##### 



FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For quarterly period ended June 30, 2004 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _____________ to _____________. COMMISSION FILE NUMBER    000-23733 CAPITAL AUTOMOTIVE REIT  Maryland
    
    54-1870224(State of organization)
    
    (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 July 31, 2004
was 36,598,849.




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##### 



CAPITAL AUTOMOTIVE REIT
FORM 10-Q
INDEX Page No.Part I  Financial InformationItem 1  Financial StatementsConsolidated Balance Sheets  June 30, 2004 (unaudited) and December 31, 2003.
    
    3Consolidated Statements of Operations (unaudited)  three months and six months ended June 30, 2004 and June 30, 2003.
    
    4Consolidated Statements of Cash Flows (unaudited)  six months ended June 30, 2004 and June 30, 2003.
    
    5Consolidated Statements of Changes in Shareholders' Equity and Other Comprehensive Income (unaudited)  six months ended June 30, 2004
    
    6Notes to Consolidated Financial Statements (unaudited)
    
    7Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    25Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    45Item 4  Controls and Procedures
    
    46Part II  Other InformationItem 1  Legal Proceedings
    
    49Item 2  Changes in Securities
    
    49Item 3  Defaults Upon Senior Securities
    
    50Item 4  Submission of Matters to Vote to Security Holders
    
    50Item 5  Other Information
    
    51Item 6  Exhibits and Reports on Form 8-K
    
    51Signatures
    
    52
 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) June 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSReal estate:Land
    
    $
    815,266
    
    
    $
    732,693Buildings and improvements
    
    
    1,221,090
    
    
    
    1,142,117Accumulated depreciation
    
    
    (128,608
    )
    
    
    (116,247
    )1,907,748
    
    
    
    1,758,563Cash and cash equivalents
    
    
    15,396
    
    
    
    13,352Other assets, net
    
    
    73,840
    
    
    
    89,670Total Assets
    
    $
    1,996,984
    
    
    $
    1,861,585LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Mortgage debt
    
    $
    781,814
    
    
    $
    1,066,084Unsecured debt
    
    
    232,164
    
    
    
    4,425Borrowings under credit facilities
    
    
    77,010
    
    
    
    75,009Accounts payable and accrued expenses
    
    
    33,802
    
    
    
    26,773Security deposits payable
    
    
    6,954
    
    
    
    7,568Total Liabilities
    
    
    1,131,744
    
    
    
    1,179,859Minority Interest
    
    
    128,044
    
    
    
    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 June 30, 2004 and December 31, 2003
    
    
    40
    
    
    
    402,600,000 Series B Cumulative Redeemable Preferred Shares issued and outstanding
as of June 30, 2004 and no shares issued or outstanding as of December 31, 2003
    
    
    26
    
    
    
    Common shares, par value $.01 per share; 100 million shares authorized,
36,597,786 shares issued and outstanding as of June 30, 2004 and
33,032,901 shares issued and outstanding as of December 31, 2003
    
    
    366
    
    
    
    330Additional paid-in-capital
    
    
    767,272
    
    
    
    600,278Deferred compensation
    
    
    (4,555
    )
    
    
    (2,098
    )Accumulated other comprehensive loss
    
    
    (5,364
    )
    
    
    (13,541
    )Distributions in excess of accumulated earnings
    
    
    (20,589
    )
    
    
    (15,735
    )Total Shareholders Equity
    
    
    737,196
    
    
    
    569,274Total Liabilities and Shareholders Equity
    
    $
    1,996,984
    
    
    $
    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 Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenue:Rental
    
    $
    48,423
    
    
    $
    40,964
    
    
    $
    95,722
    
    
    $
    80,047Interest and other
    
    
    588
    
    
    
    415
    
    
    
    1,558
    
    
    
    638Total revenue
    
    
    49,011
    
    
    
    41,379
    
    
    
    97,280
    
    
    
    80,685Expenses:Depreciation and amortization
    
    
    8,981
    
    
    
    7,420
    
    
    
    17,700
    
    
    
    14,585General and administrative
    
    
    2,994
    
    
    
    2,393
    
    
    
    5,735
    
    
    
    4,626Interest
    
    
    16,067
    
    
    
    16,137
    
    
    
    33,297
    
    
    
    31,180Debt extinguishment charge
    
    
    8,712
    
    
    
    
    
    
    
    8,712
    
    
    
    Total expenses
    
    
    36,754
    
    
    
    25,950
    
    
    
    65,444
    
    
    
    50,391Income from continuing operations before minority interest
    
    
    12,257
    
    
    
    15,429
    
    
    
    31,836
    
    
    
    30,294Minority interest
    
    
    (1,678
    )
    
    
    (3,285
    )
    
    
    (4,971
    )
    
    
    (6,714
    )Income from continuing operations
    
    
    10,579
    
    
    
    12,144
    
    
    
    26,865
    
    
    
    23,580Income from discontinued operations, net of minority interest
    
    
    238
    
    
    
    544
    
    
    
    1,545
    
    
    
    1,009Gain on sale of real estate, net of minority interest
    
    
    259
    
    
    
    23
    
    
    
    1,212
    
    
    
    58Total discontinued operations
    
    
    497
    
    
    
    567
    
    
    
    2,757
    
    
    
    1,067Net income
    
    
    11,076
    
    
    
    12,711
    
    
    
    29,622
    
    
    
    24,647Preferred share dividends
    
    
    (2,776
    )
    
    
    
    
    
    
    (4,628
    )
    
    
    Net income available to common shareholders
    
    $
    8,300
    
    
    $
    12,711
    
    
    $
    24,994
    
    
    $
    24,647Shares of common stock outstanding used to
compute basic earnings per common share
    
    
    36,057
    
    
    
    30,670
    
    
    
    35,053
    
    
    
    29,481Basic earning per common share:Income from continuing operations
    
    $
    0.22
    
    
    $
    0.40
    
    
    $
    0.63
    
    
    $
    0.80Net income
    
    $
    0.23
    
    
    $
    0.41
    
    
    $
    0.71
    
    
    $
    0.84Shares of common stock outstanding used to
compute diluted earnings per common share
    
    
    36,501
    
    
    
    31,618
    
    
    
    35,587
    
    
    
    30,418Diluted earnings per common share:Income from continuing operations
    
    $
    0.21
    
    
    $
    0.39
    
    
    $
    0.63
    
    
    $
    0.78Net income
    
    $
    0.23
    
    
    $
    0.40
    
    
    $
    0.71
    
    
    $
    0.82Dividends declared per common share
    
    $
    0.4200
    
    
    $
    0.4085
    
    
    $
    0.8365
    
    
    $
    0.8150
 See accompanying Notes to Consolidated Financial Statements. 4




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##### 



CAPITAL AUTOMOTIVE REIT
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Six Months Ended June 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    29,622
    
    
    $
    24,647Adjustments to reconcile net income to net cash provided by operating activities:Gain on disposition of real estate net of minority interest
    
    
    (1,212
    )
    
    
    (58
    )Stock compensation expense
    
    
    728
    
    
    
    604Depreciation and amortization
    
    
    19,282
    
    
    
    16,288Debt extinguishment charge related to swap breakage and deferred loan fees
    
    
    6,482
    
    
    
    Income from continuing operations applicable to minority interest
    
    
    4,971
    
    
    
    6,714Income from discontinued operations applicable to minority interest
    
    
    350
    
    
    
    287Changes in operating assets and liabilities:Increase in other assets
    
    
    (3,274
    )
    
    
    (2,828
    )Increase in accounts payable and accrued expenses
    
    
    1,736
    
    
    
    1,287(Decrease) increase in security deposits payable
    
    
    (614
    )
    
    
    38Net cash provided by operating activities
    
    
    58,071
    
    
    
    46,979Cash flows from investing activities:Purchase of furniture and equipment, net of disposals
    
    
    (17
    )
    
    
    (37
    )Real estate investments
    
    
    (157,664
    )
    
    
    (106,309
    )Real estate dispositions
    
    
    20,658
    
    
    
    1,928Net cash used in investing activities
    
    
    (137,023
    )
    
    
    (104,418
    )Cash flows from financing activities:Proceeds from borrowings under credit facilities
    
    
    120,000
    
    
    
    28,000Proceeds from debt issuance
    
    
    272,175
    
    
    
    234,480Repayment of borrowings under credit facilities
    
    
    (117,999
    )
    
    
    (121,544
    )Repayment of debt
    
    
    (305,968
    )
    
    
    (91,638
    )Debt principal payments
    
    
    (15,602
    )
    
    
    (14,925
    )Payments for debt issuance costs
    
    
    (8,226
    )
    
    
    (6,556
    )Decrease (increase) in restricted cash
    
    
    5,625
    
    
    
    (8,526
    )Payment of common share dividends
    
    
    (24,205
    )
    
    
    (22,081
    )Payment of preferred share dividends
    
    
    (2,881
    )
    
    
    Distributions to minority partners
    
    
    (6,480
    )
    
    
    (6,845
    )Series A Cumulative Redeemable Preferred Shares issuance costs
    
    
    (97
    )
    
    
    Net proceeds from issuance of Series B Cumulative Redeemable Preferred Shares
    
    
    63,180
    
    
    
    Net proceeds from issuance of common shares
    
    
    101,474
    
    
    
    69,286Net cash provided by financing activities
    
    
    80,996
    
    
    
    59,651Net increase in cash and cash equivalents
    
    
    2,044
    
    
    
    2,212Cash and cash equivalents at beginning of period
    
    
    13,352
    
    
    
    7,442Cash and cash equivalents at end of period
    
    $
    15,396
    
    
    $
    9,654Supplemental Data:Real estate acquisitions in exchange for equity issuance
    
    $
    10,057
    
    
    $
    Real estate acquisitions in exchange for like-kind property
    
    $
    14,968
    
    
    $
    Interest paid during the period
    
    $
    28,119
    
    
    $
    27,843Dividends and distributions reinvested to purchase common shares
    
    $
    5,659
    
    
    $
    2,434Change in valuation of fair value swap
    
    $
    7,136
    
    
    $
    
 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 Shares
    
    Common
    
    Additional
    
    Excess of
    
    
    
    Other
    
    
    
    OtherPreferred Shares
    
    Common
    
    Par Value
    
    Shares
    
    Paid-in
    
    Accumulated
    
    Deferred
    
    Comprehensive
    
    
    
    ComprehensiveSeries A
    
    Series B
    
    Shares
    
    Series A
    
    Series B
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,636
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,636
    )
    
    
    Series A Cumulative Redeemable Preferred Shares
issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (97
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (97
    )
    
    
    Net proceeds from issuance of Series B
Cumulative Redeemable Preferred Shares
    
    
    
    
    
    
    2,600,000
    
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    63,154
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,180
    
    
    
    Net proceeds from follow-on offerings
    
    
    
    
    
    
    
    
    
    
    2,825,000
    
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    96,558
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96,586
    
    
    
    Issuance of common shares from dividend
reinvestment and share purchase plan, net of
costs
    
