UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

For the transition period from                      to                      

Commission file number 0-6201

BRESLER & REINER, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

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

Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.01 par value

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No  x

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  x  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No  x

The aggregate market value of the voting stock held by non-affiliates (1,319,840 shares) was $38,407,344 as of June 30, 2006. The aggregate market value was computed by reference to the last sale of the Common Stock of the Registrant at $29.10 per share. For purposes of this computation, directors, officers and holders of 5% or more of the Registrant’s Common Stock are considered affiliates of the Registrant at that date.

The number of shares of the registrant’s Common Stock outstanding as of March 29, 2007 was 5,477,212.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Report incorporates by reference information from the definitive Proxy Statement for the registrant’s 2007 Annual Meeting of Stockholders to be held on June 13, 2007.

BRESLER & REINER, INC.

ANNUAL REPORT ON
FORM 10-K

For the Fiscal Year Ended December 31, 2006

TABLE OF CONTENTS

 

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and which could materially affect actual results, performances or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to the risk factors discussed in this Annual Report on Form 10-K. Accordingly, there is no assurance that the Company’s expectations will be realized. Except as otherwise required by the federal securities laws, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

The “Company” means Bresler & Reiner, Inc., a Delaware corporation, and one or more of its subsidiaries and affiliates, and, as the context may require, Bresler & Reiner, Inc. only.

ITEM 1. BUSINESS

Our Company

Bresler & Reiner, Inc. is a Delaware corporation that for over 40 years has been primarily engaged in the ownership of commercial, residential and hospitality properties and in the development of commercial and residential buildings and land.

We engage in real estate activities in the Philadelphia, Pennsylvania; Houston, Texas; Washington, D.C.; Wilmington, Delaware; Baltimore, Maryland; Maryland and Delaware Eastern Shore; and Orlando and Tampa, Florida, metropolitan areas. We are not involved in any operations outside of the United States of America.

Our Strategy

Our goal is to generate attractive risk-adjusted investment returns through ownership of operating properties and participation in development projects.

Operating Properties

To achieve our goal with regards to operating properties, we employ the following strategy:

·       Target Properties that Have Stable Cash Flows and Present Upside Potential.   We seek to acquire well located properties that have stable cash flows and also present upside potential that may result from valued added improvements, enhanced tenant services and strong management. We view existing vacancies or near-term lease expirations as opportunities to increase rental revenue.

·       Employ Successful Bidding and Due Diligence Techniques.   Our strong local relationships and effective due diligence allows us to make an informed offer based on a thorough evaluation of the property and its potential. We consider such factors as:

·       economic and demographic conditions in the property’s local and regional market;

·       the location, age, occupancy and rental rates of competing properties;

·       the location, age, construction quality and design of the property;

·       the current and projected cash flow of the property in its current condition;

·       the potential to increase cash flow through moderate renovation and enhanced tenant service;

·       the terms of existing debt on the property and the availability of new financing on favorable terms;

·       the terms of tenant leases, including the relationship between the property’s current rents and market rents and the ability to increase rents upon lease rollover;

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·       the property’s current expense structure and the potential to increase operating margins;

·       access to experienced local property managers and leasing agents; and

·       whether we have or can achieve a sufficient concentration of properties in a sub-market to achieve economies of scale and enhanced service levels from local service providers.

·       Engage Third Party Property Managers and Leasing Agents.   We use third-party property managers and leasing agents who have a strong presence in the applicable local market to handle day-to-day operations and leasing activity of the properties. We believe property management and leasing is local in nature and that managers and leasing agents are an integral part of the property’s success. We hire property managers and leasing agents who embrace the idea of building a collaborative relationship with us, are highly motivated, offer value-added services and have solid relationships with high quality, cost-effective vendors. By clustering our properties, we are able to provide onsite property maintenance services that are both cost effective and better suited to respond to tenant requests in a timely manner, thereby increasing tenant loyalty and lowering tenant turnover costs.

·       Employ Asset Management and Oversight.   We engage in rigorous oversight and asset management of our properties. We make regular on-site visits, touring the properties and meeting with the property managers and leasing agents. We work with our property managers to identify revenue generation and expense reduction opportunities. We establish internal controls to ensure compliance with our operating, accounting and reporting requirements and test these controls during periodic site visits conducted by our internal audit department. We approve each property’s long and short-term capital replacement plans and annual operating budgets and review monthly operating and leasing reports for each property.

Development Properties

We employ the following strategy to achieve our goals with respect to development projects:

·       Due Diligence Techniques.   We thoroughly evaluate a development project’s potential for generating strong risk-adjusted returns by considering such factors as:

·       the highest and best use for the project;

·       the economic and demographic conditions in the project’s local and regional market;

·       competition from comparable projects;

·       the projected cash flow of the project;

·       potential risk-adjusted returns on our investment;

·       development risks including cost overruns and delays; and

·       interest-rate risk.

·       Partner with Developers.   We partner with reputable local, regional and national developers who have expert knowledge of their markets and strong relationships with general contractors and service providers. The agreements with our joint venture partners generally provide for a distribution waterfall that provides us with a preferred return on our investment as well as incentives to our partners to maximize returns on the project.

