BRESLER & REINER INC - 10-Q Quarterly Report

Item 1. Consolidated Financial Statements and Notes

BRESLER & REINER, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004

	March 31, 2005			December 31, 2004
	(Unaudited)
ASSETS
Real Estate:
Rental property and equipment	$	337,217,000		$	313,187,000
Property and land development	154,080,000			129,595,000
Land held for investment	2,847,000			2,847,000
Real estate, at cost	494,144,000			445,629,000
Less: accumulated depreciation	(34,823,000		)	(32,800,000		)
Total real estate, net	459,321,000			412,829,000
Assets held for sale	6,876,000			6,911,000
Receivables:
Income taxes receivable	980,000			1,535,000
Mortgage and notes receivable	1,892,000			5,680,000
Other receivables	3,817,000			7,063,000
Cash and cash equivalents	8,758,000			9,914,000
Restricted cash and deposits held in escrow	12,906,000			10,540,000
Investments	46,982,000			40,029,000
Investment in and advances to joint ventures	12,649,000			9,842,000
Deferred charges and other assets, net	27,901,000			30,837,000
Total assets	$	582,082,000		$	535,180,000
LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES
Mortgage and construction loans and other debt	$	368,624,000		$	329,170,000
Liabilities of assets held for sale	5,482,000			5,512,000
Accounts payable, trade and accrued expenses	12,940,000			15,045,000
Deferred income taxes payable	9,058,000			8,911,000
Other liabilities	17,819,000			12,429,000
Total liabilities	413,923,000			371,067,000
Minority interest	36,133,000			32,968,000
Commitments and contingencies
SHAREHOLDERS’ EQUITY
Common shares, $0.01 par value; 7,000,000 shares authorized, 5,679,306 shares issued, and 5,477,212 shares outstanding as of both March 31, 2005 and December 31, 2004	57,000			57,000
Additional paid-in capital	7,536,000			7,536,000
Retained earnings	126,250,000			125,369,000
Treasury stock (202,094 shares as of March 31, 2005 and December 31, 2004)	(1,817,000		)	(1,817,000		)
Total shareholders’ equity	132,026,000			131,145,000
Total liabilities and shareholders’ equity	$	582,082,000		$	535,180,000

See Notes to Consolidated Financial Statements

BRESLER & REINER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited)

	2005			2004
OPERATING REVENUES
Homebuilding, residential lots and other development	$	15,843,000		$	2,729,000
Rentals—commercial	9,778,000			6,504,000
Rentals—residential	2,783,000			2,530,000
Hospitality	1,994,000			1,706,000
Other	38,000			110,000
Total operating revenues	30,436,000			13,579,000
COSTS AND EXPENSES
Cost of homebuilding, residential lots and other development	11,529,000			2,562,000
Rental expense—commercial
Operating expenses	4,276,000			2,096,000
Depreciation and amortization expense	2,677,000			1,710,000
Rental expense—residential
Operating expenses	1,068,000			1,122,000
Depreciation and amortization expense	635,000			850,000
Hospitality expense
Operating expenses	2,089,000			1,362,000
Depreciation and amortization expense	170,000			220,000
General and administrative expense	1,122,000			964,000
Other expenses	—			6,000
Total operating expenses	23,566,000			10,892,000
Total operating income	6,870,000			2,687,000
OTHER INCOME (EXPENSES)
Interest income	349,000			410,000
Interest expense	(4,060,000		)	(3,091,000		)
Income before income taxes, income from investments in joint ventures, minority interest and income from discontinued operations	3,159,000			6,000
Income from investments in joint ventures	222,000			457,000
Minority interest	(1,996,000		)	(68,000		)
Income before income taxes and discontinued operations	1,385,000			395,000
Provision for income taxes	(503,000		)	(112,000		)
Income from continuing operations	882,000			283,000
(Loss)/income from discontinued operations, net of tax	(1,000		)	9,000
Net income	$	881,000		$	292,000
EARNINGS PER SHARE OF COMMON STOCK
Basic and Diluted:
Income from continuing operations	$	0.16		$	0.05
Income from discontinued operations, net of tax	—			—
Net income	$	0.16		$	0.05
Weighted average number of common shares outstanding	5,477,212			5,477,212

See Notes to Consolidated Financial Statements

BRESLER & REINER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

	2005			2004
OPERATING ACTIVITIES:
Net income	$	881,000		$	292,000
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	3,297,000			2,789,000
Income from investments in joint ventures	(222,000		)	(457,000		)
Minority interest expense	1,996,000			68,000
Deferred income taxes	147,000			84,000
Amortization of finance costs	89,000			118,000
Homebuilding and land development	(20,414,000		)	(5,701,000		)
Cost of homebuilding and land development	10,294,000			2,307,000
Distribution of income from investments in joint ventures	109,000			183,000
Changes in assets and liabilities:
Receivables	3,801,000			(1,587,000		)
Other assets	3,697,000			(2,915,000		)
Other liabilities	(1,467,000		)	1,577,000
Total adjustments	1,327,000			(3,534,000		)
Net cash provided by (used in) operating activities	2,208,000			(3,242,000		)
INVESTING ACTIVITIES:
Increase in cash due to change in consolidation method	—			519,000
Distributions from (investment in) joint ventures	(2,694,000		)	648,000
Deposits for property acquisitions	(879,000		)	—
Increase in restricted cash	(828,000		)	(1,769,000		)
Decrease (increase) in investments in municipal obligations	(6,953,000		)	8,126,000
Purchase of rental property, equipment and other	(21,893,000		)	(73,568,000		)
Increase in property and land under development	(12,023,000		)	(10,035,000		)
Decrease in notes receivable	3,788,000			2,067,000
Net cash used in investing activities	(41,482,000		)	(74,012,000		)
FINANCING ACTIVITIES:
Proceeds from mortgage and construction loans and other debt	49,256,000			70,104,000
Repayment of notes and real estate loans payable	(9,802,000		)	(172,000		)
Deposits held in escrow	(1,538,000		)	1,047,000
Contributions from (distributions to) minority partners	1,169,000			(707,000		)
Increase in deferred charges	(967,000		)	(607,000		)
Net cash provided by financing activities	38,118,000			69,665,000
Net decrease in cash and cash equivalents	(1,156,000		)	(7,589,000		)
Cash and cash equivalents, beginning of period	9,914,000			13,561,000
Cash and cash equivalents, end of period	$	8,758,000		$	5,972,000
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
Consolidation of Waterfront Associates, LLC	$	—		$	9,385,000
Debt assumed on acquisitions	—			24,716,000

See Notes to Consolidated Financial Statements

BRESLER & REINER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 in the Washington, DC; Philadelphia, Pennsylvania; Baltimore, Maryland; Ocean City, Maryland; Wilmington, Delaware; Orlando, Florida and Tampa, Florida, 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 months ended March 31, 2005, are not necessarily indicative of the results that may be expected for the full year. These consolidated 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 for the year ended December 31, 2004.

