##### 



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, 2003

|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|(  ) |  | 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)

8270 Greensboro Drive, Suite 950, McLean, Virginia 22102
(Address of principal executive offices and zip code)

(703) 288-3075
(Registrants telephone Number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes   (X)    No  (  )

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes   (X)    No  (  )

Number of common shares of beneficial interest outstanding as of October 31,
2003 was 32,594,289.

1



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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, 2003 (unaudited) and
December 31, 2002.                                                          |    |          | 3      | 
|                               |                                                                                                | Consolidated Statements of Operations (unaudited)  three months
and nine months ended September 30, 2003 and September 30, 2002.            |    |          | 4      | 
|                               |                                                                                                | Consolidated Statements of Cash Flows (unaudited)  nine months ended
September 30, 2003 and September 30, 2002.                             |    |          | 5      | 
|                               |                                                                                                | Consolidated Statements of Changes in Shareholders Equity and Other
Comprehensive Income (unaudited)  nine months ended
September 30, 2003 |    |          | 6      | 
|                               |                                                                                                | Notes to Consolidated Financial Statements (unaudited)                                                                                       |    |          | 7  18 | 
|                               | Item 2  Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                                                              |    | 19  33  |       
|                               | Item 3  Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                                                              |    | 33  34  |       
|                               | Item 4  Controls and Procedures                                                               |                                                                                                                                              |    | 34  36  |       
|Part II  Other Information    |                                                                                                |                                                                                                                                              |    |         
|                               | Item 1  Legal Proceedings                                                                     |                                                                                                                                              |    | 37       |       
|                               | Item 2  Changes in Securities                                                                 |                                                                                                                                              |    | 37       |       
|                               | Item 3  Defaults Upon Senior Securities                                                       |                                                                                                                                              |    | 37       |       
|                               | Item 4  Submission of Matters to Vote to Security Holders                                     |                                                                                                                                              |    | 37       |       
|                               | Item 5  Other Information                                                                     |                                                                                                                                              |    | 37       |       
|                               | Item 6  Exhibits and Reports on Form 8-K                                                      |                                                                                                                                              |    | 37       |       
|Signatures                     |                                                                                                |                                                                                                                                              | 38 |         

2



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##### 



PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CAPITAL AUTOMOTIVE REIT
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

|                                                                                                                                                                                                               |                            |                   |                                            |           |               |           |              |         |           |           | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ----------------- | ------------------------------------------ | --------- | ------------- | --------- | ------------ | ------- | --------- | --------- | 
|                                                                                                                                                                                                               |                            |                   |                                            |           | September 30, |           | December 31,
|                                                                                                                                                                                                               |                            |                   |                                            |           | 2003          |           | 2002        
|                                                                                                                                                                                                               |                            |                   |                                            |           |               |           |             
|                                                                                                                                                                                                               |                            |                   |                                            |           | (Unaudited)   |           |              |         |          
|ASSETS                                                                                                                                                                                                         |                            |                   |                                            |           |               |           |              |        
|Real estate:                                                                                                                                                                                                   |                            |                   |                                            |           |               |           |              |        
|                                                                                                                                                                                                               | Land                       |                   | $                                          | 688,115   |               |           | $            | 632,868 |          
|                                                                                                                                                                                                               | Buildings and improvements |                   |                                            | 1,014,656 |               |           |              | 941,285 |          
|                                                                                                                                                                                                               | Accumulated depreciation   |                   |                                            | (108,124  | )             |           |              | (85,523 | )        
|                                                                                                                                                                                                               |                            |                   |                                            |           |               |           |              |        
|                                                                                                                                                                                                               |                            |                   | 1,594,647                                  |           |               |           | 1,488,630    |        
|Cash and cash equivalents                                                                                                                                                                                      |                            |                   | 18,143                                     |           |               |           | 7,442        |        
|Other assets, net                                                                                                                                                                                              |                            |                   | 53,643                                     |           |               |           | 46,398       |        
|                                                                                                                                                                                                               |                            |                   |                                            |           |               |           |              |        
|                                                                                                                                                                                                               |                            | Total Assets      |                                            | $         | 1,666,433     |           |              | $       | 1,542,470 |          
|                                                                                                                                                                                                               |                            |                   |                                            |           |               |           |              |        
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                           |                            |                   |                                            |           |               |           |              |        
|Liabilities:                                                                                                                                                                                                   |                            |                   |                                            |           |               |           |              |        
|Mortgage debt                                                                                                                                                                                                  |                            | $                 | 1,017,616                                  |           |               | $         | 898,733      |        
|Borrowings under credit facilities                                                                                                                                                                             |                            |                   | 30,002                                     |           |               |           | 111,096      |        
|Accounts payable and accrued expenses                                                                                                                                                                          |                            |                   | 30,867                                     |           |               |           | 29,022       |        
|Security deposits payable                                                                                                                                                                                      |                            |                   | 7,230                                      |           |               |           | 6,948        |        
|                                                                                                                                                                                                               |                            |                   |                                            |           |               |           |              |        
|                                                                                                                                                                                                               |                            | Total Liabilities |                                            |           | 1,085,715     |           |              |         | 1,045,799 |          
|                                                                                                                                                                                                               |                            |                   |                                            |           |               |           |              |        
|Minority Interest                                                                                                                                                                                              |                            |                   | 118,596                                    |           |               |           | 116,048      |        
|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,
32,449,746 shares issued and outstanding as of September 30, 2003 and
28,321,396 shares issued and outstanding as of December 31, 2002 |                            |                   | 324                                        |           |               |           | 283          |        
|Additional paid-in-capital                                                                                                                                                                                     |                            |                   |                                           |           |               |           | 413,688      |        
|Deferred compensation                                                                                                                                                                                          |                            |                   |                                           |           |               |           | (1,550       | )      
|Accumulated other comprehensive income (loss)                                                                                                                                                                  |                            |                   |                                           |           |               |           | (16,274      | )      
|Distributions in excess of accumulated earnings                                                                                                                                                                |                            |                   | 37,718                                     |           |               |           | (15,524      | )      
|                                                                                                                                                                                                               |                            |                   |                                            |           |               |           |              |        
|                                                                                                                                                                                                               |                            |                   | Total Shareholders Equity                 |           |               | 38,042    |              |         |           | 380,623   | 
|                                                                                                                                                                                                               |                            |                   |                                            |           |               |           |              |        
|                                                                                                                                                                                                               |                            |                   | Total Liabilities and Shareholders Equity |           | $             | 1,242,353 |              |         | $         | 1,542,470 | 
|                                                                                                                                                                                                               |                            |                   |                                            |           |               |           |              |        

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,    
|                                                                              |                               |   | 2003               |        | 2002              |   | 2003   |        | 2002
|                                                                              |                               |   |                    |        |                   |   |        |        |     
|Revenue:                                                                      |                               |   |                    |        |                   |   |        |        |      |   |         |         |  |   |         |        
|Rental                                                                        |                               | $ | 43,013             |        |                   | $ | 36,067 |        |      | $ | 125,309 |         |  | $ | 102,243 |        
|Interest and other                                                            |                               |   | 144                |        |                   |   | 241    |        |      |   | 783     |         |  |   | 505     |        
|                                                                              |                               |   |                    |        |                   |   |        |        |      |   |         |         |  |   |         |        
|                                                                              | Total revenue                 |   |                    | 43,157 |                   |   |        | 36,308 |      |   |         | 126,092 |  |   |         | 102,748 | 
|                                                                              |                               |   |                    |        |                   |   |        |        |      |   |         |         |  |   |         |        
|Expenses:                                                                     |                               |   |                    |        |                   |   |        |        |      |   |         |         |  |   |         |        
|Depreciation and amortization                                                 |                               |   | 7,834              |        |                   |   | 6,776  |        |      |   | 22,936  |         |  |   | 18,933  |        
|General and administrative                                                    |                               |   | 2,546              |        |                   |   | 2,026  |        |      |   | 7,172   |         |  |   | 6,136   |        
|Interest                                                                      |                               |   | 16,323             |        |                   |   | 13,558 |        |      |   | 48,160  |         |  |   | 35,376  |        
|                                                                              |                               |   |                    |        |                   |   |        |        |      |   |         |         |  |   |         |        
|                                                                              | Total expenses                |   |                    | 26,703 |                   |   |        | 22,360 |      |   |         | 78,268  |  |   |         | 60,445  | 
|                                                                              |                               |   |                    |        |                   |   |        |        |      |   |         |         |  |   |         |        
|Income from continuing operations before minority interest                    |                               |   | 16,454             |        |                   |   | 13,948 |        |      |   | 47,824  |         |  |   | 42,303  |        
|Minority interest                                                             |                               |   | (3,383             | )      |                   |   | (3,286 | )      |      |   | (10,335 | )       |  |   | (10,013 | )      
|                                                                              |                               |   |                    |        |                   |   |        |        |      |   |         |         |  |   |         |        
|Income from continuing operations                                             |                               |   | 13,071             |        |                   |   | 10,662 |        |      |   | 37,489  |         |  |   | 32,290  |        
|Income from discontinued operations                                           |                               |   |                   |        |                   |   | 40     |        |      |   | 171     |         |  |   | 180     |        
|Gain on sale of real estate                                                   |                               |   |                   |        |                   |   | 222    |        |      |   | 58      |         |  |   | 222     |        
|                                                                              |                               |   |                    |        |                   |   |        |        |      |   |         |         |  |   |         |        
|                                                                              | Total discontinued operations |   |                    |       |                   |   |        | 262    |      |   |         | 229     |  |   |         | 402     | 
|                                                                              |                               |   |                    |        |                   |   |        |        |      |   |         |         |  |   |         |        
|Net income                                                                    |                               | $ | 13,071             |        |                   | $ | 10,924 |        |      | $ | 37,718  |         |  | $ | 32,692  |        
|                                                                              |                               |   |                    |        |                   |   |        |        |      |   |         |         |  |   |         |        
|Shares of common stock outstanding used to
compute basic earnings per share   |                               |   | 31,919             |        |                   |   | 27,917 |        |      |   | 30,303  |         |  |   | 27,291  |        
|                                                                              |                               |   |                    |        |                   |   |        |        |      |   |         |         |  |   |         |        
|Basic earning per share:                                                      |                               |   |                    |        |                   |   |        |        |      |   |         |         |  |   |         |        
|Income from continuing operations                                             |                               | $ | 0.41               |        |                   | $ | 0.38   |        |      | $ | 1.24    |         |  | $ | 1.18    |        
|Net income                                                                    |                               | $ | 0.41               |        |                   | $ | 0.39   |        |      | $ | 1.24    |         |  | $ | 1.20    |        
|Shares of common stock outstanding used to
compute diluted earnings per share |                               |   | 32,731             |        |                   |   | 28,956 |        |      |   | 31,198  |         |  |   | 28,454  |        
|                                                                              |                               |   |                    |        |                   |   |        |        |      |   |         |         |  |   |         |        
|Diluted earnings per share:                                                   |                               |   |                    |        |                   |   |        |        |      |   |         |         |  |   |         |        
|Income from continuing operations                                             |                               | $ | 0.40               |        |                   | $ | 0.37   |        |      | $ | 1.21    |         |  | $ | 1.15    |        
|Net income                                                                    |                               | $ | 0.40               |        |                   | $ | 0.38   |        |      | $ | 1.22    |         |  | $ | 1.16    |        
|Dividends declared per share                                                  |                               | $ | 0.4110             |        |                   | $ | 0.3980 |        |      | $ | 1.2260  |         |  | $ | 1.1805  |        

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,
|                                                                                  |                                           |   | 2003                            |          | 2002
|                                                                                  |                                           |   |                                 |          |     
|Cash flows from operating activities:                                             |                                           |   |                                 |          |      |   |          |         
|Net income                                                                        |                                           | $ | 37,718                          |          |      | $ | 32,692   |         
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                           |   |                                 |          |      |   |          |         
|Gain on disposition of real estate net of minority interest                       |                                           |   | (58                             | )        |      |   | (222     | )       
|Stock compensation expense                                                        |                                           |   | 853                             |          |      |   | 869      |         
|Depreciation and amortization                                                     |                                           |   | 24,797                          |          |      |   | 20,077   |         
|Income from continuing operations applicable to minority interest                 |                                           |   | 10,335                          |          |      |   | 10,013   |         
|Income from discontinued operations applicable to minority interest               |                                           |   | 49                              |          |      |   | 57       |         
|Increase in other assets                                                          |                                           |   | (3,503                          | )        |      |   | (8,184   | )       
|Increase in accounts payable and accrued expenses                                 |                                           |   | 1,877                           |          |      |   | 4,329    |         
|Increase (decrease) in security deposits payable                                  |                                           |   | 282                             |          |      |   | (67      | )       
|                                                                                  |                                           |   |                                 |          |      |   |          |         
|                                                                                  | Net cash provided by operating activities |   |                                 | 72,350   |      |   |          | 59,564   |  
|                                                                                  |                                           |   |                                 |          |      |   |          |         
|Cash flows from investing activities:                                             |                                           |   |                                 |          |      |   |          |         
|Purchase of furniture and equipment                                               |                                           |   | (44                             | )        |      |   | (71      | )       
|Real estate acquisitions                                                          |                                           |   | (130,906                        | )        |      |   | (280,339 | )       
|Real estate dispositions                                                          |                                           |   | 1,928                           |          |      |   | 7,524    |         
|                                                                                  |                                           |   |                                 |          |      |   |          |         
|                                                                                  | Net cash used in investing activities     |   |                                 | (129,022 | )    |   |          | (272,886 | )
|                                                                                  |                                           |   |                                 |          |      |   |          |         
|Cash flows from financing activities:                                             |                                           |   |                                 |          |      |   |          |         
|Proceeds from borrowings under credit facilities                                  |                                           |   | 58,000                          |          |      |   | 251,712  |         
|Proceeds from mortgage debt                                                       |                                           |   | 234,480                         |          |      |   | 205,385  |         
|Repayment of borrowings under credit facilities                                   |                                           |   | (139,094                        | )        |      |   | (169,220 | )       
|Repayment of mortgage debt                                                        |                                           |   | (91,638                         | )        |      |   |         |         
|Mortgage principal payments                                                       |                                           |   | (23,959                         | )        |      |   | (16,093  | )       
|Payments for debt issuance costs                                                  |                                           |   | (6,636                          | )        |      |   | (7,311   | )       
|Decrease (increase) in restricted cash                                            |                                           |   | 1,178                           |          |      |   | (12,368  | )       
|Payment of cash dividend                                                          |                                           |   | (33,673                         | )        |      |   | (32,432  | )       
|Distributions to minority partners                                                |                                           |   | (10,234                         | )        |      |   | (9,862   | )       
|Payment for the purchase of outstanding warrants to purchase common shares        |                                           |   |                                |          |      |   | (6,328   | )       
|Redemption of units of limited partnership interest in the Partnership            |                                           |   |                                |          |      |   | (153     | )       
|Proceeds from follow-on offering, net of costs                                    |                                           |   | 66,430                          |          |      |   |         |         
|Proceeds from issuance of other common shares, net of costs                       |                                           |   | 12,519                          |          |      |   | 17,132   |         
|                                                                                  |                                           |   |                                 |          |      |   |          |         
|                                                                                  | Net cash provided by financing activities |   |                                 | 67,373   |      |   |          | 220,462  |  
|                                                                                  |                                           |   |                                 |          |      |   |          |         
|Net increase in cash and cash equivalents                                         |                                           |   | 10,701                          |          |      |   | 7,140    |         
|Cash and cash equivalents at beginning of period                                  |                                           |   | 7,442                           |          |      |   | 9,490    |         
|                                                                                  |                                           |   |                                 |          |      |   |          |         
|Cash and cash equivalents at end of period                                        |                                           | $ | 18,143                          |          |      | $ | 16,630   |         
|                                                                                  |                                           |   |                                 |          |      |   |          |         
|Supplemental Data:                                                                |                                           |   |                                 |          |      |   |          |         
|Real estate acquisitions in exchange for equity issuance                          |                                           | $ |                                |          |      | $ | 19,000   |         
|                                                                                  |                                           |   |                                 |          |      |   |          |         
|Interest paid during the period                                                   |                                           | $ | 45,404                          |          |      | $ | 29,465   |         
|                                                                                  |                                           |   |                                 |          |      |   |          |         

See accompanying Notes to Consolidated Financial Statements.

