both of which commenced operations in the fourth quarter of2003, $0.7 million related to the Fort Hamilton project, which commencedoperations in June 2004, $0.6 million related to the Walter Reed Army MedicalCenter and Fort Detrick project which commenced operations in July 2004 and$1.0 million related to reimbursement of costs incurred in the development ofthe CDMP for the Fort Hamilton Project, Walter Reed Army Medical Center/FortDetrick project and the Fort Eustis/Fort Story project.

 

Managementfees from related parties totaled $1.5 million in the nine-month period endedSeptember 30, 2004.  Of these fees, $0.7million related to the Fort Stewart and Hunter Army Airfield project and $0.7million related to the Fort Carson project, both of which commenced operationsin the fourth quarter of 2003, and $0.1 million related to the Fort Hamiltonproject, which commenced operations in June 2004, and the Walter Reed ArmyMedical Center and Fort Detrick project, which commenced operations in July2004.

 

Otherfee income of $4.2 million in the nine-month period ended September 30, 2004consisted of $3.2 million of development and construction/renovation feesearned from related parties and $1.0 million of business development fees. Ofthe development and construction/renovation fees, $1.5 million related to theFort Stewart and Hunter Army Airfield project, $0.5 million related to the FortCarson project, $0.5 million related to the Fort Hamilton project and $0.7million related to the Walter Reed Army Medical Center and Fort Detrickproject.

 

*Expenses*. Property operating expenses increased to $3.2 million in the nine-monthperiod ended September 30, 2004 from $2.7 million in the comparable period of2003, primarily due to staffing 

 

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increasesrelated to expansion of the planning, execution and management teams to addressthe needs of the military housing segment.

 

Reimbursedexpenses increased to $14.8 million in the nine-month period ended September30, 2004, primarily due to payroll expenses for Fort Stewart and Hunter ArmyAirfield, Fort Carson, Fort Hamilton, Walter Reed Army Medical Center and FortDetrick; closing costs and transition expenses for Fort Hamilton and WalterReed and Fort Detrick, and expenses for Fort Carson’s management and renovationcontracts.

 

###### *Corporate*

###### * *

Rentalrevenue and expense reimbursements increased to $1.1 million in the nine-monthperiod ended September 30, 2004 from $0.6 million in the comparable period of2003.  The $0.5 million increase isprimarily the result of increased payroll and related expenses.  The increase in the reimbursement is indirect correlation to the increase in related expenses.

 

Otherincome increased slightly to $0.4 million in the nine-month period endedSeptember 30, 2004 from $0.3 million in the nine-month period ended September30, 2003.

 

Reimbursedexpenses increased to $0.7 million from $0.1 million, due to theinclusion of the corporate departments in overall operations noted above.

 

Administrative expenses increased to $4.5 million in the nine-monthperiod ended September 30, 2004 from $2.7 million in the comparable to periodof 2003, primarily due to increased staffing and additional costs incurred inconnection with becoming a public company**.**

 

Depreciation,relating primarily to our headquarters and corporate aircraft, of $0.6 millionin the nine-month period ended September 30, 2004 was comparable to thenine-month period ended September 30, 2003.

 

Interestexpense of $0.3 million in the nine-month period ended September 30, 2004 wascomparable to the nine-month period ended September 30, 2003.

 

Compensation expense was recorded in thenine-month period ended September 30, 2004, relating to profits interestsawarded by Gary M. Holloway to certain employees of The GMH PredecessorEntities and other entities affiliated with Gary M. Holloway in recognition ofpast services. These employees were eligible to participate in the net proceedsor value received by Gary M. Holloway upon the sale or disposition of certainstudent housing properties and the military housing business in excess of Mr.Holloway’s equity investments in such assets. These employees rendered all services and satisfied all conditionsnecessary to earn the right to benefit from these profits interests as of thedate that such profits interests were awarded. In accordance with Financial Accounting Standards Statement No.5, *Accounting for Contingencies*, compensation expense relatingto the award of these profits interests is required to be recognized by The GMHPredecessor Entities when the sale or disposition of the assets resulting inproceeds received by Gary M. Holloway in an amount in excess of his equityinvestment in such assets becomes probable. This amount became probable during the third quarter of 2004 when, inconnection with the contribution of the ownership interests in GMH MilitaryHousing LLC, College Park Management Inc. and other assets by Mr. Holloway toour operating partnership in anticipation of the initial public offering of theCompany, the remaining profits interests awards were amended to fix the valueof such awards at $33.2 million to be paid to these employeesunconditionally.  Accordingly, thisamount was recognized in the third quarter of 2004 and Mr. Holloway’sobligations regarding the profits interests were satisfied upon the transfer of$33.2 million of units of limited partnership in our operating 

