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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended SEPTEMBER 30, 2004or
 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 1-9997 CRT PROPERTIES, INC.  FLORIDA
(State or other jurisdiction of
incorporation or organization)
    
    59-2898045
(I.R.S. Employer
Identification No.)
 225 NE MIZNER BOULEVARD, SUITE 200
BOCA RATON, FLORIDA
(Address of principal executive offices)
    
    33432
(Zip Code)
 Registrants telephone number, including area code: (561) 395-9666 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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No o Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. Class
Common Stock, $.01 par value
    
    Outstanding at October 29, 2004
26,862,347 shares




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CRT PROPERTIES, INC. AND SUBSIDIARIES INDEX  
 PAGE NO.PART I. FINANCIAL INFORMATIONReport of Independent Registered Public Accounting Firm
    
    
    3Item 1. Financial Statements (Unaudited):Condensed Consolidated Balance Sheets
September 30, 2004 and December 31, 2003
    
    
    4Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended
September 30, 2004 and 2003
    
    
    5Condensed Consolidated Statement of Changes in
Shareholders Equity for the Nine Months
Ended September 30, 2004
    
    
    6Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2004 and 2003
    
    
    7Notes to Condensed Consolidated Financial
Statements for the Three and Nine Months
Ended September 30, 2004 and 2003
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    17Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4.Controls and Procedures
    
    
    28PART II.OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits and Reports on Form 8-K
    
    
    31Signatures and Exhibits
    
    
    33
 2




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of
CRT Properties, Inc.
Boca Raton, Florida: We have reviewed the accompanying condensed consolidated balance sheet of CRT
Properties, Inc. and subsidiaries (the Company), formerly Koger Equity, Inc.
and subsidiaries as of September 30, 2004, and the related condensed
consolidated statements of operations for the three-month and nine-month
periods ended September 30, 2004 and 2003, of changes in shareholders equity
for the nine-month period ended September 30, 2004 and of cash flows for the
nine-month periods ended September 30, 2004 and 2003. These interim financial
statements are the responsibility of the Companys management. We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America. We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
the Company as of December 31, 2003, and the related consolidated statements of
operations, changes in shareholders equity, and cash flows for the year then
ended (not presented herein); and in our report dated March 5, 2004, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2003 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived. DELOITTE & TOUCHE LLP
West Palm Beach, Florida
November 1, 2004 3




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CRT PROPERTIES, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 (In thousands, except share data)
 September 30,
    
    December 31,2004
    
    2003ASSETSReal Estate Investments:Operating properties:Land
    
    $
    149,853
    
    
    $
    119,973Buildings
    
    
    1,016,263
    
    
    
    838,430Furniture and equipment
    
    
    3,734
    
    
    
    3,599Accumulated depreciation
    
    
    (205,843
    )
    
    
    (179,569
    )Operating properties, net
    
    
    964,007
    
    
    
    782,433Undeveloped land held for investment
    
    
    14,575
    
    
    
    10,975Undeveloped land held for sale
    
    
    3,039
    
    
    
    3,041Cash and cash equivalents
    
    
    4,845
    
    
    
    9,163Restricted cash
    
    
    14,024
    
    
    
    11,114Accounts receivable, net of allowance for
uncollectible accounts of $1,196 and $939
    
    
    19,378
    
    
    
    16,236Investment in unconsolidated entity
    
    
    3,240
    
    
    
    Other assets
    
    
    30,935
    
    
    
    15,239TOTAL ASSETS
    
    $
    1,054,043
    
    
    $
    848,201LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Mortgages and loans payable
    
    $
    517,025
    
    
    $
    408,716Accounts payable
    
    
    2,784
    
    
    
    4,299Accrued real estate taxes payable
    
    
    10,850
    
    
    
    1,853Accrued liabilities  other
    
    
    11,108
    
    
    
    11,016Dividends payable
    
    
    9,700
    
    
    
    7,824Advance rents and security deposits
    
    
    7,016
    
    
    
    6,846Total Liabilities
    
    
    558,483
    
    
    
    440,554Minority interest
    
    
    6,844
    
    
    
    4,672Shareholders Equity:Preferred stock, $.01 par value; 50,000,000 shares
authorized; liquidation preference of $25 per share;
2,990,000 shares issued and outstanding
    
    
    30
    
    
    
    30Common stock, $.01 par value; 100,000,000 shares
authorized; 35,361,691 and 30,011,225 shares
issued; 26,857,025 and 21,495,956 shares outstanding
    
    
    354
    
    
    
    300Capital in excess of par value
    
    
    650,131
    
    
    
    546,968Notes receivable from stock sales to related parties
    
    
    (1,292
    )
    
    
    (5,092
    )Accumulated other comprehensive loss
    
    
    (241
    )
    
    
    (241
    )Dividends in excess of net income
    
    
    (28,768
    )
    
    
    (7,405
    )Treasury stock, at cost; 8,504,666 and 8,515,269 shares
    
    
    (131,498
    )
    
    
    (131,585
    )Total Shareholders Equity
    
    
    488,716
    
    
    
    402,975TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,054,043
    
    
    $
    848,201
 See notes to unaudited condensed consolidated financial statements. 4




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CRT PROPERTIES, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)
 (In thousands, except per share data)
 Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003REVENUESRental and other rental services
    
    $
    40,974
    
    
    $
    35,163
    
    
    $
    121,373
    
    
    $
    107,407Management fees
    
    
    89
    
    
    
    
    
    
    
    263
    
    
    
    331Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Total operating revenues
    
    
    41,063
    
    
    
    35,163
    
    
    
    121,636
    
    
    
    107,743EXPENSESProperty operations
    
    
    16,114
    
    
    
    13,907
    
    
    
    47,686
    
    
    
    41,949Depreciation and amortization
    
    
    10,479
    
    
    
    7,925
    
    
    
    29,615
    
    
    
    24,537General and administrative
    
    
    4,146
    
    
    
    2,385
    
    
    
    10,157
    
    
    
    8,415Direct costs of management fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88Other
    
    
    47
    
    
    
    36
    
    
    
    157
    
    
    
    103Total operating expenses
    
    
    30,786
    
    
    
    24,253
    
    
    
    87,615
    
    
    
    75,092OPERATING INCOME
    
    
    10,277
    
    
    
    10,910
    
    
    
    34,021
    
    
    
    32,651OTHER INCOME AND (EXPENSE)Equity in earnings of unconsolidated entity
    
    
    65
    
    
    
    
    
    
    
    306
    
    
    
    Interest income
    
    
    53
    
    
    
    39
    
    
    
    315
    
    
    
    179Mortgage and loan interest, including amortization
of deferred loan costs of $584 and $370 for the three
months and $1,336 and $1,095 for the nine months
    
    
    (8,155
    )
    
    
    (7,289
    )
    
    
    (22,981
    )
    
    
    (22,059
    )Total other income and (expense)
    
    
    (8,037
    )
    
    
    (7,250
    )
    
    
    (22,360
    )
    
    
    (21,880
    )INCOME BEFORE GAIN ON SALE OR DISPOSITION OF
ASSETS, INCOME TAXES, AND MINORITY INTEREST
    
    
    2,240
    
    
    
    3,660
    
    
    
    11,661
    
    
    
    10,771Gain on sale or disposition of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    589INCOME BEFORE INCOME TAXES AND MINORITY INTEREST
    
    
    2,240
    
    
    
    3,660
    
    
    
    11,661
    
    
    
    11,360Income tax expense (benefit)
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (22
    )NET INCOME BEFORE MINORITY INTEREST
    
    
    2,240
    
    
    
    3,661
    
    
    
    11,661
    
    
    
    11,382Minority Interest
    
    
    72
    
    
    
    
    
    
    
    72
    
    
    
    NET INCOME
    
    
    2,168
    
    
    
    3,661
    
    
    
    11,589
    
    
    
    11,382Dividends on preferred stock
    
    
    (1,588
    )
    
    
    (371
    )
    
    
    (4,764
    )
    
    
    (371
    )NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    580
    
    
    $
    3,290
    
    
    $
    6,825
    
    
    $
    11,011EARNINGS PER SHARE:Basic
    
    $
    0.02
    
    
    $
    0.15
    
    
    $
    0.26
    
    
    $
    0.52Diluted
    
    $
    0.02
    
    
    $
    0.15
    
    
    $
    0.25
    
    
    $
    0.52WEIGHTED AVERAGE SHARES:Basic
    
    
    26,855
    
    
    
    21,332
    
    
    
    26,590
    
    
    
    21,314Diluted
    
    
    27,180
    
    
    
    21,455
    
    
    
    26,919
    
    
    
    21,377
 See notes to unaudited condensed consolidated financial statements. 5




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CRT PROPERTIES, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
 SHAREHOLDERS EQUITY
 (Unaudited)
 (In thousands)
 Preferred Stock
    
    Common Stock
    
    Capitalin Excess
    
    NotesReceivable
    
    AccumulatedOther
    
    DividendsIn Excess
    
    
    
    
    
    TotalShare-Shares
    
    Par
    
    Shares
    
    Par
    
    of Par
    
    from Stock
    
    Comprehensive
    
    of Net
    
    Treasury
    
    holdersIssued
    
    Value
    
    Issued
    
    Value
    
    Value
    
    Sales
    
    Loss
    
    Income
    
    Stock
    
    EquityBALANCE AT
DECEMBER 31, 2003
    
    
    2,990
    
    
    $
    30
    
    
    
    30,011
    
    
    $
    300
    
    
    $
    546,968
    
    
    $
    (5,092
    )
    
    $
    (241
    )
    
    $
    (7,405
    )
    
    $
    (131,585
    )
    
    $
    402,975Common stock sold
    
    
    
    
    
    
    
    
    
    
    5,175
    
    
    
    52
    
    
    
    100,283
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87
    
    
    
    100,422Options exercised
    
    
    
    
    
    
    
    
    
    
    175
    
    
    
    2
    
    
    
    2,880
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,882Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,952
    )
    
    
    
    
    
    
    (32,952
    )Stock loan repayments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,800Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,589
    
    
    
    
    
    
    
    11,589BALANCE AT
SEPTEMBER 30, 2004
    
    
    2,990
    
    
    $
    30
    
    
    
    35,361
    
    
    $
    354
    
    
    $
    650,131
    
    
    $
    (1,292
    )
    
    $
    (241
    )
    
    $
    (28,768
    )
    
    $
    (131,498
    )
    
    $
    488,716
 See notes to unaudited condensed consolidated financial statements. 6




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CRT PROPERTIES, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited and In Thousands)
 Nine MonthsEnded September 30,2004
    
    2003OPERATING ACTIVITIESNet income
    
    $
    11,589
    
    
    $
    11,382Adjustments to reconcile net income to net cash
provided by operating activities:Equity in earnings of unconsolidated entity
    
    
    (306
    )
    
    
    Minority interest expense
    
    
    72
    
    
    
    Depreciation and amortization
    
    
    29,615
    
    
    
    24,537Amortization of deferred loan costs
    
    
    1,336
    
    
    
    1,095Provision for uncollectible accounts
    
    
    388
    
    
    
    488Gain on sale or disposition of assets
    
    
    
    
    
    
    (589
    )Changes in assets and liabilities:Increase in receivables and other assets
    
    
    (10,224
    )
    
    
    (928
    )Increase in accounts payable, accrued liabilities
and other liabilities
    
    
    7,751
    
    
    
    6,980Net cash provided by operating activities
    
    
    40,221
    
    
    
    42,965INVESTING ACTIVITIESProperty acquisitions
    
    
    (125,718
    )
    
    
    (33,103
    )Tenant improvements to first generation space
    
    
    (6,533
    )
    
    
    (3,300
    )Tenant improvements to second generation space
    
    
    (3,106
    )
    
    
    (3,448
    )Building improvements
    
    
    (9,975
    )
    
    
    (3,857
    )Deferred tenant costs
    
    
    (3,784
    )
    
    
    (1,585
    )Additions to furniture and equipment
    
    
    (135
    )
    
    
    (213
    )Increase in restricted cash
    
    
    (2,910
    )
    
    
    (3,086
    )Proceeds from sale of assets
    
    
    
    
    
    
    1,580Investment in unconsolidated entity
    
    
    (2,934
    )
    