    
    
    
    
    
    
    
    
    
    199,055
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    5,776
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,778
    
    
    
    Issuance of restricted shares, net of forfeitures
    
    
    
    
    
    
    
    
    
    
    86,427
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    3,109
    
    
    
    
    
    
    
    (3,110
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    653
    
    
    
    
    
    
    
    653
    
    
    
    Issuance of phantom shares, net of forfeitures
    
    
    
    
    
    
    
    
    
    
    17,020
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    Exercise of common stock options and warrants
    
    
    
    
    
    
    
    
    
    
    347,995
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4,783
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,787
    
    
    
    Redemption of units of limited partnership
interest in the Partnership to common shares
    
    
    
    
    
    
    
    
    
    
    89,388
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1,202
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,203
    
    
    
    Accrued compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    Change in valuation of interest rate swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,177
    
    
    
    8,177
    
    
    
    8,177Change in valuation of interest rate swap
attributable to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,484
    )Preferred share dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,628
    )
    
    
    
    
    
    
    
    
    
    
    (4,628
    )
    
    
    Common share dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,848
    )
    
    
    
    
    
    
    
    
    
    
    (29,848
    )
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,622
    
    
    
    
    
    
    
    
    
    
    
    29,622
    
    
    
    29,622Balance at June 30, 2004 (unaudited)
    
    
    3,950,000
    
    
    
    2,600,000
    
    
    
    36,597,786
    
    
    $
    40
    
    
    $
    26
    
    
    $
    366
    
    
    $
    767,272
    
    
    $
    (20,589
    )
    
    $
    (4,555
    )
    
    $
    (5,364
    )
    
    $
    737,196
    
    
    $
    36,315
 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 June 30, 2004,
owned approximately 81.7% 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 and Series B 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 June 30, 2004, we had invested more than $2.0 billion in 330 properties
located in 31 states, consisting of approximately 2,480 acres of land and
containing approximately 14.2 million square feet of buildings and
improvements. Our tenants operate 473 motor vehicle franchises on our
properties, representing 44 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 June 30, 2004 of approximately 17.0 years), with our
entire portfolio having a weighted average initial lease term of approximately
14.9 years. As of June 30, 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 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 and 7




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##### 



six months ended June 30, 2004, are not necessarily indicative of
the results that may be expected for the full year. These financial statements
should be read in conjunction with our audited consolidated financial
statements and 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 June 30, 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 $8.9 million and $7.6 million for the three
months ended June 30, 2004 and 2003, respectively. Real estate depreciation
expense, including depreciation expense related to discontinued operations, was
approximately $17.7 million and $15.0 million for the six months ended June 30,
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 $16,000 and $18,000
for the three months ended June 30, 2004 and 2003, respectively. Total
depreciation expense related to our furniture, fixtures and equipment was
approximately $34,000 and $40,000 for the six months ended June 30, 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 $7.4 million and $5.0
million as of June 30, 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 $14.6 million and $20.2
million as of June 30, 2004 and December 31, 2003, respectively. Deferred Loan Costs Certain costs incurred in connection with the issuance of debt instruments are
capitalized and generally amortized over the terms of the respective issuance
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 $22.5
million and $18.1 million as of June 30, 2004 and December 31, 2003,
respectively. Loan cost amortization expense was approximately $712,000 and
$661,000 for the three months ended June 30, 2004 and 2003, respectively. Loan
cost amortization expense was approximately $1.5 million and $1.2 million for
the six months ended June 30, 2004 and 2003, respectively. Upon the early
extinguishment of debt instruments, we expense any associated unamortized
deferred loan costs in the period of the debt retirement. 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 9




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##### 



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 million and $1.4 million as of June 30, 2004 and December
31, 2003, respectively. Leasing cost amortization expense was approximately
$50,000 and $43,000 for the three months ended June 30, 2004 and 2003,
respectively. Leasing cost amortization expense was approximately $98,000 and
$84,000 for the six months ended June 30, 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 June 30, 2004, approximately $424 million of our real estate portfolio, or
21%, was subject to variable rate leases. This compares to $410 million of our
real estate portfolio, or 24%, that was subject to variable rate leases as of
June 30, 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 $18.4 million and $16.7 million as of June 30, 2004 and
December 31, 2003, respectively. Straight-lined rental revenue was
approximately $1.1 million and $1.3 million for the three months ended June 30,
2004 and 2003, respectively. Straight-lined rental revenue was approximately
$2.2 million and $2.5 million for the six months ended June 30, 2004 and 2003,
respectively. Derivative Instruments During the normal course of business, we are exposed to certain financial
market risks, the most predominant being fluctuations in interest rates. 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. 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 10




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##### 



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 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, the change in the unrealized
gain or loss is recorded 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 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 recorded to the carrying value of the debt
instrument 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 June 30, 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. 11




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##### 



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 Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Net income available to common
shareholders, as reported
    
    $
    8,300
    
    
    $
    12,711
    
    
    $
    24,994
    
    
    $
    24,647Add: Share-based compensation
expense included in reported net
income, net of minority interest
    
    
    329
    
    
    
    212
    
    
    
    595
    
    
    
    470Deduct: Total share-based
compensation expense determined
under the fair value-based method
for all awards, net of minority
interest
    
    
    (348
    )
    
    
    (250
    )
    
    
    (632
    )
    
    
    (549
    )Pro forma net income
    
    $
    8,281
    
    
    $
    12,673
    
    
    $
    24,957
    
    
    $
    24,568Basic earnings per common share:As reported
    
    $
    0.23
    
    
    $
    0.41
    
    
    $
    0.71
    
    
    $
    0.84Pro forma
    
    $
    0.23
    
    
    $
    0.41
    
    
    $
    0.71
    
    
    $
    0.83Diluted earnings per common share:As reported
    
    $
    0.23
    
    
    $
    0.40
    
    
    $
    0.71
    
    
    $
    0.82Pro forma
    
    $
    0.23
    
    
    $
    0.40
    
    
    $
    0.70
    
    
    $
    0.81
 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 June 2004, the Emerging Issues Task Force, commonly referred to as the EITF,
reached a tentative conclusion on EITF Issue No. 04-8, The Effect of
Contingently Convertible Debt on Diluted Earnings Per Share. Contingently
convertible debt instruments, which are commonly referred to as Co-Cos and
include our $110 million of 6% Convertible Notes, combine the features of
contingently issuable shares with a convertible debt instrument. These
instruments generally become convertible into common stock only if one or more
specified events occur, such as the underlying common stock achieving a
specified price target. The EITF tentatively concluded that Co-Cos should be
included in diluted earnings per share computations using the if-converted
method regardless of whether the market price trigger or other 12




---



##### 



contingent
feature has been met. Under current interpretations of Statement of Financial Accounting Standards,
commonly referred to as SFAS, No. 128, Earnings Per Share, issuers of Co-Cos
exclude the potential common shares underlying the Co-Co from the calculation
of diluted earnings per share until the market price or other contingency is
met. When the contingency is met, generally the if-converted method is used to
calculate the dilutive impact of the instrument. Under the if-converted
method, the instrument is considered converted, with the resulting number of
shares included in the denominator of the earnings per share calculation and
the interest expense, net of tax, added back to the numerator of the earnings
per share calculation. The EITF agreed the tentative conclusion would be applied by restating
previously diluted earnings per share. If approved by the Financial Accounting
Standards Board, commonly referred to as the FASB, we do not expect the
implementation of EITF Issue No. 04-8 will have a significant impact on our
results of operations and earnings per common share. 4.      INVESTMENTS IN REAL ESTATE During the second quarter, we completed approximately $126 million in real
estate investments, including sale-leaseback financing on 14 auto retail
properties to six dealer groups, including two new tenants. These dealer
groups consist primarily of Top 100 dealer groups, both private and
publicly-traded. Also included in the second quarter investments was
approximately $18 million in construction improvements, transacted with six
existing tenants. Several of the properties acquired this quarter will undergo
major renovations by the tenants over the next 12 to 24 months, which we have
committed up to $75 million to fund. The second quarter real estate
investments contain 28 automotive franchises located in 13 states (California,
Florida, Georgia, Illinois, Louisiana, Maryland, Michigan, New Jersey, North
Carolina, Ohio, South Carolina, Texas and Virginia) and have a weighted average
initial lease term of approximately 17 years, with multiple renewal options
exercisable at the option of the tenants. The investments were funded with
approximately $70.0 million from borrowings on our short-term credit
facilities, with the issuance of $10.1 million in operating partnership units
at an average price of $28.61 per unit, and with cash on hand. During the
second quarter, a tenant completed the construction of a new facility, totaling
$10 million, on land owned by us. The construction was funded through our
construction financing program. We acquired this facility upon completion of
construction. 13




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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 second quarter, we sold two auto retail locations for approximately
$3.5 million to one dealer group, resulting in a combined gain of approximately
$315,000 before minority interest. In exchange for the early termination of
the leases related to these properties, we received approximately $175,000 in
lease termination fees, which was recorded during the second quarter. In
addition, we sold five auto retail locations back to a tenant for $6.7 million
in net proceeds, consisting of $700,000 in cash and a $6.0 million secured
first mortgage note, with additional collateral as well as personal guarantees.
The secured mortgage is a three-year, interest-only note. The gain related to
this sale, totaling approximately $700,000 before minority interest, has been
deferred. The earnings generated from these real estate dispositions, including the
combined recognized gain and lease termination fees, have been reported as
discontinued operations. Since January 1, 2003, we have sold 14 auto retail locations with net proceeds
totaling approximately $44.1 million. The following table sets forth the
components of discontinued operations related to properties sold subsequent to
January 1, 2003 (in thousands): For the three months
    
    For the six monthsended June 30,
    
    ended June 30,2004
    
    2003
    
    2004
    
    2003Revenue:Rental
    
    $
    116
    
    
    $
    1,122
    
    
    $
    654
    
    
    $
    2,285Other
    
    
    175
    
    
    
    151
    
    
    
    1,423
    
    
    
    191Total revenue
    
    
    291
    
    
    
    1,273
    
    
    
    2,077
    
    
    
    2,476Expenses:Depreciation
    
    
    2
    
    
    
    256
    
    
    
    106
    
    
    
    520Interest
    
    
    
    
    
    
    326
    
    
    
    76
    
    
    
    660Total expenses
    
    
    2
    
    
    
    582
    
    
    
    182
    
    
    
    1,180Income from discontinued operations before gain
on sale of real estate and minority interest
    
    
    289
    
    
    
    691
    
    
    
    1,895
    
    
    
    1,296Gain on sale of real estate
    
    
    315
    
    
    
    29
    
    
    
    1,486
    
    
    
    75Income related to discontinued operations
before minority interest
    
    
    604
    
    
    
    720
    
    
    
    3,381
    
    
    
    1,371Minority interest related to discontinued operations
    
    
    (107
    )
    
    
    (153
    )
    
    
    (624
    )
    