 

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partnership to these employees on November 2,2004, the closing date of our initial public offering.

## ** **

## **Liquidity and Capital Resources**

## ** **

Historically,short-term liquidity requirements had been satisfied through existing workingcapital, cash provided by operations and contributions from Gary M.Holloway.  Subsequent to our initialpublic offering, our existing working capital and cash provided by operations,together with amounts available to us under a new $150 million revolving creditfacility obtained by our operating partnership on November 8, 2004, areexpected to be sufficient to meet our short-term liquidity requirements.Availability under the credit facility is limited to a borrowing base amountequal to the sum of 60% of the value of an unencumbered asset pool (which in noevent may contain fewer than five student housing properties) and 50% ofstudent and military housing management fees for the most recently completedfiscal quarter on an annualized basis.  GMHCommunities Trust serves as guarantor for the credit facility.  Advances under the credit facility bearinterest, at the election of the borrower, at a Eurodollar rate based on LIBORor a base rate based on the prime rate announced by Bank of America, N.A., asthe administrative agent of the facility, plus an “Applicable Rate,” rangingfrom 1.50% to 2.00% for Eurodollar rate loans or 0.625% to 1.375% for base rateloans.  The Applicable Rate is determinedby the leverage ratio of all liabilities to total asset value of theCompany.  In connection with this newrevolving credit facility, we have certain corporate level financialcovenants.  As of December 10, 2004, wehave not drawn any funds on this facility and are in compliance with allapplicable financial covenants.  As of December10, 2004, $135.0 million in funds were available to be drawn under the facilitybased on our then current borrowing base.

 

We willelect to be treated as a REIT for federal income tax purposes.  As a REIT, we will be required to distributeat least 90% of our REIT taxable income to our shareholders on an annual basis.Therefore, except as discussed below, as a general matter, a substantialportion of cash generated by our operations will be used to fund distributionsto shareholders and holders of limited partnership interests in our operatingpartnership, and will not be available to satisfy our liquidity needs.

 

Futuredistributions will be declared at the discretion of our board of trustees andwill depend on our actual cash flow, our financial condition, capitalrequirements, the annual distribution requirements under the REIT provisions ofthe Code and other such factors as our board of trustees deems relevant. Weanticipate paying quarterly distributions to our shareholders commencing withthe quarter ending December 31, 2004. We expect that our quarterlydistribution, which will be prorated for the initial partial quarter as a publiccompany, will be $9.3 million. On an annualized basis, this would be $0.91 pershare. We expect that for some period following our initial public offering,our cash flow from operations will be insufficient to fund this distributionand distributions in the future. Therefore, we expect to rely on third partydebt financing in order to fund these distributions and other capital needs orour board of trustees may choose to pay a lower distribution. Any indebtednesswe incur will increase our leverage and decrease our ability to borrow moneyfor other needs, such as acquisition or development of properties.

 

As ofSeptember 30, 2004, 15 of our properties, our corporate headquarters, ourcorporate aircraft, and our corporate furniture, are encumbered by notespayable aggregating $220.8 million and secured by first liens on the individualassets with an aggregate cost basis of approximately $272.8 million beforeaccumulated depreciation.  Our notespayable mature at various dates between July 2007 and September 2014 andrequire monthly payments of principal and interest or monthly payments ofinterest only. The table below sets forth for the remainder of this year, thefive succeeding years and thereafter the aggregate annual principal paymentsdue and the weighted-average interest rate of our notes payable due in eachperiod. 