    
    Net cash used in investing activities
    
    
    (155,095
    )
    
    
    (47,012
    )FINANCING ACTIVITIESProceeds from exercise of stock options
    
    
    2,882
    
    
    
    317Proceeds from issuance of preferred stock
    
    
    
    
    
    
    72,145Proceeds from sales of common stock
    
    
    100,422
    
    
    
    204Proceeds from mortgages and loans
    
    
    82,490
    
    
    
    36,000Principal payments on mortgages and loans payable
    
    
    (50,055
    )
    
    
    (73,570
    )Contributions from minority interest
    
    
    2,100
    
    
    
    Stock loan repayment
    
    
    3,800
    
    
    
    Dividends paid
    
    
    (31,083
    )
    
    
    (22,374
    )Net cash provided by financing activities
    
    
    110,556
    
    
    
    12,722Net (decrease) increase in cash and cash equivalents
    
    
    (4,318
    )
    
    
    8,675Cash and cash equivalents  beginning of period
    
    
    9,163
    
    
    
    4,627Cash and cash equivalents  end of period
    
    $
    4,845
    
    
    $
    13,302SUPPLEMENTAL CASH FLOW INFORMATIONCash paid during the period for income taxes
    
    $
    5
    
    
    $
    Cash paid during the period for interest
    
    $
    21,456
    
    
    $
    20,757Non cash item-assumption of debt from real estate acquisitions
    
    $
    75,874
    
    
    $
    Non cash item-issuance of limited partner units for real estate acquisitions
    
    $
    2,041
    
    
    $
    
 See notes to unaudited condensed consolidated financial statements. 7




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CRT PROPERTIES, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE MONTHS
 ENDED SEPTEMBER 30, 2004 AND 2003
 (Unaudited)
 1. ORGANIZATION.CRT Properties, Inc. (CRT or the Company), a
Florida corporation formerly known as Koger Equity, Inc., was incorporated in
1988 to own and manage commercial office buildings and other income-producing
properties. CRT is a self-administered and self-managed real estate
investment trust (a REIT) and its common stock and preferred stock are
listed on the New York Stock Exchange under the ticker symbol CRO and
CROPRA, respectively. As of September 30, 2004, CRT owned or had interests
in 134 office buildings containing 10.8 million rentable square feet,
primarily located within 21 suburban office projects and two urban centers in
12 metropolitan areas in the Southeastern United States, Maryland and Texas. 2. BASIS OF PRESENTATION. The condensed consolidated financial
statements have been prepared by CRT. All material intercompany transactions
and accounts have been eliminated in consolidation. The financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission related to interim financial statements. The accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for
the year ended December 31, 2003, included in the Companys Form 10-K Annual
Report for the year ended December 31, 2003. The accompanying balance sheet at
December 31, 2003 has been derived from the audited financial statements at
that date and is condensed. All adjustments which, in the opinion of management, are necessary to fairly
present the results for the interim periods have been made. Certain prior
year amounts have been reclassified in order to conform to the current year
presentation. Results of operations for the three and nine months ended
September 30, 2004 are not necessarily indicative of the results to be
expected for future periods or for the full year. New Accounting Standards. In November 2002, the FASB issued FASB
Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees of Indebtedness of Others. FIN No. 45 requires
certain guarantees to be recorded at fair value and also requires significant
new disclosures related to guarantees, even when the likelihood of making any
payments under the guarantee is remote. FIN No. 45 generally applies to
contracts or indemnification agreements that contingently require the
guarantor to make payments to the guaranteed party based on changes in an
underlying variable that is related to an asset, liability, or an equity
security of the guaranteed party. FIN No. 45 is effective for guarantees
issued or modified after December 31, 2002. The Company adopted FIN No. 45
effective January 1, 2003. The Companys adoption of FIN No. 45 has not had a
material impact on its condensed consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure provisions of
SFAS No. 123 to require prominent disclosure about the effects of an entitys
accounting policy with respect to stock-based employee compensation on
reported net income and earnings per share in annual and interim financial
statements. SFAS No. 148 does not amend SFAS No. 123 to require companies to
account for their employee stock-based awards using the fair value method.
However, the disclosure provisions are required for all companies with
stock-based employee compensation, regardless of whether they utilize the fair
value method of accounting described in SFAS No. 123 or the intrinsic value
method described in APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS No. 148s transition provisions are effective for fiscal
years ending after December 15, 2002. The Company adopted the interim
disclosure provisions of SFAS No. 148 effective January 1, 2003. The
Companys adoption of SFAS No. 148 has not had a material impact on its
condensed consolidated financial statements. 8




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In
December 2003, FASB Interpretation No. (FIN) 46(R), Consolidation of
Variable Interest Entities was issued. FIN 46(R) replaces FIN 46 and addresses
consolidation by business enterprises of variable interest entities. The
provisions of FIN 46(R) are effective for the first reporting period that ends
after December 15, 2003 for variable interests in those entities commonly
referred to as special-purpose entities. Application of the provisions of FIN
46(R) for all other entities is effective for the first reporting period ending
after March 15, 2004. The Companys adoption of FIN 46(R) has not had a
material impact on its consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133. This statement was effective for contracts entered into or modified
after June 30, 2003. The Companys adoption of SFAS No. 149 has not had a
material impact on its consolidated financial statements. 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. SFAS No. 150 is effective for
all financial instruments created or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003 (July 1, 2003 for calendar quarter companies). The
Company adopted SFAS No. 150 effective July 1, 2003. The Companys adoption
of SFAS No. 150 has not had a material impact on its consolidated financial
statements. In December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition (SAB No. 104), which
codifies, revises and rescinds certain sections of SAB No. 101, Revenue
Recognition, in order to make this interpretive guidance consistent with
current authoritative guidance. The Companys adoption of SAB No. 104 did not
have a material impact on its consolidated financial statements. 3. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES.The preparation of
condensed consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
Company to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, and expenses and the disclosure of contingent
assets and liabilities. These estimates are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances. However, actual results could differ from the Companys
estimates under different assumptions or conditions. On an ongoing basis, the
Company evaluates the reasonableness of its estimates. The Company believes the following significant accounting policies affect the
significant estimates and assumptions used in the preparation of its condensed
consolidated financial statements: Investments in Real Estate. Rental property and improvements, including
interest and other costs capitalized during construction, are included in real
estate investments and are stated at cost. Expenditures for ordinary
maintenance and repairs are expensed to operations as they are incurred.
Significant renovations and improvements, which improve or extend the useful
life of the assets, are capitalized. Except for amounts attributed to land,
rental property and improvements are depreciated as described below. The Company recognizes gains on the sale of property in accordance with SFAS
No. 66. Revenues from sales of property are recognized when a significant down
payment is received, the earnings process is complete and the collection of any
remaining receivables is reasonably assured. Acquisitions of Real Estate. The Company assesses the fair value of
acquired tangible and intangible assets, including land, buildings, tenant
improvements, above and below market leases, origination costs, acquired
in-place leases, other identified intangible assets and assumed liabilities in
accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations and allocates the purchase price to the acquired assets
and assumed liabilities, including land at appraised value and buildings at
replacement cost. The Company assesses and considers fair value based on
estimated cash 9




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flow projections that utilize appropriate discount and/or capitalization
rates, as well as available market information. Estimates of future cash flows
are based on a number of factors including the historical operating results,
known and anticipated trends, and market and economic conditions. Results of
operations of acquired entities are included in consolidated earnings from the
date of acquisition. The fair value of the tangible assets of an acquired
property considers the value of the property as if it were vacant. The Company
also considers an allocation of purchase price of other acquired intangibles,
including acquired in-place leases that may have a customer relationship
intangible value, including (but not limited to) the nature and extent of the
existing relationship with the tenants, the tenants credit quality and
expectations of lease renewals. Depreciation and Amortization. The Company computes depreciation on its
operating properties using the straight-line method based on estimated useful
lives of 3 to 39 years. A significant portion of the acquisition cost of each
operating property is allocated to the acquired buildings (usually 85% to 90%).
The allocation of the acquisition cost to buildings and the determination of
the useful lives are based on the Companys estimates. If the Company were to
allocate acquisition costs inappropriately to buildings or to incorrectly
estimate the useful lives of its operating properties, it may be required to
adjust future depreciation expense. Deferred tenant costs (leasing commissions
and tenant relocation costs) are amortized over the term of the related leases. Impairment of Long-Lived Assets. The Companys long-lived assets include
investments in real estate. The Company assesses impairment of long-lived
assets whenever changes or events indicate that the carrying value may not be
recoverable. The Company assesses impairment of operating properties based on
the operating cash flows of the properties. In performing its assessment, the
Company must make assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. During the
quarter and nine months ended September 30, 2004, no impairment charges were
recorded. If these estimates or their related assumptions change in the
future, the Company may be required to record impairment charges. Revenue Recognition.Rental income is generally recognized over the lives
of leases according to provisions of the underlying lease agreements. Certain
leases provide for tenant occupancy during periods for which no rent is due or
where minimum rent payments increase during the term of the lease. For these
leases, the Company records rental income for the full term of each lease on a
straight-line basis. For the quarters ended September 30, 2004 and 2003, the
recognition of rental revenues on a straight-line basis for applicable leases
increased rental revenues by $1,492,000 and $802,000, respectively, over the
amount which would have been recognized based upon the contractual provisions
of these leases. For the nine months ended September 30, 2004 and 2003, the
recognition of rental revenues on a straight-line basis for applicable leases
increased rental revenues by $4,148,000 and $3,172,000, respectively, over the
amount which would have been recognized based upon the contractual provisions
of these leases. The Company has historically generated management fees and leasing commissions
by providing on-site property management and leasing services to a limited
number of third party owners. Management fees are generally earned monthly and
are based on a percentage of the managed properties monthly rental and other
operating revenues. Leasing commissions are earned when the Company, on behalf
of the third party owner, negotiates or assists in the negotiation of new
leases, renewals and expansions of existing leases, and are generally based on
a percentage of rents to be received under the initial term of the respective
leases. Allowances for Doubtful Accounts. The Company maintains allowances for
doubtful accounts for estimated losses due to the inability of its tenants to
make required payments for rents and other rental services. In assessing the
recoverability of these receivables, the Company makes assumptions regarding
the financial condition of the tenants based primarily on past payment trends
and certain financial information that tenants submit to the Company. If the
financial condition of the Companys tenants were to deteriorate and result in
an impairment of their ability to make payments, the Company may be required to
increase its allowances by recording additional bad debt expense. Likewise,
should the financial condition of its tenants improve and result in payments or
settlements of previously reserved amounts, the Company may be required to
record a reduction in bad debt expense. Federal Income Taxes. The Company is qualified and has elected tax
treatment as a real estate investment trust under the Internal Revenue Code (a
REIT). A corporate REIT is a legal entity that owns income-producing real
property, and through distributions of income to its shareholders, is permitted
to reduce or avoid the payment of federal income taxes at the corporate level. 10




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To maintain qualification as a REIT, the Company must, among other
requirements, distribute to shareholders at least 90 percent of REIT taxable
income. To the extent that the Company pays dividends equal to 100 percent of
REIT taxable income, the earnings of the Company are taxed at the shareholder
level. However, the use of net operating loss carryforwards, which may reduce
REIT taxable income to zero, are limited for alternative minimum tax purposes.
Distributed capital gains on sales of real estate are not subject to tax at the
REIT level; however, undistributed capital gains are taxed at the REIT level.
If the Company fails to qualify as a REIT in any taxable year, it will be
subject to federal income taxes and will not be able to qualify as a REIT for
four subsequent taxable years. Although CRT Realty Services, Inc. (CRTRSI),
a taxable REIT subsidiary, is consolidated with the Company for financial
reporting purposes, this entity is subject to federal income tax and files
separate federal and state income tax returns. Stock Options. Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply Accounting Principles Board Opinion No. 25 (APB 25), which recognizes
compensation cost based on the intrinsic value of the equity instrument
awarded. As a result, there were no stock options charged to income during the
three and nine months ended September 30, 2004 and 2003. The Company has
continued to apply APB 25 to its stock based compensation awards to employees
and has disclosed the required pro forma effect on net income and earnings per
share as follows: Three MonthsEnded September 30,2004
    
