BRESLER & REINER INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES 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, 2004

OR

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 0-6201

BRESLER & REINER, INC.

(Exact name of registrant as specified in its charter)

Delaware		52-0903424
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

11140 Rockville Pike, Suite 620 Rockville, MD 20852
(Address of principal executive offices)

(301) 945-4300
Registrant’s telephone number, including area code

www.breslerandreiner.com

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date. 2,738,606 shares of Common Stock $0.01 par value, as of August 13, 2004.

BRESLER & REINER, INC.

FORM 10-Q

JUNE 30, 2004

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

	Item 1.	Consolidated Financial Statements and Notes

		Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and December 31, 2003 (Audited)

		Consolidated Statements of Operations (Unaudited) for the Three Months Ended June 30, 2004 and 2003

		Consolidated Statements of Operations (Unaudited) for the Six Months Ended June 30, 2004 and 2003

		Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2004 and 2003

		Notes to the Consolidated Financial Statements (Unaudited)

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

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk

	Item 4.	Controls and Procedures

PART II. OTHER INFORMATION

	Item 5.	Exhibits and Reports on Form 8-K

SIGNATURES

CERTIFICATIONS

PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements and Notes

BRESLER & REINER, INC.

CONSOLIDATED BALANCE SHEETS

June 30, 2004 and December 31, 2003

	June 30, 2004			December 31, 2003
	(Unaudited)			(Audited)

ASSETS

Real estate:
Rental property and equipment	$	284,809,000		$	201,703,000
Property and land development	83,353,000			22,127,000
Land held for investment and homes held for sale	3,141,000			3,231,000
Real estate, at cost	371,303,000			227,061,000
Less: accumulated depreciation	(28,000,000		)	(24,278,000		)
Total real estate, net	343,303,000			202,783,000

Assets held for sale, net	1,539,000			1,669,000

Receivables:
Income taxes receivable	3,771,000			3,881,000
Mortgage and notes receivables, affiliates	2,130,000			2,276,000
Mortgage and notes receivables, other	3,702,000			5,718,000
Other receivables	6,663,000			4,068,000
Cash and cash equivalents	8,411,000			13,561,000
Restricted cash and deposits held in escrow	15,052,000			12,868,000
Investments	35,806,000			52,635,000
Investment in and advances to joint ventures	16,268,000			35,230,000
Deferred charges and other assets, net	24,381,000			13,237,000

Total assets	$	461,026,000		$	347,926,000

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:
Mortgage and construction loans and other debt	$	281,599,000		$	183,142,000
Accounts payable, trade and accrued expenses	9,764,000			7,202,000
Deferred income taxes payable	10,005,000			9,773,000
Other liabilities	4,467,000			3,927,000

Total liabilities	305,835,000			204,044,000

Minority interest	27,537,000			15,787,000

Shareholders’ equity:
Common stock, $0.01 par value; 4,000,000 shares authorized; 2,839,653 shares issued; 2,738,606 shares outstanding as of June 30, 2004 and December 31, 2003	28,000			28,000
Additional paid-in capital	7,565,000			7,565,000
Retained earnings	121,878,000			122,319,000
Treasury stock (101,047 shares as of June 30, 2004 and December 31, 2003)	(1,817,000		)	(1,817,000		)

Total shareholders’ equity	127,654,000			128,095,000

Total liabilities and shareholders’ equity	$	461,026,000		$	347,926,000

See Notes to Conolidated Financial Statements

BRESLER & REINER, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

For the Three Months Ended June 30, 2004 and 2003

(Unaudited)

	2004			2003

REVENUES

Homebuilding, residential lots and other development	$	3,309,000		$	—
Rentals - commercial	8,809,000			4,072,000
Rentals - residential	2,439,000			390,000
Hospitality	2,373,000			2,299,000
Management fees, affiliates	27,000			99,000
Interest	453,000			421,000
Income from equity investments	134,000			1,214,000
Other	—			80,000

	$	17,544,000		$	8,575,000

COSTS AND EXPENSES

Cost of homebuilding, residential lots and other development	$	3,109,000		$	22,000
Rental expense - commercial
Operating expenses	3,301,000			1,534,000
Depreciation and amortization expense	2,178,000			1,146,000
Rental expense - residential
Operating expenses	1,198,000			244,000
Depreciation and amortization expense	522,000			58,000
Hospitality expense
Operating expenses	1,313,000			1,356,000
Depreciation and amortization expense	197,000			206,000
General and administrative expense	1,169,000			831,000
Interest expense	3,519,000			1,906,000
Minority interest	(64,000		)	39,000
Other expenses	421,000			5,000

	$	16,863,000		$	7,347,000

Income before income taxes and discontinued operations	681,000			1,228,000
Provision for income taxes	153,000			198,000

Income from continuing operations	528,000			1,030,000

Income from discontinued operations, net of tax	108,000			1,909,000

Net income	$	636,000		$	2,939,000

Income from continuing operations per common share	$	0.19		$	0.38

Income from discontinued operations per common share	$	0.04		$	0.69

Net income per common share	$	0.23		$	1.07

Weighted average number of common shares outstanding	2,738,606			2,738,606

See Notes to Consolidated Financial Statements

BRESLER & REINER, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2004 and 2003

(Unaudited)

	2004		2003

REVENUES

Homebuilding, residential lots and other development	$	6,038,000	$	183,000
Rentals - commercial	15,231,000		8,190,000
Rentals - residential	4,969,000		784,000
Hospitality	4,079,000		3,989,000
Management fees, affiliates	54,000		204,000
Interest	863,000		1,061,000
Income from equity investments	591,000		1,348,000
Other	83,000		141,000

	$	31,908,000	$	15,900,000

COSTS AND EXPENSES

Cost of homebuilding, residential lots and other development	$	5,677,000	$	184,000
Rental expense - commercial
Operating expenses	5,338,000		3,334,000
Depreciation and amortization expense	3,881,000		2,258,000
Rental expense - residential
Operating expenses	2,291,000		530,000
Depreciation and amortization expense	1,372,000		127,000
Hospitality expense
Operating expenses	2,638,000		2,545,000
Depreciation and amortization expense	417,000		432,000
General and administrative expense	2,133,000		1,900,000
Interest expense	6,610,000		3,642,000
Minority interest	4,000		112,000
Other expenses	505,000		10,000

	$	30,866,000	$	15,074,000

Income before income taxes and discontinued operations	1,042,000		826,000
Provision for income taxes	251,000		105,000

Income from continuing operations	791,000		721,000

Income from discontinued operations, net of tax	137,000		2,057,000

Net income	$	928,000	$	2,778,000

Income from continuing operations per common share	$	0.29	$	0.26

Income from discontinued operations per common share	$	0.05	$	0.75

Net income per common share	$	0.34	$	1.01

Weighted average number of common shares outstanding	2,738,606		2,738,606

See Notes to Consolidated Financial Statements

BRESLER & REINER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2004 and 2003

(Unaudited)

	2004			2003
OPERATING ACTIVITIES:
Net income	$	928,000		$	2,778,000
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	5,641,000			2,347,000
Gain on sale of Maplewood Manor	—			(2,851,000		)
Gain on sale of properties and realty interests	—			(62,000		)
Income from equity investments	(591,000		)	(1,348,000		)
Minority interest expense	4,000			112,000
Deferred income taxes	232,000			—
Amortization of finance costs	236,000			177,000
Changes in other assets and liabilities:
Residential building and lot development	(13,067,000		)	(5,498,000		)
Cost of homebuilding and land development	5,076,000			121,000
Assets held for sale, net	130,000			154,000
Restricted cash	117,000			(934,000		)
Receivables	(2,154,000		)	(1,319,000		)
Other assets	(4,909,000		)	(225,000		)
Other liabilities	1,725,000			1,310,000
Total adjustments	(7,560,000		)	(8,016,000		)
Net cash (used in) provided by operating activities	(6,632,000		)	(5,238,000		)

INVESTING ACTIVITIES:
Distributions from joint ventures	1,878,000			1,442,000
Decrease in investments in municipal bonds	16,829,000			6,162,000
Purchase of rental property, equipment and other	(74,268,000		)	(1,527,000		)
Purchase of property and land held for development	(12,493,000		)	—
Decrease (increase) in notes receivable	2,162,000			(94,000		)
Proceeds from sale of Maplewood Manor	—			3,900,000
Net cash (used in) provided by investing activities	(65,892,000		)	9,883,000

FINANCING ACTIVITIES:
Proceeds from real estate and other loans	70,090,000			—
Repayment of notes and real estate loans payable	(1,103,000		)	(500,000		)
Deposits held in escrow	(2,301,000		)	—
Contributions from (distribution to) minority partners	2,146,000			(40,000		)
Increase in deferred charges	(774,000		)	(551,000		)
Dividends paid	(684,000		)	—
Net cash provided by (used in) financing activities	67,374,000			(1,091,000		)

Net (decrease) increase in cash and cash equivalents	(5,150,000		)	3,554,000

Cash and cash equivalents, beginning of period	13,561,000			5,445,000

Cash and cash equivalents, end of period	$	8,411,000		$	8,999,000

SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
Consolidation of Waterfront Associates, LLC	9,385,000			—
Debt assumed on Clarksburg Ridge acquisition	—			4,338,000
Deposit liability assumed on Clarksburg Ridge acquisition	—			2,869,000
Debt assumed on West Germantown acquisition	16,246,000			—

See Notes to Consolidated Financial Statements

BRESLER & REINER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION AND ORGANIZATION

Bresler & Reiner, Inc. (“B&R” and, together with its subsidiaries and affiliates, “we,” the “Company” or “us”) engages in the acquisition, development and ownership of commercial, residential and hospitality real estate located in the Washington, DC, Orlando, Florida and Philadelphia, Pennsylvania metropolitan areas.

