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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended JUNE 30, 2004or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from ___________ to ___________ Commission File Number 1-9997 CRT PROPERTIES, INC. FORMERLY
KNOWN AS KOGER EQUITY, INC.  FLORIDA
(State or other jurisdiction of
incorporation or organization)
    
    59-2898045
(I.R.S. Employer
Identification No.)225 NE MIZNER BOULEVARD, SUITE 200
BOCA RATON, FLORIDA
(Address of principal executive offices)
    
    33432
(Zip Code)
 Registrants telephone
number, including area code: (561) 395-9666 Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes   x   No   
o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes   x   No   
o Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. Class
Common Stock, $.01 par value
    
    Outstanding at July 30, 2004
26,854,397 shares




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CRT PROPERTIES, INC. AND
SUBSIDIARIES INDEX PAGE NO.PART I. FINANCIAL INFORMATIONReport of Independent Registered Public Accounting Firm
    
    
    3Item 1. Financial Statements (Unaudited):Condensed Consolidated Balance Sheets
June 30, 2004 and December 31, 2003
    
    
    4Condensed Consolidated Statements of Operations
for the Three and Six Months Ended
June 30, 2004 and 2003
    
    
    5Condensed Consolidated Statement of Changes in
Shareholders Equity for the Six Months
Ended June 30, 2004
    
    
    6Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2004 and 2003
    
    
    7Notes to Condensed Consolidated Financial
Statements for the Three and Six Months
Ended June 30, 2004 and 2003
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    22PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23Item 5. Other Information
    
    
    24Item 6. Exhibits and Reports on Form 8-K
    
    
    27Signatures and Exhibits
    
    
    29
 2




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of
CRT Properties, Inc.
Boca Raton, Florida: We have reviewed the accompanying condensed consolidated balance sheet of CRT
Properties, Inc. and subsidiaries (the Company), formerly Koger Equity, Inc.
and subsidiaries as of June 30, 2004, and the related condensed consolidated
statements of operations for the three-month and six-month periods ended June
30, 2004 and 2003, of changes in shareholders equity for the six-month period
ended June 30, 2004 and of cash flows for the six-month periods ended June 30,
2004 and 2003. These interim financial statements are the responsibility of the
Companys management. We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America. We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
the Company as of December 31, 2003, and the related consolidated statements of
operations, changes in shareholders equity, and cash flows for the year then
ended (not presented herein); and in our report dated March 5, 2004, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2003 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived. DELOITTE & TOUCHE LLP
West Palm Beach, Florida
August 2, 2004 3




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements (Unaudited): CRT PROPERTIES, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(In thousands, except share data)
 June 30,
    
    December 31,2004
    
    2003ASSETSReal Estate Investments:Operating properties:Land
    
    $
    146,035
    
    
    $
    119,973Buildings
    
    
    982,880
    
    
    
    838,430Furniture and equipment
    
    
    3,713
    
    
    
    3,599Accumulated depreciation
    
    
    (196,893
    )
    
    
    (179,569
    )Operating properties, net
    
    
    935,735
    
    
    
    782,433Undeveloped land held for investment
    
    
    14,133
    
    
    
    10,975Undeveloped land held for sale
    
    
    3,039
    
    
    
    3,041Cash and cash equivalents
    
    
    5,981
    
    
    
    9,163Restricted cash
    
    
    11,923
    
    
    
    11,114Accounts receivable, net of allowance for
uncollectible accounts of $1,093 and $939
    
    
    17,742
    
    
    
    16,236Investment in unconsolidated affiliate
    
    
    3,389
    
    
    
    Other assets
    
    
    21,457
    
    
    
    15,239TOTAL ASSETS
    
    $
    1,013,399
    
    
    $
    848,201LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Mortgages and loans payable
    
    $
    472,866
    
    
    $
    408,716Accounts payable
    
    
    5,732
    
    
    
    4,299Accrued real estate taxes payable
    
    
    9,721
    
    
    
    1,853Accrued liabilities  other
    
    
    10,085
    
    
    
    11,016Dividends payable
    
    
    9,694
    
    
    