5



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##### 



CAPITAL AUTOMOTIVE REIT
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY AND OTHER COMPREHENSIVE INCOME
(in thousands, except share data)

Distributions in
      
      
      
      
      
      AccumulatedAdditional
      
      Excess of
      
      
      
      
      
      Other
      
      
      
      
      
      OtherCommon Shares
      
      Paid-in
      
      Accumulated
      
      Deferred
      
      Comprehensive
      
      
      
      
      
      ComprehensiveShares
      
      Par Value
      
      Capital
      
      Earnings
      
      Compensation
      
      Income (Loss)
      
      Total
      
      IncomeBalance
          at December 31, 2002 (audited)
      
      
      28,321,396
      
      
      $
      283
      
      
      $
      413,688
      
      
      $
      (15,524
      )
      
      $
      (1,550
      )
      
      $
      (16,274
      )
      
      $
      380,623Adjustment
          to reflect minority interest ownership in
          Partnership
      
      
      
      
      
      
      
      
      
      
      (6,245
      )
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (6,245
      )
      
      
      Proceeds
          from follow-on offering, net of costs
      
      
      2,702,500
      
      
      
      27
      
      
      
      66,403
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      66,430
      
      
      
      Issuance
          of common shares from dividend reinvestment and share purchase plan,
          net of costs
      
      
      167,349
      
      
      
      1
      
      
      
      4,307
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      4,308
      
      
      
      Issuance
          of restricted shares, net of forfeitures
      
      
      60,569
      
      
      
      1
      
      
      
      1,398
      
      
      
      
      
      
      
      (1,399
      )
      
      
      
      
      
      
      
      
      
      
      Amortization
          of deferred compensation
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      727
      
      
      
      
      
      
      
      727
      
      
      
      Issuance
          of phantom shares, net of forfeitures
      
      
      12,460
      
      
      
      
      
      
      
      103
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      103
      
      
      
      Exercise
          of common stock options and warrants
      
      
      891,898
      
      
      
      9
      
      
      
      12,431
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      12,440
      
      
      
      Redemption
          of units of limited partnership interest in the
          Partnership to common shares
      
      
      293,574
      
      
      
      3
      
      
      
      3,864
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      3,867
      
      
      
      Accrued
          compensation
      
      
      
      
      
      
      
      
      
      
      126
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      126
      
      
      
      Change
          in valuation of interest rate swap
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (162
      )
      
      
      (162
      )
      
      
      (162
      )Change
          in valuation of interest rate swap attributable to
          minority interest
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      35Dividends
          declared
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (37,813
      )
      
      
      
      
      
      
      
      
      
      
      (37,813
      )
      
      
      Net
          income
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      37,718
      
      
      
      
      
      
      
      
      
      
      
      37,718
      
      
      
      37,718Balance
          at September 30, 2003 (unaudited)
      
      
      32,449,746
      
      
      $
      324
      
      
      $
      496,075
      
      
      $
      (15,619
      )
      
      $
      (2,222
      )
      
      $
      (16,436
      )
      
      $
      462,122
      
      
      $
      37,591


See accompanying Notes to Consolidated Financial Statements.

6



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##### 



CAPITAL AUTOMOTIVE REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.     ORGANIZATION AND BASIS OF PRESENTATION

Organization

Capital Automotive REIT, which we refer to as the Company, is a Maryland real
estate investment trust formed in October 1997. We own interests in real
estate and conduct our operations, directly or indirectly, through Capital
Automotive L.P., which we refer to as the Partnership, and its subsidiaries.
We are the sole general partner of the Partnership and, as of September 30,
2003, owned approximately 79.6% of the units of limited partnership interest in
the Partnership, which we refer to as Units. References to we, us and
our refer to the Company or, if the context requires, the Partnership and our
business and operations conducted through the Partnership and/or directly or
indirectly owned subsidiaries.

Our primary business strategy is to purchase real estate (land, buildings and
other improvements), which we simultaneously lease to operators of franchised
automobile dealerships and motor vehicle service, repair or parts businesses,
used vehicle businesses and other related businesses under long-term,
triple-net leases. Triple-net leases typically require the tenant to pay all
operating expenses of a property, including, but not limited to, all real
estate taxes, assessments and other government charges, insurance, utilities,
repairs and maintenance. We use (i) the term dealerships to refer to these
types of businesses that are operated on our properties, and (ii) the terms
dealer group, tenant or operators of dealerships to refer to the persons and
companies that lease our properties. We focus on leasing properties to dealer
groups that have a long history of operating multi-site, multi-franchised
dealerships, generally targeting the largest dealer groups in terms of revenues
in the largest metropolitan areas in the U.S. in terms of population. In
addition, we provide facility improvement and expansion funding, construction
financing and takeout commitments in certain situations.

As of September 30, 2003, we had invested more than $1.7 billion in 313
properties located in 30 states (Alabama, Arizona, California, Colorado,
Connecticut, Florida, Georgia, Idaho, Illinois, Indiana, Louisiana, Maryland,
Michigan, Mississippi, Missouri, Nevada, New Jersey, New Mexico, New York,
North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South
Carolina, Tennessee, Texas, Utah and Virginia), consisting of approximately
2,234 acres of land and containing approximately 12.8 million square feet of
buildings and improvements. Our tenants operate 436 motor vehicle franchises
on our properties, representing 43 brands of motor vehicles, which include all
of the top selling brands in the U.S. The initial lease terms generally range
from 10 to 20 years (with a weighted average initial lease term for leases
entered into during the quarter ended September 30, 2003 of approximately 17.7
years), with our entire portfolio having a weighted average initial lease term
of approximately 14.4 years. As of September 30, 2003, our portfolio had a
weighted average remaining lease term of approximately 11.2 years. The leases
typically have options to renew upon generally the same terms and conditions
for one or more additional periods of five to 10 years each, exercisable at the
option of the tenants (with renewal options typically ranging from a total of
five to 40 years).

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared
by management in accordance with accounting principles generally accepted in
the United States, commonly referred to as GAAP, for interim financial
information and in conformity with the rules and regulations of the Securities
and Exchange Commission, commonly referred to as the SEC. Accordingly, they do
not include all of the information and footnotes required by GAAP for complete
financial statements. In the

7



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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, 2003, 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, 2002.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements of the Company have been
prepared in accordance with GAAP and include the accounts of the Company, its
wholly owned subsidiaries, and other entities where the Company has a majority
ownership, all of which it controls. The equity interests of other limited
partners are reflected as minority interest. All significant intercompany
transactions and balances have been eliminated in consolidation.

Real Estate and Depreciation

The purchase price of real estate properties acquired is allocated to the
various components, such as land, buildings and improvements, and in-place
leases, in accordance with Statement of Financial Accounting Standards No. 141,
commonly referred to SFAS No. 141. The purchase price is allocated based on
the fair value of each component at the time of acquisition. The fair value of
the buildings and improvements are recorded at their replacement cost. Any
significant amounts paid above or below the fair value of the land and building
and improvements acquired would be recorded as a lease intangible asset or
liability and amortized and recorded as an increase or reduction to rental
income over the remaining life of the associated lease. Based on our analysis,
we had not recorded any lease intangible assets or liabilities as of September
30, 2003 and December 31, 2002. External acquisition costs directly related to
each property are capitalized as a cost of the respective property.

Depreciation is computed using the straight-line method over an estimated
useful life of 20 to 45 years for the buildings and improvements. Real estate
depreciation expense was approximately $7.8 million and $6.7 million for the
three months ended September 30, 2003 and 2002, respectively. Real estate
depreciation expense was approximately $22.8 million and $18.9 million for the
nine months ended September 30, 2003 and 2002, respectively.

Furniture, Fixtures and Equipment

Furniture, fixtures and equipment are recorded at cost. Depreciation is
calculated on a straight-line basis over the estimated useful lives of the
assets, ranging from three to five years. Total depreciation expense related
to our furniture, fixtures and equipment was approximately $18,000 and $20,000
for the three months ended September 30, 2003 and 2002, respectively. Total
depreciation expense related to our furniture, fixtures and equipment was
approximately $58,000 and $55,000 for the nine months ended September 30, 2003
and 2002, respectively.

Cash and Cash Equivalents

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

8



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Restricted Cash

Restricted cash consists primarily of cash reserved to fund debt service
payments and funds invested in cash collateral accounts. The purpose of the
cash collateral accounts is to hold funds, generally in the amount of the
interest rate swap valuations at any point in time, to protect lenders in case
of an early termination of the existing swaps by us. The cash collateral
accounts are controlled by the lenders, however, we earn the interest on the
funds held. Restricted cash is included in other assets and totaled
approximately $15.1 million and $16.1 million as of September 30, 2003 and
December 31, 2002, respectively.

Deferred Loan Costs

Certain costs incurred in connection with our revolving credit facilities and
issuing mortgage debt are capitalized and generally amortized over the terms of
the respective revolving credit facility or mortgage debt using the effective
interest method or on a straight-line basis, which approximates the effective
interest method. Deferred loan costs include lender fees and other third party
costs. These costs, net of accumulated amortization, are included in other
assets and total approximately $18.4 million and $13.4 million as of September
30, 2003 and December 31, 2002, respectively. Loan cost amortization expense
was approximately $675,000 and $550,000 for the three months ended September
30, 2003 and 2002, respectively. Loan cost amortization expense was
approximately $1.9 million and $1.0 million for the nine months ended September
30, 2003 and 2002, respectively.

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. Capitalized leasing costs include employee compensation and
payroll-related fringe benefits directly related to time spent performing
leasing-related activities. These activities include evaluating the financial
condition of prospective clients, evaluating and recording guarantees,
collateral and other security arrangements, negotiating lease terms, preparing
lease documents and closing the transaction. These costs, net of accumulated
amortization, are included in other assets and total approximately $1.4 million
and $1.2 million as of September 30, 2003 and December 31, 2002, respectively.
Leasing cost amortization expense was approximately $44,000 and $36,000 for the
three months ended September 30, 2003 and 2002, respectively. Leasing cost
amortization expense was approximately $128,000 and $109,000 for the nine
months ended September 30, 2003 and 2002, respectively.

Income Taxes

We believe we are qualified and will continue to qualify as a real estate
investment trust, commonly referred to as a REIT, under the provisions of the
Internal Revenue Code of 1986, as amended. As a REIT, we are required to
distribute at least 90% of our taxable income to our shareholders and comply
with certain other requirements. We generally will not be subject to federal
income tax on taxable income that we distribute to our shareholders.

Rental Revenue Recognition

We lease our real estate pursuant to long-term, triple-net leases, under which
the tenants typically pay all operating expenses of a property, including, but
not limited to, all real estate taxes, assessments and other government
charges, insurance, utilities, repairs and maintenance. 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 by the lease agreement. However, under our
variable rate lease program, monthly base rent is calculated based on a spread
over an applicable index, typically LIBOR. As of September 30, 2003,
approximately $413 million of our more than $1.7

9



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billion real estate portfolio, or 24%, was subject to variable rate leases.
This compares to approximately $367.0 million of our approximately $1.5 billion
real estate portfolio, or 24%, that was subject to variable rate leases as of
September 30, 2002. The vast majority of our variable rate lease agreements
contain minimum lease rates, generally between 8% and 9%, and fixed rate
conversion features generally with minimum rates of 10.0% to 10.25%, and none
of these leases contains a maximum rate.

Our leases typically provide for upward periodic adjustments in base rent due
from our tenants, usually based on a factor of the change in the consumer price
index, commonly referred to as CPI. In addition, our leases are generally
subject to certain fixed minimum and/or maximum rent escalators during the
initial lease term. The fixed minimum rent escalations are straight-lined into
rental income over the initial lease term. Any rent adjustments above the
fixed minimum escalations are recorded as revenue in the period they are due
from the tenants. Straight-lined rents are included in other assets and
totaled approximately $15.5 million and $11.8 million as of September 30, 2003
and December 31, 2002, respectively. Straight-lined rental revenue was
approximately $1.2 million for the three months ended September 30, 2003 and
2002. Straight-lined rental revenue was approximately $3.7 million and $3.9
million for the nine months ended September 30, 2003 and 2002, respectively.