The accompanying unaudited consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in conformity with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three and six months ended June 30, 2004, are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with our audited Consolidated Financial Statements and Notes thereto, included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003.

PRINCIPLES OF CONSOLIDATION

Our consolidated financial statements include the accounts of Bresler & Reiner, Inc., our wholly owned subsidiaries, and entities which we control or, entities that are required to be consolidated under Financial Accounting Standards Board Interpretation No. 46 (“FIN 46”). Entities which we do not control or entities that are not required to be consolidated under FIN 46, are accounted for under the equity method.

All significant intercompany balances and transactions have been eliminated in consolidation.

REVENUE RECOGNITION

Real estate sales—Gains on sales of homes and land parcels are recognized pursuant to the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 66, “Accounting for Sales of Real Estate”. Revenues and cost of sales are recorded at the time each home or land parcel is closed and title and possession have been transferred to the buyer. Homebuilding and related costs are charged to the cost of the homes closed under the specific identification method. Land development costs are charged to the cost of land parcels closed on a relative sales value basis.

Leasing operations—We recognize revenue in accordance with SFAS No. 13, “Accounting for Leases.” SFAS No. 13 requires that revenue be recognized on a straight-line basis over the term of the lease for operating leases.

Hospitality revenue—We recognize hospitality revenue as services are provided.

Rental, construction and management fees—We generally recognize rental, construction and management fees as services are provided.

RENTAL PROPERTY AND EQUIPMENT

Rental property and equipment are stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets, generally 40 years for buildings and three to 10 years for furniture, fixtures and equipment. Replacements and renovations that extend the useful life of an asset are capitalized and depreciated over their estimated useful lives. Tenant improvements are capitalized and depreciated over the shorter of the terms of the respective tenant’s lease or estimated useful life. Depreciation expense totaled $1,914,000 and $1,142,000 for the three months ended June 30, 2004 and 2003, respectively and $3,639,000 and $2,290,000 for the six months ended June 30, 2004 and 2003, respectively.

PROPERTY AND LAND DEVELOPMENT

When construction commences, costs are transferred to property and land development where they are accumulated by project. Project costs included in property and land development include capitalized interest, property taxes, materials and labor. These costs are charged to costs of homes and lots sold on a pro rata basis as properties and lots are sold, in accordance with SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects.”

We review our accumulated costs to ensure that any costs in excess of net realizable value are charged to operations when identified. For the three and six months ended June 30, 2004, we capitalized $414,000 and $706,000 of interest, respectively, related to our equity investments in development projects.

LAND HELD FOR INVESTMENT

Land held for investment is recorded at the lower of cost or estimated fair value less cost to sell.

INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND PARTNERSHIPS

For entities that are not deemed to be variable interest entities (“VIE’s”), as set forth in FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46”), as revised in December 2003, we account for our investments in these partnerships and joint ventures in accordance with Statement of Position No. 78-9, “Accounting for Investments in Real Estate Ventures” and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” For entities in which we have a controlling interest, we consolidate the investment and a minority interest is recognized in our consolidated financial statements. Minority interest in the balance sheet represents the minority owners’ share of equity as of the balance sheet date; minority interest in the income statement represents the minority owners’ share of the income or loss of the consolidated joint venture. For entities in which we do not have a controlling interest, we account for our investment using the equity method of accounting and do not consolidate the investment. We evaluate control primarily based on the investors’ relative voting rights in the joint venture.

For entities that are deemed to be VIE’s, as set forth in FIN 46, we account for our investments in joint ventures based on a determination of the entity’s primary beneficiary. If we are the primary beneficiary through being subject to a majority of the potential variability in gains or losses of the VIE (with the primary focus on losses), then we consolidate our investment in the joint venture. If we are not the primary beneficiary, then we account for our investment by the equity method.

DEFERRED CHARGES AND OTHER ASSETS

Included in deferred charges are fees incurred in connection with obtaining financing for our real estate. These fees are deferred and amortized as a part of interest expense over the term of the related debt instrument on a straight-line basis, which approximates the effective interest method. In addition, deferred costs include leasing charges, comprised of tenant allowances and lease commissions incurred to originate a lease, which are amortized on a straight-line basis over the term of the related lease.

The application of SFAS No. 141 “Business Combinations” and SFAS No. 142 “Goodwill and Other Intangible Assets” (together “SFAS Nos. 141 and 142”) to real estate acquisitions requires us to allocate the purchase price to acquired in-place leases in addition to land, building and improvements. In order to determine the value to be allocated to the acquired leases, we are required to make several assumptions regarding the relative value of the in-place leases when compared to the current market. Some of the judgments required as a part of this exercise include (1) determining the market rental rates of the acquired leases, (2) estimating the market value of concessions (rent abatements, tenant improvement allowances, etc.) and leasing commissions to be paid on new leases, (3) estimating the lease-up period required to achieve the occupancy levels that the property has at the time of the acquisition, and (4) applying an estimated risk-adjusted discount rate to the existing tenants. As a result of adopting SFAS Nos. 141 and 142, we have intangible lease assets totaling $14,639,000 and $6,911,000 at June 30, 2004 and December 31, 2003, respectively, related to the fair value of acquired leases. The lease intangibles are amortized on a straight-line basis over the lives of the acquired leases.

The amortization of deferred charges and other assets, including the amortization of acquired in-place leases, totaled $1,056,000 and $356,000 for the three months ended June 30, 2004 and 2003, respectively and $2,205,000 and $703,000 for the six months ended June 30, 2004 and 2003, respectively.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the stated amounts of assets, liabilities, revenues, and expenses presented in the financial statements, as well as the disclosures relating to contingent liabilities. Consequently, actual results could differ from those estimates that have been reported in our financial statements.

RECLASSIFICATIONS

Certain amounts in the 2003 consolidated financial statements have been reclassified to conform to the current year presentation.

EARNINGS PER SHARE

We have no dilutive securities; therefore, basic and fully diluted earnings per share are identical. Earnings per share are based upon the weighted-average number of shares outstanding during the quarter (2,738,606 shares in both the first and second quarter of 2004 and 2003). On May 17, 2004, the Company’s Board of Directors declared a special cash dividend of $0.50 per common share, $0.25 per share of which was paid on June 15, 2004. The remaining dividend payment will be made on December 15, 2004 at an adjusted per share amount of $0.125. The per-share payment has been adjusted to take into account the 2-for-1 stock split the Company has announced that will become effective on or around September 1, 2004.

COMPREHENSIVE INCOME

Except for net income, we do not have any items impacting comprehensive income. Therefore, comprehensive income and net income are the same.

2. NEW ACCOUNTING PRONOUNCEMENTS

FASB Interpretation No. 46—In December 2003, the FASB issued the revised FIN 46, to expand upon and strengthen existing accounting guidance that address when a company should include the assets, liabilities and activities of another entity in its financial statements. To improve financial reporting by companies involved with variable interest entities (“VIEs”), FIN 46 requires that a VIE be consolidated by a company if that company is the primary beneficiary through being subject to a majority of the potential variability in gains or losses of the VIE (with the primary focus on losses). Prior to FIN 46, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. We had previously adopted the provisions of FIN 46 for variable interest entities created after January 31, 2003. However, the adoption of FIN 46 for variable interest entities created on or before January 31, 2003 is required for periods ended after March 15, 2004. We have adopted the final provisions of FIN 46 as of March 31, 2004. As a result we have consolidated Waterfront Associates LLC (“WALLC) in which a 54% owned subsidiary of the Company owns a 92% interest. We previously classified WALLC in investments in and advances to joint ventures. The consolidation of WALLC resulted, as of the consolidation date, in an increase in total assets of $10,600,000 (including an increase in property and land development of $28,757,000 and a decrease in investments in and advances to joint ventures of $18,359,000) an increase in accrued expenses and accounts payable of $1,700,000 and an increase in minority interest liability of $8,900,000. At June 30, 2004 total assets of this entity were $29,319,000, and total liabilities were $429,000. At June 30, 2004, the Company has $9,914,000 of equity at risk relating to its investment in WALLC.

We have also identified Golfview and Laguna Vista as additional VIE’s which we have consolidated into our June 30, 2004 financial statements. Our total investment in these entities was $7,664,000 at June 30, 2004.

3. SIGNIFICANT TRANSACTIONS, ACQUISITIONS AND INVESTMENTS

During the first six months of 2004, we entered into several material transactions as described below. All acquisitions of real estate and investments in joint ventures have been included in our accompanying statements of operations from the date of the transaction forward.

Golfview On April 7, 2004 a joint venture in which we own a 50% interest and an unaffiliated third party owns the balance, acquired a 144 unit mid-rise residential rental complex located in St. Petersburg, Florida, for a purchase price of $10,800,000. The joint venture plans to convert the complex into 140 for-sale residential condominium units. In connection with the purchase the joint venture obtained a $14,000,000 acquisition and construction loan, approximately $7,800,000 of which was drawn down for the funding of the acquisition. The loan, which bears a variable-interest rate of one month LIBOR plus 175 basis points, matures in one year. We invested $3,664,000 for our interest in the joint venture. We have consolidated the entity’s assets and liabilities in our unaudited consolidated financial statements.