    7,824Advance rents and security deposits
    
    
    7,218
    
    
    
    6,846Total Liabilities
    
    
    515,316
    
    
    
    440,554Minority interest
    
    
    4,672
    
    
    
    4,672Shareholders Equity:Preferred stock, $.01 par value; 50,000,000 shares
authorized; liquidation preference of $25 per share;
2,990,000 shares issued and outstanding
    
    
    30
    
    
    
    30Common stock, $.01 par value; 100,000,000 shares
authorized; 35,349,691 and 30,011,225 shares
issued; 26,841,197 and 21,495,956 shares outstanding
    
    
    354
    
    
    
    300Capital in excess of par value
    
    
    649,838
    
    
    
    546,968Notes receivable from stock sales to related parties
    
    
    (5,092
    )
    
    
    (5,092
    )Accumulated other comprehensive loss
    
    
    (241
    )
    
    
    (241
    )Dividends in excess of net income
    
    
    (19,949
    )
    
    
    (7,405
    )Treasury stock, at cost; 8,508,494 and 8,515,269 shares
    
    
    (131,529
    )
    
    
    (131,585
    )Total Shareholders Equity
    
    
    493,411
    
    
    
    402,975TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,013,399
    
    
    $
    848,201
 See notes to unaudited condensed consolidated financial statements. 4




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CRT PROPERTIES, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
(In thousands, except per share data)
 Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003REVENUESRental and other rental services
    
    $
    40,931
    
    
    $
    35,964
    
    
    $
    80,399
    
    
    $
    72,244Management fees
    
    
    108
    
    
    
    126
    
    
    
    174
    
    
    
    331Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Total operating revenues
    
    
    41,039
    
    
    
    36,090
    
    
    
    80,573
    
    
    
    72,580EXPENSESProperty operations
    
    
    16,036
    
    
    
    14,694
    
    
    
    31,572
    
    
    
    28,042Depreciation and amortization
    
    
    9,916
    
    
    
    8,156
    
    
    
    19,136
    
    
    
    16,612General and administrative
    
    
    3,167
    
    
    
    3,086
    
    
    
    6,011
    
    
    
    6,030Direct costs of management fees
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    88Other
    
    
    58
    
    
    
    31
    
    
    
    110
    
    
    
    67Total operating expenses
    
    
    29,177
    
    
    
    25,969
    
    
    
    56,829
    
    
    
    50,839OPERATING INCOME
    
    
    11,862
    
    
    
    10,121
    
    
    
    23,744
    
    
    
    21,741OTHER INCOME AND (EXPENSE)Equity in earnings of unconsolidated affiliate
    
    
    110
    
    
    
    
    
    
    
    241
    
    
    
    Interest income
    
    
    135
    
    
    
    86
    
    
    
    262
    
    
    
    140Mortgage and loan interest, including amortization
of deferred loan costs of $378 and $368 for the three
months and $752 and $725 for the six months
    
    
    (7,520
    )
    
    
    (7,367
    )
    
    
    (14,826
    )
    
    
    (14,770
    )Total other income and (expense)
    
    
    (7,275
    )
    
    
    (7,281
    )
    
    
    (14,323
    )
    
    
    (14,630
    )INCOME BEFORE GAIN ON SALE OR DISPOSITION OF
ASSETS AND INCOME TAXES
    
    
    4,587
    
    
    
    2,840
    
    
    
    9,421
    
    
    
    7,111Gain on sale or disposition of assets
    
    
    
    
    
    
    589
    
    
    
    
    
    
    
    589INCOME BEFORE INCOME TAXES
    
    
    4,587
    
    
    
    3,429
    
    
    
    9,421
    
    
    
    7,700Income tax expense (benefit)
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    (21
    )NET INCOME
    
    
    4,587
    
    
    
    3,450
    
    
    
    9,421
    
    
    
    7,721Dividends on preferred stock
    
    
    (1,588
    )
    
    
    
    
    
    
    (3,176
    )
    