    
    (304
    )Total discontinued operations, net of
minority interest
    
    $
    497
    
    
    $
    567
    
    
    $
    2,757
    
    
    $
    1,067
 14




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##### 



6.      BALANCE SHEET RESTRUCTURING AND DEBT EXTINGUISHMENT As previously discussed in our Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2004, we completed a significant restructuring of our
balance sheet by paying off a portion of our outstanding debt with Ford Motor
Credit Corporation (Ford). We repaid approximately $214 million of mortgage
debt outstanding with Ford, of which approximately $161 million was variable
rate debt, with a weighted average spread over LIBOR of 226 basis points, and
approximately $53 million was variable rate debt swapped to fixed rate debt,
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, as further described in the Equity Transactions
footnote herein;
    
    On April 15, 2004, we closed on a public offering of $125
million 6.75% senior unsecured monthly income notes at par, as
further described in the Mortgages and Notes Payable footnote
herein;
    
    On April 27, 2004, we issued 2,500,000 8% Series B
Cumulative Redeemable Preferred Shares at $25.00 per share, as
further described in the Equity Transactions footnote herein; and
    
    Approximately $23 million from borrowings on our
short-term credit facilities, which were subsequently repaid
during the second quarter of 2004, and cash on hand due to the
timing of the equity and debt transactions noted above. As a result of this 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. In May 2004, we repaid the remainder of our outstanding Ford debt totaling
approximately $92 million, which had an effective interest rate of
approximately 7.84%, and paid the related prepayment penalties totaling
approximately $2.2 million. The debt was repaid with a portion of the net
proceeds derived from our May 12, 2004 public offering of $110 million of 6%
Convertible Notes, as further described in the Mortgages and Notes Payable
footnote herein. As a result of these transactions, we incurred debt extinguishment charges
totaling approximately $8.7 million, or $0.20 per share to net income available
to common shareholders. The debt extinguishment charges consisted of the
following:  
    
    swap breakage fees totaling approximately $4.0 million
related to the repayment of variable rate debt with Ford that had
been swapped to a fixed rate;
    
    the write-off of deferred loan fees related to the loans
that were paid off and the termination of our $60 million
unsecured credit facility totaling approximately $2.5 million; and
    
    prepayment penalties totaling approximately $2.2 million
related to the repayment of the fixed rate debt with Ford. 15




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##### 



7.      MORTGAGES AND NOTES PAYABLE The following is a summary of our total debt outstanding as of June 30, 2004
and December 31, 2003 (dollars in thousands): Principal
    
    
    
    
    
    Principal
    
    Effective
    
    Term/Original
    
    Balance as of
    
    
    
    
    
    Balance as of
    
    Interest
    
    AmortizationDescription of Debt
    
    Debt Issued
    
    June 30, 2004
    
    
    
    
    
    December 31, 2003
    
    Rate*
    
    Schedule7.59% fixed rate debt due 12/1/08 (1)
    
    
    38,050
    
    
    $
    32,294
    
    
    
    
    
    
    $
    33,046
    
    
    
    7.96
    %
    
    10 yr/17 yr7.50% fixed rate debt due 8/10/13 (2)
    
    
    82,600
    
    
    
    75,029
    
    
    
    
    
    
    
    75,717
    
    
    
    7.62
    %
    
    12 yr/30 yr5.84% fixed rate debt due 2/1/14 (3)
    
    
    11,900
    
    
    
    11,831
    
    
    
    
    
    
    
    
    
    
    
    6.17
    %
    
    10 yr/25 yr6.77% fixed rate debt due 7/1/14 (4)
    
    
    20,400
    
    
    
    20,230
    
    
    
    
    
    
    
    20,400
    
    
    
    6.87
    %
    
    10.5 yr/30 yrTriple Net Lease Mortgage Notes, Series 2002
(5)
    
    
    325,000
    
    
    
    299,532
    
    
    
    
    
    
    
    306,251
    
    
    
    7.70
    %
    
    (5)Triple Net Lease Mortgage Notes, Series
2003-1 (6)
    
    
    228,000
    
    
    
    220,333
    
    
    
    
    
    
    
    223,469
    
    
    
    5.86
    %
    
    (6)Various fixed rate debt (7)
    
    
    160,554
    
    
    
    
    
    
    
    
    
    
    
    145,765
    
    
    
    
    
    
    (7)Total Mortgage Fixed Rate Debt
    
    
    
    
    
    $
    659,249
    
    
    
    
    
    
    $
    804,648
    
    
    
    7.07
    %Variable rate debt due 9/29/11 (8)
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    137,357
    
    
    
    
    
    
    (8)Various variable rate debt (9)
    
    
    155,385
    
    
    
    122,565
    
    
    
    
    
    
    
    124,079
    
    
    
    3.99
    %
    
    4.6 to 12 yr/25 to 30 yrTotal Mortgage Variable Rate Debt
    
    
    
    
    
    $
    122,565
    
    
    
    
    
    
    $
    261,436
    
    
    
    3.87
    %TOTAL MORTGAGE DEBT (10)
    
    
    
    
    
    $
    781,814
    
    
    
    
    
    
    $
    1,066,084
    
    
    
    6.54
    %Variable rate debt due 10/2/08 (11)
    
    
    4,500
    
    
    
    4,300
    
    
    
    
    
    
    
    4,425
    
    
    
    3.76
    %
    
    5 yr/ 15 yr6.75% Monthly Income Notes due 4/15/19 (12)
    
    
    125,000
    
    
    
    125,000
    (13
    )
    
    
    
    
    
    
    
    
    
    4.15
    %
    
    (12)6% Convertible Notes due 5/15/24 (14)
    
    
    110,000
    
    
    
    110,000
    
    
    
    
    
    
    
    
    
    
    
    6.55
    %
    
    (14)TOTAL UNSECURED DEBT
    
    
    
    
    
    $
    239,300
    
    
    
    
    
    
    $
    4,425
    
    
    
    4.98
    %$100 million revolving secured facility (15)
    
    
    
    
    
    
    47,700
    
    
    
    
    
    
    
    49,326
    
    
    
    4.22
    %
    
    (15)$100 million revolving secured construction
facility (16)
    
    
    
    
    
    
    29,310
    
    
    
    
    
    
    
    25,683
    
    
    
    4.47
    %
    
    (16)$60 million revolving unsecured facility
(17)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17)TOTAL CREDIT FACILITIES
    
    
    
    
    
    $
    77,010
    
    
    
    
    
    
    $
    75,009
    
    
    
    4.25
    %TOTAL DEBT OUTSTANDING
    
    
    
    
    
    $
    1,098,124
    (13
    )
    
    
    
    
    $
    1,145,518
    
    
    
    6.27
    %
  *
    
    For the quarter ended June 30, 2004. Includes deferred loan fees
amortized over the life of the loans. 16




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##### 



(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)
    
    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.(3)
    
    This loan requires monthly interest and level principal payments with
a final payment at maturity of approximately $9.2 million.(4)
    
    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.(5)
    
    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
    
    
    
    146,578
    
    
    
    8/15/14A-1b
    
    
    9,064
    
    
    
    9,064
    
    
    
    7/15/15A-2
    
    
    75,900
    
    
    
    67,990
    
    
    
    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.(6)
    
    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
    
    
    
    101,333
    
    
    
    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.(7)
    
    This represents debt outstanding with Ford which was repaid during
the second quarter of 2004, as further described in the Balance Sheet
Restructuring and Debt Extinguishment footnote herein. The debt
consisted of approximately $92 million of fixed rate debt at an
effective interest rate of 7.84%, scheduled to mature on July 6, 2011,
and approximately $53 million of variable rate debt swapped to fixed
rate with an effective interest rate of 7.6%, scheduled to mature at the
end of 2012.(8)
    
    This loan, totaling $135.6 million, bearing interest at a spread of
227 basis points over the 30-day LIBOR, was repaid during the second
quarter of 2004, as further described in the Balance Sheet Restructuring
and Debt Extinguishment footnote herein.(9)
    
    The loans outstanding bear interest at variable rates ranging from
185 to 357 basis points above 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 17




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##### 



principal and interest, or interest-only payments until maturity, at
which time the loans require final payments totaling
approximately $105.0 million. One of these loans, totaling $51.3 million
as of June 30, 2004, is cross defaulted with the revolving credit
facilities discussed in footnote (15) and (16). Six of these loans
totaling $56.3 million as of June 30, 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
five of the aforementioned loans, the Partnership has partially guaranteed
the monetary obligations under the loans limited to approximately $17.3
million as of June 30, 2004. Two of the loans previously outstanding with
Ford, totaling approximately $26 million, were repaid during the second
quarter of 2004, as further described in the Balance Sheet Restructuring
and Debt Extinguishment footnote herein.(10)
    
    Certain amounts of our mortgage debt are subject to prepayment
penalties.(11)
    
    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.(12)
    
    On April 15, 2004 we closed on a public offering of $125.0 million
6.75% senior unsecured monthly income notes at par. The notes were
issued under our shelf registration statement filed with the SEC on June
25, 2003, which we refer to as the 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. 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.
The unrealized loss on our fair value hedge was approximately $7.1
million as of June 30, 2004, as further described in the Interest Rate
Swaps section herein. Total net proceeds to the Company, after
deducting the discounts and commissions to the underwriters and other
expenses of the offering, totaled approximately $121 million. The net
proceeds were used to pay off a portion of the debt outstanding with
Ford (see footnotes (8) and (9)).(13)
    
    Although the principal balance of the $125.0 million 6.75% senior
unsecured monthly income notes was $125.0 million as of June 30, 2004,
in accordance with GAAP, the carrying value of the debt on our balance
sheet has been reduced by $7.1 million, representing the change in the
fair value of the swap described in footnote (12) and as more fully
described in the Interest Rate Swaps section.(14)
    
    On May 12, 2004, we closed on a public offering of $110.0 million 6%
convertible notes. The notes were issued under our 2003 Shelf
Registration Statement. The notes have a 20-year term and are
convertible, at the option of the holder, into the Companys common
shares under certain circumstances, at an initial conversion price of
$35.5679 per share, subject to certain adjustments. The initial price
is equivalent to a conversion rate of 28.1152 shares per $1,000
principal amount of notes and equivalent to a premium of 30%. The
conversion rate will be adjusted under certain circumstances, including
common stock splits, common stock issuances as dividends and increases
in the dividend rate. The Company may, at its option, redeem the notes
for cash on or after May 15, 2009, at any time, in whole or, from time
to time, in part, at a redemption price equal to 100% of the principal
amount to be redeemed plus accrued and unpaid interest. The noteholders
may require us to repurchase all or part of the notes on May 15, 2009,
May 15, 2014 and May 15, 2019, or upon a change in control, at a price
equal to 100% of the principal amount plus accrued and unpaid interest.
The notes require semi-annual interest payments. In accordance with
GAAP, the notes will be accounted for as debt, and interest expense
recorded, until the conversion of the notes. In addition, the deferred
loan fees associated with this debt are being amortized over a five-year
period. Total net proceeds to the Company, after deducting the
discounts and commissions to the underwriters and other expenses of the
offering, totaled approximately $107 million. The net proceeds were
used to pay off approximately $92 million of the debt outstanding with
Ford and the related prepayment penalties totaling $2.2 million (see
footnote (7)), to fund acquisitions and for general corporate purposes.(15)
    
