Saul B F Real Estate Investment Trust 10-Q 2006 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2005

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission File Number 1-7184

B. F. SAUL REAL ESTATE INVESTMENT TRUST

(Exact name of registrant as specified in its charter)

Maryland	52-6053341
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

7501 Wisconsin Avenue

Bethesda, Maryland 20814

(Address of principal executive offices) (Zip Code)

(301) 986-6000

(Registrant’s telephone number, including area code)

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  ¨

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. (Check one):

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

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

The number of Common Shares of Beneficial Interest, $1 Par Value, outstanding as of February 10, 2006, was 4,807,510.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited):
	(a)	Consolidated Balance Sheets at December 31, 2005 and September 30, 2005	3
	(b)	Consolidated Statements of Operations for the three month period ended December 31, 2005 and 2004	4
	(c)	Consolidated Statements of Comprehensive Income and Changes in Shareholders’ Equity for the three month period ended December 31, 2005 and 2004	6
	(d)	Consolidated Statements of Cash Flows for the three month period ended December 31, 2005 and 2004	7
	(e)	Notes to Consolidated Financial Statements	9
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations:
	(a)	Financial Condition	17
		Real Estate	17
		Banking	17
	(b)	Liquidity and Capital Resources	24
		Real Estate	24
		Banking	26
	(c)	Results of Operations
		Three months ended December 31, 2005 compared to three months ended December 31, 2004	31
Item 3.Quantitative and Qualitative Disclosures About Market Risk			36
Item 4.Controls and Procedures			36
PART II. OTHER INFORMATION
Item 6.Exhibits			37

2

Item 1. Financial Statements

Consolidated Balance Sheets

B.F. SAUL REAL ESTATE INVESTMENT TRUST

(In thousands)	December 31, 2005			September 30, 2005
	(Unaudited)
ASSETS
Real Estate
Income-producing properties
Hotel	$	262,565		$	246,144
Office and industrial		195,541			194,643
Other		2,253			2,253
		460,359			443,040
Accumulated depreciation		(186,780	)		(182,255	)
		273,579			260,785
Land parcels		46,183			48,029
Construction in progress		7,180			—
Real estate held for sale		3,845			10,043
Investment in Saul Holdings and Saul Centers		78,997			75,323
Cash and cash equivalents		13,096			13,920
Note receivable - related party		15,400			13,100
Other assets		43,424			44,630
Total real estate assets		481,704			465,830
Banking
Cash and other deposits		591,143			507,499
Securities purchased under agreements to resell		50,000			—
Loans held for securitization and/or sale		1,554,083			1,718,132
Investment securities (market value $198,544 and $198,769, respectively)		200,793			200,902
Mortgage-backed securities (market value $819,104 and $849,764, respectively)		832,550			859,808
Loans receivable (net of allowance for losses of $28,640 for both periods)		9,627,930			9,303,800
Federal Home Loan Bank stock		121,946			136,093
Real estate held for sale		19,580			20,265
Property and equipment, net		545,235			534,371
Automobiles subject to lease, net		148,307			185,036
Goodwill and other intangible assets, net		39,635			30,923
Interest-only strips receivable		354,034			348,227
Servicing assets, net		165,332			164,592
Other assets		228,414			235,313
Total banking assets		14,478,982			14,244,961
TOTAL ASSETS	$	14,960,686		$	14,710,791
LIABILITIES
Real Estate
Mortgage notes payable	$	283,446		$	278,411
Mortgage note payable - real estate held for sale		5,186			15,917
Notes payable - secured		250,000			250,000
Notes payable - unsecured		57,135			57,760
Secured revolving credit facility		9,000			—
Accrued dividends payable - preferred shares of beneficial interest		1,354			—
Other liabilities and accrued expenses		27,191			22,180
Deferred tax liability, net		36,246			35,951
Total real estate liabilities		669,558			660,219
Banking
Deposit accounts		10,255,677			9,781,768
Borrowings		580,166			498,914
Federal Home Loan Bank advances		2,154,361			2,468,740
Other liabilities		374,229			399,862
Capital notes - subordinated		175,000			175,000
Total banking liabilities		13,539,433			13,324,284
Commitments and contingencies
Minority interest held by affiliates		128,706			124,932
Minority interest — other		296,013			296,013
TOTAL LIABILITIES		14,633,710			14,405,448
SHAREHOLDERS’ EQUITY
Preferred shares of beneficial interest, $10.50 cumulative, $1 par value, 90 million shares authorized, 516,000 shares issued and outstanding, liquidation value $51.6 million		516			516
Common shares of beneficial interest, $1 par value, 10 million shares authorized, 6,641,598 shares issued		6,642			6,642
Paid-in surplus		92,943			92,943
Retained earnings		270,716			249,083
		370,817			349,184
Less cost of 1,834,088 common shares of beneficial interest in treasury		(43,841	)		(43,841	)
TOTAL SHAREHOLDERS’ EQUITY		326,976			305,343
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	14,960,686		$	14,710,791

The Notes to Consolidated Financial Statements are an integral part of these statements.

3

Consolidated Statements of Operations

B.F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)

	For the Three Months Ended December 31,
(In thousands, except per share amounts)	2005			2004
REAL ESTATE
Income
Hotels	$	25,175		$	21,813
Office and industrial (including $1,311 and $1,266 of rental income from banking segment, respectively)		10,107			9,559
Other		376			323
Total income		35,658			31,695
Expenses
Direct operating expenses:
Hotels		15,684			14,004
Office and industrial properties		3,119			2,883
Land parcels and other		312			247
Interest and amortization of debt expense		12,248			11,699
Depreciation		4,859			4,661
Advisory, management and leasing fees - related parties		3,464			3,210
General and administrative		923			553
Total expenses		40,609			37,257
Equity in earnings (losses) of unconsolidated entities:
Saul Holdings and Saul Centers		2,617			1,976
Other		(166	)		(227	)
REAL ESTATE OPERATING LOSS	$	(2,500	)	$	(3,813	)
BANKING
Interest income
Loans	$	155,956		$	118,276
Mortgage-backed securities		8,427			4,575
Other		4,590			3,156
Total interest income		168,973			126,007
Interest expense
Deposit accounts		35,740			18,372
Borrowings		33,481			23,845
Total interest expense		69,221			42,217
Net interest income		99,752			83,790
Provision (credit) for loan losses		(557	)		(383	)
Net interest income after provision for loan losses		100,309			84,173
Other income
Deposit servicing fees		35,519			34,091
Servicing, securitization and mortgage banking income		52,095			65,028
Automobile rental income, net		12,526			25,249
Other		12,841			9,275
Total other income		112,981			133,643

Continued on following page.

4

Consolidated Statements of Operations (Continued)

B.F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)

	For the Three Months Ended December 31,
(In thousands, except per share amounts)	2005			2004
BANKING (Continued)
Operating expenses
Salaries and employee benefits	$	71,888		$	63,995
Servicing assets amortization and other loan expenses		22,178			15,490
Property and equipment (including $1,311 and $1,266 of rental expense paid to real estate segment, respectively)		13,258			10,715
Marketing		5,677			3,285
Data processing		9,997			8,268
Depreciation and amortization		19,895			30,098
Other		14,813			16,150
Total operating expenses		157,706			148,001
BANKING OPERATING INCOME	$	55,584		$	69,815
TOTAL COMPANY
Income from continuing operations before income taxes and minority interest	$	53,084		$	66,002
Income tax provision		18,596			23,672
Income from continuing operations before minority interest		34,488			42,330
Minority interest held by affiliates		(5,774	)		(7,516	)
Minority interest — other		(7,272	)		(7,255	)
INCOME FROM CONTINUING OPERATIONS		21,442			27,559
Discontinued real estate operations:
Income (loss) from operations of discontinued real estate assets (including gain on disposal of $1,256 in 2005)		1,323			(2,256	)
Income tax provision (benefit)		463			(787	)
INCOME (LOSS) ON DISCONTINUED REAL ESTATE OPERATIONS		860			(1,469	)
TOTAL COMPANY NET INCOME	$	22,302		$	26,090
Dividends: Real Estate Trust’s preferred shares of beneficial interest		(1,354	)		(1,354	)
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	20,948		$	24,736
NET INCOME (LOSS) PER COMMON SHARE
Income from continuing operations	$	4.18		$	5.46
Discontinued operations		0.18			(0.31	)
NET INCOME PER COMMON SHARE (BASIC AND DILUTED)	$	4.36		$	5.15

The Notes to Consolidated Financial Statements are an integral part of these statements.

5

Consolidated Statements of Comprehensive Income and Changes in Shareholders’ Equity

B.F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)

	For the Three Months Ended December 31,
(Dollars in thousands)	2005			2004
COMPREHENSIVE INCOME
Net income	$	22,302		$	26,090
Other comprehensive income		—			—
TOTAL COMPREHENSIVE INCOME	$	22,302		$	26,090
CHANGES IN SHAREHOLDERS’ EQUITY
PREFERRED SHARES OF BENEFICIAL INTEREST
Beginning and end of period (516,000 shares)	$	516		$	516
COMMON SHARES OF BENEFICIAL INTEREST
Beginning and end of period (6,641,598 shares)		6,642			6,642
PAID-IN SURPLUS
Beginning and end of period		92,943			92,943
RETAINED EARNINGS
Beginning of period		249,083			185,342
Net income		22,302			26,090
Adjustments - Saul Holdings investment		685			597
Dividends:
Real Estate Trust preferred shares of beneficial interest:
Distributions payable		(1,354	)		(1,354	)
End of period		270,716			210,675
TREASURY SHARES
Beginning and end of period (1,834,088 shares)		(43,841	)		(43,841	)
TOTAL SHAREHOLDERS’ EQUITY	$	326,976		$	266,935

The Notes to Consolidated Financial Statements are an integral part of these statements.

6

Consolidated Statements of Cash Flows

B.F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)

	For the Three Months Ended December 31,
(In thousands)	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss	$	(796	)	$	(3,975	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Gain on sale of property		(1,256	)		—
Depreciation		4,859			4,976
Amortization of debt expense		682			569
Equity in earnings of unconsolidated entities, net of net distributions of $0 and $1,646, respectively		(2,451	)		(103	)
Deferred tax benefit		(75	)		(1,097	)
Decrease in accounts receivable and accrued income		321			645
Increase (decrease) in accounts payable and accrued expenses		2,951			(114	)
Dividends and tax sharing payments		9,638			10,058
Other		(2,278	)		(108	)
		11,595			10,851
Banking
Net income		23,098			30,065
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of premiums, discounts and net deferred loan fees		9,776			8,801
Increase in income taxes payable		17,501			4,893
Depreciation and amortization		19,895			30,098
Provision (credit) for loan losses		(557	)		(383	)
Minority interest held by affiliates		5,774			7,516
Minority interest - other		2,500			2,500
Proceeds from sales of trading securities		68,429			68,486
Purchases and net fundings of loans held for securitization and/or sale		(1,102,290	)		(1,439,766	)
Proceeds from sales of loans held for securitization and/or sale		1,171,932			1,866,633
Increase in interest-only strips receivable		(5,807	)		(53,751	)
Increase in servicing assets		(739	)		(17,012	)
(Increase) decrease in other assets		6,928			(20,190	)
Increase (decrease) in other liabilities		(43,135	)		15,924
Other		(1,887	)		(1,726	)
		171,418			502,088
Net cash provided by operating activities		183,013			512,939
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures and acquisition - properties		(10,191	)		(2,805	)
Development/redevelopment expenditures		(4,992	)		—
Property sales, net		7,620			2,090
Net advances, note receivable - related party		(2,300	)		—
Equity investment in unconsolidated entities		—			(3,790	)
Other investments		(158	)		(311	)
		(10,021	)		(4,816	)
Banking
Purchases of investment securities		—			(129,279	)
Proceeds from redemption of Federal Home Loan Bank Stock		56,385			84,177
Purchases of Federal Home Loan Bank stock		(42,238	)		(81,414	)
Net principal collected on loans		1,472,922			1,222,398
Net fundings and purchases of loans receivable		(1,776,686	)		(1,516,616	)
Principal collected on mortgage-backed securities		49,933			49,136
Purchases of mortgage-backed securities		(23,223	)		(184,190	)
Repayments of automobiles subject to lease		27,935			69,108
Net purchases of property and equipment		(22,315	)		(22,830	)
Net proceeds from sales of property and equipment		212			—
Net proceeds from sales of real estate		913			229
Disbursements for real estate held for investment or sale		(1,092	)		(973	)
Purchase of investment management company		(8,803	)		—
		(266,057	)		(510,254	)
Net cash used in investing activities		(276,078	)		(515,070	)

Continued on following page.

