##### 



FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Mark One)

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

For quarterly period ended September 30, 2001

(   )                 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
(Exact name of registrant as specified in its charter)

|                        |  |                                        
|----------------------- |  | ---------------------------------------
|Maryland                |  | 54-1870224                             
|(State of organization) |  | (I.R.S. Employer Identification Number)

1420 Spring Hill Road, Suite 525, 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.

YesX      No

Number of common shares of beneficial interest outstanding as of October 31,
2001 was 26,003,523.

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##### 



CAPITAL AUTOMOTIVE REIT
FORM 10-Q
INDEX

|                                                                     |  |         
|-------------------------------------------------------------------- |  | --------
|                                                                     |  | Page No.
|                                                                     |  |         
|Part I  Financial Information                                       |  |         
|                                                                    
|Item 1  Financial Statements                                        |  |         
|                                                                     |  |         
|Consolidated Balance Sheets  September 30, 2001 (unaudited) and     |  |         
|December 31, 2000.                                                   |  | 3       
|                                                                    
|Consolidated Statements of Operations (unaudited)  three months and |  |         
|nine months ended September 30, 2001 and September 30, 2000.         |  | 4       
|                                                                    
|Consolidated Statements of Cash Flows (unaudited)  nine months      |  |         
|ended September 30, 2001 and September 30, 2000.                     |  | 5       
|                                                                    
|Notes to Consolidated Financial Statements (unaudited)               |  | 6  13  
|                                                                    
|Item 2  Managements Discussion and Analysis of Financial Condition |  |         
|and Results of Operations                                            |  | 14  23 
|                                                                    
|Item 3  Quantitative and Qualitative Disclosures About Market Risk  |  | 23  24 
|                                                                    
|Part II  Other Information                                          |  |         
|                                                                    
|Item 1  Legal Proceedings                                           |  | 25      
|                                                                    
|Item 2  Changes in Securities                                       |  | 25      
|                                                                    
|Item 3  Defaults Upon Senior Securities                             |  | 25      
|                                                                    
|Item 4  Submission of Matters to Vote to Security Holders           |  | 25      
|                                                                    
|Item 5  Other Information                                           |  | 25      
|                                                                    
|Item 6  Exhibits and Reports on Form 8-K                            |  | 25  26 
|                                                                    
|Signatures                                                           |  | 27      

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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)

|                                                                                                                                                                                                         |                            |                   |                                            |         |               |           |              |         |           |           | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ----------------- | ------------------------------------------ | ------- | ------------- | --------- | ------------ | ------- | --------- | --------- | 
|                                                                                                                                                                                                         |                            |                   |                                            |         | September 30, |           | December 31,
|                                                                                                                                                                                                         |                            |                   |                                            |         | 2001          |           | 2000        
|                                                                                                                                                                                                         |                            |                   |                                            |         |               |           |             
|                                                                                                                                                                                                         |                            |                   |                                            |         | (Unaudited)   |           |              |         |          
|ASSETS                                                                                                                                                                                                   |                            |                   |                                            |         |               |           |              |        
|Real estate:                                                                                                                                                                                             |                            |                   |                                            |         |               |           |              |        
|                                                                                                                                                                                                         | Land                       |                   | $                                          | 501,964 |               |           | $            | 446,418 |          
|                                                                                                                                                                                                         | Buildings and improvements |                   |                                            | 700,478 |               |           |              | 591,452 |          
|                                                                                                                                                                                                         | Accumulated depreciation   |                   |                                            | (54,007 | )             |           |              | (38,644 | )        
|                                                                                                                                                                                                         |                            |                   |                                            |         |               |           |              |        
|                                                                                                                                                                                                         |                            |                   | 1,148,435                                  |         |               |           | 999,226      |        
|Cash and cash equivalents                                                                                                                                                                                |                            |                   | 1,540                                      |         |               |           | 6,298        |        
|Other assets, net                                                                                                                                                                                        |                            |                   | 17,537                                     |         |               |           | 16,065       |        
|                                                                                                                                                                                                         |                            |                   |                                            |         |               |           |              |        
|                                                                                                                                                                                                         |                            | Total Assets      |                                            | $       | 1,167,512     |           |              | $       | 1,021,589 |          
|                                                                                                                                                                                                         |                            |                   |                                            |         |               |           |              |        
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                     |                            |                   |                                            |         |               |           |              |        
|Liabilities:                                                                                                                                                                                             |                            |                   |                                            |         |               |           |              |        
|Mortgage debt                                                                                                                                                                                            |                            | $                 | 645,090                                    |         |               | $         | 571,519      |        
|Borrowings under credit facilities                                                                                                                                                                       |                            |                   | 21,708                                     |         |               |           | 14,200       |        
|Accounts payable and accrued expenses                                                                                                                                                                    |                            |                   | 13,513                                     |         |               |           | 24,254       |        
|Security deposits payable                                                                                                                                                                                |                            |                   | 6,931                                      |         |               |           | 5,855        |        
|                                                                                                                                                                                                         |                            |                   |                                            |         |               |           |              |        
|                                                                                                                                                                                                         |                            | Total Liabilities |                                            |         | 687,242       |           |              |         | 615,828   |          
|                                                                                                                                                                                                         |                            |                   |                                            |         |               |           |              |        
|Minority Interest                                                                                                                                                                                        |                            |                   | 113,696                                    |         |               |           | 115,728      |        
|Shareholders Equity                                                                                                                                                                                     |                            |                   |                                            |         |               |           |              |        
|Preferred shares, par value $.01 per share; 20 million shares authorized,
no shares issued or outstanding                                                                                                |                            |                   |                                           |         |               |           |             |        
|Common shares, par value $.01 per share; 100 million shares authorized,
25,985,108 shares issued and outstanding at September 30, 2001 and
21,185,240 shares issued and outstanding at December 31, 2000 |                            |                   | 260                                        |         |               |           | 212          |        
|Additional paid-in-capital                                                                                                                                                                               |                            |                   | 381,103                                    |         |               |           | 307,715      |        
|Distributions in excess of accumulated earnings                                                                                                                                                          |                            |                   | (14,789                                    | )       |               |           | (17,894      | )      
|                                                                                                                                                                                                         |                            |                   |                                            |         |               |           |              |        
|                                                                                                                                                                                                         |                            |                   | Total Shareholders Equity                 |         |               | 366,574   |              |         |           | 290,033   | 
|                                                                                                                                                                                                         |                            |                   |                                            |         |               |           |              |        
|                                                                                                                                                                                                         |                            |                   | Total Liabilities and Shareholders Equity |         | $             | 1,167,512 |              |         | $         | 1,021,589 | 
|                                                                                                                                                                                                         |                            |                   |                                            |         |               |           |              |        

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 |        | Nine Months Ended
|                                                                              |                |   | September 30,      |        | September 30,    
|                                                                              |                |   | 2001               |        | 2000              |   | 2001   |        | 2000
|                                                                              |                |   |                    |        |                   |   |        |        |     
|Revenue:                                                                      |                |   |                    |        |                   |   |        |        |      |   |        |        |  |   |        |       
|Rental                                                                        |                | $ | 30,155             |        |                   | $ | 25,612 |        |      | $ | 86,543 |        |  | $ | 75,378 |       
|Interest and other                                                            |                |   | 182                |        |                   |   | 156    |        |      |   | 275    |        |  |   | 830    |       
|                                                                              |                |   |                    |        |                   |   |        |        |      |   |        |        |  |   |        |       
|                                                                              | Total revenue  |   |                    | 30,337 |                   |   |        | 25,768 |      |   |        | 86,818 |  |   |        | 76,208 | 
|                                                                              |                |   |                    |        |                   |   |        |        |      |   |        |        |  |   |        |       
|Expenses:                                                                     |                |   |                    |        |                   |   |        |        |      |   |        |        |  |   |        |       
|Depreciation and amortization                                                 |                |   | 5,476              |        |                   |   | 4,421  |        |      |   | 15,631 |        |  |   | 13,075 |       
|General and administrative                                                    |                |   | 1,790              |        |                   |   | 1,646  |        |      |   | 5,235  |        |  |   | 4,970  |       
|Interest                                                                      |                |   | 12,015             |        |                   |   | 10,595 |        |      |   | 35,510 |        |  |   | 31,227 |       
|                                                                              |                |   |                    |        |                   |   |        |        |      |   |        |        |  |   |        |       
|                                                                              | Total expenses |   |                    | 19,281 |                   |   |        | 16,662 |      |   |        | 56,376 |  |   |        | 49,272 | 
|                                                                              |                |   |                    |        |                   |   |        |        |      |   |        |        |  |   |        |       
|Net income before minority interest and extraordinary item                    |                |   | 11,056             |        |                   |   | 9,106  |        |      |   | 30,442 |        |  |   | 26,936 |       
|Minority interest                                                             |                |   | (2,763             | )      |                   |   | (2,619 | )      |      |   | (8,212 | )      |  |   | (7,711 | )     
|                                                                              |                |   |                    |        |                   |   |        |        |      |   |        |        |  |   |        |       
|Net income before extraordinary item                                          |                |   | 8,293              |        |                   |   | 6,487  |        |      |   | 22,230 |        |  |   | 19,225 |       
|Extraordinary item  Significant modification of debt                         |                |   | (526               | )      |                   |   |       |        |      |   | (526   | )      |  |   |       |       
|                                                                              |                |   |                    |        |                   |   |        |        |      |   |        |        |  |   |        |       
|Net income                                                                    |                | $ | 7,767              |        |                   | $ | 6,487  |        |      | $ | 21,704 |        |  | $ | 19,225 |       
|                                                                              |                |   |                    |        |                   |   |        |        |      |   |        |        |  |   |        |       
|Shares of common stock outstanding used to
compute basic earnings per share   |                |   | 24,305             |        |                   |   | 20,811 |        |      |   | 22,493 |        |  |   | 20,867 |       
|                                                                              |                |   |                    |        |                   |   |        |        |      |   |        |        |  |   |        |       
|Basic earnings per share before extraordinary item                            |                | $ | 0.34               |        |                   | $ | 0.31   |        |      | $ | 0.99   |        |  | $ | 0.92   |       
|Basic earnings per share                                                      |                | $ | 0.32               |        |                   | $ | 0.31   |        |      | $ | 0.96   |        |  | $ | 0.92   |       
|Shares of common stock outstanding used to
compute diluted earnings per share |                |   | 25,635             |        |                   |   | 21,096 |        |      |   | 23,360 |        |  |   | 21,061 |       
|                                                                              |                |   |                    |        |                   |   |        |        |      |   |        |        |  |   |        |       
|Diluted earnings per share before extraordinary item                          |                | $ | 0.33               |        |                   | $ | 0.31   |        |      | $ | 0.96   |        |  | $ | 0.91   |       
|Diluted earnings per share                                                    |                | $ | 0.31               |        |                   | $ | 0.31   |        |      | $ | 0.94   |        |  | $ | 0.91   |       

See accompanying Notes to Consolidated Financial Statements.

