**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

**FORM 10-Q**

| **ý**                                                                                                                                                                                                                                  |   | **     QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|
| **SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                        |
| **For the  quarterly period ended March 31, 2007**                                                                                                                                                                                          |
|                                                                                                                                                                                                                                        |
| **o**                                                                                                                                                                                                                                       |   | **     TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE** |
| **SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                        |
| **For the  transition period from                    to                  ** |
| ** **                                                                                                                                                                                                                                  |
| **Commission  file number 001-32290**                                                                                                                                                                                                       |

 

**GMHCOMMUNITIES TRUST**

(ExactName of Registrant as Specified in Its Charter)

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

 

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

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

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

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso     No x

On May 9, 2007, 41,567,146 of the registrant’s commonshares of beneficial interest, $0.001 par value, were outstanding.

 

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**GMH COMMUNITIES TRUST****INDEX TO FORM 10-Q**
| Cautionary Note Regarding  Forward-Looking Statements                                                |   |
|------------------------------------------------------------------------------------------------------|--------|
|                                                                                                 |   |
| **Part I —  Financial Information**                                                        |   |
| Item 1. Financial  Statements                                                                        |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations |   |
| Item 3.  Quantitative and Qualitative Disclosure About Market Risk                                   |   |
| Item 4. Controls  and Procedures                                                                     |   |
|                                                                                                 |   |
| **Part II — Other  Information**                                                           |   |
| Item 1. Legal  Proceedings                                                                           |   |
| Item 1A. Risk Factors                                                                                |   |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                 |   |
| Item 3.  Defaults Upon Senior Securities                                                             |   |
| Item 4.  Submission of Matters to a Vote of Security Holders                                         |   |
| Item 5. Other  Information                                                                           |   |
| Item 6. Exhibits                                                                                     |   |
|                                                                                                 |   |
| Signatures                                                                                           |   |

** **

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**CAUTIONARY NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

Ourdisclosure and analysis in this document and in the documents that are or willbe incorporated by reference into this document contain forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933,as amended, and Section 21E of the Securities Exchange Act of 1934, asamended. Forward-looking statements provide our current expectations orforecasts of future events and are not statements of historical fact. Theseforward-looking statements include information about possible or assumedfuture events, including, among other things, operating or financialperformance, strategic plans and objectives, or regulatory or competitiveenvironments. Statements regarding the following subjects are forward-lookingby their nature:

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

·       our projected operatingresults and financial condition;

·       completion of any of ourtargeted acquisitions or development projects, sales of assets, refinancings orjoint venture transactions within our expected timeframe or at all;

·       our ability to obtainfuture financing arrangements on terms acceptable to us, or at all;

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

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

·       our understanding of ourcompetition, market opportunities and trends;

·       projected timing andamounts of capital expenditures;

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

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

·       the factors referenced inthe sections of this report titled “Our Business,” “Risk Factors” and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”;

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

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

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

·       failure to effectivelyremediate any deficiencies in our disclosure controls and procedures andinternal control over financial reporting, or failure to identify additionalmaterial weaknesses and deficiencies in our disclosure controls and proceduresand internal control over financial reporting that could occur in the future;

·       the adverse effects ofpending litigation or any investigation of the Company by the U.S. Securitiesand Exchange Commission, or SEC;

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

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·       the effects of militarybase realignment and closures, or deployments, on installations covered by ourmilitary housing privatization projects;

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

·       reductions in governmentmilitary spending;

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

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

·       changes in local realestate conditions (including changes in rental rates and the number ofcompeting properties) and the degree and nature of our competition;

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

·       potential liability underenvironmental or other laws; and

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

When we use 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 undertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise,except to the extent otherwise required by law.

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**PART I — FINANCIAL INFORMATION**

**Item 1.****    FinancialStatements**

**GMH COMMUNITIES TRUST****CONSOLIDATED BALANCE SHEETS**(in thousands, except par value and number of shares)
| ** **                                                                                                                                                                     | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                     | ** ** | ** **               |       |                        |       |
| Real estate  investments:                                                                                                                                                      |       |                     |       |                        |       |
| Student housing  properties                                                                                                                                                    |       | $                        | 1,432,421  |                        | $          | 1,659,422 |   |
| Accumulated  depreciation                                                                                                                                                      |       | 66,040                   |       | 66,855                      |       |
|                                                                                                                                                                           |       | 1,366,381                |       | 1,592,567                   |       |
| Corporate assets:                                                                                                                                                              |       |                     |       |                        |       |
| Corporate assets                                                                                                                                                               |       | 9,560                    |       | 9,427                       |       |
| Accumulated  depreciation                                                                                                                                                      |       | 1,127                    |       | 1,002                       |       |
|                                                                                                                                                                           |       | 8,433                    |       | 8,425                       |       |
|                                                                                                                                                                           |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                     |       | 16,354                   |       | 22,539                      |       |
| Restricted cash                                                                                                                                                                |       | 18,351                   |       | 16,955                      |       |
| Accounts and other  receivables, net:                                                                                                                                          |       |                     |       |                        |       |
| Related party                                                                                                                                                                  |       | 13,825                   |       | 17,131                      |       |
| Third party                                                                                                                                                                    |       | 3,464                    |       | 2,762                       |       |
| Investments in military  housing projects                                                                                                                                      |       | 51,458                   |       | 37,987                      |       |
| Deferred contract costs                                                                                                                                                        |       | 135                      |       | 2,344                       |       |
| Deferred financing  costs, net                                                                                                                                                 |       | 4,230                    |       | 5,103                       |       |
| Lease intangibles, net                                                                                                                                                         |       | 1,343                    |       | 2,468                       |       |
| Deposits                                                                                                                                                                       |       | 2,354                    |       | 907                         |       |
| Assets held for sale                                                                                                                                                           |       | 217,568                  |       | —                      |       |
| Other assets                                                                                                                                                                   |       | 5,506                    |       | 4,802                       |       |
| Total assets                                                                                                                                                                   |       | $                        | 1,709,402  |                        | $          | 1,713,990 |   |
| **LIABILITIES AND BENEFICIARIES’  EQUITY**                                                                                                                                |       |                     |       |                        |       |
| Notes payable                                                                                                                                                                  |       | $                        | 962,723    |                        | $          | 1,028,290 |   |
| Line of credit                                                                                                                                                                 |       | 137,824                  |       | 199,435                     |       |
| Accounts payable                                                                                                                                                               |       | 2,416                    |       | 3,213                       |       |
| Accrued expenses                                                                                                                                                               |       | 26,920                   |       | 27,257                      |       |
| Dividends and  distributions payable                                                                                                                                           |       | 12,077                   |       | 12,077                      |       |
| Liabilities related to  assets held for sale                                                                                                                                   |       | 138,090                  |       | —                      |       |
| Other liabilities                                                                                                                                                              |       | 25,833                   |       | 28,446                      |       |
| Total  liabilities                                                                                                                                                             |       | 1,305,883                |       | 1,298,718                   |       |
|                                                                                                                                                                           |       |                     |       |                        |       |
| Minority interest                                                                                                                                                              |       | 152,853                  |       | 157,972                     |       |
| Commitments and  contingencies (Note 11)                                                                                                                                       |       |                     |       | —                      |       |
| Beneficiaries’ equity:                                                                                                                                                    |       |                     |       |                        |       |
| Common shares of  beneficial interest, $0.001 par value; 500,000,000 shares authorized,  41,567,146 issued and outstanding at March 31, 2007,  and December 31, 2006 |       | 42                       |       | 42                          |       |
| Preferred  shares—100,000,000 shares authorized, no shares issued or outstanding                                                                                          |       | —                   |       | —                      |       |
| Additional paid-in capital                                                                                                                                                     |       | 325,442                  |       | 325,347                     |       |
| Cumulative earnings                                                                                                                                                            |       | 1,453                    |       | 1,324                       |       |
| Cumulative dividends                                                                                                                                                           |       | (76,271                  | )          | (69,413                     | )          |
| Total  beneficiaries’ equity                                                                                                                                              |       | 250,666                  |       | 257,300                     |       |
| Total liabilities and  beneficiaries’ equity                                                                                                                              |       | $                        | 1,709,402  |                        | $          | 1,713,990 |   |

 

*See accompanying notes to consolidated financial statements.*

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**GMHCOMMUNITIES TRUST****CONSOLIDATED STATEMENTS OF OPERATIONS**(Unaudited and in thousands, except share and per share information)
| ** **                                                                                                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                                                                                                          | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Revenue:**                                                                                                                        |       |                                                 |       |   |   |
| Rent and other property income                                                                                                      |       | $                                                    | 51,464     |   | $ | 39,659 |   |
| Expense reimbursements:                                                                                                             |       |                                                 |       |   |   |
| Related party                                                                                                                       |       | 17,399                                               |       | 13,380 |   |
| Third party                                                                                                                         |       | 1,446                                                |       | 1,336 |   |
| Management fees:                                                                                                                    |       |                                                 |       |   |   |
| Related party                                                                                                                       |       | 2,421                                                |       | 2,039 |   |
| Third party                                                                                                                         |       | 678                                                  |       | 1,008 |   |
| Other fee income-related party                                                                                                      |       | 6,138                                                |       | 4,680 |   |
| Other income                                                                                                                        |       | 228                                                  |       | 89 |   |
| Total revenue                                                                                                                       |       | 79,774                                               |       | 62,191 |   |
| **Operating  Expenses:**                                                                                                            |       |                                                 |       |   |   |
| Property operating expenses                                                                                                         |       | 22,142                                               |       | 16,458 |   |
| Reimbursed expenses                                                                                                                 |       | 18,845                                               |       | 14,716 |   |
| Real estate taxes                                                                                                                   |       | 4,901                                                |       | 3,743 |   |
| Administrative expenses                                                                                                             |       | 4,870                                                |       | 4,080 |   |
| Audit Committee special investigation expenses                                                                                      |       | —                                               |       | 2,575 |   |
| Depreciation and amortization                                                                                                       |       | 11,806                                               |       | 9,472 |   |
| Interest                                                                                                                            |       | 17,475                                               |       | 10,128 |   |
| Total operating expenses                                                                                                            |       | 80,039                                               |       | 61,172 |   |
| (Loss) income  before equity in earnings of unconsolidated entities, income taxes and  minority interest from continuing operations |       | (265                                                 | )          | 1,019 |   |
| Equity in  earnings of unconsolidated entities                                                                                      |       | 1,029                                                |       | 1,216 |   |
| Income before  income taxes and minority interest from continuing operations                                                        |       | 764                                                  |       | 2,235 |   |
| Income taxes                                                                                                                        |       | 1,526                                                |       | 973 |   |
| (Loss) income  before minority interest from continuing operations                                                                  |       | (762                                                 | )          | 1,262 |   |
| Minority  interest attributable to continuing operations                                                                            |       | (329                                                 | )          | 560 |   |
| Net (Loss)  income from continuing operations                                                                                       |       | (433                                                 | )          | 702 |   |
| **Discontinued  Operations:**                                                                                                       |       |                                                 |       |   |   |
| Income from discontinued operations before minority  interest                                                                       |       | 990                                                  |       | 787 |   |
| Minority interest attributable to discontinued  operations                                                                          |       | 428                                                  |       | 349 |   |
| Income from  discontinued operations                                                                                                |       | 562                                                  |       | 438 |   |
| Net income                                                                                                                          |       | $                                                    | 129        |   | $ | 1,140 |   |
| Earnings per  common share-basic                                                                                                    |       |                                                 |       |   |   |
| Continuing operation                                                                                                                |       | $                                                    | (0.01      | ) | $ | 0.02 |   |
| Discontinued operations                                                                                                             |       | 0.01                                                 |       | 0.01 |   |
|                                                                                                                                |       | $                                                    | 0.00       |   | $ | 0.03 |   |
| Earnings per  common share-diluted                                                                                                  |       |                                                 |       |   |   |
| Continuing operations                                                                                                               |       | $                                                    | (0.01      | ) | $ | 0.02 |   |
| Discontinued operations                                                                                                             |       | 0.01                                                 |       | 0.01 |   |
|                                                                                                                                |       | $                                                    | 0.00       |   | $ | 0.03 |   |
| Weighted-average  shares outstanding during the period:                                                                             |       |                                                 |       |   |   |
| Basic                                                                                                                               |       | 41,494,521                                           |       | 39,672,998 |   |
| Diluted                                                                                                                             |       | 73,128,701                                           |       | 73,979,690 |   |
| Common share dividend  declared per share                                                                                           |       | $                                                    | .1650      |   | $ | 0.2275 |   |

 

*Seeaccompanying notes to consolidated financial statements.*

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**GMH COMMUNITIES TRUST****CONSOLIDATED STATEMENTS OF CASH FLOWS**(Unaudited and in thousands)
| ** **                                                                                                     | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                                                                                     | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Cash  flows from operating activities:**                                                                     |       |                                                 |       |   |   |
| Net income                                                                                                     |       | $                                                    | 129        |   | $ | 1,140 |   |
| Minority  interest                                                                                             |       | 99                                                   |       | 909 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities from  continuing operations: |       |                                                 |       |   |   |
| Depreciation                                                                                                   |       | 10,681                                               |       | 7,822 |   |
| Amortization:                                                                                                  |       |                                                 |       |   |   |
| Lease intangibles                                                                                              |       | 1,015                                                |       | 1,539 |   |
| Investment in military housing projects                                                                        |       | 111                                                  |       | 111 |   |
| Notes payable fair value adjustment                                                                            |       | (1,994                                               | )          | (590 | ) |
| Deferred loan costs                                                                                            |       | 1,322                                                |       | 321 |   |
| Restricted shares                                                                                              |       | 95                                                   |       | 37 |   |
| Allowance for doubtful accounts                                                                                |       | 530                                                  |       | 416 |   |
| Equity in earnings of unconsolidated entities in  excess of distributions received                             |       | (332                                                 | )          | (1,216 | ) |
| Changes in operating assets and liabilities from  continuing operations:                                       |       |                                                 |       |   |   |
| Restricted cash                                                                                                |       | (937                                                 | )          | (1,319 | ) |
| Accounts and other receivables                                                                                 |       | 2,080                                                |       | 422 |   |
| Deferred contract costs                                                                                        |       | 2,209                                                |       | (614 | ) |
| Deposits and other assets                                                                                      |       | (2,166                                               | )          | 650 |   |
| Accounts payable                                                                                               |       | (676                                                 | )          | (1,250 | ) |
| Accrued expenses and other liabilities                                                                         |       | (3,185                                               | )          | 3,448 |   |
| Net cash provided by discontinued operations                                                                   |       | 524                                                  |       | 686 |   |
| Net cash provided by operating activities                                                                      |       | 9,505                                                |       | 12,512 |   |
| **Cash  flows from investing activities:**                                                                     |       |                                                 |       |   |   |
| Property acquisitions                                                                                          |       | (1,291                                               | )          | (66,446 | ) |
| Capitalized expenditures                                                                                       |       | (1,479                                               | )          | (9,868 | ) |
| Distributions received in excess of earnings of  unconsolidated entities                                       |       | 654                                                  |       | 320 |   |
| Investments in military housing projects                                                                       |       | (13,850                                              | )          | — |   |
| Discontinued operations                                                                                        |       | (89                                                  | )          | (326 | ) |
| Net cash used in investing activities                                                                          |       | (16,055                                              | )          | (76,320 | ) |
| **Cash  flows from financing activities:**                                                                     |       |                                                 |       |   |   |
| Owner distributions                                                                                            |       | (12,077                                              | )          | (16,227 | ) |
| Redemption of unit holders                                                                                     |       | —                                               |       | (45 | ) |
| Proceeds from line of credit                                                                                   |       | 12,000                                               |       | 70,000 |   |
| Repayment of line of credit                                                                                    |       | (73,611                                              | )          | (31,000 | ) |
| Proceeds from notes payable                                                                                    |       | 90,000                                               |       | 49,912 |   |
| Repayment of notes payable                                                                                     |       | (15,370                                              | )          | (977 | ) |
| Payment of financing costs                                                                                     |       | (464                                                 | )          | (360 | ) |
| Discontinued operations                                                                                        |       | (113                                                 | )          | (107 | ) |
| Net cash provided by financing activities                                                                      |       | 365                                                  |       | 71,196 |   |
| Net increase  (decrease) in cash and cash equivalents                                                          |       | (6,185                                               | )          | 7,388 |   |
| Cash and cash  equivalents, beginning of period                                                                |       | 22,539                                               |       | 2,240 |   |
| Cash and cash  equivalents, end of period                                                                      |       | $                                                    | 16,354     |   | $ | 9,628 |   |
|                                                                                                           |       |                                                 |       |   |   |
| **Supplemental  information:**                                                                                 |       |                                                 |       |   |   |
| Real estate acquired by assuming debt including debt  premium                                                  |       | $                                                    | —     |   | $ | 20,064 |   |
| Cash paid for interest                                                                                         |       | $                                                    | 17,758     |   | $ | 10,685 |   |
| Cash paid for  taxes                                                                                           |       | $                                                    | 1,002      |   | $ | 1,254 |   |

 

*Seeaccompanying notes to consolidated financial statements.*

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**GMHCOMMUNITIES TRUST**

Notesto Consolidated Financial StatementsMarch 31, 2007(Unaudited)

**1. Organization and Basis ofPresentation**

***Organization***

GMHCommunities Trust (the “Trust,” the “Company,” or sometimes referred toas “we”) conducts substantially all of its operations through its operatingpartnership, GMH Communities, LP, a Delaware limited partnership (the “OperatingPartnership”). As of March 31, 2007, the Operating Partnership had 73,191,763units of partnership interest outstanding, of which the Trust owned 40,985,977units of limited partnership interest; and through a wholly-owned subsidiary,GMH Communities GP Trust, the Trust owned 581,169 units of general partnershipinterest, which represents 100% of the general partnership interest in theOperating Partnership. As of March 31, 2007, there were 31,624,617 units oflimited partnership interest outstanding that were not owned by the Company.  

