**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-Q**

 

**(MarkOne)**
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|----------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                     |
|       |       | **For  the quarterly period ended September 30, 2005**                                              |
|       |       |                                                                                                     |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from                       to                       **

 

**Commissionfile number 001-32290**

 

**GMHCOMMUNITIES TRUST**

(Exact Name ofRegistrant as Specified in Its Charter)

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

 

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

 

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

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes ** **o   No  ý

 

On October 31, 2005,39,699,843 of the registrant’s common shares of beneficial interest, $0.001 parvalue, were outstanding. This amount includes 33,854 restricted common sharesthat are considered outstanding for voting purposes and are eligible to receivedividend distributions payable to common shareholders, but are not consideredoutstanding under generally accepted accounting principles for purposes of thefinancial statements included in this report.

 

 

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**GMHCOMMUNITIES TRUST**

 

**INDEXTO FORM 10-Q**

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

 

 

**CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Our disclosure andanalysis in this report contain forward-looking statements within the meaningof Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. Forward-looking statementsprovide our current expectations or forecasts of future events and are notstatements of historical fact. These forward-looking statements includeinformation about possible or assumed future events, including, among otherthings, operating or financial performance, strategic plans and objectives, orregulatory or competitive environments. Statements regarding the followingsubjects are forward-looking by their nature:

 

•         our ability to successfullyimplement our business strategy, including our ability to acquire and managestudent housing properties and to secure and operate military housing privatizationprojects;

 

•         our projected operating resultsand financial condition;

 

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

 

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

 

•         estimates relating to, and ourability to pay, future dividends;

 

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

 

•         our understanding of ourcompetition, market opportunities and trends;

 

•         projected timing and amounts ofcapital expenditures; and

 

•         the impact of technology on ourproperties, operations and business.

 

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

 

•         the factors referenced in the424(b) prospectus relating to our most recent public offering of commonshares, as filed with the Securities and Exchange Commission (“SEC”) on September 28,2005, including those sections of the prospectus titled “Risk Factors,” “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” and “OurBusiness and Properties;”

 

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

 

2

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

 

•         availability of qualifiedpersonnel;

 

•         unanticipated costs associatedwith the acquisition and integration of our student housing property acquisitionsand development projects, and military housing privatization projects;

 

•         the effects of military baserealignment and closures on installations covered by our military housingprivatization projects;

 

•         high leverage on the entitiesthat own the military housing privatization projects;

 

•         reductions in governmentmilitary spending;

 

•         changes in student populationenrollment at colleges and universities or adverse trends in the off-campusstudent housing market;

 

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

 

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

 

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

 

•         potential liability underenvironmental or other laws; and

 

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

 

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

 

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**PART I— FINANCIAL INFORMATION**

 

**Item1.    Financial Statements**

 

**GMHCOMMUNITIES TRUST**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(Unaudited and inthousands, except par value and number of shares)

 
| ** **                                                                                                                                                                        | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                        |       |                         |       |                        |       |
| Real estate investments:                                                                                                                                                          |       |                         |       |                        |       |
| Student housing  properties                                                                                                                                                       |       | $                            | 1,080,304  |                        | $          | 638,635 |   |
| Accumulated  depreciation                                                                                                                                                         |       | (19,109                      | )     | (3,905                      | )     |
|                                                                                                                                                                              |       | 1,061,195                    |       | 634,730                     |       |
| Corporate assets:                                                                                                                                                                 |       |                         |       |                        |       |
| Corporate assets                                                                                                                                                                  |       | 7,686                        |       | 11,625                      |       |
| Accumulated  depreciation                                                                                                                                                         |       | (443                         | )     | (241                        | )     |
|                                                                                                                                                                              |       | 7,243                        |       | 11,384                      |       |
| Cash and cash equivalents                                                                                                                                                         |       | 33,248                       |       | 60,926                      |       |
| Restricted cash                                                                                                                                                                   |       | 12,575                       |       | 2,313                       |       |
| Accounts and other receivables, net:                                                                                                                                              |       |                         |       |                        |       |
| Related party                                                                                                                                                                     |       | 21,912                       |       | 9,309                       |       |
| Third party                                                                                                                                                                       |       | 5,365                        |       | 2,257                       |       |
| Investments in military housing projects                                                                                                                                          |       | 37,220                       |       | 39,482                      |       |
| Deferred contract costs                                                                                                                                                           |       | 470                          |       | 126                         |       |
| Deferred financing costs, net                                                                                                                                                     |       | 4,064                        |       | 2,820                       |       |
| Lease intangibles, net                                                                                                                                                            |       | 3,244                        |       | 4,994                       |       |
| Deposits                                                                                                                                                                          |       | 672                          |       | 1,848                       |       |
| Other assets                                                                                                                                                                      |       | 6,080                        |       | 2,872                       |       |
| Total assets                                                                                                                                                                      |       | $                            | 1,193,288  |                        | $          | 773,061 |   |
| **LIABILITIES AND BENEFICIARIES’ EQUITY**                                                                                                                                    |       |                         |       |                        |       |
| Notes payable                                                                                                                                                                     |       | $                            | 629,171    |                        | $          | 370,007 |   |
| Line of credit                                                                                                                                                                    |       | 137,000                      |       | —                      |       |
| Accounts payable:                                                                                                                                                                 |       |                         |       |                        |       |
| Related party                                                                                                                                                                     |       | 57                           |       | 277                         |       |
| Third party                                                                                                                                                                       |       | 688                          |       | 1,160                       |       |
| Accrued expenses                                                                                                                                                                  |       | 24,233                       |       | 9,308                       |       |
| Dividends and distributions payable                                                                                                                                               |       | 14,107                       |       | 9,583                       |       |
| Other liabilities                                                                                                                                                                 |       | 10,728                       |       | 4,907                       |       |
| Total liabilities                                                                                                                                                                 |       | 815,984                      |       | 395,242                     |       |
| Minority interest                                                                                                                                                                 |       | 197,120                      |       | 182,118                     |       |
| Beneficiaries’ equity:                                                                                                                                                       |       |                         |       |                        |       |
| Common shares of  beneficial interest, $0.001 par value; 500,000,000 shares authorized,  30,350,989 issued and outstanding at September 30, 2005 and  December 31, 2004 |       | 30                           |       | 30                          |       |
| Preferred shares—100,000,000 shares authorized, no  shares issued or outstanding                                                                                             |       | —                       |       | —                      |       |
| Additional paid-in capital                                                                                                                                                        |       | 200,367                      |       | 200,276                     |       |
| Cumulative earnings                                                                                                                                                               |       | 5,373                        |       | 251                         |       |
| Cumulative dividends                                                                                                                                                              |       | (25,586                      | )          | (4,856                      | )          |
| Total beneficiaries’ equity                                                                                                                                                  |       | 180,184                      |       | 195,701                     |       |
| Total liabilities and beneficiaries’ equity                                                                                                                                  |       | $                            | 1,193,288  |                        | $          | 773,061 |   |

 

*Seeaccompanying notes to condensed consolidated and combined financial statements.*

 

4

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**GMHCOMMUNITIES TRUST AND THE GMH PREDECESSOR ENTITIES**

**CONDENSEDCONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS**

(Unaudited and inthousands, except share and per share information)

 
| ** **                                               | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                               | ** ** | **(Company)**                             | ** ** | **(Predecessor)**                        | ** ** | **(Company)** | ** ** | **(Predecessor)** | ** ** |
|                                                     |       |                                      |       |                                     |       |   |   |   |   |
| **Revenue:**                                             | ** ** | ** **                                | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rent and other property income                           |       | $                                         | 35,429     |                                     | $          | 6,753 |   | $ | 91,033 |   | $ | 7,023 |   |
| Expense reimbursements:                                  |       |                                      |       |                                     |       |   |   |   |   |
| Related party                                            |       | 20,744                                    |       | 8,702                                    |       | 42,475 |   | 16,669 |   |
| Third party                                              |       | 1,299                                     |       | 1,906                                    |       | 3,876 |   | 5,475 |   |
| Management fees:                                         |       |                                      |       |                                     |       |   |   |   |   |
| Related party                                            |       | 1,838                                     |       | 967                                      |       | 5,350 |   | 2,683 |   |
| Third party                                              |       | 1,364                                     |       | 752                                      |       | 3,015 |   | 3,430 |   |
| Other fee income-related party                           |       | 7,181                                     |       | 2,115                                    |       | 14,762 |   | 4,174 |   |
| Other income                                             |       | 81                                        |       | 141                                      |       | 248 |   | 493 |   |
| Total revenue                                            |       | 67,936                                    |       | 21,336                                   |       | 160,759 |   | 39,947 |   |
| **Operating Expenses:**                                  | ** ** | ** **                                | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Property operating expenses                              |       | 17,306                                    |       | 5,808                                    |       | 39,900 |   | 9,851 |   |
| Reimbursed expenses                                      |       | 22,043                                    |       | 10,608                                   |       | 46,351 |   | 22,144 |   |
| Real estate taxes                                        |       | 3,428                                     |       | 490                                      |       | 8,003 |   | 490 |   |
| Administrative expenses                                  |       | 2,983                                     |       | 2,172                                    |       | 8,657 |   | 4,488 |   |
| Profits interest expense                                 |       | —                                    |       | 33,180                                   |       | — |   | 33,180 |   |
| Depreciation and amortization                            |       | 7,719                                     |       | 1,770                                    |       | 22,563 |   | 2,188 |   |
| Interest                                                 |       | 8,981                                     |       | 1,722                                    |       | 21,228 |   | 1,880 |   |
| Total operating expenses                                 |       | 62,460                                    |       | 55,750                                   |       | 146,702 |   | 74,221 |   |
| Income (loss) before minority interest and income  taxes |       | 5,476                                     |       | (34,414                                  | )          | 14,057 |   | (34,274 | ) |
| Minority interest                                        |       | 2,758                                     |       | —                                   |       | 7,021 |   | — |   |
| Income before income taxes                               |       | 2,718                                     |       | —                                   |       | 7,036 |   | — |   |
| Income taxes                                             |       | 976                                       |       | —                                   |       | 1,914 |   | — |   |
| Net income (loss)                                        |       | $                                         | 1,742      |                                     | $          | (34,414 | ) | $ | 5,122 |   | $ | (34,274 | ) |
|                                                     |       |                                      |       |                                     |       |   |   |   |   |
| Earnings per common share—basic                     |       | $                                         | 0.06       |                                     |       |   | $ | 0.17 |   |   |   |
|                                                     |       |                                      |       |                                     |       |   |   |   |   |
| Earnings per common share—diluted                   |       | $                                         | 0.05       |                                     |       |   | $ | 0.16 |   |   |   |
| Weighted-average shares outstanding during the  period:  |       |                                      |       |                                     |       |   |   |   |   |
| Basic                                                    |       | 30,350,989                                |       |                                     |       | 30,350,989 |   |   |   |
| Diluted                                                  |       | 32,786,617                                |       |                                     |       | 32,458,633 |   |   |   |
| Common share dividend declared per share                 |       | $                                         | 0.2275     |                                     |       |   | $ | 0.6825 |   |   |   |

 

*Seeaccompanying notes to condensed consolidated and combined financial statements.*

 

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**GMHCOMMUNITIES TRUST AND THE GMH PREDECESSOR ENTITIES**

**CONDENSEDCONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS**

(Unaudited and inthousands)

 
| ** **                                                                                    | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| ** **                                                                                    | ** ** | **(Company)**                            | ** ** | **(Predecessor)** | ** ** |
|                                                                                          |       |                                     |       |   |   |
| **Cash flows from operating activities:**                                                     |       |                                     |       |   |   |
| Net income (loss)                                                                             |       | $                                        | 5,122      |   | $ | (34,274 | ) |
| Adjustments to reconcile net income (loss) to net  cash from operating activities:            |       |                                     |       |   |   |
| Depreciation                                                                                  |       | 15,615                                   |       | 2,188 |   |
| Amortization:                                                                                 |       |                                     |       |   |   |
| Lease  intangibles                                                                            |       | 6,948                                    |       | — |   |
| Notes payable  fair value adjustment                                                          |       | (1,637                                   | )          | (266 | ) |
| Deferred loan  costs                                                                          |       | 905                                      |       | 36 |   |
| Restricted  shares                                                                            |       | 78                                       |       | — |   |
| Allowance for  doubtful accounts                                                              |       | 935                                      |       | — |   |
| Equity in  earnings of unconsolidated entities                                                |       | —                                   |       | (70 | ) |
| Income from  investments in military housing projects                                         |       | (1,113                                   | )          | — |   |
| Minority  interest                                                                            |       | 7,021                                    |       | — |   |
| Changes in operating assets and liabilities:                                                  |       |                                     |       |   |   |
| Restricted cash                                                                               |       | (10,262                                  | )          | (1,966 | ) |
| Accounts and  other receivables                                                               |       | (17,662                                  | )          | (346 | ) |
| Deferred  contract costs                                                                      |       | (344                                     | )          | (4,954 | ) |
| Due from related  parties                                                                     |       | —                                   |       | (4,778 | ) |
| Other assets                                                                                  |       | (2,028                                   | )          | (4,972 | ) |
| Accounts payable                                                                              |       | (693                                     | )          | — |   |
| Accrued expenses                                                                              |       | 14,594                                   |       | 14,171 |   |
| Accrued profits  interest                                                                     |       | —                                   |       | 33,180 |   |
| Other  liabilities                                                                            |       | 5,821                                    |       | 1,030 |   |
| Net cash from operating activities                                                            |       | 23,300                                   |       | (1,021 | ) |
| **Cash flows from investing activities:**                                                     |       |                                     |       |   |   |
| Property acquisitions                                                                         |       | (329,160                                 | )          | (120,152 | ) |
| Capitalized expenditures                                                                      |       | (3,300                                   | )          | (75 | ) |
| Military housing project equity distributions  (investments)                                  |       | 4,459                                    |       | (3 | ) |
| Purchase of management contracts                                                              |       | —                                   |       | (1,186 | ) |
| Net cash from investing activities                                                            |       | (328,001                                 | )          | (121,416 | ) |
| **Cash flows from financing activities:**                                                     |       |                                     |       |   |   |
| Common share dividends                                                                        |       | (18,661                                  | )          | — |   |
| Limited partnership unit distributions                                                        |       | (18,205                                  | )          | — |   |
| Owner distributions                                                                           |       | —                                   |       | (31,652 | ) |
| Owner contributions                                                                           |       | —                                   |       | 90,688 |   |
| Proceeds from line of credit                                                                  |       | 244,000                                  |       | — |   |
| Repayment of line of credit                                                                   |       | (107,000                                 | )          | — |   |
| Proceeds from notes payable                                                                   |       | 202,228                                  |       | 69,536 |   |
| Repayment of notes payable                                                                    |       | (23,190                                  | )          | (808 | ) |
| Short-term borrowings from owner                                                              |       | —                                   |       | 3,697 |   |
| Payment of financing costs                                                                    |       | (2,149                                   | )          | (663 | ) |
| Costs related to initial public offering                                                      |       | —                                   |       | (5,443 | ) |
| Net cash from financing activities                                                            |       | 277,023                                  |       | 125,355 |   |
| Net (decrease) increase in cash and cash equivalents                                          |       | (27,678                                  | )          | 2,918 |   |
| Cash and cash equivalents, beginning of period                                                |       | 60,926                                   |       | 515 |   |
| Cash and cash equivalents, end of period                                                      |       | $                                        | 33,248     |   | $ | 3,433 |   |
|                                                                                          |       |                                     |       |   |   |
| **Supplemental information:**                                                                 |       |                                     |       |   |   |
| Real estate acquired by assuming debt                                                         |       | $                                        | 83,341     |   | $ | 128,622 |   |
| Issuance of units of limited partnership interest  for purchase of student housing properties |       | $                                        | 28,528     |   | $ | — |   |
| Property distributed at net book value                                                        |       | $                                        | 3,854      |   | $ | 381 |   |
| Debt distributed at net book value                                                            |       | $                                        | 4,208      |   | $ | — |   |
| Cash paid for interest                                                                        |       | $                                        | 20,846     |   | $ | 1,880 |   |
| Cash paid for taxes                                                                           |       | $                                        | 2,272      |   | $ | — |   |
| Furniture and computers contributed at net book  value                                        |       | $                                        | —     |   | $ | 463 |   |

 

*Seeaccompanying notes to condensed consolidated and combined financial statements.*

 

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**GMHCOMMUNITIES TRUST AND THE GMH PREDECESSOR ENTITIES**

 

Notes to CondensedConsolidated and Combined Financial Statements

September 30,2005

(Unaudited)

 

**1. Organizationand Basis of Presentation**

 

***Organization***

 

Management of both GMHCommunities Trust (the “Trust,” and collectively with its subsidiaries, “we” orthe “Company) and The GMH Predecessor Entities (defined below) has preparedthese condensed consolidated and combined financial statements pursuant to the rules andregulations of the Securities and Exchange Commission (the “SEC”). Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with U.S. generally accepted accounting principles havebeen condensed or combined pursuant to such rules and regulations,although we believe that the disclosures are adequate to make the informationpresented not misleading. The condensed consolidated and combined financialstatements should be read in conjunction with the audited financial statementsand the notes thereto of the Trust and The GMH Predecessor Entities included inthe Trust’s Annual Report on Form 10-K for the year endedDecember 31, 2004, as filed with the SEC on March 31, 2005. Inmanagement’s opinion, all adjustments, consisting solely of normal recurringadjustments, necessary to present fairly the consolidated financial position ofthe Trust and the consolidated and combined results of operations and cashflows of the Trust and The GMH Predecessor Entities are included. The resultsof operations for such interim periods are not necessarily indicative of theresults for the full year.

 

The Trust elected toqualify as a real estate investment trust, or REIT, under the Internal RevenueCode of 1986, as amended (the “Code”) commencing with its taxable year ended December 31,2004. The Trust was formed as a Maryland real estate investment trust in May 2004and prior to completion of our initial public offering, had no operations. Wecompleted our initial public offering on November 2, 2004, pursuant towhich we sold an aggregate of 30,350,989 common shares of beneficial interestat an offering price of $12.00 per share, and raised an aggregate of$331.7 million in net proceeds, after deducting the underwriters’ discountand other offering-related expenses. We contributed the net proceeds from theoffering to our operating partnership, GMH Communities, LP, a Delaware limitedpartnership (the “Operating Partnership”), in exchange for units of partnershipinterest. As of September 30, 2005, the Operating Partnership had61,978,306 units of partnership interest outstanding, of which the Trust owned29,769,820 units of limited partnership interest; and through a wholly-ownedsubsidiary, GMH Communities GP Trust, the Trust owned 581,169 units of generalpartnership interest, which represents 100% of the general partnership interestin the Operating Partnership. As of September 30, 2005, there were31,627,317 units of limited partnership interest outstanding that were notowned by the Company.