4



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CAPITAL AUTOMOTIVE REIT
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

|                                                                                  |                                                     |   |                                 |          |      |   |         |         |  
|--------------------------------------------------------------------------------- | --------------------------------------------------- | - | ------------------------------- | -------- | ---- | - | ------- | ------- | -
|                                                                                  |                                                     |   | Nine Months Ended September 30,
|                                                                                  |                                                     |   | 2001                            |          | 2000
|                                                                                  |                                                     |   |                                 |          |     
|Cash flows from operating activities:                                             |                                                     |   |                                 |          |      |   |         |        
|Net income                                                                        |                                                     | $ | 21,704                          |          |      | $ | 19,225  |        
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                     |   |                                 |          |      |   |         |        
|Extraordinary item                                                                |                                                     |   | 526                             |          |      |   |        |        
|Depreciation and amortization                                                     |                                                     |   | 16,537                          |          |      |   | 13,826  |        
|Income applicable to minority interest                                            |                                                     |   | 8,212                           |          |      |   | 7,711   |        
|Increase in other assets                                                          |                                                     |   | (3,185                          | )        |      |   | (1,119  | )      
|Increase (decrease) in accounts payable and accrued expenses                      |                                                     |   | 1,299                           |          |      |   | (2,497  | )      
|Increase in security deposits payable                                             |                                                     |   | 1,076                           |          |      |   | 393     |        
|                                                                                  |                                                     |   |                                 |          |      |   |         |        
|                                                                                  | Net cash provided by operating activities           |   |                                 | 46,169   |      |   |         | 37,539  |  
|                                                                                  |                                                     |   |                                 |          |      |   |         |        
|Cash flows from investing activities:                                             |                                                     |   |                                 |          |      |   |         |        
|Purchase of furniture and equipment, net of disposals                             |                                                     |   | (26                             | )        |      |   | (25     | )      
|Real estate acquisitions                                                          |                                                     |   | (170,907                        | )        |      |   | (48,698 | )      
|Proceeds from the dispositions of real estate                                     |                                                     |   | 7,411                           |          |      |   | 4,811   |        
|                                                                                  |                                                     |   |                                 |          |      |   |         |        
|                                                                                  | Net cash used in investing activities               |   |                                 | (163,522 | )    |   |         | (43,912 | )
|                                                                                  |                                                     |   |                                 |          |      |   |         |        
|Cash flows from financing activities:                                             |                                                     |   |                                 |          |      |   |         |        
|Proceeds from borrowings under credit facilities                                  |                                                     |   | 121,238                         |          |      |   | 44,500  |        
|Proceeds from mortgage debt                                                       |                                                     |   | 83,261                          |          |      |   | 13,962  |        
|Repayment of borrowings under credit facilities                                   |                                                     |   | (113,730                        | )        |      |   | (11,700 | )      
|Mortgage principal payments                                                       |                                                     |   | (9,690                          | )        |      |   | (7,932  | )      
|Payment of cash dividend                                                          |                                                     |   | (26,599                         | )        |      |   | (23,182 | )      
|Distributions to minority partners                                                |                                                     |   | (9,680                          | )        |      |   | (9,133  | )      
|Repurchase of common shares                                                       |                                                     |   | (142                            | )        |      |   | (9,863  | )      
|Proceeds from follow-on offering, net of costs                                    |                                                     |   | 61,264                          |          |      |   |        |        
|Issuance of other common shares, net of costs                                     |                                                     |   | 6,673                           |          |      |   | 1,984   |        
|                                                                                  |                                                     |   |                                 |          |      |   |         |        
|                                                                                  | Net cash provided by (used in) financing activities |   |                                 | 112,595  |      |   |         | (1,364  | )
|                                                                                  |                                                     |   |                                 |          |      |   |         |        
|Net decrease in cash and cash equivalents                                         |                                                     |   | (4,758                          | )        |      |   | (7,737  | )      
|Cash and cash equivalents at beginning of period                                  |                                                     |   | 6,298                           |          |      |   | 11,886  |        
|                                                                                  |                                                     |   |                                 |          |      |   |         |        
|Cash and cash equivalents at end of period                                        |                                                     | $ | 1,540                           |          |      | $ | 4,149   |        
|                                                                                  |                                                     |   |                                 |          |      |   |         |        
|Supplemental Data:                                                                |                                                     |   |                                 |          |      |   |         |        
|Real estate acquisitions in exchange for equity issuance                          |                                                     | $ | 1,212                           |          |      | $ | 1,897   |        
|                                                                                  |                                                     |   |                                 |          |      |   |         |        
|Interest paid during the period                                                   |                                                     | $ | 33,737                          |          |      | $ | 35,526  |        
|                                                                                  |                                                     |   |                                 |          |      |   |         |        

See accompanying Notes to Consolidated Financial Statements.

5



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CAPITAL AUTOMOTIVE REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.     ORGANIZATION AND BASIS OF PRESENTATION

Organization

Capital Automotive REIT (the Company) is a Maryland real estate investment
trust formed in October 1997. The Company owns interests in real estate
through Capital Automotive L.P. (the Operating Partnership) and its
subsidiaries. The Company is the sole general partner of the Operating
Partnership, and as of September 30, 2001 owned approximately 76.3% of the
units of limited partnership interest in the Operating Partnership (Units).
References to we, us and our refer to the Company or, if the context
otherwise requires, the Operating Partnership and our business and operations
conducted through the Operating 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, parts or 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, (ii) the term dealer group to refer to a group of related persons
and companies who sell us properties, and (iii) the term dealer group, tenant,
lessee or operators of dealerships to refer to the related persons and
companies that lease our properties. We focus on buying properties from 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 also provide facility improvement and expansion funding,
construction financing and takeout commitments in certain situations.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared
by our management in accordance with U.S. generally accepted accounting
principles (GAAP) for interim financial information and in conformity with
the rules and regulations of the Securities and Exchange Commission (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 nine months ended September 30, 2001,
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,
2000.

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 investors
are reflected as minority interest. All significant intercompany transactions
and balances have been eliminated in consolidation.

6



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Real Estate and Depreciation

Real estate assets are recorded at cost. External acquisition costs directly
related to each property are capitalized as a cost of the respective property.
The cost of real estate properties acquired is allocated between land and
buildings and improvements based upon estimated market values at the time of
acquisition. Depreciation is computed using the straight-line method over an
estimated useful life of 20 to 40 years for the buildings and improvements.

Cash and Cash Equivalents

Cash and cash equivalents are comprised of highly liquid instruments purchased
with original maturities of three months or less.

Deferred Loan Costs

Certain costs incurred in connection with obtaining our credit facilities and
issuance of mortgage notes are capitalized and generally amortized over the
terms of the respective credit facilities or notes on a straight-line basis
(which approximates the effective interest method).

Capitalized Leasing Costs

Certain initial direct costs incurred by us in negotiating and consummating a
successful lease are capitalized and generally amortized over the initial base
term of the lease. These costs, net of accumulated amortization, are included
in other assets. Capitalized leasing costs include employee compensation and
payroll related fringe benefits directly related to time spent performing
leasing related activities. Such activities include evaluating the prospective
tenants financial condition, evaluating and recording guarantees, collateral
and other security arrangements, negotiating lease terms, preparing lease
documents and closing the transaction.

Income Taxes

We are qualified as a real estate investment trust under the provisions of the
Internal Revenue Code of 1986, as amended (the Code). As a real estate
investment trust, we are generally not subject to federal income tax to the
extent that we distribute annually at least 90% of our taxable income to our
shareholders and comply with certain other requirements.

Rental Revenue Recognition

We lease our real estate pursuant to long-term, triple-net leases that
typically require the tenants to pay substantially all operating expenses of a
property, including, but not limited to, real estate taxes, assessments and
other government charges, insurance, utilities, repairs, maintenance and other
expenses. All leases are accounted for as operating leases and rental income
attributable to the leases is recorded monthly when due from tenants. Rental
income attributable to the majority of our leases is fixed per the lease
agreement. However, under our variable rate lease program, rental income
attributable to our leases is variable, and monthly base rent is calculated
based on a spread over an applicable index, generally LIBOR. As of September
30, 2001, $288.0 million of our $1.2 billion real estate portfolio, or 24%, was
subject to variable rate leases. Of the total variable rate leases, the
majority of the lease agreements contain minimum cap rates and fixed rate
conversion features.