Waterfront In October 2002, following the expiration of a major tenant’s lease at the Waterfront Complex, which is located in the Southwest Washington, D.C Urban Renewal Area, BRW, a 54% owned subsidiary of ours, entered into a joint venture with K/FCE Investment LLC (“K/FCE”) (a joint venture between the Washington DC based developer, The Kaempfer Company, Inc., and the national developer, Forest City Enterprises, Inc.), to form WALLC for the purposes of redeveloping and repositioning the Waterfront Complex. BRW contributed the buildings and the leasehold improvements relating to the Waterfront Complex to WALLC. Affiliates of K/FCE are marketing, leasing, redeveloping, and managing the complex. K/FCE is the managing member of WALLC and has sole responsibility for the management, control, and operation of the WALLC, as well as for the formulation and execution of its business and investment policy.

On April 22, 2004, the Federal National Mortgage Association entered into a non-binding Letter of Intent with WALLC, for the lease of up to 1.5 million square feet of new office space for more than 20 years in the Waterfront Complex.

Laguna Vista On March 25, 2004 we entered into a Stock Purchase Agreement with two unaffiliated third parties for the purchase of 100% of the stock of Laguna Vista Company (“Laguna Vista”), which is developing 41 luxury condominium units in Ocean City, Maryland. Laguna Vista has obtained a $15,100,000 construction loan, which bears interest at one month LIBOR plus 1.85% and matures September 30, 2005. Based on the terms of the agreement, we are required to purchase the stock for a total price of $8,000,000 by March 31, 2005, should the project attain certain sales targets. At the time we entered into the agreement, we advanced $3,000,000 as a deposit for the purchase of the stock. In addition to the stock purchase deposit we have provided a total of $3,000,000 in loans to Laguna Vista. The loans, which were advanced in September 2003, November 2003, and March 2004, each bear interest at 10% per annum and mature one year from the loan date. The borrower has an option to extend the maturity date on each of the loans for one year. We have consolidated the entity’s assets and liabilities in our unaudited consolidated financial statements due to the financing we have provided and our participation in the anticipated profits in the project.

Fort Washington Executive Center On February 26, 2004, a joint venture, in which we own a 96.5% interest and two unaffiliated third parties own the balance, acquired an executive center located in Fort Washington, Pennsylvania, consisting of three commercial buildings containing a total of approximately 393,000 square feet of office space. The purchase price of the property was $52,664,000. At the time of the acquisition, the joint venture placed a $33,300,000 mortgage loan on two of the buildings and a $15,700,000 mortgage loan on the third building. Each of the loans, bears a fixed-interest rate of 5.6% and matures in ten years. As a condition of financing, we executed conditional master lease agreements as tenant, on each of the loans for certain periods and space within the properties. We invested $7,000,000 for our 96.5% interest in the joint venture. We have consolidated the entity’s assets and liabilities and results of operations in our unaudited consolidated financial statements.

One Northbrook On February 18, 2004, we acquired an approximately 95,000 square foot office building located in a commercial office park in Trevose, Pennsylvania, for a purchase price of $16,900,000. On February 19, 2004, we placed a ten-year, 5.75% fixed-rate mortgage of $15,300,000 on the property. As a condition of financing, we executed a master lease agreement as tenant for certain periods and space within the property. We have consolidated the entity’s assets and liabilities and results of operations in our unaudited consolidated financial statements.

220 West Germantown Pike On February 5, 2004, a joint venture, in which we own a 97.5% interest and two unaffiliated third parties own the balance, acquired an office complex containing two commercial office buildings, in Plymouth Meeting, Pennsylvania comprising a total of approximately 115,000 square feet. The total purchase price of the office buildings was $20,500,000. In connection with the acquisition, the joint venture assumed a 5.9% fixed-rate mortgage loan on the buildings. The loan, which had an outstanding principal balance of $16,246,000 at the time of the assumption, matures in 2013. The loan was recorded at the assumed balance since it approximated market value at the time of the acquisition. We invested $4,875,000 for our 97.5% interest in the joint venture. We have consolidated the entity’s assets and liabilities and results of operations in our unaudited consolidated financial statements.

640 North Broad On January 14, 2004, a joint venture in which we own a 86.5% interest and two unaffiliated third parties own the balance, acquired a historic property in Philadelphia, PA, comprising two buildings, for a purchase price of $9,050,000. At the time of the acquisition, the joint venture placed a $6,000,000 loan on the buildings. The loan, which bears a variable-interest rate of one month LIBOR plus 175 basis points, matures in one year. The joint venture is redeveloping the buildings into an approximately 266 unit apartment property. We invested $3,200,000 for our 86.5% interest in the joint venture. We have consolidated the entity’s assets and liabilities in our unaudited consolidated financial statements.

Pro-Forma Results of Operations. The following unaudited pro-forma statements reflect our results of operations as if all the material acquisitions had occurred on the first day of the periods presented (in thousands, except earnings per share amounts):

	Pro-forma Three Months Ended June 30,
	2004		2003

Revenue	$	17,544	$	12,449
Net income	$	636	$	2,802
Earnings per share	$	0.23	$	1.02

	Pro-forma Six Months Ended June 30,
	2004		2003

Revenue	$	33,421	$	23,615
Net income	$	922	$	2,513
Earnings per share	$	0.34	$	0.92

4. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND PARTNERSHIPS

At June 30, 2004, our investments in non-consolidated joint ventures and partnerships consisted of the following:

JOINT VENTURE OR PARTNERSHIP	OWNERSHIP PERCENTAGE

WBP Undeveloped Land, LLC (“WBP Undeveloped Land”)	80	%
1925 K Associates LLC (“1925 K Street”)	85	%
Madison Building Associates, LLC (“Madison Building”)	25	%
Congressional South Associates LLC (“Congressional South”)	25	%
Selborne House at St. Marks Owner, LLC (“Selborne House”)	33	%
Redwood Commercial Management, LLC (“Redwood Commercial”)	50	%
Tech-High Leasing Company (“High Tech Leasing”)	50	%
Builders Leasing Company (“Builders Leasing”)	20	%
Third Street SW Investors (“Third Street”)	1	%

Waterfront Associates Upon the formation of WALLC in October 2002, since BRW did not have a controlling interest in the entity, it accounted for its investment under the equity method and did not consolidate the assets, liabilities and operations of WALLC from the period beginning the formation of the partnership and ending March 31, 2004. Upon the adoption of FIN 46 effective March 31, 2004, the assets and liabilities of WALLC and its results from operations from that date through June 30, 2004, are consolidated by BRW and included in B&R’s consolidated financial statements, since WALLC is considered to be a variable interest entity as defined by FIN 46 and BRW is deemed to be the primary beneficiary of the entity.

Below are condensed unaudited balance sheets for our unconsolidated joint venture entities as of June 30, 2004 and December 31, 2003 (in thousands):

	June 30, 2004
	1925 K Street		Madison Building		Congressional South		WBP Undeveloped Land		Other (1)			Total

ASSETS
Cash	$	127	$	292	$	152	$	—	$	217		$	788
Land held for investment	—		—		—		5,432		—			5,432
Construction in progress	—		—		10,718		—		5,442			16,160
Land, building and equipment, net	29,384		16,862		18,512		—		1,449			66,207
Other assets	1,197		574		8,147		801		1,453			12,172
Total assets	$	30,708	$	17,728	$	37,529	$	6,233	$	8,561		$	100,759

LIABILITIES AND MEMBERS’ EQUITY
Mortgages and notes	$	20,056	$	14,323	$	30,765	$	5,000	$	8,213		$	78,357
Other liabilities	3,240		329		546		386		3,528			8,029
Total liabilities	23,296		14,652		31,311		5,386		11,741			86,386
Members’ equity (deficit)	7,412		3,076		6,218		847		(3,180		)	14,373
Total liabilities and members’ equity	$	30,708	$	17,728	$	37,529	$	6,233	$	8,561		$	100,759
Company’s interest in members’ equity	$	6,891	$	1,770	$	3,406	$	377	$	1,031		$	13,475

(1) Represents the combined balance sheets of Third Street, Tech-High Leasing, Builders Leasing, Selborne House and Redwood Commercial.

	December 31, 2003
	1925 K Street		Madison Building		Congressional South		WBP Undeveloped Land		Waterfront Associates		Other (1)			Total

ASSETS
Cash	$	327	$	289	$	54	$	—	$	156	$	312		$	1,138
Land held for investment	—		—		—		5,432		—		—			5,432
Construction in progress	—		—		8,546		—		—		1,822			10,368
Land, building and equipment, net	30,179		17,068		18,877		—		26,395		1,495			94,014
Other assets	698		457		6,446		842		228		773			9,444
Total assets	$	31,204	$	17,814	$	33,923	$	6,274	$	26,779	$	4,402		$	120,396

LIABILITIES AND MEMBERS’ EQUITY
Mortgages and notes	$	20,187	$	14,404	$	28,146	$	5,000	$	—	$	4,784		$	72,521
Other liabilities	3,713		249		—		365		571		2,889			7,787
Total liabilities	23,900		14,653		28,146		5,365		571		7,673			80,308
Members’ equity (deficit)	7,304		3,161		5,777		909		26,208		(3,271		)	40,088
Total liabilities and members’ equity	$	31,204	$	17,814	$	33,923	$	6,274	$	26,779	$	4,402		$	120,396

Company’s interest in members’ equity	$	6,829	$	1,964	$	3,259	$	292	$	18,297	$	1,030		$	31,671

(1) Represents the combined balance sheets of Third Street, Tech-High Leasing, Builders Leasing, Selborne House and Redwood Commercial.