 

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| ** ** | ** ** | **Annual  Principal  Payments** | ** ** | **Weighted  average  Interest  Rate** | ** ** |
|------------|------------|---------------------------------|------------|---------------------------------------|------------|
| ** ** | ** ** | **(in thousands)**              | ** ** |
| 2004       |       | $                               | 767        |                                  | 4.38       | % |
| 2005       |       | 9,204                           |       | 4.39                                  |       |
| 2006       |       | 3,962                           |       | 4.39                                  |       |
| 2007       |       | 73,687                          |       | 4.72                                  |       |
| 2008       |       | 4,369                           |       | 4.73                                  |       |
| 2009       |       | 4,599                           |       | 4.74                                  |       |
| Thereafter |       | 124,213                         |       | 4.75                                  |       |
|       |       | $                               | 220,801    |                                  | 4.57       | % |

 

 

Short-termliquidity requirements consist primarily of funds necessary to pay operatingexpenses and other costs. These expenses and costs may include (i) recurringmaintenance and capital expenditures to maintain and lease our properties, (ii)interest expense and scheduled principal payments on outstanding indebtedness,(iii) real property taxes and insurance, (iv) corporate salaries, employeebenefits and other corporate overhead and administrative expenses and (v)future distributions to shareholders and partners of our operating partnership.With regard to our military housing privatization projects, we made a $9.5million equity contribution in November 2004 relating to our Navy Northeastproject and have contractually committed to contribute an aggregate of $5.9million in 2005 and 2006 to our Walter Reed Army Medical Center/Fort Detrickproject. These equity contributions fund the development, construction andrenovation of housing units at these bases during their respective initialdevelopment periods. With regard to our currently owned student housingproperties, we do not have any short-term capital expenditure plans orcommitments.

 

Typically,we are reimbursed for certain payroll expenses relating to the student housingproperties we manage for third parties, for certain costs we incur after we areawarded a military housing privatization project until we enter into agreementsfor the project, and for transition costs we incur shortly before initiation ofour management of a military housing privatization project. However, we arerequired to fund these costs prior to the time we receive the reimbursements.Typically, Army and Navy projects require approximately $1.0 million to $7.0million in costs associated with transition and exclusive negotiations,depending on the size of the project. The expenditures typically begin 12months prior to closing the joint venture project. Accordingly, these timingdifferences add to our short-term liquidity needs.

 

Long-termliquidity requirements consist primarily of funds necessary to pay scheduleddebt maturities, renovations and other non-recurring capital expenditures thatneed to be made periodically at our properties, and the costs associated withacquisitions of student housing properties and awards or acquisitions ofmilitary housing privatization projects that we pursue. Historically, we havesatisfied our long-term liquidity requirements through various sources ofcapital, including existing working capital, cash provided by operations,long-term mortgage indebtedness, owner contributions and sales of properties.We now expect our long-term liquidity requirements to be satisfied through cashgenerated by operations that is not used to fund distributions and externalsources of debt and equity capital, including public capital markets as well asprivate sources of capital.

 

Our feeincome, primarily management fees, related to student housing projects isgenerally recognized as the fees are earned. We also earn management,construction/renovation and development fees related to military housingprojects. The standard management, construction/renovation and development feesrelated to military housing projects are generally recognized as the fees areearned. We also earn incentive management fees, which are subordinate to debtservice and are expected to be paid as earned, subject to 

 

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achievingrequired debt service coverage ratios, certain incentive benchmarks and thereceipt of cash flows from the projects. The initial development periodincentive construction/renovation and development fees are expected to be paidas earned, subject to achieving the incentive benchmarks. Subsequent to theinitial development period, standard and incentive construction/renovation anddevelopment fees generally are expected to be paid as earned and are dependentupon the deposit of funds into the reinvestment account which will be thesource of funding for future renovations and project improvements. If the cashflows from any project are insufficient to meet the coverage ratios orbenchmarks entitling us to receive fee payments, any unpaid fees will accumulateand be subsequently paid from operations or upon dissolution of the projects tothe extent that funds are available and the applicable thresholds are met. Ifthese thresholds are not met, we will not have access to certain of the fees wehave earned. The unavailability of these funds would increase our short-termand long-term liquidity needs.

