**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 June 30, 2006**

 

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

 

**For the transition period from                to                 **

 

**Commission file number 001-32290**

 

**GMHCOMMUNITIES TRUST**

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes  o** **   No  x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone)

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

Yeso     No x

 

OnSeptember 15, 2006, 41,567,146 of the registrant’s common shares of beneficialinterest, $0.001 par value, were outstanding.

 

 

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**GMH COMMUNITIES TRUST**

**INDEX TO FORM 10-Q**

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

 

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**CAUTIONARY NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

 

Our disclosure and analysis in this document contain forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. Forward-looking statements provide our current expectations or forecastsof future events and are not statements of historical fact. These forward-lookingstatements include information about possible or assumed future events,including, among other things, operating or financial performance, strategicplans and objectives, or regulatory or competitive environments. Statementsregarding the following subjects are forward-looking by their nature:

 

•  ourability to successfully implement our business strategy, including our abilityto acquire and manage student housing properties and to secure and operatemilitary housing privatization projects;

 

•  ourprojected operating results and financial condition;

 

•  completionof any of our targeted acquisitions or development projects within our expectedtimeframe or at all;

 

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

 

•  estimatesrelating to, and our ability to pay, future dividends;

 

•* *our ability to qualify as a REITfor federal income tax purposes;

 

•* *our understanding of our competition,market opportunities and trends;

 

•* *projected timing and amounts ofcapital expenditures;

 

•  our ability to successfullyimplement remedial measures that will effectively address material weaknessesand significant deficiencies that have been identified with respect to ourdisclosure controls and internal controls over financial reporting; and

 

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

 

The forward-looking statements are based on our beliefs, assumptionsand expectations of our future performance, taking into account all 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 to differmaterially from our management’s current expectations include, but are notlimited to:

 

•  thefactors referenced in the section of our Annual Report on Form 10-K for theyear ended December 31, 2005 titled “*RiskFactors*” and in the section of this report titled “*Management’s Discussion and Analysis of FinancialCondition and Results of Operations*;”

 

•  changesin our business strategy, including acquisition and development activities;

 

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

 

•  availabilityof qualified and/or sufficient personnel, including, but not limited, withinour finance and accounting staff;

 

•* *failure to effectively remediate existing material weaknesses andsignificant deficiencies in our disclosure controls and internal controls overfinancial reporting, including through the implementation of such measures as discussedin the section of our Annual Report on Form 10-

 

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K for the year ended December31, 2005 titled “*Controls and Procedures*”under Item 9A of that report, or failure to identify additional materialweaknesses and significant deficiencies in our disclosure controls and internalcontrols over financial reporting that could occur in the future;

 

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

 

•* *unanticipated costs associated withthe acquisition and integration of our student housing property acquisitionsand development projects, and military housing privatization projects;

 

•  theeffects of military base realignment and closures, or deployments, oninstallations covered by our military housing privatization projects;

 

•  highleverage on the entities that own the military housing privatization projects;

 

•  reductionsin government military spending;

 

•  changesin student population enrollment at colleges and universities or adverse trendsin the off-campus student housing market;

 

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

 

•  changesin local real estate conditions (including changes in rental rates and thenumber of competing properties) and the degree and nature of our competition;

 

•  failureto lease unoccupied space in accordance with management’s projections;

 

•  potentialliability under environmental or other laws; and

 

•  theexistence of complex regulations relating to our status as a REIT and theadverse consequences of our 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 intendto identify forward-looking statements. You should not place undue reliance onthese forward-looking statements. We are not obligated to publicly update or reviseany forward-looking statements, whether as a result of new information, futureevents or otherwise, except to the extent otherwise required by law.

 

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**PART I — FINANCIAL INFORMATION**

 

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

 

**GMH COMMUNITIES TRUST**

**CONSOLIDATED BALANCE SHEETS**

(in thousands, except par value and number of shares)

 
| ** **                                                                                                                                                                                                         | ** ** | **June  30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                         | ** ** | **(unaudited)**               | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                                         |       | ** **                    |       |                        |       |
| Real estate  investments:                                                                                                                                                                                          |       |                          |       |                        |       |
| Student housing properties                                                                                                                                                                                         |       | $                             | 1,356,654  |                        | $          | 1,210,255 |   |
| Accumulated depreciation                                                                                                                                                                                           |       | 46,297                        |       | 29,039                      |       |
|                                                                                                                                                                                                               |       | 1,310,357                     |       | 1,181,216                   |       |
| Corporate  assets:                                                                                                                                                                                                 |       |                          |       |                        |       |
| Corporate assets                                                                                                                                                                                                   |       | 8,858                         |       | 8,178                       |       |
| Accumulated depreciation                                                                                                                                                                                           |       | 738                           |       | 565                         |       |
|                                                                                                                                                                                                               |       | 8,120                         |       | 7,613                       |       |
| Cash and cash equivalents                                                                                                                                                                                          |       | 4,668                         |       | 2,240                       |       |
| Restricted cash                                                                                                                                                                                                    |       | 13,965                        |       | 11,625                      |       |
| Accounts and  other receivables, net:                                                                                                                                                                              |       |                          |       |                        |       |
| Related party                                                                                                                                                                                                      |       | 18,356                        |       | 19,191                      |       |
| Third party                                                                                                                                                                                                        |       | 2,911                         |       | 2,925                       |       |
| Investments in military housing projects                                                                                                                                                                           |       | 39,463                        |       | 37,828                      |       |
| Deferred contracts costs                                                                                                                                                                                           |       | 1,886                         |       | 1,063                       |       |
| Deferred financing costs, net                                                                                                                                                                                      |       | 3,779                         |       | 4,088                       |       |
| Lease intangibles, net                                                                                                                                                                                             |       | 1,100                         |       | 3,201                       |       |
| Deposits                                                                                                                                                                                                           |       | 8,081                         |       | 2,856                       |       |
| Other assets                                                                                                                                                                                                       |       | 3,899                         |       | 4,105                       |       |
| Total assets                                                                                                                                                                                                       |       | $                             | 1,416,585  |                        | $          | 1,277,951 |   |
| **LIABILITIES  AND BENEFICIARIES’ EQUITY**                                                                                                                                                                    |       |                          |       |                        |       |
| Notes payable                                                                                                                                                                                                      |       | $                             | 796,414    |                        | $          | 692,069 |   |
| Line of credit                                                                                                                                                                                                     |       | 93,000                        |       | 36,000                      |       |
| Accounts payable                                                                                                                                                                                                   |       | 4,593                         |       | 5,566                       |       |
| Accrued expenses                                                                                                                                                                                                   |       | 31,605                        |       | 21,253                      |       |
| Dividends and distributions payable                                                                                                                                                                                |       | 16,642                        |       | 16,227                      |       |
| Other liabilities                                                                                                                                                                                                  |       | 20,581                        |       | 21,337                      |       |
| Total liabilities                                                                                                                                                                                                  |       | 962,835                       |       | 792,452                     |       |
| Minority interest                                                                                                                                                                                                  |       | 174,734                       |       | 188,633                     |       |
| Commitments and contingencies (Note 9)                                                                                                                                                                             |       | —                        |       | —                      |       |
| Beneficiaries’  equity:                                                                                                                                                                                       |       |                          |       |                        |       |
| Common shares of beneficial interest, $0.001 par value; 500,000,000  shares authorized, 41,526,198 issued and outstanding at June 30, 2006,  and 39,699,843 issued and outstanding at December 31,  2005 |       | 40                            |       | 40                          |       |
| Preferred shares—100,000,000 shares authorized, no shares issued or  outstanding                                                                                                                              |       | —                        |       | —                      |       |
| Additional paid-in capital                                                                                                                                                                                         |       | 325,165                       |       | 325,455                     |       |
| Unearned share compensation                                                                                                                                                                                        |       | —                        |       | (320                        | )          |
| Cumulative earnings                                                                                                                                                                                                |       | 6,909                         |       | 6,310                       |       |
| Cumulative dividends                                                                                                                                                                                               |       | (53,098                       | )          | (34,619                     | )          |
| Total beneficiaries’ equity                                                                                                                                                                                   |       | 279,016                       |       | 296,866                     |       |
| Total liabilities and beneficiaries’ equity                                                                                                                                                                   |       | $                             | 1,416,585  |                        | $          | 1,277,951 |   |

 

*See accompanying notes to consolidated financialstatements.*

 

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**GMH COMMUNITIESTRUST**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited and in thousands, except share and per share information)

 
| ** **                                                                                              | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                              | ** ** | ** **                                          | ** ** | **(Restated)**                                    | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| **Revenue:**                                                                                            |       |                                                |       |                                              |       |   |   |   |   |
| Rent and other property income                                                                          |       | $                                                   | 44,033     |                                              | $          | 29,763 |   | $ | 88,070 |   | $ | 55,604 |   |
| Expense reimbursements:                                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Related party                                                                                           |       | 17,675                                              |       | 12,369                                            |       | 31,055 |   | 20,456 |   |
| Third party                                                                                             |       | 1,389                                               |       | 1,303                                             |       | 2,725 |   | 2,577 |   |
| Management fees:                                                                                        |       |                                                |       |                                              |       |   |   |   |   |
| Related party                                                                                           |       | 2,101                                               |       | 1,543                                             |       | 4,140 |   | 3,330 |   |
| Third party                                                                                             |       | 647                                                 |       | 1,008                                             |       | 1,655 |   | 1,545 |   |
| Other fee income-related party                                                                          |       | 5,581                                               |       | 3,619                                             |       | 10,261 |   | 6,954 |   |
| Other income                                                                                            |       | 53                                                  |       | 56                                                |       | 144 |   | 167 |   |
| Total revenue                                                                                           |       | 71,479                                              |       | 49,661                                            |       | 138,050 |   | 90,633 |   |
| **Operating Expenses:**                                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Property operating expenses                                                                             |       | 19,730                                              |       | 12,130                                            |       | 37,935 |   | 22,198 |   |
| Reimbursed expenses                                                                                     |       | 19,064                                              |       | 13,672                                            |       | 33,780 |   | 23,033 |   |
| Real estate taxes                                                                                       |       | 4,377                                               |       | 3,143                                             |       | 8,578 |   | 5,155 |   |
| Administrative expenses                                                                                 |       | 4,535                                               |       | 2,834                                             |       | 8,300 |   | 5,776 |   |
| Audit Committee and Special Committee  expenses                                                         |       | 2,301                                               |       | —                                            |       | 4,876 |   | — |   |
| Depreciation and amortization                                                                           |       | 10,715                                              |       | 8,683                                             |       | 21,064 |   | 16,408 |   |
| Interest                                                                                                |       | 11,676                                              |       | 6,901                                             |       | 22,630 |   | 12,258 |   |
| Total operating expenses                                                                                |       | 72,398                                              |       | 47,363                                            |       | 137,163 |   | 84,828 |   |
| (Loss) income before equity in earnings of  unconsolidated entities, income taxes and minority interest |       | (919                                                | )          | 2,298                                             |       | 887 |   | 5,805 |   |
| Equity in earnings of unconsolidated  entities                                                          |       | 1,174                                               |       | 455                                               |       | 2,390 |   | 941 |   |
| Income before income taxes and minority  interest                                                       |       | 255                                                 |       | 2,753                                             |       | 3,277 |   | 6,746 |   |
| Income taxes                                                                                            |       | 1,214                                               |       | 1,118                                             |       | 2,187 |   | 2,258 |   |
| (Loss) income before minority interest                                                                  |       | (959                                                | )          | 1,635                                             |       | 1,090 |   | 4,488 |   |
| Minority interest                                                                                       |       | (418                                                | )          | 809                                               |       | 491 |   | 2,217 |   |
| Net (loss) income                                                                                       |       | $                                                   | (541       | )                                                 | $          | 826 |   | $ | 599 |   | $ | 2,271 |   |
|                                                                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Earnings (loss) per common share—basic                                                             |       | $                                                   | (0.01      | )                                                 | $          | 0.03 |   | $ | 0.01 |   | $ | 0.07 |   |
|                                                                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Earnings (loss) per common share—diluted                                                           |       | $                                                   | (0.01      | )                                                 | $          | 0.03 |   | $ | 0.01 |   | $ | 0.07 |   |
| Weighted-average shares outstanding during  the period:                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                                                                                   |       | 40,872,036                                          |       | 30,350,989                                        |       | 40,275,829 |   | 30,350,989 |   |
| Diluted                                                                                                 |       | 73,097,859                                          |       | 61,878,439                                        |       | 73,537,988 |   | 61,806,301 |   |
| Common share dividend declared per share                                                                |       | $                                                   | 0.2275     |                                              | $          | 0.2275 |   | $ | 0.4550 |   | $ | 0.4550 |   |

 

*See accompanying notes to consolidated financialstatements.*

 

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**GMH COMMUNITIES TRUST**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited and in thousands)

 
| ** **                                                                                    | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                                                    | ** ** | ** **                                        | ** ** | **(Restated)** | ** ** |
|                                                                                          |       |                                              |       |   |   |
| **Cash flows from operating  activities:**                                                    |       |                                              |       |   |   |
| Net  income                                                                                   |       | $                                                 | 599        |   | $ | 2,271 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:            |       |                                              |       |   |   |
| Depreciation                                                                                  |       | 17,431                                            |       | 11,124 |   |
| Amortization:                                                                                 |       |                                              |       |   |   |
| Lease  intangibles                                                                            |       | 3,400                                             |       | 5,230 |   |
| Investment  in military housing projects                                                      |       | 233                                               |       | 54 |   |
| Notes  payable fair value adjustment                                                          |       | (1,251                                            | )          | (1,093 | ) |
| Deferred  loan costs                                                                          |       | 666                                               |       | 574 |   |
| Restricted  shares                                                                            |       | 75                                                |       | 46 |   |
| Allowance  for doubtful accounts                                                              |       | 957                                               |       | 446 |   |
| Equity  in earnings of unconsolidated entities in excess of distributions received            |       | (1,818                                            | )          | (477 | ) |
| Minority  interest                                                                            |       | 491                                               |       | 2,217 |   |
| Changes  in operating assets and liabilities:                                                 |       |                                              |       |   |   |
| Restricted  cash                                                                              |       | (2,340                                            | )          | (6,517 | ) |
| Accounts  and other receivables                                                               |       | (108                                              | )          | (7,840 | ) |
| Deferred  contract costs                                                                      |       | (823                                              | )          | (708 | ) |
| Deposits  and other assets                                                                    |       | (5,019                                            | )          | (2,882 | ) |
| Accounts  payable                                                                             |       | (973                                              | )          | (734 | ) |
| Accrued  expenses and other liabilities                                                       |       | 9,546                                             |       | 10,486 |   |
| Net  cash provided by operating activities                                                    |       | 21,066                                            |       | 12,197 |   |
| **Cash  flows from investing activities:**                                                    |       |                                              |       |   |   |
| Property  acquisitions                                                                        |       | (75,429                                           | )          | (213,697 | ) |
| Capitalized  expenditures                                                                     |       | (25,561                                           | )          | (474 | ) |
| Distributions  received from unconsolidated entities in excess of earnings                    |       | —                                            |       | 3,901 |   |
| Net  cash used in investing activities                                                        |       | (100,990                                          | )          | (210,270 | ) |
| **Cash  flows from financing activities:**                                                    |       |                                              |       |   |   |
| Owner  distributions                                                                          |       | (32,454                                           | )          | (23,200 | ) |
| Redemption  of unit holders                                                                   |       | (45                                               | )          | — |   |
| Proceeds  from line of credit                                                                 |       | 93,000                                            |       | 143,000 |   |
| Repayment  of line of credit                                                                  |       | (36,000                                           | )          | (72,000 | ) |
| Proceeds  from notes payable                                                                  |       | 60,389                                            |       | 129,704 |   |
| Repayment  of notes payable                                                                   |       | (2,181                                            | )          | (22,553 | ) |
| Payment  of financing costs                                                                   |       | (357                                              | )          | (1,400 | ) |
| Net  cash provided by financing activities                                                    |       | 82,352                                            |       | 153,551 |   |
| Net  increase (decrease) in cash and cash equivalents                                         |       | 2,428                                             |       | (44,522 | ) |
| Cash  and cash equivalents, beginning of period                                               |       | 2,240                                             |       | 60,926 |   |
| Cash  and cash equivalents, end of period                                                     |       | $                                                 | 4,668      |   | $ | 16,404 |   |
|                                                                                          |       |                                              |       |   |   |
| **Supplemental  information:**                                                                |       |                                              |       |   |   |
| Real  estate acquired by assuming debt including debt premium                                 |       | $                                                 | 46,963     |   | $ | 76,768 |   |
| Issuance  of units of limited partnership interest for purchase of student housing properties |       | $                                                 | —     |   | $ | 28,528 |   |
| Property  distributed at net book value                                                       |       | $                                                 | —     |   | $ | 3,854 |   |
| Debt  distributed at net book value                                                           |       | $                                                 | —     |   | $ | 4,208 |   |
| Cash  paid for interest, net of amounts capitalized of $1,377 during 2006                     |       | $                                                 | 22,258     |   | $ | 12,074 |   |
| Cash  paid for taxes                                                                          |       | $                                                 | 2,270      |   | $ | 661 |   |

 

*See accompanying notes to consolidated financialstatements.*

 

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**GMH COMMUNITIES TRUST**

 

Notes to Consolidated Financial Statements

June 30, 2006

(Unaudited)

 

**1.Organization and Basis of Presentation**

 

***Organization***

 

GMH Communities Trust (the “Trust,” the “Company,” or sometimesreferred to as “we”) conducts substantially all of its operations through its operatingpartnership, GMH Communities, LP, a Delaware limited partnership (the “OperatingPartnership”). As of June 30, 2006, the Operating Partnership had 73,150,815 unitsof partnership interest outstanding, of which the Trust owned 40,945,029 unitsof limited partnership interest; and through a wholly-owned subsidiary, GMHCommunities GP Trust, the Trust owned 581,169 units of general partnershipinterest, which represents 100% of the general partnership interest in theOperating Partnership. As of June 30, 2006, 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 aself-advised, self-managed, specialty housing company that focuses on providinghousing to college and university students residing off-campus and to membersof the U.S. military and their families located on or near military basesthroughout the United States. Through the Operating Partnership, we own andoperate our student housing properties and the interests in joint ventures thatown military housing privatization projects (“military housing projects”).

 

***Basis ofPresentation***

 

The consolidated financial statements have been prepared by the Companywithout audit except as to the balance sheet as of December 31, 2005, which hasbeen derived from audited data, pursuant to the rules and regulations of theUnited States Securities and Exchange Commission. Certain information andfootnote disclosures normally included in the financial statements prepared inaccordance with accounting principles generally accepted in the United Stateshave been condensed or omitted pursuant to such rules and regulations, althoughthe Company believes that the included disclosures are adequate to make theinformation presented not misleading. In the opinion of management, alladjustments (consisting solely of normal recurring matters) necessary for afair presentation of the financial position of the Company as of June 30, 2006,the results of its operations for the three-month and six-month periods endedJune 30, 2006 and June 30, 2005 and its cash flows for the six-month periodsended June 30, 2006 and June 30, 2005 have been included. The June 30, 2005financial statements have been restated as disclosed in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2005 (see Note 13). Theresults of operations for such interim periods are not necessarily indicativeof the results for a full year. These consolidated financial statements shouldbe read in conjunction with the Company’s consolidated financial statements andnotes to the financial statements included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2005.

 

**2. Summaryof Significant Accounting Policies**

 

***Use of Estimates***

 

Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect various amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

 

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***Real EstateInvestments and Corporate Assets***

 

We carry realestate investments and corporate assets at cost, net of accumulateddepreciation. Cost of acquired assets includes the purchase price and related closingcosts. We allocate the cost of real estate investments to net tangible andidentified intangible assets based on relative fair values in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 141 (“SFAS 141”),*Business Combinations*. Weestimate 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 ofin-place leases is based on the difference between (i) the property valuedwith existing in-place leases and (ii) the property valued as if vacant.As lease 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 $6.6 million atJune 30, 2006 and $3.2 million at December 31, 2005.

 

We expenseroutine repair and maintenance expenditures that do not improve the value of anasset and extend 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. During the third quarter of eachfiscal year, the Company typically will experience an increase in propertyoperating expenses over other quarters as a result of repair and maintenanceexpenditures relating to turnover of units at student housing properties. TheCompany’s student housing lease terms generally commence in August or Septemberto coincide with the beginning of the academic year. Accordingly, the Companyexpects to incur a majority of its repair and maintenance costs in the thirdquarter to prepare for new residents.

 

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

 

***Cash Equivalents***

 

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

 

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***Restricted Cash***

 

Restrictedcash consists of security deposits and cash held as escrow for real estatetaxes, capital expenditures, and other amounts, as required by the terms ofvarious loan agreements.

 

***Allowance forDoubtful Accounts***

 

We estimatethe collectibility of receivables generated by rental and other income as aresult of the operation of our student housing properties. If we believe thatthe collectibility of certain amounts is questionable, we record a specificreserve for these amounts to reduce the amount outstanding to an amount webelieve will be collectible and a reserve for all other accounts based on arange of percentages applied to aging categories, which is based on historicalcollection and write-off experience.

 

We alsoevaluate the collectibility of fee income and expense reimbursements generatedby the management 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.

 

Accountsreceivable are presented net of the allowance for doubtful accounts of $624,000at June 30, 2006 and $710,000 at December 31, 2005.

 

***Deferred ContractCosts***

 

Deferred contract costs include costs attributable to a specificmilitary housing project incurred in connection with seeking Congressionalapproval of a Community Development and Management Plan, or CDMP, subsequent tothe project being awarded by the Department of Defense, or DoD. In addition,deferred contract costs also include transition and closing costs incurred thatare expected to be reimbursed by the military housing project. Such amounts areevaluated as to the probability of recovery and costs that are not consideredprobable of recovery are written off. Revenue is recognized and the relatedcosts are expensed at the time that the reimbursement for preparing the CDMP isapproved by Congress or at closing of the military housing project.

 

***Deferred FinancingCosts***

 

Costs incurredin connection 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 $1.9 million at June 30, 2006 and $1.2 million atDecember 31, 2005.