 

In September 2005,we commenced a public offering of common shares. The offering was completed on October 4,2005 with the sale of 9,315,000 common shares of beneficial interest, including1,215,000 shares issued upon full exercise of the underwriters’ over-allotmentoption, at an offering price of $14.25 per share. The Company raised anaggregate of $124.7 million in net proceeds from the offering after deductingthe underwriters’ discounts, payment of financial advisory fees and otheroffering-related expenses.  The netproceeds of this offering, which the Company contributed to the OperatingPartnership in exchange for units of partnership interest, were used by theOperating Partnership to repay outstanding indebtedness under our creditfacility.

 

We, through the OperatingPartnership and its subsidiaries, are a self-advised, self-managed, specialtyhousing company that focuses on providing housing to college and university studentsresiding off-campus and to members of the U.S. military and their familieslocated on or near military bases throughout the United States. Through theOperating Partnership, we own and operate our student housing properties andthe interests in joint ventures that own military housing privatizationprojects (“military housing projects”).

 

***Formation Transactions***

 

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

 

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

 

•         353 Associates, L.P. owns andoperates a 44,721 square foot commercial office building located in NewtownSquare, Pennsylvania. In connection with the completion of our initial publicoffering on November 2, 2004, Mr. Holloway and an entity wholly-ownedby him contributed 100% of the equity interests in 353 Associates, L.P. to theOperating Partnership. The building is currently used as the Company’scorporate headquarters. 353 Associates, L.P. historically leased the buildingto certain of The GMH Predecessor Entities and other entities owned or controlledby Mr. Holloway. We continue to lease a portion of the building to certainother entities owned or controlled by Mr. Holloway that were notcontributed to the Company in connection with our initial public offering.

 

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

 

•         GMH Military Housing, LLC,through its wholly-owned subsidiaries, engages in the development,construction, renovation and management of family military housing unitslocated on or near military bases throughout the United States. In connectionwith the formation of the Operating Partnership on July 27, 2004, Mr. Hollowaycontributed 100% of the outstanding equity interests in GMH Military Housing,LLC and each of its wholly-owned subsidiaries to the Operating Partnership. GMHMilitary Housing, LLC has made an election to be treated as a corporation forfederal income tax purposes as a “taxable REIT subsidiary,” as defined in theCode.

 

•         Corporate Flight Services, LLC (“CorporateFlight LLC”) owned and operated a corporate aircraft that had been leased tocertain of The GMH Predecessor Entities and other entities owned or controlledby Mr. Holloway that were not contributed to the Company in connectionwith our initial public offering. In connection with the completion of ourinitial public offering on November 2, 2004, Mr. Holloway contributed100% of the outstanding equity interests in Corporate Flight LLC to theOperating Partnership. In February 2005, the Company transferred itsinterest in Corporate Flight LLC, including the corporate aircraft andassociated debt initially contributed to the Operating Partnership at the timeof the initial public offering, back to Mr. Holloway.  See Note 8.

 

***Redemption of Operating Partnership Interests***

 

Prior to our initialpublic offering, Vornado and Mr. Holloway were the sole equity holders ofthe Operating Partnership and each held, through affiliated entities, generalpartnership interests in the Operating Partnership. Concurrent with the closingof the Company’s initial public offering on November 2, 2004, we becamethe sole general partner of the Operating Partnership. In accordance with theterms of the limited partnership agreement of the Operating Partnership andconcurrent with the completion of our initial public offering on November 2,2004, we paid approximately $77.3 million to Vornado relating to theredemption of all of Vornado’s Class B partnership interests in theOperating Partnership based on Vornado’s $113.8 million contribution tothe Operating Partnership as of the date of the offering, plus a preferentialreturn in the amount of $13.5 million, and after giving effect to thesurrender by Vornado of $50.0 million in value of its pre-offeringpartnership interest in the Operating Partnership, as payment for the portionof its warrant required to be exercised upon completion of our initial publicoffering under the terms of the warrant. Upon closing of our initial publicoffering, Vornado exercised the warrant to purchase 6,666,667 units of limitedpartnership interest in our Operating Partnership at a price of $7.50 per unit,which represented a 20.972% economic interest in the Operating Partnershipimmediately prior to our initial public offering. As of September 30,2005, the remaining portion of the warrant was exercisable for up to 5,857,164units of limited partnership interest of the Operating Partnership or commonshares, at an exercise price of $8.54 per unit or common share, at any timeduring the 18 months following the closing of our initial public offering.

 

In addition, inconnection with the redemption of Vornado’s interests in the OperatingPartnership and amendment to the partnership agreement for the OperatingPartnership on November 2, 2004, Mr. Holloway’s Class A limitedpartnership interest and managing general partnership interest in the OperatingPartnership were exchanged for 19,624,294 limited partnership units and Mr. Hollowaycontributed additional assets to the Operating Partnership, including interestsin entities that own our corporate headquarters and aircraft and interests inan additional student housing property.

 

In recognition of pastservice, certain employees of The GMH Predecessor Entities and other entitiesaffiliated with Gary M. Holloway were awarded profits interests by Gary M.Holloway. These employees were eligible to participate in the net proceeds orvalue received by Gary M. Holloway upon the sale or disposition of certainstudent housing properties and the military housing business in excess of Mr. Holloway’sequity investments in such assets.  These employees rendered all servicesand satisfied all conditions necessary to earn the right to benefit from theseprofits interests as of the date that such profits interests wereawarded.  In accordance with Financial Accounting Standards StatementNo.5,*Accounting for Contingencies*,compensation expense relating to the award of these profits interests wasrequired to be recognized by The GMH Predecessor Entities when the sale ordisposition of the assets resulting in proceeds received by Gary M. Holloway inan amount in excess of his equity investment in such assets becameprobable.  This amount became probable during the third quarter of 2004when, in connection with the contribution of the ownership interests in GMHMilitary Housing LLC, College Park Management, Inc. and other assets by Mr. Hollowayto our operating

 

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partnership inanticipation of the initial public offering of the Company, the remainingprofits interests awards were amended to fix the value of such awards at $33.2million to be paid to these employees unconditionally.  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.

 

***Basis of Presentation***

 

The financial statementsof GMH Communities Trust included herein present the consolidated financialposition of the Company and its subsidiaries as of September 30, 2005 and December 31,2004, the consolidated results of their operations for the three and ninemonths ended September 30, 2005 and their consolidated cash flows for thenine months ended September 30, 2005. All intercompany items andtransactions have been eliminated.

 

The financial statementsof The GMH Predecessor Entities included herein present the combined results oftheir operations for the three and nine months ended September 30, 2004and their combined cash flows for the nine months ended September 30,2005. All intercompany items and transactions have been eliminated.

 

**2.Summary of Significant Accounting Policies**

 

***Use of Estimates***

 

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

 

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

 

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

 

The value of in-placeleases is based on the difference between (i) the property valued withexisting in-place leases and (ii) the property valued as if vacant. Aslease terms typically are 12 months or less, rates on in-place leasesgenerally approximate market rental rates. Factors that we consider in thevaluation of in-place leases include an estimate of incremental carrying costsduring the expected lease-up periods considering current market conditions andnature of the tenancy. We amortize the value of in-place leases to expense overthe remaining term of the respective leases. Accumulated amortization relatedto intangible lease costs was $9.2 million at September 30, 2005 and$2.3 million at December 31, 2004.

 

Purchase prices ofstudent housing properties to be acquired are not expected to be allocated totenant relationships considering the terms of the leases and the expectedlevels of renewals.

 

We expense routine repairand maintenance expenditures that do not improve the value of an asset orextend its useful life, including turnover costs such as cleaning and interiorpainting. We capitalize expenditures that improve the value and extend the usefullife of an asset. We compute depreciation using the straight-line method overthe estimated useful lives of the assets, which is 40 years for buildingsincluding student housing properties and the commercial office building, andthree to five years for residential furniture and appliances. During the thirdquarter of each fiscal year, the Company typically will experience an increasein property operating expenses over other quarters as a result of repair andmaintenance expenditures relating to turnover of units at student housingproperties. The Company's student housing lease terms generally commence inAugust or September to coincide with the beginning of the academic year.Accordingly, the Company expects to incur a majority of its repair and maintenancecosts in the third quarter to prepare for new residents.

 

In accordance withStatement of Financial Accounting Standards No. 144 (“SFAS 144”),*Accounting for the Impairment or Disposal ofLong-Lived Assets*, long-lived assets, such as real estate investmentsand purchased intangibles subject to amortization, are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountmay not be recoverable. These circumstances may include, but are not limitedto, operational performance, market conditions and competition from otheroff-campus properties and on-campus housing, legal and environmental concerns,and results of appraisals or other information obtained as part of a financingor disposition strategy. We review recoverability of assets to be held and usedthrough 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 undiscounted future cashflows, an impairment charge is recognized by the amount by which the carryingvalue of the asset exceeds the fair value of the asset determined usingcustomary valuation techniques, such as the present value of expected futurecash flows. Assets to be disposed of would be separately presented in thebalance sheet and reported at the lower of the carrying amount or fair valueless costs to sell, and no longer would be depreciated.

 

***Cash Equivalents***

 

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

 

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***Restricted Cash***

 

Restricted cash consistsof security deposits and cash held as escrows for real estate taxes and capitalexpenditures as required by the terms of various loan agreements.

 

***Allowance for Doubtful Accounts***

 

We estimate thecollectibility of receivables generated by rental and other income as a resultof the operation of our student housing properties. If we believe that 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 thecollectibility of fee income and expense reimbursements generated by themanagement of student housing properties owned by others and through the provisionof development, construction, renovation and management services to ourmilitary housing projects based upon the individual facts and circumstances,and record a reserve for specific amounts, if necessary.

 

Accounts receivable arestated net of an allowance for doubtful accounts of $409,000 at September 30,2005 and $159,000 at December 31, 2004.

 

***Deferred Financing Costs***

 

Costs incurred inconnection with obtaining financing are capitalized and amortized on astraight-line basis over the term of the related loan, which is not materiallydifferent than the effective interest method. Amortization of deferredfinancing costs is included in interest expense. Accumulated amortization ofdeferred financing costs was $915,000 at September 30, 2005 and $359,000at December 31, 2004.

 

***Deferred Contract Costs***

 

Deferred contract costsrepresent costs attributable to a specific military housing project incurred inconnection with seeking Congressional approval of a Community Development andManagement Plan, or CDMP, subsequent to the project being awarded by theDepartment of Defense, or DoD. In addition, deferred contract costs alsoinclude transition and closing costs incurred that are expected to bereimbursed by the military housing project. Such amounts are evaluated as tothe probability of recovery and costs that are not considered probable ofrecovery are written off. Revenue is recognized and the related costs areexpensed at the time that the reimbursement for preparing the CDMP is approvedby Congress or at closing of the military housing project.

 

***Deposits***

 

Deposits primarilyconsist of amounts paid to third parties in connection with planned studenthousing acquisitions and amounts paid to lenders that provide the relatedfinancing or the refinancing of existing loans.  At September 30,2005, deposits for planned acquisitions and financings totaled less than$0.1 million and other deposits not related to acquisitions or financingstotaled $0.6 million. At December 31, 2004, deposits for plannedacquisitions totaled $0.8 million and deposits related to financingstotaled $1.0 million.

 

***Advertising Costs***

 

Advertising costs areexpensed as incurred. Advertising expense for the three and nine-month periodsended September 30, 2005 and 2004 was $513,000, $1,394,000, $21,000, and$41,000, respectively.

 

***Revenue Recognition***

 

*StudentHousing Segment*

 

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

 

Standard management feesare based on a percentage of monthly cash receipts or gross monthly rental andother revenues generated by the properties managed for others. We recognizethese fees when the cash is received by the property or the revenue is earnedby the managed property, depending upon whether the management agreementrelating to a student housing property bases the earned management fee on cashversus accrual basis revenue recognition.

 

Incentive management feesare earned as a result of the achievement of certain operating performancecriteria over a specified period of time by certain managed properties,including targeted annual debt service coverage ratios. Revenue is recognizedat the amount that would be due under the contract if the contract wasterminated on the balance sheet date.

 

Expense reimbursements arecomprised primarily of salary and related costs of our employees working atcertain properties we manage for others, the cost of which is reimbursed by theowners of the related properties. We accrue expense reimbursements as therelated expenses are incurred.

 

*MilitaryHousing Segment*

 

Standard management feesare based on a percentage of revenue generated by the military housing projectsfrom the basic allowance for housing provided by the government to servicemembers, referred to as BAH, and are recognized when the revenue is earned by

 

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the military housingprojects. Incentive management fees are based upon the satisfaction of certaincriteria including, among other things, satisfying designated benchmarksrelating to emergency work order response, occupancy rates, home turnover andresident satisfaction surveys. Incentive management fees are recognized whenthe various criteria stipulated in the management contract have been satisfied.

 

Standard development andconstruction/renovation fees are based on a percentage of development andconstruction/renovation costs incurred by the military housing projectsincluding hard and soft costs and financing costs, and are recognized on amonthly basis as the costs are incurred by the military housing projects. Hardcosts consist of costs relating to goods such as building components, furnitureand equipment and other tangible assets; and soft costs consist of costsincurred relating to intangible services such as consulting, architectural anddesign services. Incentive development and construction/renovation fees arebased upon the satisfaction of certain criteria including, among other things,completing a number of housing units according to schedule, achieving specificsafety records and implementing small business or minority subcontractingplans. Incentive development and construction/renovation fees are recognizedwhen the various criteria stipulated in the contract have been satisfied.

 

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

 

Business development feesare earned from companies with which we have relationships in recognition ofbusiness development efforts and expenses incurred by us in connection withpursuing military housing projects. The fees consist of (i) a base fee,which is a fee paid to the Company in consideration of the Company’s ongoingpursuit of additional projects, and is paid regardless of whether a project isawarded, and (ii) an incentive fee, which is paid over the course of anawarded project based on a percentage of certain development costs incurred bythe project.  The base fees are recognized on a straight-line basis overthe term of the related business development agreement.  The incentivefees are recognized as the related costs are incurred by the respectivemilitary housing projects.

 

Preferred returns areearned on our investments in military housing projects.  The preferredreturns are based on a fixed percentage of our investment in military housingprojects and are recognized at the rates specified in the agreements, subjectto projected availability of funds in the underlying project.  Accruedpreferred returns are periodically evaluated for collectibility.

 

***Reimbursed Expenses***

 

Expense reimbursementsinclude payroll and related expenses, incurred for certain employees engaged inthe operation of certain student housing properties and military housingprojects under management, and other operating expenses that are reimbursed tothe Company by the owner of the related student housing property or militaryhousing project.

 

***Minority Interest***

 

Minority interest as initiallyrecorded at the date of our initial public offering represented the net equityof the Operating Partnership, including the proceeds received from the sale ofthe warrant to Vornado, multiplied by the ownership percentage of holders oflimited partnership units in the Operating Partnership other than the Company.The Operating Partnership is obligated to redeem, at the request of a holder,each unit of limited partnership interest for cash or common shares on aone-for-one basis, subject to adjustments for share splits, dividends,recapitalizations or similar events. If the minority interest unit holders’share of a current year loss would cause the minority interest balance to beless than zero, the minority interest balance will be reported as zero unlessthere is an obligation of the minority interest holders to fund those losses.Any losses in excess of the minority interest will be charged against equity.If future earnings materialize, equity will be credited for all earnings up tothe amount of those losses previously absorbed. Distributions to limitedpartnership unit holders other than the Company are recorded as a reduction tominority interest.

 

In March 2005, June 2005and September 2005, the Company declared quarterly distributions of $0.2275per outstanding unit of limited partnership interest. The March 2005distribution to the holders of limited partnership units in the OperatingPartnership of $6.7 million was recorded as a reduction to minorityinterest and was paid in April 2005. The June 2005 distribution tothe holders of limited partnership units in the Operating Partnership of$6.8 million was recorded as a reduction to minority interest and was paidin July 2005. The September 2005 distribution to the holders oflimited partnership units in the Operating Partnership of $7.2 million wasrecorded as a reduction to minority interest on the September 30, 2005balance sheet and was paid in October 2005.

 

***Investments in Military Housing Projects***

 

We evaluate each of ourinvestments in military housing projects to determine if the underlying entityis a variable interest entity (“VIE”) as defined under FASB FinancialInterpretation No. 46 (as revised) (“FIN 46”). If an entity is deemed tobe a VIE pursuant to FIN 46, the entity that absorbs a majority of the expectedlosses of the VIE is deemed to be the primary beneficiary and must consolidatethe VIE. If the entity is not a VIE, it is evaluated for consolidation based oncontrolling voting interests. If we have the majority voting interest with theability to control operations and where no approval, veto or other importantrights have been granted to other holders, the entity would be consolidated. Weare not the primary beneficiary of any VIEs, nor do we have controlling votinginterests in any of our military housing projects. We record investments inmilitary housing projects initially at our cost and subsequently adjust them toreflect our preferred return, and other distributions.

 

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***Income Taxes***

 

GMH Communities Trustelected to be taxed as a REIT under the Code when it filed its tax return forthe year ended December 31, 2004 in September 2005 pursuant to anextension granted in March 2005. To continue to qualify as a REIT, theCompany must meet a number of organizational and operational requirements,including a requirement that we currently distribute at least 90% of ouradjusted taxable income to our shareholders. We believe we are organized andoperate in a manner that allows us to qualify for taxation as a REIT under theCode, and it is our intention to adhere to these requirements and maintain theCompany’s REIT status in the future. Accordingly, no provision has been madefor federal income taxes in the accompanying consolidated financial statements,other than with respect to the Company’s taxable REIT subsidiaries.

 

In conformity with theCode and applicable state and local tax statutes, taxable income or loss of TheGMH Predecessor Entities was required to be reported in the tax returns of GaryM. Holloway, Sr. and Vornado, 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 of TheGMH Predecessor Entities.

 

***Recent Accounting Pronouncements***

 

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

 

In November 2004,the Company established an equity incentive plan (the “Plan”) that provides forthe issuance of options, restricted shares, share appreciation rights,performance units and other equity based awards.  For the three and ninemonths ended September 30, 2005, the Company issued 8,126 and 33,854restricted common shares under the Plan to non-employee members of the Company’sBoard of Trustees. The restricted common shares vest over a three-year periodfrom the grant date. The restricted common shares are entitled to the samedividend and voting rights during the vesting period as the issued andoutstanding common shares. The fair value of the awards was calculated based onthe closing market price of the Company’s common shares on the grant date andis expensed on a straight-line basis over the vesting period.  The Companyrecognized non-cash stock-based compensation expense related to the restrictedcommon shares of $32,000 and $78,000 for the three and nine months ended September 30,2005, respectively.

