##### 



FORM 10-Q
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For quarterly period ended June 30, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 COMMISSION
FILE NUMBER 000-23733
 CAPITAL AUTOMOTIVE REIT
  Maryland
(State of organization)
    
    54-1870224
(I.R.S. Employer Identification Number)
 
 
  þ o
  þ o




---



##### 



CAPITAL AUTOMOTIVE REIT
 FORM 10-Q
INDEX
 Page No.Part I  Financial InformationItem 1 - Financial Statements.Consolidated Balance Sheets  June 30, 2005 (unaudited) and
December 31, 2004
    
    
    3Consolidated Statements of Operations (unaudited)  three months
and six months ended June 30, 2005 and June 30, 2004
    
    
    4Consolidated Statements of Comprehensive Income (unaudited)  three
months and six months ended June 30, 2005 and June 30, 2004
    
    
    5Consolidated Statements of Cash Flows (unaudited)  six months ended
June 30, 2005 and June 30, 2004
    
    
    6Consolidated Statements of Changes in Shareholders Equity
(unaudited)  six months ended June 30, 2005
    
    
    7Notes to Consolidated Financial Statements (unaudited)
    
    
    8Item 2 - Managements Discussion and Analysis of Financial Condition
and Results of Operations.
    
    
    27Item 3 - Quantitative and Qualitative Disclosures About Market Risk.
    
    
    47Item 4 - Controls and Procedures.
    
    
    48Part II  Other InformationItem 1 - Legal Proceedings.
    
    
    49Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    49Item 3 - Defaults Upon Senior Securities.
    
    
    49Item 4 - Submission of Matters to a Vote of Security Holders.
    
    
    49Item 5 - Other Information.
    
    
    50Item 6 - Exhibits.
    
    
    50Signatures
    
    
    51
 2




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##### 



PART
I  FINANCIAL INFORMATION
 ITEM I  FINANCIAL STATEMENTS
 CAPITAL AUTOMOTIVE REIT
 CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 June 30,
    
    December 31,2005
    
    2004(unaudited)ASSETSReal estate:Land
    
    $
    879,847
    
    
    $
    866,480Buildings and improvements
    
    
    1,376,756
    
    
    
    1,330,843Accumulated depreciation
    
    
    (162,696
    )
    
    
    (143,886
    )2,093,907
    
    
    
    2,053,437Mortgages and other financing receivables
    
    
    216,676
    
    
    
    43,378Cash and cash equivalents
    
    
    7,247
    
    
    
    8,332Other assets, net
    
    
    56,538
    
    
    
    53,010Total Assets
    
    $
    2,374,368
    
    
    $
    2,158,157LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Mortgage debt
    
    $
    541,370
    
    
    $
    634,365Unsecured debt
    
    
    558,553
    
    
    
    381,592Borrowings under credit facilities
    
    
    75,000
    
    
    
    30,000Accounts payable and accrued expenses
    
    
    21,368
    
    
    
    23,731Security deposits payable
    
    
    10,180
    
    
    
    9,665Total Liabilities
    
    
    1,206,471
    
    
    
    1,079,353Minority Interest
    
    
    148,046
    
    
    
    144,877Shareholders EquityPreferred shares, par value $.01 per share; 20 million shares authorized,3,950,000 Series A Cumulative Redeemable Preferred Shares issued
and outstanding as of June 30, 2005 and December 31, 2004
    
    
    40
    
    
    
    402,600,000 Series B Cumulative Redeemable Preferred Shares issued
and outstanding as of June 30, 2005 and December 31, 2004
    
    
    26
    
    
    
    26Common shares, par value $.01 per share; 100 million shares authorized,46,173,833 shares issued and outstanding as of June 30, 2005
and
43,406,280 shares issued and outstanding as of December 31, 2004
    
    
    462
    
    
    
    434Additional paid-in capital
    
    
    1,042,903
    
    
    
    957,938Deferred compensation
    
    
    (7,212
    )
    
    
    (3,816
    )Accumulated other comprehensive income
    
    
    85
    
    
    
    Distributions in excess of accumulated earnings
    
    
    (16,453
    )
    
    
    (20,695
    )Total Shareholders Equity
    
    
    1,019,851
    
    
    
    933,927Total Liabilities and Shareholders Equity
    
    $
    2,374,368
    
    
    $
    2,158,157
  3




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##### 



CAPITAL AUTOMOTIVE REIT
 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Revenue:Rental
    
    $
    56,810
    
    
    $
    47,417
    
    
    $
    112,078
    
    
    $
    93,620Mortgage and other financing
    
    
    1,611
    
    
    
    418
    
    
    
    2,497
    
    
    
    1,121Interest and other
    
    
    557
    
    
    
    170
    
    
    
    757
    
    
    
    437Total revenue
    
    
    58,978
    
    
    
    48,005
    
    
    
    115,332
    
    
    
    95,178Expenses:Depreciation and amortization
    
    
    10,217
    
    
    
    8,761
    
    
    
    20,279
    
    
    
    17,266General and administrative
    
    
    3,420
    
    
    
    2,994
    
    
    
    6,704
    
    
    
    5,735Interest
    
    
    17,435
    
    
    
    15,801
    
    
    
    33,327
    
    
    
    32,719Debt extinguishment charge
    
    
    
    
    
    
    8,712
    
    
    
    
    
    
    
    8,712Total expenses
    
    
    31,072
    
    
    
    36,268
    
    
    
    60,310
    
    
    
    64,432Income from continuing operations before minority interest
    
    
    27,906
    
    
    
    11,737
    
    
    
    55,022
    
    
    
    30,746Minority interest
    
    
    (3,846
    )
    
    
    (1,586
    )
    
    
    (7,632
    )
    
    
    (4,774
    )Income from continuing operations
    
    
    24,060
    
    
    
    10,151
    
    
    
    47,390
    
    
    
    25,972Income from discontinued operations, net of minority interest
    
    
    236
    
    
    
    666
    
    
    
    445
    
    
    
    2,438Gain on sale of real estate, net of minority interest
    
    
    514
    
    
    
    259
    
    
    
    598
    
    
    
    1,212Total discontinued operations
    
    
    750
    
    
    
    925
    
    
    
    1,043
    
    
    
    3,650Net income
    
    
    24,810
    
    
    
    11,076
    
    
    
    48,433
    
    
    
    29,622Preferred share dividends
    
    
    (3,152
    )
    
    
    (2,776
    )
    
    
    (6,303
    )
    
    
    (4,628
    )Net income available to common shareholders  basic and diluted
    
    $
    21,658
    
    
    $
    8,300
    
    
    $
    42,130
    
    
    $
    24,994Common shares outstanding used to compute
basic earnings per common share
    
    
    43,992
    
    
    
    36,057
    
    
    
    43,616
    
    
    
    35,053Basic earnings per common share:Income from continuing operations
    
    $
    0.48
    
    
    $
    0.20
    
    
    $
    0.94
    
    
    $
    0.61Net income
    
    $
    0.49
    
    
    $
    0.23
    
    
    $
    0.97
    
    
    $
    0.71Common shares outstanding used to compute
diluted earnings per common share
    
    
    44,331
    
    
    
    36,501
    
    
    
    43,919
    
    
    
    35,587Diluted earnings per common share:Income from continuing operations
    
    $
    0.47
    
    
    $
    0.20
    
    
    $
    0.94
    
    
    $
    0.60Net income
    
    $
    0.49
    
    
    $
    0.23
    
    
    $
    0.96
    
    
    $
    0.71Dividends declared per common share
    
    $
    0.4380
    
    
    $
    0.4200
    
    
    $
    0.8685
    
    
    $
    0.8365
  4




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##### 



CAPITAL AUTOMOTIVE REIT
 UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    

    2004
    
    2005
    
    2004Net income
    
    $
    24,810
    
    
    $
    11,076
    
    
    $
    48,433
    
    
    $
    29,622Other comprehensive income:Change in valuation of interest rate swap, net of minority interest
    
    
    
    
    
    
    10,333
    
    
    
    
    
    
    
    6,693Change in foreign currency translation, net of minority interest
    
    
    72
    
    
    
    
    
    
    
    72
    
    
    
    Other comprehensive income
    
    
    72
    
    
    