7

Consolidated Statements of Cash Flows (Continued)

B.F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)

	For the Three Months Ended December 31,
(In thousands)	2005			2004
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Net proceeds from secured revolving credit facility	$	9,000		$	—
Proceeds from mortgage financings		85,500			—
Principal curtailments and repayments of mortgages		(96,433	)		(7,284	)
Proceeds from sales of unsecured notes		935			1,435
Repayments of unsecured notes		(1,560	)		(1,064	)
Refunds (costs) of obtaining financings		160			(143	)
		(2,398	)		(7,056	)
Banking
Proceeds from customer deposits and sales of certificates of deposit		20,213,277			16,558,635
Customer withdrawals of deposits and payments for maturing certificates of deposit		(19,739,368	)		(16,262,058	)
Net increase in securities sold under repurchase agreements		73,713			16,021
Advances from the Federal Home Loan Bank		5,750,176			6,445,000
Repayments of advances from the Federal Home Loan Bank		(6,064,555	)		(6,702,293	)
Net increase (decrease) in other borrowings		7,540			(4,190	)
Cash dividends paid on preferred stock		(2,500	)		(2,500	)
Cash dividends paid on common stock		(10,000	)		(12,000	)
		228,283			36,615
Net cash provided by financing activities		225,885			29,559
Net increase in cash and cash equivalents		132,820			27,428
Cash and cash equivalents at beginning of period		521,419			574,390
Cash and cash equivalents at end of period	$	654,239		$	601,818
Components of cash and cash equivalents at end of period as presented in the consolidated balance sheets:
Real Estate
Cash and cash equivalents	$	13,096		$	30,821
Banking
Cash and other deposits		591,143			520,997
Securities purchased under agreements to resell		50,000			50,000
Cash and cash equivalents at end of period	$	654,239		$	601,818
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	69,358		$	55,320
Income taxes paid, net		1,969			20,211
Shares of Saul Centers, Inc. common stock		1,876			5,371
Saul Holdings Limited Partnership Units		1,776			—
Cash received during the period from:
Dividends on shares of Saul Centers, Inc. common stock		1,876			1,595
Distributions from Saul Holdings Limited Partnership		1,776			1,632
Supplemental disclosures of noncash activities:
Rollovers of notes payable - unsecured		823			1,665
Loans held for sale and/or securitization exchanged for trading securities		66,616			—
Loans receivable transferred from real estate acquired in settlement of loans		1,582			—
Assumption of debt not included in cash paid for acquisition of property		5,810			—

The Notes to Consolidated Financial Statements are an integral part of these statements.

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. GENERAL:

The Trust has prepared its financial statements and other disclosures on a fully consolidated basis. The term “Trust” used in the text and the financial statements included herein refers to the consolidated entity, which includes B.F. Saul Real Estate Investment Trust and its subsidiaries, including Chevy Chase Bank, F.S.B. and its subsidiaries (“Chevy Chase” or the “Bank”). “Real Estate Trust” refers to B.F. Saul Real Estate Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy Chase’s subsidiaries. The operations conducted by the Real Estate Trust are designated as “Real Estate,” while the business conducted by the Bank and its subsidiaries is identified by the term “Banking.” In the opinion of management, the consolidated financial statements reflect all adjustments necessary for a fair presentation of the Trust’s financial position and results of operations. All such adjustments are of a normal recurring nature. These financial statements and the accompanying notes should be read in conjunction with the Trust’s audited consolidated financial statements included in its Form 10-K for the fiscal year ended September 30, 2005. The results of operations for interim periods are not necessarily indicative of results to be expected for the year.

Certain reclassifications of prior periods’ information have been made to conform with the presentation for the three months ended December 31, 2005, including the reclassification of certain income and expense amounts to operations of discontinued real estate assets to assure comparability of all periods presented.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following accounting policies should be read in conjunction with the Trust’s audited consolidated financial statements and the accompanying notes included in its Form 10-K for the fiscal year ended September 30, 2005.

REAL ESTATE INVESTMENT PROPERTIES

The Real Estate Trust purchases real estate investment properties from time to time and allocates the purchase price to various components, such as land, buildings, personal property and intangibles related to in-place leases and customer or franchise relationships in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) 141, “Business Combinations.” The purchase price is allocated based on the relative fair value of each component.

The fair value of an office building is determined as if the building was vacant upon acquisition and subsequently leased at market rates. As such, the determination of fair value considers the present value of all cash flows to be generated from the property including the initial lease up period. The Real Estate Trust determines the fair value of above and below market intangibles associated with in-place leases by assessing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition. In the case of below market leases, the Real Estate Trust considers the remaining contractual lease period and renewal periods, taking into consideration the likelihood of the tenant exercising its renewal options. The fair value of a below market lease component is recorded as deferred income and amortized as additional lease revenue over the remaining contractual lease period and any renewal options included in the valuation analysis. The fair value of above market lease intangibles is recorded as a deferred asset and is amortized as a reduction of lease revenue over the remaining contractual lease term. The Real Estate Trust determines the fair value of at-market in-place leases considering the cost of acquiring similar leases, foregone rents associated with the lease-up period and carrying costs associated with the lease-up period. Intangible assets associated with at-market in-place leases are amortized as additional lease expense over the remaining contractual lease term. To the extent customer relationship intangibles are present in an acquisition, the fair value of the intangibles are amortized over the life of the customer relationship.

The purchase price allocation for the acquisition of a hotel property is determined based on the relative fair vale of the components of the property, which include land, building, personal property, franchise relationships and any in-place leases. The valuation of the personal property is based on management’s evaluation of the value of such property. The personal property is amortized over its remaining estimated useful life. The allocation to land and building are determined based on their relative fair value. To the extent that franchise relationship intangibles are present in an acquisition, the fair value of the intangibles are amortized over the life of the franchise relationship.

Interest, real estate taxes and other carrying costs are capitalized on projects under development and construction. Once construction is substantially completed the assets are placed in service, their operating income, operating expenses, consisting mainly of real estate taxes, payroll, repairs and maintenance, utilities, insurance, franchise, marketing and other property related expenses and depreciation are included in current operations. Property operating expenses are charged to operations as incurred. Interest expense capitalized during the three month period ended December 31, 2005 totaled $51,000. There was no capitalization of interest during the three month period ended December 31, 2004.

9

CONSTRUCTION IN PROGRESS

Construction in progress includes preconstruction costs and development costs of active projects. Preconstruction costs associated with these active projects include legal, zoning and permitting costs and other project carrying costs incurred prior to the commencement of construction. Development costs include direct construction costs and indirect costs incurred subsequent to the start of construction such as architectural, engineering, construction management and carrying costs consisting of interest, real estate taxes and insurance. The Construction in Progress balance as of December 31, 2005 is as follows:

Construction in Progress

(In thousands)

	December 31, 2005
Tysons Park Place	$	2,998
Dulles Springhill Suites		2,873
Circle 75 Development		1,309
Total	$	7,180

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

The Emerging Issues Task Force (“EITF”) issued EITF 04-5, last updated on July 15, 2005, “Investors Accounting for an Investment in a Limited Partnership when the Investor is the General Partner and the Limited Partners have Certain Rights, (“EITF 04-5”) which addresses the General Partner in a limited partnership who is presumed to control the partnership unless the Limited Partners have the ability, through a majority vote, to remove the General Partner without cause or the ability to effectively participate in significant decisions that would be expected to be made in the ordinary course of business. The EITF is effective as of June 29, 2005 for new limited partnerships and existing limited partnerships where the partnership agreement has been modified after that date or no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The Trust has not entered into any new agreements or made any amendments to existing agreements that are covered by EITF 04-5. The Trust is evaluating the potential impact of EITF 04-5 with respect to existing agreements and does not anticipate that the adoption of EITF 04-5, if applicable, will have a material impact on its financial condition or results of operations.

3. CONSOLIDATED FINANCIAL STATEMENTS:

The accompanying financial statements include the accounts of the Real Estate Trust, which is involved in the ownership and development of income-producing properties. The accounts of the Bank have also been consolidated. Accordingly, the accompanying financial statements reflect the assets, liabilities, operating results and cash flows for two business operations: Real Estate and Banking. All significant inter-company transactions, except as disclosed elsewhere in the financial statements, have been eliminated in consolidation. Tax sharing and dividend payments between the Real Estate Trust and the Bank are presented gross in the Consolidated Statements of Cash Flows. For purposes of calculating primary and diluted earnings per share, weighted average common shares outstanding totaled 4,807,510 for both the three month period ended December 31, 2005 and December 31, 2004. The Trust has no common share equivalents. No common share dividends were paid or declared in the three month period ended December 31, 2005. On January 19, 2006, the Trust declared a dividend on its common shares of $0.248 per share, totaling approximately $1.2 million, payable on January 20, 2006, to holders of record on December 30, 2005.

4. TAXES:

The Real Estate Trust voluntarily terminated its qualification as a real estate investment trust under the Internal Revenue Code during fiscal 1978. As a result of the Real Estate Trust’s acquisition of an additional 20% equity interest in the Bank in June 1990, the Bank became a member of the Real Estate Trust’s affiliated group filing consolidated federal income tax returns. The current effect of the Real Estate Trust’s consolidation of the Bank’s operations into its federal income tax return results in the use of the Real Estate Trust’s net operating losses to reduce the federal income taxes the Bank would otherwise owe.

10

5. INVESTMENT IN SAUL CENTERS, INC. AND SAUL HOLDINGS LIMITED PARTNERSHIP – REAL ESTATE TRUST:

During the three-month period ended December 31, 2005, the Real Estate Trust purchased, through dividend reinvestment, approximately 55,000 shares of common stock of Saul Centers, Inc. (“Saul Centers”), and as of December 31, 2005 owned approximately 4,522,000 shares representing 26.8% of such company’s outstanding common stock. As of December 31, 2005, the market value of these shares was approximately $163.2 million. Substantially all these shares have been pledged as collateral with the Real Estate Trust’s credit line banks.

In fiscal 1993, the Real Estate Trust entered into a series of transactions in connection with the initial public offering of Saul Centers. The Real Estate Trust transferred its 22 shopping centers and one of its office properties, together with the $196 million of mortgage debt and deferred interest associated with such properties, to a newly formed partnership, Saul Holdings Limited Partnership (“Saul Holdings Partnership”), in which as of December 31, 2005 the Real Estate Trust owns (directly and through its wholly owned subsidiaries) a 19.3% interest, other entities affiliated with the Real Estate Trust own a 4.6% interest and Saul Centers owns a 76.1% interest. Under the Saul Holdings Partnership agreement, the units are generally convertible on a one-for-one basis into common stock of Saul Centers. However, at the current time, the units held by the Real Estate Trust are not convertible into Saul Centers common stock because of restrictions contained in the Saul Holdings Partnership agreement on the number of shares of common stock of Saul Centers that the Real Estate Trust and its affiliates can beneficially own at any point in time. The Real Estate Trust shares in cash distributions from operations and from capital transactions involving the sale of properties. The partnership agreement of Saul Holdings Partnership provides for quarterly distributions to the partners out of net cash flow. During the three-month period ended December 31, 2005, the Real Estate Trust received total cash distributions of $1.8 million from Saul Holdings Partnership which were all reinvested in new Partnership Units. Substantially all of the Real Estate Trust’s ownership interest in Saul Holdings Partnership has been pledged as collateral with the Real Estate Trust’s credit line banks.