Derivative Instruments

To minimize interest rate risk, during 2002 and 2001, we entered into three
interest rate swap arrangements with third parties to fix the interest rate on
the underlying variable rate debt. These swaps were documented as cash flow
hedges and were designated as highly effective at the inception of the swap
agreements. Therefore, in accordance with GAAP, the unrealized gain or loss
upon measuring the swaps at their fair value is recorded as a component of
accumulated other comprehensive income (loss) within shareholders equity on
our consolidated balance sheets. The fair value of the swaps is recorded as
either a derivative instrument asset or a derivative instrument liability on
our consolidated balance sheets.

Share-Based Compensation

The Capital Automotive Group 1998 Equity Incentive Plan (as amended in February
1999 and as restated and amended in February 2002), which we refer to as the
Plan, provides equity compensation to our employees, officers, non-employee
trustees and certain other service providers. At September 30, 2003, we
accounted for our Plan under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. All options granted under this plan had exercise prices equal
to or greater than the market value of the underlying common stock on the date
of grant. Therefore, no compensation expense is reflected in net income for
stock option-based awards.

10



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The following table illustrates the effect on net income and earnings per share
if we had applied the fair value recognition provisions of the Financial
Accounting Standards Board, commonly referred to as FASB, Statement of
Financial Accounting Standards, commonly referred to as SFAS, No. 123,
Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting For
Stock-Based Compensation  Transition and Disclosure, to share-based
compensation (in thousands, except per share data).

|                                                                                                                                     |             |   |                      |      |                     |   |        |      |      |   |        |      |  |   |        |      | 
|------------------------------------------------------------------------------------------------------------------------------------ | ----------- | - | -------------------- | ---- | ------------------- | - | ------ | ---- | ---- | - | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                                                     |             |   | For the Three Months |      | For the Nine Months
|                                                                                                                                     |             |   | Ended September 30,  |      | Ended September 30,
|                                                                                                                                     |             |   | 2003                 |      | 2002                |   | 2003   |      | 2002
|                                                                                                                                     |             |   |                      |      |                     |   |        |      |     
|Net income, as reported                                                                                                              |             | $ | 13,071               |      |                     | $ | 10,924 |      |      | $ | 37,718 |      |  | $ | 32,692 |     
|Add: Share-based
compensation expense
included in reported net
income, net of minority
interest                                      |             |   | 198                  |      |                     |   | 225    |      |      |   | 669    |      |  |   | 663    |     
|Deduct: Total share-based
compensation expense
determined under the fair
value-based method for all
awards, net of minority
interest |             |   | (236                 | )    |                     |   | (332   | )    |      |   | (787   | )    |  |   | (1,077 | )   
|                                                                                                                                     |             |   |                      |      |                     |   |        |      |      |   |        |      |  |   |        |     
|Pro forma net income                                                                                                                 |             | $ | 13,033               |      |                     | $ | 10,817 |      |      | $ | 37,600 |      |  | $ | 32,278 |     
|Basic earnings per share:                                                                                                            |             |   |                      |      |                     |   |        |      |      |   |        |      |  |   |        |     
|                                                                                                                                     | As reported |   | $                    | 0.41 |                     |   | $      | 0.39 |      |   | $      | 1.24 |  |   | $      | 1.20 | 
|                                                                                                                                     | Pro forma   |   | $                    | 0.41 |                     |   | $      | 0.39 |      |   | $      | 1.24 |  |   | $      | 1.18 | 
|Diluted earnings per share:                                                                                                          |             |   |                      |      |                     |   |        |      |      |   |        |      |  |   |        |     
|                                                                                                                                     | As reported |   | $                    | 0.40 |                     |   | $      | 0.38 |      |   | $      | 1.22 |  |   | $      | 1.16 | 
|                                                                                                                                     | Pro forma   |   | $                    | 0.40 |                     |   | $      | 0.38 |      |   | $      | 1.21 |  |   | $      | 1.15 | 

Use of Estimates

The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.

Reclassifications

Certain amounts in the 2002 consolidated financial statements have been
reclassified to conform with the current year presentation.

3.     NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued FASB Interpretation No. 46, commonly referred
to as FIN 46, Consolidation of Variable Interest Entities. Under FIN 46,
companies will be required to determine if they are the primary beneficiary of
a variable interest entity, commonly referred to as a VIE. If they are the
primary beneficiary, the VIE must be consolidated. All companies with variable
interests in VIEs created after January 31, 2003 must apply the provisions of
FIN 46 immediately. Public companies with a variable interest in a VIE created
before February 1, 2003 were originally required to apply the
provisions of FIN 46 no later than the beginning of the first interim or annual
reporting period beginning

11



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after June 15, 2003. This requirement was
subsequently deferred by the FASB in October 2003 to the first interim or
annual period ending after December 15, 2003. FIN 46 has not had and we do
not expect that it will have a significant impact on our financial condition or
results of operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 requires that any gain or loss on extinguishment of debt that was
classified as an extraordinary item in prior periods presented that does not
meet the criteria in Accounting Principles Board Opinion No. 30 for
classification as an extraordinary item be reclassified. These gains and
losses will now be required to be presented within the statement of income in
appropriate segregated line items. SFAS No. 145 is effective for our fiscal
year beginning on January 1, 2003. As a result, we reclassified expenses
related to an extinguishment of debt during 2001 from an extraordinary item,
totaling $526,000 net of minority interest, to interest expense totaling
$702,000 before minority interest. This reclassification results in a decrease
in income from continuing operations before minority interest for 2001, but has
no impact on our net income.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. Instruments that are indexed
and potentially settled in an issuers own shares that are not within the scope
of SFAS No. 150 remain subject to existing guidance. SFAS No. 150 must be
applied immediately to instruments entered into or modified after May 31, 2003
and to all other instruments that exist as of the beginning of the first
interim financial reporting period beginning after June 15, 2003. On October
29, 2003, the FASB deferred the application of paragraphs 9 and 10 of SFAS No.
150 and determined that the application would be reconsidered as a component of
a separate, ongoing FASB project. Therefore, the effective date of its
application is currently undeterminable. The adoption of SFAS No. 150 has not
and is not expected to have a significant impact on our financial condition or
results of operations.

4.     ACQUISITIONS

During the three months ended September 30, 2003, we completed approximately
$24.4 million of property acquisitions, bringing total acquisitions for the
nine-month period ended September 30, 2003 to $130.8 million. The third quarter
acquisitions included one auto mall, four other auto retail properties and
construction and improvement fundings. These acquisitions contain nine
automotive franchises and added approximately 224,000 square feet of buildings
and improvements on approximately 28 acres of land. The leases have initial
lease terms ranging from 15 to 20 years, with a weighted average initial lease
term of 17.7 years. The leases have renewal options exercisable at the option
of the tenants ranging from a total of 20 to 40 years. The acquisitions were
funded with cash on hand and borrowings on our short-term revolving credit
facilities. A summary of the third quarter acquisitions is as follows:



| |  |  | Two properties totaling approximately $8.7 million leased to
affiliates of Sonic Automotive, Inc. (Sonic) located in Alabama.
Included in the acquisition is a collision center and an auto mall
that currently has three franchises (Audi, Land Rover and Porsche).
Three additional franchises (BMW, Cadillac and Lexus) will be
constructed on the auto mall during the next six months. We have
committed to fund approximately $18 million for the construction of
these new dealerships upon satisfactory completion of each facility
subject to due diligence and customary closing conditions. As of
September 30, 2003, we leased 86 properties to affiliates of Sonic,
representing approximately 23% of the Companys total annualized
rental revenue.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | One property totaling approximately $7.5 million leased to a
subsidiary of UnitedAuto Group,
Inc. (UnitedAuto) located in Arizona. A Ford franchise is operated on
the property. As of                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

12



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| |   |  | September 30, 2003, we leased 17 properties to
subsidiaries of UnitedAuto, representing approximately 11% of the
Companys total annualized rental revenue.                                                                                                                                                                                                                                                                                
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Two properties totaling approximately $5.5 million leased to
subsidiaries of Asbury Automotive Group, Inc. (Asbury) located in
Georgia and Mississippi. Five franchises (Buick, Cadillac,
Chevrolet, GMC and Pontiac) and a collision center are operated on
these properties. As of September 30, 2003, we leased 11 properties
to subsidiaries of Asbury, representing approximately 3% of the
Companys total annualized rental revenue.
|
| |  |  | Construction and improvement fundings, totaling approximately
$2.7 million, all of which were transacted with existing tenants.                                                                                                                                                                                                                                                                                                            

5.     DISCONTINUED 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 gains and losses from dispositions of properties and
all operating earnings from these properties be reported as discontinued
operations. This also requires that all past earnings applicable to a
property disposed of subsequent to January 1, 2002 be reported as discontinued
operations. As a result, previously reported income from continuing
operations will be updated each time a property is sold. This requirement is
for presentation only and has no impact on net income.

The following table is a summary of revenue from properties sold subsequent to
January 1, 2002 (not including the gain on the sale of the properties) and
total discontinued operations for the three months and nine months ended
September 30, 2003 and 2002:

|                                                         |  |                    |   |                   |  |      |         |      |  |   |         |  |  |   |         | 
|-------------------------------------------------------- |  | ------------------ | - | ----------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                                                         |  | Three Months Ended |   | Nine Months Ended
|                                                         |  | September 30,      |   | September 30,    
|                                                         |  |                    |   |                  
|                                                         |  | 2003               |   | 2002              |  | 2003 |         | 2002
|                                                         |  |                    |   |                   |  |      |         |     
|Revenue                                                  |  | $                  |  |                   |  | $    | 105,000 |      |  | $ | 226,000 |  |  | $ | 536,000 | 
|Total discontinued operations                            |  | $                  |  |                   |  | $    | 262,000 |      |  | $ | 229,000 |  |  | $ | 402,000 | 
|Number of properties
included in discontinued
operations |  |                    |  |                   |  |      | 4       |      |  |   | 1       |  |  |   | 4       | 

6.     MORTGAGE DEBT AND REVOLVING CREDIT FACILITIES

As of September 30, 2003, we had total mortgage debt outstanding of
approximately $1.02 billion (consisting of approximately $792.9 million of
fixed rate and approximately $224.7 million of variable rate debt), which was
secured by approximately 266 of our properties. In addition, we had
approximately $30.0 million outstanding on our revolving credit facilities.

13



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##### 



The following is a summary of our total debt outstanding as of September 30,
2003 and December 31, 2002 (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 |          | 2003 |               | 2002 |               | Rate*   |               | Schedule
|7.50% fixed rate debt due 4/20/03 (1)              |                                   | $           | 12,000   |      |               | $    |              |         |               | $        | 10,771       |         |       |  |     |      |   |                   | (1  | )
|7.59% fixed rate debt due 12/1/08 (2)              |                                   |             | 38,050   |      |               |      | 33,415        |         |               |          | 34,572       |         |       |  | 7.95 | %    |   | 10 yr/17 yr      
|7.54% fixed rate debt due 7/6/11 (3)               |                                   |             | 100,000  |      |               |      | 92,994        |         |               |          | 94,413       |         |       |  | 7.69 | %    |   | 12 yr/25 yr      
|7.565% fixed rate debt due 11/12/12 (4)            |                                   |             | 28,500   |      |               |      | 25,650        |         |               |          | 26,220       |         |       |  | 7.62 | %    |   | 12 yr/25 yr      
|7.5975% fixed rate debt due 12/18/12 (4)           |                                   |             | 32,054   |      |               |      | 29,212        |         |               |          | 29,781       |         |       |  | 7.59 | %    |   | 12 yr/30 yr      
|7.50% fixed rate debt due 8/10/13 (5)              |                                   |             | 82,600   |      |               |      | 77,093        |         |               |          | 79,158       |         |       |  | 7.62 | %    |   | 12 yr/30 yr      
|Triple Net Lease Mortgage Notes, Series 2002 (6)   |                                   |             | 325,000  |      |               |      | 309,535       |         |               |          | 318,995      |         |       |  | 7.70 | %    |   |                   | (6  | )
|Triple Net Lease Mortgage Notes, Series 2003-1
(7) |                                   |             | 228,000  |      |               |      | 225,002       |         |               |          |             |         |       |  | 5.86 | %    |   |                   | (7  | )
|                                                   |                                   |             |          |      |               |      |               |         |               |          |              |         |       |  |      |      |   |                   |     |  
|                                                   | Total Mortgage Fixed Rate Debt    |             |          |      |               |      | $             | 792,901 |               |          | $            | 593,910 |       |  |      | 7.17 | % |                   |     |   | 
|Variable rate debt due 9/29/11 (8)                 |                                   |             | 150,000  |      |               |      | 139,642       |         |               |          | 143,907      |         |       |  | 3.40 | %    |   | 12 yr/25 yr      
|                                                   |                                   |             |          |      |               |      |               |         |               |          |              |         |       |  |      |      |   | 10 to 12 yr/25 to
|Various variable rate debt (9)                     |                                   |             | 90,030   |      |               |      | 85,073        |         |               |          | 80,049       |         |       |  | 4.12 | %    |   | 30 yr            
|Short-term variable rate debt (10)                 |                                   |             | 80,867   |      |               |      |              |         |               |          | 80,867       |         |       |  |     |      |   |                   | (10 | )
|                                                   |                                   |             |          |      |               |      |               |         |               |          |              |         |       |  |      |      |   |                   |     |  
|                                                   | Total Mortgage Variable Rate Debt |             |          |      |               |      | $             | 224,715 |               |          | $            | 304,823 |       |  |      | 3.67 | % |                   |     |   | 
|                                                   |                                   |             |          |      |               |      |               |         |               |          |              |         |       |  |      |      |   |                   |     |  
|TOTAL MORTGAGE DEBT                                |                                   |             |          |      |               | $    | 1,017,616     |         |               | $        | 898,733      |         |       |  | 6.40 | %    |   |                   |     |  
|$100 million revolving secured facility (11)       |                                   |             |          |      |               |      | 22,002        |         |               |          | 65,096       |         |       |  | 4.26 | %    |   |                   | (11 | )
|$60 million revolving unsecured facility (12)      |                                   |             |          |      |               |      | 8,000         |         |               |          | 46,000       |         |       |  | 4.21 | %    |   |                   | (12 | )
|$100 million revolving secured facility (13)       |                                   |             |          |      |               |      |              |         |               |          |             |         |       |  |     |      |   |                   | (13 | )
|                                                   |                                   |             |          |      |               |      |               |         |               |          |              |         |       |  |      |      |   |                   |     |  
|TOTAL CREDIT FACILITIES                            |                                   |             |          |      |               | $    | 30,002        |         |               | $        | 111,096      |         |       |  | 4.26 | %    |   |                   |     |  
|                                                   |                                   |             |          |      |               |      |               |         |               |          |              |         |       |  |      |      |   |                   |     |  
|TOTAL DEBT OUTSTANDING                             |                                   |             |          |      |               | $    | 1,047,618     |         |               | $        | 1,009,829    |         |       |  | 6.39 | %    |   |                   |     |  
|                                                   |                                   |             |          |      |               |      |               |         |               |          |              |         |       |  |      |      |   |                   |     |  



|*   |  | For the quarter ended September 30, 2003. Includes deferred loan
fees amortized over the life of the loans.                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) |  | This loan was paid off on March 26, 2003 with the net proceeds from
the issuance of the Triple Net Lease Mortgage Notes, Series 2003-1 as
discussed in footnote (7) below.                                                                                                                                                                                                                                                                                                                                 
|   
|(2) |  | The loan requires monthly payments of principal and interest with a
final payment at maturity of approximately $24.2 million. The
Partnership has provided a guaranty of collection limited to
approximately $8.9 million of this loan, contingent upon the lender
first making written demand upon and proceeding against the borrower,
including obtaining judgment and foreclosing upon all collateral. All
amounts recovered from the borrower or collateral following a default
reduce such guarantee.
|   
|(3) |  | The loan requires quarterly payments of principal and interest with a
final payment at maturity of approximately $72.4 million.                                                                                                                                                                                                                                                                                                                                                                            
|   
|(4) |  | These loans require quarterly interest and level principal payments
until maturity, at which time the loans require final payments totaling
approximately $33.5 million. These loans bear interest equal to the
A1/P1 Commercial Paper Rate plus 215 basis points. We have entered into
interest rate swap arrangements with a third party to fix the interest
rates                                                                                                                                       