    10,333
    
    
    
    72
    
    
    
    6,693Total comprehensive income
    
    $
    24,882
    
    
    $
    21,409
    
    
    $
    48,505
    
    
    $
    36,315
  5




---



##### 



CAPITAL AUTOMOTIVE REIT
 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Six Months Ended June 30,2005
    
    2004Cash flows from operating activities:Net income
    
    $
    48,433
    
    
    $
    29,622Adjustments to reconcile net income to net cash provided by operating activities:Gain on disposition of real estate net of minority interest
    
    
    (598
    )
    
    
    (1,212
    )Stock compensation expense
    
    
    1,152
    
    
    
    728Depreciation and amortization
    
    
    22,216
    
    
    
    19,282Write-off of deferred loan fees related to debt extinguishment
    
    
    
    
    
    
    2,497Minority interest expense including amounts attributable to discontinued operations
    
    
    7,715
    
    
    
    5,321Changes in assets and liabilities:Increase in other assets
    
    
    (3,928
    )
    
    
    (3,274
    )Increase in accounts payable and accrued expenses
    
    
    510
    
    
    
    5,940Increase (decrease) in security deposits payable
    
    
    515
    
    
    
    (614
    )Net cash provided by operating activities
    
    
    76,015
    
    
    
    58,290Cash flows from investing activities:Purchase of furniture and equipment, net of disposals
    
    
    (84
    )
    
    
    (17
    )Property acquisitions and improvements
    
    
    (69,891
    )
    
    
    (155,278
    )Investments in mortgages and other financing receivables
    
    
    (183,689
    )
    
    
    (12,382
    )Investments in joint venture
    
    
    (2,553
    )
    
    
    Proceeds from mortgages and other financing receivables
    
    
    15,507
    
    
    
    9,996Property dispositions
    
    
    4,736
    
    
    
    20,658Net cash used in investing activities
    
    
    (235,974
    )
    
    
    (137,023
    )Cash flows from financing activities:Proceeds from borrowings under credit facilities
    
    
    195,000
    
    
    
    120,000Proceeds from debt issuance
    
    
    175,000
    
    
    
    272,175Repayment of borrowings under credit facilities
    
    
    (150,000
    )
    
    
    (117,999
    )Repayment of debt
    
    
    (81,465
    )
    
    
    (305,968
    )Debt principal payments
    
    
    (11,530
    )
    
    
    (15,602
    )Payments for debt issuance costs
    
    
    (1,478
    )
    
    
    (8,226
    )Decrease in restricted cash
    
    
    2,148
    
    
    
    5,625Payment of common share dividends
    
    
    (30,165
    )
    
    
    (24,205
    )Payment of preferred share dividends
    
    
    (6,303
    )
    
    
    (2,881
    )Distributions to minority partners
    
    
    (7,023
    )
    
    
    (6,480
    )Series A Cumulative Redeemable Preferred Shares issuance costs
    
    
    
    
    
    
    (97
    )Net proceeds from issuance of Series B Cumulative Redeemable Preferred Shares
    
    
    
    
    
    
    63,180Net proceeds from issuances of common shares, net of forfeitures
    
    
    74,690
    
    
    
    101,255Net cash provided by financing activities
    
    
    158,874
    
    
    
    80,777Net (decrease) increase in cash and cash equivalents
    
    
    (1,085
    )
    
    
    2,044Cash and cash equivalents at beginning of period
    
    
    8,332
    
    
    
    13,352Cash and cash equivalents at end of period
    
    $
    7,247
    
    
    $
    15,396Supplemental Data:Real estate acquisitions in exchange for equity issuance
    
    $
    
    
    
    $
    10,057Real estate acquisitions in exchange for like-kind property
    
    $
    
    
    
    $
    14,968Interest paid during the period
    
    $
    27,632
    
    
    $
    28,119Dividends and distributions reinvested to purchase common shares
    
    $
    7,740
    
    
    $
    5,659Change in valuation of fair value swap
    
    $
    1,961
    
    
    $
    7,136
  6




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##### 



CAPITAL AUTOMOTIVE REIT
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(in thousands, except share data)
 Distributions in
    
    
    
    
    
    AccumulatedPreferred Shares
    
    Common
    
    Additional
    
    Excess of
    
    
    
    
    
    OtherPreferred Shares
    
    Common
    
    Par Value
    
    Shares
    
    Paid-in
    
    Accumulated
    
    Deferred
    
    ComprehensiveSeries A
    
    Series B
    
    Shares
    
    Series A
    
    Series B
    
    Par Value
    
    Capital
    
    Earnings
    
    Compensation
    
    Income
    
    TotalBalance at December 31, 2004
    
    
    3,950,000
    
    
    
    2,600,000
    
    
    
    43,406,280
    
    
    $
    40
    
    
    $
    26
    
    
    $
    434
    
    
    $
    957,938
    
    
    $
    (20,695
    )
    
    $
    (3,816
    )
    
    $
    
    
    
    $
    933,927Reallocation of minority interest ownership in
Partnership
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,487
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,487
    )Net proceeds from follow-on offerings
    
    
    
    
    
    
    
    
    
    
    2,135,900
    
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    73,815
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73,836Issuance of common shares from dividend
reinvestment and share purchase plan, net of
costs
    
    
    
    
    
    
    
    
    
    
    247,784
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    8,249
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,252Issuance of restricted shares, net of forfeitures
    
    
    
    
    
    
    
    
    
    
    125,208
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    4,194
    
    
    
    
    
    
    
    (4,488
    )
    
    
    
    
    
    
    (292
    )Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,092
    
    
    
    
    
    
    
    1,092Issuance of phantom shares, net of forfeitures
    
    
    
    
    
    
    
    
    
    
    18,572
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128Exercise of common share options
    
    
    
    
    
    
    
    
    
    
    44,784
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    902
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    902Redemption of units of limited partnership
interest in the Partnership to common shares
    
    
    
    
    
    
    
    
    
    
    195,305
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    3,104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,106Accrued compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60Change in foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85
    
    
    
    85Preferred share dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,303
    )
    
    
    
    
    
    
    
    
    
    
    (6,303
    )Common share dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,888
    )
    
    
    
    
    
    
    
    
    
    
    (37,888
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,433
    
    
    
    
    
    
    
    
    
    
    
    48,433Balance at June 30, 2005 (unaudited)
    
    
    3,950,000
    
    
    
    2,600,000
    
    
    
    46,173,833
    
    
    $
    40
    
    
    $
    26
    
    
    $
    462
    
    
    $
    1,042,903
    
    
    $
    (16,453
    )
    
    $
    (7,212
    )
    
    $
    85
    
    
    $
    1,019,851
  7




---



##### 



Organization
    Basis of Presentation
  8




---



##### 



Principles of Consolidation
  Real Estate and Depreciation
    Mortgages and Other Financing Receivables
  9




---



##### 



.
 Furniture, Fixtures and Equipment
  Cash and Cash Equivalents
  Restricted Cash
  Deferred Loan Costs
  10




---



##### 



Capitalized Leasing Costs
  Income Taxes
  Rental Revenue Recognition
   11




---



##### 



Interest Rate Swaps
        12




---



##### 



Foreign Currency Translation
  Share-Based Compensation
   13




---



##### 



For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2005
    
    2004
    
    2005
    
    2004Net income available to common
shareholders, as reported
    
    $
    21,658
    
    
    $
    8,300
    
    
    $
    42,130
    
    
    $
    24,994Add: Share-based compensation
expense included in reported net
income, net of minority interest
    
    
    487
    
    
    
    329
    
    
    
    972
    
    
    
    595Deduct: Total share-based
compensation expense determined
under the fair-value-based method
for all awards, net of minority
interest
    
    
    (524
    )
    
    
    (366
    )
    
    
    (1,046
    )
    
    
    (668
    )Pro forma net income
    
    $
    21,621
    
    
    $
    8,263
    
    
    