 

We willbe required to make equity contributions at the beginning of the initialdevelopment period for typical Navy transactions and at the end of the initialdevelopment period for typical Army transactions. If cash flow is insufficient,any unpaid equity returns will accumulate per the modified internalrate-of-return calculation and subsequently be paid from operations or upondissolution of the projects to the extent the funds are available. Based on ourcurrent expectations regarding the terms of the debt funding for our militaryprojects, we expect that the projects will generate sufficient cash flows tofund the reinvestment account and pay anticipated equity returns.

 

## **Cash Distribution Policy**

## ** **

Weexpect to qualify as a REIT under the Code commencing with the taxable yearending on December 31, 2004. As a REIT, we generally will not be subject tofederal income tax to the extent that we distribute our REIT taxable income toour shareholders, but the taxable income generated by our taxable REITsubsidiaries will be subject to regular corporate income tax. We intend to makeat least the minimum distributions required to maintain our REIT qualificationsunder the Code. Holders of units of limited partnership interest in ouroperating partnership will also be entitled to distributions of cash equivalentto dividends per share paid to our common shareholders.

 

## **Inflation**

## ** **

Typicalstudent housing leases are for 12 month periods or less. Accordingly, we havethe ability to seek to enter into new leases with terms designed to recoverexpense increases annually and thus expect to be able to mitigate our exposureto inflation with regard to our student housing properties.

 

Withrespect to our military housing privatization projects, the amount of rentalrevenue received in connection with the leasing of military housing propertiesis based on the amount of BAH paid to members of the U.S. military.  Under current law, Congress must appropriatean aggregate budget for BAH for all of the military branches, and the DoD mustannually adjust the BAH stipend to be received by each individual member of theU.S. military to reflect changes in the profile of particular service members.A U.S. military branch considers the cost of comparable housing in theparticular geographic area surrounding a military base in determining theappropriate amount of the BAH stipend; however, we cannot guarantee that annualBAH amounts to be received by members of the U.S. military will appropriatelyreflect the levels of inflation experienced in these particular geographicareas and that, correspondingly, we will not have any exposure to inflationwith respect to rental revenues received for military housing properties.

 

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**Item 3.****                                  ****Quantitative and 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 short-term interestrates. As of September 30, 2004, 63.8% of the outstanding principal amount ofour notes payable on properties we owned as of such date have fixed interestrates with a weighted-average rate of 4.75%. The remaining 36.2% of outstandingprincipal amount of our notes payable have variable interest rates primarilyequal to LIBOR plus 2.05% to 2.25%. Based on our variable-rate debt balance, ifinterest rates were to increase by 1.0%, our interest expense would increase byapproximately $0.8 million on an annual basis.

 

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

 

*(a)**                              **Evaluation of Disclosure Controlsand Procedures*

 

Ourmanagement, with the participation of our Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report. Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures as of the end of the period coveredby this report have been designed and are functioning effectively to providereasonable assurance that the information required to be disclosed by us inreports filed under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms. We believe that a controls system, no matter how well designed andoperated, cannot provide absolute assurance that the objectives of the controlssystem are met, and no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within a company havebeen detected.

 

*(b)**                              **Change in Internal Control overFinancial Reporting*

 

Therehave been no changes in our internal control over financial reporting duringour most recent fiscal quarter that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

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# ** **

# ** **

# ** **

# **Part II**— OTHER INFORMATION

# ** **

 

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

 

None.