Pursuant to a reimbursement agreement among the partners of Saul Holdings Partnership and its subsidiary limited partnerships (collectively, the “Partnerships”), the Real Estate Trust and its subsidiaries that are partners in the Partnerships agreed to reimburse Saul Centers and the other partners in the event the Partnerships fail to make payments with respect to certain portions of the Partnerships’ debt obligations and Saul Centers or any such other partners personally make payments with respect to such debt obligations. At December 31, 2005, the maximum potential obligations of the Real Estate Trust and its subsidiaries under this agreement totaled approximately $100.0 million. The Real Estate Trust believes that Saul Holdings will be able to make all payments due with respect to its debt obligations.

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5. INVESTMENT IN SAUL CENTERS INC. AND SAUL HOLDINGS LIMITED PARTNERSHIP-REAL ESTATE

TRUST (Continued):

The unaudited condensed Consolidated Balance Sheets as of December 31, 2005 and 2004, and the unaudited Consolidated

Statements of Operations for the three month period ended December 31, 2005 and 2004 of Saul Centers follow:

SAUL CENTERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	December 31,
(In thousands)	2005			2004
Assets
Real estate investments	$	762,640		$	682,808
Accumulated depreciation		(195,376	)		(181,420	)
Other assets		64,069			82,008
Total assets	$	631,333		$	583,396
Liabilities and stockholders’ equity
Mortgage notes payable	$	482,431		$	453,646
Other liabilities		34,432			28,786
Total liabilities		516,863			482,432
Minority interests		2,499			—
Total stockholders’ equity		111,971			100,964
Total liabilities and stockholders’ equity	$	631,333		$	583,396

SAUL CENTERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended December 31,
(In thousands)	2005			2004
Revenue
Base rent	$	25,753		$	23,774
Other revenue		7,080			5,795
Total revenue		32,833			29,569
Expenses
Operating expenses		6,986			5,896
Interest and amortization of deferred debt expense		7,658			7,114
Depreciation and amortization		5,889			5,828
General and administrative		2,572			2,475
Total expenses		23,105			21,313
Net operating income before minority interests		9,728			8,256
Minority interests		(1,847	)		(2,028	)
Net income		7,881			6,228
Preferred dividends		(2,000	)		(2,000	)
Net income available to common shareholders	$	5,881		$	4,228

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6. REAL ESTATE ACQUIRED – REAL ESTATE TRUST:

On November 1, 2005, the Real Estate Trust acquired a 137 room hotel property located in Fairfax County, Virginia for a purchase price of approximately $12.7 million, which included the assumption of a mortgage note of $5.8 million (see Note 9). The Real Estate Trust accounted for the acquisition in accordance with SFAS No. 141, “Business Combinations.” The Real Estate Trust allocates the purchase price to various components, such as land, building, personal property and intangibles related to any in-place leases and customer or franchise relationships, if applicable, as described in Note 2. A total of $317,000 of the total cost was allocated as personal property and included in hotel real estate assets at December 31, 2005. The personal property assets are being amortized over their estimated remaining useful life, a weighted average term of 2.0 years. There were no above or below market lease intangibles or any value assigned to customer or franchise relationships. The results of operations of the acquired hotel are included in the consolidated statements of operations as of the acquisition date.

7. RELATED PARTY TRANSACTIONS – REAL ESTATE TRUST:

Under an existing unsecured note receivable from B.F. Saul Company, which was modified and amended on October 1, 2005, not to exceed $30.0 million, the Real Estate Trust advanced an additional net amount of $2.3 million during the current quarter. At December 31, 2005, the note balance totaled $15.4 million. Interest is computed on the note at 200 basis points over a floating rate index. Interest earned on the note totaled $194,000 and $68,000 for the three month periods ended December 31, 2005 and 2004, respectively. The note is due and payable on September 30, 2015.

8. DISCONTINUED OPERATIONS – REAL ESTATE TRUST:

During fiscal 2005, the Real Estate Trust determined that it would sell two of its hotel properties which no longer met its investment criteria. Therefore, in fiscal 2005, the Real Estate Trust determined that the held for sale criteria in accordance with FASB No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” had been met for both properties. Accordingly, the Real Estate Trust compared the carrying value of these assets to their estimated fair value, less cost to sell, to determine if the assets were impaired. The Real Estate Trust determined that no adjustments to the carrying amounts were required. The sale of one of these properties closed on December 16, 2005. The remaining hotel asset is classified as Real Estate Held for Sale on the Consolidated Balance Sheets. A mortgage note secured by the remaining property is classified as Mortgage notes payable – real estate held for sale on the Consolidated Balance Sheets. Included in Income (loss) from Operations of Discontinued Real Estate Assets on the Consolidated Statements of Operations is the gain on sale of the hotel asset that closed on December 16, 2005 of approximately $1.3 million as well as combined operating income from the two hotel properties of approximately $67,000.

9. EXTINGUISHMENT OF LIABILITIES – REAL ESTATE TRUST:

In connection with the hotel asset acquired on November 1, 2005 (see Note 6) the Real Estate Trust, on December 21, 2005, defeased the loan that was assumed with the acquisition of the hotel property. The Real Estate Trust paid $6.6 million into an escrow fund with which United States government securities were purchased. The defeasance was funded by available cash and line of credit borrowings. The government securities became replacement collateral for the loan securing the hotel, and became the sole source of payment of the $5.8 million loan (the “Fiscal 2006 defeased loan”). As a result of the transaction the Real Estate Trust is no longer the primary obligor with respect to the Fiscal 2006 defeased loan. The escrow fund is maintained by Wells Fargo Bank, National Association, as Securities Intermediary and Custodian. The $5.8 million Fiscal 2006 defeased loan was accounted for as if it were extinguished in December 2005. The Real Estate Trust incurred defeasance charges of approximately $900,000, including a prepayment premium of $829,000.

10. MORTGAGE NOTES PAYABLE – SECURED – REAL ESTATE TRUST:

On December 29, 2005, the Real Estate Trust placed a $9.5 million mortgage note on the hotel property that was acquired on November 1, 2005. The note, which is due on January 1, 2016, bears interest at 5.92%. Monthly principal and interest payments, based on a 25 year amortization schedule, of $60,745 are required with a balloon payment of $7.4 million due at maturity.

On December 2, 2005, the Real Estate Trust refinanced one of six properties that were secured by an approximately $88.0 million portfolio mortgage note which was due on March 31, 2006. The property was refinanced with a new 10 year mortgage note of $76.0 million. The proceeds from this refinancing, along with available cash and line of credit borrowings were used to repay the portfolio loan. As a result the Real Estate Trust unlevered the remaining five properties. The loan, which is due on January 11, 2016, bears interest at 5.3% and requires interest only payments for the initial 5 years. Beginning in year 6, monthly principal and interest payments of $422,000 are required with a balloon payment of $70.3 million due at maturity.

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11. INDUSTRY SEGMENT INFORMATION - REAL ESTATE TRUST

Industry segment information with regard to the Real Estate Trust is presented below. For information regarding the Bank, please refer to the “Banking” sections of the accompanying financial statements

	Three Months Ended December 31,
(In thousands)	2005			2004
INCOME (from continuing operations)
Hotels	$	25,175		$	21,813
Office and industrial properties		10,107			9,559
Other		376			323
	$	35,658		$	31,695
OPERATING PROFIT (LOSS) (from continuing operations) (1)
Hotels	$	6,677		$	4,946
Office and industrial properties		4,948			4,883
Other		59			71
		11,684			9,900
Equity earnings of unconsolidated entities, net		2,451			1,749
Interest and amortization of debt expense		(12,248	)		(11,699	)
Advisory, management and leasing fees - related parties		(3,464	)		(3,210	)
General and administrative		(923	)		(553	)
Operating loss from continuing operations	$	(2,500	)	$	(3,813	)
IDENTIFIABLE ASSETS (AT PERIOD END)
Hotels	$	177,966		$	169,522
Office and industrial properties		129,688			124,085
Other		174,050			162,921
	$	481,704		$	456,528
INTEREST AND AMORTIZATION OF DEBT EXPENSE (from continuing operations)
Hotels	$	3,458		$	2,676
Office and industrial properties		2,909			2,946
Other (net of amount capitalized)		5,881			6,077
	$	12,248		$	11,699
DEPRECIATION (from continuing operations)
Hotels	$	2,814		$	2,863
Office and industrial properties		2,040			1,793
Other		5			5
	$	4,859		$	4,661
CAPITAL EXPENDITURES AND PROPERTY ACQUISITIONS (from continuing operations)
Hotels (2)	$	8,488		$	667
Office and industrial properties		1,626			1,812
Other		5,069			160
	$	15,183		$	2,639

(1) Operating profit (loss) includes income less direct operating expenses and depreciation

(2) Assumption of debt totaling $5.8 million is not included in capital expenditures and property acquisitions for the 2005 quarter.

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12. SUBSEQUENT EVENTS – REAL ESTATE TRUST:

On January 19, 2006, the Real Estate Trust deposited cash of approximately $7.6 million into an escrow fund with which United States government securities were purchased to complete a partial defeasance of a mortgage loan made to the Real Estate Trust. The defeased portion of the loan encumbered the hotel property which was held for sale at December 31, 2005. The defeasance was funded by available cash and line of credit borrowings. The government securities became the replacement collateral for the loan securing the hotel, and became the sole source of payment for the $5.8 million loan (the “Defeased loan”). As a result of the transaction, the principal amount owed by the Real Estate Trust was reduced by $5.8 million, with corresponding reductions in the principal and interest payments to be made to maturity. The Real Estate Trust expects to incur defeasance charges of approximately $1.9 million, including a prepayment premium of $1.8 million. The escrow fund is maintained by Wells Fargo Bank, National Association, as Securities Intermediary and Custodian, and the Real Estate Trust is no longer the primary obligor with respect to the Defeased loan.

On January 19, 2006, the sale of a hotel property, which was classified as held for sale at December 31, 2005, was finalized and the Real Estate Trust received proceeds of $5.5 million from the sale. The Real Estate Trust financed an additional $500,000 through the issuance of a note to the purchaser. The note, which bears interest at 9.0%, is due on January 18, 2008. Interest accrues on the note beginning on July 12, 2006 through maturity. All principal and accrued interest are due at maturity. The Real Estate Trust expects to realize a gain of approximately $2.2 million on the sale of the hotel property.

13. LOANS HELD FOR SECURITIZATION AND/OR SALE - THE BANK:

At December 31, 2005, loans held for securitization and/or sale were composed of single-family residential and home equity loans totaling $1,553.5 million and $580,000 respectively. At September 30, 2005, loans held for securitization and/or sale were composed of single-family residential and home equity loans totaling $1,717.8 million and $341,000 respectively.

14. LOANS RECEIVABLE - THE BANK:

Loans receivable is composed of the following:

(In Thousands)	December 31, 2005			September 30, 2005
Single-family residential	$	6,179,886		$	5,843,205
Home equity		1,744,992			1,796,148
Other real estate		427,555			358,937
Commercial		1,032,171			1,035,972
Automobile		118,332			149,253
Other consumer		51,291			53,742
		9,554,227			9,237,257
Deferred loan origination costs, net of unearned discounts		102,343			95,183
Allowance for losses on loans		(28,640	)		(28,640	)
		73,703			66,543
Total	$	9,627,930		$	9,303,800

15. REAL ESTATE HELD FOR SALE - THE BANK:

The Bank’s real estate acquired in settlement of loans or real estate owned (“REO”) is considered to be held for sale and is carried at the lower of cost or fair value (less estimated selling costs). At December 31, 2005 and September 30, 2005, real estate held for sale totaled $19.6 and $20.3 million respectively.

15

16. BUSINESS SEGMENTS -THE BANK:

The Bank has three operating segments: retail banking, commercial banking, and nonbanking services. Retail banking consists of traditional banking services, which include lending, leasing and deposit products offered to retail and small business customers. Commercial banking also consists of traditional banking services, as well as products and services tailored for larger corporate customers. Nonbanking services include asset management and similar services offered by subsidiaries of the Bank. In the following table, commercial banking and nonbanking services have been combined and reported as other.