Selling Properties

We acquire operating properties as a long term investment, and we pursue our development properties to complete the development process. However, we continually evaluate whether we should continue to hold properties or to dispose of them. In evaluating whether to dispose of a property we consider the amount of control we exert over the ownership entity, whether the property fits with our overall strategy, and whether re-deployment opportunities for the sale proceeds offer greater returns than can be achieved through continuing to own and operate the existing property.

Prudent Financing

We maintain a strong liquidity position that allows us to effectively compete for acquisitions where the seller may require the buyer to rapidly close on the purchase of a property. We employ mortgage debt in order to enhance our returns on invested capital. In certain instances we enter into master lease agreements or provide loan guarantees in order to maximize the benefits of leverage. At other times we prepay existing mortgage debt in order to place more favorable debt. While

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under accounting principles generally accepted in the United States of America (“GAAP”) the cost and other penalties associated with such prepayments adversely affect our earnings in the year in which they occur, we proceed with such prepayments after considering among other things, whether the benefits to be gained over the course of the loan from the new leverage outweigh the costs incurred in the current year on a net present value basis.

Our Competitive Strengths

To employ our strategy we utilize our competitive strengths which include:

·       Experienced Management.   Our management team has extensive experience acquiring, financing, developing, repositioning and selling real estate. The co-founders of the Company are active members of the Board.

·       Network of Industry Contacts and Collaborative Relationships.   Our management team has developed a broad network of contacts that include property owners, developers, lenders, brokers, property managers and leasing agents.

·       Growth Oriented Capital Structure.   Our strong liquidity position provides us with flexibility in structuring transactions and allows us to react quickly to investment opportunities.

Financial Information about Business Segments

We operate in six reportable business segments: Commercial Rental Property; Residential Rental Property; Hospitality Property; Developed and Undeveloped Land sales; Commercial and Residential Condominiums; and Commercial Building and Residential Apartment Development. For additional information about these segments see Note 17 of Notes to Consolidated Financial Statements in Item 15 of this report and Managements’ Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of Part II of this report.

Narrative Description of the Business

The following is a brief description of each of our reportable business segments:

Commercial Rental Property

This segment includes the rental income derived by commercial properties from the leasing 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. At December 31, 2006 we owned, or had an ownership interest in, 47 commercial office and flex warehouse buildings containing approximately 3,749,000 square feet of space. The properties are located in the Philadelphia, Pennsylvania; Houston, Texas; Washington, D.C. and Wilmington, Delaware metropolitan areas.

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. Redwood manages approximately 1,050,000 square feet of commercial office space, approximately 559,000 square feet of which are owned by entities which we control.

Residential Rental Property

This segment includes the rental income derived by residential properties from the leasing of apartment units and other related revenue sources. Apartment leases generally provide for a fixed monthly rental over a one-year term. At December 31, 2006, we owned, or had an ownership interest in, four residential properties containing a total of 1,136 apartment units. The properties are located in the Orlando, Florida and Washington, D.C. metropolitan areas.

Included in this segment for 2004 are fees generated from a wholly-owned subsidiary that formerly managed a residential property owned by affiliated third parties. This management contract was terminated during the year ended December 31, 2004.

Hospitality Property

This segment includes revenue and income generated from services provided at our two hotel properties. The properties bear the Doubletree and Holiday Inn Express brands and are both managed by third party managers. The properties are located in Baltimore, Maryland and Camp Springs, Maryland. In February 2007, we sold the Doubletree brand hotel.

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Developed and Undeveloped Land

This segment includes the revenues and costs associated with the development and sale of land parcels and lots as part of residential subdivisions and undeveloped commercial land sales. The residential subdivisions are located on the Maryland and Delaware Eastern Shore, and the undeveloped commercial land is located in the Washington, DC metropolitan area.

Commercial and Residential Condominiums

This segment primarily includes the revenues and costs associated with the development and sale of commercial and residential condominiums. This activity is conducted in the Washington, DC; Philadelphia, Pennsylvania and Baltimore, Maryland metropolitan markets.

Development of Rental Properties

This segment primarily includes the development and construction of commercial and residential buildings that will be leased to tenants upon completion. Costs associated with this segment are capitalized until completion, at which time the assets are placed in service and transferred to either the residential or commercial rental property segment. This activity is conducted in the Washington, DC and Philadelphia, Pennsylvania metropolitan markets.

Other Information

Competition

We operate in highly competitive marketplaces in virtually all aspects of our real estate activities:

·       During the acquisition process we compete against other buyers of real estate; including both public and private real estate investment trusts, real estate development companies, investment firms, investment funds and financial institutions. We compete primarily based on offer prices and the ability to fund the acquisition and close the transaction in a timely manner. This competition may reduce the availability of properties at prices that meet our targeted rates of return on invested capital or may require us to reduce our targeted rates of return.

·       We compete for tenants and guests at our operating commercial, residential and hospitality properties primarily based on price, location and amenities offered. An oversupply of real property created by other developers and owners could hinder our ability to maintain high occupancy levels or could require that we reduce rents or offer significant concessions. Such situations could materially and adversely affect our results of operations and cash flows.

·       We compete for development projects with other developers of similar projects as well as existing projects. Increased supply of condominium units and developed land could affect the prices at which we can sell these projects, thereby adversely affecting our results of operations and cash flows.