Below are condensed unaudited statements of operations for our unconsolidated joint venture entities for the periods indicated (in thousands):

	Three Months Ended June 30, 2004
	1925 K Street		Madison Building		Congressional South		WBP Undeveloped Land			Other (1)			Total

Operating revenues	$	1,052	$	619	$	473	$	—		$	769		$	2,913
Operating expenses	466		168		183		—			807			1,624
Interest expense	132		229		—		60			60			421
Depreciation expense	288		133		274		—			14			709

Net income (loss)	$	166	$	89	$	16	$	(60	)	$	(112	)	$	159

Company’s equity in earnings (loss) of unconsolidated joint ventures	$	141	$	22	$	4	$	(48	)	$	15		$	134

(1) Represents the combined results of Third Street, Tech-High Leasing, Builders Leasing and Redwood Commercial.

	Three Months Ended June 30, 2003
	1925 K Street		Madison Building		WBP Undeveloped Land		Waterfront Associates		Other (1)		Total
Operating revenues	$	1,113	$	560	$	3,352	$	—	$	516	$	5,541
Operating expenses	526		124		2,089		—		322		3,061
Interest expense	188		237		42		—		84		551
Depreciation expense	226		110		—		—		23		359

Net income (loss)	$	173	$	89	$	1,221	$	—	$	87	$	1,570

Company’s equity in earnings (loss) of unconsolidated joint ventures	$	147	$	22	$	977	$	—	$	68	$	1,214

(1) Represents the combined results of Third Street, Tech-High Leasing, Builders Leasing and Redwood Commercial.

Below are condensed unaudited statements of operations for our unconsolidated joint venture entities for the periods indicated (in thousands):

	Six Months Ended June 30, 2004
	1925 K Street		Madison Building		Congressional South		WBP Undeveloped Land			Waterfront Associates			Other (1)			Total

Operating revenues	$	2,460	$	1,237	$	1,011	$	—		$	632		$	1,448		$	6,788
Operating expenses	958		342		209		—			744			1,411			3,664
Interest expense	262		460		—		121			—			141			984
Depreciation expense	578		264		365		—			—			50			1,257
													—
Net income (loss)	$	662	$	171	$	437	$	(121	)	$	(112	)	$	(154	)	$	883

Company’s equity in earnings (loss) of unconsolidated joint ventures	$	563	$	43	$	109	$	(97	)	$	(103	)	$	76		$	591

(1) Represents the combined results of Third Street, Tech-High Leasing, Builders Leasing and Redwood Commercial.

	Six Months Ended June 30, 2003
	1925 K Street		Madison Building		WBP Undeveloped Land		Waterfront Associates		Other (1)		Total
Operating revenues	$	2,283	$	1,154	$	3,412	$	—	$	1,589	$	8,438
Operating expenses	993		341		2,170		—		1,328		4,832
Interest expense	377		460		118		—		171		1,126
Depreciation expense	545		238		—		—		47		830
							—		—		—
Net income (loss)	$	368	$	115	$	1,124	$	—	$	43	$	1,650

Company’s equity in earnings (loss) of unconsolidated joint ventures	$	313	$	29	$	899	$	—	$	107	$	1,348

(1) Represents the combined results of Third Street, Tech-High Leasing, Builders Leasing and Redwood Commercial.

The difference between the carrying value of our investment in and advances to unconsolidated joint ventures and partnerships and our interest in member’s equity noted above is primarily due to advances to the joint ventures and capitalized interest on our investment balance in joint ventures that own real estate under development.

5. COMMITMENTS AND CONTINGENCIES

FINANCIAL COMMITMENTS

At June 30, 2004, we had approximately $156,000 of outstanding letters of credit representing performance guarantees for land improvements in home building and land development operations.

GUARANTEES

We have provided an unconditional and irrevocable payment guaranty of $5,500,000 to Wachovia Bank, N.A in connection with a $20,000,000 loan made to 1925K Associates, LLC (1925K) in February 2004. The loan matures in April 2007, but may be extended for up to an additional two years at the option of the borrower.

We have provided an unconditional and irrevocable payment guaranty to Riggs Bank for 33.3% of the loan balance outstanding under the $7,100,000 construction loan, made to Selborne House. The other members of Selborne House have guaranteed the remaining balance under the loan. The loan matures in January 2006 and has an extension option of 5 years. Our payment guarantee will be reduced to 16.7% of the outstanding loan balance, upon Selborne House maintaining a debt service ratio of 1.25 to 1.0 for a period of one year. Additionally, along with the other members of Selborne House, we have jointly and severally guaranteed the completion of the project prior to July 2005. At June 30, 2004, the outstanding loan balance totaled $5,147,000.

We have guaranteed repayment of 66.6% of the loan balance outstanding under the $6,300,000 acquisition and construction loan made by Citizen’s Bank of Pennsylvania to Cigar Factory Apartments, L.P. (“Cigar Factory”). The remainder of the outstanding balance under the loan has been guaranteed by the other members of Cigar Factory. The loan matures in July 2005, but may be extended for an additional year at the option of the borrower. Together with the other members of Cigar Factory, we have also guaranteed completion of construction of improvements to Cigar Factory on or before the maturity date of the loan, or if the loan is extended, the extended maturity date. At June 30, 2004, the outstanding loan balance totaled $3,347,000.

In connection with the $15,100,000 construction loan Laguna Vista has obtained, we have guaranteed the purchase of half of all unpurchased condominium units at Laguna Vista at September 30, 2005 at a total acquisition price that will equate to one half of the outstanding loan balance at that date. At June 30, 2004, the outstanding loan balance totaled $4,987,000.

LITIGATION

We are not presently involved in any litigation nor to our knowledge is any litigation threatened against us or our subsidiaries that, in management’s opinion, would result in any material adverse effect on our ownership, financial condition, management, or operation of our properties.

6. MORTGAGE AND CONSTRUCTION LOANS AND OTHER DEBT (in thousands):

Property (1)	Interest Rate		Maturity	June 30, 2004		December 31, 2003
Fort Washington	5.60	%	2014	$	48,852	—
Washington Business Park	7.63	%	2031	39,167		39,343
Victoria Place Apartments	4.72	%	2013	33,694		33,895
The Fountains	5.00	%	2007	24,831		24,831
Versar Center	6.18	%	2013	18,208		18,312
Sudley North Buildings A,B,C,& D and Bank Building	7.47	%	2012	17,678		17,760
West Germantown Pike	5.90	%	2013	16,178		—
One Northbrook	5.75	%	2014	15,257		—
900 Northbrook	5.98	%	2013	11,138		11,200
Inn at the Colonnade	7.45	%	2011	9,900		9,978
Golfview		(2)	2005	8,125		—
Laguna Vista		(3)	2005	4,987		—
640 N. Broad Street		(2)	2005	6,000		—
Fort Hill Office Building	7.70	%	2011	5,582		5,609
Holiday Inn Express	7.88	%	2011	3,656		3,682
Charlestown North	6.74	%	2012	4,904		4,926
Clarksburg Ridge		(4)	2005	4,095		6,712
Cigar Factory		(5)(6)	2005	3,347		894
Total mortgage and construction loans				275,599		177,142
Other debt		(7)(8)	2005	6,000		6,000
Total mortgage and construction loans and other debt				$	281,599	$	183,142

(1) Note is secured by related property.

(2) Variable interest rate of one month LIBOR plus 175 basis points.

(3) Variable interest rate of one month LIBOR plus 185 basis points.

(4) Variable interest rate of lender’s prime plus 100 basis points.

(5) Variable interest rate of one month LIBOR plus 275 basis points.

(6) The Company has provided a payment guarantee on 66.7% of the outstanding debt under this loan.

(7) Variable interest rate of one month LIBOR plus 195 basis points.

(8) Note is an unsecured loan to the Company.

As of June 30, 2004, we are in compliance with all debt covenants.

7. DISCONTINUED OPERATIONS

In December 2003, we sold 95% of our interest in Town Square Commons, LLC (“The Commons”), to an unaffiliated third party. The Commons owns a 116 unit apartment complex in Washington DC. The purchaser has a call option to purchase, and we have a corresponding put option to sell, the remaining 5% interest in The Commons, beginning in December 2004. We have recorded the results of operations of The Commons as part of discontinued operations, in the accompanying consolidated financial statements.

In May 2003, we sold to a third party our Maplewood Manor nursing home in Lakewood, New Jersey. We have recorded the operating results of the nursing home along with a $1,711,000 gain, net of taxes as part of discontinued operations in the accompanying consolidated financial statements for 2003.

We are currently holding for sale the 7800 Building, a commercial office building containing approximately 15,000 square feet of space, five commercial properties currently leased to convenience store operators. The net assets and liabilities of these properties are classified as assets held for sale and the operating results are classified as discontinued operations in the accompanying consolidated financial statements.

The following summary presents the combined operating results of properties we have classified as discontinued operations (in thousands):

	Three months ended June 30
	2004		2003
Revenues	$	219	$	503
Income before gain on sale and provision for income taxes	181		328
Gain on sale	—		2,851
Provision for income taxes	73		1,270
Income from discontinued operations	$	108	$	1,909

	Six months ended June 30
	2004		2003
Revenues	$	323	$	1,074
Income before gain on sale and provision for income taxes	229		581
Gain on sale	—		2,851
Provision for income taxes	92		1,375
Income from discontinued operations	$	137	$	2,057

8. INCOME TAXES

SFAS No. 109, “Accounting for Income Taxes,” establishes financial accounting and reporting standards for the effects of income taxes that result from our activities during the current and preceding years. It requires an asset and liability approach to accounting for income taxes. Balance sheet accruals for income taxes are adjusted to reflect changes in tax rates in the period such changes are enacted. The Company and its subsidiaries file a consolidated income tax return.

Our provision for income taxes for the three months and six months ended June 30, 2004 and 2003, includes a provision for income taxes on the income from continuing operations as well as a provision for income taxes on the discontinued operations. The provision for income taxes is calculated by applying the estimated full year effective tax rate to our earnings for six months ended June 30, 2004 and 2003.