    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 June 30, 2004, the borrowings under the facility
bear interest equal to the 30-day LIBOR rate plus 300 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.(16)
    
    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 June 30, 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. 18




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##### 



(17)
    
    This facility was terminated on April 1, 2004 because it prohibited
the issuance of senior unsecured debt. On April 15,
2004, we closed on the public offering of senior unsecured monthly income
notes as further described in footnote (12) above. 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 ratios and maximum debt to adjusted
net worth and unencumbered assets to unsecured debt 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 June 30, 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 June 30, 2004 are as follows (in thousands): For the Year Ended December 31, PrincipalAmortization
    
    Maturities
    
    Total2004
    
    $
    14,044
    
    
    $
    
    
    
    $
    14,0442005
    
    
    29,205
    
    
    
    
    
    
    
    29,2052006
    
    
    30,959
    
    
    
    
    
    
    
    30,9592007
    
    
    32,842
    
    
    
    
    
    
    
    32,8422008
    
    
    34,590
    
    
    
    49,331
    
    
    
    83,921Thereafter
    
    
    369,280
    
    
    
    460,863
    
    
    
    830,143Total
    
    $
    510,920
    
    
    $
    510,194
    
    
    $
    1,021,114
 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 $13.3
million and $12.8 million as of June 30, 2004 and December 31, 2003,
respectively, is included in other assets on our consolidated balance sheets. As of June 30, 2004, we have two interest rate swap arrangements with third
parties to fix the interest rate on the underlying variable rate debt, with a
notional balance totaling approximately $100 million, which we have designated
as cash flow hedges. During the second quarter of 2004, we terminated two of
the interest rate swap arrangements with notional balances totaling
approximately $58 million as part of our debt restructuring, as further
described in the Balance Sheet Restructuring and Debt Extinguishment footnote
herein. In conjunction with the early termination of these swap arrangements,
we incurred swap 19




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##### 



breakage fees totaling approximately $4.0 million. For a derivative qualifying as a cash flow hedge, the change in the unrealized
gain or loss is recorded 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 $5.4 million and
$13.5 million as of June 30, 2004 and December 31, 2003, respectively. Total
comprehensive income for the three months ended June 30, 2004 and 2003 was
approximately $21.4 million and $9.8 million, respectively. Total
comprehensive income for the six months ended June 30, 2004 and 2003 was
approximately $36.3 million and $20.8 million, respectively. On March 18, 2004, in conjunction with pricing of the $125 million 6.75% senior
unsecured monthly income notes, 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 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 recorded to the carrying value of the debt instrument
being hedged on our consolidated balance sheets. The unrealized loss on our fair value hedge was approximately $7.1 million as
of June 30, 2004. The net unrealized gain or loss on our fair value hedge and
the debt being hedged had no impact on our net income for the three months and
six months ended June 30, 2004, respectively. 8.      EQUITY TRANSACTIONS Common Shares 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 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 $35.0 million. 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 repay $18.0 million of borrowings
under our short-term credit facilities and to pay off a portion of the debt
outstanding with Ford. Preferred Shares 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. Net proceeds to the
Company, after deducting the discounts and commissions to the underwriters and
other expenses of this offering, totaled approximately $63.2 million. The
Company contributed the net proceeds of the offering to the Partnership in
exchange for Series B Preferred Units in the Partnership. Of the total net
proceeds, approximately $53 million was used to pay off a portion of the debt
outstanding with Ford and the remaining proceeds were used to fund 20




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##### 



acquisitions
and for general corporate purposes. The preferred shares are non-voting and redeemable for cash, at $25.00 per
share plus any accrued and unpaid
dividends, at our option on or after April 27, 2009, unless in limited
circumstances in which early redemption is necessary to preserve our status as
a real estate investment trust for federal income tax purposes. The preferred
shares have no stated maturity and are not subject to any sinking fund
provisions. Additionally, the shares are not convertible into or exchangeable
for any other security unless conversion is necessary to maintain our status as
a real estate investment trust. Holders of preferred shares are entitled to
cumulative cash dividends at a rate of 8% of the $25.00 liquidation preference
per year (equivalent to $2.00 per year per share), payable quarterly (when and
as declared by the Board of Trustees). In the case of the preferred shares,
there are Series B Preferred Units in the Partnership owned by us that carry
substantially the same terms. 9.      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 18.3% and 19.3% as of June 30, 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 17.7% and 21.3% for the three months ended June 30, 2004
and 2003, respectively. The Minority Interest ownership percentage in income
of the Partnership was 18.1% and 22.2% for the six months ended June 30, 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 8.1 million and
7.9 million Common Units as of June 30, 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. 10.      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 21




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##### 



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. A reconciliation of income and weighted average common shares used to calculate
basic and diluted earnings per common share for the three months and six months
ended June 30, 2004 and 2003 is as follows (in thousands,
except per share data): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Income from continuing operations
    
    $
    10,579
    
    
    $
    12,144
    
    
    $
    26,865
    
    
    $
    23,580Preferred share dividends
    
    
    (2,776
    )
    
    
    
    
    
    
    (4,628
    )
    
    
    Income from continuing operations used to
calculate basic earnings per common share
    
    
    7,803
    
    
    
    12,144
    
    
    
    22,237
    
    
    
    23,580Impact of dilutive securities
    
    
    17
    
    
    
    79
    
    
    
    99
    
    
    
    115Income from continuing operations used to
calculate diluted earnings per common
share
    
    $
    7,820
    
    
    $
    12,223
    
    
    $
    22,336
    
    
    $
    23,695Basic earnings per common share
    
    $
    0.22
    
    
    $
    0.40
    
    
    $
    0.63
    
    
    $
    0.80Diluted earnings per common share
    
    $
    0.21
    
    
    $
    0.39
    
    
    $
    0.63
    
    
    $
    0.78Net income available to common shareholders
    
    $
    8,300
    
    
    $
    12,711
    
    
    $
    24,994
    
    
    $
    24,647Impact of dilutive securities
    
    
    18
    
    
    
    82
    
    
    
    119
    
    
    
    171Net income used to calculate diluted
earnings per common share
    
    $
    8,318
    
    
    $
    12,793
    
    
    $
    25,113
    
    
    $
    24,818Basic earnings per common share
    
    $
    0.23
    
    
    $
    0.41
    
    
    $
    0.71
    
    
    $
    0.84Diluted earnings per common share
    
    $
    0.23
    
    
    $
    0.40
    
    
    $
    0.71
    
    
    $
    0.82Weighted average shares:Common shares outstanding used to compute
basic earnings per common share
    
    
    36,057
    
    
    
    30,670
    
    
    
    35,053
    
    
    
    29,481Impact of dilutive securities
    
    
    444
    
    
    
    948
    
    
    
    534
    
    
    
    937Common shares outstanding used to compute
diluted earnings per common share
    
    
    36,501
    
    
    
    31,618
    
    
    
    35,587
    
    
    
    30,418
 22




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##### 



11.      DIVIDENDS DECLARED PER SHARE The following table summarizes any activity related to our dividends during the
six months ended June 30, 2004: Record Date
    
    Date Payable
    
    Per ShareSeries A Preferred Shares:December 11, 2003 - January 31, 2004 (1)
    
    February 2, 2004
    
    February 17, 2004
    
    $
    0.26042February 1, 2004 - April 30, 2004
    
    May 3, 2004
    
    May 17, 2004
    
    $
    0.46875May 1, 2004 - July 31, 2004
    
    August 2, 2004
    
    August 16, 2004
    
    $
    0.46875Series B Preferred Shares:April 27, 2004 - July 31, 2004 (1)
    
    August 2, 2004
    
    August 16, 2004
    
    $
    0.52220Common Shares:Fourth Quarter 2003
    
    February 9, 2004
    
    February 19, 2004
    
    $
    0.41650First Quarter 2004
    
    May 10, 2004
    
    May 20, 2004
    
    $
    0.42000Second Quarter 2004
    
    August 9, 2004
    
    August 20, 2004
    
    $
    0.42300
  (1)
    
    Initial dividend payment was prorated from the original issuance date through the date indicated. 12.      LEGAL PROCEEDINGS We are engaged in litigation relating to the activities of Michael Burkitt, a
former employee who left to become 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 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. Milestone, together with three of its sponsors and investors, then 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
has been extended by mutual agreement. We believe that the issuance of a
temporary injunction to this effect has not and 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. On June 25, 2004, the Circuit Court of Fairfax County granted us permission to
amend our motion for judgment and add new parties. We have added Milestone,
The Staubach Company, Staubach Retail Services, Inc., Cypress Equities, L.L.C.,
Presidio Financial Partners, L.L.C., and John Geller (who resigned from his
position at Ernst & Young LLP, where he served as our audit partner, to become
the Chief Financial Officer of Milestone) as defendants and Capital Automotive
L.P. as co-plaintiff to our Fairfax, Virginia suit for misappropriation of
trade secrets, breaches of fiduciary duty, tortuous interference with CARS
business relationships, and conspiracies to injure CARS in its reputation,
trade, business, and profession. We are seeking $250,000,000 in compensatory
and punitive damages, and three-fold damages pursuant to Virginias conspiracy
statute, and injunctive relief pursuant to the Virginia Uniform Trade Secrets
Act. 23




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Although no assurance can be provided with respect to any litigation, we
believe that the allegations against us in the Texas petition are without merit
and that we have meritorious defenses to the claims made in the petition. We
intend to prosecute our case and 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. 24




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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 26. In the next
section, beginning on page 28, we discuss our results of operations for the
periods presented. We then provide, beginning on page 32, 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 43, we discuss funds from operations, or FFO,
which is a relative non-GAAP financial measure of performance 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 June 30,
2004, we had invested more than $2.0 billion in 330 properties located in 31
states, consisting of approximately 2,480 acres of land and containing
approximately 14.2 million square feet of buildings and improvements. Our
tenants operate 473 motor vehicle franchises on our properties, representing 44
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 June 30, 2004 of approximately 17.0 years), with our entire
portfolio having a weighted average initial lease term of approximately 14.9
years. As of June 30, 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 25