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. 46R (“FIN 46R”). 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.

Rentals—we recognize rental 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—we recognize hospitality revenue as services are provided.

Rental and management fees—we recognize rental 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 39 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. Depreciation expense totaled $2,116,000 and $1,713,000 for the three months ended March 31, 2005 and 2004, respectively.

BRESLER & REINER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Upon acquisitions of real estate, we assess the fair value of acquired assets (including land, buildings and improvements, and identified intangibles such as above and below market leases and acquired in-place leases and tenant relationships) and acquired liabilities in accordance with SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets” and allocate purchase price based on these assessments. We assess fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market conditions that may affect the property.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, we evaluate the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured based on net, undiscounted expected cash flows. Assets are considered to be impaired if the undiscounted expected cash flows are less than the carrying amount of the assets. Impairment charges are recorded based upon the difference between the carrying value of the asset and its fair value.

PROPERTY AND LAND DEVELOPMENT

When construction commences, costs are recorded in property and land development where they are accumulated by project. Project costs included in property and land development include materials and labor, capitalized interest and property taxes. These costs are charged to costs of homes and lots sold based on either the specific identification method or the relative sales value method, whichever is more appropriate, 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.

LAND HELD FOR INVESTMENT

Land held for investment is recorded at cost and reviewed for impairment when such indicators arise. If determined to be impaired, it is recorded at its estimated fair value.

INVESTMENTS IN AND ADVANCES TO JOINT VENTURES

For entities that are not deemed to be variable interest entities (“VIEs”), as set forth in FIN 46R, we account for our investments in these 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 statements of operations represents the minority owners’ share of the income or loss of the consolidated joint venture. For entities in which we exercise significant influence but do not control, 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 and the investment is accounted for as described above.

For entities that are deemed to be VIEs, as set forth in FIN 46R, 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,

BRESLER & REINER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

then we consolidate our investment in the joint venture. If we are not the primary beneficiary then we do not consolidate our investment in the joint venture.

INVESTMENTS

Investments consist principally of investments in municipal obligations. Our investments are classified as trading. Trading securities are recorded at fair value, with unrealized holding gains and losses included in earnings. At March 31, 2005 and December 31, 2004, cost approximated fair value for these securities. At March 31, 2005 and December 31, 2004, the total of these investments that were short term in nature with maturities of less than one year, were $39,182,000 and $34,748,000, respectively.

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 based on the relative fair values of the assets and liabilities acquired. In order to determine the amount of the purchase price 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 (including rent concessions and tenant improvement allowances) and leasing commissions to be paid on new leases, (3) estimating an appropriate lease-up period and (4) applying an estimated risk-adjusted discount rate to the existing tenants’ leases.

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 2004 consolidated financial statements have been reclassified to conform to the current year presentation.

EARNINGS PER COMMON SHARE

We have no dilutive securities; therefore, basic and fully diluted earnings per share are identical. Weighted average common shares outstanding were 5,477,212 for both the three months ended March 31, 2005 and 2004 (restated for a 2-for-1 stock split, affected in the form of a stock dividend in 2004).

BRESLER & REINER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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. SIGNIFICANT TRANSACTIONS, ACQUISITIONS AND INVESTMENTS

During the first quarter ended March 31, 2005 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.

1105 Market Street On February 15, 2005 we acquired a 173,000 square foot commercial office building located in Wilmington, Delaware, for a purchase price of $20,700,000. At the time of the acquisition we placed a $19,000,000 mortgage loan on the building. The loan bears interest at one-month LIBOR plus 195 basis points. We have provided a guarantee for the entire loan balance. We anticipate spending between $3,000,000 and $4,000,000 on renovations and tenant improvements. We have consolidated the property’s assets and liabilities and results of operations in our consolidated financial statements.

Devon Square On February 10, 2005, together with an unaffiliated third party investor, we acquired two commercial office buildings containing a total of 140,000 square feet of office space, located in Devon, Pennsylvania. The purchase price of the buildings was $17,109,000. In connection with the purchase, we entered into a tenant-in-common agreement with the third party investor, whereby each party is an equal tenant-in-common of the buildings. At the time of the acquisition, a $21,350,000 acquisition and construction loan was obtained, $12,451,000 of which was drawn down at the closing. The loan bears interest at the higher of the lender’s prime rate or the federal funds rate plus one-half percent and matures in August 2007. It is anticipated that approximately $8,900,000 will be expended in 2005 on capital improvements, tenant improvements and leasing commissions related to the renovation and further lease-up of the buildings, with such amounts funded through draws on the loan. We and the outside investor each contributed $2,667,000 to fund the acquisition. We have accounted for our investment in Devon Square using the equity method in our consolidated financial statements.

Crisfield In January and March 2005 we invested a total of $2,500,000 for a 51% interest in an entity that owns a parcel of undeveloped land which is subdivided into 232 residential lots, in Crisfield, Maryland. An unaffiliated third party owns the remaining membership interest in the entity. The entity intends to develop the land as lots to be sold to a homebuilder. The entity purchased the parcel for approximately $10,250,000, which was funded by an $8,321,000 drawdown on an $11,700,000 acquisition and development loan and a $2,500,000 deposit from a homebuilder. The loan bears interest at one month LIBOR plus 275 basis points and matures in January 2008. We have consolidated the entity’s assets and liabilities and results of operations in our consolidated financial statements.

BRESLER & REINER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Pro-Forma Results of Operations—Unaudited The following unaudited pro-forma statements reflect our results of operations as if our material acquisition, Ft. Washington, in 2004 had occurred on the first day of the periods presented (in thousands, except earnings per share amounts):

	Pro-forma Three Months Ended March 31,
	2005		2004
Operating revenues	$	30,436	$	15,092
Net income	$	881	$	286
Earnings per common share	$	0.16	$	0.05

These unaudited pro-forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually resulted had the acquisitions been effective on the first day of the periods presented.

3. INTANGIBLE ASSETS

As a result of adopting SFAS Nos. 141 and 142, we have intangible in-place lease assets and intangible in-place lease liabilities. The following table summarizes these intangible assets and liabilities as of the dates presented (in thousands):

	March 31, 2005					December 31, 2004
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Acquired in-place lease assets	$	20,995		$	8,402	$	19,110		$	6,838
Acquired in-place lease liabilities	5,848			1,780		2,783			1,204

The amortization of acquired above-market-in-place lease assets, included in depreciation and amortization expense totaled $1,138,000 and $468,000 for the three months ended March 31, 2005 and 2004, respectively.

The amortization of acquired above-market-in-place lease assets, net of acquired in-place lease liabilities, included as a net increase in revenues totaled $226,000 and $87,000 for the three months ended March 31, 2005 and 2004, respectively.

