##### 



FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For quarterly period ended March 31, 2005 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to .
 COMMISSION FILE NUMBER 000-23733 CAPITAL AUTOMOTIVE REIT  Maryland
(State of organization)
    
    54-1870224
(I.R.S. Employer Identification Number)
 8270 Greensboro Drive, Suite 950, McLean, Virginia 22102
(Address of principal executive offices and zip code) (703) 288-3075
(Registrants telephone Number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No o Number of common shares of beneficial interest outstanding as of April 30, 2005 was
43,684,272.




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##### 



CAPITAL AUTOMOTIVE REIT
FORM 10-Q
INDEX Page No.Part I  Financial InformationItem 1  Financial Statements.Consolidated Balance Sheets March 31, 2005 (unaudited) and
    
    
    3December 31, 2004Consolidated Statements of Operations (unaudited)  three months
ended March 31, 2005 and March 31, 2004
    
    
    4Consolidated Statements of Cash Flows (unaudited)  three months ended
March 31, 2005 and March 31, 2004
    
    
    5Consolidated Statements of Changes in Shareholders Equity and Other
Comprehensive Income (unaudited)  three months ended
March 31, 2005
    
    
    6Notes to Consolidated Financial Statements (unaudited)
    
    
    7Item 2  Managements Discussion and Analysis of Financial Condition
and Results of Operations.
    
    
    23Item 3  Quantitative and Qualitative Disclosures About Market Risk.
    
    
    41Item 4  Controls and Procedures.
    
    
    41Part II  Other InformationItem 1  Legal Proceedings.
    
    
    42Item 2  Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    42Item 3  Defaults Upon Senior Securities.
    
    
    42Item 4  Submission of Matters to a Vote of Security Holders.
    
    
    42Item 5  Other Information.
    
    
    42Item 6  Exhibits.
    
    
    44Signatures
    
    
    45
 2




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##### 



PART I  FINANCIAL INFORMATION
ITEM I  FINANCIAL STATEMENTS
CAPITAL AUTOMOTIVE REIT
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data) March 31,
    
    
    December 31,2005
    
    
    2004(unaudited)ASSETSReal estate:Land
    
    $
    872,971
    
    
    $
    866,480Buildings and improvements
    
    
    1,363,717
    
    
    
    1,330,843Accumulated depreciation
    
    
    (153,833
    )
    
    
    (143,886
    )2,082,855
    
    
    
    2,053,437Cash and cash equivalents
    
    
    40,816
    
    
    
    8,332Other assets, net
    
    
    96,579
    
    
    
    96,388Total Assets
    
    $
    2,220,250
    
    
    $
    2,158,157LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Mortgage debt
    
    $
    547,146
    
    
    $
    634,365Unsecured debt
    
    
    555,148
    
    
    
    381,592Borrowings under credit facilities
    
    
    
    
    
    
    30,000Accounts payable and accrued expenses
    
    
    22,565
    
    
    
    23,731Security deposits payable
    
    
    10,128
    
    
    
    9,665Total Liabilities
    
    
    1,134,987
    
    
    
    1,079,353Minority Interest
    
    
    145,428
    
    
    
    144,877Shareholders EquityPreferred shares, par value $.01 per share;
20 million shares authorized,3,950,000 Series A Cumulative Redeemable
Preferred Shares issued
and outstanding as of March 31, 2005 and December 31, 2004
    
    
    40
    
    
    
    402,600,000 Series B Cumulative Redeemable Preferred Shares issued
and outstanding as of March 31, 2005 and December 31, 2004
    
    
    26
    
    
    
    26Common shares, par value $.01 per share; 100 million shares authorized,
43,682,563 shares issued and outstanding as of March 31, 2005 and
43,406,280 shares issued and outstanding as of December 31, 2004
    
    
    437
    
    
    
    434Additional paid-in capital
    
    
    966,045
    
    
    
    957,938Deferred compensation
    
    
    (7,737
    )
    
    
    (3,816
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    Distributions in excess of accumulated earnings
    
    
    (18,976
    )
    
    
    (20,695
    )Total Shareholders Equity
    
    
    939,835
    
    
    
    933,927Total Liabilities and Shareholders Equity
    
    $
    2,220,250
    
    
    $
    2,158,157
 See accompanying Notes to Consolidated Financial Statements. 3




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##### 



CAPITAL AUTOMOTIVE REIT
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) Three Months EndedMarch 31,2005
    
    
    2004Revenue:Rental
    
    $
    55,568
    
    
    $
    46,505Interest and other
    
    
    1,087
    
    
    
    970Total revenue
    
    
    56,655
    
    
    
    47,475Expenses:Depreciation and amortization
    
    
    10,133
    
    
    
    8,575General and administrative
    
    
    3,284
    
    
    
    2,741Interest
    
    
    15,976
    
    
    
    17,005Total expenses
    
    
    29,393
    
    
    
    28,321Income from continuing operations before minority interest
    
    
    27,262
    
    
    
    19,154Minority interest
    
    
    (3,810
    )
    
    
    (3,215
    )Income from continuing operations
    
    
    23,452
    
    
    
    15,939Income from discontinued operations, net of minority interest
    
    
    88
    
    
    
    1,654Gain on sale of real estate, net of minority interest
    
    
    84
    
    
    
    953Total discontinued operations
    
    
    172
    
    
    
    2,607Net income
    
    
    23,624
    
    
    
    18,546Preferred share dividends
    
    
    (3,152
    )
    
    
    (1,852
    )Net income available to common shareholders  basic and diluted
    
    $
    20,472
    
    
    $
    16,694Common shares outstanding used to compute
basic earnings per common share
    
    
    43,235
    
    
    
    34,049Basic earnings per common share:Income from continuing operations
    
    $
    0.47
    
    
    $
    0.41Net income
    
    $
    0.47
    
    
    $
    0.49Common shares outstanding used to compute
diluted earnings per common share
    
    
    43,538
    
    
    
    34,673Diluted earnings per common share:Income from continuing operations
    
    $
    0.47
    
    
    $
    0.41Net income
    
    $
    0.47
    
    
    $
    0.48Dividends declared per common share
    
    $
    0.4305
    
    
    $
    0.4165
 See accompanying Notes to Consolidated Financial Statements. 4




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##### 



CAPITAL AUTOMOTIVE REIT
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Three Months Ended March 31,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    23,624
    
    
    $
    18,546Adjustments to reconcile net income to net cash provided by operating activities:Gain on disposition of real estate net of minority interest
    
    
    (84
    )
    
    
    (953
    )Stock compensation expense
    
    
    576
    
    
    
    328Depreciation and amortization
    
    
    11,056
    
    
    
    9,587Minority interest expense including amounts attributable to discontinued operations
    
    
    3,826
    
    
    
    3,592Changes in operating assets and liabilities:Increase in other assets
    
    
    (1,074
    )
    
    
    (2,540
    )(Decrease) increase in accounts payable and accrued expenses
    
    
    (1,715
    )
    
    
    2,844Increase in security deposits payable
    
    
    463
    
    
    
    55Net cash provided by operating activities
    
    
    36,672
    
    
    
    31,459Cash flows from investing activities:Purchase of furniture and equipment, net of disposals
    
    
    (41
    )
    
    
    (12
    )Property acquisitions and improvements
    
    
    (40,443
    )
    
    
    (35,989
    )Investments in mortgage notes receivable and construction advances
    
    
    (7,875
    )
    
    
    (5,891
    )Proceeds from mortgage notes receivable and construction advances
    
    
    10,872
    
    
    
    Property dispositions
    
    
    986
    
    
    
    16,501Net cash used in investing activities
    
    
    (36,501
    )
    
    
    (25,391
    )Cash flows from financing activities:Proceeds from borrowings under credit facilities
    
    
    95,000
    
    
    
    23,000Proceeds from debt issuance
    
    
    175,000
    
    
    
    11,900Repayment of borrowings under credit facilities
    
    
    (125,000
    )
    
    
    (80,000
    )Repayment of debt
    
    
    (81,465
    )
    
    
    Debt principal payments
    
    
    (5,754
    )
    
    
    (6,852
    )Payments for debt issuance costs
    
    
    (1,347
    )
    
    
    (311
    )Increase in restricted cash
    
    
    (2,142
    )
    
    
    (317
    )Payment of common share dividends
    
    
    (15,410
    )
    
    
    (11,544
    )Payment of preferred share dividends
    
    
    (3,152
    )
    
    
    (1,029
    )Distributions to minority partners
    
    
    (3,477
    )
    
    
    (3,229
    )Series A Cumulative Redeemable Preferred Shares issuance costs
    
    
    
    
    
    
    (93
    )Proceeds
from the issuance of common shares, net of costs and forfeitures
    
    
    60
    
    
    
    61,638Net cash provided by (used in) financing activities
    
    
    32,313
    
    
    
    (6,837
    )Net increase (decrease) in cash and cash equivalents
    
    
    32,484
    
    
    
    (769
    )Cash and cash equivalents at beginning of period
    
    
    8,332
    
    
    
    13,352Cash and cash equivalents at end of period
    
    $
    40,816
    
    
    $
    12,583Supplemental Data:Real estate acquisitions in exchange for like-kind property
    
    $
    
    
    
    $
    14,968Interest paid during the period
    
    $
    12,735
    
    
    $
    11,067Dividends and distributions reinvested to purchase common shares
    
    $
    3,351
    
    
    $
    3,069Change in valuation of fair value swap
    
    $
    (1,444
    )
    
    $
    (1,146
    )
 See accompanying Notes to Consolidated Financial Statements. 5




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##### 



CAPITAL AUTOMOTIVE REIT
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY AND OTHER COMPREHENSIVE INCOME
(in thousands, except share data) Distributions in
    
    
    
    
    
    
    AccumulatedPreferred Shares
    
    
    Common
    
    
    Additional
    
    
    Excess of
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    OtherPreferred Shares
    
    
    Common
    
    
    Par Value
    
    
    Shares
    
    
    Paid-in
    
    
    Accumulated
    
    
    Deferred
    
    
    Comprehensive
    
    
    
    
    
    
    ComprehensiveSeries A
    
    
    Series B
    
    
    Shares
    
    
    Series A
    
    
    Series B
    
    
    Par Value
    
    
    Capital
    
    
    Earnings
    
    
    Compensation
    
    
    Income (Loss)
    
    
    Total
    
    
    IncomeBalance at December
31, 2004
    
    
    3,950,000
    
    
    
    2,600,000
    
    
    
    43,406,280
    
    
    $
    40
    
    
    $
    26
    
    
    $
    434
    
    
    $
    957,938
    
    
    $
    (20,695
    )
    
    $
    (3,816
    )
    
    $
    
    
    
    $
    933,927Reallocation of
minority interest
ownership in
Partnership
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (195
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (195
    )
    
    
    December 2004
common share
follow-on offering
issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37
    )
    
    
    Issuance of common
shares from
dividend
reinvestment and
share purchase
plan, net of costs
    
    
    
    
    
    
    
    
    
    
    112,840
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    3,703
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,704
    
    
    
    Issuance of
restricted shares,
net of forfeitures
    
    
    
    
    
    
    
    
    
    
    124,621
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    4,172
    
    
    
    
    
    
    
    (4,467
    )
    
    
    
    
    
    
    (293
    )
    
    
    Amortization of
deferred
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    546
    
    
    
    
    
    
    
    546
    
    
    
    Issuance of phantom
shares, net of
forfeitures
    
    
    
    
    
    
    
    
    
    
    18,572
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128
    
    
    
    Exercise of common
share options
    
    
    
    
    
    
    
    
    
    
    20,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    306
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    306
    
    
    
    Accrued compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    Preferred share
dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,152
    )
    
    
    
    
    
    
    
    
    
    
    (3,152
    )
    
    
    Common share
dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,753
    )
    
    
    
    
    
    
    
    
    
    
    (18,753
    )
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,624
    
    
    
    
    
    
    
    
    
    
    
    23,624
    
    
    
    23,624Balance at March
31, 2005
(unaudited)
    
    
    3,950,000
    
    
    
    2,600,000
    
    
    
    43,682,563
    
    
    $
    40
    
    
    $
    26
    
    
    $
    437
    
    
    $
    966,045
    
    
    $
    (18,976
    )
    
    $
    (7,737
    )
    
    $
    
    
    
    $
    939,835
    
    
    $
    23,624
 See accompanying Notes to Consolidated Financial Statements. 6




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CAPITAL AUTOMOTIVE REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) 1. ORGANIZATION AND BASIS OF PRESENTATION Organization Capital Automotive REIT, which we refer to as the Company, is a Maryland real estate investment
trust formed in October 1997. We own interests in real estate and conduct our operations, directly
or indirectly, through Capital Automotive L.P., which we refer to as the Partnership, and its
subsidiaries. We are the sole general partner of the Partnership and, as of March 31, 2005, owned
approximately 84.2% of the common units of limited partnership interest in the Partnership, which
we refer to as Common Units, as well as 100% of the Series A and Series B preferred units of
limited partnership interest in the Partnership, which we refer to as Preferred Units. References
to we, us and our refer to the Company or, if the context requires, the Partnership and our
business and operations conducted through the Partnership and/or directly or indirectly owned
subsidiaries. Our primary business strategy is to purchase real estate (land, buildings and other improvements)
or leasehold interests therein, which we simultaneously lease to operators of franchised automobile
dealerships and motor vehicle service, repair or parts businesses, used vehicle businesses and
other related businesses under long-term, triple-net leases. In addition, we provide mortgages,
facility improvements, construction financing and takeout commitments in certain circumstances.
Triple-net leases typically require the tenant to pay all operating expenses of a property,
including, but not limited to, all real estate taxes, assessments and other government charges,
insurance, utilities, repairs and maintenance. We use (i) the term dealerships to refer to these
types of businesses that are operated on our properties and (ii) the terms dealer group, tenant
or operators of dealerships to refer to the persons and entities that lease our properties from
us or mortgage their properties with us. We focus on leasing properties or providing mortgages to
dealer groups that have a long history of operating multi-site, multi-franchised dealerships,
generally targeting the largest dealer groups in terms of revenues in the largest metropolitan
areas in the U.S. in terms of population. As of March 31, 2005, we had real estate investments of nearly $2.3 billion, primarily consisting
of interests in 343 properties located in 31 states, including approximately 2,594 acres of land
and containing approximately 15.0 million square feet of buildings and improvements. Our tenants
operate 505 motor vehicle franchises on our properties, representing 44 brands of motor vehicles,
which include all of the top selling brands in the U.S. The initial lease terms generally range
from 10 to 20 years (with a weighted average initial lease term for leases entered into during the
quarter ended March 31, 2005 of 17.7 years), with our entire portfolio having a weighted average
initial lease term of approximately 15.1 years. As of March 31, 2005, our portfolio had a weighted
average remaining lease term of approximately 11.7 years. The leases typically have options to
renew upon generally the same terms and conditions for one or more additional periods of five to 10
years each, exercisable at the option of the tenants (with renewal options typically ranging from a
total of five to 40 years). Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States, commonly referred to
as GAAP, for interim financial information and in conformity with the rules and regulations of the
Securities and Exchange Commission, commonly referred to as the SEC. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring adjustments)
considered
necessary for a fair presentation have been included. The results of operations for the three
months ended March 31, 2005, are not necessarily indicative of the results that may be expected for
the full year. These financial statements should be read in conjunction with our audited
consolidated financial statements and footnotes thereto, included in the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2004. 7