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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 second quarter, we increased our real estate investments by
approximately $120.4 million, bringing the total increase in investments for
the year to $144.2 million. Property Investments During the second quarter, we completed approximately $126 million in real
estate investments, including sale-leaseback financing on 14 auto retail
properties to six dealer groups, including two new tenants. These dealer
groups consist primarily of Top 100 dealer groups, both private and
publicly-traded. Also included in the second quarter investments was
approximately $18 million in construction improvements, transacted with six
existing tenants. Several of the properties acquired this quarter will undergo
major renovations by the tenants over the next 12 to 24 months, which we have
committed up to $75 million to fund. The second quarter real estate
investments contain 28 automotive franchises located in 13 states (California,
Florida, Georgia, Illinois, Louisiana, Maryland, Michigan, New Jersey, North
Carolina, Ohio, South Carolina, Texas and Virginia) and have a weighted average
initial lease term of approximately 17 years, with multiple renewal options
exercisable at the option of the tenants. The investments were funded with
approximately $70.0 million from borrowings on our short-term credit
facilities, with the issuance of $10.1 million in operating partnership units
at an average price of $28.61 per unit, and with cash on hand. During the
second quarter, a tenant completed the construction of a new facility, totaling
$10 million, on land owned by us. The construction was funded through our
construction financing program. We acquired this facility upon completion of
construction. Property Dispositions During the second quarter, we sold two auto retail locations, for approximately
$3.5 million, to one dealer group, resulting in a combined gain of
approximately $315,000 before minority interest. In exchange for early
termination of the leases related to these properties, we received
approximately $175,000 in lease termination fees, which was recorded during the
second quarter. In addition, we sold five auto retail locations back to a
tenant for $6.7 million in net proceeds, consisting of $700,000 in cash and a
$6 million secured first mortgage note, with additional collateral as well as
personal guarantees. The secured mortgage is a three-year, interest-only note.
The gain related to this sale, totaling approximately $700,000 before minority
interest, has been deferred. The earnings generated from these real estate
dispositions, including the combined recognized gain and the lease termination
fees, have been reported as discontinued operations. Financing Balance Sheet Restructuring and Extinguishment of Debt As previously discussed in our Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2004, we completed a significant restructuring of our 26




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##### 



balance sheet by paying off a portion of our outstanding debt with Ford Motor
Credit Corporation (Ford). We repaid approximately $214 million of mortgage
debt outstanding with Ford, of which approximately $161 million was variable
rate debt, with a weighted average spread over LIBOR of 226 basis points, and
approximately $53 million was variable rate debt swapped to fixed rate debt,
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, as further described in the Liquidity and Capital Resources
 Equity Offeringssection herein;
    
    On April 15, 2004, we closed on a public offering of $125 million
6.75% senior unsecured monthly income notes at par, as further described
in the Liquidity and Capital Resources  Mortgages and Notes Payable
section herein;
    
    On April 27, 2004, we issued 2,500,000 8% Series B Cumulative
Redeemable Preferred Shares at $25.00 per share, as further described in
the Liquidity and Capital Resources  Equity Offeringssection herein;
and
    
    Approximately $23 million from borrowings on our short-term credit
facilities, which were subsequently repaid during the second quarter of
2004, and cash on hand due to the timing of the equity and debt
transactions noted above. As a result of this 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. In May 2004, we repaid the remainder of our outstanding Ford debt totaling
approximately $92 million, which had an effective interest rate of
approximately 7.84%, and incurred related prepayment penalties totaling
approximately $2.2 million. The debt and prepayment penalties were paid with a
portion of the net proceeds derived from our May 12, 2004 public offering of
$110 million of 6% Convertible Notes, as further described in the Liquidity
and Capital Resources  Mortgages and Notes Payablesection herein. As a result of these transactions, we incurred a debt extinguishment charge
totaling approximately $8.7 million, or $0.20 per share to net income available
to common shareholders. The debt extinguishment charge consisted of: (i) swap
breakage fees totaling approximately $4.0 million related to the repayment of
variable rate debt with Ford that had been swapped to a fixed rate; (ii) the
write-off of deferred loan fees related to the loans that were paid off and the
termination of our $60 million unsecured credit facility totaling approximately
$2.5 million; and (iii) prepayment penalties totaling approximately $2.2
million related to the repayment of the fixed rate debt with Ford. By completing the restructuring during the second quarter of 2004, we
significantly improved our balance sheet flexibility while continuing our
strategy of match-funding our debt with our leases. Specifically, we
accomplished the following:  
    
    Replaced $306 million of secured financing with unsecured financing and equity capital;
    
    Reduced our long-term variable rate debt by approximately $60 million;
    
    Increased our unencumbered assets. As of June 30, 2004, our
encumbered assets totaled nearly $800 million;
    
    Reduced future amortization requirements by approximately $81 million
over the remaining terms 27




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##### 



of the repaid debt, including approximately $12
million in amortization previously scheduled within the next twelve
months. This also improved our overall leverage and debt service and
fixed charge coverage ratios; and
    
    Extended the weighted average remaining term of our long-term debt. Shelf Registration On June 4, 2004, we filed a shelf registration statement, which we refer to as
the 2004 Shelf Registration Statement, with the SEC relating to the future
offering of up to an aggregate of $600 million of common shares, preferred
shares, depositary shares, debt securities and warrants exercisable for common
or preferred shares. The 2004 Shelf Registration includes approximately $64.2
million available under our shelf registration statement filed with the SEC on
March 2, 1999 as well as approximately $1.5 million available under our shelf
registration statement filed with the SEC on June 25, 2003, which we refer to
as the 2003 Shelf Registration Statement, for the issuance of securities. We
believe the 2004 Shelf Registration Statement will provide us with more
efficient and immediate access to capital markets when considered appropriate.
As of June 30, 2004, we had not issued any securities pursuant to the 2004
Shelf Registration Statement and, thus, $600 million was available under the
2004 Shelf Registration Statement for the issuance of securities. RESULTS OF OPERATIONS Revenue This section should be read in conjunction with the section captioned Variable
Rate Lease Programherein. For the three months
    
    
    
    For the six months(dollars in
    
    ended June 30,
    
    %
    
    ended June 30,
    
    %thousands)
    
    2004
    
    2003
    
    Change
    
    2004
    
    2003
    
    ChangeRevenueRental
    
    $
    48,423
    
    
    $
    40,964
    
    
    
    18
    %
    
    $
    95,722
    
    
    $
    80,047
    
    
    
    20
    %Interest and other
    
    
    588
    
    
    
    415
    
    
    
    42
    %
    
    
    1,558
    
    
    
    638
    
    
    
    144
    %Total
    
    $
    49,011
    
    
    $
    41,379
    
    
    
    18
    %
    
    $
    97,280
    
    
    $
    80,685
    
    
    
    21
    %
 Rental.The increase in rental revenue from the three and six months ended
June 30, 2003 to the three and six months ended June 30, 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 June 30, 2004. The results of operations related to these properties
were reclassified from rental revenue to discontinued operations for all
periods presented as further described under the Discontinued Operations
section herein. 28




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##### 



Real Estate beforeAccumulated
    
    
    
    
    
    
    
    
    
    Total SquareDepreciation (in
    
    Number of
    
    Total Land
    
    Footage (inAs of
    
    thousands)
    
    Properties
    
    Acreage
    
    millions)December 31, 2002
    
    $
    1,527,911
    
    
    
    275
    
    
    
    2,022
    
    
    
    11.5June 30, 2003
    
    
    1,633,917
    
    
    
    292
    
    
    
    2,167
    
    
    
    12.2December 31, 2003
    
    
    1,830,553
    
    
    
    312
    
    
    
    2,283
    
    
    
    13.2June 30, 2004
    
    
    2,036,356
    
    
    
    330
    
    
    
    2,480
    
    
    
    14.2
 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
and six months ended June 30, 2003 to the three and six months ended June 30,
2004 was primarily due to interest earned on notes or construction advances
secured by real estate funded during the previous twelve months. Notes and
construction advances totaled $13.4 million as of June 30, 2004. Included in
interest income for the six months ended June 30, 2004 is interest earned on a
$25.5 million note secured by real estate issued in the fourth quarter of 2003
that was repaid at the end of the first quarter of 2004. Expenses For the three months
    
    
    
    For the six monthsended June 30,
    
    %
    
    ended June 30,
    
    %(dollars in thousands)
    
    2004
    
    2003
    
    Change
    
    2004
    
    2003
    
    ChangeExpensesDepreciation and amortization
    
    $
    8,981
    
    
    $
    7,420
    
    
    
    21
    %
    
    $
    17,700
    
    
    $
    14,585
    
    
    
    21
    %General and administrative
    
    
    2,994
    
    
    
    2,393
    
    
    
    25
    %
    
    
    5,735
    
    
    
    4,626
    
    
    
    24
    %Interest
    
    
    16,067
    
    
    
    16,137
    
    
    
    0
    %
    
    
    33,297
    
    
    
    31,180
    
    
    
    7
    %Debt extinguishment charge
    
    
    8,712
    
    
    
    
    
    
    
    100
    %
    
    
    8,712
    
    
    
    
    
    
    
    100
    %Total
    
    $
    36,754
    
    
    $
    25,950
    
    
    
    42
    %
    
    $
    65,444
    
    
    $
    50,391
    
    
    
    30
    %
 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 and six months ended June 30, 2003 to the three and six months ended
June 30, 2004 due primarily to:  
    
    an increase in professional services 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. 29




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##### 



Interest.The following table sets forth certain information regarding our
debt as of the periods indicated. Principal Balance as of June 30,
    
    Effective Interest Rate for the
    
    Effective Interest Rate for the Six(in thousands)
    
    Three Months Ended June 30*,
    
    Months Ended June 30*,Fixed
    
    Variable
    
    
    
    
    
    Fixed
    
    Variable
    
    
    
    
    
    Fixed
    
    VariableYear
    
    Rate Debt
    
    Rate Debt
    
    Total
    
    Rate Debt
    
    Rate Debt
    
    Total
    
    Rate Debt
    
    Rate Debt
    
    Total2003
    
    $
    799,704
    
    
    $
    244,498
    
    
    $
    1,044,202
    
    
    
    7.17
    %
    
    
    3.92
    %
    
    
    6.45
    %
    
    
    7.36
    %
    
    
    4.07
    %
    
    
    6.35
    %2004
    
    
    794,249
    
    
    
    303,875
    
    
    
    1,098,124
    
    
    
    7.02
    %
    
    
    3.73
    %
    
    
    6.27
    %
    
    
    7.10
    %
    
    
    3.74
    %
    
    
    6.26
    %
  *
    
    Includes deferred loan fees amortized over the life of the
loans. Interest expense for the three months ended June 30, 2003 was slightly higher
than the three months ended June 30, 2004. Although our overall debt increased
from new debt issuances and borrowings on our credit facilities, which was
primarily obtained to fund real estate investments, our effective interest rate
decreased to 6.27% for the second quarter of 2004 from 6.45% for the same
quarter in the prior year, primarily due to our balance sheet restructuring, as
further described in the Recent Developmentssection herein. In addition,
the borrowings on our short-term revolving credit facilities, totaling $77
million, which were primarily used to fund acquisitions, occurred at the end of
the quarter thereby having a minimal impact on interest expense. The increase in interest expense from the six months ended June 30, 2003 to the
six months ended June 30, 2004 is primarily due to an increase in our overall
debt during the past 18 months, which was primarily obtained to fund 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 for that period, but resulted in an increase in interest expense in
subsequent periods. The increase in interest expense was partially offset by a
decrease in our effective rate for the six months ended June 30, 2004, as
compared to the same period in prior year as noted above. Debt Extinguishment Charge.Debt extinguishment expenses for the three and six
months ended June 30, 2004 totaled approximately $8.7 million. The expenses
are attributable to the balance sheet restructuring that was completed during
the second quarter of 2004, as further described in the Recent Developments
section herein. The debt extinguishment charge consisted of (i) swap breakage
fees totaling approximately $4.0 million related to the repayment of variable
rate debt with Ford that had been swapped to a fixed rate; (ii) the write-off
of deferred loan fees related to the loans that were paid off and the
termination of our $60 million unsecured credit facility totaling approximately
$2.5 million; and (iii) prepayment penalties totaling approximately $2.2
million related to the repayment of the fixed rate debt with Ford. 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 30