    
    NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    2,999
    
    
    $
    3,450
    
    
    $
    6,245
    
    
    $
    7,721EARNINGS PER SHARE:Basic
    
    $
    0.11
    
    
    $
    0.16
    
    
    $
    0.24
    
    
    $
    0.36Diluted
    
    $
    0.11
    
    
    $
    0.16
    
    
    $
    0.23
    
    
    $
    0.36WEIGHTED AVERAGE SHARES:Basic
    
    
    26,840
    
    
    
    21,311
    
    
    
    26,455
    
    
    
    21,305Diluted
    
    
    27,230
    
    
    
    21,382
    
    
    
    26,882
    
    
    
    21,335
 See notes to unaudited condensed consolidated financial statements. 5




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CRT PROPERTIES, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
 SHAREHOLDERS EQUITY
(Unaudited)
(In thousands)
 Preferred Stock
    
    Common Stock
    
    Capital
    
    Notes
    
    Accumulated
    
    RetainedEarnings(Dividends
    
    
    
    
    
    Totalin Excess
    
    Receivable
    
    Other
    
    In Excess
    
    
    
    
    
    Share-Shares
    
    Par
    
    Shares
    
    Par
    
    of Par
    
    from Stock
    
    Comprehensive
    
    of Net
    
    Treasury
    
    holdersIssued
    
    Value
    
    Issued
    
    Value
    
    Value
    
    Sales
    
    Loss
    
    Income)
    
    Stock
    
    EquityBALANCE AT
DECEMBER 31, 2003
    
    
    2,990
    
    
    $
    30
    
    
    
    30,011
    
    
    $
    300
    
    
    $
    546,968
    
    
    $
    (5,092
    )
    
    $
    (241
    )
    
    $
    (7,405
    )
    
    $
    (131,585
    )
    
    $
    402,975Common stock sold
    
    
    
    
    
    
    
    
    
    
    5,175
    
    
    
    52
    
    
    
    100,229
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    100,337Options exercised
    
    
    
    
    
    
    
    
    
    
    163
    
    
    
    2
    
    
    
    2,641
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,643Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,965
    )
    
    
    
    
    
    
    (21,965
    )Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,421
    
    
    
    
    
    
    
    9,421BALANCE AT
JUNE 30, 2004
    
    
    2,990
    
    
    $
    30
    
    
    
    35,349
    
    
    $
    354
    
    
    $
    649,838
    
    
    $
    (5,092
    )
    
    $
    (241
    )
    
    $
    (19,949
    )
    
    $
    (131,529
    )
    
    $
    493,411
 See notes to unaudited condensed consolidated financial statements. 6




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CRT PROPERTIES, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
(In thousands)
 Six MonthsEnded June 30,2004
    
    2003OPERATING ACTIVITIESNet income
    
    $
    9,421
    
    
    $
    7,721Adjustments to reconcile net income to net cash
provided by operating activities:Equity in earnings of unconsolidated affiliate
    
    
    (241
    )
    
    
    Depreciation and amortization
    
    
    19,136
    
    
    
    16,612Amortization of deferred loan costs
    
    
    752
    
    
    
    725Provision for uncollectible accounts
    
    
    277
    
    
    
    328Gain on sale or disposition of assets
    
    
    
    
    
    
    (589
    )Changes in assets and liabilities:Increase in receivables and other assets
    
    
    (7,701
    )
    
    
    (536
    )Increase in accounts payable, accrued liabilities
and other liabilities
    
    
    8,742
    
    
    
    3,902Net cash provided by operating activities
    
    
    30,386
    
    
    
    28,163INVESTING ACTIVITIESProperty acquisitions
    
    
    (83,944
    )
    
    
    Tenant improvements to first generation space
    
    
    (4,297
    )
    
    
    (2,627
    )Tenant improvements to second generation space
    
    
    (2,106
    )
    
    
    (2,644
    )Building improvements
    
    
    (7,940
    )
    
    
    (2,246
    )Deferred tenant costs
    
    
    (2,371
    )
    
    
    (1,101
    )Additions to furniture and equipment
    
    
    (114
    )
    
    
    (168
    )Increase in restricted cash
    
    
    (809
    )
    
