##### 



FORM 10-Q SECURITIES AND EXCHANGE COMMISSION  (Mark One) (X)
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For quarterly period ended March 31, 2004 (  )
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to .
 COMMISSION FILE NUMBER 000-23733 CAPITAL AUTOMOTIVE REIT  Maryland
(State of organization)
    
    54-1870224
(I.R.S. Employer Identification Number)
 8270 Greensboro Drive, Suite 950, McLean, Virginia 22102
(Address of principal executive offices and zip code) (703) 288-3075
(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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (X) No (  ) Number of common shares of beneficial interest outstanding as of April 30, 2004
was 36,188,053.




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CAPITAL AUTOMOTIVE REIT
FORM 10-Q
INDEX Page No.Part I  Financial InformationItem 1  Financial StatementsConsolidated Balance Sheets March 31, 2004 (unaudited) and December 31, 2003.
    
    
    3Consolidated Statements of Operations (unaudited)  three months ended March 31, 2004 and March 31, 2003.
    
    
    4Consolidated Statements of Cash Flows (unaudited)  three months ended March 31, 2004 and March 31, 2003.
    
    
    5Consolidated Statements of Changes in Shareholders Equity and Other Comprehensive Income (unaudited)  three months ended March 31, 2004
    
    
    6Notes to Consolidated Financial Statements (unaudited)
    
    
    7Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 4  Controls and Procedures
    
    
    45Part II  Other InformationItem 1  Legal Proceedings
    
    
    48Item 2  Changes in Securities
    
    
    48Item 3  Defaults Upon Senior Securities
    
    
    48Item 4  Submission of Matters to Vote to Security Holders
    
    
    49Item 5  Other Information
    
    
    49Item 6  Exhibits and Reports on Form 8-K
    
    
    49Signatures
    
    
    51
 2




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##### 



PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CAPITAL AUTOMOTIVE REIT
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data) March 31,
    
    December 31,2004
    
    2003(Unaudited)ASSETSReal estate:Land
    
    $
    757,416
    
    
    $
    732,693Buildings and improvements
    
    
    1,160,682
    
    
    
    1,142,117Accumulated depreciation
    
    
    (121,642
    )
    
    
    (116,247
    )1,796,456
    
    
    
    1,758,563Cash and cash equivalents
    
    
    12,583
    
    
    
    13,352Other assets, net
    
    
    73,071
    
    
    
    89,670Total Assets
    
    $
    1,882,110
    
    
    $
    1,861,585LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Mortgage debt
    
    $
    1,071,182
    
    
    $
    1,066,084Unsecured debt
    
    
    4,375
    
    
    
    4,425Borrowings under credit facilities
    
    
    18,009
    
    
    
    75,009Accounts payable and accrued expenses
    
    
    35,738
    
    
    
    26,773Security deposits payable
    
    
    7,623
    
    
    
    7,568Total Liabilities
    
    
    1,136,927
    
    
    
    1,179,859Minority Interest
    
    
    117,544
    
    
    
    112,452Shareholders EquityPreferred shares, par value $.01 per share; 20 million shares authorized,
3,950,000 Series A Cumulative Redeemable Preferred Shares issued
and outstanding as of March 31, 2004 and December 31, 2003
    
    
    40
    
    
    
    40Common shares, par value $.01 per share; 100 million shares authorized,
35,187,392 shares issued and outstanding as of March 31, 2004 and
33,032,901 shares issued and outstanding as of December 31, 2003
    
    
    352
    
    
    
    330Additional paid-in-capital
    
    
    663,838
    
    
    
    600,278Deferred compensation
    
    
    (4,934
    )
    
    
    (2,098
    )Accumulated other comprehensive loss
    
    
    (18,012
    )
    
    
    (13,541
    )Distributions in excess of accumulated earnings
    
    
    (13,645
    )
    
    
    (15,735
    )Total Shareholders Equity
    
    
    627,639
    
    
    
    569,274Total Liabilities and Shareholders Equity
    
    $
    1,882,110
    
    
    $
    1,861,585
 See accompanying Notes to Consolidated Financial Statements. 3




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CAPITAL AUTOMOTIVE REIT
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) Three Months EndedMarch 31,2004
    
    2003Revenue:Rental
    
    $
    47,610
    
    
    $
    39,386Interest and other
    
    
    970
    
    
    
    223Total revenue
    
    
    48,580
    
    
    
    39,609Expenses:Depreciation and amortization
    
    
    8,804
    
    
    
    7,254General and administrative
    
    
    2,741
    
    
    
    2,233Interest
    
    
    17,230
    
    
    
    15,043Total expenses
    
    
    28,775
    
    
    
    24,530Income from continuing operations before minority interest
    
    
    19,805
    
    
    
    15,079Minority interest
    
    
    (3,335
    )
    
    
    (3,479
    )Income from continuing operations
    
    
    16,470
    
    
    
    11,600Income from discontinued operations, net of minority interest
    
    
    1,123
    
    
    
    301Gain on sale of real estate, net of minority interest
    
    
    953
    
    
    
    35Total discontinued operations
    
    
    2,076
    
    
    
    336Net income
    
    
    18,546
    
    
    
    11,936Preferred share dividends
    
    
    (1,852
    )
    
    
    Net income available to common shareholders
    
    $
    16,694
    
    
    $
    11,936Shares of common stock outstanding used to
compute basic earnings per common share
    
    
    34,049
    
    
    
    28,279Basic earnings per common share:Income from continuing operations
    
    $
    0.43
    
    
    $
    0.41Net income
    
    $
    0.49
    
    
    $
    0.42Shares of common stock outstanding used to
compute diluted earnings per common share
    
    
    34,673
    
    
    
    29,205Diluted earnings per common share:Income from continuing operations
    
    $
    0.42
    
    
    $
    0.40Net income
    
    $
    0.48
    
    
    $
    0.41Dividends declared per common share
    
    $
    0.4165
    
    
    $
    0.4065
 See accompanying Notes to Consolidated Financial Statements. 4




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##### 



CAPITAL AUTOMOTIVE REIT
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Three Months Ended March 31,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    18,546
    
    
    $
    11,936Adjustments to reconcile net income to net cash provided by operating activities:Gain on disposition of real estate net of minority interest
    
    
    (953
    )
    
    
    (35
    )Stock compensation expense
    
    
    328
    
    
    
    334Depreciation and amortization
    
    
    9,587
    
    
    
    7,951Income from continuing operations applicable to minority interest
    
    
    3,335
    
    
    
    3,479Income from discontinued operations applicable to minority interest
    
    
    257
    
    
    
    90Changes in operating assets and liabilities:Increase in other assets
    
    
    (2,540
    )
    
    
    (1,431
    )Increase in accounts payable and accrued expenses
    
    
    2,614
    
    
    
    590Increase in security deposits payable
    
    
    55
    
    
    
    122Net cash provided by operating activities
    
    
    31,229
    
    
    
    23,036Cash flows from investing activities:Purchase of furniture and equipment, net of disposals
    
    
    (12
    )
    
    
    (20
    )Real estate investments
    
    
    (41,880
    )
    
    
    (17,090
    )Real estate dispositions
    
    
    16,501
    
    
    
    1,025Net cash used in investing activities
    
    
    (25,391
    )
    
    
    (16,085
    )Cash flows from financing activities:Proceeds from borrowings under credit facilities
    
    
    23,000
    
    
    
    Proceeds from mortgage debt
    
    
    11,900
    
    
    
    228,000Repayment of borrowings under credit facilities
    
    
    (80,000
    )
    
    
    (111,093
    )Repayment of mortgage debt
    
    
    
    
    
    
    (91,638
    )Mortgage principal payments
    
    
    (6,852
    )
    
    
    (5,983
    )Payments for debt issuance costs
    
    
    (311
    )
    
    
    (5,760
    )Increase in restricted cash
    
    
    (317
    )
    
    
    (3,247
    )Payment of common share dividends
    
    
    (11,544
    )
    
    
    (10,046
    )Payment of preferred share dividends
    
    
    (1,029
    )
    
    
    Distributions to minority partners
    
    
    (3,229
    )
    
    
    (3,453
    )Series A Cumulative Redeemable Preferred Shares issuance costs
    
    
    (93
    )
    
    
    Net proceeds from issuance of common shares
    
    
    61,868
    
    
    
    3,082Net cash used in financing activities
    
    
    (6,607
    )
    
    
    (138
    )Net
(decrease) increase in cash and cash equivalents
    
    
    (769
    )
    
    
    6,813Cash and cash equivalents at beginning of period
    
    
    13,352
    
    
    
    7,442Cash and cash equivalents at end of period
    
    $
    12,583
    
    
    $
    14,255Supplemental Data:Real estate acquisitions in exchange for like-kind property
    
    $
    14,968
    
    
    $
    Interest paid during the period
    
    $
    11,067
    
    
    $
    12,407Dividends and distributions reinvested to purchase common shares
    
    $
    3,069
    
    
    $
    1,534
 See accompanying Notes to Consolidated Financial Statements. 5




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CAPITAL AUTOMOTIVE REIT
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY AND OTHER COMPREHENSIVE INCOME
(in thousands, except share data) Distributions in
    
    
    
    
    
    AccumulatedPreferred
    
    Common
    
    Additional
    
    Excess of
    
    
    
    
    
    Other
    
    
    
    
    
    OtherPreferred
    
    Common
    
    Shares
    
    Shares
    
    Paid-in
    
    Accumulated
    
    Deferred
    
    Comprehensive
    
    
    
    
    
    ComprehensiveShares
    
    Shares
    
    Par Value
    
    Par Value
    
    Capital
    
    Earnings
    
    Compensation
    
    Income (Loss)
    
    Total
    
    IncomeBalance at December 31, 2003 (audited)
    
    
    3,950,000
    
    
    
    33,032,901
    
    
    $
    40
    
    
    $
    330
    
    
    $
    600,278
    
    
    $
    (15,735
    )
    
    $
    (2,098
    )
    
    $
    (13,541
    )
    
    $
    569,274Reallocation of minority interest ownership in
Partnership
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,719
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,719
    )
    
    
    Series A Cumulative Redeemable Preferred Shares
issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (93
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (93
    )
    
    
    Net proceeds from follow-on offering
    
    
    
    
    
    
    1,825,000
    
    
    
    
    
    
    
    18
    
    
    
    61,584
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,602
    
    
    
    Issuance of common shares from dividend
reinvestment and share purchase plan, net of
costs
    
    
    
    
    
    
    92,346
    
    
    
    
    
    
    
    1
    
    
    
    3,110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,111
    
    
    
    Issuance of restricted shares, net of forfeitures
    
    
    
    
    
    
    87,124
    
    
    
    
    
    
    
    1
    
    
    
    3,126
    
    
    
    
    
    
    
    (3,127
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    291
    
    
    
    
    
    
    
    291
    
    
    
    Issuance of phantom shares, net of forfeitures
    
    
    
    
    
    
    17,020
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    Exercise of common stock options and warrants
    
    
    
    
    
    
    43,613
    
    
    
    
    
    
    
    1
    
    
    
    242
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    243
    
    
    
    Redemption of units of limited partnership
interest in the Partnership to common shares
    
    
    
    
    
    
    89,388
    
    
    
    
    
    
    
    1
    
    
    
    1,202
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,203
    
    
    
    Accrued compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    Change in valuation of interest rate swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,471
    )
    
    
    (4,471
    )
    
    
    (4,471
    )Change in valuation of interest rate swap
attributable to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    831Preferred share dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,852
    )
    
    
    
    
    
    
    
    
    
    
    (1,852
    )
    
    
    Common share dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,604
    )
    
    
    
    
    
    
    
    
    
    
    (14,604
    )
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,546
    
    
    
    
    
    
    
    
    
    
    
    18,546
    
    
    
    18,546Balance at March 31, 2004 (unaudited)
    
    
    3,950,000
    
    
    
    35,187,392
    
    
    $
    40
    
    
    $
    352
    
    
    $
    663,838
    
    
    $
    (13,645
    )
    
    $
    (4,934
    )
    
    $
    (18,012
    )
    
    $
    627,639
    
    
    $
    14,906
 See accompanying Notes to Consolidated Financial Statements. 6




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CAPITAL AUTOMOTIVE REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 1. ORGANIZATION AND BASIS OF PRESENTATION Organization Capital Automotive REIT, which we refer to as the Company, is a Maryland real
estate investment trust formed in October 1997. We own interests in real
estate and conduct our operations, directly or indirectly, through Capital
Automotive L.P., which we refer to as the Partnership, and its subsidiaries.
We are the sole general partner of the Partnership and, as of March 31, 2004,
owned approximately 81.8% of the common units of limited partnership interest
in the Partnership, which we refer to as Common Units, as well as 100% of the
Series A preferred units of limited partnership interest in the Partnership,
which we refer to as Preferred Units. References to we, us and our refer
to the Company or, if the context requires, the Partnership and our business
and operations conducted through the Partnership and/or directly or indirectly
owned subsidiaries. Our primary business strategy is to purchase real estate (land, buildings and
other improvements), which we simultaneously lease to operators of franchised
automobile dealerships and motor vehicle service, repair or parts businesses,
used vehicle businesses and other related businesses under long-term,
triple-net leases. Triple-net leases typically require the tenant to pay all
operating expenses of a property, including, but not limited to, all real
estate taxes, assessments and other government charges, insurance, utilities,
repairs and maintenance. We use (i) the term dealerships to refer to these
types of businesses that are operated on our properties and (ii) the term
dealer group, tenant or operators of dealerships to refer to the persons and
companies that lease our properties. We focus on leasing properties to dealer
groups that have a long history of operating multi-site, multi-franchised
dealerships, generally targeting the largest dealer groups in terms of revenues
in the largest metropolitan areas in the U.S. in terms of population. In
addition, we provide facility improvement and expansion funding, construction
financing and takeout commitments in certain circumstances. As of March 31, 2004, we had invested more than $1.9 billion in 324 properties
located in 31 states (Alabama, Arizona, Arkansas, California, Colorado,
Connecticut, Florida, Georgia, Idaho, Illinois, Indiana, Louisiana, Maryland,
Michigan, Mississippi, Missouri, Nevada, New Jersey, New Mexico, New York,
North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South
Carolina, Tennessee, Texas, Utah and Virginia), consisting of approximately
2,356 acres of land and containing approximately 13.7 million square feet of
buildings and improvements. Our tenants operate 448 motor vehicle franchises
on our properties, representing 43 brands of motor vehicles, which include all
of the top selling brands in the U.S. The initial lease terms generally range
from 10 to 20 years (with a weighted average initial lease term for leases
entered into during the quarter ended March 31, 2004 of approximately 18.1
years), with our entire portfolio having a weighted average initial lease term
of approximately 14.9 years. As of March 31, 2004, our portfolio had a weighted
average remaining lease term of approximately 11.7 years. The leases typically
have options to renew upon generally the same terms and conditions for one or
more additional periods of five to 10 years each, exercisable at the option of
the tenants (with renewal options typically ranging from a total of five to 40
years). Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared
by management in accordance with accounting principles generally accepted in
the United States, commonly referred to as GAAP, for interim financial
information and in conformity with the rules and regulations of the Securities
and Exchange Commission, commonly referred to as the SEC. Accordingly, they do
not 7