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 (CPI). Certain of our leases also or alternatively provide for a fixed
minimum and/or maximum periodic adjustment during the initial lease

7



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##### 



term, generally based on a fixed percentage of the base rent. We straight-line
the fixed minimum escalator rental income over the initial lease term. Any
rent adjustments above the fixed minimum escalators are recorded as revenue in
the period they are due from the tenants. Straight-lined rents are included in
other assets.

In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. This SAB summarizes certain
views in applying GAAP to revenue recognition in financial statements. We
adopted SAB 101 in the fourth quarter of 2000. The adoption and implementation
of the policies of SAB 101 has not had any impact on our revenue recognition
policies, financial condition or results of operations.

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.

3.     ACQUISITIONS

During the three months ended September 30, 2001, we completed a total of
approximately $120.5 million of acquisitions in nine separate transactions.
These acquisitions included 11 dealership properties, one of which is operated
by an existing tenant, and facility improvements and construction fundings with
existing tenants. We funded the acquisitions with net proceeds from our
underwritten public equity offering that closed during the third quarter, the
issuance of long-term debt drawn under a $150 million commitment from Toyota
Financial Services and funds drawn down on our short-term credit facilities.
These acquisitions added approximately 538,000 square feet of buildings and
improvements on approximately 127 acres of land in 11 states (Alabama,
California, Florida, Georgia, Maryland, New Jersey, Ohio, South Carolina,
Tennessee, Texas and Virginia). These properties have initial lease terms
ranging from 15 to 20 years, with a weighted average initial lease term of 15.2
years. The leases have renewal options exercisable at the option of the tenant
ranging from a total of 20 to 30 years.



| |  |  | Included in the third quarter acquisitions were nine automotive
retail properties totaling approximately $102.4 million from CarMax
(NYSE: KMX), a division of Circuit City Stores, Inc. (NYSE: CC) (the
CarMax acquisition). This acquisition added approximately 413,000
square feet of buildings and improvements on approximately 116 acres of
land in seven states (California, Florida, Maryland, South Carolina,
Tennessee, Texas and Virginia). Eight used-car superstores and five
new-car franchises are operated on these nine properties including
Toyota, Mitsubishi and Nissan. These properties have initial lease
terms of 15 years and multiple renewal options.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of September 30, 2001, we had invested approximately $1.2 billion in 260
properties located in 27 states, comprising approximately 1,767 acres of land
and containing approximately 9.7 million square feet of buildings and
improvements. Our tenants operate 364 motor vehicle franchises on our
properties, representing 37 brands of motor vehicles. The initial lease terms
generally range from 10 to 20 years, with a weighted average initial lease term
of approximately 13.8 years, and generally have options to renew under the same
terms and conditions for one or more additional periods of five to 10 years
exercisable at the option of the tenant (ranging from a total of five to 40
years).

8



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##### 



4.     MORTGAGE LOANS AND CREDIT FACILITIES

As of September 30, 2001, we had total debt outstanding of $666.8 million. Of
this debt, approximately $645.1 million (consisting of $324.1 million of fixed
rate and $321.0 million of variable rate debt) was mortgage debt secured by
approximately 220 of our properties. In addition, we had $21.7 million
outstanding on our credit facilities.

The following is a summary of our total debt outstanding as of September 30,
2001 and December 31, 2000 (dollars in thousands):

|                                                     |                                   |             |          |         |               |      |               |         |               |          |              |         |       |  |      |      |   |                                         |  |  | 
|---------------------------------------------------- | --------------------------------- | ----------- | -------- | ------- | ------------- | ---- | ------------- | ------- | ------------- | -------- | ------------ | ------- | ----- |  | ---- | ---- | - | --------------------------------------- |  |  | 
|                                                     |                                   |             |          |         |               |      | Principal     |         | Principal     |          |              |         |      
|                                                     |                                   |             |          |         |               |      | Balance as of |         | Balance as of |          | Effective    |         | Term/
|                                                     |                                   |             | Original |         | September 30, |      | December 31,  |         | Interest      |          | Amortization
|Description of Debt                                  |                                   | Debt Issued |          | 2001    |               | 2000 |               | Rate*   |               | Schedule
|                                                    
|7.59% fixed rate debt due 12/1/08                    |                                   | $           | 38,050   |         |               | $    | 36,201        |         |               | $        | 37,103       |         |       |  | 8.00 | %    |   | 10 yr/17 yr                            
|7.635% fixed rate debt due 10/1/14                   |                                   |             | 111,950  |         |               |      | 100,585       |         |               |          | 103,749      |         |       |  | 7.93 | %    |   | 15 yr/15 yr                            
|8.05% fixed rate debt due 10/1/14                    |                                   |             | 85,000   |         |               |      | 79,159        |         |               |          | 81,560       |         |       |  | 8.33 | %    |   | 15 yr/15 yr                            
|7.54% fixed rate debt due 7/6/11                     |                                   |             | 100,000  |         |               |      | 96,915        |         |               |          | 98,093       |         |       |  | 7.71 | %    |   | 12 yr/25 yr                            
|8.03% fixed rate debt due 9/29/11 (1)                |                                   |             | 150,000  |         |               |      |              |         |               |          | 150,000      |         |       |  |      |      |   |                                         |  | 
|7.50% fixed rate debt due 1/20/03                    |                                   |             | 12,000   |         |               |      | 11,214        |         |               |          | 11,421       |         |       |  | 7.76 | %    |   | 4.25 yr/20 yr                          
|                                                     |                                   |             |          |         |               |      |               |         |               |          |              |         |       |  |      |      |   |                                         |  | 
|                                                     | Total Mortgage Fixed Rate Debt    |             | $        | 497,000 |               |      | $             | 324,074 |               |          | $            | 481,926 |       |  |      | 7.96 | % |                                         |  |  | 
|                                                    
|Variable rate debt due 9/29/11 (1)                   |                                   | $           | 150,000  |         |               | $    | 150,000       |         |               |          |             |         |       |  | 7.31 | %    |   | 12 yr/25 yr, levelpayments             
|Variable rate debt due 8/10/13 (2)                   |                                   |             | 82,600   |         |               |      | 82,600        |         |               |          |             |         |       |  | 4.72 | %    |   | 12 yr/30 yr, levelprincipal            
|Various variable rate debt (3)                       |                                   |             | 90,554   |         |               |      | 88,416        |         |               |          | 89,593       |         |       |  | 5.93 | %    |   | 10 to 12 yr/25 to30 yr, level principal
|                                                     |                                   |             |          |         |               |      |               |         |               |          |              |         |       |  |      |      |   |                                         |  | 
|                                                     | Total Mortgage Variable Rate Debt |             | $        | 323,154 |               |      | $             | 321,016 |               |          | $            | 89,593  |       |  |      | 6.57 | % |                                         |  |  | 
|                                                     |                                   |             |          |         |               |      |               |         |               |          |              |         |       |  |      |      |   |                                         |  | 
|TOTAL MORTGAGE DEBT                                  |                                   |             |          |         |               | $    | 645,090       |         |               | $        | 571,519      |         |       |  | 7.08 | %    |   |                                         |  | 
|                                                    
|$50 million revolving partially secured
facility (4) |                                   |             |          |         |               |      | 13,900        |         |               |          | 14,198       |         |       |  | 5.66 | %    |   | 3 yr                                   
|$100 million revolving secured facility (5)          |                                   |             |          |         |               |      | 7,808         |         |               |          | 2            |         |       |  | 6.29 | %    |   | 1 yr                                   
|                                                     |                                   |             |          |         |               |      |               |         |               |          |              |         |       |  |      |      |   |                                         |  | 
|TOTAL CREDIT FACILITIES                              |                                   |             |          |         |               | $    | 21,708        |         |               | $        | 14,200       |         |       |  | 6.08 | %    |   |                                         |  | 
|                                                     |                                   |             |          |         |               |      |               |         |               |          |              |         |       |  |      |      |   |                                         |  | 
|TOTAL DEBT OUTSTANDING                               |                                   |             |          |         |               | $    | 666,798       |         |               | $        | 585,719      |         |       |  | 7.27 | %    |   |                                         |  | 
|                                                     |                                   |             |          |         |               |      |               |         |               |          |              |         |       |  |      |      |   |                                         |  | 



---

|*   |  | For the quarter ended September 30, 2001. Includes deferred loan fees
amortized over the life of the loans.                                                                                                                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) |  | This loan was converted from fixed rate to variable rate during the
third quarter of 2001. The new terms require monthly payments (including interest and principal)
which bear interest equal to the 30-day LIBOR rate plus 227 basis
points. Effective interest rate for the quarter is a blended rate of
both the fixed and variable rates. See Extraordinary Item  Significant
Modification of Debt section herein.
|   
|(2) |  | This loan bears interest equal to the 30-day LIBOR rate plus 175
basis points. At the end of the third quarter, the Company entered into
an agreement with a third party to swap the variable rate to a 7.31%
fixed rate, effective July 1, 2002.                                                                                                                                                                       
|   
|(3) |  | These loans bear interest at variable rates ranging from 200 to 215
basis points per annum above the A1-P1 Commercial Paper Rate and have
maturity dates ranging from December 22, 2009 to December 18, 2012. The
terms                                                                                                                                                                                                 

9



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##### 



|    |  | of the various loans require quarterly interest payments and level
principal payments.                                                                                                                                                     
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(4) |  | This facility bears interest equal to the 30-day LIBOR rate plus 175
basis points and requires the repayment of secured borrowings within 12
months and unsecured borrowings within 150 days. The facility matures
on March 3, 2002.       
|   
|(5) |  | This facility bears interest equal to the 30-day LIBOR rate plus 225
basis points and requires the repayment of principal within 150 days.
The facility has a one-year term, which terminates on March 21, 2002,
and is renewable annually.