Employees

On December 31, 2006, we had 28 full-time employees, all but one of whom were located at our corporate offices in Rockville, Maryland, working in such areas as finance, accounting, asset management and internal audit. We believe that our relations with our employees are good. The on-site personnel engaged in the day-to-day operations and the development activities of properties are employees or sub-contactors of the management companies or developers contracted to operate or develop such properties.

Market Concentrations

The commercial properties we owned at December 31, 2006 are concentrated in both the Mid-Atlantic region of the country, and the Houston, Texas metropolitan market. Our residential apartment properties are concentrated in the Central Florida area. Our hospitality properties are located in the Baltimore, Maryland and Washington, D.C. metropolitan areas. Our development projects are located in the Washington, D.C., Maryland and Delaware Eastern Shore, and Philadelphia, Pennsylvania metropolitan areas. No single tenant represents more than 10% of our total revenues.

Seasonality

Our commercial properties are unaffected by seasonality. There are limited seasonal impacts on results at residential properties with slightly lower occupancy during the months of December and January. Our hospitality properties are affected to a larger extent by seasonality; however, the impact is minimal to our overall results of operations. Sales of

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residential condominiums are affected by seasonality with fewer sales in the winter months. Sales of developed land are not affected by seasonality since the sales contracts with the homebuilders incorporate structured take-down of lots.

Access to Company Information

We electronically file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and amendments to these reports, with the Securities and Exchange Commission (the SEC). The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

We make available, free of charge, by responding to requests addressed to our investor relations department, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and amendments to these reports. These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. These reports can also be accessed on our website (http://www.breslerandreiner.com). Information on our website, however is not part of this report.

ITEM 1A. RISK FACTORS

Risk Factors That May Affect Our Future Business Results

We face a number of material risks and uncertainties in our business, which could materially and adversely affect our business, financial condition and results of operations and, as a result, the trading price of our common stock. We believe that the risks and uncertainties described below are the material risks that we face. Any investor in our securities should carefully consider the risks described below.

We are subject to risks associated with investments in real estate.   The value of and our income from our properties may decline due to factors that adversely affect real estate generally and those that are specific to our properties. General factors that may adversely affect our real estate portfolios include:

·       increases in interest rates;

·       a general tightening of the availability of credit;

·       a decline in the economic conditions in one or more of our primary markets;

·       an increase in competition for tenants and customers or a decrease in demand by tenants and customers;

·       an increase in supply of our property types in our primary markets;

·       a continuation of terrorist activities or other acts of violence, war in the United States or abroad or the occurrence of such activities or acts that impact properties in our real estate portfolios or that may impact the general economy; and

·       the adoption on the national, state or local level of more restrictive laws and governmental regulations, including more restrictive zoning, land use or environmental regulations and increased real estate taxes.

In addition, there are factors that may adversely affect the value of, and our income from, specific properties, including:

·       adverse changes in the perceptions of prospective tenants or purchasers of the attractiveness of the property;

·       opposition from local community or political groups with respect to development or construction at a particular site;

·       our inability to provide adequate management and maintenance or to obtain adequate insurance;

·       our inability to collect rent or other receivables;

·       an increase in operating costs;

·       introduction of a competitor’s property in or in close proximity to one of our current markets; and

·       earthquakes, floods or underinsured or uninsured natural disasters.

The occurrence of one or more of the above risks could result in a significant reduction in the net operating income generated by these properties and we could lose some or all of our investments in those properties.

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We may not be able to recover increased property maintenance costs through rent increases.   Our properties are subject to increases in operating expenses. Certain commercial tenants are obligated to pay a portion of the escalating operating costs. In addition, certain tenants are subject to rent escalations for cost of living increases. However, we may not be able to increase revenues enough to offset these increased expenses.

Various factors could adversely affect development of new projects or the repositioning of existing projects.   Our development projects are subject to significant risks relating to our ability to complete our projects on time and on budget. Factors that may result in a development project exceeding budget or being prevented from completion include:

·       an inability to secure sufficient financing on favorable terms, including an inability to refinance construction loans;

·       construction delays or cost overruns, either of which may increase project development costs;

·       an increase in commodity costs;

·       an inability to obtain zoning, occupancy and other required governmental permits and authorizations;

·       an inability to secure tenants or anchors necessary to support the project; and

·       failure to achieve or sustain anticipated occupancy or sales levels.

If any of these occur, we may not achieve our projected returns on properties under development and we could lose some or all of our investments in those properties. In the past, we have elected not to proceed with specific development projects, and we anticipate that this may occur again from time to time in the future.

The construction of real estate projects entails unique risks, including risks that the project will fail to conform to building plans, specifications and timetables. These failures could be caused by strikes, weather, government regulations and other conditions beyond our control. In addition, we may become liable for injuries and accidents occurring during the construction process that are not insured.

In the construction of new projects, we may guarantee the lender of the construction loan the lien-free completion of the project. This guaranty is recourse to us and places the risk of construction delays and cost overruns on us. This type of guaranty is released upon completion of the project. Furthermore, we typically guarantee a portion of project indebtedness. We may have to make significant expenditures in the future in order to comply with our guaranty obligations.