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##### 



include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. The results of operations for the three
months ended March 31, 2004, are not necessarily indicative of the results that
may be expected for the full year. These financial statements should be read
in conjunction with our audited consolidated financial statements and footnotes
thereto, included in the Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2003. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements of the Company have been
prepared in accordance with GAAP and include the accounts of the Company, its
wholly-owned subsidiaries, and other entities where the Company has a majority
ownership, all of which it controls. The equity interests of other limited
partners are reflected as minority interest. All significant intercompany
transactions and balances have been eliminated in consolidation. Real Estate and Depreciation The purchase price of real estate properties acquired is allocated to the
various components, such as land, buildings and improvements, and in-place
leases as appropriate, in accordance with Statement of Financial Accounting
Standards, commonly referred to as SFAS, No. 141, Business Combinations. The
purchase price is allocated based on the fair value of each component at the
time of acquisition. The fair value of the buildings and improvements are
recorded at the cost of our acquisition which we believe approximates their
replacement costs. We generally do not acquire real estate assets that have
in-place leases. We typically execute our leases simultaneously with the
purchase of the real estate, and because of this, no value has been ascribed to
any in-place leases because we do not believe any exist. Therefore, we have
not recorded any lease intangible assets or liabilities on our consolidated
balance sheets as of March 31, 2004 and December 31, 2003. Depreciation is computed using the straight-line method over an estimated
useful life of 20 to 45 years for the buildings and improvements. Real estate
depreciation expense, including depreciation expense related to discontinued
operations, was approximately $8.8 million and $7.4 million for the three
months ended March 31, 2004 and 2003, respectively. Furniture, Fixtures and Equipment Furniture, fixtures and equipment are recorded at cost. Depreciation is
calculated on a straight-line basis over the estimated useful lives of the
assets, ranging from three to five years. Total depreciation expense related
to our furniture, fixtures and equipment was approximately $17,000 and $22,000
for the three months ended March 31, 2004 and 2003, respectively. Improvement Fundings and Construction Financing We may fund improvements made by our tenants on our existing properties.
Improvements include costs incurred on facilities during which the tenants
business continues to operate without interruption. Improvement fundings are
recorded as buildings and improvements on our consolidated balance sheets and
the amounts charged to the tenant during the project are recorded as rental
revenue. Once the project is completed, the remaining useful life of the
buildings and improvements is determined and depreciation expense is adjusted
accordingly on a prospective basis. 8




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##### 



We may provide construction financing to our tenants in certain circumstances
in which we own the underlying land that is leased to the tenant. Construction
financing includes fundings for the construction of new facilities for which
operations have not commenced or fundings for major improvements to existing
facilities that cause operations to cease during the construction period.
Fundings are recorded as construction advances during the period of
construction and the amounts charged to our tenant during that time are
recorded as interest income.After completion of the project, the construction
advances are paid down simultaneously with our purchase of the buildings and
improvements. The buildings and improvements are acquired at fair market value
and recorded as real estate on our consolidated financial statements.
Construction advances are included in other assets and totaled approximately
$10.9 million and $5.0 million as of March 31, 2004 and December 31, 2003,
respectively. Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid instruments purchased with
original maturities of three months or less. Restricted Cash Restricted cash consists primarily of cash reserved to fund debt service
payments and funds held in cash collateral accounts. In addition, as of
December 31, 2003, restricted cash also consisted of funds held in escrow
accounts related to the substitution of properties within an existing debt
agreement. The purpose of the cash collateral accounts is to hold funds,
generally in the amount of the interest rate swap valuations at any point in
time, to protect lenders in case of an early termination of the existing swaps
by us. The cash collateral accounts are controlled by the lenders, however, we
earn interest on the funds invested. The purpose of the escrow accounts
related to substitutions is to provide temporary collateral in conjunction with
property substitutions when the release of a mortgaged property occurs prior to
the lenders acceptance of a replacement property. The amount represents an
agreed upon amount of cash held in escrow until such property substitution is
completed, at which time the cash is returned to us. Restricted cash is
included in other assets and totaled approximately $20.5 million and $20.2
million as of March 31, 2004 and December 31, 2003, respectively. Deferred Loan Costs Certain costs incurred in connection with our revolving credit facilities and
issuing mortgage debt are capitalized and generally amortized over the terms of
the respective revolving credit facility or mortgage debt using the effective
interest method or on a straight-line basis, which approximates the effective
interest method. Deferred loan costs include lender fees and other third party
costs. These costs, net of accumulated amortization, are included in other
assets and totaled approximately $17.7 million and $18.1 million as of March
31, 2004 and December 31, 2003, respectively. Loan cost amortization expense
was approximately $764,000 and $522,000 for the three months ended March 31,
2004 and 2003, respectively. Capitalized Leasing Costs Certain direct costs initially incurred by us in negotiating and consummating a
successful lease are capitalized and generally amortized over the initial base
term of the lease. Capitalized leasing costs include employee compensation and
payroll-related fringe benefits directly related to time spent performing
successful leasing-related activities. These activities include evaluating the
financial condition of prospective clients, evaluating and recording
guarantees, collateral and other security arrangements, negotiating lease
terms, preparing lease documents and closing the transaction. These costs, net
of accumulated amortization, are included in other assets and totaled
approximately $1.6 9




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##### 



million and $1.4 million as of March 31, 2004 and December
31, 2003, respectively. Leasing cost amortization expense was approximately
$49,000 and $41,000 for the three months ended March 31,
2004 and 2003, respectively. Income Taxes We believe we are qualified and will continue to qualify as a real estate
investment trust, commonly referred to as a REIT, under the provisions of the
Internal Revenue Code of 1986, as amended. As a REIT, we are required to
distribute at least 90% of our taxable income to our shareholders and comply
with certain other requirements. We generally will not be subject to federal
income tax on taxable income that we distribute to our shareholders. The
Company is subject to certain state and local income and franchise taxes. Rental Revenue Recognition We lease our real estate pursuant to long-term, triple-net leases, under which
the tenants typically pay all operating expenses of a property, including, but
not limited to, all real estate taxes, assessments and other government
charges, insurance, utilities, repairs and maintenance. Our leases are
recorded as operating leases under SFAS No. 13, Accounting for Leases, for
financial reporting purposes. As such, the leased assets remain on our balance
sheet and we depreciate them based on their estimated useful lives. Rental
income attributable to the leases is recorded monthly when due from tenants.
Rental income attributable to the majority of our leases is fixed by the lease
agreement. However, under our variable rate lease program, monthly base rent
is calculated based on a spread over an applicable index, typically LIBOR. As
of March 31, 2004, approximately $412 million of our real estate portfolio, or
21%, was subject to variable rate leases. This compares to $384 million of our
real estate portfolio, or 24%, that was subject to variable rate leases as of
March 31, 2003. The vast majority of our variable rate lease agreements
contain minimum lease rates, generally between 8% and 9%, and fixed rate
conversion features generally with minimum rates of 10.0% to 10.25%, and none
of these leases contains a maximum rate. Our leases typically provide for upward periodic adjustments in base rent due
from our tenants, usually based on a factor of the change in the consumer price
index, commonly referred to as the CPI. In addition, certain of our leases are
subject to fixed minimum and/or maximum rent escalators during the initial
lease term and extension periods. Our leases typically reset to market during
certain renewal periods. The fixed minimum rent escalations are straight-lined
into rental income over the initial lease term. Any rent adjustments above the
fixed minimum escalations are recorded as revenue in the period they are due
from the tenants. Straight-lined rents are included in other assets and
totaled approximately $17.3 million and $16.7 million as of March 31, 2004 and
December 31, 2003, respectively. Straight-lined rental revenue was
approximately $1.1 million and $1.2 million for the three months ended March
31, 2004 and 2003, respectively. Derivative Instruments Our financing strategy is to match-fund our long-term debt to our leases,
allowing us to substantially lock in our investment spreads during the initial
lease term. During the normal course of our business, we are exposed to the
effect of interest rate fluctuations that may impact our investment spreads.
To limit this exposure, we have entered into interest rate swap arrangements
with third parties, to manage, or hedge, this risk. We do not use derivative
instruments for speculative purposes. We will either hedge our variable rate
debt to convert it to a fixed interest rate, designating such hedge as a cash
flow hedge, or hedge our fixed rate debt to convert it to a variable interest
rate, designating such hedge as a fair value hedge. The derivative instruments, including cash flow and fair value hedges that we
have entered into, have been designated as highly effective at the inception of
the swap arrangements. We continue to evaluate 10




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##### 



the highly effective nature of
those hedges and believe our hedges continue to be highly effective. For a derivative qualifying as a cash flow hedge, we record the change in the
unrealized gain or loss as a component of accumulated other comprehensive
income (loss) within shareholders equity on our consolidated balance sheets.
The fair value of the swap is recorded as either an asset or liability on our
consolidated balance sheets. For a derivative qualifying as a fair value hedge, the change in the net
unrealized gain or loss upon measuring the fair value hedge and the fair value
of the debt instrument or firm commitment being hedged is recorded on our
consolidated statements of operations. Generally, these amounts offset each
other. The fair value of the swap is recorded as either an asset or liability,
with a corresponding increase or decrease to the carrying value of the debt
instrument or firm commitment being hedged on our consolidated balance sheets. Share-Based Compensation The Capital Automotive Group 1998 Equity Incentive Plan (as amended in February
1999 and as restated and amended in February 2002), which we refer to as the
Plan, provides equity compensation to our employees, officers, non-employee
trustees and certain other service providers. At March 31, 2004, we accounted
for our Plan under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. All options granted under this Plan had exercise prices equal
to or greater than the market value of the underlying common stock on the date
of grant. Therefore, no compensation expense is reflected in net income for
stock option-based awards. The following table illustrates the effect on net income and earnings per
common share if we had applied the fair value recognition provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148,
Accounting For Stock-Based Compensation  Transition and Disclosure, to
share-based compensation (in thousands, except per share data). For the Three MonthsEnded March 31,2004
    
    2003Net income available to common shareholders, as reported
    
    $
    16,694
    
    
    $
    11,936Add: Share-based compensation expense included in
reported net income, net of minority interest
    
    
    273
    
    
    
    257Deduct: Total share-based compensation expense
determined under the fair value-based method for all
awards, net of minority interest
    
    
    (309
    )
    
    
    (303
    )Pro forma net income
    
    $
    16,658
    
    
    $
    11,890Basic earnings per common share:As reported
    
    $
    0.49
    
    
    $
    0.42Pro forma
    
    $
    0.49
    
    
    $
    0.42Diluted earnings per common share:As reported
    
    $
    0.48
    
    
    $
    0.41Pro forma
    
    $
    0.48
    
    
    $
    0.41
 11




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##### 



Use of Estimates The preparation of financial statements in conformity with GAAP requires
management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. Reclassifications Certain amounts in the 2003 consolidated financial statements have been
reclassified to conform with the current year presentation. 3. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued FASB Interpretation No. 46, commonly referred
to as FIN 46, Consolidation of Variable Interest Entities. Under FIN 46,
companies are required to determine if they are the primary beneficiary of
a variable interest entity, commonly referred to as a VIE. If they are the
primary beneficiary, the VIE must be consolidated. All companies with variable
interests in VIEs created after January 31, 2003 must apply the provisions of
FIN 46 immediately. Public companies with a variable interest in a VIE created
before February 1, 2003 were originally required to apply the provisions of FIN
46 no later than the beginning of the first interim or annual reporting period
beginning after June 15, 2003. This requirement was subsequently deferred by
the FASB in October 2003 to the first interim or annual period ending after
December 15, 2003. FIN 46 has not had and we do not expect that it will have
a significant impact on our financial condition or results of operations. 4. INVESTMENTS IN REAL ESTATE During the three months ended March 31, 2004, we invested approximately $82.4
million in five auto retail properties and several new construction and
facility improvement projects, located in 11 states. We funded the first
quarter investments with the following: (i) the repayment
of a $25.5 million note previously issued by the Company that was secured by a
property acquired during the first quarter; (ii) a property owned by us that
was sold back to a tenant as part of a like-kind exchange; and (iii) cash on
hand. The real estate acquired contains 11 automotive franchises and added
approximately 418,000 square feet of buildings and improvements on
approximately 60 acres of land. These properties have initial lease terms
generally ranging from 15 to 20 years, with a weighted average initial lease
term of 18.1 years. The leases typically have options to renew upon generally
the same terms and conditions for one or more additional periods of five to 10
years each, exercisable at the option of the tenants. Projects currently under
development, which we are funding, include a Pontiac-GMC and Collision Center
facility and an auto mall consisting of ten franchises (Acura, Audi, Bentley,
BMW, Infiniti, Lexus, Maserati, Mercedes-Benz, Porsche and Volvo) scheduled for
completion during the next two years. Included in the first quarter investments were $5.9 million in construction
advances. These advances relate to the development of several new facilities,
constructed by our tenants and funded by us. The projects currently under
development primarily consist of Honda, Lexus, Mercedes-Benz and Porsche
franchises scheduled for completion during the next two years. 12




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##### 



5. DISCONTINUED OPERATIONS Beginning in 2002, SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, requires that gains and losses from dispositions of
properties and all operating earnings from these properties be reported as
discontinued operations. This also requires that all past earnings
applicable to a property disposed of subsequent to January 1, 2002 be reported
as discontinued operations. As a result, previously reported income from
continuing operations will be updated each time a property is sold. This
requirement is for presentation only and has no impact on net income. During the first quarter of 2004, we sold six auto retail locations, totaling
$33.2 million, to four dealer groups, resulting in a combined gain of
approximately $1.2 million before minority interest. In exchange for the early
termination of the leases related to certain of these properties, we received
approximately $1.2 million in lease termination fees, which was recorded during
the quarter. The earnings generated from this real estate, including the
combined gain and lease termination fees, have been reported as discontinued
operations. Since January 1, 2003, we have sold seven auto retail locations, totaling $35.2
million. The following table sets forth the components of discontinued
operations related to properties sold subsequent to January 1, 2003 (in
thousands): Three months ended March 31,2004
    
    2003Revenue:Rental
    
    $
    227
    
    
    $
    860Other
    
    
    1,248
    
    
    
    40Total revenue
    
    
    1,475
    
    
    
    900Expenses:Depreciation
    
    
    19
    
    
    
    175Interest
    
    
    76
    
    
    
    334Total expenses
    
    
    95
    
    
    
    509Income from discontinued operations before gain
on sale of real estate and minority interest
    
    
    1,380
    
    
    
    391Gain on sale of real estate
    
    
    1,171
    
    
    
    46Total discontinued operations before minority interest
    
    
    2,551
    
    
    
    437Minority interest related to discontinued operations
    
    
    (475
    )
    
    
    (101
    )Total discontinued operations, net of minority interest
    
    $
    2,076
    
    
    $
    336
 6. RELATED PARTY TRANSACTIONS During the first quarter of 2004, we funded approximately $4.5 million to a
tenant affiliated with a member of our Board of Trustees (board member) to
purchase a new service center. The new facility had been constructed by the
tenant in 2003 at a cost of approximately $5.5 million on land owned by a
subsidiary of the Company. In connection with this funding, the lease term for
certain properties, including these improvements, leased to affiliates of the
board member were extended for an additional 15 years. The funding was on
substantially the same terms as a comparable funding would have been with a
non-affiliated tenant and was approved by the Audit Committee and
independent members of our Board of
Trustees. 13




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##### 



During the first quarter of 2004, we consented to the assignment of a lease
from an entity related to one of our board members to an unrelated third party.
The assignee has been the operator of the dealership facility since we
acquired the property in 1998. The terms of the assignment were on
substantially the same terms as we would provide to a non-affiliated tenant and
were approved by the Audit Committee and independent members of our Board of Trustees. The lease
provides for annualized rental payments as of March 31, 2004 of approximately
$354,000. As of March 31, 2004, we owned 25 properties that were leased to entities
related to three board members and/or members of their families. The leases in
the aggregate provide for annualized rental payments as of March 31, 2004 of
approximately $13.0 million. 7. MORTGAGE DEBT AND REVOLVING CREDIT FACILITIES As of March 31, 2004, we had total mortgage debt outstanding of approximately
$1.07 billion (consisting of approximately $811.3 million of fixed rate and
approximately $259.9 million of variable rate mortgage debt), which was
secured by 268 of our properties. In addition, we had approximately $4.4
million of unsecured debt and approximately $18.0 million outstanding on our
revolving credit facilities. 14




---



##### 



The following is a summary of our total debt outstanding as of March 31, 2004
and December 31, 2003 (dollars in thousands): Principal
    
    PrincipalOriginal
    
    Balance as of
    
    Balance as of
    
    Effective
    
    Term/Debt
    
    March 31,
    
    December 31,
    
    Interest
    
    AmortizationDescription of Debt
    
    Issued
    
    2004
    
    2003
    
    Rate*
    
    Schedule7.59% fixed rate debt due 12/1/08 (1)
    
    
    38,050
    
    
    $
    32,671
    
    
    $
    33,046
    
    
    
    7.95
    %
    
    10 yr/17 yr7.54% fixed rate debt due 7/6/11 (2)
    
    
    100,000
    
    
    
    92,041
    
    
    
    92,041
    
    
    
    7.84
    %
    
    12 yr/25 yr7.565% fixed rate debt due 11/16/12 (3)
    
    
    28,500
    
    
    
    25,080
    
    
    
    25,080
    
    
    
    7.74
    %
    
    12 yr/25 yr7.5975% fixed rate debt due 12/18/12 (3)
    
    
    32,054
    
    
    