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##### 



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements of the Company have been prepared in accordance
with GAAP and include the accounts of the Company, its wholly-owned subsidiaries, and other
entities where the Company has a majority ownership, all of which it controls. The equity
interests of other limited partners are reflected as minority interest. All significant
intercompany transactions and balances have been eliminated in consolidation. Real Estate and Depreciation The purchase price of real estate properties acquired is allocated to the various components, such
as land, buildings and improvements, and in-place leases as appropriate, in accordance with the
Financial Accounting Standards Board, commonly referred to as the FASB, Statement of Financial
Accounting Standards, commonly referred to as SFAS, No. 142, Goodwill and Other Intangible
Assets. The purchase price is allocated based on the fair value of each component at the time of
acquisition. The fair value of the buildings and improvements are recorded at the cost of our
acquisition which we believe approximates their replacement costs. We generally do not acquire
real estate assets that have in-place leases. We typically execute our leases simultaneously with
the purchase of the real estate, and because of this, no value has been ascribed to any in-place
leases because we do not believe any exist. Therefore, we have not recorded any lease intangible
assets or liabilities on our consolidated balance sheets as of March 31, 2005 and December 31,
2004. Depreciation is computed on our buildings and improvements or leasehold interest assets using the
straight-line method over the lesser of the estimated useful life or ground lease term, generally
20 to 45 years. Real estate depreciation expense, including depreciation expense related to
discontinued operations, was approximately $10.0 million and $8.8 million for the three months
ended March 31, 2005 and 2004, respectively. Furniture, Fixtures and Equipment Furniture, fixtures and equipment are recorded at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets, ranging from three to five
years. Total depreciation expense related to our furniture, fixtures and equipment was
approximately $30,000 and $17,000 for the three months ended March 31, 2005 and 2004, respectively. Facility Improvements From time to time, we fund facility improvements on our existing properties. Improvements include
costs incurred on facilities during which the tenants business continues to operate. Facility
improvements are recorded as buildings and improvements on our consolidated balance sheets and the
rents charged to the tenant on these improvements during the project are recorded as rental
revenue. Once the project is completed, the remaining useful life of the buildings and
improvements is determined and depreciation expense is adjusted accordingly on a prospective basis. 8




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##### 



Construction Financing We may provide construction financing to our tenants in circumstances in which we own or have a
ground lease on the underlying land, which in either case is leased to the tenant. Construction
financing includes fundings for the construction of new facilities for which operations have not
commenced or fundings for major improvements to existing facilities that cause operations to cease
during the construction period. Fundings are recorded as construction advances during the period
of construction and the amounts charged to our tenant during that time are recorded as interest
income.After completion of the project, the construction advances are paid down simultaneously
with our purchase of the buildings and improvements. We are not obligated to purchase the property
if certain conditions are not met. The buildings and improvements are acquired at fair market
value and recorded as real estate on our consolidated financial statements. Construction advances
are included in other assets and totaled approximately $12.9 million and $12.1 million as of March
31, 2005 and December 31, 2004, respectively. Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid instruments purchased with original maturities
of three months or less. Restricted Cash Restricted cash consists primarily of cash reserved to fund debt service payments and funds held in
cash collateral accounts. The purpose of the cash collateral accounts is to hold funds, generally
in the amount of the interest rate swap valuations at any point in time, to protect lenders in case
of an early termination of the existing swaps by us. The cash collateral accounts are controlled
by the lenders; however, we earn interest on the funds invested. Restricted cash is included in
other assets and totaled approximately $7.2 million and $5.0 million as of March 31, 2005 and
December 31, 2004, respectively. Deferred Loan Costs Certain costs incurred in connection with the issuance of debt instruments are capitalized and
generally amortized over the terms of the respective issuance using the effective interest method
or on a straight-line basis, which approximates the effective interest method. Deferred loan costs
include lender fees and other third party costs. These costs, net of accumulated amortization, are
included in other assets and totaled approximately $23.2 million and $22.7 million as of March 31,
2005 and December 31, 2004, respectively. Loan cost amortization expense was approximately
$921,000 and $764,000 for the three months ended March 31, 2005 and 2004, respectively. Upon the
early extinguishment of debt instruments, we expense any associated unamortized deferred loan costs
in the period the debt is retired. We did not have any such expenses during the three months ended
March 31, 2005 and 2004. Capitalized Leasing Costs Certain direct costs incurred by us in negotiating and consummating a successful lease are
capitalized and generally amortized over the initial base term of the lease. Capitalized leasing
costs include employee compensation and payroll-related fringe benefits directly related to time
spent performing successful leasing-related activities. These activities include evaluating the
financial condition of prospective clients, evaluating and recording guarantees, collateral and
other security arrangements, negotiating lease terms, preparing lease documents and closing the
transaction. These costs, net of accumulated amortization, are
included in other assets and totaled
approximately $1.9 million and $1.8 million as of March 31, 2005 and December 31, 2004,
respectively. Leasing cost amortization expense was approximately $55,000 and $49,000 for the
three months ended March 31, 2005 and 2004, respectively. 9




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##### 



Income Taxes We believe we are qualified and will continue to qualify as a real estate investment trust,
commonly referred to as a REIT, under the provisions of the Internal Revenue Code of 1986, as
amended. As a REIT, we are required to distribute at least 90% of our taxable income (excluding
any net capital gains) to our shareholders and comply with certain other requirements. We
generally will not be subject to federal income tax on taxable income that we distribute to our
shareholders. The Company is subject to certain state and local income and franchise taxes. Rental Revenue Recognition We lease our real estate pursuant to long-term, triple-net leases, under which the tenants
typically pay all operating expenses of a property, including, but not limited to, all real estate
taxes, assessments and other government charges, insurance, utilities, repairs and maintenance.
Our leases are recorded as operating leases under SFAS No. 13, Accounting for Leases, for
financial reporting purposes. As such, the leased assets remain on our balance sheet and we
depreciate them based on their estimated useful lives. Rental income attributable to the leases is
recorded monthly when due from tenants. Rental income attributable to the majority of our leases
is fixed by the lease agreement. However, under our variable rate lease program, monthly base rent
is calculated based on a spread over an applicable index, typically LIBOR. As of March 31, 2005,
approximately $404 million of our real estate portfolio, or 18%, was subject to variable rate
leases. This compares to $412 million of our real estate portfolio, or 21%, that was subject to
variable rate leases as of March 31, 2004. The vast majority of our variable rate lease agreements
contain minimum lease rates, generally between 8% and 9%, and fixed rate conversion features
generally with minimum rates of 10.0% to 10.25%, and none of these leases contain a maximum rate. Our leases typically provide for upward periodic adjustments in base rent due from our
tenants, usually based on a factor of the change in the consumer price index, commonly referred to
as CPI. In addition, certain of our leases are subject to fixed minimum and/or maximum rent
escalators during the initial lease term and extension periods. Our leases typically reset to
market during certain renewal periods. The fixed minimum rent escalations are straight-lined into
rental income over the initial lease term. Any rent adjustments above the fixed minimum
escalations are recorded as revenue in the period they are due from the tenants. Straight-lined
rents are included in other assets and totaled approximately $21.1 million and $20.2 million as of
March 31, 2005 and December 31, 2004, respectively. Straight-lined rental revenue, including
revenue related to discontinued operations, was approximately $939,000 and $1.1 million for the
three months ended March 31, 2005 and 2004, respectively. Interest Rate Swaps During the normal course of business, we are exposed to certain financial market risks, including
fluctuations in interest rates. In general, our strategy of match-funding our long-term debt to
our leases reduces our exposure to interest rate fluctuations by substantially locking in our
investment spreads during the initial term of the leases. As part of this strategy, we have used
and may continue to use interest rate swap arrangements to manage or hedge our risk related to the
effect of interest rate fluctuations on our investment spreads. We do not enter into interest rate
swap arrangements for speculative purposes. We will either hedge our variable rate debt to convert
it to a fixed interest rate, designating such hedge as a cash flow hedge, or hedge our fixed rate
debt to convert it to a variable interest rate, designating such hedge as a fair value hedge. The cash flow and fair value hedges were designed to mirror the underlying debt in terms of index,
spread, reset, amortization, compounding and maturity. Due to the identical nature of the terms of
the swap arrangements and the underlying terms of the debt, the swap arrangements we have entered
into with third parties were designated as highly effective at the inception of the swap
arrangements. 10




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##### 



For all swap arrangements, we are required to post collateral, generally in the amount of the swap
valuations at any point in time, to protect the lenders in case of an early termination by us. The
collateral posted by us related to our hedges, totaling approximately $5.9 million and $3.3 million
as of March 31, 2005 and December 31, 2004, respectively, is included in other assets on our
consolidated balance sheets. For a derivative qualifying as a cash flow hedge, the change in the unrealized gain or loss is
recorded as a component of accumulated other comprehensive income (loss) within shareholders
equity on our consolidated balance sheets. The fair value of the swap is recorded as either an
asset or liability on our consolidated balance sheets. As of March 31, 2005 and December 31, 2004, we did not have any outstanding interest rate swap
arrangements designated as cash flow hedges. Therefore, we did not have any associated unrealized
gains or losses as of March 31, 2005 and December 31, 2004. Total comprehensive income for the
three months ended March 31, 2005 and 2004 was approximately $23.6 million and $14.9 million,
respectively. Total comprehensive income equaled net income for the three months ended March 31,
2005. For a derivative qualifying as a fair value hedge, the change in the net unrealized gain or loss
upon measuring the fair value hedge and the fair value of the debt instrument being hedged is
recorded on our consolidated statements of operations. Generally, these amounts offset each other.
The fair value of the swap is recorded as either an asset or liability, with a corresponding
increase or decrease recorded to the carrying value of the debt instrument being hedged on our
consolidated balance sheets. The unrealized loss on our fair value hedge was approximately $4.9 million and $3.4 million as of
March 31, 2005 and December 31, 2004, respectively. The net unrealized gain or loss on our fair
value hedge and the debt being hedged had no impact on our net income for the three months ended
March 31, 2005 and 2004, respectively. We have evaluated our fair value hedge as of March 31, 2005
and believe it continues to be highly effective. Upon the early termination of swap arrangements or when we believe it is probable we are not
subject to interest rate risk, we recognize the realized gain or loss in our results of operations
in the period of the swap breakage. We did not have any such expenses during the three months
ended March 31, 2005 and 2004. Share-Based Compensation The Capital Automotive Group Second Amended and Restated 1998 Equity Incentive Plan, which we refer
to as the Plan, provides equity compensation to our employees, officers, non-employee trustees and
certain other service providers. At March 31, 2005, we accounted for our Plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. All options granted under this Plan had exercise prices
equal to or greater than the market value of the underlying common stock on the date of grant.
Therefore, no compensation expense is reflected in net income for stock option-based awards. In December 2004, the FASB issued a revision to SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123(R), Share-Based Payment, supercedes APB Opinion No. 25 and its
related Interpretations and was to be effective for the first interim or annual period that begins
after June 15, 2005 for public companies (other than those filing as small business issuers). In
April 2005, the SEC amended the effective date of SFAS
No. 123(R) to require adoption of this
Statement to commence in the first annual period that begins after June 15, 2005 (other than those
filing as small business issuers). SFAS No. 123(R) requires the fair-value-based recognition
method to be applied to all awards granted after the required effective date and to awards
modified, repurchased, or cancelled after that date. In
addition, the cumulative effect of initially applying this Statement, if any, must be recognized as
of the effective date. The adoption of SFAS No. 123(R) is not expected to have a significant
impact on our financial condition or results of operations. 11




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##### 



The following table illustrates the effect on net income and earnings per share if we had applied
the fair-value-based recognition method (in thousands, except per share data). For the Three MonthsEnded March 31,2005
    
    
    2004Net income available to common
shareholders, as reported
    
    $
    20,472
    
    
    $
    16,694Add: Share-based compensation expense
included in reported net income, net of
minority interest
    
    
    484
    
    
    
    267Deduct: Total share-based compensation
expense determined under the fair-value-based method for all awards, net of
minority interest
    
    
    (522
    )
    