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

***Basis of Presentation***

Theconsolidated financial statements have been prepared by the Company withoutaudit except as to the balance sheet as of December 31, 2006, which has beenderived from audited data, pursuant to the rules and regulations of the UnitedStates Securities and Exchange Commission. Certain information and footnote disclosuresnormally included in the financial statements prepared in accordance withaccounting principles generally accepted in the United States have beencondensed or omitted pursuant to such rules and regulations, although theCompany believes that the included disclosures are adequate to make theinformation presented not misleading. In the opinion of management, alladjustments (consisting solely of normal recurring matters) necessary for afair presentation of the financial position of the Company as of March 31,2007, the results of its operations for the three-month periods ended March 31,2007 and March 31, 2006 and its cash flows for the three-month periods endedMarch 31, 2007 and March 31, 2006 have been included.  The results of operations for such interimperiods are not necessarily indicative of the results for a full year. Theseconsolidated financial statements should be read in conjunction with theCompany’s consolidated financial statements and notes to the financialstatements included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2006. 

***Liquidity***

OnOctober 2, 2006, the Company entered into a $250.0 million revolving line ofcredit with Wachovia Bank (Wachovia Line). The Wachovia Line had an initialterm of six months, which was subsequently amended in February 2007 to extendthe initial term through June 1, 2007. If not repaid, the Company can extend the maturity to October 2, 2007,with the payment of an additional 2% of the outstanding principal balance andan increase in the interest rate charged from LIBOR plus 2% to LIBOR plus4.5%.  In December 2006, the Companyannounced that it had developed a business strategy to repay the outstandingline of credit through a combination of refinancing certain properties andselling other properties to third parties or through a joint venture in whichthe Company would retain an ownership interest.   On March 12, 2007 the criteria forclassification as held for sale under SFAS No. 144 was met, as the specificproperties for sale were identified and the Board of Trustees approved the planto sell the specific properties.

Therefinancing portion of this strategy was completed in February 2007 andgenerated net proceeds of $73.6 million that were used to repay an equal amountof outstanding indebtedness under the Company’s line of credit.  On April 13, 2007 the Company completed thetransfer of its 100% interest in five of the six student housing propertiesinto the joint venture, of which the Company retained a 10% interest.  The sixth property to be included in thejoint venture will be transferred upon lender approval of

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the joint venture’sassumption of existing mortgage indebtedness on that property.  It is expected that the sixth property willbe transferred by the end of the second quarter of 2007.  The Company received net proceeds totalingapproximately $56.1 million from the transaction, which were used to repay anequal amount of indebtedness outstanding under the Company’s line ofcredit.  The transfer of the sixthproperty is expected to generate $5.1 million of net proceeds. 

On May7, 2007, the Company entered into a note facility structured through a NotePurchase Agreement (Note Facility) with Merrill Lynch, Pierce, Fenner and SmithIncorporated, which allows the Company, through the Operating Partnership, toborrow, on a revolving basis, up to a maximum of $100 million, subject toincrease to $125 million if certain conditions are met. The borrowings arerepresented by notes that are issued by the Operating Partnership to MerrillLynch in accordance with Rule 144A of the Securities Act of 1933, as amended,and then may be transferred to “qualified institutional buyers” also under Rule144A. As of the date of effectiveness of the Note Facility, the Companyinitially issued a note to Merrill Lynch representing borrowings equal toapproximately $90.7 million under the Note Facility, and used these proceeds torepay remaining principal and interest under, and to terminate, the WachoviaLine along with transaction costs associated with the Note Facility.

Duringthe second quarter of 2007, the Company had executed agreements to sell six ofits currently-owned student housing properties. The due diligence period expired on May 4, 2007, and the third-partybuyers have placed a non-refundable deposit of $2.5 million in escrow.  The Company expects to complete thesetransactions during the second quarter of 2007. The proceeds from these transactions also will be used to repayoutstanding indebtedness under the Note Facility. 

**2. Summary of Significant AccountingPolicies**

***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 net tangible and identifiedintangible assets based on relative fair values in accordance with SFASNo. 141, *Business Combinations*(“SFAS 141”).We estimate fair value based on information obtained from a number of sources,including our due diligence, marketing and leasing activities, independentappraisals that may be obtained in connection with the acquisition or financingof the respective property, and other market data.

The value of in-placeleases is based on the difference between (i) the property valued withexisting in-place leases and (ii) the property valued as if vacant. Aslease terms typically are 12 months or less, actual rates on in-placeleases generally approximate market rental rates. Factors that we consider inthe valuation of in-place leases include an estimate of incremental carryingcosts during the expected lease-up periods considering current marketconditions and nature of the tenancy. Purchase prices of student housingproperties to be acquired are not expected to be allocated to tenantrelationships considering the terms of the leases and the expected levels ofrenewals. We amortize the value of in-place leases to expense over theremaining term of the respective leases, which is generally one year or less.Accumulated amortization related to intangible lease costs was $3.1 million atMarch 31, 2007 and  $2.0 million atDecember 31, 2006.

We expense routine repairand maintenance expenditures that do not improve the value of an asset orextend its useful life, including turnover costs. We capitalize expendituresthat improve the value and extend the useful life of an asset. We computedepreciation using the straight-line method over the estimated useful lives ofthe assets, which is generally 40 years for buildings including studenthousing properties and the commercial office building, and three to five yearsfor residential furniture and appliances. Commencing towards the end of thesecond quarter and more significantly during the third quarter of each fiscalyear, the Company typically will experience an increase in property operatingexpenses over other quarters as a result of repair and maintenance expendituresrelating to turnover of units at student housing properties. The Company’sstudent housing lease terms generally commence in August orSeptember to coincide with the beginning of the academic year.Accordingly, the Company 

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expectsto incur a majority of its repair and maintenance costs in the second and thirdquarters to prepare for new residents.

In accordance with SFAS 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*, long-lived assets, such as real estateinvestments and purchased intangibles subject to amortization, are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount may not be recoverable. These circumstances may include, butare not limited to, operational performance, market conditions and competitionfrom other off-campus properties and on-campus housing, legal and environmentalconcerns, and results of appraisals or other information obtained as part of afinancing or disposition strategy. When required, we review recoverability ofassets to be held and used through a comparison of the carrying amount of anasset to estimated undiscounted future cash flows expected to be generated bythe asset. If the carrying amount of an asset exceeds its estimatedundiscounted future cash flows, an impairment charge is recognized in an amountby which the carrying value of the asset exceeds the fair value of the assetdetermined using customary valuation techniques, such as the present value ofexpected future cash flows. Assets to be disposed of would be separatelypresented in the balance sheet as assets held for sale and reported at thelower of the carrying amount or fair value less costs to sell, and no longerwould be depreciated.  

***Cash Equivalents***

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

***Restricted Cash***

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

***Allowance for 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 of percentagesapplied to aging categories, which is based on historical collection andwrite-off experience.

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

Accounts receivable arepresented net of the allowance for doubtful accounts of $303,000 and $331,000at March 31, 2007 and December 31, 2006, respectively.

***Deferred Financing Costs***

Costs incurred inconnection with obtaining financing are deferred and amortized on astraight-line basis over the term of the related loan, which is not materiallydifferent than the effective interest method. Amortization of deferredfinancing costs is included in interest expense. Accumulated amortization ofdeferred financing costs was $4.2 million and $2.9 million at March 31,2007 and December 31, 2006, respectively.

***Deferred Contract Costs***

Deferred contract costsinclude costs attributable to a specific military housing project incurred inconnection with seeking Congressional approval of a Community Development andManagement Plan, or CDMP, subsequent to 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.

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***Deposits***

Deposits primarilyconsist of amounts paid to third parties in connection with plannedacquisitions or joint venture transactions, amounts paid to lenders thatprovide related financing or the refinancing of existing loans and depositspaid to utility companies. At March 31, 2007, deposits for planned acquisitionsand our joint venture transaction totaled $1.7 million and other depositstotaled $677,000.  At December 31,2006, deposits for planned acquisitions totaled $155,000 and other depositstotaled $752,000. 

***Fair Value of Financial Instruments***

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

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

The carrying value andfair value of fixed-rate notes payable at March 31, 2007 were bothapproximately $1.1  million.  Fairvalue was estimated using rates the Company believed were available to it as ofMarch 31, 2007 for debt with similar terms. The carrying value of variable-ratenotes payable approximates fair value at March 31, 2007.

***Advertising Costs***

Advertising costs areexpensed as incurred. 

***Revenue Recognition***

**Student Housing OwnedProperties Segment**

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

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

**Student Housing ManagedProperties Segment**

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

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

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

**Military Housing Segment**

Standard and incentivemanagement fees, which are based on a percentage of effective gross revenuegenerated by the military housing privatization projects from the basicallowance for housing (BAH) provided by the government to service members arerecognized when the revenue is earned by the military housing projects.Incentive management fees are based upon the satisfaction of certain criteriaincluding, among other things, satisfying designated benchmarks relating toemergency work order response, occupancy rates, home turnover and residentsatisfaction surveys. Incentive management fees are recognized when the variouscriteria stipulated in the management contract have been satisfied. Accrued andunbilled incentive management fees of $1.2 million and $1.0 million are included in accountsreceivable—related party at March 31, 2007 and December 31, 2006, respectively.

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Standard and incentivedevelopment and construction/renovation fees, which are based on a percentageof development and construction/renovation costs incurred by the militaryhousing projects, including hard and soft costs and financing costs, arerecognized on a monthly basis as the costs are incurred by the military housingprojects. Incentive development and construction/renovation fees are based uponthe satisfaction of certain criteria including, among other things, completinga number of houses according to schedule, achieving specific safety records andimplementing small business or minority subcontracting plans. Incentivedevelopment and construction/renovation fees are recognized when the variouscriteria stipulated in the contract have been satisfied. Accrued and unbilledincentive development and construction/renovation fees of $2.7 million and$2.3 million are included in accounts receivable—related party at March31, 2007 and December 31, 2006, respectively.

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

Business development feesare earned from our business partners that provide architectural and design orconstruction services for the Company’s military housing projects. The feesconsist of (i) an annual base fee, which is a fee paid to the Company inconsideration of the Company’s ongoing pursuit of additional projects and isnot contingent upon the success of those efforts and can be cancelled at anytime, and (ii) an additional fee, which is paid over the course of anawarded project based on a percentage of revenue earned by these businesspartners for providing services to the Company’s military housing projects. Thebase fees are recognized on a straight-line basis over the term of the relatedbusiness development agreement, which is generally one year. The additional feeis recognized and paid to us as the related services are provided to ourmilitary housing projects by our business partners.

In certain instances, theCompany may receive fees relating to the performance ofpre-construction/renovation services. These pre-construction/renovation feesare determined on a project-by-project basis, and are (i) paid in proportionto the amount of pre-construction/renovation costs incurred by us for theproject, and (ii) recognized as revenue upon performance of thepre-construction/renovation services.

The Company earns equityreturns on its investments in military housing projects. During the initialdevelopment period for a project, the equity returns are a fixed percentage ofour investment and subsequent to the initial development period for a project,the equity returns are based on a fixed percentage of our investment and on theproject’s net operating income, subject to cash distribution caps, as definedin the operating agreements related to the particular project. As of March 31,2007, only the Fort Carson project had passed its initial development period.

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

***Minority Interest***

Minority interest as initiallyreported at the date of our initial public offering represented the net equityof the Operating Partnership, including the proceeds received from the sale ofthe warrant to Vornado, 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, at the Company’s option, subject to adjustments for sharesplits, dividends, recapitalizations and similar events; except that Gary M.Holloway, Sr. has the right to require the Operating Partnership to redeemhis and his affiliates’ units of limited partnership interest for commonshares, subject to his restriction from owning more than 20% of the Company’soutstanding common shares. If the minority interest unitholders’ share of acurrent year loss would cause the minority interest balance to be less thanzero, the minority interest balance will be reported as zero unless there is anobligation of the minority interest holders to fund those losses. Any losses inexcess of the minority interest will be charged against equity. If futureearnings materialize, equity will be credited for all earnings up to the amountof those losses previously absorbed. Distributions to limited partnershipunitholders other than the Company are recorded as a reduction to minorityinterest.

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***Investments in Military Housing Projects and StudentHousing Joint Ventures***

We own equity interestsin the joint ventures that own our military housing privatization projects withthe U.S. military to design, develop, construct/renovate and manage themilitary family housing located on or near various bases throughout the UnitedStates. The Company evaluates its investments in military housing project jointventures in which we have a variable interest to determine if the underlyingentity is a variable interest entity (“VIE”) as defined under FASB FinancialInterpretation No. 46 (as revised) (“FIN 46(R)”). The Company hasconcluded that each of the military housing project joint ventures in which ithas a variable interest is a VIE and that the Company is not the primarybeneficiary of any of these VIEs. We record our investments in joint venturesunder our military housing projects in accordance with the equity method ofaccounting. Our investment is initially recorded at cost, and then subsequentlyadjusted at each balance sheet date to an amount equal to what we would receivefrom the joint venture in the event that it were liquidated at net book valueas of that date, and assuming that the proceeds from the liquidation aredistributed in accordance with the terms of, and priority of returns set forthunder, the joint venture’s operating agreement. The Company has exposure toloss to the extent of its investments, if any, and any receivables due from theproject.

The Company entered intoa joint venture in the third quarter of 2005 to develop and construct two studenthousing properties. The Company contributed land to the joint venture inexchange for its 10% interest and cash. In addition, the Company has the optionto purchase the joint venture partner’s interest in the joint venture withinone year of completion of the properties, and the Company has provided certainguarantees for a portion of the construction loans. As such, the transaction isbeing accounted for as a financing arrangement, whereby the Company records thereal estate as an asset, depreciates the property, and records a financingobligation. Construction was completed in August 2006.

***Income Taxes***

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

***Audit Committee and Special Committee Expenses***

During the first quarterof 2006, the Audit Committee of our Board of Trustees initiated aninvestigation promptly following receipt of a letter from the Company’s formerChief Financial Officer, alleging, among other things, a “tone at the top”problem within management, and raising concerns regarding various accountingmethodologies that were being considered by management in connection withcertain transactions that occurred in the fourth quarter of 2005. The AuditCommittee conducted the investigation with the assistance of independent legalcounsel, as well as a forensic accounting firm retained by the Audit Committee’scounsel. The investigation was completed during the third quarter of 2006.

During 2006, the Board ofTrustees formed a Special Committee to explore strategic alternatives for theCompany. The Special Committee was disbanded in December 2006.

The Company incurredsignificant legal, accounting, financial advisory as well as committee fees inconnection with both the Audit Committee investigation and activities of theSpecial Committee. All costs have been expensed as incurred and are reported inAudit Committee and Special Committee expenses on the accompanying consolidatedstatements of operations.

***Adoption of Recent Accounting Pronouncements***

Effective January 1, 2007we adopted the Financial Accounting Standards Board (“FASB”) InterpretationNo. 48,*“Accounting for Uncertainty inIncome Taxes,*” (FIN 48), which prescribes detailed guidance forthe financial statement recognition, measurement and disclosure of uncertaintax positions recognized in an enterprise’s financial statements in accordancewith SFAS No. 109,*“Accounting forIncome Taxes.”* Tax positions must meet a more-likely-than-notrecognition threshold at the effective date to be recognized upon the adoptionof FIN 48 and in subsequent periods. Under FIN 48, the Company determined that there were no uncertain taxpositions recognized in the consolidated financial statements and thereforethere was no impact of the adoption of FIN 48 on its consolidated financialstatement.

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***Recent Accounting Pronouncements***

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements* (“SFAS 157”). SFAS 157 defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair value measurements.SFAS 157 applies where other accounting pronouncements require or permitfair value measurements. This statement is effective for financial statementsissued for fiscal years beginning after November 15, 2007, which for theCompany is January 1, 2008, and interim periods within those fiscal years.The Company is evaluating the impact this statement will have on itsconsolidated financial statements.

InFebruary 2007, the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities* (“SFAS159”). SFAS 159 provides entities with an option to measure many financialassets and liabilities and certain other items at fair value as determined onan instrument by instrument basis. The Company has not yet evaluated theimpact, if any, this standard might have on the Company’s consolidatedfinancial statements once it becomes effective on January 1, 2008.

***Reclassifications***

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

**3. Real Estate Investments and Assets held for sale**

Includedin real estate investments are 65 student housing properties that the Companyowns or has equity interests in located near 42 colleges and universities in 24states. These 65 properties contain an aggregate of 12,307 units and 39,460beds.The Company’s investment instudent housing properties at March 31, 2007 and December 31, 2006was as follows (in thousands):

|                                       | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Land                                  |       | $                        | 151,049    |                        | $          | 168,579 |   |
| Building and  improvements            |       | 1,240,215                |       | 1,444,349                   |       |
| Residential  furniture and appliances |       | 39,014                   |       | 44,902                      |       |
| Construction in  progress             |       | 2,143                    |       | 1,592                       |       |
|                                  |       | $                        | 1,432,421  |                        | $          | 1,659,422 |   |

 

Included in assets heldfor sale are 12 student housing properties, of which six of the twelveproperties have been or are committed to be sold during the second quarter of2007 to a joint venture in which the Company retains a 10% ownership interestand are therefore included in continuing operations.  The other six properties have been identifiedand approved for sale by the Board of Trustees in March 2007, and are presentedin discontinued operations.  These 12properties contain an aggregate of 2,125 units and 7,236 beds. The assets heldfor sale at March 31, 2007 was as follows (in thousands):

|                                       | ** ** | **March 31,  2007** | ** ** |
|---------------------------------------|------------|--------------------------|------------|
| Land                                  |       | $                        | 18,822     |   |
| Building and  improvements            |       | 204,612                  |       |
| Residential  furniture and appliances |       | 6,258                    |       |
| Construction in  progress             |       | 35                       |       |
|                                  |       | 229,727                  |       |
| Less accumulated  depreciation        |       | (12,159                  | )          |
| Assets held for sale                  |       | $                        | 217,568    |   |

 

**4. Investments in Military Housing Projects**

We record our investmentsin joint ventures under our military housing projects in accordance with theequity method of accounting.  Ourinvestment is initially recorded at cost, and subsequently adjusted at eachbalance sheet date to an amount equal to what we would receive from the jointventure in the event that it were liquidated at net book value as of that date,assuming that the proceeds from the liquidation are distributed in accordancewith the terms of, and the priority of returns set forth under, the jointventure’s operating agreement. The terms of the various agreements generallyprovide for the payment to

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the Company of an agreed upon return on the Company’sinvested capital and a return of the Company’s invested capital prior to thedistribution of any amounts to the government entity that is a member of thejoint venture.