    28,644
    
    
    
    28,644
    
    
    
    7.62
    %
    
    12 yr/30 yr7.50% fixed rate debt due 8/10/13 (4)
    
    
    82,600
    
    
    
    75,717
    
    
    
    75,717
    
    
    
    7.62
    %
    
    12 yr/30 yr5.84% fixed rate debt due 2/1/14 (5)
    
    
    11,900
    
    
    
    11,880
    
    
    
    
    
    
    
    6.59
    %
    
    10 yr/25 yr6.77% fixed rate debt due 7/1/14 (6)
    
    
    20,400
    
    
    
    20,400
    
    
    
    20,400
    
    
    
    6.77
    %
    
    10.5 yr/30 yrTriple Net Lease Mortgage Notes, Series 2002 (7)
    
    
    325,000
    
    
    
    302,906
    
    
    
    306,251
    
    
    
    7.70
    %
    
    (7)Triple Net Lease Mortgage Notes, Series 2003-1 (8)
    
    
    228,000
    
    
    
    221,913
    
    
    
    223,469
    
    
    
    5.86
    %
    
    (8)Total Mortgage Fixed Rate Debt
    
    
    
    
    
    $
    811,252
    
    
    $
    804,648
    
    
    
    7.17
    %Variable rate debt due 9/29/11 (9)
    
    
    150,000
    
    
    
    136,216
    
    
    
    137,357
    
    
    
    3.42
    %
    
    12 yr/25 yrVarious variable rate debt (10)
    
    
    130,110
    
    
    
    123,714
    
    
    
    124,079
    
    
    
    3.97
    %
    
    5 to 12 yr/25 to 30 yrTotal Mortgage Variable Rate Debt
    
    
    
    
    
    $
    259,930
    
    
    $
    261,436
    
    
    
    3.68
    %TOTAL MORTGAGE DEBT (11)
    
    
    
    
    
    $
    1,071,182
    
    
    $
    1,066,084
    
    
    
    6.33
    %Variable rate debt due 10/2/08 (12)
    
    
    4,500
    
    
    
    4,375
    
    
    
    4,425
    
    
    
    3.69
    %
    
    5 yr/ 15 yrTOTAL UNSECURED DEBT
    
    
    
    
    
    $
    4,375
    
    
    $
    4,425
    
    
    
    3.69
    %$100 million revolving secured facility (13)
    
    
    
    
    
    
    18,005
    
    
    
    49,326
    
    
    
    4.21
    %
    
    (13)$60 million revolving unsecured facility (14)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14)$100 million revolving secured construction
facility (15)
    
    
    
    
    
    
    4
    
    
    
    25,683
    
    
    
    4.21
    %
    
    (15)TOTAL CREDIT FACILITIES
    
    
    
    
    
    $
    18,009
    
    
    $
    75,009
    
    
    
    4.21
    %TOTAL DEBT OUTSTANDING
    
    
    
    
    
    $
    1,093,566
    
    
    $
    1,145,518
    
    
    
    6.25
    %
  *
    
    For the quarter ended March 31, 2004. Includes deferred loan fees
amortized over the life of the loans.(1)
    
    The loan requires monthly payments of principal and interest with a
final payment at maturity of approximately $24.2 million. The
Partnership has provided a guaranty of collection limited to
approximately $8.9 million of this loan, contingent upon the lender
first making written demand upon and proceeding against the borrower,
including obtaining judgment and foreclosing upon all collateral. All
amounts recovered from the borrower or collateral following a default
reduce such guarantee.(2)
    
    The loan requires quarterly payments of principal and interest with a
final payment at maturity of approximately $72.4 million.(3)
    
    These loans require quarterly interest and level principal payments
until maturity, at which time the loans require final 15




---



##### 



payments totaling approximately $33.5 million. These loans bear interest
equal to the A1/P1 Commercial Paper Rate plus 215 basis points. We have
entered into interest rate swap arrangements with a third party to fix the
interest rates on these loans. Subsequent to March 31, 2004, these loans
were paid off and the swap arrangements were terminated as part of our
debt restructuring, as further described in the Subsequent Events footnote
herein.(4)
    
    This loan requires quarterly interest and level principal payments
with a final payment at maturity of approximately $49.6 million. This
loan bears interest equal to the 30-day LIBOR rate plus 175 basis
points. We have entered into an interest rate swap arrangement with a
third party to fix the interest rate on this loan.(5)
    
    This loan requires monthly interest and level principal payments with
a final payment at maturity of approximately $9.2 million.(6)
    
    This loan requires quarterly interest and level principal payments
with a final payment at maturity of approximately $13.4 million. This
loan bears interest equal to the three-month LIBOR rate plus 225 basis
points. We have entered into an interest rate swap arrangement with a
third party to fix the interest rate on this loan.(7)
    
    During 2002, we issued $325 million in four classes of Triple Net
Lease Mortgage Notes, Series 2002. CARS Loan Servicer L.L.C., one of
our subsidiaries, is servicer of the notes on behalf of the noteholders.
The following is a breakdown of the Triple Net Lease Mortgage Notes,
Series 2002 by class: Original Principal
    
    Current PrincipalClass
    
    Balance
    
    Balance
    
    Maturity DateA-1a
    
    
    164,136
    
    
    
    148,906
    
    
    
    8/15/14A-1b
    
    
    9,064
    
    
    
    9,064
    
    
    
    7/15/15A-2
    
    
    75,900
    
    
    
    69,036
    
    
    
    7/15/15A-3
    
    
    75,900
    
    
    
    75,900
    
    
    
    6/15/22
  Classes A-1a and A-1b are fully-amortizing in succession over their
respective terms and Classes A-2 and A-3 are fully-amortizing in
succession over 20 years. The Partnership has provided a guaranty of
collection limited to approximately $35 million of this loan, contingent
upon the trustee first making written demand upon and proceeding against
the borrower, including obtaining judgment and foreclosing upon all
collateral. All amounts recovered from the borrower or collateral
following a default reduce such guarantee. In connection with the
issuance of this debt, the Company guarantees certain customary,
non-recourse, carveout indemnities. Additionally, in conjunction with the
servicing of the debt, the Company guarantees CARS Loan Servicer, L.L.C.s
obligations to make certain principal, interest and property protection
advances.(8)
    
    During 2003, we issued $228 million in two classes of Triple Net
Lease Mortgage Notes, Series 2003-1. CARS Loan Servicer L.L.C. is
servicer of the notes on behalf of the noteholders. The following is a
breakdown of the Triple Net Lease Mortgage Notes, Series 2003-1 by
class: Original Principal
    
    Current PrincipalClass
    
    Balance
    
    Balance
    
    Maturity DateA-1
    
    
    109,000
    
    
    
    102,913
    
    
    
    9/25/15A-2
    
    
    119,000
    
    
    
    119,000
    
    
    
    3/25/19
  The notes amortize in succession over a 20-year amortization schedule with
the Class A-1 notes fully-amortizing and the Class A-2 notes requiring a
final payment at maturity of approximately $70.8 million. In connection
with the issuance of this debt, the Company guarantees certain customary,
non-recourse, carveout indemnities. Additionally, in conjunction with the
servicing of the debt, the Company guarantees CARS Loan Servicer, L.L.C.s
obligations to make certain principal, interest and property protection
advances.(9)
    
    The loan bears interest equal to the 30-day LIBOR rate plus 227 basis
points and requires monthly level payments of principal and interest
with a final payment at maturity of approximately $101.4 million.
Subsequent to March 31, 2004, the loan was paid off as part of our debt
restructuring, as further described in the Subsequent Events footnote
herein.(10)
    
    These loans bear interest at variable rates ranging from 185 to 357
basis points above the A1/P1 Commercial Paper Rate, the 30-day LIBOR
rate or the three-month LIBOR rate and have maturity dates ranging from
November 30, 2008 to June 2, 2015. The terms of the various loans
require either quarterly interest and level principal payments, monthly
level payments of principal and interest, or interest-only payments
until maturity, at which time the loans require final payments totaling
approximately $100.6 million. One of these loans, totaling $51.6
million as of March 31, 2004, is cross defaulted with the revolving
credit facilities discussed in footnote (13) and (15). Four of these
loans totaling $39.9 million as of March 31, 2004 and issued by
subsidiaries of the Company, contain acceleration clauses in the event
of a material adverse change, which are at the lenders discretion.
Additionally, on three of the 16




---



##### 



aforementioned loans, the Partnership has partially guaranteed the
monetary obligations under the loans limited to approximately $9.1 million
as of March 31, 2004. Subsequent to March 31, 2004, two of the loans
totaling $25.9 million as of March 31, 2004, were paid off as part of our
debt restructuring, as further described in the Subsequent Events footnote
herein.(11)
    
    Certain amounts of our mortgage debt are subject to prepayment
penalties.(12)
    
    The loan bears interest equal to the three-month LIBOR rate plus 250
basis points and requires monthly level payments of principal plus
interest with a final payment at maturity of approximately $3.0 million.(13)
    
    Amounts borrowed under this facility bear interest at market rates
determined at the time of each draw until such time as the Company and
the lender set an interest rate for any future amounts borrowed under
the facility. As of March 31, 2004, the borrowings under the facility
bear interest equal to the 30-day LIBOR rate plus 295 to 315 basis
points. Properties are eligible within the borrowing base for 150 days,
unless extended by the Company and the lender. The facility has a
one-year term, which matures on March 21, 2005, and is renewable
annually.(14)
    
    The facility provides for a three-year term with interest determined,
at our option, at either the Prime rate less 50 basis points or the
one-month, two-month or three-month LIBOR rate plus 200 basis points.
Properties are eligible within the borrowing base for 12 months, unless
extended by the Company and the lender. On April 1, 2004, we
terminated this facility because it prohibited the issuance of senior
unsecured debt, which closed on April 15, 2004, as further described in
the Subsequent Events footnote herein.(15)
    
    This construction credit facility provides for a one-year term.
Amounts borrowed under this facility bear interest equal to a spread
over LIBOR as determined at the time of each draw. As of March 31,
2004, the borrowings under the facility bear interest equal to the
30-day LIBOR rate plus 323 basis points. Properties are eligible within
the borrowing base for 12 months, unless extended by the Company and the
lender. The facility matures on June 22, 2005, and is renewable
annually. The more significant debt covenants related to our mortgage debt, unsecured
debt and credit facilities limit our debt to assets ratio and require us to
comply with minimum debt service coverage and maximum debt to adjusted net
worth ratios. Several of our loan agreements contain no financial covenants;
however, there are negative covenants relating to customary items such as
operation and maintenance of the properties securing the loans and limitations
on issuing additional debt at those subsidiaries. As of March 31, 2004, we
were in compliance with all of the debt covenants related to our mortgage debt,
unsecured debt and credit facilities. Aggregate annual repayments of our debt outstanding (excluding borrowings on
our credit facilities) as of March 31, 2004 are as follows (in thousands): For the Year Ended December 31, Debt RepaymentPrincipal
    
    
    
    
    
    Subsequent toAmortization
    
    Maturities
    
    March 31, 2004(1)
    
    Total2004
    
    $
    22,126
    
    
    $
    
    
    
    $
    7,102
    
    
    $
    29,2282005
    
    
    31,060
    
    
    
    
    
    
    
    7,343
    
    
    
    38,4032006
    
    
    32,981
    
    
    
    
    
    
    
    7,527
    
    
    
    40,5082007
    
    
    35,043
    
    
    
    
    
    
    
    7,774
    
    
    
    42,8172008
    
    
    36,966
    
    
    
    49,331
    
    
    
    8,015
    
    
    
    94,312Thereafter
    
    
    376,048
    
    
    
    276,153
    
    
    
    178,088
    
    
    
    830,289Total
    
    $
    534,224
    
    
    $
    325,484
    
    
    $
    215,849
    
    
    $
    1,075,557
 (1) As further described in the Subsequent Events footnote herein, during April
2004, we repaid approximately $216 million of our total debt outstanding as of
March 31, 2004 with Ford Motor Credit Corporation (Ford) that was scheduled to
mature primarily between 2011 and 2012 and, in connection therewith, issued
$125 million of senior unsecured monthly income notes that mature in 2019. 17




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Interest Rate Swaps We have entered into interest rate swap arrangements with third parties to
manage, or hedge, our risk related to the effect of interest rate fluctuations
on our investment spreads. We do not use derivative instruments for
speculative purposes. We will either hedge our variable rate debt to convert
it to a fixed interest rate, designating such hedge as a cash flow hedge, or
hedge our fixed rate debt to convert it to a variable interest rate,
designating such hedge as a fair value hedge. The cash flow and fair value
hedges were designed to mirror the underlying debt in terms of index, spread,
reset, amortization, compounding and maturity. Due to the identical nature of
the terms of the swap arrangements and the underlying terms of the debt, the
swaps were designated as highly effective at the inception of the swap
arrangements. We continue to evaluate the highly effective nature of those
hedges and believe our hedges continue to be highly effective. For all swap
arrangements, we are required to post collateral, generally in the amount of
the swap valuations at any point in time, to protect the lenders in case of an
early termination by us. The collateral posted by us related to our hedges, totaling approximately $19.4
million and $12.8 million as of March 31, 2004 and December 31, 2003,
respectively, is included in other assets on our consolidated balance sheets. As of March 31, 2004, we have four interest rate swap arrangements with third
parties to fix the interest rate on the underlying variable rate debt, with a
notional balance totaling approximately $158 million, which we have designated
as cash flow hedges. Subsequent to March 31, 2004, two of the interest rate
swap arrangements with notional balances totaling approximately $58 million
were terminated as part of our debt restructuring, as further described in the
Subsequent Events footnote herein. For a derivative qualifying as a cash flow hedge, we record the change in the
unrealized gain or loss as a component of accumulated other comprehensive
income (loss) within shareholders equity on our consolidated balance sheets.
The fair value of the swap is recorded as either an asset or liability on our
consolidated balance sheets. The unrealized loss on our cash flow hedges was approximately $18.0 million and
$13.5 million as of March 31, 2004 and December 31, 2003, respectively. Total
comprehensive income for the three months ended March 31, 2004 and 2003 was
approximately $14.9 million and $11.0 million,
respectively.  On April 15, 2004,
the Company closed on a public offering of $125 million senior unsecured
monthly income notes. Interest on the 6.75% notes is payable monthly. The
notes have a 15-year term and are redeemable at the Companys option after five
years at par. On March 18, 2004, in conjunction with pricing of the $125
million of fixed rate debt, we entered into an interest rate swap arrangement
with a third party to cause the interest rate on $100 million of the fixed rate
debt effectively to be at a floating rate of the three-month LIBOR plus 162.4
basis points. At the time we entered into the swap, we had a firm commitment
to close the debt on April 15, 2004. Therefore, we hedged our firm commitment
and the debt. The swap arrangement has been designated as a fair value hedge. For a derivative qualifying as a fair value hedge, the change in the net
unrealized gain or loss upon measuring the fair value hedge and the fair value
of the debt instrument or firm commitment being hedged is recorded on our
consolidated statements of operations. Generally, these amounts offset each
other. The fair value of the swap is recorded as either an asset or liability,
with a corresponding increase or decrease to the carrying value of the debt
instrument or firm commitment being hedged on our consolidated balance sheets. The unrealized loss on our fair value hedge was approximately $1.1 million as
of March 31, 2004. The net unrealized gain or loss on our fair value hedge and
the portion of the firm commitment of the debt being hedged had no impact on
our net income for the three months ended March 31, 2004. 18