 

***Reclassifications***

 

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

 

**3. Real Estate Investments and Acquisitions**

 

As of September 30,2005, the Company owned 52 student housing properties located near 39 collegesand universities in 24 states. These properties contain an aggregate of 9,657units and 31,371 beds. The Company’s investment in student housing propertiesat September 30, 2005 and December 31, 2004 was as follows (inthousands):

 
| ** **                           | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Land                                 |       | $                            | 212,098    |                        | $          | 124,656 |   |
| Building and improvements            |       | 845,459                      |       | 501,680                     |       |
| Residential furniture and appliances |       | 22,747                       |       | 12,299                      |       |
|                                 |       | $                            | 1,080,304  |                        | $          | 638,635 |   |

 

During the three monthsended September 30, 2005, the Company acquired six student housing propertieslocated near six colleges and universities in six states with an aggregate of1,213 units and 3,237 beds for an aggregate acquisition cost of approximately$123.4 million.

 

During the three monthsended June 30, 2005, the Company acquired eight student housing propertieslocated near six colleges and universities in five states with an aggregate of1,354 units and 4,300 beds for an aggregate acquisition cost of approximately$147.4 million.  In connection with the acquisition of two of theseproperties, the Company issued a total of 1,940,282 units of limitedpartnership interest in the Operating Partnership to the sellers with anaggregate fair value of $26.9 million.  The fair value of the limitedpartnership units was based on the closing price of the Company’s common shareson the acquisition date.  The fair value of the units of limitedpartnership interest was recorded as an increase to minority interest.

 

During the three monthsended March 31, 2005, the Company acquired eight student housing propertieslocated near six colleges and universities in six states with an aggregate of1,607 units and 4,795 beds for an aggregate acquisition cost of approximately

 

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$172.8 million. GaryM. Holloway, Sr., four other employees of the Company, including twoexecutive officers of the Company, and an employee of an entity owned by Mr. Holloway,held an ownership interest in two of these properties that were acquired for atotal purchase price of $38.2 million.  The Company paid $36.6million of cash to investors in the selling entity not affiliated with theCompany and issued a total of 141,549 units of limited partnership interest inthe Operating Partnership to Mr. Holloway and these individuals with anaggregate fair value of $1.6 million in connection with the purchase of the twoproperties.  The fair value of the limited partnership units was based onthe closing price of the Company’s common shares on the acquisition date. Thefair value of the units of limited partnership interest was recorded as anincrease to minority interest.

 

InAugust 2005, the Company entered into a joint venture with aninstitutional investor to develop and construct two student housing properties.The joint venture plans to develop two 144 unit/576 bed purpose-built studenthousing communities located in Orono, Maine and Bowling Green, Ohio.  Construction is expected to be completed by August 2006,concurrent with the beginning of the 2006-2007 academic year.  Under the terms of the joint ventureagreement, the Company contributed the two undeveloped land parcels on whichthe properties will be built in exchange for a 10% equity interest in the jointventure.  In addition, the Company willmanage the development and construction of the joint venture properties andreceive a fee for these services. The Company has the option to purchase thejoint venture partners’ interest in the properties from the joint venturewithin one year of completion. The joint venture has obtained one constructionloan and expects to obtain a second construction loan in the fourth quarterthat will permit draws of up to $32.0 million to fund the construction of theproperties. In addition to customary default provisions, theconstruction loans shall be deemed to be in default if there is a materialdefault, after any applicable notice and cure period, under the Company’s$150.0 million senior unsecured revolving credit facility (see Note 7). TheCompany has guaranteed the repayment of up to $8.0 million of the constructionloans. The guarantee is reduced to $4.8 million in the event that no event ofdefault, as defined in the loan agreements, has occurred and certain otherconditions are satisfied.  The Company accounts for its investment inthe joint venture using the equity method of accounting.  The carrying value of the Company’sinvestment in the joint venture was $0.4 million at September 30, 2005 andis included in other assets on the accompanying consolidated balance sheet.

 

**4. Investments in Military Housing Projects**

 

Investments in militaryhousing projects are initially recorded at cost and are subsequently adjustedfor preferred returns earned and other distributions received. Preferredreturns earned on our investments in military housing projects are accrued atthe rates specified in the agreements, subject to projected availability offunds in the underlying project. Accrued preferred returns are periodicallyevaluated for collectibility.

 

In November 2003,GMH Military Housing, LLC and FW Military Housing LLC formed a joint ventureknown as GMH Military Housing-Fort Carson LLC, which acquired the ownershipinterests of an unrelated bankrupt entity that was a member of Fort CarsonFamily Housing LLC, the entity that owns the Fort Carson military housingproject. GMH Military Housing, LLC contributed approximately $2.4 millionto GMH Military Housing-Fort Carson LLC in return for its 10% interest in thejoint venture. The 10% ownership interest in the joint venture was accountedfor using the equity method of accounting from the acquisition date in November 2003through November 1, 2004. In connection with our initial public offeringon November 2, 2004, the remaining 90% interest in the joint venture wasacquired in exchange for the issuance to FW Military Housing LLC of 2,583,334units of limited partnership interest in the Operating Partnership having avalue of $31.0 million. This acquisition was recorded at the fair value ofthe consideration paid. During the three and nine months ended September 30,2005, the Company received $0.1 million and $4.0 million, respectively, ofequity distributions from Fort Carson Family Housing LLC.  The carrying value of this investment was$25.7 million at September 30, 2005 and $29.7 million at December 31,2004. The Company earns a preferred return on its investment in Fort CarsonFamily Housing LLC, which is paid on a monthly basis.

 

In November 2004,the Company and Benham Military Communities, LLC formed a joint venture knownas GMH/Benham Military Communities LLC for the purpose of investing in the NavyNortheast Region military housing project. The Company contributed$9.5 million to GMH/Benham Military Communities LLC in return for a 90%interest and Benham Military Communities, LLC invested $1.1 million for theremaining 10% interest. The Company consolidates GMH/Benham MilitaryCommunities LLC as it has a 90% economic interest and controls a majority ofthe voting interests. Benham Military Communities, LLC’s 10% interest isaccounted for as minority interest and is included in accrued expenses on theconsolidated balance sheet at September 30, 2005 and December 31,2004.  In November 2004, GMH/Benham Military Communities, LLCinvested $10.6 million in Northeast Housing LLC, which owns and operatesthe Navy Northeast Region military housing project. GMH/Benham MilitaryCommunities LLC earns a preferred return on its investment in Northeast HousingLLC. The preferred return will accrue, but not be paid, until the end of theinitial development period for the project in October 2010. The carryingvalue of this investment was $11.5 million at September 30, 2005 and$10.8 million at December 31, 2004.

 

**5. Income Taxes**

 

Current income taxexpense of the Company’s taxable REIT subsidiaries was $1.9 million,  which includes $1.3 million of federal taxesand $0.6 million of state taxes, for the nine months ended September 30,2005.  The federal statutory tax rate of the taxable REIT subsidiaries forthe nine months ended September 30, 2005 was 34%.  The effective taxrate of the taxable REIT subsidiaries for the nine months ended September 30,2005 was 32.5%. The Company’s effective tax rate is lower than the federalstatutory rate as a result of the permanent depreciation and amortization differencesbetween income subject to income tax for book and tax purposes.

 

**6. Notes Payable**

 

During the three monthsended September 30, 2005, a fixed-rate note payable in the amount of$6.6 million was assumed relating to

 

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the acquisition of astudent housing property and fixed-rate notes payable totaling $72.6 millionwere obtained in connection with the acquisition of five other student housingproperties and the refinancing of a previously acquired property. These notesrequire monthly payments of principal and/or interest, bear interest at fixedrates ranging from 4.76% to 5.30%, and mature at various dates through 2024. Inconjunction with the purchase accounting for these properties, the net carryingvalue of the assumed note payable was increased by $0.2 million to recordit at its estimated fair value. The fair value of the assumed note wascalculated as the difference between the present value of the note using acurrent estimated market rate of interest and the outstanding principal amount.This amount is being amortized as an adjustment to interest expense over theterm of the related debt.

 

During the three monthsended June 30, 2005, fixed-rate notes payable totaling $28.8 millionwere assumed relating to the acquisition of two student housing properties andfixed-rate notes payable totaling $58.8 million were obtained in connectionwith the acquisition of five student housing properties. These notes requiremonthly payments of principal and/or interest, bear interest at fixed ratesranging from 4.50% to 5.46%, and mature at various dates through 2015. Inconjunction with the purchase accounting for these properties, the net carryingvalue of the assumed notes payable was increased by $0.4 million to recordthem at their estimated fair value. The fair value of the assumed notes wascalculated as the difference between the present value of the notes using acurrent estimated market rate of interest and the outstanding principal amount.This amount is being amortized as an adjustment to interest expense over theterm of the related debt.

 

During the three monthsended June 30, 2005, a variable-rate note payable in the amount of$6.8 million was obtained in connection with the acquisition of a studenthousing property. The note requires payments of interest only at LIBOR plus2.05% (LIBOR on this loan was 3.56% at September 30, 2005) and matures in2015.

 

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

 

During the three monthsended March 31, 2005, fixed-rate notes payable totaling $48.0 millionwere assumed relating to the acquisition of four student housing properties anda fixed-rate note payable in the amount of $31.4 million was obtained inconnection with the acquisition of another student housing property. These notesrequire monthly payments of principal and/or interest, bear interest at fixedrates ranging from 4.92% to 7.09%, and mature at various dates through 2014. Inconjunction with the purchase accounting for these properties, the net carryingvalue of the assumed notes payable was increased by $2.1 million to recordthem at their estimated fair value. The fair value of the assumed notes wascalculated as the difference between the present value of the notes using acurrent estimated market rate of interest and the outstanding principal amount.This amount is being amortized as an adjustment to interest expense over theterm of the related debt.

 

During the three monthsended March 31, 2005, a variable-rate note payable in the amount of$9.2 million was obtained in connection with the acquisition of a studenthousing property. The note requires payments of interest only at LIBOR plus1.90% (LIBOR on this loan was 3.57% at September 30, 2005) and matures in2007.

 

In February 2005,the Company completed the refinancing of variable-rate notes secured by sevenof its student housing properties. In connection with the refinancing, theCompany repaid approximately $20.4 million of the total$113.7 million of indebtedness secured by these seven properties, andreplaced the remaining $93.3 million of variable-rate debt with an equalamount of fixed-rate debt with interest rates ranging from 4.24% to 4.7% andmaturity terms ranging from five to seven years.

 

Prior to its contributionto the Company in connection with the completion of our initial publicoffering, Corporate Flight LLC financed the acquisition and refurbishments ofthe corporate aircraft with two notes payable. One loan required monthlypayments of principal and interest at the commercial paper rate plus 1.8%through January 2011. The second loan required monthly payments ofprincipal and interest at 9.5% through August 2006. On February 28,2005, the Company sold and transferred its ownership of 100% of the outstandingmembership interests in Corporate Flight LLC back to Gary M. Holloway, Sr.Corporate Flight LLC’s primary asset was the corporate aircraft which had a netbook value of $3.8 million at February 28, 2005 and was secured bythe two notes payable, which had an aggregate outstanding balance of $4.2 millionat February 28, 2005.  Corporate Flight LLC’s net deficit of$171,000, net of $180,000 tax expense related to the taxable gain upon thetransfer, was recorded as a capital contribution and allocated to additionalpaid-in capital and minority interest on the consolidated balance sheet.

 

At September 30,2005, notes payable totaling $623.5 million were secured by 45 studenthousing properties with a cost and net book value of $907.5 million and$891.5 million, respectively. At December 31, 2004, notes payabletotaling $359.8 million were secured by 23 student housing properties witha cost and net book value of $451.9 million and $449.1 million,respectively.

 

At September 30,2005, the Company had a note payable in the amount of $5.7 million securedby the corporate headquarters, requiring monthly payments of principal andinterest at LIBOR plus 2.25% (LIBOR on this loan was 3.56% at September 30,2005).  In July 2005, the maturity date of the loan was extended fromAugust 2005 to November 2005. The remaining principal balance was repaidin full in October 2005.

 

14

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The aggregate annual principal payments as of September 30, 2005due on our notes payable and line of credit for the remainder of 2005, the fivesucceeding years and thereafter are as follows (in thousands):

 
| 2005       |   | $       | 7,043   |   |
|------------|--------|---------|---------|--------|
| 2006       |   | 5,188   |    |
| 2007       |   | 224,960 |    |
| 2008       |   | 4,708   |    |
| 2009       |   | 34,076  |    |
| 2010       |   | 65,954  |    |
| Thereafter |   | 424,242 |    |
|       |   | $       | 766,171 |   |

 

**7. Line of Credit**

 

In November 2004,the Company entered into a $150 million three-year unsecured revolvingcredit facility, subject to increase to $250 million (the “Credit Facility”),with a consortium of banks. The Credit Facility provides for the issuance of upto $20 million of letters of credit, which is included in the$150 million available under the Credit Facility. The Company’savailability under the Credit Facility as of September 30, 2005 waslimited to a borrowing base amount equal to the sum of 60% of the value of anunencumbered asset pool (which as of September 30, 2005 consisted of sevenstudent housing properties, and in no event could contain fewer than fivestudent housing properties) as of the end of the previous quarter and 50% ofthe annualized value of the Company’s cash flow from the management,development and construction/renovation fees received in connection with militaryhousing projects and from the management of student housing properties in theprevious quarter, provided that the total cash flow attributable to annualizedmanagement fees did not exceed 50% of the borrowing base.

 

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

 

The Credit Facilitycontains affirmative and negative covenants and also contains financialcovenants that, among other things, as of September 30, 2005, (i) requiredthe Company to maintain a total leverage ratio equal to or less than 65%through December 31, 2005. At the end of the first quarter of 2006, themaximum leverage ratio will decrease to 60%, (ii) limited the aggregateamount of outstanding variable-rate indebtedness to 30% of total indebtednesscommencing February 8, 2005, (iii) limited the payment of dividendsby the Company to its shareholders to 110% of funds from operations as definedin the Credit Facility, (iv) limited the amount of recourse debt,exclusive of amounts outstanding under the Credit Facility, to$25 million, and in no event greater than $150 million in total, and (v) requiredthe Company to maintain a consolidated tangible net worth, as defined in theCredit Facility, of at least $275 million plus an amount equal to 75% ofthe net proceeds from any equity issuances subsequent to the closing date ofthe Credit Facility in November 2004. The financial covenants as of September 30,2005 also required the Company to operate in compliance with the followingratios as defined by the terms of the Credit Facility: (i) fixed chargecoverage ratio equal to or greater than 1.75x; (ii) interest coverageratio equal to or greater than 2.00x; and (iii) unsecured interestcoverage ratio equal to or greater than 2.25x. The Company was in compliancewith all covenants at September 30, 2005.

 

In January 2005, theCompany paid a dividend to its shareholders in excess of 95% of funds fromoperations for the period November 2, 2004 to December 31,2004.  The Company received a formal waiver of this instance ofnoncompliance with the financial covenant. The Company and the lenders alsoagreed to modify the covenant related to the payment of dividends toshareholders for the year ending December 31, 2005. Under the terms of themodification, the Company is now restricted from paying dividends to itsshareholders in 2005 in excess of 110% of funds from operations. The dividendpayment terms of the Credit Facility will revert to the original restrictionagainst distributions in excess of 95% of funds from operations after 2005.

 

Additionally, the Companydid not reduce the aggregate amount of its outstanding variable-rateindebtedness as a percentage of its total outstanding indebtedness below 30% byFebruary 8, 2005, as required by the terms of the Credit Facility. On February 24,2005, the Company converted certain variable-rate loans secured by sevenstudent housing properties to fixed-rate loans. As a result of thisrefinancing, the Company lowered its outstanding variable-rate indebtedness asa percentage of fixed-rate indebtedness below the 30% limit. The Companyreceived a formal waiver of this instance of noncompliance with the financialcovenant for the period from February 8, 2005 through February 23,2005.

 

At June 30, 2005,the Company’s leverage ratio exceeded the 60% ceiling set forth in the CreditFacility.  The Company received a formal waiver of this instance ofnoncompliance with the financial covenant.

 

In August 2005, theCompany amended the Credit Facility (the “Amendment”).  Under theAmendment, the calculation of the borrowing base was revised to include cashflow from the military housing construction and development fees and toincrease the total cash flow attributable to annualized fees from themanagement, construction and development of the military housing projects andstudent housing properties from 35% to 50%.  The Amendment also increasedthe applicable interest rate ranges on outstanding borrowings under the CreditFacility to the following: 1.625% to 2.375% for Eurodollar rate loans and 0.75%to 1.75% for prime rate loans.  In addition, the Amendment modified thecalculation of the leverage ratio and increased the maximum leverage ratio from60% to 65% through December 31, 2005.  At the end of the firstquarter of 2006, the maximum leverage ratio will revert to 60%.

 

As of September 30,2005, the Company had $137.0 million outstanding under the Credit Facility,bearing interest at a weighted-average rate of 5.90%, and an additional$13.0 million was available for draw under the facility. As of September 30,2005, there were no letters of credit outstanding under the Credit Facility.

 

15

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**8. Transactions with Related Parties**

 

In the ordinary course ofits operations, the Company has on-going business relationships with GaryM. Holloway, Sr., entities affiliated with Mr. Holloway, andentities in which Mr. Holloway or the Company has an equity investment.These relationships and related transactions are summarized below. Theoperating results or financial position of the Company and The GMH PredecessorEntities could be significantly different from those that would have beenreported if the entities were autonomous.

 

Through the completion ofthe Company’s initial public offering on November 2, 2004, common costsfor human resources, information technology, office equipment and furniture,and certain management personnel were allocated to the various entities ownedor controlled by Mr. Holloway, including The GMH Predecessor Entities,using assumptions based on headcount that management believed were reasonable.During the three and nine months ended September 30, 2004, such coststotaled $1.4 million and $2.9 million, respectively, and are included inadministrative expenses in the accompanying combined statements ofoperations.  Subsequent to November 2, 2004, such costs were incurreddirectly by the Operating Partnership. The allocation of such costs to otherentities owned or controlled by Mr. Holloway during the three and ninemonths ended September 30, 2005 totaled $21,000 and $232,000,respectively, and is reflected as expense reimbursements from related partiesin the accompanying consolidated statements of operations.