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##### 



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. Since January 1, 2003, we have sold 14 auto retail locations with net proceeds
totaling approximately $44.1 million. The following table sets forth the components of discontinued operations
related to properties sold subsequent to January 1, 2003 (in thousands): For the three months
    
    For the six monthsended June 30,
    
    ended June 30,2004
    
    2003
    
    2004
    
    2003Revenue:Rental
    
    $
    116
    
    
    $
    1,122
    
    
    $
    654
    
    
    $
    2,285Other
    
    
    175
    
    
    
    151
    
    
    
    1,423
    
    
    
    191Total revenue
    
    
    291
    
    
    
    1,273
    
    
    
    2,077
    
    
    
    2,476Expenses:Depreciation
    
    
    2
    
    
    
    256
    
    
    
    106
    
    
    
    520Interest
    
    
    
    
    
    
    326
    
    
    
    76
    
    
    
    660Total expenses
    
    
    2
    
    
    
    582
    
    
    
    182
    
    
    
    1,180Income from discontinued operations before gain
on sale of real estate and minority interest
    
    
    289
    
    
    
    691
    
    
    
    1,895
    
    
    
    1,296Gain on sale of real estate
    
    
    315
    
    
    
    29
    
    
    
    1,486
    
    
    
    75Income related to discontinued operations
before minority interest
    
    
    604
    
    
    
    720
    
    
    
    3,381
    
    
    
    1,371Minority interest related to discontinued operations
    
    
    (107
    )
    
    
    (153
    )
    
    
    (624
    )
    
    
    (304
    )Total discontinued operations, net of
minority interest
    
    $
    497
    
    
    $
    567
    
    
    $
    2,757
    
    
    $
    1,067
 Preferred Share Dividends The increase represents the dividends for the three months and six months ended
June 30, 2004 related to the 7 1/2% Series A Cumulative Redeemable Preferred
Shares issued on December 11, 2003 and the 8% Series B Cumulative Redeemable
Preferred Shares issued on April 27, 2004. There were no Series A or Series B
preferred share dividends for the three months and six months ended June 30,
2003. 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. Because triple-net leases typically require the tenant to
pay all operating expenses of a property, our exposure to rising property
expenses due to inflation is reduced. 31




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##### 



LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $15.4 million and $9.7 million at June 30, 2004
and June 30, 2003, respectively. The changes in cash and cash equivalents during the six months ended June 30,
2004 and 2003 were attributable to operating, investing and financing
activities, as described below. Six Months Ended June 30,(dollars in thousands)
    
    2004
    
    2003Cash provided by operating activities
    
    $
    58,071
    
    
    $
    46,979Cash used in investing activities
    
    
    (137,023
    )
    
    
    (104,418
    )Cash provided by financing activities
    
    
    80,996
    
    
    
    59,651
 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 provided by financing activities for the six months ended June 30, 2004
primarily reflects:  
    
    $272.2 million of proceeds received from our offering of 6.75%
senior unsecured monthly income notes, our offering of 6% convertible
notes and mortgage debt that closed during the period;
    
    $120.0 million of proceeds received from borrowings on our revolving credit facilities;
    
    $101.5 million of proceeds received from the issuance of common shares, net of costs;
    
    $63.2 million of proceeds received from our offering of 8% Series B
Cumulative Redeemable Preferred Shares, net of costs; and
    
    the decrease in restricted cash totaling $5.6 million. The cash provided by financing activities was partially offset by:  
    
    the repayment of mortgage debt totaling $306.0 million;
    
    the repayment of borrowings on our revolving credit facilities totaling $118.0 million; 32




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##### 




    
    distributions made to both common and preferred shareholders as
well as minority partners during the period totaling $33.6 million;
    
    payments of principal on outstanding mortgage debt totaling $15.6 million; and
    
    payments for debt issuance costs totaling $8.2 million. Cash provided by financing activities for the six months ended June 30, 2003 primarily reflects:  
    
    $234.5 million of proceeds received from mortgage debt that closed during the period;
    
    $69.3 million of proceeds received from the issuance of common shares, net of costs; and
    
    $28.0 million of proceeds received from borrowings on our revolving credit facilities. The cash provided by financing activities was partially offset by:  
    
    the repayment of borrowings on our revolving credit facilities totaling $121.5 million;
    
    the repayment of mortgage debt totaling $91.6 million;
    
    distributions made to common shareholders and minority partners
during the period totaling $28.9 million;
    
    payments of principal on outstanding mortgage debt totaling $14.9 million;
    
    the increase in restricted cash totaling $8.5 million; and
    
    payments for debt issuance costs totaling $6.6 million. Financing Strategy Our objective is to have consistent access to long and short-term debt and
equity at costs efficient to run our business and produce the highest returns.
We typically fund our short-term liquidity requirements through available cash
or one of our revolving credit facilities. As of June 30, 2004, we had two
facilities, which provided short-term borrowing capacity of $200 million, of
which $123 million was available as of June 30, 2004. Periodically, in order
to more closely match the term and the interest rate nature (fixed or variable
rate) of our debt with that of our leases, we replace our short-term debt using
the proceeds of long-term debt or equity. During the second quarter of 2004, we completed a significant restucturing of
our balance sheet by paying off a portion of our outstanding debt with Ford,
which has improved our balance sheet flexibility while continuing our strategy
of match-funding our debt to our leases. A description of the debt
restructuring and the impact to our balance sheet is included in the Recent
Developments section herein. In conjunction with the restructuring, on April
1, 2004, we terminated our $60 million revolving unsecured credit facility
because it prohibited the issuance of senior unsecured debt. We are currently negotiating an unsecured revolving credit and term loan
facility (Facility) to replace the credit facility we terminated in April 2004
and to refinance certain of our existing secured debt. The Facility is
anticipated to be syndicated with multiple participating financial institutions
including several new funding sources for us. The revolving credit portion of
the Facility is anticipated to be $200 million with an option to increase it to
$350 million during the three-year term. The term loan portion of the Facility
is anticipated to be a $150 million five-year unsecured term loan. Pricing for
the Facility, which 33




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##### 



adjusts over time based on our leverage or our debt rating,
if elected, is expected to be at 145 basis points over LIBOR based on our
projected leverage at closing. We anticipate closing the Facility during the
third quarter of 2004. We have continued to use our secured lines of credit
while negotiating the Facility. 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 June 30, 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 10.8 years and our earliest
meaningful long-term debt
maturity was not until 2009. As of June 30, 2004, our total outstanding debt
(including borrowings on our credit facilities) equaled approximately 54% 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 86%. As of June 30, 2004, our total outstanding fixed rate debt equaled
approximately 49% of our total real estate investments subject to fixed rate
leases. The weighted average remaining term of our fixed rate leases was 11.7
years and the weighted average remaining term of our outstanding fixed rate
debt was 10.9 years. As a result, our fixed rate leases and debt were 93%
match-funded. Our total outstanding variable rate debt equaled approximately
72% of our total real estate investments subject to variable rate leases. The
weighted average remaining term of our variable rate leases was 12.0 years and
the weighted average remaining term of our outstanding variable rate debt was
8.0 years. As a result, variable rate leases and our variable rate debt were
66% 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 June 30, 2004, our debt to assets ratio was approximately 52% and our debt
to total market capitalization was approximately 43%. 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 further described 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. 34




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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-
    
    Average One-Estate Subject
    
    Subject to
    
    Total Variable
    
    Month LIBOR
    
    Month LIBORto Variable
    
    Variable Rate
    
    Rate Debt
    
    for the three
    
    for the sixPeriod
    
    Rate Leases
    
    Leases
    
    Outstanding (1)
    
    months ended
    
    months endedJune 30, 2003
    
    $
    410,431
    
    
    
    24
    %
    
    $
    244,498
    
    
    
    1.26
    %
    
    
    1.30
    %June 30, 2004
    
    
    424,169
    
    
    
    21
    %
    
    
    303,875
    
    
    
    1.15
    %
    
    
    1.13
    %
 (1) Includes amounts outstanding on our revolving credit facilities totaling
$17.6 million and $77.0 as of June 30, 2003 and June 30 2004, respectively. As further described 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 18
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. 35




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##### 



Mortgages and Notes Payable The following is a summary of our total debt outstanding as of June 30, 2004
and December 31, 2003 (dollars in thousands): Principal
    
    
    
    
    
    Principal
    
    Effective
    
    Term/Original
    
    Balance as of
    
    
    
    
    
    Balance as of
    
    Interest
    
    AmortizationDescription of Debt
    
    Debt Issued
    
    June 30, 2004
    
    
    
    
    
    December 31, 2003
    
    Rate*
    
    Schedule7.59% fixed rate debt due 12/1/08 (1)
    
    
    38,050
    
    
    $
    32,294
    
    
    
    
    
    
    $
    33,046
    
    
    
    7.96
    %
    
    10 yr/17 yr7.50% fixed rate debt due 8/10/13 (2)
    
    
    82,600
    
    
    
    75,029
    
    
    
    
    
    
    
    75,717
    
    
    
    7.62
    %
    
    12 yr/30 yr5.84% fixed rate debt due 2/1/14 (3)
    
    
    11,900
    
    
    
    11,831
    
    
    
    
    
    
    
    
    
    
    
    6.17
    %
    
    10 yr/25 yr6.77% fixed rate debt due 7/1/14 (4)
    
    
    20,400
    
    
    
    20,230
    
    
    
    
    
    
    
    20,400
    
    
    
    6.87
    %
    
    10.5 yr/30 yrTriple Net Lease Mortgage Notes,
Series 2002 (5)
    
    
    325,000
    
    
    
    299,532
    
    
    
    
    
    
    
    306,251
    
    
    
    7.70
    %
    
    (5)Triple Net Lease Mortgage Notes,
Series 2003-1 (6)
    
    
    228,000
    
    
    
    220,333
    
    
    
    
    
    
    
    223,469
    
    
    
    5.86
    %
    
    (6)Various fixed rate debt (7)
    
    
    160,554
    
    
    
    
    
    
    
    
    
    
    
    145,765
    
    
    
    
    