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8. MINORITY INTEREST Assets and liabilities allocated to the limited partners (other than the
Company), which we describe as the Minority Interest, are based on their
ownership percentage of the Partnership at the end of the period. The
ownership percentage is determined by dividing the number of Common Units held
by the Minority Interest at the end of the period by the total Common Units
outstanding at the end of the period, excluding derivative securities. The
full redemption amount of the Preferred Units is deducted from the
Partnerships equity prior to applying the ownership percentage to calculate
Minority Interest. The Minority Interest ownership percentage in assets and
liabilities of the Partnership was 18.2% and 19.3% as of March 31, 2004 and
December 31, 2003, respectively. Income before minority interest is allocated to the limited partners based on
their weighted average ownership during the period. The ownership percentage
is determined by dividing the weighted average number of Common Units held by
the Minority Interest by the total weighted average number of Common Units
outstanding during the period, excluding derivative securities. Income before
minority interest is reduced by Preferred Unit dividends prior to applying the
ownership percentage. The Minority Interest ownership percentage in income of
the Partnership was 18.6% and 23.1% for the three months ended March 31, 2004
and 2003, respectively. Holders of Common Units, which we refer to as Unitholders, are entitled to
quarterly distributions which are equivalent to the quarterly dividend
distributions received by holders of common shares. There were 7.8 million and
7.9 million Common Units as of March 31, 2004 and December 31, 2003,
respectively, not held by the Company, which were outstanding and could be
exchanged for common shares of the Company on a one-for-one basis in specified
circumstances. When a Unitholder converts Common Units to shares of common
stock, an adjustment is recorded to equity to reflect the change in the
Minority Interest ownership in the Partnership. When the Company issues common
shares from an underwritten public offering, its share-based compensation plan
and its Dividend Reinvestment and Share Purchase Plan, the net proceeds from
these issuances are contributed to the Partnership in exchange for Common Units
in the Partnership and an adjustment is recorded to equity to reflect the
change in the Minority Interest ownership in the Partnership. 9. EARNINGS PER COMMON SHARE Basic earnings per common share is computed as net income available to common
shareholders divided by the weighted average common shares, excluding
restricted shares, outstanding for the period. Diluted earnings per common
share is computed as net income available to common shareholders, adjusted to
reflect the change in the income allocated to minority interest calculated as
if the dilutive securities were outstanding, divided by the weighted average
common shares outstanding for the period plus the effect of dilutive securities
outstanding for the period, based on the treasury stock method. Dilutive
securities include options, warrants, phantom shares and restricted shares. 19




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A reconciliation of income and weighted average common shares used to calculate
basic and diluted earnings per common share for the three months ended March
31, 2004 and 2003 is as follows (in thousands, except per share data): Three Months EndedMarch 31,2004
    
    2003Income from continuing operations
    
    $
    16,470
    
    
    $
    11,600Preferred share dividends
    
    
    (1,852
    )
    
    
    Income from continuing operations used to
calculate basic earnings per common share
    
    
    14,618
    
    
    
    11,600Impact of dilutive securities
    
    
    49
    
    
    
    86Income from continuing operations used to
calculate diluted earnings per common share
    
    $
    14,667
    
    
    $
    11,686Basic earnings per common share
    
    $
    0.43
    
    
    $
    0.41Diluted earnings per common share
    
    $
    0.42
    
    
    $
    0.40Net income available to common shareholders
    
    $
    16,694
    
    
    $
    11,936Impact of dilutive securities
    
    
    58
    
    
    
    89Net income used to calculate diluted earnings per
common share
    
    $
    16,752
    
    
    $
    12,025Basic earnings per common share
    
    $
    0.49
    
    
    $
    0.42Diluted earnings per common share
    
    $
    0.48
    
    
    $
    0.41Weighted average shares:Common shares outstanding used to compute basic
earnings per common share
    
    
    34,049
    
    
    
    28,279Impact of dilutive securities
    
    
    624
    
    
    
    926Common shares outstanding used to compute diluted
earnings per common share
    
    
    34,673
    
    
    
    29,205
 10. EQUITY TRANSACTIONS On February 9, 2004, we sold 1,825,000 common shares in an underwritten public
offering at an initial price to the public of $35.40 per share under our shelf
registration statement filed with the SEC on June 25, 2003, which we refer to
as the 2003 Shelf Registration Statement. Net proceeds to the Company, after
deducting the discounts and commissions to the underwriters and other expenses
of this offering, totaled approximately $61.5 million. After the offering,
$336.6 million was available under the 2003 Shelf Registration Statement for
the issuance of securities. The Company contributed the net proceeds of the
offering to the Partnership in exchange for Common Units in the Partnership and
used the net proceeds to fund acquisitions, to repay borrowings under our
short-term credit facilities and for general corporate purposes. 20




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11. DIVIDENDS DECLARED PER SHARE Common Shares Dividends are generally declared a quarter in arrears. Dividends declared per
share for the three months ended March 31, 2004 and 2003 represent the fourth
quarter dividend for 2003 and 2002, respectively. On April 13, 2004, our Board of Trustees declared a cash dividend of $0.4200
per common share for the first quarter ended March 31, 2004 to shareholders of
record as of May 10, 2004. The common share dividend will be paid on May 20,
2004. Preferred Shares On April 13, 2004, our Board of Trustees declared a cash dividend of $0.46875
per Series A Cumulative Redeemable Preferred Share for the period commencing
February 1, 2004 and ending April 30, 2004, to shareholders of record as of May
3, 2004. The Series A preferred share dividend will be paid on May 17, 2004. 12. LEGAL PROCEEDINGS We are engaged in litigation relating to the activities of Michael Burkitt, a
former employee who currently serves as the President, Chief Executive Officer,
and a member of the board of directors of Milestone Realty Trust, a Maryland
corporation, which we refer to as Milestone. We filed a motion for judgment in
the Circuit Court of Fairfax County, Virginia against Mr. Burkitt seeking
injunctive relief, punitive damages and actual damages of $5,000,000 resulting
from Mr. Burkitts alleged misappropriation of our trade secrets, breaches of
his fiduciary duties to us, and his misstatements to third parties regarding
his role and activities as an employee of ours. On April 2, 2004, Mr. Burkitt filed a Demurrer or, in the alternative, a Motion
for a Bill of Particulars in the Virginia Circuit Court alleging that our
complaint failed to state a cause of action or to plead facts supporting its
claim. The court heard arguments relating to both the Demurrer and the Motion
on April 23, 2004. The Court refused to dismiss that portion of
our motion for
judgment with respect to misappropriation of trade secrets, refused to grant
Mr. Burkitts Motion for a Bill of Particulars and, with
respect to our claim of breach of fiduciary duty relating to trade secrets
and misstatements following termination of employment, granted the
Demurrer, with leave for us to amend our motion. We have filed an
amended motion for judgment addressing our breach of fiduciary duty
claim. In addition, Milestone, together with three of its sponsors and investors, has
filed suit against us in the District Court in Dallas County, Texas, seeking
injunctive relief, actual damages of at least $150,000,000 and treble damages
resulting from our alleged attempt to interfere with Milestones business
relationships with potential investors and tenants and its efforts to raise
capital. On April 6, 2004, the Dallas District Court issued a temporary
restraining order, prohibiting us, our officers, employees, agents, and all
other persons acting with us from contacting or attempting to contact, verbally
or in writing, any representative of any entity that may be an investor or
seller of real property to Milestone, for the purpose of disparaging Milestone,
its officers and affiliates by untruthful statements and innuendoes or
accusations. The order currently expires on May 21, 2004, but the parties
anticipate the order will be extended by mutual agreement until completion of
discovery, which is currently underway. We believe that the issuance of a
temporary injunction to this effect will not affect our operations adversely.
In connection with this suit, we and the plaintiffs engaged in mediation in
Dallas, Texas, on April 19, 2004, which did not result in a settlement. It is difficult to forecast the outcome of this litigation. These matters are
still in the preliminary stages, 21




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and we are in the process of evaluating our options for responding to the Texas
petition. Although no assurance can be provided with respect to any litigation, we
believe that the allegations in the Texas petition are without merit and that
we have meritorious defenses to the claims made in the petition. We intend to
defend ourselves vigorously, and management does not anticipate that the
litigation will have a material adverse effect on our financial position or
results of operations. 13. SUBSEQUENT EVENTS The Company has undertaken a restructuring of its balance sheet. During April
2004, we repaid the majority of our mortgage debt outstanding with Ford
totaling approximately $214 million, of which approximately $161 million was
variable rate debt, with a weighted average spread over LIBOR of 226 basis
points. The remaining $53 million was variable rate debt swapped to fixed rate
bearing interest at approximately 7.6%. The net proceeds used to repay the
debt were derived from the following sources:  
    
    On April 2, 2004, we issued 1,000,000 common shares in an
underwritten public offering at an initial price to the public of $35.15
per share. The shares were issued under our 2003 Shelf Registration
Statement. The Company contributed the $35 million of net proceeds from
the offering to the Partnership in exchange for Common Units in the
Partnership. Of the total net proceeds, approximately $18 million was
used to pay down amounts outstanding on our short-term credit facilities
and the remainder was used to pay off a portion of the debt outstanding
with Ford;
    
    On April 15, 2004, we closed on a public offering of $125 million
senior unsecured monthly income notes at par and received net proceeds
of approximately $121 million. The 6.75% notes were issued under our
2003 Shelf Registration Statement. Interest on the notes is payable
monthly. The notes have a 15-year term and are redeemable at the
Companys option after five years at par. The notes are listed on the
American Stock Exchange (AMEX) under the symbol CJM. The Company
contributed the net proceeds from the offering to the Partnership in
exchange for notes having economic terms substantially identical to
those of the 6.75% notes. On March 18, 2004, which was the date the
Company priced the notes, we entered into an interest rate swap
arrangement with a third party to cause the interest rate on $100
million of the notes effectively to be at a floating rate of the
three-month LIBOR plus 162.4 basis points. We have structured the swap
arrangement so that it is documented as a fair value hedge designated as
highly effective at inception;
    
    On April 27, 2004, we issued 2,500,000 8% Series B Cumulative
Redeemable Preferred Shares at $25.00 per share. On May 4, 2004,
upon exercise of the underwriters over-allotment option, we
issued an additional 100,000 Series B preferred shares at $25.00
per share. The Series B preferred
shares were issued under our 2003 Shelf Registration Statement. The
Company contributed the $63 million of net proceeds from the offering to
the Partnership in exchange for Series B Preferred Units in the
Partnership. The preferred shares pay quarterly dividends in arrears
and are listed on the NASDAQ National Market under the symbol CARSO.
The shares are redeemable at the Companys option after April 27, 2009.
Of the total net proceeds, approximately $53 million was used to pay off
a portion of the debt outstanding with Ford. The remaining net proceeds
will be used to fund future acquisitions and for general corporate
purposes; and
    
    Approximately $23 million from borrowings on our short-term credit
facilities and cash on hand was used to pay off a portion of the debt
outstanding with Ford. 22




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After
the aforementioned offerings, approximately $111.5 million remains available under our
2003 Shelf Registration Statement for the issuance of securities. As a result of this balance sheet restructuring, on April 1, 2004, we
terminated our $60 million unsecured credit facility, which prohibited the
issuance of senior unsecured debt. As of March 31, 2004, the facility had no
amounts outstanding and was expected to remain principally unused until its
expiration in March 2005. As a result of these transactions, we expect to incur a debt extinguishment
charge totaling approximately $5.1 million, or $0.11 per common
share. The debt extinguishment charge will be
recorded in the second quarter of 2004 and will consist of the write-off of
deferred loan fees totaling approximately $950,000 and swap breakage fees
totaling approximately $4.1 million related to the pay-off of variable rate
debt with Ford that had been swapped to a fixed rate. 23




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Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations We begin Managements Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) with our primary business strategy to give the
reader an overview of the goals of our business. This is followed by a
discussion of our recent developments beginning on page 25. In the next
section, beginning on page 28, we discuss our results of operations for the
periods presented. We then provide, beginning on page 31, an analysis of our
liquidity and capital resources, including discussions of our cash flows,
financing strategy, debt arrangements, sources of capital and financial
commitments. Finally, on page 42, we discuss funds from operations, or FFO,
which is a relative non-GAAP financial measure of performance and liquidity of
an equity REIT used by the REIT industry. The MD&A should be read in conjunction with the other sections of this
Quarterly Report on Form 10-Q, including the consolidated financial statements
and notes thereto appearing in Item 1 of this report, disclosures about our
market risk appearing in Item 3 of this report and the subsection captioned
Forward-Looking Statements herein. OVERVIEW Our primary business strategy is to purchase real estate (land, buildings and
other improvements), which we simultaneously lease to operators of franchised
automobile dealerships and motor vehicle service, repair or parts businesses,
used vehicle businesses and other related businesses under long-term,
triple-net leases. We use (i) the term dealerships to refer to these types of
businesses that are operated on our properties and (ii) the term dealer group,
tenant or operators of dealerships to refer to the persons and companies that
lease our properties. We focus on leasing properties to dealer groups that
have a long history of operating multi-site, multi-franchised dealerships,
generally targeting the largest dealer groups in terms of revenues in the
largest major metropolitan areas in the U.S. in terms of population. In
addition, we provide facility improvement and expansion funding, construction
financing and takeout commitments in certain circumstances. As of March 31,
2004, we had invested more than $1.9 billion in 324 properties located in 31
states, consisting of approximately 2,356 acres of land and containing
approximately 13.7 million square feet of buildings and improvements. Our
tenants operate 448 motor vehicle franchises on our properties, representing 43
brands of motor vehicles, which include all of the top selling brands in the
U.S. Substantially all of our properties are leased pursuant to long-term,
triple-net leases, under which the tenants typically pay all operating expenses
of a property, including, but not limited to, all real estate taxes,
assessments and other government charges, insurance, utilities, repairs and
maintenance. The initial lease terms generally range from 10 to 20 years (with
a weighted average initial lease term for leases entered into during the
quarter ended March 31, 2004 of approximately 18.1 years), with our entire
portfolio having a weighted average initial lease term of approximately 14.9
years. As of March 31, 2004, our portfolio had a weighted average remaining
lease term of approximately 11.7 years. The leases typically have options to
renew upon generally the same terms and conditions for one or more additional
periods of five to 10 years each, exercisable at the option of the tenants
(with renewal options typically ranging from a total of five to 40 years). Substantially all of our revenues are derived from (1) rents received or
accrued under long-term, triple-net leases; (2) interest earned on notes
secured by real estate; (3) interest earned from the temporary investment of
funds in short-term investments; and (4) other fee income. We are a self-administered and self-managed real estate company operating as a
real estate investment trust, or a REIT, for federal income tax purposes. Our
general and administrative expenses consist 24




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primarily of compensation expense
for our executive officers and other employees, professional fees,
office administration expenses (including rent), business taxes and insurance
and various other expenses incurred in managing our business. Our primary
non-cash expense is the depreciation of our properties. We depreciate
buildings and improvements on our properties over a nine-year to 40-year period
for tax purposes and a 20-year to 45-year period for financial reporting
purposes. We do not own or lease any significant personal property, furniture
or equipment at any property we currently own. RECENT DEVELOPMENTS Real Estate Investments During the first quarter, the Company increased its real estate investments by
approximately $23.7 million. The investment activity for the quarter consisted
of $82.4 million in property investments, $33.2 million in property
dispositions, and the repayment of a $25.5 million note previously issued by us
that was secured by a property acquired during the first quarter. Property
Investments
During the three months ended March 31, 2004, we invested approximately $82.4
million in five auto retail properties and several new construction and
facility improvement projects, located in 11 states. The real estate acquired
contains 11 automotive franchises and added approximately 418,000 square feet
of buildings and improvements on approximately 60 acres of land. These
properties have a weighted average initial lease term of 18.1 years, with
multiple renewal options exercisable at the option of our tenants. Unless
otherwise noted below, the investments were funded with cash on hand. A
summary of these investments is as follows:  
    
    One property totaling $25.5 million leased to Herb Gordon Auto Group,
Inc., an affiliate of Atlantic Automotive (Mile One Automotive), a new
tenant located in Silver Spring, Maryland. Five franchises are operated
on the property, including Dodge, Mercedes-Benz, Nissan, Subaru, and
Volvo, as well as a used car dealership and a body shop. With this
purchase, a note previously issued by us and secured by this property
was paid off. We have committed to fund approximately $15 million for
improvements to these facilities. As of March 31, 2004, this tenant
represents approximately 1% of our total annualized rental revenue.
    
    One property leased to Park Place Motorcars, Ltd. in Dallas, Texas.
We have committed to fund a state-of-the-art Mercedes-Benz and Porsche
sales and service facility that will be constructed on the property.
Simultaneously with the acquisition, we sold to Park Place Motorcars the
current Mercedes-Benz sales and service facility, which approximates the
property acquisition value. The dealer is relocating its operations to
expand its service capability and inventory selection to support higher
sales volumes and maintain high customer satisfaction. As of March 31,
2004, we leased five properties to affiliates of Park Place Motorcars,
Ltd., representing approximately 3% of our total annualized rental
revenue.
    
    One property totaling $11.0 million leased to an affiliate of Wolfe
Automotive Group, a new tenant, located in Ballwin, Missouri, a suburb
of St. Louis. A Toyota franchise is operated on the property. As of
March 31, 2004, this tenant represents less than 1% of our total
annualized rental revenue.
    