 

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

 

OnOctober 27, 2004, the Securities and Exchange Commission simultaneouslydeclared effective our Registration Statement on Form S-11 (File No.333-116343) (the “Registration Statement”) as filed under the Securities Act of1933, as amended, and our registration statement on Form 8-A (File No.001-32290), as filed under the Securities Exchange Act of 1934, as amended, inconnection with the initial public offering of our common shares of beneficialinterest. On November 2, 2004, we completed our initial public offering andsold 28,571,429 of our common shares at an initial public offering price of$12.00 per share.  In addition, onNovember 15, 2004, we completed the sale of an additional 1,779,560 commonshares in connection with the exercise of a portion of the over-allotmentoption by the underwriters of our initial public offering.  The managing underwriters of our initialpublic offering were Banc of America Securities LLC and Merrill Lynch, Pierce,Fenner & Smith Incorporated.

 

Underthe Registration Statement, we registered a total of $460,000,000 of our commonshares for sale in connection with our initial public offering, and have soldan aggregate dollar amount of common shares under the Registration Statementequal to $364.2 as of December 13, 2004, based on the initial offering priceper share of $12.00.  Since the effectivedate of the Registration Statement through December 13, 2004, we have incurredan aggregate of approximately $33.3 in expenses relating to our initial publicoffering, including: approximately $25.5 million relating to the underwriters’discount of 6% per share and financial advisory fees payable to the managingunderwriters relating to the structuring of our initial public offering equalto 1% of the gross proceeds of the offering; $.8 million relating toreimbursements to the underwriters for a portion of their reasonableout-of-pocket expenses; and approximately $7.0 million in other offeringrelated expenses.  From the effectivedate of the Registration Statement through December 10, 2004, we have used anaggregate of $293.5 million of the $330.9 million in total net proceeds from ourinitial public offering for the following:

 

•                  approximately $77.3 million to redeem allof Vornado Realty Trust’s general and limited partnership interests in ouroperating partnership that were outstanding immediately prior to completion of ourinitial public offering;

 

•                  approximately $161.9 million to fund theequity portion of the purchase price of eight student housing properties;

 

•                  approximately $17.7 million to fund thepurchase price for the remaining 90% interest in three student housingproperties in which we owned a 10% interest immediately prior to our initialpublic offering;

 

•                  approximately $32.6 million to repayindebtedness incurred by Gary M. Holloway in connection with his purchase of astudent housing property, which was contributed to our operating partnershipupon completion of our initial public offering;

 

•                  approximately $4.0 million to fund thecash portion of the aggregate consideration payable to Gary M. Holloway inexchange for his contribution of assets to our operating partnership; and

 

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We expect to usethe remaining net proceeds from our initial public offering to fund our workingcapital needs, the acquisition of additional student housing assets, includingacquisitions that we have under contract or under a non-binding letter ofintent, military housing privatization projects that we may identify in thefuture, and for other general corporate purposes.

 

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

 

None.

 

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

 

None.

 

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

 

None.

 

**Item 6.****                                  ****Exhibits and Reports on Form 8-K**

 

(a)           Exhibits

 
| **Exhibit** | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1        |       | Contribution  Agreement, dated July 27, 2004, by and among GMH Communities, LP, GMH Communities  GP, LLC and GMH LP LLC. (Incorporated by reference from the Registrant’s  Amendment No. 1 to its Registration Statement on Form S-11 filed with the  Securities and Exchange Commission on August 11, 2004, as amended (Filed No.  333-116343).                                                                                                                                                                  |
| 10.2        |       | Warrant,  dated July 27, 2004, as amended on October 26, 2004, issued to Vornado Realty  LP, by GMH Communities Trust and GMH Communities, LP. (Incorporated by  reference from the Registrant’s Amendment No. 7 to its Registration Statement  on Form S-11 filed with the Securities and Exchange Commission on October 27,  2004, as amended (Filed No. 333-116343).                                                                                                                                           |
| 31.1        |       | Certifications  of Chief Executive Officer Required by Rule 13a-14(a) of the Securities  Exchange Act of 1934, as amended.(furnished herewith)                                                                                                                                                                                                                                                                                                                                                                         |
| 31.2        |       | Certifications  of Chief Financial Officer Required by Rule 13a-14(a) of the Securities  Exchange Act of 1934, as amended. (furnished herewith)                                                                                                                                                                                                                                                                                                                                                                        |
| 32.1        |       | Certifications  of Chief Executive Officer Required by Rule 13a-14(b) of the Securities  Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed”  for purposes of Section 18 of the Securities Exchange Act of 1934, as  amended, or otherwise subject to the liability of that section. Further, this  exhibit shall not be deemed to be incorporated by reference into any filing  under the Securities Act of 1933, as amended, or the Securities Exchange Act  of 1934, as amended.) |