    
    (303
    )Pro forma net income
    
    $
    20,434
    
    
    $
    16,658Basic earnings per common share:As reported
    
    $
    0.47
    
    
    $
    0.49Pro forma
    
    $
    0.47
    
    
    $
    0.49Diluted earnings per common share:As reported
    
    $
    0.47
    
    
    $
    0.48Pro forma
    
    $
    0.47
    
    
    $
    0.48
 Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates. Reclassifications Certain amounts in the 2004 consolidated financial statements have been reclassified to conform
with the current year presentation. 3. REAL ESTATE INVESTMENTS During the first quarter of 2005, we increased our net real estate investments by approximately
$36.0 million. The first quarter real estate investments consisted of approximately $48.3 million
in real estate investments transacted with six existing tenants, partially offset by $12.4 million
in real estate property and mortgage note dispositions and repayments of mortgage notes receivable
and construction advances.
These investments were located in eight states and include two auto retail properties, facility
improvements, advances on one mortgage note receivable and construction advances. The investments
were funded with cash on hand and the issuance of long-term debt. The real estate investments
contain five automobile franchises and have initial lease terms generally ranging from 15 to 20
years, with a weighted average initial lease term of 17.7 years. The leases have multiple renewal
options, which
generally are subject to the same terms and conditions and which are exercisable at the option of
the tenants. 12




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##### 



The following is a summary of our real estate investments as of March 31, 2005 and December 31,
2004 (dollars in thousands): Balance as ofMarch 31, 2005
    
    
    December 31, 2004Land
    
    $
    872,971
    
    
    $
    866,480Buildings and improvements
    
    
    1,363,717
    
    
    
    1,330,843Mortgage notes receivable
    
    
    27,057
    
    
    
    31,242Construction advances
    
    
    12,907
    
    
    
    12,136Total real estate investments
    
    $
    2,276,652
    
    
    $
    2,240,701
 Mortgage notes receivable and construction advances are included in other assets on our
consolidated balance sheets. These notes require monthly interest payments, which are included in
interest and other income on our consolidated statements of operations. 4. DISCONTINUED OPERATIONS Beginning in 2002, SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
requires that gains and losses from dispositions of properties and all operating earnings from
these properties be reported as discontinued operations. This also requires that all past
earnings applicable to a property disposed of subsequent to January 1, 2002 be reported as
discontinued operations. As a result, previously reported income from continuing operations
will be updated each time a property is sold. This requirement is for presentation only and has no
impact on net income. During the first quarter of 2005, we sold one auto retail location and a mortgage note receivable
for approximately $6.4 million in sale proceeds, net of commissions and other costs, and recognized
approximately $100,000 of a previously deferred gain. In addition, in exchange for early
termination of the lease, we also received a lease termination fee totaling approximately $93,000,
which was recorded during the first quarter. The earnings generated from the real estate
disposition, including the lease termination fee, and the gain related to the sale of the mortgage
note receivable have been reported as discontinued operations. 13




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##### 



The following table sets forth the components of discontinued operations related to the real estate
dispositions subsequent to January 1, 2004 (in thousands): For the three monthsended March 31,2005
    
    
    2004Revenue:Rental
    
    $
    13
    
    
    $
    1,332Other
    
    
    93
    
    
    
    1,248Total revenue
    
    
    106
    
    
    
    2,580Expenses:Depreciation
    
    
    2
    
    
    
    248Interest
    
    
    
    
    
    
    301Total expenses
    
    
    2
    
    
    
    549Income from discontinued operations before gain
on sale of real estate and minority interest
    
    
    104
    
    
    
    2,031Gain on sale of real estate
    
    
    100
    
    
    
    1,171Income related to discontinued operations
before minority interest
    
    
    204
    
    
    
    3,202Minority interest related to discontinued operations
    
    
    (32
    )
    
    
    (595
    )Total discontinued operations, net of
minority interest
    
    $
    172
    
    
    $
    2,607
 14




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##### 



5. DEBT OUTSTANDING The following is a summary of our total debt outstanding as of March 31, 2005 and December 31, 2004
(dollars in thousands): Principal
    
    
    Principal Balance
    
    
    Effective
    
    
    Term/Original
    
    
    Balance as of
    
    
    as of December
    
    
    Interest
    
    
    AmortizationDescription of Debt
    
    Debt Issued
    
    
    March 31, 2005
    
    
    31, 2004
    
    
    Rate*
    
    
    Schedule7.59% fixed rate debt due 12/1/08 (1)
    
    
    38,050
    
    
    $
    31,101
    
    
    $
    31,513
    
    
    
    
    
    
    10 yr/17 yr5.84% fixed rate debt due 2/1/14 (2)
    
    
    11,900
    
    
    
    11,673
    
    
    
    11,728
    
    
    
    
    
    
    10 yr/25 yrTriple Net Lease Mortgage Notes, Series
2002 (3)
    
    
    325,000
    
    
    
    288,922
    
    
    
    292,557
    
    
    
    
    
    
    (3)Triple Net Lease Mortgage Notes, Series
2003-1 (4)
    
    
    228,000
    
    
    
    215,450
    
    
    
    217,102
    
    
    
    
    
    
    (4)Various variable rate debt (5)
    
    
    91,320
    
    
    
    
    
    
    
    81,465
    
    
    
    
    
    
    (5)TOTAL MORTGAGE DEBT (6)
    
    
    
    
    
    $
    547,146
    
    
    $
    634,365
    
    
    6.83%Variable rate term loan due 8/20/09 (7)
    
    
    150,000
    
    
    
    150,000
    
    
    
    150,000
    
    
    
    
    
    
    (7)5.46% Senior Notes due 2/24/15 (8)
    
    
    175,000
    
    
    
    175,000
    
    
    
    
    
    
    
    
    
    
    (8)6.75% Monthly Income Notes due 4/15/19 (9)
    
    
    125,000
    
    
    
    125,000
    (10)
    
    
    125,000
    (10)
    
    
    
    
    
    (9)6% Convertible Notes due 5/15/24 (11)
    
    
    110,000
    
    
    
    110,000
    
    
    
    110,000
    
    
    
    
    
    
    (11)TOTAL UNSECURED DEBT
    
    
    
    
    
    $
    560,000
    
    
    $
    385,000
    
    
    5.16%$250 million revolving unsecured facility (7)
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    (7)TOTAL CREDIT FACILITIES
    
    
    
    
    
    $
    
    
    
    $
    30,000
    
    
    4.14%TOTAL DEBT OUTSTANDING
    
    
    
    
    
    $
    1,107,146
    (10)
    
    $
    1,049,365
    (10)
    
    6.03%
   *
    
    For the quarter ended March 31, 2005. Includes deferred loan fees amortized over the
life of the loans.(1)
    
    This loan requires monthly payments of principal and interest with a final payment at
maturity of approximately $24.2 million. The Partnership has provided a guaranty of
collection limited to approximately $8.9 million of this loan, contingent upon the lender
first making written demand upon and proceeding against the borrower, including obtaining
judgment and foreclosing upon all collateral. All amounts recovered from the borrower or
collateral following a default reduce such guarantee.(2)
    
    This loan requires monthly level payments of principal and interest with a final
payment at maturity of approximately $9.2 million. 15




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##### 



(3)
    
    During 2002, we issued $325 million in four classes of Triple Net Lease Mortgage Notes,
Series 2002. CARS Loan Servicer L.L.C., one of our subsidiaries, is servicer of the notes
on behalf of the noteholders. The following is a breakdown of the Triple Net Lease
Mortgage Notes, Series 2002 by class: Original Principal
    
    Current PrincipalClass
    
    Balance
    
    Balance
    
    Maturity DateA-1a
    
    
    164,136
    
    
    
    139,209
    
    
    8/15/14A-1b
    
    
    9,064
    
    
    
    9,064
    
    
    7/15/15A-2
    
    
    75,900
    
    
    
    64,749
    
    
    7/15/15A-3
    
    
    75,900
    
    
    
    75,900
    
    
    6/15/22
  Classes A-1a and A-1b are fully-amortizing in succession over their respective terms and
Classes A-2 and A-3 are fully-amortizing in succession over 20 years. The notes have a
weighted average effective interest rate (including deferred loan fees amortized over the
life of the notes) of approximately 7.7%. The Partnership has provided a guaranty of
collection limited to approximately $35 million of this loan, contingent upon the trustee
first making written demand upon and proceeding against the borrower, including obtaining
judgment and foreclosing upon all collateral. All amounts recovered from the borrower or
collateral following a default reduce such guarantee. In connection with the issuance of
this debt, the Company guarantees certain customary, non-recourse, carveout indemnities.
Additionally, in conjunction with the servicing of the debt, the Company guarantees CARS
Loan Servicer L.L.C.s obligations to make certain principal, interest and property
protection advances.(4)
    
    During 2003, we issued $228 million in two classes of Triple Net Lease Mortgage Notes,
Series 2003-1. CARS Loan Servicer L.L.C. is servicer of the notes on behalf of the
noteholders. The following is a breakdown of the Triple Net Lease Mortgage Notes, Series
2003-1 by class: Original Principal
    
    Current PrincipalClass
    
    Balance
    
    Balance
    
    Maturity DateA-1
    
    
    109,000
    
    
    
    96,450
    
    
    9/25/15A-2
    
    
    119,000
    
    
    
    119,000
    
    
    3/25/19
  The notes amortize in succession over a 20-year amortization schedule with the Class A-1
notes fully-amortizing and the Class A-2 notes requiring a final payment at maturity of
approximately $70.8 million. The notes have a weighted average effective interest rate
(including deferred loan fees amortized over the life of the notes) of approximately 5.86%.
In connection with the issuance of this debt, the Company guarantees certain customary,
non-recourse, carveout indemnities. Additionally, in conjunction with the servicing of the
debt, the Company guarantees CARS Loan Servicer L.L.C.s obligations to make certain
principal, interest and property protection advances.(5)
    
    This represents debt that was outstanding with one lender, of which approximately $81
million was repaid during the first quarter of 2005. Approximately $73 million of the debt
repaid had a spread over the 30-day LIBOR of 175 basis points with a remaining maturity of
approximately 8.6 years. We had previously entered into an interest rate swap arrangement
with a third party to fix the interest rate on this loan to 7.5%. We terminated the swap
arrangement during the fourth quarter of 2004 in anticipation of the debt repayment during
the first quarter of 2005. The remaining debt repaid had a spread over the three-month
LIBOR of 225 basis points with a remaining maturity of approximately 9.6 years. The debt
was repaid with borrowings on our unsecured credit facility, which were subsequently repaid
with the proceeds received from the 5.46% senior unsecured note offering described in
footnote (8).(6)
    
    Our mortgage debt is subject to prepayment penalties.(7)
    
    During 2004, we closed on a syndicated unsecured revolving credit and term loan
facility. The revolving credit portion of the facility is $250 million with an initial
three-year term and an option to extend the term for an additional one-year period. The
term loan portion of the facility is a $150 million five-year unsecured term loan and
requires interest-only payments until maturity, at which time the loan requires a final
payment totaling $150 million. The facility bears interest at a spread, generally over
LIBOR, and adjusts over time, based upon our debt rating or leverage. As of March 31, 2005,
the borrowings under the facility bear interest, based upon our debt rating, equal to the
30-day LIBOR rate plus 95 basis points.(8)
    
    On February 24, 2005, the Partnership entered into a note purchase agreement to sell
$175 million in aggregate principal amount of 5.46% senior unsecured notes in a private
offering to institutional accredited investors within the meaning of Regulation D under
the Securities Act of 1933. Pursuant to the agreement, the Partnership issued $100 million
of the notes on February 24, 2005 and an additional $75 million on March 30, 2005. The
Company has guaranteed the Partnerships obligations under the notes. Interest on the
notes is payable semi-annually. The notes 16




---



##### 



have a 10-year term. The Partnership may, at
its option, prepay the notes, at any time, in whole or, from time to time, in part, in an
amount equal to at least $5 million of the aggregate principal amount then outstanding, at
100% of the principal amount to be prepaid, plus any make-whole amount due in connection
with the prepayment. In general, the make-whole amount is the amount by which the
discounted value of the remaining payments relating to the principal amount to be prepaid
(determined in accordance with the terms of the note purchase agreement) exceeds the
principal
amount to be prepaid. The net proceeds to the Company, after deducting the expenses of the
offering, totaled approximately $174 million. A portion of the net proceeds were used to
repay borrowings outstanding on our syndicated unsecured credit facility and to fund
acquisitions. The remainder of the net proceeds will be used to fund future real estate
investments and for general corporate purposes.(9)
    
    During 2004, we closed on a public offering of $125 million 6.75% senior unsecured
monthly income notes at par. Interest on the notes is payable monthly. The notes have a
15-year term and are redeemable at the Companys option after five years at par. On March
18, 2004, which was the date the Company priced the notes, we entered into an interest rate
swap arrangement with a third party to cause the interest rate on $100 million of the notes
effectively to be at a floating rate of the three-month LIBOR plus 162.4 basis points. The
unrealized loss on our fair value hedge was approximately $4.9 million and $3.4 million as
of March 31, 2005 and December 31, 2004, respectively, as further described in the Summary
of Significant Accounting Policies  Interest Rate Swaps footnote herein.(10)
    
    Although the principal balance of the $125 million 6.75% senior unsecured monthly
income notes was $125 million as of March 31, 2005 and December 31, 2004, in accordance
with GAAP, the carrying value of the debt on our balance sheet has been reduced by $4.9
million and $3.4 million, respectively, representing the change in the fair value of the
swap described in footnote (9) and as more fully described in the Summary of Significant
Accounting Policies  Interest Rate Swaps footnote herein.(11)
    