14



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##### 





|    |  | on these loans.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(5) |  | This loan requires quarterly interest and level principal payments
with a final payment at maturity of approximately $49.6 million. This
loan bears interest equal to the 30-day LIBOR rate plus 175 basis
points. We have entered into an interest rate swap arrangement with a
third party to fix the interest rate on this loan.                                                                                                                       
|   
|(6) |  | During 2002, we issued $325 million in four classes of Triple Net
Lease Mortgage Notes, Series 2002. The notes have a weighted average
effective interest rate (including deferred fees amortized over the life
of the notes) of approximately 7.7%. CARS Loan Servicer L.L.C., one of
our subsidiaries, is servicer of the notes on behalf of the noteholders.
The following is a breakdown of the Triple Net Lease Mortgage Notes,
Series 2002 by class:

|      |  |         |                    |         |                   |               |         |  |  |  |         |  | 
|----- |  | ------- | ------------------ | ------- | ----------------- | ------------- | ------- |  |  |  | ------- |  | 
|      |  |         | Original Principal |         | Current Principal |               |         |  | 
|Class |  | Balance |                    | Balance |                   | Maturity Date
|A-1a  |  |         | 164,136            |         |                   |               | 153,494 |  |  |  | 8/15/14 | 
|A-1b  |  |         | 9,064              |         |                   |               | 9,064   |  |  |  | 7/15/15 | 
|A-2   |  |         | 75,900             |         |                   |               | 71,077  |  |  |  | 7/15/15 | 
|A-3   |  |         | 75,900             |         |                   |               | 75,900  |  |  |  | 6/15/22 | 



|    |  | Classes A-1a and A-1b are fully-amortizing in succession over their
respective terms and Classes A-2 and A-3 are fully-amortizing in
succession over 20 years. The Partnership has provided a guaranty of
collection limited to approximately $35 million of this loan, contingent
upon the trustee first making written demand upon and proceeding against
the borrower, including obtaining judgment and foreclosing upon all
collateral. All amounts recovered from the borrower or collateral
following a default reduce such guarantee. In connection with the
issuance of this debt, in certain situations, the Company guarantees
payments of principal and interest and any unpaid debt. The term of the
guaranty is the same as the term of the debt.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(7) |  | On March 26, 2003, we issued $228 million in two classes of Triple
Net Lease Mortgage Notes, Series 2003-1. CARS Loan Servicer L.L.C. is
servicer of the notes on behalf of the noteholders. The following is a
breakdown of the Triple Net Lease Mortgage Notes, Series 2003-1 by
class:                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|      |  |                    |         |                   |  |               |         |  |  |  |         | 
|----- |  | ------------------ | ------- | ----------------- |  | ------------- | ------- |  |  |  | ------- | 
|      |  | Original Principal |         | Current Principal |  |               |         | 
|Class |  | Balance            |         | Balance           |  | Maturity Date
|A-1   |  |                    | 109,000 |                   |  |               | 106,002 |  |  |  | 9/25/15 | 
|A-2   |  |                    | 119,000 |                   |  |               | 119,000 |  |  |  | 3/25/19 | 



|     |  | The Class A-1 and Class A-2 notes have weighted average effective interest
rates (including deferred fees amortized over the life of the notes) of
approximately 5.4% and 6.3%, respectively. The notes amortize in
succession over a 20-year amortization schedule with the Class A-1 notes
fully-amortizing and the Class A-2 notes requiring a final payment at
maturity of approximately $70.8 million. In connection with the issuance
of this debt, in certain situations, the Company guarantees payments of
principal and interest and any unpaid debt. The term of the guaranty is
the same as the term of the debt.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(8)  |  | The loan bears interest equal to the 30-day LIBOR rate plus 227 basis
points and requires monthly level payments of principal and interest
with a final payment at maturity of approximately $100.2 million.                                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(9)  |  | These loans bear interest at variable rates ranging from 200 to 357
basis points above the A1/P1 Commercial Paper Rate, the 30-day LIBOR
rate, or the 3-month LIBOR rate and have maturity dates ranging from
December 22, 2009 to June 2, 2015. The terms of the various loans
require either quarterly interest and level principal payments or
monthly level payments of principal and interest until maturity, at
which time the loans require final payments totaling approximately
$65.5 million.                                                                                                                      
|    
|(10) |  | This short-term loan was paid off on March 26, 2003 with the net
proceeds from the issuance of the Triple Net Lease Mortgage Notes,
Series 2003-1 as discussed in footnote (7) above.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|(11) |  | Amounts borrowed under this facility bear interest at market rates
determined at the time of each draw until such time as the Company and
the lender set an interest rate for any future amounts borrowed under
the facility. As of September 30, 2003, the borrowings under the
facility bear interest equal to the 30-day LIBOR rate plus 295 to 300
basis points. Properties are eligible within the borrowing base for 150
days, unless extended by the Company and the lender. The facility has a
one-year term, which matures on March 21, 2004, and is renewable
annually.                                            
|    
|(12) |  | The facility provides for a three-year term with interest determined,
at our option, at either the Prime rate less 50 basis points or the
one-month, two-month or three-month LIBOR rate plus 200 basis points.
As of September 30, 2003, the
borrowings under the facility bear interest equal to the one-month LIBOR
plus 200 basis points. Properties are eligible within the borrowing base
for 12 months, unless extended by the Company and the lender. The
facility matures on March 29, 2005.                                                                                                                        

15



---



##### 





|(13) |  | This construction credit facility provides for a one-year term.
Amounts borrowed under this facility bear interest at a spread over
LIBOR as determined at the time of each draw. Proceeds will be used to
fund construction and improvement financing for existing tenants. As of
September 30, 2003, no amounts had been borrowed on this facility. The
facility matures on June 22, 2004, and is renewable annually.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of September 30, 2003, we were in compliance with all of the debt covenants
related to our mortgage debt and credit facilities.

Aggregate annual principal amortization and payments due at maturity of our
mortgage debt as of September 30, 2003 are as follows (in thousands):

|                                |  |              |         |            |  |       |         |  |  |   |           | 
|------------------------------- |  | ------------ | ------- | ---------- |  | ----- | ------- |  |  | - | --------- | 
|                                |  | Principal    |         |            |  |       |         |  |  |  
|For the Year Ended December 31, |  | Amortization |         | Maturities |  | Total
|2003                            |  | $            | 9,943   |            |  | $     |        |  |  | $ | 9,943     | 
|2004                            |  |              | 36,544  |            |  |       |        |  |  |   | 36,544    | 
|2005                            |  |              | 37,305  |            |  |       |        |  |  |   | 37,305    | 
|2006                            |  |              | 38,632  |            |  |       |        |  |  |   | 38,632    | 
|2007                            |  |              | 40,931  |            |  |       |        |  |  |   | 40,931    | 
|Thereafter                      |  |              | 438,027 |            |  |       | 416,234 |  |  |   | 854,261   | 
|                                |  |              |         |            |  |       |         |  |  |   |           | 
|Total                           |  | $            | 601,382 |            |  | $     | 416,234 |  |  | $ | 1,017,616 | 
|                                |  |              |         |            |  |       |         |  |  |   |           | 

Interest Rate Swaps

To minimize interest rate risk, during 2002 and 2001, we entered into three
interest rate swap arrangements with third parties to fix the interest rate on
the underlying variable rate debt, totaling approximately $141 million. These
swaps were 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 arrangements and the underlying terms
of the debt, these swaps were documented as cash flow hedges and designated as
highly effective at inception of the swap arrangements. Therefore, in
accordance with GAAP, the unrealized gain or loss upon measuring the swaps at
their fair value is recorded as a component of accumulated other comprehensive
income (loss) within shareholders equity on our consolidated balance sheets.
The fair value of the swaps is recorded as either a derivative instrument asset
or a derivative instrument liability on our consolidated balance sheets. In
addition, we are required to post collateral, generally in the amount of the
swap valuations at any point in time, to protect the lenders in case of an
early termination by us. The collateral posted by us, totaling approximately
$13.9 million and $15.0 million as of September 30, 2003 and December 31, 2002,
respectively, is included in other assets on our consolidated balance sheets.
Total comprehensive income for the three months ended September 30, 2003 and
2002 was $16.8 million and $1.9 million, respectively. Total comprehensive
income for the nine months ended September 30, 2003 and 2002 was $37.6 million
and $18.6 million, respectively. The unrealized loss as of September 30, 2003
and December 31, 2002 was as follows (in thousands):

|                                |  |                    |        |                   |  |   |        | 
|------------------------------- |  | ------------------ | ------ | ----------------- |  | - | ------ | 
|                                |  | September 30, 2003 |        | December 31, 2002
|                                |  |                    |        |                  
|Derivative instrument liability |  | $                  | 16,436 |                   |  | $ | 16,274 | 

16



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##### 



7.     MINORITY INTEREST

Assets and liabilities allocated to the limited partners (other than the
Company), which we describe as the Minority Interest, are based on their
ownership percentage of the Partnership at the end of the period. The
ownership percentage is determined by dividing the number of Units held by the
Minority Interest at the end of the period by the total Units outstanding at
the end of the period, excluding derivative securities. The Minority Interest
ownership percentage in assets and liabilities of the Partnership was 20.4% and
23.4% as of September 30, 2003 and December 31, 2002, respectively.

Income before minority interest is allocated to the limited partners based on
their weighted average ownership during the period. The ownership percentage
is determined by dividing the weighted average number of Units held by the
Minority Interest by the total weighted average number of Units outstanding
during the period, excluding derivative securities. The Minority Interest
ownership percentage in income of the Partnership was 20.6% and 23.6% for the
three months ended September 30, 2003 and 2002, respectively. The Minority
Interest ownership percentage in income of the Partnership was 21.6% and 23.7%
for the nine months ended September 30, 2003 and 2002, respectively.

Holders of Units, which we refer to as Unitholders, are entitled to quarterly
distributions which are equivalent to the quarterly dividend distributions
received by holders of common shares. There were approximately 8.3 million and
8.6 million limited partnership units in the Partnership, as of September 30,
2003 and December 31, 2002, respectively, not held by the Company, which were
outstanding and could be exchanged for common shares of the Company on a
one-for-one basis in specified circumstances. When a Unitholder converts Units
to shares of common stock, an adjustment is recorded to equity to reflect the
change in the Minority Interest ownership in the Partnership.

8.     EARNINGS PER SHARE

Basic earnings per share is computed as net income divided by the weighted
average common shares, excluding restricted shares, outstanding for the period.
Diluted earnings per share is computed as net income, adjusted to reflect the
change in the income allocated to minority interest calculated as if the
derivative securities were outstanding, divided by the weighted average common
shares outstanding for the period plus the effect of dilutive securities
outstanding for the period, based on the treasury stock method. Dilutive
securities include options, warrants, phantom shares and restricted shares.