The estimated annual amortization of acquired in-place lease assets, net of acquired below-market-in-place lease liabilities to be included as a net reduction in revenues for each of the five fiscal years is as follows (in thousands):

2005	$	833
2006	675
2007	541
2008	571
2009	411

BRESLER & REINER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The estimated annual amortization of acquired in-place lease assets to be included in amortization expense for each of the five fiscal years is as follows (in thousands):

2005	$	3,295
2006	2,785
2007	2,129
2008	1,429
2009	806

4. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES

At March 31, 2005, our investments in non-consolidated joint ventures and partnerships consisted of the following:

Joint Venture	Ownership Percentage
1925 K Associates LLC (“1925 K Street”)		85	%
WBP Undeveloped Land (“WBP Undeveloped Land”)		80	%
Redwood Commercial Management, LLC (“Redwood Commercial”)		50	%
Tech-High Leasing Company (“Tech-High Leasing”)		50	%
Devon Square		50	%
Selborne House at St. Marks Owner, LLC (“Arbor Crest”)		33	%
Madison Building Associates, LLC (“Madison Building”)		25	%

Below are condensed balance sheets for our unconsolidated joint venture entities as of March 31, 2005 and December 31, 2004 (in thousands):

	March 31, 2005			December 31, 2004
ASSETS
Cash		$	2,042		$	1,348
Land held for investment		5,704			5,432
Land, building and equipment, net		70,861			77,654
Other assets		4,832			1,276
Total assets		$	83,439		$	85,710
LIABILITIES AND MEMBERS’ EQUITY
Mortgages and notes		$	58,726		$	39,366
Other liabilities		6,227			5,527
Total liabilities		64,953			44,893
Members’ equity		18,486			40,817
Total liabilities and members’ equity		$	83,439		$	85,710
Company’s interest in members’ equity		$	12,649		$	9,738

BRESLER & REINER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

	Three Months Ended March 31,
	2005			2004
Operating revenues		$	2,669		$	3,875
Operating expenses		1,366			2,040
Interest expense		558			503
Depreciation expense		591			548
Net income		154			784
Company’s equity in earnings of unconsolidated joint ventures		$	222		$	457

BRESLER & REINER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Property(1)	Interest Rate	Maturity		March 31, 2005		December 31, 2004
Fort Washington	5.60%		2014	$	48,391		$	48,556
Washington Business Park	7.63%		2031	38,877			38,983
Victoria Place Apartments	4.72%		2013	33,308			33,446
The Fountains at Waterford Lakes	5.00%		2007	24,758			24,773
Seaside	Lender’s Prime Rate		2007	19,492			19,095
1105 Market Street	One month LIBOR + 195 basis pts.		2007	19,000			—
Versar Center	6.18%		2013	18,040			18,100
Sudley North Buildings A,B,C,& D and Bank Bldg.	7.47%		2012	17,548			17,597
640 North Broad—acquisition and construction loan	One month LIBOR + 155 basis pts.		2007	9,567			6,000
640 North Broad—bridge loan	One month LIBOR + 175 basis pts.		2007	6,900			2,128
West Germantown Pike	5.90%		2033	16,009			16,064
One Northbrook	5.75%		2014	15,116			15,166
Laguna Vista	One month LIBOR + 185 basis pts.		2005	12,450			10,236
900 Northbrook	5.98%		2013	11,038			11,073
Baltimore Portfolio (4 Buildings)	One month LIBOR + 175 basis pts.		2006	9,815			9,815
Inn at the Colonnade	7.45%		2011	9,774			9,806
Crisfield	One month LIBOR + 200 basis pts.		2008	8,661			—
Baltimore Portfolio (1 Building)	5.95%		2012	8,414			8,452
Fort Hill	7.70%		2011	5,538			5,554
Charlestown North	6.74%		2012	4,858			4,874
Holiday Inn Express	7.88%		2011	3,612			3,627
Golfview	One month LIBOR + 175 basis pts.		2007	2,924			10,385
Sudley South	One month LIBOR + 275 basis pts.		2006	451			—
Cigar Factory	One month LIBOR + 275 basis pts.		2005	—			1,566
Total mortgage and construction loans				344,541			315,296
Unsecured Loan to B&R(2)	One month LIBOR + 195 basis pts.		2005	6,000			6,000
Acquisition Line of Credit(3)	One month LIBOR + 175 basis pts.		2005	7,874			7,874
Other debt	(4)		(4)	10,209			—
Total mortgage and construction loans and other debt				$	368,624		$	329,170

(1) Note is secured by related property.

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

(3) Note is an unsecured line of credit to the Company.

(4) Other debt includes two promissory notes issued during the first quarter of 2005, see descriptions of these notes below.

BRESLER & REINER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

At March 31, 2005 the one month LIBOR rate was 2.86%.

In February 2005, we borrowed $8,000,000 from Trilon Plaza Company (“Trilon”), a related party and executed a note payable for this amount. The note bears interest at a fixed interest rate of 10% per annum and matures in February 2007. The note is secured by the 7800 Building and the 5-acre parcel of land immediately adjacent to the property.

In March 2005 in connection with the purchase of 100% of the stock of Laguna Vista, we issued a $1,709,000 deferred purchase money promissory note. The note is payable out of cash proceeds from the sale of Laguna Vista’s condominium units.

6. DISCONTINUED OPERATIONS

In December 2004, we sold to two unaffiliated parties five commercial properties that were leased to convenience store operators. We are currently holding for sale three of the eight Baltimore properties acquired in November 2004. We have recorded the results of operations of these properties as part of discontinued operations, in the accompanying consolidated statements of operations.

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

	Three Months Ended March 31,
	2005				2004
Revenues		$	332,000			$	22,000
(Loss)/income before provision for income taxes		$	(12,000	)		$	15,000
Minority interest		11,000				—
Provision for income taxes		—				(6,000		)
(Loss)/income from discontinued operations		$	(1,000	)		$	9,000

7. COMMITMENTS AND CONTINGENCIES

GUARANTEES

We have provided an unconditional and irrevocable payment guaranty of $5,500,000 to Wachovia Bank, N.A in connection with a loan made to 1925K Associates, LLC. 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 PNC Bank for 33.3% of the loan balance outstanding under the $7,100,000 construction loan, made to Arbor Crest. The other members of Arbor Crest have guaranteed the remaining balance under the loan. The loan matures in January 2006 and provides for one 5-year extension option. Our payment guarantee will be reduced to 16.7% of the outstanding loan balance, upon Arbor Crest maintaining a debt service ratio of 1.25 to 1.0 for a period of one year. At March 31, 2005 the outstanding loan balance totaled $7,046,000.

In connection with the $15,100,000 construction loan made by Wachovia Bank, N.A. to Laguna Vista, 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 March 31, 2005 the outstanding loan balance totaled $12,450,000.

BRESLER & REINER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We have guaranteed repayment of the entire loan balance outstanding under a $15,000,000 mortgage loan made by Wachovia Bank, N.A to the entities that own seven of the Baltimore properties. The loan matures in 2006 and provides for two, one-year extension options.

We have guaranteed the full amount of the outstanding balance under both the $32,000,000 acquisition and construction loan and the $6,900,000 bridge construction loan made by Wachovia Bank, N.A. to 640 North Broad. Both loans mature in 2007, while the acquisition and construction loan provides for two one-year extension options. At March 31, 2005, the total amount outstanding under the loans totaled $16,467,000.