We face risks associated with property acquisitions.   We have in the past acquired, and intend in the future to acquire, properties and portfolios of properties, including large portfolios that would increase our size and potentially alter our capital structure. Although we believe that the acquisitions that we have completed in the past and that we expect to undertake in the future have and will enhance our future financial performance, the success of such transactions is subject to a number of factors, including the risk that:

·       we may not be able to obtain financing for acquisitions on favorable terms;

·       acquired properties may fail to perform as expected;

·       the actual costs of repositioning or redeveloping acquired properties may be higher than our estimates; and

·       we may not be able to efficiently integrate acquired properties, particularly portfolios of properties, into our organization and to manage new properties in a way that allows us to realize cost savings and synergies.

We may be unable to sell properties at fair value to avoid losses or to reposition our portfolio.   Because real estate investments are relatively illiquid, we may be unable to dispose of underperforming properties and may be unable to reposition our portfolio in response to changes in regional or local real estate markets. As a result, we may incur operating losses from some of our properties and may have to write down the value of some properties due to impairment. In addition, we may be forced to sell properties during unfavorable market conditions and therefore not realize their fair market value.

We face significant competition from other real estate developers.   We compete with real estate developers, operators and institutions for tenants and acquisition and development opportunities. Some of these competitors have significantly greater financial resources than we do. Such competition may reduce the number of suitable investment opportunities offered to us, may interfere with our ability to attract and retain tenants and may increase vacancies, which could result in increased supply and lower market rental rates. In addition, some of our competitors may be willing to make space available at lower prices than available space in our properties.

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We may be unable to renew expiring leases, lease vacant space or re-lease space on a timely basis or on comparable or better terms.   Leases for commercial properties, representing 25% of our annualized commercial base rent at December 31, 2006, expire on or before December 31, 2007. Current tenants may not renew their leases upon the expiration of their terms; or we may not be able to locate qualified replacement tenants under acceptable terms.

We cannot assure you that our tenants will not default on their leases and fail to make rental payments to us. Moreover, we may be unable to locate a replacement tenant in a timely manner or on comparable or better terms if a tenant defaults on its lease. The loss of rental revenues from a number of our tenants and our inability to replace such tenants may adversely affect our profitability and our ability to meet our financial obligations.

Increased interest rates would raise our cost of capital and could affect our ability to obtain new mortgage debt or refinance existing mortgage debt.   An increase in interest rates would increase our cost of capital, which may affect our ability to obtain new mortgage debt or to refinance existing mortgage debt and would limit our ability to make future acquisitions. Higher interest rates upon refinancing mortgage debt would decrease cash flow from operations, negatively impacting our earnings and lowering our cash returns as a percentage of our invested equity. In addition, a rise in interest rates could raise the cost of our variable rate debt in excess of increased earnings on our short-term investments, thereby negatively impacting our earnings. In addition, an increase in interest rates could decrease the amounts that third parties are willing to pay for our assets, thereby limiting our ability to alter our portfolio promptly in relation to economic or other conditions.

We may have difficulty obtaining financing in weak markets.   Weak real estate markets not only affect the prices for which real estate properties can be purchased or sold, and rental revenues, but also affect the availability of financing. Under such conditions we may have difficulty refinancing existing acquisition and construction financing with long-term financing, which could result in our having to accept less favorable financing terms or use our cash resources to repay indebtedness that otherwise would be refinanced. If principal payments due at maturity cannot be refinanced, extended or repaid with proceeds from other sources, such as the proceeds of sales of assets or new equity securities, cash flow will not be sufficient to repay all maturing debt in years when significant “balloon” payments come due.

Our debt level may impair our ability to pursue our business plan.   As of December 31, 2006, our indebtedness totaled $610,681,000, of which $533,104,000 are mortgage and construction loans. We are likely to incur significant additional debt to finance future acquisition and development activities. Our level of debt and the limitations imposed on us by our debt agreements creates risks, including the following:

·       our cash flow may be insufficient to make required payments of principal and interest;

·       we may be unable to borrow additional funds as needed or on favorable terms;

·       we may be unable to refinance some or all of our indebtedness, including mortgage debt, or any refinancing may not be on terms as favorable as those of the existing indebtedness;

·       we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms;

·       any default in payment of our indebtedness or violation of any covenants in our loan documents could result in acceleration of those obligations and possible loss of property to foreclosure; and

·       our default under any one of our mortgage loans with cross default provisions could result in a default on other indebtedness and loss of properties securing the indebtedness.

If the economic performance of any of our properties declines, our ability to make debt service payments could be adversely affected. If a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, we may lose that property to lender foreclosure.

The mortgage debt we have incurred for properties we acquired during the last three years has ranged between 80% and 90% of the purchase price of these properties. We do not have a policy limiting the amount of debt that we may incur. Furthermore, our   bylaws do not limit the amount or percentage of indebtedness that we may incur. Accordingly, our management and board of directors have discretion to increase the amount of our outstanding debt at any time without approval by our stockholders. Changes in our debt policies could expose us to greater credit risk, interest rate risk or result in a more leveraged balance sheet. If we become highly leveraged, then the resulting increase in debt service could adversely affect our ability to make payments on our outstanding indebtedness and may harm our financial condition.

Weaker economic conditions in the markets in which our properties are located could adversely affect our financial condition.   Our  properties are located in the Philadelphia, Pennsylvania; Houston, Texas; Washington, D.C.; Wilmington, Delaware; Baltimore, Maryland; Maryland and Delaware Eastern Shore; and Orlando, and Tampa, Florida, metropolitan

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areas.   A decline in the economies of one or more of our core real estate markets, or in the U.S. economy as a whole, could adversely affect our financial position, results of operations, cash flow and ability to pay dividends to shareholders.