    42,056
    
    
    $
    24,921Basic earnings per common share:As reported
    
    $
    0.49
    
    
    $
    0.23
    
    
    $
    0.97
    
    
    $
    0.71Pro forma
    
    $
    0.49
    
    
    $
    0.23
    
    
    $
    0.96
    
    
    $
    0.71Diluted earnings per common share:As reported
    
    $
    0.49
    
    
    $
    0.23
    
    
    $
    0.96
    
    
    $
    0.71Pro forma
    
    $
    0.49
    
    
    $
    0.23
    
    
    $
    0.96
    
    
    $
    0.70
 Use of Estimates
  Reclassifications
     14




---



##### 



.
 15




---



##### 



For the three months
    
    For the six monthsended June 30,
    
    ended June 30,2005
    
    2004
    
    2005
    
    2004Revenue:Rental
    
    $
    60
    
    
    $
    1,122
    
    
    $
    373
    
    
    $
    2,756Other
    
    
    250
    
    
    
    175
    
    
    
    343
    
    
    
    1,423Total revenue
    
    
    310
    
    
    
    1,297
    
    
    
    716
    
    
    
    4,179Expenses:Depreciation
    
    
    12
    
    
    
    222
    
    
    
    85
    
    
    
    540Interest
    
    
    19
    
    
    
    266
    
    
    
    103
    
    
    
    654Total expenses
    
    
    31
    
    
    
    488
    
    
    
    188
    
    
    
    1,194Income from discontinued operations before gain
on sale of real estate and minority interest
    
    
    279
    
    
    
    809
    
    
    
    528
    
    
    
    2,985Gain on sale of real estate
    
    
    609
    
    
    
    315
    
    
    
    709
    
    
    
    1,486Income related to discontinued operations
before minority interest
    
    
    888
    
    
    
    1,124
    
    
    
    1,237
    
    
    
    4,471Minority interest related to discontinued operations
    
    
    (138
    )
    
    
    (199
    )
    
    
    (194
    )
    
    
    (821
    )Total discontinued operations, net of
minority interest
    
    $
    750
    
    
    $
    925
    
    
    $
    1,043
    
    
    $
    3,650
 16




---



##### 



Principal
    
    
    
    
    
    Principal Balance
    
    
    
    
    
    Effective
    
    Term/Original
    
    Balance as of
    
    
    
    
    
    as of December 31,
    
    
    
    
    
    Interest
    
    AmortizationDescription of Debt
    
    Debt Issued
    
    June 30, 2005
    
    
    
    
    
    2004
    
    
    
    
    
    Rate*
    
    Schedule7.59% fixed rate debt due 12/1/08 (1)
    
    $
    38,050
    
    
    $
    30,694
    
    
    
    
    
    
    $
    31,513
    
    
    
    
    
    
    
    
    
    
    10 yr/17 yr5.84% fixed rate debt due 2/1/14 (2)
    
    
    11,900
    
    
    
    11,620
    
    
    
    
    
    
    
    11,728
    
    
    
    
    
    
    
    
    
    
    10 yr/25 yrTriple Net Lease Mortgage Notes, Series
2002 (3)
    
    
    325,000
    
    
    
    285,283
    
    
    
    
    
    
    
    292,557
    
    
    
    
    
    
    
    
    
    
    (3)Triple Net Lease Mortgage Notes, Series
2003-1 (4)
    
    
    228,000
    
    
    
    213,773
    
    
    
    
    
    
    
    217,102
    
    
    
    
    
    
    
    
    
    
    (4)Various variable rate debt (5)
    
    
    91,320
    
    
    
    
    
    
    
    
    
    
    
    81,465
    
    
    
    
    
    
    
    
    
    
    (5)TOTAL MORTGAGE DEBT (6)
    
    
    
    
    
    $
    541,370
    
    
    
    
    
    
    $
    634,365
    
    
    
    
    
    
    
    6.96
    %Variable rate term loan due 8/20/09 (7)
    
    
    150,000
    
    
    
    150,000
    
    
    
    
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    (7)5.46% Senior Notes due 2/24/15 (8)
    
    
    175,000
    
    
    
    175,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8)6.75% Monthly Income Notes due 4/15/19 (9)
    
    
    125,000
    
    
    
    125,000
    (10
    )

    
    
    
    
    
    125,000
    (10)
    

    
    
    
    
    
    
    
    
    (9)6% Convertible Notes due 5/15/24 (11)
    
    
    110,000
    
    
    
    110,000
    
    
    
    
    
    
    
    110,000
    
    
    
    
    
    
    
    
    
    
    (11)TOTAL UNSECURED DEBT
    
    
    
    
    
    $
    560,000
    
    
    
    
    
    
    $
    385,000
    
    
    
    
    
    
    
    5.45
    %$250 million revolving unsecured facility (7)
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    (7)TOTAL CREDIT FACILITIES
    
    
    
    
    
    $
    75,000
    
    
    
    
    
    
    $
    30,000
    
    
    
    
    
    
    
    4.38
    %TOTAL DEBT OUTSTANDING
    
    
    
    
    
    $
    1,176,370
    (10
    )

    
    
    
    
    $
    1,049,365
    (10)
    

    
    
    
    
    
    6.17
    %
 *
    
    For the quarter ended June 30, 2005. Includes deferred loan fees amortized over the life
of the loans.(1)
    
    This loan requires monthly payments of principal and interest with a final
payment at maturity of approximately $24.2 million. The Partnership has provided a
guaranty of collection limited to approximately $8.9 million of this loan, contingent
upon the lender first making written demand upon and proceeding against the borrower,
including obtaining judgment and foreclosing upon all collateral. All amounts recovered
from the borrower or collateral following a default reduce such guarantee.(2)
    
    This loan requires monthly level payments of principal and interest with a final
payment at maturity of approximately $9.2 million.(3)
    
    During 2002, we issued $325 million in four classes of Triple Net Lease Mortgage
Notes, Series 2002. CARS Loan Servicer L.L.C., one of our subsidiaries, is servicer of
the notes on behalf of the noteholders. 17




---



##### 



The following is a breakdown of the Triple Net Lease Mortgage Notes, Series 2002 by class: Original Principal
    
    Current PrincipalClass
    
    Balance
    
    Balance
    
    Maturity DateA-1a
    
    
    $164,136
    
    
    
    $136,686
    
    
    
    8/15/14A-1b
    
    
    9,064
    
    
    
    9,064
    
    
    
    7/15/15A-2
    
    
    75,900
    
    
    
    63,633
    
    
    
    7/15/15A-3
    
    
    75,900
    
    
    
    75,900
    
    
    
    6/15/22
 Classes A-1a and A-1b are fully-amortizing in succession over their respective terms and
Classes A-2 and A-3 are fully-amortizing in succession over 20 years. The notes have a
weighted average effective interest rate (including deferred loan fees amortized over the
life of the notes) of approximately 7.7%. The Partnership has provided a guaranty of
collection limited to approximately $35 million of this loan, contingent upon the trustee
first making written demand upon and proceeding against the borrower, including obtaining
judgment and foreclosing upon all collateral. All amounts recovered from the borrower or
collateral following a default reduce such guarantee. In connection with the issuance of
this debt, the Company guarantees certain customary, non-recourse, carveout indemnities.
Additionally, in conjunction with the servicing of the debt, the Company guarantees CARS
Loan Servicer L.L.C.s obligations to make certain principal, interest and property
protection advances.(4)
    
    During 2003, we issued $228 million in two classes of Triple Net Lease Mortgage
Notes, Series 2003-1. CARS Loan Servicer L.L.C. is servicer of the notes on behalf of
the noteholders. The following is a breakdown of the Triple Net Lease Mortgage Notes,
Series 2003-1 by class: Original Principal
    
    Current PrincipalClass
    
    Balance
    
    Balance
    
    Maturity DateA-1
    
    
    $109,000
    
    
    
    $   94,773
    
    
    
    9/25/15A-2
    
    
    119,000
    
    
    
    119,000
    
    
    
    3/25/19
 The notes amortize in succession over a 20-year amortization schedule with the Class A-1
notes fully-amortizing and the Class A-2 notes requiring a final payment at maturity of
approximately $70.8 million. The notes have a weighted average effective interest rate
(including deferred loan fees amortized over the life of the notes) of approximately
5.86%. In connection with the issuance of this debt, the Company guarantees certain
customary, non-recourse, carveout indemnities. Additionally, in conjunction with the
servicing of the debt, the Company guarantees CARS Loan Servicer L.L.C.s obligations to
make certain principal, interest and property protection advances.(5)
    