    2003Net income  As reported
    
    $
    2,168,000
    
    
    $
    3,661,000Dividends on preferred shares
    
    
    (1,588,000
    )
    
    
    (371,000
    )Stock-based employee compensation expense
determined under fair value method for all
forfeitures (awards)
    
    
    
    
    
    
    (364,000
    )Pro forma net income
    
    $
    580,000
    
    
    $
    2,926,000EARNINGS PER SHARE:Basic-as reported
    
    $
    0.02
    
    
    $
    0.15Basic-pro forma
    
    $
    0.02
    
    
    $
    0.14Diluted-as reported
    
    $
    0.02
    
    
    $
    0.15Diluted-pro forma
    
    $
    0.02
    
    
    $
    0.14
 Nine MonthsEnded September 30,2004
    
    2003Net income  As reported
    
    $
    11,589,000
    
    
    $
    11,382,000Dividends on preferred shares
    
    
    (4,764,000
    )
    
    
    (371,000
    )Stock-based employee compensation expense
determined under fair value method for all
forfeitures (awards)
    
    
    94,000
    
    
    
    (791,000
    )Pro forma net income
    
    $
    6,919,000
    
    
    $
    10,220,000EARNINGS PER SHARE:Basic-as reported
    
    $
    0.26
    
    
    $
    0.52Basic-pro forma
    
    $
    0.26
    
    
    $
    0.48Diluted-as reported
    
    $
    0.25
    
    
    $
    0.52Diluted-pro forma
    
    $
    0.26
    
    
    $
    0.48
 11




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Investment in Unconsolidated Entity. The Company accounts for an
investment in an unconsolidated entity using the equity method of accounting,
as it does not have a controlling interest over the operating and financial
policies of the joint venture. As a result, the assets and liabilities of the
joint venture are not included in the Companys balance sheet. FASB
Interpretation (FIN) No. 46®, Consolidation of Variable Interest
Entities, requires existing unconsolidated Variable Interest Entities (VIE)
to be consolidated by their primary beneficiaries. The primary beneficiary of a
VIE is the party that absorbs a majority of the entitys expected losses or
receives a majority of its expected residual returns, or both. The Company
accounts for its investment in an unconsolidated entity using the equity method
of accounting rather than consolidation under FIN 46® since the Company has
determined that it is not the primary beneficiary of the entity. This
investment was initially recorded at cost and subsequently adjusted for equity
in earnings and cash contributions and distributions. Fair Value of Financial Instruments. The Company believes the carrying
amount of its financial instruments (temporary investments, accounts
receivable, and accounts payable) is a reasonable estimate of fair value of
these instruments. Based on an estimated market interest rate of 8.0 percent,
the fair value of the Companys mortgages and loans payable would be
approximately $531.2 million at September 30, 2004. Fair Value of In-Place Leases. SFAS No. 142 Goodwill and Other
Intangible Assets, requires the separate recognition of intangible assets
acquired as part of an asset acquisition, including the value attributable to
leases in place and certain customer relationships. The Company intends to
amortize these intangible assets on a straight-line basis over the remaining
term of the existing leases (generally averages 4 to 5 years). As of September
30, 2004, the Company had recorded as intangible assets (before accumulated
amortization), the estimated value of leases in place as follows (in
thousands): As ofSeptember 30,2004Three Ravinia
    
    $
    274,000The Lakes on Post Oak
    
    
    1,500,000Tollway Crossing
    
    
    272,000CIGNA Plaza
    
    
    228,000Atlantic Center Plaza
    
    
    9,401,000McGinnis Park
    
    
    329,000Total fair value of leases
    
    $
    12,004,000
 The Company is currently evaluating any other intangible assets that may have
arisen resulting from its more recent acquisitions including the Decoverly
Office Park in Rockville, Maryland, Baymeadows Way in Jacksonville, Florida,
and Westchase Corporate Center in Houston, Texas. Cash and Cash Equivalents. Cash in excess of daily requirements is
invested in short-term monetary securities. Such temporary cash investments
have an original maturity of less than three months and are deemed to be cash
equivalents for purposes of the condensed consolidated financial statements. Restricted Cash. Restricted cash represents amounts contractually placed
in escrow for purposes of making payments for certain future building
improvements, tenant allowances, leasing commissions, real estate taxes, and
debt service. 4. STATEMENTS OF CASH FLOWS. On January 13, 2004, the Company issued 5,175,000
shares of its common stock (including 675,000 shares issued in connection with
the exercise of an over-allotment option granted to the Companys underwriter)
at a price to the public of $20.45 per share. The net proceeds of the offering
($100.2 million) were used to pay down the Companys revolving credit facility
($15 million), fund the Decoverly acquisition ($42.2 million) as well as a
portion of the Atlantic Center Plaza acquisition ($40.5 million) and for
general corporate purposes. On January 27, 2004, the Company acquired Atlantic
Center Plaza, a 12




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##### Table of Contents



twenty-three story 502,000 square foot office building located in Atlanta,
Georgia, for a purchase price of $116.5 million plus closing and other costs.
Under the terms of the acquisition agreement, the Company assumed a 3-year
variable interest rate secured loan of approximately $75.9 million with an
interest rate of LIBOR (1.6% at September 30, 2004) plus 160 basis points.
Simultaneously, at closing, the Company assumed a second 3-year variable
interest rate secured loan of $10.0 million with an interest rate of LIBOR plus
600 basis points and immediately prepaid the loan in full. The Company funded
the remainder of the purchase price with a portion of the net proceeds ($40.5
million) from its January 2004 common stock offering. On April 2, 2004, the Company acquired four properties, including two Class A
office buildings, a ground lease and an undeveloped parcel of land located in
the Decoverly Office Park in Rockville, Maryland for a purchase price of $42.0
million plus closing and other costs. The two three-story office buildings
aggregate approximately 155,000 square feet of rentable space. The undeveloped
land parcel contains 3.2 acres with an approved site plan for a four-story
105,000 square foot office building. The funds required for this acquisition
were provided by the proceeds from the Companys January 2004 common stock
offering. On July 23, 2004 the Company acquired a five-story, 224,000 square foot,
single-tenant, class A office building located at 7777 Baymeadows Way in
Jacksonville, Florida, for a purchase price of $20.8 million, plus closing and
other costs. As part of this transaction, the Company issued 33,202 DownREIT
limited partnership units in exchange for a $760,985 contribution from a
related minority partner (Thomas J. Crocker, the Companys Chief Executive
Officer) in a joint venture with the Company (see Note 9). The Company
received an additional minority interest contribution of $154,107 from an
unrelated third party. This building also has an adjacent six-story parking
garage. The acquisition of the Baymeadows Way property was financed in part
with the proceeds of a secured loan in the amount of approximately $13.8
million, which bears interest at a fixed rate of 5.55% and matures in 2014. On August 16, 2004, the Company acquired the Westchase Corporate Center located
in Houston, Texas; a six-story, 184,000 square foot, class A office building
for a purchase price of $20.3 million, plus closing and other costs. As part
of this transaction, the Company issued 28,584 DownREIT limited partnership
units in exchange for a $639,015 contribution from a related minority partner
(Thomas J. Crocker, the Companys Chief Executive Officer) in a joint venture
with the Company (see Note 9). The Company received an additional minority
interest contribution of $545,893 from an unrelated third party. The Company
financed the acquisition of the Westchase property in part with the proceeds of
a secured loan totaling approximately $15.2 million, which bears interest at a
fixed rate of 5.39% and matures in 2014. 5. EARNINGS PER SHARE. Basic earnings per common share has been computed
based on the weighted average number of shares of common stock outstanding for
each period. Diluted earnings per common share is similar to basic earnings
per share except that the weighted average number of common shares outstanding
is increased to include the number of additional common shares that would have
been outstanding if the dilutive common shares underlying the options had been
issued. The treasury stock method is used to calculate dilutive shares which
reduces the gross number of dilutive shares by the number of shares
purchasable from the proceeds of the options assumed to be exercised. 13




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For the three and nine months ended September 30, 2004 and 2003, earnings per
common share is calculated as follows (in thousands except per share data): Three MonthsEnded September 30,2004
    
    2003EARNINGS PER COMMON AND DILUTIVE
POTENTIAL COMMON SHARE:Net Income available to common shareholders
    
    $
    580
    
    
    $
    3,290Shares:Weighted average number of common
shares outstanding  Basic
    
    
    26,855
    
    
    
    21,332EARNINGS PER SHARE  BASIC
    
    $
    0.02
    
    
    $
    0.15Shares:Weighted average number of common
shares outstanding  Basic
    
    
    26,855
    
    
    
    21,332Effect of dilutive securities (a):Stock options
    
    
    325
    
    
    
    123Adjusted weighted average common shares  Diluted
    
    
    27,180
    
    
    
    21,455EARNINGS PER SHARE  DILUTED
    
    $
    0.02
    
    
    $
    0.15
 Nine MonthsEnded September 30,2004
    
    2003EARNINGS PER COMMON AND DILUTIVE
POTENTIAL COMMON SHARE:Net Income available to common shareholders
    
    $
    6,825
    
    
    $
    11,011Shares:Weighted average number of common
shares outstanding  Basic
    
    
    26,590
    
    
    
    21,314EARNINGS PER SHARE  BASIC
    
    $
    0.26
    
    
    $
    0.52Shares:Weighted average number of common
shares outstanding  Basic
    
    
    26,590
    
    
    
    21,314Effect of dilutive securities (a):Stock options
    
    
    329
    
    
    
    63Adjusted weighted average common shares  Diluted
    
    
    26,919
    
    
    
    21,377EARNINGS PER SHARE  DILUTED
    
    $
    0.25
    
    
    $
    0.52
 (a) Shares issuable were derived using the Treasury Stock Method for all
dilutive potential shares. The Company excluded approximately 125,000
antidilutive stock options from the above calculation for the three and nine
months ended September 30, 2004. 14




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##### Table of Contents



6. MORTGAGES AND LOANS PAYABLE. At September 30, 2004, the Company had
$517,025,000 of loans outstanding, which are collateralized by mortgages on
all but nine of the Companys buildings. Annual maturities for mortgages and
loans payable are summarized as follows (in thousands): Year Ending December 31,2004
    
    $
    78,4632005
    
    
    6,0672006
    
    
    23,6572007
    
    
    122,0462008
    
    
    89,545Subsequent Years
    
    
    197,247Total
    
    $
    517,025
 On April 21, 2004, the Company amended and extended the loan agreement
governing its $75.9 million loan with MetLife assumed in connection with the
acquisition of Atlantic Center Plaza. As part of the amendment, the existing
variable interest rate (LIBOR plus 160 basis points) will remain in place until
December 31, 2004 and the Company will draw an additional $4.1 million prior
to December 31, 2004. Effective January 1, 2005, the rate will be fixed at
5.49% until December 31, 2014. In August 2004, the Company replaced its previous $100 million secured
revolving credit facility, which was scheduled to mature in December 2004, with
a new $165 million secured revolving credit facility, which has a three-year
term and a one-year extension option and is scheduled to expire on August 23,
2007. 7. DIVIDENDS. The Company paid quarterly dividends on its common
stock of $0.35 per share on February 5, 2004, May 6, 2004, and August 5, 2004,
to shareholders of record on December 31, 2003, March 31, 2004, and June 30,
2004, respectively. During the quarter ended September 30, 2004, the
Companys Board of Directors declared a quarterly dividend on its common stock
of $0.35 per share payable on October 31, 2004, to shareholders of record on
September 30, 2004. On February 17, 2004, the Companys Board of Directors declared a dividend on
its preferred stock of $0.53125 per share paid on March 15, 2004, to
shareholders of record on March 1, 2004. This preferred dividend covered the
period December 15, 2003 through March 14, 2004. On May 26, 2004, the
Companys Board of Directors declared a dividend on its preferred stock of
$0.53125 per share paid on June 15, 2004, to shareholders of record on June 1,
2004. This preferred dividend covered the period March 15, 2004 through June
14, 2004. On August 26, 2004, the Companys Board of Directors declared a
dividend on its preferred stock of $0.53125 per share paid on September 15,
2004, to shareholders of record on September 1, 2004. This preferred dividend
covered the period June 15, 2004 through September 14, 2004. 8. SEGMENT REPORTING. The Company operates in one business segment, the
ownership and management of commercial real estate. The Companys primary
business is the ownership, development, and operation of income-producing
office properties. Management operates each property as an individual
operating segment and has aggregated these operating segments into a single
segment for financial reporting purposes due to the fact that all of the
individual operating segments have similar economic characteristics. As of
September 30, 2004, all of the Companys operations were located in the
Southeastern United States, Maryland and Texas. 9. NOTES RECEIVABLE FROM STOCK SALES. On February 17, 2000, and in
conjunction with the Companys plan (the Repurchase Plan) to repurchase up to
2.65 million shares of common stock (the Shares), the Company entered into an
agreement to, from time to time, loan to Mr. Thomas J. Crocker, Chief Executive
Officer, and Mr. Robert E. Onisko, former Chief Financial Officer
(collectively, the Officers), certain amounts in connection with their
purchase of up to 500,000 shares and 150,000 shares, respectively, of the
Companys common stock (collectively the Loan Stock). For Loan Stock
purchases consummated pursuant to the Companys 1998 Equity and Cash Incentive
Plan, the Company had agreed to advance up to 100% of the purchase price of the
shares. For Loan Stock purchases consummated in the open market or pursuant to
the Repurchase Plan, the Company had agreed to advance up to 50% of the
purchase price of the shares. Each Officers loan was collateralized by any
Loan Stock purchased by such Officer. Aside from an Officers equity interest
in Loan Shares, the Company has limited or no personal recourse against an
Officer for the principal amount of any outstanding loan balance. The Officers,
under the terms of the plan, are personally obligated to make any 15