We are investing in properties in real estate markets that are outside our core geographic markets.   Over the course of the last year we have made acquisitions outside of our core geographic areas.  We may not be able to operate effectively outside of our core markets. We may continue to make investments in new markets, which may expose us to a variety of risks including:

·       a lack of market knowledge and understanding of the local economies; and

·       unfamiliarity with local government and permitting procedures.

Our insurance may not be adequate to cover losses, including those that result from environmental damage or terrorist acts.   We carry comprehensive general liability, property, flood, earthquake and rental loss insurance with respect to our properties within insured limits and policy specifications that we believe are customary for similar properties. There are specific types of losses, generally of a catastrophic nature, such as losses from wars, biological, chemical or radioactive contamination, terrorism or earthquakes, for which we may not have adequate insurance coverage or, in our judgment, for which we cannot obtain insurance at a reasonable cost.

Should an uninsured loss or a loss in excess of insured limits occur, including any loss resulting from floods or other natural disasters, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. Any such loss could materially and adversely affect our results of operations, cash flows and financial position. Nevertheless, we might remain obligated for any mortgage debt or other financial obligations related to the property, even if the property is irreparably damaged. We are also subject to additional wind damage underwriting premiums for certain properties. It is also possible that third-party insurance carriers will not be able to maintain reinsurance sufficient to cover any losses that may be incurred.

The costs of compliance with or liabilities under environmental laws may adversely affect our operating results.   Our operating expenses could be higher than anticipated due to the cost of complying with existing or future environmental laws and regulations. As an owner of real property, we can be liable for environmental contamination created by the presence or discharge of hazardous substances on the property, regardless of:

·       our lack of knowledge of the contamination;

·       the timing of the contamination;

·       the cause of the contamination; or

·       the party responsible for the contamination of the property.

There may be environmental problems associated with our properties of which we are unaware.   We could be held liable for the environmental costs associated with the release of regulated substances or related claims, whether by us, our tenants, former owners or tenants of the affected property or others. The presence of hazardous substances on a property could result in personal injury or other claims by private parties. Such claims could result in costs or liabilities that could exceed the value of that property. If we become aware of any environmental problems, we take steps to remediate them.

Although our leases generally require our tenants to operate in compliance with all applicable laws and to indemnify us against any environmental liabilities arising from a tenant’s activities on the property, we could nonetheless be subject to strict liability by virtue of our ownership interest for environmental liabilities created by our tenants and we cannot be sure that our tenants would satisfy their indemnification obligations under the applicable lease.

We are controlled by the Bresler and Reiner families, whose interests may differ from those of other shareholders.   As of March 30, 2007, members of the Bresler and Reiner families, which include members of our current board of directors and executive officers, owned over 70% of our common stock. As a result of their ownership, these family members have the ability to elect our board of directors and to control our management and policies. Generally, they may also determine, without the consent of our other shareholders, the outcome of any corporate transaction or other matters submitted to our shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets and prevent or cause a change in control.

We expect to experience significant growth in the future and may not be able to adapt our management and operational systems to integrate additional properties without unanticipated significant disruption or expense.   During the three year period ended December 31, 2006, the total size of our commercial office portfolio increased by 2,174,000 square feet. We intend to continue to make a significant number of additional acquisitions and cannot assure you that we will be able to adapt

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our management, administrative, accounting and operational systems to integrate the properties into our portfolio, or that we will be able to manage any future acquisitions of additional properties without operating disruptions or unanticipated costs. In addition, acquisitions will require substantial attention from our management, and may cause disruptions in our operations and divert management’s attention away from day-to-day operations. Our failure to successfully integrate additional property acquisitions into our portfolio could have a material adverse effect on our results of operations and financial condition.

If our property managers or leasing agents default on their obligations, operating results from affected properties could suffer and we may have difficulty finding replacements.   We outsource property management and leasing of our properties to local property managers and leasing agents, who perform all day-to-day property management and leasing functions for our properties. Although we oversee our property managers and leasing agents, they may not satisfy their obligations under our agreements. If they fail to do so, our relationships with our tenants could be damaged or we could incur liabilities from loss or injury at a property. In either case our operating results and financial condition could be negatively affected. If a property manager or leasing agent breaches its agreement with us, we will seek to replace them. However, we may not be able to obtain suitable replacements within the relevant market. In addition, as we enter a new market we will seek to engage local third-party property managers, leasing agents and other service providers. However, we may not be able to identify such service providers who meet our standards and who are capable of complying with our property management and leasing guidelines.

Property ownership through joint ventures may limit our ability to act exclusively in our interests.   Several of our properties are owned through joint ventures with third parties. We could become engaged in a dispute with one or more of our joint venture partners that might affect our ability to operate a jointly-owned property. Moreover, our joint venture partners may have business objectives that are inconsistent with ours or may have competing interests that could create conflicts of interest. If the objectives of our joint venture partners are inconsistent with ours, we may not be able to act exclusively in our interests.

Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make unanticipated expenditures that adversely affect our financial condition.   Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. We believe our properties substantially comply with present requirements of the ADA. However, if found non-compliant we would have to incur additional costs to bring the property into compliance.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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ITEM 2. PROPERTIES

Commercial Rental Properties

We owned or held an ownership interest in the following commercial office properties at December 31, 2006:

Consolidated Properties (1)				Location		Date of Acquisition/ Opening				Number of Buildings				Square Feet				Occupancy at 12/31/06				B&R Ownership				Loan Balance at 12/31/06 (7)					Purchase Price/ Development Cost (2)
														(in 000’s)												(in 000’s)					(in 000’s)
Philadelphia, Pennsylvania metropolitan area:
Fort Washington Executive Center				Ft. Washington, PA			2004				3				393				100.0%				97.5%	(3)			$	47,249				$	52,664
Mearns Park				Warminster, PA			2006				1				300				98.7%				97.0%	(4)			16,500					19,000
Valley Square				Plymouth Meeting, PA			2006				5				294				87.3%				97.0%	(4)			37,500					42,500
Blue Bell Plaza				Plymouth Meeting, PA			2006				2				155				100.0%				100.0%	(4)			29,800					32,000
West Germantown Pike				Plymouth Meeting, PA			2004				2				115				100.0%				98.0%	(3)			15,626					20,500
One Northbrook				Trevose, PA			2004				1				95				78.9%				100.0%	(4)			14,770					16,900
510 Township Road				Plymouth Meeting, PA			2006				1				87				59.2%				100.0%	(4)			10,760					13,500
Cross Keys				Doylestown, PA			2005				1				82				90.9%				100.0%	(4)			14,500					17,792
102 Pickering Way				Exton, PA			2005				1				80				97.9%				100.0%	(4)			9,940					15,275
900 Northbrook				Trevose, PA			2003				1				66				94.0%				90.0%	(3)			10,792					12,050
Houston, Texas metropolitan area:
Commerce Park North				Houston, TX			2006				2				164				91.2%				100.0%	(4)			9,400					11,750
10333 Harwin Drive				Houston, TX			2006				1				148				55.0%				100.0%	(4)			10,532					12,585
9950 Westpark				Houston, TX			2006				1				111				70.6%				100.0%	(4)			6,342					7,818
17043-49 El Camino				Houston, TX			2006				4				82				81.9%				100.0%	(4)			5,024					6,052
1120 NASA Road				Houston, TX			2006				1				80				83.6%				100.0%	(4)			5,208					6,642
8700 Commerce Drive				Houston, TX			2006				1				77				76.8%				100.0%	(4)			3,809					4,979
1717 Portway Plaza				Houston, TX			2006				1				67				78.7%				100.0%	(4)			2,711					4,858
1110 NASA Road				Houston, TX			2006				1				60				90.0%				100.0%	(4)			3,408					4,978
950 Threadneedle				Houston, TX			2006				1				59				100.0%				100.0%	(4)			—					5,250
1100 NASA Road				Houston, TX			2006				1				57				90.1%				100.0%	(4)			2,830					4,502
Washington, DC metropolitan area:
Versar Center				Springfield, VA			2002				2				217				88.1%				100.0%				17,626					20,000
Sudley North (Buildings A, B & C)				Manassas, VA			1987				3				116				89.8%				100.0%				10,161					9,848
Wynwood				Chantilly, VA			2005				2				88				100.0%				100.0%				11,800					13,000
Sudley North (Building D)				Manassas, VA			1987				1				69				100.0%				50.0%				6,114					4,729
Fort Hill				Centreville, VA			2000				1				66				100.0%				80.0%				5,428					7,050
Bank Building				Manassas, VA			1991				1				3				100.0%				100.0%				947					876
Wilmington, Delaware metropolitan area:
919 Market Street				Wilmington, DE			2005				1				223				92.1%				100.0%	(4)			35,600					40,525
1105 Market Street (5)				Wilmington, DE			2005				1				173				58.4%				100.0%	(4)			19,000					20,700
Total consolidated properties											44				3,527				86.5%								$	363,377				$	428,323
Unconsolidated Properties (1)
Devon Square				Devon, PA			2002				2				140				38.1%				5.5%				$	16,557				$	17,109
Madison Building (6)				McLean, VA			2002				1				82				100.0%				24.9%				13,869					22,000
Total unconsolidated properties											3				222												$	30,426				$	39,109
Total consolidated and unconsolidated properties											47				3,749												$	393,803				$	467,432

 

NOTES:

(1)             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 GAAP.

(2)             Includes intangible in-place lease assets and liabilities for purchased properties.

(3)             Represents our share of the Class A voting membership interest in the entity. An unrelated third party owns a Class B membership interest in the joint venture that entitles this party to 15% of cash available from operations after the Class A members have received a cumulative annual 12%

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return on their investment in the property and 15% of cash available from a refinancing or sale of the property after the Class A members have received a full return of their investment along with a cumulative annual 12% return on their investment.

(4)             We have entered into asset supervision agreements with an unaffiliated third-party for  properties located  in Pennsylvania and an associate for properties located in Texas that entitles these parties to 20% of cash available from operations after we have received a cumulative annual 12% return on our investment in the property, and 20% of cash available from a refinancing or sale of the property after we have received a full return of our investment along with a cumulative annual 12% return on our investment.

(5)             Property was reported as held for sale at December 31, 2006 and was sold in February 2007

(6)             Our interest in this property was sold in February 2007.

(7)             Generally, new mortgage loans obtained for acquired properties have 10-year terms and 30-year amortization schedules.