    One property totaling $2.5 million leased to an affiliate of
Midwestern Auto Group located in Dublin, Ohio, a suburb of Columbus.
Two franchises, Ferrari and Maserati, are located on the property. As
of March 31, 2004, we leased three properties to affiliates of
Midwestern Auto Group, representing approximately 1% of our total
annualized rental revenue. 25




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
    
    One property totaling approximately $2.4 million leased to a
subsidiary of Asbury Automotive
Group, Inc., located in Bryant, Arkansas, which is 18 miles southwest of
Little Rock. A Hyundai franchise is operated on the property. As of
March 31, 2004, we leased 13 properties to subsidiaries of Asbury,
representing approximately 4% of our total annualized rental revenue.
    
    New construction and improvement fundings, totaling approximately
$26.0 million, all of which were transacted with existing tenants on
previously acquired properties. Property Dispositions During the first quarter, we sold six auto retail locations, totaling $33.2
million, to four dealer groups, resulting in a combined gain of approximately
$1.2 million before minority interest. In exchange for the early termination of
the leases related to certain of these properties, we received approximately
$1.2 million in lease termination fees, which was recorded during the first
quarter. The earnings generated from this real estate, including the combined
gain and the lease termination fees, have been reported as discontinued
operations. Financing During the first quarter, we completed an underwritten public offering of
1,825,000 of our common shares priced at $35.40 per share under our shelf
registration statement filed with the SEC on June 25, 2003, which we refer to
as the 2003 Shelf Registration Statement. The net proceeds of the offering
totaling $61.5 million were used to fund acquisitions, to repay borrowings
under our short-term credit facilities and for general corporate purposes. We
also closed on a mortgage note totaling $11.9 million with one of the worlds
largest financial services companies. The loan has a ten-year term, 5.84%
fixed interest rate, 25-year amortization period and requires monthly interest
and principal payments. The net proceeds from the debt were used to repay
borrowings under our short-term credit facilities. The Company has also undertaken a restructuring of its balance sheet. During
April 2004, we repaid the majority of our mortgage debt outstanding with Ford
Motor Credit Corporation (Ford) totaling approximately $214 million, of which
approximately $161 million was variable rate debt, with a weighted average
spread over LIBOR of 226 basis points. The remaining $53 million was variable
rate debt swapped to fixed rate bearing interest at approximately 7.6%. The
net proceeds used to repay the debt were derived from the following sources:  
    
    On April 2, 2004, we issued 1,000,000 common shares in an
underwritten public offering at an initial price to the public of $35.15
per share. The shares were issued under our 2003 Shelf Registration
Statement. Of the total $35 million in net proceeds, approximately $18
million was used to pay down amounts outstanding on our short-term
credit facilities and the remainder was used to pay off a portion of the
debt outstanding with Ford;
    
    On April 15, 2004, we closed on a public offering of $125 million
senior unsecured monthly income notes at par and received net proceeds
of approximately $121 million. The 6.75% notes were issued under our
2003 Shelf Registration Statement. Interest on the notes is payable
monthly. The notes have a 15-year term and are redeemable at the
Companys option after five years at par. The notes are listed on the
American Stock Exchange (AMEX) under the symbol CJM. On March 18,
2004, which was the date the Company priced the notes, we entered into
an interest rate swap arrangement with a third party to cause the
interest rate on $100 million of the notes effectively to be at a
floating rate of the three-month LIBOR plus 162.4 basis points. We have
structured the swap arrangement so that it is documented as a fair value
hedge designated as highly effective at inception; 26




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
    
    On April 27, 2004, we issued 2,500,000 8% Series B Cumulative
Redeemable Preferred Shares at
$25.00 per share. On May 4, 2004, upon exercise of the
underwriters over-allotment option, we issued an additional 100,000
Series B preferred shares at $25.00 per share. The Series B preferred shares were issued under
our 2003 Shelf Registration Statement. The preferred shares pay quarterly
dividends in arrears and are listed on the NASDAQ National Market under
the symbol CARSO. The shares are redeemable at the Companys option
after April 27, 2009. The Company received net proceeds of approximately
$63 million, of which approximately $53 million was used to pay off a
portion of the debt outstanding with Ford. The remaining net proceeds
will be used to fund future acquisitions and for general corporate
purposes; and
    
    Approximately $23 million from borrowings on our short-term credit
facilities and cash on hand was used to pay off a portion of the debt
outstanding with Ford. After
the aforementioned offerings, approximately $111.5 million remains available under our
2003 Shelf Registration Statement for the issuance of securities. As a result of this balance sheet restructuring, on April 1, 2004, we
terminated our $60 million unsecured credit facility, which prohibited the
issuance of senior unsecured debt. As of March 31, 2004, the facility had no
amounts outstanding and was expected to remain principally unused until its
expiration in March 2005. We plan to structure a new credit facility in the
future that will better suit our needs. In the interim, we believe we have
adequate availability under our remaining credit facilities to fund our
short-term liquidity needs. As a result of these transactions, we expect to incur a debt extinguishment
charge totaling approximately $5.1 million, or $0.11 per common
share. The debt extinguishment charge will be recorded in the second
quarter of 2004 and will consist of the write-off of deferred loan fees
totaling approximately $950,000 and swap breakage fees totaling approximately
$4.1 million related to the pay-off of variable rate debt with Ford that had
been swapped to a fixed rate. This restructuring increases our balance sheet flexibility while
continuing our strategy of match-funding our debt with our leases.
Specifically, the Company accomplishes the following:  
    
    Replaces $214 million of secured financing with unsecured financing and equity capital;
    
    Increases our unencumbered assets to more than $500 million;
    
    Retains approximately $62 million in cash that would have been used
to pay principal amortization over the remaining terms of the repaid
debt. Approximately $9.5 million represents the additional cash
retained over the next twelve months. This also improves our overall
leverage and debt service and fixed charge coverage ratios. On a pro
forma basis, assuming the balance sheet restructuring had taken place on
March 31, 2004, the Companys March 31, 2004 debt to asset ratio would
have been reduced by 5%, and for the trailing twelve months ended March
31, 2004, our debt service and fixed charge coverage ratios would have
been improved by approximately 20 basis points and 5 basis points,
respectively;
    
    Reduces our long-term variable rate debt by approximately $60
million, which continues our strategy of match-funding in order to
minimize our interest rate risk; and
    
    Extends the weighted average remaining term of our long-term debt.
On a pro forma basis, assuming the balance sheet restructuring had taken
place on March 31, 2004, our weighted average remaining term of our
long-term debt would have increased from 10.3 years as of March 27




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31, 2004
to 11.4 years, and our earliest meaningful long-term debt maturity would
have remained
in 2011. In comparison, our weighted average remaining lease term on our
portfolio is 11.7 years as of March 31, 2004 and the earliest meaningful
lease expirations do not occur until 2008. With this restructuring, we
further our strategy of match-funding our long-term debt to our leases,
allowing us to substantially lock in our investment spreads during the
initial lease term. On a pro forma basis, assuming the balance sheet
restructuring had taken place on March 31, 2004:
    
    On a portfolio basis, our total outstanding debt would have
equaled approximately 52% of our total real estate investments and
would have been more than 96% match-funded.
    
    Our total outstanding fixed rate debt would have equaled
approximately 52% of our total real estate subject to fixed rate
leases and would have been nearly 100% match-funded.
    
    Our total outstanding variable rate debt would have equaled
approximately 54% of our total real estate subject to variable rate
leases and would have been nearly 85% match-funded. RESULTS OF OPERATIONS Revenue This section should be read in conjunction with the section captioned Variable
Rate Lease Programherein. For the three months ended
    
    PercentageMarch 31,
    
    Change(dollars in thousands)
    
    2004
    
    2003
    
    2004 to 2003RevenueRental
    
    $
    47,610
    
    
    $
    39,386
    
    
    
    21
    %Interest and other
    
    
    970
    
    
    
    223
    
    
    
    335
    %Total
    
    $
    48,580
    
    
    $
    39,609
    
    
    
    23
    %
 Rental.The increase in rental revenue from the three months ended March 31,
2003 to the three months ended March 31, 2004 was primarily attributable to the
growth of our real estate portfolio from property acquisitions from which we
generate our rental income. The following table demonstrates the growth of our
real estate portfolio for the periods indicated. Excluded in the periods
presented are property dispositions that have occurred through March 31, 2004.
The results of operations related to these properties were reclassified from
rental revenue to discontinued operations for all periods presented as
discussed under the Discontinued Operations section herein. Real Estate beforeAccumulated
    
    
    
    
    
    
    
    
    
    Total SquareDepreciation (in
    
    Number of
    
    Total Land
    
    Footage (inAs of
    
    thousands)
    
    Properties
    
    Acreage
    
    millions)December 31, 2002
    
    $
    1,538,999
    
    
    
    282
    
    
    
    2,036
    
    
    
    11.6March 31, 2003
    
    
    1,556,142
    
    
    
    286
    
    
    
    2,060
    
    
    
    11.7December 31, 2003
    
    
    1,841,641
    
    
    
    319
    
    
    
    2,297
    
    
    
    13.3March 31, 2004
    
    
    1,918,098
    
    
    
    324
    
    
    
    2,356
    
    
    
    13.7
 The increase in rental income was also attributable to an increase from rent
adjustments above the fixed minimum escalators, which are recorded as revenue
in the period they are due from the tenants. Interest and Other.The increase in interest and other income from the three
months ended March 31, 2003 to the three months ended March 31, 2004 was
primarily due to interest earned on a $25.5 million note that was repaid at the
end of the first quarter of 2004, simultaneous with our acquisition of 28




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##### 



the property securing the note. The increase was also attributable to interest
earned on construction
advances secured by real estate funded during the previous twelve months, which
totaled $10.9 million as of March 31, 2004. Expenses For the three monthsended March 31,
    
    PercentageChange(dollars in thousands)
    
    2004
    
    2003
    
    2004 to 2003ExpensesDepreciation and
amortization
    
    $
    8,804
    
    
    $
    7,254
    
    
    
    21
    %General and administrative
    
    
    2,741
    
    
    
    2,233
    
    
    
    23
    %Interest
    
    
    17,230
    
    
    
    15,043
    
    
    
    15
    %Total
    
    $
    28,775
    
    
    $
    24,530
    
    
    
    17
    %
 Depreciation and Amortization.Depreciation and amortization consisted
primarily of depreciation on buildings and improvements owned during the
periods indicated above. The increases are primarily attributable to the
growth of our real estate portfolio described under Revenue  Rental above,
resulting in an increase in our depreciable assets. General and Administrative.General and administrative expenses increased from
the three months ended March 31, 2003 to the three months ended March 31, 2004
due primarily to:  
    
    an increase in professional services during quarter ended March 31,
2004, resulting in higher legal and accounting fees;
    
    an increase in payroll and related expenses primarily attributable to
an increase in overall compensation and an increase in the number of
employees; and
    
    an increase in state and local taxes and registration fees due to the
growth in our real estate portfolio as well as changes in state tax
laws. Interest.The following table sets forth certain information regarding our
debt as of the periods indicated. Principal Balance as of March 31/Effective Interest Rate for the Three Months Ended March 31*(in thousands)Year
    
    Fixed Rate Debt
    
    Variable Rate Debt
    
    Total2003
    
    $
    806,488/7.62
    %
    
    $
    222,626/4.16
    %
    
    $
    1,029,114/6.24
    %2004
    
    
    811,252/7.17
    %
    
    
    282,314/3.74
    %
    
    
    1,093,566/6.25
    %
  *
    
    Includes deferred loan fees amortized over the life of the
loans. The increase in interest expense from the three months ended March 31, 2003 to
the three months ended March 31, 2004 is primarily due to an increase in our
overall debt during the past 12 months, which was primarily obtained to
directly or indirectly finance our investments in real estate during that time
period, as well as the conversion of approximately $200 million of variable
rate debt to fixed rate debt at the end of the first quarter of 2003. During
2003, we completed a $228 million debt securitization, at an effective rate of
5.86%, in order to lock in rates during the low interest rate environment. The
net proceeds from the debt securitization were primarily used to pay down
borrowings on our short-term revolving credit facilities and to pay off
short-term variable rate mortgage debt. As the debt was issued at the end of
the first quarter of 2003, the conversion from variable to fixed rate debt had
little impact on interest expense 29




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##### 



for that period, but resulted in an increase
in interest expense in subsequent periods. Discontinued Operations Beginning in 2002, SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, requires that gains and losses from dispositions of
properties and all operating earnings from these properties be reported as
discontinued operations. This also requires that all past earnings
applicable to a property disposed of subsequent to January 1, 2002 be reported
as discontinued operations. As a result, previously reported income from
continuing operations will be updated each time a property is sold. This
requirement is for presentation only and has no impact on net income. During the first quarter of 2004, we sold six auto retail locations, totaling
$33.2 million, to four dealer groups, resulting in a combined gain of
approximately $1.2 million before minority interest. In exchange for the early
termination of the leases related to certain of these properties, we received
approximately $1.2 million in lease termination fees, which was recorded during
the quarter. The earnings generated from this real estate, including the
combined gain and lease termination fees, have been reported as discontinued
operations. Since January 1, 2003, we have sold seven auto retail locations, totaling $35.2
million. The following table sets forth the components of discontinued
operations related to properties sold subsequent to January 1, 2003 (in
thousands): Three months ended March 31,2004
    
    2003Revenue:Rental
    
    $
    227
    
    
    $
    860Other
    
    
    1,248
    
    
    
    40Total revenue
    
    
    1,475
    
    
    
    900Expenses:Depreciation
    
    
    19
    
    
    
    175Interest
    
    
    76
    
    
    
    334Total expenses
    
    
    95
    
    
    
    509Income from discontinued operations before gain
on sale of real estate and minority interest
    
    
    1,380
    
    
    
    391Gain on sale of real estate
    
    
    1,171
    
    
    
    46Total discontinued operations before minority interest
    
    
    2,551
    
    
    
    437Minority interest related to discontinued operations
    
    
    (475
    )
    
    
    (101
    )Total discontinued operations, net of minority interest
    
    $
    2,076
    
    
    $
    336
 Preferred Share Dividends The increase represents the dividends for the three months ended March 31, 2004
related to the 71⁄2% Series A Cumulative Redeemable Preferred Shares issued
on December 11, 2003. There were no Series A preferred share dividends for the
three months ended March 31, 2003. 30




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##### 



Impact of Inflation Our leases typically contain provisions to mitigate the adverse impact of
inflation on our results of operations. These provisions include upward
periodic adjustments in base rent due from our tenants, usually based on a
factor of the change in the consumer price index, commonly referred to as the
CPI. In addition, certain of our leases are subject to fixed minimum and/or
maximum rent escalators during the initial lease term. Substantially all of our properties are leased to tenants under long-term,
triple-net leases. Triple-net leases tend to reduce our exposure to rising
property expenses due to inflation. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $12.6 million and $14.3 million at March 31,
2004 and March 31, 2003, respectively. The changes in cash and cash
equivalents during the three months ended March 31, 2004 and 2003 were
attributable to operating, investing and financing activities, as described
below. Three Months EndedMarch 31,(dollars in thousands)
    
    2004
    
    2003Cash provided by operating activities
    
    $
    31,229
    
    
    $
    23,036Cash used in investing activities
    
    
    (25,391
    )
    
    
    (16,085
    )Cash used in financing activities
    
    
    (6,607
    )
    
    
    (138
    )
 Operating Activities Cash provided by operating activities represents cash received primarily from
rents under long-term, triple-net leases, plus interest and other fee income,
less normal recurring general and administrative expenses and interest payments
on debt outstanding. Investing Activities Cash used in investing activities primarily reflects the investment in
dealership properties, facility improvements and construction fundings, net of
property dispositions. Financing Activities Cash used in financing activities for the three months ended March 31, 2004
primarily reflects:  
    
    the repayment of borrowings on our revolving credit facilities
totaling $80.0 million;
    
    distributions made to both common and preferred shareholders as
well as minority partners during the period totaling $15.8 million; and
    
    payments of principal on outstanding mortgage debt totaling $6.9 million. The cash used in financing activities was partially offset by:  
    
    $61.9 million of proceeds received from the issuance of common shares, net of costs;
    
    $23.0 million of proceeds received from borrowings on our revolving credit facilities; and
    