(In Thousands)	Retail Banking		Other			Total
Three Months Ended December 31, 2005
Operating income	$	194,037	$	19,212		$	213,249
Operating expense		145,710		14,491			160,201
Core earnings		48,327		4,721			53,048
Non-core items		2,609		(73	)		2,536
Operating Income	$	50,936	$	4,648		$	55,584
Average assets	$	13,071,458	$	1,387,140		$	14,458,598
Three Months Ended December 31, 2004
Operating income	$	203,300	$	14,571		$	217,871
Operating expense		137,866		12,247			150,113
Core earnings		65,434		2,324			67,758
Non-core items		1,672		385			2,057
Operating Income	$	67,106	$	2,709		$	69,815
Average assets	$	12,274,702	$	1,260,537		$	13,535,239

The financial information for each segment is reported on the basis used internally by the Bank’s management to evaluate performance. Core earnings exclude certain items such as income and expenses related to adjustments to loan loss reserves in excess of net charge-offs and certain other nonrecurring items. Items excluded from core earnings are shown as non-core items. Measurement of the performance of these segments is based on the management structure of the Bank and is not necessarily comparable with financial information of other entities. The information presented is not necessarily indicative of the segment’s results of operations if each of the segments were independent entities.

17. LITIGATION - THE BANK:

In the normal course of business, the Bank is involved in litigation, which may include litigation arising out of its lending activities, the enforcement or defense of the priority of its security interests, the continued development and marketing of certain of its real estate properties and certain employment claims. Although the amounts claimed in some of the litigation in which the Bank is a defendant may be material, the Bank denies liability and, in the opinion of management, litigation currently pending will not have a material impact on the financial condition or future operations of the Bank.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Trust has prepared its financial statements and other disclosures on a fully consolidated basis. The term “Trust” used in the text and the financial statements included herein refers to the combined entity, which includes B.F. Saul Real Estate Investment and its subsidiaries, including Chevy Chase and Chevy Chase’s subsidiaries. “Real Estate Trust” refers to B.F. Saul Real Estate Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy Chase’s subsidiaries. The operations conducted by the Real Estate Trust are designated as “Real Estate,” while the business conducted by the Bank and its subsidiaries is identified by the term “Banking.”

The principal business activities of the Real Estate Trust are the ownership of 80% of the outstanding common stock of the Bank, whose assets accounted for 97% of the Trust’s consolidated assets at December 31, 2005, and the ownership and development of income-producing properties. By virtue of its ownership of a majority interest in the Bank, the Trust is a savings and loan holding company and subject to regulation, examination and supervision by the OTS.

The following discussion and analysis provides information that management believes to be necessary for an understanding of the Trust’s financial condition and results of operations, and should be read in conjunction with the accompanying financial statements, notes thereto and other information contained in this document.

FINANCIAL CONDITION

REAL ESTATE

The Real Estate Trust’s investment portfolio at December 31, 2005, consisted primarily of hotels, office projects, and land parcels. At December 31, 2005, the Real Estate Trust’s hotel portfolio included 17 properties containing 3,240 available rooms. The office property portfolio consisted of 14 properties with a total gross leasable area of 1,990,000 square feet.

The hotel portfolio, excluding the property purchased on November 1, 2005, the property sold on December 16, 2005 and the property held for sale as of December 31, 2005, (“Same hotel properties”) experienced an average occupancy of 64.1% and an average room rate of $118.55 during the three-month period ended December 31, 2005, compared to an average occupancy of 65.5% and an average room rate of $102.24 during the same period in the prior year. REVPAR (revenue per available room) for the hotels was $76.03 for the three-month period ended December 31, 2005, a 13.5% increase over REVPAR for the three-month period ended December 31, 2004 of $66.96.

Office space in the Real Estate Trust’s office property portfolio was 90.6% leased at December 31, 2005, compared to a leasing rate of 90.5% at December 31, 2004. At December 31, 2005, of the total gross leasable area of 1,990,000 square feet, 146,130 square feet (7.3%) and 349,982 square feet (17.6%) were subject to leases expiring in the remainder of fiscal 2006 and fiscal 2007, respectively.

BANKING

General. The Bank’s assets increased by $234.0 million during the current quarter to $14.5 billion at December 31, 2005. Total loans increased $160.1 million to $11.2 billion at December 31, 2005. The Bank recorded operating income of $55.6 million during the quarter ended December 31, 2005, compared to operating income of $69.8 million during the quarter ended December 31, 2004. The decrease in operating income reflects a decrease in other (non-interest) income as well as increased interest and operating expenses, which were only partially offset by an increase in net interest income. Prepayment speeds continued at a high level during the current quarter as a result of the flattened “yield curve” which management believes led to more borrowers with adjustable rate mortgage loans refinancing those loans with loans with interest rates that are fixed for longer periods. Higher than projected prepayments, together with a slight adjustment to the projected timing of future prepayments, resulted in a $14.6 million reduction in the fair value of the Bank’s interest-only assets during the current quarter. See “Loan Originations, Securitizations and Sales – Retained Interests and Servicing Assets.”

At December 31, 2005, the Bank’s tangible, core, tier 1 risk-based and total risk-based regulatory capital ratios were 6.00%, 6.00%, 9.00% and 11.10%, respectively. The Bank’s regulatory capital ratios exceeded regulatory requirements as well as the standards established for “well-capitalized” institutions under the prompt corrective action regulations issued pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”). See “Capital.”

During the quarter ended December 31, 2005, the Bank declared and paid out of retained earnings a cash dividend on its Common Stock in the amount of $1,000 per share. The Bank also declared and paid a cash dividend on its Preferred Stock in the amount of $0.50 per share.

Asset Quality.The following table sets forth information concerning the Bank’s non-performing assets. Amounts shown are after charge-offs and, in the case of REO, after all valuation allowances.

17

Non-Performing Assets

(Dollars in thousands)

	December 31, 2005			September 30, 2005
Non-performing assets:
Non-accrual loans:
Residential mortgage	$	23,604		$	20,874
Home equity		1,633			1,443
Other real estate		—			—
Commercial		49			30
Other consumer		1,403			1,359
Total non-accrual loans (1)		26,689			23,706
Real estate acquired in settlement of loans		19,580			20,265
Total non-performing assets	$	46,269		$	43,971
Allowance for losses on loans	$	28,640		$	28,640
Allowance for losses on real estate held for investment		—			—
Total allowances for losses	$	28,640		$	28,640
Ratios:
Non-performing assets to total assets		0.32	%		0.31	%
Allowance for losses on loans to non-accrual loans (1)		107.31	%		120.81	%
Allowance for losses on loans to total loans receivable (2)		0.26	%		0.26	%

(1) Before deduction of allowances for losses.

(2) Includes loans receivable and loans held for securitization and/or sale, before deduction of allowance for losses.

Non-performing assets include non-accrual loans and REO, acquired either through foreclosure or deed-in-lieu of foreclosure, or pursuant to in-substance foreclosure. Non-accrual loans consist of loans contractually past due 90 days or more or with respect to which other factors indicate that full payment of principal and interest is unlikely.

Non-performing assets totaled $46.3 million at December 31, 2005, compared to $44.0 million at September 30, 2005. Non-accrual loans increased by $3.0 million ($2.7 million of which consisted of residential mortgage loans) which was partially offset by a decrease in REO. There were 32 non-accrual residential mortgage loans at December 31, 2005, compared to 28 loans at September 30, 2005. The Bank maintained valuation allowances of $28.6 million on its loan portfolio at both December 31, 2005 and September 30, 2005.

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Delinquent Loans. At December 31, 2005, delinquent loans increased slightly to $29.3 million, or 0.3% of loans from $29.2 million, or 0.3% of loans at September 30, 2005. The following table sets forth information regarding the Bank’s delinquent loans at December 31, 2005.

	Principal Balance (Dollars in thousands) Loans Delinquent for
	30-59 days			60-89 days			Total
Residential mortgage	$	8,608		$	1,035		$	9,643
Home equity		7,577			1,307			8,884
Other real estate		2,502			—			2,502
Other		6,003			2,236			8,239
Total	$	24,690		$	4,578		$	29,268
Total as a Percentage of Loans(1)		0.2	%		0.1	%		0.3	%

⁽¹⁾ Includes loans held for sale and/or securitization, before valuation allowances, unearned premiums and discounts and deferred loan origination fees (costs).

Residential mortgage loans delinquent 30-89 days decreased to $9.6 million at December 31, 2005 from $10.5 million at September 30, 2005. Home equity loans delinquent 30-89 days increased to $8.9 million at December 31, 2005 from $5.7 million at September 30, 2005.

Other delinquent loans decreased to $8.2 million at December 31, 2005, from $10.6 million at September 30, 2005, primarily because the Bank’s portfolio of indirect automobile loans continues to decline as a result of the Bank’s prior decision to discontinue origination of these loans.

Potential Problem Assets. Although not considered non-performing assets, primarily because the loans are not 90 or more days past due and the borrowers have not abandoned control of the properties, potential problem assets are assets which are experiencing problems sufficient to cause management to have serious doubts as to the ability of the borrowers to comply with present repayment terms. At both December 31, 2005 and September 30, 2005, potential problem assets totaled $0.4 million.

Troubled Debt Restructurings. At December 31, 2005 and September 30, 2005, the Bank had no troubled debt restructurings.

Allowances for Losses. The following tables show loss experience by asset type and the components of the allowance for losses on loans.

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Analysis of Allowance for and Charge-offs of Loans

(Dollars in thousands)

	Three Months Ended December 31,
	2005			2004
Balance at beginning of period	$	28,640		$	37,750
Provision (credit) for loan losses		(557	)		(383	)
Charge-offs:
Residential mortgage		(102	)		(67	)
Home equity		(94	)		(119	)
Other real estate		(1	)		—
Subprime automobile		(505	)		(1,716	)
Other		(1,598	)		(2,119	)
Total charge-offs		(2,300	)		(4,021	)
Recoveries:
Home equity		56			32
Other real estate		25			—
Subprime automobile		1,218			2,838
Other		1,558			1,534
Total recoveries		2,857			4,404
Net recoveries		557			383
Balance at end of period	$	28,640		$	37,750
Provision for loan losses to average loans(1) (2)		(0.02	)%		(0.01	)%
Net loan recoveries to average loans(1) (2)		(0.02	)%		(0.01	)%
Ending allowance for losses on loans to total loans(2) (3)		0.26	%		0.36	%

(1) Annualized

(2) Includes loans held for securitization and/or sale.

(3) Before deduction of allowance for losses.

Components of Allowance for Losses on Loans by Type

(Dollars in thousands)

	December 31, 2005				September 30, 2005
	Amount		Percent of Loans to Total Loans		Amount		Percent of Loans to Total Loans
Balance at end of period allocated to:
Residential mortgage	$	5,100	69.5	%	$	5,100	68.9	%
Home equity		3,480	15.8			3,570	16.4
Other real estate		1,920	3.8			1,925	3.3
Commercial		6,780	9.3			6,775	9.5
Prime automobile		4,460	1.1			3,610	1.3
Other		2,045	0.5			2,005	0.6
Unallocated		4,855	—			5,655	—
Total	$	28,640			$	28,640

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At December 31, 2005, the Bank’s total allowances for losses on loans and real estate held for investment or sale was $28.6 million, unchanged from the level at September 30, 2005. The allowance for losses on loans represents management’s estimate of credit losses inherent in the Bank’s loan portfolio as of the balance sheet date. The Bank’s allowance consists of several key elements, which include the allocated allowance, specific allowances for identified loans and the unallocated allowance. Management reviews the adequacy of the valuation allowances on loans using a variety of measures and tools including historical loss performance, delinquency status, current economic conditions, internal risk ratings and current underwriting policies and procedures. The overall credit quality of the Bank’s loan portfolio did not significantly change during the December quarter, as evidenced by net loan loss recoveries and stable levels of delinquencies and non-performing assets. As a result, the Bank did not change the level of the loan loss allowance.