Residential Apartment Properties

We owned or held an ownership interest in the following residential apartment properties at December 31, 2006:

Consolidated Properties (1)				Location		Date of Acquisition/ Opening				Apt. Units				Occupancy at 12/31/06				B&R Ownership				Loan Balance at 12/31/06					Purchase Price Development/ Cost (2)
																						(in 000’s)					(in 000’s)
The Fountains				Orlando, FL			2003				400				91.8%				100.0%	(3)			$	39,500				$	35,100
Victoria Place				Orlando, FL			2003				364				89.0%				85.0%				32,341					39,500
Huntington at Sundance				Lakeland, FL			2006				292				96.9%				100.0%	(3)			14,454					24,650
Total consolidated properties											1,056				92.2%								$	86,295				$	99,250
Unconsolidated Properties (1)
Arbor Crest				Silver Spring, MD			2004				80				91.3%				33.3%				$	9,000				$	8,455
Total consolidated and unconsolidated properties											1,136												$	95,295				$	107,705

 

NOTES:

(1)             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.

(2)             Includes intangible assets and liabilities for  purchased properties.

(3)             We have entered into an asset supervision agreement with an unaffiliated third-party that entitles that party to 20% of cash available from operations after we have received a cumulative annual 12% return on our investment in the property, and 20% of cash available from a refinancing or sale of the property after we have received a full return of our investment along with a cumulative annual 12% return on our investment.

Hospitality Properties

We owned the following hospitality properties at December 31, 2006 which are consolidated into our consolidated financial statements:

		Location		Rooms				Date of Acquisition/ Opening				Average Room Rate for the Year Ended 12/31/06					REVPAR for the Year Ended 12/31/06					Occupancy for the Year Ended 12/31/06				B&R Ownership %				Loan Balance at 12/31/06					Purchase Price/ Development Cost
																														(in 000’s)					(in 000’s)
Inn at the Colonnade (1)		Baltimore, MD			125				1993				$	138.17				$	95.50				69.1%				100.0%				$	9,458				$	7,368
Holiday Inn Express		Camp Springs, MD			151				1987				$	102.75				$	60.14				58.5%				100.0%				3,500					3,170
Total					276																										$	12,958				$	10,538

(1)             Property was reported as held for sale at December 31, 2006 and was sold in February 2007.

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Commercial, Residential and Land Development

We owned or had an ownership interest in the following development projects at December 31, 2006:

Project Name		Location		Date of Acquisition				Development Type		Size (1)		Number sold (2)		B&R Ownership %				Loan Balance at 12/31/06
																		(in 000s)
Consolidated Properties (3)
Commercial & Residential Condominiums
Laguna Vista		Ocean City, MD			2003			Residential Condominiums		41 units		25			100.0%				$	—
400 S Philadelphia Ave.		Ocean City, MD			2004			Residential Condominiums		20 units		—			51.0%				6,400
Sudley South (Buildings I & III)		Manassas, VA			1991			Commercial Office Condominiums		108,000 sq. ft.		45,000 sq. ft.			100.0%				2,855
Developed and Undeveloped Land
Crisfield		Crisfield, MD			2005			Residential Lots		232 lots		16			51.0%				11,700
Red Mill Pond		Lewes, DE			2005			Residential Lots		541 lots		—			51.0%				32,603
Seaside		Ocean City, MD			2004			Residential Lots		139 lots		58			51.0%				12,813
Rental Properties Development
Waterfront		Washington, DC			1964			Commercial Office, Residential and Retail		2,166,000 sq ft (4)		—(5)			24.8%				—
1150 Northbrook		Trevose, PA			2003			Commercial Office Building		108,000 sq. ft.		—(5)			100.0%				$	4,103
Unconsolidated Properties (3)
Guilford Properties		Baltimore, MD			2006			(6)		(6)		—			51.0%				$	6,345
Holliday Development		Baltimore, MD			2006			(6)		(6)		—			51.0%				1,785
Symphony House		Philadelphia, PA			2005			Residential Condominiums		163 units (7)		—			22.3%				63,286
Venice Lofts		Philadelphia, PA			2005			Residential Condominiums		128 units		2			22.3%				26,639

 

NOTES:

(1)             Represents the actual or planned size of the project.

(2)             Represents number of sales that had closed as of December 31, 2006.

(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 anticipated size of the Waterfront Complex. See below for description of the Waterfront Complex

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

(6)             The type of development and size of the project has yet to be determined.

(7)             Project also includes a theatre containing 35,000 square feet of space, a parking garage and retail space.

Waterfront Complex

Beginning in 1964, we developed a shopping-office center (“Waterfront Complex”) in Washington, D.C., containing approximately 1,144,000 square feet of office, retail and storage space. These improvements were constructed on ground leased from The District of Columbia Redevelopment Land Agency (“RLA”) for a term expiring in 2058 with an option to extend for an additional 20 years.

We assigned our interests in the Waterfront Complex to a joint venture entity, B&R Waterfront Properties, LLC (“BRW”). We are the managing member and hold a 54% interest in BRW, which is consolidated into our consolidated financial statements.

Prior to 2002, the United States General Services Administration (“GSA”) leased approximately 955,000 square feet of space in the Waterfront Complex under a thirty year lease agreement. In September 2002 the GSA lease expired and was not subsequently renewed.