We have guaranteed the full amount of a $7,044,000 development loan maturing in 2006 from Wachovia Bank, N.A, to Paradise Developers, our wholly-owned subsidiary. At March 31, 2005, the balance outstanding under the loan was $451,000.

We have guaranteed repayment of the entire loan balance outstanding under a $19,000,000 mortgage loan from Wells Fargo to 1105 Market Street. The loan matures in 2007.

We have guaranteed repayment of $1,700,000 of an $11,700,000 acquisition and development loan from Wachovia Bank N.A. to Crisfield. The loan matures in January 2008. At March 31, 2005, the balance of the loan was $8,661,000.

We have guaranteed repayment of the entire loan balance outstanding under a $21,300,000 acquisition and construction loan from Wells Fargo to Devon Square. The loan matures in August 2007. At March 31, 2005, the balance outstanding under the loan totaled approximately $12,451,000.

MASTER LEASE AGREEMENTS

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. 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 ending February 2009, provided a lease for this space is not obtained. To date the joint venture has obtained leases covering 35,000 square feet of this space, with such leases providing for first year rent of between $18.00 and $21.25 per square foot. The other master lease agreement 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.

LITIGATION

We are not presently involved in any material 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 financial condition, results of operations or cash flows.

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.

BRESLER & REINER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Our provision for income taxes for the three months ended March 31, 2005 and 2004, 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 year to date earnings through March 31, 2005 and 2004.

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, Residential and Land Development

This segment primarily includes the development and sale of homes and residential condominium units, the development of commercial and residential buildings and the development and sale of lots as part of residential subdivisions.

Commercial Rental Property

This segment includes the rental income derived by commercial properties from leases of office and industrial 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, 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. Also included in this segment are fees earned from our management of residential properties.

Hospitality Properties

This segment includes revenue and income derived from services provided at our hospitality properties.

Our real estate investments are located in the Washington DC; Philadelphia, Pennsylvania; Baltimore, Crisfield and Ocean City, Maryland; Wilmington, Delaware; Orlando and Tampa, Florida metropolitan areas. We are not involved in any operations in countries other than the United States of America.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

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

BRESLER & REINER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

March 31, 2005 (in thousands)	Commercial, Residential and Land Development			Commercial Rental			Residential Rental			Hospitality			Corporate and Other			Consolidated
Statement of Operations:
Total operating revenues	$	15,843,000		$	9,797,000		$	2,783,000		$	1,994,000		$	19,000		$	30,436,000
Cost of homebuilding, residential lots and other development	(11,529,000		)	—			—			—			—			(11,529,000		)
Operating expenses	—			(4,276,000		)	(1,068,000		)	(2,089,000		)	—			(7,433,000		)
Depreciation and amortization expense	—			(2,677,000		)	(635,000		)	(170,000		)	—			(3,482,000		)
Interest expense	—			(3,159,000		)	(799,000		)	(260,000		)	158,000			(4,060,000		)
Income (loss) from investments in joint ventures	—			300,000			(78,000		)	—			—			222,000
Minority interest	(2,089,000		)	111,000			(18,000		)	—			—			(1,996,000		)
General, administrative and other expenses	—			—			—			—			(1,122,000		)	(1,122,000		)
Interest income	—			—			—			—			349,000			349,000
Income (loss) before taxes and discontinued operations	$	2,225,000		$	96,000		$	185,000		$	(525,000	)	$	(596,000	)	$	1,385,000

March 31, 2005 (in thousands)	Commercial, Residential and Land Development		Commercial Rental			Residential Rental			Hospitality			Corporate and Other		Consolidated
Assets:
Real estate at cost	$	156,927,000	$	237,847,000		$	83,130,000		$	16,240,000		$	—	$	494,144,000
Accumulated depreciation	—		(19,243,000		)	(6,850,000		)	(8,730,000		)	—		(34,823,000		)
Investments in joint ventures	415,000		11,792,000			442,000			—			—		12,649,000
Cash, cash equivalents and restricted cash	—		—			—			—			21,664,000		21,664,000
Investments	—		—			—			—			46,982,000		46,982,000
Other	44,000		22,859,000			879,000			495,000			17,189,000		41,466,000
	$	157,386,000	$	253,255,000		$	77,601,000		$	8,005,000		$	85,835,000	$	582,082,000

BRESLER & REINER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2004 (in thousands)	Commercial, Residential and Land Development				Commercial Rental			Residential Rental			Hospitality			Corporate and Other			Consolidated
Statement of Operations:
Total operating revenues		$	2,729,000		$	6,517,000		$	2,544,000		$	1,706,000		$	83,000		$	13,579,000
Cost of homebuilding, residential lots and other development		(2,562,000		)	—			—			—			—			(2,562,000		)
Operating expenses		—			(2,096,000		)	(1,122,000		)	(1,362,000		)	—			(4,580,000		)
Depreciation and amortization expense		—			(1,710,000		)	(850,000		)	(220,000		)	—			(2,780,000		)
Interest expense		—			(2,274,000		)	(786,000		)	(272,000		)	241,000			(3,091,000		)
Income (loss) from investments in joint ventures		(153,000		)	610,000			—			—			—			457,000
Minority interest		(150,000		)	95,000			(13,000		)	—			—			(68,000		)
General, administrative and other expenses		—			—			—			—			(970,000		)	(970,000		)
Interest income		—			—			—			—			410,000			410,000
Income (loss) before taxes and discontinued operations		$	(136,000	)	$	1,142,000		$	(227,000	)	$	(148,000	)	$	(236,000	)	$	395,000

December 31, 2004 (in thousands)	Commercial, Residential and Land Development		Commercial Rental			Residential Rental			Hospitality			Corporate and Other		Consolidated
Assets:
Real estate at cost	$	132,442,000	$	214,687,000		$	82,596,000		$	15,904,000		$	—	$	445,629,000
Accumulated depreciation	—		(18,011,000		)	(6,217,000		)	(8,572,000		)	—		(32,800,000		)
Investments in joint ventures	415,000		8,942,000			485,000			—			—		9,842,000
Cash, cash equivalents and restricted cash	—		—			—			—			20,454,000		20,454,000
Investments	—		—			—			—			40,029,000		40,029,000
Other	44,000		29,635,000			991,000			656,000			20,700,000		52,026,000
	$	132,901,000	$	235,253,000		$	77,855,000		$	7,988,000		$	81,183,000	$	535,180,000

11. SUBSEQUENT EVENTS:

Cross Keys On April 6, 2005 we acquired an 82,000 square foot commercial office building located in Doylestown, Pennsylvania. The purchase price of the office building was $17,792,000. In connection with

BRESLER & REINER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the acquisition, we assumed a 5.45% fixed-rate mortgage loan on the building. The loan, which had an outstanding principal balance of $10,969,000 at the time of the assumption, matures in 2013.