9. SEGMENT INFORMATION:

In accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” the Company reports segment information for the following four categories:

Commercial Rental Property

This segment includes the rental income derived by commercial properties from leases of office, industrial and retail space and other related revenue sources. Commercial leases generally provide for a fixed monthly rental over terms that range from three to 10 years.

Also included in this segment is income generated from management and leasing activities associated with our 50% ownership interest in Redwood Commercial Management, LLC (“Redwood”), a commercial management company.

Residential Rental Property

This segment includes the rental income derived from residential properties from leases of apartment units and other related revenue sources. Apartment leases generally provide for a fixed monthly rental over a one-year term.

Hospitality Properties

This segment includes revenue and income from two hospitality properties: The Inn at the Colonnade located in Baltimore, Maryland and the Holiday Inn Express located in Camp Springs, Maryland.

Commercial, Residential and Land Development

This segment primarily includes the development and sale of homes and residential condominium units, the development of commercial buildings and the development of lots as part of residential subdivisions. Also included are the revenues and costs associated with undeveloped commercial land sales, and other construction activity.

We are not involved in any operations in countries other than the United States.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate performance based upon revenues less operating expenses of the combined properties in each segment.

Our reportable segments are a consolidation of related subsidiaries that are managed separately as each segment requires different operating, pricing, and leasing strategies.

Following is a summary of the Company’s reportable segments.

Three months ended June 30, 2004

(in thousands, unaudited)

	Commercial, Residential and Land Development				Commercial Rental		Residential Rental			Hospitality		Corporate and Other			Consolidated

Total revenues	$		3,413		$	8,866	$	2,439		$	2,373	$	453		$	17,544
Cost of homebuilding, residential lots and other development	3,109				—		—			—		—			3,109
Operating expenses	—				3,301		1,198			1,313		—			5,812
Depreciation and amortization expense	—				2,178		522			197		—			2,897
Interest expense	—				2,830		840			214		(365		)	3,519
Minority interest	(150			)	125		(39		)	—		—			(64		)
General, administrative and other expenses	—				—		—			—		1,590			1,590
Income (loss) before taxes and discontinued operations	$	454			$	432	$	(82	)	$	649	$	(772	)	$	681
Income from equity investments	$	104			$	30	$	—		$	—	$	—		$	134

Six months ended June 30, 2004
(in thousands, unaudited)

	Commercial, Residential and Land Development				Commercial Rental		Residential Rental			Hospitality		Corporate and Other			Consolidated

Total revenues	$		5,989		$	15,925	$	4,969		$	4,079	$	946		$	31,908
Cost of homebuilding, residential lots and other development	5,677				—		—			—		—			5,677
Operating expenses	—				5,338		2,291			2,638		—			10,267
Depreciation and amortization expense	—				3,881		1,372			417		—			5,670
Interest expense	—				5,104		1,626			486		(606		)	6,610
Minority interest	—				30		(26		)	—		—			4
General, administrative and other expenses	—				—		—			—		2,638			2,638
Income (loss) before taxes and discontinued operations	$	312			$	1,572	$	(294	)	$	538	$	(1,086	)	$	1,042
Income from equity investments	$	(49		)	$	640	$	—		$	—	$	—		$	591

As of June 30, 2004
(in thousands, unaudited)

Assets:
Real estate at cost	$		84,726	$	189,117		$	81,618		$	14,951		$	891		$	371,303
Accumulated depreciation	—			(14,347		)	(4,900		)	(8,352		)	(401		)	(28,000		)
Investments in joint ventures	1,010			12,486			2,772			—			—			16,268
Cash, cash equivalents and restricted cash	—			—			—			—			23,463			23,463
Investments	—			—			—			—			35,806			35,806
Other	—			—			—			—			42,186			42,186
	$	85,736		$	187,256		$	79,490		$	6,599		$	101,945		$	461,026

Three months ended June 30, 2003
(in thousands, unaudited)

	Commercial, Residential and Land Development				Commercial Rental		Residential Rental			Hospitality		Corporate and Other			Consolidated
Total revenues	$		976		$	4,973	$	85		$	2,299	$	501		$	8,834
Cost of homebuilding, residential lots and other development	22				—		—			—		—			22
Operating expenses	—				1,705		73			1,356		—			3,134
Depreciation and amortization expense	—				1,423		40			206		—			1,669
Interest expense	—				1,558		85			263		—			1,906
Minority interest	(44			)	83		—			—		—			39
General, administrative and other expenses	—				—		—			—		836			836
Income (loss) before taxes and discontinued operations	$	998			$	204	$	(113	)	$	474	$	(335	)	$	1,228
Income from equity investments	$	976			$	238	$	—		$	—	$	—		$	1,214

Six months ended June 30, 2003
(in thousands, unaudited)

	Commercial, Residential and Land Development			Commercial Rental		Residential Rental			Hospitality		Corporate and Other			Consolidated

Total revenues	$		1,082	$	8,843	$	784		$	3,989	$	1,202		$	15,900
Cost of homebuilding, residential lots and other development	184			—		—			—		—			184
Operating expenses	—			3,334		530			2,545		—			6,409
Depreciation and amortization expense	—			2,258		127			432		—			2,817
Interest expense	—			2,948		169			525		—			3,642
Minority interest	—			112		—			—		—			112
General, administrative and other expenses	—			—		—			—		1,910			1,910
Income (loss) before taxes and discontinued operations	$	898		$	191	$	(42	)	$	487	$	(708	)	$	826
Income from equity investments	$	899		$	449	$	—		$	—	$	—		$	1,348

As of December 31, 2003 (in thousands)

Assets:
Real estate at cost	$		25,358	$	105,516		$	80,809		$	14,709		$	669		$	227,061
Accumulated depreciation	—			(12,186		)	(3,829		)	(7,921		)	(342		)	(24,278		)
Investments in joint ventures	19,083			13,374			2,773			—			—			35,230
Cash, cash equivalents and restricted cash	—			—			—			—			26,429			26,429
Investments	—			—			—			—			52,635			52,635
Other	—			—			—			—			30,849			30,849
	$	44,441		$	106,704		$	79,753		$	6,788		$	110,240		$	347,926

10. Subsequent Events

On August 3, 2004 we obtained a $30,000,000 unsecured line of credit. Terms of the line require draws to be used for the acquisition of real estate, with a maximum of $15,000,000 to be used for the purchase of development real estate. Covenants under the line include maintaining a minimum liquidity of $30,000,000 (consisting of cash, cash equivalents and short-term investments) and a minimum shareholder’s equity of $100,000,000 and achieving annual net income of $4,000,000 and annual funds from operations, (defined as net income, computed in accordance with GAAP, excluding gains or losses, net of taxes, from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures), of $9,500,000. The line had $1,794,000 outstanding at August 13, 2004, due to draws used for the purchase of two land parcels in Ocean City, Maryland. Together with an equity partner, we plan to develop for-sale condominium units on the land parcels.

On June 16, 2004, the Board of Directors approved a 2-for-1 stock split of the Company’s common stock to be affected in the form of a stock dividend. On the same date the Board of Directors also approved an amendment to the Certificate of Incorporation to increase the authorized Common Stock from 4,000,000 shares to 7,000,000 shares in order to permit the payment of the stock dividend. On July 21, 2004, stockholders holding more than fifty percent of the voting power of the issued and outstanding capital stock executed the shareholder consent to this amendment. The amendment will be filed with the Secretary of State with the State of Delaware on or about September 1, 2004 at which time the stock dividend will be distributed.

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

Overview

The four segments in which we operate: commercial rental property; residential rental property; hospitality; and commercial, residential and land development, provide us with a diversified portfolio of assets across the real estate spectrum. Our strategy revolves around using our strong liquidity position to invest in commercial and residential real estate through acquisitions of both operational and development properties. We also acquire other forms of real estate, such as undeveloped commercial and residential land, as such opportunities arise. We are an active owner of our real estate assets and are focused on maximizing profitability throughout our portfolio by working closely with the third party management companies that manage our properties to identify revenue generation and expense reduction opportunities.

In 2003 and the first half of 2004 we took advantage of a low-interest rate environment to acquire, through both wholly owned subsidiaries and joint venture entities with unaffiliated third parties that we consolidate in our financial statements, real estate assets totaling approximately $220,000,000. As our cost of capital increases with rising interest rates, we will be challenged going forward to continue to utilize our cash and other sources of financing available to purchase additional real estate that has the potential to generate strong cash returns on our investment.

The discussion that follows is based primarily on our consolidated balance sheets as of June 30, 2004 and December 31, 2003, and the results of operations for the three months and six months ended June 30, 2004 and 2003 and should be read along with our consolidated financial statements and related notes. The ability to compare one period to another may be significantly affected by acquisitions and dispositions of commercial and residential properties and the acquisition and subsequent partial development and sale of residential lots.

Application of Critical Accounting Policies

We apply certain significant accounting policies when preparing our consolidated financial statements. A summary of these policies is included in our latest annual report on Form 10-K/A for the period ended December 31, 2003. The preparation of these financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expense, and the related disclosures of contingent assets and liabilities at the date of the financial statements. We evaluate these estimates and judgments on an ongoing basis and base our estimates on historical experience, current conditions, and various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates form our basis for making judgments about the carrying values of assets and liabilities, as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may differ from these estimates.

We believe that estimates, assumptions and judgments involved in the accounting policies described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our most recent annual report on Form 10-K/A have the greatest potential impact on our financial statements.