As of September 30, 2001, we were in compliance with all of the loan covenants
related to our mortgage debt and credit facilities.

Aggregate annual principal maturities (which includes principal amortization)
of mortgage debt as of September 30, 2001 are as follows (in thousands):

|                                |  |   |         | 
|------------------------------- |  | - | ------- | 
|For the Year Ended December 31, |  |   |         | 
|2001                            |  | $ | 5,217   | 
|2002                            |  |   | 20,451  | 
|2003                            |  |   | 31,955  | 
|2004                            |  |   | 22,251  | 
|2005                            |  |   | 23,577  | 
|Thereafter                      |  |   | 541,639 | 
|                                |  |   |         | 
|Total                           |  | $ | 645,090 | 
|                                |  |   |         | 

Interest Rate Swap

In June 1998, the Financial Accounting Standards Board (''FASB) issued
Statement of Financial Accounting Standards (''SFAS) No. 133, ''Accounting
for Derivative Instruments and Hedging Activities. This statement was
originally effective for all fiscal quarters of fiscal years beginning after
June 15, 1999; however, during the second quarter of 1999 the FASB issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities 
Deferral of the Effective Date of FASB Statement No. 133, which deferred the
effective date until June 15, 2000. In June 2000, the FASB issued SFAS No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment to SFAS No. 133, which required that all companies be
in compliance with SFAS No. 133 as of January 1, 2001. SFAS No. 133 does not
require restatement of financial statements from prior periods. SFAS No. 133
requires an entity to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value.

During the third quarter of 2001, we borrowed $82.6 million of long-term debt
drawn under a $150 million commitment for secured financing from Toyota
Financial Services. The terms of debt provide for a 12-year term with interest
at a spread over the one-month LIBOR rate. At the end of the third quarter, we
entered into an agreement with a third party to swap the variable rate to a
7.31% fixed rate, effective July 1, 2002. Fixing the rate of this debt with an
interest rate swap falls within our strategy of minimizing interest rate risk
by match-funding our leases with debt in order to lock in our investment spread
over the lease term. The swap was designed to mirror the underlying variable
rate debt in terms of index, spread, reset, amortization, compounding and
maturity. Due to the identical nature of the terms of the swap and the
underlying terms of the debt, we determined that the derivative instrument is
highly effective. Consequently, the unrealized gain or loss upon measuring the
swap at its fair value will be recorded as a component of other comprehensive
income within Stockholders Equity, and either a derivative instrument asset or
liability.

10



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##### 



Extraordinary Item  Significant Modification of Debt

As noted in footnote (1) of the debt table herein, the interest rate on $150
million of debt was converted from fixed rate to variable rate during the third
quarter. The conversion of the interest rate on the debt from fixed to
variable resulted in a significant modification of the debt. In accordance
with GAAP, we wrote-off the remaining deferred loan fees relating to the debt
and classified the write-off as an extraordinary item on the statement of
operations. The extraordinary item totaled $526,000, or $0.02 per basic and
diluted share.

5.     NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 141, Business Combinations (effective
July 1, 2001) and SFAS No. 142, Goodwill and Other Intangible Assets
(effective for the Company on January 1, 2002). SFAS No. 141 prohibits
pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that
goodwill and some intangible assets will no longer be amortized but instead
will be subject to periodic impairment testing. We do not expect the adoption
of either SFAS No. 141 or SFAS No. 142 to have a significant impact on our
financial condition or results of operations.

In August 2001, the FASB issued SFAS No, 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (effective for the Company on January 1, 2002).
SFAS No. 144 requires that one accounting model be used for long-lived assets
to be disposed of by sale, whether previously held and used or newly-acquired,
and broadens the presentation of discontinued operations to include more
disposal transactions. We do not expect the adoption of SFAS No. 144 to have a
significant impact on our financial condition or results of operations.

6.     MINORITY INTEREST

Minority interest represents the Units of the Operating Partnership owned by
limited partners (other than the Company) of the Operating Partnership.
Minority interest is calculated at approximately 23.7% of the Operating
Partnerships partners capital as of September 30, 2001 and approximately
25.0% of the Operating Partnerships partners net income for the three months
ended September 30, 2001 and 27.0% for the nine months ended September 30,
2001. The ownership of the Operating Partnership as of September 30, 2001 is
as follows (Units in thousands):

|                   |                  |       |  |          |          |         |  |      |       |  
|------------------ | ---------------- | ----- |  | -------- | -------- | ------- |  | ---- | ----- | -
|                   |                  |       |  | Units    |          | Percent
|                   |                  |       |  |          |          |        
|Partners capital: |                  |       |  |          |          |         |  |     
|                   | Limited Partners |       |  | 8,059.5  |          |         |  | 23.7 | %    
|                   | The Company      |       |  | 25,985.1 |          |         |  | 76.3 | %    
|                   |                  |       |  |          |          |         |  |     
|                   |                  | Total |  |          | 34,044.6 |         |  |      | 100.0 | %
|                   |                  |       |  |          |          |         |  |     

7.     EARNINGS PER SHARE

Basic earnings per share is computed as net income divided by the weighted
average common shares outstanding for the period. Diluted earnings per share
is computed as net income, adjusted to reflect the change in the Companys
share of income based on an ownership calculation that includes weighted

11



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##### 



average common share equivalents, divided by the weighted average common shares
outstanding for the
period plus the effect of dilutive common equivalent shares outstanding for the
period, based on the treasury stock method. Dilutive common equivalent shares
include restricted shares, restricted phantom shares, options and warrants. A
reconciliation of net income and weighted average common shares used to
calculate basic and diluted earnings per share for the three months and nine
months ended September 30, 2001 and 2000 is as follows (in thousands, except
per share data):

|                                 |                              |  |        |        |         |  |          |        |          |  |         |      |       |  |          |        |          |  |  |        |  |  |   |      | 
|-------------------------------- | ---------------------------- |  | ------ | ------ | ------- |  | -------- | ------ | -------- |  | ------- | ---- | ----- |  | -------- | ------ | -------- |  |  | ------ |  |  | - | ---- | 
|                                 |                              |  | 2001   |        | 2000   
|                                 |                              |  |        |        |        
|                                 |                              |  |        |        |         |  | Weighted |        | Earnings |  |         |      |       |  | Weighted |        | Earnings
|                                 |                              |  | Net    |        | Average |  | Per      |        | Net      |  | Average |      | Per  
|                                 |                              |  | Income |        | Shares  |  | Share    |        | Income   |  | Shares  |      | Share
|                                 |                              |  |        |        |         |  |          |        |          |  |         |      |      
|Three Months Ended September 30: |                              |  |        |        |         |  |          |        |          |  |         |      |       |  |          |        |          |  |  |        |  |  |   |     
|Before Extraordinary Item:       |                              |  |        |        |         |  |          |        |          |  |         |      |       |  |          |        |          |  |  |        |  |  |   |     
|                                 | Earnings per share  basic   |  | $      | 8,293  |         |  |          | 24,305 |          |  | $       | 0.34 |       |  | $        | 6,487  |          |  |  | 20,811 |  |  | $ | 0.31 | 
|                                 | Adjustments (1)              |  |        | 108    |         |  |          | 1,330  |          |  |         | 0.01 |       |  |          |       |          |  |  | 285    |  |  |   |     | 
|                                 |                              |  |        |        |         |  |          |        |          |  |         |      |       |  |          |        |          |  |  |        |  |  |   |     
|                                 | Earnings per share  diluted |  | $      | 8,401  |         |  |          | 25,635 |          |  | $       | 0.33 |       |  | $        | 6,487  |          |  |  | 21,096 |  |  | $ | 0.31 | 
|                                
|After Extraordinary Item:        |                              |  |        |        |         |  |          |        |          |  |         |      |       |  |          |        |          |  |  |        |  |  |   |     
|                                 | Earnings per share  basic   |  | $      | 7,767  |         |  |          | 24,305 |          |  | $       | 0.32 |       |  | $        | 6,487  |          |  |  | 20,811 |  |  | $ | 0.31 | 
|                                 | Adjustments (1)              |  |        | 108    |         |  |          | 1,330  |          |  |         | 0.01 |       |  |          |       |          |  |  | 285    |  |  |   |     | 
|                                 |                              |  |        |        |         |  |          |        |          |  |         |      |       |  |          |        |          |  |  |        |  |  |   |     
|                                 | Earnings per share  diluted |  | $      | 7,875  |         |  |          | 25,635 |          |  | $       | 0.31 |       |  | $        | 6,487  |          |  |  | 21,096 |  |  | $ | 0.31 | 
|Nine Months Ended September 30:  |                              |  |        |        |         |  |          |        |          |  |         |      |       |  |          |        |          |  |  |        |  |  |   |     
|                                
|Before Extraordinary Item:       |                              |  |        |        |         |  |          |        |          |  |         |      |       |  |          |        |          |  |  |        |  |  |   |     
|                                 | Earnings per share  basic   |  | $      | 22,230 |         |  |          | 22,493 |          |  | $       | 0.99 |       |  | $        | 19,225 |          |  |  | 20,867 |  |  | $ | 0.92 | 
|                                 | Adjustments (1)              |  |        | 220    |         |  |          | 867    |          |  |         | 0.03 |       |  |          |       |          |  |  | 194    |  |  |   | 0.01 | 
|                                 |                              |  |        |        |         |  |          |        |          |  |         |      |       |  |          |        |          |  |  |        |  |  |   |     
|                                 | Earnings per share  diluted |  | $      | 22,450 |         |  |          | 23,360 |          |  | $       | 0.96 |       |  | $        | 19,255 |          |  |  | 21,061 |  |  | $ | 0.91 | 
|                                
|After Extraordinary Item:        |                              |  |        |        |         |  |          |        |          |  |         |      |       |  |          |        |          |  |  |        |  |  |   |     
|                                 | Earnings per share  basic   |  | $      | 21,704 |         |  |          | 22,493 |          |  | $       | 0.96 |       |  | $        | 19,225 |          |  |  | 20,867 |  |  | $ | 0.92 | 
|                                 | Adjustments (1)              |  |        | 220    |         |  |          | 867    |          |  |         | 0.02 |       |  |          |       |          |  |  | 194    |  |  |   | 0.01 | 
|                                 |                              |  |        |        |         |  |          |        |          |  |         |      |       |  |          |        |          |  |  |        |  |  |   |     
|                                 | Earnings per share  diluted |  | $      | 21,924 |         |  |          | 23,360 |          |  | $       | 0.94 |       |  | $        | 19,225 |          |  |  | 21,061 |  |  | $ | 0.91 | 