17



---



##### 



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, 2003 and 2002 is as follows (in thousands, except
per share data):

|                                                                               |                            |   |                    |      |                   |   |        |      |      |   |        |      |  |   |        |      | 
|------------------------------------------------------------------------------ | -------------------------- | - | ------------------ | ---- | ----------------- | - | ------ | ---- | ---- | - | ------ | ---- |  | - | ------ | ---- | 
|                                                                               |                            |   | Three Months Ended |      | Nine Months Ended
|                                                                               |                            |   | September 30,      |      | September 30,    
|                                                                               |                            |   |                    |      |                  
|                                                                               |                            |   | 2003               |      | 2002              |   | 2003   |      | 2002
|                                                                               |                            |   |                    |      |                   |   |        |      |     
|Income from continuing operations                                              |                            | $ | 13,071             |      |                   | $ | 10,662 |      |      | $ | 37,489 |      |  | $ | 32,290 |     
|Adjustments                                                                    |                            |   | 67                 |      |                   |   | 91     |      |      |   | 237    |      |  |   | 315    |     
|                                                                               |                            |   |                    |      |                   |   |        |      |      |   |        |      |  |   |        |     
|Income from continuing
operations used to calculate
diluted earnings per share |                            | $ | 13,138             |      |                   | $ | 10,753 |      |      | $ | 37,726 |      |  | $ | 32,605 |     
|                                                                               |                            |   |                    |      |                   |   |        |      |      |   |        |      |  |   |        |      | 
|                                                                               | Basic earnings per share   |   | $                  | 0.41 |                   |   | $      | 0.38 |      |   | $      | 1.24 |  |   | $      | 1.18 | 
|                                                                               | Diluted earnings per share |   | $                  | 0.40 |                   |   | $      | 0.37 |      |   | $      | 1.21 |  |   | $      | 1.15 | 
|                                                                               |                            |   |                    |      |                   |   |        |      |      |   |        |      |  |   |        |      | 
|Net income                                                                     |                            | $ | 13,071             |      |                   | $ | 10,924 |      |      | $ | 37,718 |      |  | $ | 32,692 |     
|Adjustments                                                                    |                            |   | 67                 |      |                   |   | 93     |      |      |   | 239    |      |  |   | 320    |     
|                                                                               |                            |   |                    |      |                   |   |        |      |      |   |        |      |  |   |        |     
|Net income used to calculate
diluted earnings per share                        |                            | $ | 13,138             |      |                   | $ | 11,017 |      |      | $ | 37,957 |      |  | $ | 33,012 |     
|                                                                               |                            |   |                    |      |                   |   |        |      |      |   |        |      |  |   |        |      | 
|                                                                               | Basic earnings per share   |   | $                  | 0.41 |                   |   | $      | 0.39 |      |   | $      | 1.24 |  |   | $      | 1.20 | 
|                                                                               | Diluted earnings per share |   | $                  | 0.40 |                   |   | $      | 0.38 |      |   | $      | 1.22 |  |   | $      | 1.16 | 
|Weighted average shares:                                                       |                            |   |                    |      |                   |   |        |      |      |   |        |      |  |   |        |     
|Common shares outstanding used
to compute basic earnings per
share             |                            |   | 31,919             |      |                   |   | 27,917 |      |      |   | 30,303 |      |  |   | 27,291 |     
|Adjustments                                                                    |                            |   | 812                |      |                   |   | 1,039  |      |      |   | 895    |      |  |   | 1,163  |     
|                                                                               |                            |   |                    |      |                   |   |        |      |      |   |        |      |  |   |        |     
|Common shares outstanding used
to compute diluted earnings per
share           |                            |   | 32,731             |      |                   |   | 28,956 |      |      |   | 31,198 |      |  |   | 28,454 |     

9.     DIVIDENDS DECLARED PER SHARE

Dividends are generally declared a quarter in arrears. Dividends declared per
share for the three months ended September 30, 2003 and 2002 represent the
second quarter dividend for 2003 and 2002, respectively. Dividends declared
per share for the nine months ended September 30, 2003 include the first and
second quarter dividends for 2003 and the fourth quarter dividend for 2002.
Dividends declared per share for the nine months ended September 30, 2002
includes the first and second quarter dividends for 2002 and the fourth quarter
dividend for 2001.

10.     SUBSEQUENT EVENTS

Declaration of Dividend.On October 14, 2003, our Board of Trustees declared a
cash dividend of $0.4140 per share, which will be paid on November 20, 2003 to
shareholders of record as of November 10, 2003.

18



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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

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. Also,
documents that we subsequently file with the SEC will contain forward-looking
statements. When we refer to forward-looking statements or information,
sometimes we use words such as may, will, could, should, plans,
intends, expects, believes, estimates, anticipates and continues.
In particular, Item II and Item III of Part I of this Form 10-Q describe
forward-looking information. The 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 February 12, 2003. 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 different than those described. These factors
include, but are not limited to:



| |  |  | risks that our tenants will not pay rent;                                                                                                                                                                                                                                                                                                                    
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | risk related to our reliance on a small number of
tenants for a significant portion of our revenue;                                                                                                                                                                                                                                                          
|
| |  |  | risks of financing, such as our ability to meet
existing financial covenants and to consummate planned and
additional financings on terms that are acceptable to us;                                                                                                                                                                                         
|
| |  |  | risks that our growth will be limited if we cannot obtain additional capital;                                                                                                                                                                                                                                                                                
|
| |  |  | risks that planned and additional acquisitions may not be consummated;                                                                                                                                                                                                                                                                                       
|
| |  |  | risks 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, supply, vehicle financing,
marketing or other practices or changes in the economy
generally;
|
| |  |  | risks generally incident to the ownership of real
property, including adverse changes in economic conditions,
changes in the investment climate for real estate, changes
in real estate taxes and other operating expenses, adverse
changes in governmental rules and fiscal policies and the
relative illiquidity of real estate;                           
|
| |  |  | environmental and other risks associated with the
acquisition and leasing of automotive properties; and                                                                                                                                                                                                                                                      
|
| |  |  | risks related to our status as a REIT for federal
income tax purposes, such as the existence of complex
regulations relating to our status as a REIT, the effect of
future changes in REIT requirements as a result of new
legislation and the adverse consequences of the failure to
qualify as a REIT.                                                     

Given these uncertainties, readers are cautioned not to place undue reliance on
these forward-looking statements. We also make no promise to update any of the
forward-looking statements, or to publicly release the results if we revise any
of them.

19



---



##### 



OVERVIEW

Our primary business strategy is to purchase real estate (land, buildings and
other improvements), which we simultaneously lease to operators of franchised
automobile dealerships and motor vehicle service, repair or parts businesses,
used vehicle businesses and other related businesses under long-term,
triple-net leases. We focus on leasing properties to dealer groups that have a
long history of operating multi-site, multi-franchised dealerships, generally
targeting the largest dealer groups in terms of revenues in the largest
metropolitan areas in the U.S. in terms of population. In addition, we provide
facility improvement and expansion funding, construction financing and takeout
commitments in certain circumstances. As of September 30, 2003, we had
invested more than $1.7 billion in 313 properties located in 30 states,
consisting of approximately 2,234 acres of land and containing approximately
12.8 million square feet of buildings and improvements. Our tenants operate
436 motor vehicle franchises on our properties, representing 43 brands of motor
vehicles, which include all of the top selling brands in the U.S.

Substantially all of our properties are leased pursuant to long-term,
triple-net leases, under which the tenants typically pay all operating expenses
of a property, including, but not limited to, all real estate taxes,
assessments and other government charges, insurance, utilities, repairs and
maintenance. The initial lease terms generally range from 10 to 20 years (with
a weighted average initial lease term for leases entered into during the
quarter ended September 30, 2003 of approximately 17.7 years), with our entire
portfolio having a weighted average initial lease term of approximately 14.4
years. As of September 30, 2003, our portfolio had a weighted average
remaining lease term of approximately 11.2 years. The leases typically have
options to renew upon generally the same terms and conditions for one or more
additional periods of five to 10 years each, exercisable at the option of the
tenants (with renewal options typically ranging from a total of five to 40
years).

Substantially all of our revenues are derived from (1) rents received or
accrued under long-term, triple-net leases; (2) interest earned from the
temporary investment of funds in short-term investments; and (3) other fee
income.

We incur general and administrative expenses including, principally,
compensation expense for our executive officers and other employees,
professional fees, office administration expenses (including rent), business
taxes and insurance and various other expenses incurred in managing our
business. We are a self-administered and self-managed real estate company
operating as a real estate investment trust, or a REIT, for federal income tax
purposes. Our primary non-cash expense is the depreciation of our properties.
We depreciate buildings and improvements on our properties over a nine-year to
40-year period for tax purposes and a 20-year to 45-year period for financial
reporting purposes. We do not own or lease any significant personal property,
furniture or equipment at any property we currently own.

THIRD QUARTER ACQUISITIONS

During the three months ended September 30, 2003, we completed approximately
$24.4 million of property acquisitions, bringing total acquisitions for the
nine-month period ended September 30, 2003 to $130.8 million. The third quarter
acquisitions included one auto mall, four other auto retail properties and
construction and improvement fundings. These acquisitions contain nine
automotive franchises and added approximately 224,000 square feet of buildings
and improvements on approximately 28 acres of land. The leases have initial
lease terms ranging from 15 to 20 years, with a weighted average initial lease
term of 17.7 years. The leases have renewal options exercisable at the option
of the tenants ranging from a total of 20 to 40 years. The acquisitions were
funded with cash on hand and borrowings on our short-term revolving credit
facilities. A summary of the third quarter acquisitions is as follows:



| |  |  | Two properties totaling approximately $8.7 million leased to
affiliates of Sonic Automotive, Inc. (Sonic) located in Alabama.
Included in the acquisition is a collision center and an auto
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20



---



##### 





| |   |  | mall
that currently has three franchises (Audi, Land Rover and Porsche).
Three additional
franchises (BMW, Cadillac and Lexus) will be constructed on the auto mall during the next six months. We have committed to fund
approximately $18 million for the construction of these new dealerships
upon satisfactory completion of each facility subject to due diligence
and customary closing conditions. As of September 30, 2003, we leased
86 properties to affiliates of Sonic, representing approximately 23% of
the Companys total annualized rental revenue.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | One property totaling approximately $7.5 million leased to a
subsidiary of UnitedAuto Group, Inc. (UnitedAuto) located in Arizona.
A Ford franchise is operated on the property. As of September 30,
2003, we leased 17 properties to subsidiaries of UnitedAuto,
representing approximately 11% of the Companys total annualized
rental revenue.                                                                                                                                                                                                                   
|
| |  |  | Two properties totaling approximately $5.5 million leased to
subsidiaries of Asbury Automotive Group, Inc. (Asbury) located in
Georgia and Mississippi. Five franchises (Buick, Cadillac,
Chevrolet, GMC and Pontiac) and a collision center are operated on
these properties. As of September 30, 2003, we leased 11 properties
to subsidiaries of Asbury, representing approximately 3% of the
Companys total annualized rental revenue.                                                                                                                          
|
| |  |  | Construction and improvement fundings, totaling approximately
$2.7 million, all of which were transacted with existing tenants.                                                                                                                                                                                                                                                                                                                                                                                                                                      

RESULTS OF OPERATIONS

Revenue

Rental.Rental revenue for the three months ended September 30, 2003 increased
19% to $43.0 million from $36.1 million for the same quarter in 2002. Rental
revenue for the nine months ended September 30, 2003 increased 23% to $125.3
million from $102.2 million for the same period in 2002. The increase was
primarily attributable to:



| |  |  | the growth of our real estate portfolio from which we generate our
rental income. This increase will vary depending on the timing of our
property acquisitions and whether or not our leases have fixed minimum
escalators. We owned 313 properties as of September 30, 2003 versus
287 properties as of September 30, 2002, although one of the
properties owned as of September 30, 2002 was sold subsequent to
September 30, 2002 and reclassified from rental revenue to
discontinued operations as discussed under Discontinued Operations
below;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | an increase from rent escalations above the fixed minimum escalators,
which are recorded as revenue in the period they are due from the
tenants.                                                                                                                                                                                                                                                                                                                                                                                                        

In addition to the above, during the quarter and nine months ended September
30, 2003, the investment spreads on our variable rate leases have increased as
compared to the same period in the prior year. As of September 30, 2003 our
variable rate leases totaled $413 million, as compared to $367 million as of
September 30, 2002. Under these leases, base rent changes monthly, generally
based upon a spread over LIBOR. The vast majority of these variable rate
leases contain minimum lease rates, generally ranging from 8% to 9%, which has
allowed us to realize additional investment spread during the current low
short-term interest rate environment. During the past year, the average
one-month LIBOR rate has decreased from 1.82% during the third quarter of 2002
to 1.11% during the third quarter of 2003. This has resulted in a decrease in
interest expense on our variable rate debt, as discussed in Expenses below.
However, the revenue generated from the vast majority of our variable rate
leases has remained constant during this same time period, since the minimum
lease rates were in effect at these LIBOR levels.

21



---



##### 



Interest and Other.Interest and other income for the three months ended
September 30, 2003 decreased 40% to $144,000 from $241,000 for the same quarter
in 2002. Interest and other income for the nine months ended September 30,
2003 increased 55% to $783,000 from $505,000 for the same period in 2002.
Differences in interest and other income are primarily due to fluctuations in
the cash collateral balances held by our lenders at any point in time and
changes in the interest rates earned on these balances. The purpose of the cash
collateral accounts is to hold funds, generally in the amount of the swap
valuations at any point in time, to protect the lenders in case of an early
termination by us. The cash collateral accounts are controlled by the lenders,
however, we earn interest on the funds held. Our cash collateral accounts
totaled $13.9 million and $14.0 million as of September 30, 2003 and 2002.

Expenses

Depreciation and Amortization.Depreciation and amortization for the three
months ended September 30, 2003 increased 16% to $7.8 million from $6.8 million
for the same quarter in 2002. Depreciation and amortization for the nine months
ended September 30, 2003 increased 21% to $22.9 million from $18.9 million for
the same period in 2002. 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.General and administrative expenses for the three
months ended September 30, 2003 increased 26% to $2.5 million from $2.0 million
for the same quarter in 2002. General and administrative expenses for the nine
months ended September 30, 2003 increased 17% to $7.2 million from $6.1 million
for the same period in 2002. The increase in operating expenses is due
primarily to:



| |  | an increase in payroll and related expenses primarily attributable to an increase in base compensation and bonus targets,
expenses related to stock based compensation plans, and an increase in the number of employees;                                                
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | an increase in directors and officers insurance due to an increase in market rates;                                                                                                                                                                                      
| 
| |  | an increase in professional fees associated with the implementation of Section 404 of the Sarbanes-Oxley Act of 2002, which
requires companies to assess the effectiveness of their internal controls over financial reporting, effective for our
fiscal year ended 2004;
| 
| |  | an increase in business taxes and state registration fees due to the growth in our real estate portfolio during 2002 and
2003 as well as changes in state tax laws;                                                                                                      
| 
| |  | an increase in rent and occupancy costs due to the relocation of our office during the fourth quarter of 2002; and                                                                                                                                                       
| 
| |  | an increase in fees paid to our Board of Trustees.                                                                                                                                                                                                                       

The increase in operating expenses from the nine months ended September 30,
2002 was partially offset by the decrease in information technology costs due
to projects initiated and completed during the first quarter of 2002.

Interest.Interest expense for the three months ended September 30, 2003
increased 20% to $16.3 million from $13.6 million for the same quarter in 2002.
Interest expense for the nine months ended September 30, 2003 increased 36% to
$48.2 million from $35.4 million for the same period in 2002. The increase in
interest expense is primarily due to an increase in our overall debt during the
past twelve months, which was primarily obtained to directly or indirectly
finance the acquisition of properties during that time period.