    This represents debt that was outstanding with one lender, of which approximately
$81 million was repaid during the first quarter of 2005. Approximately $73 million of
the debt repaid had a spread over the 30-day LIBOR of 175 basis points with a remaining
maturity of approximately 8.6 years. We had previously entered into an interest rate
swap arrangement with a third party to fix the interest rate on this loan to 7.5%. We
terminated the swap arrangement during the fourth quarter of 2004 in anticipation of the
debt repayment during the first quarter of 2005. The remaining debt repaid had a spread
over the three-month LIBOR of 225 basis points with a remaining maturity of
approximately 9.6 years. The debt was repaid with borrowings on our unsecured credit
facility, which were subsequently repaid with the proceeds received from the 5.46%
senior unsecured note offering described in footnote (8).(6)
    
    Our mortgage debt is subject to prepayment penalties.(7)
    
    During 2004, we closed on a syndicated unsecured revolving credit and term loan
facility. The revolving credit portion of the facility is $250 million with an initial
three-year term and an option to extend the term for an additional one-year period. The
term loan portion of the facility is a $150 million five-year unsecured term loan and
requires interest-only payments until maturity, at which time the loan requires a final
payment totaling $150 million. The facility bears interest at a spread, generally over
LIBOR, and adjusts over time, based upon our debt rating or leverage. On May 10, 2005,
we entered into an amendment with the lender to reduce the interest rate spread over
LIBOR on the term loan portion of the facility from 95 basis points to 87.5 basis points
based on our current credit ratings. The amendment did not result in a significant
modification of debt for GAAP purposes. As of June 30, 2005, the borrowings under the
term loan portion of the facility bear interest, based upon our debt rating, equal to
the 30-day LIBOR rate plus 87.5 basis points. As of June 30, 2005, the borrowings under
the revolving credit portion of the facility bear interest, based upon our debt rating,
equal to the 30-day LIBOR rate 18




---



##### 



plus 95 basis points. The term loan portion of the
facility cannot be prepaid without penalty prior to October 1, 2005.(8)
    
    On February 24, 2005, the Partnership entered into a note purchase agreement to
sell $175 million in aggregate principal amount of 5.46% senior unsecured notes in a
private offering to institutional accredited investors within the meaning of
Regulation D under the Securities Act of 1933. Pursuant to the agreement, the
Partnership issued $100 million of the notes on February 24, 2005 and an additional $75
million on March 30, 2005. The Company has guaranteed the Partnerships obligations
under the notes. Interest on the notes is payable semi-annually. The notes have a
10-year term. The Partnership may, at its option, prepay the notes, at any time, in
whole or, from time to time, in part, in an amount equal to at least $5 million of the
aggregate principal amount then outstanding, at 100% of the principal amount to be
prepaid, plus any make-whole amount due in connection with the prepayment. In general,
the make-whole amount is the amount by which the discounted value of the remaining
payments relating to the principal amount to be prepaid (determined in accordance with
the terms of the note purchase agreement) exceeds the principal amount to be prepaid.
The net proceeds to the Company, after deducting the expenses of the offering, totaled
approximately $174 million. A portion of the net proceeds were used to repay borrowings
outstanding on our syndicated unsecured credit facility and to fund acquisitions. The
remainder of the net proceeds were used to fund real estate investments and for general
corporate purposes.(9)
    
    During 2004, we closed on a public offering of $125 million 6.75% senior
unsecured monthly income notes at par. Interest on the notes is payable monthly. The
notes have a 15-year term and are redeemable at the Companys option after five years at
par. On March 18, 2004, which was the date the Company priced the notes, we entered
into an interest rate swap arrangement with a third party to cause the interest rate on
$100 million of the notes effectively to be at a floating rate of the three-month LIBOR
plus 162.4 basis points.The unrealized loss on our fair value hedge was approximately
$1.4 million and $3.4 million as of June 30, 2005 and December 31, 2004, respectively,
as further described in the Summary of Significant Accounting Policies  Interest Rate
Swaps footnote herein.(10)
    
    Although the principal balance of the $125 million 6.75% senior unsecured monthly
income notes was $125 million as of June 30, 2005 and December 31, 2004, in accordance
with GAAP, the carrying value of the debt on our balance sheet has been reduced by $1.4
million and $3.4 million as of June 30, 2005 and December 31, 2004, respectively,
representing the change in the fair value of the swap described in footnote (9) and as
more fully described in the Summary of Significant Accounting Policies  Interest Rate
Swaps footnote herein.(11)
    
    During 2004, we closed on a public offering of $110 million 6% convertible notes.
The notes have a 20-year term and are convertible, at the option of the holder, into
the Companys common shares under certain circumstances, at an initial conversion price
of $35.5679 per share, subject to certain adjustments. The initial price is equivalent
to a conversion rate of 28.1152 shares per $1,000 principal amount of notes and was
equivalent to a premium of 30% at the closing. The conversion rate will be adjusted
under certain circumstances, including common stock splits, common stock issuances as
dividends and increases in the dividend rate. The Company may, at its option, redeem
the notes for cash on or after May 15, 2009, at any time, in whole or, from time to
time, in part, at a redemption price equal to 100% of the principal amount to be
redeemed plus accrued and unpaid interest. The noteholders may require us to repurchase
all or part of the notes on May 15, 2009, May 15, 2014 and May 15, 2019, or upon a
change in control, at a price equal to 100% of the principal amount plus accrued and
unpaid interest. The notes require semi-annual interest payments. The deferred loan
fees associated with this debt are being amortized over a five-year period.   
    
    incur or guarantee additional debt;
    
    make certain distributions, investments and other restricted payments, including
 19




---



##### 



distribution payments on our outstanding common and preferred shares;
    
    limit the ability of restricted subsidiaries to make payments to us;
    
    enter into transactions with certain affiliates;
    
    create certain liens; and
    
    consolidate, merge or sell our assets.
  
    
    relating to the maintenance of the property securing the debt;
    
    restricting our ability to sell, assign or further encumber the properties
securing the debt;
    
    restricting our ability to incur additional debt;
    
    restricting our ability to amend or modify existing leases; and
    
    relating to certain prepayment restrictions.
   
    
    limit the amount of debt to a certain percentage of total assets;
    
    limit the amount of secured debt to a certain percentage of total assets;
    
    maintain certain minimum interest and debt service coverage ratios; and
    
    maintain a certain level of unencumbered assets.
  20




---



##### 



For the Year Ended December 31,
 PrincipalAmortization
    
    Maturities
    
    Total2005
    
    $
    11,902
    
    
    $
    
    
    
    $
    11,9022006
    
    
    25,142
    
    
    
    
    
    
    
    25,1422007
    
    
    26,979
    
    
    
    
    
    
    
    26,9792008
    
    
    28,735
    
    
    
    24,211
    
    
    
    52,9462009
    
    
    28,810
    
    
    
    260,000
    
    
    
    288,810Thereafter
    
    
    315,594
    
    
    
    379,997
    
    
    
    695,591Total
    
    $
    437,162
    
    
    $
    664,208
    
    
    $
    1,101,370
     Series of
    
    
    
    
    
    
    
    Annual
    
    Annual
    
    EarliestPreferred Share
    
    # of
    
    Month
    
    Dividend
    
    Dividend
    
    Redemptionof Beneficial Interest
    
    Shares Issued
    
    of Issuance
    
    Yield (1)
    
    Per Share
    
    DateSeries A
    
    
    3,950,000
    
    
    December 2003
    
    
    7.5
    %
    
    $
    1.875
    
    
    12/11/08Series B
    
    
    2,600,000
    
    
    April/May 2004
    
    
    8.0
    %
    
    
    2.000
    
    
    4/27/09
 (1)
    
    Yield computed based on $25.00 per share redemption price.  21




---



##### 



22




---



##### 



23




---



##### 



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Income from continuing operations
    
    $
    24,060
    
    
    $
    10,151
    
    
    $
    47,390
    
    
    $
    25,972Preferred share dividends
    
    
    (3,152
    )
    
    
    (2,776
    )
    
    
    (6,303
    )
    
    
    (4,628
    )Income from continuing operations used
to calculate basic earnings per common
share
    