 

***Deposits***

 

Deposits primarilyconsist of amounts paid to third parties in connection with plannedacquisitions and amounts paid to lenders that provide related financing or therefinancing of existing loans. At June 30, 2006, deposits for plannedacquisitions totaled $7.5 million, deposits related to financings totaled $0.1million, and other deposits not related to acquisitions or financings totaled$0.5 million. At December 31, 2005, deposits for planned acquisitionstotaled $2.1 million, deposits related to financings totaled $0.2 millionand other deposits not related to acquisitions or financings totaled $0.6million.

 

***Fair Value ofFinancial Instruments***

 

The carryingamount of cash and cash equivalents, restricted cash, accounts and otherreceivables, deposits, other assets, accounts payable, accrued expenses, dividendsand distributions payable, and other liabilities approximate fair value becauseof the relatively short-term nature of these instruments.

 

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The carryingvalue and fair value of fixed-rate notes payable at June 30, 2006 was $742.5 millionand $727.8 million, respectively. Fair value was estimated using rates theCompany believed were available to it as of June 30, 2006 for debt with similarterms. The carrying value of variable-rate notes payable approximates fairvalue at June 30, 2006.

 

***Advertising Costs***

 

Advertisingcosts are expensed as incurred. Advertising expense was $533,000 and $540,000for the three months ended June 30, 2006 and June 30, 2005, respectively, and$997,000 and $881,000 for the six months ended June 30, 2006 and June 30, 2005,respectively.

 

***Revenue Recognition***

 

*Student Housing Segment*

 

Rental revenue is recognized when due over the lease terms, which aregenerally 12 months or less.

 

Other propertyincome, including, but not limited to, lease processing fees, move-in fees and activityfees is recognized as earned throughout the course of the year. The timing ofthese fees typically fluctuates in relation to the academic year leasing cycle.

 

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

 

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

 

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

 

*Military HousingSegment*

 

Standard andincentive management fees, which are based on a percentage of effective gross revenuegenerated by the military housing projects from the basic allowance for housing(“BAH”) provided by the government to service members, are recognized when therevenue is earned by the military housing projects. Incentive management feesare based upon the satisfaction of certain criteria including, among otherthings, satisfying designated benchmarks relating to emergency work orderresponses, occupancy rates, home turnover and resident satisfaction surveys.Incentive management fees are recognized when the various criteria stipulatedin the management contract have been satisfied. Accrued and unbilled incentivemanagement fees of $1.0 million are included in accounts receivable – relatedparty at each of June 30, 2006 and December 31, 2005.

 

Standard andincentive development and construction/renovation fees, which are based on apercentage of development and construction/renovation costs incurred by themilitary housing projects, including hard and soft costs and financing costs, arerecognized on a monthly basis as the costs are incurred by the military housingprojects. Incentive development and construction/renovation fees are based uponthe satisfaction of certain criteria including, among other things, completinga number of housing units according to schedule, achieving specific safetyrecords and implementing small business or minority subcontracting plans. Incentivedevelopment and construction/renovation fees are recognized when the variouscriteria stipulated in the contract have been satisfied. Accrued and unbilledincentive development and

 

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construction/renovation fees of $2.5 million and $2.7 million areincluded in accounts receivable – related party at June 30, 2006 and December31, 2005, respectively.

 

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

 

Revenues on fixed-price renovation contracts are recorded on thepercentage-of-completion method. When the percentage-of-completion method isused, contract revenue is recognized in the ratio that costs incurred to datebear to estimated costs at completion. Adjustments to cost estimates are madein the period in which the facts requiring such revisions become known. Whenthe revised estimates indicate a loss, such loss is currently provided for inits entirety.

 

Business development fees are earned from our business partners thatprovide architectural and design or construction services for the Company’smilitary housing projects. These fees are received in connection with pursuingand coordinating the completion of military housing projects. The fees consistof (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 may be cancelled at anytime, and (ii) an additional fee, which is paid over the course of anawarded project based on a percentage of revenue earned by these businesspartners for providing services to the Company’s military housingprojects.  The base fees are recognized on a straight-line basis over theterm of the related business development agreement, which is generally oneyear.  The additional fee is recognized and paid to the Company as therelated services are provided to our military housing projects by our businesspartners.

 

The Company 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 June 30,2006, only the Fort Carson project had passed its initial development period.

 

Expensereimbursements are comprised primarily of renovation expenses and propertymanagement expenses, the costs of which are reimbursed by the militaryprivatization projects to which they relate. The expenses include payments tothird parties for renovation services, and include salaries and related costsof the Company’s employees that are managing the renovation and propertymanagement activities. The Company accrues expense reimbursements as therelated expenses are incurred.

 

***MinorityInterest***

 

Minorityinterest as initially reported at the date of our initial public offeringrepresented the net equity of the Operating Partnership, including the proceedsreceived from the sale of the warrant to Vornado Realty Trust, multiplied bythe ownership percentage of holders of limited partnership units in theOperating Partnership other than the Company. The Operating Partnership isobligated to redeem, at the request of a holder, each unit of limitedpartnership interest for cash or common shares on a one-for-one basis, at theCompany’s option, subject to adjustments for share splits, dividends,recapitalizations and similar events; except that Gary M. Holloway, Sr. has theright to require the Operating Partnership to redeem his and his affiliates’units of limited partnership interest for common shares, subject to hisrestriction from owning more than 20% of the Company’s outstanding commonshares. If the minority interest unitholders’ share of a current year losswould cause the minority interest balance to be less than zero, the minorityinterest balance will be reported as zero unless there is an obligation of theminority interest unit holders to fund those losses. Any losses in excess ofthe minority interest will be charged against equity. If future earningsmaterialize, equity will be credited for all earnings up to the amount of thoselosses previously absorbed. Distributions to limited partnership unitholdersother than the Company are recorded as a reduction to minority interest.

 

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***Investmentsin Military Housing Projects and Student Housing Joint Ventures***

 

The Company’s current military housing projects are joint venturesentered into between the Company and the U.S. military to design, develop,construct/renovate and manage the military family housing located on or nearvarious bases throughout the United States. The Company evaluates itsinvestments in military housing project joint ventures in which we have avariable interest to determine if the underlying entity is a variable interestentity (“VIE”) as defined under FASB Financial Interpretation No. 46 (asrevised) (“FIN 46(R)”). The Company has concluded that each of the militaryhousing project joint ventures in which it has a variable interest is a VIE andthat the Company is 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 operatingagreement. The Company has exposure to loss to the extent of its investments,if any, and any receivables due from the project.

 

The Company entered into a joint venture in the third quarter of 2005to develop and construct two student housing properties. The Company isaccounting for the transaction as a financing arrangement because the Companyoriginally owned the land and contributed it to the joint venture and theCompany has the option to purchase the joint venture partner’s interest in thejoint venture within one year of completion of the properties and because theCompany has provided certain guarantees for the completion of construction andfor a portion of the construction loans. Therefore, the Company accounts forits investment in the joint venture by including the joint venture’s assets andliabilities in the Company’s consolidated financial statements.

 

***Income Taxes***

 

 The Company elected to be taxedas a REIT under the Internal Revenue Code of 1986, as amended, commencing withits taxable year ended December 31, 2004. To continue to qualify as aREIT, the Company must meet a number of organizational and operationalrequirements, including a requirement that we currently distribute at least 90%of our adjusted taxable income to our shareholders. We believe we are organizedand operate in a manner that allows us to qualify for taxation as a REIT underthe Code, and it is our intention to adhere to these requirements and maintainthe Company’s REIT status in the future. Accordingly, no provision has beenmade for federal income taxes in the accompanying consolidated financialstatements, other than with respect to the Company’s taxable REIT subsidiaries.

 

***Share-BasedCompensation***

 

On January 1, 2006, the Company adopted SFAS No. 123R, as revised,*“Share-Based Payment.”* SFAS No. 123Rreplaces SFAS No. 123,*“Accounting forStock-Based Compensation”* and supersedes APB Opinion No. 25,*“Accounting for Stock Issued to Employees.”*The scope of SFAS No. 123R includes a wide range of share-basedcompensation arrangements including stock options, restricted share plans,performance-based awards, stock appreciation rights, and employee stockpurchase plans. SFAS No. 123R requires companies to recognize in theirfinancial statements the compensation expense relating to share-based paymenttransactions. There was no material impact as of and for the three andsix-month periods ended June 30, 2006.

 

InNovember 2004, the Company established an equity incentive plan (the “Plan”)that provides for the issuance of up to 2,000,000 common shares pursuant tooptions, restricted share awards, share appreciation rights, performance unitsand other equity based awards.  During the six-month period ended June 30,2006 and the year ended December 31, 2005, the Company issued 9,108 and 33,854restricted common shares, respectively, under the Plan to non-employee membersof the Company’s Board of Trustees. The restricted common shares vest over athree-year period from the grant date. The restricted common shares areentitled to the same dividend and voting rights during the vesting period asthe issued

 

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and outstanding common shares.The fair value of the awards was calculated based on the closing market priceof the Company’s common shares on the grant date and is expensed on astraight-line basis over the vesting period. The Company recognized non-cashstock-based compensation expense related to the restricted common shares of $38,000and $21,000, for the three months ended June 30, 2006 and 2005, respectively,and $75,000 and $46,000 for the six months ended June 30, 2006 and 2005,respectively.

 

**3. RealEstate Investments and Acquisitions**

 

As of June 30, 2006, theCompany owned 61 student housing properties located near 43 colleges anduniversities in 24 states. These properties contain an aggregate of 11,494units and 37,014 beds.TheCompany’s investment in student housing properties at June 30, 2006 and December 31,2005, which includes construction in progress relating to two student housingproperties under development pursuant to a joint venture with an institutionalpartner, was as follows (in thousands):

 
| ** **                           | ** ** | **June 30,  2006** | ** **    | **December 31,  2005** | ** ** |
|--------------------------------------|------------|-------------------------|---------------|-----------------------------|------------|
| Land                                 |       | $                       |  129,671 |                        | $          |  110,634 |   |
| Building and improvements            |       | 1,159,774               |          | 1,055,157                   |       |
| Residential furniture and appliances |       | 30,749                  |          | 26,159                      |       |
| Construction in progress             |       | 36,460                  |          | 18,305                      |       |
|                                 |       | $                       | 1,356,654     |                        | $          | 1,210,255 |   |

 

Duringthe three months ended June 30, 2006, the Company acquired one student housingproperty located in Columbia, South Carolina and serving the University ofSouth Carolina, containing 264 units and 924 beds, for a purchase price ofapproximately $36.9 million. The Company estimated $396,000 of the purchaseprice to be the fair value of in-place leases.

 

Duringthe three months ended March 31, 2006, the Company acquired six studenthousing properties located near six colleges and universities in six stateswith an aggregate of 994 units and 2,750 beds for an aggregate purchase priceof approximately $82.6 million. The Company estimated $904,000 of theaggregate purchase price to be the fair value of in-place leases.

 

Thepurchase accounting has been recorded on a preliminary basis pending results ofthe final allocation.****The results ofoperations of these properties are included in the accompanying statements ofoperations from the respective acquisition dates.

 

**4. Investmentsin Military Housing Projects**

 

The acquisition of our ownership interests in the joint venture thatinitially owned the rights relating to our Fort Carson and Fort Eustis/Storymilitary housing projects was recorded at the fair value of the considerationpaid in the amount of $31.0 million. The underlying book value of the equity onthe acquisition date was approximately $11.5 million. The remaining $19.5million of this investment is being amortized based on the then current fiscalyear revenue as a percentage of the estimated revenue to be earned over theremaining lives of the projects, which are 45 years for the Fort Carson projectand 50 years for the Fort Eustis/Story project. Amortization expense was $0.1millionfor the three months ended June 30, 2006, and less than $0.1 million for thethree months ended June 30, 2005. Amortization expense was $0.2 million and$0.1 million for the six months ended June 30, 2006 and 2005, respectively. Theaccumulated amortization of the excess purchase price was $0.5 million and $0.3million at June 30, 2006 and December 31, 2005, respectively.

 

During the six months ended June 30, 2006, the Company received $0.6million of equity distributions from Fort Carson Family Housing LLC.  Thecarrying value of this investment was $27.3 million at June 30, 2006 and $26.1 millionat December 31, 2005. The Company earns a preferred return on its investment inFort Carson Family Housing LLC, plus 30% of the project’s Available Cash(defined as net operating income minus debt service and general reserves) untilJune 2015, and 10% of the project’s Available Cash thereafter. For the sixmonths ended June 30, 2006, the preferred return plus 30% of

 

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Available Cash earned was $2.0million. The project began repaying the Company’s initial investment in FortCarson Family Housing LLC in July 2005. The equity is expected to be completelyrepaid by 2015.

 

In November 2004, the Company and Benham Military Communities, LLCformed a joint venture known as GMH/Benham Military Communities LLC for thepurpose of investing in the Navy Northeast Region military housing project. TheCompany contributed $9.5 million to GMH/Benham Military Communities LLC inreturn for a 90% interest and Benham Military Communities, LLC invested$1.1 million for the remaining 10% interest. The Company consolidatesGMH/Benham Military Communities LLC as it has a 90% economic interest andcontrols a majority of the voting interests. Benham Military Communities, LLC’s10% interest is accounted for as minority interest and is included in otherliabilities.  In November 2004, GMH/Benham Military Communities, LLCinvested $10.6 million in Northeast Housing LLC, which owns and operatesthe Navy Northeast Region military housing project. GMH/Benham MilitaryCommunities LLC earns a preferred return on its investment in Northeast HousingLLC. The preferred return will accrue, but not be paid, until the end of theinitial development period for the project in October 2010. The carryingvalue of this investment was $12.2 million at June 30, 2006 and $11.7 millionat December 31, 2005.

 

Effective May 1, 2006, the Company officiallypartnered with the U.S. Department of the Army, to be the private sectorpartner for the design, development, construction/renovation and management ofthe military family housing communities at Fort Gordon located near Augusta,Georgia. The 50-year term of the Fort Gordon project includes a six-yearInitial Development Period with project costs of approximately $110.0 million.

 

On May 1, 2006, the Company also acquired anownership position and commenced property management and maintenance servicesfor the U.S. Department of the Army’s military family housing at CarlisleBarracks and Picatinny Arsenal, located in Carlisle, PA and Dover, NJ,respectively. The Company commenced providing property management andmaintenance services at the two installations on May 1, 2006, when one of theCompany’s subsidiaries entered into agreements with the Army, including a50-year ground lease for the purpose of owning and managing the housinginventory at the two installations. Under the agreements, the Company willreceive fees for the provision of management and maintenance services at theseinstallations. On July 21, 2006, financing was secured for theCarlisle/Picatinny project, and as of the date of this report, construction andrenovation agreements were in the process of being completed to permit thecommencement of construction/renovation activities. The housing project at thetwo installations covers an aggregate of 348 end-state housing units and has afive-year Initial Development Period.

 

**5. IncomeTaxes**

 

TheCompany has elected Taxable REIT Subsidiary (“TRS”) status for certain of itscorporate subsidiaries. The following table summarizes the Company’sprovisions for income taxes for the three and six month periods ended June 30,2006 and 2005 (in thousands):

 
| ** **      | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **      | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **      | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|            |       |                             |       |                           |       |   |   |   |   |
| Federal taxes   |       | $                                | 1,027      |                           | $          | 946 |   | $ | 1,850 |   | $ | 1,910 |   |
|            |       |                             |       |                           |       |   |   |   |   |
| State taxes     |       | 187                              |       | 172                            |       | 337 |   | 348 |   |
|            |       |                             |       |                           |       |   |   |   |   |
| Total provision |       | $                                | 1,214      |                           | $          | 1,118 |   | $ | 2,187 |   | $ | 2,258 |   |

 

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**6. NotesPayable**

 

Duringthe three months ended June 30, 2006, a fixed-rate note payable, bearinginterest at 5.57%, in the amount of $28.0 million was assumed relating tothe acquisition of a student housing property. This note requires monthly interest-onlypayments through December 2006. Thereafter, monthly principal and interestpayments of approximately $160,000 are due until the loan matures in November 2014,with a balloon payment of $24.7 million due at maturity. In conjunction with thepurchase accounting for this property, the net carrying value of the assumednote payable was decreased by $0.7 million to record the note at its estimatedfair value. The fair value of the note was calculated as the difference betweenthe present value of the note using a current estimated market rate of interestand the outstanding principal amount. This amount is being amortized as anadjustment to interest expense over the term of the related debt.

 

AtJune 30, 2006, notes payable totaling $766.9 million were secured by 54student housing properties with a cost basis of $1,145.2 million. Inaddition, as of June 30, 2006, we had $23.8 million in construction loanindebtedness outstanding that was secured by two student housing propertiesunder development through a joint venture. This indebtedness had a weightedaverage interest rate of 6.97%, matures in 2008, and requires monthly paymentsof interest only. Such interest will be capitalized until the end of theconstruction period in August/September 2006.

 

OnJanuary 12, 2006, the Company placed new mortgage debt on the corporateheadquarters in the amount of $5.7 million. The new mortgage debt has a term of10 years with a fixed interest rate of 5.58%, and requires monthly payments ofinterest only.

 

**7. Line of Credit**

 

InNovember 2004, the Company entered into a $150 million three-yearunsecured revolving credit facility, subject to increase to $250 million(the “Credit Facility”), with a consortium of banks. The Credit Facilityprovides for the issuance of up to $20 million of letters of credit, whichis included in the $150 million available under the Credit Facility. TheCompany’s availability under the Credit Facility, as amended, is limited to aborrowing base amount equal to the sum of 60% of the value of an unencumberedasset pool as of the end of the previous quarter (which as of June 30, 2006 consistedof seven student housing properties, and in no event may contain fewer thanfive student housing properties) and 50% of the value of the Company’s cashflow from the management, development and renovation of military housingprojects and student housing properties in the previous quarter, provided thatthe total cash flow attributable to annualized management fees does not exceed 50%of the borrowing base.

 

Asof June 30, 2006, the Company had $93.0 million outstanding under the CreditFacility, bearing interest at a Eurodollar rate based on 30-day LIBOR and60-day LIBOR ranging from 5.13% to 5.29%, plus 2.125%, resulting in totalinterest rates ranging from 7.26% to 7.42%. As of June 30, 2006, there were noletters of credit outstanding under the Credit Facility, and the Company had anadditional $57.0 million in total borrowings available under the CreditFacility.

 

TheCompany may elect to have amounts outstanding under the Credit Facility bearinterest at a Eurodollar rate based on LIBOR or the prime rate, plus an applicablerate, ranging from 1.625% to 2.375% for Eurodollar rate loans or 0.75% to 1.75%for prime rate loans. The applicable rate is determined by the leverage ratioof total liabilities to total asset value of the Company, as defined in theCredit Facility. In addition, the Company pays fees for unused availability onthe Credit Facility.

 

TheCredit Facility contains affirmative and negative covenants and also containsfinancial covenants which, among other things, (i) require the Company tomaintain a total leverage ratio equal to or less than 60%, (ii) limit theaggregate amount of outstanding variable-rate indebtedness to 30% of totalindebtedness commencing February 8, 2005, (iii) limit the payment ofdividends by the Company to its shareholders to 95% (110% for the year endedDecember 31, 2005) of funds from operations, as defined in the Credit Facility,(iv) limit the amount of recourse debt, exclusive of amounts outstandingunder the Credit Facility, to $25 million, and in no event greater than$150 million in total, and (v) require the

 

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Company to maintain a consolidated tangible net worth, as defined inthe Credit Facility, of at least $275 million plus an amount equal to 75%of the net proceeds from any equity issuances subsequent to the closing date ofthe Credit Facility in November 2004. The financial covenants also requirethe Company to operate in compliance with the following ratios as defined bythe terms of the Credit Facility: (i) fixed charge coverage ratio equal toor greater than 1.75x; (ii) interest coverage ratio equal to or greaterthan 2.00x; and (iii) unsecured interest coverage ratio equal to orgreater than 2.25x.

 

InJanuary 2006, the Company paid a dividend to its shareholders in excess ofthe 110% of funds from operations for the year ended December 31, 2005. TheCompany received a waiver of this instance of noncompliance with the financialcovenant.

 

Given that the Company’s compliance with debt covenants under theCredit Facility is determined as of the end of each fiscal quarter, the Companycannot determine at this time whether it will be in compliance with each of thedebt covenants throughout 2006. If the Company is deemed to be in noncompliancewith any of its debt covenants, and the Company is unable to obtain a waiverfrom the syndicate lenders and therefore is restricted from drawing additionalborrowings from the Credit Facility, it has several alternatives to it. Inaddition to its cash flows from operations, the Company can financeunencumbered properties or refinance existing debt, sell assets or reduce itsdividend to shareholders. The Company would evaluate each of these alternativesupon an event of noncompliance with the debt covenants under the CreditFacility and will take action necessary to ensure that the Company has adequatefinancial resources available to it to operate as a going concern.

 

During the three months ended June 30, 2006, as a result of the ongoingdelay in the filing of the  Company’sAnnual Report on Form 10-K for the fiscal year ended December 31, 2005 andQuarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2006, theCompany obtained waivers of the covenant under its Credit Facility thatrequires the Company to deliver audited financial statements for the 2005fiscal year no later than 90 days after the fiscal year end, and unauditedquarterly financial statements no later than 45 days after each fiscal quarter.These waivers extended the period by which the Company may deliver thefinancial statements relating to the year ended December 31, 2005 and thequarter ended March 31, 2006 until August 15, 2006, and the financialstatements for the three months ended June 30, 2006 until September 15, 2006.The Company has paid an aggregate of $470,000 in fees in connection withobtaining these waivers, $240,000 of which was charged to expense in the secondquarter.

 

As of June 30, 2006, the Company failed tocomply with the financial covenants under the Credit Facility that requiredmaintenance of an interest coverage ratio equal to or greater than 2.00x, and afixed charge coverage ratio equal to or greater than 1.75x. On September 1,2006, the Company entered into a Third Amendment and Waiver to Credit Agreementwith the lender syndicate under the Credit Facility. Under the agreement, thelender syndicate provided waivers of the Company’s noncompliance with thesefinancial covenants as of the end of the quarter ended June 30, 2006. Inaddition, the agreement provided for amendments to the definitions of the terms“consolidated EBITDA” and “funds from operations” to permit the Company to addback the non-recurring expenses relating to the special investigation performedby the Audit Committee and to the formation and operations of the Company’sSpecial Committee in connection with its review of strategic alternatives. Inaddition, the agreement included an amendment to the Company’s total leverageratio, commencing with the quarter ended June 30, 2006, from 60% to 70%. Underthe terms of the amendment, the 70% total leverage ratio will be in effectthrough December 31, 2006, and thereafter will revert to 60%. Commencing withthe quarter ended June 30, 2006 and through December 31, 2006, the applicablerate on all amounts outstanding under the credit facility, as amended, when theCompany’s leverage ratio exceeds 65% will be 2.625% and 2.00% for Eurodollarrate loans and prime rate loans, respectively. The Company incurred $540,000 infees in connection with obtaining this waiver and amendment.