102 Pickering Way On April 14, 2005 we acquired an 80,000 square foot commercial office building located in Exton, Pennsylvania. The purchase price of the office building was $15,275,000. In connection with the acquisition, we assumed a 6.5% fixed-rate mortgage loan on the building. The loan, which had an outstanding principal balance of $10,149,000 at the time of the assumption, matures in 2013.

919 Market Street On April 21, 2005 we acquired a 225,000 square foot commercial office building located in Wilmington, Delaware. The purchase price of the office building was $40,525,000. In connection with the acquisition, we assumed a 5.89% fixed-rate mortgage loan on the building. The loan, which had an outstanding principal balance of $22,498,000 at the time of the assumption, matures in 2033. If this loan is not prepaid by June 2013, the annual interest rate increases by a minimum of 2%.

Red Mill Pond In May 2005 we invested a total of $3,000,000 for a 51% interest in an entity that owns a parcel of undeveloped land which is subdivided into 544 residential lots, in Sussex County, Delaware. An unaffiliated third party owns the remaining membership interest in the entity. The entity intends to develop the land as lots to be sold to a homebuilder. The entity purchased the parcel for approximately $26,482,000 which was funded primarily by a $23,968,000 drawdown on a $53,400,000 acquisition and development loan and proceeds from a $5,000,000 deposit from the homebuilder.

Venice Lofts and Symphony House On May 6, 2005, we invested a total of $8,000,000 for a 44.5% interest in an entity that owns 50% limited partnership interests in two limited partnerships. One of the limited partnerships intends to develop a 234,900 square foot residential development consisting of 38 luxury townhouse and 90 mid-rise condominium units on Venice Island located in Philadelphia, PA. The other limited partnership intends to develop 163 luxury high-rise condominium units, a 35,000 square foot theater and approximately 4,300 square feet of retail space in center city Philadelphia, PA.

Midlantic Office Trust, Inc. On May 13, 2005, Midlantic Office Trust, Inc. (“Midlantic”) filed a registration statement with the Securities Exchange Commission for the initial public offering of its common stock. Upon completion of Midlantic’s initial public offering, Midlantic will purchase from us, for an aggregate purchase price (including assumption of debt) of approximately $270,600,000, eight commercial office properties consisting of 23 buildings currently owned by us and one additional commercial property consisting of two buildings that we have under contract and expect to acquire. We will hold long term incentive plan units in Midlantic’s operating partnership representing approximately 2% of Midlantic’s outstanding common stock following the offering. In addition, we will purchase $15,000,000 in Midlantic common stock as part of the initial public offering.

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

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 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 sustain occupancy levels at our properties;

· 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;

· our exposure to interest rate risk on our variable-rate debt;

· 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.

Overview.

We are a real estate owner and developer with a portfolio that includes commercial, residential and hospitality properties as well as undeveloped and developed land. We earn our revenues and profits primarily from leasing commercial office space and residential apartment units; providing services at our hospitality properties; selling residential properties and selling both developed and undeveloped land. We have a diversified portfolio of assets across the real estate spectrum that encompasses the following four real estate segments: commercial property rentals; residential apartment rentals; hospitality; and commercial, residential and land development. Our real estate investments are located in the Washington DC; Philadelphia, Pennsylvania; Baltimore, Maryland; Ocean City, Maryland; Wilmington, Delaware; Orlando, Florida and Tampa, Florida metropolitan areas.

We acquire operating commercial and residential properties that we identify as having the potential for increased returns and employ management companies with in-depth knowledge of their local markets to manage the properties. Together with the management companies, we implement capital expenditure and leasing programs to increase the property’s occupancy rates, revenue and overall value. For development projects, we partner with well-respected regional and national developers to acquire real

estate for the purpose of developing residential for-sale condominium units, residential rental apartment units, commercial properties and residential land.

To achieve the highest possible risk-adjusted return on our invested capital, we seek to minimize the amount of equity we invest in any one acquisition property through obtaining or assuming high levels of debt relative to the purchase price of the assets we acquire, while still maintaining strong debt service coverage ratios on our mortgage debt. In some instances we further minimize our required equity contributions through entering into joint venture agreements with unaffiliated third party investors.

In 2005 we will continue our strategy of investing in both operating properties and in development real estate. Our biggest challenge in 2005 will be to continue to utilize our cash and other sources of financing available to purchase real estate that has the potential to generate strong cash returns on our investment, in an interest-rate environment that may not be as accommodating as it has been in recent years, and to maximize the cash returns on our existing assets. While interest rates remain low our strategy will continue to involve obtaining high debt levels relative to the purchase price of acquired properties. However, should interest rates increase we may be required to obtain lower levels of debt and look for greater participation from our equity partners or invest larger amounts of our own equity. A higher interest rate environment would also raise our cost of capital, thereby making it more difficult to find acquisition opportunities that have the potential to meet or exceed our required returns on investment.

On May 13, 2005, Midlantic Office Trust, Inc. (“Midlantic”) filed a registration statement with the Securities Exchange Commission for the initial public offering of its common stock. Upon completion of Midlantic’s initial public offering, Midlantic will purchase from us, for an aggregate purchase price (including assumption of debt) of approximately $270,600,000, eight commercial office properties consisting of 23 buildings currently owned by us and one additional commercial property consisting of two buildings that we have under contract and expect to acquire. We will hold long term incentive plan units in Midlantic’s operating partnership representing approximately 2% of Midlantic’s outstanding common stock following the offering. In addition, we will purchase $15,000,000 in Midlantic common stock as part of the initial public offering. The proceeds of the sale will provide us with substantial resources to pursue our strategy.

The discussion that follows is based primarily on our consolidated balance sheets as of March 31, 2005 and December 31, 2004 and the results of operations for the three months ended March 31, 2005 and 2004 and should be read along with our consolidated financial statements and related notes included elsewhere herein. The ability to compare one period to another may be significantly affected by acquisitions of commercial properties and the development and sale of residential condominiums and residential lots.

Application of Critical Accounting Policies

Our accounting policies comply with accounting principles generally accepted in the United States. The application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties. We have made best estimates and judgments of certain amounts included in the financial statements. However, actual results could differ from these estimates and a change in the facts and circumstances of the underlying transactions could significantly change the application of an accounting policy and the resulting financial statement impact. A summary of these policies is included in our latest annual report on Form 10-K for the year ended December 31, 2004. These policies have not changed significantly in 2005.

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 have the greatest potential impact on our financial statements.

Balance Sheet Overview.

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

	March 31, 2005		December 31, 2004			$ Change 2004 to 2005
						Increase (decrease)
Assets:
Rental property and equipment, at cost	$	337,217		$	313,187		$	24,030
Property and land development	154,080			129,595			24,485
Cash, cash equivalents, and investments	55,740			49,943			5,797
Investments in and advances to joint ventures	12,649			9,842			2,807
Deferred charges and other assets, net	27,901			30,837			(2,936		)
Total assets	582,082			535,180			46,902
Liabilities and Shareholders’ Equity:
Mortgage and construction loans and other debt	368,624			329,170			39,454
Total liabilities	413,923			371,067			42,856
Minority interest	36,133			32,968			3,165
Shareholders’ equity	132,026			131,145			881

Material changes in assets include:

· Rental property and equipment, at cost increased primarily as a result of the acquisition of the 1105 Market Street commercial office building in 2005.