    During 2004, we closed on a public offering of $110 million 6% convertible notes. The
notes have a 20-year term and are convertible, at the option of the holder, into the
Companys common shares under certain circumstances, at an initial conversion price of
$35.5679 per share, subject to certain adjustments. The initial price is equivalent to a
conversion rate of 28.1152 shares per $1,000 principal amount of notes and was equivalent
to a premium of 30% at the closing. The conversion rate will be adjusted under certain
circumstances, including common stock splits, common stock issuances as dividends and
increases in the dividend rate. The Company may, at its option, redeem the notes for cash
on or after May 15, 2009, at any time, in whole or, from time to time, in part, at a
redemption price equal to 100% of the principal amount to be redeemed plus accrued and
unpaid interest. The noteholders may require us to repurchase all or part of the notes on
May 15, 2009, May 15, 2014 and May 15, 2019, or upon a change in control, at a price equal
to 100% of the principal amount plus accrued and unpaid interest. The notes require
semi-annual interest payments. The deferred loan fees associated with this debt are being
amortized over a five-year period. Additionally, during the first quarter of 2005, we terminated two secured credit facilities,
totaling $200 million, which were replaced by our syndicated unsecured revolving credit facility as
further described above. Our unsecured debt generally contains various restrictive covenants. The covenants in our
unsecured debt include, among others, provisions restricting our ability to:  
    incur or guarantee additional debt;
    make certain distributions, investments and other restricted payments, including
distribution payments on our outstanding common and preferred shares;
    limit the ability of restricted subsidiaries to make payments to us;
    enter into transactions with certain affiliates;
    create certain liens; and
    consolidate, merge or sell our assets. 17




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##### 



Our secured debt generally contains customary covenants, including, among others, provisions:  
    relating to the maintenance of the property securing the debt;
    restricting our ability to sell, assign or further encumber the properties
securing the debt;
    restricting our ability to incur additional debt;
    restricting our ability to amend or modify existing leases; and
    relating to certain prepayment restrictions. Our ability to meet some of the covenants in our debt, including covenants related to the condition
of the property or payment of real estate taxes, may be dependent on the performance by our tenants
under their leases. In addition, certain financial covenants in our debt, including our $250 million unsecured
revolving credit facility, require us and our subsidiaries, among other things, to:  
    limit the amount of debt to a certain percentage of total assets;
    limit the amount of secured debt to a certain percentage of total assets;
    maintain certain minimum interest and debt service coverage ratios; and
    maintain a certain level of unencumbered assets. As of March 31, 2005, we were in compliance with all of the debt covenants related to our debt
outstanding. Aggregate annual repayments of our debt outstanding as of March 31, 2005 are as follows (in
thousands): For the Year Ended December 31, PrincipalAmortization
    
    
    Maturities
    
    
    Total2005
    
    $
    17,678
    
    
    $
    
    
    
    $
    17,6782006
    
    
    25,142
    
    
    
    
    
    
    
    25,1422007
    
    
    26,979
    
    
    
    
    
    
    
    26,9792008
    
    
    28,735
    
    
    
    24,211
    
    
    
    52,9462009
    
    
    28,810
    
    
    
    260,000
    
    
    
    288,810Thereafter
    
    
    315,594
    
    
    
    379,997
    
    
    
    695,591Total
    
    $
    442,938
    
    
    $
    664,208
    
    
    $
    1,107,146
 18




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##### 



6. PREFERRED EQUITY Set forth below is a summary of our preferred shares of beneficial interest: Series of
    
    
    
    
    
    
    
    
    
    Annual
    
    
    Annual
    
    
    EarliestPreferred Share
    
    # of
    
    
    Month
    
    
    Dividend
    
    
    Dividend
    
    
    Redemptionof Beneficial Interest
    
    Shares Issued
    
    
    of Issuance
    
    
    Yield (1)
    
    
    Per Share
    
    
    DateSeries A
    
    
    3,950,000
    
    
    December 2003
    
    
    7.5%
    
    
    $
    1.875
    
    
    
    12/11/08Series B
    
    
    2,600,000
    
    
    April/May 2004
    
    
    8.0%
    
    
    
    2.000
    
    
    
    4/27/09
  (1)
    
    Yield computed based on $25.00 per share redemption price. All of the classes of preferred shares set forth in the table above are non-voting and
redeemable for cash, at $25.00 per share plus any accrued and unpaid dividends, at our option only
on or after the earliest redemption date, unless in limited circumstances in which early redemption
is necessary to preserve our status as a real estate investment trust for federal income tax
purposes. The preferred shares have no stated maturity and are not subject to any sinking fund
provisions. Additionally, the shares are not convertible into or exchangeable for any other
security unless conversion is necessary to maintain our status as a real estate investment trust.
Holders of these shares are entitled to cumulative dividends, payable quarterly. In the case of
each series of preferred shares, there is a series of Preferred Units owned by us that carries
substantially the same terms. 7. MINORITY INTEREST Assets and liabilities allocated to the limited partners (other than the Company), which we
describe as the Minority Interest, are based on their ownership percentage of the Partnership at
the end of the period. The ownership percentage is determined by dividing the number of Common
Units held by the Minority Interest at the end of the period by the total Common Units outstanding
at the end of the period, excluding derivative securities. The full redemption amount of the
Preferred Units is deducted from the Partnerships equity prior to applying the ownership
percentage to calculate Minority Interest. The Minority Interest ownership percentage in the
Partnerships equity was 15.8% as of March 31, 2005 and December 31, 2004. Income before minority interest is allocated to the limited partners based on their weighted
average ownership during the period. The ownership percentage is determined by dividing the
weighted average number of Common Units held by the Minority Interest by the total weighted average
number of Common Units outstanding during the period, excluding derivative securities. Income
before minority interest is reduced by Preferred Unit dividends prior to applying the ownership
percentage. The Minority Interest ownership percentage in income of the Partnership was 15.8% and
18.6% for the three months ended March 31, 2005 and 2004, respectively. Holders of Common Units, which we refer to as Unitholders, are entitled to quarterly distributions
which are equivalent to the quarterly dividend distributions received by holders of common shares.
There were 8.1 million Common Units as of March 31, 2005 and December 31, 2004, not held by the
Company, which were outstanding and could be exchanged for common shares of the Company on a
one-for-one basis in specified circumstances. When a Unitholder converts Common Units to common
shares, an adjustment is recorded to equity to reflect the change in the Minority Interest
ownership in the Partnership. When the Company issues common shares from an underwritten public
offering, its share-based compensation plan and its Dividend Reinvestment and Share Purchase Plan,
the net proceeds from these issuances are contributed to the Partnership in exchange for Common
Units and an adjustment is recorded to equity to reflect the change in the Minority Interest
ownership in the Partnership. 19




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##### 



8. EARNINGS PER COMMON SHARE Basic earnings per common share is computed as net income available to common shareholders divided
by the weighted average common shares, excluding restricted shares, outstanding for the period.
Diluted earnings per common share is computed as net income available to common shareholders,
adjusted to reflect the change in the income allocated to minority interest calculated as if the
dilutive securities were outstanding, divided by the weighted average common shares outstanding for
the period plus the effect of dilutive securities outstanding for the period, based on the treasury
stock method. Dilutive securities include options, phantom shares and restricted shares. In September 2004, the Emerging Issues Task Force, commonly referred to as the EITF, reached a
final consensus affirming their June 2004 tentative conclusion (with modifications) on EITF Issue
No. 04-8, The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share.
Contingently convertible debt instruments, which are commonly referred to as Co-Cos and include our
$110 million 6% convertible notes, combine the features of contingently issuable shares with a
convertible debt instrument. These instruments generally become convertible into common stock only
if one or more specified contingencies occur, and at least one of the contingencies is based on the
market price of the issuers shares. The EITF concluded that Co-Cos should be included in diluted
earnings per share computations using the if-converted method regardless of whether the market
price trigger or other contingent feature has been met. Under the if-converted method, the
instrument is considered converted, with the resulting number of shares included in the denominator
of the earnings per common share calculation and the interest expense, net of tax, added back to
the numerator of the earnings per common share calculation. In applying the if-converted method,
conversion shall not be assumed for purposes of computing diluted earnings per share if the effect
would be anti-dilutive. The FASB plans to issue an amendment to SFAS No. 128, Earnings Per Share, during the first six
months of 2005. The effective date of the September 2004 consensus was originally to coincide with
the effective date of the proposed amendment. As a result of the delay in the amendment of SFAS
No. 128, in November 2004, the EITF agreed to change the transition provisions of the consensus
reached to require that the guidance be applied to reporting periods ending after December 15,
2004. The consensus must be applied by restating all periods during which the contingently
convertible debt instrument was outstanding. During the second quarter of 2004, we closed on a public offering of $110 million 6% convertible
notes, as further described in the Debt Outstanding footnote herein. The notes have a 20-year
term and are convertible, at the option of the holder, into the Companys common shares under
certain circumstances, at an initial conversion price of $35.5679 per share, subject to certain
adjustments. The result of the potential conversion of the $110 million 6% convertible notes was
not included in the calculation of diluted earnings per share because it would have been
anti-dilutive for the three months ended March 31, 2005. 20




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##### 



A reconciliation of income and weighted average common shares used to calculate basic and diluted
earnings per common share for the three months ended March 31, 2005 and 2004 is as follows (in
thousands, except per share data): Three Months EndedMarch 31,2005
    
    
    2004Income from continuing operations
    
    $
    23,452
    
    
    $
    15,939Preferred share dividends
    
    
    (3,152
    )
    
    
    (1,852
    )Income from continuing operations used to
calculate basic earnings per common share
    
    
    20,300
    
    
    
    14,087Impact of dilutive securities
    
    
    22
    
    
    
    48Income from continuing operations used to
calculate diluted earnings per common share
    
    $
    20,322
    
    
    $
    14,135Basic earnings per common share
    
    $
    0.47
    
    
    $
    0.41Diluted earnings per common share
    
    $
    0.47
    
    
    $
    0.41Net income available to common shareholders
    
    $
    20,472
    
    
    $
    16,694Impact of dilutive securities
    
    
    21
    
    
    
    58Net income used to calculate diluted
earnings per common share
    
    $
    20,493
    
    
    $
    16,752Basic earnings per common share
    
    $
    0.47
    
    
    $
    0.49Diluted earnings per common share
    
    $
    0.47
    
    
    $
    0.48Weighted average shares:Common shares outstanding used to compute
basic earnings per common share
    
    
    43,235
    
    
    
    34,049Impact of dilutive securities
    
    
    303
    
    
    
    624Common shares outstanding used to compute
diluted earnings per common share
    
    
    43,538
    
    
    
    34,673
 21




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##### 



9. DIVIDENDS DECLARED PER SHARE The following table summarizes any activity related to our dividends during the three months ended
March 31, 2005: Record Date
    
    Date Payable
    
    Per ShareCommon Shares:Fourth Quarter 2004
    
    February 7, 2005
    
    February 18, 2005
    
    $
    0.43050First Quarter 2005
    
    May 10, 2005
    
    May 20, 2005
    
    $
    0.43800Series A Preferred Shares:November 1, 2004 - January 31, 2005
    
    February 1, 2005
    
    February 15, 2005
    
    $
    0.46875February 1, 2005 - April 30, 2005
    
    May 2, 2005
    
    May 16, 2005
    
    $
    0.46875Series B Preferred Shares:November 1, 2004  January 31, 2005
    
    February 1, 2005
    
    February 15, 2005
    
    $
    0.50000February 1, 2005 - April 30, 2005
    
    May 2, 2005
    
    May 16, 2005
    
    $
    0.50000
 10. COMMITMENTS We currently have contractual commitments to fund facility improvements and construction with
several tenants generally on properties we own. Such commitments are subject to typical
construction terms and conditions. Improvements include costs incurred by tenants on facilities
during which the tenants business continues to operate without interruption. Construction
financings include advances for the construction of new facilities by tenants for which operations
have not commenced or fundings for major improvements to existing facilities that cause operations
to cease during the construction period. As of March 31, 2005, these commitments totaled
approximately $130 million. The majority of these projects are expected to be completed during the
next two years. 22




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations. We begin Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) with our primary business strategy to give the reader an overview of the goals of our
business. This is followed by a discussion of our recent developments beginning on page 24. In the
next section, beginning on page 25, we discuss our results of operations for the periods presented.
We then provide, beginning on page 29, an analysis of our liquidity and capital resources,
including discussions of our cash flows, financing strategy, debt arrangements, sources of capital
and financial commitments. Finally, on page 38, we discuss funds from operations, or FFO, which is
a relative non-GAAP financial measure of performance of a REIT used by the REIT industry. The MD&A should be read in conjunction with the other sections of this Quarterly Report on Form
10-Q, including the consolidated financial statements and notes thereto appearing in Item 1 of this
report, disclosures about our market risk appearing in Item 3 of this report and the subsection
captioned Forward-Looking Statements herein. OVERVIEW Our primary business strategy is to purchase real estate (land, buildings and other improvements)
or leasehold interests therein, which we simultaneously lease to operators of franchised automobile
dealerships and motor vehicle service, repair or parts businesses, used vehicle businesses and
other related businesses under long-term, triple-net leases. In addition, we provide mortgages,
fund facility improvements, construction financing and takeout commitments in certain
circumstances. We use (i) the term dealerships to refer to these types of businesses that are
operated on our properties and (ii) the terms dealer group, tenant or operators of
dealerships to refer to the persons and entities that lease our properties from us or mortgage
their properties with us. We focus on leasing properties or providing mortgages to dealer groups
that have a long history of operating multi-site, multi-franchised dealerships, generally targeting
the largest dealer groups in terms of revenues in the largest metropolitan areas in the U.S. in
terms of population. As of March 31, 2005, we had real estate investments of nearly $2.3 billion,
primarily consisting of interests in 343 properties located in 31 states, including approximately
2,594 acres of land and containing approximately 15.0 million square feet of buildings and
improvements. Our tenants operate 505 motor vehicle franchises on our properties, representing 44
brands of motor vehicles, which include all of the top selling brands in the U.S. Substantially all of our properties are leased pursuant to long-term, triple-net leases, under
which the tenants typically pay all operating expenses of a property, including, but not limited
to, all real estate taxes, assessments and other government charges, insurance, utilities, repairs
and maintenance. The initial lease terms generally range from 10 to 20 years (with a weighted
average initial lease term for leases entered into during the quarter ended March 31, 2005 of 17.7
years), with our entire portfolio having a weighted average initial lease term of approximately
15.1 years. As of March 31, 2005, our portfolio had a weighted average remaining lease term of
approximately 11.7 years. The leases typically have options to renew upon generally the same terms
and conditions for one or more additional periods of five to 10 years each, exercisable at the
option of the tenants (with renewal options typically ranging from a total of five to 40 years). Substantially all of our revenues are derived from (1) rents received or accrued under long-term,
triple-net leases; (2) interest earned on mortgage notes or construction advances secured by real
estate; (3) interest earned from the temporary investment of funds in short-term investments; and
(4) other fee income. 23