 

**8. Transactionswith Related Parties**

 

Inthe ordinary course of its operations, the Company has on-going businessrelationships with Gary M. Holloway, Sr., entities affiliated with Mr. Holloway,and entities in which Mr. Holloway or the Company has an equityinvestment. These relationships and related transactions are summarized below.

 

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Inconnection with the Company’s initial public offering, Mr. Holloway, andvarious entities wholly-owned by Mr. Holloway, entered into a ContributionAgreement, dated October 18, 2004, with the Operating Partnership.Pursuant to the Contribution Agreement, Mr. Holloway contributed to theOperating Partnership all of the partnership interests of GH 353 Associates,L.P., which entity’s sole asset was the corporate headquarters building locatedin Newtown Township, Pennsylvania. The Commonwealth of Pennsylvania and NewtownTownship each impose a 1% transfer tax on the transfer of these partnership interests.Mr. Holloway paid the Company approximately $61,000 as reimbursement forone-half of the aggregate transfer tax that was originally paid by the Companyin connection with transfer tax assessed against the transfer of thepartnership interests. The amount was received by the Company in 2006 fromMr. Holloway, and was recorded as a reduction to corporate assets on theCompany balance sheet as of December 31, 2005.

 

TheCompany provided certain functions to entities affiliated with Gary M.Holloway, Sr., including human resources, legal and information technology. Suchcosts totaled $42,000 and $93,000 during the three months ended June 30, 2006and June 30, 2005, respectively, and $85,000 and $191,000 during the six monthsended June 30, 2006 and June 30, 2005, respectively, and are included inexpense reimbursement from related parties in the accompanying consolidatedstatements of operations.

 

The Company leases space in its corporateheadquarters to entities wholly-owned by Gary M. Holloway, Sr. Rentalincome from these entities totaled $39,000 and $78,000 during the three and sixmonths ended June 30, 2006, respectively, and $61,000 and $122,000 during thethree and six months ended June 30, 2005, respectively, and are included in rentand other property income in the accompanying consolidated statements ofoperations.

 

The Company provided property managementconsulting services to GMH Capital Partners Asset Services, LP, an entitywholly-owned by Mr. Holloway, in connection with property management servicesthat GMH Capital Partners Asset Services, LP performed related to five studenthousing properties containing a total of 2,172 beds. The Company earnedconsulting fees equal to 80% of the management fees that GMH Capital PartnersAsset Services, LP earned for providing the property management services. Forthe three and six months ended June 30, 2005, such fees totaled $73,000 and$134,000, respectively. As of January 1, 2006, the management agreementsrelating to four of these properties were assigned from GMH Capital PartnersAsset Services, LP to a subsidiary of the Company, and the management agreementrelating to the fifth property was terminated. As a result, no such consultingfees were earned by the Company during the three or six months ended June 30,2006. In addition, the Company earned management fees from an additional propertyin which Mr. Holloway is an investor. During the three and six monthsended June 30, 2006, such income totaled $17,000 and $37,000, respectively, and$197,000 during the six months ended June 30, 2005. No such income was receivedduring the three months ended June 30, 2005.

 

The Company is reimbursed by joint venturesrelating to certain military housing projects in which the Company has anownership interest, as well as student housing properties under the Company’s managementin which Mr. Holloway was an investor through March 2005, for the cost ofcertain employees engaged in the daily operation of those military housingprojects and student housing properties. The reimbursement of these costs isreflected as expense reimbursements from related parties in the accompanyingconsolidated statements of operations. During the three and six months endedJune 30, 2006, such reimbursed costs totaled $17.5 million and $30.9 million,respectively. During the three and six months ended June 30, 2005, suchreimbursed costs totaled $12.2 million and $20.2 million, respectively. Inaddition, included in accrued expenses is a liability of $2.0 million due backto the joint venture that owns the Navy Northeast Region project that primarilyrelates to an overfunding of reimbursable expenses.

 

Mr. Holloway owns Bryn MawrAbstract, Inc., an entity that provides title abstract services to thirdparty title insurance companies, from which we have purchased title insurancewith respect to certain student housing properties and military housingprojects that we have acquired or refinanced. In connection with the purchaseof title insurance for these student housing properties and military housingprojects, premiums were paid to other title insurance companies, which fees insome cases are fixed according to statute. From these premiums, the other titleinsurance companies paid to Bryn Mawr Abstract, Inc. $39,000 and $183,000during the three and six months ended June 30, 2005, respectively, for theprovision of title abstract services, and $187,000 during the three and sixmonths ended June 30, 2006.

 

14

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Mr. Holloway owns GMH Capital Partners Commercial Realty LP, anentity that has provided real estate consulting and brokerage services for realestate transactions. During the six months ended June 30, 2005, GMH CapitalPartners Commercial Realty LP received aggregate commissions of $284,000, respectively,and no such payments were made during the three months ended June 30, 2005 orduring the three and six months ended June 30, 2006.

 

In February 2005, the Companytransferred its interest in Corporate Flight Services, LLC, including thecorporate aircraft and associated debt initially contributed to the OperatingPartnership at the time of the initial public offering, back toMr. Holloway. Corporate Flight Services, LLC had a net deficit of$171,000, net of $180,000 tax expense related to a taxable gain upon thetransfer to Mr. Holloway, on the date it was transferred back to Mr. Holloway.This transfer was accounted for as a capital contribution to additional paid-incapital. During the three and six months ended June 30, 2006, the Company paidto Corporate Flight Services, LLC $266,000 and $500,000, respectively, inconnection with use of the aircraft for student housing and military housingrelated travel. During the three and six months ended June 30, 2005, theCompany paid to Corporate Flight Services LLC $157,000 for use of the aircraft.

 

Gary M. Holloway, Sr., an executive officerof the Company, a former executive officer of the Company, another employee ofthe Company, and an employee of an entity wholly-owned by Mr. Holloway, eachheld an ownership interest in two student housing properties that were acquiredby the Company during the first quarter of 2005 for a total purchase price of$38.2 million. The Company paid $36.5 million in cash to investors in theselling entity not affiliated with the Company and issued a total of 141,549units of limited partnership interest in the Operating Partnership to Mr.Holloway and these individuals with an aggregate fair value of $1.7 million inconnection with the purchase.

 

**9. Commitments and Contingencies**

 

As of June 30, 2006, we had agreements toacquire five student housing properties, a portfolio that contains up to 13student housing properties, and eight undeveloped parcels of land for thedevelopment of four future student housing properties, for an aggregatepurchase price of $340.5 million and had placed deposits related to suchacquisitions totaling approximately $7.5 million.

 

With regard to military housing projects atArmy bases, the Company is typically required to fund its portion of the equitycommitment to the project’s joint venture after all other sources of fundingfor the project have been expended. With respect to the Company’s NavyNortheast Region project, however, the Company was required to fund the equitycommitment at commencement of the project. In connection with finalizing theagreements with the DoD for the Company’s military housing projects, theCompany has committed to contribute the following aggregate amounts as of June30, 2006 (in thousands):

 
| 2006                |   | $      | 2,000  |   |
|---------------------|--------|--------|--------|--------|
| 2007                |   | 5,900  |   |
| 2010                |   | 6,600  |   |
| 2011 and thereafter |   | 18,800 |   |
| Total               |   | $      | 33,300 |   |

 

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

 

In 2004, theCompany entered into employment agreements with three of its executiveofficers. Each employment agreement is for an initial three-year term beginningon November 2, 2004 and provides for base salaries aggregating $975,000 in eachof the three years. The base salaries increase annually effectiveJanuary 1 of each year by a minimum amount equal to at least thepercentage increase in the Consumer Price

 

15

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Index. OnDecember 31, 2005, the Company and one of its executive officers enteredinto a separation agreement, pursuant to which the executive resigned from hisposition as an officer of the Company and effectively terminated his employmentagreement with the Company. Under the terms of the separation agreement, theexecutive remained eligible for an incentive bonus award for the fiscal year2005, which was paid to the executive in June 2006. In addition, the executivehas agreed to remain subject to certain restrictive covenants contained in theemployment agreement, including non-disclosure of confidential information,non-competition and non-solicitation of employees, assignment of intellectualproperty rights, and on-going cooperation with the Company in connection with pendingmatters.  The Company and the executive separately executed a ConsultingAgreement, dated January 1, 2006, pursuant to which the executive hasagreed to provide consulting services to the Company for an initial termthrough May 31, 2007. The Company is paying the former executive $25,000per month during the term of the Consulting Agreement as compensation for hisservices, which payments are being charged to expense as incurred.

 

Under theprovisions of FIN 45, *“Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others an interpretation of FASB StatementsNo. 5, 57, and 107 and rescission of FASB Interpretation No. 34,”*a guarantor is to recognize, at the inception of a guarantee, a liability forthe fair value of the obligation undertaken by issuing the guarantee. TheCompany enters into indemnification agreements in the ordinary course ofbusiness that are subject to the provisions of FIN 45. Under these agreements,the Company indemnifies, holds harmless, and agrees to reimburse theindemnified party for losses suffered or incurred by the indemnified party. Themaximum potential amount of future payments the Company could be required tomake under these indemnification agreements is unlimited. The Company believesthe estimated fair value of these agreements is immaterial. Accordingly, therewere no liabilities recorded for these agreements as of June 30, 2006 andDecember 31, 2005.

 

On April 5, 2006, the Company, Gary M. Holloway Sr., our Chairman,President and Chief Executive Officer, and Bradley W. Harris, our former ChiefFinancial Officer, were named as defendants in a class action complaint filedin United States District Court for the Eastern District of Pennsylvania, orthe Court. The complaint provides that the Plaintiff has filed a federal classaction on behalf of purchasers of the publicly traded securities of the Companybetween October 28, 2004 and March 10, 2006, referred to as the Class Period,seeking to pursue remedies under the Securities Act of 1933 and the SecuritiesExchange Act of 1934. Plaintiff alleges that defendants issued a series offalse and misleading financial results regarding the Company to the marketduring the Class Period, and more specifically, failed to disclose: (1) thatthe Company’s earnings, net income and revenues were materially inflated andexpenses were materially understated; (2) that the Company’s funds fromoperations were materially inflated; (3) that the Company lacked adequateinternal controls; (4) that the Company’s reported financial results were inviolation of generally accepted accounting principles, or GAAP; and (5) that asa result of the foregoing, the Company’s financial results were materiallyinflated at all relevant times. Plaintiff alleges claims under Section 11 ofthe Securities Act with respect to all of the defendants; Section 12(a)(2) ofthe Securities Act with respect to the Company; Section 15 of the SecuritiesAct with respect to Mr. Holloway and Mr. Harris; Section 10(b) and Rule 10b-5of the Exchange Act with respect to all of the defendants; and Section 20(a) ofthe Exchange Act with respect to Mr. Holloway and Mr. Harris.

 

On April 11, 2006, April 20, 2006, April 27, 2006 and May 15, 2006,four additional class action complaints were filed with the Court against thedefendants by separate law firms, and the Company anticipates that additionalcomplaints may be filed in the near future until a class has been certified bythe Court and a lead plaintiff has been named. Each of these additional filedcomplaints alleges the same claims against the defendants as described abovewith respect to the complaint filed on April 5, 2006, except that the complaintfiled on April 20, 2006 restricts the class period to purchasers of thepublicly traded securities of the Company to the time period between May 5,2005 and March 10, 2006.

 

The defendants have not yet responded to these complaints. The outcomeof this litigation is uncertain, and while the Company believes that it hasvalid defenses to Plaintiff’s claims and intends to defend the class actionlawsuit vigorously, no assurance can be given as to the outcome of thislitigation. The Company is not presently able to reasonably estimate potentiallosses, if any, related to these lawsuits.

 

16

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Therefore, the Company has not establisheda reserve for these claims. An adverse outcome could have a material adverseeffect on our consolidated financial statements and results of operations.

 

The Company is subject to routine litigation, claims and administrativeproceedings arising in the ordinary course of business. The maximum exposure tothe Company relating to these matters cannot be determined at this time.Management believes that the disposition of these matters will not have amaterial adverse impact on the Company’s financial position or results ofoperations.

 

**10. Segment Reporting**

 

The Company ismanaged as individual entities that comprise three reportable segments:(1) student housing (2) military housing and (3) corporate. TheCompany’s management evaluates each segment’s performance based upon netincome. The accounting policies of the reportable segments are the same asthose described in the summary of significant accounting policies. 

 
| ** **                                                                                              | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2006**                                            | ** ** | **2005 (Restated)** | ** ** |
| ** **                                                                                              | ** ** | **Student  Housing**                                | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                                                              | ** ** | **(dollars in thousands)**                | ** ** |
|                                                                                                    |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Revenue:**                                                                                            |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income                                                                          |       | $                                                   | 43,994     |   | $ | — |   | $ | 39 |   | $ | 44,033 |   | $ | 29,702 |   | $ | — |   | $ | 61 |   | $ | 29,763 |   |
| Expense reimbursements:                                                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                           |       | 103                                                 |       | 17,457 |   | 115 |   | 17,675 |   | — |   | 12,247 |   | 122 |   | 12,369 |   |
| Third party                                                                                             |       | 1,389                                               |       | — |   | — |   | 1,389 |   | 1,303 |   | — |   | — |   | 1,303 |   |
| Management fees:                                                                                        |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                           |       | 17                                                  |       | 2,084 |   | — |   | 2,101 |   | — |   | 1,543 |   | — |   | 1,543 |   |
| Third party                                                                                             |       | 647                                                 |       | — |   | — |   | 647 |   | 1,008 |   | — |   | — |   | 1,008 |   |
| Other fee income, related party                                                                         |       | —                                              |       | 5,581 |   | — |   | 5,581 |   | — |   | 3,619 |   | — |   | 3,619 |   |
| Other income                                                                                            |       | 32                                                  |       | 14 |   | 7 |   | 53 |   | 22 |   | — |   | 34 |   | 56 |   |
| Total revenue                                                                                           |       | 46,182                                              |       | 25,136 |   | 161 |   | 71,479 |   | 32,035 |   | 17,409 |   | 217 |   | 49,661 |   |
|                                                                                                    |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating Expenses:**                                                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property operating expense                                                                              |       | 18,217                                              |       | 1,513 |   | — |   | 19,730 |   | 10,844 |   | 1,286 |   | — |   | 12,130 |   |
| Reimbursed expenses                                                                                     |       | 1,492                                               |       | 17,457 |   | 115 |   | 19,064 |   | 1,303 |   | 12,247 |   | 122 |   | 13,672 |   |
| Real estate taxes                                                                                       |       | 4,353                                               |       | — |   | 24 |   | 4,377 |   | 3,143 |   | — |   | — |   | 3,143 |   |
| Administrative expenses                                                                                 |       | —                                              |       | — |   | 4,535 |   | 4,535 |   | — |   | — |   | 2,834 |   | 2,834 |   |
| Audit Committee and Special Committee  expenses                                                         |       | —                                              |       | — |   | 2,301 |   | 2,301 |   | — |   | — |   | — |   | — |   |
| Depreciation and amortization                                                                           |       | 10,507                                              |       | 130 |   | 78 |   | 10,715 |   | 8,565 |   | 19 |   | 99 |   | 8,683 |   |
| Interest                                                                                                |       | 11,235                                              |       | — |   | 441 |   | 11,676 |   | 6,681 |   | — |   | 220 |   | 6,901 |   |
| Total operating expenses                                                                                |       | 45,804                                              |       | 19,100 |   | 7,494 |   | 72,398 |   | 30,536 |   | 13,552 |   | 3,275 |   | 47,363 |   |
| Income (loss) before equity in earnings of  unconsolidated entities, income taxes and minority interest |       | 378                                                 |       | 6,036 |   | (7,333 | ) | (919 | ) | 1,499 |   | 3,857 |   | (3,058 | ) | 2,298 |   |
| Equity in earnings of unconsolidated  entities                                                          |       | —                                              |       | 1,174 |   | — |   | 1,174 |   | — |   | 455 |   | — |   | 455 |   |
| Income (loss) before income taxes and  minority interest                                                |       | 378                                                 |       | 7,210 |   | (7,333 | ) | 255 |   | 1,499 |   | 4,312 |   | (3,058 | ) | 2,753 |   |
| Income tax (benefit) expense                                                                            |       | (232                                                | )          | 1,446 |   | — |   | 1,214 |   | 15 |   | 1,103 |   | — |   | 1,118 |   |
| Income (loss) before minority interest                                                                  |       | 610                                                 |       | 5,764 |   | (7,333 | ) | (959 | ) | 1,484 |   | 3,209 |   | (3,058 | ) | 1,635 |   |
| Minority interest                                                                                       |       | 266                                                 |       | 2,514 |   | (3,198 | ) | (418 | ) | 734 |   | 1,587 |   | (1,512 | ) | 809 |   |
| **Net (loss) income**                                                                                   |       | $                                                   | 344        |   | $ | 3,250 |   | $ | (4,135 | ) | $ | (541 | ) | $ | 750 |   | $ | 1,622 |   | $ | (1,546 | ) | $ | 826 |   |

 

17

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| ** **                                                                                              | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2006**                                          | ** ** | **2005 (Restated)** | ** ** |
| ** **                                                                                              | ** ** | **Student  Housing**                              | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                                                              | ** ** | **(dollars in thousands)**              | ** ** |
|                                                                                                    |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Revenue:**                                                                                            |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income                                                                          |       | $                                                 | 87,992     |   | $ | — |   | $ | 78 |   | $ | 88,070 |   | $ | 55,482 |   | $ | — |   | $ | 122 |   | $ | 55,604 |   |
| Expense reimbursements:                                                                                 |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                           |       | 189                                               |       | 30,694 |   | 172 |   | 31,055 |   | 186 |   | 20,060 |   | 210 |   | 20,456 |   |
| Third party                                                                                             |       | 2,725                                             |       | — |   | — |   | 2,725 |   | 2,577 |   | — |   | — |   | 2,577 |   |
| Management fees:                                                                                        |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                           |       | 37                                                |       | 4,103 |   | — |   | 4,140 |   | 197 |   | 3,133 |   | — |   | 3,330 |   |
| Third party                                                                                             |       | 1,655                                             |       | — |   | — |   | 1,655 |   | 1,545 |   | — |   | — |   | 1,545 |   |
| Other fee income, related party                                                                         |       | —                                            |       | 10,261 |   | — |   | 10,261 |   | — |   | 6,884 |   | 70 |   | 6,954 |   |
| Other income                                                                                            |       | 83                                                |       | 23 |   | 38 |   | 144 |   | 75 |   | 24 |   | 68 |   | 167 |   |
| Total revenue                                                                                           |       | 92,681                                            |       | 45,081 |   | 288 |   | 138,050 |   | 60,062 |   | 30,101 |   | 470 |   | 90,633 |   |
|                                                                                                    |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating Expenses:**                                                                                 |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property operating expense                                                                              |       | 34,883                                            |       | 3,052 |   | — |   | 37,935 |   | 20,208 |   | 1,990 |   | — |   | 22,198 |   |
| Reimbursed expenses                                                                                     |       | 2,914                                             |       | 30,694 |   | 172 |   | 33,780 |   | 2,763 |   | 20,060 |   | 210 |   | 23,033 |   |
| Real estate taxes                                                                                       |       | 8,530                                             |       | — |   | 48 |   | 8,578 |   | 5,155 |   | — |   | — |   | 5,155 |   |
| Administrative expenses                                                                                 |       | —                                            |       | — |   | 8,300 |   | 8,300 |   | — |   | — |   | 5,776 |   | 5,776 |   |
| Audit Committee special investigation  expenses                                                         |       | —                                            |       | — |   | 4,876 |   | 4,876 |   | — |   | — |   | — |   | — |   |
| Depreciation and amortization                                                                           |       | 20,659                                            |       | 249 |   | 156 |   | 21,064 |   | 16,044 |   | 54 |   | 310 |   | 16,408 |   |
| Interest                                                                                                |       | 21,671                                            |       | — |   | 959 |   | 22,630 |   | 11,793 |   | — |   | 465 |   | 12,258 |   |
| Total operating expenses                                                                                |       | 88,657                                            |       | 33,995 |   | 14,511 |   | 137,163 |   | 55,963 |   | 22,104 |   | 6,761 |   | 84,828 |   |
| Income (loss) before equity in earnings of  unconsolidated entities, income taxes and minority interest |       | 4,024                                             |       | 11,086 |   | (14,223 | ) | 887 |   | 4,099 |   | 7,997 |   | (6,291 | ) | 5,805 |   |
| Equity in earnings of unconsolidated  entities                                                          |       | —                                            |       | 2,390 |   | — |   | 2,390 |   | — |   | 941 |   | — |   | 941 |   |
| Income (loss) before income taxes and  minority interest                                                |       | 4,024                                             |       | 13,476 |   | (14,223 | ) | 3,277 |   | 4,099 |   | 8,938 |   | (6,291 | ) | 6,746 |   |
| Income tax (benefit) expense                                                                            |       | (232                                              | )          | 2,419 |   | — |   | 2,187 |   | 15 |   | 2,243 |   | — |   | 2,258 |   |
| Income (loss) before minority interest                                                                  |       | 4,256                                             |       | 11,057 |   | (14,223 | ) | 1,090 |   | 4,084 |   | 6,695 |   | (6,291 | ) | 4,488 |   |
| Minority interest                                                                                       |       | 1,883                                             |       | 4,862 |   | (6,254 | ) | 491 |   | 2,017 |   | 3,307 |   | (3,107 | ) | 2,217 |   |
| **Net income (loss)**                                                                                   |       | $                                                 | 2,373      |   | $ | 6,195 |   | $ | (7,969 | ) | $ | 599 |   | $ | 2,067 |   | $ | 3,388 |   | $ | (3,184 | ) | $ | 2,271 |   |

 
| ** **                        | ** ** | **Student  Housing**    | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-----------------------|------------|---------------|------------|-----------|------------|
| ** **                        | ** ** | **(in thousands)** | ** ** |
| **As of June 30, 2006:**          |       |                    |       |                  |       |          |       |      |       |
| Total assets                      |       | $                       | 1,341,102  |                  | $          | 58,761        |       | $         | 16,722     |   | $ | 1,416,585 |   |
| Total liabilities                 |       | $                       | 888,895    |                  | $          | (10,739       | )          | $         | 84,679     |   | $ | 962,835 |   |
| **As of December 31, 2005:** |       |                    |       |                  |       |          |       |      |       |
| Total assets                      |       | $                       | 1,206,555  |                  | $          | 59,242        |       | $         | 12,154     |   | $ | 1,277,951 |   |
| Total liabilities                 |       | $                       | 769,469    |                  | $          | (3,682        | )          | $         | 26,665     |   | $ | 792,452 |   |
|                                   |            |                         |            |                       |            |               |            |           |            |  |  |  |  |  |  |  |  |