 

The Company leases spacein its corporate headquarters to entities wholly-owned by Mr. Holloway. During the three and nine-month periods ended September 30, 2005 and 2004,rental income from these entities totaled $61,000, $183,000, $70,000, and$340,000, respectively, and is included in rent and other property income inthe accompanying consolidated and combined statements of operations.

 

The Company providesproperty management consulting services to GMH Capital Partners Asset Services,LP, an entity wholly-owned by Mr. Holloway, in connection with propertymanagement services that GMH Capital Partners Asset Services, LP performsrelated to five student housing properties containing a total of 2,172 beds.The Company earns consulting fees equal to 80% of the net management fees thatGMH Capital Partners Asset Services, LP earns for providing the propertymanagement services.  For the three and nine months ended September 30,2005, such fees totaled $53,000 and $187,000, respectively.  No such feeswere recognized in the comparable periods in 2004.

 

Through March 31,2005 the Company earned management fees from properties in which Mr. Hollowaywas an investor.  As of September 30, 2005, the Company does notmanage any properties in which Mr. Holloway is an investor and accordinglydid not earn any such fees in the quarter then ended.  During thenine-month period ended September 30, 2005 and the three and nine-monthperiods ended September 30, 2004, such income totaled $0.2 million, $0.3million and $1.2 million, respectively.

 

The Company is reimbursedby the owners of certain military housing projects and student housingproperties under management, including certain student housing properties inwhich Mr. Holloway was an investor through March 31, 2005, for thecost of certain employees engaged in the daily operation of those militaryhousing projects and student housing properties. The reimbursement of thesecosts is reflected as expense reimbursements from related parties in theaccompanying consolidated and combined statements of operations.

 

The GMH PredecessorEntities previously paid management fees and reimbursed expenses to entitiesowned by Mr. Holloway that were not contributed to the Company inconnection with its initial public offering. During the three and nine-monthperiods ended September 30, 2004, the management fees and reimbursedexpenses totaled $22,000 and $77,000, respectively.

 

Denis J. Nayden, one ofthe Company’s trustees, is a senior vice president of General Electric Company,which is the parent company of General Electric Capital Corporation. At September 30,2005, we had $248.0 million of indebtedness to General Electric CapitalCorporation secured by properties or other assets that we own.

 

Mr. Holloway ownsBryn Mawr Abstract, Inc., an entity that provides title abstract servicesto third party title insurance companies, from which we have purchased titleinsurance with respect to student housing properties that we have acquired orrefinanced in 2005. In connection with our purchase of title insurance forthese student housing properties, we paid premiums to other title insurancecompanies, which fees in some cases are fixed according to statute. From thesepremiums, the other title companies paid to Bryn Mawr Abstract $162,000 and$345,000 during the three and nine-month periods ended September 30, 2005,respectively, for the provision of title abstract services.

 

Mr. Holloway ownsGMH Capital Partners Commercial Realty LP, an entity that provides real estateconsulting and brokerage services for real estate transactions. During thethree months ended March 31, 2005, GMH Capital Partners Commercial RealtyLP received aggregate commissions of $284,000 from the sellers of two studenthousing properties that the Company purchased.

 

In February 2005,the Company transferred its interest in Corporate Flight LLC, including thecorporate aircraft and associated debt initially contributed to the OperatingPartnership at the time of the initial public offering, back to Mr. Holloway. Corporate Flight LLC had a net deficit of $171,000, net of $180,000 tax expenserelated to the taxable gain upon the transfer to Mr. Holloway, on the dateit was transferred back to Mr. Holloway. This transfer was accounted foras a capital contribution and recorded as an $87,000 increase to additionalpaid-in capital and an $84,000 increase to minority interest.  During thethree and nine months ended September 30, 2005, the Company paid CorporateFlight LLC $32,000 and $197,000, respectively, for use of an aircraft owned byCorporate Flight LLC.

 

16

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**9.Commitments and Contingencies**

 

As of September 30,2005, we had an agreement to acquire one undeveloped parcel of land for an aggregatepurchase price of $1.4 million.

 

In connection withfinalizing the agreements with the DoD for the Company’s military housingprojects, the Company has committed to contribute the following aggregateamounts as of September 30, 2005 (in thousands):

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

 

In connection with thedevelopment, management, construction, and renovation agreements for certain ofthe military housing projects, the Company guarantees the completion of itsobligations under the agreements. The guarantees require the Company to fundany costs in excess of the amounts budgeted in the underlying development,management, construction, and renovation agreements. Management believes that theseguarantees will not have a material adverse impact on the Company’s financialposition or results of operations.

 

The Company is subject toroutine litigation, claims and administrative proceedings arising in theordinary course of business. Management believes that the disposition of thesematters will not have a material adverse impact on the Company’s financialposition or results of operations.

 

The Company has enteredinto employment agreements with three of its executive officers. Eachemployment agreement is for an initial three-year term beginning in November 2004and provides for base salaries aggregating $975,000 in each of the three years.The base salaries are increased annually effective January 1 of each yearby a minimum amount equal to at least the percentage increase in the ConsumerPrice Index.

 

Under the provisions ofFIN 45,*“Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others an interpretation of FASB Statements No. 5, 57, and107 and rescission of FASB Interpretation No. 34,”* a guarantoris to recognize, at the inception of a guarantee, a liability for the fairvalue of the obligation undertaken by issuing the guarantee. The Company entersinto indemnification agreements in the ordinary course of business that aresubject to the provisions of FIN 45. Under these agreements, the Companyindemnifies, holds harmless, and agrees to reimburse the indemnified party forlosses suffered or incurred by the indemnified party. The maximum potentialamount of future payments the Company could be required to make under theseindemnification agreements is unlimited. The Company believes the estimatedfair value of these agreements is immaterial. Accordingly, there were noliabilities recorded for these agreements as of September 30, 2005 and December 31,2004.

 

During the three monthsended September 30, 2005, the Company recognized a management fee of$0.8 million from a student housing property managed for a third party.The fee related to management services provided by the Company during 2004 and2005 that had not been previously recognized because it was deemed to beuncollectible. The fee was collected in October 2005.

 

**10.Segment Reporting**

 

The Company is managed asindividual entities that comprise two reportable segments: (1) studenthousing and (2) military housing. The Company’s management evaluates eachsegment’s performance based upon net income. The accounting policies of thereportable segments are the same as those described in the summary ofsignificant accounting policies.  Corporate includes the activities ofcertain departments from a corporate level, which includes personnel thatservice GMH Communities Trust as a whole and support our overall operations.

 

17

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| ** **                                               | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                               | ** ** | **2005 (Company)**                        | ** ** | **2004 (Predecessor)** | ** ** |
| ** **                                               | ** ** | **Student  Housing**                      | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                               | ** ** | **(in thousands)**                        | ** ** |
| **Revenue:**                                             |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income                           |       | $                                         | 35,369     |   | $ | — |   | $ | 60 |   | $ | 35,429 |   | $ | 6,683 |   | $ | — |   | $ | 70 |   | $ | 6,753 |   |
| Expense reimbursements:                                  |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                            |       | —                                    |       | 20,722 |   | 22 |   | 20,744 |   | 367 |   | 7,697 |   | 638 |   | 8,702 |   |
| Third party                                              |       | 1,299                                     |       | — |   | — |   | 1,299 |   | 1,906 |   | — |   | — |   | 1,906 |   |
| Management fees:                                         |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                            |       | —                                    |       | 1,838 |   | — |   | 1,838 |   | 348 |   | 619 |   | — |   | 967 |   |
| Third party                                              |       | 1,364                                     |       | — |   | — |   | 1,364 |   | 752 |   | — |   | — |   | 752 |   |
| Other fee income-related party                           |       | 625                                       |       | 6,556 |   | — |   | 7,181 |   | — |   | 2,115 |   | — |   | 2,115 |   |
| Other income                                             |       | 34                                        |       | 45 |   | 2 |   | 81 |   | 14 |   | 24 |   | 103 |   | 141 |   |
| Total revenue                                            |       | 38,691                                    |       | 29,161 |   | 84 |   | 67,936 |   | 10,070 |   | 10,455 |   | 811 |   | 21,336 |   |
| **Operating Expenses:**                                  |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property operating expenses                              |       | 16,058                                    |       | 1,248 |   | — |   | 17,306 |   | 4,773 |   | 1,035 |   | — |   | 5,808 |   |
| Reimbursed expenses                                      |       | 1,299                                     |       | 20,722 |   | 22 |   | 22,043 |   | 2,273 |   | 7,697 |   | 638 |   | 10,608 |   |
| Real estate taxes                                        |       | 3,428                                     |       | — |   | — |   | 3,428 |   | 490 |   | — |   | — |   | 490 |   |
| Administrative expenses                                  |       | —                                    |       | — |   | 2,983 |   | 2,983 |   | — |   | — |   | 2,172 |   | 2,172 |   |
| Profits interest expense                                 |       | —                                    |       | — |   | — |   | — |   | — |   | — |   | 33,180 |   | 33,180 |   |
| Depreciation and amortization                            |       | 7,617                                     |       | — |   | 102 |   | 7,719 |   | 1,526 |   | 10 |   | 234 |   | 1,770 |   |
| Interest                                                 |       | 8,707                                     |       | — |   | 274 |   | 8,981 |   | 1,627 |   | — |   | 95 |   | 1,722 |   |
| Total operating expenses                                 |       | 37,109                                    |       | 21,970 |   | 3,381 |   | 62,460 |   | 10,689 |   | 8,742 |   | 36,319 |   | 55,750 |   |
| Income (loss)  before minority interest and income taxes |       | 1,582                                     |       | 7,191 |   | (3,297 | ) | 5,476 |   | (619 | ) | 1,713 |   | (35,508 | ) | (34,414 | ) |
| Minority interest                                        |       | 864                                       |       | 3,502 |   | (1,608 | ) | 2,758 |   | — |   | — |   | — |   | — |   |
| Income (loss) before income taxes                        |       | 718                                       |       | 3,689 |   | (1,689 | ) | 2,718 |   | (619 | ) | 1,713 |   | (35,508 | ) | (34,414 | ) |
| Income taxes                                             |       | 55                                        |       | 921 |   | — |   | 976 |   | — |   | — |   | — |   | — |   |
| **Net income (loss)**                                    |       | $                                         | 663        |   | $ | 2,768 |   | $ | (1,689 | ) | $ | 1,742 |   | $ | (619 | ) | $ | 1,713 |   | $ | (35,508 | ) | $ | (34,414 | ) |

 
| ** **                     | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------|------------|------------------------------------------|------------|
| ** **                     | ** ** | **2005 (Company)**                       | ** ** | **2004 (Predecessor)** | ** ** |
| ** **                     | ** ** | **Student  Housing**                     | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                     | ** ** | **(in thousands)**                       | ** ** |
| **Revenue:**                   |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income |       | $                                        | 90,851     |   | $ | — |   | $ | 182 |   | $ | 91,033 |   | $ | 6,683 |   | $ | — |   | $ | 340 |   | $ | 7,023 |   |
| Expense reimbursements:        |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                  |       | 186                                      |       | 42,057 |   | 232 |   | 42,475 |   | 1,089 |   | 14,845 |   | 735 |   | 16,669 |   |
| Third party                    |       | 3,876                                    |       | — |   | — |   | 3,876 |   | 5,475 |   | — |   | — |   | 5,475 |   |
| Management fees:               |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                  |       | 197                                      |       | 5,153 |   | — |   | 5,350 |   | 1,163 |   | 1,520 |   | — |   | 2,683 |   |
| Third party                    |       | 3,015                                    |       | — |   | — |   | 3,015 |   | 3,430 |   | — |   | — |   | 3,430 |   |
| Other fee income-related party |       | 664                                      |       | 14,067 |   | 31 |   | 14,762 |   | — |   | 4,174 |   | — |   | 4,174 |   |
| Other income                   |       | 109                                      |       | 69 |   | 70 |   | 248 |   | 58 |   | 70 |   | 365 |   | 493 |   |
| Total revenue                  |       | 98,898                                   |       | 61,346 |   | 515 |   | 160,759 |   | 17,898 |   | 20,609 |   | 1,440 |   | 39,947 |   |
| **Operating Expenses:**        |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property operating expenses    |       | 35,813                                   |       | 4,087 |   | — |   | 39,900 |   | 6,683 |   | 3,168 |   | — |   | 9,851 |   |
| Reimbursed expenses            |       | 4,062                                    |       | 42,057 |   | 232 |   | 46,351 |   | 6,564 |   | 14,845 |   | 735 |   | 22,144 |   |
| Real estate taxes              |       | 8,003                                    |       | — |   | — |   | 8,003 |   | 490 |   | — |   | — |   | 490 |   |
| Administrative expenses        |       | —                                   |       | — |   | 8,657 |   | 8,657 |   | — |   | — |   | 4,488 |   | 4,488 |   |
| Profits interest expense       |       | —                                   |       | — |   | — |   | — |   | — |   | — |   | 33,180 |   | 33,180 |   |
|                                |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| Depreciation and amortization                            |   | 22,154 |   | — |   | 409    |   | 22,563  |   | 1,537  |   | 18     |   | 633     |   | 2,188   |   |
|----------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|--------|--------|---------|--------|---------|--------|
| Interest                                                 |   | 20,489 |   | — |   | 739    |   | 21,228  |   | 1,627  |   | — |   | 253     |   | 1,880   |   |
| Total operating expenses                                 |   | 90,521 |   | 46,144 |   | 10,037 |   | 146,702 |   | 16,901 |   | 18,031 |   | 39,289  |   | 74,221  |   |
| Income (loss)  before minority interest and income taxes |   | 8,377  |   | 15,202 |   | (9,522 | )      | 14,057  |   | 997    |   | 2,578  |   | (37,849 | )      | (34,274 | )      |
| Minority interest                                        |   | 4,184  |   | 7,593  |   | (4,756 | )      | 7,021   |   | — |   | — |   | —  |   | —  |   |
| Income (loss) before income taxes                        |   | 4,193  |   | 7,609  |   | (4,766 | )      | 7,036   |   | 997    |   | 2,578  |   | (37,849 | )      | (34,274 | )      |
| Income taxes                                             |   | 100    |   | 1,814  |   | — |   | 1,914   |   | — |   | — |   | —  |   | —  |   |
| **Net income (loss)**                                    |   | $      | 4,093  |   | $      | 5,795  |   | $       | (4,766 | )      | $      | 5,122  |   | $       | 997    |    | $      | 2,578 |   | $ | (37,849 | ) | $ | (34,274 | ) |
|                                                          |        |        |        |        |        |        |        |         |        |        |        |        |        |         |        |         |        |  |  |  |  |  |  |  |  |

 

 
| ** **                         | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|------------------------------------|------------|----------------------|------------|-----------------------|------------|---------------|------------|-----------|------------|
| ** **                         | ** ** | **(in thousands)**   | ** ** |
| **As of September 30, 2005:** |       |                 |       |                  |       |          |       |      |       |
| Total assets                       |       | $                    | 1,090,474  |                  | $          | 60,079        |       | $         | 42,735     |   | $ | 1,193,288 |   |
| **As of December 31, 2004:**  |       |                 |       |                  |       |          |       |      |       |
| Total assets                       |       | $                    | 663,980    |                  | $          | 57,856        |       | $         | 51,225     |   | $ | 773,061 |   |

 

**11. Earnings Per Common Share**

 

The following tabledetails the number of shares and net income used to calculate basic and dilutedearnings per share for the three and nine-month periods ended September 30,2005 (in thousands, except share and per share amounts):

 
| ** **                                                      | ** ** | **Three months ended September 30, 2005** | ** ** | **Nine months ended September 30, 2005** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                      | ** ** | **Basic**                                      | ** ** | **Diluted**                                   | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
|                                                            |       |                                           |       |                                          |       |   |   |   |   |
| Net income                                                      |       | $                                              | 1,742      |                                          | $          | 1,742 |   | $ | 5,122 |   | $ | 5,122 |   |
| Minority  interest                                              |       | —                                         |       | —                                        |       | — |   | — |   |
| Income available  to common shareholders                        |       | $                                              | 1,742      |                                          | $          | 1,742 |   | $ | 5,122 |   | $ | 5,122 |   |
|                                                            |       |                                           |       |                                          |       |   |   |   |   |
| Weighted-average  common shares outstanding                     |       | 30,350,989                                     |       | 30,350,989                                    |       | 30,350,989 |   | 30,350,989 |   |
| Warrant                                                         |       | —                                         |       | 2,435,628                                     |       | — |   | 2,107,644 |   |
| Units of limited  partnership held by minority interest holders |       | —                                         |       | —                                        |       | — |   | — |   |
| Restricted  common shares                                       |       | —                                         |       | —                                        |       | — |   | — |   |
| Total  weighted-average shares outstanding                      |       | 30,350,989                                     |       | 32,786,617                                    |       | 30,350,989 |   | 32,458,633 |   |
| Earnings per  common share                                      |       | $                                              | 0.06       |                                          | $          | 0.05 |   | $ | 0.17 |   | $ | 0.16 |   |

 

The computation ofdiluted earnings per share for the three and nine month periods ended September 30,2005 excludes the assumed conversion of the units of limited partnershipinterest held by minority interest holders, the related minority interestexpense and the vesting of the restricted common shares because the assumedconversion and vesting has an anti-dilutive effect on earnings per share.

 

In March 2005, June 2005and September 2005, the Company declared quarterly dividends of $0.2275per outstanding common share. The March dividend of $6.9 million waspaid in April 2005 to common shareholders of record on March 30,2005. The June dividend of $6.9 million was paid in July 2005 tocommon shareholders of record on June 29, 2005.  The September dividend of $6.9 millionwas paid in October 2005 to common shareholders of record on September 22,2005.

 

**12.Acquisition of Real Estate Investments**

 

During the year ended December 31,2004, the three months ended September 30, 2005 and the nine months ended September 30,2005, the Company acquired 30, six, and 22 student housing properties,respectively, for an aggregate acquisition cost of $1.1 billion. Theresults of operations for each of the acquired properties have been included inour statements of operations from the respective purchase dates.  All proforma financial information presented within this footnote is not necessarilyindicative of the results which actually would have occurred if the purchaseshad been consummated on January 1, 2004, nor does the pro formainformation purport to represent the results of operations for future periods.