22



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##### 



In addition, the effective interest rate on our debt, which includes deferred
loan fees amortized over the life of the loans, was 6.39% for the quarter ended
September 30, 2003 as compared to 6.37% for the quarter ended September 30,
2002. For the nine months ended September 30, 2003, the effective interest
rate on our debt was 6.36% as compared to 6.41% for the nine months ended
September 30, 2002. The change in the effective interest rate for the nine
months ended September 30, 2003 is due to the decrease in interest rates during
the past twelve months. This was partially offset by the issuance of long-term
fixed rate debt during the same period to lock in rates during this low
interest rate environment, resulting in a reduction of our borrowings on our
short-term revolving credit facilities, and $80 million of debt that was
swapped from variable rate to fixed rate effective during the fourth quarter of
2002.

Discontinued 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 gains and losses
from dispositions of properties and all operating earnings from these
properties be reported as discontinued operations. This also requires that
all past earnings applicable to a property disposed of subsequent to January 1,
2002 be reported as discontinued operations. As a result, previously
reported income from continuing operations will be updated each time a
property is sold. This requirement is for presentation only and has no impact
on net income.

The following table is a summary of revenue from properties sold subsequent to
January 1, 2002 (not including the gain on the sale of the properties) and
total discontinued operations for the three months and nine months ended
September 30, 2003 and 2002:

|                                                         |  |                    |   |                   |  |      |         |      |  |   |         |  |  |   |         | 
|-------------------------------------------------------- |  | ------------------ | - | ----------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                                                         |  | Three Months Ended |   | Nine Months Ended
|                                                         |  | September 30,      |   | September 30,    
|                                                         |  |                    |   |                  
|                                                         |  | 2003               |   | 2002              |  | 2003 |         | 2002
|                                                         |  |                    |   |                   |  |      |         |     
|Revenue                                                  |  | $                  |  |                   |  | $    | 105,000 |      |  | $ | 226,000 |  |  | $ | 536,000 | 
|Total discontinued operations                            |  | $                  |  |                   |  | $    | 262,000 |      |  | $ | 229,000 |  |  | $ | 402,000 | 
|Number of properties
included in discontinued
operations |  |                    |  |                   |  |      | 4       |      |  |   | 1       |  |  |   | 4       | 

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $18.1 million and $16.6 million at September 30,
2003 and September 30, 2002, respectively. The changes in cash and cash
equivalents during the nine months ended September 30, 2003 and 2002 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,
2003 and 2002 was $72.4 million and $59.6 million, respectively, and
represents, in each year, cash received primarily from rents under long-term,
triple-net leases, plus interest and other fee income, less normal recurring
general and administrative expenses and interest payments on debt outstanding.

Investing Activities

Cash used in investing activities for the nine months ended September 30, 2003
and 2002 was $129.0 million and $272.9 million, respectively, and primarily
reflects the acquisition of dealership properties, facility improvements and
construction financings, net of sales, during those periods.

Financing Activities

Cash provided by financing activities for the nine months ended September 30,
2003 and 2002 was $67.4

23



---



##### 



million and $220.5 million, respectively. Cash
provided by financing activities for the nine months ended September 30, 2003
primarily reflects:



| |  |  | $234.5 million of proceeds received from mortgage debt incurred
during the period;                                                                                                                           
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | $66.4 million of proceeds received from our follow-on common share
offering, net of costs;                                                                                                                   
|
| |  |  | $58.0 million of proceeds received from borrowings on our revolving
credit facilities;                                                                                                                       
|
| |  |  | $12.5 million of proceeds received from the issuance of common
shares through our Dividend Reinvestment and Share Purchase Plan, which
we refer to as the DRIP, and equity incentive plans, net of costs; and
|
| |  |  | the decrease of restricted cash totaling $1.2 million.                                                                                                                                                       

The cash provided by financing activities was partially offset by:



| |  |  | the repayment of borrowings on our revolving credit facilities totaling $139.1 million;           
| | - |  | --------------------------------------------------------------------------------------------------
|
| |  |  | the repayment of mortgage debt totaling $91.6 million;                                            
|
| |  |  | distributions made to shareholders and minority partners during the
period totaling $43.9 million;
|
| |  |  | payments of principal on outstanding mortgage debt totaling $24.0 million; and                    
|
| |  |  | payments for debt issuance costs totaling $6.6 million.                                           

Cash provided by financing activities for the nine months ended September 30,
2002 primarily reflects:



| |  |  | $251.7 million of proceeds received from borrowings on our revolving credit facilities;                                         
| | - |  | --------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | $205.4 million of proceeds received from mortgage debt incurred during the period; and                                          
|
| |  |  | $17.1 million of proceeds received from the issuance of common
shares through our DRIP and equity incentive plans, net of costs.

The cash provided by financing activities was partially offset by:



| |  |  | the repayment of borrowings on our revolving credit facilities
totaling $169.2 million;                                                                                                                                    
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | distributions made to shareholders and minority partners during the
period totaling $42.3 million;                                                                                                                         
|
| |  |  | payments of principal on outstanding mortgage debt totaling $16.1 million;                                                                                                                                                 
|
| |  |  | the increase of restricted cash totaling $12.4 million;                                                                                                                                                                    
|
| |  |  | payments for debt issuance costs totaling $7.3 million;                                                                                                                                                                    
|
| |  |  | payments made during the first quarter of 2002 totaling $6.0
million and $293,000 to purchase outstanding warrants to purchase
common shares during the fourth quarter of 2001 and first quarter of
2002, respectively; and

24



---



##### 





| |  |  | the redemption of Units totaling $153,000.
| | - |  | ------------------------------------------

Debt Financing Strategy

We typically fund our short-term liquidity requirements through available cash
or one of our three revolving credit facilities. These facilities provide
short-term borrowing capacity of $260 million of which approximately $230
million was available as of September 30, 2003. Periodically, in order to more
closely match the term of our debt with that of our leases, we replace our
short-term debt using the proceeds of long-term mortgage debt.

To minimize interest rate risk, we typically match the average term of our
long-term debt with the average remaining term of our leases as well as the
type of debt with the type of leases (fixed or variable rate) 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 debt with leases. We may change the 70% guideline at any time
without shareholder approval. As of September 30, 2003, approximately 91% of
our debt outstanding was substantially match-funded debt. As of September 30,
2003, our long-term debt had a weighted average remaining term of 10.9 years
and our leases had a weighted average remaining term of 11.2 years.

We have adopted a policy to limit debt to approximately 65% of our assets
(calculated as total assets plus accumulated depreciation). This policy may be
changed by our Board of Trustees at any time without notice or shareholder
approval. As of September 30, 2003, our debt to assets ratio was approximately
59% and our debt to total market capitalization was approximately 46%.

In light of our current financial position, we believe that we will be able to
obtain additional financing for our short-term and long-term liquidity
requirements as discussed in Liquidity Requirementsbelow. We have used and
may continue to use interest rate swap arrangements to minimize interest rate
risk and to match-fund our long-term debt with our long-term leases. However,
there can be no assurance that additional financing or capital will be
available, or that the terms will be acceptable or advantageous to us.

Variable Rate Lease Program

We may offer our current and prospective tenants the option of utilizing our
variable rate lease program. Under this program, base rent changes monthly
based upon a spread over an applicable index, typically LIBOR. In addition,
our leases typically provide for upward periodic adjustments in base rent,
usually based on a factor of the change in the consumer price index, commonly
referred to as CPI. The vast majority of our variable rate lease agreements
contain minimum lease rates, generally between 8% and 9%, and fixed rate
conversion features generally with minimum rates of 10.0% to 10.25%, and none
of these leases contains a maximum rate. Upon conversion, the fixed base rent
typically continues to be adjusted upward periodically based on a factor of the
change in the CPI or other escalation provisions set forth in the lease.

As of September 30, 2003, approximately $413 million of our more than $1.7
billion real estate portfolio, or 24%, was subject to variable rate leases.
The execution of these variable rate leases has enabled us to utilize variable
rate debt, which totaled $255 million as of September 30, 2003. Of the $255
million, approximately $200 million is matched with variable rate leases. The
investment spreads on our variable rate lease portfolio will change under
certain interest rate conditions. Our strategy of including minimum lease
rates in our variable rate leases allows us to realize additional investment
spread during the current low interest rate environment. During the past year,
as LIBOR has decreased, the interest expense on our

25



---



##### 



variable rate debt has also
decreased. However, the revenue generated from the vast majority of our
variable rate leases has remained constant during this same time period, since
the minimum lease rates
were in effect at these LIBOR levels. Because many of our leases are subject
to minimum lease rates, as LIBOR rises, our investment spreads will contract
from current levels until the one-month LIBOR reaches 3.0% to 3.5%. At that
time, our variable lease rates and variable debt rates will rise equally with
LIBOR.

Mortgage Debt and Revolving Credit Facilities

As of September 30, 2003, we had total mortgage debt outstanding of
approximately $1.02 billion (consisting of approximately $792.9 million of
fixed rate and approximately $224.7 million of variable rate debt), which was
secured by approximately 266 of our properties. In addition, we had
approximately $30.0 million outstanding on our revolving credit facilities.

26



---



##### 



The following is a summary of our total debt outstanding as of September 30,
2003 and December 31, 2002 (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 |         | 2003          |  | 2002          |           | Rate*         |  | Schedule    
|7.50% fixed rate debt due 4/20/03 (1)              |  | $           | 12,000  |               |  | $             |          |               |  | $            | 10,771    |       |  |  |     |   |  |                   | (1  | )
|7.59% fixed rate debt due 12/1/08 (2)              |  |             | 38,050  |               |  |               | 33,415    |               |  |              | 34,572    |       |  |  | 7.95 | % |  | 10 yr/17 yr      
|7.54% fixed rate debt due 7/6/11 (3)               |  |             | 100,000 |               |  |               | 92,994    |               |  |              | 94,413    |       |  |  | 7.69 | % |  | 12 yr/25 yr      
|7.565% fixed rate debt due 11/12/12 (4)            |  |             | 28,500  |               |  |               | 25,650    |               |  |              | 26,220    |       |  |  | 7.62 | % |  | 12 yr/25 yr      
|7.5975% fixed rate debt due 12/18/12 (4)           |  |             | 32,054  |               |  |               | 29,212    |               |  |              | 29,781    |       |  |  | 7.59 | % |  | 12 yr/30 yr      
|7.50% fixed rate debt due 8/10/13 (5)              |  |             | 82,600  |               |  |               | 77,093    |               |  |              | 79,158    |       |  |  | 7.62 | % |  | 12 yr/30 yr      
|Triple Net Lease Mortgage Notes, Series 2002 (6)   |  |             | 325,000 |               |  |               | 309,535   |               |  |              | 318,995   |       |  |  | 7.70 | % |  |                   | (6  | )
|Triple Net Lease Mortgage Notes, Series 2003-1
(7) |  |             | 228,000 |               |  |               | 225,002   |               |  |              |          |       |  |  | 5.86 | % |  |                   | (7  | )
|                                                   |  |             |         |               |  |               |           |               |  |              |           |       |  |  |      |   |  |                   |     |  
|Total Mortgage Fixed Rate Debt                     |  |             |         |               |  | $             | 792,901   |               |  | $            | 593,910   |       |  |  | 7.17 | % |  |                   |     |  
|Variable rate debt due 9/29/11 (8)                 |  |             | 150,000 |               |  |               | 139,642   |               |  |              | 143,907   |       |  |  | 3.40 | % |  | 12 yr/25 yr      
|                                                   |  |             |         |               |  |               |           |               |  |              |           |       |  |  |      |   |  | 10 to 12 yr/25 to
|Various variable rate debt (9)                     |  |             | 90,030  |               |  |               | 85,073    |               |  |              | 80,049    |       |  |  | 4.12 | % |  | 30 yr            
|Short-term variable rate debt (10)                 |  |             | 80,867  |               |  |               |          |               |  |              | 80,867    |       |  |  |     |   |  |                   | (10 | )
|                                                   |  |             |         |               |  |               |           |               |  |              |           |       |  |  |      |   |  |                   |     |  
|Total Mortgage Variable Rate Debt                  |  |             |         |               |  | $             | 224,715   |               |  | $            | 304,823   |       |  |  | 3.67 | % |  |                   |     |  
|                                                   |  |             |         |               |  |               |           |               |  |              |           |       |  |  |      |   |  |                   |     |  
|TOTAL MORTGAGE DEBT                                |  |             |         |               |  | $             | 1,017,616 |               |  | $            | 898,733   |       |  |  | 6.40 | % |  |                   |     |  
|$100 million revolving secured facility (11)       |  |             |         |               |  |               | 22,002    |               |  |              | 65,096    |       |  |  | 4.26 | % |  |                   | (11 | )
|$60 million revolving unsecured facility (12)      |  |             |         |               |  |               | 8,000     |               |  |              | 46,000    |       |  |  | 4.21 | % |  |                   | (12 | )
|$100 million revolving secured facility (13)       |  |             |         |               |  |               |          |               |  |              |          |       |  |  |     |   |  |                   | (13 | )
|                                                   |  |             |         |               |  |               |           |               |  |              |           |       |  |  |      |   |  |                   |     |  
|TOTAL CREDIT FACILITIES                            |  |             |         |               |  | $             | 30,002    |               |  | $            | 111,096   |       |  |  | 4.26 | % |  |                   |     |  
|                                                   |  |             |         |               |  |               |           |               |  |              |           |       |  |  |      |   |  |                   |     |  
|TOTAL DEBT OUTSTANDING                             |  |             |         |               |  | $             | 1,047,618 |               |  | $            | 1,009,829 |       |  |  | 6.39 | % |  |                   |     |  
|                                                   |  |             |         |               |  |               |           |               |  |              |           |       |  |  |      |   |  |                   |     |  



|*   |  | For the quarter ended September 30, 2003. Includes deferred loan
fees amortized over the life of the loans.                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) |  | This loan was paid off on March 26, 2003 with the net proceeds from
the issuance of the Triple Net Lease Mortgage Notes, Series 2003-1 as
discussed in footnote (7) below.                                                                                                                                                                                                                                                                                                                                 
|   
|(2) |  | The loan requires monthly payments of principal and interest with a
final payment at maturity of approximately $24.2 million. The
Partnership has provided a guaranty of collection limited to
approximately $8.9 million of this loan, contingent upon the lender
first making written demand upon and proceeding against the borrower,
including obtaining judgment and foreclosing upon all collateral. All
amounts recovered from the borrower or collateral following a default
reduce such guarantee.
|   
|(3) |  | The loan requires quarterly payments of principal and interest with a
final payment at maturity of approximately $72.4 million.                                                                                                                                                                                                                                                                                                                                                                            
|   
|(4) |  | These loans require quarterly interest and level principal payments
until maturity, at which time the loans require final payments totaling
approximately $33.5 million. These loans bear interest equal to the
A1/P1 Commercial Paper Rate plus 215 basis points. We have entered into
interest rate swap arrangements with a third party to fix the interest
rates                                                                                                                                       