 

18

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**11. Earnings Per Common Share**

 

The following table details the number ofshares and net income used to calculate basic and diluted earnings per sharefor the three and six months ended June 30, 2006 and June 30, 2005 (inthousands, except share and per share amounts):

 
| ** **                                                      | ** ** | **Three Months Ended  June 30, 2006** | ** ** | **Three Months Ended  June 30, 2005  (Restated)** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **Basic**                                                 | ** ** | **Diluted**                                                      | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
|                                                            |       |                                                      |       |                                                             |       |   |   |   |   |
| Net income (loss)                                               |       | $                                                         | (541       | )                                                                | $          | (541 | ) | $ | 826 |   | $ | 826 |   |
| Minority interest                                               |       | —                                                    |       | (418                                                             | )          | — |   | 809 |   |
|                                                            |       |                                                      |       |                                                             |       |   |   |   |   |
| Income (loss) available to common  shareholders                 |       | $                                                         | (541       | )                                                                | $          | (959 | ) | $ | 826 |   | $ | 1,635 |   |
|                                                            |       |                                                      |       |                                                             |       |   |   |   |   |
| Weighted-average common shares outstanding                      |       | 40,872,036                                                |       | 40,872,036                                                       |       | 30,350,989 |   | 30,350,989 |   |
| Warrant                                                         |       | —                                                    |       | 601,206                                                          |       | — |   | 1,818,030 |   |
| Units of limited partnership held by  minority interest holders |       | —                                                    |       | 31,624,617                                                       |       | — |   | 29,708,356 |   |
| Restricted common shares                                        |       | —                                                    |       | —                                                           |       | — |   | 1,064 |   |
| Total weighted-average shares outstanding                       |       | 40,872,036                                                |       | 73,097,859                                                       |       | 30,350,989 |   | 61,878,439 |   |
| Earnings (loss) per common share                                |       | $                                                         | (0.01      | )                                                                | $          | (0.01 | ) | $ | 0.03 |   | $ | 0.03 |   |

 
| ** **                                                      | ** ** | **Six Months Ended  June 30, 2006** | ** ** | **Six Months Ended  June 30, 2005  (Restated)** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **Basic**                                               | ** ** | **Diluted**                                                         | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
|                                                            |       |                                                    |       |                                                                |       |   |   |   |   |
| Net income                                                      |       | $                                                       | 599        |                                                                | $          | 599 |   | $ | 2,271 |   | $ | 2,271 |   |
| Minority interest                                               |       | —                                                  |       | 491                                                                 |       | — |   | 2,217 |   |
|                                                            |       |                                                    |       |                                                                |       |   |   |   |   |
| Income available to common shareholders                         |       | $                                                       | 599        |                                                                | $          | 1,090 |   | $ | 2,271 |   | $ | 4,488 |   |
|                                                            |       |                                                    |       |                                                                |       |   |   |   |   |
| Weighted-average common shares outstanding                      |       | 40,275,829                                              |       | 40,275,829                                                          |       | 30,350,989 |   | 30,350,989 |   |
| Warrant                                                         |       | —                                                  |       | 1,636,199                                                           |       | — |   | 1,819,651 |   |
| Units of limited partnership held by  minority interest holders |       | —                                                  |       | 31,625,960                                                          |       | — |   | 29,634,589 |   |
| Restricted common shares                                        |       | —                                                  |       | —                                                              |       | — |   | 1,072 |   |
| Total weighted-average shares outstanding                       |       | 40,275,829                                              |       | 73,537,988                                                          |       | 30,350,989 |   | 61,806,301 |   |
| Earnings per common share                                       |       | $                                                       | 0.01       |                                                                | $          | 0.01 |   | $ | 0.07 |   | $ | 0.07 |   |

 

In connection with the Company’s formationtransactions during 2004, the Company and its Operating Partnership issued awarrant to Vornado Realty Trust, a portion of which was exercised by Vornadoupon the closing of the Company’s initial public offering. On November 2, 2004,in connection with the closing of the Company’s initial public offering, Vornadoexercised the warrant for 6,666,667 units of limited partnership interest inour Operating Partnership at a price of $7.50 per unit. On May 2, 2006,the Company issued 1,817,247 common shares of beneficial interest to Vornadopursuant to the exercise of its warrant, dated July 27, 2004, as amended.Under the terms of the warrant, Vornado was entitled to exercise

 

19

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

 

On June 19, 2006, the Company declared aquarterly dividend of $0.2275 per outstanding common share. The dividend of $16.6 millionwas paid on July 14, 2006, of which $9.4 million and $7.2 million was paid to commonshareholders and unitholders of the Operating Partnership, respectively, ofrecord on June 30, 2006.

 

**12. Acquisition of Real Estate Investments**

 

The Company acquired 24 student housingproperties and three land parcels during the year ended December 31, 2005 forand aggregate purchase price of approximately $548.5 million; one studenthousing property during the three months ended June 30, 2006 for a purchase priceof $36.9 million, and seven student housing properties during the six monthsended June 30, 2006, for an aggregate purchase price of $119.4 million. Duringthe three and six months ended June 30, 2005, the Company acquired eightand 16 student housing properties, respectively, for an aggregate purchase priceof $146.4 million and $317.8 million.  The results of operationsfor each of the acquired properties have been included in our statements ofoperations from the respective purchase dates.  All pro forma financialinformation presented within this footnote is not necessarily indicative of theresults which actually would have occurred if the purchases had beenconsummated on January 1, 2005, nor does the pro forma information purportto represent the results of operations for future periods.

 

The following unaudited pro forma financialinformation for the three- and six- month periods ended June 30, 2006 and June30, 2005 gives effect to the acquisition of the 31 student housing propertiesas if the transactions had occurred on January 1, 2005 (in thousands):

 
| ** **                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                         |       |                                            |       |                                          |       |   |   |   |   |
| Pro forma revenue            |       | $                                               | 72,966     |                                          | $          | 70,499 |   | $ | 140,192 |   | $ | 121,456 |   |
| Pro forma net  income (loss) |       | $                                               | (552       | )                                             | $          | 1,212 |   | $ | 608 |   | $ | 3,020 |   |
| Pro forma EPS – Basic   |       | $                                               | (0.01      | )                                             | $          | 0.05 |   | $ | 0.02 |   | $ | 0.10 |   |
| Pro forma EPS – Diluted |       | $                                               | (0.01      | )                                             | $          | 0.05 |   | $ | 0.01 |   | $ | 0.09 |   |

 

**13. Restatement ofPrior Results**

 

The Company is restating its consolidated financial statements for thethree and six months ended June 30, 2005 due to the discovery of errors inrevenue recognition, depreciation and operating expenses related to certaintransactions reported by the Company and to reclassify equity in earnings ofunconsolidated entities. The following is a summary of previouslyreported and restated quarterly financial information for the three and six monthsended June 30, 2005 (in thousands, except per share data):

 

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| ** **                         | ** ** | **Three Months Ended  June 30, 2005** | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                         | ** ** | **As Reported**                                      | ** ** | **As Restated**                                    | ** ** | **As Reported** | ** ** | **As Restated** | ** ** |
|                               |       |                                                      |       |                                                    |       |   |   |   |   |
| Total revenue                      |       | $                                                         | 50,619     |                                                    | $          | 49,661 |   | $ | 92,823 |   | $ | 90,633 |   |
| Net income                         |       | $                                                         | 1,562      |                                                    | $          | 826 |   | $ | 3,380 |   | $ | 2,271 |   |
| Basic earnings per common  share   |       | $                                                         | 0.05       |                                                    | $          | 0.03 |   | $ | 0.11 |   | $ | 0.07 |   |
| Diluted earnings per common  share |       | $                                                         | 0.05       |                                                    | $          | 0.03 |   | $ | 0.11 |   | $ | 0.07 |   |

 

The following provides a moredetailed reconciliation of the amounts previously reported on Form 10-Q for thethree and six months ended June 30, 2005 to the restated amounts (in thousands).

 
| ** **                                                    | ** ** | **Three Months Ended  June 30, 2005** | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Revenue:                                                      |       |                                                      |       |                                                    |       |
| Total revenue previously reported                             |       | $                                                         | 50,619     |                                                    | $          | 92,823 |   |
| Reduction in expense reimbursement –  related party      |       | (622                                                      | )          | (1,275                                                  | )          |
| Reduction in management fees – third party               |       | (3                                                        | )          | (106                                                    | )          |
| Reduction in other fee income – related  party(a)        |       | (333                                                      | )          | (809                                                    | )          |
| Total adjustments to revenues                                 |       | (958                                                      | )          | (2,190                                                  | )          |
| Total revenues as restated                                    |       | $                                                         | 49,661     |                                                    | $          | 90,633 |   |
|                                                          |       |                                                      |       |                                                    |       |
| Net income:                                                   |       |                                                      |       |                                                    |       |
| Net income previously reported                                |       | $                                                         | 1,562      |                                                    | $          | 3,380 |   |
| Revenue recognition adjustments                               |       | (958                                                      | )          | (2,190                                                  | )          |
| Increase (reduction) in property operating  expenses          |       | (229                                                      | )          | 396                                                     |       |
| Reduction of expense reimbursement                            |       | 622                                                       |       | 1,275                                                   |       |
| Increase in real estate taxes                                 |       | (575                                                      | )          | (580                                                    | )          |
| Increase in administrative expenses                           |       | (93                                                       | )          | (102                                                    | )          |
| Increase in depreciation and amortization(b)                  |       | (613                                                      | )          | (1,564                                                  | )          |
| Increase in interest expense                                  |       | (61                                                       | )          | (11                                                     | )          |
| Increase in equity in earnings of  unconsolidated entities(a) |       | 455                                                       |       | 941                                                     |       |
| Increase in income taxes                                      |       | (965                                                      | )          | (1,320                                                  | )          |
| Decrease in minority interest                                 |       | 1,681                                                     |       | 2,046                                                   |       |
| Net income as restated                                        |       | $                                                         | 826        |                                                    | $          | 2,271 |   |

 

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(a)   Includes the reclassification of $455,000and $941,000 for the three and six months ended June 30, 2005, respectively, ofpreferred returns from military housing project joint ventures.

 

(b)   Based on the Company’s re-evaluation ofthe estimates used in the purchase price allocation of properties, amountsallocated to land and buildings have been revised. Previously, the Company’sestimate of the land allocation was 20% of the purchase price for acquiredproperties. Management has changed its estimates used in this allocation toreflect the allocation for properties acquired to correspond to appraisedvalues. The change in estimate is being applied retroactively through priorperiods. The Company will obtain appraisals for all properties to be acquiredgoing forward. With respect to properties acquired for which appraisals had notbeen obtained prior to implementation of this change in estimates, the Companyused appraisals for properties with similar characteristics. The change inestimates has resulted in an increase in the purchase price allocation tobuildings and a decrease in the purchase price allocation to land by $126.0million for the properties acquired through 2005, and an increase in thedepreciation expense on buildings by the amounts stated above.

 

**14. Subsequent Events**

 

In the third quarter of 2006, the Companyentered into employment agreements with John DeRiggi, President of the StudentHousing Business and Chief Investment Officer, Joseph M. Macchione,

 

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Executive VicePresident, General Counsel and Secretary and J. Patrick O’Grady, who commencedemployment as the Company’s Executive Vice President and Chief FinancialOfficer effective as of July 1, 2006. These employment agreements are for aninitial three-year term effective as of July 1, 2006 and provide for basesalaries aggregating $850,000 in each of the three years. The base salarieswill increase annually effective January 1 of each year by a minimum amountequal to at least the percentage increase in the Consumer Price Index.

 

On July 21, 2006, financing was secured forthe Carlisle/Picatinny project, in which the Company acquired an ownershipposition and to which the Company commenced providing property management andmaintenance services effective as of May 1, 2006. As of the filing of thisreport, construction and renovation agreements were in the process of beingcompleted to permit the commencement of construction/renovation activities.

 

On August 1, 2006, the Company acquired twostudent housing properties, containing an aggregate of 203 units and 696 beds,for an aggregate purchase price of approximately $41.4 million. Theseacquisitions were financed through the placement of new mortgage debt on theproperties and borrowings under the Company's Credit Facility. With respect tothe property located in San Diego, California, the Company placed $28.6 millionin 10-year, interest-only mortgage debt on the property, with a fixed interestrate of 5.97%. With respect to the property located in Mankato, Minnesota, theCompany placed $3.0 million in 10-year, interest-only, mortgage debt on theproperty, with a fixed interest rate of 6.19%.

 

On August 17, 2006, the Company completed theacquisition of an aggregate of five contiguous land parcels for the developmentof a student housing property located near Sam Houston State University inHuntsville, TX. The land parcels were acquired for an aggregate purchase priceof approximately $1.8 million, which was financed primarily from borrowingsunder the Company’s Credit Facility.

 

Effective as of September 6, 2006, theCompany entered into a Third Amendment and Waiver to Credit Agreement with thelender syndicate under the Credit Facility. Under the agreement, the lendersyndicate provided waivers of the Company’s financial covenants relating to therequirement to maintain an interest coverage ratio equal to or greater than2.00x, and a fixed charge coverage ratio equal to or greater than 1.75x, eachas of the end of the quarter ended June 30, 2006. In addition, the agreementprovided for amendments to the definitions of the terms “consolidated EBITDA” and“funds from operations” to permit the Company to add back the non-recurringexpenses relating to the special investigation performed by the Audit Committeeand to the formation and operations of the Company’s Special Committee inconnection with its review of strategic alternatives. In addition, theagreement included an amendment to the Company’s total leverage ratio,commencing with the quarter ended June 30, 2006, from 60% to 70%. Under theterms of the amendment, the 70% total leverage ratio will be in effect throughDecember 31, 2006, and thereafter will revert to 60%. Commencing with thequarter ended June 30, 2006 and through December 31, 2006, the applicable rateon all amounts outstanding under the credit facility, as amended, when theCompany’s leverage ratio exceeds 65% will be 2.625% and 2.00% for Eurodollarrate loans and prime rate loans, respectively. The Company incurred $540,000 infees in connection with this waiver and amendment

 

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**Item2.****            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 to college anduniversity students residing off-campus and to members of the U.S. military andtheir families. As of June 30, 2006, we owned, or had ownership interests in,61 student housing properties containing a total of 11,494 units and 37,014beds, one undeveloped parcel of land held for development as student housingproperties and three partially developed parcels of land, and we owned minorityequity interests in joint ventures that own our military housing privatizationprojects. Additionally, as of June 30, 2006, our operating partnership had anownership interest in, and through various wholly-owned subsidiaries operates,nine military housing privatization projects, comprising an aggregate of approximately17,093 end-state housing units on 21 military bases.

 

On May 1, 2006, we officially closed on theaward of the project that was under exclusive negotiation, comprising 887end-state housing units on the base of Fort Gordon located near Augusta, Georgia.On May 1, 2006, we also acquired an ownership interest in the Army’s CarlisleBarracks and Picatinny Arsenal project and began providing management andmaintenance services to this project, which covers 348 end-state units. On July21, 2006, financing was secured for the project, and as of the filing of thisreport, construction and renovation agreements are in the process of beingcompleted to permit the commencement of construction/renovation activities. Wealso are currently in the solicitation process with the U.S. Air Force for amilitary housing privatization project that is expected to cover four bases and2,875 end-state housing units.

 

Through our taxable REIT subsidiaries, weprovide development, construction, renovation and management services for ourmilitary housing privatization projects and property management services forstudent housing properties owned by others. In order to comply with theapplicable requirements under the REIT provisions of the Code, we must limitthe operations of taxable REIT subsidiaries so that securities issued to us byour taxable REIT subsidiaries do not represent more than 20% of our totalassets as of the close of any quarter in our taxable year and so that dividendsfrom our taxable REIT subsidiaries, together with our other non-qualifyinggross income, do not exceed 25% of our gross income for any taxable year.

 

Currently, our operations are managed withintwo operating segments: (1) student housing and (2) military housing.This structure provides an effective platform for maximizing market penetrationand optimizing operating economies of scale. In addition, we separately report athird segment with the activities of certain departments from a corporatelevel, which includes personnel that service GMH Communities Trust as a wholeand support our overall operations.

 

***Restatement of 2005 quarterly financialstatements and identification of material weaknesses in internal control overfinancial reporting and disclosure controls and procedures***

 

As previously disclosed in our Annual Reporton Form 10-K for the year ended December 31, 2005, in the first quarter of 2006the Audit Committee of our Board of Trustees conducted an investigation ofcertain accounting and financial reporting matters. The investigationidentified material weaknesses in our internal control over financial reportingand in our disclosure controls and procedures as of December 31, 2005. While wehave initiated a remediation plan designed to address these materialweaknesses, we cannot provide assurance that such plan will effect completeremediation of all of the identified material weaknesses as of the end of the2006 fiscal year. In connection with the investigation, we reviewed ourpreviously reported financial statements. Through this review, we identifiedadjustments that were material to the results we previously reported for thequarterly periods ended March 31, 2005, June 30, 2005 and September 30, 2005. Accordingly,we previously restated our financial statements for the three months endedMarch 31, 2005, and we are restating our financial statements for the three andsix months ended June 30, 2005 in this report. In addition, we are in theprocess of restating our financial statements for the

 

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period ended September 30, 2005,which we expect to include in an amendment to our Quarterly Report on Form 10-Qfor the three months ended September 30, 2005. Operating results for the threeand six-month periods ended June 30, 2005 as presented in this report have beenrestated, and are provided in more detail in Note 13 to the consolidatedfinancial statements contained in the section entitled “Financial Statementsand Supplementary Data” in Part I, Item 1 of this report.

 

*Student Housing*

 

The student housing segment acquires, ownsand manages off-campus student housing properties strategically located nearcollege or university campuses. During the period beginning July 2004 and endingJune 30, 2006, our rental revenue increased substantially as a result of theacquisition of our properties, including those properties acquired in ourformation transactions. The rental payments we receive as a result of theproperties that we own are reflected in our revenue. Additionally, operatingexpenses, real estate taxes and depreciation and amortization have increased asa result of these acquisitions. Further, interest expense has increased relatedto the financing of the properties we have acquired.

 

Historically, we have found certain propertyrevenues and operating expenses to be cyclical in nature, and therefore notincurred ratably over the course of the year. As our properties are leasedpredominantly on an academic-year basis, certain of our operating revenues andexpenses will vary from quarter to quarter depending on the leasing cycle. Forexample, we experience significant turnover costs during the third quarter ofour fiscal year, in connection with preparing our properties for new residentsprior to commencement of the new academic-year lease period, which typicallybegins in August or September. In addition, we also typically incur higherlease-up costs during the first two quarters of our fiscal year, as this is theperiod during which we heavily target students for leases that will commencefor the next academic year. Property revenues and expenses may differ fromexpected results in the year of acquisition, depending on the timing of theacquisition in relation to the leasing cycle. We expect this trend to continueas we acquire additional properties. In comparing our operating statistics forthe three months ended June 30, 2006 versus the same period in 2005, most ofthe key operating metrics for the student housing segment experiencedsignificant increases, primarily as a result of the acquisition of additional propertiesduring 2005 and the first half of 2006. Most notably, for the three monthsended June 30, 2006 compared to the three months ended June 30, 2005, rent andother property income, depreciation and amortization, interest expense, realestate taxes, and property operating expense each increased significantly. Theseincreases were due to a number of factors, including the increase in size ofour portfolio in general, as well as the following: with respect to real estatetaxes, more aggressive assessments by local taxing authorities with respect tocertain of our student housing properties throughout 2005 and the first half of2006; and with respect to property operating expenses due primarily to timingissues surrounding the dates on which we acquired properties in relation to thestudent housing leasing cycle, as noted above. During 2005 and the quarter endedJune 30, 2006, we also experienced, and expect to continue to experience,increases in operating expenses (in addition to the proportionate increaseassociated with the increased number of properties owned in 2006 versus 2005)that will include increased utility expenses resulting from national trends inhigher energy-related costs and higher insurance costs.

 

We earn management fees from managingproperties for related parties and third parties. These fees are typicallyequal to a percentage of cash receipts or gross rental revenues generated bythe managed properties, or equal to a fixed monthly amount, according to themanagement agreements for the properties we manage. We also have the ability toearn incentive management fees by achieving specified property-levelperformance criteria for certain properties we manage for third parties.Further, certain operating expenses incurred related to properties we managefor others are reimbursed by the owners of the properties managed. We expect tocontinue generating fee income revenue and operating expense reimbursementsfrom the properties that we manage for others, although the amounts areexpected to become less significant as a percentage of our overall revenues asrental income increases from the properties we own. During the second half of2006, we expect to continue to pursue new third-party management agreements byutilizing relationships in the student housing market and providing oursignificant operational economies of scale as a savings mechanism for otherthird party owners, including institutional owners and individual studenthousing owners.