Forward Looking Statements

This Form 10-Q contains forward-looking statements that are based on current estimates, expectations, forecasts and projections about us, our future performance, the industry in which we operate, our beliefs and management’s assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by or on behalf of us. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” or “would be,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. These risks and uncertainties include:

• our ability to compete effectively;

• our exposure to the credit risks of our tenants;

• our ability to recruit and retain key personnel;

• adverse changes in the local or general economy and market conditions;

• our ability to obtain necessary governmental permits and approvals;

• our ability to complete development projects in a timely manner and within budget;

• our ability to secure tenants for our projects and properties;

• our ability to sustain occupancy levels at our properties through keeping existing tenants and securing new ones;

• our ability to secure tenants for the residential and commercial properties that we develop;

• changes in the interest rate environment which will affect our ability to obtain mortgage financing on acceptable terms;

• future litigation; and

• changes in environmental health and safety laws.

The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document, as well as the Company’s annual report filed on Form 10-K/A for the year ended December 31, 2003.

Balance Sheet Overview

The following table reflects certain condensed balance sheet items from our consolidated balance sheets as of the dates presented (in thousands):

	June 30, 2004		December 31, 2003		Change 2003 to 2004
					Increase (decrease)
Assets:
Rental property and equipment, at cost	$	284,809	$	201,703	$	83,106
Property and land development	83,353		22,127		61,226
Cash, cash equivalents, and investments	44,217		66,196		(21,979		)
Investments in and advances to joint ventures	16,268		35,230		(18,962		)
Deferred charges and other assets, net	24,381		13,237		11,144
Total assets	461,026		347,926		113,100

Liabilities:
Mortgage and construction loans and other debt	281,599		183,142		98,457
Total liabilities	305,835		204,044		101,791
Minority Interest	27,537		15,787		11,750
Shareholders’ Equity	127,654		128,095		(441		)

Material changes in assets include:

• Rental property and equipment increased primarily as a result of the acquisition of the Fort Washington Executive Center, the West Germantown Pike commercial office buildings and the One Northbrook commercial office building.

• Property and land development increased primarily as a result of the acquisition of and initial development work performed on the 640 North Broad, Laguna Vista and Golfview properties and the consolidation of Waterfront Associates, LLC, the entity that owns the Waterfront Complex, into our June 30, 2004 consolidated balance sheet, partially offset by sales of Clarksburg Ridge developed lots.

• Cash, cash equivalents and investments decreased in total primarily due to the use of cash in acquisitions.

• Investments in and advances to joint ventures decreased primarily due to the consolidation of Waterfront Associates, LLC into our consolidated balance sheet effective March 31, 2004.

• Deferred charges and other assets, net increased primarily due to the value assigned to the in-place leases of properties acquired in 2004.

Material changes in liabilities include:

• Mortgage and construction loans and other debt increased primarily as a result of mortgage and construction loans obtained or assumed in connection with the acquisition of the Fort Washington Executive Center, the West Germantown Pike commercial office buildings, the One Northbrook commercial office building, the 640 North Broad building, Laguna Vista and Golfview.

• Minority interest increased primarily as a result of the consolidation of Waterfront Associates, LLC into our consolidated June 30, 2004 balance sheet.

Shareholders equity decreased due to a $1,369,000 cash dividend declared in June 2004. The decrease was partially offset by net income recorded for the six months ended June 30, 2004.

Financial Overview

For the Three Months Ended June 30, 2004 and 2003:

The following table reflects key line items from our unaudited statements of operations for the three months ended June 30, 2004 and 2003 (in thousands):

	June 30, 2004		June 30, 2003		Change 2003 to 2004			% Change 2003 to 2004
					Increase (decrease)			Increase(decrease)
Revenues from commercial rental properties	$	8,809	$	4,072	$	4,737		116.3	%
Revenues from residential rental properties	2,439		390		2,049			525.4
Revenues from hospitality properties	2,373		2,299		74			3.2
Homebuilding, residential lots and other development revenues	3,309		—		3,309			—
Income from equity investments	134		1,214		(1,080		)	(89.0	)
Total revenues	17,544		8,575		8,969			104.6

Commercial operating expenses	3,301		1,534		1,767			115.2
Residential operating expenses	1,198		244		954			391.0
Hospitality operating expenses	1,313		1,356		(43		)	(3.2	)
Commercial depreciation and amortization expense	2,178		1,146		1,032			90.1
Residential depreciation and amortization expense	522		58		464			800.0
Cost of homebuilding, residential lots and other development	3,109		22		3,087			14,031.8
General and administrative expense	1,169		831		338			40.7
Interest expense	3,519		1,906		1,613			84.6
Other expenses	421		5		416			8,320.0
Discontinued operations, net of tax	108		1,909		(1,801		)	(94.3	)
Net income (loss)	636		2,939		(2,303		)	(78.4	)

General Overview.

Total revenue for the three months ended June 30, 2004 increased by $8,969,000 over total revenue for the comparable period in 2003. The increase was primarily due to revenue generated from sales of developed land at Clarksburg Ridge along with revenue generated from the acquisition of the Victoria Place apartment complex, The Fountains apartment complex and the 900 Northbrook commercial building in the second half of 2003 and the acquisition of the Fort Washington Executive Center, the West Germantown Pike commercial office buildings and the One Northbrook commercial office building in the first quarter of 2004.

Net income for the three months ended June 30, 2004 decreased by $2,303,000 compared to net income for the comparable period in 2003. The decrease was primarily due to a $1,711,000 gain, net of taxes, recorded in 2003 relating to the sale of a nursing home, and $734,000 of income, net of taxes recorded in 2003, related to the sale of undeveloped land. The properties that were acquired in the second half of 2003 and the first half of 2004 did not generate significant amounts of income for the three months ended June 30, 2004, due to the large amounts of recorded amortization expense related to the fair value of the acquired leases associated with these properties.

Commercial Rental Property.

At June 30, 2004 we owned, or had an ownership interest in, 27 commercial property buildings containing approximately 2,035,000 square feet of space compared to 20 commercial property buildings containing approximately 1,366,000 square feet of commercial space at June 30, 2003, an increase of 669,000 square feet. Our portfolio of commercial properties owned by entities that we consolidate contained approximately 1,723,000 square feet of commercial space, compared to approximately 1,054,000 square feet at June 30, 2003, an increase of approximately 669,000 square feet. The increase is due to the November 2003 acquisition of the 900 Northbrook commercial building and the February 2004 acquisitions of the Fort Washington Executive Center, the West Germantown Pike commercial buildings and the One Northbrook commercial building.

The table below sets forth the commercial rental properties which we owned, or had ownership interests in, at June 30, 2004 (square feet in thousands)

	Square Feet	Occupancy		Location	B&R Ownership
Consolidated Properties
Washington Business Park (1)	568	96.6	%	Lanham, MD	80.0	%
Fort Washington Executive Center (2)	393	90.9	%	Ft. Washington, PA	96.5	%
Versar Center	217	99.0	%	Springfield, VA	100.0	%
Sudley North (Buildings A,B&C)(2)	116	95.3	%	Manassas, VA	98.8	%
200-220 West Germantown Pike (3)	115	100.0	%	Plymouth Meeting, PA	97.5	%
One Northbrook	95	86.5	%	Trevose, PA	100.0	%
Sudley North (Building D)	69	100.0	%	Manassas, VA	49.4	%
900 Northbrook	66	94.0	%	Trevose, PA	87.5	%
Fort Hill	66	100.0	%	Centreville, VA	80.0	%
7800 Building (4)	15	100.0	%	Manassas, VA	100.0	%
Bank Building	3	100.0	%	Manassas, VA	100.0	%
Total consolidated properties	1,723
Unconsolidated Properties
1925K Street	149	98.1	%	Washington, DC	85.0	%
Madison Building	82	97.8	%	McLean, VA	24.9	%
Congressional South (5)	81	32.8	%	Rockville, MD	25.0	%
Total unconsolidated properties	312
Total consolidated and unconsolidated properties	2,035

(1) Consists of two office buildings and seven flex and warehouse buildings

(2) Consists of three office buildings

(3) Consists of two office buildings

(4) Property is being held for sale

(5) A large portion of the property is currently under development

The $4,737,000 revenue increase in 2004 relative to 2003 can be primarily attributed to a $4,483,000 increase in revenue from the acquisitions of 900 Northbrook, Fort Washington Executive Center, West Germantown Pike and One Northbrook. The remaining increase is primarily due to higher occupancy at Washington Business Park.

Depreciation and amortization expense in 2004 increased by $1,032,000 over the prior year primarily due to the acquisitions of 900 Northbrook, Fort Washington Executive Center, West Germantown Pike and One Northbrook.

Residential Rental Property.

At June 30, 2004 we owned, or had a material ownership interest in, three residential properties, containing a total of 942 apartment units. The total number of units increased by 764 units over the June 30, 2003 total, due to the acquisitions of the Victoria Place and The Fountains apartment complexes in the second half of 2003. The table below sets forth these residential rental properties.

Property	Apt. Units	Occupancy		Location	B&R Ownership%
The Fountains	400	91.5	%	Orlando, FL	100.0	%
Victoria Place	364	94.8	%	Orlando, FL	85.0	%
Charlestown North	178	84.8	%	Greenbelt, MD	100.0	%
Total	942

The $2,049,000 increase in residential rental revenue over the prior year can be attributed to a $2,060,000 increase in revenue from the acquisitions of Victoria Place and The Fountains.

Operating expenses consist of direct operating costs of the properties including property taxes and insurance and excluding interest expense and depreciation expense. The increase in residential operating expenses of $954,000 over the prior year can be primarily attributed to a $910,000 increase in operating expenses from the acquisitions of Victoria Place and The Fountains.