---

|(1) |  | Adjustment to net income reflects the change in the Companys share of
income based on an ownership calculation including weighted average common
share equivalents. The adjustment to weighted average shares reflects the
effect of dilutive common equivalent shares outstanding for the period, based
on the treasury stock method.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8.     401(K) PLAN

During 1998, we adopted the Capital Automotive L.P. Employee 401(k) Plan (the
401(k) Plan). Employees who are at least 21 years of age are eligible to
participate in the 401(k) Plan after three months of service. Participants may
contribute up to 20% of their earnings, on a pre-tax basis, subject to annual
limitations imposed by the Code. Management may make matching or discretionary
contributions to the 401(k) Plan. These contributions will vest ratably over
five years from each employees date of service. During December 2000, we
approved a 20% match of the participants elected deferral contribution during
2001 (subject to maximum limits).

12



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##### 



9.     FOLLOW-ON EQUITY OFFERING

On August 8, 2001, we sold 3,852,500 common shares (which includes the full
exercise of the underwriters over-allotment option to purchase 502,500 common
shares) in an underwritten public offering at a price to the public of $17.00
per share under our shelf registration statement filed with the SEC on March 2,
1999 (the Shelf Registration Statement). Net proceeds to the Company, after
deducting the discounts and commissions to the underwriters and other expenses
of this offering, totaled approximately $61.3 million. After the offering,
$134.5 million remains available under the Shelf Registration Statement for the
issuance of securities. The Company contributed the net proceeds of the
offering to the Operating Partnership in exchange for Units in the Operating
Partnership and the Operating Partnership used the proceeds to fund a portion
of the purchase price of the CarMax acquisition as described in Note 3.

10.     SUBSEQUENT EVENTS

Declaration of Dividend

On October 16, 2001, our Board of Trustees declared a cash dividend of $0.3880
per share, which will be paid on November 20, 2001 to shareholders of record as
of November 9, 2001.

13



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##### 



CAPITAL AUTOMOTIVE REIT
ITEM II  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS  THREE MONTHS AND NINE MONTHS
ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000

The following discussion should be read in conjunction with the accompanying
unaudited consolidated financial statements and notes thereto.

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 (the Exchange
Act). Also, documents that we subsequently file with the Securities and
Exchange Commission (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 statements made herein are not all inclusive, particularly
with respect to possible future events, and should be read together with other
filings made by the Company under the Securities Act and the Exchange Act,
including the risks and other risk factors contained in the Companys Form
8-K/A filed on January 19, 2001. Other parts of this 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:



| |  |  | risks that our growth will be limited if we cannot obtain
additional capital;                                                                                                                                                                                                                                                                                    
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | risks of financing, such as our ability to consummate
additional financings on terms which are acceptable to us and
the ability to meet existing financial covenants;                                                                                                                                                                                            
|
| |  |  | risks that acquisitions may not be consummated;                                                                                                                                                                                                                                                                                                                  
|
| |  |  | risks that our tenants will not pay rent or that our
operating costs will be higher than expected;                                                                                                                                                                                                                                                               
|
| |  |  | risks related to the automotive industry, such as the
ability of our tenants to compete effectively in the automotive
retail industry and the ability of our tenants to perform their
lease obligations as a result of changes in any manufacturers
production, inventory, marketing or other practices;                                                        
|
| |  |  | environmental and other risks associated with the
acquisition and leasing of automotive properties; and                                                                                                                                                                                                                                                          
|
| |  |  | risks related to our status as a real estate investment
trust, commonly referred to 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, or to publicly release the results if we revise any
of them.

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, parts or other
related businesses under long-term, triple-net leases. We focus on buying
properties from dealer groups that have a long history of operating multi-site,
multi-franchised dealerships,

14



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##### 



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 also
provide facility improvement and expansion funding, construction financing and
takeout commitments in certain situations. As of September 30, 2001, we had
invested approximately $1.2 billion in 260 properties located in 27 states,
comprising approximately 1,767 acres of land and containing approximately 9.7
million square feet of buildings and improvements. Our tenants operate 364
motor vehicle franchises on our properties, representing 37 brands of motor
vehicles.

Substantially all of our properties are leased pursuant to long-term,
triple-net leases that typically require the tenants to pay substantially all
operating expenses of a property, including, but not limited to, real estate
taxes, assessments and other government charges, insurance, utilities, repairs,
maintenance and other expenses. The initial lease terms generally range from
10 to 20 years, with a weighted average initial lease term of approximately
13.8 years, and generally have options to renew under the same terms and
conditions for one or more additional periods of five to 10 years exercisable
at the option of the tenant (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; and (2) interest earned from the
temporary investment of funds in short-term investments.

We incur general and administrative expenses including, principally,
compensation expense for our executive officers and other employees,
professional fees and various expenses incurred in the process of identifying
and acquiring additional properties. We are self-administered and managed by
our trustees, executive officers and other employees. Our primary non-cash
expense is the depreciation of our properties. For tax purposes, we depreciate
buildings on our properties over a 40-year period and site improvements on our
properties over a 15-year period. We depreciate both buildings and
improvements over a 20-year to 40-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.

THIRD QUARTER ACQUISITIONS

During the three months ended September 30, 2001, we completed a total of
approximately $120.5 million of acquisitions in nine separate transactions.
These acquisitions included 11 dealership properties, one of which is operated
by an existing tenant, and facility improvements and construction fundings with
existing tenants. We funded the acquisitions with net proceeds from our
underwritten public equity offering that closed during the third quarter, the
issuance of long-term debt drawn under a $150 million commitment from Toyota
Financial Services and funds drawn down on our short-term credit facilities.
These acquisitions added approximately 538,000 square feet of buildings and
improvements on approximately 127 acres of land in 11 states (Alabama,
California, Florida, Georgia, Maryland, New Jersey, Ohio, South Carolina,
Tennessee, Texas and Virginia). These properties have initial lease terms
ranging from 15 to 20 years, with a weighted average initial lease term of 15.2
years. The leases have renewal options exercisable at the option of the tenant
ranging from a total of 20 to 30 years.

Included in the third quarter acquisitions were nine automotive retail
properties totaling approximately $102.4 million from CarMax (NYSE: KMX), a
division of Circuit City Stores, Inc. (NYSE: CC) (the CarMax acquisition).
This acquisition added approximately 413,000 square feet of buildings and
improvements on approximately 116 acres of land in seven states (California,
Florida, Maryland, South Carolina, Tennessee, Texas and Virginia). Eight
used-car superstores and five new-car franchises are operated on these nine
properties including Toyota, Mitsubishi and Nissan. These properties have
initial lease terms of 15 years and multiple renewal options.

15



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RESULTS OF OPERATIONS

Rental revenue for the three months ended September 30, 2001 increased 18% to
$30.2 million from $25.6 million for the same quarter in 2000. Rental revenue
for the nine months ended September 30, 2001 increased 15% to $86.5 million
from $75.4 million for the same period in 2000. The increase was primarily
attributable to the growth of our real estate portfolio and the timing of our
property acquisitions, from which we generate our rental income. We owned 260
properties as of September 30, 2001 versus 239 properties as of September 30,
2000. In addition, included in rental revenue for the three months and nine
months ended September 30, 2001 were straight-lined rents totaling $810,000 and
$2.4 million, respectively, as compared to straight-lined rents of $588,000 and
$1.6 million, respectively, for the three months and nine months ended
September 30, 2000.

The increase in rental revenues was partially offset by a decrease in interest
rates on our variable rate leases. As of September 30, 2001, $288.0 million of
our $1.2 billion real estate portfolio, or 24%, was subject to variable rate
leases. We had a corresponding decrease in interest rates on our variable rate
debt resulting in reduced interest expense, which is more fully described
below. During the third quarter, we converted the leases relating to $185.3
million of property leased to our largest tenant from fixed rate to variable
rate. Under the variable rate leases, rent changes monthly based on a spread
to LIBOR with a minimum cap rate. The tenant has the ability to fix the cap
rate during the initial term of the lease, at a rate no less than the fixed cap
rate under the original lease. Other terms of the leases, including lease
escalators, remain the same. We also converted the interest rate on the
underlying debt that is primarily secured by the properties subject to these
leases from fixed rate to variable rate as discussed below.