    
    20,908
    
    
    
    7,375
    
    
    
    41,087
    
    
    
    21,344Impact of dilutive securities
    
    
    24
    
    
    
    50
    
    
    
    44
    
    
    
    98Income from continuing operations used
to calculate diluted earnings per
common share
    
    $
    20,932
    
    
    $
    7,425
    
    
    $
    41,131
    
    
    $
    21,442Basic earnings per common share
    
    $
    0.48
    
    
    $
    0.20
    
    
    $
    0.94
    
    
    $
    0.61Diluted earnings per common share
    
    $
    0.47
    
    
    $
    0.20
    
    
    $
    0.94
    
    
    $
    0.60Net income available to common
shareholders
    
    $
    21,658
    
    
    $
    8,300
    
    
    $
    42,130
    
    
    $
    24,994Impact of dilutive securities
    
    
    24
    
    
    
    61
    
    
    
    45
    
    
    
    119Net income used to calculate diluted
earnings per common share
    
    $
    21,682
    
    
    $
    8,361
    
    
    $
    42,175
    
    
    $
    25,113Basic earnings per common share
    
    $
    0.49
    
    
    $
    0.23
    
    
    $
    0.97
    
    
    $
    0.71Diluted earnings per common share
    
    $
    0.49
    
    
    $
    0.23
    
    
    $
    0.96
    
    
    $
    0.71Weighted average shares:Common shares outstanding used to
compute basic earnings per common
share
    
    
    43,992
    
    
    

    36,057
    
    
    
    43,616
    
    
    
    35,053Impact of dilutive securities
    
    
    339
    
    
    
    444
    
    
    
    303
    
    
    
    534Common shares outstanding used to
compute diluted earnings per common
share
    
    
    44,331
    
    
    
    36,501
    
    
    
    43,919
    
    
    
    35,587
 24




---



##### 



Record Date
    
    Date Payable
    
    Per ShareCommon Shares:Fourth Quarter 2004
    
    February 7, 2005
    
    February 18, 2005
    
    $
    0.43050First Quarter 2005
    
    May 10, 2005
    
    May 20, 2005
    
    $
    0.43800Second Quarter 2005
    
    August 9, 2005
    
    August 19, 2005
    
    $
    0.44600Series A Preferred Shares:November 1, 2004 - January 31, 2005
    
    February 1, 2005
    
    February 15, 2005
    
    $
    0.46875February 1, 2005 - April 30, 2005
    
    May 2, 2005
    
    May 16, 2005
    
    $
    0.46875May 1, 2005 - July 31, 2005
    
    August 1, 2005
    
    August 15, 2005
    
    $
    0.46875Series B Preferred Shares:November 1, 2004 - January 31, 2005
    
    February 1, 2005
    
    February 15, 2005
    
    $
    0.50000February 1, 2005 - April 30, 2005
    
    May 2, 2005
    
    May 16, 2005
    
    $
    0.50000May 1, 2005 - July 31, 2005
    
    August 1, 2005
    
    August 15, 2005
    
    $
    0.50000
  Facility Improvements and Construction Financing
  Guarantee Commitments
   25




---



##### 



26




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
      27




---



##### 



Real Estate Investments
    28




---



##### 



Financing
  
    
    On May 10, 2005, we entered into an amendment with the lender to reduce the interest
rate spread over LIBOR on the term loan portion of our syndicated unsecured revolving
credit and term loan facility from 95 basis points to 87.5 basis points based on our
current credit ratings, as further described in the Liquidity and Capital Resources  Debt
Outstandingsection herein; and
    
    On June 6, 2005, we issued 2,135,900 common shares in an underwritten public offering at
an initial price to the public of $35.12 per share, as further described in the Liquidity
and Capital Resources  Equity Offeringssection herein.
  Revenue
 Liquidity and Capital
Resources  Variable Rate Lease Program
 For the three months
    
    
    
    
    
    For the six monthsended June 30,
    
    %
    
    ended June 30,
    
    %(dollars in thousands)
    
    2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    ChangeRevenueRental
    
    $
    56,810
    
    
    $
    47,417
    
    
    
    20
    %
    
    $
    112,078
    
    
    $
    93,620
    
    
    
    20
    %Mortgage and other
financing
    
    
    1,611
    
    
    
    418
    
    
    
    285
    %
    
    
    2,497
    
    
    
    1,121
    
    
    
    123
    %Interest and other
    
    
    557
    
    
    
    170
    
    
    
    228
    %
    
    
    757
    
    
    
    437
    
    
    
    73
    %Total
    
    $
    58,978
    
    
    $
    48,005
    
    
    
    23
    %
    
    $
    115,332
    
    
    $
    95,178
    
    
    
    21
    %
 Rental. Discontinued Operations
 Real Estate beforeAccumulated
    
    
    
    
    
    
    
    
    
    Total SquareDepreciation (in
    
    
    
    
    
    
    
    
    
    Footage (inAs of
    
    thousands)
    
    Number of Properties
    
    Total Land Acreage
    
    millions)December 31, 2003
    
    $
    1,791,977
    
    
    
    301
    
    
    
    2,182
    
    
    
    12.9June 30, 2004
    
    
    1,997,780
    
    
    
    319
    
    
    
    2,380
    
    
    
    13.9December 31, 2004
    
    
    2,186,712
    
    
    
    340
    
    
    
    2,532
    
    
    
    14.8June 30, 2005
    
    
    2,256,603
    
    
    
    345
    
    
    
    2,687
    
    
    
    15.1
  Mortgage and Other Financing.
 29




---



##### 



Interest and Other.
 Expenses
 For the three months
    
    
    
    
    
    For the six monthsended June 30,
    
    %
    
    ended June 30,
    
    %(dollars in thousands)
    
    2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    ChangeExpensesDepreciation and amortization
    
    $
    10,217
    
    
    $
    8,761
    
    
    
    17
    %
    
    $
    20,279
    
    
    $
    17,266
    
    
    
    17
    %General and administrative
    
    
    3,420
    
    
    
    2,994
    
    
    
    14
    %
    
    
    6,704
    
    
    
    5,735
    
    
    
    17
    %Interest
    
    
    17,435
    
    
    
    15,801
    
    
    
    10
    %
    
    
    33,327
    
    
    
    32,719
    
    
    
    2
    %Debt extinguishment charge
    
    
    
    
    
    
    8,712
    
    
    
    (100
    %)
    
    
    
    
    
    
    8,712
    
    
    
    (100
    %)Total
    
    $
    31,072
    
    
    $
    36,268
    
    
    
    (14
    %)
    
    $
    60,310
    
    
    $
    64,432
    
    
    
    (6
    %)
 Depreciation and Amortization. Revenue  Rental
 General and Administrative.
 
    
    an increase in payroll and related expenses primarily attributable to an increase in
overall compensation and an increase in the number of employees;
    
    an increase in professional fees related to information technology consultation
services; and
    
    an increase in state and local income and business taxes primarily due to the growth of
our real estate portfolio as well as changes in state tax laws.
  30




---



##### 



Interest.
 (in thousands)Balance as of:
    
    Fixed Rate
    
    Variable Rate
    
    Credit Facilities
    
    Total6/30/04
    
    $
    794,249
    
    
    $
    226,865
    
    
    $
    77,010
    
    
    $
    1,098,1246/30/05
    
    $
    851,370
    
    
    $
    250,000
    
    
    $
    75,000
    
    
    $
    1,176,370Effective Interest
Rate for the Three
Months Ended June
30*2004
    
    
    7.02%
    
    
    
    3.71%
    
    
    
    4.25%
    
    
    
    6.27%2005
    
    
    6.63%
    
    
    
    4.71%
    
    
    
    4.38%
    
    
    
    6.17%Effective Interest
Rate for the Six
Months Ended June
30*2004
    
    
    7.10%
    
    
    
    3.69%
    
    
    
    4.22%
    
    
    
    6.26%2005
    
    
    6.72%
    
    
    
    4.49%
    
    
    
    4.20%
    
    
    
    6.10%
 *
    
    Includes deferred loan fees amortized over the life of the loans. Discontinued Operations
 Discontinued Operations
   .
 31