Depreciation and amortization expense in 2004 increased by $464,000 over the prior year primarily due to the acquisitions of Victoria Place and The Fountains.

Hospitality Properties.

Revenue in 2004 was comparable to 2003. Operating expenses, which consist of direct operating costs of the properties including property taxes and insurance and excluding interest expense and depreciation expense, were also comparable to 2003.

Homebuilding, Residential Lots and Other Development.

Homebuilding, residential lots and other development revenue in 2004 increased by $3,309,000 compared to the prior year. The increase can be attributed to the sale of 23 developed lots in Clarksburg Ridge in 2004.

The cost of homebuilding, residential lots and other development in 2004 increased by $3,087,000 compared to the prior year. The increase can be primarily attributed to the Clarksburg Ridge lot sales.

Income from equity investments

Income from equity investments, which consists of income earned from joint ventures that are not consolidated into our financial statements, decreased by $1,080,000 in 2004 primarily due to the sale in 2003 of five parcels consisting of approximately 15 acres of undeveloped land at Washington Business Park. No land parcels were sold in 2004.

General and Administrative Expense

General and administrative expense increased by $338,000 primarily due to higher salary and consulting expense in 2004.

Interest Expense

The increase in interest expense of $1,613,000 over the prior year is primarily due to interest on debt obtained or assumed in 2004 and 2003 in connection with the acquisitions of Victoria Place, The Fountains, 900 Northbrook, Fort Washington Executive Center, West Germantown Pike and One Northbrook. We capitalized $414,000 of interest for the three months ended June 30, 2004. No interest was capitalized during the comparable period in 2003.

Other Expenses

Other expenses increased by $416,000 in 2004, primarily due to a loss from operations at the Waterfront property, which are incidental to the redevelopment of the property.

Provision for Income Taxes

The provision for income taxes, which includes a provision for both income from continuing operations and income from discontinued operations has been calculated by applying the estimated full year effective tax rate to our year-to-date earnings. The effective tax rate used in 2004 was 27.0%, which reflects a reduction from the statutory rates primarily for tax-exempt interest earned on investments in municipal obligations.

Discontinued Operations, net of tax

Discontinued operations, net of tax, decreased by $1,801,000 primarily due to the sale of a nursing home in May 2003, which generated a gain, net of tax, of $1,711,000.

For the Six Months Ended June 30, 2004 and 2003:

The following table reflects key line items from our unaudited statements of operations for the six months ended June 30, 2004 and 2003 (in thousands):

	June 30, 2004		June 30, 2003		Change 2003 to 2004			% Change 2003 to 2004
					Increase(decrease)			Increase(decrease)
Revenues from commercial rental properties	$	15,231	$	8,190	$	7,041		86.0	%
Revenues from residential rental properties	4,969		784		4,185			533.8
Revenues from hospitality properties	4,079		3,989		90			2.3
Homebuilding, residential lots and other development revenues	6,038		183		5,855			3,199.5
Income from equity investments	591		1,348		(757		)	(56.2	)
Total Revenues	31,908		15,900		16,008			100.7

Commercial operating expenses	5,338		3,334		2,004			60.1
Residential operating expenses	2,291		530		1,761			332.3
Hospitality operating expenses	2,638		2,545		93			3.7
Commercial depreciation and amortization expense	3,881		2,258		1,623			71.9
Residential depreciation and amortization expense	1,372		127		1,245			980.3
Cost of homebuilding, residential lots and other development	5,677		184		5,493			2,985.3
General and administrative expense	2,133		1,900		233			12.3
Interest expense	6,610		3,642		2,968			81.5
Other expenses	505		10		495			4,950.0
Discontinued operations, net of tax	137		2,057		(1,920		)	(93.3	)
Net income	928		2,778		(1,850		)	(66.6	)

General Overview.

Total revenue for the six months ended June 30, 2004 increased by $16,008,000 over total revenue for the comparable period in 2003. The increase was primarily due to revenue generated from the acquisition of the Victoria Place apartment complex, The Fountains apartment complex, the 900 Northbrook commercial building, the Fort Washington Executive Center, the West Germantown Pike commercial office buildings and the One Northbrook commercial office building, along with sales of developed land at Clarksburg Ridge.

Net income for the six months ended June 30, 2004 decreased by $1,850,000 compared to net income for the comparable period in 2003. The decrease was primarily due to a $1,711,000 gain, net of taxes, recorded in 2003 relating to the sale of a nursing home, as well as $734,000 of income, net of taxes recorded in 2003 related to the sale of undeveloped land. The properties that were acquired in the second half of 2003 and the first half of 2004 did not generate significant amounts of income due to the large amounts of recorded amortization expense related to the fair value of the acquired leases associated with these properties.

Commercial Rental Property.

The $7,041,000 revenue increase in 2004 relative to 2003 can be primarily attributed to a $6,502,000 increase in revenue from the acquisitions of 900 Northbrook, Fort Washington Executive Center, West Germantown Pike and One Northbrook. The remaining increase is primarily due to an increase in occupancy at Washington Business Park.

Operating expenses consist of direct operating costs of the properties including property taxes and insurance and excluding interest expense and depreciation expense. Operating expenses in 2004 increased relative to 2003 by $2,004,000 due to a $2,426,000 increase in operating expenses from the acquisitions of 900 Northbrook, Fort Washington Executive Center, West Germantown Pike and One Northbrook. This increase was partially offset by lower snow removal and utility costs across the portfolio in 2004 compared to 2003, when severe weather conditions and record snowfalls were experienced in the Washington, DC region.

Depreciation and amortization expense in 2004 increased by $1,623,000 over the prior year primarily due to the acquisitions of 900 Northbrook, Fort Washington Executive Center, West Germantown Pike and One Northbrook.

Residential Rental Property.

The $4,185,000 increase in residential rental revenue over prior year can be primarily attributed to a $4,208,000 increase in revenue from the acquisitions of Victoria Place and The Fountains.

Operating expenses consist of direct operating costs of the properties including property taxes and insurance and excluding interest expense and depreciation expense. The increase in residential operating expenses of $1,761,000 over the prior year can be attributed to a $1,700,000 increase in operating expenses from the acquisitions of Victoria Place and The Fountains.

Depreciation and amortization expense in 2004 increased by $1,245,000 over the prior year primarily due to the acquisitions of Victoria Place and The Fountains.

Hospitality Properties.

Homebuilding, Residential Lots and Other Development.

Homebuilding, residential lots and other development revenue in 2004 increased by $5,855,000 compared to the prior year. The increase can be primarily attributed to the sale of 42 developed lots in Clarksburg Ridge in 2004.

The cost of homebuilding, residential lots and other development in 2004 increased by $5,493,000 compared to the prior year. The increase can be primarily attributed to the cost of sales of the Clarksburg Ridge lots.

Income from equity investments

Income from equity investments, which consists of income earned from joint ventures that are not consolidated into our financial statements, decreased by $757,000 in 2004 primarily due to the sale in 2003 of five parcels consisting of approximately 15 acres of undeveloped land at Washington Business Park. No land parcels were sold in 2004.

General and Administrative Expense

General and administrative expense increased by $233,000 primarily due to higher salary and consulting expenses in 2004, partially offset by a $274,000 pension liability accrual recorded in 2003.

Interest Expense

The increase in interest expense of $2,968,000 over the prior year is primarily due to interest on debt obtained or assumed in 2004 and 2003 in connection with the acquisitions of Victoria Place, The Fountains, 900 Northbrook, Fort Washington Executive Center, West Germantown Pike and One Northbrook. We capitalized $706,000 of interest related to our investment in development projects, in 2004. No interest was capitalized in 2003.

Other Expenses

Other expenses increased by $495,000 in 2004, primarily due to a loss from operations at the Waterfront property, which are incidental to the redevelopment of the property.

Provision for Income Taxes

Discontinued Operations, net of tax

Discontinued operations, net of tax, decreased by $1,920,000 primarily due to the sale of a nursing home in May 2003, which generated a gain, net of tax, of $1,711,000.

Funds From Operations

We consider Funds From Operations (“FFO”) to be a meaningful measure of our performance and we evaluate management based on FFO. We provide FFO as a supplemental measure for reviewing our comparative operating performance (although FFO should be reviewed in conjunction with net income which remains the primary measure of performance). FFO is a recognized metric used extensively by the real estate industry. Accounting for real estate assets using historical cost accounting under generally accepted accounting principles (“GAAP”) assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results that exclude historical cost depreciation to be useful in evaluating the operating performance of real estate companies. As a result, the National Association of Real Estate Investment Trusts (“NAREIT”) created the concept of FFO as a standard supplemental measure of operating performance that adjusts GAAP net income to exclude historical cost depreciation.

While we are not a real estate investment trust (“REIT”), in light of the fact that we are a real estate company with large amounts of depreciable and amortizable real estate assets and we compete against REITS, we believe FFO to be a relevant measurement of our performance.

FFO as defined by the NAREIT is “net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis”. Our FFO measure differs from NAREIT’S definition in that we exclude income tax expense related to property sales. The exclusion of income tax expense on property sales is consistent with the objective of presenting comparative period operating performance. FFO should not be considered an alternative to net income as an indicator of our operating performance, or as an alternative to cash flows from operating, investing or financing activities as a measure of liquidity. Additionally, the FFO measure presented by us is not calculated in the same manner as FFO measures of other real estate companies and therefore may not necessarily be comparable. We believe that FFO provides relevant information about our operations and is useful, along with net income, for an understanding of our operating activities.

Our funds from operations were $3,764,000 for the three months ended June 30, 2004, compared to $3,081,000 for the three months ended June 30, 2003, an increase of $683,000 or 22.2%.