    
    (7)Total Mortgage Fixed Rate Debt
    
    
    
    
    
    $
    659,249
    
    
    
    
    
    
    $
    804,648
    
    
    
    7.07
    %Variable rate debt due 9/29/11 (8)
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    137,357
    
    
    
    
    
    
    (8)Various variable rate debt (9)
    
    
    155,385
    
    
    
    122,565
    
    
    
    
    
    
    
    124,079
    
    
    
    3.99
    %
    
    4.6 to 12 yr/25 to 30 yrTotal Mortgage Variable Rate Debt
    
    
    
    
    
    $
    122,565
    
    
    
    
    
    
    $
    261,436
    
    
    
    3.87
    %TOTAL MORTGAGE DEBT (10)
    
    
    
    
    
    $
    781,814
    
    
    
    
    
    
    $
    1,066,084
    
    
    
    6.54
    %Variable rate debt due 10/2/08 (11)
    
    
    4,500
    
    
    
    4,300
    
    
    
    
    
    
    
    4,425
    
    
    
    3.76
    %
    
    5 yr/ 15 yr6.75% Monthly Income Notes due
4/15/19 (12)
    
    
    125,000
    
    
    
    125,000
    (13
    )
    
    
    
    
    
    
    
    
    
    4.15
    %
    
    (12)6% Convertible Notes due 5/15/24 (14)
    
    
    110,000
    
    
    
    110,000
    
    
    
    
    
    
    
    
    
    
    
    6.55
    %
    
    (14)TOTAL UNSECURED DEBT
    
    
    
    
    
    $
    239,300
    
    
    
    
    
    
    $
    4,425
    
    
    
    4.98
    %$100 million revolving secured
facility (15)
    
    
    
    
    
    
    47,700
    
    
    
    
    
    
    
    49,326
    
    
    
    4.22
    %
    
    (15)$100 million revolving secured
construction facility (16)
    
    
    
    
    
    
    29,310
    
    
    
    
    
    
    
    25,683
    
    
    
    4.47
    %
    
    (16)$60 million revolving unsecured
facility (17)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17)TOTAL CREDIT FACILITIES
    
    
    
    
    
    $
    77,010
    
    
    
    
    
    
    $
    75,009
    
    
    
    4.25
    %TOTAL DEBT OUTSTANDING
    
    
    
    
    
    $
    1,098,124
    (13
    )
    
    
    
    
    $
    1,145,518
    
    
    
    6.27
    %
  *
    
    For the quarter ended June 30, 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 36




---



##### 



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)
    
    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.(3)
    
    This loan requires monthly interest and level principal payments with
a final payment at maturity of approximately $9.2 million.(4)
    
    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.(5)
    
    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
    
    
    
    146,578
    
    
    
    8/15/14A-1b
    
    
    9,064
    
    
    
    9,064
    
    
    
    7/15/15A-2
    
    
    75,900
    
    
    
    67,990
    
    
    
    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.(6)
    
    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
    
    
    
    101,333
    
    
    
    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.(7)
    
    This represents debt outstanding with Ford which was repaid during
the second quarter of 2004, as further described in the Recent
Developmentssection herein. The debt consisted of approximately $92
million of fixed rate debt at an effective interest rate of 7.84%,
scheduled to mature on July 6, 2011, and approximately $53 million of
variable rate debt swapped to fixed rate with an effective interest rate
of 7.6%, scheduled to mature at the end of 2012.(8)
    
    This loan, totaling $135.6 million, bearing interest at a spread of
227 basis points over the 30-day LIBOR, was repaid during the second
quarter of 2004, as further described in the Recent Developments
section herein.(9)
    
    The loans outstanding bear interest at variable rates ranging from
185 to 357 basis points above 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 $105.0 million. One of these loans, totaling $51.3 million
as of June 30, 2004, is cross defaulted with the revolving credit
facilities discussed in footnote (15) and (16). Six of these loans
totaling $56.3 million as of June 37




---



##### 



30, 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
five of the aforementioned loans, the Partnership has partially guaranteed
the monetary obligations under the loans limited to approximately $17.3
million as of June 30, 2004. Two of the loans previously outstanding with
Ford, totaling approximately $26 million, were repaid during the second
quarter of 2004, as further described in the Recent Developmentssection
herein.(10)
    
    Certain amounts of our mortgage debt are subject to prepayment
penalties.(11)
    
    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.(12)
    
    On April 15, 2004 we closed on a public offering of $125.0 million
6.75% senior unsecured monthly income notes at par. The 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. 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. The
unrealized loss on our fair value hedge was approximately $7.1 million
as of June 30, 2004, as further described in the Interest Rate Swaps
section herein. Total net proceeds to the Company, after deducting the
discounts and commissions to the underwriters and other expenses of the
offering, totaled approximately $121 million. The net proceeds were
used to pay off a portion of the debt outstanding with Ford (see
footnotes (8) and (9)).(13)
    
    Although the principal balance of the $125.0 million 6.75% senior
unsecured monthly income notes was $125.0 million as of June 30, 2004,
in accordance with GAAP, the carrying value of the debt on our balance
sheet has been reduced by $7.1 million, representing the change in the
fair value of the swap described in footnote (12) and as more fully
described in the Interest Rate Swap section.(14)
    
    On May 12, 2004, we closed on a public offering of $110 million 6%
convertible notes. The notes were issued under our 2003 Shelf
Registration Statement. The notes have a 20-year term and are
convertible, at the option of the holder, into the Companys common
shares under certain circumstances, at an initial conversion price of
$35.5679 per share, subject to certain adjustments. The initial price
is equivalent to a conversion rate of 28.1152 shares per $1,000
principal amount of notes and equivalent to a premium of 30%. The
conversion rate will be adjusted under certain circumstances, including
common stock splits, common stock issuances as dividends and increases
in the dividend rate. The Company may, at its option, redeem the notes
for cash on or after May 15, 2009, at any time, in whole or, from time
to time, in part, at a redemption price equal to 100% of the principal
amount to be redeemed plus accrued and unpaid interest. The noteholders
may require us to repurchase all or part of the notes on May 15, 2009,
May 15, 2014 and May 15, 2019, or upon a change in control, at a price
equal to 100% of the principal amount plus accrued and unpaid interest.
The notes require semi-annual interest payments. In accordance with
GAAP, the notes will be accounted for as debt, and interest expense
recorded, until the conversion of the notes. In addition, the deferred
loan fees associated with this debt are being amortized over a five-year
period. Total net proceeds to the Company, after deducting the
discounts and commissions to the underwriters and other expenses of the
offering, totaled approximately $107 million. The net proceeds were
used to pay off approximately $92 million of the debt outstanding with
Ford and the related prepayment penalties totaling $2.2 million (see
footnote (7)), to fund acquisitions and for general corporate purposes.(15)
    
    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 June 30, 2004, the borrowings under the facility
bear interest equal to the 30-day LIBOR rate plus 300 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.(16)
    
    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 June 30, 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.(17)
    
    This facility was terminated on April 1, 2004 because it prohibited
the issuance of senior unsecured debt. On April 15, 2004, we closed on
the public offering of senior unsecured monthly income notes as further
described in footnote (12) above. 38




---



##### 



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 ratios and maximum debt to adjusted
net worth and unencumbered assets to unsecured debt 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 June 30, 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 $13.3
million and $12.8 million as of June 30, 2004 and December 31, 2003,
respectively, is included in other assets on our consolidated balance sheets. As of June 30, 2004, we have two interest rate swap arrangements with third
parties to fix the interest rate on the underlying variable rate debt, with a
notional balance totaling approximately $100 million, which we have designated
as cash flow hedges. During the second quarter of 2004, we terminated two of
the interest rate swap arrangements with notional balances totaling
approximately $58 million as part of our debt restructuring, as further
described in the Recent Developmentssection herein. In conjunction with the
early termination of these swap arrangements, we incurred swap breakage fees
totaling approximately $4.0 million. For a derivative qualifying as a cash flow hedge, the change in the unrealized
gain or loss is recorded 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 $5.4 million and
$13.5 million as of June 30, 2004 and December 31, 2003, respectively. Total
comprehensive income for the three months ended June 30, 2004 and 2003 was
approximately $21.4 million and $9.8 million, respectively. Total
comprehensive income for the six months ended June 30, 2004 and 2003 was
approximately $36.3 million and $20.8 million, respectively. On March 18, 2004, in conjunction with pricing of the $125 million 6.75% senior
unsecured monthly income notes, 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. 39




---



##### 



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 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 recorded to the
carrying value of the debt instrument being hedged on our consolidated balance
sheets. The unrealized loss on our fair value hedge was approximately $7.1 million as
of June 30, 2004. The net unrealized gain or loss on our fair value hedge and
the debt being hedged had no impact on our net income for the three months and
six months ended June 30, 2004, respectively. Equity Offerings 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 under our 2003
Shelf Registration Statement. Net proceeds to us, after deducting the
discounts and commissions to the underwriters and other expenses of this
offering, totaled approximately $35.0 million. We contributed the net proceeds
of the offering to the Partnership in exchange for Common Units in the
Partnership and used the net proceeds to repay $18.0 million of borrowings
under our short-term credit facilities and to pay off a portion of the debt
outstanding with Ford. 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. Net proceeds to us, after
deducting the discounts and commissions to the underwriters and other expenses
of this offering, totaled approximately $63.2 million. We contributed the net
proceeds of the offering to the Partnership in exchange for Series B Preferred
Units in the Partnership. Of the total net proceeds, approximately $53 million
was used to pay off a portion of the debt outstanding with Ford and the
remaining proceeds were used to fund acquisitions and for general corporate
purposes. The preferred shares are non-voting and redeemable for cash, at $25.00 per
share plus any accrued and unpaid dividends, at our option on or after April
27, 2009, unless in limited circumstances in which early redemption is
necessary to preserve our status as a real estate investment trust for federal
income tax purposes. The preferred shares have no stated maturity and are not
subject to any sinking fund provisions. Additionally, the shares are not
convertible into or exchangeable for any other security unless conversion is
necessary to maintain our status as a real estate investment trust. Holders of
preferred shares are entitled to cumulative cash dividends at a rate of 8% of
the $25.00 liquidation preference per year (equivalent to $2.00 per year per
share), payable quarterly (when and as declared by the Board of Trustees). In
the case of the preferred shares, there are Series B Preferred Units in the
Partnership owned by us that carry substantially the same terms. On June 4, 2004, we filed our 2004 Shelf Registration Statement with the SEC
relating to the future offering of up to an aggregate of $600 million of common
shares, preferred shares, depositary shares, debt securities and warrants
exercisable for common or preferred shares, as further described in the Recent
Developmentssection herein. 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, 40