The allowance for losses on residential mortgage loans was $5.1 million at December 31, 2005 and September 30, 2005. The allowance for losses on loans secured by real estate totaled $10.5 million at December 31, 2005, which constituted 41.6% of total non-accrual real estate loans. During the three months ended December 31, 2005, the Bank recorded net charge-offs of $0.1 million on these assets.

The unallocated allowance for losses totaled $4.9 million at December 31, 2005, a decrease of $0.8 million from the level at September 30, 2005. The unallocated allowance is based upon management’s evaluation and judgement of various conditions that are not directly measured in the determination of the allocated allowance. The conditions evaluated in connection with the unallocated allowance include existing general economic and business conditions affecting key lending areas of the Bank, credit quality trends, collateral volumes, loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions within portfolio segments, recent loss experience, regulatory examination results and findings of the Bank’s internal credit evaluations. At December 31, 2005 and September 30, 2005, most of the unallocated allowance relates to risks inherent in the mortgage loan portfolio, including, for example, geographic concentration and negative amortization features. The Bank has assessed its exposure related to hurricane-related damage to properties securing loans in the Gulf Coast Region and any available insurance on those properties and, at this time, believes its unallocated allowances are sufficient to cover incurred but not identified losses related to its various loan portfolios.

Asset and Liability Management. The following table presents the Bank’s interest rate sensitivity gap at December 31, 2005. Balances of interest-earning assets and interest-bearing liabilities are shown in the earlier of the period where contractual payments are due, interest rates adjust or prepayment is anticipated to occur. Adjustable and floating rate loans are included in the period in which their interest rates are next scheduled to adjust, and prepayment rates are assumed for all of the Bank’s loans based on management’s estimates. The Bank’s deposits with no stated maturity, including savings and transaction accounts, have interest rates that may reprice at any time. However, market experience has proven that these deposits adjust to market prices over a much longer period of time. The Bank considers these deposits to be relatively insensitive to interest rate changes. The table contains information of the Bank only and does not include consolidation or elimination entries required for the Trust’s financial presentation.

21

Interest Rate Sensitivity Table (Gap)

(Dollars in thousands)

	Six Months or Less			More than Six Months through One Year			More than One Year through Three Years			More than Three Years through Five Years			More than Five Years			Total
Real estate loans:
Adjustable-rate	$	3,295,274		$	523,036		$	1,607,067		$	1,055,143		$	227		$	6,480,747
Fixed-rate		29,509			24,372			52,023			18,442			6,619			130,965
Home equity credit lines and second mortgages		1,517,606			11,763			44,739			48,438			220,809			1,843,355
Commercial		847,730			13,454			44,675			32,973			91,969			1,030,801
Consumer and other		62,800			38,417			53,566			6,209			9,710			170,702
Loans held for securitization and/or sale		1,554,083			—			—			—			—			1,554,083
Mortgage-backed securities		202,982			191,894			148,841			234,021			54,812			832,550
Other investments		250,302			—			200,793			—			—			451,095
Total interest-earning assets		7,760,286			802,936			2,151,704			1,395,226			384,146			12,494,298
Total non-interest earning assets		—			—			—			—			1,984,684			1,984,684
Total assets	$	7,760,286		$	802,936		$	2,151,704		$	1,395,226		$	2,368,830		$	14,478,982
Deposits:
Fixed maturity deposits	$	1,303,798		$	796,995		$	512,980		$	121,181		$	—		$	2,734,954
NOW, statement and passbook accounts		—			101,221			202,443			202,443			3,155,202			3,661,309
Money market deposit accounts		2,505,530			—			—			—			—			2,505,530
Borrowings:
Capital notes - subordinated		—			—			—			—			175,000			175,000
Other		1,892,330			151,297			600,167			37,765			52,969			2,734,528
Total interest-bearing liabilities		5,701,658			1,049,513			1,315,590			361,389			3,383,171			11,811,321
Total non-interest bearing liabilities		—			—			—			—			1,711,293			1,711,293
Minority interest		—			—			—			—			175,391			175,391
Stockholders’ equity		—			—			—			—			780,977			780,977
Total liabilities & stockholders’ equity	$	5,701,658		$	1,049,513		$	1,315,590		$	361,389		$	6,050,832		$	14,478,982
Gap	$	2,058,628		$	(246,577	)	$	836,114		$	1,033,837		$	(2,999,025	)
Cumulative gap	$	2,058,628		$	1,812,051		$	2,648,165		$	3,682,002		$	682,977
Cumulative gap as a percentage of total assets		14.2	%		12.5	%		18.3	%		25.4	%		4.7	%

The interest sensitivity “gap” shown in the table represents the sum of all interest-earning assets minus all interest-bearing liabilities subject to repricing within the same period. The one-year gap, as a percentage of total assets, was 12.5% at December 31, 2005, compared to 13.8% at September 30, 2005. The change in the Bank’s one-year gap reflects an increase in shorter-term deposits and borrowings used to fund adjustable-rate residential mortgage loans with repricing terms greater than one year.

Capital. At December 31, 2005, the Bank complied with all of its regulatory capital requirements and its capital ratios exceeded the ratios established for “well-capitalized” institutions under OTS prompt corrective action regulations.

The following table shows the Bank’s regulatory capital levels at December 31, 2005, compared to the regulatory requirements in effect at that date. The information below is based upon the Bank’s understanding of the regulations and interpretations currently in effect and may be subject to change. The table contains information of the Bank only and does not include consolidation or elimination entries required for the Trust’s financial presentation.

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Regulatory Capital

(Dollars in thousands)

	Actual					Minimum Capital Requirement				Excess Capital
	Amount			As a % of Assets		Amount		As a % of Assets		Amount		As a % of Assets
Stockholders’ equity per financial statements	$	780,977
Minority interest in REIT Subsidiary (1)		144,000
		924,977
Adjustments for tangible and core capital:
Intangible assets		(57,972	)
Non-includable subsidiaries		(1,365	)
Non-qualifying purchased/originated loan servicing rights		—
Total tangible capital		865,640		6.00	%	$	216,557	1.50	%	$	649,083	4.50	%
Total core capital (2)		865,640		6.00	%	$	577,484	4.00	%	$	288,156	2.00	%
Tier 1 risk-based capital (2)		865,640		9.00	%	$	385,419	4.00	%	$	480,221	5.00	%
Adjustments for total risk-based capital:
Subordinated capital debentures		175,000
Allowance for general loan losses		28,640
Total supplementary capital		203,640
Total available capital		1,069,280
Equity investments (3)		(2,777	)
Total risk-based capital (2)	$	1,066,503		11.10	%	$	770,837	8.00	%	$	295,666	3.10	%

(1) Eligible for inclusion in core capital in an amount up to 25% of the Bank’s core capital pursuant to authorization from the OTS.

(2) Under the OTS “prompt corrective action” regulations, the standards for classification as “well capitalized” are a leverage (or “core capital”) ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total risk-based capital ratio of at least 10.0%.

(3) Includes one property classified as real estate held for sale which is treated as an equity investment for regulatory capital purposes.

23

During fiscal year 2005, a subsidiary of the Bank purchased a non-controlling ownership interest in a limited liability company. The investment is classified as other assets on the Consolidated Balance Sheets and is treated as a non-includable asset and deducted from core capital for regulatory capital purposes. As of December 31, 2005 and September 30, 2005, the Bank’s investment totaled $0.7 million and $10.2 million, respectively. The decline in the carrying value reflects a cash distribution from the limited liability company to the Bank. Primarily as a result of the reduction in this investment as well as an increase in the fair value of the Bank’s servicing assets, total deductions from tangible and core capital declined by $14.6 million from the amounts deducted as of September 30, 2005.

OTS capital regulations provide a five-year holding period (or such longer period as may be approved by the OTS) for REO to qualify for an exception from treatment as an equity investment. If an REO property is considered an equity investment, its then-current book value is deducted from total risk-based capital. The following table sets forth the Bank’s REO at December 31, 2005, by the fiscal year in which the property was acquired through foreclosure.

Fiscal Year	(In thousands)
1990	$	2,777	(1)
1991		8,762	(2)
1995		6,622	(2)
2005		780
2006		639
Total REO	$	19,580

⁽¹⁾ The Bank treats this amount as an equity investment for regulatory capital purposes.

⁽²⁾ The Bank received an extension of the holding periods of these properties through May 6, 2006.

LIQUIDITY AND CAPITAL RESOURCES

REAL ESTATE

The Real Estate Trust’s cash flows from operating activities have historically been insufficient to meet all of its cash flow requirements. The Real Estate Trust’s internal sources of funds, primarily cash flow generated by its income-producing properties, generally have been sufficient to meet its cash needs other than the repayment of principal on outstanding debt, including outstanding unsecured notes sold to the public, the payment of interest on its indebtedness, and the payment of capital improvement costs. In the past, the Real Estate Trust funded such shortfalls through a combination of external funding sources, primarily new financings, the sale of unsecured notes, refinancing of maturing mortgage debt, proceeds from asset sales, and dividends and tax sharing payments from the Bank. Although cash flows from operating activities have improved over the prior two fiscal years and for three-month period ended December 31, 2005, for the foreseeable future, the Real Estate Trust’s ability to generate positive cash flow from operating activities and to meet its liquidity needs, including debt service payments, repayment of debt principal and capital expenditures, will continue to depend on these available external sources. Dividends received from the Bank are a component of funding sources available to the Real Estate Trust. The availability and amount of dividends in future periods is dependent upon, among other things, the Bank’s operating performance and income, and regulatory restrictions on such payments.

The Real Estate Trust believes that the financial condition and operating results of the Bank in recent periods should enhance prospects for the Real Estate Trust to receive dividends and tax sharing payments from the Bank. During the three-month period ended December 31, 2005, the Bank made dividend payments totaling $8.0 million and tax sharing payments totaling $1.6 million to the Real Estate Trust. Dividend and tax sharing payments received by the Real Estate Trust are presented as cash flows from operating activities in the Consolidated Statements of Cash Flows.

In recent years, the operations of the Real Estate Trust have generated net operating losses while the Bank has reported net income. It is anticipated that the Trust’s consolidation of the Bank’s operations into the Trust’s federal income tax return will result in the use of the Real Estate Trust’s net operating losses to reduce the federal income taxes the Bank would otherwise owe. If in any future year, the Bank has taxable losses or unused credits, the Real Estate Trust would be obligated to reimburse the Bank the greater of (i) the tax benefit to the group using such tax losses or unused tax credits in the group’s consolidated federal income tax returns or (ii) the amount of the refund which the Bank would otherwise have been able to claim if it were not being included in the consolidated federal income tax return of the group.

24

During the three-month period ended December 31, 2005, the Trust purchased, through dividend reinvestment, approximately 55,000 shares of common stock of Saul Centers and as of December 31, 2005 owned approximately 4,522,000 shares representing 26.8% of such company’s outstanding common stock. As of December 31, 2005, the market value of these shares was approximately $163.2 million. Substantially all these shares have been pledged as collateral with the Real Estate Trust’s credit line banks.

As the owner, directly and through two wholly-owned subsidiaries, of a limited partnership interest in Saul Holdings Limited Partnership (“Saul Holdings Partnership”) the Real Estate Trust shares in cash distributions from operations and from capital transactions involving the sale of properties. The partnership agreement of Saul Holdings Partnership provides for quarterly cash distributions to the partners out of net cash flow. During the three-month period ended December 31, 2005, the Real Estate Trust received total cash distributions of $1.8 million from Saul Holdings Partnership which were all reinvested in new Partnership Units. Substantially all of the Real Estate Trust’s ownership interest in Saul Holdings Partnership has been pledged as collateral with the Real Estate Trust’s lines of credit banks.

The Real Estate Trust currently has outstanding unsecured notes, with maturities ranging from one to ten years. To the degree that the Real Estate Trust does not sell new unsecured notes to finance the scheduled repayments of outstanding unsecured notes as they mature, it will finance such repayments from other sources of funds.