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and all interest payments. Each loan bears interest at 150 basis points over
the applicable LIBOR rate, which interest is payable quarterly. The outstanding
principal amount of each loan and all accrued but unpaid interest is due on the
earlier of (i) February 17, 2010 or (ii) the second anniversary of the
Officers termination by the Company for cause. During the three and nine
months ended September 30, 2004, Thomas J. Crocker made interest payments of
$7,524 and $56,881 and Robert E. Onisko made interest payments of $9,052 and
$25,834, respectively. As of July 1, 2004, Mr. Crocker had purchased 320,370
shares of Loan Stock and the aggregate outstanding principal balance of his
loans was approximately $3,800,000 all of which had been repaid as of July 26,
2004. For some time, the Companys Board of Directors has considered the
possibility of eliminating any further commitment to loan funds to Mr. Crocker
and to have Mr. Crockers loans repaid in full, in the belief that eliminating
this arrangement would be in the Companys best interest. Based on a proposal
initially submitted by Mr. Crocker and approved by a special committee
comprised of the Companys independent directors as well as the Companys
entire board of directors, on July 16, 2004, the Company and Mr. Crocker
entered into a definitive agreement whereby: (1) Mr. Crocker agreed to repay
the outstanding loans and terminate his rights to future loans upon the
acquisition of the Baymeadows property; (2) the Company agreed to make a one
time payment of $540,000 to Mr. Crocker as additional compensation to defray a
portion of the costs and expenses incurred by Mr. Crocker in connection with
his negotiation of the agreement with the Company; and (3) the Company and Mr.
Crocker agreed to co-invest in a joint venture to acquire the Baymeadows and
Westchase properties (the Properties), acquired during the quarter ended
September 30, 2004. The joint venture arrangement between the Company and Mr.
Crocker was created in part to effect for the benefit of Mr. Crocker a
tax-deferred, like-kind exchange of a hotel in Boca Raton, Florida for the
Properties. This arrangement requires the Company to protect Mr. Crockers
ability to defer recognition of taxable gains through certain restrictions on
the Companys ability to sell or finance the Properties. Mr. Crocker
contributed $1.4 million and owns approximately 10% of the joint venture in the
form of a DownREIT limited partnership interest. The one time payment of
$540,000 was made to Mr. Crocker on July 30, 2004. Mr. Crocker repaid his
outstanding loans in full on July 26, 2004. The arrangements above are
described in detail in a Form 8-K filed by the Company on July 30, 2004. As of
September 30, 2004, Mr. Onisko has purchased 102,490 shares of Loan Stock and
the aggregate outstanding principal balance of his loans was approximately
$1,292,000. The Company has no discretion or termination right under this
agreement since the Companys loan to Mr. Onisko was made under the terms of a
contract which precedes the Sarbanes-Oxley Act. 10. COMMON STOCK. On January 13, 2004, the Company issued 5,175,000
shares of its common stock (including 675,000 shares issued in connection with
the exercise of an over-allotment option granted to the Companys underwriter)
at a price to the public of $20.45 per share. The net proceeds of the
offering were used to pay down the Companys revolving credit facility ($15
million), fund the Decoverly acquisition ($42.2 million) as well as a portion
of the Atlantic Center Plaza acquisition ($40.5 million) and for general
corporate purposes. 11. SUBSEQUENT EVENTS. On October 4, 2004, the Company sold
approximately 14.5 acres of undeveloped land located across the street from
its Atlanta Gwinnet Center for approximately $3.25 million. This transaction
resulted in a gain of approximately $293,000. On September 30, 2004, the Company entered into a purchase and sale agreement
with East Las Olas Investors II, WLD Realty, Ltd., and Halmos Holdings, Inc. to
acquire the partnership interests in two class A office buildings located in
the central business district of Fort Lauderdale, Florida. On October 15,
2004, after further discussions between the parties, the purchase price was fixed at $138.6 million (plus closing and other costs) and the Company deposited $5 million in
earnest money. The office buildings, known as the Las Olas
Centre, comprise approximately 470,000 rentable square feet and, as of
September 30, 2004, was 87% occupied. The transaction is expected to close
during the fourth quarter of 2004 and will be financed with a 10-year, $99
million fixed interest rate loan with the remainder to be drawn on the
Companys line of credit. On October 14, 2004, the Company announced plans to develop a $90 million,
20-story, 335,000-square-foot, class A office tower in a joint venture with
The Related Companies of New York. 16




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##### Table of Contents



On November 2, 2004, the Company entered into a purchase and sale agreement
with the WHML-S Real Estate Limited Partnership to acquire a 437,000 rentable
square foot class A office building for a purchase price of approximately $39
million (plus closing and other costs). The building, located in Dallas,
Texas, is comprised of two interconnected towers consisting of Tower 1 with 8
floors, and Tower 2 with 11 floors, and is situated on approximately 10.1 acres
with an attached four-story parking garage. In connection with this
acquisition, the Company will enter into a joint venture with Wilcox Capital
Group, whereby the Company will own 75% of the venture. Pending the Companys
successful completion of due diligence on the property, the acquisition of
Signature Place would be expected to close during the fourth quarter of 2004
and will be financed with proceeds from a non-recourse mortgage and the balance
of the equity required of the Company will be drawn on the Companys revolving
line of credit. As of September 30, 2004, the Signature Place office building
was 65% leased. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION Estimates and certain other matters discussed in this report may be
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although CRT Properties, Inc. believes the
expectations reflected in such forward-looking statements are based on
reasonable assumptions; there can be no assurance that its expectations will be
attained. Certain factors could cause actual results to differ materially from
the Companys expectations, including those set forth as risk factors in the
Companys SEC reports and filings, including its Annual Report on Form 10-K for
the year ended December 31, 2003. Included among these factors are changes in
general economic conditions, including changes in the economic conditions
affecting industries in which its principal tenants compete; its ability to
timely lease or re-lease space at current or anticipated rents to creditworthy
tenants; its ability to achieve economies of scale over time; the demand for
tenant services beyond those traditionally provided by landlords; changes in
interest rates; changes in operating costs; its ability to attract and retain
high-quality personnel at a reasonable cost in a highly competitive labor
environment; future demand for its debt and equity securities; its ability to
refinance its debt on reasonable terms at maturity; and its ability to complete
current and future development projects on schedule and on budget. Many of
these factors are beyond the Companys ability to control or predict.
Forward-looking statements are not guarantees of performance. For
forward-looking statements contained or incorporated by reference herein, the
Company claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. The Company
assumes no obligation to update or supplement forward-looking statements that
become untrue because of subsequent events. 
 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS The following discussion should be read in conjunction with the condensed
consolidated financial statements and related notes appearing elsewhere in
this Form 10-Q, and Managements Discussion and Analysis of Financial
Condition and Results of Operations included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2003. CRTs revenues are dependent in part on the occupancy of its
portfolio of office buildings. Over the past few years, as a struggling
national economy resulted in white-collar job losses and a general oversupply
of office space in many markets, occupancy rates declined in most of the
markets CRT serves. The office building sector continues to experience
comparatively low occupancy rates in most markets. As of September 30, 2004,
CRTs portfolio was 80% occupied compared to 82% as of September 30, 2003 and
81% as of December 31, 2003. CRT uses numerous approaches to maintain and
increase occupancy, including prioritizing efforts to retain existing tenants,
using rental concessions such as free rent and improvement allowances, offering
market-specific broker incentives and employing highly skilled and proactive
management and leasing professionals. CRTs leases have an overall average lease term of
approximately five years. In any given year, the Company generally renews over
half of its expiring office leases; however, for those office leases that are
not renewed, the Company must remarket the vacated office space. Since rental
rates generally decline as vacancy rates increase (and vice versa), the Company
may lease the vacated space at terms less favorable than the terms of the
expired lease. The amount of rental concessions given, such as free rent or
improvement allowances, will also impact effective rental rates. On September 11, 2003, the Company acquired Tollway Crossing (a three-story
building) and CIGNA Plaza (a five-story building) in Dallas, Texas for
approximately $33.1 million. The two office buildings combined contain
approximately 280,000 square feet of rentable space. The funds required for
this acquisition were provided by the proceeds from the Companys September
10, 2003 preferred stock issuance. As of September 30, 2004, Tollway Crossing
and CIGNA Plaza were 100% and 95% occupied, respectively. On December 30, 2003, the Company completed a joint venture agreement with
Triangle W/Development to acquire a 75% interest in two five-story office
buildings encompassing 202,000 square feet and 8.5 acres of undeveloped land
suitable for development located in the McGinnis Park office complex in
Atlanta, Georgia. The Company contributed approximately $13.9 million to pay
off an existing mortgage plus an additional amount for closing costs and
working capital, funded from its secured line of credit. The joint venture
assumed an existing mortgage on the undeveloped land of approximately $978,000.
As of September 30, 2004, the McGinnis Park office buildings were 58% leased. On January 27, 2004, the Company acquired Atlantic Center Plaza, a twenty-three
story 502,000 square foot building located in Atlanta, Georgia, for a purchase
price of $116.5 million plus closing and other costs. As of September 30,
2004, approximately 88% of 17