· Property and land development increased primarily as a result of the acquisition of Crisfield and development work performed on the 640 North Broad, Laguna Vista, Golfview, Cigar Factory and Seaside projects. This increase was partially offset by sales of condominium units at Cigar Factory, Golfview and Laguna Vista and sales of residential lots at Clarksburg Ridge.

· Cash, cash equivalents and investments increased in total primarily due to the $8,000,000 of loan proceeds we received from a related party.

· Investments in and advances to joint ventures increased primarily due to our investment in Devon Square.

· Deferred charges and other assets, net decreased primarily due the amortization of in-place lease assets.

Material changes in liabilities include:

· Mortgage and construction loans and other debt increased primarily as a result of the mortgage loan obtained in connection with the acquisition of 1105 Market Street as well as draws on

construction and development loans related to 640 North Broad, Laguna Vista, Golfview and Seaside. This increase was partially offset by loan repayments from sale proceeds at Cigar Factory, Golfview and Laguna Vista.

· Minority interest increased primarily as a result of our minority partner’s share of income generated from sales at Cigar Factory and Golfview.

Financial Overview.

Results of Operations—three months ended March 31, 2005 compared to the three months ended March 31, 2004.

The following table reflects key line items from our statements of operations for the three months ended March 31, 2005 and 2004 (in thousands, except percentages):

	March 31, 2005			March 31, 2004			Change 2004 to 2005				% Change 2004 to 2005
							Increase/(decrease)
Revenues from homebuilding and residential lots		$	15,843		$	2,729		$	13,114			480.5
Revenues from commercial rental properties		9,778			6,504			3,274				50.3
Revenues from residential rental properties		2,783			2,530			253				10.0
Revenues from hospitality properties		1,994			1,706			288				16.9
Total operating revenues		30,436			13,579			16,857				124.1
Cost of homebuilding and residential lots		11,529			2,562			8,967				350.0
Commercial operating expenses		4,276			2,096			2,180				104.0
Residential operating expenses		1,068			1,122			(54		)		(4.8	)
Hospitality operating expenses		2,089			1,362			727				53.4
Commercial depreciation and amortization expense		2,677			1,710			967				56.5
Residential depreciation and amortization expense		635			850			(215		)		(25.3	)
General and administrative expense		1,122			964			158				16.4
Interest expense		4,060			3,091			969				31.3
Income from investments in joint ventures		222			457			(235		)		(51.4	)
Minority interest		1,996			68			1,928				2,835.3
Net income		881			292			589				201.7

General Overview. Total operating revenues for the three months ended March 31, 2005 increased by $16,857,000 over total operating revenues for the three months ended March 31, 2004. The increase was primarily due to revenue generated from sales of condominium apartment units at Cigar Factory and Golfview and sales of residential lots at Clarksburg Ridge in addition to revenue generated from the acquisition of the Fort Washington Executive Center, the West Germantown Pike commercial office buildings, the One Northbrook commercial office building, and the Baltimore portfolio of commercial office buildings and the 1105 Market Street commercial office building. Net income for the three months ended March 31, 2005 increased by $589,000 compared to net income for 2004, primarily due to sales of condominium apartment units.

Homebuilding and Residential Lots.

At March 31, 2005 we owned or had a material ownership interest in entities involved in 14 development projects. The table below sets forth these development projects.

Project Name

Development Type

Size(1)

Number sold(2)

Location

B&R
Ownership
%

Consolidated Properties(3)

Clarksburg Ridge

Residential Lots

159 lots

155 lots

Clarksburg, MD

100.0

Golfview

Residential Condominiums

141 units

49 units

St. Petersburg, FL

50.0

Laguna Vista

Residential Condominiums

41 units

1 unit

Ocean City, MD

100.0

Cigar Factory

Residential Condominiums

30 units

21 units

Philadelphia, PA

66.7

400 S. Philadelphia Ave.

Residential Condominiums

20 units

—

Ocean City, MD

51.0

146th Street

Residential Condominiums

18 units

—

Ocean City, MD

51.0

Seaside

Residential Lots

138 lots

—

Ocean City, MD

51.0

Waterfront

Commercial Office Complex

1,144,000 sq. ft.(4)

—

(5)

Washington, DC

47.4

Northbrook Development

Commercial Office Building

108,000 sq. ft.

—

(5)

Trevose, PA

100.0

Sudley South

Commercial Office Condominium

54,000 sq. ft.

—

Manassas, VA

100.0

640 N. Broad Street

Residential Apartments

266 units

—

(5)

Philadelphia, PA

80.0

Divine Lorraine

Residential Apartments

135 units

—

(5)

Philadelphia, PA

95.0

Crisfield

Residential Lots

232 lots

—

Crisfield, MD

51.0

Unconsolidated Property(3)

WBP Land

Undeveloped Land

79 acres

29 acres

Lanham, MD

80.0

NOTES:

(1) Represents the actual or planned size of the project based on square footage, lots, units or acres.

(2) Represents number of sales that had closed as of March 31, 2005.

(3) Consolidated properties represent properties whose assets, liabilities and results of operations are consolidated into our consolidated financial statements. Unconsolidated property represents a property that is accounted for under the equity method of accounting, in accordance with GAAP.

(4) Represents the current size of the Waterfront Complex. The size of the development project has not yet been determined.

(5) Upon completion, the space will be leased to tenants.

Homebuilding and residential lots revenue in 2005 increased by $13,114,000 compared to the prior year. The increase can be attributed to the sale in 2005 of six developed lots at Clarksburg Ridge, eight condominium apartment units at Cigar Factory, 47 condominium apartment units at Golfview and one condominium unit at Laguna Vista, compared to the sale in 2004 of 19 developed lots at Clarksburg Ridge.

The cost of homebuilding and residential lots in 2005 increased by $8,967,000 compared to the prior year. The increase can be attributed to the cost of sales allocated to the developed lots and condominium units sold at Clarksburg Ridge, Cigar Factory, Golfview and Laguna Vista.

Commercial Rental Properties.

The table below sets forth the commercial rental properties which we owned or had ownership interests in at March 31, 2005.