    $11.9 million of proceeds received from mortgage debt that closed during the period. 31




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##### 



Cash used in financing activities for the three months ended March 31, 2003 primarily reflects:  
    
    the repayment of borrowings on our revolving credit facilities totaling $111.1 million;
    
    the repayment of mortgage debt totaling $91.6 million;
    
    distributions made to common shareholders and minority partners
during the period totaling $13.5 million;
    
    payments of principal on outstanding mortgage debt totaling $6.0 million;
    
    payments for debt issuance costs totaling $5.8 million; and
    
    the increase of restricted cash totaling $3.2 million.  The cash used in financing activities was partially offset by:  
    
    $228.0 million of proceeds received from mortgage debt that closed
during the period; and
    
    $3.1 million of proceeds received from the issuance of common
shares, net of costs. Financing Strategy Our objective is to have multiple sources of debt and equity financing
available to us. We typically fund our short-term liquidity requirements
through available cash or one of our revolving credit facilities. As of March
31, 2004, we had three facilities, which provided short-term borrowing capacity
of $260 million, of which $242 million was available as of March 31, 2004.
Periodically, in order to more closely match the term of our debt with that of
our leases, we replace our short-term debt using the proceeds of long-term debt
or equity. On April 1, 2004, we terminated our $60 million revolving unsecured credit
facility because it prohibited the issuance of senior unsecured debt, as
further described in the Recent Developments section herein. As of March 31,
2004, this facility had no amounts outstanding and was expected to remain
principally unused until its expiration in March 2005. We plan to structure a
new credit facility in the future that will better suit our needs. In the
interim, we believe we have adequate availability under our remaining credit
facilities to fund our short-term liquidity needs. Our long-term liquidity requirements are financed with both long-term debt and
equity. When accessing the capital markets, our objective is to improve the
strength and flexibility of our balance sheet while providing accretion to our
shareholders. We use a disciplined approach of matching the term and interest rate nature
(fixed or variable-rate) of our long-term debt to our leases. We use this
process, which we refer to as match-funding, to substantially lock in our
investment spreads during the initial lease term. As of March 31, 2004, our
leases had a weighted average remaining term of 11.7 years and the earliest
meaningful lease expirations do not occur until 2008. Similarly, our long-term
debt had a weighted average remaining term of 10.3 years and our earliest
meaningful long-term debt maturity was not until 2011. As of March 31, 2004,
our total outstanding debt (including borrowings on our credit facilities)
equaled approximately 57% of our total real estate investments and the ratio of
the remaining weighted average term of our debt to the remaining weighted
average term of our leases (match-funded percentage) was 87%. 32




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##### 



As of March 31, 2004, our total outstanding fixed rate debt equaled
approximately 53% of our total real estate investments subject to fixed rate
leases. The weighted average remaining term of our fixed rate leases was 11.5
years and the weighted average remaining term of our outstanding fixed rate
debt was 11.2 years. As a result, our fixed rate leases and debt were 97%
match-funded. Our total outstanding variable rate debt equaled approximately
68% of our total real estate investments subject to variable rate leases. The
weighted average remaining term of our variable rate leases was 12.2 years and
the weighted average remaining term of our outstanding variable rate debt was
7.1 years. As a result, variable rate leases and our variable rate debt were
58% match-funded. We have adopted a policy to limit debt to approximately 65% of our assets
(calculated as total assets plus accumulated depreciation). This policy may be
changed by our Board of Trustees at any time without shareholder approval. As
of March 31, 2004, our debt to assets ratio was approximately 55% and our debt
to total market capitalization was approximately 40%. Subsequent to March 31, 2004, we restructured our balance sheet, which has
increased our balance sheet flexibility while continuing our strategy of
match-funding our debt to our leases. A description of the restructuring and
the impact to our balance sheet is described in the Recent Developments
section herein. In light of our current financial position, we believe that we will be able to
obtain additional financing for our short-term and long-term liquidity
requirements as discussed in the Liquidity Requirementssection herein. We
have used and may continue to use interest rate swap arrangements to manage
interest rate risk and to match-fund our debt to our leases. However, there
can be no assurance that additional financing or capital will be available, or
that the terms will be acceptable or advantageous to us. Variable Rate Lease Program We may offer our current and prospective tenants the option of utilizing our
variable rate lease program. Under this program, base rent changes monthly
based upon a spread over an applicable index, typically LIBOR. In addition,
our leases typically provide for upward periodic adjustments in base rent,
usually based on a factor of the change in the CPI. The vast majority of our
variable rate lease agreements contain minimum lease rates, generally between
8% and 9%, and fixed rate conversion features generally with minimum rates of
10.0% to 10.25%, and none of these leases contains a maximum rate. Upon
conversion, the fixed base rent typically continues to be adjusted upward
periodically based on a factor of the change in the CPI or other escalation
provisions set forth in the lease. 33




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##### 



The following table sets forth certain information regarding our variable rate
leases and debt as of the periods indicated (dollars in thousands): Percent of ourTotal Real
    
    Portfolio
    
    
    
    
    
    Average One-Estate Subject
    
    Subject to
    
    Total Variable
    
    Month LIBORto Variable
    
    Variable Rate
    
    Rate Debt
    
    for the threePeriod
    
    Rate Leases
    
    Leases
    
    Outstanding (1)
    
    months endedMarch 31, 2003
    
    $
    384,064
    
    
    
    24%
    
    
    $
    222,626
    
    
    
    1.33
    %March 31, 2004
    
    
    412,324
    
    
    
    21%
    
    
    
    282,314
    
    
    
    1.10
    %
 (1) Includes amounts outstanding on our revolving credit facilities totaling
$2,000 and $18.0 million as of March 31, 2003 and March 31 2004, respectively. As discussed in the Financing Strategysection above, the match-funding of
our variable rate lease portfolio with variable rate debt furthers our strategy
of substantially locking in our investment spreads over the initial term of our
leases. In addition, the minimum lease rates built into the majority of our
variable rate leases protect our investment returns as interest rates decline
and allow us to realize additional spread during the current low interest rate
environment. To illustrate, during the past 15 months, as LIBOR has decreased,
the interest expense on our variable rate debt has also decreased. However,
the revenue generated from the vast majority of our variable rate leases has
remained constant during this same time period as the minimum lease rates were
in effect at these LIBOR levels. Because many of our leases are subject to
minimum lease rates, as LIBOR rises, our investment spreads will contract from
current levels until the one-month LIBOR reaches 3.0% to 3.5%, at which time
the lease rates will rise above our minimum lease rates. At that time, our
variable lease rates and variable debt rates will rise equally with LIBOR. Mortgage Debt and Revolving Credit Facilities As of March 31, 2004, we had total mortgage debt outstanding of approximately
$1.07 billion (consisting of approximately $811.3 million of fixed rate and
approximately $259.9 million of variable rate mortgage debt), which was
secured by 268 of our properties. In addition, we had approximately $4.4
million of unsecured debt and approximately $18.0 million outstanding on our
revolving credit facilities. 34




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##### 



The following is a summary of our total debt outstanding as of March 31, 2004
and December 31, 2003 (dollars in thousands): Principal
    
    PrincipalOriginal
    
    Balance as of
    
    Balance as of
    
    Effective
    
    Term/Debt
    
    March 31,
    
    December 31,
    
    Interest
    
    AmortizationDescription of Debt
    
    Issued
    
    2004
    
    2003
    
    Rate*
    
    Schedule7.59% fixed rate debt due 12/1/08 (1)
    
    
    38,050
    
    
    $
    32,671
    
    
    $
    33,046
    
    
    
    7.95
    %
    
    10 yr/17 yr7.54% fixed rate debt due 7/6/11 (2)
    
    
    100,000
    
    
    
    92,041
    
    
    
    92,041
    
    
    
    7.84
    %
    
    12 yr/25 yr7.565% fixed rate debt due 11/16/12 (3)
    
    
    28,500
    
    
    
    25,080
    
    
    
    25,080
    
    
    
    7.74
    %
    
    12 yr/25 yr7.5975% fixed rate debt due 12/18/12 (3)
    
    
    32,054
    
    
    
    28,644
    
    
    
    28,644
    
    
    
    7.62
    %
    
    12 yr/30 yr7.50% fixed rate debt due 8/10/13 (4)
    
    
    82,600
    
    
    
    75,717
    
    
    
    75,717
    
    
    
    7.62
    %
    
    12 yr/30 yr5.84% fixed rate debt due 2/1/14 (5)
    
    
    11,900
    
    
    
    11,880
    
    
    
    
    
    
    
    6.59
    %
    
    10 yr/25 yr6.77% fixed rate debt due 7/1/14 (6)
    
    
    20,400
    
    
    
    20,400
    
    
    
    20,400
    
    
    
    6.77
    %
    
    10.5 yr/30 yrTriple Net Lease Mortgage Notes, Series 2002 (7)
    
    
    325,000
    
    
    
    302,906
    
    
    
    306,251
    
    
    
    7.70
    %
    
    (7)Triple Net Lease Mortgage Notes, Series 2003-1 (8)
    
    
    228,000
    
    
    
    221,913
    
    
    
    223,469
    
    
    
    5.86
    %
    
    (8)Total Mortgage Fixed Rate Debt
    
    
    
    
    
    $
    811,252
    
    
    $
    804,648
    
    
    
    7.17
    %Variable rate debt due 9/29/11 (9)
    
    
    150,000
    
    
    
    136,216
    
    
    
    137,357
    
    
    
    3.42
    %
    
    12 yr/25 yrVarious variable rate debt (10)
    
    
    130,110
    
    
    
    123,714
    
    
    
    124,079
    
    
    
    3.97
    %
    
    5 to 12 yr/25 to 30 yrTotal Mortgage Variable Rate Debt
    
    
    
    
    
    $
    259,930
    
    
    $
    261,436
    
    
    
    3.68
    %TOTAL MORTGAGE DEBT (11)
    
    
    
    
    
    $
    1,071,182
    
    
    $
    1,066,084
    
    
    
    6.33
    %Variable rate debt due 10/2/08 (12)
    
    
    4,500
    
    
    
    4,375
    
    
    
    4,425
    
    
    
    3.69
    %
    
    5 yr/ 15 yrTOTAL UNSECURED DEBT
    
    
    
    
    
    $
    4,375
    
    
    $
    4,425
    
    
    
    3.69
    %$100 million revolving secured facility (13)
    
    
    
    
    
    
    18,005
    
    
    
    49,326
    
    
    
    4.21
    %
    
    (13)$60 million revolving unsecured facility (14)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14)$100 million revolving secured construction
facility (15)
    
    
    
    
    
    
    4
    
    
    
    25,683
    
    
    
    4.21
    %
    
    (15)TOTAL CREDIT FACILITIES
    
    
    
    
    
    $
    18,009
    
    
    $
    75,009
    
    
    
    4.21
    %TOTAL DEBT OUTSTANDING
    
    
    
    
    
    $
    1,093,566
    
    
    $
    1,145,518
    
    
    
    6.25
    %
  *
    
    For the quarter ended March 31, 2004. Includes deferred loan fees
amortized over the life of the loans.(1)
    
    The loan requires monthly payments of principal and interest with a
final payment at maturity of approximately $24.2 million. The
Partnership has provided a guaranty of collection limited to
approximately $8.9 million of this loan, contingent upon the lender
first making written demand upon and proceeding against the borrower,
including obtaining judgment and foreclosing upon all collateral. All
amounts recovered from the borrower or collateral following a default
reduce such guarantee.(2)
    
    The loan requires quarterly payments of principal and interest with a
final payment at maturity of approximately $72.4 million.(3)
    
    These loans require quarterly interest and level principal payments
until maturity, at which time the loans require final 35




---



##### 



payments totaling approximately $33.5 million. These loans bear interest
equal to the A1/P1 Commercial Paper Rate plus 215 basis points. We have
entered into interest rate swap arrangements with a third party to fix the
interest rates on these loans. Subsequent to March 31, 2004, these loans
were paid off and the swap arrangements were terminated as part of our
debt restructuring, as further described in the Recent Developments
section herein.(4)
    
    This loan requires quarterly interest and level principal payments
with a final payment at maturity of approximately $49.6 million. This
loan bears interest equal to the 30-day LIBOR rate plus 175 basis
points. We have entered into an interest rate swap arrangement with a
third party to fix the interest rate on this loan.(5)
    
    This loan requires monthly interest and level principal payments with
a final payment at maturity of approximately $9.2 million.(6)
    
    This loan requires quarterly interest and level principal payments
with a final payment at maturity of approximately $13.4 million. This
loan bears interest equal to the three-month LIBOR rate plus 225 basis
points. We have entered into an interest rate swap arrangement with a
third party to fix the interest rate on this loan.(7)
    
    During 2002, we issued $325 million in four classes of Triple Net
Lease Mortgage Notes, Series 2002. CARS Loan Servicer L.L.C., one of
our subsidiaries, is servicer of the notes on behalf of the noteholders.
The following is a breakdown of the Triple Net Lease Mortgage Notes,
Series 2002 by class: Original Principal
    
    Current PrincipalClass
    
    Balance
    
    Balance
    
    Maturity DateA-1a
    
    
    164,136
    
    
    
    148,906
    
    
    
    8/15/14A-1b
    
    
    9,064
    
    
    
    9,064
    
    
    
    7/15/15A-2
    
    
    75,900
    
    
    
    69,036
    
    
    
    7/15/15A-3
    
    
    75,900
    
    
    
    75,900
    
    
    
    6/15/22
  Classes A-1a and A-1b are fully-amortizing in succession over their
respective terms and Classes A-2 and A-3 are fully-amortizing in
succession over 20 years. The Partnership has provided a guaranty of
collection limited to approximately $35 million of this loan, contingent
upon the trustee first making written demand upon and proceeding against
the borrower, including obtaining judgment and foreclosing upon all
collateral. All amounts recovered from the borrower or collateral
following a default reduce such guarantee. In connection with the
issuance of this debt, the Company guarantees certain customary,
non-recourse, carveout indemnities. Additionally, in conjunction with the
servicing of the debt, the Company guarantees CARS Loan Servicer, L.L.C.s
obligations to make certain principal, interest and property protection
advances.(8)
    
    During 2003, we issued $228 million in two classes of Triple Net
Lease Mortgage Notes, Series 2003-1. CARS Loan Servicer L.L.C. is
servicer of the notes on behalf of the noteholders. The following is a
breakdown of the Triple Net Lease Mortgage Notes, Series 2003-1 by
class: Original Principal
    
    Current PrincipalClass
    
    Balance
    
    Balance
    
    Maturity DateA-1
    
    
    109,000
    
    
    
    102,913
    
    
    
    9/25/15A-2
    
    
    119,000
    
    
    
    119,000
    
    
    
    3/25/19
  The notes amortize in succession over a 20-year amortization schedule with
the Class A-1 notes fully-amortizing and the Class A-2 notes requiring a
final payment at maturity of approximately $70.8 million. In connection
with the issuance of this debt, the Company guarantees certain customary,
non-recourse, carveout indemnities. Additionally, in conjunction with the
servicing of the debt, the Company guarantees CARS Loan Servicer, L.L.C.s
obligations to make certain principal, interest and property protection
advances.(9)
    
    The loan bears interest equal to the 30-day LIBOR rate plus 227 basis
points and requires monthly level payments of principal and interest
with a final payment at maturity of approximately $101.4 million.
Subsequent to March 31, 2004, the loan was paid off as part of our debt
restructuring, as further described in the Recent Developmentssection
herein.(10)
    
    These loans bear interest at variable rates ranging from 185 to 357
basis points above the A1/P1 Commercial Paper Rate, the 30-day LIBOR
rate or the three-month LIBOR rate and have maturity dates ranging from
November 30, 2008 to June 2, 2015. The terms of the various loans
require either quarterly interest and level principal payments, monthly
level payments of principal and interest, or interest-only payments
until maturity, at which time the loans require final payments totaling
approximately $100.6 million. One of these loans, totaling $51.6
million as of March 31, 2004, is cross defaulted with the revolving
credit facilities discussed in footnote (13) and (15). Four of these
loans totaling $39.9 million as of March 31, 2004 and issued by
subsidiaries of the Company, contain acceleration clauses in the event
of a material adverse change, which are at the lenders discretion.
Additionally, on three of the 36