27



---



##### 





|    |  | on these loans.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(5) |  | This loan requires quarterly interest and level principal payments
with a final payment at maturity of approximately $49.6 million. This
loan bears interest equal to the 30-day LIBOR rate plus 175 basis
points. We have entered into an interest rate swap arrangement with a
third party to fix the interest rate on this loan.                                                                                                                       
|   
|(6) |  | During 2002, we issued $325 million in four classes of Triple Net
Lease Mortgage Notes, Series 2002. The notes have a weighted average
effective interest rate (including deferred fees amortized over the life
of the notes) of approximately 7.7%. CARS Loan Servicer L.L.C., one of
our subsidiaries, is servicer of the notes on behalf of the noteholders.
The following is a breakdown of the Triple Net Lease Mortgage Notes,
Series 2002 by class:

|      |  |         |                    |         |                   |               |         |  |  |  |         |  | 
|----- |  | ------- | ------------------ | ------- | ----------------- | ------------- | ------- |  |  |  | ------- |  | 
|      |  |         | Original Principal |         | Current Principal |               |         |  | 
|Class |  | Balance |                    | Balance |                   | Maturity Date
|A-1a  |  |         | 164,136            |         |                   |               | 153,494 |  |  |  | 8/15/14 | 
|A-1b  |  |         | 9,064              |         |                   |               | 9,064   |  |  |  | 7/15/15 | 
|A-2   |  |         | 75,900             |         |                   |               | 71,077  |  |  |  | 7/15/15 | 
|A-3   |  |         | 75,900             |         |                   |               | 75,900  |  |  |  | 6/15/22 | 



|    |  | Classes A-1a and A-1b are fully-amortizing in succession over their
respective terms and Classes A-2 and A-3 are fully-amortizing in
succession over 20 years. The Partnership has provided a guaranty of
collection limited to approximately $35 million of this loan, contingent
upon the trustee first making written demand upon and proceeding against
the borrower, including obtaining judgment and foreclosing upon all
collateral. All amounts recovered from the borrower or collateral
following a default reduce such guarantee. In connection with the
issuance of this debt, in certain situations, the Company guarantees
payments of principal and interest and any unpaid debt. The term of the
guaranty is the same as the term of the debt.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(7) |  | On March 26, 2003, we issued $228 million in two classes of Triple
Net Lease Mortgage Notes, Series 2003-1. CARS Loan Servicer L.L.C. is
servicer of the notes on behalf of the noteholders. The following is a
breakdown of the Triple Net Lease Mortgage Notes, Series 2003-1 by
class:                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|      |  |                    |         |                   |  |               |         |  |  |  |         | 
|----- |  | ------------------ | ------- | ----------------- |  | ------------- | ------- |  |  |  | ------- | 
|      |  | Original Principal |         | Current Principal |  |               |         | 
|Class |  | Balance            |         | Balance           |  | Maturity Date
|A-1   |  |                    | 109,000 |                   |  |               | 106,002 |  |  |  | 9/25/15 | 
|A-2   |  |                    | 119,000 |                   |  |               | 119,000 |  |  |  | 3/25/19 | 



|     |  | The Class A-1 and Class A-2 notes have weighted average effective interest
rates (including deferred fees amortized over the life of the notes) of
approximately 5.4% and 6.3%, respectively. The notes amortize in
succession over a 20-year amortization schedule with the Class A-1 notes
fully-amortizing and the Class A-2 notes requiring a final payment at
maturity of approximately $70.8 million. In connection with the issuance
of this debt, in certain situations, the Company guarantees payments of
principal and interest and any unpaid debt. The term of the guaranty is
the same as the term of the debt.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(8)  |  | The loan bears interest equal to the 30-day LIBOR rate plus 227 basis
points and requires monthly level payments of principal and interest
with a final payment at maturity of approximately $100.2 million.                                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(9)  |  | These loans bear interest at variable rates ranging from 200 to 357
basis points above the A1/P1 Commercial Paper Rate, the 30-day LIBOR
rate, or the 3-month LIBOR rate and have maturity dates ranging from
December 22, 2009 to June 2, 2015. The terms of the various loans
require either quarterly interest and level principal payments or
monthly level payments of principal and interest until maturity, at
which time the loans require final payments totaling approximately
$65.5 million.                                                                                                                      
|    
|(10) |  | This short-term loan was paid off on March 26, 2003 with the net
proceeds from the issuance of the Triple Net Lease Mortgage Notes,
Series 2003-1 as discussed in footnote (7) above.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|(11) |  | Amounts borrowed under this facility bear interest at market rates
determined at the time of each draw until such time as the Company and
the lender set an interest rate for any future amounts borrowed under
the facility. As of September 30, 2003, the borrowings under the
facility bear interest equal to the 30-day LIBOR rate plus 295 to 300
basis points. Properties are eligible within the borrowing base for 150
days, unless extended by the Company and the lender. The facility has a
one-year term, which matures on March 21, 2004, and is renewable
annually.                                            
|    
|(12) |  | The facility provides for a three-year term with interest determined,
at our option, at either the Prime rate less 50 basis points or the
one-month, two-month or three-month LIBOR rate plus 200 basis points.
As of September 30, 2003, the borrowings under the facility bear
interest equal to the one-month LIBOR plus 200 basis points. Properties
are eligible within the borrowing base for 12 months, unless extended by
the Company and the lender. The facility matures on March 29, 2005.                                                                                                                        

28



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|(13) |  | This construction credit facility provides for a one-year term.
Amounts borrowed under this facility bear interest at a spread over
LIBOR as determined at the time of each draw. Proceeds will be used to
fund construction and improvement financing for existing tenants. As of
September 30, 2003, no amounts had been borrowed on this facility. The
facility matures on June 22, 2004, and is renewable annually.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the quarter and trailing 12 months ended September 30, 2003, our interest
coverage and debt service coverage ratios were 2.5 and 1.6, respectively. We
consider the interest coverage and debt service coverage ratios meaningful
financial performance measures of liquidity as they provide our investors with
information pertaining to our ability to satisfy our debt service requirements.
These measures are typically used by our lenders in assessing our compliance
with certain debt covenants. These ratios are considered non-GAAP financial
measures because they are calculated using Earnings Before Interest, Taxes,
Depreciation and Amortization, commonly referred to as EBITDA. The ratios
should not be considered an alternative measure of operating results or cash
flow from operations as determined in accordance with GAAP.

The following is a calculation of our interest coverage ratio and our debt
service coverage ratio for the three months and twelve months ended September
30, 2003 (dollars in thousands). The calculation includes a reconciliation of
EBITDA to its most directly comparable GAAP measure, net income.

|                                                                                  |  |                    |        |                     |  |   |         | 
|--------------------------------------------------------------------------------- |  | ------------------ | ------ | ------------------- |  | - | ------- | 
|                                                                                  |  | Three months ended |        | Twelve months ended
|                                                                                  |  | September 30, 2003 |        | September 30, 2003 
|Interest Coverage Ratio:                                                          |  |                    |        |                     |  |   |         | 
|Net Income before minority interest (Earnings)                                    |  | $                  | 16,454 |                     |  | $ | 62,645  | 
|Interest expense                                                                  |  |                    | 16,323 |                     |  |   | 63,449  | 
|Depreciation and amortization                                                     |  |                    | 7,834  |                     |  |   | 30,311  | 
|                                                                                  |  |                    |        |                     |  |   |         | 
|EBITDA                                                                            |  | $                  | 40,611 |                     |  | $ | 156,405 | 
|Interest Coverage Ratio (EBITDA divided by
interest expense)                      |  |                    | 2.5    |                     |  |   | 2.5     | 
|                                                                                  |  |                    |        |                     |  |   |         | 
|Debt Service Coverage Ratio (DSCR):                                               |  |                    |        |                     |  |   |         | 
|Interest expense                                                                  |  | $                  | 16,323 |                     |  | $ | 63,449  | 
|Principal amortization for the period                                             |  |                    | 9,077  |                     |  |   | 32,669  | 
|                                                                                  |  |                    |        |                     |  |   |         | 
|                                                                                  |  | $                  | 25,400 |                     |  | $ | 96,118  | 
|DSCR (EBITDA divided by interest expense +
principal amortization for the period) |  |                    | 1.6    |                     |  |   | 1.6     | 
|                                                                                  |  |                    |        |                     |  |   |         | 

As of September 30, 2003, we were in compliance with all of the debt covenants
related to our mortgage debt and revolving credit facilities.

Interest Rate Swaps

To minimize interest rate risk, during 2002 and 2001, we entered into three
interest rate swap arrangements with third parties to fix the interest rate on
the underlying variable rate debt, totaling approximately $141 million. These
swaps were 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 arrangements and the underlying terms
of the debt, these swaps were documented as cash flow hedges and designated as
highly effective at inception of the swap arrangements. Therefore, in
accordance with GAAP, the unrealized gain or loss upon measuring the swaps at
their fair value is recorded as a component of accumulated other comprehensive
income (loss) within shareholders equity

29



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on our consolidated balance sheets.
The fair value of the swaps is recorded as either a derivative
instrument asset or a derivative instrument liability on our consolidated
balance sheets. In addition, we are required to post collateral, generally in
the amount of the swap valuations at any point in time, to protect the lenders
in case of an early termination by us. The collateral posted by us, totaling
approximately $13.9 million and $15.0 million as of September 30, 2003 and
December 31, 2002, respectively, is included in other assets on our
consolidated balance sheets. Total comprehensive income for the three months
ended September 30, 2003 and 2002 was $16.8 million and $1.9 million,
respectively. Total comprehensive income for the nine months ended September
30, 2003 and 2002 was $37.6 million and $18.6 million, respectively. The
unrealized loss as of September 30, 2003 and December 31, 2002 was as follows
(in thousands):

|                                |  |                    |        |                   |  |   |        | 
|------------------------------- |  | ------------------ | ------ | ----------------- |  | - | ------ | 
|                                |  | September 30, 2003 |        | December 31, 2002
|                                |  |                    |        |                  
|Derivative instrument liability |  | $                  | 16,436 |                   |  | $ | 16,274 | 

Liquidity Requirements

Short-term liquidity requirements consist primarily of normal recurring
operating expenses and capital expenditures, debt service requirements
(including debt service relating to additional and replacement debt),
distributions to shareholders and holders of Units, who we refer to as
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 from operations and our existing
revolving credit facilities. We anticipate that any additional acquisitions of
properties, facility improvement and expansion fundings and construction
financings during the next 12 months will be funded with amounts available
under our existing commitments for long-term financing, future long-term
secured and unsecured debt and the issuance of common or preferred equity or
Units, each of which may be initially funded with our existing revolving credit
facilities. Acquisitions of properties, 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 and
long-term growth and income.

As of September 30, 2003, 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 acquisitions 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.

Aggregate annual principal amortization and payments due at maturity of our
mortgage debt as of September 30, 2003 are as follows (in thousands):

|                                |  |              |         |            |  |       |         |  |  |   |           | 
|------------------------------- |  | ------------ | ------- | ---------- |  | ----- | ------- |  |  | - | --------- | 
|                                |  | Principal    |         |            |  |       |         |  |  |  
|For the Year Ended December 31, |  | Amortization |         | Maturities |  | Total
|2003                            |  | $            | 9,943   |            |  | $     |        |  |  | $ | 9,943     | 
|2004                            |  |              | 36,544  |            |  |       |        |  |  |   | 36,544    | 
|2005                            |  |              | 37,305  |            |  |       |        |  |  |   | 37,305    | 
|2006                            |  |              | 38,632  |            |  |       |        |  |  |   | 38,632    | 
|2007                            |  |              | 40,931  |            |  |       |        |  |  |   | 40,931    | 
|Thereafter                      |  |              | 438,027 |            |  |       | 416,234 |  |  |   | 854,261   | 
|                                |  |              |         |            |  |       |         |  |  |   |           | 
|Total                           |  | $            | 601,382 |            |  | $     | 416,234 |  |  | $ | 1,017,616 | 
|                                |  |              |         |            |  |       |         |  |  |   |           | 

30



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Commitments for Long-Term Financing

During the second quarter of 2001, we received a commitment for $150.0 million
of secured long-term variable rate 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
the 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 or three-month LIBOR rate. As of September 30, 2003, we had
approximately $60.9 million available under this commitment.

During the second quarter of 2003, we signed a commitment for $40 million of
secured mortgage financing from Bank of America. The commitment can be drawn
down in multiple fundings under one or more debt instruments, and each funding
is subject to customary conditions and the lenders satisfaction with the loan
documentation. The commitment provides financing for up to five years at a
spread over LIBOR. As of September 30, 2003, there were no borrowings under
this commitment.

Equity Transactions

On April 25, 2003, we sold 2,350,000 common shares in an underwritten public
offering at an initial price to the public of $26.00 per share under our shelf
registration statement filed with the SEC on March 2, 1999, which we refer to
as the Shelf Registration Statement. In addition, on May 2, 2003, 352,500
common shares subject to the underwriters over-allotment option were issued at
an initial price to the public of $26.00 per share. Net proceeds to the
Company, after deducting the discounts and commissions to the underwriters and
other expenses of this offering, totaled approximately $66.4 million. After
the offering, $64.2 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 used them to fund acquisitions, repay borrowings
under our short-term credit facilities and for general corporate purposes.

On June 25, 2003, we filed a shelf registration statement, which we refer to as
the 2003 Shelf Registration Statement, with the SEC relating to the future
offering of up to an aggregate of $500 million of common shares, preferred
shares, depositary shares, debt securities and warrants exercisable for common
or preferred shares. We believe the 2003 Shelf Registration Statement will
provide us with more efficient and immediate access to capital markets when
considered appropriate. As of June 30, 2003, we had not issued any securities
pursuant to the 2003 Shelf Registration Statement and, thus, $500 million was
available under the 2003 Shelf Registration Statement for the issuance of
securities.