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the propertys rentable space was leased. Under the terms of the acquisition
agreement, the Company assumed a 3-year variable interest rate secured loan of
approximately $75.9 million with an interest rate of LIBOR (1.65% at September
30, 2004) plus 160 basis points. Simultaneously, at closing, the Company
assumed a second 3-year variable interest rate secured loan of $10.0 million
with an interest rate of LIBOR plus 600 basis points and immediately prepaid
the loan in full. The Company funded the remainder of the purchase price with
a portion of the net proceeds from its January 2004 common stock offering. On April 2, 2004, the Company acquired four properties, including two Class A
four-story office buildings, a ground lease and an undeveloped parcel of land
located in the Decoverly Office Park in Rockville, Maryland for a purchase
price of $42.0 million plus closing and other costs. The two three-story
office buildings aggregate approximately 155,000 square feet of rentable space
and were 93% occupied as of September 30, 2004. The undeveloped land parcel
contains 3.2 acres with an approved site plan for a four-story 105,000 square
foot office building. The funds required for this acquisition were provided by
the proceeds from the Companys January 2004 common stock offering. On April 21, 2004, the Company amended and extended the loan agreement
governing its $75.9 million loan with MetLife assumed in connection with the
acquisition of Atlantic Center Plaza. As part of the amendment, the existing
variable interest rate (LIBOR plus 160 basis points) will remain in place until
December 31, 2004 and the Company will draw an additional $4.1 million prior
to December 31, 2004. Effective January 1, 2005, the rate will be fixed at
5.49% until December 31, 2014. On July 23, 2004 the Company acquired a five-story, 224,000 square foot,
single-tenant, class A office building located at 7777 Baymeadows Way in
Jacksonville, Florida, for a purchase price of $20.8 million, plus closing and
other costs. As part of this transaction, the Company issued 33,202 DownREIT
limited partnership units in exchange for a $760,985 contribution from a
related minority partner (Thomas J. Crocker, the Companys Chief Executive
Officer) in a joint venture with the Company (see Note 9). The Company
received an additional minority interest contribution of $154,107 from an
unrelated third party. This building also has an adjacent six-story parking
garage. The acquisition of the Baymeadows Way property was financed in part
with the proceeds of a secured loan in the amount of approximately $13.8
million, which bears interest at a fixed rate of 5.55% and matures in 2014. On August 16, 2004, the Company acquired the Westchase Corporate Center located
in Houston, Texas; a six-story, 184,000 square foot, class A office building
for a purchase price of $20.3 million, plus closing and other costs. As part
of this transaction, the Company issued 28,584 DownREIT limited partnership
units in exchange for a $639,015 contribution from a related minority partner
(Thomas J. Crocker, the Companys Chief Executive Officer) in a joint venture
with the Company (see Note 9). The Company received an additional minority
interest contribution of $545,893 from an unrelated third party. The Company
financed the acquisition of the Westchase property in part with the proceeds of
a secured loan totaling approximately $15.2 million, which bears interest at a
fixed rate of 5.39% and matures in 2014. 18




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CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements that appear
elsewhere in this quarterly report on Form 10-Q. A full summary of the
significant accounting policies used in preparing the consolidated financial
statements is set forth in Note 3 to those statements. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
contingencies at the date of the financial statements and the reported amounts
of revenues and expenses for the reporting period. Actual results could differ
materially from estimates made. The Company believes that the specific
accounting policies discussed below are critical in preparing its consolidated
financial statements due to the increased level of assumptions used or
estimates made in determining their impact on its consolidated financial
statements. Revenue Recognition. The Company generates principally all of its
operating revenues from leasing space to various tenants in office buildings
owned by the Company. Tenants include for-profit companies across a number of
industries as well as various federal and state departments and agencies. The
Companys twenty five largest tenants comprise over half of the Companys
occupied space and generate over half of the Companys annual operating
revenues. Rental income generally commences at the inception of the lease (as
opposed to actual move-in date) and is recognized based on the terms of the
individual leases. Many of the Companys leases call for annual fixed
increases in rental payments and in such case, rental income is recognized over
the terms of the lease on a straight-line basis. Certain other leases call for
annual increases based upon an inflation index, such as the Consumer Price
Index. For these leases, since the annual dollar increase in rental income
cannot be determined at the inception of the lease, rental income increases
each year after applying the inflation index. Where rental concessions (such
as free rent) are given to tenants, the Company also recognizes rental income
on a straight-line basis over the full term of the leases. The Company may
require certain tenants to pay a security deposit in addition to their first
months rent; the Company records such security deposits as a liability. Many
of the Companys leases require tenants to pay their prorata portion of
property operating expenses in addition to their base rent, such amounts
typically being in excess of a base year amount. Impairment or Disposal of Long-Lived Assets. The Company evaluates its
real estate assets quarterly to assess whether any impairment indicators are
present that affect the recovery of the carrying amount. Changes in the supply
or demand of tenants for the Companys properties could impact its ability to
lease available space. Should a significant amount of available space exist
for an extended period, the Companys investment in a particular office
building may be impaired. Real estate assets are classified as held for sale or held and used in
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. In
accordance with SFAS No. 144, the Company records assets held for sale at the
lower of carrying amount or fair value less costs to sell. With respect to
assets classified as operating properties, the Company periodically reviews
these assets to determine whether its carrying amount will be recovered. A
long-lived asset is considered impaired if its carrying value exceeds the
estimated fair value. Fair value is based on the estimated and realizable
contract sales price (if available) for the asset less estimated costs to sell.
If a sales price is not available, the estimated undiscounted cash flows of
the asset for the remaining estimated holding period are used to determine if
the carrying value is recoverable. Upon impairment, the Company would
recognize an impairment loss to reduce the carrying value of the long-lived
asset to its estimated fair value. The Companys estimate of fair value and
cash flows to be generated from its properties requires it to make assumptions
that are highly subjective and based on a variety of factors, including but not
limited to: existing leases, future leasing and terminations, market rental
rates, capital improvements, tenant improvements, leasing commissions,
inflation and other variables. If one or more assumptions proves incorrect or
if the Companys assumptions change, the recognition of an impairment loss on
one or more properties may be necessary in the future, which would result in a
decrease in net income. No impairment losses were recognized for the nine
months ending September 30, 2004. Depreciation. Depreciation of buildings and parking garages is computed
using the straight-line method over an estimated useful life of 3 to 39 years.
Depreciation of building improvements is computed using the straight-line
method over the estimated useful life of the improvement. Tenant improvements
are generally amortized over the term of the respective leases. If the Company
were to incorrectly estimate the useful lives of its operating properties, it
may be required to adjust future depreciation expense. Therefore, a 19




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change in the estimated useful lives assigned to buildings and improvements
would result in either an increase or decrease in depreciation expense, which
would result in an increase or decrease in net income. Cost of Real Estate Acquired. The Company accounts for its acquisitions
of real estate in accordance with Statement of Financial Accounting Standards
No. 141, Business Combinations, which requires the fair value of the real
estate acquired to be allocated to the acquired tangible assets, consisting of
land, building, building improvements and tenant improvements, and identified
intangible assets and liabilities, consisting of the value of above and below
market leases, customer relationships, lease costs and the value of in-place
leases. The allocation to intangible assets is based upon various factors including the
above or below market component of inplace leases, the value of in-place
leases, leasing commissions, legal fees and the value of customer
relationships. The value allocable to the above or below market component of
an acquired in-place lease is determined based upon the present value (using an
interest rate which reflects the risks associated with the lease) of the
difference between (i) the contractual amounts to be paid pursuant to the lease
over its remaining term, and (ii) managements estimate of the amounts that
would be paid using current fair market rates over the remaining term of the
lease. The amounts allocated to above or below market leases are included in
other assets in the balance sheet and are amortized to rental income over the
average remaining term of the respective leases. The remaining purchase price is allocated among various categories of tangible
assets (building and land) and is based upon managements determination of the
value of the property as if it were vacant using discounted cash flow models.
Factors considered by management include an estimate of carrying costs during
the expected lease-up periods considering current market conditions and costs
to execute similar leases. Differing assumptions and methods could result in
different estimates of fair value and thus, a different purchase price
allocation and corresponding increase or decrease in depreciation and
amortization expense. Allowance for Doubtful Accounts. Accounts receivable are reduced by an
allowance for amounts that may become uncollectible in the future. Our
receivable balance is comprised primarily of rents and operating expense
recoveries due from tenants. Changes in general economic conditions, or in the
industries in which our tenants operate, could impact our tenants ability to
honor their lease obligations, which could in turn affect our recorded revenues
and estimates of the collectibility of our receivables. Revenue from real
estate rentals is recognized and accrued as earned on a pro rata basis over the
term of the lease. The Company regularly evaluates the adequacy of its
allowance for doubtful accounts considering such factors as credit quality of
our tenants, delinquency of payment, historical trends and current economic
conditions. The Company provides an allowance for doubtful accounts for tenant
balances that are over 90 days past due and for specific tenant receivables for
which collection is considered doubtful. Actual write-offs may differ from
these estimates, which could result in an increase or decrease in bad debt
expense. OFF-BALANCE SHEET ARRANGEMENTS On January 12, 2004, the Company, through a newly formed subsidiary DownREIT
limited partnership called Koger BFC, Ltd., acquired all of the partnership
interests in Broward Financial Center (BFC) in downtown Fort Lauderdale,
Florida, in a joint venture with an affiliate of Investcorp Properties Limited
of New York (Investcorp), for approximately $60.1 million. BFC is a single
twenty-four story building containing approximately 326,000 rentable square
feet. CRT has a 30% interest in the joint venture. Approximately 14% of the
existing partnership interests in BFC were owned by entities in which the
Companys Chief Executive Officer, Thomas J. Crocker had a 50% ownership
interest (Crocker Affiliate). The decision to acquire BFC and the terms
thereof were approved by the members of the Companys board of directors and
finance committee without the participation of Mr. Crocker. Investcorp, as the
joint venture partner acquiring 70% of the economic interests, played a
substantial role in negotiating the purchase. The Company acquired the
partnership interests held by Crocker Affiliate by issuing 97,948 limited
partnership units (Units) in exchange for the contribution of its partnership
interests. The Units will be entitled to receive quarterly distributions
equivalent to the quarterly dividend declared on the Companys common stock.
Commencing on the first anniversary of the transaction, Crocker Affiliate can
cause the Units to be redeemed in exchange for cash (at a price per Unit equal
to the lesser of the per share price for a share of the Companys common stock
at the time of redemption and the average per share closing price of the
Companys common stock for the thirty trading days preceding the redemption)
or, at the Companys option, shares of the Companys common stock (one share of
the Companys common 20




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stock per Unit). The Companys total investment in this joint venture is $5.3
million including DownREIT minority contributions ($2.1 million) and closing
costs. The Company accounts for this investment using the equity method of
accounting as it does not have a controlling interest over the operating and
financial policies of the joint venture, nor is it the primary beneficiary
under FIN 46®. As a result, the assets and liabilities of this joint venture
are not included in the Companys balance sheet. This investment was recorded
initially at cost and subsequently adjusted for equity in earnings and cash
contributions and distributions. RECENT DEVELOPMENTS On October 4, 2004, the Company sold approximately 14.5 acres of undeveloped
land located across the street from its Atlanta Gwinnet Center for
approximately $3.25 million. This transaction resulted in a gain of
approximately $293,000. On September 30, 2004, the Company entered into a purchase and sale agreement
with East Las Olas Investors II, WLD Realty, Ltd., and Halmos Holdings, Inc. to
acquire the partnership interests in two class A office buildings located in
the central business district of Fort Lauderdale, Florida. On October 15,
2004, after further discussions between the parties, the purchase price was fixed at $138.6 million (plus closing and other costs) and the Company deposited $5 million in
earnest money. The office buildings, known as the Las Olas
Centre, comprise approximately 470,000 rentable square feet and, as of
September 30, 2004, was 87% occupied. The transaction is expected to close
during the fourth quarter of 2004 and will be financed with a 10-year, $99
million fixed interest rate loan with the remainder to be drawn on the
Companys line of credit. On October 14, 2004, the Company announced plans to develop a $90 million,
20-story, 335,000-square-foot, class A office tower in a joint venture with
The Related Companies of New York. On November 2, 2004, the Company entered into a purchase and sale agreement
with the WHML-S Real Estate Limited Partnership to acquire a 437,000 rentable
square foot class A office building for a purchase price of approximately $39
million (plus closing and other costs). The building, located in Dallas,
Texas, is comprised of two interconnected towers consisting of Tower 1 with 8
floors, and Tower 2 with 11 floors, are situated on approximately 10.1 acres
with an attached four-story parking garage. In connection with this
acquisition, the Company will enter into a joint venture with Wilcox Capital
Group, whereby the Company will own 75% of the venture. Pending the Companys
successful completion of due diligence on the property, the acquisition of
Signature Place would be expected to close during the fourth quarter of 2004
and will be financed with proceeds from a non-recourse mortgage and the balance
of the equity required of the Company will be drawn on the Companys revolving
line of credit. As of September 30, 2004, the Signature Place office building
was 65% leased. RESULTS OF OPERATIONS Rental and other rental services revenues totaled $40,974,000 for the quarter
ended September 30, 2004, compared to $35,163,000 for the quarter ended
September 30, 2003. Rental and other rental services revenues totaled
$121,373,000 for the nine months ended September 30, 2004, compared to
$107,407,000 for the nine months ended September 30, 2003. These increases
resulted primarily from an increase in revenues resulting from the acquisition
of Atlantic Center Plaza in January 2004 ($3,862,000 and $9,904,000 for the
quarter and nine months ended September 30, 2004, respectively), CIGNA Plaza
and Tollway Crossing in September 2003 ($1,171,000 and $4,600,000 for the
quarter and nine months ended September 30, 2004, respectively), Decoverly in
April 2004 ($1,240,000 and $2,376,000 for the quarter and nine months ended
September 30, 2004, respectively), Westchase Corporate Center and Baymeadows
Way during the third quarter of 2004 ($945,000 for the quarter and nine months
ended September 30, 2004, respectively) and McGinnis Park in December 2003
($510,000 and $1,571,000 for the quarter and nine months ended September 30,
2004, respectively). The effect of this increase was partially offset by a
decrease in rental revenues from the Lakes on Post Oak property acquired in
December 2002 ($172,000 and $1,315,000 for the quarter and nine months ended
September 30, 2004, respectively), the Three Ravinia Drive property acquired
in January 2002 ($480,000 and $1,008,000 for the quarter and nine months ended
September 30, 2004, respectively), and a decline in rental revenues from the
Companys portfolio of assets acquired 21