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##### 



aforementioned loans, the Partnership has partially guaranteed the
monetary obligations under the loans limited to approximately $9.1 million
as of March 31, 2004. Subsequent to March 31, 2004, two of the loans
totaling $25.9 million as of March 31, 2004, were paid off as part of our
debt restructuring, as further described in the Recent Developments
section herein.(11)
    
    Certain amounts of our mortgage debt are subject to prepayment
penalties.(12)
    
    The loan bears interest equal to the three-month LIBOR rate plus 250
basis points and requires monthly level payments of principal plus
interest with a final payment at maturity of approximately $3.0 million.(13)
    
    Amounts borrowed under this facility bear interest at market rates
determined at the time of each draw until such time as the Company and
the lender set an interest rate for any future amounts borrowed under
the facility. As of March 31, 2004, the borrowings under the facility
bear interest equal to the 30-day LIBOR rate plus 295 to 315 basis
points. Properties are eligible within the borrowing base for 150 days,
unless extended by the Company and the lender. The facility has a
one-year term, which matures on March 21, 2005, and is renewable
annually.(14)
    
    The facility provides for a three-year term with interest determined,
at our option, at either the Prime rate less 50 basis points or the
one-month, two-month or three-month LIBOR rate plus 200 basis points.
Properties are eligible within the borrowing base for 12 months, unless
extended by the Company and the lender. On April 1, 2004, we
terminated this facility as it prohibited the issuance of senior
unsecured debt, which closed on April 15, 2004, as further described in
the Recent Developmentssection herein.(15)
    
    This construction credit facility provides for a one-year term.
Amounts borrowed under this facility bear interest equal to a spread
over LIBOR as determined at the time of each draw. As of March 31,
2004, the borrowings under the facility bear interest equal to the
30-day LIBOR rate plus 323 basis points. Properties are eligible within
the borrowing base for 12 months, unless extended by the Company and the
lender. The facility matures on June 22, 2005, and is renewable
annually. For the quarter ended March 31, 2004, our interest coverage and debt service
coverage ratios were 2.5 and 1.7, respectively. For the trailing 12 months,
our interest coverage and debt service coverage ratios were 2.5 and 1.6,
respectively. We consider the interest coverage and debt service coverage
ratios meaningful financial performance measures of liquidity as they provide
our investors with information pertaining to our ability to satisfy our debt
service requirements. These measures are typically used by our lenders in
assessing our compliance with certain debt covenants. These ratios are
considered non-GAAP financial measures because they are calculated using
Earnings Before Interest, Taxes, Depreciation and Amortization, commonly
referred to as EBITDA. The ratios should not be considered an alternative
measure of operating results or cash flow from operations as determined in
accordance with GAAP. 37




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##### 



The following is a calculation of our interest coverage and debt
service coverage ratios for the three months and twelve months ended March 31,
2004 (dollars in thousands). The calculation includes a reconciliation of
EBITDA to its most directly comparable GAAP measure, net income. Three months ended
    
    Twelve months endedMarch 31, 2004
    
    March 31, 2004Interest Coverage Ratio:Net Income before minority interest
    
    $
    22,359
    
    
    $
    72,192Interest expense
    
    
    17,306
    
    
    
    66,745Depreciation and amortization
    
    
    8,823
    
    
    
    32,519EBITDA
    
    $
    48,488
    
    
    $
    171,456Interest Coverage Ratio (EBITDA
divided by interest expense and
preferred share dividends)
    
    
    2.5
    
    
    
    2.5Debt Service Coverage Ratio (DSCR):Interest expense
    
    $
    17,306
    
    
    $
    66,745Preferred dividends
    
    
    1,852
    
    
    
    2,263Principal amortization for the period
    
    
    9,824
    
    
    
    37,282$
    28,982
    
    
    $
    106,290DSCR (EBITDA divided by interest
expense + principal amortization +
preferred dividends)
    
    
    1.7
    
    
    
    1.6
 The more significant debt covenants related to our mortgage debt, unsecured
debt and credit facilities limit our debt to assets ratio and require us to
comply with minimum debt service coverage and maximum debt to adjusted net
worth ratios. Several of our loan agreements contain no financial covenants;
however, there are negative covenants relating to customary items such as
operation and maintenance of the properties securing the loans and limitations
on issuing additional debt at those subsidiaries. As of March 31, 2004, we
were in compliance with all of the debt covenants related to our mortgage debt,
unsecured debt and credit facilities. Interest Rate Swaps We have entered into interest rate swap arrangements with third parties to
manage, or hedge, our risk related to the effect of interest rate fluctuations
on our investment spreads. We do not use derivative instruments for
speculative purposes. We will either hedge our variable rate debt to convert
it to a fixed interest rate, designating such hedge as a cash flow hedge, or
hedge our fixed rate debt to convert it to a variable interest rate,
designating such hedge as a fair value hedge. The cash flow and fair value
hedges were designed to mirror the underlying debt in terms of index, spread,
reset, amortization, compounding and maturity. Due to the identical nature of
the terms of the swap arrangements and the underlying terms of the debt, the
swaps were designated as highly effective at the inception of the swap
arrangements. We continue to evaluate the highly effective nature of those
hedges and believe our hedges continue to be highly effective. For all swap
arrangements, we are required to post collateral, generally in the amount of
the swap valuations at any point in time, to protect the lenders in case of an
early termination by us. The collateral posted by us related to our hedges, totaling approximately $19.4
million and $12.8 million as of March 31, 2004 and December 31, 2003,
respectively, is included in other assets on our consolidated balance sheets. 38




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##### 



As of March 31, 2004, we have four interest rate swap arrangements with third
parties to fix the interest rate on the underlying variable rate debt, with a
notional balance totaling approximately $158 million, which we have designated
as cash flow hedges. Subsequent to March 31, 2004, two of the interest rate
swap arrangements with notional balances totaling approximately $58 million
were terminated as part of our debt restructuring, as further described in the
Recent Developmentssection herein. For a derivative qualifying as a cash flow hedge, we record the change in the
unrealized gain or loss as a component of accumulated other comprehensive
income (loss) within shareholders equity on our consolidated balance sheets.
The fair value of the swap is recorded as either an asset or liability on our
consolidated balance sheets. The unrealized loss on our cash flow hedges was approximately $18.0 million and
$13.5 million as of March 31, 2004 and December 31, 2003, respectively. Total
comprehensive income for the three months ended March 31, 2004 and 2003 was
approximately $14.9 million and $11.0 million, respectively. On April 15, 2004, the Company closed on a public offering of $125 million
senior unsecured monthly income notes. Interest on the 6.75% notes is payable
monthly. The notes have a 15-year term and are redeemable at the Companys
option after five years at par. On March 18, 2004, in conjunction with pricing
of the $125 million of fixed rate debt, we entered into an interest rate swap
arrangement with a third party to cause the interest rate on $100 million of
the fixed rate debt effectively to be at a floating rate of the three-month
LIBOR plus 162.4 basis points. At the time we entered into the swap, we had a
firm commitment to close the debt on April 15, 2004. Therefore, we hedged our
firm commitment and the debt. The swap arrangement has been designated as a
fair value hedge. For a derivative qualifying as a fair value hedge, the change in the net
unrealized gain or loss upon measuring the fair value hedge and the fair value
of the debt instrument or firm commitment being hedged is recorded on our
consolidated statements of operations. Generally, these amounts offset each
other. The fair value of the swap is recorded as either an asset or liability,
with a corresponding increase or decrease to the carrying value of the debt
instrument or firm commitment being hedged on our consolidated balance sheets. The unrealized loss on our fair value hedge was approximately $1.1 million as
of March 31, 2004. The net unrealized gain or loss on our fair value hedge and
the portion of the firm commitment of the debt being hedged had no impact on
our net income for the three months ended March 31, 2004. Equity Offerings On February 9, 2004, we sold 1,825,000 common shares in an underwritten public
offering at an initial price to the public of $35.40 per share under our
2003 Shelf Registration Statement. Net proceeds to the Company, after
deducting the discounts and commissions to the underwriters and other expenses
of this offering, totaled approximately $61.5 million. After the offering,
$336.6 million was available under the 2003 Shelf Registration Statement for
the issuance of securities. The Company contributed the net proceeds of the
offering to the Partnership in exchange for Common Units in the Partnership and
used the net proceeds to fund acquisitions, to repay borrowings under our
short-term credit facilities and for general corporate purposes. Subsequent to March 31, 2004, in connection with our balance sheet
restructuring, we completed two equity offerings, which are described in the
Recent Developmentssection herein. 39




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##### 



Liquidity Requirements Short-term liquidity requirements consist primarily of normal recurring
operating expenses and capital expenditures, debt service requirements
(including debt service relating to additional and replacement debt),
collateral calls on interest rate swaps, distributions to common and preferred
shareholders, distributions to minority partners and amounts required for
additional property acquisitions, facility improvement fundings and
construction financings. We expect to meet these requirements (other than
amounts required for additional property acquisitions, facility improvement
fundings and construction financings) through cash provided from operations and
our existing revolving credit facilities. We anticipate that any additional
acquisitions of properties, facility improvement fundings and construction
financings during the next 12 months will be funded with long-term secured and
unsecured debt and the issuance of common or preferred equity, each of which
may be initially funded with our existing or new revolving credit facilities.
Acquisitions of properties, facility improvement fundings and construction
financings will be made subject to our investment objectives and policies with
the intention of maximizing both current and long-term growth and income. Included in our short-term liquidity requirements is the repayment of
approximately $18.0 million of borrowings outstanding on our revolving credit
facilities as of March 31, 2004, which was subsequently repaid with the net
proceeds from our follow-on common share offering that closed on April 2, 2004
as further described in the Recent Developments section herein. Properties
are eligible within the borrowing base of our credit facilities for 150 days to
twelve months, unless extended by the Company and the lender, and therefore we
are generally required to repay these borrowings within twelve months. As
discussed under our Financing Strategysection herein, on April 1, 2004, we
terminated our $60 million revolving unsecured credit facility because it
prohibited the issuance of senior unsecured debt. We plan to structure a new
credit facility in the future that will better suit our needs. In the interim,
we believe we have adequate availability under our remaining credit facilities
to fund our short-term liquidity needs. As of March 31, 2004, long-term liquidity requirements consisted primarily of
obligations under our long-term debt and dividends paid to our preferred
shareholders. We anticipate that long-term liquidity requirements will also
include amounts required for acquisitions of properties, facility improvement
fundings and construction financings. We expect to meet our long-term liquidity
requirements through long-term secured and unsecured borrowings and other debt
and equity financing alternatives. The availability and terms of any such
financing will depend upon market and other conditions. Aggregate annual repayments of our debt outstanding (excluding borrowings on
our credit facilities) as of March 31, 2004 are as follows (in thousands): For the Year Ended December 31, Debt RepaymentPrincipal
    
    
    
    
    
    Subsequent toAmortization
    
    Maturities
    
    March 31, 2004(1)
    
    Total2004
    
    $
    22,126
    
    
    $
    
    
    
    $
    7,102
    
    
    $
    29,2282005
    
    
    31,060
    
    
    
    
    
    
    
    7,343
    
    
    
    38,4032006
    
    
    32,981
    
    
    
    
    
    
    
    7,527
    
    
    
    40,5082007
    
    
    35,043
    
    
    
    
    
    
    
    7,774
    
    
    
    42,8172008
    
    
    36,966
    
    
    
    49,331
    
    
    
    8,015
    
    
    
    94,312Thereafter
    
    
    376,048
    
    
    
    276,153
    
    
    
    178,088
    
    
    
    830,289Total
    
    $
    534,224
    
    
    $
    325,484
    
    
    $
    215,849
    
    
    $
    1,075,557
  (1)
    
    As further described in the Recent Developmentssection herein,
during April 2004, we repaid approximately $216 million of our total
debt outstanding as of March 31, 2004 with Ford that was scheduled to
mature primarily between 40




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##### 



2011
    
    and 2012 and, in connection therewith,
issued $125 million of senior unsecured monthly income notes that
mature in 2019. We also currently have contractual commitments for future facility improvements
and construction financings with several large tenants on properties we
currently own. Improvements include costs incurred on facilities during which
the tenants business continues to operate without interruption. Construction
financings include advances for the construction of new facilities for which
operations have not commenced or fundings for major improvements to existing
facilities that cause operations to cease during the construction period. As
of March 31, 2004, these commitments totaled approximately $100 million. The
majority of these projects are expected to be completed during the next two
years. Dividend Reinvestment and Share Purchase Plan During April 2000, we implemented a Dividend Reinvestment and Share Purchase
Plan, which we refer to as the DRIP, which was subsequently amended in March
2001. Under the DRIP, current shareholders and Unitholders are permitted to
elect to reinvest all, a portion or none of their cash dividends or
distributions to purchase common shares. The DRIP also allows both new
investors and existing shareholders and Unitholders to make optional cash
payments to purchase common shares. The DRIP permits current shareholders, Unitholders and new investors to invest
a minimum of $500 up to a maximum of $10,000 in common shares per month. The
DRIP also allows us to raise additional capital by waiving the limitations on
the $10,000 maximum per month, as further described in the Prospectus relating
to the DRIP. Shares purchased under the DRIP through reinvestment of dividends
are purchased at a discount (currently 3%) to the market price. Shares
purchased under the DRIP through optional cash payments of $10,000 or less are
purchased at market price. Common shares may be purchased directly from us or in open market or privately
negotiated transactions, as we determine from time to time, to fulfill the
requirements for the DRIP. For the three months ended March 31, 2004, we
issued approximately 92,300 common shares under the DRIP, totaling
approximately $3.1 million. Common Share Repurchase Program During 1998, we announced that our Board of Trustees had authorized the
repurchase of up to 6.0 million common shares. Purchases have been and will be
made from time to time in open market transactions at prevailing prices or in
negotiated private transactions at the discretion of management. During the
three months ended March 31, 2004, no common shares were repurchased. From the
inception of the common share repurchase program through March 31, 2004, a
total of 4,094,700 common shares have been repurchased at an average price of
$10.62 per common share. In conjunction with the common share repurchases, the
Partnership redeemed an equivalent number of Common Units from the Company for
equivalent purchase prices. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that are reasonably likely to have a
current or future material effect on our financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources. 41




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FUNDS FROM OPERATIONS (FFO) The National Association of Real Estate Investment Trusts (NAREIT) developed
FFO as a relative non-GAAP financial measure of performance and liquidity of an
equity REIT in order to recognize that income-producing real estate
historically has not depreciated on the basis determined under GAAP. FFO, as
defined under the revised definition adopted in April 2002 by NAREIT and as
presented by us, is net income, computed in accordance with GAAP, plus
depreciation and amortization of assets unique to the real estate industry,
plus minority interest related to income from continuing operations and income
from discontinued operations, and excluding gains from the sales of property,
and after adjustments for unconsolidated partnerships and joint ventures. FFO
does not represent cash flows from operating activities in accordance with GAAP
(which, unlike FFO, generally reflects all cash effects of transactions and
other events in the determination of net income) and should not be considered
an alternative to net income as an indication of our performance or to cash
flow as a measure of liquidity or ability to make distributions. We consider
FFO a meaningful, additional measure of operating performance because it
primarily excludes the assumption that the value of the real estate assets
diminishes predictably over time, which is contrary to what we believe occurs
with our assets, and because industry analysts have accepted it as a
performance measure. Comparison of our presentation of FFO, using the NAREIT
definition, to similarly titled measures for other REITs may not necessarily be
meaningful due to possible differences in the application of the NAREIT
definition used by such REITs. 42




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##### 



The following table reconciles FFO, FFO available to common shareholders and
FFO per common share for the three months ended March 31, 2004 and 2003 to
their most directly comparable GAAP measures, net income and net income per
common share (in thousands, except per share data): Three Months EndedMarch 31,2004
    
    2003Net income
    
    $
    18,546
    
    
    $
    11,936Real estate depreciation and amortization
    
    
    8,805
    
    
    
    7,407Minority interest related to income from
continuing operations and income from
discontinued operations
    
    
    3,592
    
    
    
    3,569Gain on sale of real estate
    
    
    (953
    )
    
    
    (35
    )FFO
    
    
    29,990
    
    
    
    22,877Preferred share dividends
    
    
    (1,852
    )
    
    
    FFO available to common shareholders
    
    $
    28,138
    
    
    $
    22,877Weighted average number of common shares used to
compute basic net income per common share
    
    
    34,049
    
    
    
    28,279Weighted average number of common shares used to
compute fully diluted net income per common share
    