Interest and other income for the three months ended September 30, 2001
increased 17% to $182,000 from $156,000 for the same quarter in 2000. The
increase was the result of a gain on the sale of properties totaling $125,000
for the three months ended September 30, 2001 versus no property dispositions
for the same quarter last year. The increase was partially offset by a
decrease in interest earned on temporary investments. Interest and other
income for the nine months ended September 30, 2001 decreased 67% to $275,000
from $830,000 for the same period in 2000. The decrease was the result of a
$186,000 reduction in the total gain on the sale of properties during the nine
months ended September 30, 2001 versus the same period of 2000, as well as a
decrease in interest earned on temporary investments.

Depreciation and amortization for the three months ended September 30, 2001
increased 24% to $5.5 million from $4.4 million for the same quarter in 2000.
Depreciation and amortization for the nine months ended September 30, 2001
increased 20% to $15.6 million from $13.1 million for the same period in 2000.
Depreciation and amortization consisted primarily of depreciation on buildings
and improvements owned during those periods. The increase is attributable to
the growth of our real estate portfolio, resulting in an increase in our
depreciable assets.

General and administrative expenses for the three months ended September 30,
2001 increased $144,000, or 9%, to $1.8 million from $1.6 million for the same
quarter in 2000. General and administrative expenses for the nine months ended
September 30, 2001 increased 5% to $5.2 million from $5.0 million for the same
period in 2000. The increase in general and administrative expenses was
primarily due to: (1) an increase in payroll and related expenses primarily
attributable to the issuance of additional stock based compensation awarded to
employees and an increase in the number of employees; (2) an increase in state
income taxes due to the growth in our real estate portfolio during 1999 and
2000; and (3) additional costs associated with our marketing and investor
relations program. The increase was partially offset by a decrease in
professional services and a write-down of our investment in BBCN during the
third quarter of 2000. During 2000, we wrote off our $300,000 investment in
BBCN, a start-up, on-line procurement solution company for the automotive
retail industry, of which $150,000 was written off in the third quarter. We
wrote off our investment in BBCN because they ceased operations due to their
inability to secure the necessary capital to fund their business.

16



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Interest expense for the three months ended September 30, 2001 increased 13% to
$12.0 million from $10.6 million for the same quarter in 2000. Interest
expense for the nine months ended September 30, 2001 increased 14% to $35.5
million from $31.2 million for the same period in 2000. The increase was due
to an increase in debt outstanding during that time period (including mortgage
debt and borrowings under our credit facilities), which was obtained to finance
the acquisition of properties. As discussed above, the increase was partially
offset by a decrease in interest rates on our variable rate debt, which totaled
$321.0 million as of September 30, 2001. The effective rate on our debt, which
includes deferred loan fees amortized over the life of the loans, decreased
from 8.08% for the third quarter of 2000 to 7.27% for the third quarter of
2001. Debt outstanding as of September 30, 2001 was approximately $666.8
million (consisting of approximately $645.1 million of mortgage debt and
approximately $21.7 million of borrowings under our credit facilities) compared
to approximately $540.3 million (consisting of approximately $507.5 million of
mortgage debt and approximately $32.8 million of borrowings under our credit
facilities) as of September 30, 2000.

During the third quarter, the Company amended $150.0 million of fixed rate debt
due September 29, 2011 to variable rate debt. The debt was converted in
conjunction with the Companys conversion of leases relating to $185.3 million
of property from fixed rate to variable rate as discussed above. The new terms
require monthly payments (including interest and principal) which bear interest at the 30-day LIBOR rate
plus 227 basis points versus a fixed rate of 8.03%. The conversion of the
interest rate on the debt from fixed to variable resulted in a significant
modification of the debt. In accordance with GAAP, we wrote-off the remaining
deferred loan fees relating to the debt and classified the write-off as an
extraordinary item on the statement of operations. The extraordinary item
totaled $526,000, or $0.02 per basic and diluted share.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $1.5 million and $4.1 million at September 30,
2001 and September 30, 2000, respectively. The changes in cash and cash
equivalents during the nine months ended September 30, 2001 and 2000 were
attributable to operating, investing and financing activities, as described
below.

Operating Activities

Cash provided by operating activities for the nine months ended September 30,
2001 and September 30, 2000 was $46.2 million and $37.5 million, respectively,
and represents, in both years, cash received primarily from rents under
long-term, triple-net leases, plus interest and other income, less normal
recurring general and administrative expenses and interest payments on debt
outstanding.

Investing Activities

Cash used in investing activities for the nine months ended September 30, 2001
and September 30, 2000 was $163.5 million and $43.9 million, respectively, and
primarily reflects the acquisition of dealership properties, facility
improvement and expansion fundings and construction financings, net of sales,
during those periods.

Financing Activities

Cash provided by financing activities for the nine months ended September 30,
2001 was $112.6 million and cash used in financing activities for the nine
months ended September 30, 2000 was $1.4 million.

Cash provided by financing activities for the nine months ended September 30,
2001 primarily reflects:



| |  |  | $121.2 million of proceeds received from borrowings on our
short-term credit facilities; 
| | - |  | -----------------------------------------------------------------------------------------
|
| |  |  | $83.3 million of proceeds received from long-term mortgage debt
closed during the period;

17



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| |  |  | $61.3 million of proceeds received from our follow-on offering, net of costs; and        
| | - |  | -----------------------------------------------------------------------------------------
|
| |  |  | $6.7 million of proceeds received from the issuance of other common shares, net of costs.

The cash provided by financing activities was partially offset by:



| |  |  | the repayment of borrowings on our short-term credit facilities totaling $113.7 million;              
| | - |  | ------------------------------------------------------------------------------------------------------
|
| |  |  | payments of principal on outstanding long-term mortgage debt totaling $9.7 million;                   
|
| |  |  | distributions made to shareholders and minority partners during the
period totaling $36.3 million; and
|
| |  |  | the repurchase of common shares totaling $142,000.                                                    

Cash used in financing activities for the nine months ended September 30, 2000 primarily reflects:



| |  |  | the repayment of borrowings on our short-term credit facilities totaling $11.7 million;               
| | - |  | ------------------------------------------------------------------------------------------------------
|
| |  |  | payments of principal on outstanding long-term mortgage debt totaling $7.9 million;                   
|
| |  |  | distributions made to shareholders and minority partners during the
period totaling $32.3 million; and
|
| |  |  | the repurchase of common shares totaling $9.9 million.                                                

The cash used in financing activities was partially offset by:



| |  |  | $44.5 million of proceeds received from borrowings on our short-term credit facilities;      
| | - |  | ---------------------------------------------------------------------------------------------
|
| |  |  | $14.0 million of proceeds received from long-term mortgage debt
closed during the period; and
|
| |  |  | $2.0 million of proceeds received from the issuance of other common
shares, net of costs.    

Mortgage Indebtedness and Credit Facilities

As of September 30, 2001, we had total debt outstanding of $666.8 million. Of
this debt, approximately $645.1 million (consisting of $324.1 million of fixed
rate and $321.0 million of variable rate debt) was mortgage debt secured by
approximately 220 of our properties. In addition, we had $21.7 million
outstanding on our credit facilities.

18



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The following is a summary of our total debt outstanding as of September 30,
2001 and December 31, 2000 (dollars in thousands):

|                                                     |                                   |             |          |         |               |      |               |         |               |          |              |         |       |  |      |      |   |                                         |  |  | 
|---------------------------------------------------- | --------------------------------- | ----------- | -------- | ------- | ------------- | ---- | ------------- | ------- | ------------- | -------- | ------------ | ------- | ----- |  | ---- | ---- | - | --------------------------------------- |  |  | 
|                                                     |                                   |             |          |         |               |      | Principal     |         | Principal     |          |              |         |       |  |      |      |  
|                                                     |                                   |             |          |         |               |      | Balance as of |         | Balance as of |          | Effective    |         | Term/
|                                                     |                                   |             | Original |         | September 30, |      | December 31,  |         | Interest      |          | Amortization
|Description of Debt                                  |                                   | Debt Issued |          | 2001    |               | 2000 |               | Rate*   |               | Schedule
|                                                    
|7.59% fixed rate debt due 12/1/08                    |                                   | $           | 38,050   |         |               | $    | 36,201        |         |               | $        | 37,103       |         |       |  | 8.00 | %    |   | 10 yr/17 yr                            
|7.635% fixed rate debt due 10/1/14                   |                                   |             | 111,950  |         |               |      | 100,585       |         |               |          | 103,749      |         |       |  | 7.93 | %    |   | 15 yr/15 yr                            
|8.05% fixed rate debt due 10/1/14                    |                                   |             | 85,000   |         |               |      | 79,159        |         |               |          | 81,560       |         |       |  | 8.33 | %    |   | 15 yr/15 yr                            
|7.54% fixed rate debt due 7/6/11                     |                                   |             | 100,000  |         |               |      | 96,915        |         |               |          | 98,093       |         |       |  | 7.71 | %    |   | 12 yr/25 yr                            
|8.03% fixed rate debt due 9/29/11 (1)                |                                   |             | 150,000  |         |               |      |              |         |               |          | 150,000      |         |       |  |      |      |   |                                         |  | 
|7.50% fixed rate debt due 1/20/03                    |                                   |             | 12,000   |         |               |      | 11,214        |         |               |          | 11,421       |         |       |  | 7.76 | %    |   | 4.25 yr/20 yr                          
|                                                     |                                   |             |          |         |               |      |               |         |               |          |              |         |       |  |      |      |   |                                         |  | 
|                                                     | Total Mortgage Fixed Rate Debt    |             | $        | 497,000 |               |      | $             | 324,074 |               |          | $            | 481,926 |       |  |      | 7.96 | % |                                         |  |  | 
|                                                    
|Variable rate debt due 9/29/11 (1)                   |                                   | $           | 150,000  |         |               | $    | 150,000       |         |               |          |             |         |       |  | 7.31 | %    |   | 12 yr/25 yr, levelpayments             
|Variable rate debt due 8/10/13 (2)                   |                                   |             | 82,600   |         |               |      | 82,600        |         |               |          |             |         |       |  | 4.72 | %    |   | 12 yr/30 yr, levelprincipal            
|Various variable rate debt (3)                       |                                   |             | 90,554   |         |               |      | 88,416        |         |               |          | 89,593       |         |       |  | 5.93 | %    |   | 10 to 12 yr/25 to30 yr, level principal
|                                                     |                                   |             |          |         |               |      |               |         |               |          |              |         |       |  |      |      |   |                                         |  | 
|                                                     | Total Mortgage Variable Rate Debt |             | $        | 323,154 |               |      | $             | 321,016 |               |          | $            | 89,593  |       |  |      | 6.57 | % |                                         |  |  | 
|                                                     |                                   |             |          |         |               |      |               |         |               |          |              |         |       |  |      |      |   |                                         |  | 
|TOTAL MORTGAGE DEBT                                  |                                   |             |          |         |               | $    | 645,090       |         |               | $        | 571,519      |         |       |  | 7.08 | %    |   |                                         |  | 
|                                                    
|$50 million revolving partially secured
facility (4) |                                   |             |          |         |               |      | 13,900        |         |               |          | 14,198       |         |       |  | 5.66 | %    |   | 3 yr                                   
|$100 million revolving secured facility (5)          |                                   |             |          |         |               |      | 7,808         |         |               |          | 2            |         |       |  | 6.29 | %    |   | 1 yr                                   
|                                                     |                                   |             |          |         |               |      |               |         |               |          |              |         |       |  |      |      |   |                                         |  | 
|TOTAL CREDIT FACILITIES                              |                                   |             |          |         |               | $    | 21,708        |         |               | $        | 14,200       |         |       |  | 6.08 | %    |   |                                         |  | 
|                                                     |                                   |             |          |         |               |      |               |         |               |          |              |         |       |  |      |      |   |                                         |  | 
|TOTAL DEBT OUTSTANDING                               |                                   |             |          |         |               | $    | 666,798       |         |               | $        | 585,719      |         |       |  | 7.27 | %    |   |                                         |  | 
|                                                     |                                   |             |          |         |               |      |               |         |               |          |              |         |       |  |      |      |   |                                         |  | 