 

24

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During the second half of 2006, we expect toacquire additional student housing properties and development projects that arelocated in our targeted markets and that meet management’s underwritingcriteria for creating long-term growth potential. During 2005, we entered intoa joint venture with an institutional partner to develop and construct twostudent housing properties. Under the terms of this venture, our joint venturepartner agreed to fund 90% of the equity expected to be required for developmentof the properties, which includes acquisition costs for the properties and aportion of the development and construction costs, and we agreed to fund theremaining 10% of the required equity. The joint venture then obtained constructionloans for the properties to be developed that permits draws for up to a certainpercentage of the total cost of development. The terms of the joint ventureprovide that we manage the properties, including the development, constructionand pre-leasing of the properties, and have the option to purchase our partner’sinterest in the joint venture within one year after completion of theproperties. In an effort to conserve our capital resources, we will consider, atleast through the remainder of 2006, funding future acquisitions of studenthousing properties and development projects through joint venture structures.We also may determine that it is appropriate to purchase additional studenthousing properties outright, as opposed to with a joint venture partner,depending upon many factors which may include, but are not limited to, theapplicable purchase price, available capital and projected returns with respectto the property. In addition to utilizing cash from operations and from ourline of credit, we may leverage existing student housing properties which areunderleveraged or unencumbered by debt to generate cash to fund the purchase ofadditional student housing properties or our equity investments in jointventures. The timing of any additional acquisitions or development projectswill be dependent upon various factors, including our ability to completesatisfactory due diligence, find suitable joint venture partners and agree uponmutually acceptable joint venture terms, obtain appropriate debt financing onthe properties, and the availability of capital.

 

During the three months ended June 30, 2006,we executed agreements of sale relating to, in the aggregate, thepurchase of a portfolio of 13 student housing properties from CapstoneProperties for an aggregate purchase price of $247.0 million. On July 26,2006, we gave notice to the seller that we were terminating agreements relatingto two of the properties in the portfolio, in accordance with the terms ofthose agreements. On July 27, 2006, we entered into a first amendment to theagreements of sale (i) to formally terminate the agreement relating to thosetwo properties, (ii) reduce the aggregate purchase price of the remaining 11properties to approximately $223.0 million, and extend the due diligence periodunder the agreements through August 5, 2006. On August 2, 2006, our Board ofTrustees approved the acquisition of the portfolio, subject to the Company’sreceipt of appropriate financing. We expect to close on this acquisition duringthe fourth quarter of 2006.

 

During the three months ended June 30, 2006,we acquired a student housing property, College Park – Stadium Suites, locatedin Columbia, South Carolina and serving the University of South Carolina. Theproperty contains 264 units and 924 beds and was acquired on April 20, 2006 foran acquisition price of approximately $36.9 million, including the assumptionof approximately $28.0 million of existing 10-year fixed-rate mortgage debtwith an interest rate of 5.57%.

 

As of June 30, 2006, with regard to ourstudent housing segment, we:

 

•  owned 61 student housing propertiescontaining a total of 11,494 units and37,014 beds;

 

•  managed a total of 23 student housingproperties owned by others, containing a total of 4,056 units and 13,122 beds; and we provided pre-leasing services for twostudent housing properties owned by others, which were under construction andwhen complete will contain a total of 455 units and 1,938 beds;

 

•  owned a 10% interest in a joint venturethat had two student housing properties under development, which are expectedupon completion to contain a total of 288 units and 1,152 beds; and

 

25

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•  owned one undeveloped and one partiallydeveloped parcel of land, which currently are expected, upon completion, tocontain a total of 252 units and 870 beds.

 

On August 1, 2006, the Company acquired twostudent housing properties, containing an aggregate of 203 units and 696 beds,for an aggregate purchase price of approximately $41.4 million. These acquisitionswere financed through the placement of new mortgage debt on the properties. Withrespect to the property located in San Diego, California, the Company placed$28.6 million in 10-year, interest-only mortgage debt on the property, with afixed interest rate of 5.97%. With respect to the property located in Mankato,Minnesota, the Company placed $3.0 million in 10-year, interest-only, mortgagedebt on the property, with a fixed interest rate of 6.19%.

 

On August 17, 2006, the Company completed theacquisition of an aggregate of five contiguous land parcels for the developmentof a student housing property located near Sam Houston State University inHuntsville, TX. The land parcels were acquired for an aggregate purchase priceof approximately $1.8 million, which was financed primarily from borrowingsunder the Company’s credit facility.

 

*Military Housing*

 

Our military housing segment develops, constructs, renovates andmanages military housing privatization projects in which we acquire interests.Our military housing segment began generating revenue in the fourth quarter of2003 with the initiation of our Fort Carson and Fort Stewart and Hunter ArmyAirfield projects. Revenue grew throughout 2005 and the first six months of2006 with the addition of various other projects. We receive income from ourmilitary housing segment which is comprised primarily of fee income forproviding development, construction/renovation and management services to ourmilitary housing privatization projects and from returns on the equity weinvest 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 60 to 90-day period preceding the initiation of our management of theproject. Typically, at the time we initiate management on a project, theproject reimburses us for these amounts from the proceeds of the debt issued bythe joint venture that owns the project.

 

As of June 30, 2006, we owned equityinterests in the joint ventures that owned the nine military housingprivatization projects currently in operation, encompassing 21 military basestotaling 17,093 end-state housing units. During the three and six months endedJune 30, 2006, we earned fees for providing development, construction/renovationand management services to eight military housing privatization projects. Withrespect to the Carlisle/Picatinny project, which represents the ninth militaryhousing privatization project in operation as of June 30, 2006, constructionand renovation agreements for the project were still in the process of beingnegotiated. Therefore, we earned fees only for management services during thethree and six-months ended June 30, 2006.

 

In May 2005, the U.S. Department of theArmy selected us to be its private sector partner for the design, development,construction, renovation and management of family military housing units atFort Gordon, located near Augusta, Georgia. On May 1, 2006, we closed on theformal award of this project by the Army and officially commenced operations onthis project. The project will have a six-year initial development period withnew construction and renovations of 887 end-state housing units. The 50-yearproject term will involve the development, management and construction ofhigh-quality homes, the targeted renovation of existing homes, and the additionof community enhancing facilities and services. In addition, we are currentlyin the solicitation process with the Air Force for a military housingprivatization project that is expected to cover four bases and 2,875 end-statehousing units.

 

26

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In February 2006, we entered into anagreement with American Eagle Communities Northeast LLC to obtain its rights toexclusively negotiate with the Army with respect the Carlisle/Picatinny projectlocated in Carlisle, Pennsylvania and Dover, New Jersey. On May 1, 2006, we acquiredan ownership interest in the Carlisle/Picatinny project and began providingproperty management and maintenance services to the project. On July 21, 2006, financingwas secured for the project and, as of the date of this report, constructionand renovation agreements were in the process of being completed to permit thecommencement of construction/renovation activities. The 50-year project has afive-year initial development period and covers new construction and/orrenovation of 348 end-state housing units.

 

By the end of 2006, we, together with theArmy as our joint venture partner for our Fort Carson project, expect to receiveCongressional approval to expand the Fort Carson project. The expansion isexpected to have a four-year initial development period covering approximately400 new housing units. If the proposed expansion plan is approved by Congress,financing is expected to be completed shortly thereafter. With the proposedexpansion, the Fort Carson project would cover in excess of 3,000 end-statehousing units.

 

With regard to trends and uncertainties inthe military housing market, some of the bases included in our military housingprivatization projects were targeted for closure or realignment in the latest roundof the Base Realignment and Closure, or BRAC, process, which was initiated in1988 and completed its fifth and, under current legislation, the final round in2005. The Department of Defense (DoD) released its initial recommendations forBRAC in May 2005, and the BRAC Commission then voted to amend the DoD’sinitial list on July 19, 2005. Under the BRAC Commission’s revisions,several bases were removed from the DoD’s list of bases targeted for closure,including the Submarine Base in New London, CT and the Portsmouth NavalShipyard in Kittery, Maine. In addition, the BRAC Commission also proposed aless significant realignment at the Fort Eustis base under our Fort Eustis/FortStory project in Newport News, Virginia than was proposed by the DoD, and theBRAC Commission proposed to close the Naval Air Station in Brunswick, Maine,which had been recommended by the DoD to be realigned.   Finally, theBRAC Commission voted to uphold the DoD’s recommendation to close the WalterReed Army Medical Center in Washington, DC.  In September 2005, theBRAC Commission sent its report to the President regarding its findings andrecommended changes to the DoD’s initial report, and President Bush accepted theBRAC Commission’s recommendations in their entirety. On November 9, 2005,the BRAC round was completed when Congress also approved the BRAC Commission’srecommendations in their entirety. Under the final BRAC list versus theoriginal DoD recommendations, the number of affected military housing unitscovered by our existing projects was reduced from 2,500 to approximately 700units, with these remaining approximately 700 units located at the Naval AirStation in Brunswick, Maine.  As of the filing of this report, nodates had been formally approved for closure of the Naval Air Station or theWalter Reed Army Medical Center; however, it is anticipated that such closureswould occur no later than 2011 in accordance with applicable BRAC legislation.

 

We are in the process of finalizingplans with the Navy to restructure the terms and debt financing for the NavyNortheast Region project as a result of (i) the anticipated closureof the Naval Air Station, which covers approximately 723 end-state housingunits and (ii) the need to further reduce the number of end-statehousing units for the project overall by approximately 620 units due tochanges in area housing market conditions that are affecting occupancy ratesfor the project. As part of the anticipated plan to reduce the scope ofthe Navy Northeast Region project, the joint venture entity that we owntogether with the Navy is in the process of restructuring the outstanding bondsthat were originally issued to finance the project. We expect the restructuringto be completed during the fourth quarter of 2006.

 

With respect to the BRAC-related closure ofthe Walter Reed Army Medical Center, we do not expect the closure to result inthe loss of housing units, as these housing units are likely to be utilized bypersonnel who will be relocated from serving at Walter Reed to serving atnearby military facilities in the Washington, DC metropolitan area.

 

Our management team also had under review, asof August 18, 2006, 10 additional potential privatization project opportunities.These projects span multiple bases and total, in the aggregate, approximately 22,700housing units. Individual projects identified as opportunities range from approximately1,000 units to 5,500 units per project. We consider a project as “under review”once a base

 

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has been identified by the DoDfor privatization and our management begins initial due diligence andevaluation of the economic and strategic value of the project. After furtherdue diligence, we may decide not to pursue any of these potential privatizationprojects. We also will continue to pursue opportunities to acquire projects orproject rights from our competitors, as well as opportunities to participate inpilot housing programs for unaccompanied military personnel.

 

**Critical Accounting Policies**

 

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

 

The followingpolicies require significant judgments and estimates on our part in preparingthe Company’s consolidated financial statements. Changes in these judgments andestimates could have a material effect on these financial statements.

 

**Revenue Recognition**

 

*Student Housing*

 

Studenthousing revenue includes rental revenue and other property income, standard andincentive management fees, and reimbursements of certain operating expenses.These sources of revenue are described in greater detail below:

 

• we recognize student housing rental revenue when due over the leaseterms, which are generally 12 months or less;

 

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

 

• standard management fees are based on a percentage of monthly cashreceipts or gross monthly rental and other revenues generated by the propertiesmanaged for others. We recognize these fees on a monthly basis as the servicesare performed;

 

• we earn incentive management fees as a result of the achievement ofcertain operating performance criteria over a specified period by certainmanaged properties, including targeted annual debt service coverage ratios ofthe properties. We recognize these fees at the amount that would be due underthe contract if the contract was terminated on the balance sheet date; and

 

• expense reimbursements are comprised primarily of salary and relatedcosts of certain of our employees working at certain properties we manage forothers, the cost of which is reimbursed by the owners of the relatedproperties. We accrue operating expense reimbursements as the related expensesare incurred.

 

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*Military Housing*

 

We earnmilitary housing revenues for providing services to our military housingprivatization projects, including the following:

 

• standard and incentive management fees, which are based on a percentageof effective gross revenue generated by the military housing privatizationprojects from the basic allowance for housing provided by the government toservice members, referred to as BAH, are recognized when the revenue is earnedby the military housing projects. Incentive management fees are based upon thesatisfaction of certain criteria including, among other things, satisfyingdesignated benchmarks relating to emergency work order response, occupancyrates, home turnover and resident satisfaction surveys. Incentive managementfees are recognized when the various criteria stipulated in the managementcontract have been satisfied.

 

•   standard and incentive development andconstruction/renovation fees, which are based on a percentage of developmentand construction/renovation costs incurred by the military housingprivatization projects, including hard and soft costs and financing costs arerecognized on a monthly basis as the costs are incurred by the military housingprojects. Incentive development and construction/renovation fees are based uponthe satisfaction of certain criteria including, among other things, completinga number of housing units according to schedule, achieving specific safetyrecords and implementing small business or minority subcontracting plans. Thesefees are recognized when the various criteria stipulated in the contract havebeen satisfied.

 

•  in certain instances, we may receive feesrelating to the performance of pre-construction/renovation services. Thesepre-construction/renovation fees are determined on a project-by-project basis,and are paid in proportion to the amount of pre-construction/renovation costsincurred by us for the project. These pre-construction/renovation fees aredetermined on a project-by-project basis, and are recognized as revenue uponperformance of the pre-construction/renovation services.

 

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

 

•   business development fees are earned from ourbusiness partners that provide architectural and design or constructionservices for our military housing privatization projects. These fees are earnedin connection with pursuing and coordinating the completion of military housingprojects. The fees consist of (i) an annual base fee, which is a fee paidto the Company in consideration of the Company’s ongoing pursuit of additionalprojects and is not contingent upon the success of those efforts and may becancelled at any time, and (ii) an additional fee, which is paid over thecourse of an awarded project based on a percentage of revenue earned by these businesspartners for providing services to our 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.  Theadditional fee is recognized and paid to us as the related services areprovided to our military housing projects by our business partners.

 

•  equity returns are earned on ourinvestments in military housing projects. During the initial development periodfor a project, the equity returns are a fixed percentage of our investment andsubsequent to the initial development period for a project, the equity returnsare based on a fixed percentage of our investment and on the project’s netoperating income, subject to cash distribution

 

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caps, as defined in theoperating agreements related to the particular project. As of June 30, 2006,only the Fort Carson project had passed its initial development period.

 

•   expense reimbursements are comprisedprimarily of renovation expenses and property management expenses, the costs ofwhich are reimbursed by the military privatization projects to which theyrelate. The expenses include payments to third parties for renovation services,and include salaries and related costs of our employees that are managing therenovation and property management activities. We accrue expense reimbursementsas the related expenses are incurred.

 

***Real EstateInvestments and Corporate Assets***

 

We carry real estate investments and corporate assets at cost, net ofaccumulated depreciation. Cost of acquired assets includes the purchase priceand related closing costs. We allocate the cost of real estate investments to nettangible and identified intangible assets based on relative fair values inaccordance with Statement of Financial 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-place leases is based on the difference between(i) the property valued with existing in-place leases and (ii) theproperty valued as if vacant. As lease terms typically are 12 months orless, actual rates on in-place leases generally approximate market rentalrates. Factors that we consider in the valuation of in-place leases include anestimate of incremental carrying costs during the expected lease-up periodsconsidering current market conditions and nature of the tenancy. Purchaseprices of student housing properties to be acquired are not expected to beallocated to tenant relationships considering the terms of the leases and theexpected levels of renewals. We amortize the value of in-place leases toexpense over the remaining term of the respective leases, which is generallyone year or less.

 

We expense routine repair and maintenance costs that do not improve thevalue of an asset or extend its useful life, including turnover costs. Wecapitalize expenditures that improve the value and extend the useful life of anasset. We compute depreciation using the straight-line method over theestimated useful lives of the assets, which is generally 40 years forbuildings including student housing properties and the commercial officebuilding, and three to five years for residential furniture and appliances.During the third quarter of each fiscal year, we typically will experience anincrease in property operating expenses over other quarters as a result ofrepair and maintenance expenditures relating to turnover of units at studenthousing properties. The Company’s student housing lease terms generallycommence in August or September to coincide with the beginning of the academicyear. Accordingly, the Company expects to incur a majority of its repair andmaintenance costs in the third quarter to prepare for new residents.

 

In accordance with Statement of Financial Accounting StandardsNo. 144 (“SFAS 144”),*Accountingfor the Impairment or Disposal of Long-Lived Assets*, long-livedassets, such as real estate investments and purchased intangibles subject toamortization, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable. Thesecircumstances may include, but are not limited to, operational performance,market conditions and competition from other off-campus properties andon-campus housing, legal and environmental concerns, and results of appraisalsor other information obtained as part of a financing or disposition strategy.When required, we review recoverability of assets to be held and used through acomparison of the carrying amount of an asset to estimated undiscounted futurecash flows expected to be generated by the asset. If the carrying amount of anasset exceeds its estimated undiscounted future cash flows, an impairmentcharge is recognized in an amount by which the carrying value of the assetexceeds the fair value of the asset determined using customary valuationtechniques, such as the present value of expected future cash flows. Assets tobe disposed of would be separately presented in the balance sheet and reportedat the lower of the carrying amount or fair value less costs to sell, and nolonger would be depreciated.

 

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***Allowance forDoubtful Accounts***

 

We estimate the collectibility of receivables generated by rental andother income as a result of the operation of our student housing properties. Ifwe believe that the collectibility of certain amounts is questionable, werecord a specific reserve for these amounts to reduce the amount outstanding toan amount we believe will be collectible and a reserve for all other accountsbased on a range of percentages applied to aging categories, which is based onhistorical collection and write-off experience.

 

We also evaluate the collectibility of fee income and expensereimbursements generated by the management of student housing properties ownedby others and through the provision of development, construction, renovationand management services to our military housing privatization projects basedupon the individual facts and circumstances, and record a reserve for specificamounts, if necessary.

 

***Minority Interest***

 

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

 

***Investments inMilitary Housing Projects and Student Housing Joint Ventures***

 

Military housing projects are joint ventures entered into between theCompany and the U.S. military to design, develop, construct/renovate and managethe military family housing located on or near various bases throughout theUnited States. The Company evaluates its investments in military housingproject joint ventures in which we have a variable interest to determine if theunderlying entity is a variable interest entity (“VIE”) as defined under FASBFinancial Interpretation No. 46 (as revised) (“FIN 46(R)”). The Companyhas concluded that each of the military housing project joint ventures in whichit has 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 into a joint venture in the third quarter of 2005to develop and construct two student housing properties. The Company isaccounting for the transaction as a financing arrangement because the Companyoriginally owned the land and contributed it to the joint venture and has theoption to purchase the joint venture partner’s interest in the joint venturewithin one year of completion of the

 

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properties, and because theCompany has provided certain guarantees for the completion of construction andfor a portion of the construction loans. Therefore, the Company accounts forits investment in the joint venture by including its assets and liabilities inthe Company’s consolidated financial statements.

 

***Income Taxes***

 

The Company elected to be taxed as a REIT under the Code commencingwith its taxable year ended December 31, 2004. To continue to qualify as aREIT, the Company must meet a number of organizational and operationalrequirements, including a requirement that we currently distribute at least 90%of our adjusted taxable income to our shareholders. We believe we are organizedand operate in a manner that allows us to qualify for taxation as a REIT underthe Code, and it is our intention to adhere to these requirements and maintainthe Company’s REIT status in the future. Accordingly, no provision has beenmade for federal income taxes in the accompanying consolidated financialstatements, other than with respect to the Company’s taxable REIT subsidiaries.

 

***Comparison of theThree Months Ended June 30, 2006***

***to the Three MonthsEnded June 30, 2005***

 
| ** **                                                                                              | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2006**                                            | ** ** | **2005 (Restated)** | ** ** |
| ** **                                                                                              | ** ** | **Student  Housing**                                | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                                                              | ** ** | **(dollars in thousands)**                | ** ** |
|                                                                                                    |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Revenue:**                                                                                            |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income                                                                          |       | $                                                   | 43,994     |   | $ | — |   | $ | 39 |   | $ | 44,033 |   | $ | 29,702 |   | $ | — |   | $ | 61 |   | $ | 29,763 |   |
| Expense reimbursements:                                                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                           |       | 103                                                 |       | 17,457 |   | 115 |   | 17,675 |   | — |   | 12,247 |   | 122 |   | 12,369 |   |
| Third party                                                                                             |       | 1,389                                               |       | — |   | — |   | 1,389 |   | 1,303 |   | — |   | — |   | 1,303 |   |
| Management fees:                                                                                        |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                           |       | 17                                                  |       | 2,084 |   | — |   | 2,101 |   | — |   | 1,543 |   | — |   | 1,543 |   |
| Third party                                                                                             |       | 647                                                 |       | — |   | — |   | 647 |   | 1,008 |   | — |   | — |   | 1,008 |   |
| Other fee income, related party                                                                         |       | —                                              |       | 5,581 |   | — |   | 5,581 |   | — |   | 3,619 |   | — |   | 3,619 |   |
| Other income                                                                                            |       | 32                                                  |       | 14 |   | 7 |   | 53 |   | 22 |   | — |   | 34 |   | 56 |   |
| Total revenue                                                                                           |       | 46,182                                              |       | 25,136 |   | 161 |   | 71,479 |   | 32,035 |   | 17,409 |   | 217 |   | 49,661 |   |
|                                                                                                    |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating Expenses:**                                                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property operating expense                                                                              |       | 18,217                                              |       | 1,513 |   | — |   | 19,730 |   | 10,844 |   | 1,286 |   | — |   | 12,130 |   |
| Reimbursed expenses                                                                                     |       | 1,492                                               |       | 17,457 |   | 115 |   | 19,064 |   | 1,303 |   | 12,247 |   | 122 |   | 13,672 |   |
| Real estate taxes                                                                                       |       | 4,353                                               |       | — |   | 24 |   | 4,377 |   | 3,143 |   | — |   | — |   | 3,143 |   |
| Administrative expenses                                                                                 |       | —                                              |       | — |   | 4,535 |   | 4,535 |   | — |   | — |   | 2,834 |   | 2,834 |   |
| Audit Committee and Special Committee  expenses                                                         |       | —                                              |       | — |   | 2,301 |   | 2,301 |   | — |   | — |   | — |   | — |   |
| Depreciation and amortization                                                                           |       | 10,507                                              |       | 130 |   | 78 |   | 10,715 |   | 8,565 |   | 19 |   | 99 |   | 8,683 |   |
| Interest                                                                                                |       | 11,235                                              |       | — |   | 441 |   | 11,676 |   | 6,681 |   | — |   | 220 |   | 6,901 |   |
| Total operating expenses                                                                                |       | 45,804                                              |       | 19,100 |   | 7,494 |   | 72,398 |   | 30,536 |   | 13,552 |   | 3,275 |   | 47,363 |   |
| Income (loss) before equity in earnings of  unconsolidated entities, income taxes and minority interest |       | 378                                                 |       | 6,036 |   | (7,333 | ) | (919 | ) | 1,499 |   | 3,857 |   | (3,058 | ) | 2,298 |   |
| Equity in earnings of unconsolidated  entities                                                          |       | —                                              |       | 1,174 |   | — |   | 1,174 |   | — |   | 455 |   | — |   | 455 |   |
| Income (loss) before income taxes and  minority interest                                                |       | 378                                                 |       | 7,210 |   | (7,333 | ) | 255 |   | 1,499 |   | 4,312 |   | (3,058 | ) | 2,753 |   |
| Income tax (benefit) expense                                                                            |       | (232                                                | )          | 1,446 |   | — |   | 1,214 |   | 15 |   | 1,103 |   | — |   | 1,118 |   |
| Income (loss) before minority interest                                                                  |       | 610                                                 |       | 5,764 |   | (7,333 | ) | (959 | ) | 1,484 |   | 3,209 |   | (3,058 | ) | 1,635 |   |
| Minority interest                                                                                       |       | 266                                                 |       | 2,514 |   | (3,198 | ) | (418 | ) | 734 |   | 1,587 |   | (1,512 | ) | 809 |   |
| **Net (loss) income**                                                                                   |       | $                                                   | 344        |   | $ | 3,250 |   | $ | (4,135 | ) | $ | (541 | ) | $ | 750 |   | $ | 1,622 |   | $ | (1,546 | ) | $ | 826 |   |

 

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***Student Housing***

 

*Revenue*.Of the 61 properties owned as of June 30, 2006, we acquired 24 of the studenthousing properties during the twelve months ended December 31, 2005, sixproperties during the three months ended March 31, 2006, and one propertyduring the three months ended June 30, 2006. Rent and other property income totaled$44.0 million for the three months ended June 30, 2006. As of June 30, 2005, weowned 46 student housing properties, with rent and other property incometotaling $29.7 million for the three months ended June 30, 2005.