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##### 



We are a self-administered and self-managed real estate company operating as a real estate
investment trust, or a REIT, for federal income tax purposes. Our general and administrative
expenses consist primarily of compensation expense for our executive officers and other employees,
professional fees,
office administration expenses (including rent), business taxes and insurance and various other
expenses incurred in managing our business. Our primary non-cash expense is the depreciation of
our properties. We depreciate buildings and improvements on our properties or leasehold interests
over a nine-year to 40-year period for tax purposes and generally a 20-year to 45-year period for
financial reporting purposes. We do not own or lease any significant personal property, furniture
or equipment at any property we own. RECENT DEVELOPMENTS Real Estate Investments During the first quarter of 2005, we increased our net real estate investments by approximately
$36.0 million. The first quarter real estate investments consisted of approximately $48.3 million
in real estate investments transacted with six existing tenants, partially offset by $12.4 million
in real estate property and mortgage note dispositions and repayments of mortgage notes receivable
and construction advances.
These investments were located in eight states and include two auto retail properties, facility
improvements, advances on one mortgage note receivable and construction advances. The investments
were funded with cash on hand and the issuance of long-term debt. The real estate investments
contain five automobile franchises and have initial lease terms generally ranging from 15 to 20
years, with a weighted average initial lease term of 17.7 years. The leases have multiple renewal
options, which generally are subject to the same terms and conditions and which are exercisable at
the option of the tenants. Financing During the first quarter of 2005, we completed the following transactions:  
    On January 27, 2005, we repaid $73.0 million of secured variable rate debt. The secured
debt repaid had a spread over the 30-day LIBOR of 175 basis points with a remaining
maturity of 8.6 years. We had previously entered into an interest rate swap arrangement
with a third party to fix the interest rate on this loan to 7.5%. We terminated the swap
arrangement during the fourth quarter of 2004 in anticipation of the debt repayment during
the first quarter of 2005. The debt was repaid with borrowings on our unsecured credit
facility, which were subsequently repaid with the proceeds received from the 5.46% senior
unsecured note offering described below;
    On February 24, 2005, we entered into a note purchase agreement to sell $175 million in
aggregate principal amount of senior unsecured notes in a private offering to institutional
accredited investors within the meaning of Regulation D under the Securities Act of 1933.
The notes bear interest at a fixed rate of 5.46% per annum and mature on February 24,
2015. Pursuant to the agreement, the Partnership issued $100 million of the notes on
February 24, 2005 and an additional $75 million on March 30, 2005. A portion of the $174
million in net proceeds were used to repay borrowings outstanding on our unsecured credit
facility and to fund acquisitions. The remainder of the net proceeds will be used to fund
future real estate investments and for general corporate purposes; and
    On March 24, 2005, we repaid $8.5 million of secured variable rate debt. The secured
debt repaid had a spread over the three-month LIBOR of 225 basis points with a remaining
maturity of 9.6 years. The debt was repaid with borrowings on our unsecured credit
facility, which were subsequently repaid with the proceeds received from the 5.46% senior
unsecured note offering described above. 24




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##### 



RESULTS OF OPERATIONS Revenue This section should be read in conjunction with the section captioned Liquidity and Capital
Resources  Variable Rate Lease Programherein. For the three monthsended March 31,
    
    
    %(dollars in thousands)
    
    2005
    
    
    2004
    
    
    ChangeRevenueRental
    
    $
    55,568
    
    
    $
    46,505
    
    
    19
    %Interest and other
    
    
    1,087
    
    
    
    970
    
    
    12
    %Total
    
    $
    56,655
    
    
    $
    47,475
    
    
    19
    %
 Rental.The increase in rental revenue from the three months ended March 31, 2004 to the
three months ended March 31, 2005 was primarily attributable to the growth of our real estate
portfolio from sale-leaseback transactions and facility improvements from which we generate our
rental income. The following table demonstrates the growth of our real estate portfolio for the
periods indicated. Excluded in the periods presented are property dispositions that have occurred
through March 31, 2005. The results of operations related to these properties were reclassified
from rental revenue to discontinued operations for all periods presented as further described under
the Discontinued Operations section herein. Real Estate beforeAccumulated
    
    
    
    
    
    
    
    
    
    
    Total SquareDepreciation (in
    
    
    Number of
    
    
    Total Land
    
    
    Footage (inAs of
    
    thousands)
    
    
    Properties
    
    
    Acreage
    
    
    millions)December 31, 2003
    
    $
    1,801,510
    
    
    
    302
    
    
    
    2,232
    
    
    
    13.0March 31, 2004
    
    
    1,877,968
    
    
    
    307
    
    
    
    2,292
    
    
    
    13.4December 31, 2004
    
    
    2,196,245
    
    
    
    341
    
    
    
    2,582
    
    
    
    14.9March 31, 2005
    
    
    2,236,688
    
    
    
    343
    
    
    
    2,594
    
    
    
    15.0
 The increase in rental income was also attributable to an increase from rent adjustments above
the fixed minimum escalators, which are recorded as revenue in the period they are due from the
tenants. Interest and Other.The increase in interest and other income from the three months ended March
31, 2004 to the three months ended March 31, 2005 was primarily due to interest earned on mortgage
notes and construction advances secured by real estate. Mortgage notes and construction advances
totaled approximately $40.0 million and $10.9 million as of March 31, 2005 and 2004, respectively.
The increase was partially offset by lease assignment fees earned during the three months ended
March 31, 2004. There were no lease assignment fees during the three months ended March 31, 2005. 25




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##### 



Expenses For the three monthsended March 31,
    
    
    %(dollars in thousands)
    
    2005
    
    
    2004
    
    
    ChangeExpensesDepreciation and amortization
    
    $
    10,133
    
    
    $
    8,575
    
    
    18
    %General and administrative
    
    
    3,284
    
    
    
    2,741
    
    
    20
    %Interest
    
    
    15,976
    
    
    
    17,005
    
    
    (6
    %)Total
    
    $
    29,393
    
    
    $
    28,321
    
    
    4
    %
 Depreciation and Amortization.Depreciation and amortization consisted primarily of
depreciation on buildings and improvements we owned or had a leasehold interest in during the
periods indicated above. The increases are primarily attributable to the growth of our real estate
portfolio described under Revenue  Rental above, resulting in an increase in our depreciable
assets. General and Administrative.General and administrative expenses increased from the three months
ended March 31, 2004 to the three months ended March 31, 2005 due primarily to an increase in
payroll and related expenses primarily attributable to an increase in overall compensation and an
increase in the number of employees as well as an increase in professional fees related to
information technology consultation services. This increase was partially offset by a decrease in
legal fees related to expenses recognized during the three months ended March 31, 2004 related to
the litigation that was settled during the fourth quarter of 2004. Interest.The following table sets forth certain information regarding our debt as of the periods
indicated. Credit(in thousands)
    
    Fixed Rate
    
    
    Variable Rate
    
    
    Facilities
    
    
    TotalBalance as of:3/31/04
    
    $
    811,252
    
    
    $
    264,305
    
    
    $
    18,009
    
    
    $
    1,093,5663/31/05
    
    $
    857,146
    
    
    $
    250,000
    
    
    $
    
    
    
    $
    1,107,146Effective Interest
Rate for the Three
Months Ended March
31*2004
    
    
    7.17%
    
    
    
    3.68%
    
    
    
    4.21%
    
    
    
    6.25%2005
    
    
    6.83%
    
    
    
    4.29%
    
    
    
    4.14%
    
    
    
    6.03%
  *
    
    Includes deferred loan fees amortized over the life of the loans. The decrease in interest expense for the three months ended March 31, 2004 to the three months
ended March 31, 2005 was primarily due to the repositioning of our balance sheet from secured debt
to unsecured debt and equity during 2004 and 2005. This resulted in a decrease in our average debt
outstanding for the first quarter of 2005 as compared to the same period in the prior year.
Further, although interest rates increased from the prior year, our credit spreads, and therefore
our effective interest rate, continued to contract as a result of the repositioning. The decrease
was partially offset by the reclassification of approximately $301,000 of interest expense related
to 2004 and 2005 property dispositions to discontinued operations for the three months ended March
31, 2004 as compared to no reclassification of interest expense for the three months ended March
31, 2005, as further described in the Discontinued Operations section herein. In accordance with
GAAP, interest expense is required to be reclassified to discontinued operations for the period of
time during which the properties sold secured the debt. Interest related to the associated debt
instrument after the disposition of the property is recorded to interest expense resulting in an
increase in interest expense in subsequent periods. 26




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##### 



Discontinued Operations We sell properties from time to time, generally when a tenant has indicated that a particular
location no longer meets their operational needs. Beginning in 2002, SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
requires that gains and losses from dispositions of properties and all operating earnings from
these properties be reported as discontinued operations. This also requires that all past
earnings applicable to a property disposed of subsequent to January 1, 2002 be reported as
discontinued operations. As a result, previously reported income from continuing operations
will be updated each time a property is sold. This requirement is for presentation only and has no
impact on net income. During the first quarter of 2005, we sold one auto retail location and a mortgage note receivable
for approximately $6.4 million in sale proceeds, net of commissions and other costs, and recognized
approximately $100,000 of a previously deferred gain. In addition, in exchange for early
termination of the lease, we also received a lease termination fee totaling approximately $93,000,
which was recorded during the first quarter. The earnings generated from the real estate
disposition, including the lease termination fee, and the gain related to the sale of the mortgage
note receivable have been reported as discontinued operations. 27




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##### 



The following table sets forth the components of discontinued operations related to the real estate
dispositions subsequent to January 1, 2004 (in thousands): For the three monthsended March 31,2005
    
    
    2004Revenue:Rental
    
    $
    13
    
    
    $
    1,332Other
    
    
    93
    
    
    
    1,248Total revenue
    
    
    106
    
    
    
    2,580Expenses:Depreciation
    
    
    2
    
    
    
    248Interest
    
    
    
    
    
    
    301Total expenses
    
    
    2
    
    
    
    549Income from discontinued operations before gain
on sale of real estate and minority interest
    
    
    104
    
    
    
    2,031Gain on sale of real estate
    
    
    100
    
    
    
    1,171Income related to discontinued operations
before minority interest
    
    
    204
    
    
    
    3,202Minority interest related to discontinued operations
    
    
    (32
    )
    
    
    (595
    )Total discontinued operations, net of
minority interest
    
    $
    172
    
    
    $
    2,607
 Preferred Share Dividends For the three months ended March 31,(dollars in thousands)
    
    2005
    
    
    2004Preferred share dividends
    
    $
    3,152
    
    
    $
    1,852
 The increase represents dividends related to the 8% Series B Cumulative Redeemable Preferred
Shares issued on April 27, 2004. There were no Series B preferred share dividends during the three
months ended March 31, 2004. Impact of Inflation Our leases typically contain provisions to mitigate the adverse impact of inflation on our results
of operations. These provisions include upward periodic adjustments in base rent due from our
tenants, usually based on the factor of the change in the consumer price index, commonly referred
to as the CPI. In addition, certain of our leases are subject to fixed minimum and/or maximum rent
escalators during the initial lease term. Substantially all of our properties are leased to tenants under long-term, triple-net leases.
Because triple-net leases typically require the tenant to pay all operating expenses of a property,
our exposure to rising property expenses due to inflation is reduced. 28




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##### 



LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $40.8 million and $12.6 million at March 31, 2005 and March 31,
2004, respectively. The changes in cash and cash equivalents during the three months ended March 31, 2005 and 2004 were
attributable to operating, investing and financing activities, as described below. Three Months EndedMarch 31,(dollars in thousands)
    
    2005
    
    
    2004Cash provided by operating activities
    
    $
    36,672
    
    
    $
    31,459Cash used in investing activities
    
    
    (36,501
    )
    
    
    (25,391
    )Cash provided by (used in) financing activities
    
    
    32,313
    
    
    
    (6,837
    )
 Operating Activities Cash provided by operating activities represents cash received primarily from rents under
long-term, triple-net leases, plus interest and other fee income, less normal recurring general and
administrative expenses and interest payments on debt outstanding. Investing Activities Cash used in investing activities primarily reflects investments in dealership properties,
mortgages, facility improvements and construction financings, net of sales. Financing Activities Cash provided by financing activities for the three months ended March 31, 2005 primarily reflects:  
    $175.0 million of proceeds received from debt issuances during the period; and
    $95.0 million of proceeds received from borrowings on our revolving credit facility. The cash provided by financing activities was partially offset by:  
    the repayment of borrowings on our revolving credit facility totaling $125.0 million;
    the repayment of debt totaling $81.5 million;
    distributions made to both common and preferred shareholders as well as minority
partners during the period totaling $22.0 million;
    payments of principal on outstanding debt totaling $5.8 million;
    the increase in restricted cash totaling $2.1 million; and
    payments for debt issuance costs totaling $1.3 million. 29