---

|*   |  | For the quarter ended September 30, 2001. Includes deferred loan fees
amortized over the life of the loans.                                                                                                                                                                                                                                   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) |  | This loan was converted from fixed rate to variable rate during the
third quarter of 2001. The new terms require monthly payments (including interest and principal) which bear interest equal to the 30-day LIBOR rate plus 227 basis
points. Effective interest rate for the quarter is a blended rate of
both the fixed and variable rates.
|   
|(2) |  | This loan bears interest equal to the 30-day LIBOR rate plus 175
basis points. At the end of the third quarter, the Company entered into
an agreement with a third party to swap the variable rate to a 7.31%
fixed rate, effective July 1, 2002.                                                                                             
|   
|(3) |  | These loans bear interest at variable rates ranging from 200 to 215
basis points per annum above the A1-P1 Commercial Paper Rate and have
maturity dates ranging from December 22, 2009 to December 18, 2012. The
terms of the various loans require quarterly interest payments and level
principal payments.                                
|   
|(4) |  | This facility bears interest equal to the 30-day LIBOR rate plus 175
basis points and requires the repayment of secured borrowings within 12
months and unsecured borrowings within 150 days. The facility matures
on March 3, 2002.                                                                                                          
|   
|(5) |  | This facility bears interest equal to the 30-day LIBOR rate plus 225
basis points and requires the repayment of principal within 150 days.
The facility has a one-year term, which terminates on March 21, 2002,
and is renewable annually.                                                                                                   

19



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As of September 30, 2001, we were in compliance with all of the loan covenants
related to our mortgage debt and credit facilities.

Interest Rate Swap

In June 1998, the Financial Accounting Standards Board (''FASB) issued
Statement of Financial Accounting Standards (''SFAS) No. 133, ''Accounting
for Derivative Instruments and Hedging Activities. This statement was
originally effective for all fiscal quarters of fiscal years beginning after
June 15, 1999; however, during the second quarter of 1999 the FASB issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities 
Deferral of the Effective Date of FASB Statement No. 133, which deferred the
effective date until June 15, 2000. In June 2000, the FASB issued SFAS No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment to SFAS No. 133, which required that all companies be
in compliance with SFAS No. 133 as of January 1, 2001. SFAS No. 133 does not
require restatement of financial statements from prior periods. SFAS No. 133
requires an entity to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value.

During the third quarter of 2001, we borrowed $82.6 million of long-term debt
drawn under a $150 million commitment for secured financing from Toyota
Financial Services. The terms of debt provide for a 12-year term with interest
at a spread over the one-month LIBOR rate. At the end of the third quarter, we
entered into an agreement with a third party to swap the variable rate to a
7.31% fixed rate, effective July 1, 2002. Fixing the rate of this debt with an
interest rate swap falls within our strategy of minimizing interest rate risk
by match-funding our leases with debt in order to lock in out investment spread
over the lease term. The swap was designed to mirror the underlying variable
rate debt in terms of index, spread, reset, amortization, compounding and
maturity. Due to the identical nature of the terms of the swap and the
underlying terms of the debt, we determined that the derivative instrument is
highly effective. Consequently, the unrealized gain or loss upon measuring the
swap at its fair value will be recorded as a component of other comprehensive
income within Stockholders Equity, and either a derivative instrument asset or
liability.

Liquidity Requirements

Short-term liquidity requirements consist primarily of normal recurring
operating expenses, regular debt service requirements (including debt service
relating to additional and replacement debt), recurring corporate expenditures,
distributions to shareholders and holders of Units (Unitholders), and amounts
required for additional property acquisitions, facility improvement and
expansion fundings and construction financings. We expect to meet these
requirements (other than amounts required for additional property acquisitions,
facility improvement and expansion fundings and construction financings)
through cash provided by operating and financing activities. We anticipate
that any additional acquisition of properties, facility improvement and
expansion fundings or construction financings during the next 12 months will be
funded with amounts available under our existing credit facilities, existing
long-term debt commitments, future long-term secured and unsecured debt and the
issuance of common or preferred equity or Units. Acquisitions of property,
facility improvement and expansion fundings and construction financings will be
made subject to our investment objectives and policies with the intention of
maximizing both current income and long-term growth in income.

As of September 30, 2001, long-term liquidity requirements consisted primarily
of maturities under our long-term debt. We anticipate that long-term liquidity
requirements will also include amounts required for acquisition of properties,
facility improvement and expansion fundings and construction financings. We
expect to meet 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.

20



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Our liquidity requirements with respect to future acquisitions of properties,
facility improvement and expansion fundings and construction financings may be
reduced to the extent that we use Units as consideration for such purchases.

During the second quarter of 2001, we received a commitment for $150.0 million
of long-term secured financing from Toyota Financial Services. The commitment
can be drawn down in multiple fundings under one or more debt instruments, and
each funding is subject to customary conditions precedent and lenders
satisfaction with the loan documentation. The terms of the commitment provide
for a 12-year term with interest at a spread over the one-month LIBOR rate.
During the third quarter of 2001, we borrowed $82.6 million under this
commitment to partially fund third quarter acquisitions and to repay amounts
outstanding under our short-term credit facilities. As of September 30, 2001,
we had $67.4 million available under this commitment.

On August 8, 2001, we sold 3,852,500 common shares (which includes the full
exercise of the underwriters over-allotment option to purchase 502,500 common
shares) in an underwritten public offering at a price to the public of $17.00
per share under our shelf registration statement filed with the SEC on March 2,
1999 (the Shelf Registration Statement). Net proceeds to the Company, after
deducting the discounts and commissions to the underwriters and other expenses
of this offering, totaled approximately $61.3 million. After the offering,
$134.5 million remains available under the Shelf Registration Statement for the
issuance of securities. The Company contributed the net proceeds of the
offering to the Operating Partnership in exchange for Units in the Operating
Partnership and the Operating Partnership used the proceeds to fund a portion
of the purchase price of the CarMax acquisition as described in the Third
Quarter Acquisitions section herein.

We have adopted a policy to limit debt to approximately 65% of our assets
(calculated as total assets plus accumulated depreciation). As of September
30, 2001, our debt was approximately 54.6% of our assets. This policy may be
changed by our Board of Trustees at any time without shareholder approval. In
addition, to minimize interest rate risk, we generally match the term of our
long-term leases with that of our debt as well as the type of leases with the
type of debt (fixed or variable) in order to maintain an investment spread over
the lease term. We describe this process as match-funding. We currently
intend to match-fund at least 70% of our total outstanding long-term debt with
long-term leases. As of September 30, 2001, approximately 87% of our debt
outstanding (including the $82.6 million of variable rate debt that will become
fixed rate debt effective July 1, 2002, under our interest rate swap) was
substantially match-funded, non-recourse debt. We may change the 70% guideline
at any time without shareholder approval. As of September 30, 2001, our
long-term debt had a weighted average remaining term of 10.8 years, and our
leases had a weighted average remaining lease term of 11.5 years.