    
    (873
    )Proceeds from sale of assets
    
    
    
    
    
    
    1,580Investment in unconsolidated affiliate
    
    
    (3,148
    )
    
    
    Net cash used in investing activities
    
    
    (104,729
    )
    
    
    (8,079
    )FINANCING ACTIVITIESProceeds from exercise of stock options
    
    
    2,643
    
    
    
    134Proceeds from sales of common stock
    
    
    100,337
    
    
    
    144Proceeds from mortgages and loans
    
    
    6,000
    
    
    
    31,000Principal payments on mortgages and loans payable
    
    
    (17,724
    )
    
    
    (36,327
    )Dividends paid
    
    
    (20,095
    )
    
    
    (14,921
    )Net cash provided by (used in) financing activities
    
    
    71,161
    
    
    
    (19,970
    )Net (decrease) increase in cash and cash equivalents
    
    
    (3,182
    )
    
    
    114Cash and cash equivalents  beginning of period
    
    
    9,163
    
    
    
    4,627Cash and cash equivalents  end of period
    
    $
    5,981
    
    
    $
    4,741SUPPLEMENTAL CASH FLOW INFORMATIONCash paid during the period for income taxes
    
    $
    5
    
    
    $
    Cash paid during the period for interest
    
    $
    13,966
    
    
    $
    13,910Non cash item-assumption of debt from real estate acquisitions
    
    $
    75,874
    
    
    $
    Non cash item-issuance of limited partner units for real estate acquisitions
    
    $
    2,041
    
    
    $
    
 See notes to unaudited condensed consolidated financial statements. 7




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CRT PROPERTIES, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND SIX MONTHS
ENDED JUNE 30, 2004 AND 2003
(Unaudited)
 1. ORGANIZATION.CRT Properties, Inc. (CRT or the Company), a
Florida corporation formerly known as Koger Equity, Inc., was incorporated in
1988 to own and manage commercial office buildings and other income-producing
properties. CRT is a self-administered and self-managed real estate
investment trust (a REIT) and its common stock and preferred stock are
listed on the New York Stock Exchange under the ticker symbol CRO and
CROPRA, respectively. As of June 30, 2004, CRT owned or had interests in
132 office buildings containing 10.4 million rentable square feet, primarily
located within 20 suburban office projects and two urban centers in 12
metropolitan areas in the Southeastern United States, Maryland and Texas. In addition to managing its own properties, the Company formerly provided
asset management services to Crocker Realty Trust, a related party. The
Company and Crocker Realty Trust terminated the asset management agreement on
May 1, 2003. 2. BASIS OF PRESENTATION. The condensed consolidated financial
statements have been prepared by CRT. All material intercompany transactions
and accounts have been eliminated in consolidation. The financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission related to interim financial statements. The accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for
the year ended December 31, 2003, included in the Companys Form 10-K Annual
Report for the year ended December 31, 2003. The accompanying balance sheet at
December 31, 2003 has been derived from the audited financial statements at
that date and is condensed. All adjustments which, in the opinion of management, are necessary to fairly
present the results for the interim periods have been made. Certain prior
year amounts have been reclassified in order to conform to the current year
presentation. Results of operations for the three and six months ended June
30, 2004 are not necessarily indicative of the results to be expected for
future periods or for the full year. New Accounting Standards. In July 2002, the Financial Accounting
Standards Board (FASB) issued Statement on Financial Accounting Standards
(SFAS) No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. This Statement applies to costs associated with an exit activity
that does not involve an entity newly acquired in a business combination, an
asset retirement obligation covered by SFAS No. 143 or with a disposal
activity covered by SFAS No. 144. SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity shall be recognized and
measured initially at its fair value in the period in which the liability is
incurred provided that such fair value can be reasonably estimated. An
exception applies for certain one-time termination benefits that are incurred
over time. The Company adopted SFAS No. 146 effective January 1, 2003. The
Companys adoption of SFAS No. 146 has not had a material impact on its
condensed consolidated financial statements. In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees of
Indebtedness of Others. FIN No. 45 requires certain guarantees to be
recorded at fair value and also requires significant new disclosures related
to guarantees, even when the likelihood of making any payments under the
guarantee is remote. FIN No. 45 generally applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying variable
that is related to an asset, liability, or an equity security of the
guaranteed party. FIN No. 45 is effective for guarantees issued or modified
after December 31, 2002. The Company adopted FIN No. 45 effective January 1,
2003. The Companys adoption of FIN No. 45 has not had a material impact on
its condensed consolidated financial statements. 8