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##### 



Cash used in financing activities for the three months ended March 31, 2004 primarily reflects:  
    the repayment of borrowings on our revolving credit facilities totaling $80.0 million;
    distributions made to both common and preferred shareholders as well as minority
partners during the period totaling $15.8 million; and
    payments of principal on outstanding debt totaling $6.9 million. The cash used in financing activities was partially offset by:  
    $61.6 million of proceeds received from the issuance of common shares, net of costs and
forfeitures;
    $23.0 million of proceeds received from borrowings on our revolving credit facilities; and
    $11.9 million of proceeds received from debt issuances during the period. Financing Strategy Our primary objective is to have consistent access to long and short-term debt and equity at costs
efficient to run our business and produce the highest returns. During 2004, we completed a
significant recapitalization of our balance sheet and achieved investment-grade senior unsecured
debt credit ratings from Moodys Investors Service and Standard & Poors Ratings Services. We
believe that utilizing an investment grade capital structure is optimal for the execution of our
business strategy. It provides us much more consistent access to debt at lower costs than we
previously obtained using secured debt. This enables us to have more flexibility to provide
creative solutions for our clients. By replacing a significant portion of our secured debt with
unsecured debt and equity, we have lowered our overall leverage and improved our cash flow and debt
service and fixed charge coverage ratios. We intend to conduct our operations so as to best be
able to maintain or improve our investment-grade rated status. We typically fund our short-term liquidity requirements through available cash or our $250 million
unsecured revolving credit facility (currently priced at 95 basis points over LIBOR). As of March
31, 2005, there were no borrowings outstanding under the facility. Availability under our credit
facility is determined based on current borrowings outstanding under the facility as well as
certain financial covenants contained within the facility. Periodically, in order to more closely match the term and the interest rate nature (fixed or
variable rate) of our debt with that of our leases, we will replace the borrowings outstanding on
our credit facility using the proceeds of long-term debt or equity. When accessing the capital
markets, our objective is to maintain the strength and flexibility of our balance sheet while
providing accretion to our shareholders. We use a disciplined approach of matching the term and interest rate nature (fixed or variable
rate) of our long-term debt to our leases. We use this process, which we refer to as
match-funding, to substantially lock in our investment spreads during the initial lease term. As
of March 31, 2005, our leases had a weighted average remaining term of 11.7 years and the earliest
meaningful lease expirations do not occur until 2008. Similarly, our debt had a weighted average
remaining term of 9.8 years and our earliest meaningful long-term debt maturity was not until 2009.
As of March 31, 2005, our total outstanding debt equaled approximately 49% of our total real
estate investments subject to leases and the ratio of the remaining weighted average term of our
debt to the remaining weighted average term of our leases (match-funded percentage) was 82%. 30




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##### 



As of March 31, 2005, our total outstanding fixed rate debt equaled approximately 47% of our total
real estate investments subject to fixed rate leases. The weighted average remaining term of our
fixed rate leases was 12.1 years and the weighted average remaining term of our outstanding fixed
rate debt was 10.3 years. As a result, our fixed rate leases and debt were 85% match-funded. Our
total outstanding variable rate debt equaled approximately 62% of our total real estate investments
subject to variable rate
leases. The weighted average remaining term of our variable rate leases was 11.3 years and the
weighted average remaining term of our outstanding variable rate debt was 8.3 years. As a result,
variable rate leases and our variable rate debt were 73% match-funded. As of March 31, 2005, our ratio of debt to gross assets (calculated as total assets plus
accumulated depreciation) was approximately 47%, our secured debt to gross assets was approximately
23% and our debt to total market capitalization was approximately 37%. Certain financial
agreements to which we are a party contain covenants that limit our ability to incur debt under
certain circumstances. In light of our current financial position, we believe that we will be able to obtain additional
financing for our short-term and long-term liquidity requirements as further described in the
Liquidity Requirements section herein. We have used and may continue to use interest rate swap
arrangements to manage interest rate risk and to match-fund our debt to our leases. However, there
can be no assurance that additional financing or capital will be available, or that the terms will
be acceptable or advantageous to us. Variable Rate Lease Program We may offer our current and prospective tenants the option of utilizing our variable rate lease
program. Under this program, base rent changes monthly based upon a spread over an applicable
index, typically LIBOR. In addition, our leases typically provide for upward periodic adjustments
in base rent, usually based on a factor of the change in the CPI. The vast majority of our
variable rate lease agreements contain minimum lease rates, generally between 8% and 9%, and fixed
rate conversion features generally with minimum rates of 10.0% to 10.25%, and none of these leases
contains a maximum rate. Upon conversion, the fixed base rent typically continues to be adjusted
upward periodically based on a factor of the change in the CPI or other escalation provisions set
forth in the lease. The following table sets forth certain information regarding our variable rate leases and debt as
of the periods indicated (dollars in thousands): Percentage of ourTotal Real
    
    Portfolio
    
    
    
    
    
    Average One-Estate Subject
    
    Subject to
    
    Total Variable
    
    Month LIBORto Variable
    
    Variable Rate
    
    Rate Debt
    
    for the threePeriod
    
    Rate Leases
    
    Leases
    
    Outstanding (1)
    
    months endedMarch 31, 2004
    
    $
    412,324
    
    
    
    21
    %
    
    $
    282,314
    
    
    
    1.10
    %March 31, 2005
    
    
    403,841
    
    
    
    18
    %
    
    
    250,000
    
    
    
    2.64
    %
 (1)
    
    Includes amounts outstanding on our revolving credit facilities totaling $18.0 million and
$0 as of March 31, 2004 and March 31, 2005, respectively. As further described in the Financing Strategysection above, the match-funding of our variable
rate lease portfolio with variable rate debt furthers our strategy of substantially locking in our
investment spreads over the initial term of our leases. In addition, the minimum lease rates built
into the majority of our variable rate leases protect our investment returns as interest rates
decline and allow us to realize additional spread during low interest rate environments. However,
because many of our leases are subject to minimum lease rates, as LIBOR rises, our investment
spreads will generally contract from current levels until the one-month LIBOR reaches 3.0% to 3.5%,
at which time substantially all of our lease rates will rise above our minimum lease rates. 31




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##### 



To illustrate, during the three months ended March 31, 2005, as LIBOR has generally increased by
approximately 50 basis points, our investments spreads have contracted. While the interest expense
on
our variable rate debt has increased, the revenue generated from the vast majority of our variable
rate leases has remained constant during this same time period as the majority of the minimum lease
rates were in effect at these LIBOR levels. In contrast, during the three months ended March 31, 2004, as LIBOR remained constant, the interest
expense on our variable rate debt and the revenue generated from the vast majority of our variable
rate
leases remained constant. When LIBOR decreases, the interest expense on our variable rate debt will decrease. However, the
revenue generated from the majority of our variable rate leases will remain constant as the minimum
lease rates would be in effect at current LIBOR levels. Debt Outstanding The following is a summary of our total debt outstanding as of March 31, 2005 and December 31, 2004
(dollars in thousands): Principal
    
    
    Principal Balance
    
    
    Effective
    
    
    Term/Original
    
    
    Balance as of
    
    
    as of December
    
    
    Interest
    
    
    AmortizationDescription of Debt
    
    Debt Issued
    
    
    March 31, 2005
    
    
    31, 2004
    
    
    Rate*
    
    
    Schedule7.59% fixed rate debt due 12/1/08 (1)
    
    
    38,050
    
    
    $
    31,101
    
    
    $
    31,513
    
    
    
    
    
    
    10 yr/17 yr5.84% fixed rate debt due 2/1/14 (2)
    
    
    11,900
    
    
    
    11,673
    
    
    
    11,728
    
    
    
    
    
    
    10 yr/25 yrTriple Net Lease Mortgage Notes, Series
2002 (3)
    
    
    325,000
    
    
    
    288,922
    
    
    
    292,557
    
    
    
    
    
    
    (3)Triple Net Lease Mortgage Notes, Series
2003-1 (4)
    
    
    228,000
    
    
    
    215,450
    
    
    
    217,102
    
    
    
    
    
    
    (4)Various variable rate debt (5)
    
    
    91,320
    
    
    
    
    
    
    
    81,465
    
    
    
    
    
    
    (5)TOTAL MORTGAGE DEBT (6)
    
    
    
    
    
    $
    547,146
    
    
    $
    634,365
    
    
    6.83%Variable rate term loan due 8/20/09 (7)
    
    
    150,000
    
    
    
    150,000
    
    
    
    150,000
    
    
    
    
    
    
    (7)5.46% Senior Notes due 2/24/15 (8)
    
    
    175,000
    
    
    
    175,000
    
    
    
    
    
    
    
    
    
    
    (8)6.75% Monthly Income Notes due 4/15/19 (9)
    
    
    125,000
    
    
    
    125,000
    (10)
    
    
    125,000
    (10)
    
    
    
    
    
    (9)6% Convertible Notes due 5/15/24 (11)
    
    
    110,000
    
    
    
    110,000
    
    
    
    110,000
    
    
    
    
    
    
    (11)TOTAL UNSECURED DEBT
    
    
    
    
    
    $
    560,000
    
    
    $
    385,000
    
    
    5.16%$250 million revolving unsecured facility (7)
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    (7)TOTAL CREDIT FACILITIES
    
    
    
    
    
    $
    
    
    
    $
    30,000
    
    
    4.14%TOTAL DEBT OUTSTANDING
    
    
    
    
    
    $
    1,107,146
    (10)
    
    $
    1,049,365
    (10)
    
    6.03%
 *
    
    For the quarter ended March 31, 2005. Includes deferred loan fees amortized over the
life of the loans. 32




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##### 



(1)
    
    This loan requires monthly payments of principal and interest with a final payment at
maturity of approximately $24.2
million. The Partnership has provided a guaranty of collection limited to approximately
$8.9 million of this loan, contingent upon the lender first making written demand upon and
proceeding against the borrower, including obtaining judgment and foreclosing upon all
collateral. All amounts recovered from the borrower or collateral following a default
reduce such guarantee.(2)
    
    This loan requires monthly level payments of principal and interest with a final
payment at maturity of approximately $9.2 million.(3)
    
    During 2002, we issued $325 million in four classes of Triple Net Lease Mortgage Notes,
Series 2002. CARS Loan Servicer L.L.C., one of our subsidiaries, is servicer of the notes
on behalf of the noteholders. The following is a breakdown of the Triple Net Lease
Mortgage Notes, Series 2002 by class: Original Principal
    
    Current PrincipalClass
    
    Balance
    
    Balance
    
    Maturity DateA-1a
    
    
    164,136
    
    
    
    139,209
    
    
    8/15/14A-1b
    
    
    9,064
    
    
    
    9,064
    
    
    7/15/15A-2
    
    
    75,900
    
    
    
    64,749
    
    
    7/15/15A-3
    
    
    75,900
    
    
    
    75,900
    
    
    6/15/22
  Classes A-1a and A-1b are fully-amortizing in succession over their respective terms and
Classes A-2 and A-3 are fully-amortizing in succession over 20 years. The notes have a
weighted average effective interest rate (including deferred loan fees amortized over the
life of the notes) of approximately 7.7%. The Partnership has provided a guaranty of
collection limited to approximately $35 million of this loan, contingent upon the trustee
first making written demand upon and proceeding against the borrower, including obtaining
judgment and foreclosing upon all collateral. All amounts recovered from the borrower or
collateral following a default reduce such guarantee. In connection with the issuance of
this debt, the Company guarantees certain customary, non-recourse, carveout indemnities.
Additionally, in conjunction with the servicing of the debt, the Company guarantees CARS
Loan Servicer L.L.C.s obligations to make certain principal, interest and property
protection advances.(4)
    
    During 2003, we issued $228 million in two classes of Triple Net Lease Mortgage Notes,
Series 2003-1. CARS Loan Servicer L.L.C. is servicer of the notes on behalf of the
noteholders. The following is a breakdown of the Triple Net Lease Mortgage Notes, Series
2003-1 by class: Original Principal
    
    Current PrincipalClass
    
    Balance
    
    Balance
    
    Maturity DateA-1
    
    
    109,000
    
    
    
    96,450
    
    
    9/25/15A-2
    
    
    119,000
    
    
    
    119,000
    
    
    3/25/19
  The notes amortize in succession over a 20-year amortization schedule with the Class A-1
notes fully-amortizing and the Class A-2 notes requiring a final payment at maturity of
approximately $70.8 million. The notes have a weighted average effective interest rate
(including deferred loan fees amortized over the life of the notes) of approximately 5.86%.
In connection with the issuance of this debt, the Company guarantees certain customary,
non-recourse, carveout indemnities. Additionally, in conjunction with the servicing of the
debt, the Company guarantees CARS Loan Servicer L.L.C.s obligations to make certain
principal, interest and property protection advances.(5)
    
    This represents debt that was outstanding with one lender, of which approximately $81
million was repaid during the first quarter of 2005. Approximately $73 million of the debt
repaid had a spread over the 30-day LIBOR of 175 basis points with a remaining maturity of
approximately 8.6 years. We had previously entered into an interest rate swap arrangement
with a third party to fix the interest rate on this loan to 7.5%. We terminated the swap
arrangement during the fourth quarter of 2004 in anticipation of the debt repayment during
the first quarter of 2005. The remaining debt repaid had a spread over the three-month
LIBOR of 225 basis points with a remaining maturity of approximately 9.6 years. The debt
was repaid with borrowings on our unsecured credit facility, which were subsequently repaid
with the proceeds received from the 5.46% senior unsecured note offering described in
footnote (8).(6)
    
    Our mortgage debt is subject to prepayment penalties. 33




---



##### 



(7)
    
    During 2004, we closed on a syndicated unsecured revolving credit and term loan
facility. The revolving credit
portion of the facility is $250 million with an initial three-year term and an option to
extend the term for an additional one-year period. The term loan portion of the facility is
a $150 million five-year unsecured term loan and requires interest-only payments until
maturity, at which time the loan requires a final payment totaling $150 million. The
facility bears interest at a spread, generally over LIBOR, and adjusts over time, based upon
our debt rating or leverage. As of March 31, 2005, the borrowings under the facility bear
interest, based upon our debt rating, equal to the 30-day LIBOR rate plus 95 basis points.(8)
    