    
    34,673
    
    
    
    29,205Weighted average number of common shares and
units used to compute basic FFO per common share
    
    
    41,823
    
    
    
    36,765Weighted average number of common shares and
units used to compute fully diluted FFO per
common share
    
    
    42,447
    
    
    
    37,691Basic net income per common share
    
    $
    0.49
    
    
    $
    0.42Diluted net income per common share
    
    $
    0.48
    
    
    $
    0.41Basic FFO per common share
    
    $
    0.67
    
    
    $
    0.62Diluted FFO per common share
    
    $
    0.66
    
    
    $
    0.61
 Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Also,
documents that we subsequently file with the SEC will contain forward-looking
statements. When we refer to forward-looking statements or information,
sometimes we use words such as may, will, could, should, plans,
intends, expects, believes, estimates, anticipates and continues.
In particular, Item II and Item III of Part I of this Form 10-Q describe
forward-looking information. The risk factors are not all inclusive,
particularly with respect to possible future events, and should be read
together with other filings made by the Company under the Securities Act and
the Exchange Act, including the risks and other risk factors contained in the
Companys Form 8-K/A filed on March 12, 2004. Other parts of this Form 10-Q
may also describe forward-looking information. Many 43




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##### 



things can happen that can cause our actual results to be very different than
those described. These factors include, but are not limited to:  
    
    risks that our tenants will not pay rent;
    
    risks related to our reliance on a small number of
tenants for a significant portion of our revenue;
    
    risks of financing, such as increases in interest
rates, our ability to meet existing financial covenants and
to consummate planned and additional financings on terms
that are acceptable to us;
    
    risks that our growth will be limited if we cannot obtain additional capital;
    
    risks that planned and additional acquisitions may not be consummated;
    
    risks that competition for acquisitions could
result in increased acquisition prices and costs as well as
a reduction in capitalization rates;
    
    risks relating to the automotive industry, such as
the ability of our tenants to compete effectively in the
automotive retail industry and the ability of our tenants to
perform their lease obligations as a result of changes in
any manufacturers production, supply, vehicle financing,
incentives, warranty programs, marketing or other practices,
or changes in the economy generally;
    
    risks generally incident to the ownership of real
property, including adverse changes in economic conditions,
changes in the investment climate for real estate, changes
in real estate taxes and other operating expenses, adverse
changes in governmental rules and fiscal policies and the
relative illiquidity of real estate;
    
    environmental and other risks associated with the
acquisition and leasing of automotive properties; and
    
    risks related to our status as a REIT for federal
income tax purposes, such as the existence of complex
regulations relating to our status as a REIT, the effect of
future changes in REIT requirements as a result of new
legislation and the adverse consequences of the failure to
qualify as a REIT. Given these uncertainties, readers are cautioned not to place undue reliance on
these forward-looking statements. We also make no promise to update any of the
forward-looking statements. You should carefully review the risks and the risk
factors contained in the Companys Form 8-K/A filed on March 12, 2004, as well
as the other information in this Quarterly Report on Form 10-Q before investing
in us. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to certain financial market risks, the most predominant being
fluctuations in interest rates. Interest rate fluctuations are monitored by
our management as an integral part of our overall risk management program,
which recognizes the unpredictability of financial markets and seeks to reduce
the potentially adverse effect on our results of operations. In general, our
strategy of match-funding our long-term debt to our leases reduces our exposure
to interest rate fluctuations, by substantially locking in our investment
spreads during the initial term of the leases. As part of this strategy, we
have used and may continue to use interest rate swap arrangements to manage, or
hedge our interest rate risk. We do not enter into interest rate swap
arrangements for trading purposes. During the three months ended March 31, 2004, our fixed rate debt increased
from $804.6 million as of 44




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##### 



December 31, 2003 to $811.3 million as of March 31, 2004. Interest rate
fluctuations may affect the fair value of our fixed rate debt instruments. If
interest rates on our fixed rate debt instruments at March 31, 2004 had been
one percentage point higher or lower, the fair value of those debt instruments
on that date would have decreased or increased, respectively, by approximately
$52.4 million. As of March 31, 2004, approximately $412 million, or 21% of our total real
estate portfolio, was leased to tenants utilizing our variable rate lease
program as further described under the Liquidity and Capital Resources
section herein, as compared to $425 million as of December 31, 2003. As of
March 31, 2004, our total variable rate debt outstanding was $282.3 million, as
compared to $340.9 million as of December 31, 2003. If interest rates on our variable rate debt instruments outstanding at March
31, 2004 had been 1% higher or lower, our annual interest expense relating to
those debt instruments would have increased or decreased, respectively, by
approximately $2.8 million, based on balances at March 31, 2004. This impact
on net income as a result of an increase or decrease in interest rates by 1% is
partially reduced by the structure of our variable rate leases as noted above.
Because of the minimum lease rates built into the majority of our leases, if
the underlying index on our variable rate lease agreements outstanding at March
31, 2004 had been 1% higher or lower, our annual rental revenue relating to
those lease agreements would have increased by approximately $437,000 or
decreased by approximately $379,000 respectively. Assuming the underlying index
increased to a level where none of our minimum lease rates were triggered, a 1%
increase or decrease in the underlying index would increase or decrease our
rental revenue by approximately $3.2 million to $4.1 million because of certain
investment spread variations at various LIBOR levels. Item 4. Controls and Procedures Quarterly Evaluation.We carried out an evaluation as of March 31, 2004 of the
effectiveness of the design and operation of our disclosure controls and
procedures, which we refer to as our disclosure controls, and our internal
controls and procedures for financial reporting, which we refer to as our
internal controls. This evaluation was done under the supervision and with the
participation of management, including our President and Chief Executive
Officer and our Senior Vice President, Chief Financial Officer and Treasurer.
Rules adopted by the SEC require that we present the conclusions of the
President and Chief Executive Officer and our Senior Vice President, Chief
Financial Officer and Treasurer about the effectiveness of our disclosure
controls and internal controls as of the end of the period covered by this
quarterly report. CEO and CFO Certifications.Included as Exhibits 31.1 and 31.2 to this
Quarterly Report on Form 10-Q are forms of Certification of our President and
Chief Executive Officer and our Senior Vice President, Chief Financial Officer
and Treasurer. The forms of Certification are required in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002. This section of the Quarterly
Report on Form 10-Q you are currently reading is the information concerning the
evaluation referred to in the Section 302 certifications, and this information
should be read in conjunction with the Section 302 certifications for a more
complete understanding of the topics presented. Disclosure Controls and Procedures and Internal Control over Financial
Reporting.Disclosure controls and procedures are designed with the objective
of ensuring that information required to be disclosed in our reports filed or
submitted under the Exchange Act, such as this Quarterly Report on Form 10-Q,
is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms. Disclosure controls and procedures are
also designed with the objective of ensuring that such information is
accumulated and communicated to our management, including our President and
Chief Executive Officer and our Senior Vice President, Chief Financial Officer
and Treasurer, as appropriate to 45




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##### 



allow timely decisions regarding required
disclosure. Internal control over financial reporting is a process designed by, or under
the supervision of our President and Chief Executive Officer and our Senior
Vice President, Chief Financial Officer and Treasurer, and effected by our
Board of Trustees, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with GAAP and
includes those policies and procedures that:  
    
    pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of our
assets;
    
    provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that our receipts and expenditures are being made only
in accordance with authorizations of management or our Board; and
    
    provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets
that could have a material adverse effect on our financial statements. Limitations on the Effectiveness of Controls.Management, including our
President and Chief Executive Officer and our Senior Vice President, Chief
Financial Officer and Treasurer, do not expect that our disclosure controls and
procedures or our internal control over financial reporting will prevent all
errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by managements override of the control.
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected. Scope of the Evaluation.The evaluation by our President and Chief Executive
Officer and our Senior Vice President, Chief Financial Officer and Treasurer of
our disclosure controls and procedures and our internal control over financial
reporting included a review of procedures and discussions with our Vice
President and Chief Accounting Officer, who is our Disclosure Control Monitor
and others in our organization. In the course of the evaluation, we sought to
identify data errors, control problems or acts of fraud and to confirm that
appropriate corrective action, including process improvements, were being
undertaken. This type of evaluation is done on a quarterly basis so that the
conclusions concerning controls effectiveness can be reported in our Quarterly
Reports on Form 10-Q and Annual Report on Form 10-K. Our internal control over financial reporting is also evaluated on an ongoing
basis by personnel in our accounting department and by our independent auditors
in connection with their audit and review activities. The overall goals of
these various evaluation activities are to monitor our disclosure controls and
procedures and our internal control over financial reporting and to make
modifications as necessary. Our intent in this regard is that the disclosure
controls and procedures and the internal control over financial reporting will
be maintained as systems that change (including with improvements and 46




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corrections) as conditions warrant. Among other matters, we sought in our
evaluation to determine
whether there were any significant deficiencies or material weaknesses in
our internal control over financial reporting, or whether we had identified any
acts of fraud involving personnel who have a significant role in our internal
control over financial reporting. This information was important both for the
evaluation generally and because the Section 302 certifications require that
our President and Chief Executive Officer and our Senior Vice President, Chief
Financial Officer and Treasurer disclose that information to the Audit
Committee of our Board of Trustees and to our independent auditors and to
report on related matters in this section of the Quarterly Report on Form 10-Q.
In the professional auditing literature, significant deficiencies are
referred to as reportable conditions; these are control issues that could
have a significant adverse effect on the ability to record, process, summarize
and report financial data in the financial statements. A material weakness
is defined in the auditing literature as a particularly serious reportable
condition where the internal control does not reduce to a relatively low level
the risk that misstatements caused by error or fraud may occur in amounts that
would be material in relation to the financial statements and not be detected
within a timely period by employees in the normal course of performing their
assigned functions. We also sought to deal with other control matters in the
evaluation, and in each case if a problem was identified, we considered what
revision, improvement and/or correction was necessary to be made in accordance
with our on-going procedures. Conclusions.Based upon the evaluation, our President and Chief Executive
Officer and our Senior Vice President, Chief Financial Officer and Treasurer
have concluded that, as of March 31, 2004 and subject to the limitations noted
above, our disclosure controls and procedures were effective at the reasonable
assurance level to ensure that material information relating to us and our
consolidated subsidiaries is made known to management, including our President
and Chief Executive Officer and our Senior Vice President, Chief Financial
Officer and Treasurer. During the three months ended March 31, 2004, there were no significant changes
in our internal control over financial reporting that has materially affected,
or is reasonably likely to materially affect our internal control for financial
reporting. 47




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CAPITAL AUTOMOTIVE REIT
PART II-OTHER INFORMATION Item 1. Legal Proceedings We are engaged in litigation relating to the activities of Michael Burkitt, a
former employee who currently serves as the President, Chief Executive Officer,
and a member of the board of directors of Milestone Realty Trust, a Maryland
corporation, which we refer to as Milestone. We filed a motion for judgment in
the Circuit Court of Fairfax County, Virginia against Mr. Burkitt seeking
injunctive relief, punitive damages and actual damages of $5,000,000 resulting
from Mr. Burkitts alleged misappropriation of our trade secrets, breaches of
his fiduciary duties to us, and his misstatements to third parties regarding
his role and activities as an employee of ours. On April 2, 2004, Mr. Burkitt filed a Demurrer or, in the alternative, a Motion
for a Bill of Particulars in the Virginia Circuit Court alleging that our
complaint failed to state a cause of action or to plead facts supporting its
claim. The court heard arguments relating to both the Demurrer and the Motion
on April 23, 2004. The Court refused to dismiss that portion of
our motion for
judgment with respect to misappropriation of trade secrets, refused to grant
Mr. Burkitts Motion for a Bill of Particulars and, with
respect to our claim of breach of fiduciary duty relating to trade secrets
and misstatements following termination of employment, granted the
Demurrer, with leave for us to amend our motion. We have filed an
amended motion for judgment addressing our breach of fiduciary duty
claim. In addition, Milestone, together with three of its sponsors and investors, has
filed suit against us in the District Court in Dallas County, Texas, seeking
injunctive relief, actual damages of at least $150,000,000 and treble damages
resulting from our alleged attempt to interfere with Milestones business
relationships with potential investors and tenants and its efforts to raise
capital. On April 6, 2004, the Dallas District Court issued a temporary
restraining order, prohibiting us, our officers, employees, agents, and all
other persons acting with us from contacting or attempting to contact, verbally
or in writing, any representative of any entity that may be an investor or
seller of real property to Milestone, for the purpose of disparaging Milestone,
its officers and affiliates by untruthful statements and innuendoes or
accusations. The order currently expires on May 21, 2004, but the parties
anticipate the order will be extended by mutual agreement until completion of
discovery, which is currently underway. We believe that the issuance of a
temporary injunction to this effect will not affect our operations adversely.
In connection with this suit, we and the plaintiffs engaged in mediation in
Dallas, Texas, on April 19, 2004, which did not result in a settlement. It is difficult to forecast the outcome of this litigation. These matters are
still in the preliminary stages, and we are in the process of evaluating our
options for responding to the Texas petition. Although no assurance can be provided with respect to any litigation, we
believe that the allegations in the Texas petition are without merit and that
we have meritorious defenses to the claims made in the petition. We intend to
defend ourselves vigorously, and management does not anticipate that the
litigation will have a material adverse effect on our financial position or
results of operations. Item 2. Changes in Securities Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. 48




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Item 4. Submission of Matters to Vote of Security Holders Not applicable. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits:  3.4
    
    Articles Supplementary to Amended and Restated Declaration of Trust, as
amended, of Capital Automotive REIT, dated April 22, 2004 (previously
filed as Exhibit 2 to the Registration Statement on Form 8-A filed on
April 26, 2004 and incorporated herein by reference)4.6
    
    Third Amendment to Second Amended and Restated Partnership Agreement of
Capital Automotive L.P. (filed herewith)4.7
    
    Fourth Amendment to Second Amended and Restated Partnership Agreement of
Capital Automotive L.P. (filed herewith)4.8
    
    Indenture, dated as of April 15, 2004, between Capital Automotive REIT
and Wells Fargo Bank, National Association (filed herewith).4.9
    
    First Supplemental Trust Indenture, dated as of April 15, 2004, between
Capital Automotive REIT and Wells Fargo Bank, National Association (filed
herewith).4.10
    
    Form of Certificate for 8% Series B Cumulative Redeemable Preferred
Shares, par value $.01 per share, of Capital Automotive REIT (filed as
Exhibit 4 to the Registration Statement on Form 8-A filed on April 26,
2004 and incorporated herein by reference).31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer (filed herewith)31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer (filed herewith)32.1
    
    Section 1350 Certification of Chief Executive Officer (filed herewith)32.2
    
    Section 1350 Certification of Chief Financial Officer (filed herewith) (b) Reports on Form 8-K A Form 8-K was dated and furnished to the SEC on January 14, 2004 in response
to Items 7 and 12 to file a press release announcing our fourth quarter 2003
acquisitions and to update 2004 earnings guidance. A Form 8-K dated February 4, 2004 was filed with the SEC on February 6, 2004 in
response to Item 7 to incorporate by reference into our Registration Statement
on Form S-3 (No. 333-106445) certain exhibits thereto. 49




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A Form 8-K was dated and furnished to the SEC on February 11, 2004 in response
to Items 7 and 12 to file a press release announcing our financial results for
the quarter and year ended December 31, 2003. On March 12, 2004, we filed a Form 8-K/A under Item 5 amending our prior Form
8-K/A dated February 26, 1999 and updated periodically to list certain factors
that may affect our operating results and, therefore, the accuracy of our
forward-looking statements. A Form 8-K dated March 18, 2004 was filed with the SEC on March 22, 2004 in
response to Item 7 to incorporate by reference into our Registration Statement
on Form S-3 (No. 333-106445) certain exhibits thereto. A Form 8-K dated March 29, 2004 was filed with the SEC on March 31, 2004 in
response to Item 7 to incorporate by reference into our Registration Statement
on Form S-3 (No. 333-106445) certain exhibits thereto. 50




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. CAPITAL AUTOMOTIVE
REIT(Registrant)BY:
    
    /s/ Thomas D. EckertThomas D. EckertPresident and Chief Executive Officer(principal executive officer)BY:
    
    /s/ David S. KayDavid S. KaySenior Vice President, Chief Financial Officer andTreasurer(principal financial officer)Dated: May 6, 2004
 51