As ofMarch 31, 2007, of the 10 joint venture entities in which we had ownership interestsrelating to military housing privatization projects in operation as of thatdate, we had invested capital in four of the joint ventures as discussed below.

OnFebruary 6, 2007 the Company closed on the Air Education and Training Command (“AETC”)Group I project with the Department of the Air Force.  This military housing privatization projectcovers four bases and 2,875 end-state housing units.  The AETC Group I project represents theCompany’s first military housing project with the Department of the AirForce.  The 50-year term of the projectcommences with a five-year Initial Development Period (“IDP”) that includes thedesign, construction and/or renovation of, as well as the overall managementand operational responsibilities over the end-state housing units.  The Company invested $8.0 million for its 80%interest in the partnership that owns the rights to the AETC Group Iproject.  The Company has concluded thatthis joint venture is a variable interest entity (VIE) as defined under FIN46(R) and that the Company is not the primary beneficiary.  The primary beneficiary is a non-equitypartner in the joint venture that is more closely associated with the VIE.  The Company earns a preferred return on itsinvestment in AETC Group I.   Thepreferred return will accrue, but not be paid, until the end of the IDP for theproject which is projected to be in 2013. The carrying value of this investment was $8.1 million at March 31,2007.  

Duringthe first quarter of 2007, the Company contributed $5.9 million and BenhamMilitary Communities, LLC contributed $0.7 million, through their jointventure, GMH/Benham Military Communities LLC, which used the funds to make arequired $6.5 million equity contribution commitment to FDWR Parent LLC, whichoperates the Fort Detrick/Walter Reed Medical Center military housingproject.  The Company has a 90% interestand Benham has a 10% interest in GMH/Benham Military Communities LLC, which isentitled to a preferred return on its investment in FDWR Parent LLC.

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 millionto GMH/Benham Military Communities LLC in return for a 90% interest and BenhamMilitary Communities, LLC invested $1.1 million for the remaining 10%interest. The Company consolidates GMH/Benham Military Communities LLC as ithas a 90% economic interest and controls a majority of the voting interests.Benham Military Communities, LLC’s 10% interest is accounted for as minorityinterest and is included in other liabilities.  In November 2004,GMH/Benham Military Communities, LLC invested $10.6 million in NortheastHousing LLC, which owns and operates the Navy Northeast Region military housingproject. GMH/Benham Military Communities LLC is entitled to a preferred returnon its investment in Northeast Housing LLC. The preferred return will accrue,but not be paid, until the end of the initial development period for theproject in October 2010. The carrying value of this investment was $12.9million at March 31, 2007 and $12.7 million at December 31, 2006.

Theacquisition of our ownership interests in the joint venture that owns a 10%interest in Fort Carson Family, LLC and has the rights to exclusively negotiatethe Fort Eustis/Fort Story military housing projects was recorded at the fairvalue of the consideration paid in the amount of $31.0 million.  The underlying book value of the equity onthe acquisition date was approximately $11.5 million.  The remaining $19.5 million of thisinvestment is being amortized based on the then current fiscal year revenue asa percentage of the estimated revenue to be earned over the remaining lives ofthe projects, which are 45 years for the Fort Carson project and 50 years forthe Fort Eustis/Story project. Amortization expense was $0.1 million for boththe three months ended March 31, 2007 and 2006. The accumulated amortization of the excess purchase price was $0.8million and $0.7 million at March 31, 2007 and December 31, 2006, respectively.The carrying value of this investment was $24.4 million at March 31, 2007 and$25.3 million at December 31, 2006. The Company is entitled to a preferred return on its investment in FortCarson Family Housing LLC, plus 50% of the project’s net operating income,which will decrease to 30% and 15% in 2012 and 2016, respectively. After 2016and through 2025, the Company’s returns on its investments are subject to anannual maximum amount of $1.75 million. The project began repaying the Company’sinitial investment in Fort Carson Family Housing LLC in July 2005.  The equity is expected to be completelyrepaid by 2015. During the three months ended March 31, 2007 and 2006, theCompany received $0.4 million and $0.1 million, respectively of equitydistributions from Fort Carson Family Housing LLC. 

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Thefollowing is a summary of the financial position of the unconsolidated FortCarson Family Housing LLC (in thousands):

|                                 | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Net Property                    |       | $                        | 162,979    |                        | $          | 162,106 |   |
| Other Assets                    |       | $                        | 129,735    |                        | $          | 132,020 |   |
| Notes payable                   |       | $                        | 260,150    |                        | $          | 260,730 |   |
| Other  Liabilities              |       | $                        | 4,821      |                        | $          | 5,160 |   |
| Equity                          |       | $                        | 27,743     |                        | $          | 28,236 |   |
| Company’s Share of  Equity |       | $                        | 5,823      |                        | $          | 6,479 |   |

 

The following is a summaryof the results of operations of the unconsolidated Fort Carson Family HousingLLC (in thousands):

|                                | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Revenue                        |       | $                                                    | 7,490      |   | $ | 8,039 |   |
| Operating  Expenses            |       | $                                                    | 2,552      |   | $ | 2,116 |   |
| Interest  Expense, net         |       | $                                                    | 2,475      |   | $ | 2,825 |   |
| Depreciation and  amortization |       | $                                                    | 1,894      |   | $ | 1,867 |   |
| Net Income                     |       | $                                                    | 569        |   | $ | 1,231 |   |

 

**5. Notes Payable**

At March 31, 2007, notes payable totaling$962.7 million were secured by 63 student housing properties, includingthe two properties that we have an ownership interest in and our corporateoffice.  The net carrying value of theseencumbered properties was $1.3 billion at March 31, 2007.  These notes payable had a weighted averageinterest rate of 5.41% a weighted average maturity of 7.14 years, mature atvarious dates between May 2007 and March 2017 and require monthly payments ofprincipal and interest or monthly payments of interest only.  As of March 31, 2007, the Company failed to complywith one of its financial covenants on one of its notes payable and received awaiver. This note was subsequently refinanced in May 2007.

At March 31, 2007, included in liabilities related toassets held for sale, were notes payable totaling $138.1 million which weresecured by 11 student housing properties with a cost basis of $196.4million.  The notes payable had aweighted average interest rate of 4.81%, a weighted average maturity of 5.47years, mature at various dates between October 2007 and November 2016 andrequire monthly payments of principal and interest or monthly payments ofinterest only.

On February 27, 2007, the Company completed therefinancing of four owned student housing properties. Under the refinancing,the Company placed an aggregate of $90.0 million in mortgage indebtedness onthe properties, with each loan having a 10-year interest-only term and bearinga fixed interest rate of 5.6%.  TheCompany received net proceeds of $73.6 million from the refinancings that wereused to repay an equal amount of outstanding indebtedness under the WachoviaLine.

**6. Transactions with Related Parties**

In the ordinary course ofits operations, the Company has on-going business relationships withGary M. Holloway, Sr., entities affiliated with Mr. Holloway,and entities in which Mr. Holloway or the Company has an equityinvestment. The operating results or financial position of the Company could besignificantly different from those that would have been reported if theentities were autonomous. These relationships and related transactions aresummarized below.

Shared costs for humanresources, information technology, office equipment and furniture, and certainmanagement personnel were allocated to the various entities owned or controlledby Mr. Holloway, using assumptions based on headcount that managementbelieved were reasonable. The allocation of such costs to other entities ownedor controlled by Mr. Holloway during the three months ended March 31, 2007and 2006 totaled $64,000 and $57,000, respectively, and are reflected asexpense reimbursements from related parties in the accompanying consolidatedstatements of operations.

The Company leases spacein its corporate headquarters to entities wholly-owned by Mr. Holloway.During each of the three month periods ended March 31, 2007 and 2006,rental income from these entities totaled

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$39,000.These amounts are included in other property income in the accompanyingconsolidated and combined statements of operations.

The Company earnedmanagement fees from properties in which Mr. Holloway was an investor untilDecember 2006. During the three months ended March 31, 2006 such income totaled$86,000.

The Company is reimbursedby the joint ventures relating to certain of its military housing projects inwhich the Company has an ownership interest, as well as student housingproperties under the Company’s management in which Mr. Holloway was aninvestor through December 2006, for the cost of certain employees engaged inthe daily operation of those military housing projects and student housingproperties. The reimbursement of these costs is included in expensereimbursements—related party in the accompanying consolidated and combinedstatements of operations. During the three months ended March 31, 2007 and2006, such expense reimbursements relating to these military housing projectsand student housing properties totaled $17.3 million and $13.3 million,respectively.

Mr. Holloway ownsBryn Mawr Abstract, Inc., an entity that provides title abstract servicesto third party title insurance companies, from which we have purchased titleinsurance with respect to certain student housing properties and militaryhousing projects that we have acquired or refinanced. In connection with thepurchase of title insurance for these student housing properties and militaryhousing projects, premiums were paid to other title insurance companies, whichfees in some cases are fixed according to statute. From these premiums, theother title insurance companies paid to Bryn Mawr Abstract, Inc. $82,000and $130,000 during the three months ended March 31, 2007 and 2006,respectively, for providing title abstract services.

Mr. Holloway ownsCorporate Flight Services, LLC, an entity that provides aircraft services.  During the three months ended March 31,2007 and 2006, the Company paid Corporate Flight Services, LLC $283,000 and$234,000, respectively for use of an aircraft owned by Corporate FlightServices, LLC.

**7. Commitments and Contingencies**

As of March 31, 2007, wehad agreements to acquire one student housing property and 13 parcels of land for the development of a future studenthousing property for an aggregate purchase price of $17.8 million andhad placed deposits related to such acquisitions totaling approximately$364,000.

With regard to militaryhousing privatization projects at Army bases, depending on the terms of eachrespective agreement, the Company is either required to fund its portion of theequity commitment to the project’s joint venture (i) after all other sources offunding for the project have been expended or (ii) after the initialdevelopment period is completed. With respect to the Company’s Navy NortheastRegion project and AETC Group I project, however, the Company was required tofund the equity commitment at commencement of the project.  With respect to the Company’s FortDetrick/WRAMC project, the Company was required to fund its equity commitmentduring the first quarter of 2007. In connection with finalizing the agreementswith the DoD for the Company’s military housing projects, the Company hascommitted to contribute the following aggregate amounts as of March 31, 2007(in thousands):

| 2007  |   | $      | 1,980  |   |
|-------|--------|--------|--------|--------|
| 2010  |   | 6,600  |   |
| 2011  |   | 12,510 |   |
| 2012  |   | 6,300  |   |
| Total |   | $      | 27,390 |   |

 

In connection with thedevelopment, management, construction and renovation agreements for certain ofthe military housing projects, the Company guarantees the completion of itsobligations under the agreements. The guarantees require the Company to fundany costs in excess of the amounts budgeted in the underlying development,management, construction and renovation agreements. The maximum exposure to theCompany on these guarantees cannot be determined at this time. Managementbelieves that these guarantees will not have a material adverse impact on theCompany’s financial position or results of operations.

Under the provisions ofFIN 45, *“Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers an interpretation of FASB Statements No. 5, 57, and 107 andrescission of FASB Interpretation No. 34,”* a guarantor is torecognize, at the inception of a guarantee, a liability for the fair value ofthe obligation undertaken by issuing the guarantee. The Company enters intoindemnification agreements in the ordinary course of business that are subjectto the provisions of FIN 45. Under these agreements, the Company indemnifies,holds harmless, and agrees to reimburse the indemnified party for lossessuffered or incurred by the indemnified party. The maximum

16

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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 December 31, 2006 and2005.

Starting on April 5,2006, five putative class actions alleging violations of Sections 11, 12(a)(2)and 15 of the Securities Act of 1933 and Sections 10(b) and 20 the SecuritiesExchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commissionhave been filed in the United States District Court for the Eastern District ofPennsylvania, naming as defendants GMH Communities Trust, Gary M. Holloway,Sr., and Bradley W. Harris.  Thecomplaints purport to bring claims on behalf of a class of purchasers of GMHsecurities during various periods, the longest of which is the period betweenOctober 28, 2004 and March 10, 2006.  ByOrders filed January 22, 2007, the cases were consolidated, and, leadplaintiffs and lead counsel were appointed. A consolidated complaint alleging violations of Sections 11 and 15 ofthe Securities Act of 1933 and Sections 10(b) and 20(a) of the SecuritiesExchange Act of 1934 was filed on March 19, 2007 against the same defendantsfor a class period between May 5, 2005 and March 10, 2006 based upon theCompany’s restatement of certain financial results. The defendants have sixtydays in which to respond either by answering or moving to dismiss.  In the January 22, 2007 Order, the Courtordered that the parties shall not file any dispositive motions beforeattending a settlement conference with the Magistrate Judge.  Discovery is stayed pending the dispositionof any motion to dismiss.  The outcome ofthis litigation is uncertain, and while the Company believes that it has validdefenses to Plaintiff’s claims and intends to defend the class action lawsuitvigorously, no assurance can be given as to the outcome of this litigation. Anadverse outcome could have a material adverse effect on our financial conditionand results of operations.

On March 12, 2007, StoneGate I LLC, Southview LLC, The Commons LLC, Seminole Ride LLC, LB&JLimited, Bruce Forbes, Lois Forbes and Jeff Forbes filed a complaint in theUnited States District Court for the Eastern District of Pennsylvania againstGMH Communities Trust, GMH Communities, L.P., College Park Investments, LLC,Peach Grove Associates, LLC, Neff Avenue Associates, LLC, Gary M. Holloway,Sr., Bradley W. Harris and John DeRiggi. The complaint alleges violations of Sections 10(b), 18 and 20(a) of theSecurities Exchange Act of 1934, Section 522(a) and 522(c) of the VirginiaSecurities Act and Sections 1-401 and 1-501 of the Pennsylvania Securities Act,as well as common law claims for fraud, fraud in the inducement, negligentmisrepresentation and breach of contract. The claims arise from the Company’s restatement of certain financialresults upon which plaintiffs purportedly relied in selling properties tocertain defendants.  In connection withthe acquisition of the properties, Company entities purchased four studenthousing properties in exchange for a combination of cash, assumption of debtand the issuance of 1,940,282 units of limited partnership interests in ouroperating partnership valued at a total of approximately $76.8 million. Theunits of limited partnership interest were issued for a total value ofapproximately $27.5 million or $14.17 per unit of limited partnership interest.The parties are currently negotiating the timing of defendants’ response.  Discovery is stayed pending the dispositionof any motion to dismiss.

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

**8.Segment Reporting**

The Company is comprised of fourreportable segments: (1) student housing – owned properties(2) student housing – management, (3) military housing and (4)corporate.  The operating results of ourstudent housing owned properties and student housing management, which includedour acquisitions department, had been previously classified as onesegment.  The acquisition department isnow included in the corporate segment. The segment data for 2006 has beenrestated to conform to the current year’s presentation.  The corporate segment also includes thecorporate overhead and other service departments. The Company’s managementevaluates each segment’s performance based upon net income. The accountingpolicies of the reportable segments are the same as those described in thesummary of significant accounting policies. 

17

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| ** **                                                                                                                          | ** ** | **Three Months Ended March 31, 2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **Student  Housing-  Owned  Properties**                       | ** ** | **Student  Housing  Management** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Elimination** | ** ** | **Total** | ** ** |
| **Revenue**                                                                                                                         |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income                                                                                                      |       | $                                                              | 51,425     |   | $ | — |   | $ | — |   | $ | 39 |   | $ | — |   | $ | 51,464 |   |
| Expense  reimbursements:                                                                                                            |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                                                       |       | —                                                         |       | — |   | 17,335 |   | 64 |   | — |   | 17,399 |   |
| Third party                                                                                                                         |       | —                                                         |       | 1,446 |   | — |   | — |   |   |   | 1,446 |   |
| Management fees:                                                                                                                    |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Owned properties                                                                                                                    |       | —                                                         |       | 1,914 |   | — |   | — |   | (1,914 | ) | — |   |
| Related party                                                                                                                       |       | —                                                         |       | — |   | 2,421 |   | — |   | — |   | 2,421 |   |
| Third party                                                                                                                         |       | —                                                         |       | 678 |   | — |   | — |   | — |   | 678 |   |
| Other fee income  – related party                                                                                              |       | —                                                         |       | — |   | 6,138 |   | — |   | — |   | 6,138 |   |
| Other income                                                                                                                        |       | 29                                                             |       | 8 |   | 20 |   | 171 |   |   |   | 228 |   |
| Total revenue                                                                                                                       |       | 51,454                                                         |       | 4,046 |   | 25,914 |   | 274 |   | (1,914 | ) | 79,774 |   |
|                                                                                                                                |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Operating  Expenses:**                                                                                                            |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Property operating expense                                                                                                          |       | 18,114                                                         |       | 2,053 |   | 1,975 |   | — |   | — |   | 22,142 |   |
| Intercompany management fee                                                                                                         |       | 1,914                                                          |       | — |   | — |   | — |   | (1,914 | ) | — |   |
| Reimbursed expenses                                                                                                                 |       | —                                                         |       | 1,446 |   | 17,335 |   | 64 |   | — |   | 18,845 |   |
| Real estate taxes                                                                                                                   |       | 4,877                                                          |       | — |   | — |   | 24 |   | — |   | 4,901 |   |
| Administrative expenses                                                                                                             |       | —                                                         |       | — |   | — |   | 4,870 |   | — |   | 4,870 |   |
| Audit Committee and Special Committee expenses                                                                                      |       | —                                                         |       | — |   | — |   | — |   | — |   | — |   |
| Depreciation and amortization                                                                                                       |       | 11,571                                                         |       | — |   | 118 |   | 117 |   |   |   | 11,806 |   |
| Interest                                                                                                                            |       | 15,984                                                         |       | — |   | — |   | 1,491 |   |   |   | 17,475 |   |
| Total operating expenses                                                                                                            |       | 52,460                                                         |       | 3,499 |   | 19,428 |   | 6,566 |   | (1,914 | ) | 80,039 |   |
| (Loss) income  before equity in earnings of unconsolidated entities, income taxes and  minority interest from continuing operations |       | (1,006                                                         | )          | 547 |   | 6,486 |   | (6,292 | ) | — |   | (265 | ) |
| Equity in  earnings of unconsolidated entities                                                                                      |       | —                                                         |       | — |   | 1,029 |   | — |   | — |   | 1,029 |   |
| (Loss) income  before income taxes and minority interest from continuing operations                                                 |       | (1,006                                                         | )          | 547 |   | 7,515 |   | (6,292 | ) | — |   | 764 |   |
| Income tax  expense                                                                                                                 |       | —                                                         |       | 68 |   | 1,458 |   | — |   | — |   | 1,526 |   |
| Income (loss)  before minority interest                                                                                             |       | (1,006                                                         | )          | 479 |   | 6,057 |   | (6,292 | ) | — |   | (762 | ) |
| Minority  interest attributable to continuing operations                                                                            |       | —                                                         |       | — |   | — |   | (329 | ) | — |   | (329 | ) |
| Net (loss)  income from continuing operations                                                                                       |       | (1,006                                                         | )          | 479 |   | 6,057 |   | (5,963 | ) | — |   | (433 | ) |
|                                                                                                                                |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Discontinued  Operations:**                                                                                                       |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Income from discontinued operations before minority  interest                                                                       |       | 789                                                            |       | 201 |   | — |   | — |   | — |   | 990 |   |
| Minority interest                                                                                                                   |       | —                                                         |       | — |   | — |   | 428 |   | — |   | 428 |   |
| Income from discontinued operations                                                                                                 |       | 789                                                            |       | 201 |   | — |   | (428 | ) | — |   | 562 |   |
|                                                                                                                                |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Net (loss) income                                                                                                                   |       | $                                                              | (217       | ) | $ | 680 |   | $ | 6,057 |   | $ | (6,391 | ) | $ | — |   | $ | 129 |   |