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prior to January 1, 2002 of $1,403,000 and $3,523,000 for the quarter and nine
months ended September 30, 2004, respectively, as compared to the same period
in 2003. At September 30, 2004, the Companys buildings were on average 80
percent occupied with an average rental rate of $17.71 per rentable square
foot. At September 30, 2003, the Companys buildings were on average 82
percent occupied with an average rental rate of $17.28 per rentable square
foot. Property operations expense includes such charges as utilities, real estate
taxes, janitorial, maintenance, property insurance, provision for
uncollectible rents and management costs. Property operations expense
increased $2,207,000 and $5,737,000 for the three and nine months ended
September 30, 2004, compared to the same period in 2003. These increases were
due primarily to operations expense resulting from the acquisition of Atlantic
Center Plaza in January 2004 ($1,068,000 and $3,310,000 for the quarter and
nine months ended September 30, 2004), Decoverly in April 2004 ($435,000 and
$830,000 for the quarter and nine months ended September 30, 2004) and CIGNA
Plaza and Tollway Crossing in September 2003 ($696,000 and $2,055,000 for the
quarter and nine months ended September 30, 2004, respectively). Theses
increases were partially offset by a decrease in operating expenses from the
Three Ravinia Drive property acquired in January 2002 ($349,000 and $560,000
for the quarter and nine months ended September 30, 2004, respectively. The amount of property operations expense and its percentage of total rental
revenues for the applicable periods are as follows: Percent ofRental and OtherPeriod
    
    Amount
    
    Rental Services RevenuesSeptember 30, 2004Quarter
    
    $
    16,114,000
    
    
    
    39.3
    %September 30, 2003Quarter
    
    $
    13,907,000
    
    
    
    39.6
    %September 30, 2004Nine Months
    
    $
    47,686,000
    
    
    
    39.3
    %September 30, 2003Nine Months
    
    $
    41,949,000
    
    
    
    39.1
    %
 Depreciation expense has been calculated on the straight-line method based
upon the useful lives of the Companys depreciable assets, generally 3 to 39
years. Depreciation expense increased $1,722,000 and $4,358,000 for the three
and nine months ended September 30, 2004, respectively, compared to the same
period in 2003. These increases were due primarily to depreciation resulting
from the Companys acquisition of Atlantic Center Plaza in January 2004
($962,000 and $2,108,000 for the quarter and nine months ended September 30,
2004, respectively), McGinnis Park in December 2003 ($288,000 and $489,000 for
the quarter and nine months ended September 30, 2004, respectively), Decoverly
in April 2004 ($146,000 and $292,000 for the quarter and nine months ended
September 30, 2004, respectively) and CIGNA Plaza and Tollway Crossing in
September 2003 ($171,000 and $512,000 for the quarter and nine months ended
September 30, 2004, respectively). General and administrative expenses increased $1,761,000 and $1,742,000 for
the three and nine months ended September 30, 2004, respectively, compared to
the same period in 2003. These increases were the result of a one-time
payment of $540,000 made during the quarter on behalf of the Companys Chief
Executive Officer (as described in Note 9 to the condensed consolidated
financial statements), as well as an overall increase in payroll related costs
($403,000 and $709,000 for the quarter and nine months ended September 30,
2004, respectively) and administrative costs, including costs incurred in
connection with changing the Company name and compliance with the
Sarbanes-Oxley Act of 2002 ($521,000 and $740,000 for the quarter and nine
months ended September 30, 2004, respectively). Amortization expense increased $832,000 and $720,000 for the three and nine
months ended September 30, 2004, respectively, as compared to the same period
in 2003. These increases were due primarily to the amortization of the fair
value of acquired leases for Atlantic Center Plaza ($667,000 for the three and
nine months ended September 30, 2004). Mortgage and loan interest expense increased $866,000 and $922,000 for the
three and nine months ended September 30, 2004, respectively, compared to the
same period in 2003. These increases were primarily the result of an increase
in interest expense due 22




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to a mortgage indebtedness assumed in connection with the acquisition of
Atlantic Center Plaza in January 2004 and a decrease in the average
outstanding balance on the Companys line of credit since September 30, 2003. Net income decreased $1,493,000 for the quarter and increased $207,000 for the
nine months ended September 30, 2004, respectively, as compared to the same
period in 2003. This quarterly decrease was primarily due to an increase in
depreciation and amortization expense and property operating costs incurred in
connection with the Companys recent acquisition of Atlantic Center Plaza.
During the third quarter of 2004, the Company completed its evaluation of, and
recorded an intangible asset for the fair value of leases acquired in the
Atlantic Center Plaza transaction. As a result, the Company recorded $667,000
of additional amortization expense. The Company paid $1,588,000 and
$4,764,000 in dividends to preferred shareholders for the quarter and nine
months ended September 30, 2004, respectively. No such dividends were paid
during the quarter or nine months ended September 30, 2003, since the
preferred stock was issued in September 2003. As a result, net income
available to common shareholders declined by $2,710,000 and $4,186,000 for the
quarter and nine months ended September 30, 2004, respectively, as compared to
the same period in 2003. LIQUIDITY AND CAPITAL RESOURCES Operating ActivitiesDuring the nine months ended September 30, 2004,
the Company generated approximately $40.2 million in net cash from operating
activities, approximately $2.7 million less than the comparable period of
2003. The Companys decreased generation of cash from operations is primarily
attributable to an increase in the aggregate rate of accounts receivable and
other assets (approximately $9.3 million). The decrease in cash generated by
operations was partly offset by an increase in depreciation and amortization
(approximately $5.1 million) and a growth in the rate of increases in accounts
payable ($771,000). The Companys primary internal sources of cash are the collection of rents
from buildings owned by the Company. As a REIT for federal income tax
purposes, the Company must, among other requirements, pay out annually as
dividends, at least 90 percent of its REIT taxable income (which, due to
non-cash charges, including depreciation and net operating loss carryforwards,
may be substantially less than cash flow from operating activities). In the
past, the Company has paid out dividends in amounts at least equal to its REIT
taxable income. The Company believes that its cash flow from operating
activities will be sufficient to cover debt service payments and to pay the
dividends required to maintain REIT status through 2004. Dividends are
determined quarterly by the Companys board of directors. The level of cash flow generated by rents depends primarily on the occupancy
rates of the Companys buildings and changes in rental rates on new and
renewed leases and under escalation provisions in existing leases. At
September 30, 2004, leases representing approximately 5.2 percent of the gross
annualized rent from the Companys properties, without regard to the exercise
of options to renew, were due to expire during the remainder of 2004. These
scheduled expirations represent leases for space in buildings located in 17 of
the 24 centers or locations in which the Company owns buildings. Certain of
these tenants may not renew their leases or may reduce their demand for space.
During the nine months ended September 30, 2004, leases were renewed on
approximately 58.7 percent of the Companys rentable square feet that were
scheduled to expire during the nine-month period. Current market conditions
in certain markets may require that rental rates at which leases are renewed
or at which vacated space is leased be lower than rental rates under existing
leases. Based upon the amount of leases that will expire during 2004 and the
competition for tenants in the markets in which the Company operates, the
Company has and expects to continue to offer incentives to certain new and
renewal tenants. These incentives may include the payment of tenant
improvement costs and, in certain markets, reduced rents during initial lease
periods. Governmental tenants (including the State of Florida and the United States
Government) which account for approximately 19.5 percent of the Companys
occupied space at September 30, 2004 may be subject to budget reductions in
times of recession and governmental austerity measures. Consequently, there
can be no assurance that governmental appropriations for rents may not be
reduced. Additionally, certain of the private sector tenants that have
contributed to the Companys rent stream may reduce their current demands, or
curtail their future need, for additional office space. 23




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The Company believes that the markets in which it operates provide
significant growth potential due to their diverse economies, expanding
metropolitan areas, skilled work force and moderate labor costs. However,
cash from operations could be reduced if economic conditions result in lower
occupancy rates and lower rental income for the Companys buildings, which may
in turn affect the amount of dividends paid by the Company. Investing ActivitiesAt September 30, 2004, substantially all of the
Companys invested assets were in real properties or joint ventures invested
in real properties and the Companys primary use of cash for investing
activities was property acquisitions. Of the $155.1 million utilized in
investing activities in the nine months ended September 30, 2004, $125.7
million was for property acquisitions. An additional $23.4 million was used
for tenant and building improvements, as well as deferred tenant costs during
the period. Improvements to the Companys existing properties have been
financed through internal operations and lender required escrow accounts for
The Lakes on Post Oak. On January 27, 2004, the Company acquired Atlantic Center Plaza, a twenty-three
story 502,000 square foot building located in Atlanta, Georgia, for a purchase
price of $116.5 million plus closing and other costs. The Company initially
allocated approximately $10.0 million and $108.1 million of the net purchase
price to value of the acquired land and building, respectively. During the first quarter of 2004, the Company acquired a 30% interest in a
joint venture that owns the Broward Financial Center, resulting in a total
investment of $5.3 million (including closing costs and fees) which includes a
DownREIT minority contribution of $2.1 million. On April 2, 2004, the Company acquired four properties, including two Class A
office buildings, a ground lease and an undeveloped parcel of land located in
the Decoverly Office Park in Rockville, Maryland for a purchase price of $42.0
million plus closing and other costs. The two three-story office buildings
aggregate approximately 155,000 square feet of rentable space. The undeveloped
land parcel contains 3.2 acres with an approved site plan for a four-story
105,000 square foot office building. The Company initially allocated
approximately $19.7 million and $22.8 million of the net purchase price to
value of the acquired land and buildings, respectively. On July 23, 2004 the Company acquired a five-story, 224,000 square foot,
single-tenant, class A office building located at 7777 Baymeadows Way in
Jacksonville, Florida, for a purchase price of $20.8 million, plus closing and
other costs. As part of this transaction, the company issued 33,200 Down REIT
limited partnership units in exchange for a $760,985 contribution from a
related minority partner (Thomas J. Crocker, the Companys Chief Executive
Officer) in a joint venture with the Company (see Note 9). The Company
received an additional minority interest contribution of $154,107 from an
unrelated third party. The Company initially allocated approximately $2.4
million and $18.6 million of the net purchase price to value of the acquired
land and building, respectively. On August 16, 2004, the Company acquired the Westchase Corporate Center located
in Houston, Texas; a six-story, 184,000 square foot, class A office building
for a purchase price of $20.3 million, plus closing and other costs. As part
of this transaction, the Company issued 28,583 DownREIT limited partnership
units in exchange for a $639,015 contribution from a related minority partner
(Thomas J. Crocker, the Companys Chief Executive Officer) in a joint venture
with the Company (see Note 9). The Company received an additional minority
interest contribution of $545,893 from an unrelated third party. The Company
initially allocated approximately $2.1 million and $18.7 million of the net
purchase price to value of the acquired land and building, respectively. Financing ActivitiesThe Company generated $110.6 million and $12.7
million of cash in financing activities during the nine months ended September
30, 2004 and September 30, 2003, respectively. For the nine months ended
September 30, 2004, the Companys largest sources of cash from financing
activities were proceeds from the sales of common stock ($100.4 million) and
proceeds from mortgages and loans ($82.5 million). In the same time period,
the Companys largest uses of cash for financing activities were principal
payments on mortgages and loans payable ($50.1 million) and dividends paid
($31.1 million). For the nine months ended September 30, 2003, the Companys
largest sources of cash for financing activities were proceeds from mortgages
and loans ($36.0 million) and proceeds from the sale of preferred stock ($72.1
million). In the same period, the Companys primary uses of 24