The Real Estate Trust has a $60.0 million secured revolving credit line with an unrelated bank that matures on January 31, 2008, with provisions for extending the term for an additional year. This facility is secured by a portion of the Real Estate Trust’s ownership in Saul Holdings Partnership and Saul Centers. Interest is computed by reference to a floating rate index with the current interest rate spread at 200 basis points over the index. At December 31, 2005, the Real Estate Trust had no outstanding borrowings and unrestricted availability of $60.0 million.

The Real Estate Trust has an additional $60.0 million revolving credit line with an unrelated bank that matures on June 30, 2008, with provisions for extending the term for an additional year. This facility is secured by a portion of the Real Estate Trust’s ownership in Saul Holdings Partnership and Saul Centers. Interest is computed by reference to a floating rate index with the current interest rate spread at 200 basis points over the index. At December 31, 2005, the Real Estate Trust had outstanding borrowings of $9.0 million and unrestricted availability of $51.0 million.

25

The maturity schedule for the Real Estate Trust’s outstanding debt at December 31, 2005 for the balance of fiscal 2006 and subsequent years is set forth in the following table:

Debt Maturity Schedule

(In thousands)

Fiscal Year	Mortgage Notes Payable		Notes Payable Secured		Notes Payable Unsecured		Total
2006(1)	$	3,954	$	—	$	6,142	$	10,096
2007		5,605		—		7,004		12,609
2008		5,849		9,000		5,201		20,050
2009		15,679		—		5,264		20,943
2010		10,282		—		6,051		16,333
Thereafter		247,263		250,000		27,473		524,736
Total	$	288,632	$	259,000	$	57,135	$	604,767

(1) January 1, 2006 - September 30, 2006

Of the total mortgage debt outstanding at December 31, 2005, $285.1 million was non-recourse to the Real Estate Trust.

On December 29, 2005 the Real Estate Trust placed a $9.5 million mortgage note on the hotel property that was acquired on November 1, 2005. The note, which is due on January 1, 2016, bears interest at 5.92%. In connection with the same hotel asset the Real Estate Trust, on December 21, 2005, defeased the $5.8 million loan that was assumed with the acquisition of the property. The Real Estate Trust paid $6.6 million into an escrow fund with which United States government securities were purchased to satisfy the loan defeasance. The defeasance was funded by available cash and line of credit borrowings.

On December 2, 2005 the Real Estate Trust refinanced one of six properties that were secured by an approximately $88.0 million portfolio mortgage note which was due on March 31, 2006. The property was refinanced with a new 10 year mortgage note of $76.0 million. The proceeds from this refinancing, along with available cash and line of credit borrowings were used to repay the portfolio loan. As a result the Real Estate Trust unlevered the remaining five properties. The loan, which is due on January 11, 2016, bears interest at 5.3%.

REAL ESTATE ACQUISITION, DISPOSITION, DEVELOPMENT AND CAPITAL EXPENDITURES

On December 16, 2005, the sale of a hotel property, which was one of two hotel properties place on the market during fiscal year 2005, was finalized and the Real Estate Trust received proceeds from the sale of approximately $8.0 million resulting in a gain of $1.3 million.

On November 1, 2005, the Real Estate Trust acquired a 137 room hotel property located in Fairfax County, Virginia for a purchase price of approximately $12.7 million, which included the assumption of a mortgage note of $5.8 million.

The Real Estate Trust owns various land parcels with approximately 452 acres of available land. These parcels offer potential development opportunities for the Trust. During fiscal 2005 the Real Estate Trust commenced the ground-up development of a hotel property on a land parcel owned in Northern Virginia and is exploring development scenarios on several other land parcels. In addition, the development of for-sale residential townhouses and the related infrastructure commenced in fiscal 2006 on land parcels owned in Atlanta, Georgia.

The Real Estate Trust believes that the capital improvement costs for its income-producing properties will be in the range of $14.0 to $19.0 million per year for the next several years.

BANKING

Liquidity. The goal of liquidity management is to provide adequate funds to meet changes in loan demand or unexpected deposit withdrawals. The Bank accomplishes this goal by maintaining liquid assets in the form of cash and short-term investments, as well as sufficient unused borrowing capacity with securities dealers and other wholesale lenders. Growth in the Bank’s core deposits and principal and interest payments on loans and mortgage-backed securities also provide sources of liquidity. In addition, the Bank’s mortgage loan portfolio can be used as collateral for advances from the Federal Home Loan Bank (“FHLB”) of Atlanta.

26

At December 31, 2005, the estimated remaining collateral, after market value and other adjustments, of that portion of the Bank’s assets that may be pledged to the FHLB of Atlanta and various securities dealers totaled $4.4 billion, or 30.6% of total assets. The Bank’s maximum credit availability with the FHLB of Atlanta is 50% of total assets, provided that the Bank has sufficient collateral to pledge against its advances and subject to certain limitations and conditions imposed by the FHLB of Atlanta.

Also at December 31, 2005, the Bank had cash and other short-term assets totaling $641.1 million, or 4.4% of total assets.

The Bank also accesses a variety of other short-term and long-term funding sources, including securitizations and sales of loan receivables. As part of its mortgage banking activities, the Bank sold or securitized and sold $1.2 billion of single-family residential mortgage loans during the December 2005 quarter. Generally, all long-term, fixed-rate residential mortgage loans originated during the current quarter have been or are in the process of being sold. Variable rate mortgage loans are either sold or placed into the Bank’s portfolio.

Management believes that the Bank’s primary sources of funds will be sufficient to meet the Bank’s foreseeable long-term liquidity needs. The mix of funding sources used from time to time will be determined by a number of factors, including capital planning objectives, lending and investment strategies and market conditions.

Loan Originations, Securitizations and Sales – Retained Interests and Servicing Assets.Prepayment speeds continued at a high level during the quarter primarily as a result of the flattened “yield curve,” that is, a narrow difference between short term interest rates, which determine the interest rates on the adjustable rate mortgages generated by the Bank, and long term interest rates, which determine the interest rates on mortgages with interest rates fixed for longer periods. Historical experience has shown that prepayment speeds are generally correlated to the steepness of the yield curve. The steeper the yield curve, the less likely the loan will prepay. The flatter the curve, the less attractive variable rate loans are to consumers, and prepayment speeds tend to increase. In addition, as prepayment penalty periods expire, borrowers are more likely to prepay their loans. In connection with its loan origination, securitization and sale activities, the Bank generally receives or retains various interests in the sold loans, which may include servicing assets, securities, or interest-only certificates and/or interest-only strips receivable (collectively, “interest-only assets”). The Bank sometimes retains a limited amount of recourse relating to securitized loans through one or more means, most often through the establishment of reserve accounts or overcollateralization of receivables. The Bank records these interests as assets on its financial statements. In some cases, the Bank determines the carrying value of the assets based on future cash flows expected to be received by the Bank from the underlying assets. Most of these cash flows are payable to the Bank before the claims of others, while a small portion of the cash flows are subordinated to the claims of others. The Bank’s policy is to limit the aggregate amount of mortgage servicing rights and interest-only assets arising out of the securitization and sale of certain of the Bank’s ARMs to 75% of the Bank’s core capital. At December 31, 2005, those assets totaled 54% of the Bank’s core capital. The following tables summarize the carrying value of these assets at December 31, 2005 and September 30, 2005.

27

	December 31, 2005
	Not Subordinated		Subordinated		Total
	(in thousands)
Interest-only certificates	$	278,228	$	—	$	278,228
Interest-only strips receivable		75,316		490		75,806
Total interest-only assets		353,544		490		354,034
Servicing assets		165,332		—		165,332
Reserve accounts		20,071		4,658		24,729
Total	$	538,947	$	5,148	$	544,095
	September 30, 2005
	Not Subordinated		Subordinated		Total
	(in thousands)
Interest-only certificates	$	271,460	$	—	$	271,460
Interest-only strips receivable		75,772		995		76,767
Total interest-only assets		347,232		995		348,227
Servicing assets		164,592		—		164,592
Reserve accounts		18,704		4,711		23,415
Total	$	530,528	$	5,706	$	536,234

The following tables show the changes in the Bank’s servicing assets and interest-only assets for each of the periods shown:

Servicing Assets Activity

(In thousands)

	Three Months Ended December 31,
	2005			2004
Beginning balance	$	201,156		$	164,764
Additions		18,171			30,012
Amortization		(16,639	)		(12,592	)
Charge-offs		—			(243	)
Ending balance		202,688			181,941
Valuation allowance		(37,356	)		(17,073	)
Carrying value	$	165,332		$	164,868

Activity in the valuation allowance for servicing assets is summarized as follows:

	Three Months Ended December 31,
	2005		2004
Beginning balance	$	36,564	$	16,909
Additions (reductions) charged to loan expenses		792		407
Charge-offs		—		(243	)
Ending balance	$	37,356	$	17,073

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The carrying value of the Bank’s servicing assets increased by $0.7 million during the current quarter as a result of the capitalization of $18.2 million of servicing rights related to $1.2 billion of mortgage loans sold, where the Bank retained the servicing rights which was partially offset by $16.6 million of amortization expenses related to previously capitalized servicing rights and $0.8 million addition to the valuation allowance. The Bank did not purchase or sell any bulk servicing rights during the current quarter.

Interest-Only Assets Activity

(In thousands)

	Three Months Ended December 31,
	2005			2004
Beginning balance	$	348,227		$	287,842
Additions		52,751			85,929
Accretion		7,227			6,050
Cash received		(39,587	)		(26,035	)
Fair value adjustments		(14,584	)		(12,195	)
Ending balance	$	354,034		$	341,591

The Bank’s interest-only assets represent a constant rate on each loan which is fixed for the life of the transaction. The carrying value of the Bank’s interest-only assets increased by $5.8 million during the current quarter as a result of capitalization of $52.8 million of interest-only assets related to $961.9 million of mortgage loans sold where the Bank retained or received such interest-only assets. This increase was offset by $39.6 million of cash received and a $14.6 million decrease in the fair value of the interest-only assets which resulted from higher actual prepayments during the quarter and a slight change in the projected timing of prepayments. The increase in the amount of cash received in the three-month period results from an increase in the amount of mortgage loans to which the interest-only assets relate.

Key assumptions and the sensitivity of the current fair value of single-family residential retained interests to an immediate 10 percent and 20 percent adverse change in those assumptions are as follows:

(Dollars in thousands)	December 31, 2005			September 30, 2005
Carrying value(1) (fair value)	$	375,710		$	368,594
Expected weighted-average life(2) (in years)		2.7			2.6
Prepayment Speed assumption(2)(3) (annual rate)		24.16	%		24.91	%
Impact on fair value of 10% adverse change	$	(30,903	)	$	(33,396	)
Impact on fair value of 20% adverse change	$	(58,024	)	$	(62,407	)
Residual cash flow discount rate (annual)		8.50	%		8.50	%
Impact on fair value of 10% adverse change	$	(7,629	)	$	(7,775	)
Impact on fair value of 20% adverse change	$	(14,965	)	$	(15,228	)

⁽¹⁾ December 31, 2005 includes interest-only assets of $354,034 and reserve accounts of $21,676. September 30, 2005 includes interest-only assets of $348,227 and reserve accounts of $20,367.

⁽²⁾ Expected weighted average life and prepayment speed assumptions are based on the life of the securitization.

⁽³⁾ Represents Constant Prepayment Rate. Certain loans may require the payment of a fee if the borrower prepays the loan during the period up to three years after origination. The Bank uses a lower prepayment assumption during these periods.

29

These sensitivities are hypothetical and should be used with caution. Changes in the fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. The effects shown in the above table of a variation in a particular assumption on the fair value of interest-only strips receivable is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another factor, which might magnify or counteract the sensitivities.

Commitments and Contingencies.The Bank is obligated under recourse provisions related to the servicing of certain residential mortgage loans. At both December 31, 2005 and September 30, 2005, recourse to the Bank under these arrangements totaled $3.9 million.

There were no material commitments for capital expenditures at December 31, 2005.