Our funds from operations were $6,929,000 for the six months ended June 30, 2004, compared to $4,206,000 for the six months ended June 30, 2003, an increase of $2,723,000 or 64.7%.

The increase for both the three month and six month period ended June 30, is primarily the result of commercial and residential properties acquired in 2004 and the second half of 2003 and sales of lots at Clarksburg Ridge.

The following table reflects the calculation of funds from operations (in thousands):

	For the three months ended June 30,
	2004		2003
Net income	$	636	$	2,939
Add: Depreciation and amortization including Company’s share of unconsolidated real estate joint ventures	3,128		1,853
Less: Gain on sale of properties, net of tax	—		(1,711		)
Funds from operations	$	3,764	$	3,081

	For the six months ended June 30,
	2004		2003
Net income	$	928	$	2,778
Add: Depreciation and amortization including Company’s share of unconsolidated real estate joint ventures	6,001		3,139
Less: Gain on sale of properties, net of tax	—		(1,711		)
Funds from operations	$	6,929	$	4,206

Liquidity and Capital Resources

Cash Flows

Our principal sources of cash are cash from our operations, our ability to obtain mortgage financing and additional financing through various financial markets and asset dispositions. Our principal uses of cash are real estate acquisitions, investments in real estate joint ventures, funding development projects and working capital requirements and payments of debt, capital expenditures, operating costs and corporate expenses.

Operating Activities:

During the six months ended June 30, 2004 net cash used in operating activities was $6,632,000 primarily due to the acquisition of Laguna Vista and Golfview, which as condominium development properties are classified under operating activities in the cash flow statement.

Investing Activities:

During the six months ended June 30, 2004, net cash used in investing activities totaled $65,892,000. Cash used for investments primarily resulted from cash outflows of $86,761,000 primarily for the acquisition of the Fort Washington Executive Center, the West Germantown Pike commercial office buildings, the One Northbrook commercial office building and the 640 North Broad Building.

These outflows were reduced by cash inflows totaling $20,869,000 primarily consisting of proceeds received from the liquidation of a portion of our investments in municipal obligations and distributions from joint ventures.

Financing Activities:

During the six months ended June 30, 2004, net cash generated by financing activities totaled $67,374,000. This primarily resulted from the placement of mortgage debt related to the acquisition of the Fort Washington Executive Center, the One Northbrook building and the 640 North Broad Building, partially offset by cash dividend distributions totaling $684,000.

Excess cash flow generated from our properties, from distributions from joint ventures and from proceeds of new mortgage loans placed on unencumbered properties and refinancing of existing debt, is typically invested in municipal obligations that are short-term in nature. These investments are then liquidated as needed for our real estate acquisitions and investments in joint ventures. At June 30, 2004, we had $35,806,000 of such investments.

Future Capital Requirements

On May 17, 2004, the Company’s Board of Directors declared a special cash dividend of $0.50 per common share, $0.25 per share of which was paid on June 15, 2004 for total distributions of $684,000. The remaining payment of $684,000, will be paid on December 15, 2004 at an adjusted per share amount of $0.125. The per-share payment has been adjusted to take into account the 2-for-1 stock split that will become effective on or about September 1, 2004.

Pursuant to our $6,000,000 unsecured loan, we are required to maintain a minimum liquidity of $30,000,000. At June 30, 2004 we had $44,217,000 of cash, cash equivalents and investments. Together with a $30 million unsecured line of credit which we obtained in August 2004 (see Subsequent Events), this liquidity will enable us to quickly respond to real estate acquisition opportunities, which would require equity investments.

Pursuant to our $30,000,000 line of credit we are required to achieve annual net income of $4,000,000 and annual funds from operations of $9,500,000. We anticipate meeting both these requirements for the year ended December 31, 2004.

Cash flow from operations for the remainder of 2004 indicates that current obligations and working capital needs can be met. Unanticipated funding requirements that could surface during 2004 include unexpected revenue losses caused by tenant defaults or bankruptcies that have a detrimental affect on the cash flow generated from operations. In addition, we have an extensive development and construction pipeline. These development projects may require additional equity contributions should we be unable to obtain the necessary financing or should the existing construction loans be insufficient to fund development cost overruns.

Off-Balance Sheet Commitments

As of June 30, 2004, our off-balance sheet commitments were as follows:

• We have provided an unconditional and irrevocable payment guaranty of $5,500,000 to Wachovia Bank, N.A in connection with a $20,000,000 loan made to 1925K Street in February 2004. The loan matures in 2007 and may be extended for up to an additional two years at the option of the borrower.

• We have provided an unconditional and irrevocable payment guaranty to Riggs Bank for 33.3% of the loan balance outstanding under the $7,100,000 construction loan, made to Selborne House. Additionally, along with the other members of Selborne House, we have jointly and severally guaranteed the completion of the project prior to July 2005. At June 30, 2004, the outstanding loan balance totaled $5,147,000 and unused capacity under the loan totaled

$1,953,000.

• We have guaranteed repayment of 66.6% of the loan balance outstanding under the $6,300,000 acquisition and construction loan, made by Citizen’s Bank of Pennsylvania to Cigar Factory Apartments, L.P. (“Cigar Factory”). The loan matures July 2005, but may be extended for an additional year at the option of the borrower. Together with the other members of Cigar Factory, we have also guaranteed completion of construction of improvements to Cigar Factory on or before the maturity date of the loan, or if the loan is extended, the extended maturity date. At June 30, 2004, the outstanding loan balance totaled $3,347,000 and unused capacity under the loan totaled $2,953,000.

• At June 30, 2004, we had unused capacity under a development loan for Clarksburg Ridge of $2,015,000.

• At June 30, 2004 we had approximately $156,000 of outstanding letters of credit representing performance guarantees for land improvements in home building and land development operations.

• Based on the operating agreement of WALLC, K/FCE, the managing member of WALLC, may elect to require that additional capital contributions be made to pay expenses incurred both during and subsequent to the development of the Waterfront Complex. The initial $25,000,000 of contributions is required to be made by K/FCE. Thereafter each member’s required contribution will be based on their respective ownership percentage in the joint venture at the time of the required contribution.

• In connection with the two mortgage loans obtained for the Fort Washington Executive Center, we have entered into two master lease agreements with the lender. The one requires us to lease 41,000 square feet of office space at an annual rent of $21.25 per square foot for a five year term, beginning February 2004, provided a lease for this space is not obtained. The other requires us to lease 110,000 square feet of office space at an annual rent of $21.00 per square foot for a five year term beginning January 2008, provided a major tenant fails to exercise a five year extension option on their lease at that time.

• In connection with the mortgage loan obtained for the One Northbrook building, we have entered into a master lease agreement with the lender. The agreement requires us to lease 9,000 square feet of office space at an annual rent of $24.25 per square foot for a five year term, beginning February 2004, provided a lease for this space is not obtained.

• In connection with the $15,100,000 construction loan Laguna Vista has obtained, we have guaranteed the purchase of half of all unpurchased condominium units at September 30, 2005 at a total acquisition price that will equate to one half of the outstanding loan balance at that date.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss arising from adverse changes in interest rates. Our market risk arises from interest rate risk inherent in our investment assets and our variable rate debt. Interest rate risk is the possibility that changes in interest rates will cause unfavorable changes in net income or in the value of interest rate-sensitive assets, liabilities and commitments.

We do not believe that we have any material exposures to adverse changes in interest rates associated with our investment assets. We invest in investment grade state and local government issues with short-term maturities and fixed rates of return. The short-term nature of the investments provides opportunities for reinvestment at higher interest rates, as those rates increase.

At June 30, 2004 we had $26,554,000 of variable-rate development loans outstanding, that are subject to interest-rate sensitivity. In addition, we had an unsecured $6,000,000 variable-rate loan outstanding that matures in 2005, and a joint venture, in which we have an 85% non-controlling interest had a $20,000,000 variable-rate loan outstanding that matures in 2007. An increase in interest expense on our variable rate debt caused by a rise in interest rates would be largely offset by an increase in interest income earned on our cash, cash equivalents and short-term investment assets, which totaled $44,217,000 at June 30, 2004.

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Company performed an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective in informing them of material information relating to the Company that is required to be included in our reports filed or submitted under the Exchange Act of 1934 (the “Exchange Act”). Since the date of our evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect these controls.

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in such reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decision regarding required disclosure.

PART II. OTHER INFORMATION

Item 5. Exhibits and Reports on Form 8-K.

A. Exhibits

Exhibit Number			Description of Document
31.1			Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from Sidney M. Bresler, Chief Executive Officer. (Filed herewith.)
31.2			Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from Darryl M. Edelstein, Chief Financial Officer. (Filed herewith.)
32			Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from Sidney M. Bresler, Chief Executive Officer and Darryl M. Edelstein, Chief Financial Officer (Filed herewith.)

B. Reports on Form 8-K

On April 28, 2004, we filed a Report on Form 8-K for the purpose of providing certain information regarding the signing of a letter of intent by our affiliate, Waterside Associates, LLC, with the Federal National Mortgage Association.

On May 11, 2004 we filed a Report on Form 8-K/A, for the purpose of amending certain financial statement information related to our acquisition of the Fort Washington Executive Center.

On May 17, 2004 we filed a Report on Form 8-K, furnishing our press release dated May 17, 2004, which announced our earnings for the quarter ended March 31, 2004, as well as the declaration of a cash dividend of $0.50 per share.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 16, 2004.

	BRESLER & REINER, INC.

	By:	/s/ SIDNEY M. BRESLER
		Sidney M. Bresler
		Chief Executive Officer

	By:	/s/ DARRYL M. EDELSTEIN
		Darryl M. Edelstein
		Chief Financial Officer