    On February 24, 2005, the Partnership entered into a note purchase agreement to sell
$175 million in aggregate principal amount of 5.46% senior unsecured notes in a private
offering to institutional accredited investors within the meaning of Regulation D under
the Securities Act of 1933. Pursuant to the agreement, the Partnership issued $100 million
of the notes on February 24, 2005 and an additional $75 million on March 30, 2005. The
Company has guaranteed the Partnerships obligations under the notes. Interest on the
notes is payable semi-annually. The notes
have a 10-year term. The Partnership may, at its option, prepay the notes, at any time, in
whole or, from time to time, in part, in an amount equal to at least $5 million of the
aggregate principal amount then outstanding, at 100% of the principal amount to be prepaid,
plus any make-whole amount due in connection with the prepayment. In general, the
make-whole amount is the amount by which the discounted value of the remaining payments
relating to the principal amount to be prepaid (determined in accordance with the terms of
the note purchase agreement) exceeds the principal amount to be prepaid. The net proceeds
to the Company, after deducting the expenses of the offering, totaled approximately $174
million. A portion of the net proceeds were used to repay borrowings outstanding on our
syndicated unsecured credit facility and to fund acquisitions. The remainder of the net
proceeds will be used to fund future real estate investments and for general corporate
purposes.(9)
    
    During 2004, we closed on a public offering of $125 million 6.75% senior unsecured
monthly income notes at par. Interest on the notes is payable monthly. The notes have a
15-year term and are redeemable at the Companys option after five years at par. On March
18, 2004, which was the date the Company priced the notes, we entered into an interest rate
swap arrangement with a third party to cause the interest rate on $100 million of the notes
effectively to be at a floating rate of the three-month LIBOR plus 162.4 basis points. The
unrealized loss on our fair value hedge was approximately $4.9 million and $3.4 million as
of March 31, 2005 and December 31, 2004, respectively, as further described in the
Interest Rate Swaps section herein.(10)
    
    Although the principal balance of the $125 million 6.75% senior unsecured monthly
income notes was $125 million as of March 31, 2005 and December 31, 2004, in accordance
with GAAP, the carrying value of the debt on our balance sheet has been reduced by $4.9
million and $3.4 million, respectively, representing the change in the fair value of the
swap described in footnote (9) and as more fully described in the Interest Rate Swaps
section herein.(11)
    
    During 2004, we closed on a public offering of $110 million 6% convertible notes. The
notes have a 20-year term and are convertible, at the option of the holder, into the
Companys common shares under certain circumstances, at an initial conversion price of
$35.5679 per share, subject to certain adjustments. The initial price is equivalent to a
conversion rate of 28.1152 shares per $1,000 principal amount of notes and was equivalent
to a premium of 30% at the closing. The conversion rate will be adjusted under certain
circumstances, including common stock splits, common stock issuances as dividends and
increases in the dividend rate. The Company may, at its option, redeem the notes for cash
on or after May 15, 2009, at any time, in whole or, from time to time, in part, at a
redemption price equal to 100% of the principal amount to be redeemed plus accrued and
unpaid interest. The noteholders may require us to repurchase all or part of the notes on
May 15, 2009, May 15, 2014 and May 15, 2019, or upon a change in control, at a price equal
to 100% of the principal amount plus accrued and unpaid interest. The notes require
semi-annual interest payments. The deferred loan fees associated with this debt are being
amortized over a five-year period. Additionally, during the first quarter of 2005, we terminated two secured credit facilities,
totaling $200 million, which were replaced by our syndicated unsecured revolving credit facility as
further described above. 34




---



##### 



Our unsecured debt generally contains various restrictive covenants. The covenants in our
unsecured debt include, among others, provisions restricting our ability to:  
    incur or guarantee additional debt;
    make certain distributions, investments and other restricted payments, including
distribution payments on our outstanding common and preferred shares;
    limit the ability of restricted subsidiaries to make payments to us;
    enter into transactions with certain affiliates;
    create certain liens; and
    consolidate, merge or sell our assets. Our secured debt generally contains customary covenants, including, among others, provisions:  
    relating to the maintenance of the property securing the debt;
    restricting our ability to sell, assign or further encumber the properties
securing the debt;
    restricting our ability to incur additional debt;
    restricting our ability to amend or modify existing leases; and
    relating to certain prepayment restrictions. Our ability to meet some of the covenants in our debt, including covenants related to the condition
of the property or payment of real estate taxes, may be dependent on the performance by our tenants
under their leases. In addition, certain financial covenants in our debt, including our $250 million unsecured
revolving credit facility, require us and our subsidiaries, among other things, to:  
    limit the amount of debt to a certain percentage of total assets;
    limit the amount of secured debt to a certain percentage of total assets;
    maintain certain minimum interest and debt service coverage ratios; and
    maintain a certain level of unencumbered assets. As of March 31, 2005, we were in compliance with all of the debt covenants related to our debt
outstanding. Interest Rate Swaps During the normal course of business, we are exposed to certain financial market risks, including
fluctuations in interest rates. In general, our strategy of match-funding our long-term debt to
our leases reduces our exposure to interest rate fluctuations by substantially locking in our
investment spreads during the initial term of the leases. As part of this strategy, we have used
and may continue to use interest rate swap arrangements to manage or hedge our risk related to the
effect of interest rate fluctuations on our investment spreads. We do not enter into interest rate
swap arrangements for speculative purposes. We will either hedge our variable rate debt to convert
it to a fixed interest rate, designating such hedge as a cash flow hedge, or hedge our fixed rate
debt to convert it to a variable interest rate, designating such hedge as a fair value hedge. 35




---



##### 



The cash flow and fair value hedges were designed to mirror the underlying debt in terms of
index, spread, reset, amortization, compounding and maturity. Due to the identical nature of the
terms of the swap arrangements and the underlying terms of the debt, the swap arrangements we have
entered into with third parties were designated as highly effective at the inception of the swap
arrangements. For all swap arrangements, we are required to post collateral, generally in the amount of the swap
valuations at any point in time, to protect the lenders in case of an early termination by us. The
collateral posted by us related to our hedges, totaling approximately $5.9 million and $3.3 million
as of March 31, 2005 and December 31, 2004, respectively, is included in other assets on our
consolidated balance sheets. For a derivative qualifying as a cash flow hedge, the change in the unrealized gain or loss is
recorded as a component of accumulated other comprehensive income (loss) within shareholders
equity on our consolidated balance sheets. The fair value of the swap is recorded as either an
asset or liability on our consolidated balance sheets. As of March 31, 2005 and December 31, 2004, we did not have any outstanding interest rate swap
arrangements designated as cash flow hedges. Therefore, we did not have any associated unrealized
gains or losses as of March 31, 2005 and December 31, 2004. Total comprehensive income for the
three months ended March 31, 2005 and 2004 was approximately $23.6 million and $14.9 million,
respectively. Total comprehensive income equaled net income for the three months ended March 31,
2005. For a derivative qualifying as a fair value hedge, the change in the net unrealized gain or loss
upon measuring the fair value hedge and the fair value of the debt instrument being hedged is
recorded on our consolidated statements of operations. Generally, these amounts offset each other.
The fair value of the swap is recorded as either an asset or liability, with a corresponding
increase or decrease recorded to the carrying value of the debt instrument being hedged on our
consolidated balance sheets. The unrealized loss on our fair value hedge was approximately $4.9 million and $3.4 million as of
March 31, 2005 and December 31, 2004, respectively. The net unrealized gain or loss on our fair
value hedge and the debt being hedged had no impact on our net income for the three months ended
March 31, 2005 and 2004, respectively. We have evaluated our fair value hedge as of March 31, 2005
and believe it continues to be highly effective. Upon the early termination of swap arrangements or when we believe it is probable we are not
subject to interest rate risk, we recognize the realized gain or loss in our results of operations in the
period of the swap breakage. We did not have any such expenses during the three months ended March
31, 2005 and 2004. Liquidity Requirements Short-term liquidity requirements consist primarily of normal recurring operating expenses and
capital expenditures, debt service requirements (including debt service relating to additional and
replacement debt), collateral calls on interest rate swaps, distributions to common and preferred
shareholders, distributions to minority partners and amounts required for additional investments in
properties, mortgages, facility improvements and construction financings (real estate
investments). We expect to meet these requirements (other than amounts required for real estate
investments) through cash provided from operations and our existing revolving credit facility. We
anticipate that any additional real estate investments during the next 12 months will be funded
with cash provided from operations, long-term unsecured debt and the issuance of common or
preferred equity or Units, each of which may be initially funded with our existing revolving credit
facility. Real estate investments will be made subject to our investment objectives and policies
with the intention of maximizing both current and long-term growth and income. 36




---



##### 



As of March 31, 2005, our contractual long-term liquidity requirements consisted primarily of
obligations under our long-term debt and our unsecured credit facility and dividends paid to our
preferred shareholders. We anticipate that long-term liquidity requirements will also include
amounts required for real estate investments as well as distributions to common shareholders and
minority partners. We expect to meet long-term liquidity requirements through long-term unsecured
borrowings and equity issuances. The availability and terms of any such financing will depend upon
market and other conditions. Aggregate annual repayments of our debt outstanding as of March 31, 2005 are as follows (in
thousands): For the Year Ended December 31, PrincipalAmortization
    
    
    Maturities
    
    
    Total2005
    
    $
    17,678
    
    
    $
    
    
    
    $
    17,6782006
    
    
    25,142
    
    
    
    
    
    
    
    25,1422007
    
    
    26,979
    
    
    
    
    
    
    
    26,9792008
    
    
    28,735
    
    
    
    24,211
    
    
    
    52,9462009
    
    
    28,810
    
    
    
    260,000
    
    
    
    288,810Thereafter
    
    
    315,594
    
    
    
    379,997
    
    
    
    695,591Total
    
    $
    442,938
    
    
    $
    664,208
    
    
    $
    1,107,146
 Additionally, our preferred shares pay quarterly dividends in arrears at a yearly rate of $1.875
per Series A preferred share and $2.00 per Series B preferred share, totaling approximately $12.6
million in preferred share dividends to be paid by us on an annual basis. The preferred shares are
redeemable for cash, at $25.00 per share plus any accrued and unpaid dividends, at our option on or
after December 11, 2008 for the Series A preferred shares or April 27, 2009 for the Series B
preferred shares. The preferred shares have no stated maturity. We are the tenant under certain ground leases expiring between August 2010 and August 2035, with
substantially all ground leases having options to renew for one or more additional periods ranging
from a total of 10 to 15 years, but in no event extending beyond 2035. In connection with the
acquisition of such leasehold interests we also acquired the interest in the buildings and improvements located on the
land subject to such ground leases. We in turn have subleased our interests in such ground leases
and the related buildings and improvements to our tenants. Certain predecessors in interest to us
(which predecessors are, or are affiliates of, our tenants) remain liable for rent and other
obligations under the ground leases. In addition, our tenants are responsible for making the
rental payments under the related ground leases directly to the ground landlords. Total future
minimum lease payments under the remaining terms of the ground leases totaled approximately $113.6
million as of March 31, 2005. We also currently have contractual commitments to fund facility improvements and construction with
several tenants generally on properties we own. Such commitments are subject to typical
construction terms and conditions. Improvements include costs incurred by tenants on facilities
during which the tenants business continues to operate without interruption. Construction
financings include advances for the construction of new facilities by tenants for which operations
have not commenced or fundings for major improvements to existing facilities that cause operations
to cease during the construction period. As of March 31, 2005, these commitments totaled
approximately $130 million. The majority of these projects are expected to be completed during the
next two years. 37




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##### 



Dividend Reinvestment and Share Purchase Plan During April 2000, we implemented a Dividend Reinvestment and Share Purchase Plan, which we refer
to as the DRIP, which was subsequently replaced on October 1, 2004. Under the DRIP, current common
shareholders and holders of common units, which we refer to as Unitholders, are permitted to elect
to reinvest all, a portion or none of their cash dividends or distributions to purchase common
shares. The DRIP also allows both new investors and existing common shareholders and Unitholders
to make optional cash payments to purchase common shares. The DRIP permits current common shareholders, Unitholders and new investors to invest a minimum of
$100 and up to a maximum of $10,000 in common shares per month. The DRIP also allows us to raise
additional capital by waiving the limitations on the $10,000 maximum per month, as more fully
described in the prospectus relating to the DRIP. Shares purchased under the DRIP through
reinvestment of dividends are purchased at a discount (currently 3%) to the market price. Shares
purchased under the DRIP through optional cash payments of $10,000 or less are purchased at market
price. Common shares may be purchased directly from us or in open market or privately negotiated
transactions, as we determine from time to time, to fulfill the requirements for the DRIP. For the
three months ended March 31, 2005, we issued approximately 113,000 common shares under the DRIP,
totaling approximately $3.7 million. Common Share Repurchase Program During 1998, we announced that our Board of Trustees had authorized the repurchase of up to 6.0
million common shares. Purchases have been and will be made from time to time in open market
transactions at prevailing prices or in negotiated private transactions at the discretion of
management. During the three months ended March 31, 2005 there were no repurchases of common
shares. From the inception of the common share repurchase program through March 31, 2005, a total
of 4,094,700 common shares have been repurchased at an average price of $10.62 per common share.
In conjunction with the common share repurchases, the Partnership redeemed an equivalent number of
Common Units from the Company for equivalent purchase prices. Off-Balance Sheet Arrangements As of March 31, 2005, we have no off-balance sheet arrangements that are reasonably likely to have
a current or future material effect on our financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources. FUNDS FROM OPERATIONS (FFO) The National Association of Real Estate Investment Trusts (NAREIT) developed FFO as a relative
non-GAAP financial measure of performance of a REIT in order to recognize that income-producing
real estate historically has not depreciated on the basis determined under GAAP. FFO, as defined
under the revised definition adopted in April 2002 by NAREIT and as presented by us, is net income,
computed in accordance with GAAP, plus depreciation and amortization of assets unique to the real
estate industry, plus minority interest related to income from continuing operations and income
from discontinued operations, and excluding gains from the sales of property, and after adjustments
for unconsolidated partnerships and joint ventures. FFO does not represent cash flows from
operating activities in accordance with GAAP (which, unlike FFO, generally reflects all cash
effects of transactions and other events in the determination of net income) and should not be
considered an alternative to net income as an indication of our performance or to cash flow as a
measure of liquidity or ability to make distributions. We consider FFO a meaningful, additional
measure of operating performance because it primarily excludes the assumption that the value of the real estate assets diminishes predictably over time, which is
contrary to what we believe occurs with our assets, and because industry analysts have accepted it
as a performance measure. Comparison of our presentation of FFO, using the NAREIT definition, to
similarly titled measures for other REITs may not necessarily be meaningful due to possible
differences in the application of the NAREIT definition used by such REITs. 38