30

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 2005 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2004

REAL ESTATE

The Real Estate Trust recorded operating loss from continuing operations of $2.5 million in the quarter ended December 31, 2005 (the “2005 quarter”) compared to an operating loss from continuing operations of $3.8 million in the quarter ended December 31, 2004 (the “2004 quarter”). The changes reflect improved operating results in the hotel and office and industrial portfolios and higher equity earnings from unconsolidated entities offset by increased interest and amortization of debt expense, depreciation, advisory and management fees and general and administrative expenses.

Income after direct operating expenses from hotels, which excludes the hotel sold during the 2005 quarter and the hotel property held for sale, increased $1.7 million, or 21.5%, in the 2005 quarter from the level achieved in the 2004 quarter. Total revenue increased approximately $3.4 million, or 15.4%, as the average room rate for the hotel properties increased $16.25, or 15.9% which offset a slight decrease in the occupancy percentage from 65.5% in the 2004 quarter to 63.9% in the 2005 quarter. This increase in average room rate while maintaining occupancy levels reflects the strong demand at the Real Estate Trust’s hotel properties, particularly the Northern Virginia and Florida properties. Room sales for the 2005 quarter increased approximately $2.9 million, or 16.7%, from the 2004 quarter, while food, beverage and other sales increased $446,000, or 10.2%. The hotel purchased on November 1, 2005 contributed approximately $600,000 to the increase in overall revenue. Direct operating expenses increased $1.7 million, or 12.0%, reflecting increased operating costs, such as payroll costs, utility costs, hotel franchise and marketing costs and other operating costs associated with the increased hotel revenue.

Income after direct operating expenses from office and industrial properties increased $312,000, or 4.7%, in the 2005 quarter compared to the 2004 quarter. Total revenue increased $548,000, or 5.7%, in the 2005 quarter. Occupancy levels have remained relatively constant for the two periods with occupancy increasing slightly from 90.5% at December 31, 2004 to 90.6% at December 31, 2005. Increased revenue generated by the Real Estate Trust’s metropolitan Washington, D.C. portfolio offset slightly lower revenue generated from its other office and industrial properties. In addition the Real Estate Trust acquired an approximately 12,000 square foot office building on May 25, 2005 which contributed revenue of $124,000 to the 2005 quarter. Direct operating expenses increased $236,000, or 8.2%, due to higher repair and maintenance, utility costs and property taxes.

Other income, which includes interest income, income from other real estate properties and other miscellaneous income, increased $53,000, or 16.4%, principally due to higher interest income in the quarter reflecting increased interest rates on invested cash balances in the 2005 quarter which offset lower income from the other real estate properties.

Land parcels and other expense increased $65,000, or 26.3%, in the 2005 quarter when compared to the 2004 quarter as a result of increased operating expenses at the Real Estate Trust’s other real estate properties, including the land parcels purchased in fiscal 2005.

Interest and amortization of debt expense increased $549,000 in the 2005 quarter when compared to the 2004 quarter. Included in the 2005 quarter is a write-off of unamortized debt costs of $106,000 associated with the early pay-off of a mortgage that had secured six operating properties and a defeasance premium of $829,000 associated with the payoff of the mortgage assumed by the Real Estate Trust with the November 1, 2005 hotel property purchase. These one-time charges were slightly offset by a decrease in other interest expense of approximately $386,000 due to reduced mortgage interest expense, lower debt amortization expense, increased capitalized interest and lower unsecured note interest which offset additional line of credit interest. The average balance of outstanding borrowings decreased to $603.5 million in the 2005 quarter from $615.5 million in the 2004 quarter, reflecting lower mortgage balances which offset higher line of credit and unsecured note balances. The average cost of borrowings remained fairly constant at 7.84% in the 2005 quarter and 7.86% in the 2004 quarter.

Depreciation expense increased $198,000, or 4.2%, reflecting recent acquisitions and capital improvements in both the hotel and office and industrial portfolios that have been placed in service during the 2005 quarter and the prior two fiscal years.

Advisory, management and leasing fees paid to related parties increased $254,000, or 7.9%, in the 2005 quarter when compared to the 2004 quarter. The advisory fee in the 2005 quarter was $503,000 per month compared to $487,000 per month for the 2004 quarter, an aggregate increase of $48,000. The remainder of the increase, totaling $206,000, was due mainly to higher hotel management fees reflecting the 15.4% increase in hotel revenue.

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General and administrative expense increased $370,000 from $553,000 in the 2004 quarter to $923,000 in the 2005 quarter. The increase is due to the determination during the 2005 quarter to write-off certain acquisition and development costs for projects that the Real Estate Trust has determined not to pursue.

Equity in earnings of unconsolidated entities reflected net earnings of $2.5 million in the 2005 quarter as compared to $1.7 million in the 2004 quarter, an increase of $702,000, or 40.1%. Earnings from Saul Holdings Partnership and Saul Centers were higher by $641,000 in the 2005 quarter primarily due to increases in operating income generated as a result of the acquisition, development and redevelopment activity of those entities. Losses from other investments totaled $166,000 in the 2005 quarter compared to $227,000 in the 2004 quarter. These losses are a result of a write-down of a non-public investment accounted for under the equity method.

During fiscal 2005, the Real Estate Trust determined that it would sell two of its hotel properties. The sale of one of these properties closed on December 16, 2005. Net operating results for these two hotels produced income from operations of discontinued real estate assets of approximately $1.3 million for the 2005 quarter, which includes a gain on sale of approximately $1.3 million, and income from operations of discontinued real estate assets of $67,000 for the 2005 quarter. The loss from operations of discontinued real estate assets for the 2004 quarter of $2.3 million included an operating loss for the two hotels referenced above of $478,000, an operating loss of $1.8 million for a hotel that was sold in December 2004, which includes $1.6 million of costs associated with the defeasance of the mortgage which the hotel property secured, including a $1.5 million prepayment premium and an additional loss of $17,000 which reflects the difference between the actual loss on the sale of the hotel property and the estimated loss recorded in fiscal 2004. Also included in the 2004 quarter is operating income of $18,000 associated with the other real estate property sold in January 2005.

BANKING

Overview. The Bank recorded operating income $55.6 million for the three months ended December 31, 2005 (the “2005 quarter”), compared to operating income of $69.8 million and for the three months ended December 31, 2004 (the “2004 quarter”). The decrease in operating income is attributable to a decrease in other (non-interest) income as well as increases in interest and operating expenses which were only partially offset by an increase in net interest income.

Net Interest Income. Net interest income, before the provision for loan losses, increased $16.0 million (or 19.1%) in the 2005 quarter. The Bank recorded $0.1 million of interest income on non-accrual and restructured loans during the 2005 quarter. The Bank would have recorded additional interest income of $0.3 million during the 2005 quarter if non-accrual assets and restructured loans had been current in accordance with their original terms. See “Financial Condition – Asset Quality – Non-Performing Assets.”

The following table sets forth, for the periods indicated, information regarding the total amount of income from interest-earning assets and the resulting yields, the interest expense associated with interest-bearing liabilities, expressed in dollars and rates, and the net interest spread and net yield on interest-earning assets. The table contains information of the Bank only and does not include consolidation or elimination entries required for the Trust’s financial presentation.

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Net Interest Margin Analysis

(Dollars in thousands)

	Three Months Ended December 31,
	2005						2004
	Average Balances		Interest		Yield/ Rate		Average Balances		Interest		Yield/ Rate
Assets:
Interest-earning assets:
Loans receivable, net (1)	$	11,243,896	$	155,956	5.55	%	$	10,825,388	$	118,276	4.37	%
Mortgage-backed securities		834,109		8,427	4.04			392,984		4,575	4.66
Securities purchased under agreements to resell		77,065		780	4.05			74,457		366	1.97
Trading securities		5,854		129	8.81			10,301		140	5.44
Investment securities		203,015		1,659	3.27			129,647		789	2.43
Other interest-earning assets		215,196		2,022	3.76			231,577		1,861	3.21
Total		12,579,135		168,973	5.37			11,664,354		126,007	4.32
Noninterest-earning assets:
Cash		390,134						323,376
Real estate held for investment or sale		18,931						21,349
Property and equipment, net		539,489						500,270
Automobiles subject to lease, net		165,242						389,047
Goodwill and other intangible assets, net		37,104						24,015
Other assets		728,563						612,828
Total assets	$	14,458,598					$	13,535,239
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits	$	2,369,902		1,343	0.23		$	2,232,867		1,201	0.22
Savings deposits		1,128,624		811	0.29			1,213,864		853	0.28
Time deposits		2,507,300		21,795	3.48			1,869,576		10,173	2.18
Money market deposits		2,535,020		11,791	1.86			2,388,781		6,145	1.03
Total deposits		8,540,846		35,740	1.67			7,705,088		18,372	0.95
Borrowings		3,282,618		33,481	4.08			3,358,477		23,845	2.84
Total liabilities		11,823,464		69,221	2.34			11,063,565		42,217	1.53
Noninterest-bearing items:
Noninterest-bearing deposits		1,425,532						1,298,788
Other liabilities		278,022						284,637
Minority interest		175,391						175,391
Stockholders’ equity		756,189						712,858
Total liabilities and stockholders’ equity	$	14,458,598					$	13,535,239
Net interest income			$	99,752					$	83,790
Net interest spread (2)					3.03	%					2.79	%
Net yield on interest-earning assets (3)					3.17	%					2.87	%
Interest-earning assets to interest-bearing liabilities					106.39	%					105.43	%

(1) Includes loans held for sale and/or securitization. Interest on non-accruing loans has been included only to the extent reflected in the Condensed Consolidated Statements of Operations; however, the loan balance is included in the average amount outstanding until transferred to real estate acquired in settlement of loans.

(2) Equals the weighted average yield on total interest-earning assets minus the weighted average rate on total interest-bearing liabilities.

(3) Equals annualized net interest income divided by the average balances of total interest-earning assets.

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The following table presents certain information regarding changes in interest income and interest expense of the Bank during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to changes in volume (change in volume multiplied by old rate); changes in rate (change in rate multiplied by old volume); and changes in rate and volume.

Volume and Rate Changes in Net Interest Income

(Dollars in thousands)

	Three Months Ended December 31, 2005 Compared to Three Months Ended December 31, 2004 Increase (Decrease) Due to Change in
	Volume (1)			Rate(1)			Total Change
Interest income:
Loans (2)	$	4,727		$	32,953		$	37,680
Mortgage-backed securities		7,774			(3,922	)		3,852
Securities purchased under agreements to resell		13			401			414
Trading securities		(290	)		279			(11	)
Investment securities		542			328			870
Other interest-earning assets		(695	)		856			161
Total interest income		12,071			30,895			42,966
Interest expense:
Deposit accounts		2,182			15,186			17,368
Borrowings		(3,623	)		13,259			9,636
Total interest expense		(1,441	)		28,445			27,004
Increase in net interest income	$	13,512		$	2,450		$	15,962

(1) The net change attributable to the combined impact of volume and rate has been allocated in proportion to the absolute value of the change due to volume and the change due to rate.

(2) Includes loans held for sale and/or securitization.

Interest income in the 2005 quarter increased $43.0 million (or 34.1%) from the 2004 quarter primarily as a result of higher average yields on and higher average balances of loans receivable. Also contributing to the increased income was an increase in interest income on mortgage-backed securities and other investments caused by higher average balances.

The Bank’s net interest spread increased to 3.03% in the 2005 quarter from 2.79% in the 2004 quarter. The 24 basis point increase was primarily the result of a 118 basis point increase in the average yield on loans which was partially offset by an 81 basis point increase in the cost of deposits and borrowings. The ratio of average interest-earning assets to average interest-bearing liabilities increased to 106.4% for the 2005 quarter compared to 105.4% for the 2004 quarter.

Interest income on loans, the largest category of interest-earning assets, increased to $156.0 million for the 2005 quarter from $118.3 million for the 2004 quarter, an increase of 31.9%, primarily because of higher average yields on loans receivable. The average yield on the loan portfolio increased to 5.55% from 4.37% from the 2004 quarter, reflecting increases in the various indices on which interest rates of adjustable rate loans are based. Interest income on residential mortgage loans increased $25.4 million due to a $336.3 million increase in average balances as well as a 112 basis point increase in the average yield (to 5.14% from 4.02%) during the 2005 quarter. Higher average balances of and higher average yields on home equity loans resulted in a $7.1 million (or 34.9%) increase in interest income on those loans. Lower average yields on and lower average balances of automobile loans resulted in a $2.5 million (or 53.6%) decrease in interest income on those loans.