 

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The following unauditedstudent housing segment pro forma financial information for the three and ninemonth periods ended September 30, 2005 and 2004 gives effect to theacquisition of the 52 student housing properties as if the transactions hadoccurred on January 1, 2004 (in thousands).  The pro-forma financial information for thethree and nine months ended September 30, 2004 excludes the $33.2 millionof profits interest expense due to its material non-recurring nature.

 
| ** **                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Pro forma rent  and other property income |       | $                                          | 34,711     |                                      | $          | 33,634 |   | $ | 104,132 |   | $ | 100,903 |   |
| Pro forma net income                      |       | 4,558                                      |       | 4,416                                     |       | 13,673 |   | 13,249 |   |
|                                           |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |

 

**13.Subsequent Events**

 

In September 2005,the Company commenced a public offering of common shares. The offering wascompleted on October 4, 2005 with the sale of 9,315,000 common shares ofbeneficial interest, including 1,215,000 shares issued upon full exercise ofthe underwriters’ over-allotment option, at an offering price of $14.25 pershare. The Company raised an aggregate of $124.7 million in net proceeds fromthe offering after deducting the underwriters’ discounts, payment of financialadvisory fees and other offering-related expenses.  The net proceeds of this offering, which theCompany contributed to the Operating Partnership in exchange for units ofpartnership interest, were used by the Operating Partnership to repay outstandingindebtedness under the Company's credit facility.

 

In October 2005, theCompany acquired two student housing properties, containing an aggregate 572units and 1,620 beds, for an aggregate purchase price of $108.2 million. Theseacquisitions were partially financed with the assumption of a $35.6 millionloan secured by one of the properties.

 

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**Item2.****                                   Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

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

 

*Inconnection with the formation transactions completed prior to andsimultaneously with completion of our initial public offering, the interests inThe GMH Predecessor Entities were contributed to our Operating Partnership asdescribed in Note 1 to the financial statements included in this report. We have described our operations in this report as if the historical operationsof our predecessor entities were conducted by us. The following discussion andanalysis should be read in conjunction with the financial statements and notesthereto of GMH Communities Trust and The GMH Predecessor Entities appearing in Part I,Item 1of this report.*

 

**Overview**

 

We are a self-advised,self-managed, specialty housing company that focuses on providing housing tocollege and university students residing off-campus and to members of the U.S.military and their families. As of September 30, 2005, we owned 52 studenthousing properties containing a total of 9,567 units, 31,371 beds, and fourundeveloped parcels of land for development as student housing properties, andowned minority interests in joint ventures that own our military housingprojects.  We also managed or providedconsulting services for 18 student housing properties owned by others,containing a total of 4,225 units and 12,085 beds and an estimated 224 unitsand 718 beds currently under construction and we provided interim managementservices for an additional student housing property under construction.Additionally, our Operating Partnership has an ownership interest in, andthrough various wholly-owned subsidiaries operates, seven military housingprojects comprising an aggregate of 15,857 housing units on 18 military bases.  As of September 30, 2005, we also werein exclusive negotiation process with the U.S. Department of the Army for theFort Gordon project, containing an estimated 857 end-state housing units andwere in the solicitation process with the U.S. Air Force for a military housingproject that is expected to cover four bases and in excess of 2,000 end-statehousing units. Through our taxable REIT subsidiaries, we provide development,construction, renovation and management services for our military housing projects,and property management services for student housing properties owned byothers, including colleges, universities, and other private owners. In order tocomply with the applicable requirements under the REIT provisions of theInternal Revenue Code, we must limit the operations of our taxable REITsubsidiaries so that securities issued to us by our taxable REIT subsidiariesdo not represent more than 20% of our total assets as of the close of anyquarter in our taxable year and so that dividends from our taxable REITsubsidiaries, together with our other non-qualifying gross income, do notexceed 25% of our gross income for any taxable year.

 

As a result of thevarious transactions and acquisitions completed in anticipation of, inconnection with and subsequent to our initial public offering in November 2004,we expect our future results of operations to include significantly higherrevenues and expenses than those reflected in our predecessor entity financialstatements.

 

Currently, our operationsare managed within two operating segments: (1) student housing and (2) militaryhousing. This structure provides an effective platform for maximizing marketpenetration and optimizing operating economies of scale. In addition, weseparately report the activities of certain departments from a corporate level,which includes personnel that service GMH Communities Trust as a whole andsupport our overall operations.

 

A summary of theactivities in both of our student housing and military segments during thethird quarter of 2005 is provided below. In addition to these events, wecommenced an underwritten public offering of common shares of beneficialinterest during the third quarter of 2005, which was completed on October 4,2005. We sold an aggregate of 9,315,000 common shares in the offering,including 1,215,000 shares issued upon full exercise of the underwriters’over-allotment option, at an offering price of $14.25 per share. We raised anaggregate of $124.7 million in net proceeds from the offering, after deductingthe underwriters’ discounts, payment of financial advisory fees and otheroffering-related expenses.

 

*StudentHousing*

 

The student housingsegment acquires, owns and manages premiere off-campus student housingproperties strategically located near college or university campuses throughoutthe United States. Since July 2004, our rental revenue has increasedsubstantially as a result of our acquisition of a total of 52 properties as of September 30,2005. While we manage the properties we own, we do not recognize any fee incomefrom their management. Instead, the rent payments we receive as a result of ourownership of these properties are reflected in our revenue. Additionally,operating expenses, real estate taxes and depreciation and amortization have increasedas a result of these acquisitions. Further, interest expense has increasedrelated to the financing of these properties acquired.

 

We earn management feesas a percentage of cash receipts or gross rental revenues generated by themanaged properties, according to the management agreements for the propertieswe manage. We also have the ability to earn incentive management fees byachieving specified property-level performance criteria for certain propertieswe manage for third parties. Further, certain operating expenses

 

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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 properties that we manage for others althoughthe amounts are expected to become less significant as rental income increasesfrom the properties we own.

 

During the three monthsended September 30, 2005, we acquired six student housing properties andtwo undeveloped parcels of land for an aggregate acquisition cost ofapproximately $123.4 million.  The acquisition cost includes totalpurchase price and capitalized acquisition costs which are allocated to studenthousing properties, lease intangibles, and any fair value debt adjustment. Thesix properties are located near six colleges and universities in six states andcontain an aggregate of 1,213 units and 3,237 beds.  More specifically,these acquisitions included the following:

 

•    a student housing property, SeminoleSuites, located in Tallahassee, Florida and serving Florida State University,Tallahassee Community College and Florida A&M University.  The property contains 264 units and 924 beds,and was acquired in July 2005 for an acquisition cost of approximately$33.4 million, including the placement of $20.4 million in fixed-rate mortgage debt;

 

•    a student housing property, TheCommons, located in Harrisonburg, Virginia and serving James MadisonUniversity. The property contains 132 units and 528 beds and was acquired in July 2005for an acquisition cost of approximately $13.7 million, including theassumption of $6.6 million of indebtedness;

 

•    a student housing property, TheTowers at 3rd (formerly known as Presidential Tower), located in Champaign,Illinois and serving the University of Illinois – Urbana/Champaign.  Theproperty contains 136 units and 271 beds and was acquired in August 2005for an acquisition cost of approximately $23.1 million, including the placementof $14.5 million in fixed-rate mortgage debt;

 

•    a student housing property, CampusWalk, located in Wilmington, North Carolina and serving University NorthCarolina-Wilmington.  The property contains 289 units and 290 beds and wasacquired in August 2005 for an acquisition cost of approximately $10.4million, including the placement of $6.7 million in fixed-rate mortgage debt;

 

•    a student housing property, BlantonCommon, located in Valdosta, Georgia and serving Valdosta State University. Theproperty contains 208 units and 608 beds and was acquired in September 2005for an acquisition cost of approximately $25.1 million;

 

•    a student housing property,University Meadows, located in Mt. Pleasant, Michigan and serving CentralMichigan University. The property contains 184 units and 616 beds and wasacquired in September 2005 for an acquisition cost of approximately $14.1million, including the placement of $9.6 million in fixed-rate mortgage debt;and

 

•    through a joint venture with aninstitutional partner, two undeveloped land parcels located in Orono, Maine andBowling Green, Ohio and known as Orchard Trails and the Enclave-Phase II,respectively.  Orchard Trails consists ofa 61-acre parcel of undeveloped land and the Enclave-Phase II consists of an 11-acreparcel of undeveloped land.  Thesedevelopment land parcels were initially acquired by us for an aggregateacquisition cost of approximately $1.7 million, and then in August 2005,were contributed into the joint venture entity in which we hold a 10% interest.  When developed, both Orchard Trails and theEnclave-Phase II are expected to consist of 144 units and 576 beds.  Construction on both properties began in August 2005and is expected to be completed prior to the 2006/2007 academic year.  The estimated aggregate costs for acquiringthe assets and development and construction is $43.5 million, with developmentand construction costs to be partially funded (up to 75% of total constructionand development costs) by construction loans with lenders engaged by the jointventure entity, and the remaining amount (approximately $11.5 million) to befunded 10% by us and 90% by our joint venture partner. During the third quarterof 2005, the joint venture completed the placement of the construction loanwith respect to the Orchard Trails property, and expects to complete theplacement of the construction loan with respect to the Enclave – Phase IIduring the fourth quarter of 2005. We will manage these properties, includingdevelopment, construction and pre-leasing activities, and we have an option topurchase our joint venture partner’s interest in the joint venture within oneyear after completion of the properties.

 

In addition to theacquisitions described above, in September 2005, we placed $21.3 millionof fixed-rate mortgage indebtedness on a student housing property located inLubbock, Texas that serves Texas Tech University.  We had acquired theproperty in November 2004 for an aggregate purchase price of $29.5million. Proceeds from this mortgage debt financing were used to repayoutstanding borrowings under our line of credit.

 

As of September 30,2005, with regard to our student housing segment, we:

 

•    owned 52 student housing propertiescontaining a total of 9,657 units and 31,371 beds; and

 

•    managed, or provided managementconsulting services for, a total of 18 student housing properties owned byothers, containing a total of 4,225 units and 12,085 beds and an estimated 224units and 718 beds currently under construction and we provided interimmanagement services for an additional student housing property underconstruction. Specifically, we provided management consulting services withrespect to five of these properties to GMH Capital Partners Asset Services, LP,an entity wholly-owned by Gary M. Holloway, Sr.

 

In the third quarter of2005, we experienced an increase in property operating expenses as a result ofrepair and maintenance expenditures relating to turnover of our units at ourstudent housing properties.  Our student housing lease terms generallycommence in August or September to coincide with the beginning of theacademic year.  As a result, we expect to incur a majority of our repairand

 

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maintenance costs in thethird quarter to prepare the units for the new residents, and we expect ouroperating expenses, as a percentage of revenue, to decrease in the fourthquarter. During the third quarter, we expensed approximately $2.0 millionof repair and maintenance costs relating to turnover of our student housingunits. We also have experienced, and expect to continue to experience goingforward, increases in operating expenses, including increased utility expensesresulting from national trends in higher energy-related costs and increasedreal estate taxes relating to more aggressive assessments performed bymunicipal taxing authorities with respect to certain of our student housingproperties.

 

*Subsequent Developments.*InOctober 2005, we acquired two additional student housing properties,referred to as University Crossings and Pegasus Connection.  University Crossings, containing 260units/690 beds, is located in Philadelphia, Pennsylvania and primarily servesDrexel University and the University of Pennsylvania. Pegasus Connection, aproperty that we managed prior to the acquisition and containing 312 units/930beds, is located in Orlando, Florida and serves the University of CentralFlorida.

 

As of October 31,2005, we had agreements to acquire three student housing properties and oneland parcel for development, and non-binding letters of intent to acquire sixstudent housing properties and one land parcel for development.  We will be continuing our due diligenceprocess with respect to these transactions during the fourth quarter of2005.   During the remainder of 2005, wealso expect to continue to review potential transactions covering additionalstudent housing properties that are located in the Company’s targeted marketsand that meet management’s underwriting criteria for creating long-term growthpotential.  The timing of any of these acquisitions will be dependent uponvarious factors, including the ability to complete satisfactory due diligence,obtain appropriate financing on the properties and the availability of capital.

 

*MilitaryHousing*

 

Our military housingsegment develops, constructs, renovates and manages military housing projectsin which we acquire interests. Our military housing segment began generatingrevenue in the fourth quarter of 2003 with the initiation of our Fort Carson andFort Stewart and Hunter Army Airfield projects. Revenue grew throughout 2004and continues to grow during 2005 with the addition of various other projects. Excludingexpense reimbursements, revenue from our military housing segment is comprisedprimarily of fee income for providing development, construction/renovation andmanagement services to our military housing projects and, to a lesser extent,from returns on the equity we invest in the projects. Expense reimbursementsconsist primarily of payroll and related expenses, closing costs and transitioncosts we incur for the project in the 30 to 90-day period preceding theinitiation of our management of the project. Typically, at the time we initiatemanagement on a project, the project reimburses us for these amounts from theproceeds of the debt issued by the project to finance its operations.

 

As of September 30,2005, we owned equity interests in the joint ventures that own seven militaryhousing projects currently in operation. During the three months ended September 30,2005, we earned fees for providing development, construction/renovation andmanagement services to these seven military housing projects, which encompass18 military bases totaling 15,857 end-state housing units. In addition, we werein negotiations with the U.S. Department of the Army for the Fort Gordonproject located near Augusta, GA, and in the solicitation process with the U.S.Air Force regarding a project expected to cover four bases.

 

In July 2005, theCompany officially partnered with the Department of the Army to design, build,manage and maintain the military family housing units at Fort Bliss, located inEl Paso, Texas, and the White Sands Missile Range near Las Cruces, New Mexico.The finalized plans include a six-year initial development period withestimated project costs of $445.9 million and 3,277 end-state housingunits.  Project financing was obtained and the initial development periodfor the project began in July 2005.

 

The Company and the U.S.Department of the Army also are continuing to review the possibility ofrefinancing the Fort Carson project to obtain additional project cost funding,possibly totaling up to $50.0 million for the construction of another 200units.

 

With regard to trends anduncertainties in the military housing market, the effects of the baserealignment and closure (BRAC) initiatives under the Defense Base Closure andRealignment Act of 1990, as amended, are being closely monitored bymanagement.  Under these regulations, the federal government haspreviously undertaken four rounds of BRAC beginning in 1988, and again in 1991,1993 and 1995. The fifth round of BRAC was initiated in 2004, and the finallist of additional bases approved for realignment or closure became effectiveduring the fourth quarter of 2005.

 

By way of background, theDepartment of Defense (DoD) released its initial recommendations for BRAC in May 2005,and the BRAC Commission then voted to amend the DoD’s initial list on July 19,2005. Under the BRAC Commission’s revisions, several bases were removed fromthe DoD’s list of bases targeted for closure, including the Submarine Base inNew London, CT and the Portsmouth Naval Shipyard in Kittery, Maine. Inaddition, the BRAC Commission also proposed a less significant realignment atthe Fort Eustis base under our Fort Eustis/Fort Story project in Newport News,Virginia than was proposed by the DoD; and the BRAC Commission proposed toclose the Naval Air station in Brunswick, Maine, which had been recommended bythe DoD to be realigned.   Finally, theBRAC Commission voted to uphold the DoD’s recommendation to close the WalterReed Army Medical Center in Washington, DC. In September 2005, the BRAC Commission sent its report to thePresident regarding its findings and recommended changes to the DoD’s initialreport, and President Bush accepted the BRAC Commission’s recommendations intheir entirety. On November 9, 2005, the BRAC round was completed whenCongress also approved the BRAC Commission’s recommendations in their entirety.

 

Under the final BRAC listversus the original DoD recommendations, the possible number of affectedmilitary housing units covered by our existing projects was reduced from 2,500to 700 units, with these remaining 700 units located at the Naval Air Stationin Brunswick, Maine.  We believe that theclosure of the Walter Reed Army Medical Center will not result in the loss ofhousing units, as these housing units are likely to be utilized by personnelwho will be relocated from serving at Walter Reed to serving at nearby militarymedical facilities.

 

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The military housingprivatization initiative had not been undertaken at the time of previous BRACrounds, and therefore there is no historical information regarding the impactof a base closure on a military housing privatization project. To date, therehas been no indication from the DoD or the BRAC Commission that the federalgovernment has factored into its analysis of the possible effects that a baseclosure or realignment resulting from BRAC could have with respect to theoutstanding debt financing for a project. In addition, prior BRAC rounds haveshown that even once a base is approved for closure or realignment, the actualclosing or realignment of the base could take several years to becompleted.  Accordingly, managementcurrently expects that the closure of the Naval Air Station in Brunswick, Mainewill not occur for at least three years. We are unable to determine with any certainty, however, the specificimpact, and the timing of any such impact, that base closures and realignmentsat our projects will have on our military housing operating results, other thanthe possible cessation or reduction of fees related to the affected bases.

 

**CriticalAccounting Policies**

 

Management’s Discussionand Analysis of Financial Condition and Results of Operations discusses theCompany’s consolidated financial statements and The GMH Predecessor Entities’combined financial statements, which have been prepared in accordance with U.S.generally accepted accounting principles. The preparation of these financialstatements requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. While the estimates andjudgments associated with the application of these accounting principles may beaffected by different assumptions or conditions, we believe the estimates andjudgments associated with the reported amounts are appropriate under thecircumstances in which they were made. In addition, other companies in similarbusinesses may utilize different estimation policies and methodologies, whichmay impact the comparability of our results of operations and financialcondition to those companies.

 

The following policiesrequire significant judgments and estimates on our part in preparing theconsolidated financial statements of the Company and the combined financialstatements of The GMH Predecessor Entities. Changes in these judgments andestimates could have a material effect on these financial statements.

 

***Revenue Recognition***

 

*StudentHousing*. Student housing revenue includes rental revenue andother property income, standard and incentive management fees andreimbursements of certain operating expenses. These sources of revenue aredescribed in more detail below:

 

•    we recognize student housing rental revenuewhen due over the lease terms, which are generally 12 months or less;

 

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

 

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

 

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

 

*MilitaryHousing*.  We earn military housing revenues by providingservices to our military housing projects which include the following:

 

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

 

•    standard development andconstruction/renovation fees, based on a percentage of development andconstruction/renovation costs incurred by the military housing projectsincluding hard and soft costs and financing costs, are recognized on a monthlybasis as the costs are incurred by the military housing projects.  Hard costs consist of costs relating to goodssuch as building components, furniture and equipment and other tangible assets;and soft costs consist of costs incurred relating to intangible services suchas consulting, architectural and design services. Incentive development andconstruction/renovation fees are based upon the satisfaction of certaincriteria including, among other things, completing a number of housing unitsaccording to schedule, achieving specific safety records and implementing smallbusiness or minority subcontracting plans. Incentive development andconstruction/renovation

 

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fees are recognized whenthe various criteria stipulated in the contract have been satisfied;

 

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

 

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

 

•    preferred returns are earned on ourinvestments in military housing projects.  The preferred returns are basedon a fixed percentage of our investment in military housing projects and arerecognized as accrued at the rates specified in the agreements, subject toprojected availability of funds in the underlying project.  Accrued preferredreturns are periodically evaluated for collectibility; and

 

Deferred costs aresubject to estimation and judgment. Management makes determinations as to whichcosts are eligible for reimbursement and at what level they will be reimbursed.Management considers various factors in making these estimates and judgments,including the terms of the specific contract and historical experience as towhich costs are recoverable. Costs that are not probable of recovery areexpensed.