---



##### 



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 and new 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 $77.0 million of borrowings outstanding on our revolving credit
facilities as of June 30, 2004. Subsequent to June 30, 2004, we repaid $34
million of the borrowings outstanding and will repay the remainder with funds
expected to be available to us under a new credit facility expected to close
during the third quarter of 2004, as further described below. Properties are
eligible within the borrowing base of our credit facilities for 150 days to
twelve months, unless extended by us and the lender, and therefore we are
generally required to repay these borrowings within twelve months. As further
described 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 are currently negotiating
an unsecured revolving credit and term loan facility to replace this credit
facility and to refinance certain of its existing secured debt, as further
described in the Financing Strategysection herein. As of June 30, 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 June 30, 2004 are as follows (in thousands): For the Year Ended December 31,
 PrincipalAmortization
    
    Maturities
    
    Total2004
    
    $
    14,044
    
    
    $
    
    
    
    $
    14,0442005
    
    
    29,205
    
    
    
    
    
    
    
    29,2052006
    
    
    30,959
    
    
    
    
    
    
    
    30,9592007
    
    
    32,842
    
    
    
    
    
    
    
    32,8422008
    
    
    34,590
    
    
    
    49,331
    
    
    
    83,921Thereafter
    
    
    369,280
    
    
    
    460,863
    
    
    
    830,143Total
    
    $
    510,920
    
    
    $
    510,194
    
    
    $
    1,021,114
 Facility Improvements and Construction Financing Commitments We currently have contractual commitments for future facility improvements and
construction financings with several large tenants on properties we currently
own. Improvements include costs incurred by tenants on facilities during which
the tenants business continues to operate without interruption. Construction
financings include advances for the construction of new facilities by tenants
for which 41




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##### 



operations have not commenced or fundings for major improvements to
existing facilities that cause operations to cease during the construction
period. As of June 30, 2004, these commitments totaled approximately $141
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 June 30, 2004, we issued
approximately 107,700 common shares under the DRIP, totaling approximately $2.7
million. For the six months ended June 30, 2004, we issued approximately
200,000 common shares under the DRIP, totaling approximately $5.8 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
six months ended June 30, 2004, no common shares were repurchased. From the
inception of the common share repurchase program through June 30, 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 us 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. 42




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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 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. 43




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##### 



The following table reconciles FFO, FFO available to common shareholders and
FFO per common share for the three months and six months ended June 30, 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 Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    11,076
    
    
    $
    12,711
    
    
    $
    29,622
    
    
    $
    24,647Real estate depreciation and amortization
    
    
    8,967
    
    
    
    7,658
    
    
    
    17,772
    
    
    
    15,065Minority interest related to income from
continuing operations and income from
discontinued operations
    
    
    1,729
    
    
    
    3,432
    
    
    
    5,321
    
    
    
    7,001Gain on sale of real estate
    
    
    (259
    )
    
    
    (23
    )
    
    
    (1,212
    )
    
    
    (58
    )FFO
    
    
    21,513
    
    
    
    23,778
    
    
    
    51,503
    
    
    
    46,655Preferred share dividends
    
    
    (2,776
    )
    
    
    
    
    
    
    (4,628
    )
    
    
    FFO available to common shareholders
    
    $
    18,737
    
    
    $
    23,778
    
    
    $
    46,875
    
    
    $
    46,655Weighted average number of common shares
used to compute basic net income per
common share
    
    
    36,057
    
    
    
    30,670
    
    
    
    35,053
    
    
    
    29,481Weighted average number of common shares
used to compute fully diluted net income
per common share
    
    
    36,501
    
    
    
    31,618
    
    
    
    35,587
    
    
    
    30,418Weighted average number of common shares
and units used to compute basic FFO per
common share
    
    
    43,822
    
    
    
    38,970
    
    
    
    42,822
    
    
    
    37,873Weighted average number of common shares
and units used to compute fully diluted
FFO per common share
    
    
    44,265
    
    
    
    39,918
    
    
    
    43,356
    
    
    
    38,811Basic net income per common share
    
    $
    0.23
    
    
    $
    0.41
    
    
    $
    0.71
    
    
    $
    0.84Diluted net income per common share
    
    $
    0.23
    
    
    $
    0.40
    
    
    $
    0.71
    
    
    $
    0.82Basic FFO per common share
    
    $
    0.43
    
    
    $
    0.61
    
    
    $
    1.09
    
    
    $
    1.23Diluted FFO per common share
    
    $
    0.42
    
    
    $
    0.60
    
    
    $
    1.08
    
    
    $
    1.20
 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 our other filings under the Securities Act and the Exchange Act,
including the risks and other risk factors contained in our Form 8-K/A filed on
March 12, 2004. Other parts of this 44




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##### 



Form 10-Q may also describe
forward-looking information. Many
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 or refinance our maturing debt;
    
    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 for new transactions;
    
    risks relating to the automotive industry, such as
the ability of our tenants to compete effectively in the
automotive retail industry or operate profitably 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;
    
    risks related to our financing of new construction
and improvements;
    
    environmental and other risks associated with the
acquisition and leasing of automotive properties;
    
    risks that litigation judgments or settlements
could have a material adverse effect on our operations and
financial condition; 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 our 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- 45




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##### 



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 six months ended June 30, 2004, our fixed rate debt decreased from
$804.6 million as of December 31, 2003 to $794.2 million as of June 30, 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 June 30,
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 $50.5 million. As of June 30, 2004, approximately $424 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
June 30, 2004, our total variable rate debt outstanding was $303.9 million, as
compared to $340.9 million as of December 31, 2003. If interest rates on our variable rate debt instruments outstanding at June 30,
2004 had been 1% higher or lower, our annual interest expense relating to those
debt instruments would have increased or decreased, respectively, by
approximately $3.0 million, based on balances at June 30, 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 June
30, 2004 had been 1% higher or lower, our annual rental revenue relating to
those lease agreements would have increased by approximately $426,000 or
decreased by approximately $368,000 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 $3.4 million to $4.2 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 June 30, 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 46




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##### 



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 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. 47




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##### 



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
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 Public Company Accounting Oversight Boards Auditing Standard No. 2, a
significant deficiency is a control deficiency, or combination of control
deficiencies, that adversely affects the ability to initiate, authorize,
record, process, or report external financial data reliably in accordance with
GAAP such that there is more than a remote likelihood that a misstatement of
the annual or interim financial statements that is more than inconsequential
will not be prevented or detected. A control deficiency exists when the
design or operation of a control does not allow management or employees, in the
normal course of performing their assigned functions, to prevent or detect
misstatements on a timely basis. A material weakness is defined in Auditing
Standard No. 2 as a significant deficiency, or a combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be
prevented or detected. 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 June 30, 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 June 30, 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. 48




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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 left to become 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 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. Milestone, together with three of its sponsors and investors, then 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
has been extended by mutual agreement. We believe that the issuance of a
temporary injunction to this effect has not and 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. On June 25, 2004, the Circuit Court of Fairfax County granted us permission to
amend our motion for judgment and add new parties. We have added Milestone,
The Staubach Company, Staubach Retail Services, Inc., Cypress Equities, L.L.C.,
Presidio Financial Partners, L.L.C., and John Geller (who resigned from his
position at Ernst & Young LLP, where he served as our audit partner, to become
the Chief Financial Officer of Milestone) as defendants and Capital Automotive
L.P. as co-plaintiff to our Fairfax, Virginia suit for misappropriation of
trade secrets, breaches of fiduciary duty, tortuous interference with CARS
business relationships, and conspiracies to injure CARS in its reputation,
trade, business, and profession. We are seeking $250,000,000 in compensatory
and punitive damages, and three-fold damages pursuant to Virginias conspiracy
statute, and injunctive relief pursuant to the Virginia Uniform Trade Secrets
Act. Although no assurance can be provided with respect to any litigation, we
believe that the allegations against us in the Texas petition are without merit
and that we have meritorious defenses to the claims made in the petition. We
intend to prosecute our case and 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 On June 30, 3004, the Partnership issued 181,457 Common Units to Auto
Properties, L.L.C. and 170,068 Common Units to L.G.S. Autonation, L.L.C., as
partial consideration for the acquisition of three parcels of real property and
improvements located in Maryland and Ohio. The Common Units will be eligible
for redemption beginning on July 31, 2005 for cash by the Partnership, or at
our option, common shares on a one for one basis. The issuance of such Common
Units was effected in reliance on an exemption from registration under Section
4(2) of the Securities Act. 49




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##### 



Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to Vote of Security Holders The annual meeting of shareholders of Capital Automotive REIT (the Meeting)
was held on May 11, 2004. The matters voted upon at the Meeting were: (1)
Election of Trustees; and (2) Ratification of the appointment of the accounting
firm of Ernst & Young LLP to serve as independent accountants for Capital
Automotive REIT for the fiscal year ending December 31, 2004. Proxies for the
Meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act
of 1934, as amended, and the regulations promulgated thereunder. There was no
solicitation in opposition to managements solicitations. All of managements
nominees for the Board of Trustees were elected. The following table sets
forth the results of these votes: Proposal
    
    Results(1) A proposal to elect nine Board of Trustee members:John E. Anderson
    
    For:
    
    
    31,319,206Withheld:
    
    
    101,553Thomas D. Eckert
    
    For:
    
    
    31,320,358Withheld:
    
    
    100,402Craig L. Fuller
    
    For:
    
    
    31,320,424Withheld:
    
    
    100,336Paul M. Higbee
    
    For:
    
    
    31,320,358Withheld:
    
    
    100,402William E. Hoglund
    
    For:
    
    
    31,205,538Withheld:
    
    
    215,222R. Michael McCullough
    
    For:
    
    
    31,206,124Withheld:
    
    
    214,636John J. Pohanka
    
    For:
    
    
    30,471,573Withheld:
    
    
    949,187Robert M. Rosenthal
    
    For:
    
    
    31,114,779Withheld:
    
    
    305,981Vincent A. Sheehy
    
    For:
    
    
    30,647,933Withheld:
    
    
    772,827
 50




---



##### 



(2) Ratification of the appointment of the accounting firm of Ernst
& Young LLP to serve as independent accountants for Capital
Automotive REIT for the fiscal year ending December 31, 2004: For:
    
    
    30,863,249Against:
    
    
    537,708Abstain:
    
    
    19,799Broker No Vote:
    
    
    5
 Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 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 dated March 26, 2004 was filed with the SEC on April 7, 2004 in
response to Item 5 regarding our motion for judgment against a former employee
and the petition for injunctive relief against us. A Form 8-K dated April 22, 2004 was filed with the SEC on April 26, 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 was dated and furnished to the SEC on April 28, 2004 in response to
Items 7 and 12 to file a press release announcing our first quarter 2004
acquisitions and to update 2004 earnings guidance. A Form 8-K dated May 7, 2004 was filed with the SEC on May 10, 2004 in response
to Item 7 to incorporate by reference into our Registration Statement on Form
S-3 (No. 333-106445) certain exhibits thereto. 51




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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. Eckert
President and Chief Executive Officer
(principal executive officer)BY:
    
    /s/ David S. KayDavid S. Kay
Senior Vice President, Chief Financial
Officer and Treasurer
(principal financial officer)
 Dated: August 6, 2004 52