Interest income on mortgage-backed securities increased $3.9 million (or 84.2%) due to a $441.1 million increase in average balances which was partially offset by a decrease in the average yields on those securities to 4.04% from 4.66%.

Interest expense on deposits increased $17.4 million (or 94.5%) during the 2005 quarter. The increase resulted primarily from a 72 basis point increase in the average rate on deposits (to 1.67% from 0.95%) due to increased rates paid by the Bank in response to higher market interest rates and, to a lesser extent, a $835.8 million increase in average deposit balances.

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Interest expense on borrowings increased $9.6 million (or 40.4%) in the 2005 quarter compared to the 2004 quarter. Interest expense on advances from the FHLB of Atlanta increased $4.7 million (or 23.3%) due primarily to higher average rates paid on the advances which were partially offset by lower average balances.

Provision for Loan Losses. During the 2005 quarter, the Bank recorded a credit for loan losses of $0.6 million, compared to a negative provision of $0.4 million in the 2004 quarter. Management’s prior decisions to discontinue subprime automobile lending and indirect consumer lending, and focus more on residential mortgages, have improved the overall credit quality of the Bank’s loan portfolio. As the balances of automobile loans continue to decline, charge-offs and delinquencies also have been declining. See “Financial Condition – Asset Quality – Allowances for Losses.”

Other income. Other income decreased to $113.0 million in the 2005 quarter from $133.6 million in the 2004 quarter. The $20.7 million (or 15.5%) decrease was primarily attributable to decreases in automobile rental income and servicing, securitization and mortgage banking income, partially offset by an increase in other income.

Automobile rental income decreased to $12.5 million in the 2005 quarter from $25.2 million in the prior corresponding quarter, a 50.4% decrease. The $12.7 million decrease resulted primarily from a $223.8 million (or 57.5%) decrease in average outstanding leases as a result of the Bank’s prior decision to discontinue origination of automobile leases.

Servicing, securitization and mortgage banking income decreased to $52.1 million in the 2005 quarter, from $65.0 million in the 2004 quarter, a 19.9% decrease. During the 2005 quarter, the Bank securitized and/or sold $1.2 billion of loans and recognized gains of $31.0 million. During the quarter ended December 31, 2004, the Bank securitized and/or sold $1.9 billion and recognized gains of $56.6 million. Partially offsetting this decrease was an increase in fees related to the prepayments of certain residential mortgage loans.

Other income increased to $12.8 million in the 2005 quarter from $9.3 million in the 2004 quarter, a 38.4% increase. The $3.6 million increase in the 2005 quarter was primarily due to (a) increased fee income related to asset management and trust services and (b) earnings of $1.2 million on a joint venture investment.

Operating Expenses. Operating expenses during the 2005 quarter increased $9.7 million (or 6.6%) from the 2004 quarter. The increase was largely due to increases in servicing assets amortization and other loan expenses, salaries and employee benefits, property and equipment, and marketing, which were partially offset by a reduction in depreciation and amortization.

Servicing assets amortization and other loan expenses increased to $22.2 million in the 2005 quarter from $15.5 million in the 2004 quarter. The increase resulted primarily from an increase in servicing assets amortization to $16.6 million for the 2005 quarter compared to $12.6 million for the 2004 quarter.

Salaries and employee benefits increased $7.9 million (or 12.3%) in the 2005 quarter due primarily to the increased number of retail branches and the increased number of hours those branches are open.

Property and equipment increased $2.5 million (or 23.7%) in the current quarter due to increased rent expense related to the addition of new retail branch offices.

Marketing expenses increased $2.4 million (or 72.8%) in the current quarter primarily due to increased efforts to further promote the Bank’s products and services.

Depreciation and amortization expense decreased $10.2 million (or 34.0%). Depreciation expense related to automobiles subject to lease decreased $10.9 million, to $8.8 million for the 2005 quarter, due to lower levels of outstanding leases resulting from the Bank’s prior decision to discontinue origination of automobile leases.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information required by this Item is included in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 4. CONTROLS AND PROCEDURES

The Trust maintains disclosure controls and procedures that are designated to ensure that information required to be disclosed in the Trust’s reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Trust’s management, including its Chairman and its Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e) promulgated under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

The Trust carried out an evaluation, under the supervision and with the participation of the Trust’s management, including its Chairman and its Vice President and Chief Financial Officer of the effectiveness of the design and operation of the Trust’s disclosure controls and procedures as of December 31, 2005. Based on the foregoing, the Company’s Chairman and its Vice President and Chief Financial Officer concluded that the Trust’s disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2005.

During the three months ended December 31, 2005 there were no changes in the Trust’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting.

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PART II

Item 6. EXHIBITS

(a) Exhibits required by Item 601 of Regulation S-K are set forth below.

EXHIBITS

EXHIBITS		DESCRIPTION
3.		ORGANIZATIONAL DOCUMENTS
	(a)	Second Amended and Restated Declaration of Trust filed with the Maryland State Department of Assessments and Taxation on May 23, 2002 as Exhibit 3(a) to Registration Statement 333-70753 is hereby incorporated by reference.
	(b)	Second Amended and Restated By-Laws of the Trust dated as of May 23, 2002 as Exhibit 3(b) to Registration Statement 333-70753 is hereby incorporated by reference.
4.		INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
	(a)	Indenture, dated as of February 25, 2004, by and between the Trust and Wells Fargo Bank, National Association, as Trustee, with respect to the Trust’s 7 1/2% Senior Secured Notes due 2014 and 7 1/2% Series B Senior Secured Notes due 2014, including Form of Note, as filed as Exhibit 4 (a) to Registration Statement 333-113640 is hereby incorporated by reference.
	(b)	Indenture, dated as of April 14, 2003, between the Trust and U.S. Bank National Association, as Trustee, with respect to the Trust’s Unsecured Notes Due for One Year to Ten Years from Date of Issue, as filed as Exhibit 4(a) to Registration Statement 333-104068 is hereby incorporated by reference.
	(c)	Indenture dated as of September 1, 1992 with respect to the Trust’s Notes due from One to Ten Years from Date of Issue filed as Exhibit 4(a) to Registration Statement No. 33-34930 is hereby incorporated by reference.
	(d)	First Supplemental Indenture dated as of January 16, 1997 with respect to the Trust’s Notes due from One to Ten years from Date of Issue filed as Exhibit 4(b) to Registration Statement No. 33-34930 is hereby incorporated by reference.
	(e)	Second Supplemental Indenture dated as of January 13, 1999 with respect to the Trust’s Notes due from One to Ten Years from Date of Issuance as filed as Exhibit 4(l) to Registration Statement No. 333-70753 is hereby incorporated by reference.

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10.		MATERIAL CONTRACTS
	(a)	Amended and Restated Advisory Contract dated as of October 1, 2005 by and among the Trust, B.F. Saul Company and B.F. Saul Advisory Company, LLC, filed as Exhibit 10(a) to Trust’s September 30 2005 Form 8-K is hereby incorporated by reference.
	(b)	Form of Commercial Asset Management and Leasing Agreement between the Trust and B.F. Saul Property Company filed as Exhibit 10(c) to the Trust’s September 30, 2005 Form 8-K is hereby incorporated by reference.
	(c)	Tax Sharing Agreement dated June 28, 1990 among the Trust, Chevy Chase Bank F.S.B. and certain of their subsidiaries filed as Exhibit 10(c) to Registration Statement No. 33-34930 is hereby incorporated by reference.
	(d)	First Amendment to Tax Sharing Agreement effective May 16, 1995 among the Trust, Chevy Chase Bank F.S.B. and certain of their subsidiaries, as filed as Exhibit 10(f) to the Trust’s Annual Report on Form 10-K (File No. 1-7184) for the fiscal year ended September 30, 2001 is hereby incorporated by reference.
	(e)	Agreement dated June 28, 1990 among the Trust, B.F. Saul Company, Franklin Development Co., Inc., The Klingle Corporation and Westminster Investing Corporation relating to the transfer of certain shares of Chevy Chase Bank, F.S.B. and certain real property to the Trust in exchange for Preferred Shares of the Trust filed as Exhibit 10(d) to Registration Statement No. 33-34930 is hereby incorporated by reference.
	(f)	Regulatory Capital Maintenance/Dividend Agreement dated May 17, 1988 among B.F. Saul Company, the Trust and the Federal Savings and Loan Insurance Corporation filed as Exhibit 10(e) to the Trust’s Annual Report on Form 10-K (File No. 1-7184) for the fiscal year ended September 30, 1991 is hereby incorporated by reference.
	(g)	Registration Rights and Lock-Up Agreement dated August 26, 1993 by and among Saul Centers, Inc. and the Trust, Westminster Investing Corporation, Van Ness Square Corporation, Dearborn, L.L.C., B.F. Saul Property Company and Avenel Executive Park Phase II, Inc. as filed as Exhibit 10.6 to Registration Statement No. 33-64562 is hereby incorporated by reference.
	(h)	First Amendment to Registration Rights and Lock-Up Agreement dated September 29, 1999 by and among Saul Centers, Inc., the Trust, Westminster Investing Corporation, Van Ness Square Corporation, Dearborn Corporation, Franklin Property Company and Avenel Executive Park Phase II, Inc., as filed as Exhibit 10(b) to the Trust’s Annual Report on Form 10-K (File No. 1-7184) for the fiscal year ended September 30, 2001 is hereby incorporated by reference.
	(i)	Exclusivity and Right of First Refusal Agreement dated August 26, 1993 among Saul Centers, Inc., the Trust, B.F. Saul Company, Westminster Investing Corporation, B.F. Saul Property Company, Van Ness Square Corporation, and Chevy Chase Savings Bank, F.S.B. as filed as Exhibit 10.7 to Registration Statement No. 33-64562 hereby incorporated by reference.
	(j)	Fourth Amended and Restated Reimbursement Agreement dated as of April 25, 2000 by and among Saul Centers, Inc., Saul Holdings Limited Partnership, Saul Subsidiary I Limited Partnership, Saul Subsidiary II Limited Partnership, Saul QRS, Inc., B.F. Saul Property Company, Westminster Investing Corporation, Van Ness Square Corporation, Dearborn, L.L.C., Avenel Executive Park Phase II, L.L.C., and the Trust, as filed as Exhibit 10(k) to the Trust’s Quarterly Report on Form 10-Q (File No. 1-7184) for the fiscal quarter ended March 31, 2000 is hereby incorporated by reference.
	(k)	Bank Stock Registration Rights Agreement dated as of March 25, 1998 between the Trust and Norwest Bank Minnesota, National Association, as Trustee, as filed as Exhibit 4(d) to Registration Statement No. 333-49937 is hereby incorporated by reference.
	(l)	Amended and Restated Note Administration Fee Agreement dated as of October 1, 2005, between the Trust, B.F. Saul Company and B.F. Saul Advisory Company L.L.C., as filed as Exhibit 10(n) to the Trust’s September 30, 2005 Form 8-K is hereby incorporated by reference.
	(m)	Development Agreement dated as of October 1, 2005 between the Trust and B.F. Saul Property Company, as filed as Exhibit 10(o) to the Trust’s September 30, 2005 Form 8-K is hereby incorporated by reference.
	12.    Ratio of Earnings to Fixed Charges (filed herewith).
	31.    Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer and Chief Financial Officer (filed herewith).
	32.    Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer (filed herewith).

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SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	B. F. SAUL REAL ESTATE INVESTMENT TRUST
	(Registrant)
Date: February 10, 2006	/s/ Stephen R. Halpin, Jr.
	Stephen R. Halpin, Jr.
	Vice President and Chief Financial Officer (Principal Financial Officer)
Date: February 10, 2006	/s/ Kenneth D. Shoop
	Kenneth D. Shoop
	Vice President, Chief Accounting Officer and Treasurer (Principal Accounting Officer)

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