 

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

 

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

 

The value of in-placeleases is based on the difference between (i) the property valued withexisting in-place leases, and (ii) the property valued as if vacant. Aslease terms typically are 12 months or less, rates on in-place leasesgenerally approximate market rental rates. Factors that we consider in thevaluation of in-place leases include an estimate of incremental carrying costsduring the expected lease-up periods considering current market conditions, andthe nature of the tenancy. We amortize the value of in-place leases to expenseover the remaining term of the respective leases.

 

Purchase prices ofstudent housing properties to be acquired are not expected to be allocated totenant relationships considering the terms of the leases and the expectedlevels of renewals.

 

We expense routine repairand maintenance expenditures that do not improve the value of an asset orextend its useful life, including turnover costs such as cleaning and interiorpainting. We capitalize expenditures that improve the value and extend theuseful life of an asset. We compute depreciation using the straight-line methodover the estimated useful lives of the assets, which is 40 years for buildingsincluding student housing properties and the commercial office building, andthree to five years for residential furniture and appliances.

 

In accordance withStatement of Financial Accounting Standards No. 144 (“SFAS 144”),*Accounting for the Impairment or Disposal ofLong-Lived Assets*, we review long-lived assets, such as real estateinvestments and purchased intangibles subject to amortization, for impairmentwhenever events or changes in circumstances indicate that the carrying amountmay not be recoverable. These circumstances may include, but are not limitedto, operational performance, market conditions and competition from otheroff-campus properties and on-campus housing, legal and environmental concerns,and results of appraisals or other information obtained as part of a financingor disposition strategy. We review recoverability of assets to be held and usedthrough a comparison of the carrying amount of an asset to the estimatedundiscounted future cash flows expected to be generated by the asset. If thecarrying amount of an asset exceeds its estimated undiscounted future cashflows, we recognize an impairment charge in the amount by which the carryingvalue of the asset exceeds the fair value of the asset determined usingcustomary valuation techniques, such as the present value of expected futurecash flows. Assets to be disposed of would be separately presented in thebalance sheet and reported at the lower of the carrying amount or fair valueless costs to sell, and no longer would be depreciated.

 

***Allowance for Doubtful Accounts***

 

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

 

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We also evaluate thecollectibility of fee income and expense reimbursements generated by themanagement of student housing properties owned by others, and through theprovision of development, construction, renovation and management services toour military housing projects, based upon the individual facts andcircumstances of each situation and record a reserve for specific amounts, ifnecessary. Accounts receivable are stated net of the allowance for doubtfulaccounts.

 

***Notes Payable***

 

We record notes payable thatwe assume in connection with the acquisition of student housing properties attheir estimated fair value, with the corresponding difference between theestimated fair value and assumed carrying value of the notes payable recordedas an adjustment to the purchase price of the related property. We determinefair value of assumed notes payable based on various assumptions related tomarket conditions, including the type, age and location of the acquiredproperty and quoted interest rates for debt with similar terms.

 

***Minority Interest***

 

Minority interest asinitially recorded at the date of our initial public offering represented thenet equity of the Operating Partnership, including the proceeds received fromthe sale of the warrant to Vornado, multiplied by the ownership percentage ofholders of limited partnership units in the Operating Partnership other thanthe Company. The Operating Partnership is obligated to redeem, at the requestof a holder, each unit of limited partnership interest for common shares on aone-for-one basis, subject to adjustments for share splits, dividends,recapitalizations or similar events. If the minority interest unit holders’share of a current year loss would cause the minority interest balance to beless than zero, the minority interest balance will be reported as zero unlessthere is an obligation of the minority interest holders to fund those losses.Any losses in excess of the minority interest will be charged against equity.If future earnings materialize, equity will be credited for all earnings up tothe amount of those losses previously absorbed. Distributions to limitedpartnership unit holders other than the Company are recorded as a reduction tominority interest.

 

***Investments in Military Housing Projects***

 

We evaluate each of ourinvestments in military housing projects to determine if the underlying entityis a variable interest entity (“VIE”) as defined under FASB FinancialInterpretation No. 46 (as revised) (“FIN 46”). If an entity is deemed tobe a VIE pursuant to FIN 46, the entity that absorbs a majority of the expectedlosses of the VIE is deemed to be the primary beneficiary and must consolidatethe VIE. If the entity is not a VIE, it is evaluated for consolidation based oncontrolling voting interests. If we have the majority voting interest with theability to control operations and where no approval, veto or other importantrights have been granted to other holders, the entity would be consolidated. Weare not the primary beneficiary of any VIEs, nor do we have controlling votinginterests in any of our military housing projects. We record investments inmilitary housing projects initially at our cost and subsequently adjust them toreflect our preferred return and other distributions.

 

***Income Taxes***

 

We elected to be taxed asa REIT in connection with the filing of our tax return for the taxable yearended on December 31, 2004. We have elected to treat certain subsidiariesof our Operating Partnership as taxable REIT subsidiaries, and may make suchelections as to other subsidiaries in the future. In general, a taxable REITsubsidiary may perform real estate and non-real estate-related business, exceptfor the operation or management of health care facilities or lodging facilitiesor the provision to any person, under a franchise, license or otherwise, ofrights to any brand name under which any lodging facility or health carefacility is operated.

 

If we fail to qualify asa REIT in any taxable year, we will be subject to federal income tax, includingany applicable alternative minimum tax, on our taxable income at regularcorporate tax rates.

 

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

 

**Resultsof Operations**

 

Our results of operationsrepresent the operations of our student housing and military housing operatingsegments. The following significant factors affected our results of operationsfor the three and nine months ended September 30, 2005 as compared to thethree and nine months ended September 30, 2004:

 

•    In November 2004, we completedour initial public offering pursuant to which we sold an aggregate of30,350,989 common shares and raised an aggregate of $331.7 million in netproceeds.

 

•    In 2004, subsequent to the formationof the Trust in May 2004, we acquired 30 student housing propertiescontaining an aggregate of 5,529 units and 19,085 beds for an aggregateacquisition cost of $634.4 million.  During the three months ended March 31,2005, we acquired eight student housing properties with an aggregate of 1,607units and 4,795 beds for an aggregate acquisition cost of approximately $172.8million.  During the three months ended June 30, 2005, we acquiredeight student housing properties with an aggregate of 1,464 units and 4,740beds for an aggregate acquisition cost of approximately $147.4 million. During the three months ended September 30, 2005, we acquired six studenthousing properties with an aggregate of 1,213 units and 3,237 beds and twoundeveloped parcels of land for an aggregate acquisition cost of approximately$123.4 million. These student housing properties

 

26

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contributed $35.3 millionand $90.9 million of rent and other property income in the three and ninemonths ended September 30, 2005, respectively.

 

•    The Fort Stewart and Hunter ArmyAirfield and Fort Carson military housing projects both commenced operations inthe fourth quarter of 2003; the Fort Hamilton military housing projectcommenced operations in the second quarter of 2004; the Walter Reed ArmyMedical Center and Fort Detrick military housing project commenced operationsin the third quarter of 2004; the Fort Eustis/Fort Story and the Navy Northeastmilitary housing projects both commenced operations in the fourth quarter of2004; and the Fort Bliss/White Sands Missile Range military housing projectcommenced operations in the third quarter of 2005.  These military housingprojects contributed $29.1 million and $61.3 million of revenue in the threeand nine months ended September 30, 2005, respectively.

 

•    In November 2004, we enteredinto a $150 million three-year unsecured revolving credit facility with aconsortium of banks. During the first, second and third quarters of 2005, thecredit facility has been used to fund student housing acquisitions.

 

The results of operationspresented below reflect the results of operations of The GMH PredecessorEntities for the three and nine months ended September 30, 2004, and ourresults of operations for the three and nine months ended September 30,2005.

 

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

 
| ** **                                               | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                               | ** ** | **2005 (Company)**                        | ** ** | **2004 (Predecessor)** | ** ** |
| ** **                                               | ** ** | **Student  Housing**                      | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                               | ** ** | **(in thousands)**                        | ** ** |
| **Revenue:**                                             |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income                           |       | $                                         | 35,369     |   | $ | — |   | $ | 60 |   | $ | 35,429 |   | $ | 6,683 |   | $ | — |   | $ | 70 |   | $ | 6,753 |   |
| Expense reimbursements:                                  |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                            |       | —                                    |       | 20,722 |   | 22 |   | 20,744 |   | 367 |   | 7,697 |   | 638 |   | 8,702 |   |
| Third party                                              |       | 1,299                                     |       | — |   | — |   | 1,299 |   | 1,906 |   | — |   | — |   | 1,906 |   |
| Management fees:                                         |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                            |       | —                                    |       | 1,838 |   | — |   | 1,838 |   | 348 |   | 619 |   | — |   | 967 |   |
| Third party                                              |       | 1,364                                     |       | — |   | — |   | 1,364 |   | 752 |   | — |   | — |   | 752 |   |
| Other fee income-related party                           |       | 625                                       |       | 6,556 |   | — |   | 7,181 |   | — |   | 2,115 |   | — |   | 2,115 |   |
| Other income                                             |       | 34                                        |       | 45 |   | 2 |   | 81 |   | 14 |   | 24 |   | 103 |   | 141 |   |
| Total revenue                                            |       | 38,691                                    |       | 29,161 |   | 84 |   | 67,936 |   | 10,070 |   | 10,455 |   | 811 |   | 21,336 |   |
| **Operating Expenses:**                                  |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property operating expenses                              |       | 16,058                                    |       | 1,248 |   | — |   | 17,306 |   | 4,773 |   | 1,035 |   | — |   | 5,808 |   |
| Reimbursed expenses                                      |       | 1,299                                     |       | 20,722 |   | 22 |   | 22,043 |   | 2,273 |   | 7,697 |   | 638 |   | 10,608 |   |
| Real estate taxes                                        |       | 3,428                                     |       | — |   | — |   | 3,428 |   | 490 |   | — |   | — |   | 490 |   |
| Administrative expenses                                  |       | —                                    |       | — |   | 2,983 |   | 2,983 |   | — |   | — |   | 2,172 |   | 2,172 |   |
| Profits interest expense                                 |       | —                                    |       | — |   | — |   | — |   | — |   | — |   | 33,180 |   | 33,180 |   |
| Depreciation and amortization                            |       | 7,617                                     |       | — |   | 102 |   | 7,719 |   | 1,526 |   | 10 |   | 234 |   | 1,770 |   |
| Interest                                                 |       | 8,707                                     |       | — |   | 274 |   | 8,981 |   | 1,627 |   | — |   | 95 |   | 1,722 |   |
| Total operating expenses                                 |       | 37,109                                    |       | 21,970 |   | 3,381 |   | 62,460 |   | 10,689 |   | 8,742 |   | 36,319 |   | 55,750 |   |
| Income (loss)  before minority interest and income taxes |       | 1,582                                     |       | 7,191 |   | (3,297 | ) | 5,476 |   | (619 | ) | 1,713 |   | (35,508 | ) | (34,414 | ) |
| Minority interest                                        |       | 864                                       |       | 3,502 |   | (1,608 | ) | 2,758 |   | — |   | — |   | — |   | — |   |
| Income (loss) before income taxes                        |       | 718                                       |       | 3,689 |   | (1,689 | ) | 2,718 |   | (619 | ) | 1,713 |   | (35,508 | ) | (34,414 | ) |
| Income taxes                                             |       | 55                                        |       | 921 |   | — |   | 976 |   | — |   | — |   | — |   | — |   |
| **Net income (loss)**                                    |       | $                                         | 663        |   | $ | 2,768 |   | $ | (1,689 | ) | $ | 1,742 |   | $ | (619 | ) | $ | 1,713 |   | $ | (35,508 | ) | $ | (34,414 | ) |

 

***Student Housing***

 

*Revenue*.Of the 52 student housing properties owned as of September 30, 2005, weacquired 30 of the properties during the six months ended December 31,2004, eight properties during the three months ended March 31, 2005, eightproperties during the three months ended June 30, 2005 and the remainingsix properties during the three months ended September 30, 2005. Rent andother property income from these 52 properties totaled $35.3 million for thethree months ended September 30, 2005.

 

Expense reimbursementsfrom related parties totaled $0.4 million in 2004. There was not acorresponding amount in 2005 because we acquired two student housing propertiesto which the expense reimbursements related in March 2005.  Inaddition, we ceased managing one additional student housing property to whichthe expense reimbursements related in March 2005 because it was sold to athird party.

 

Expense reimbursementsfrom third parties decreased to $1.3 million in 2005 from $1.9 million in 2004primarily due to our ceasing

 

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to provide services tofive third-party owned student housing properties following the sale of theproperties. We expect expense reimbursements, which relate to properties wemanage but do not own, to become less significant as a percentage of ouroverall revenue as rental revenue earned from the properties that we do owncontinues to increase.

 

Management fee incomefrom related parties was $0.3 million in 2004. There was not a correspondingamount in 2005 because we acquired two student housing properties from relatedparties in March 2005 that we managed prior to purchase.  Inaddition, in March 2005 we ceased providing management services relatingto an additional student housing property owned by a related party due to thesale of the property.

 

Management fee incomefrom third parties increased to $1.4 million in 2005 from $0.8 million in 2004,primarily as a result of our recovery and ability to recognize a management feeof $0.8 million in 2005 that we were previously unable to recognize due to thefee being deemed uncollectible. This fee was offset by a $0.2 million decreasein management fees as a result of our ceasing to provide management services tofive student housing properties owned by third parties due to the sale of theproperties by the third parties. For the remainder of 2005, we expect managementfees to contribute less significantly to total revenues given the expectedgrowth in rental revenue from the operations of properties we own.

 

Other fee income fromrelated parties totaled $0.6 million in 2005 as a result of fees earned fromproviding development and management services to a joint venture formed during the third quarter of 2005 with aninstitutional investor to develop and construct two student housingproperties.  We expect these fees todecrease to approximately $0.3 million in the fourth quarter because ofexpected decrease in the amount of development and management services to beprovided in the fourth quarter.

 

*Expenses*. Property operating expenses increased to $16.0 million in 2005 from $4.8million in 2004, primarily due to expenses attributable to the 52 propertiesacquired from July 2004 through September 2005.  We expectproperty operating expenses to increase significantly in the future as weacquire additional properties.

 

Reimbursed expensesdecreased to $1.3 million in 2005 from $2.3 million in 2004, primarily due toour acquisition of the two student housing properties from related parties in March 2005that we managed prior to our purchase.  In addition, we ceased providingmanagement services relating to five additional student housing propertiesowned by third parties due to the sale of the properties by the third parties.

 

Real estate taxesincreased to $3.4 million in 2005 from $0.5 million in 2004 due to theacquisition of 52 properties from July 2004 through September 2005.We expect real estate taxes to increase significantly in the future as weacquire additional properties.

 

Depreciation andamortization increased to $7.6 million in 2005 from $1.5 million in 2004 as aresult of acquiring 52 properties for an aggregate acquisition cost of $1,078.0million from July 2004 through September 2005. The $7.6 million in2005 is comprised of $5.9 million of depreciation and $1.7 million of leaseintangible amortization.  We expect depreciation and amortization toincrease significantly in the future as we acquire additional properties.

 

Interest expenseincreased to $8.7 million in 2005 from $1.6 million in 2004 as a result ofincurring debt, including placement of new mortgage debt and the assumption ofexisting mortgage debt and borrowings under our line of credit, in connectionwith the acquisition of 52 properties from July 2004 through September 2005.   During the three months ended September 30,2005, we placed $72.6 million of new mortgage debt and assumed $6.6 million ofexisting mortgage debt. We expect interest expense to increase in the future aswe incur additional debt to fund acquisitions and as interest rates rise.

 

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

 

***Military Housing***

 

*Revenue*.Expense reimbursements totaled $20.7 million in 2005 compared to$7.7 million in 2004. Of the 2005 amount, $1.9 million related to theFort Stewart and Hunter Army Airfield project and $2.3 million related tothe Fort Carson project, both of which commenced operations in the fourthquarter of 2003; $0.1 million related to the Fort Hamilton project, whichcommenced operations in the second quarter of 2004; $0.8 million relatedto the Walter Reed Army Medical Center and Fort Detrick project, whichcommenced operations in the third quarter of 2004; $1.8 million related tothe Fort Eustis/Fort Story project and $10.4 million related to the NavyNortheast project, both of which commenced operations in the fourth quarter of2004; and $3.4 million related to the Fort Bliss/White Sands Missile Rangeproject, which commenced operations in the third quarter of 2005.  Of the 2004 amount, $5.7 million related tothe Fort Carson project, $0.9 million related to the Fort Stewart and HunterArmy Airfield project, $0.1 million related to the Fort Hamilton project, $0.6million related to the Walter Reed Army Medical Center and Fort Detrick projectand $0.4 million related to costs incurred in the development of CDMP for theFort Eustis/Fort Story project.

 

Management fees fromrelated parties totaled $1.8 million in 2005 compared to $0.6 million in2004.  Of the 2005 amount, $0.2 million related to the Fort Stewart andHunter Army Airfield project and $0.3 million related to the Fort Carsonproject, both of which commenced operations in the fourth quarter of 2003; $0.1million related to the Fort Hamilton project, which commenced operations in thesecond quarter of 2004; $0.1 million related to the Walter Reed Army MedicalCenter and Fort Detrick project which commenced operations in the third quarterof 2004; $0.1 million related to the Fort Eustis/Fort Story project and$0.8 million related to the Navy Northeast project, both of whichcommenced operations in the fourth quarter of 2004; and $0.2 million related tothe Fort Bliss/White Sands Missile Range project, which commenced operations inthe third quarter of 2005. Of the 2004 amount $0.2 million

 

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related to the FortStewart and Hunter Army Airfield project, $0.3 million related to the FortCarson project and $0.1 million related to the Fort Hamilton, Walter Reed ArmyMedical Center and Fort Detrick projects.