	Number of Buildings		Square Feet	Occupancy(1)			Location	B&R Ownership
Consolidated Properties(2)
Washington Business Park(3)		9	568,000		91.2	%	Lanham, MD		80.0	%
Baltimore Portfolio(4)		5	409,000		79.1	%	Baltimore, MD		51.0	%
Fort Washington Executive Center		3	393,000		98.7	%	Ft. Washington, PA		96.5	%
Versar Center		2	217,000		89.6	%	Springfield, VA		100.0	%
Sudley North (Buildings A,B&C)		3	116,000		94.4	%	Manassas, VA		98.8	%
West Germantown Pike		2	115,000		100.0	%	Plymouth Meeting, PA		97.5	%
One Northbrook		1	95,000		83.2	%	Trevose, PA		100.0	%
Sudley North (Building D)		1	69,000		100	%	Manassas, VA		49.4	%
900 Northbrook		1	66,000		94.0	%	Trevose, PA		87.5	%
Fort Hill		1	66,000		100.0	%	Centreville, VA		80.0	%
7800 Building		1	15,000		100.0	%	Manassas, VA		100.0	%
Bank Building		1	3,000		100	%	Manassas, VA		100.0	%
1105 Market Street(5)		1	173,000		25.7	%	Wilmington, DE		100.0	%
Total consolidated properties		31	2,305,000
Unconsolidated Properties(2)
1925 K Street		1	149,000		98.2	%	Washington, DC		85.0	%
Devon Square(5)		2	140,000		68.4	%	Devon, PA		50.0	%
Madison Building		1	82,000		96.5	%	McLean, VA		24.9	%
Total unconsolidated properties		4	371,000
Total consolidated and unconsolidated properties		35	2,676,000

NOTES:

(1) At March 31, 2005.

(2) Consolidated properties represent properties whose assets, liabilities and results of operations are consolidated into our consolidated financial statements. Unconsolidated properties represent properties that are accounted for under the equity method of accounting, in accordance with accounting principles generally accepted in the United States (“GAAP”).

(3) Consists of two office buildings and seven flex and warehouse buildings.

(4) Total portfolio consists of eight buildings three of which are being held for sale. The results of operations are included in Income from discontinued operations, net of tax in the accompanying financial statements.

(5) Property currently under renovation.

The $3,274,000 revenue increase in 2005 relative to 2004 is primarily due to the acquisition in 2004 of the Fort Washington Executive Center, the West Germantown Pike commercial office buildings, the One

Northbrook commercial office building and the Baltimore portfolio of commercial office buildings, and the acquisition in 2005 of the 1105 Market Street commercial office building. Revenues from comparable properties that were owned for the same periods in 2005 and 2004 decreased by $816,000 due to lower revenue at Washington Business Park as a result of lower occupancy and a lease termination fee received in 2004.

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 2005 increased relative to 2004 by $2,180,000 due to operating expenses from properties acquired in 2005 and a full year of expenses from properties acquired in 2004. Operating expenses from comparable properties remained stable.

Depreciation and amortization expense in 2005 increased by $967,000 over the prior year due to the depreciation expense recorded related to the 2005 and 2004 acquisitions.

Residential Rental Properties.

The table below sets forth the residential rental properties we owned or had an ownership interest in at March 31, 2005.

	Apt. Units		Occupancy(1)			Location	B&R Ownership %
Consolidated Properties(2)
The Fountains		400		98.9	%	Orlando, FL		100.0	%
Victoria Place		364		94.5	%	Orlando, FL		85.0	%
Charlestown North		178		95.3	%	Greenbelt, MD		100.0	%
Total Consolidated Properties		942
Unconsolidated Property(2)
Arbor Crest		80		44.4	%(3)	Silver Spring, MD		33.3	%
Total Consolidated and Unconsolidated		1,022

NOTES:

(1) At March 31, 2005.

(2) Consolidated properties represent properties whose assets, liabilities and results of operations are consolidated into our consolidated financial statements. Unconsolidated property represents a property that is accounted for under the equity method of accounting, in accordance with GAAP.

(3) Development of this age-restricted apartment community was completed in September 2004.

The $253,000 increase in residential revenue in 2005 relative to 2004 is primarily due to higher occupancy rates at Victoria Place and The Fountains.

Depreciation and amortization expense in 2005 decreased by $215,000 over the prior year primarily due to lower amortization expense as a result of in-place lease assets being fully amortized in 2004 at Victoria Place and The Fountains.

Hospitality Properties.

For the three months ended March 31, 2005, the average daily room rate at The Inn at the Colonnade increased to $134.13 from $130.37 in the prior year, while occupancy decreased to 65.3% from 67.1%. Revenue per available room (“REVPAR”) increased to $87.59 from $87.48 in the prior year. The average daily room rate at the Holiday Inn increased to $83.70 from $75.38 in the prior year, while occupancy decreased to 60.3% from 69.7%. REVPAR decreased to $50.47 from $52.54 in the prior year.

Revenue increased by $288,000 over the prior year primarily due to food and beverage revenue generated by Club at the Colonnade, a restaurant on the premises of the Inn at the Colonnade. Prior to November 2004, the restaurant space was leased to a third party.

Operating expenses, which consist of direct operating costs of the properties including property taxes and insurance and excluding interest expense and depreciation expense, increased by $727,000 compared to 2004. The increase can be primarily attributed to: increased salary and benefits at the Inn at the Colonnade due to the hiring of additional staff; food and beverage expenses associated with the Club at the Colonnade; and management fees incurred at the Holiday Inn due to the termination of the management agreement with a wholly-owned subsidiary and the signing of a new management agreement with an unrelated third party management company in July 2004.

General and Administrative Expense. General and administrative expense increased by $158,000 compared to 2004 primarily due to higher salary and benefits expense due to the hiring of additional personnel.

Interest Expense. The increase in interest expense of $969,000 for the first quarter of 2005 over the prior year period is primarily due to interest on debt obtained or assumed in 2005 and 2004 in connection with the acquisitions of Fort Washington, West Germantown Pike, One Northbrook, the Baltimore portfolio and 1105 Market Street. For the three months ended March 31, 2005 and March 31, 2004, we capitalized interest of approximately $424,000 and $293,000, respectively related to our investment in development projects.

Income from Investments in Joint Ventures. Income from investments in joint ventures, which consists of income earned from joint ventures that are not consolidated into our financial statements, decreased by $235,000 in the first quarter of 2005 primarily due to operating losses from Arbor Crest and decreased income from 1925 K Street.

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 an effective tax rate of 36% in 2005 and 27% in 2004. The effective tax rates reflect a reduction from the statutory rates primarily for tax-exempt interest earned on investments in municipal obligations.

Minority Interest. Minority interest expense increased by $1,928,000 in the first quarter of 2005 over the prior year period primarily due our minority partners’ share of profits generated from condominium apartment sales at Cigar Factory and Golfview.

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 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 $4,340,000 in the first quarter of 2005, compared to $3,165,000 in the first quarter of 2004, an increase of $1,175,000 or 37.1%. The increase is primarily due to funds from operations generated from properties we acquired after the first quarter of 2004, a full quarter of funds from operations generated from properties we acquired in the first quarter of 2004 and increased sales in 2005 of condominium units.