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In October 2002, BRW formed a joint venture, called Waterfront Associates LLC (“WALLC”), with K/FCE Investment LLC (“K/FCE”), a joint venture between The Kaempfer Company, Inc. and Forest City Enterprises, Inc., to redevelop and reposition the Waterfront Complex. BRW contributed the leasehold improvements relating to the Waterfront Complex to WALLC. Affiliates of K/FCE are marketing, leasing, redeveloping, and managing the complex. Based on the terms of the agreement K/FCE committed to contribute the first $25,000,000 of redevelopment funds and has the right, subject to certain conditions, to increase its ownership in the joint venture up to 50% by the making of capital contributions or by causing the joint venture to make capital distributions. K/FCE, as the managing member of WALLC, 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.

Between 2002 and December 31, 2006 WALLC expended approximately $18,000,000 in planning and development costs as it sought to obtain the necessary Planned Unit Development (“PUD”) approvals and find a large tenant for the project. In 2006 WALLC entered into several transactions that will have a major impact on the repositioning and redevelopment of the Waterfront Complex.

In November 2006, WALLC entered into a Land Disposition and Development Agreement (“LDDA”) with RLA Revitalization Corporation (“RLARC”), a subsidiary of the RLA. Based on the LDDA, the existing ground lease will be extinguished and a fee simple ownership interest for most of the site will be conveyed to WALLC. In return, RLARC will retain fee simple ownership in a portion of the site that is sufficient to develop a 400,000 square foot mixed-use residential building. Based on the agreement, which is subject to several contingencies including obtaining the necessary PUD approvals, WALLC has committed to develop 2,166,000 square feet of commercial office, retail and residential space at the Waterfront Complex.

In November 2006, WALLC entered into two lease agreements with agencies of the District of Columbia for the lease of a total of 500,000 square feet of office space in two new commercial office buildings to be constructed by WALLC at the Waterfront Complex. The leases, which are subject to several approval and development contingencies, have 15 year terms and include rental payments of $28.40 per square foot on a triple-net basis. Development of the office buildings is anticipated to commence in 2007.

In March 2007, in accordance with an amended and restated operating agreement of WALLC entered into the same month, K/FCE exercised its right  to increase its ownership interest in the joint venture to 50% by making a $25,000,000 contribution to WALLC (the “equalization contribution”) with such amount distributed to BRW. The equalization contribution is in addition to $23,000,000 that K/FCE has either contributed or has committed to contribute to WALLC.

Major Tenants

There are no tenants or recurring customers whose revenues are 10% or more of our total operating revenues from continuing operations. The following is a table of our three largest tenants:

Tenant Name		Property Name Location		Lease Maturity Date				Base Rental Income for the 12 months ended December 31, 2006					Percent of commercial Rental Revenue for the twelve months ended December 31, 2006				Percent of Total Operating Revenue for the twelve months ended December 31, 2006
Hartford Fire Insurance Company		Ft Washington Executive Ctr., Ft Washington, PA			2007				$	4,756,000				9.0	%			4.6	%
Merck		Blue Bell Plaza, Plymouth Meeting, PA			2008				2,951,000					5.6				2.9
Platinum Technology, Inc.		W Germantown Pike, Plymouth Meeting, PA			2009				2,260,000					4.3				2.2

 

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ITEM 3. LEGAL PROCEEDINGS

We are subject to various legal proceedings and claims that arise in the ordinary course of our business. Management believes that the final outcome of such matters will not have a material adverse effect on our financial position, results of operations or liquidity.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to the vote of the security holders during the fourth quarter of 2006.

Executive Officers of the Registrant

Executive Officers of Registrant (included pursuant to General Instruction G to Form 10-K and instruction 3 to Item 401(b) of Regulation S-K).

The following list is included as an unnumbered Item in Part I of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders to be held on June 13, 2007.

Name				Age		Positions & Offices		Date Elected to Office
Charles S. Bresler				79		Chairman & Director		June 1970
Sidney M. Bresler				52		Chief Executive Officer, President, Director and Assistant Secretary		June 2002 August 2002 February 2003
Jean S. Cafardi				60		Corporate Secretary		November 2000
Darryl M. Edelstein				39		Executive Vice President—Finance, Chief Financial Officer and Treasurer		November 2006 August 2003 May 2004

 

In accordance with Article V of our By-Laws, each officer was elected to serve until his successor is chosen and shall have qualified or until his earlier resignation or removal.

Sidney M. Bresler is the son of  Charles S. Bresler.

Each officer has held the above positions as his principal occupation for more than the past five years with the exception of Sidney M. Bresler and Darryl M. Edelstein.

Prior to June 2002 and during his seventeen years of employment with the Company, Sidney M. Bresler has served in various capacities.

Darryl M. Edelstein, who is a CPA,  joined us in August 2003, as our Chief Financial Officer. He was our Chief Operating Officer from March 2005 to November 2006. Between October 2005 and November 2006 he relinquished the position of Chief Financial Officer. In November 2006 he became our Executive Vice President-Finance and resumed the position of Chief Financial Officer and the position of  Chief Operating Officer was eliminated.  During the previous five years he worked at the Company and in various finance capacities for Crestline Capital Corporation. During the eight years prior to that he worked in various finance and accounting capacities at Host Marriott Corporation, Kraft Foods Inc. and Ernst & Young, LLP.

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