 

Other fee income totaled$6.6 million in 2005 compared to $2.1 million in 2004. Of the 2005 amount, $4.7million related to development and construction/renovation fees, $0.9 millionrelated to business development fees, and $1.0 million related to preferredreturns on the military housing investments. Of the $4.7 million developmentand construction/renovation fees, $1.0 million related to the Fort Stewart andHunter Army Airfield project, which commenced operations in the fourth quarterof 2003; $0.2 million related to the Fort Hamilton project, which commencedoperations in the second quarter of 2004; $0.4 million related to theWalter Reed Army Medical Center and Fort Detrick project which commencedoperations in the third quarter of 2004; $0.3 million related to the FortEustis/Fort Story project and $1.7 million related to the Navy Northeastproject, both of which commenced operations in the fourth quarter of 2004; and$1.1 million related to the Fort Bliss/White Sands Missile Range project, whichcommenced operations in the third quarter of 2005. Of the $1.0 million ofpreferred returns, $0.2 million related to the Navy Northeast investment and$0.8 million related to the Fort Carson investment.  The 2004 amountconsisted of $1.8 million of development and construction/renovation fees and$0.3 million of business development fees. Of the development andconstruction/renovation fees, $0.7 million related to the Fort Stewart andHunter Army Airfield project, $0.3 million related to the Fort Carson project,$0.1 million related to the Fort Hamilton project and $0.7 million related tothe Walter Reed Army Medical Center and Fort Detrick.

 

*Expenses*. Property operating expenses include costs related to operating the militaryhousing segment of our business. These costs increased to $1.2 million in 2005from $1.0 million in 2004, primarily due to costs associated with operating theFort Eustis/Fort Story project and the Navy Northeast project, both of whichcommenced operations in the fourth quarter of 2004 and the Fort Bliss/WhiteSands Missile Range project, which commenced operations in the third quarter of2005.

 

Reimbursed expensesincreased to $20.7 million in 2005 from $7.7 million in 2004 primarily due toincreases in payroll and renovation expenses related to the seven militaryhousing projects in operation as of September 30, 2005 and closing costsand transition expenses for the Fort Bliss/White Sands Missile Range project.

 

***Corporate***

 

Rental revenue andexpense reimbursements, which were recognized with respect to the portion ofour corporate headquarters leased to entities affiliated with Gary M. Holloway, Sr.,and payroll and related expenses reimbursed by entities affiliated with Mr. Hollowayfor the provision of common services, decreased to $0.1 million in 2005 from$0.7 million in 2004.  The decrease is aresult of increased expense reimbursements in 2004 related to our initialpublic offering.

 

Administrative expenses,primarily relating to management of our corporate office, accounting, legal,human resources and information technology, increased to $3.0 million in 2005from $2.2 million in 2004 primarily due to increased staffing and additionalcosts incurred in connection with becoming a public company and growth in ouroperating segments**.**

 

Depreciation andamortization, relating primarily to our corporate headquarters and relatedmortgage, decreased slightly to $0.1 million in 2005 from $0.2 million in 2004primarily due to the sale and transfer of an interest in a corporate aircraftin February 2005.

 

Interest expenseincreased to $0.3 million in 2005 from $0.1 million in 2004 primarily due to anincrease in the interest rate on our corporate headquarters loan.

 

Compensation expense wasrecorded in the three-month period ended September 30, 2004 related toprofits interests awarded to certain employees.  These employees wereeligible to participate in the net proceeds or value received in excess of theequity investments in such assets upon their sale or disposition.  These assets included certain student housing properties and the militarybusiness included in The GMH Predecessor Entities.  These employeesrendered all services and satisfied all conditions necessary to earn the rightto benefit from these profits interests prior to September 30,2004. In accordance with Financial Accounting Standards Statement No.5,*Accounting for Contingencies*,compensation expense relating to the award of these profits interests isrequired to be recognized by The GMH Predecessor Entities when the sale ordisposition of the assets resulting in proceeds received by Gary M. Holloway inan amount in excess of his equity investment in such assets becomesprobable.  This amount became probable during the third quarter of 2004when, in connection with the contribution of the ownership interests in GMHMilitary Housing LLC, College Park Management, Inc. and other assets by Mr. Hollowayto our operating partnership in anticipation of the initial public offering ofthe Company, the remaining profits interests awards were amended to fix thevalue of such awards at $33.2 million to be paid to these employeesunconditionally.  Accordingly, this amount was recognized in the thirdquarter of 2004 and Mr. Holloway’s obligations regarding the profitsinterests were satisfied upon the transfer of $33.2 million of units of limitedpartnership in our operating partnership to these employees on November 2,2004, the closing date of our initial public offering.

 

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***Comparison of the Nine Months Ended September 30, 2005to the Nine Months Ended September 30, 2004***

 
| ** **                                               | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                               | ** ** | **2005 (Company)**                       | ** ** | **2004 (Predecessor)** | ** ** |
| ** **                                               | ** ** | **Student  Housing**                     | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                               | ** ** | **(in thousands)**                       | ** ** |
| **Revenue:**                                             |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income                           |       | $                                        | 90,851     |   | $ | — |   | $ | 182 |   | $ | 91,033 |   | $ | 6,683 |   | $ | — |   | $ | 340 |   | $ | 7,023 |   |
| Expense reimbursements:                                  |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                            |       | 186                                      |       | 42,057 |   | 232 |   | 42,475 |   | 1,089 |   | 14,845 |   | 735 |   | 16,669 |   |
| Third party                                              |       | 3,876                                    |       | — |   | — |   | 3,876 |   | 5,475 |   | — |   | — |   | 5,475 |   |
| Management fees:                                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                            |       | 197                                      |       | 5,153 |   | — |   | 5,350 |   | 1,163 |   | 1,520 |   | — |   | 2,683 |   |
| Third party                                              |       | 3,015                                    |       | — |   | — |   | 3,015 |   | 3,430 |   | — |   | — |   | 3,430 |   |
| Other fee income-related party                           |       | 664                                      |       | 14,067 |   | 31 |   | 14,762 |   | — |   | 4,174 |   | — |   | 4,174 |   |
| Other income                                             |       | 109                                      |       | 69 |   | 70 |   | 248 |   | 58 |   | 70 |   | 365 |   | 493 |   |
| Total revenue                                            |       | 98,898                                   |       | 61,346 |   | 515 |   | 160,759 |   | 17,898 |   | 20,609 |   | 1,440 |   | 39,947 |   |
| **Operating Expenses:**                                  |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property operating expenses                              |       | 35,813                                   |       | 4,087 |   | — |   | 39,900 |   | 6,683 |   | 3,168 |   | — |   | 9,851 |   |
| Reimbursed expenses                                      |       | 4,062                                    |       | 42,057 |   | 232 |   | 46,351 |   | 6,564 |   | 14,845 |   | 735 |   | 22,144 |   |
| Real estate taxes                                        |       | 8,003                                    |       | — |   | — |   | 8,003 |   | 490 |   | — |   | — |   | 490 |   |
| Administrative expenses                                  |       | —                                   |       | — |   | 8,657 |   | 8,657 |   | — |   | — |   | 4,488 |   | 4,488 |   |
| Profits interest expense                                 |       | —                                   |       | — |   | — |   | — |   | — |   | — |   | 33,180 |   | 33,180 |   |
| Depreciation and amortization                            |       | 22,154                                   |       | — |   | 409 |   | 22,563 |   | 1,537 |   | 18 |   | 633 |   | 2,188 |   |
| Interest                                                 |       | 20,489                                   |       | — |   | 739 |   | 21,228 |   | 1,627 |   | — |   | 253 |   | 1,880 |   |
| Total operating expenses                                 |       | 90,521                                   |       | 46,144 |   | 10,037 |   | 146,702 |   | 16,901 |   | 18,031 |   | 39,289 |   | 74,221 |   |
| Income (loss)  before minority interest and income taxes |       | 8,377                                    |       | 15,202 |   | (9,522 | ) | 14,057 |   | 997 |   | 2,578 |   | (37,849 | ) | (34,274 | ) |
| Minority interest                                        |       | 4,184                                    |       | 7,593 |   | (4,756 | ) | 7,021 |   | — |   | — |   | — |   | — |   |
| Income (loss) before income taxes                        |       | 4,193                                    |       | 7,609 |   | (4,766 | ) | 7,036 |   | 997 |   | 2,578 |   | (37,849 | ) | (34,274 | ) |
| Income taxes                                             |       | 100                                      |       | 1,814 |   | — |   | 1,914 |   | — |   | — |   | — |   | — |   |
| **Net income (loss)**                                    |       | $                                        | 4,093      |   | $ | 5,795 |   | $ | (4,766 | ) | $ | 5,122 |   | $ | 997 |   | $ | 2,578 |   | $ | (37,849 | ) | $ | (34,274 | ) |

 

***Student Housing***

 

*Revenue*.Of the 52 properties owned as of September 30, 2005, we acquired 30 of thestudent housing properties during 2004 and the remaining 22 properties duringthe nine months ended September 30, 2005. Rent from these 52 propertiestotaled $90.9 million for the nine months ended September 30, 2005.

 

Expense reimbursementsfrom related parties decreased to $0.2 million in 2005 from $1.1 million in2004, primarily due to our acquisition of two student housing properties fromrelated parties in March 2005, which we managed prior to purchase. In addition, we ceased managing one student housing property owned by a relatedparty in March 2005 because it was sold to a third party.

 

Expense reimbursementsfrom third parties decreased to $3.9 million in 2005 from $5.5 million in 2004,primarily due to our ceasing to provide services to five student housingproperties in 2005 owned by third parties upon the sale of theproperties.  We expect expense reimbursements, which relate to propertieswe manage but do not own, to become less significant as a percentage of overallrevenue as rental revenue earned from the properties that we do own continuesto increase.

 

Management fee incomefrom related parties decreased to $0.2 million in 2005 from $1.2 million in2004. The decrease in management fee income was primarily due to ouracquisition of two student housing properties from related parties in March 2005that we managed prior to purchase.  In addition, in March 2005 weceased providing management services relating to an additional student housingproperty owned by a related party upon the sale of the property.

 

Management fee incomefrom third parties decreased to $3.0 million in 2005 from $3.4 million in 2004,primarily due to our ceasing to manage five student housing properties owned bythird parties upon the sale of the properties which was partially offset by anincrease of $0.8 million related to our recognition of a management fee in 2005that had not been previously recognized because it was deemed to beuncollectible.  For the remainder of 2005, we expect management fees tocontribute less significantly as a percentage of overall revenue given theexpected growth in rental revenue from the operations of properties we own.

 

Other fee income fromrelated parties totaled $0.6 million in 2005 as a result of fees earned fromproviding development and management services to our joint venture with an institutional investor to finance the development andconstruction of two student

 

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housingproperties.  We expect these fees todecrease to approximately $0.3 million in the fourth quarter because ofexpected decrease in the amount of development and management services to beprovided in the fourth quarter.

 

*Expenses*. Property operating expenses increased to $35.8 million in 2005 from $6.7million in 2004, primarily due to expenses attributable to the 52 propertiesacquired from July 2004 through September 2005.  We expectexpenses to increase significantly in the future as we acquire additionalproperties.

 

Reimbursed expensesdecreased to $4.1 million in 2005 from $6.6 million in 2004, primarily due toour acquisition of the two student housing properties from related parties in March 2005that we managed prior to our purchase.  In addition, during the ninemonths ended September 30, 2005, we ceased providing management servicesrelating to five student housing properties owned by third parties and astudent housing property owned by a related party upon the sale of theproperties.

 

Real estate taxesincreased to $8.0 million in 2005 from $0.5 million in 2004 due to theacquisition of 52 properties from July 2004 through September 2005.We expect real estate taxes to increase significantly in the future as weacquire additional properties.

 

Depreciation andamortization increased to $22.2 million in 2005 from $1.5 million in 2004 as aresult of acquiring 52 properties for an aggregate acquisition cost of $1,078.0million from July 2004 through September 2005. The $22.2 million in2005 is comprised of $15.2 million of depreciation and $7.0 million of leaseintangible amortization. We expect depreciation and amortization to increasesignificantly in the future as we acquire additional properties.

 

Interest expenseincreased to $20.5 million in 2005 from $1.6 million in 2004 as a result ofincurring debt, including placement of new mortgage debt and the assumption ofexisting mortgage debt, and borrowings under our line of credit, in connectionwith the acquisition of 52 properties from July 2004 through September 2005.During the nine months ended September 30, 2005, we placed $202.0 millionof new mortgage debt, assumed $83.3 million of existing mortgage debt, andborrowed $244.0 million and repaid $107.0 million under our line ofcredit.  We expect interest expense to increase in the future as we incuradditional debt to fund acquisitions and as interest rates rise.

 

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

 

***Military Housing***

 

*Revenue*.Expense reimbursements totaled $42.0 million in 2005 compared to$14.8 million in 2004. Of the 2005 amount, $7.9 million related tothe Fort Stewart and Hunter Army Airfield project and $7.3 million relatedto the Fort Carson project, both of which commenced operations in the fourth quarterof 2003; $0.4 million related to the Fort Hamilton project, whichcommenced operations in the second quarter of 2004; $1.3 million relatedto the Walter Reed Army Medical Center and Fort Detrick project, whichcommenced operations in the third quarter of 2004; $3.2 million related tothe Fort Eustis/Fort Story project; and $18.5 million related to the NavyNortheast project, both of which commenced operations in the fourth quarter of2004; and $3.4 million related to the Fort Bliss/White Sands Missile Rangeproject, which commenced operations in the third quarter of 2005. Of the 2004amount, $2.0 million related to the Fort Stewart and Hunter Army Airfieldproject, $10.5 million related to the Fort Carson project, $0.7 million relatedto the Fort Hamilton project, $0.6 million related to the Walter Reed ArmyMedical Center and Fort Detrick project and $1.0 million related toreimbursement of costs incurred in the development of the CDMP for the FortHamilton Project, Walter Reed Army Medical Center/Fort Detrick project and theFort Eustis/Fort Story project.

 

Management fees fromrelated parties totaled $5.2 million in 2005 compared to $1.5 million in2004.  Of the 2005 amount, $0.7 million related to the Fort Stewart andHunter Army Airfield project and $1.1 million related to the Fort Carsonproject, both of which commenced operations in the fourth quarter of 2003; $0.2million related to the Fort Hamilton project, which commenced operations in thesecond quarter of 2004; $0.2 million related to the Walter Reed Army MedicalCenter and Fort Detrick project which commenced operations in the third quarterof 2004; $0.4 million related to the Fort Eustis/Fort Story project and$2.4 million related to the Navy Northeast project, both of whichcommenced operations in the fourth quarter of 2004; and $0.2 million related tothe Fort Bliss/White Sands Missile Range project, which commenced operations inthe third quarter of 2005.  Of the 2004amount, $0.7 million related to the Fort Stewart and Hunter Army Airfieldproject, $0.7 million related to the Fort Carson project and $0.1 millionrelated to the Fort Hamilton project and the Walter Reed Army Medical Centerand Fort Detrick project.

 

Other fee income totaled$14.1 million in 2005 compared to $4.2 million in 2004. Of the 2005 amount,$9.7 million related to development and construction/renovation fees earnedfrom related parties, $2.5 million related to business development fees, and$1.9 million related to preferred returns on the military housing investments.Of the $9.7 million of development and construction/renovation fees, $3.1million related to the Fort Stewart and Hunter Army Airfield project, whichcommenced operations in the fourth quarter of 2003; $0.7 million related to theFort Hamilton project, which commenced operations in June 2004; $0.9million related to the Walter Reed Army Medical Center and Fort Detrick projectwhich commenced operations in July 2004; $0.5 million related to the FortEustis/Fort Story project and $3.4 million related to the Navy Northeastproject, both of which commenced operations in the fourth quarter of 2004; and$1.1 million related to the Fort Bliss/White Sands Missile Range project, whichcommenced operations in the third quarter of 2005.  Of the $1.9 million of preferred returns in2005, $0.6 million related to the Navy Northeast investment and $1.3 millionrelated to the Fort Carson investment. The 2004 amount consisted of $3.2million of development and construction/renovation fees and $1.0 million ofbusiness development fees. Of the development and construction/renovation fees,$1.5 million related to the Fort Stewart and Hunter Army Airfield project, $0.5million related to the Fort Carson project, $0.5 million related to the FortHamilton project and $0.7 million related to the Walter Reed Army MedicalCenter and

 

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Fort Detrick project.

 

*Expenses*. Property operating expenses include costs related to operating the militaryhousing segment of our business. These costs increased to $4.1 million in 2005from $3.2 million in 2004 primarily due to costs associated with operating theFort Eustis/Fort Story project and the Navy Northeast project, both of whichcommenced operations in the fourth quarter of 2004; and the Fort Bliss/WhiteSands Missile Range project, which commenced operations in the third quarter of2005.

 

Reimbursed expensesincreased to $42.0 million in 2005 from $14.8 million in 2004 primarily due topayroll and renovation expenses related to the seven military housing projectsin operation as of September 30, 2005; closing costs and transitionexpenses for the Fort Hamilton, Walter Reed, Fort Detrick, Fort Eustis/FortStory, Navy Northeast and Fort Bliss/White Sands projects; and expensesrelating to the Fort Carson project’s management contracts.

 

***Corporate***

 

Rental revenue andexpense reimbursements, which were recognized with respect to the portions ofour corporate headquarters leased to entities affiliated with Gary M. Holloway, Sr.,and payroll and related expenses reimbursed by entities affiliated with Mr. Hollowayfor the provision of common services, decreased to $0.4 million in 2005 from$1.1 million in 2004 primarily as a result of reimbursed expenses in 2004related to our initial public offering.

 

Administrative expenses,primarily relating to management of our corporate office, accounting, legal,human resources and information technology, and corporate aircraft, increasedto $8.7 million in 2005 from $4.4 million in 2004 primarily due to increasedstaffing and additional costs incurred in connection with becoming a publiccompany and growth in our operating segments**.**

 

Depreciation, relatingprimarily to our corporate headquarters, decreased to $0.4 million in 2005 from$0.6 million in 2004 primarily due to the sale and transfer of an interest in acorporate aircraft in February 2005.

 

Interest expenseincreased to $0.7 million in 2005 from $0.3 million in 2004 primarily due to anincrease in the interest rate on our corporate headquarters loan and thecorporate aircraft loan.