 

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| ** **                                                                                                                              | ** ** | **Three Months Ended March 31, 2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **Student  Housing-  Owned  Properties**                       | ** ** | **Student  Housing  Management** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Elimination** | ** ** | **Total** | ** ** |
| **Revenue**                                                                                                                             |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income                                                                                                          |       | $                                                              | 39,620     |   | $ | — |   | $ | — |   | $ | 39 |   | $ | — |   | $ | 39,659 |   |
| Expense  reimbursements:                                                                                                                |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                                                           |       | —                                                         |       | 86 |   | 13,237 |   | 57 |   | — |   | 13,380 |   |
| Third party                                                                                                                             |       | —                                                         |       | 1,336 |   | — |   | — |   | — |   | 1,336 |   |
| Management fees:                                                                                                                        |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Owned properties                                                                                                                        |       | —                                                         |       | 1,503 |   | — |   | — |   | (1,503 | ) | — |   |
| Related party                                                                                                                           |       | —                                                         |       | 20 |   | 2,019 |   | — |   | — |   | 2,039 |   |
| Third party                                                                                                                             |       | —                                                         |       | 1,008 |   | — |   | — |   | — |   | 1,008 |   |
| Other fee income  – related party                                                                                                  |       | —                                                         |       | — |   | 4,680 |   | — |   | — |   | 4,680 |   |
| Other income                                                                                                                            |       | 36                                                             |       | 13 |   | 9 |   | 31 |   | — |   | 89 |   |
| Total revenue                                                                                                                           |       | 39,656                                                         |       | 3,966 |   | 19,945 |   | 127 |   | (1,503 | ) | 62,191 |   |
|                                                                                                                                    |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Operating  Expenses:                                                                                                                    |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Property operating expense                                                                                                              |       | 13,453                                                         |       | 1,466 |   | 1,539 |   | — |   | — |   | 16,458 |   |
| Intercompany management fee                                                                                                             |       | 1,503                                                          |       | — |   | — |   | — |   | (1,503 | ) | — |   |
| Reimbursed expenses                                                                                                                     |       | —                                                         |       | 1,422 |   | 13,237 |   | 57 |   | — |   | 14,716 |   |
| Real estate taxes                                                                                                                       |       | 3,719                                                          |       | — |   | — |   | 24 |   | — |   | 3,743 |   |
| Administrative expenses                                                                                                                 |       | —                                                         |       | — |   | — |   | 4,080 |   | — |   | 4,080 |   |
| Audit Committee and Special Committee expenses                                                                                          |       | —                                                         |       | — |   | — |   | 2,575 |   | — |   | 2,575 |   |
| Depreciation and amortization                                                                                                           |       | 9,275                                                          |       | — |   | 119 |   | 78 |   |   |   | 9,472 |   |
| Interest                                                                                                                                |       | 9,610                                                          |       | — |   | — |   | 518 |   |   |   | 10,128 |   |
| Total operating expenses                                                                                                                |       | 37,560                                                         |       | 2,888 |   | 14,895 |   | 7,332 |   | (1,503 | ) | 61,172 |   |
| Income (loss)  before equity in earnings of unconsolidated subsidiaries, income taxes and  minority interest from continuing operations |       | 2,096                                                          |       | 1,078 |   | 5,050 |   | (7,205 | ) | — |   | 1,019 |   |
| Equity in  earnings of unconsolidated entities                                                                                          |       | —                                                         |       | — |   | 1,216 |   | — |   | — |   | 1,216 |   |
| Income (loss)  before income taxes and minority interest from continuing operations                                                     |       | 2,096                                                          |       | 1,078 |   | 6,266 |   | (7,205 | ) | — |   | 2,235 |   |
| Income tax  expense                                                                                                                     |       | —                                                         |       | — |   | 973 |   | — |   | — |   | 973 |   |
| Income (loss)  before minority interest from continuing operations                                                                      |       | 2,096                                                          |       | 1,078 |   | 5,293 |   | (7,205 | ) | — |   | 1,262 |   |
| Minority  interest attributable to continuing operations                                                                                |       | —                                                         |       | — |   | — |   | 560 |   | — |   | 560 |   |
| Income from  continuing operations                                                                                                      |       | 2,096                                                          |       | 1,078 |   | 5,293 |   | (7,765 | ) | — |   | 702 |   |
| **Discontinued  Operations**                                                                                                            |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Income from discontinued operations                                                                                                     |       | 616                                                            |       | 171 |   | — |   | — |   | — |   | 787 |   |
| Minority interest                                                                                                                       |       | —                                                         |       | — |   | — |   | 349 |   | — |   | 349 |   |
| Income from discontinued operations                                                                                                     |       | 616                                                            |       | 171 |   | — |   | (349 | ) | — |   | 438 |   |
|                                                                                                                                    |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                                                                       |       | $                                                              | 2,712      |   | $ | 1,249 |   | $ | 5,293 |   | $ | (8,114 | ) | $ | — |   | $ | 1,140 |   |

 
|                              | ** ** | **Student  Housing  Owned  Properties** | ** ** | **Student  Housing-  Management** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total**  | ** ** |
|------------------------------|------------|-----------------------------------------|------------|-----------------------------------|------------|-----------------------|------------|---------------|------------|------------|------------|
| ** **                   | ** ** | **(in thousands)**                 | ** ** |
| ** **                   | ** ** | ** **                              | ** ** | ** **                        | ** ** | ** **            | ** ** | ** **    | ** ** | ** ** | ** ** |
| **As of  March 31, 2007:**   |       |                                    |       |                              |       |                  |       |          |       |       |       |
| Total assets                 |       | $                                       | 1,610,358  |                              | $          | 6,030                 |       | $             | 67,036     |       | $          | 25,703 |   | $ | 1,709,127 |   |
| Total liabilities            |       | $                                       | 1,092,431  |                              | $          | 1,227                 |       | $             | (13,078    | )          | $          | 225,303 |   | $ | 1,305,883 |   |
| **As of  December 31, 2006** |       |                                    |       |                              |       |                  |       |          |       |       |       |
| Total assets                 |       | $                                       | 1,619,776  |                              | $          | 2,560                 |       | $             | 58,714     |       | $          | 32,940 |   | $ | 1,713,990 |   |
| Total liabilities            |       | $                                       | 1,087,819  |                              | $          | 4,435                 |       | $             | (16,551    | )          | $          | 223,015 |   | $ | 1,298,718 |   |

 

19

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**9.  Earnings Per Common Share**

Thefollowing table details the number of shares and net income used to calculatebasic and diluted earnings per share for the three months ended March 31, 2007and March 31, 2006 (in thousands, except share and per share amounts): 
| ** **                                                      | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                      | ** ** | **March 31, 2006**     | ** ** | **March 31, 2007**     | ** ** |
| ** **                                                      | ** ** | **Basic**                        | ** ** | **Diluted**                      | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
|                                                            |       |                             |       |                             |       |   |   |   |   |
| Net (loss)  income from continuing operation                    |       | $                                | (433       | )                                | $          | (433 | ) | $ | 702 |   | $ | 702 |   |
| Net income from  discontinued operations                        |       | 562                              |       | 562                              |       | 438 |   | 438 |   |
| Minority  interest in continuing operations                     |       | —                           |       | (329                             | )          | — |   | 560 |   |
| Minority  interest in discontinued operations                   |       | —                           |       | 428                              |       | — |   | 349 |   |
| Income available  to common shareholders                        |       | $                                | 129        |                             | $          | 228 |   | $ | 1,140 |   | $ | 2,049 |   |
|                                                            |       |                             |       |                             |       |   |   |   |   |
| Weighted-average  common shares outstanding                     |       | 41,494,521                       |       | 41,494,521                       |       | 39,672,998 |   | 39,672,998 |   |
| Warrant                                                         |       | —                           |       | —                           |       | — |   | 2,671,193 |   |
| Units of limited  partnership held by minority interest holders |       | —                           |       | 31,624,617                       |       | — |   | 31,627,287 |   |
| Restricted  common shares                                       |       | —                           |       | 9,563                            |       | — |   | 8,212 |   |
| Total  weighted-average shares outstanding                      |       | 41,494.521                       |       | 73,128,701                       |       | 39,672,998 |   | 73,979,690 |   |
| Earnings (loss)  per common share                               |       |                             |       |                             |       |   |   |   |   |
| Continuing operations                                           |       | $                                | (0.01      | )                                | $          | (0.01 | ) | $ | 0.02 |   | $ | 0.02 |   |
| Discontinued operations                                         |       | 0.01                             |       | $                                | 0.01       |   | 0.01 |   | $ | 0.01 |   |
|                                                            |       | $                                | 0.00       |                             | $          | 0.00 |   | $ | 0.03 |   | $ | 0.03 |   |

 

On March 14, 2007, the Company declared a quarterlydividend of $0.165 per outstanding common share.  The aggregate amount of dividends of $12.1million was paid on April 13, 2007, of which $6.9 million and $5.2 million,respectively, was paid to common shareholders and unitholders of the OperatingPartnership of record on March 29, 2007.

**10.Discontinued Operations**

Forthe three month periods March 31, 2007 and 2006, income from discontinuedoperations relates to six of the 12 properties that the Company held for saleas of March 31, 2007. The other six properties (consisting of five propertiesthat were placed into the joint venture as of April 2007, and one remainingproperty expected to be transferred into the joint venture by the end of the secondquarter of 2007) have not been presented as discontinued operations because theCompany (i) expects to receive significant continuing cash flows generated byearning management fees from the Company’s ongoing management of theproperties, in addition to the cash flows resulting from the Company’s 10%equity ownership in the joint venture that owns and operates the properties,and (ii) continue to have significant involvement in the on-going operationsthrough its continuing management of the properties and its 10% equityownership in the joint venture that owns the properties.

Thefollowing table summarizes the revenue and expense information for the threemonths ended March 31, 2007 and 2006 (in thousands).
|                                                               | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                    | ** ** | **March 31, 2007**     | ** ** | **March 31 ,2006** | ** ** |
| **Revenue:**                                                  |       |                             |       |   |   |
| Rent and other operating income                               |       | $                                | 5,271      |   | $ | 4,378 |   |
| Other Income                                                  |       | 1                                |       | 2 |   |
| Total Revenue                                                 |       | 5,272                            |       | 4,380 |   |
|                                                          |       |                             |       |   |   |
| **Expenses:**                                                 |       |                             |       |   |   |
| Property operating expenses                                   |       | 1,727                            |       | 1,432 |   |
| Real estate taxes                                             |       | 595                              |       | 458 |   |
| Depreciation and amortization                                 |       | 898                              |       | 877 |   |
| Interest expense                                              |       | 1,062                            |       | 826 |   |
| Total operating expenses                                      |       | 4,282                            |       | 3,593 |   |
|                                                          |       |                             |       |   |   |
| Income from  discontinued operations before minority interest |       | 990                              |       | 787 |   |
| Minority  interest                                            |       | 428                              |       | 349 |   |
| Income from  discontinued operations                          |       | $                                | 562        |   | $ | 438 |   |

 

20

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**11.Subsequent Events**

On April 13, 2007,the Company entered into a joint venture transaction with the Fidelity RealEstate Group, a unit of Pyramis Global Advisors, a Fidelity InvestmentsCompany, encompassing six student housing properties. Under the joint venture structure,the Company completed the transfer of its 100% interest in five of the sixstudent housing properties into the joint venture entity, which is now jointlyowned by Fidelity and the Company. The sixth property to be included in thejoint venture will be transferred upon lender approval of the joint venture’sassumption of existing mortgage indebtedness on that property. As part of thetransaction the joint venture simultaneously placed new mortgage indebtednesson the five properties in an aggregate amount of approximately $88.0 million.The new mortgage debt has a five-year term and requires interest-only paymentsat a fixed rate of approximately 5.52%. After the repayment of previously existingmortgage debt on the properties, the Company received net proceeds from boththe Fidelity equity contribution and the new mortgage debt totalingapproximately $56.1 million, and has used these proceeds to repay an equalamount of indebtedness outstanding under the Wachovia Line. The transfer of thesixth property to be placed into the joint venture is expected to be completedby the end of the second quarter of 2007 and is expected to generate $5.1million of net proceeds.  Under the termsof the joint venture, the Company will continue to manage the properties andreceive management fees.

On May3, 2007, the Company completed the refinancing of three student housingproperties that previously had debt maturity dates during 2007.****Under the refinancing, the Company placed an aggregate of$31.6 million in mortgage indebtedness covering the three propertiespursuant to a LIBOR-based pool. Under this pool arrangement, the loan isinterest-only with a one year term (with four additional one year extensionoptions), and bears a variable interest rate of 30-day LIBOR plus 1.9%. TheCompany did not receive any net proceeds from this refinancing.

On May 7, 2007, theCompany entered into the Note Facility, under the terms of a Note PurchaseAgreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated (MerrillLynch).  Under the terms of the Facility,our Operating Partnership may issue up to an aggregate principal amount of$100.0 million in notes at any time through April 30, 2010, and subject tocertain conditions may increase the maximum principal amount up to $125million. On May 7, 2007, the Operating Partnership issued a note to MerrillLynch for approximately $90.7 million, which was used to pay a $1.0 millioncommitment fee to Merrill Lynch, closing costs and to repay principal andinterest due under, and to terminate, the Wachovia Line. The initial note wasissued with an interest rate of 7.07% and has a term through April 30,2010.   The notes are issuable at anannual interest of LIBOR plus 1.75%, will require monthly payments of interestonly, and are secured solely by the fees and equity returns the Companyreceives in connection with the military housing projects currently inoperation, as well as those projects for which the Company is currently underexclusive negotiations.

The notes issued inconnection with the Note Facility are administered under a Trust Indenture, whichcontains affirmative and negative covenants and also contains financialcovenants which, among other things, require that the Company maintain (i) afixed charge coverage ratio, as defined in the Trust Indenture, of at least1:15 to1:00, (ii) a consolidated tangible net worth, as defined in the TrustIndenture, of at least $375 million (iii) quarterly minimum Adjusted ManagementEBITDA, as defined in the Trust Indenture, of $3.5 million and (iv) our federaltax status as a REIT.

During the second quarter of 2007, the Company hadexecuted agreements to sell six of its currently-owned student housingproperties. The due diligence period expired on May 4, 2007, and thethird-party buyers have placed a non-refundable deposit of $2.5 million inescrow. The Company expects to complete these transactions during the secondquarter of 2007.

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**Item 2.****           Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

**Overview**

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

As of March 31,2007, we owned, or had ownership interests in, 77 student housing propertiescontaining a total of 14,432 units and 46,696 beds and seven undeveloped orpartially developed parcels of land held for development as student housingproperties. As of the date of this report, we held a 10% interest in jointventures that owned seven of these student housing properties, covering a totalof 1,056 units and 3,824 beds and provided management services for all of theseproperties.  In addition, we managed atotal of 18 student housing properties owned by others, containing a total of3,053 units and 9,900 beds, including 51 units and 279 beds currently underconstruction. 

In our military housing segment,as of March 31, 2007, our operating partnership had an ownership interestin, and through various wholly-owned subsidiaries operated, 10 militaryhousing privatization projects, comprising an aggregate of 20,364 end-statehousing units on 25 military bases. Through our taxable REIT subsidiaries, weprovide development, construction, renovation and management services to ourmilitary housing privatization projects (other than our AETC Group I projectwith the U.S. Air Force), and property management services to student housingproperties owned by others. In addition, we provide consulting services withrespect to the management of certain student housing properties owned byothers, including colleges, universities, and other private owners. In order tocomply with the applicable requirements under the REIT provisions of the Code,we must limit the operations of taxable REIT subsidiaries so that securitiesissued to us by our taxable REIT subsidiaries do not represent more than 20% ofour total assets as of the close of any quarter in our taxable year and so thatdividends from our taxable REIT subsidiaries, together with our othernon-qualifying gross income, do not exceed 25% of our gross income for anytaxable year.

       Currently,our operations are managed within three operating segments that are separatelyreported: (1) student housing owned properties (2) student housingmanagement and (3) military housing. This structure provides an effectiveplatform for maximizing market penetration and optimizing operating economiesof scale. In addition, we separately report the activities of certaindepartments from a corporate level, which includes personnel that service GMHCommunities Trust as a whole and support our overall operations.