 

Expense reimbursements from related parties increasedto $103,000 for the three months ended June 30, 2006. There were no expensereimbursements from related parties during the three months ended June 30,2005. This increase was due to one student housing property, partially owned byan affiliate of Gary M. Holloway, Sr., that we began managing as of January 1,2006. Expense reimbursements from third parties increased to $1.4 million forthe three months ended June 30, 2006 from $1.3 million for the three monthsended June 30, 2005. We expect expense reimbursements, which relate toproperties we manage but do not own, to continue to become a less significant portionof our student housing revenues as rental revenues earned from additionalproperties that we acquire continues to increase.

 

Management fee income from related parties increasedto $17,000 for the three months ended June 30, 2006. There were no managementfees earned during the three months ended June 30, 2005 from related partiesprimarily due to the Company’s acquisition of two student housing propertiesfrom related parties in March 2005, which were managed by the Company prior topurchase. In addition, we ceased managing another student housing property in March2005 as it was sold to a third party. The management fee income from relatedparties in 2006 consisted entirely of standard management fees related to theone student housing property partially owned by Mr. Holloway. Management feeincome from third parties decreased to $0.6 million for the three months endedJune 30, 2006 from $1.0 million for the three months ended June 30, 2005, primarilydue to the one-time payment in 2005 of approximately $400,000 in subordinatemanagement fees from a property that we managed.

 

For the remainder of 2006, we expectmanagement fee income to contribute less significantly to total revenues giventhe expected growth in rental revenue from the operations of properties we own.

 

*Expenses*. Property operating expenses increased to $18.2 million for the three monthsended June 30, 2006 from $10.8 million for the three months ended June 30, 2005,primarily due to expenses attributable to the 15 properties acquired from July1, 2005 through June 30, 2006. Property operating expenses also includecompensation and operating costs with respect to our student housing acquisitionsdepartment. We expect property operating expenses to continue to increase inthe future as we acquire additional properties. With respect to properties thatwe currently own, we also expect to continue to experience increases in utilityexpenses resulting from national trends in higher energy-related costs.

 

Reimbursed expenses were substantiallyunchanged, increasing to $1.5 million for the three months ended June 30, 2006from $1.3 million for the three months ended June 30, 2005.

 

Real estate taxes increased to $4.4 million for the three months endedJune 30, 2006 from $3.1 million for the three months ended June 30, 2005,primarily due to the acquisition of 15 properties since the end the secondquarter of 2005. We expect real estate taxes to continue to increasesignificantly in the

 

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future as we acquire additionalproperties, and to the extent that local authorities continue to aggressivelypursue higher real estate tax assessments on properties that we currently own.

 

Depreciation and amortization increased to $10.5million for the three months ended June 30, 2006 from $8.6 million for thethree months ended June 30, 2005 as a result of acquiring 15 properties for anaggregate purchase price of $347.2 million from July 1, 2005 through June 30, 2006.The $10.5 million in 2006 is comprised of $8.8 million of depreciation and $1.7million of lease intangible amortization, and the $8.6 million in 2005 iscomprised of $5.7 million of depreciation and $2.9 million of lease intangibleamortization. Depreciation expense increased primarily due to the acquisitionof 15 properties since the end of the second quarter of 2005, and leaseintangible amortization decreased primarily due to the timing and amount ofacquisitions.

 

Interest expense increased to $11.2 millionfor the three months ended June 30, 2006, from $6.7 million in 2005. Thisincrease was a result of the issuance and assumption of $229.3 million of debt,including borrowing under our line of credit, in connection with theacquisition of 15 properties from July 1, 2005 through June 30, 2006. Duringthe three months ended June 30, 2006, the Company borrowed $23.0 million andrepaid $5.0 million under the line of credit, and during the three months endedJune 30, 2005, the Company borrowed $38.0 million and repaid $27.0 millionunder the line of credit.  We expect interest expense to increase in thefuture as we incur additional debt to fund acquisitions. For more informationregarding the amount of fixed-rate and variable-rate indebtedness we held as ofDecember 31, 2005 and June 30, 2006, see the section titled *Quantitative and Qualitative Disclosures About Market Risk*under Part I, Item 3 of this report.

 

***Military Housing***

 

*Revenue*. Expense reimbursementstotaled $17.5 million for the three months ended June 30, 2006 as comparedto $12.2 million for the three months ended June 30, 2005. This increasewas primarily due to payroll and renovation expenses related to the ninemilitary housing projects in operation as of June 30, 2006 as compared with thenumber of military housing projects in operation as of June 30, 2005; andclosing costs and transition expenses for the Fort Gordon project, whichcommenced operations in May 2006, offset by decreases at the FortStewart/Hunter project caused by anticipated declines in renovation activities,as well as decreases at the Fort Carson project due to changes in the terms ofthe management contract in December 2005, which resulted in fewer reimbursableexpenses being incurred directly by the project. The table below sets forthcertain information regarding the revenue from expense reimbursements for eachof our military housing projects for the three months ended June 30, 2006 and 2005.

 
| ** **                                                | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Project**                                               | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **(in millions)**                              | ** ** |
| Fort Stewart and Hunter Army Airfield  Project            |       | $                                                   | 1.2        |   | $ | 4.1 |   |
| Fort Carson Project                                       |       | 0.7                                                 |       | 2.0 |   |
| Fort Hamilton Project                                     |       | 0.6                                                 |       | 0.1 |   |
| Walter Reed Army Medical Center and Fort  Detrick Project |       | 0.2                                                 |       | 0.2 |   |
| Fort  Eustis/Fort Story Project                           |       | 1.2                                                 |       | 0.4 |   |
| Navy Northeast Region Project                             |       | 8.8                                                 |       | 5.1 |   |
| Fort Bliss/White Sands Missile Range  Project(1)          |       | 3.4                                                 |       | 0.3 |   |
| Fort Gordon Project(2)                                    |       | 1.3                                                 |       | — |   |
| Carlisle/Picatinny Project(2)                             |       | 0.1                                                 |       | — |   |
| Total                                                     |       | $                                                   | 17.5       |   | $ | 12.2 |   |

 

(1) Commencedoperations in the third quarter of 2005.

(2) Commencedoperations in the second quarter of 2006.

 

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Management fees from related parties totaled $2.1 million for the threemonths ended June 30, 2006 compared to $1.5 million for the three months endedJune 30, 2005. The amount of management fees from related parties that wereceive during a fiscal period is affected by the number of housing units thatwe manage under our military housing projects during that period, which numberwill fluctuate based on the number of housing units that we construct/renovateor demolish during that period. Management fees from related parties increasedduring the three months ended June 30, 2006 as compared to the three monthsended March 31, 2005, primarily due to commencement of operations relating to ourFort Bliss/White Sands Missile Range project during the third quarter of 2005,as well as due to increased occupancy and rental activity at our FortStewart/Hunter project and the commencement of our Fort Gordon project in thesecond quarter of 2006. The table below sets forth certain informationregarding the revenue from management fees from related parties for each of ourmilitary housing projects for the three months ended June 30, 2006 and 2005.

 
| ** **                                                | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Project**                                               | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **(in millions)**                              | ** ** |
| Fort Stewart and Hunter Army Airfield  Project            |       | $                                                   | 0.3        |   | $ | 0.2 |   |
| Fort Carson Project                                       |       | 0.3                                                 |       | 0.3 |   |
| Fort Hamilton Project                                     |       | 0.1                                                 |       | 0.1 |   |
| Walter Reed Army Medical Center and Fort  Detrick Project |       | 0.1                                                 |       | — |   |
| Fort  Eustis/Fort Story Project                           |       | 0.1                                                 |       | 0.1 |   |
| Navy Northeast Region Project                             |       | 0.8                                                 |       | 0.8 |   |
| Fort Bliss/White Sands Missile Range  Project(1)          |       | 0.3                                                 |       | — |   |
| Fort Gordon Project(2)                                    |       | 0.1                                                 |       | — |   |
| Total                                                     |       | $                                                   | 2.1        |   | $ | 1.5 |   |

 

(1)Commenced operations in the third quarter of 2005.

(2)Commenced operations in the second quarter of 2006.

 

Other fee income from related parties, whichincludes development and construction/renovation fees and business developmentfees, totaled $5.6 million for the three months ended June 30, 2006, ascompared to $3.6 million for the same period in 2005. Of the 2006 amount, $4.5million related to development and construction/renovation fees, and $1.1million related to business development fees. The amount of other fee incomefrom related parties that we receive during a fiscal period is affected by thenumber of housing units that we construct or renovate under our militaryhousing projects during that period, which will fluctuate based on the point atwhich we are during the initial development period for the project. Other feeincome from related parties increased during the three months ended June 30,2006 as compared to the three months ended June 30, 2005, primarily due increasedconstruction/renovation activity relating to our Navy Northeast Region and FortEustis/Fort Story projects, and due to commencement of the development plansrelating to our Fort Bliss/White Sands Missile Range project during the third quarterof 2005 and relating to our Fort Gordon project during the second quarter of2006, offset by previously expected declines in construction and renovation activitiesat our Fort Stewart/Hunter project and our Walter Reed Army Medical Center andFort Detrick projects. The table below sets forth certain information regardingthe revenue from other fee income from related parties for each of our militaryhousing projects for the three months ended June 30, 2006 and 2005.

 

35

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| ** **                                                | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Project**                                               | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **(in millions)**                              | ** ** |
| **Development and Construction/Renovation  Fees**         |       |                                                |       |   |   |
| Fort Stewart and Hunter Army Airfield  Project            |       | $                                                   | 0.3        |   | $ | 1.1 |   |
| Fort Carson Project                                       |       | 0.1                                                 |       | 0.1 |   |
| Fort Hamilton Project                                     |       | 0.2                                                 |       | 0.2 |   |
| Walter Reed Army Medical Center and Fort  Detrick Project |       | 0.1                                                 |       | 0.4 |   |
| Fort  Eustis/Fort Story Project                           |       | 0.4                                                 |       | 0.1 |   |
| Navy Northeast Region Project                             |       | 1.8                                                 |       | 0.8 |   |
| Fort Bliss/White Sands Missile Range  Project(1)          |       | 1.0                                                 |       | — |   |
| Fort Gordon Project(2)                                    |       | 0.6                                                 |       | — |   |
| Total development and  construction/renovation fees       |       | 4.5                                                 |       | 2.7 |   |
|                                                      |       |                                                |       |   |   |
| **Business Development Fees**                             |       | 1.1                                                 |       | 0.9 |   |
|                                                      |       |                                                |       |   |   |
| **Total Other Fee Income from Related Parties**           | ** ** | $                                                   | 5.6        |   | $ | 3.6 |   |

 

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(1)  Commenced operations in the third quarter of2005.

(2)  Commenced operations in the second quarter of2006.

 

Equity in earnings of unconsolidated entities, consisting of equityincome and preferred returns from our military housing project joint ventures, totaled$1.2 million for the three months ended June 30, 2006 as compared to $0.5 millionfor the three months ended June 30, 2005. Of the amount for 2006, $0.2 millionrelated to preferred returns from our Navy Northeast Region project, and $1.0million related to our investment in Fort Carson Family Housing LLC. Of the2005 amount, $0.2 million related to preferred returns from our Navy Northeast Regionproject and $0.3 million related to our investment in Fort Carson FamilyHousing LLC. The increase is primarily due to equity income received from netoperating income distributions in connection with our Fort Carson project,which passed into its post-IDP phase in 2005.

 

*Expenses*. Property operating expenses include costs related to operating the militaryhousing segment of our business, such as the compensation expense related toour military housing personnel stationed in our corporate headquarters. Thesecosts totaled $1.5 million for the three months ended June 30, 2006 as comparedto $1.3 million in the same period of 2005.

 

Reimbursed expenses increased to $17.5million for the three months ended June 30, 2006 from $12.2 million for thethree months ended June 30, 2005, primarily due to payroll and renovationexpenses related to the military housing projects in operation as of June 30,2006, as well as closing costs and transition expenses for the Fort Gordonproject, which commenced operations in the second quarter of 2006.

 

***Corporate***

 

Rental revenue and expense reimbursements,which were recognized with respect to the portions of our corporateheadquarters leased to entities affiliated with Gary M. Holloway, Sr., andpayroll and related expenses reimbursed by entities affiliated with Mr.Holloway for the provision of common services, decreased to $154,000 for thethree months ended June 30, 2006 from $183,000 for the three months ended June30, 2005. This decrease was primarily the result of decreases in commonservices provided by the Company and a decrease in rental revenue due to areduction of office space leased by the entities affiliated with Mr. Holloway.

 

Other income, consisting primarily ofinterest income and fees earned from entities affiliated with Gary M. Holloway,Sr., was $34,000 for the three months ended June 30, 2005, as compared to $7,000for the three months ended June 30, 2006. The other income received during thethree months ended June 30, 2005 related to consulting management fees paid tothe Company in connection with the provision of consulting management servicesfor five student housing properties. On January 1, 2006, four of the managementagreements relating to these properties were transferred to the Company fromGMH Asset

 

36

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Services Capital Partners, LP,at which time the management fee income for these properties was recorded inthe Company’s student housing segment, and the fifth management agreement wasterminated.

 

Administrative expenses, primarily relatingto management of our corporate office, accounting, legal, human resources andinformation technology, increased to $4.5 million for the three months endedJune 30, 2006 from $2.8 million for the three months ended June 30, 2005,primarily due to increased staffing and additional costs incurred in connectionwith the transition of financial management and an increase in professionalfees.

 

Audit Committee and Special Committeeexpenses consist of legal fees, forensic accounting fees, incremental auditfees and waiver fees associated with waivers of covenants under our creditfacility, incurred in connection with the special investigation performed byour Audit Committee and its independent counsel that commenced in the first quarterof 2006 and legal, financial advisory and Special Committee fees associatedwith the formation of the Special Committee to explore strategic alternativesfor the Company. During the three months ended June 30, 2006, these feestotaled $2.3 million.

 

Depreciation, relating primarily to ourcorporate headquarters, decreased to $78,000 for the three months ended June 30,2006 from $99,000 for the comparable period in 2005.

 

Interest expense increased to $0.4 millionfor the three months ended June 30, 2006 from $0.2 million for the three monthsended June 30, 2005. This increase was primarily the result of an increase inoverall interest rates under the Company’s credit facility.

 

***Comparison of theSix Months Ended June 30, 2006***

***to the Six MonthsEnded June 30, 2005***

 
| ** **                                                                                              | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2006**                                          | ** ** | **2005 (Restated)** | ** ** |
| ** **                                                                                              | ** ** | **Student  Housing**                              | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Student  Housing** | ** ** | **Military  Housing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                                                              | ** ** | **(dollars in thousands)**              | ** ** |
|                                                                                                    |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Revenue:**                                                                                            |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rent and other property income                                                                          |       | $                                                 | 87,992     |   | $ | — |   | $ | 78 |   | $ | 88,070 |   | $ | 55,482 |   | $ | — |   | $ | 122 |   | $ | 55,604 |   |
| Expense reimbursements:                                                                                 |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                           |       | 189                                               |       | 30,694 |   | 172 |   | 31,055 |   | 186 |   | 20,060 |   | 210 |   | 20,456 |   |
| Third party                                                                                             |       | 2,725                                             |       | — |   | — |   | 2,725 |   | 2,577 |   | — |   | — |   | 2,577 |   |
| Management fees:                                                                                        |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party                                                                                           |       | 37                                                |       | 4,103 |   | — |   | 4,140 |   | 197 |   | 3,133 |   | — |   | 3,330 |   |
| Third party                                                                                             |       | 1,655                                             |       | — |   | — |   | 1,655 |   | 1,545 |   | — |   | — |   | 1,545 |   |
| Other fee income, related party                                                                         |       | —                                            |       | 10,261 |   | — |   | 10,261 |   | — |   | 6,884 |   | 70 |   | 6,954 |   |
| Other income                                                                                            |       | 83                                                |       | 23 |   | 38 |   | 144 |   | 75 |   | 24 |   | 68 |   | 167 |   |
| Total revenue                                                                                           |       | 92,681                                            |       | 45,081 |   | 288 |   | 138,050 |   | 60,062 |   | 30,101 |   | 470 |   | 90,633 |   |
|                                                                                                    |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating Expenses:**                                                                                 |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property operating expense                                                                              |       | 34,883                                            |       | 3,052 |   | — |   | 37,935 |   | 20,208 |   | 1,990 |   | — |   | 22,198 |   |
| Reimbursed expenses                                                                                     |       | 2,914                                             |       | 30,694 |   | 172 |   | 33,780 |   | 2,763 |   | 20,060 |   | 210 |   | 23,033 |   |
| Real estate taxes                                                                                       |       | 8,530                                             |       | — |   | 48 |   | 8,578 |   | 5,155 |   | — |   | — |   | 5,155 |   |
| Administrative expenses                                                                                 |       | —                                            |       | — |   | 8,300 |   | 8,300 |   | — |   | — |   | 5,776 |   | 5,776 |   |
| Audit Committee special investigation  expenses                                                         |       | —                                            |       | — |   | 4,876 |   | 4,876 |   | — |   | — |   | — |   | — |   |
| Depreciation and amortization                                                                           |       | 20,659                                            |       | 249 |   | 156 |   | 21,064 |   | 16,044 |   | 54 |   | 310 |   | 16,408 |   |
| Interest                                                                                                |       | 21,671                                            |       | — |   | 959 |   | 22,630 |   | 11,793 |   | — |   | 465 |   | 12,258 |   |
| Total operating expenses                                                                                |       | 88,657                                            |       | 33,995 |   | 14,511 |   | 137,163 |   | 55,963 |   | 22,104 |   | 6,761 |   | 84,828 |   |
|                                                                                                    |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before equity in earnings of  unconsolidated entities, income taxes and minority interest |       | 4,024                                             |       | 11,086 |   | (14,223 | ) | 887 |   | 4,099 |   | 7,997 |   | (6,291 | ) | 5,805 |   |
| Equity in earnings of unconsolidated  entities                                                          |       | —                                            |       | 2,390 |   | — |   | 2,390 |   | — |   | 941 |   | — |   | 941 |   |
| Income (loss) before income taxes and  minority interest                                                |       | 4,024                                             |       | 13,476 |   | (14,223 | ) | 3,277 |   | 4,099 |   | 8,938 |   | (6,291 | ) | 6,746 |   |
| Income tax (benefit) expense                                                                            |       | (232                                              | )          | 2,419 |   | — |   | 2,187 |   | 15 |   | 2,243 |   | — |   | 2,258 |   |
| Income (loss) before minority interest                                                                  |       | 4,256                                             |       | 11,057 |   | (14,223 | ) | 1,090 |   | 4,084 |   | 6,695 |   | (6,291 | ) | 4,488 |   |
| Minority interest                                                                                       |       | 1,883                                             |       | 4,862 |   | (6,254 | ) | 491 |   | 2,017 |   | 3,307 |   | (3,107 | ) | 2,217 |   |
| **Net income (loss)**                                                                                   |       | $                                                 | 2,373      |   | $ | 6,195 |   | $ | (7,969 | ) | $ | 599 |   | $ | 2,067 |   | $ | 3,388 |   | $ | (3,184 | ) | $ | 2,271 |   |

 

37

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***Student Housing***

 

*Revenue*.Of the 61 properties owned as of June 30, 2006, we acquired 24 of the studenthousing properties during the twelve months ended December 31, 2005, andseven properties during the six months ended June 30, 2006. Rent from all ofthese properties totaled $88.0 million for the six months ended June 30, 2006.As of June 30, 2005, we owned 46 student housing properties, with rents fromthese properties totaling $55.5 million for the six months ended June 30, 2005.

 

Expense reimbursements from related parties remainedat approximately $0.2 million for the six months ended June 30, 2006 and thesix months ended June 30, 2005. Expense reimbursements from third partiesincreased to $2.7 million for the six months ended June 30, 2006 from $2.6million for the six months ended June 30, 2005. We expect expensereimbursements, which relate to properties we manage but do not own, tocontinue to become a less significant portion of our student housing revenuesas rental revenues earned from additional properties that we acquire continuesto increase.