 

Compensation expense wasrecorded in the nine-month period ended September 30, 2004, relating toprofits interests awarded by Gary M. Holloway to certain employees of The GMHPredecessor Entities and other entities affiliated with Gary M. Holloway inrecognition of past services. These employees were eligible to participate inthe net proceeds or value received by Gary M. Holloway upon the sale ordisposition of certain student housing properties and the military housing businessin excess of Mr. Holloway’s equity investments 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.  In accordance with Financial AccountingStandards Statement No.5,*Accounting forContingencies*, compensation expense relating to the award of theseprofits interests is required to be recognized by The GMH Predecessor Entitieswhen the sale or disposition of the assets resulting in proceeds received byGary M. Holloway in an amount in excess of his equity investment in such assetsbecomes probable.  This amount became probable during the third quarter of2004 when, in connection with the contribution of the ownership interests inGMH Military Housing LLC, College Park Management Inc. and other assets by Mr. Hollowayto our operating partnership in anticipation of the initial public offering ofthe Company, the remaining profits interests awards were amended to fix thevalue of such awards at $33.2 million to be paid to these employeesunconditionally.  Accordingly, this amount was recognized in the thirdquarter of 2004 and Mr. Holloway’s obligations regarding the profitsinterests were satisfied upon the transfer of $33.2 million of units of limitedpartnership in our operating partnership to these employees on November 2,2004, the closing date of our initial public offering.

 

**Liquidityand Capital Resources**

 

Short-term liquidityrequirements consist primarily of funds necessary to pay operating expenses andother costs. These expenses and costs may include (i) recurringmaintenance and capital expenditures to maintain and lease our properties, (ii) interestexpense and scheduled principal payments on outstanding indebtedness, (iii) realestate taxes and insurance, (iv) corporate salaries, employee benefits andother corporate overhead and administrative expenses and (v) futuredistributions to shareholders and partners of our Operating Partnership.

 

Our existing workingcapital and cash provided by operations, together with amounts available to usunder our $150.0 million revolving credit facility are expected to besufficient to meet our short-term liquidity requirements.  Availability under the credit facility as of September 30, 2005 waslimited to a borrowing base amount equal to the sum of 60% of the value of anunencumbered asset pool as of the end of the previous quarter (which in noevent may contain fewer than five student housing properties) and 50% of theannualized value of our cash flow from our management, development andconstruction/renovation fees in connection with our military housing projectsand from management of our student housing properties in the previousquarter.  As of September 30, 2005,we had $137.0 million in outstanding borrowings under our credit facility, andan additional $13.0 million was available for draw under the facility.Subsequent to the end of the third quarter, and upon completion of our recentfollow-on offering in early October 2005, we used $122.0 million in netproceeds from the offering to repay outstanding borrowings under the facility.

 

The credit facility wasobtained by our Operating Partnership in November 2004, and the Trustserves as guarantor for the credit facility. Prior to an amendment to ourcredit facility that was effective as of August 9, 2005, advances underthe credit facility bore interest, at the election of the borrower, at aEurodollar rate based on LIBOR or a base rate based on the prime rate announcedby

 

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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 determined by the ratio of all liabilities to ourtotal asset value, as defined in the credit facility. The credit facility alsorequires that we maintain certain corporate level financial covenants.

 

Effective as of August 9,2005, we executed a Second Amendment and Waiver to Credit Agreement (“Amendment”),pursuant to which, among other things, the interest rates applicable toborrowings were modified to 1.625% to 2.375% for Eurodollar rate loans and0.75% to 1.75% for prime rate loans. The credit facility also requires that wemaintain certain corporate level financial covenants. Under the Amendment, thecalculation of the borrowing base was revised to include cash flow from themilitary housing construction and development fees and to increase the totalcash flow attributable to annualized fees from the management, construction anddevelopment of the military housing projects and student housing propertiesfrom 35% to 50%.  In addition, the Amendment provided a formal waiver fromthe lenders with respect to the Company’s noncompliance with the leverage ratiorequirement under the facility as of June 30, 2005, and modified thecalculation of the leverage ratio and increased the maximum leverage ratio from60% to 65% through December 31, 2005.  At the end of the firstquarter of 2006, the maximum leverage ratio will revert to 60%.

 

We elected to be treatedas a REIT for federal income tax purposes in connection with the filing of ourtax return relating to the fiscal year ended December 31, 2004. As a REIT,we are required to distribute at least 90% of our REIT taxable income to ourshareholders on an annual basis. Therefore, except as discussed below, as ageneral matter, a substantial portion of cash generated by our operations willbe used to fund distributions to shareholders and holders of limitedpartnership interests in our Operating Partnership, and will not be availableto satisfy our liquidity needs.

 

Future dividends anddistributions 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. We expectthat during the remainder of 2005, our cash flow from operations will beinsufficient to fund our anticipated dividend distributions. Therefore, weexpect to rely on amounts available under our credit facility or through otherthird party debt financing in order to fund these distributions and othercapital needs.  In addition, our board of trustees may choose to pay alower distribution in the event we are unable to obtain such financing. Anyindebtedness we incur will increase our leverage and decrease our ability toborrow money for other needs, such as for the acquisition or development ofadditional student housing properties or investments relating to additionalmilitary housing projects.

 

As of September 30,2005, 45 of our student housing properties, our corporate headquarters, andother assets were encumbered by notes payable aggregating $629.2 million andsecured by first liens on the individual assets with an aggregate cost basis ofapproximately $914.5 million before accumulated depreciation.  Our notespayable have a weighted-average interest rate of 4.98% and mature at variousdates between November 2005 and June 2024 and require monthlypayments of principal and interest or monthly payments of interest only. Thetable below sets forth, for the five succeeding years and thereafter, theaggregate annual principal payments of our notes payable and credit facility(in thousands):

 
| 2005                |   | $       | 7,043   |   |
|---------------------|--------|---------|---------|--------|
| 2006                |   | 5,188   |    |
| 2007                |   | 224,960 |    |
| 2008                |   | 4,708   |    |
| 2009                |   | 34,076  |    |
| 2010                |   | 65,954  |    |
| 2011 and thereafter |   | 424,242 |    |
|                |   | $       | 766,171 |   |

 

With regard to ourmilitary housing projects, we made a $10.6 million equity contribution in November 2004relating to our Navy Northeast project and have contractually committed tocontribute an aggregate of $2.0 million in 2006 to our Fort Hamilton project,$5.9 million in 2007 to our Walter Reed Army Medical Center/Fort Detrickproject, $3.6 million in 2010 for our Fort Eustis/Fort Story project, $8.0million in 2011 for our Fort Stewart and Hunter Army Airfield project, and $6.3million in 2011 for our Fort Bliss/White Sands project. These equitycontributions help to fund the development, construction and renovation ofhousing units at these bases during their respective initial developmentperiods.

 

Typically, we arereimbursed for certain payroll expenses relating to the student housingproperties we manage for third parties, for certain costs we incur after we areawarded a military housing project until we enter into agreements for theproject and for transition costs we incur shortly before initiation of ourmanagement of a military housing project. However, we are required to fundthese costs prior to the time we receive the reimbursements. Typically, Armyand Navy projects require approximately $1.0 million to $7.0 million in costsassociated with transition and exclusive negotiations, depending on the size ofthe project. The expenditures typically begin 12 months prior to closing of theaward of the military housing project. Accordingly, these timing differencesadd to our short-term liquidity needs.

 

If cash flows from any ofour military housing projects are insufficient to meet the coverage ratios orbenchmarks entitling us to receive fee payments, any unpaid fees willaccumulate and be subsequently paid from operations or upon dissolution of theprojects to the extent that funds are available and the applicable thresholdsare met. If these thresholds are not met, we will not have access to certain ofthe fees we have earned. The unavailability of these funds would materiallyimpact our ability to meet our short-term and long-term liquidity needs. Wewill be required to make equity contributions at the beginning of the initialdevelopment period for

 

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typical Navy transactionsand at the end of the initial development period for typical Army transactions.If cash flow is insufficient, any unpaid equity returns will accumulate asspecified in the applicable project agreement and subsequently be paid fromoperations or upon dissolution of the projects to the extent the funds areavailable. Based on our current expectations regarding the terms of the debtfunding for our military projects, we expect that the projects will generatesufficient cash flows to fund the reinvestment account and pay anticipatedequity returns.

 

With regard to ourcurrently owned student housing properties, we do not have any short-termcapital commitments; however, we will require funds in connection with ouranticipated acquisitions of additional student housing properties.  As of October 31, 2005, we hadagreements to acquire three student housing properties and one land parcel fordevelopment, and non-binding letters of intent to acquire six student housingproperties and one land parcel for development. We will be continuing our due diligence process with respect to thesetransactions during the remainder of 2005, as well as continuing to reviewpotential transactions covering additional student housing properties that arelocated in the Company’s targeted markets and that meet management’sunderwriting criteria for creating long-term growth potential.  The timingof any of these acquisitions will be dependent upon various factors, includingthe ability to complete satisfactory due diligence, obtain appropriatefinancing on the properties and the availability of capital. We intend to fundthe equity portion of the purchase price for these additional student housingproperties by using funds from our credit facility or from available cash fromoperations. In addition, we may leverage our existing student housingproperties in order to have cash available to fund the purchase price ofadditional student housing properties.

 

Depending upon the sizeof the Company’s student housing acquisition pipeline and the timing ofclosings on our properties under contract and non-binding letter of intent, theamount of cash required to fund planned student housing acquisitions during thenext twelve months may exceed the maximum capacity available under our existingcredit facility. We also may pursue additional financing as opportunitiesarise.  Future financings may include a range of different sizes or typesof financing, including the sale of additional debt or equity securities. While we believe we will be able to obtain such funds, these funds may not beavailable on favorable terms or at all. Our ability to obtain additionalfinancing depends on several factors, including future market conditions, oursuccess or lack of success in penetrating our markets, our futurecreditworthiness, and restrictions contained in agreements with our investorsor lenders, including the restrictions contained in the agreement governing ourrevolving credit facility.  These financings could increase our level ofindebtedness or result in dilution to our equity holders.

 

Long-term liquidityrequirements with respect to our student housing and military housing segmentsconsist primarily of amounts necessary to fund scheduled debt maturities,renovations and other non-recurring capital expenditures that need to be madeperiodically at our properties, and the costs associated with acquisitions ofstudent housing properties and awards or acquisitions of military housingprojects that we pursue. Historically, we have satisfied our long-termliquidity requirements through various sources of capital, including existingworking capital, cash provided by operations, long-term mortgage indebtedness,and owner contributions.  We now expect our long-term liquidityrequirements to be satisfied primarily through cash generated by operationsthat is not used to fund distributions and the additional external financingsources discussed above.

 

*Inflation*

 

As a majority of theCompany’s student housing leases are 12 months or less, rates on in-place leasesgenerally approximate market rental rates.  The Company believes thatinflationary increases in expenses will be significantly offset by rentincreases upon renewal.  A majority of the Company’s military housingmanagement fees, construction/renovation fees and business development fees arebased on a percentage of revenue or expenses generated by the Company or themilitary housing projects.  The Company believes that inflationaryincreases in expenses will be significantly offset by increases in revenue.

 

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

 

Given current marketconditions, our strategy favors fixed-rate, secured debt over variable-ratedebt to minimize our exposure to increases in interest rates. As of September 30,2005, 72% of the outstanding principal amount of our notes payable secured byproperties we owned as of such date had fixed interest rates with aweighted-average rate of 4.86%. The remaining 28% of outstanding principalamount of our notes payable and line of credit, as of September 30, 2005,had variable interest rates primarily equal to LIBOR plus 1.75% to 2.25%.

 

Based on our variablerate debt balance as of September 30, 2005, if interest rates were toincrease by 1.0%, our interest expense would increase by approximately$2.1 million on an annual basis.

 

As of September 30,2005, we had $137.0 million in funds drawn from our credit facility,bearing a weighted-average interest rate of 5.90%.  In October 2005, we repaid $122.0million of such outstanding balance on our credit facility using proceeds fromour public offering of common shares that was completed on October 4,2005.

 

**Item4.****                                   Controlsand Procedures**

 

*(a)          Evaluation of Disclosure Controls andProcedures. * Our management, with the participation ofour Chief Executive Officer and Chief Financial Officer, evaluated theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this report. Based on that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures as of the end of the period covered by this report have beendesigned and are functioning effectively to provide reasonable assurance thatthe information required to be disclosed by us in reports filed under theSecurities Exchange Act of

 

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1934 is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and is accumulated and communicated to our management,including our principal executive and financial officers, or persons performingsimilar functions, as appropriate to allow timely discussions regardingrequired disclosure. We believe that a controls system, no matter how welldesigned and operated, cannot provide absolute assurance that the objectives ofthe controls system are met, and no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, within acompany have been detected.

 

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

 

**PART II— OTHER INFORMATION**

 
| **Item 1.** | ** ** | **Legal  Proceedings**                                           |
|-------------|------------|------------------------------------------------------------------|
|        |       |                                                             |
| None.       |       |                                                             |
|        |       |                                                             |
| **Item 2.** | ** ** | **Unregistered  Sales of Equity Securities and Use of Proceeds** |
|        |       |                                                             |
| None.       |       |                                                             |
|        |       |                                                             |
| **Item 3.** | ** ** | **Defaults  Upon Senior Securities**                             |
|        |       |                                                             |
| None.       |       |                                                             |
|        |       |                                                             |
| **Item 4.** | ** ** | **Submission  of Matters to a Vote of Security Holders**         |
|        |       |                                                             |
| None.       |       |                                                             |
|        |       |                                                             |
| **Item 5.** | ** ** | **Other  Information**                                           |

 

*EntryInto a Material Definitive Agreement*

 

On November 11,2005, the Company executed an amendment to its Full Service Lease, dated as of November 2,2004, between 353 Associates, L.P. (the “Landlord”) and GMH Capital PartnersCommercial Realty Services, LP, GMH Capital Partners Asset Services, LP, GMHPhiladelphia Barrage, LLC, GMH Construction Company, Inc. and GMHAssociates, Inc (collectively, the “Tenants”), which covers the leasing of aportion of the Company’s corporate headquarters to the Tenants (see Note 1 tothe financial statements included in this report).  353 Associates, L.P. is a wholly-ownedsubsidiary of the Operating Partnership, and each of the tenants is an entitywholly-owned by Gary M. Holloway, Sr. Pursuant to the amendment, GMH Capital Partners Commercial RealtyServices, LP will manage the provision of cleaning services for the entirecorporate headquarters building in exchange for a monthly credit of $3,023.26against monthly installments of rent of $16,004.16. In addition, under theterms of the amendment, GMH Capital Partners Commercial Realty Services, LPwill manage the build-out of a portion of the first floor of the building foradditional office space and will receive a construction oversight fee equal to $15,000in consideration for the provision of such construction oversight services.  This construction oversight fee is to be paidupon substantial completion of the build-out in the form of a credit againstmonthly installments of rent. A copy of the amendment to the Full Service Leaseis attached as Exhibit 10.4 to this Quarterly Report on Form 10-Q forthe period ended September 30, 2005.  The form of amendment wasapproved by the Audit Committee of the Company’s Board of Trustees, inaccordance with the Company’s Code of Business Conduct and Ethics.

 
| **Item 6.** |   | **Exhibits** |
|-------------|--------|--------------|

 
| **Exhibit** | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1        |       | Aircraft Lease  Agreement, effective as of August 11, 2005, by and among Corporate  Flight Services, LLC, College Park Management, LLC, GMH Military Housing  Management, LLC and GMH Communities, LP (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.2        |       | Second Amendment and  Waiver to Credit Agreement, dated August 10, 2005, by and among GMH  Communities, LP, GMH Communities Trust (“Trust”), each subsidiary of the  Trust that becomes a borrower, Bank of America, N.A., as Administrative  Agent, Swing Line Lender and L/C Issuer and the following lenders: Eurohypo  AG, New York Branch, JPMorgan Chase Bank, Deutsche Bank Trust Company  Americas, Merrill Lynch Bank USA, Morgan Stanley Bank, and Bank Midwest.  (incorporated by reference to the Registrant’s Quarterly Report on  Form 10-Q for the quarter ended June 30, 2005, as filed with the  SEC on August 12, 2005). |
| 10.3        |       | Full Service Lease,  dated November 2, 2004, by and among 353 Associates; GMH Capital  Partners Commercial Realty Services, LP; GMH Capital Partners Asset Services,  LP; GMH Philadelphia Barrage, LLC; GMH Construction Company, Inc. and  GMH Associates, Inc. (filed herewith).                                                                                                                                                                                                                                                                                                                                                                            |
| 10.4        |       | First Amendment to  Lease, effective as of November 1, 2005, by and among 353 Associates,  L.P., GMH Capital Partners Commercial Realty Services, LP, GMH Capital  Partners Asset Services, LP, GMH Philadelphia Barrage, LLC, GMH Construction  Company, Inc. and GMH Associates, Inc. (filed herewith).                                                                                                                                                                                                                                                                                                                                                      |
| 31.1        |       | Certifications of Chief  Executive Officer Required by Rule 13a-14(a) of the Securities  Exchange Act of 1934, as                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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|   |   | amended.(furnished  herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2   |   | Certifications of Chief  Financial Officer Required by Rule 13a-14(a) of the Securities  Exchange Act of 1934, as amended. (furnished herewith)                                                                                                                                                                                                                                                                                                                                                                             |
| 32.1   |   | Certifications of Chief  Executive Officer Required by Rule 13a-14(b) of the Securities  Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed”  for purposes of Section 18 of the Securities Exchange Act of 1934, as  amended, or otherwise subject to the liability of that section. Further, this  exhibit shall not be deemed to be incorporated by reference into any filing  under the Securities Act of 1933, as amended, or the Securities Exchange Act  of 1934, as amended.) |
| 32.2   |   | Certifications of Chief  Financial Officer Required by Rule 13a-14(b) of the Securities  Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed”  for purposes of Section 18 of the Securities Exchange Act of 1934, as  amended, or otherwise subject to the liability of that section. Further, this  exhibit shall not be deemed to be incorporated by reference into any filing  under the Securities Act of 1933, as amended, or the Securities Exchange Act  of 1934, as amended.) |

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                                |   | GMH COMMUNITIES TRUST                  |
|-------------------------------------|--------|----------------------------------------|
|                                |   |                                   |
|                                |   |                                   |
| Date:  November 14,  2005 |   | /s/ Gary M.  Holloway, Sr.        |
|                                |   | Gary M.  Holloway, Sr.            |
|                                |   | President and Chief Executive  Officer |
|                                |   |                                   |
|                                |   |                                   |
|                                |   | /s/ Bradley W. Harris                  |
|                                |   | Bradley W. Harris                      |
|                                |   | Senior Vice President                  |
|                                |   | and Chief Financial  Officer           |

 

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