Dividend Reinvestment and Share Purchase Plan

During April 2000, we implemented a DRIP Plan, which was subsequently amended
in March 2001. Under the DRIP, current shareholders and Unitholders are
permitted to elect to reinvest all, a portion or none of their cash dividends
or distributions to purchase common shares. The DRIP also allows both new
investors and existing shareholders and Unitholders to make optional cash
payments to purchase common shares.

The DRIP permits current shareholders, Unitholders and new investors to invest
a minimum of $500 up to a maximum of $10,000 in common shares per month. The
DRIP also allows us to raise additional capital by waiving the limitations on
the $10,000 maximum per month, as 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%) to the market price.
Shares purchased under the DRIP through optional cash payments of $10,000 or
less are purchased at market price.

Common shares may be purchased directly from us or in open market or privately
negotiated transactions,

31



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as we determine from time to time, to fulfill the
requirements for the DRIP. For the three months ended
September 30, 2003, we issued approximately 63,600 common shares under the
DRIP, totaling approximately $1.8 million. For the nine months ended September
30, 2003, we issued approximately 167,300 common shares under the DRIP,
totaling approximately $4.3 million.

Common Share Repurchase Program

During 1998, we announced that our Board of Trustees had authorized the
repurchase of up to 6.0 million common shares. Purchases have been and will be
made from time to time in open market transactions at prevailing prices or in
negotiated private transactions at the discretion of management. During the
nine months ended September 30, 2003, no common shares were repurchased. From
the inception of the common share repurchase program through September 30,
2003, a total of 4,094,700 common shares have been repurchased at an average
price of $10.62 per common share. In conjunction with the common share
repurchases, the Partnership redeemed an equivalent number of Units from the
Company for equivalent purchase prices.

FUNDS FROM OPERATIONS (FFO)

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

32



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The following table reconciles FFO and FFO per share for the three months and
nine months ended September 30, 2003 and 2002 to their most directly comparable
GAAP measures, net income and net income per share (in thousands, except per
share data):

|                                                                                                       |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                       |  | Three Months Ended |        | Nine Months Ended
|                                                                                                       |  | September 30,      |        | September 30,    
|                                                                                                       |  |                    |        |                  
|                                                                                                       |  | 2003               |        | 2002              |  | 2003 |        | 2002
|                                                                                                       |  |                    |        |                   |  |      |        |     
|Net income                                                                                             |  | $                  | 13,071 |                   |  | $    | 10,924 |      |  | $ | 37,718 |   |  | $ | 32,692 |  
|Real estate depreciation and amortization                                                              |  |                    | 7,817  |                   |  |      | 6,777  |      |  |   | 22,882 |   |  |   | 18,992 |  
|Minority interest related to income from
continuing operations and income from
discontinued operations |  |                    | 3,383  |                   |  |      | 3,298  |      |  |   | 10,384 |   |  |   | 10,070 |  
|Gain on sale of real estate                                                                            |  |                    |       |                   |  |      | (222   | )    |  |   | (58    | ) |  |   | (222   | )
|                                                                                                       |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|FFO                                                                                                    |  | $                  | 24,271 |                   |  | $    | 20,777 |      |  | $ | 70,926 |   |  | $ | 61,532 |  
|                                                                                                       |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted average number of common shares
used to compute basic net income per
share                    |  |                    | 31,919 |                   |  |      | 27,917 |      |  |   | 30,303 |   |  |   | 27,291 |  
|                                                                                                       |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted average number of common shares
used to compute fully diluted net income
per share            |  |                    | 32,731 |                   |  |      | 28,956 |      |  |   | 31,198 |   |  |   | 28,454 |  
|                                                                                                       |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted average number of common shares
and units used to compute basic FFO per
share                 |  |                    | 40,185 |                   |  |      | 36,526 |      |  |   | 38,652 |   |  |   | 35,774 |  
|                                                                                                       |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted average number of common shares
and units used to compute fully diluted
FFO per share         |  |                    | 40,997 |                   |  |      | 37,565 |      |  |   | 39,547 |   |  |   | 36,937 |  
|                                                                                                       |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Basic net income per share                                                                             |  | $                  | 0.41   |                   |  | $    | 0.39   |      |  | $ | 1.24   |   |  | $ | 1.20   |  
|                                                                                                       |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Diluted net income per share                                                                           |  | $                  | 0.40   |                   |  | $    | 0.38   |      |  | $ | 1.22   |   |  | $ | 1.16   |  
|                                                                                                       |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Basic FFO per share                                                                                    |  | $                  | 0.60   |                   |  | $    | 0.57   |      |  | $ | 1.83   |   |  | $ | 1.72   |  
|                                                                                                       |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Diluted FFO per share                                                                                  |  | $                  | 0.59   |                   |  | $    | 0.55   |      |  | $ | 1.79   |   |  | $ | 1.67   |  
|                                                                                                       |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to certain financial market risks, the most predominant being
fluctuations in interest rates. Interest rate fluctuations are monitored by
our management as an integral part of our overall risk management program,
which recognizes the unpredictability of financial markets and seeks to reduce
the potentially adverse effect on our results of operations. In general, our
policy of substantially match-funding at least 70% of our total outstanding
debt with leases reduces our exposure to interest rate fluctuations. As of
September 30, 2003, approximately 91% of our debt outstanding was substantially
match-funded debt. We have used and may continue to use interest rate swap
arrangements to minimize interest rate risk and to match-fund our long-term
debt with our long-term leases. We do not enter into interest rate swap
arrangements for trading purposes.

During the nine months ended September 30, 2003, our fixed rate debt increased
from $593.9 million as of December 31, 2002 to $792.9 million as of September
30, 2003. Interest rate fluctuations may affect

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the fair value of our fixed rate debt instruments. If interest rates on our
fixed rate debt instruments at September 30, 2003 had been one percentage point
higher or lower, the fair value of those debt instruments on that date would
have decreased or increased, respectively, by approximately $52.7 million.

As of September 30, 2003, approximately $413 million, or 24% of our total real
estate portfolio, was leased to tenants utilizing our variable rate lease
program, as compared to $418 million as of December 31, 2002. Under these
leases, base rent changes monthly using a spread over an applicable index,
typically LIBOR. The vast majority of our variable rate lease agreements
contain minimum lease rates, generally between 8% and 9%, and fixed rate
conversion features generally with minimum rates of 10.0% to 10.25% , and none
of these leases contains a maximum rate. The execution of these variable rate
leases has enabled us to utilize variable rate debt, which totaled $255 million
as of September 30, 2003, as compared to $416 million as of December 31, 2002.
The investment spreads on our variable rate lease portfolio will change under
certain interest rate conditions. Our strategy of including minimum lease
rates in our variable rate leases allows us to realize additional investment
spread during the current low short-term interest rate environment. During
the past year, as LIBOR has declined, the interest expense on our variable rate
debt has also declined. However, the revenue generated from the vast majority
of our variable rate leases has remained constant during this same time period,
since the minimum lease rates were in effect at these LIBOR levels. Because
many of our leases are subject to minimum lease rates, as LIBOR rises, our
investment spreads will contract from current levels until the one-month LIBOR
reaches 3.0% to 3.5%. At that time, our variable lease rates and variable debt
rates will rise equally with LIBOR.

If interest rates on our variable rate debt instruments outstanding at
September 30, 2003 had been 1% higher or lower, our annual interest expense
relating to those debt instruments would have increased or decreased,
respectively, by approximately $2.5 million, based on balances at September 30,
2003. This impact on net income as a result of an increase or decrease in
interest rates by 1% is partially reduced by the structure of our variable rate
leases as noted above. Because of the minimum lease rates built into the
majority of our leases, if the underlying index on our variable rate lease
agreements outstanding at September 30, 2003 had been 1% higher or lower, our
annual rental revenue relating to those lease agreements would have increased
by approximately $438,000 or decreased by approximately $380,000 respectively.
Assuming the underlying index increased to a level where none of our minimum
lease rates were triggered, a 1% increase or decrease in the underlying index
would increase or decrease our rental revenue by approximately $3.2 to $4.1
million because of certain investment spread variations at various LIBOR
levels.

Item 4. Controls and Procedures

Quarterly Evaluation.We carried out an evaluation as of September 30, 2003 of
the effectiveness of the design and operation of our disclosure controls and
procedures, which we refer to as our disclosure controls, and our internal
controls and procedures for financial reporting, which we refer to as our
internal controls. This evaluation was done under the supervision and with the
participation of management, including our President and Chief Executive
Officer and our Senior Vice President, Chief Financial Officer and Treasurer.
Rules adopted by the SEC require that we present the conclusions of the
President and Chief Executive Officer and our Senior Vice President, Chief
Financial Officer and Treasurer about the effectiveness of our disclosure
controls and internal controls as of the end of the period covered by this
quarterly report.

CEO and CFO Certifications.Included as Exhibits 31.1 and 31.2 to this
Quarterly Report on Form 10-Q are forms of Certification of our President and
Chief Executive Officer and our Senior Vice President, Chief Financial Officer
and Treasurer. The forms of Certification are required in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002. This section of the Quarterly
Report on Form 10-Q which you

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are currently reading is the information
concerning the evaluation referred to in the Section 302
certifications and this information should be read in conjunction with the
Section 302 certifications for a more complete understanding of the topics
presented.

Disclosure Controls and Procedures and Internal Control over Financial
Reporting.Disclosure controls and procedures are designed with the objective
of ensuring that information required to be disclosed in our reports filed or
submitted under the Exchange Act, such as this Quarterly Report on Form 10-Q,
is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms. Disclosure controls and procedures are
also designed with the objective of ensuring that such information is
accumulated and communicated to our management, including our President and
Chief Executive Officer and our Senior Vice President, Chief Financial Officer
and Treasurer, as appropriate to allow timely decisions regarding required
disclosure.

Internal control over financial reporting is a process designed by, or under
the supervision of our President and Chief Executive Officer and our Senior
Vice President, Chief Financial Officer and Treasurer, and effected by our
Board of Directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with GAAP and
includes those policies and procedures that:



| |  |  | pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of our
assets;                                                                                                                              
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that our receipts and expenditures are being made only
in accordance with authorizations of management or our Board; and
|
| |  |  | provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets
that could have a material adverse effect on our financial statements.                                                                  

Limitations on the Effectiveness of Controls.Management, including our
President and Chief Executive Officer and our Senior Vice President, Chief
Financial Officer and Treasurer, do not expect that our disclosure controls and
procedures or our internal control over financial reporting will prevent all
errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by managements override of the control.
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected.

Scope of the Evaluation.The evaluation by our President and Chief Executive
Officer and our Senior Vice President, Chief Financial Officer and Treasurer of
our disclosure controls and procedures and our internal control over financial
reporting included a review of procedures and discussions with our Disclosure
Control Monitor and others in our organization. In the course of the
evaluation, we sought to

35



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identify data errors, control problems or acts of
fraud and to confirm that appropriate corrective action,
including process improvements, were being undertaken. This type of evaluation
is done on a quarterly basis so that the conclusions concerning controls
effectiveness can be reported in our Quarterly Reports on Form 10-Q and Annual
Report on Form 10-K.

Our internal control over financial reporting is also evaluated on an ongoing
basis by personnel in our Accounting department and by our independent auditors
in connection with their audit and review activities. The overall goals of
these various evaluation activities are to monitor our disclosure controls and
procedures and our internal control over financial reporting and to make
modifications as necessary. Our intent in this regard is that the disclosure
controls and procedures and the internal control over financial reporting will
be maintained as systems that change (including with improvements and
corrections) as conditions warrant. Among other matters, we sought in our
evaluation to determine whether there were any significant deficiencies or
material weaknesses in our internal control over financial reporting, or
whether we had identified any acts of fraud involving personnel who have a
significant role in our internal control over financial reporting. This
information was important both for the evaluation generally and because the
Section 302 certifications require that our President and Chief Executive
Officer and our Senior Vice President, Chief Financial Officer and Treasurer
disclose that information to the Audit Committee of our Board of Trustees and
to our independent auditors and to report on related matters in this section of
the Quarterly Report on Form 10-Q. In the professional auditing literature,
significant deficiencies are referred to as reportable conditions; these
are control issues that could have a significant adverse effect on the ability
to record, process, summarize and report financial data in the financial
statements. A material weakness is defined in the auditing literature as a
particularly serious reportable condition where the internal control does not
reduce to a relatively low level the risk that misstatements caused by error or
fraud may occur in amounts that would be material in relation to the financial
statements and not be detected within a timely period by employees in the
normal course of performing their assigned functions. We also sought to deal
with other control matters in the evaluation, and in each case if a problem was
identified, we considered what revision, improvement and/or correction was
necessary to be made in accordance with our on-going procedures.

Conclusions.Based upon the evaluation, our President and Chief Executive
Officer and our Senior Vice President, Chief Financial Officer and Treasurer
have concluded that, as of September 30, 2003 and subject to the limitations
noted above, our disclosure controls and procedures were effective at the
reasonable assurance level to ensure that material information relating to us
and our consolidated subsidiaries is made known to management, including our
President and Chief Executive Officer and our Senior Vice President, Chief
Financial Officer and Treasurer.

During the three months ended September 30, 2003, there were no significant
changes in our internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect our internal control for
financial reporting.

36



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##### 



CAPITAL AUTOMOTIVE REIT
PART II-OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 2. Changes in Securities

Not applicable.

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:

|      |  |                                                                                                                               
|----- |  | ------------------------------------------------------------------------------------------------------------------------------
|10.20 |  | Employment Agreement dated as of October 15, 2003 by and between
Capital Automotive L.P. and Lisa M. Clements (filed herewith)
|      |  |                                                                                                                               
|31.1  |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer (filed herewith)                                            
|      |  |                                                                                                                               
|31.2  |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer (filed herewith)                                            
|      |  |                                                                                                                               
|32.1  |  | Section 1350 Certification of Chief Executive Officer (filed herewith)                                                        
|      |  |                                                                                                                               
|32.2  |  | Section 1350 Certification of Chief Financial Officer (filed herewith)                                                        

(b)  Reports on Form 8-K

A Form 8-K was dated and furnished to the SEC on July 22, 2003 in response to
Items 7 and 12 to file a press release announcing our financial results for the
quarter ended June 30, 2003.

37



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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                                                
| |  |                         |  | Senior Vice President, Chief Financial Officer and Treasurer
| |  |                         |  | (principal financial officer)                               

Dated: November 13, 2003

38