**2007 Business Strategy**

In December 2006, weannounced that our management expected to implement a business strategybeginning in 2007 that would involve the sale, refinancing and/or entrance intojoint ventures covering a number of our currently-owned student housing properties.Our management developed this plan primarily in an effort to raise capitalproceeds that could be used to repay outstanding indebtedness under our line ofcredit with Wachovia Bank. In connection with this business strategy, wecompleted the refinancing of four of our student housing properties inFebruary 2007, for a total of $90.0 million in new 10-year mortgagedebt at a fixed interest rate of 5.6%. We used the net proceeds from thisrefinancing to repay $73.6 million in outstanding borrowings under the Wachovialine of credit, which resulted in the replacement of the indebtedness under theWachovia line of credit that was carrying a variable LIBOR-based interest rateof 7.32% as of the date of the refinancing. Immediately following this transaction,we had approximately $137.8 million in remaining borrowings outstanding underthe Wachovia line of credit.

In addition, on April 13,2007, we entered into a joint venture transaction with Fidelity Real EstateGroup covering a total of six student housing properties. As of April 13, 2007,we had completed the transfer of our 100% interest in five of the sixproperties into the joint venture entity, which is currently owned 90% byFidelity and 10% by us. The transfer of our interest in the sixth property tobe included in the joint venture is expected to be completed during the secondquarter of 2007, upon receipt of lender approval of the joint venture’sassumption of the existing mortgage indebtedness on that property. Inconnection with the closing of the five properties that are part of the jointventure, Fidelity contributed approximately $19.8 million into the jointventure, and the joint venture simultaneously placed new mortgage indebtednesson the properties in an aggregate amount of $88.0 million. The new mortgagedebt has a five-year term and requires interest-only payments at a fixed rateof approximately 5.52%. We received net proceeds from the joint venturetransaction totaling approximately $56.1 million, and used the proceeds torepay an equal amount of existing indebtedness outstanding under the Wachovialine of credit.

Also, on May 7, 2007, weentered into a revolving note facility, under the terms of a Note PurchaseAgreement, with Merrill Lynch, Pierce, Fenner & Smith Incorporated. Underthis note facility, our

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operatingpartnership may issue up to an aggregate principal amount of $100.0 million innotes outstanding at any time through April 30, 2010, and, subject to certainconditions, may be increased to up to an additional $25 million in notesoutstanding. On May 7, 2007, our operating partnership issued a note to MerrillLynch for approximately $90.7 million, which was used to pay a$1.0 million commitment fee to Merrill Lynch, closing costs and to repay principaland interest due under, and to terminate, the Wachovia line of credit. Theinitial note was issued with an interest rate of 7.07% and has a term throughApril 30, 2010. Additional notes may be issued at any time upon notice by ouroperating partnership, and we will have the ability to repay amounts underoutstanding notes and redraw such amounts through the issuance of new notes,provided that the maximum amount of notes outstanding at any time during theterm of the Note Purchase Agreement may not exceed an aggregate principalamount of $100.0 million, or $125 million to the extent permitted to beincreased. Under the terms of the note purchaser agreement, the notes will beissued to Merrill Lynch and may thereafter be transferred to “qualifiedinstitutional buyers” in accordance with Rule 144A of the Securities Act of1933, as amended. The notes will be administered under the terms of a TrustIndenture with U.S. Bank Trust National Association, serving as trustee of thenotes. The notes are issuable at an annual interest of LIBOR plus 1.75%, willrequire monthly payments of interest only, and are secured solely by the feesand equity preferred returns we receive in connection with our military housingprojects currently in operation, as well as those to be received under the NavySoutheast project and West Point project for which we are currently underexclusive negotiations.  For additionalinformation regarding the terms of this transaction, see Part II - Item 5 ofthis report and Note 11 to the financial statements included in thisreport.   

We have also had executedagreements to sell six of our currently-owned student housing properties. Thedue diligence period expired on May 4, 2007, and the potential buyers haveplaced a non-fundable deposit of $2.5 million held in escrow. The Companyexpects to complete these transactions during the second quarter of 2007.  . We expect to use the proceeds from thesesale transactions to redeem outstanding notes under the Trust Indenture withU.S. Bank Trust as discussed above and for general working capital purposes. 

 *Student Housing Owned Properties*

 The student housingowned properties segment reflects the revenues and expenses of off-campusstudent housing properties acquired and owned through the REIT ownershipstructure which are strategically located near college or university campuses.During the years ended December 31, 2004, 2005 and 2006, our rental revenueincreased substantially as a result of the acquisition of an aggregate of 75properties (excluding two properties in which we have a 10% interest togetherwith a joint venture partner) over that period. During the year endedDecember 31, 2006, we acquired 21 of these properties. Additionally,operating expenses, real estate taxes and depreciation and amortization haveincreased as a result of these acquisitions. Further, interest expense hasincreased related to the financing of the properties we have acquired.

Historically, we havefound certain property revenues and operating expenses to be cyclical innature, and therefore not incurred ratably over the course of the year. As ourproperties are leased predominantly on an academic-year basis, certain of ouroperating revenues and expenses will vary from quarter to quarter depending onthe leasing cycle. For example, we experience significant turnover costscommencing towards the end of the second quarter and more significantly duringthe third quarter of our fiscal year, in connection with preparing ourproperties for new residents prior to commencement of the new academic-yearlease period, which typically begins in August or September. In addition,we also typically incur higher lease-up costs during the first two quarters ofour fiscal year, as this is the period during which we heavily target studentsfor leases that will commence for the next academic year. Property revenues andexpenses may differ from expected results in the year of acquisition, dependingon the timing of the acquisition in relation to the leasing cycle. 

In comparing ouroperating statistics for the three months ended March 31, 2007 versus 2006,most of the key operating metrics for the student housing owned propertiessegment , such as rent and other property income, depreciation andamortization, interest expense and property operating expense,  experienced significant increases, primarilyas a result of the presentation of a full quarter of operations during 2007with respect to properties acquired during 2006. The increase in real estatetaxes was disproportionately higher than the increase in rent and other propertyincome due to more aggressive assessments by local taxing authorities withrespect to certain of our student housing properties throughout 2006, resultingin higher real estate tax expenses on a quarter-over-quarter basis for thethree months ended March 31, 2006 and 2007. The increase in property operatingexpenses was disproportionately higher than the increase in rent and otherproperty income due primarily to continuing increases in utility expenses.Since March 31, 2006, we have also experienced, and expect to continue toexperience, increases in

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operatingexpenses (in addition to the proportionate increase associated with theincreased number of properties owned during the three months ended March 31,2007 versus 2006) that will include increased utility expenses resulting fromnational trends in higher energy-related costs.

Until we are able tosuccessfully execute our 2007 business strategy to raise additional workingcapital as outlined above under “2007 Business Strategy,” we expect to placeless emphasis on the acquisition of additional student housing properties, andto continue to focus on the operational performance of our existing studenthousing properties and development projects. After we complete theimplementation of  this businessstrategy, and to the extent we are able to obtain sufficient working capitalfor additional acquisitions, we may determine that it is appropriate to placegreater emphasis on the acquisition of additional student housing propertiesthat are located in our targeted markets and that meet management’sunderwriting criteria for creating long-term growth potential. To the extentthat we seek to acquire student housing properties during the remainder of 2007,we will consider funding the acquisition through joint venture structuressimilar to the joint venture terms that we entered into with respect to ourcurrent properties held through joint ventures. The timing of any additionalacquisitions or development projects will be dependent upon various factors,including the ability to complete satisfactory due diligence, to find suitablejoint venture partners and agree upon mutually acceptable joint venture terms,to obtain appropriate debt financing on the properties, and the availability ofcapital. We would consider funding our equity portion of any joint ventures byusing funds from available cash from operations or borrowings. We may alsodetermine that it is appropriate to purchase additional student housingproperties outright, as opposed to with a joint venture partner, depending uponmany factors which may include, but are not limited to, the applicable purchaseprice, available capital, and projected returns with respect to the property.

During the three monthsended March 31, 2007, we completed the following transactions relating to ourstudent housing owned properties:

·                  onJanuary 26, 2007, we acquired a 50.1-acre land parcel located adjacent toa currently-owned student housing property located in Lincoln, Nebraska andserving the University of Nebraska, for total consideration of approximately$1.3 million; and

·                  onFebruary 28, 2007, we completed the refinancing of four currently-ownedstudent housing properties. Under the refinancing, we placed an aggregate of$90.0 million in mortgage indebtedness on the four properties, with eachloan having a 10-year interest-only term and bearing a fixed interest rate of5.6%. As a result of the refinancing, we realized net proceeds of$73.6 million, after repayment of existing mortgage loans, payment ofprepayment penalties and closing costs. These net proceeds were used to repayan equal amount of the outstanding indebtedness under our recently terminatedWachovia line of credit.

OnApril 13, 2007, we completed a joint venture transaction with the Fidelity RealEstate Group, a unit of Pyramis Global Advisors, a Fidelity InvestmentsCompany, encompassing a total of six student housing properties. Under the newownership structure, we completed the transfer of our 100% interest in five ofthe six student housing properties into the joint venture entity, which is nowjointly owned by Fidelity and by us. The sixth property to be included in thejoint venture will be transferred upon lender approval of the joint venture’sassumption of existing mortgage indebtedness on that property. As part of thetransaction the joint venture simultaneously placed new mortgage indebtednesson the five properties in an aggregate amount of approximately $88.0 million.The new mortgage debt has a five-year term and requires interest-only paymentsat a fixed rate of approximately 5.52%. After the repayment of previouslyexisting mortgage debt on the properties, we received net proceeds from boththe Fidelity equity contribution and the new mortgage debt totalingapproximately $56.1 million, and used these proceeds to repay an equal amountof indebtedness outstanding under our recently terminated Wachovia line ofcredit. The five properties included in the joint venture as of the date ofthis report include University Uptown (Denton, TX), University Heights(Knoxville, TN), University Walk (Charlotte, NC), The Ridge (Morgantown, WV),and Campus Edge - Phase I (Charlotte, NC). The transfer of the sixth propertyto be placed into the joint venture, Campus Edge - Phase II, is expected to becompleted during the second quarter of 2007. Under the terms of the jointventure, we will continue to manage the properties and receive management fees.

***StudentHousing—Management***

The student housingmanagement segment provides the on-site management function for, and generallyoversees the management of, all off-campus student housing properties for theCompany and for properties we manage that are owned by third parties. Thirdparties may be related parties or parties unaffiliated with the Company. Theproperties are strategically located near college or university campuses.

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Totalrevenues from management activities, including reimbursement of expenses,increased by approximately2.0% from the three months ended March 31, 2006 tothe same period in  2007, includingmanagement fees earned from the properties managed for the Company.

We earn management feesfrom managing properties for third parties. These fees are typically equal to apercentage of cash receipts or gross rental revenues generated by the managedproperties, or equal to a fixed monthly amount, according to the managementagreements for the properties we manage. We also have the ability to earnincentive management fees by achieving specified property-level performancecriteria for certain properties we manage for third parties. Further, certainoperating expenses incurred related to properties we manage for others arereimbursed by the owners of the properties managed. We expect to continuegenerating fee revenue and operating expense reimbursements from the propertiesthat we manage for others, although the amounts are expected to become lesssignificant as a percentage of our overall revenues as rental income increasesfrom the properties we own. During 2007, we expect to continue to pursue newthird-party management agreements by utilizing relationships in thestudent housing market and providing our significant operational economies ofscale as a savings mechanism for other third-party owners, includinginstitutional owners and individual student housing owners.  However, we expect management fees tocontribute less significantly as a percentage of overall revenue in futureperiods, as a result of the continued growth in rental revenue that we expectto generate from the operations of properties we own and from the full year ofoperations of properties that we acquired during 2006.

*MilitaryHousing*

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

As of March 31,2007, we owned equity interests in the joint ventures that owned the 10military housing privatization projects in operation, encompassing 25 militarybases totaling 20,364 end-state housing units. During the three months endedMarch 31, 2007, we earned fees for providing development,construction/renovation and management services to these 10 military housingprivatization projects.

During the three monthsended March 31, 2007, the following events occurred with respect to ourmilitary housing segment:

·                  onFebruary 6, 2007, we closed on our AETC Group I project with theDepartment of the Air Force, a military housing privatization project coveringfour bases and 2,875 end-state housing units. The AETC Group I projectrepresents our first military housing project with the Department of the AirForce;

·                  onFebruary 26, 2007, we announced that we were selected by the Department ofthe Navy to enter into exclusive negotiations for the design, construction,management and maintenance of the military family housing at 11 SoutheastRegion Navy bases in five states. The 50-year term of the Navy Southeastproject is expected to commence with a six-year initial development period, orIDP, that is valued in excess of $700 million and covering approximately 5,501end-state housing units; and

·                  on March 8,2007, we also announced that we were selected by the Department of the Army toenter into exclusive negotiations for the family housing privatization projectat the U.S. Military Academy at West Point, New York, which is expected to havea five-year IDP with project costs valued in excess of $160 million.

With regard to trends anduncertainties in the military housing market see the section of our AnnualReport on Form 10-K for the year ended December 31, 2006 titled “*Risk Factors—Specific Risks Related to our Military Housing Business*.”Our management team also had under review, as of May 7, 2007, four

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potentialadditional military housing privatization project opportunities, and willcontinue to pursue opportunities to acquire projects or project rights from ourcompetitors, as well as opportunities to participate in pilot housing programsfor unaccompanied military personnel. 

**Critical Accounting Policies**

Our “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”discusses the Company’s consolidated financial statements which have beenprepared in accordance with U.S. generally accepted accounting principles. Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting periods. While the estimates and judgments associated with theapplication of these accounting principles may be affected by differentassumptions or conditions, we believe the estimates and judgments associatedwith the reported amounts are appropriate under the circumstances in which theywere made. In addition, other companies in similar businesses may utilizedifferent estimation policies and methodologies, which may impact thecomparability of our results of operations and financial condition to thosecompanies.

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

**Revenue Recognition**

***Student Housing Owned PropertiesSegment***

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

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

***Student Housing ManagedProperties Segment***

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

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

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

*Military Housing*

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

·       standardand incentive management fees, which are based on a percentage of revenuegenerated by the military housing privatization 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;

·       standardand incentive development and construction/renovation fees, which are based ona percentage of development and construction/renovation costs incurred by themilitary housing

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privatizationprojects, including hard and soft costs and financing costs, are recognized ona monthly basis as the costs are incurred by the military housing projects.Incentive development and construction/renovation fees are based upon thesatisfaction of certain criteria including, among other things, completing anumber of housing units according to schedule, achieving specific safetyrecords and implementing small business or minority subcontracting plans. Theincentive development and construction/renovation fees are recognized when thevarious criteria stipulated in the contract have been satisfied. In addition,in certain instances, we may receive fees relating to the performance of pre-construction/renovationservices. These pre-construction/renovation fees are determined on aproject-by-project basis, and are paid in proportion to the amount ofpre-construction/renovation costs incurred by us for the project and recognizedas revenue upon performance of the pre-construction/renovation services;

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

·       businessdevelopment fees are earned from our business partners that providearchitectural and design or construction services for our military housingprojects. These fees are received in connection with pursuing and coordinatingthe completion of military housing projects. The fees consist of (i) anannual base fee, which is a fee paid to us in consideration of our ongoingpursuit of additional projects and is not contingent upon the success of thoseefforts and can be cancelled at any time, and (ii) an additional fee,which is paid over the course of an awarded project based on a percentage ofrevenue earned by these business partners for providing services to themilitary housing projects. The base fees are recognized on a straight-linebasis over the term of the related business development agreement, which isgenerally one year. The additional fee is recognized and paid to us as therelated services are provided to our military housing projects by our businesspartners.

·       equityreturns are earned on our investments in military housing projects. During theinitial development period for a project, the equity returns are a fixedpercentage of our investment and subsequent to the initial development periodfor a project, the equity returns are based on a fixed percentage of ourinvestment and on the project’s net operating income, subject to cashdistribution caps, as defined in the operating agreements related to theparticular project. As of March 31, 2007, only the Fort Carson project had passedits initial development period.

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

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

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

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

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housinglease terms generally commence in August or September to coincidewith the beginning of the academic year. Accordingly, we expect to incur amajority of its repair and maintenance costs during the second and thirdquarters 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 estateinvestments and purchased intangibles subject to amortization, are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount may not be recoverable. These circumstances may include, butare not limited to, operational performance, market conditions and competitionfrom other off-campus properties and on-campus housing, legal and environmentalconcerns, and results of appraisals or other information obtained as part of afinancing or disposition strategy. When required, we review the recoverabilityof assets to be held and used through a comparison of the carrying amount of anasset to estimated undiscounted future cash flows expected to be generated bythe asset. If the carrying amount of an asset exceeds its estimatedundiscounted future cash flows, an impairment charge is recognized in an amountby which the carrying value of the asset exceeds the fair value of the assetdetermined using customary valuation techniques, such as the present value ofexpected future cash flows. Assets to be disposed of would be separatelypresented in the balance sheet and reported at the lower of the carrying amountor fair value less costs to sell, and no longer would be depreciated.

***Allowance for Doubtful Accounts***

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

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

***Minority Interest***

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

***Investments in Military Housing Projects and StudentHousing Joint Ventures***

We own equity interestsin the joint ventures that own our military housing privatization projects withthe U.S. military to design, develop, construct/renovate and manage themilitary family housing located on or near various bases throughout the UnitedStates. We evaluate our investments in military housing project joint venturesin which we have a variable interest to determine if the underlying entity is avariable interest entity (“VIE”) as defined under FASB Financial InterpretationNo. 46 (as revised) (“FIN 46(R)”). We have concluded that each of themilitary housing project joint ventures in which we have a variable interest isa VIE and we are not the primary beneficiary of any of these VIEs. We recordour investments in joint ventures under our military housing projects inaccordance with the equity method of accounting. Our investment is initiallyrecorded at cost, and then subsequently adjusted at each balance sheet date toan amount equal to what we would receive from the joint venture in the eventthat it were liquidated at net book value as of that date, and assuming thatthe proceeds from the liquidation are distributed in accordance with the termsof, and priority of returns set forth under, the joint venture’s operating

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agreement.We have exposure to loss to the extent of our investments, if any, and anyreceivables due from the project.