The following table reflects the calculation of FFO (in thousands):

	For the three months ended March 31,
	2005		2004
Net income	$	881	$	292
Add: Depreciation and amortization including share of unconsolidated real estate joint ventures	3,459		2,873
Funds from operations	$	4,340	$	3,165

Liquidity and Capital Resources

Cash Flows

Our principal sources of cash are cash from our operations, our ability to obtain mortgage and other financing and asset dispositions. Our principal uses of cash are real estate acquisitions, investments in real estate joint ventures, funding working capital requirements and payments of debt, capital expenditures and corporate expenses. With current cash and cash equivalents and investments that are principally short-term in nature, totaling $55,740,000 at March 31, 2005, our sources of cash are sufficient to meet our liquidity needs; however we cannot be assured that our actual cash requirements will not be greater than we currently expect.

Operating Activities:

During the three months ended March 31, 2005 net cash provided by operating activities was $2,208,000.

Investing Activities:

During the three months ended March 31, 2005 net cash used in investing activities totaled $41,482,000, primarily due to outflows of $33,916,000 which included the acquisitions of 1105 Market Street, Devon Square and Crisfield.

Financing Activities:

During the three months ended March 31, 2005 net cash provided by financing activities totaled $38,118,000. This primarily resulted from the placement of mortgage and construction debt related to the acquisition 1105 Market Street and Crisfield. Reductions in cash as a result of loan principal payments and an increase in deposits held in escrow were partially offset by amounts contributed by our equity partners into joint venture entities that we consolidate into our consolidated financial statements.

Excess cash flow generated from our properties operations and from distributions from joint ventures 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.

Future Capital Requirements

Projected cash flow from operations for 2005 indicates that current obligations and working capital needs can be met. Unanticipated funding requirements that could surface include unexpected revenue losses caused by tenant defaults or bankruptcies that have a detrimental effect 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.

If the sale of properties to Midlantic described under “Overview” is completed, we will have significant additional capital resources.

Long term our main challenge will be to refinance our existing fixed-rate debt at interest rates that will allow us to continue to maximize cash returns on our investments. At March 31, 2005 the weighted average interest rate on our fixed-rate mortgage debt was 6.1%. Based on the fixed-rate debt outstanding at March 31, 2005, a 1% increase in the weighted average interest rate on our debt would increase our annual financing costs by approximately $2,559,000. Our fixed-rate mortgage debt, matures on average in approximately 10 years, beginning in 2007.

Off-Balance Sheet Commitments

As of March 31, 2005, 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 loan made to 1925K Associates, LLC. 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 PNC Bank for 33.3% of the loan balance outstanding under the $7,100,000 construction loan, made to Arbor Crest. The other members of Arbor Crest have guaranteed the remaining balance under the loan. The loan matures in January 2006 and provides for one 5-year extension option. Our payment guarantee will be reduced to 16.7% of the outstanding loan balance, upon Arbor Crest maintaining a debt service ratio of 1.25 to 1.0 for a period of one year. At March 31, 2005 the outstanding loan balance totaled $7,046,000.

· 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. To date K/FCE has contributed approximately $14,000,000 to the joint venture. At this time we cannot determine the likelihood of our having to make any contribution to the joint venture.

· In connection with the $15,100,000 construction loan made by Wachovia Bank, N.A. to Laguna Vista, 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 March 31, 2005 the outstanding loan balance totaled $12,450,000.

· We have guaranteed repayment of the entire loan balance outstanding under a $15,000,000 mortgage loan made by Wachovia Bank, N.A to the entities that own seven of the Baltimore properties. The loan matures in 2006 and provides for two, one-year extension options.

· We have guaranteed the full amount of the outstanding balance under both the $32,000,000 acquisition and construction loan and the $6,900,000 bridge construction loan made by Wachovia Bank, N.A. to 640 North Broad. Both loans mature in 2007, while the acquisition and construction loan provides for two one-year extension options. At March 31, 2005, the total amount outstanding under the loans totaled $16,467,000.

· We have guaranteed the full amount of a $7,044,000 development loan maturing in 2006 from Wachovia Bank, N.A, to Paradise Developers, our wholly-owned subsidiary. At March 31, 2005, the balance outstanding under the loan was $451,000.

· We have guaranteed repayment of the entire loan balance outstanding under a $19,000,000 mortgage loan from Wells Fargo to 1105 Market Street. The loan matures in 2007.

· We have guaranteed repayment of $1,700,000 of an $11,700,000 acquisition and development loan from Wachovia Bank N.A. to Crisfield. The loan matures in January 2008. At March 31, 2005, the balance of the loan was $8,661,000.

· We have guaranteed repayment of the entire loan balance outstanding under a $21,300,000 acquisition and construction loan from Wells Fargo to Devon Square. The loan matures in August 2007. At March 31, 2005, the balance outstanding under the loan totaled approximately $12,451,000.

· 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. 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 ending February 2009, provided a lease for this space is not obtained. To date the joint venture has obtained leases covering 35,000 square feet of this space, with such leases providing for first year rent of between $18.00 and $21.25 per square foot. The other master lease agreement 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.

Other than as disclosed in note 5 of the consolidated financial statements, there have been no significant modifications or changes in our contractual obligations and commitments.

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 March 31, 2005 we had $103,134,000 of variable-rate debt outstanding. In addition, a joint venture in which we have an 85% non-controlling interest had $20,037,000 of variable-rate debt outstanding. Based on the total of this variable-rate debt outstanding at March 31, 2005, a 1% increase in market interest rates would impact our annual pre-tax earnings by approximately $1,350,000. Assuming the rate increase is not caused by an increase in credit spreads and that there is a proportionate 1% increase in returns on our cash, cash equivalents and investments, our annual interest income would increase by approximately $557,000.

Based upon requirements for assessing the market value of debt instruments, we estimate the fair market value by discounting future cash payments at interest rates that approximate the current market. Based on these parameters, at March 31, 2005, the carrying amount of our total fixed-rate debt was $265,490,000 compared to an estimated fair value of $254,599,000.

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.

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

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 Operating Officer and 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 Operating Officer and Chief Financial Officer. (Filed herewith.)

	BRESLER & REINER, INC.
	By:	/s/ SIDNEY M. BRESLER
		Sidney M. Bresler
		*Chief Executive Officer*
	By:	/s/ DARRYL M. EDELSTEIN
		Darryl M. Edelstein
		*Chief Operating Officer and Chief Financial Officer*

PART I. FINANCIAL INFORMATION			3
	Item 1	Consolidated Financial Statements and Notes	3
		Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and December 31, 2004	3
		Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2005 and 2004	4
		Consolidated Statements of Cash Flows (Unaudited) for the Thee Months Ended March 31, 2005 and 2004	5
		Notes to the Consolidated Financial Statements (Unaudited)	6
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	31
	Item 4	Controls and Procedures	31
PART II. OTHER INFORMATION			32
	Item1	Legal Proceedings	32
	Item 2	Changes in Securities, Use of Proceeds and Issuer’s	32
	Item 3	Defaults Upon Senior Securities	32
	Item 4	Submission of Matters to Vote of the Security Holders	32
	Item 5	Other Information	32
	Item 6	Exhibits and Reports on Form 8-K	32
		Signatures	33
		Certifications