 

Management fee income from related partiesdecreased to $37,000 for the six months ended June 30, 2006 compared to $197,000for the six months ended June 30, 2005. The management fee income from relatedparties in 2006 consisted entirely of standard management fees, as compared to$0.1 million of standard management fee income and $0.1 million of assetmanagement fee income in 2005. This decrease in standard management fees wasprimarily due to the Company’s acquisition of two student housing propertiesfrom related parties in March 2005, which were managed by the Company prior tothe acquisition. In addition, we ceased managing another student housingproperty in March 2005 as it was sold to a third party. Management fee incomefrom third parties increased to $1.7 million for the six months ended June 30,2006 from $1.5 million for the six months ended June 30, 2005, primarily due tothe transfer to the Company on January 1, 2006 of management contracts relatingto four properties for which we previously provided consulting managementservices to GMH Asset Services Capital Partners, LP.

 

For the remainder of 2006, we expectmanagement fees to contribute less significantly to total revenues in thefuture given the expected growth in rental revenue from the operations ofproperties we own.

 

*Expenses*. Property operating expenses increased to $34.9 million for the six months endedJune 30, 2006 from $20.2 million for the six months ended June 30, 2005,primarily due to expenses attributable to the 15 properties acquired from July1, 2005 through June 30, 2006. Property operating expenses also includecompensation and operating costs with respect to our student housingacquisitions department. We expect property operating expenses to continue toincrease in the future as we acquire additional properties. With respect toproperties that we currently own, we also expect to continue to experienceincreases in utility expenses resulting from national trends in higherenergy-related costs.

 

Reimbursed expenses were substantiallyunchanged, increasing to $2.9 million for the six months ended June 30, 2006 from$2.8 million for the six months ended June 30, 2005.

 

38

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Real estate taxes increased to $8.5 million for the six months endedJune 30, 2006 from $5.2 million for the six months ended June 30, 2005,primarily due to the acquisition of 15 properties since the end the secondquarter of 2005. We expect real estate taxes to continue to increasesignificantly in the future as we acquire additional properties, and to theextent that local authorities continue to aggressively pursue higher realestate tax assessments on properties that we currently own.

 

Depreciation and amortization increased to $20.7million for the six months ended June 30, 2006 from $16.0 million for the sixmonths ended June 30, 2005 as a result of acquiring 15 properties for anaggregate purchase price of $347.2 million from July 1, 2005 through June 30,2006. The $20.7 million in 2006 is comprised of $17.3 million of depreciationand $3.4 million of lease intangible amortization, and the $16.0 million in2005 is comprised of $10.8 million of depreciation and $5.2 million of leaseintangible amortization. Depreciation expenses increased primarily due to theacquisition of 15 properties since the end of the second quarter of 2005, andlease intangible amortization decreased primarily due to the timing and amountof acquisitions.

 

Interest expense increased to $21.7 millionfor the six months ended June 30, 2006, from $11.8 million in 2005. Thisincrease was a result of the issuance and assumption of $229.3 million of debt,including borrowing under our line of credit, in connection with theacquisition of 15 properties from July 1, 2005 through June 30, 2006. Duringthe six months ended June 30, 2006, the Company borrowed $93.0 million andrepaid $36.0 million under the line of credit, and during the six months endedJune 30, 2005, the Company borrowed $143.0 million and repaid $72.0 millionunder the line of credit.  We expect interest expense to increase in thefuture as we incur additional debt to fund acquisitions. For more informationregarding the amount of fixed-rate and variable-rate indebtedness we held as ofDecember 31, 2005 and June 30, 2006, see the section titled *Quantitative and Qualitative Disclosures About Market Risk*under Part I, Item 3 of this report.

 

***Military Housing***

 

*Revenue*. Expensereimbursements totaled $30.7 million for the six months ended June 30,2006 as compared to $20.1 million for the six months ended June 30, 2005.This increase was primarily due to payroll and renovation expenses related tothe nine military housing projects in operation as of June 30, 2006 as comparedwith the number of military housing projects in operation as of June 30, 2005;and closing costs and transition expenses for our Fort Gordon project, whichcommenced operations in May 2006. This increase was offset by decreases at ourFort Stewart/Hunter, Walter Reed Army Medical Center and Fort Detrick projectscaused by anticipated declines in construction and renovation activities, aswell as by decreases at our Fort Carson project due to changes in the terms ofthe management contract in December 2005, which resulted in fewer reimbursableexpenses being incurred directly by the project. The table below sets forthcertain information regarding the revenue from expense reimbursements for eachof our military housing projects for the six months ended June 30, 2006 and2005.

 
| ** **                                                | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------|------------|
| **Project**                                               | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **(in millions)**                            | ** ** |
| Fort Stewart and Hunter Army Airfield  Project            |       | $                                                 | 2.4        |   | $ | 6.1 |   |
| Fort Carson Project                                       |       | 1.3                                               |       | 3.7 |   |
| Fort Hamilton Project                                     |       | 0.7                                               |       | 0.2 |   |
| Walter Reed Army Medical Center and Fort  Detrick Project |       | 0.4                                               |       | 0.6 |   |
| Fort  Eustis/Fort Story Project                           |       | 2.4                                               |       | 1.0 |   |
| Navy Northeast Region Project                             |       | 16.1                                              |       | 8.1 |   |
| Fort Bliss/White Sands Missile Range  Project(1)          |       | 6.0                                               |       | 0.4 |   |
| Fort Gordon Project(2)                                    |       | 1.3                                               |       | — |   |
| Carlisle/Picatinny Project(2)                             |       | 0.1                                               |       | — |   |
| Total                                                     |       | $                                                 | 30.7       |   | $ | 20.1 |   |

 

39

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----

(1)  Commenced operations in the third quarter of2005.

(2)  Commenced operations in the second quarter of2006.

 

Management fees from related parties totaled $4.1 million for the sixmonths ended June 30, 2006 compared to $3.1 million for the six months endedJune 30, 2005. The amount of management fees from related parties that we receiveduring a fiscal period is affected by the number of housing units that wemanage under our military housing projects during that period, which numberwill fluctuate based on the number of housing units that we construct/renovateor demolish during that period. Management fees from related parties increasedduring the six months ended June 30, 2006 as compared to the six months endedJune 30, 2005, primarily due to commencement of operations relating to our FortBliss/White Sands Missile Range project during the third quarter of 2005, aswell as due to increased occupancy and rental activity at our FortStewart/Hunter project and the commencement of our Fort Gordon project in thesecond quarter of 2006. The table below sets forth certain information regardingthe revenue from management fees from related parties for each of our militaryhousing projects for the six months ended June 30, 2006 and 2005.

 
| ** **                                                | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------|------------|
| **Project**                                               | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **(in millions)**                            | ** ** |
| Fort Stewart and Hunter Army Airfield  Project            |       | $                                                 | 0.7        |   | $ | 0.5 |   |
| Fort Carson Project                                       |       | 0.7                                               |       | 0.6 |   |
| Fort Hamilton Project                                     |       | 0.1                                               |       | 0.1 |   |
| Walter Reed Army Medical Center and Fort  Detrick Project |       | 0.1                                               |       | 0.1 |   |
| Fort  Eustis/Fort Story Project                           |       | 0.2                                               |       | 0.2 |   |
| Navy Northeast Region Project                             |       | 1.6                                               |       | 1.6 |   |
| Fort Bliss/White Sands Missile Range  Project(1)          |       | 0.6                                               |       | — |   |
| Fort Gordon Project(2)                                    |       | 0.1                                               |       | — |   |
| Total                                                     |       | $                                                 | 4.1        |   | $ | 3.1 |   |

 

----

(1)Commenced operations in the third quarter of 2005.

(2)Commenced operations in the second quarter of 2006.

 

Other fee income from related parties, whichincludes development and construction/renovation fees and business developmentfees, totaled $10.3 million for the six months ended June 30, 2006, as comparedto $6.9 million for the same period in 2005. Of the 2006 amount, $8.1 millionrelated to development and construction/renovation fees, and $2.2 millionrelated to business development fees. The amount of other fee income fromrelated parties that we receive during a fiscal period is affected by thenumber of housing units that we construct or renovate under our militaryhousing projects during that period, which number will fluctuate based on the pointat which we are during the initial development period for the project. Otherfee income from related parties increased during the six months ended June 30,2006 as compared to the six months ended June 30, 2005, primarily due to increasedconstruction/renovation activity relating to our Navy Northeast Region and FortEustis/Fort Story projects, and due to commencement of operations relating toour Fort Bliss/White Sands Missile Range project during the third quarter of2005 and our relating to our Fort Gordon project during the second quarter of2006, offset by previously expected declines in activities at our FortStewart/Hunter project. The table below sets forth certain informationregarding the revenue from other fee income from related parties for each ofour military housing projects for the six months ended June 30, 2006 and 2005.

 

40

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| ** **                                                | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------|------------|
| **Project**                                               | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **(in millions)**                            | ** ** |
| **Development and Construction/Renovation  Fees**         |       |                                              |       |   |   |
| Fort Stewart and Hunter Army Airfield  Project            |       | $                                                 | 0.9        |   | $ | 2.1 |   |
| Fort Carson Project                                       |       | 0.2                                               |       | 0.2 |   |
| Fort Hamilton Project                                     |       | 0.4                                               |       | 0.5 |   |
| Walter Reed Army Medical Center and Fort  Detrick Project |       | 0.2                                               |       | 0.5 |   |
| Fort  Eustis/Fort Story Project                           |       | 0.8                                               |       | 0.3 |   |
| Navy Northeast Region Project                             |       | 3.3                                               |       | 1.6 |   |
| Fort Bliss/White Sands Missile Range  Project(1)          |       | 1.7                                               |       | — |   |
| Fort Gordon Project(2)                                    |       | 0.6                                               |       | — |   |
| Total development and  construction/renovation fees       |       | 8.1                                               |       | 5.2 |   |
|                                                      |       |                                              |       |   |   |
| **Business Development Fees**                             |       | 2.2                                               |       | 1.7 |   |
|                                                      |       |                                              |       |   |   |
| **Total Other Fee Income from Related Parties**           |       | $                                                 | 10.3       |   | $ | 6.9 |   |

 

----

(1)  Commenced operations in the third quarter of2005.

(2) Commenced operations in the secondquarter of 2006.

 

Equity in earnings of unconsolidated entities, consisting of equityincome and preferred returns from our military housing project joint ventures, totaled$2.4 million for the six months ended June 30, 2006 as compared to $0.9 millionfor the six months ended June 30, 2005. Of the amount for 2006, $0.4 millionrelated to preferred returns from our Navy Northeast Region project, and $2.0million related to our investment in Fort Carson Family Housing LLC. Of the2005 amount, $0.4 million related to preferred returns from our Navy Northeast Regionproject and $0.5 million related to our investment in Fort Carson FamilyHousing LLC. The increase is primarily due to equity income distributions receivedfrom the project’s Available Cash (defined as net operating income minus debtservice and general reserves) in connection with our Fort Carson project, whichpassed into its post-IDP phase in 2005.

 

*Expenses*. Property operating expenses include costs related to operating the militaryhousing segment of our business, such as the compensation expense related toour military housing personnel stationed in our corporate headquarters. Thesecosts totaled $3.1 million for the six months ended June 30, 2006 as comparedto $2.0 million in the same period of 2005.

 

Reimbursed expenses increased to $30.7million for the six months ended June 30, 2006 from $20.1 million for the sixmonths ended June 30, 2005, primarily due to payroll and renovation expensesrelated to the military housing projects in operation as of June 30, 2006 andtransition, payroll and renovation expenses for the Fort Bliss/White SandsMissile Range project, which commenced operations in the third quarter of 2005.

 

***Corporate***

 

Rental revenue and expense reimbursements,which were recognized with respect to the portions of our corporateheadquarters leased to entities affiliated with Gary M. Holloway, Sr., andpayroll and related expenses reimbursed by entities affiliated with Mr.Holloway for the provision of common services, remained the same for the six-monthperiods ended June 30, 2006 and June 20, 2005, at $0.3 million.

 

Other income, consisting primarily ofinterest income and fees earned from entities affiliated with Gary M. Holloway,Sr., decreased to $38,000 for the six months ended June 30, 2006, as comparedto $68,000 for the six months ended June 30, 2005.

 

Administrative expenses, primarily relatingto management of our corporate office, accounting, legal, human resources andinformation technology, and corporate aircraft, increased to $8.3 million forthe

 

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six months ended June 30, 2006from $5.8 million for the six months ended June 30, 2005, primarily due to increasedstaffing, additional costs incurred in connection with the transition offinancial management and an increase in professional fees.

 

Audit Committee and Special Committeeexpenses consist of legal fees, forensic accounting fees, incremental auditfees and waiver fees associated with waivers of the covenants under our creditfacility, all incurred in connection with the special investigation performedby our Audit Committee and its independent counsel that commenced in the firstquarter of 2006, and legal, financial advisory and Special Committee feesassociated with the formation of the Special Committee to explore strategicalternatives for the Company. During the six months ended June 30, 2006, thesefees totaled $4.9 million.

 

Depreciation, relating primarily to ourcorporate headquarters and corporate aircraft, decreased to $0.2 million forthe six months ended June 30, 2006 from $0.3 million for the six months endedJune 30, 2005. This decrease was primarily the result of the disposition of thecorporate aircraft during the first quarter of 2005.

 

Interest expense increased to $1.0 millionfor the six months ended June 30, 2006 from $0.5 million for the six monthsended June 30, 2005. This increase was primarily the result of an increase inoverall interest rates under the Company’s credit facility.

 

**Liquidity and Capital Resources**

 

Short-term liquidity requirements consist primarily of funds necessaryto pay operating expenses and other costs. These expenses and costs include(i) recurring maintenance and capital expenditures to maintain and leaseour properties, (ii) interest expense and scheduled principal payments onoutstanding indebtedness, (iii) real estate taxes and insurance,(iv) corporate salaries, employee benefits and other corporate overheadand administrative expenses, (v) equity contributions to our investments inmilitary housing projects, and (vi) distributions to shareholders andunitholders of our operating partnership. Our existing working capital and cashprovided by operations, together with amounts available to us under our$150.0 million revolving credit facility are expected to be sufficient tomeet our short-term liquidity requirements, excluding additional acquisitionactivity. Availability under the credit facility as of June 30, 2006 waslimited to a borrowing base amount equal to the sum of 60% of the value of anunencumbered asset pool as of the end of the previous quarter (which in noevent may contain fewer than five student housing properties) and 50% of theannualized value of our cash flow from our management of military housingprivatization projects and student housing properties in the previous quarter.The credit facility was obtained by our operating partnership inNovember 2004, and GMH Communities Trust serves as guarantor for thecredit facility. Advances under the credit facility bear interest, at theelection of the borrower, at a Eurodollar rate based on LIBOR or a base ratebased on the prime rate announced by Bank of America, N.A., as theadministrative agent of the facility, plus an interest rate spread on bothEurodollar and prime rate loans that varies depending upon the Company’sleverage ratio. The credit facility also requires that we maintain certaincorporate level financial covenants.

 

As of June 30, 2006, we had availability under the credit facilityequal to $150.0 million, of which $93.0 million in borrowings wasoutstanding, and bearing interest at a Eurodollar rate based on 30-day LIBORand 60-day LIBOR ranging from 5.13% to 5.29%, plus 2.125%, resulting in totalinterest rates ranging from 7.26% to 7.42%. As of June 30, 2006, there were noletters of credit outstanding under the credit facility.

 

In January 2005, we paid a distribution to our shareholders that causedus to violate a covenant under our credit facility that restricted us frommaking distributions greater than 95% of our funds from operations. We receiveda waiver of this instance of noncompliance from our lenders. We and the lendersalso agreed to modify the covenant related to the payment of dividends to shareholdersfor the year ended December 31, 2005. Under the terms of the modification, wewere restricted from paying distributions to our shareholders with respect to2005 in excess of 110% of our funds from operations. In January 2006, we paid adividend distribution to our shareholders that, when aggregated withdistributions paid to shareholders during 2005, exceeded this 110% thresholdfor the year ended December 31, 2005. We also received a waiver of thisinstance of noncompliance with the financial covenant from our lenders. As of

 

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January 1, 2006, the financialcovenant restriction relating to these dividend payments reverted to theoriginal terms under the credit facility, such that as of June 30, 2006 we wererestricted from paying aggregate distributions to our shareholders for anygiven year in excess of 95% of our funds from operations for that year. Inaddition, the credit facility also contains an affirmative covenant requiringus to provide audited financial statements within 90 days after the end of eachfiscal year, and unaudited quarterly financial statements within 45 days afterthe end of each fiscal quarter. As a result of the delay in filing our AnnualReport on Form 10-K for the year ended December 31,2005, as well as the delayin filing our Quarterly Report on Form 10-Q for the three months ended March31, 2006 and this report, we obtained a waiver of this covenant from the lendersyndicate that permitted us to deliver our audited financial statements for the2005 fiscal year and quarterly financial statements for the first quarter of2006 no later than August 15, 2006, and to deliver our quarterly financialstatements for the second quarter of 2006 no later than September 15, 2006. As ofJune 30, 2006, we have paid fees totaling approximately $470,000 in connectionwith the above-referenced waivers obtained during 2006.

 

Effective as of September 6, 2006, we entered into a Third Amendmentand Waiver to Credit Agreement with the lender syndicate under our credit facility.Under the agreement, the lender syndicate provided waivers of the Company’sfinancial covenants relating to the requirement to maintain an interestcoverage ratio equal to or greater than 2.00x, and a fixed charge coverageratio equal to or greater than 1.75x, each as of the end of the quarter endedJune 30, 2006. In addition, the agreement provided for amendments to thedefinitions of the terms “consolidated EBITDA” and “funds from operations” topermit the Company to add back the non-recurring expenses relating to thespecial investigation performed by the Audit Committee and to the formation andoperations of the Company’s Special Committee in connection with its review ofstrategic alternatives. In addition, the agreement included an amendment to theCompany’s total leverage ratio, commencing with the quarter ended June 30,2006, from 60% to 70%. Under the terms of the amendment, the 70% total leverageratio will be in effect through December 31, 2006, and thereafter will revert to60%. Commencing with the quarter ended June 30, 2006 and through December 31,2006, the applicable rate on all amounts outstanding under the credit facility,as amended, when the Company’s leverage ratio exceeds 65% will be 2.625% and2.00% for Eurodollar rate loans and prime rate loans, respectively.

 

TheCompany cannot determine at this time whether it will be in compliance witheach of the debt covenants throughout the remainder of 2006. If the Company isdeemed to be in noncompliance with any of its debt covenants, and the Companyis unable to obtain a waiver from the syndicate lenders and therefore isrestricted from drawing additional borrowings from the credit facility, it hasseveral alternatives to accessing cash. In addition to cash flows from itsoperations, the Company can finance unencumbered properties or refinanceexisting debt, sell assets or reduce its dividends to shareholders.  TheCompany would evaluate each of these alternatives upon an event ofnoncompliance with the debt covenants under the credit facility.

 

We elected to be treated as a REIT for federal income tax purposescommencing with our taxable year ended December 31, 2004. As a REIT, weare required to distribute at least 90% of our REIT taxable income to ourshareholders on an annual basis. Therefore, except as discussed below, as ageneral matter, a substantial portion of cash generated by our operations willbe used to fund distributions to shareholders and holders of limitedpartnership interests in our operating partnership, and will not be availableto satisfy our liquidity needs.

 

Future dividends will be declared at the discretion of our board oftrustees and will depend on our actual cash flow, our financial condition,capital requirements, the annual distribution requirements under the REITprovisions of the Code and other such factors as our board of trustees deemsrelevant. For the second quarter of 2006, we declared a quarterly dividenddistribution of $0.2275 per common share, payable to shareholders of record onJune 30, 2006. We distributed this dividend on July 14, 2006, and at the sametime, our operating partnership paid a distribution of $0.2275 per unit toholders of limited partnership interest in our operating partnership. We cannotassure you that we will continue to have cash available for distributions athistorical levels or at all. Any distributions we pay in the future will dependupon our actual results of operations, economic conditions and other factorsthat could differ materially from our current expectations. We expect thatduring the second half of 2006, our cash flow from operations will be

 

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insufficient to fund ouranticipated dividend distributions. Therefore, we expect to rely on amountsavailable under our credit facility or through other third party debt financingto fund these distributions and other capital needs. In addition, our abilityto maintain our quarterly dividend payment at its current rate may be affectedby the current restriction under the terms of our credit facility that precludeus from making distributions to our shareholders in excess of 95% of funds fromoperations for the fiscal year. Our actual results of operations will beaffected by a number of factors, including: the revenue we receive from ourstudent housing properties; revenues from management fees in connection withmanagement services that we will provide for student housing properties ownedby others; revenues from our military housing projects; our operating expenses;interest expense; legal and accounting costs related to the investigation ofthe Audit Committee of our Board and related matters; costs related to ourpending class action lawsuits and the activities of the Special Committee ofour Board; expenses in connection with the implementation of remedial measuresto address the material weaknesses identified in our internal control overfinancial reporting and disclosure controls and procedures; and anyunanticipated expenditures. For more information regarding risk factors thatcould materially adversely affect our actual results of operations, please seethe section entitled “Risk Factors” in Part I, Item 1A of our Annual Report onForm 10-K for the year ended December 31, 2005. Our Board may choose to pay alower distribution in the event we are unable to obtain financing to pay ourdividend at historical levels, or in order to assure compliance with applicablerestrictive covenants on distributions under the terms of the credit facility.

 

As of June 30, 2006, 54 of our student housing properties wereencumbered by security interests relating to notes payable aggregating $766.9million and secured by first liens on the individual assets with an aggregatecost basis of approximately $1,145.2 million before accumulateddepreciation. These notes payable had a weighted-average interest rate of 5.06%,mature at various dates between March 2007 and June 2024 and require monthlypayments of principal and interest or monthly payments of interest only. Inaddition, we had $23.8 million in construction loan indebtedness outstandingthat was secured by two of the student housing properties under developmentthrough a joint venture. This indebtedness had an overall weighted averageinterest rate of 6.97%, matures in 2008, and requires monthly payments ofinterest only. On January 12, 2006, the Company placed new mortgage debt on itscorporate headquarters building in the amount of approximately $5.7 million.The new mortgage debt has a term of 10 years with a fixed-interest rate of5.58%, and requires monthly payments of interest only.