---



##### 



For the three months
    
    For the six monthsended June 30,
    
    ended June 30,2005
    
    2004
    
    2005
    
    2004Revenue:Rental
    
    $
    60
    
    
    $
    1,122
    
    
    $
    373
    
    
    $
    2,756Other
    
    
    250
    
    
    
    175
    
    
    
    343
    
    
    
    1,423Total revenue
    
    
    310

    
    
    
    1,297
    
    
    
    716
    
    
    
    4,179Expenses:Depreciation
    
    
    12
    
    
    
    222
    
    
    
    85
    
    
    
    540Interest
    
    
    19
    
    
    
    266
    
    
    
    103
    
    
    
    654Total expenses
    
    
    31
    
    
    
    488
    
    
    
    188
    
    
    
    1,194Income from discontinued operations before gain
on sale of real estate and minority interest
    
    
    279
    
    
    
    809
    
    
    
    528
    
    
    
    2,985Gain on sale of real estate
    
    
    609
    
    
    
    315
    
    
    
    709
    
    
    
    1,486Income related to discontinued operations
before minority interest
    
    
    888
    
    
    
    1,124
    
    
    
    1,237
    
    
    
    4,471Minority interest related to discontinued operations
    
    
    (138
    )
    
    
    (199
    )
    
    
    (194
    )
    
    
    (821
    )Total discontinued operations, net of
minority interest
    
    $
    750
    
    
    $
    925
    
    
    $
    1,043
    
    
    $
    3,650
 Preferred Share Dividends
 For the three months
    
    %
    
    For the six months
    
    %ended June 30,
    
    Change

    

ended June 30
    
    Change(dollars in thousands)
    
    2005
    
    2004
    


    
    2005
    
    2004Preferred share dividends
    
    $
    3,152
    
    
    $
    2,776
    
    
    
    14
    %
    
    $
    6,303
    
    
    $
    4,628
    
    
    
    36
    %
  Impact of Inflation
   32




---



##### 



Six Months EndedJune 30,(dollars in thousands)
    
    2005
    
    2004Cash provided by operating activities
    
    $
    73,462
    
    
    $
    58,290Cash used in investing activities
    
    
    (233,421
    )
    
    
    (137,023
    )Cash provided by financing activities
    
    
    158,874
    
    
    
    80,777
 Operating Activities
  Investing Activities
  Financing Activities
  
    
    $195.0 million of proceeds received from borrowings on our revolving credit facility;
    
    $175.0 million of proceeds received from debt issuances during the period;
    
    $74.7 million of proceeds received from the issuance of common shares, net of costs; and
    
    the decrease in restricted cash totaling $2.1 million.
  
    
    the repayment of borrowings on our revolving credit facility totaling $150.0 million;
    
    the repayment of debt totaling $81.5 million;
    
    distributions made to both common and preferred shareholders as well as minority
partners during the period totaling $43.5 million;
    
    payments of principal on outstanding debt totaling $11.5 million; and
    
    payments for debt issuance costs totaling $1.5 million.
 33




---



##### 




    
    $272.2 million of proceeds received from debt issuances during the period;
    
    $120.0 million of proceeds received from borrowings on our revolving credit facilities;
    
    $101.3 million of proceeds received from the issuance of common shares, net of costs;
    
    $63.2 million of proceeds received from our offering of 8% Series B Cumulative
Redeemable Preferred Shares, net of costs; and
    
    the decrease in restricted cash totaling $5.6 million.
  
    
    the repayment of debt totaling $306.0 million;
    
    the repayment of borrowings on our revolving credit facilities totaling $118.0 million;
    
    distributions made to both common and preferred shareholders as well as minority
partners during the period totaling $33.6 million;
    
    payments of principal on outstanding debt totaling $15.6 million; and
    
    payments for debt issuance costs totaling $8.2 million.
 Financing Strategy
     34




---



##### 



Variable Rate Lease Program
  35




---



##### 



Percentage of ourTotal Real Estate
    
    Portfolio Subject
    
    Total Variable Rate
    
    Average One-Month
    
    Average One-MonthSubject to Variable
    
    to Variable Rate
    
    Debt Outstanding
    
    LIBOR for the three
    
    LIBOR for the sixPeriod
    
    Rate Leases
    
    Leases
    
    (1)
    
    months ended
    
    months endedJune 30, 2004
    
    $
    424,169
    
    
    
    21
    %
    
    $
    303,875
    
    
    
    1.15
    %
    
    
    1.13
    %June 30, 2005
    
    
    388,657
    
    
    
    17
    %
    
    
    325,000
    
    
    
    3.11
    %
    
    
    2.88
    %
 (1)
    
    Includes amounts outstanding on our revolving credit facilities totaling $77.0 million and
$75.0 million as of June 30, 2004 and June 30, 2005, respectively. Financing Strategy
  36




---



##### 



Debt Outstanding
  Principal BalancePrincipal Balance
    
    as of December 31,
    
    Effective Interest
    
    Term/ AmortizationDescription of Debt
    
    Original Debt Issued
    
    as of June 30, 2005
    
    2004
    
    Rate*
    
    Schedule7.59% fixed rate debt due 12/1/08 (1)
    
    $
    38,050
    
    
    $
    30,694
    
    
    $
    31,513
    
    
    
    
    
    
    10 yr/17 yr5.84% fixed rate debt due 2/1/14 (2)
    
    
    11,900
    
    
    
    11,620
    
    
    
    11,728
    
    
    
    
    
    
    10 yr/25 yrTriple Net Lease Mortgage Notes, Series
2002 (3)
    
    
    325,000
    
    
    
    285,283
    
    
    
    292,557
    
    
    
    
    
    
    (3)Triple Net Lease Mortgage Notes, Series
2003-1 (4)
    
    
    228,000
    
    
    
    213,773
    
    
    
    217,102
    
    
    
    
    
    
    (4)Various variable rate debt (5)
    
    
    91,320
    
    
    
    
    
    
    
    81,465
    
    
    
    
    
    
    (5)TOTAL MORTGAGE DEBT (6)
    
    
    
    
    
    $
    541,370
    
    
    $
    634,365
    
    
    
    6.96
    %Variable rate term loan due 8/20/09 (7)
    
    
    150,000
    
    
    
    150,000
    
    
    
    150,000
    
    
    
    
    
    
    (7)5.46% Senior Notes due 2/24/15 (8)
    
    
    175,000
    
    
    
    175,000
    
    
    
    
    
    
    
    
    
    
    (8)6.75% Monthly Income Notes due 4/15/19
(9)
    
    
    125,000
    
    
    
    125,000
    (10)
    
    
    125,000
    (10)
    
    
    
    
    
    (9)6% Convertible Notes due 5/15/24 (11)
    
    
    110,000
    
    
    
    110,000
    
    
    
    110,000
    
    
    
    
    
    
    (11)TOTAL UNSECURED DEBT
    
    
    
    
    
    $
    560,000
    
    
    $
    385,000
    
    
    
    5.45
    %$250 million revolving unsecured
facility (7)
    
    
    
    
    
    
    75,000
    
    
    
    30,000
    
    
    
    
    
    
    (7)TOTAL CREDIT FACILITIES
    
    
    
    
    
    $
    75,000
    
    
    $
    30,000
    
    
    
    4.38
    %TOTAL DEBT OUTSTANDING
    
    
    
    
    
    $
    1,176,370
    (10)
    
    $
    1,049,365
    (10)
    
    
    6.17
    %
 *
    
    For the quarter ended June 30, 2005. Includes deferred loan fees amortized over the life
of the loans.(1)
    
    This loan requires monthly payments of principal and interest with a final
payment at maturity of approximately $24.2 million. The Partnership has provided a
guaranty of collection limited to approximately $8.9 million of this loan, contingent
upon the lender first making written demand upon and proceeding against the borrower,
including obtaining judgment and foreclosing upon all collateral. All amounts recovered
from the borrower or collateral following a default reduce such guarantee.(2)
    
    This loan requires monthly level payments of principal and interest with a final
payment at maturity of approximately $9.2 million.(3)
    
    During 2002, we issued $325 million in four classes of Triple Net Lease Mortgage
Notes, Series 2002. CARS Loan Servicer L.L.C., one of our subsidiaries, is servicer of
the notes on behalf of the noteholders. 37