Weentered into a joint venture in the third quarter of 2005 to develop andconstruct two student housing properties. We contributed land to the jointventure in exchange for its 10% interest and cash. In addition, we have theoption to purchase the joint venture partner’s interest in the joint venturewithin one year of completion of the properties, and we have provided certainguarantees for the completion of construction and for a portion of theconstruction loans. As such, the transaction is being accounted for under thefinancing method, whereby we record the real estateas an asset, depreciate the property, and record a financing obligation.Construction of both properties was completed in August 2006.

***Income Taxes***

We elected to be taxed asa REIT under the Code commencing with our taxable year ended December 31,2004. To continue to qualify as a REIT, we must meet a number of organizationaland operational requirements, including a requirement that we currentlydistribute at least 90% of our adjusted taxable income to our shareholders. Webelieve we are organized and operate in a manner that allows us to qualify fortaxation as a REIT under the Code, and it is our intention to adhere to theserequirements and maintain our REIT status in the future. Accordingly, noprovision has been made for federal income taxes in the accompanyingconsolidated financial statements, other than with respect to our taxable REITsubsidiaries.

**Results of Operations**

The results of operationsfor the three months ended March 31, 2007 and 2006 presented below reflect theresults of operations of the Company. The eliminations column represents themanagement fees that are charged to our student housing—owned segment from ourstudent housing management segment. Such amounts have been eliminated inconsolidation.

***Comparison of the Three Months Ended March 31, 2007 to theThree Months Ended March 31, 2006***
| ** **                                                                                                | ** ** | **Three Months Ended March 31, 2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                                | ** ** | **Student  Housing-  Owned  Properties**                       | ** ** | **Student  Housing  Management** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Elimination** | ** ** | **Total** | ** ** |
| **Revenue**                                                                                               |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income                                                                            |       | $                                                              | 51,425     |   | $ | — |   | $ | — |   | $ | 39 |   | $ | — |   | $ | 51,464 |   |
| Expense  reimbursements:                                                                                  |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                             |       | —                                                         |       | — |   | 17,335 |   | 64 |   | — |   | 17,399 |   |
| Third party                                                                                               |       | —                                                         |       | 1,446 |   | — |   | — |   |   |   | 1,446 |   |
| Management fees:                                                                                          |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Owned properties                                                                                          |       | —                                                         |       | 1,914 |   | — |   | — |   | (1,914 | ) | — |   |
| Related party                                                                                             |       | —                                                         |       | — |   | 2,421 |   | — |   | — |   | 2,421 |   |
| Third party                                                                                               |       | —                                                         |       | 678 |   | — |   | — |   | — |   | 678 |   |
| Other fee income  – related party                                                                    |       | —                                                         |       | — |   | 6,138 |   | — |   | — |   | 6,138 |   |
| Other income                                                                                              |       | 29                                                             |       | 8 |   | 20 |   | 171 |   |   |   | 228 |   |
| Total revenue                                                                                             |       | 51,454                                                         |       | 4,046 |   | 25,914 |   | 274 |   | (1,914 | ) | 79,774 |   |
|                                                                                                      |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Operating  Expenses:**                                                                                  |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Property operating expense                                                                                |       | 18,114                                                         |       | 2,053 |   | 1,975 |   | — |   | — |   | 22,142 |   |
| Intercompany management fee                                                                               |       | 1,914                                                          |       | — |   | — |   | — |   | (1,914 | ) | — |   |
| Reimbursed expenses                                                                                       |       | —                                                         |       | 1,446 |   | 17,335 |   | 64 |   | — |   | 18,845 |   |
| Real estate taxes                                                                                         |       | 4,877                                                          |       | — |   | — |   | 24 |   | — |   | 4,901 |   |
| Administrative expenses                                                                                   |       | —                                                         |       | — |   | — |   | 4,870 |   | — |   | 4,870 |   |
| Audit Committee and Special Committee expenses                                                            |       | —                                                         |       | — |   | — |   | — |   | — |   | — |   |
| Depreciation and amortization                                                                             |       | 11,571                                                         |       | — |   | 118 |   | 117 |   |   |   | 11,806 |   |
| Interest                                                                                                  |       | 15,984                                                         |       | — |   | — |   | 1,491 |   |   |   | 17,475 |   |
| Total operating expenses                                                                                  |       | 52,460                                                         |       | 3,499 |   | 19,428 |   | 6,566 |   | (1,914 | ) | 80,039 |   |
| (Loss) income  before equity in earnings of unconsolidated entities, income taxes, and  minority interest |       | (1,006                                                         | )          | 547 |   | 6,486 |   | (6,292 | ) | — |   | (265 | ) |
| Equity in  earnings of unconsolidated entities                                                            |       | —                                                         |       | — |   | 1,029 |   | — |   | — |   | 1,029 |   |
| (Loss) income  before minority interest                                                                   |       | (1,006                                                         | )          | 547 |   | 7,515 |   | (6.292 | ) | — |   | 764 |   |
| Income tax  expense                                                                                       |       | —                                                         |       | 68 |   | 1,458 |   | — |   | — |   | 1,526 |   |
| Income (loss)  before minority interest                                                                   |       | (1,006                                                         | )          | 479 |   | 6,057 |   | (6,292 | ) | — |   | (762 | ) |
| Minority  interest attributable to continuing operations                                                  |       | —                                                         |       | — |   | — |   | (329 | ) | — |   | (329 | ) |
| Net (loss)  Income from continuing operations                                                             |       | (1,006                                                         | )          | 479 |   | 6,057 |   | (5,963 | ) | — |   | (433 | ) |
|                                                                                                      |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Discontinued  Operations:**                                                                             |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Income from discontinued operations before minority  interest                                             |       | 789                                                            |       | 201 |   | — |   | — |   | — |   | 990 |   |
| Minority interest                                                                                         |       | —                                                         |       | — |   | — |   | 428 |   | — |   | 428 |   |
| Income from discontinued operations                                                                       |       | 789                                                            |       | 680 |   | — |   | (428 | ) | — |   | 562 |   |
|                                                                                                      |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Net (loss) income                                                                                         |       | $                                                              | (217       | ) | $ | 680 |   | $ | 6,057 |   | $ | (6,391 | ) | $ | — |   | $ | 129 |   |

 

29

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| ** **                                                                                               | ** ** | **Three Months Ended March 31, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **Student  Housing-  Owned  Properties**                       | ** ** | **Student  Housing  Management** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Elimination** | ** ** | **Total** | ** ** |
| **Revenue**                                                                                              |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income                                                                           |       | $                                                              | 39,620     |   | $ | — |   | $ | — |   | $ | 39 |   | $ | — |   | $ | 39,659 |   |
| Expense  reimbursements:                                                                                 |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                            |       | —                                                         |       | 86 |   | 13,237 |   | 57 |   | — |   | 13,380 |   |
| Third party                                                                                              |       | —                                                         |       | 1,336 |   | — |   | — |   | — |   | 1,336 |   |
| Management fees:                                                                                         |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Owned properties                                                                                         |       | —                                                         |       | 1,503 |   | — |   | — |   | (1,503 | ) | — |   |
| Related party                                                                                            |       | —                                                         |       | 20 |   | 2,019 |   | — |   | — |   | 2.039 |   |
| Third party                                                                                              |       | —                                                         |       | 1,008 |   | — |   | — |   | — |   | 1,008 |   |
| Other fee income  – related party                                                                   |       | —                                                         |       | — |   | 4,680 |   | — |   | — |   | 4,680 |   |
| Other income                                                                                             |       | 36                                                             |       | 13 |   | 9 |   | 31 |   | — |   | 89 |   |
| Total revenue                                                                                            |       | 39,656                                                         |       | 3,966 |   | 19,945 |   | 127 |   | (1,503 | ) | 62,191 |   |
|                                                                                                     |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Operating  Expenses:                                                                                     |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Property operating expense                                                                               |       | 13,453                                                         |       | 1,466 |   | 1,539 |   | — |   | — |   | 16,458 |   |
| Intercompany management fee                                                                              |       | 1,503                                                          |       | — |   | — |   | — |   | (1,503 | ) | — |   |
| Reimbursed expenses                                                                                      |       | —                                                         |       | 1,422 |   | 13,237 |   | 57 |   | — |   | 14,716 |   |
| Real estate taxes                                                                                        |       | 3,719                                                          |       | — |   | — |   | 24 |   | — |   | 3,743 |   |
| Administrative expenses                                                                                  |       | —                                                         |       | — |   | — |   | 4,080 |   | — |   | 4,080 |   |
| Audit Committee and Special Committee expenses                                                           |       | —                                                         |       | — |   | — |   | 2,575 |   | — |   | 2,575 |   |
| Depreciation and amortization                                                                            |       | 9,275                                                          |       | — |   | 119 |   | 78 |   |   |   | 9.472 |   |
| Interest                                                                                                 |       | 9,610                                                          |       | — |   | — |   | 518 |   |   |   | 10,128 |   |
| Total operating expenses                                                                                 |       | 37,560                                                         |       | 2,888 |   | 14,895 |   | 7,332 |   | (1,503 | ) | 61,172 |   |
| Income (loss)  before minority interest and income taxes                                                 |       | 2,096                                                          |       | 1,078 |   | 5,050 |   | (7,205 | ) | — |   | 1,019 |   |
| Equity in  earnings of unconsolidated entities                                                           |       | —                                                         |       | — |   | 1,216 |   | — |   | — |   | 1,216 |   |
| Income (loss)  before income taxes and minority interest                                                 |       | 2,096                                                          |       | 1,078 |   | 6,266 |   | (7,205 | ) | — |   | 2,235 |   |
| Income tax  expense                                                                                      |       | —                                                         |       | — |   | 973 |   | — |   | — |   | 973 |   |
| Income (loss)  before equity in earnings of unconsolidated entities, income taxes and  minority interest |       | 2,096                                                          |       | 1,078 |   | 5,293 |   | (7,205 | ) | — |   | 1,262 |   |
| Minority  interest attributable to continuing operations                                                 |       | —                                                         |       | — |   | — |   | 560 |   | — |   | 560 |   |
| Income from  continuing operations                                                                       |       | 2,096                                                          |       | 1,078 |   | 5,293 |   | (7,765 | ) | — |   | 702 |   |
| **Discontinued  Operations**                                                                             |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Income from discontinue operations before minority  interest                                             |       | 616                                                            |       | 171 |   | — |   | — |   | — |   | 787 |   |
| Minority interest                                                                                        |       | —                                                         |       | — |   | — |   | 349 |   | — |   | 349 |   |
| Income from discontinued operations                                                                      |       | 616                                                            |       | 171 |   | — |   | (349 | ) | — |   | 438 |   |
|                                                                                                     |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                                        |       | $                                                              | 2,712      |   | $ | 1,249 |   | $ | 5,293 |   | $ | (8,114 | ) | $ | — |   | $ | 1,140 |   |

 

30

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***Student Housing***

*StudentHousing—Owned Properties*****

*Revenue.*Of the 69 properties owned and included in our results fromcontinuing operations as of March 31, 2007, we acquired 21 of the studenthousing properties during 2006, six of which were acquired during the firstquarter of 2006.  Rent and other propertyincome increased to $51.4 million during the three months ended March 31,2007 from $39.6 million during the three months ended March 31, 2006.  The increase in rent and other propertyincome experienced during the three months ended March 31, 2007 primarilyrelates to (i) the presentation of a full quarter of operations during2006 with respect to the 6 properties acquired during the first quarter of2006, and (ii) the acquisition of an additional 15 properties during theremainder of 2006. Although we generally seek rent increases that will exceedprojected increases in property operating expenses, increases in our propertyoperating expenses exceeded our rent increases from 2006 to 2007, primarily asa result of increases in payroll, utility expenses and real estate taxesincurred during the first quarter of 2007. In future periods, our net incomewill be negatively affected to the extent property operating expenses arehigher than those projected by our management for such period prior to leaseexecution for the applicable academic year. 

We owned 49 propertieswhich are included in our results from continuing operations during both the threemonths ended March 31, 2007 and 2006, referred to herein as our same storeproperties Our revenues at the same store properties were $37.5 million duringthe three months ended March 31,  2007 ascompared to  $37.6 million during thethree months ended March 31, 2006. Our revenues for these properties, wereadversely affected by eight same store properties (which we refer to as thefocus properties) that did not achieve the economic occupancy levels we hadtargeted upon commencement of the 2006-2007 academic year. We believethat these lower than anticipated leasing results are temporary in nature atall eight focus properties, and we have committed resources to improving theiroccupancy levels. Our same store revenues, excluding the eight focus propertiesreferred to above, increased $1.4 million, or 4.9%, in 2007 as compared to theprior year.

Other income decreasedslightly to $29,000 in the first quarter of 2007 from $36,000 in the firstquarter of 2006.  Other income consistsprimarily of interest income on invested cash.

*Expenses.**  *Property operating expenses fromcontinuing operations increased to $18.1 million in 2007 from $13.5 million in thefirst quarter of 2006, primarily due to expenses attributable to the 15properties acquired during the last nine months of 2006 and our ownership andoperation for a full quarter during 2007 of the six properties acquired duringthe first quarter of 2006. The increase of $4.6 million is attributable to thefollowing: a $2.2 million increase in utilities expenses; a $0.4 millionincrease in insurance expense; a $0.8 million increase in payroll expenses atthe property level; a $0.2 million increase in bad debt expense relating touncollected rents and other income; and a $1.0 million increase in otherproperty expenses, consisting of marketing, insurance, landscaping, office andother similar property operating expenses.

With respect to our samestore properties, we experienced an increase in property operating expenses ofapproximately $0.5 million in 2007, as compared to 2006. This increase wasprimarily attributable to an increase in utilities expense.

Real estate taxes fromcontinuing operations increased to $4.9 million in 2007 from $3.7 millionin 2006, primarily due to the acquisition of 15 properties in 2006 during thelast nine months of the year and the full quarter of real estate taxes withrespect to the six properties we acquired during the first quarter of 2006. Ofthe $1.2 million increase we experienced in real estate taxes, approximately$0.1 million is related to our same store properties. We expect an overallincrease in real estate taxes during 2007 due to a full year of operations forthe 21 properties acquired during 2006, offset by a decrease as a result of thesix properties that we have or will transfer our 100% ownership interests intoa joint venture by the end of the second quarter of 2007.  We may also see an increase in real estatetaxes to the extent that local authorities continue to aggressively pursuehigher real estate tax assessments on properties that we currently own.

Depreciation andamortization from continuing operations increased to $11.6 million as comparedto $9.3 million in 2006, primarily as a result of acquiring 15 propertiesin 2006 during the last nine months of the year for an aggregate purchase priceof $325.3 million, as well as the inclusion of a full year of depreciationexpense relating to the six properties acquired during the first quarter of2006.  The $11.6 million in 2007 iscomprised of $10.6 million of depreciation and $1.0 million of leaseintangible amortization. 

Interest expense fromcontinuing operations increased to $16.0 million in 2007 from $9.6 millionin 2006, as a result of incurring additional debt, including placement of newmortgage debt and the

31

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assumptionof existing mortgage debt, as well as borrowings under the Wachovia line ofcredit, in connection with the acquisition of 21 properties in 2006. During thelast nine months of 2006, we placed $231.7 million of new mortgage debt,assumed $27.3 million of existing mortgage debt, net of premiums, and increasedborrowings under our credit lines in existence during that period. We expectinterest expense to decrease during the remainder of 2007 as the Company paysdown the remaining outstanding balance on its new note facility with MerrillLynch through i) $56.1 million of net proceeds received from the sale of thesix student housing properties transferred into a joint venture during thesecond quarter of 2007, and ii) expected proceeds to be received from the sixproperties identified for sale for which the Company has signed a definitivesales agreement. 

*StudentHousing Management*

*Revenue.*  Prior to the three months ended March 31, 2007, the Company ceased managing studenthousing properties for related parties, as the one property that we managed fora related party in the first quarter of 2006 was sold during December 2006.  Therefore, there were no expensereimbursements from related parties or management fees during 2007.

Expense reimbursementsfrom third parties remained relatively consistent during the three months endedMarch 31, 2007 as compared to the same period in the prior year.  Reimbursed expenses are comprised of payrollexpenses for on-site employees.  Weexpect expense reimbursements to increase in 2007 as a result of the managementagreement we currently have in place to manage the six properties that we haveor will transfer into a joint venture with Fidelity Real Estate Group duringthe second quarter of 2007, and as we continue to pursue new third-partymanagement agreements during 2007.

Management fee income fromthird parties decreased from $1.0 million during the three months endedMarch 31, 2006 to $0.7 million during the three months endedMarch 31, 2007. This decrease is due to one time fee of $250,000 earned inthe first quarter of 2006 related to a management fee incentive paymentreceived in connection with the sale of one of our managed properties during2006.  We expect management fee income toincrease during the remainder of 2007 as a result of the management agreementwe currently have in place to manage the six properties that we have or willtransfer into a joint venture with Fidelity Real Estate Group during the secondquarter of 2007, and as we continue to pursue new third-party managementagreements throughout 2007.

*Expenses.**  *Property operating expenses increased from $1.5million during the three months ended March 31, 2006 to $2.1 million duringthe three months ended March 31, 2007, primarily due to expensesattributable to the Company’s acquisition of 21 properties in 2006, of whichsix were acquired during the first quarter of 2006. These expenses arecomprised of payroll and general and administrative expenses directlyassociated with the operations of the Company’s owned and managed portfolios.While those employees who are directly responsible for the oversight ofspecific properties are charged directly to the Student Housing Owned segment,this segment staffs a full operations department. This department includesthose employees responsible for portfolio oversight, which includes regionalvice presidents, regional property managers, regional leasing specialists andthe associated expenses such as travel directly related to those employees whoperform this function. Such expenses are considered part of our student housingmanagement operation.

Reimbursed expenses,which includes related party and third party managed properties remainedrelatively consistent during the three months ended March 31, 2007 as comparedto the same period in the prior year. Reimbursed expenses are comprised mostly of payroll expenses for on-siteemployees. 