 

With regard to our military housing privatization projects, we made a$9.5 million equity contribution in November 2004 relating to ourNavy Northeast Region project and, as of June 30, 2006, had contractuallycommitted to make equity contributions of $2.0 million in 2006 to our FortHamilton project; $5.9 million in 2007 to our Walter Reed Army MedicalCenter/Fort Detrick project; $3.6 million in 2010 for our Fort Eustis/FortStory project; $3.0 million in 2010 to our Carlisle/Picatinny project;$8.0 million in 2011 for our Fort Stewart and Hunter Army Airfieldproject; $6.3 million in 2011 for our Fort Bliss/White Sands project; and $4.5million in 2011 for our Fort Gordon project.****Theseequity contributions help to fund the development, construction and renovationof housing units at these bases during the respective terms of the projects. Thetiming of our equity contributions to these projects may be sooner or laterthan the years referenced above, depending upon when other project funds areavailable to the project from other sources. In addition, to the extent thatCongressional approval is obtained regarding the pending Air Force militaryhousing privatization project for which we are currently in the solicitationprocess, and we close on the award of this project as currently expected tooccur prior to the end of 2006, we will be required to make an equitycontribution at closing in the amount of approximately $8.0 million.

 

Typically, we are reimbursed for certain payroll expenses relating tothe student housing properties we manage for third parties, for certain costswe incur after we are awarded the right to exclusively negotiate agreements fora military housing project until we enter into agreements for the project andfor transition costs we incur shortly before initiation of our management of amilitary housing project. However, we are required to fund these costs prior tothe time we receive the reimbursements. Typically, Army and Navy projectsrequire approximately $1.0 million to $7.0 million in costsassociated with transition and exclusive negotiations, depending on the size ofthe project. The expenditures typically begin 12 months prior to executingan agreement for the military housing project. Accordingly, the timing betweenour payments and reimbursements for projects may add to our short-termliquidity needs.

 

If cash flows from any of our military housing privatization projectsare insufficient to meet the coverage ratios or benchmarks entitling us toreceive fee payments, any unpaid fees will accumulate and be

 

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subsequently paid fromoperations or upon dissolution of the projects to the extent that funds areavailable and the applicable thresholds are met. If these thresholds are notmet, we will not have access to or receive certain of the fees we have earned.The unavailability of these funds would materially impact our ability to meetour short-term and long-term liquidity needs. We will be required to makeequity contributions at the beginning of the initial development period fortypical Navy transactions and at the end of the initial development period fortypical Army transactions. Based on our current expectations regarding theterms of the debt funding for our military housing projects, we expect that theprojects will generate sufficient cash flows to fund the reinvestment accountand pay anticipated equity returns.

 

With regard to our currently owned student housing properties, we donot have any material short-term capital commitments, other than with respectto our short-term capital needs relating to the general expenses and costsassociated with operating and managing these properties. We will require,however, funds in connection with our anticipated acquisitions of additionalstudent housing properties. During the second half of 2006, we expect toacquire additional student housing properties and development projects that arelocated in our targeted markets and that meet management’s underwritingcriteria for creating long-term growth potential. In an effort to conserve our availablecapital resources during 2006 and potentially for sometime thereafter, we willconsider funding the acquisition of many of our future student housingproperties and development projects through joint venture structures similar tothe joint venture terms that we entered into with respect to our Orono, Maineand Bowling Green, Ohio development properties. 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 intend to fund our equity portion of these joint ventures by usingfunds from our credit facility or from available cash from operations. We mayalso determine 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. Weexpect that our primary source of funding for the equity associated with theacquisition of student housing properties and development projects during theremainder of 2006, whether done through joint venture structures or not, willbe our credit facility and the placement of mortgage debt on the assetsacquired.

 

With respectto our pending acquisition of 11 properties from Capstone Properties for apurchase price of $223.0 million, which we expect to close in the fourthquarter of 2006, we currently expect to fund the acquisition price through acombination of new mortgage indebtedness to be placed on the properties andfrom additional borrowings. In connection with obtaining these additionalborrowings, the Company anticipates that it will increase the aggregatecommitment available under its credit facility over its current amount of$150.0 million pursuant to the terms provided under the credit facility, orseek to obtain separate bridge financing. Assuming completion of theacquisition of the Capstone portfolio, and depending upon the size of ourstudent housing acquisition pipeline for the next 12 months, the timing ofclosings on our properties, and the amount of cash required to fund plannedstudent housing acquisitions, we may be required to seek additional financingin addition to funds obtained through the proposed increase in the totalborrowing commitment available under the credit facility or separate bridgefinancing as referenced above. In that event, the Company has severalalternatives to accessing cash that are being considered currently. In additionto cash flows from its operations, the Company can finance unencumberedproperties or refinance existing debt, sell assets or reduce its dividends toshareholders in order to generate cash to fund the purchase of additionalstudent housing properties. We also may pursue additional sizes or types ofalternative financing, including obtaining bridge financing, replacing ourcurrent credit facility, or selling additional debt or equity securities. Whilewe believe we will be able to obtain such funds, these funds may not beavailable on favorable terms or at all. Our ability to obtain additionalfinancing depends on several factors, including future market conditions, theoutcome of the ongoing activities of the Special Committee of our Board, theoutcome of our current litigation, our success or lack of success inpenetrating our markets, our future creditworthiness, and restrictionscontained in agreements with our investors or lenders, including therestrictions contained in the agreement governing our credit facility. Thesefinancings could increase our level of indebtedness or result in dilution toour equity holders.

 

At least for the remainder of 2006, we also expect to incur significantfees in connection with the investigation performed by the Audit Committee ofour Board and related matters, such as pending class action

 

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litigation, as well as theactivities of the Special Committee of our Board. These fees primarily includeadditional legal and accounting expenses, as well as costs associated withimplementing remedial measures to address the material weaknesses in ourinternal control over financial reporting that are described in more detail inPart I, Item 4 of this report titled “*Controls and Procedures*.”  These fees will impact the level of cash fromoperations that we would otherwise expect to be available for the acquisitionof additional student housing properties, and therefore could affect the numberof acquisitions that we seek to complete during 2006.

 

Long-term liquidity requirements with respect to our student housingand military housing segments consist primarily of amounts necessary to fund scheduleddebt maturities, renovations and other non-recurring capital expenditures thatneed to be made periodically at our properties, and the costs associated withacquisitions of student housing properties and awards or acquisitions ofmilitary housing privatization projects that we pursue. Historically, we havesatisfied our long-term liquidity requirements through various sources ofcapital, including existing working capital, cash provided by operations, and long-termmortgage indebtedness. We now expect our long-term liquidity requirements to besatisfied primarily through cash generated by operations that is not used tofund distributions, as well as the additional external financing sourcesdiscussed above.

 

**Item3.****            Quantitative andQualitative Disclosure About Market Risk**

 

TheCompany has exposure to market risk through fluctuations in market interestrates. Market interest rates are highly sensitive to many factors that arebeyond our control. The Company’s market risk relates to its Line of Credit,variable rate debt obligations secured by properties and other obligationsutilized for development related activities. As of June 30, 2006, theoutstanding balance under the Line of Credit, variable rate debt obligationssecured by properties and development related floating-rate obligations totaled$93.0 million, $30.1 million and $23.8 million, respectively. These variablerate obligations totaling $146.9 million represent approximately 17% of theCompany’s consolidated debt outstanding as of June 30, 2006. The weightedaverage interest rate and maturity for variable rate debt is 7.12% and1.8 years, respectively at June 30, 2006. The Company does notutilize interest rate hedging strategies or other related tools to mitigateinterest rate risk for any of these obligations.

 

TheCompany obtains fixed rate mortgage debt upon acquisition or refinance as afunding source. As of June 30, 2006, the Company has $742.5 million, orapproximately 83% of its total outstanding balance classified as fixed ratedebt. Fixed rate debt assumed with the purchase of properties is recorded atfair value and marked-to-market at the acquisition date based on prevailinginterest rates at the time of acquisition. The weighted average interest rateand maturity for fixed rate debt, on a fair value basis was, 4.98% and6.9 years, respectively at June 30, 2006. As these debt instrumentsmature, the Company typically refinances such debt at the existing marketinterest rates, which may be more or less than the interest rates on the maturingdebt.

 

Regardingvariable rate debt, interest rate changes generally do not affect the fairmarket value but do impact interest expense and cash flows, assuming otherfactors are held constant. A 100 basis point increase or decrease in marketinterest rates would result in an increase or decrease of approximately $.8million in interest expense for the six month period ended June 30, 2006.

 

A change inmarket interest rates on our fixed rate debt impacts the fair value, but it hasno impact on interest incurred or cash flows. The fair value of the debt as ofJune 30, 2006 is approximately $727.8 million.

 

Asof June 30, 2006, we had $93.0 million in funds drawn from our creditfacility, bearing a variable interest rate at a Eurodollar rate based on a30-day LIBOR and 60-day LIBOR ranging from 5.13% to 5.29%, plus 2.125%,resulting in total interest rates ranging from 7.26% to 7.42%.

 

Asof June 30, 2006, basedon our variable rate debt balances described above, if interest rates were toincrease by 1.0%, our interest expense would increase by approximately $1.5million on an annual basis.

 

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

 

*(a)**          Evaluation of Disclosure Controls and Procedures.*

 

We maintain disclosure controls andprocedures that are designed to provide reasonable assurance that informationrequired to be disclosed in our reports under the Securities Exchange Act of1934 is recorded, processed, summarized and reported within the time periodspecified in the Securities and Exchange Commission’s rules and regulations andthat such information is accumulated and communicated to management, includingour principal executive officer and principal financial officer, asappropriate, to allow timely decisions regarding required disclosure.

 

As required by Rule 13a-15(b) promulgatedunder the Exchange Act, our management, with the participation of our chiefexecutive officer and chief financial officer, evaluated the design andoperating effectiveness as of June 30, 2006 of our disclosure controls andprocedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act. Basedon this evaluation, our chief executive officer and chief financial officerconcluded that our disclosure controls and procedures were not effective as ofJune 30, 2006. Such conclusion resulted from the identification of deficienciesthat were determined to be material weaknesses as reported in Item 9A of ourAnnual Report on Form 10-K for the year ended December 31, 2005.

 

Notwithstanding management’s evaluation thatour disclosure controls and procedures were not effective as of June 30, 2006,we believe that the consolidated financial statements included in thisQuarterly Report on Form 10-Q correctly present our financial condition, resultsof operations and cash flows for the periods covered thereby in all materialrespects.

 

*(b)**          Change in Internal Control over Financial Reporting.*

 

As reported in Item 9A of our Annual Reporton Form 10-K for the year ended December 31, 2005, as filed with the Securitiesand Exchange Commission on July 31, 2006, management concluded that ourinternal control over financial reporting was not effective as of December 31,2005. Such conclusion resulted from the identification of deficiencies thatwere determined to be material weaknesses. Specifically, we did not haveappropriate internal control over financial reporting as described in Item 9Aof our Annual Report on Form 10-K for the year ended December 31, 2005. Duringthe six months ended June 30, 2006, we completed various remediationinitiatives, and will continue to undertake extensive work to remedy thematerial weaknesses as described in Item 9A of our Annual Report on Form 10-Kfor the year ended December 31, 2005. While management believes progress hasbeen made regarding the implementation of these initiatives as of the date ofthis report, additional procedures and further evaluation are on-going.Remediation of the material weaknesses identified at December 31, 2005 remainsa priority for us during the remainder of 2006.

 

Except for the remediation initiatives withrespect to the material weaknesses described above and in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2005, there have been nochanges in our internal control over financial reporting that occurred during theperiod covered by this report, that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting. Asdescribed in that report, our Audit Committee initiated an investigation in thefirst quarter of 2006, which was not completed until after the end of thatquarter. As a result, many of the remediation efforts described in that reportdid not commence until the second quarter of 2006. During the second quarter of2006, we initiated the following remediation efforts:

 

•      With respect to the material weaknessrelating to “tone at the top,” throughout the first and second quarters of2006, members of the Audit Committee and our Board of Trustees had extensivediscussions with Gary M. Holloway, Sr., our Chairman, President and ChiefExecutive Officer, and other senior members of management regarding the Company’scontrol environment and the need to establish an appropriate “tone at the top.” Inaddition, during the second quarter of 2006, Mr. Holloway began conducting

 

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interviewswith a number of employees in an effort to assess their perception of the “toneat the top” concerns.

 

•      With respect to the material weaknessrelating to inadequate monitoring controls, and lack of appropriate personnelwith requisite skills and competencies, to execute an adequate level ofoversight to accurately assess the results of our operations, beginning withthe second quarter of 2006, we initiated discussions with senior personnel inour military housing department to require that they communicate with ouraccounting department any proposed activities that could affect the recognitionof revenue or expenses. In addition, we began developing procedures to assurethat our student housing personnel who are responsible for reportingproperty-level financial results adequately communicate with our accountingdepartment any proposed activities that would result in revenue from sourcesother than tenants or from arrangements outside of the stated terms of theirrespective leases. Military housing and student housing department employeesalso are required to report to our accounting personnel whether they are awareof any unreported revenues or expenses. In addition, during the second quarterof 2006, our management communicated with our operational and accountingpersonnel regarding the implementation of processes for more effectivelyexchanging information that we receive from our military housing businesspartners, vendors and other persons with whom we do business, as well as withour joint venture partners.

 

•      Following the termination of Mr. Harris’employment as our Chief Financial Officer on March 31, 2006, whichtermination was precipitated by events separate and apart from his letter tothe Audit Committee, we appointed Dennis J. O’Leary as our interim ChiefFinancial Officer. Mr. O’Leary has been a certified public accountantsince 1974, and worked for two of the “Big Four” accounting firms, or theirpredecessors, for an aggregate of 15 years, including six years as apartner. Mr. O’Leary served as our interim Chief Financial Officerthroughout the second quarter of 2006, until our new Chief Financial Officercommenced employment on July 1, 2006, as described below. Mr. O’Leary served asExecutive Vice President and principal financial officer from July 1, 2006through August 15, 2006.

 

•      Effectiveas of July 1, 2006, Mr. J. Patrick O’Grady commenced employment as ourExecutive Vice President and Chief Financial Officer. Mr. O’Grady has beena certified public accountant since 1985, and from 1990 to 2002 he was employedby Arthur Andersen LLP, where he served as a partner from 1997 to 2002. Since2002, Mr. O’Grady has been a partner with KPMG, LLP. Our Board of Trustees has established as akey goal for Mr. O’Grady the fostering of communication, cooperation andcoordination among our operational management and accounting personnel. Theprimary goals of this enhanced interaction are to assure that (i) ouroperational management is confident that the advice they receive fromaccounting personnel reflects a full and accurate understanding on the part ofthe accounting personnel of the operational and related matters to which the advicerelates, thereby eliminating any question of whether a more complete andaccurate understanding of these underlying matters might result in a different,and in the eyes of operational management a more desirable, accountingconclusion, and (ii) our accounting personnel are comfortable that theyhave received from operational management a detailed and complete descriptionof the matters for which they are considering the appropriate accounting. Mr. O’Gradyhas been directed to assess the competency of our accounting staff and toinitiate intensive training and other programs designed to remedy theconditions that caused these material weaknesses. Finally, Mr. O’Grady hasbeen directed to recommend staffing additions and changes to further remedythese conditions. In addition, our Audit Committee plans to work withMr. O’Grady to enhance the integration of our management’s involvementwith our internal audit function in order to more effectively review, inspectand investigate transactions so as to facilitate accurate

 

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reporting of our financial results and to implement necessary trainingfor additional personnel as they are hired.

 

**PART II— OTHER INFORMATION**

 

**Item1.****            Legal Proceedings**

 

On April 5, 2006, the Company, Gary M. Holloway Sr., our Chairman,President and Chief Executive Officer, and Bradley W. Harris, our former ChiefFinancial Officer, were named as defendants in a class action complaint filedin United States District Court for the Eastern District of Pennsylvania, orthe Court. The complaint provides that the Plaintiff has filed a federal classaction on behalf of purchasers of the publicly traded securities of the Companybetween October 28, 2004 and March 10, 2006, referred to as the Class Period,seeking to pursue remedies under the Securities Act of 1933 and the SecuritiesExchange Act of 1934. Plaintiff alleges that defendants issued a series offalse and misleading financial results regarding the Company to the marketduring the Class Period, and more specifically, failed to disclose: (1) thatthe Company’s earnings, net income and revenues were materially inflated andexpenses were materially understated; (2) that the Company’s funds fromoperations were materially inflated; (3) that the Company lacked adequateinternal controls; (4) that the Company’s reported financial results were inviolation of generally accepted accounting principles, or GAAP; and (5) that asa result of the foregoing, the Company’s financial results were materiallyinflated at all relevant times. Plaintiff alleges claims under Section 11 ofthe Securities Act with respect to all of the defendants; Section 12(a)(2) ofthe Securities Act with respect to the Company; Section 15 of the SecuritiesAct with respect to Mr. Holloway and Mr. Harris; Section 10(b) and Rule 10b-5of the Exchange Act with respect to all of the defendants; and Section 20(a) ofthe Exchange Act with respect to Mr. Holloway and Mr. Harris.

 

On April 11, 2006, April 20, 2006, April 27, 2006 and May 15, 2006, fouradditional class action complaints were filed with the Court against thedefendants by separate law firms, and the Company anticipates that additionalcomplaints may be filed in the near future until a class has been certified bythe Court and a lead plaintiff has been named. Each of these additional filedcomplaints alleges the same claims against the defendants as described abovewith respect to the complaint filed on April 5, 2006, except that the complaintfiled on April 20, 2006 restricts the class period to purchasers of thepublicly traded securities of the Company to the time period between May 5,2005 and March 10, 2006.

 

The defendants have not yet responded to these complaints. The outcomeof this litigation is uncertain, and while the Company believes that it hasvalid defenses to Plaintiff’s claims and intends to defend the class actionlawsuit vigorously, no assurance can be given as to the outcome of thislitigation. An adverse outcome could have a material adverse effect on our consolidatedfinancial statements and results of operations.

 

The Companyalso is subject to routine litigation, claims and administrative proceedingsarising in the ordinary course of business. 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**

 

Inaddition to the other information set forth in this report, you shouldcarefully consider the factors discussed in Part I, “Item 1A. Risk Factors” inour Annual Report on Form 10-K for the year ended December 31, 2005, whichcould materially affect our business, financial condition or future results.The risks described in our Annual Report on Form 10-K are not the only risksfacing our Company. Additional risks and uncertainties not currently known tous or that we currently deem to be immaterial also may materially adverselyaffect our business, financial condition and/or operating results.

 

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

 

None.

 

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

 

None.

 

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

 

None.

 

**Item5.****            Other Information**

 

None.

 

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**Item 6.            Exhibits**

 
| **Exhibit** | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 10.1        |       | Form of Agreement of Sale between College Park Investments, LLC and  entities affiliated with Capstone Properties. (Filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |
| 10.2        |       | First Amendment of Agreements of Sale and Deposit and Escrow  Agreement, entered into as of July 27, 2006, by and among College Park  Investments, LLC, each of University Commons-East Lansing, Ltd., Capstone  Commons-Athens, Ltd., University Commons-Baton Rouge, Ltd., University  Commons-Bloomington, IN., Ltd., University Commons-Columbia, S.C., L.P.,  University Commons-Eugene, OR., Ltd., University Commons-Lexington, KY.,  Ltd., University Commons-Ohio, Ltd., University Commons-Starkville, Ltd.,  University Commons-Tuscaloosa, Ltd., University Commons-Urbana, IL., Ltd.  (Filed herewith). |       |
| 10.3        |       | Second Amendment of Agreements of Sale, by and among College Park  Investments, LLC and each of University Commons-East Lansing, Ltd., Capstone  Commons-Athens, Ltd., University Commons-Baton Rouge, Ltd., University  Commons-Bloomington, IN., Ltd., University Commons-Columbia, S.C., L.P.,  University Commons-Eugene, OR., Ltd., University Commons-Lexington, KY.,  Ltd., University Commons-Ohio, Ltd., University Commons-Starkville, Ltd., University  Commons-Tuscaloosa, Ltd., University Commons-Urbana, IL., Ltd. (Filed  herewith).                                                                 |       |
| 10.4        |       | Third Amendment and Waiver to Credit Agreement, effective as of September  6, 2006, by and among GMH Communities, LP, the Registrant, each subsidiary of  the Registrant that becomes a borrower, Bank of America, N.A., as Lender,  Administrative Agent, Swing Line Lender and L/C Issuer and each lender party  to the Credit Agreement (Filed herewith).                                                                                                                                                                                                                                                         |       |
| 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 the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|                     | GMH COMMUNITIES TRUST                                                                |
|--------------------------|--------------------------------------------------------------------------------------|
|                     |                                                                                 |
|                     |                                                                                 |
| Date: September 15, 2006 | /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        |       | Form of Agreement of Sale between College Park Investments, LLC and  entities affiliated with Capstone Properties. (Filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.2        |       | First Amendment of Agreements of Sale and Deposit and Escrow  Agreement, entered into as of July 27, 2006, by and among College Park  Investments, LLC, each of University Commons-East Lansing, Ltd., Capstone  Commons-Athens, Ltd., University Commons-Baton Rouge, Ltd., University  Commons-Bloomington, IN., Ltd., University Commons-Columbia, S.C., L.P.,  University Commons-Eugene, OR., Ltd., University Commons-Lexington, KY.,  Ltd., University Commons-Ohio, Ltd., University Commons-Starkville, Ltd.,  University Commons-Tuscaloosa, Ltd., University Commons-Urbana, IL., Ltd.  (Filed herewith). |
| 10.3        |       | Second  Amendment of Agreements of Sale, by and among College Park Investments, LLC  and each of University Commons-East Lansing, Ltd., Capstone Commons-Athens,  Ltd., University Commons-Baton Rouge, Ltd., University Commons-Bloomington,  IN., Ltd., University Commons-Columbia, S.C., L.P., University  Commons-Eugene, OR., Ltd., University Commons-Lexington, KY., Ltd.,  University Commons-Ohio, Ltd., University Commons-Starkville, Ltd.,  University Commons-Tuscaloosa, Ltd., University Commons-Urbana, IL., Ltd.  (Filed herewith).                                                                |
| 10.4        |       | Third Amendment and Waiver to Credit Agreement, effective as of September  6, 2006, by and among GMH Communities, LP, the Registrant, each subsidiary of  the Registrant that becomes a borrower, Bank of America, N.A., as Lender,  Administrative Agent, Swing Line Lender and L/C Issuer and each lender party  to the Credit Agreement (Filed herewith).                                                                                                                                                                                                                                                         |
| 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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