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##### Table of Contents



cash for financing activities were principal payments on mortgages and
loans payable ($73.6 million) and dividends paid ($22.4 million). On January 13, 2004, the Company issued 5,175,000 shares of its common stock
(including 675,000 shares issued in connection with the exercise of an
over-allotment option granted to the Companys underwriter) at a price to the
public of $20.45 per share. The net proceeds of the offering ($100.2 million)
were used to pay down the Companys revolving credit facility ($15 million),
fund the Decoverly acquisition as well as a portion of the Atlantic Center
Plaza acquisition, and for general corporate purposes. The Company has a $165 million secured revolving credit facility of which
$24.0 million had been borrowed as of September 30, 2004. At September 30,
2004, the Company had a total of nine buildings that were unencumbered
consisting of four buildings in Charlotte, North Carolina, one building in
Jacksonville, Florida, two buildings in Rockville, Maryland and two buildings
in Atlanta, Georgia. Loan maturities and normal amortization of mortgages
and loans payable are expected to total approximately $78.4 million during the
remainder of calendar year 2004, including a $77.0 million mortgage note
payable to Column Financial maturing in December 2004, which has three
one-year extension options available. On April 21, 2004, the Company amended and extended the loan agreement
governing its $75.9 million loan assumed in connection with the acquisition of
Atlantic Center Plaza. As part of the amendment, the existing variable
interest rate (LIBOR plus 160 basis points) will remain in place until December
31, 2004 and the Company will draw an additional $4.1 million prior to
December 31, 2004. Effective January 1, 2005, the rate will be fixed at 5.49%
until January 1, 2015. The Company has on file with the SEC a shelf registration statement under which
common stock, preferred stock and debt securities are available for issuance
from time to time by the Company. At September 30, 2004, the Company had $500
million available under this shelf registration for future issuances of
securities. The amount and timing of future sales of Company securities will
depend on market conditions, operating cash flow, asset sales and the specific
needs of the Company. The Company may from time to time sell securities beyond
the amount needed to meet capital requirements in order to allow for the early
repayment of long-term debt, the redemption of preferred stock, the reduction
of short-term debt or for other general corporate purposes. CONTRACTUAL OBLIGATIONS
           (In thousands) Less than
    
    
    
    
    
    
    
    
    
    More thanOne
    
    
    
    
    
    
    
    
    
    FiveTotal
    
    year
    
    1-3 years
    
    3-5 years
    
    yearsLong-Term Debt Obligations(a)
    
    $
    517,025
    
    
    $
    77,000
    (c)
    
    $
    143,412
    
    
    $
    191,747
    
    
    $
    104,866Purchase Obligations (b)
    
    
    3,000
    
    
    
    3,000
 (a) Increases in interest rates on variable rate debt could increase the
Companys interest expense and adversely affect cash flow and the ability to
pay dividends to shareholders. The Company may be required to purchase
interest rate protection products in connection with future variable rate debt,
which may further increase borrowing costs. The Companys use of leverage can
adversely impact its operation, cash flow, and ability to make distributions
and its financial condition will be negatively impacted if it cannot repay or
refinance its indebtedness as it becomes due. The Company is subject to risks
normally associated with debt financing, including: the risk that its cash
flow will be insufficient to meet required payments of principal and interest;
the risk that the existing debt with respect to its properties, which in most
cases will not have been fully amortized at maturity, will not be able to be
refinanced; and the risk that the terms of any refinancing of any existing debt
will not be as favorable as the terms of the existing debt. (b) This purchase obligation consists of a contractual commitment related to
the renovation of The Lakes on Post Oak in Houston, Texas. In connection with
the loan of the Lakes on Post Oak, the Company obtained a $1,705,000 letter of
credit in lieu of additional cash escrows for tenant improvements and leasing
commissions. 25




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##### Table of Contents



(c) This variable interest rate debt has three one-year extension options. In August 2004, the Company replaced its previous $100 million secured
revolving credit facility, which was scheduled to mature in December 2004, with
a new $165 million secured revolving credit facility, which has a three-year
term and a one-year extension option and is scheduled to expire on August 23,
2007. As of September 30, 2004 and December 31, 2003, the Companys mortgage notes
payable were comprised of the following (in thousands): As of
    
    As ofSeptember 30,
    
    December 31,
    
    Current
    
    MaturityMortgage
    
    2004
    
    2003
    
    Interest Rate
    
    DateVariable rate mortgages (a)
    
    $
    176,876
    
    
    $
    93,468
    
    
    3.25% to 4.63%
    
    December 2004 to January 2015Fixed rate mortgages
    
    
    340,149
    
    
    
    315,248
    
    
    5.26% to 8.33%
    
    December 2006 to September 2014Total mortgage notes payable
    
    $
    517,025
    
    
    $
    408,716
 (a) Effective January 1, 2005, $75,876,000 of the variable rate mortgages will
be converted to a 5.49% fixed rate mortgage which has a maturity of January 1,
2005. The weighted average interest rate on the Companys mortgages was 6.01% and
6.64% as of September 30, 2004 and December 31, 2003, respectively. FUNDS FROM OPERATIONS Funds from Operations (FFO) is a non-GAAP financial measure that is a widely
used performance measure for real estate companies and is provided as a
supplemental measure of operating performance. Since real estate values have
historically risen or fallen with market conditions, many industry investors
and analysts have considered presentation of operating results for real estate
companies that use historical cost accounting to be insufficient by
themselves. The National Association of Real Estate Investment Trusts
(NAREIT) adopted the definition of FFO in order to promote an industry
standard measure of REIT financial and operating performance. FFO adds back
historical cost depreciation, which assumes the value of real estate assets
diminishes predictably in the future. NAREIT defines FFO as net income (loss)
(computed in accordance with generally accepted accounting principles (GAAP),
excluding gains (losses) from sales of property, plus depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. Given the nature of the Companys business as a real estate owner and
operator, the Company believes that FFO is helpful to investors as a starting
point in measuring its operational performance because in excluding real
estate related depreciation and amortization, and gains and losses from sales
of property, it provides a supplemental performance measure that, when
compared year over year, captures trends in occupancy rates, rental rates and
operating costs. In addition, since most equity REITs provide FFO information
to investors, FFO can also be a useful supplemental measure for comparing the
Companys results to other equity REITs. FFO excludes depreciation and amortization, however, and captures neither the
changes in the value of our properties that result from use or market
conditions, nor the level of capital expenditures and leasing commissions
necessary to maintain the operating performance of our properties, all of
which have real economic effect and could materially impact the Companys
results from operations, the utility of FFO as a measure of performance is
limited. Moreover, while the Company believes its computation of FFO conforms
to the NAREIT definition, it may not be comparable to FFO reported by REITs
that interpret the definition differently or that do not define FFO in
accordance with the NAREIT definition at all. Accordingly, FFO (i) should not
be considered as an alternative to net income (determined in accordance with
GAAP) as an indicator of the Companys financial performance, (ii) is not an
alternative 26




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##### Table of Contents



to cash flow from operating activities (determined in accordance with GAAP) as
a measure of the Companys liquidity, and (iii) is not indicative of funds
available to fund the Companys cash needs, including its ability to pay
dividends or make distributions, because of needed capital replacement or
expansion, debt service obligations, or other cash commitments and
uncertainties. The following presents the Companys reconciliation of net income to FFO
available to common shareholders for the three and nine months ended September
30, 2004 and 2003 (in thousands): Three MonthsEnded September 30,2004
    
    2003(in thousands)Net income
    
    $
    2,168
    
    
    $
    3,661Dividends on preferred stock
    
    
    (1,588
    )
    
    
    (371
    )Real estate related depreciation
    
    
    8,871
    
    
    
    7,147Real estate related depreciation
 unconsolidated entity
    
    
    58
    
    
    
    Real estate related amortization
 deferred tenant costs
    
    
    692
    
    
    
    436Real estate related amortization
 fair value of acquired leases
    
    
    784
    
    
    
    378Minority interest share of add-backs
    
    
    
    
    
    
    55Gain on sale of non-operating assets
    
    
    
    
    
    
    FFO available to common shareholders
    
    $
    11,040
    
    
    $
    11,251
 Nine MonthsEnded September 30,2004
    
    2003(in thousands)Net income
    
    $
    11,589
    
    
    $
    11,382Dividends on preferred stock
    
    
    (4,764
    )
    
    
    (371
    )Real estate related depreciation
    
    
    26,127
    
    
    
    21,728Real estate related depreciation
 unconsolidated entity
    
    
    329
    
    
    
    Real estate related amortization
 deferred tenant costs
    
    
    2,019
    
    
    
    1,264Real estate related amortization
 fair value of acquired leases

    
    
    1,100
    
    
    
    1,303Minority interest share of add-backs
    
    
    55Gain on sale of non-operating assets
    
    
    
    
    
    
    (589
    )FFO available to common shareholders
    
    $
    36,455
    
    
    $
    34,717
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk.The Company currently has a $165 million secured
revolving credit facility and term loans with variable interest rates. The
Company may incur additional variable rate debt in the future to meet its
financing needs. Increases in interest rates on such debt could increase the
Companys interest expense, which would adversely affect the Companys cash
flow and its ability to pay dividends to its shareholders. The Company has not
entered into any interest rate hedge contracts in order to mitigate the
interest rate risk with respect to the secured revolving credit facility. As
of September 30, 2004, the Company had $176.9 million 27




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##### Table of Contents



outstanding under loans with variable interest rates. If the weighted average
interest rate on this variable rate debt were 100 basis points higher or lower,
annual interest expense would be increased or decreased by approximately
$1,769,000. On April 21, 2004, the Company amended its $75.9 million loan,
effective January 1, 2005, assumed in connection with its acquisition of
Atlantic Center Plaza, to convert to a fixed interest rate of 5.49% and extend
the loan maturity date to January 1, 2015. Additionally, the Company had
$340.1 million outstanding under loans with fixed interest rates as of
September 30, 2004. The Company may incur additional fixed rate debt in the
future to meet its financing needs. If the market interest rate on this
fixed rate debt were 100 basis points lower, the fair value of the Companys
fixed rate debt would increase to $354.3 million. 
 Item 4. Controls and Procedures. The Company carried out an evaluation, with the participation of the Companys
management, including its chief executive officer and its principal financial
officer, of the effectiveness of the Companys disclosure controls and
procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act
of 1934) as of the end of the period covered by this report. Based upon that
evaluation, the Companys chief executive officer and principal financial
officer concluded that the Companys disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in
the Companys periodic SEC filings. The Companys management, including the
chief executive officer and the principal financial officer, recognizes that
any set of controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control
objectives. The Company is continuously seeking to improve the efficiency and effectiveness
of its operations and of its internal controls. This results in refinements to
processes throughout the Company. However, there has been no change in the
Companys internal control over financial reporting during the quarter ended
September 30, 2004 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting. There have been no significant changes in the Companys internal controls over
financial statements or in other factors that could significantly affect the
internal controls subsequent to the date of their evaluation in connection with
the preparation of this quarterly report on Form 10-Q. 28




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings None. 
 Item 5. Other Information  (a)
    
    The following table sets forth, with respect to each office project or
location at September 30, 2004, gross square feet, rentable square feet,
percentage leased, and the average annual rent per rentable square foot
leased. AverageAnnualGross
    
    Rentable
    
    
    
    
    
    Rent PerSquare
    
    Square
    
    Percent
    
    SquareOffice Project/Location
    
    Feet
    
    Feet (5)
    
    Leased (1)
    
    Foot (2)Atlanta Atlantic Center Plaza (3)
    
    
    507,700
    
    
    
    501,521
    
    
    
    88
    %
    
    $
    26.58Atlanta Chamblee
    
    
    1,199,800
    
    
    
    1,128,607
    
    
    