Income taxes for thethree months ended March 31, 2007 amounted to $68,000 versus no income taxexpense as compared to the same period in the prior year. Income taxes consistprimarily of taxes associated with the operations of our student housingtaxable REIT subsidiary, which manages properties for third parties.

*MilitaryHousing*****

*Revenue.**  *Expense reimbursements increased to $17.3 million for the three monthsended March 31, 2007 as compared to $13.2 million for the three months endedMarch 31, 2006. The increase is due primarily to the reimbursement of closingand transition expenses at our AETC Group I project, which commenced operationsin February 2007, and increases in reimbursement of renovation expenses at ourFort Stewart/Hunter, Fort Carson, Fort Gordon, Carlisle/Picatinny and AETCGroup I projects, offset by declines in reimbursement of renovation expenses atour Navy Northeast Region, Fort Eustis/Fort Story, and Fort Bliss/White SandsMissile Range projects. The table below sets forth certain information

32

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regarding the revenue from expense reimbursements for each of ourmilitary housing projects for the three months ended March 31, 2007 and 2006.

| Project                                                   | ** ** | **2007**               | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                                | ** ** | **(in millions)** | ** ** |
| **Expense  Reimbursements**                               | ** ** | ** **             | ** ** | ** ** | ** ** |
| Fort Stewart and  Hunter Army Airfield Project            |       | $                      | 2.1        | ** ** | $          | 1.2 | ** ** |
| Fort Carson  Project                                      |       | 0.9                    |       | 0.6        |       |
| Fort Hamilton  Project                                    |       | 0.1                    |       | 0.1        |       |
| Walter Reed Army  Medical Center and Fort Detrick Project |       | 0.2                    |       | 0.2        |       |
| Fort Eustis/Fort Story Project                            |       | 0.8                    |       | 1.2        |       |
| Navy Northeast  Region Project                            |       | 4.8                    |       | 7.3        |       |
| Fort Bliss/White  Sands Missile Range Project             |       | 1.9                    |       | 2.6        |       |
| Fort Gordon  Project(1)                                   |       | 0.4                    |       | —     |       |
| Carlisle/Picatinny  Project(1).                           |       | 1.3                    |       | —     |       |
| AETC Group I (2)                                          |       | 4.8                    |       | —     |       |
| Total expense  reimbursements                             |       | $                      | 17.3       | ** ** | $          | 13.2 | ** ** |

 

|            |
|------------|
| (1)        | The Fort Gordon project commenced operations in the  second quarter of 2006 and the Carlisle/Picatinny project commenced operations  in the third quarter of 2006. |
| ** ** | ** ** |
| (2)        | The AETC Group I project commenced operations in the  first quarter of 2007 and included $4.1 million of transition cost  reimbursements. |

 

 

Management feesfrom related parties increased to $2.4 million for the three months ended March31, 2007 compared to $2.0 million for the three months ended March 31, 2006.The amount of management fees from related parties that we receive during a fiscalperiod is affected by the number of housing units that we manage under ourmilitary housing projects during that period, which fluctuates based on thenumber of housing units that we construct/renovate or demolish during thatperiod.  Management fees from relatedparties increased during the three months ended March 31, 2007 as compared tothe three months ended March 31, 2006, primarily due to increased occupancy andrental activity at our Fort Stewart/Hunter project, the commencement of ourFort Gordon and Carlisle/Picatinny projects in the second quarter of 2006, andthe commencement of our AETC Group I project in the first quarter of 2007.  The table below sets forth certaininformation regarding the revenue from management fees from related parties foreach of our military housing projects for the three months ended March 31, 2007and 2006.

 
| Project                                                   | ** ** | **2007**               | ** ** | **2006** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                                                | ** ** | **(in millions)** | ** ** |
| Fort Stewart and  Hunter Army Airfield Project            |       | $                      | 0.4        |     | $          | 0.3 |   |
| Fort Carson  Project                                      |       | 0.3                    |       | 0.4      |       |
| Fort Hamilton  Project                                    |       | 0.1                    |       | —   |       |
| Walter Reed Army  Medical Center and Fort Detrick Project |       | 0.1                    |       | 0.1      |       |
| Fort Eustis/Fort Story Project                            |       | 0.1                    |       | 0.1      |       |
| Navy Northeast  Region Project                            |       | 0.8                    |       | 0.8      |       |
| Fort Bliss/White  Sands Missile Range Project             |       | 0.3                    |       | 0.3      |       |
| Fort Gordon  Project(1)                                   |       | 0.1                    |       | —   |       |
| Carlisle/Picatinny  Project(1)                            |       | 0.1                    |       | —   |       |
| AETC Group I  Project (2)                                 |       | 0.1                    |       | —   |       |
| Total                                                     |       | $                      | 2.4        |     | $          | 2.0 |   |

 
|        |
|--------|
| (1)    | The Fort Gordon project commenced operations in the  second quarter of 2006 and we commenced management operations for the  Carlisle/Picatinny project in the second quarter of 2006. |
|   |   |
| (2)    | The AETC Group I project commenced in the first  quarter of 2007. |

 

 

Other fee income fromrelated parties, which includes development and construction/renovation feesand business development fees, totaled $6.1 million for the three months endedMarch 31, 2007, as compared to $4.7 million for the same period in 2006.  Of the 2007 amount, $5.1 million related todevelopment and construction/renovation fees, and $1.0 million related tobusiness development fees.  The amount ofother fee income from related parties that we receive during a fiscal period isaffected by the number of housing units that we construct or renovate under ourmilitary housing projects during that period, which will fluctuate based on thepoint at which we are during the initial development period for the project.  Generally, the majority of new constructionwork is completed during the beginning years of an initial development periodwhile construction/renovation work is completed throughout the initialdevelopment period. Other fee income from related parties increased during thethree months ended March 31, 2007, as

33

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comparedto the three months ended March 31, 2006 primarily due to increases inconstruction activities at our Fort Eustis/Fort Story projects and FortBliss/White Sands projects, and the commencement of our AETC I project in thefirst quarter of 2007, offset by decreases in construction activity at our NavyNortheast Region project, our Fort Stewart/Hunter project, and our FortHamilton project. Business development fees decreased to $1.0 million for thethree months ended March 31, 2007, as compared to $1.1 million for the sameperiod in 2006 primarily due to the expiration of one of our businessdevelopment agreements at December 31, 2006. The table below sets forth certain information regarding the revenuefrom other fee income from related parties for each of our military housingprojects for the three months ended March 31, 2007 and 2006.

| Project                                                   | ** ** | **2007**               | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                                | ** ** | **(in millions)** | ** ** |
| **Development  and Construction/Renovation Fees**         | ** ** | ** **             | ** ** | ** ** | ** ** |
| Fort Stewart and  Hunter Army Airfield Project            |       | $                      | 0.2        |       | $          | 0.5 |   |
| Fort Carson  Project                                      |       | 0.2                    |       | 0.1        |       |
| Fort Hamilton  Project                                    |       | —                 |       | 0.2        |       |
| Walter Reed Army  Medical Center and Fort Detrick Project |       | 0.2                    |       | 0.1        |       |
| Fort Eustis/Fort Story Project                            |       | 0.7                    |       | 0.4        |       |
| Navy Northeast  Region Project                            |       | 1.0                    |       | 1.5        |       |
| Fort Bliss/White  Sands Missile Range Project             |       | 1.0                    |       | 0.8        |       |
| Fort Gordon  Project(1)                                   |       | 0.6                    |       | —     |       |
| Carlisle/Picatinny  Project(1)                            |       | 0.1                    |       | —     |       |
| AETC I (2)                                                |       | 1.1                    |       | —     |       |
| **Total  Development and Construction Fees**              |       | $                      | 5.1        |       | $          | 3.6 |   |
| Business  Development Fees                                |       | $                      | 1.0        |       | $          | 1.1 |   |
| Total Other Fee Income –  Related Parties            |       | $                      | 6.1        |       | $          | 4.7 |   |

 

|        |
|--------|
| (1)    | The Fort Gordon project commenced operations in the  second quarter of 2006 and the Carlisle/Picatinny project commenced  operations in the third quarter of 2006. |
|   |   |
| (2)    | The AETC Group I project commenced operations in the  first quarter of 2007. |

 

 

Equity in earnings ofunconsolidated entities, consisting of equity income and preferred returns fromour military housing project joint ventures, totaled $1.0 million for the threemonths ended March 31, 2007 as compared to $1.2 million for the three monthsended March 31, 2006.   The decrease wasprimarily due to timing differences in the recognition of the net operatingincome cash flows from the Fort Carson Family Housing LLC, upon which a portionof our returns are calculated., offset by an increase in preferred returnsearned on our AETC Group I project.  Thetable below sets forth certain information regarding equity in earnings ofunconsolidated entities for the three months ended March 31, 2007 and 2006.

| Project                        | ** ** | **2007**               | ** ** | **2006** | ** ** |
|--------------------------------|------------|------------------------|------------|----------|------------|
| ** **                     | ** ** | **(in millions)** | ** ** |
| Fort Carson  Project           |       | $                      | 0.7        |     | $          | 1.0 |   |
| Navy Northeast  Region Project |       | 0.2                    |       | 0.2      |       |
| AETC Group I  Project (1)      |       | 0.1                    |       | —   |       |
| Total                          |       | $                      | 1.0        |     | $          | 1.2 |   |

 

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

*Expenses.**  *Propertyoperating expenses include costs related to operating the military housingsegment of our business, such as the compensation expense related to ourmilitary housing personnel located in our corporate headquarters. These costsincreased to $2.0 million in for the three months ended March 31, 2007 from$1.5 million in the three months ended March 31, 2006. The increase was due to increasesin (i) our renovation company operations and (ii) in management andadministrative expenses related to our overall expansion of our business. 

Reimbursed expensesincreased to $17.3 million for the three months ended March 31, 2007 from$13.2 million for the three months ended March 31, 2006 primarily due topayroll and renovation expenses related to the ten military housing projects inoperation as of March 31, 2007 as compared with the seven military housingprojects in operation as of March 31, 2006, offset by anticipated declines inconstruction and renovation activity at certain projects.   

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*Income Taxes.**  *The effective tax rate on income taxes resulting fromthe portion of income that is earned in our Military Housing taxable REITsubsidiary remained relatively consistent at 36.0% in 2007 versus  35.5% in 2006.

***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 entitiesaffiliated with Mr. Holloway for the provision of common services,remained relatively consistent during the three months ended March 31, 2007 and2006.

Other income, consistingprimarily of interest income, increased by $140,000 primarily due to increasedovernight cash investments.

Administrative expenses, primarilyrelating to management of our corporate office, accounting, legal, humanresources, information technology and acquisition departments, increased to$4.9 million in 2007 from $4.1 million in 2006, primarily due to increases inprofessional fees, training costs associated with implementation of new leasingsoftware relating to our Student Housing division as well as other one timesoftware licensing costs, and an increase in other taxes.  

Audit Committee andspecial investigation expenses consist of legal fees, forensic accounting feesand waiver fees associated with waivers of the covenants under our former lineof credit with Wachovia Bank, incurred as a result of delays in the filings ofreports with the SEC in connection with the special investigation performed byour Audit Committee and its independent counsel that commenced in the firstquarter of 2006. During the three months ended March 31, 2006, these feestotaled $2.6 million. The special investigation was completed during the thirdquarter of 2006. 

Depreciation, relatingprimarily to our corporate assets remained relatively consistent between thethree months ended March 31, 2007 and 2006.

Interest expenseincreased to $1.5 million in 2007 from $0.5 million in 2006, primarily dueto an increase in amortization of deferred financing costs of approximately$1.0 million associated with our line of credit with Wachovia Bank that wasentered into in October 2006.

**Liquidity and Capital Resources**

Short-term liquidityrequirements consist primarily of funds necessary to pay operating expenses andother costs. These expenses and costs include (i) recurring maintenanceand capital expenditures to maintain and lease our properties,(ii) interest expense and scheduled principal payments on outstandingindebtedness, (iii) real estate taxes and insurance, (iv) corporatesalaries, employee benefits and other corporate overhead and administrativeexpenses, (v) equity contributions to our investments in military housingprojects, and (vi) distributions to shareholders and unitholders of ouroperating partnership. During the three months ended March 31, 2007 and throughMay 7, 2007, our short-term liquidity needs were funded primarily throughexisting working capital and cash provided by operations, together with amountsavailable to us under a $250 million revolving line of credit with WachoviaBank. In December 2006, our management announced a strategic plan, which beganin early 2007, that involved raising a plan to raise capital proceeds to paydown this line of credit prior to its initial maturity date of June 1, 2007(originally April 1, 2007 prior to amendment). This capital raising strategyincluded the identification of various currently-owned student housingproperties that would be sold, refinanced and/or contributed into a jointventure. As described in the section above titled “*2007Business Strategy*,” we completed the refinancing and joint venturetransactions outlined under management’s plan in February and April 2007,respectively, and, as of the date of this report, had a total of six propertiesunder agreement for sale with two separate purchasers.  For additional information regarding thisbusiness strategy, see the section above titled “*2007Business Strategy*.”

Also as part of our 2007business strategy, management indicated that it was in discussions with anumber of financial institutions to enter into a new line of credit that wouldreplace the Wachovia line of credit when terminated. On May 7, 2007, weobtained a note facility with Merrill Lynch, Pierce, Fenner & SmithIncorporated that allows our operating partnership to borrow, on a revolvingbasis through April 30, 2010, up to an aggregate principal amount of $100.0million, and subject to certain conditions, up to an additional $25.0 millionfor an aggregate of $125.0 million.  OnMay 7, 2007, our operating partnership issued a note to Merrill Lynchrepresenting approximately $90.7 million in borrowings under this notefacility, of which $1.0 million was used to pay a commitment fee to MerrillLynch and the remaining proceeds were used to repay the remaining principal andinterest due under, and to simultaneously

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terminate,our line of credit with Wachovia Bank. The initial note was issued with aninterest rate of 7.07% and has a term through April 30, 2010. Additional notesmay be issued at any time upon notice by our operating partnership, and we willhave the ability to repay amounts under outstanding notes and to re-borrowamounts through the issuance of new notes, provided that the maximum amount ofnotes outstanding at any time during the term of the note facility does notexceed an aggregate principal amount of $100.0 million, or $125.0 million tothe extent the note facility may be increased. The notes will be issued toMerrill Lynch as the initial purchaser, and may thereafter be transferred to “qualifiedinstitutional buyers” in accordance with Rule 144A of the Securities Act of1933, as amended. The notes will be administered under the terms of a TrustIndenture with U.S. Bank Trust National Association, serving as trustee of thenotes. The notes are issuable at an annual interest of LIBOR plus 1.75%, willrequire monthly payments of interest only, and are secured solely by the feesand equity preferred returns we receive in connection with our military housingprojects currently in operation, as well as those to be received, if any, underthe Navy Southeast project and West Point project for which we are currentlyunder exclusive negotiations.  

The Trust Indenture pursuantto which the notes referenced above are and may be issued going forward containa number of affirmative and negative covenants and also contains financialcovenants which, among other things, require that we maintain (i) a fixedcharge coverage ratio, as defined in the Trust Indenture, of at least 1.15 to1.00, calculated on a quarterly basis, (ii) a consolidated tangible networth, as defined by in the Trust Indenture, of at least $375 million, (iii) quarterlyminimum Adjusted Management EBITDA, as defined in the Trust Indenture, of $3.5million, and (iv) our federal tax status as a REIT.  

We elected to be treatedas a REIT for federal income tax purposes commencing with our taxable yearended December 31, 2004. As a REIT, we are required to distribute at least90% of our REIT taxable income to our shareholders on an annual basis.Therefore, except as discussed below, as a general matter, a substantialportion of cash generated by our operations will be used to fund distributionsto shareholders and holders of limited partnership interests in our operatingpartnership, and will not be available to satisfy our liquidity needs. Futuredividends will be declared at the discretion of our Board of Trustees and willdepend on our actual cash flow, our financial condition, capital requirements,the annual distribution requirements under the REIT provisions of the Code andother such factors as our Board of Trustees deems relevant. For the first quarter of 2007, we declared aquarterly dividend distribution of $0.165 per common share, payable toshareholders of record on March 29, 2007. We distributed this dividend onApril 13, 2007, and at the same time, our operating partnership paid adistribution of $0.165 per unit to holders of limited partnership interest inour operating partnership. We cannot assure you that we will continue to havecash available for distributions at historical levels or at all. Anydistributions we pay in the future will depend upon our actual results ofoperations, economic conditions and other factors that could differ materiallyfrom our current expectations. To the extent that our cash flow fromoperations is insufficient to fund our anticipated dividend distributions, wemay seek to borrow funds under our credit facility or through other third partydebt financing or we may lower our dividend distribution. Our available cash for distributions will beaffected by a number of factors, including: our ability to complete ourstrategic plans for the sale, refinancing and joint venture of multiple studenthousing properties as outlined above; the revenue we receive from our studenthousing properties; revenues from management fees in connection with managementservices that we will provide for student housing properties owned by others;revenues from our military housing projects; our operating expenses; interestexpense; costs related to our pending class action lawsuits; and anyunanticipated expenditures. For more information regarding risk factors thatcould materially adversely affect our actual results of operations, please seethe section of our Annual Report on Form 10-K for the year ended December 31,2006 titled “*Risk Factors*.”