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The following table reconciles FFO, FFO available to common shareholders and FFO per common share
for the three months ended March 31, 2005 and 2004 to their most directly comparable GAAP measures,
net income available to common shareholders and net income per common share (in thousands, except
per share data): Three Months EndedMarch 31,2005
    
    
    2004Net income
    
    $
    23,624
    
    
    $
    18,546Real estate depreciation and amortization
    
    
    10,105
    
    
    
    8,805Minority interest related to income from
continuing operations and income from
discontinued operations
    
    
    3,826
    
    
    
    3,592Gain on sale of real estate
    
    
    (84
    )
    
    
    (953
    )FFO
    
    
    37,471
    
    
    
    29,990Preferred share dividends
    
    
    (3,152
    )
    
    
    (1,852
    )FFO available to common shareholders  basic
    
    $
    34,319
    
    
    $
    28,138Dilutive effect of convertible securities
    
    
    1,811
    
    
    
    FFO available to common shareholders  diluted
    
    $
    36,130
    
    
    $
    28,138Weighted average number of common shares used
to compute basic net income per common share
    
    
    43,235
    
    
    
    34,049Weighted average number of common shares used
to compute fully diluted net income per
common share
    
    
    43,538
    
    
    
    34,673Weighted average number of common shares and
units used to compute basic FFO per common
share
    
    
    51,350
    
    
    
    41,823Weighted average number of common shares and
units used to compute fully diluted FFO per
common share
    
    
    54,747
    
    
    
    42,447Basic net income per common share
    
    $
    0.47
    
    
    $
    0.49Diluted net income per common share
    
    $
    0.47
    
    
    $
    0.48Basic FFO per common share
    
    $
    0.67
    
    
    $
    0.67Diluted FFO per common share (1)
    
    $
    0.66
    
    
    $
    0.66
 (1) The impact of the if-converted method, as further described in the Earnings Per Common
Share footnote to our consolidated financial statements, for the Companys contingently convertible
debt instrument, which was issued during the second quarter of 2004, on diluted FFO per common share is dilutive
for the three months ended March 31, 2005. Therefore, the calculation includes the effect of the
potential conversion resulting in a reduction in interest expense totaling approximately $1.8
million as well as an additional 3.1 million common shares outstanding during the period. 39




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Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Also, documents that we subsequently file with the SEC will contain
forward-looking statements. When we refer to forward-looking statements or information, sometimes
we use words such as may, will, could, should, plans, intends, expects, believes,
estimates, anticipates and continues. In particular, Item II and Item III of Part I of this
Form 10-Q describe forward-looking information. The risk factors are not all inclusive,
particularly with respect to possible future events, and should be read together with our other
filings under the Securities Act and the Exchange Act, including the risks and other risk factors
contained in our Form 8-K/A filed on March 11, 2005. Other parts of this Form 10-Q may also
describe forward-looking information. Many things can happen that can cause our actual results to
be very different than those described. These factors include, but are not limited to:  
    risks that our tenants will not pay rent;
    risks related to our reliance on a small number of dealer groups for a
significant portion of our revenue;
    risks of financing, such as increases in interest rates and our ability to
meet existing financial covenants, to maintain our investment-grade senior
unsecured debt ratings and to consummate planned and additional financings on
terms that are acceptable to us;
    risks that our growth will be limited if we cannot obtain additional capital
or refinance our maturing debt;
    risks that planned and additional real estate investments may not be
consummated;
    risks that competition for future real estate investments could result in
less favorable terms for the Company;
    risks relating to the automotive industry, such as the ability of our
tenants to compete effectively in the automotive retail industry or operate
profitably and the ability of our tenants to perform their lease obligations as
a result of changes in any manufacturers production, supply, vehicle
financing, incentives, warranty programs, marketing or other practices, or
changes in the economy generally;
    risks generally incident to the ownership of real property, including
adverse changes in economic conditions, changes in the investment climate for
real estate, changes in real estate taxes and other operating expenses, adverse
changes in governmental rules and fiscal policies and the relative illiquidity
of real estate;
    risks related to our financing of new construction and improvements;
    environmental and other risks associated with the acquisition and leasing of
automotive properties; and
    risks related to our status as a REIT for federal income tax purposes, such
as the existence of complex regulations relating to our status as a REIT, the
effect of future changes in REIT requirements as a result of new legislation
and the adverse consequences of the failure to qualify as a REIT. 40




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Given these uncertainties, readers are cautioned not to place undue reliance on these
forward-looking statements. We also make no promise to update any of the forward-looking
statements. You should carefully review the risks and the risk factors contained in our Form 8-K/A
filed on March 11, 2005, as well as the other information in this Quarterly Report on Form 10-Q
before investing in us. Item 3. Quantitative and Qualitative Disclosures About Market Risk. We are exposed to certain financial market risks, the most predominant being fluctuations in
interest rates. Interest rate fluctuations are monitored by our management as an integral part of
our overall risk management program, which recognizes the unpredictability of financial markets and
seeks to reduce the potentially adverse effect on our results of operations. In general, our
strategy of match-funding our long-term debt to our long-term leases reduces our exposure to
interest rate fluctuations by substantially locking in our investment spreads during the initial
term of the leases. As part of this strategy, we have used and may continue to use interest rate
swap arrangements to manage or hedge our interest rate risk. We do not enter into interest rate
swap arrangements for speculative purposes. During the three months ended March 31, 2005, our fixed rate debt increased from $687.9 million as
of December 31, 2004 to $857.1 million as of March 31, 2005. Interest rate fluctuations may affect
the fair value of our fixed rate debt instruments. If interest rates on our fixed rate debt
instruments at March 31, 2005 had been one percentage point higher or lower, the fair value of
those debt instruments on that date would have increased or decreased, respectively, by
approximately $55.5 million. As of March 31, 2005, approximately $404 million, or 18% of our total real estate portfolio, was
leased to tenants utilizing our variable rate lease program as further described under the
Liquidity and Capital Resources section herein, as compared to $436 million as of December 31,
2004. As of March 31, 2005, our total variable rate debt outstanding was $250.0 million, as
compared to $361.5 million as of December 31, 2004. If interest rates on our variable rate debt instruments outstanding at March 31, 2005 had been 1%
higher or lower, our annual interest expense relating to those debt instruments would have
increased or decreased, respectively, by approximately $2.5 million, based on balances at March 31,
2005. This impact on net income as a result of an increase or decrease in interest rates by 1% is
partially reduced by the structure of our variable rate leases as noted above. Because of the
minimum lease rates built into the majority of our leases, if the underlying index on our variable
rate lease agreements outstanding at March 31, 2005 had been 1% higher or lower, our annual rental
revenue relating to those lease agreements would have increased by approximately $2.4 million or
decreased by approximately $1.0 million respectively. Assuming the underlying index increased to a
level where none of our minimum lease rates were triggered, a 1% increase or decrease in the
underlying index would increase or decrease our rental revenue by approximately $3.4 million to
$4.3 million because of certain investment spread variations at various LIBOR levels. Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures.An evaluation was performed by our management,
including our President and Chief Executive Officer, our Senior Vice President, Chief Financial
Officer and Treasurer and our Vice President and Chief Accounting Officer, as to the effectiveness
of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e)
under the Securities and Exchange Act of 1934 as of March 31, 2005. Based on that evaluation, our
President and Chief Executive Officer and our Senior Vice President, Chief Financial Officer and
Treasurer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period
covered by this report. Changes in Internal Controls over Financial Reporting.There has been no change in our internal
control over financial reporting during the most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting. 41




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CAPITAL AUTOMOTIVE REIT
PART II-OTHER INFORMATION Item 1. Legal Proceedings. Not applicable. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information On January 19, 2005, the Executive Compensation Committee of our Board of Directors, which we refer
to as the Compensation Committee, approved (i) the 2004 bonuses for our executive officers, 80% of
which was paid in cash and 20% of which effectively was paid through the issuance of phantom shares
to the employee, (ii) long-term compensation for our executive officers for 2004 performance, (iii)
2005 salaries for our executive officers, (iv) the performance criteria for 2005 bonuses, and (v)
trustee compensation for 2005. Substantially all of this information is contained in our
definitive proxy statement for the 2005 annual meeting of
shareholders filed on April 1, 2005. The cash portion of the bonuses paid to our executive officers for 2004 performance were as
follows: Name
    
    BonusThomas D. Eckert
    
    $
    440,000David S. Kay
    
    $
    240,000John M. Weaver
    
    $
    200,000Jay M. Ferriero
    
    $
    260,000Lisa M. Clements
    
    $
    120,000
 42




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##### 



Pursuant to our Phantom Share Purchase Program, unless otherwise approved by the Compensation
Committee, 20% of the 2004 annual bonus otherwise payable to an executive officer must be deferred
under the program. The phantom shares are credited at a price equal to 80% of the fair market
value of our common shares on the date of grant. We pay dividend equivalents on the phantom
shares. The phantom shares awarded upon the deferral of the 2004 bonuses will be paid on the third
anniversary after the date of grant, subject to the executive officers right to defer payment. On
the payment date, the phantom shares will be paid to the executive officer in the form of common
shares or, if mutually agreed to between us and the executive officer, cash. The number of phantom
shares purchased upon deferral of 2004 bonuses for each executive officer were as follows: Name
    
    Phantom SharesThomas D. Eckert
    
    
    4,117David S. Kay
    
    
    2,246John M. Weaver
    
    
    1,872Jay M. Ferriero
    
    
    2,433Lisa M. Clements
    
    
    1,123
 In addition, the Compensation Committee awarded long-term incentive compensation grants of
restricted shares to the executive officers for 2004 performance. We pay dividends on the
restricted shares. The restricted stock will vest on January 19, 2010, subject to the executive
officers right to defer receipt. Restricted shares granted to our executive officers were as
follows: Name
    
    Restricted SharesThomas D. Eckert
    
    
    47,904David S. Kay
    
    
    20,958John M. Weaver
    
    
    17,964Jay M. Ferriero
    
    
    23,952Lisa M. Clements
    
    
    7,485
 The 2005 annual salaries for our executive officers are as follows: Name
    
    SalaryThomas D. Eckert
    
    $
    450,000David S. Kay
    
    $
    260,000John M. Weaver
    
    $
    230,000Jay M. Ferriero
    
    $
    260,000Lisa M. Clements
    
    $
    150,000
 43




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##### 



The Compensation Committee also set target bonuses for executive officers for 2005 performance and
established the performance criteria for determining such bonuses.
The 2005 target bonuses are as follows: Name
    
    Target BonusThomas D. Eckert
    
    $
    450,000David S. Kay
    
    $
    220,000John M. Weaver
    
    $
    200,000Jay M. Ferriero
    
    $
    220,000Lisa M. Clements
    
    $
    100,000
 Performance criteria include
criteria relating to the Companys performance, such as achievement of targeted 2005 funds from
operations per share and superior total shareholder return as compared to our peer group, as well
as subjective performance criteria separately established for each individual. The Compensation
Committee has discretion to award bonuses in amounts greater than or less than the targeted 2005
bonus amounts. In addition, the Compensation Committee generally
established a five percent limit on the increase in total 2005 compensation
for all executive officers in the aggregate as compared to their
total 2004 compensation. This maximum amount may not be paid unless the total return
to our shareholders exceeds the NAREIT Index for 2005 and we achieve the targeted funds from
operations per share established by the Compensation Committee. In addition, the Compensation Committee approved the trustee compensation for 2005. For 2005, each
trustee who is not an employee will receive a $35,000 annual fee for his services as a trustee.
Each non-employee trustee also will receive a $1,000 fee for each Board meeting attended and a $500
fee for each Board committee meeting attended. The Chairman of the Board of Trustees receives an
additional $10,000 annual fee, and the Chairman of the Audit Committee receives an additional
$5,000 annual fee, each for their services as chairman. In addition, the Compensation Committee
approved the grant of options to purchase 5,000 common shares to each non-employee trustee. The
exercise price for these grants was $33.40, which was the fair market value of the common shares on
the date of the grant. One-third of the options will vest on July 19, 2005, another one-third will
vest on January 19, 2006, and the remaining one-third will vest on January 19, 2007. The options
will be forfeited to the extent they are not exercisable when a trustee resigns or fails to be
re-elected as a trustee. Item 6. Exhibits.  31.1
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer (filed herewith)31.2
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer (filed herewith)32.1
    Section 1350 Certification of Chief Executive Officer (filed herewith)32.2
    Section 1350 Certification of Chief Financial Officer (filed herewith) 44




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##### 



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPITAL AUTOMOTIVE REIT (Registrant)BY:
    
    /s/ Thomas D. EckertThomas D. EckertPresident and Chief Executive Officer(principal executive officer)BY:
    
    /s/ David S. KayDavid S. KaySenior Vice President, Chief Financial Officer and Treasurer(principal financial officer)
 Dated: May 9, 2005 45




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##### 



EXHIBIT INDEX Exhibit No.
    

Description31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
(filed herewith)31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
(filed herewith)32.1
    
    Section 1350 Certification of Chief Executive Officer (filed herewith)32.2
    
    Section 1350 Certification of Chief Financial Officer (filed herewith)
 46