    89
    %
    
    
    18.39Atlanta Gwinnett
    
    
    274,400
    
    
    
    262,806
    
    
    
    89
    %
    
    
    19.28Atlanta McGinnis Park (3)
    
    
    212,400
    
    
    
    202,243
    
    
    
    58
    %
    
    
    17.16Atlanta Perimeter
    
    
    184,000
    
    
    
    181,862
    
    
    
    59
    %
    
    
    18.57Atlanta Three Ravinia (3)
    
    
    845,000
    
    
    
    804,876
    
    
    
    63
    %
    
    
    17.84
    (4)Charlotte University
    
    
    190,600
    
    
    
    182,891
    
    
    
    60
    %
    
    
    18.26Charlotte Vanguard
    
    
    548,200
    
    
    
    526,408
    
    
    
    54
    %
    
    
    14.91Dallas Cigna Plaza (3)
    
    
    133,600
    
    
    
    127,226
    
    
    
    95
    %
    
    
    22.73Dallas Tollway Crossing (3)
    
    
    159,800
    
    
    
    152,163
    
    
    
    100
    %
    
    
    22.87Houston Post Oak (3)
    
    
    1,265,000
    
    
    
    1,201,116
    
    
    
    73
    %
    
    
    17.88Houston Westchase Corporate Center (3)
    
    
    194,000
    
    
    
    184,259
    
    
    
    94
    %
    
    
    22.83Jacksonville Baymeadows
    
    
    793,400
    
    
    
    751,387
    
    
    
    93
    %
    
    
    13.46
    (4)Jacksonville Baymeadows Way (3)
    
    
    236,000
    
    
    
    224,281
    
    
    
    100
    %
    
    
    9.50
    (4)Jacksonville JTB
    
    
    436,000
    
    
    
    416,773
    
    
    
    100
    %
    
    
    12.52
    (4)Memphis Germantown
    
    
    562,600
    
    
    
    533,017
    
    
    
    87
    %
    
    
    18.00Orlando Central
    
    
    699,700
    
    
    
    615,963
    
    
    
    82
    %
    
    
    16.78Orlando Lake Mary
    
    
    318,000
    
    
    
    303,546
    
    
    
    81
    %
    
    
    17.11Orlando University
    
    
    405,200
    
    
    
    383,749
    
    
    
    75
    %
    
    
    19.39Richmond Paragon
    
    
    154,300
    
    
    
    145,127
    
    
    
    94
    %
    
    
    19.32St. Petersburg
    
    
    715,500
    
    
    
    672,085
    
    
    
    81
    %
    
    
    17.00Tallahassee
    
    
    960,300
    
    
    
    835,840
    
    
    
    73
    %
    
    
    16.89Washington D.C. Decoverly (3)
    
    
    162,500
    
    
    
    154,787
    
    
    
    93
    %
    
    
    24.05Total
    
    
    11,158,000
    
    
    
    10,492,533Weighted Average  Total Company
    
    
    
    
    
    
    
    
    
    
    80
    %
    
    $
    17.71Weighted Average  Same Store
    
    
    
    
    
    
    
    
    
    
    81
    %
    
    $
    16.76Weighted Average  Acquisition
    
    
    
    
    
    
    
    
    
    
    78
    %
    
    $
    19.67
  (1)
    
    The percent leased rates have been calculated by dividing total rentable
square feet occupied in an office building by total rentable square feet
in such building.(2)
    
    Rental rates are computed by dividing (a) total annualized base rents
(which excludes expense pass-through and reimbursements) for an office
project or location as of September 30, 2004 by (b) the rentable square
feet applicable to such total annualized rents.(3)
    
    Properties acquired subsequent to January 1, 2002.(4)
    
    Includes the effect of leases where tenants who occupy all or a
substantial portion of an entire office building pay substantially all
operating costs in addition to base rent.(5)
    
    Does not include investment in unconsolidated entity that contains
325,583 of rentable square feet and
was 86% occupied at September 30, 2004. 29




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##### Table of Contents



(b)
    
    The following schedule sets forth for all of the Companys buildings (i)
the number of leases which will expire during the remainder of calendar
year 2004 (without regard to any renewals), calendar years 2005 through
2012, and years subsequent to 2012, (ii) the total rentable area in square
feet covered by such leases, (iii) the percentage of total rentable square
feet represented by such leases, (iv) the average annual rent per square
foot for such leases, (v) the current annualized base rents represented by
such leases, and (vi) the percentage of gross annualized base rents
contributed by such leases. This information is based on the buildings
owned by the Company on September 30, 2004 and on the terms of leases in
effect as of September 30, 2004, on the basis of then existing base
rentals, and without regard to the exercise of options to renew.
Furthermore, the information below does not reflect that some leases have
provisions for early termination for various reasons, including, in the
case of government entities, lack of budget appropriations. Leases were
renewed on approximately 58.7 percent of the Companys rentable square
feet which were scheduled to expire during the nine months ended September
30, 2004. Percentage of
    
    Average
    
    
    
    
    
    PercentageTotal Square
    
    Annual Rent
    
    Total
    
    of TotalNumber of
    
    Number of
    
    Feet Leased
    
    per Square
    
    Annualized
    
    Annual RentsLeases
    
    Square Feet
    
    Represented by
    
    Foot Under
    
    Rents Under
    
    Represented byPeriod
    
    Expiring
    
    Expiring
    
    Expiring Leases
    
    Expiring Leases
    
    Expiring Leases
    
    Expiring Leases2004
    
    
    128
    
    
    
    455,551
    
    
    
    5.4
    %
    
    $
    17.12
    
    
    $
    7,798,191
    
    
    
    5.2
    %2005
    
    
    216
    
    
    
    1,033,737
    
    
    
    12.3
    %
    
    
    17.68
    
    
    
    18,275,872
    
    
    
    12.3
    %2006
    
    
    184
    
    
    
    1,285,672
    
    
    
    15.3
    %
    
    
    18.23
    
    
    
    23,439,615
    
    
    
    15.7
    %2007
    
    
    163
    
    
    
    1,319,763
    
    
    
    15.7
    %
    
    
    18.09
    
    
    
    23,871,739
    
    
    
    16.0
    %2008
    
    
    97
    
    
    
    1,059,367
    
    
    
    12.6
    %
    
    
    18.26
    
    
    
    19,313,807
    
    
    
    13.0
    %2009
    
    
    81
    
    
    
    1,521,710
    
    
    
    18.1
    %
    
    
    17.72
    
    
    
    26,964,830
    
    
    
    18.1
    %2010
    
    
    25
    
    
    
    265,357
    
    
    
    3.2
    %
    
    
    16.92
    
    
    
    4,488,996
    
    
    
    3.0
    %2011
    
    
    18
    
    
    
    266,400
    
    
    
    3.2
    %
    
    
    14.95
    
    
    
    3,983,050
    
    
    
    2.7
    %2012
    
    
    12
    
    
    
    194,474
    
    
    
    2.3
    %
    
    
    23.00
    
    
    
    4,4,72,605
    
    
    
    3.0
    %Thereafter
    
    
    14
    
    
    
    1,004,382
    
    
    
    11.9
    %
    
    
    16.21
    
    
    
    16,279,998
    
    
    
    11.0
    %Total
    
    
    938
    
    
    
    8,406,413
    
    
    
    100.0
    %
    
    $
    17.71
    
    
    $
    148,888,703
    
    
    
    100.0
    %
  (c)
    
    On September 30, 2004, the Company entered into a purchase and sale agreement
with East Las Olas Investors II, WLD Realty, Ltd., and Halmos Holdings, Inc. to
acquire the partnership interests in two class A office buildings located in
the central business district of Fort Lauderdale, Florida. On October 15,
2004, after further discussions between the parties, the purchase price was fixed at $138.6 million (plus closing and other costs) and the Company deposited $5 million in
earnest money. The office buildings, known as the Las Olas
Centre, comprise approximately 470,000 rentable square feet and, as of
September 30, 2004, was 87% occupied. The transaction is expected to close
during the fourth quarter of 2004 and will be financed with a 10-year, $99
million fixed interest rate loan with the remainder to be drawn on the
Companys line of credit. 30




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##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits Number
    
    Description10.1
    
    Third Amended and Restated
Agreement of Limited Partnership of CRT BMWCX, LTD., dated
August 16, 2004, by & between CRTP OP LP, Thomas J. Crocker, CCA III, Inc., and Westchase Corporate Center Associates, LTD.10.2
    
    Agreement of Sale of Partnership Interests, dated
September 30, 2004, by and between Koger Acquisition, LLC, East
Las Olas Investors II, WLD Realty, Ltd., and Halmos Holdings, Inc.10.3
    
    Reinstatement and First Amendment
to Agreement of Sale of Partnership Interests, dated October 15,
2004, by & between Koger Acquisition, LLC, East
Las Olas Investors II, WLD Realty, Ltd., and Halmos Holdings, Inc.15
    
    Letter re: Unaudited interim financial information.31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act32
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
  (b)
    
    Reports on Form 8-K On July 1, 2004, the Company filed a Form 8-K (dated June 23, 2004) reporting
under Item 5, Other Events, the amendment of its articles of incorporation to
change its name to CRT Properties, Inc., and providing under Item 7, Financial
Statements and Exhibits, the Koger Equity, Inc. News Release, dated June 23,
2004. On July 19, 2004, the Company furnished a Form 8-K (dated July 14, 2004),
reporting under Item 9, Regulation FD, a) the ringing of the closing bell at
the New York Stock Exchange by its CEO, Thomas J. Crocker on Friday, July 16,
2004 and that it would be added to the S&P Small Cap 600 Real Estate Investment
Trusts Sub-Industry Index and b) the announcement of its quarterly conference
call to discuss second quarter 2004 financial results and providing under Item
7, Financial Statements and Exhibits, a) the CRT Properties, Inc. News Release,
dated July 14, 2004 and b) the CRT Properties, Inc. News Release dated July 15,
2004. On July 30, 2004, the Company filed a Form 8-K (dated July 30, 2004), reporting
under Item 5, Other Events, that it terminated its loan commitment to its CEO,
Thomas J. Crocker, under a stock purchase loan agreement, with the full amount
of outstanding loans paid in cash outlining the steps taken to achieve the loan
termination. The Company announced that it completed its acquisition of a
mid-rise office building in Jacksonville, Florida, in a deal valued at
approximately $20.8 million. The Company also announced that it executed a
binding agreement to acquire the Westchase Corporate Center in Houston, Texas,
in a deal valued at approximately $19.6 million. The Company provided under
Item 7, Financial Statements and Exhibits, the CRT Properties, Inc. News
Release, dated July 30, 2004. On August 5, 2004, the Company furnished a Form 8-K (dated August 3, 2004)
reporting under Item 9, Regulation FD Disclosure, the announcement of its
quarterly results for the period ended June 30, 2004, and related supplemental
information, dated June 30, 2004, and providing under Item 7, Financial
Statements and Exhibits, the CRT Properties, Inc. News Release, dated August 3,
2004 and related supplemental information. On August 26, 2004, the Company furnished a Form 8-K (dated August 24, 2004)
reporting under Item 7.01, Regulation FD Disclosure, the closing of a $165
million secured revolving credit facility, and providing under Item 9.01,
Financial Statements and Exhibits, the CRT Properties, Inc. News Release, dated
August 24, 2004. On August 31, 2004, the Company furnished a Form 8-K (dated August 26, 2004)
reporting under Item 7.01, Regulation FD Disclosure, the announcement of a
quarterly dividend on preferred stock, and providing under Item 7, Financial
Statements and Exhibits, the CRT Properties, Inc. News Release, dated August
26, 2004. 31




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On September 20, 2004, the Company furnished a Form 8-K (dated September 17,
2004) reporting under Item 7.01, Regulation FD Disclosure, the announcement of
a quarterly dividend on common stock, and providing under Item 7, Financial
Statements and Exhibits, the CRT Properties, Inc. News Release, dated September
17, 2004. 32




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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. CRT PROPERTIES, INC.
RegistrantDated: November 8, 2004
    
    /s/ Steven A. Abney

Steven A. Abney
Vice President, Finance and
Chief Accounting Officer
(Principal Financial Officer)
CRT Properties, Inc.
 33