With regard to ourmilitary housing privatization projects, we are typically required to fund ourportion of the equity commitment to the project’s joint venture after all othersources of funding for the project have been expended. With respect to our NavyNortheast Region project and our AETC Group I project, however, we wererequired to fund the equity commitment at commencement of the project. We madea $9.5 million equity contribution in November 2004 relating to ourNavy Northeast Region project, an $8.0 million equity contribution inFebruary 2007 relating to our AETC Group I project, and, as ofMarch 31, 2007, had contractually committed to contribute the followingadditional amounts: an aggregate of $2.0 million in 2007 to our FortHamilton project; $5.9 million in 2007 to our Walter Reed Army MedicalCenter/Fort Detrick project, all of which had been funded throughMarch 2007; $3.6 million in 2010 for our Fort Eustis/Fort Storyproject;  $3.0 million in 2010 or 2011for our Carlisle/Picatinny project;  $8.0 millionin 2011 for our Fort Stewart and Hunter Army Airfield project;  an aggregate of $4.5 million to our FortGordon project in several phases that commence in 2011 and end in 2012, and$6.3 million in 2012 for our Fort Bliss/White Sands

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project.These equity contributions help to fund the development, construction andrenovation of housing units at these bases during their respective initialdevelopment periods.****

Typically, we arereimbursed for certain costs we incur after we are awarded the right toexclusively negotiate agreements for a military housing project until we enterinto agreements for the project and for transition costs we incur shortlybefore initiation of our management of a military housing project. However, weare required to fund these costs prior to the time we receive thereimbursements. Typically, our military projects require approximately$1.0 million to $7.0 million in costs associated with transition andexclusive negotiations, depending on the size of the project. The expenditurestypically begin 12 months prior to executing an agreement for the militaryhousing project. Accordingly, the timing between our payments andreimbursements for projects may add to our short-term liquidity needs.

If cash flows from any ofour military housing privatization projects are insufficient to meet thecoverage ratios or benchmarks entitling us to receive fee payments, any unpaidfees will accumulate and be subsequently paid from operations or upondissolution of the projects to the extent that funds are available and theapplicable thresholds are met. If these thresholds are not met, we will nothave access to or receive certain of the fees we have earned. Theunavailability of these funds would materially impact our ability to meet ourshort-term and long-term liquidity needs. We will be required to make equitycontributions at the beginning of the initial development period for typicalNavy transactions and at the end of the initial development period for typicalArmy transactions. We also were required to make our equity contribution at thebeginning of the initial development period for our AETC Group I project withthe Air Force during the first quarter of 2007. Based on our currentexpectations regarding the terms of the debt funding for our military housingprojects, we expect that the projects will generate sufficient cash flows tofund the reinvestment account and pay anticipated equity returns.

With regard to ourcurrently owned student housing properties, we do not have any materialshort-term capital commitments, other than with respect to our short-termcapital needs relating to the general expenses and costs associated withoperating and managing these properties. We will require, however, funds inconnection with our anticipated acquisitions of student housing properties.During at least the remainder of 2007, we currently expect to place lessemphasis on the acquisition of additional student housing properties, and tocontinue to focus on the operational performance of our existing studenthousing properties and development projects. If we are able to complete ourstrategic plan as outlined above under “2007 Business Strategy,” we maydetermine that it is appropriate to place greater emphasis on the acquisitionof student housing properties that are located in our targeted markets and thatmeet management’s underwriting criteria for creating long-term growthpotential. To the extent that we seek to acquire student housing propertiesduring at least the first six to nine months of 2007, we will consider fundingthe acquisition through joint venture structures similar to the joint ventureterms that we currently have with respect to a total of seven properties as ofthe date of this report. The timing of any acquisitions or development projectswill be dependent upon various factors, including the ability to completesatisfactory due diligence, to find suitable joint venture partners and agreeupon mutually acceptable joint venture terms, to obtain appropriate debtfinancing on the properties, and the availability of capital. We would alsoconsider funding our equity portion of any joint ventures by using funds fromavailable cash from operations or borrowings. We may also determine that it isappropriate to purchase student housing properties outright, as opposed to witha joint venture partner, depending upon factors which may include, but are notlimited to, the applicable purchase price, available capital, and projectedreturns with respect to the property.

For the remainder of2007, we also expect to incur significant legal fees in connection with ourpending class action litigation. These fees could impact the level of cash fromoperations that we would otherwise expect to be available for the acquisitionof student housing properties, and therefore could affect the number ofacquisitions that we seek to complete during the next six to 12 months.

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 housingprivatization projects that we pursue. Historically, we have satisfied ourlong-term liquidity requirements through various sources of capital, includingexisting working capital, cash provided by operations, and long-term mortgageindebtedness. We now expect our long-term liquidity requirements to besatisfied primarily through cash generated by operations that is not used tofund distributions and the additional external financing sources discussedabove.

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**Item3.****            Quantitative and QualitativeDisclosure About Market Risk**

Given current market conditions, our strategy favors fixed-rate,secured debt over variable-rate debt to minimize our exposure to increases ininterest rates. As of March 31, 2007, 82% of the outstanding principalamount of our notes payable secured by properties we owned had fixed interestrates with a weighted-average rate of 5.29%. The remaining 18% ofoutstanding principal amount of our notes payable and our Wachovia line ofcredit at March 31, 2007, had variable interest rates primarily equal toLIBOR plus 2.0%.

As of March 31, 2007, wehad $137.8 million in funds drawn from our Wachovia line of credit, bearing avariable weighted average interest rate of 7.32%.

As of March 31,2007, based on our variable rate debt balances described above, if interestrates were to increase by 1.0%, our interest expense would have increased byapproximately $2.0 million on an annual basis.      

**Item4.****          Controls and Procedures**

*(a)**          Evaluation of Disclosure Controls andProcedures. *

We maintain disclosure controls and procedures thatare designed to provide reasonable assurance that information required to bedisclosed in our reports under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time period specified in theSecurities and Exchange Commission’s rules and regulations and that suchinformation is accumulated and communicated to management, including ourprincipal executive officer and principal financial officer, as appropriate, toallow timely decisions regarding required disclosure.

As required by Rule 13a-15(b) promulgated under theExchange Act, our management, with the participation of our chief executiveofficer and chief financial officer, evaluated the design and operatingeffectiveness as of March 31, 2007 of our disclosure controls and procedures,as defined in Rule 13a-15(e) promulgated under the Exchange Act.  Based on this evaluation, our chief executiveofficer and chief financial officer concluded that our disclosure controls andprocedures were effective as of March 31, 2007. We believe that a controls system, no matter how well designedand operated, cannot provide absolute assurance that the objectives of thecontrols 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 over FinancialReporting. *

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

**PART II — OTHER INFORMATION**

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

Starting on April 5, 2006,five putative class actions alleging violations of Sections 11, 12(a)(2) and 15of the Securities Act of 1933 and Sections 10(b) and 20 the Securities ExchangeAct of 1934 and Rule 10b-5 of the Securities and Exchange Commission have beenfiled in the United States District Court for the Eastern District ofPennsylvania, naming as defendants GMH Communities Trust, Gary M. Holloway,Sr., and Bradley W. Harris.  Thecomplaints purport to bring claims on behalf of a class of purchasers of GMHsecurities during various periods, the longest of which is the period betweenOctober 28, 2004 and March 10, 2006.  ByOrders filed January 22, 2007, the cases were consolidated, and, leadplaintiffs and lead counsel were appointed. A consolidated complaint alleging violations of Sections 11 and 15 ofthe Securities Act of 1933 and Sections 10(b) and 20(a) of the SecuritiesExchange Act of 1934 was filed on March 19, 2007 against the same defendantsfor a class period between May 5, 2005 and March 10, 2006 based upon theCompany’s restatement of certain financial results. The defendants have sixtydays in which to respond either by answering or moving to dismiss.  In the January 22, 2007 Order, the Courtordered that the parties shall not file any dispositive motions beforeattending a settlement conference with the Magistrate Judge.  Discovery is stayed pending the dispositionof any motion to dismiss.  The outcome ofthis litigation is uncertain, and while the Company believes that it has valid

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defenses to Plaintiff’s claims and intends to defendthe class action lawsuit vigorously, no assurance can be given as to theoutcome of this litigation. An adverse outcome could have a material adverseeffect on our financial condition and results of operations.

On March 12, 2007, StoneGate I LLC, Southview LLC, The Commons LLC, Seminole Ride LLC, LB&JLimited, Bruce Forbes, Lois Forbes and Jeff Forbes filed a complaint in theUnited States District Court for the Eastern District of Pennsylvania againstGMH Communities Trust, GMH Communities, L.P., College Park Investments, LLC,Peach Grove Associates, LLC, Neff Avenue Associates, LLC, Gary M. Holloway,Sr., Bradley W. Harris and John DeRiggi. The complaint alleges violations of Sections 10(b), 18 and 20(a) of theSecurities Exchange Act of 1934, Section 522(a) and 522(c) of the VirginiaSecurities Act and Sections 1-401 and 1-501 of the Pennsylvania Securities Act,as well as common law claims for fraud, fraud in the inducement, negligentmisrepresentation and breach of contract. The claims arise from the Company’s restatement of certain financialresults upon which plaintiffs purportedly relied in selling properties tocertain defendants.  In connection withthe acquisition of the properties, Company entities purchased four studenthousing properties in exchange for a combination of cash, assumption of debtand the issuance of 1,940,282 units of limited partnership interests in ouroperating partnership valued at a total of approximately $76.8 million. Theunits of limited partnership interest were issued for a total value ofapproximately $27.5 million or $14.17 per unit of limited partnership interest.The parties are currently negotiating the timing of defendants’ response.  Discovery is stayed pending the dispositionof any motion to dismiss.

The Company also is subject to routine litigation,claims and administrative proceedings arising in the ordinary course ofbusiness. Other than the matters describedabove, we are not involved in any other material litigation nor, to ourknowledge, is any material litigation pending or threatened against us. 

**Item 1A. Risk Factors**

In addition to the other information set forth in thisreport, you should carefully consider the factors discussed in Part I, “Item1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December31, 2006, which could materially affect our business, financial condition orfuture results. The risks described in our Annual Report on Form 10-K are notthe only risks facing our Company. Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition and/or operatingresults.

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

None.

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

None.

**Item 4.****            Submission of Matters to a Vote of SecurityHolders**

None.

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

On May 7, 2007, GMHCommunities, LP, the Company’s operating partnership, executed a Note PurchaseAgreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated.  Under the terms of the Note PurchaseAgreement, the operating partnership may borrow, on a revolving basis throughApril 30, 2010, up to an aggregate principal amount of $100.0 million, andsubject to certain conditions, up to an additional $25.0 million for anaggregate of $125.0 million. The structure of the note facility is such thatthe operating partnership has issued a global note to Merrill Lynch, as theinitial purchaser, and which represents the right to borrow up to an aggregateprincipal amount of $100.0 million at any time through April 30, 2010.  Merrill Lynch has the right under theagreement to transfer borrowings issued under the global note to “qualifiedinstitutional buyers” in accordance with Rule 144A of the Securities Act of1933, as amended.  On May 7, 2007, ouroperating partnership issued a note to Merrill Lynch representing approximately$90.7 million in borrowings under this note facility, which was used to pay a$1.0 million commitment fee to Merrill Lynch, closing costs associatedwith obtaining the note facility, as well as

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outstandingprincipal and interest due under the Company’s line of credit with WachoviaBank (which was simultaneously terminated). The initial note representing theapproximately $90.7 million in borrowings was issued with an interest rate of7.07% and has a term through April 30, 2010. Additional individual notesrepresenting future borrowings under the global note and Note Purchase Agreementmay be issued at any time through the term of the note facility upon notice byour operating partnership. The Company will have the ability to repay amountsunder outstanding notes and to re-borrow amounts through the issuance of newnotes, provided that the maximum amount of notes outstanding at any time duringthe term of the note facility does not exceed an aggregate principal amount of$100.0 million, or $125.0 million to the extent the note facility may beincreased. 

The notes will be administered under the terms of aTrust Indenture, dated May 7, 2007, between GMH Communities, L.P. and U.S. BankTrust National Association, as trustee (“Trust Indenture”). The notes areissuable at an annual interest of LIBOR plus 1.75%, will require monthly paymentsof interest only, and are secured solely by the fees and equity preferredreturns we receive in connection with the Company’s 10 military housingprivatization projects in operation as of May 7, 2007, as well as those to bereceived, if any, under the Company’s two privatization projects that are underexclusive negotiation as of that date (referred to as the “Collateral”).  The Trust Indenture contains a number ofaffirmative and negative covenants and also contains financial covenants which,among other things, require that we maintain (i) a fixed charge coverageratio, as defined in the Trust Indenture, of at least 1.15 to 1.00, calculatedon a quarterly basis, (ii) a consolidated tangible net worth, as definedby in the Trust Indenture, of at least $375 million, (iii) quarterlyminimum Adjusted Management EBITDA, as defined in the Trust Indenture, of $3.5million, and (iv) our federal tax status as a REIT.  In addition, under the terms of the TrustIndenture, the Company must obtain prior written consent for certaintransactions, including, but not limited to, (i) a merger or sale of all orsubstantially all of the Company’s assets, (ii) certain amendments totransactions documents relating to the Company’s military housing privatizationprojects to the extent such amendment would result in material adverse change(as defined in the Trust Indenture) or adversely affect the Collateral; (iii)the sale of any equity interest in the operating partnership, other than inconnection with the issuance of common shares under the equity incentive planfor GMH Communities Trust or similar equity compensation arrangements, and inconnection with acquisitions of student housing properties; (iv) entering intotransactions with affiliates relating to or affecting the Collateral; and (v)incurring additional indebtedness, other than indebtedness relating to (a)future property acquisitions or refinancings or equity commitments with respectto the student housing business, (b) financings or refinancings relating to theabove-referenced military housing projects that are non-recourse to the Companyand subject only to customary “bad acts” guarantees, (c) equity commitmentsrelated to the above-referenced military housing projects that will not becomepayable prior to the payment in full of obligations under outstanding notes,(d) financings for future military housing projects to the extent such debt isinvestment grade (at least rated Baa by Moody’s Investors Service or BBB Standard& Poor’s) and is non-recourse to the Company, and (e) obligations tocontribute equity to military housing projects that do not exceed $15.0 millionon an individual basis.  The Indenturealso includes usual and customary events of default for loans of this natureand provides that, upon the occurrence of an event of default, payment of allamounts payable under outstanding notes may be accelerated and/or the lender’scommitment may be terminated.  In addition, upon the occurrence of certaininsolvency or bankruptcy related events of default, all amounts payable underthe note facility shall automatically become immediately due and payable, andthe lender’s commitment shall automatically terminate.

In connection with thepledge of the Collateral, the operating partnership and several of its directand indirect subsidiaries relating to the Company’s military housing segmententered into a Pledge and Security Agreement, dated May 7, 2007, in favor ofU.S. Bank Trust, as trustee (the “Pledge and Security Agreement”). Pursuant tothe Pledge and Security Agreement, the parties thereto granted a securityinterest in the pledgors’ rights, title, ownership, equity or other interestsin and to the Collateral. In addition, GMH Communities Trust and several of itsdirect and indirect subsidiaries relating to the Company’s military housingsegment executed a Guaranty Agreement, dated May 7, 2007, in favor of thetrustee and pursuant to which such guarantors have guaranteed the obligationsof the operating partnership under the Trust Indenture.  

**Item 6.****            Exhibits**
| Exhibit | ** ** | **Description of Document**                                                                                                                                                                                                                                                             |
|---------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1    |       | Third Amendment to Loan Agreement, dated as of April  13, 2007, between GMH Communities, LP and Wachovia Bank, National  Association. (Incorporated by reference to the Registrant’s Registration  Statement on Form S-11 (333-142395), as filed with the Securities and  Exchange |

 

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|      |   | Commission on April 25, 2007).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1 |   | Certification of Principal Executive Officer  Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,  as amended. (furnished herewith).                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2 |   | Certification of Principal Financial Officer  Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,  as amended. (furnished herewith).                                                                                                                                                                                                                                                                                                                                                                            |
| 32.1 |   | Certification of Principal Executive Officer  Required by Rule 13a-14(b) of the Securities Exchange Act of 1934,  as amended. (This exhibit shall not be deemed “filed” for purposes of  Section 18 of the Securities Exchange Act of 1934, as amended, or  otherwise subject to the liability of that section. Further, this exhibit  shall not be deemed to be incorporated by reference into any filing under the  Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,  as amended). |
| 32.2 |   | Certification of Principal Financial Officer  Required by Rule 13a-14(b) of the Securities Exchange Act of 1934,  as amended. (This exhibit shall not be deemed “filed” for purposes of  Section 18 of the Securities Exchange Act of 1934, as amended, or  otherwise subject to the liability of that section. Further, this exhibit  shall not be deemed to be incorporated by reference into any filing under the  Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,  as amended). |

 

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SIGNATURES

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: May 10,  2007 | /s/ Gary M. Holloway, Sr.                                                      |
|                | Gary M. Holloway, Sr.                                                          |
|                | President and Chief Executive Officer                                               |
|                |                                                                                |
|                |                                                                                |
|                | /s/ J. Patrick O’Grady                                                         |
|                | J. Patrick O’Grady                                                             |
|                | Executive Vice President and Chief Financial Officer  (Principal Financial Officer) |

 

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EXHIBIT INDEX
| Exhibit | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|---------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1    |       | Third Amendment to Loan Agreement, dated as of April  13, 2007, between GMH Communities, LP and Wachovia Bank, National  Association. (Incorporated by reference to the Registrant’s Registration  Statement on Form S-11 (333-142395), as filed with the Securities and  Exchange Commission on April 25, 2007).                                                                                                                                                                                                                   |
| 31.1    |       | Certification of Principal Executive Officer  Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,  as amended. (furnished herewith).                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2    |       | Certification of Principal Financial Officer Required  by Rule 13a-14(a) of the Securities Exchange Act of 1934, as  amended. (furnished herewith).                                                                                                                                                                                                                                                                                                                                                                            |
| 32.1    |       | Certification of Principal Executive Officer  Required by Rule 13a-14(b) of the Securities Exchange Act of 1934,  as amended. (This exhibit shall not be deemed “filed” for purposes of  Section 18 of the Securities Exchange Act of 1934, as amended, or  otherwise subject to the liability of that section. Further, this exhibit  shall not be deemed to be incorporated by reference into any filing under the  Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,  as amended). |
| 32.2    |       | Certification of Principal Financial Officer  Required by Rule 13a-14(b) of the Securities Exchange Act of 1934,  as amended. (This exhibit shall not be deemed “filed” for purposes of  Section 18 of the Securities Exchange Act of 1934, as amended, or  otherwise subject to the liability of that section. Further, this exhibit  shall not be deemed to be incorporated by reference into any filing under the  Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,  as amended). |

 

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