We may offer our 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, generally LIBOR. In addition, the monthly base rent
is typically adjusted upward periodically, usually based on a factor of the
change in the CPI. As of September 30, 2001, $288.0 million of our $1.2
billion real estate portfolio, or 24%, was subject to variable rate leases.
Of the total variable rate leases, the majority of the lease agreements contain
minimum cap rates and fixed rate conversion features. Upon conversion, the
fixed base rent typically continues to be adjusted upward periodically based on
a factor of the change in the CPI. Such leases generally are or will be
financed with long-term, variable rate debt thereby fixing our investment
spread. As of September 30, 2001, $321.0 million of our total outstanding debt
was variable rate debt. At the end of the third quarter, we entered into an
agreement with a third party to swap $82.6 million of the variable rate debt to
a 7.31% fixed rate, effective July 1, 2002.

In light of our current balance sheet position, we believe that we will be able
to obtain additional financing for our short-term and long-term capital needs
without exceeding our debt to asset ratio policy. 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.

21



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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 our management. During
the three months ended September 30, 2001, we did not repurchase any common
shares. During the nine months ended September 30, 2001, we repurchased 10,000
common shares at an average price of $14.19 per common share. From the
inception of the share repurchase program through September 30, 2001, a total
of 4,094,700 common shares have been repurchased at an average price of $10.62
per share. In conjunction with the common share repurchases, the Operating
Partnership redeemed an equivalent number of Units from the Company for
equivalent purchase prices.

Dividend Reinvestment and Share Purchase Plan

During April 2000, the Company implemented a Dividend Reinvestment and Share
Purchase Plan, which was subsequently amended in March 2001 (the DRIP). 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 more fully described in the Prospectus
relating to the DRIP. Shares purchased under the DRIP through reinvestment of
dividends are purchased at a discount (currently 3%). 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 the Company or in open market or
privately negotiated transactions, as determined from time to time by the
Company, to fulfill the requirements for the DRIP. For the three months ended
September 30, 2001, we issued approximately 1,800 common shares under the DRIP
and received approximately $30,000 in net proceeds. For the nine months ended
September 30, 2001, we issued approximately 453,000 common shares under the
DRIP and received approximately $6.3 million in net proceeds.

Offer to Purchase Warrants

On November 7, 2001, our Board of Trustees authorized the Company to make an
offer to purchase approximately 2.7 million outstanding warrants to purchase
common shares at a price of $3.25 per warrant share. The purchase price is based on
the average closing price of our common shares on the Nasdaq National Market
over the previous 15 trading days, prior to November 7, 2001, less a discount
of approximately 5.2% of that average closing price and less the exercise price
per warrant share of $15.00. Potential liquidity constraints and transaction
costs were taken into consideration in determining the discount. The offer
commenced on November 9, 2001 and is scheduled to expire on November 26, 2001.
The Company estimates that the aggregate purchase price, assuming all warrants
are tendered from the offer, will be approximately $8.9 million. The Company
intends to fund this purchase and related expenses with cash on hand or debt.

FUNDS FROM OPERATIONS

Funds From Operations (FFO) is defined under the revised definition adopted
in October 1999 by the National Association of Real Estate Investment Trusts
(NAREIT) as net income (loss) before minority interest and extraordinary item
(computed in accordance with generally accepted accounting principles)

22



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##### 



excluding gains (or losses) from sales of property plus depreciation and
amortization of assets unique to the real estate industry, and after
adjustments for unconsolidated partnerships and joint ventures.

NAREIT developed FFO as a relative measure of performance and liquidity of an
equity REIT in order to recognize that income-producing real estate
historically has not depreciated on the basis determined under GAAP. FFO does
not represent cash flows from operating activities in accordance with generally
accepted accounting principles (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, 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.

FFO for the three months and nine months ended September 30, 2001 and September
30, 2000 is computed as follows (in thousands):

|                                                                                               |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                               |  | Three Months Ended |        | Nine Months Ended
|                                                                                               |  | September 30,      |        | September 30,    
|                                                                                               |  |                    |        |                  
|                                                                                               |  | 2001               |        | 2000              |  | 2001 |        | 2000
|                                                                                               |  |                    |        |                   |  |      |        |     
|Net Income before Minority Interest and
Extraordinary Item                                     |  | $                  | 11,056 |                   |  | $    | 9,106  |      |  | $ | 30,442 |   |  | $ | 26,936 |  
|Real Estate Depreciation and Amortization                                                      |  |                    | 5,461  |                   |  |      | 4,395  |      |  |   | 15,581 |   |  |   | 13,000 |  
|Gain on Sale of Assets                                                                         |  |                    | (125   | )                 |  |      |       |      |  |   | (125   | ) |  |   | (311   | )
|                                                                                               |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Funds From Operations                                                                          |  | $                  | 16,392 |                   |  | $    | 13,501 |      |  | $ | 45,898 |   |  | $ | 39,625 |  
|                                                                                               |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted Average Number of Common Shares
and Units Used to Compute Basic FFO per
Share         |  |                    | 32,433 |                   |  |      | 29,166 |      |  |   | 30,847 |   |  |   | 29,200 |  
|                                                                                               |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted Average Number of Common Shares
and Units Used to Compute Fully Diluted
FFO per Share |  |                    | 33,763 |                   |  |      | 29,452 |      |  |   | 31,714 |   |  |   | 29,394 |  
|                                                                                               |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  

ITEM III. 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.

During the nine months ended September 30, 2001, our fixed rate debt decreased
from $481.9 million at December 31, 2000 to $324.1 million as of September 30,
2001. Interest rate fluctuations may affect the fair value of our fixed rate
debt instruments. If interest rates on our fixed rate debt instruments at
September 30, 2001 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 $17.4

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##### 



million.

During the nine months ended September 30, 2001, our variable rate debt
increased from $103.8 million as of December 31, 2000 to $342.7 million as of
September 30, 2001. In addition, our real estate investments which are leased
by tenants utilizing our variable lease rate program increased from $78.8
million as of December 31, 2000 to $288.0 million as of September 30, 2001.
Interest rate fluctuations may affect our annual interest expense on our
variable rate debt as well as our annual rental income on our variable rate
leases. Because the interest rates on our short-term and long-term variable
rate debt and the base rents on our variable rate leases are based on a spread
over an applicable index, the increase or decrease in interest expense as a
result of a one percentage point increase or decrease in the interest rate on
our variable rate debt would be substantially offset by the increase or
decrease in the rental income from our variable rate leases as a result of the
increase or decrease in the index used to calculate the base rent. Therefore,
we exclude the $288.0 million from our total variable rate debt of $342.7
million in calculating the effect of a change in interest rates on our variable
rate debt. A change in interest rates would, however, affect the interest due
on our remaining $54.7 million of variable rate debt. If interest rates on
this portion of our variable rate debt had been one percentage point higher or
lower, our annual interest expense relating to those debt instruments would
have increased or decreased, respectively, by approximately $547,000, based on
balances at September 30, 2001.

24



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##### 



CAPITAL AUTOMOTIVE REIT
PART II  OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 2. Changes in Securities

On August 8, 2001, we sold 3,852,500 common shares (which includes the full
exercise of the underwriters over-allotment option to purchase 502,500 common
shares) in an underwritten public offering at a price to the public of $17.00
per share under our shelf registration statement filed with the SEC on March 2,
1999 (the Shelf Registration Statement). Net proceeds to the Company, after
deducting the discounts and commissions to the underwriters and other expenses
of this offering, totaled approximately $61.3 million. After the offering,
$134.5 million remains available under the Shelf Registration Statement for the
issuance of securities. The Company contributed the net proceeds of the
offering to the Operating Partnership in exchange for Units in the Operating
Partnership and the Operating Partnership used the proceeds to fund a portion
of the purchase price of the CarMax acquisition as described in the Third
Quarter Acquisitions section herein.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to Vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits:

| |      |  |                                                                                                                                                                                                                                   
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 99.1 |  | Form of Lease Agreement and Form of First Amendment to Lease
Agreement for 49 separate leases, each between an affiliate of the
Registrant, as landlord, and an affiliate of Sonic Automotive, Inc.,
as tenant (filed herewith)   
|
| | 99.2 |  | Form of Lease Guaranty and Reaffirmation of Guaranty from Sonic
Automotive, Inc., relating to 49 separate leases with affiliates of
Sonic Automotive, Inc., in favor of affiliates of the Registrant, as
landlord (filed herewith)

(b)  Reports on Form 8-K



| | (1) |  | A current report on Form 8-K dated August 10, 2001 and filed with the
Securities and Exchange
| | --- |  | ---------------------------------------------------------------------------------------------

25



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##### 





| |     |  | Commission on August 24, 2001 (File No. 000-23733), reporting under Item 2
of Form 8-K, the acquisition of nine automotive retail properties from
certain entities of the CarMax Group, a division of Circuit City Stores,
Inc. (the CarMax Acquisition).                                                                                                                                              
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | A current report on Form 8-K/A dated August 10, 2001 and filed with
the Securities and Exchange Commission on September 19, 2001 (File No.
000-23733). This Form 8-K/A amended the Form 8-K dated August 10, 2001
and filed August 24, 2001, to include the financial statements required
by Item 7 of Form 8-K in connection with the CarMax Acquisition. The
following financial statements were filed:



| |  |  | Pro Forma (Unaudited) Consolidated Balance Sheet of the
Registrant as of June 30, 2001;                                 
| | - |  | ------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Pro Forma (Unaudited) Consolidated Statement of Operations of
the Registrant for the six months ended June 30, 2001; and
|
| |  |  | Pro Forma (Unaudited) Consolidated Statement of Operations of
the Registrant for the year ended December 31, 2000.      

26



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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. Eckert
Thomas D. Eckert
President and Chief Executive Officer
(principal executive officer)             
|                        
|                        
|                         |  | BY:                                  | /s/  David S. Kay
David S. Kay
Vice President and Chief Financial Officer
(principal financial and accounting officer)
|                        
|Dated: November 13, 2001 |  |                                      |                                                                                                                       

27