 

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| 32.2 |   | Certifications  of Chief Financial Officer Required by Rule 13a-14(b) of the Securities  Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed”  for purposes of Section 18 of the Securities Exchange Act of 1934, as  amended, or otherwise subject to the liability of that section. Further, this  exhibit shall not be deemed to be incorporated by reference into any filing  under the Securities Act of 1933, as amended, or the Securities Exchange Act  of 1934, as amended.) |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

(b)           Reports on Form 8-K

 

GMHCommunities Trust was not subject to the reporting requirements under the SecuritiesExchange Act of 1934, as amended, during the three-month periood endedSeptember 30, 2004, and therefore did not file any Current Reports on Form 8-Kduring such period.

 

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SIGNATURES

 

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

 

 
|                    |   | GMH COMMUNITIES TRUST                 |
|-------------------------|--------|---------------------------------------|
|                    |   |                                  |
|                    |   |                                  |
| Date: December 15, 2004 |   | /s/ Gary M. Holloway, Sr.             |
|                    |   | Gary M. Holloway, Sr.                 |
|                    |   | President and Chief Executive Officer |
|                    |   |                                  |
|                    |   |                                  |
|                    |   | /s/ Bradley W. Harris                 |
|                    |   | Bradley W. Harris                     |
|                    |   | Senior Vice President                 |
|                    |   | and Chief Financial  Officer          |

 

 

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EXHIBIT INDEX

 
| **Exhibit** | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1        |       | Contribution  Agreement, dated July 27, 2004, by and among GMH Communities, LP, GMH  Communities GP, LLC and GMH LP LLC. (Incorporated by reference from the  Registrant’s Amendment No. 1 to its Registration Statement on Form S-11 filed  with the Securities and Exchange Commission on August 11, 2004, as amended  (Filed No. 333-116343).                                                                                                                                                                  |
| 10.2        |       | Warrant,  dated July 27, 2004, as amended on October 26, 2004, issued to Vornado Realty  LP, by GMH Communities Trust and GMH Communities, LP. (Incorporated by  reference from the Registrant’s Amendment No. 7 to its Registration Statement  on Form S-11 filed with the Securities and Exchange Commission on October 27,  2004, as amended (Filed No. 333-116343).                                                                                                                                           |
| 31.1        |       | Certifications  of Chief Executive Officer Required by Rule 13a-14(a) of the Securities  Exchange Act of 1934, as amended.(furnished herewith)                                                                                                                                                                                                                                                                                                                                                                         |
| 31.2        |       | Certifications  of Chief Financial Officer Required by Rule 13a-14(a) of the Securities  Exchange Act of 1934, as amended. (furnished herewith)                                                                                                                                                                                                                                                                                                                                                                        |
| 32.1        |       | Certifications  of Chief Executive Officer Required by Rule 13a-14(b) of the Securities  Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed”  for purposes of Section 18 of the Securities Exchange Act of 1934, as  amended, or otherwise subject to the liability of that section. Further, this  exhibit shall not be deemed to be incorporated by reference into any filing  under the Securities Act of 1933, as amended, or the Securities Exchange Act  of 1934, as amended.) |
| 32.2        |       | Certifications  of Chief Financial Officer Required by Rule 13a-14(b) of the Securities  Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed”  for purposes of Section 18 of the Securities Exchange Act of 1934, as  amended, or otherwise subject to the liability of that section. Further, this  exhibit shall not be deemed to be incorporated by reference into any filing  under the Securities Act of 1933, as amended, or the Securities Exchange Act  of 1934, as amended.) |

 

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