---



##### 



The following is a breakdown of the Triple Net Lease Mortgage Notes, Series 2002 by class: Original Principal
    
    Current PrincipalClass
    
    Balance
    
    Balance
    
    Maturity DateA-1a
    
    $
    164,136
    
    
    $
    136,686
    
    
    
    8/15/14A-1b
    
    
    9,064
    
    
    
    9,064
    
    
    
    7/15/15A-2
    
    
    75,900
    
    
    
    63,633
    
    
    
    7/15/15A-3
    
    
    75,900
    
    
    
    75,900
    
    
    
    6/15/22
 
 Classes A-1a and A-1b are fully-amortizing in succession over their respective terms and
Classes A-2 and A-3 are fully-amortizing in succession over 20 years. The notes have a
weighted average effective interest rate (including deferred loan fees amortized over the
life of the notes) of approximately 7.7%. The Partnership has provided a guaranty of
collection limited to approximately $35 million of this loan, contingent upon the trustee
first making written demand upon and proceeding against the borrower, including obtaining
judgment and foreclosing upon all collateral. All amounts recovered from the borrower or
collateral following a default reduce such guarantee. In connection with the issuance of
this debt, the Company guarantees certain customary, non-recourse, carveout indemnities.
Additionally, in conjunction with the servicing of the debt, the Company guarantees CARS
Loan Servicer L.L.C.s obligations to make certain principal, interest and property
protection advances.(4)
    
    During 2003, we issued $228 million in two classes of Triple Net Lease Mortgage
Notes, Series 2003-1. CARS Loan Servicer L.L.C. is servicer of the notes on behalf of
the noteholders. The following is a breakdown of the Triple Net Lease Mortgage Notes,
Series 2003-1 by class: Original Principal
    
    Current PrincipalClass
    
    Balance
    
    Balance
    
    Maturity DateA-1
    
    $
    109,000
    
    
    $
    94,773
    
    
    
    9/25/15A-2
    
    
    119,000
    
    
    
    119,000
    
    
    
    3/25/19
 
 The notes amortize in succession over a 20-year amortization schedule with the Class A-1
notes fully-amortizing and the Class A-2 notes requiring a final payment at maturity of
approximately $70.8 million. The notes have a weighted average effective interest rate
(including deferred loan fees amortized over the life of the notes) of approximately
5.86%. In connection with the issuance of this debt, the Company guarantees certain
customary, non-recourse, carveout indemnities. Additionally, in conjunction with the
servicing of the debt, the Company guarantees CARS Loan Servicer L.L.C.s obligations to
make certain principal, interest and property protection advances.(5)
    
    This represents debt that was outstanding with one lender, of which approximately
$81 million was repaid during the first quarter of 2005. Approximately $73 million of
the debt repaid had a spread over the 30-day LIBOR of 175 basis points with a remaining
maturity of approximately 8.6 years. We had previously entered into an interest rate
swap arrangement with a third party to fix the interest rate on this loan to 7.5%. We
terminated the swap arrangement during the fourth quarter of 2004 in anticipation of the
debt repayment during the first quarter of 2005. The remaining debt repaid had a spread
over the three-month LIBOR of 225 basis points with a remaining maturity of
approximately 9.6 years. The debt was repaid with borrowings on our unsecured credit
facility, which were subsequently repaid with the proceeds received from the 5.46%
senior unsecured note offering described in footnote (8).(6)
    
    Our mortgage debt is subject to prepayment penalties.(7)
    
    During 2004, we closed on a syndicated unsecured revolving credit and term loan
facility. The revolving credit portion of the facility is $250 million with an initial
three-year term and an option to extend the term for an additional one-year period. The
term loan portion of the facility is a $150 million five-year unsecured term loan and
requires interest-only payments until maturity, at which time the loan requires a final
payment totaling $150 million. The facility bears interest at a spread, generally over
LIBOR, and adjusts over time, based upon our debt rating or leverage. On May 10, 2005,
we entered into an amendment with the lender to reduce the interest rate spread over
LIBOR on the term loan portion of the facility from 95 basis points to 87.5 basis points
based on our current credit ratings. The amendment did not result in a significant
modification of debt for GAAP purposes. As of June 30, 2005, the borrowings under the
term loan portion of the facility bear interest, based upon our debt rating, equal to
the 30-day LIBOR rate plus 87.5 basis points. As of June 30, 2005, the borrowings under
the revolving credit portion of the facility bear interest, based upon our debt rating,
equal to the 30-day LIBOR rate 38




---



##### 



plus 95 basis points. The term loan portion of the
facility cannot be prepaid without penalty prior to October 1, 2005.(8)
    
    On February 24, 2005, the Partnership entered into a note purchase agreement to
sell $175 million in aggregate principal amount of 5.46% senior unsecured notes in a
private offering to institutional accredited
investors within the meaning of Regulation D under the Securities Act of 1933. Pursuant
to the agreement, the Partnership issued $100 million of the notes on February 24, 2005
and an additional $75 million on March 30, 2005. The Company has guaranteed the
Partnerships obligations under the notes. Interest on the notes is payable
semi-annually. The notes have a 10-year term. The Partnership may, at its option,
prepay the notes, at any time, in whole or, from time to time, in part, in an amount
equal to at least $5 million of the aggregate principal amount then outstanding, at 100%
of the principal amount to be prepaid, plus any make-whole amount due in connection with
the prepayment. In general, the make-whole amount is the amount by which the discounted
value of the remaining payments relating to the principal amount to be prepaid
(determined in accordance with the terms of the note purchase agreement) exceeds the
principal amount to be prepaid. The net proceeds to the Company, after deducting the
expenses of the offering, totaled approximately $174 million. A portion of the net
proceeds were used to repay borrowings outstanding on our syndicated unsecured credit
facility and to fund acquisitions. The remainder of the net proceeds were used to fund
real estate investments and for general corporate purposes.(9)
    
    During 2004, we closed on a public offering of $125 million 6.75% senior
unsecured monthly income notes at par. Interest on the notes is payable monthly. The
notes have a 15-year term and are redeemable at the Companys option after five years at
par. On March 18, 2004, which was the date the Company priced the notes, we entered
into an interest rate swap arrangement with a third party to cause the interest rate on
$100 million of the notes effectively to be at a floating rate of the three-month LIBOR
plus 162.4 basis points.The unrealized loss on our fair value hedge was approximately
$1.4 million and $3.4 million as of June 30, 2005 and December 31, 2004, respectively,
as further described in the Summary of Significant Accounting Policies  Interest Rate
Swaps footnote herein.(10)
    
    Although the principal balance of the $125 million 6.75% senior unsecured monthly
income notes was $125 million as of June 30, 2005 and December 31, 2004, in accordance
with GAAP, the carrying value of the debt on our balance sheet has been reduced by $1.4
million and $3.4 million as of June 30, 2005 and December 31, 2004, respectively,
representing the change in the fair value of the swap described in footnote (9) and as
more fully described in the Summary of Significant Accounting Policies  Interest Rate
Swaps footnote herein.(11)
    
    During 2004, we closed on a public offering of $110 million 6% convertible notes.
The notes have a 20-year term and are convertible, at the option of the holder, into
the Companys common shares under certain circumstances, at an initial conversion price
of $35.5679 per share, subject to certain adjustments. The initial price is equivalent
to a conversion rate of 28.1152 shares per $1,000 principal amount of notes and was
equivalent to a premium of 30% at the closing. The conversion rate will be adjusted
under certain circumstances, including common stock splits, common stock issuances as
dividends and increases in the dividend rate. The Company may, at its option, redeem
the notes for cash on or after May 15, 2009, at any time, in whole or, from time to
time, in part, at a redemption price equal to 100% of the principal amount to be
redeemed plus accrued and unpaid interest. The noteholders may require us to repurchase
all or part of the notes on May 15, 2009, May 15, 2014 and May 15, 2019, or upon a
change in control, at a price equal to 100% of the principal amount plus accrued and
unpaid interest. The notes require semi-annual interest payments. The deferred loan
fees associated with this debt are being amortized over a five-year period.   
    
    incur or guarantee additional debt;
    
    make certain distributions, investments and other restricted payments, including
 39




---



##### 



distribution payments on our outstanding common and preferred shares;
    
    limit the ability of restricted subsidiaries to make payments to us;
    
    enter into transactions with certain affiliates;
    
    create certain liens; and
    
    consolidate, merge or sell our assets.
  
    
    relating to the maintenance of the property securing the debt;
    
    restricting our ability to sell, assign or further encumber the properties
securing the debt;
    
    restricting our ability to incur additional debt;
    
    restricting our ability to amend or modify existing leases; and
    
    relating to certain prepayment restrictions.
   
    
    limit the amount of debt to a certain percentage of total assets;
    
    limit the amount of secured debt to a certain percentage of total assets;
    
    maintain certain minimum interest and debt service coverage ratios; and
    
    maintain a certain level of unencumbered assets.
  Interest Rate Swaps
  40




---



##### 



Equity Offerings
  Liquidity Requirements
  41




---



##### 



For the Year Ended December 31
 PrincipalAmortization
    
    Maturities
    
    Total2005
    
    $
    11,902
    
    
    $
    
    
    
    $
    11,9022006
    
    
    25,142
    
    
    
    
    
    
    
    25,1422007
    
    
    26,979
    
    
    
    
    
    
    
    26,9792008
    
    
    28,735
    
    
    
    24,211
    
    
    
    52,9462009
    
    
    28,810
    
    
    
    260,000
    
    
    
    288,810Thereafter
    
    
    315,594
    
    
    
    379,997
    
    
    
    695,591Total
    
    $
    437,162
    
    
    $
    664,208
    
    
    $
    1,101,370
   42




---



##### 



Dividend Reinvestment and Share Purchase Plan
    Common Share Repurchase Program
  Off-Balance Sheet Arrangements
  43




---



##### 



44




---



##### 



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income
    
    $
    24,810
    
    
    $
    11,076
    
    
    $
    48,433
    
    
    $
    29,622Real estate depreciation and amortization
    
    
    10,207
    
    
    
    8,967
    
    
    
    20,312
    
    
    
    17,772Minority interest related to income from
continuing operations and income from
discontinued operations
    
    
    3,889
    
    
    
    1,729
    
    
    
    7,715
    
    
    
    5,321Gain on sale of real estate
    
    
    (514
    )
    
    
    (259
    )
    
    
    (598
    )
    
    
    (1,212
    )FFO
    
    
    38,392
    
    
    
    21,513
    
    
    
    75,862
    
    
    
    51,503Preferred share dividends
    
    
    (3,152
    )
    
    
    (2,776
    )
    
    
    (6,303
    )
    
    
    (4,628

    )FFO available to common shareholders -
basic
    
    $
    35,240
    
    
    $
    18,737
    
    
    $
    69,559
    
    
    $
    46,875Dilutive effect of convertible securities
    
    
    1,813
    
    
    
    
    
    
    
    3,624
    
    
    
    FFO available to common shareholders -
diluted
    
    $
    37,053
    
    
    $
    18,737
    
    
    $
    73,183
    
    
    $
    46,875Weighted average number of common shares
used to compute basic net income per
common share
    
    
    43,992
    
    
    
    36,057
    
    
    
    43,616
    
    
    
    35,053Weighted average number of common shares
used to compute fully diluted net income
per common share
    
    
    44,331
    
    
    
    36,501
    
    
    
    43,919
    
    
    
    35,587Weighted average number of common shares
and units used to compute basic FFO per
common share
    
    
    52,080
    
    
    
    43,822
    
    
    
    51,717
    
    
    
    42,822Weighted average number of common shares
and units used to compute fully diluted
FFO per common share
    
    
    55,512
    
    
    
    44,265
    
    
    
    55,113
    
    
    
    43,356Basic net income per common share
    
    $
    0.49
    
    
    $
    0.23
    
    
    $
    0.97
    
    
    $
    0.71Diluted net income per common share
    
    $
    0.49
    
    
    $
    0.23
    
    
    $
    0.96
    
    
    $
    0.71Basic FFO per common share
    
    $
    0.68
    
    
    $
    0.43
    
    
    $
    1.34
    
    
    $
    1.09Diluted FFO per common share (1)
    
    $
    0.67
    
    
    $
    0.42
    
    
    $
    1.33
    
    
    $
    1.08
 45




---



##### 



(1)
    
    The impact of the if-converted method, as further described in the Earnings Per Common Share
footnote to our consolidated financial statements, for the Companys contingently convertible debt
instrument, which was issued during the second quarter of 2004, on diluted FFO per common share is
dilutive for the three months and six months ended June 30, 2005. Therefore, the calculation includes the effect of the potential conversion resulting in
a reduction in interest expense totaling approximately $1.8 million and $3.6 million for the three
months and six months ended June 30, 2005, respectively, as well as an additional 3.1 million
common shares outstanding during both periods. The impact of the if-converted method for the
Companys contingently convertible debt instrument on diluted FFO per common share is anti-dilutive
for the three months and six months ended June 30, 2004. Therefore, the calculation excludes the
effect of the potential conversion for both periods. Forward-Looking Statements
  
    
    risks that our tenants will not pay rent;
    
    risks related to the mortgage loans in our portfolio, such as the risk that
our borrowers will not pay the principal or interest or otherwise default, the
level of interest income generated by the mortgage loans, the market value of
the mortgage loans and of the properties securing the loans, and provisions of
federal, state and local law that may delay or limit our ability to enforce our
rights against a borrower or guarantor in the event of a default under a loan;
    
    risks related to our reliance on a small number of dealer groups for a
significant portion of our revenue;
    
    risks of financing, such as increases in interest rates and our ability to
meet existing financial covenants, to maintain our investment-grade senior
unsecured debt ratings and to consummate planned and additional financings on
terms that are acceptable to us;
    
    risks that our growth will be limited if we cannot obtain additional capital
or refinance our maturing debt;
    
    risks that planned and additional real estate investments may not be
consummated;
    
    risks that competition for future real estate investments could result in
less favorable terms for the Company;
    
    risks relating to the automotive industry, such as the ability of our
tenants to compete effectively in the automotive retail industry or operate
profitably and the ability of our tenants to perform their lease obligations as
a result of changes in any manufacturers production, supply, vehicle
financing, incentives, warranty programs, marketing or other practices, or
changes in the economy generally;
 46




---



##### 




    
    risks generally incident to the ownership of real property, including
adverse changes in economic conditions, changes in the investment climate for
real estate, changes in real estate taxes and other operating expenses, adverse
changes in governmental rules and fiscal policies and the relative illiquidity
of real estate;
    
    risks related to our financing of new construction and improvements;
    
    environmental and other risks associated with the acquisition and leasing of
automotive properties; 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.
     Liquidity and Capital Resources
  47




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##### 



Changes in Internal Controls over Financial Reporting.
 48




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##### 



Proposal
    
    Results(1) A proposal to elect nine Board of Trustee members:Thomas D. Eckert
    
    For:
Withheld:
    
    38,433,885
908,149Craig L. Fuller
    
    For:
Withheld:
    
    39,180,832
160,516Paul M. Higbee
    
    For:
Withheld:
    
    39,185,284
156,064William E. Hoglund
    
    For:
Withheld:
    
    36,862,536
2,478,812David B. Kay
    
    For:
Withheld:
    
    38,747,138
594,210R. Michael McCullough
    
    For:
Withheld:
    
    39,184,232
157,116John J. Pohanka
    
    For:
Withheld:
    
    37,351,987
1,990,047Robert M. Rosenthal
    
    For:
Withheld:
    
    38,871,258
470,776
 49




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##### 



Vincent A. Sheehy
    
    For:
Withheld:
    
    35,157,781
4,184,253
  For:
Against:
Abstain:
Broker No Vote:
    
    38,838,555
476,916
25,875
688
        50




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##### 



SIGNATURES
  CAPITAL AUTOMOTIVE REIT(Registrant)BY:
    
    /s/ Thomas D. EckertThomas
D. EckertPresident and Chief Executive Officer(principal executive officer)BY:
    
    /s/ David S. KayDavid
S. KaySenior Vice President, Chief Financial Officer andTreasurer(principal financial officer)Dated:
August 5, 2005
 51




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##### 



Exhibit No.
    
    Description31.1
    
    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)
 52