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In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure provisions of
SFAS No. 123 to require prominent disclosure about the effects of an entitys
accounting policy with respect to stock-based employee compensation on
reported net income and earnings per share in annual and interim financial
statements. SFAS No. 148 does not amend SFAS No. 123 to require companies to
account for their employee stock-based awards using the fair value method.
However, the disclosure provisions are required for all companies with
stock-based employee compensation, regardless of whether they utilize the fair
value method of accounting described in SFAS No. 123 or the intrinsic value
method described in APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS No. 148s transition provisions are effective for fiscal
years ending after December 15, 2002. The Company adopted the interim
disclosure provisions of SFAS No. 148 effective January 1, 2003. The
Companys adoption of SFAS No. 148 has not had a material impact on its
condensed consolidated financial statements. In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, which is intended to clarify the application of ARB No.
51, Consolidated Financial Statements to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support. FIN No. 46
requires the consolidation of variable interest entities (VIEs) in which the
variable interest will absorb a majority of the entitys expected losses if
they occur, receive a majority of the entitys expected residual returns if
they occur, or both. FIN No. 46 is effective for VIEs created after January
31, 2003. It applies in the first fiscal year or interim period beginning
after December 15, 2003 to variable interest entities in which an enterprise
that is a public company holds a variable interest that it acquired before
February 1, 2003. The Companys adoption of FIN No. 46 has not had a material
impact on its condensed consolidated financial statements since the Company
did not have any VIEs as of June 30, 2004. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133. This statement was effective for contracts entered into or modified
after June 30, 2003. The Companys adoption of SFAS No. 149 has not had a
material impact on its consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
statement establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 is effective for
all financial instruments created or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003 (July 1, 2003 for calendar quarter companies). The
Company adopted SFAS No. 150 effective July 1, 2003. The Companys adoption
of SFAS No. 150 has not had a material impact on its condensed consolidated
financial statements. 3. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES.The preparation of
condensed consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
Company to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, and expenses and the disclosure of contingent
assets and liabilities. These estimates are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances. However, actual results could differ from the Companys
estimates under different assumptions or conditions. On an ongoing basis, the
Company evaluates the reasonableness of its estimates. The Company believes the following significant accounting policies affect the
significant estimates and assumptions used in the preparation of its condensed
consolidated financial statements: 9




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Investments in Real Estate. Rental property and improvements, including
interest and other costs capitalized during construction, are included in real
estate investments and are stated at cost. Expenditures for ordinary
maintenance and repairs are expensed to operations as they are incurred.
Significant renovations and improvements, which improve or extend the useful
life of the assets, are capitalized. Except for amounts attributed to land,
rental property and improvements are depreciated as described below. The Company recognizes gains on the sale of property in accordance with SFAS
No. 66. Revenues from sales of property are recognized when a significant down
payment is received, the earnings process is complete and the collection of any
remaining receivables is reasonably assured. Depreciation and Amortization. The Company computes depreciation on its
operating properties using the straight-line method based on estimated useful
lives of three to 40 years. A significant portion of the acquisition cost of
each operating property is allocated to the acquired buildings (usually 85% to
90%). The allocation of the acquisition cost to buildings and the determination
of the useful lives are based on the Companys estimates. If the Company were
to allocate acquisition costs inappropriately to buildings or to incorrectly
estimate the useful lives of its operating properties, it may be required to
adjust future depreciation expense. Deferred tenant costs (leasing commissions
and tenant relocation costs) are amortized over the term of the related leases. Impairment of Long-Lived Assets. The Companys long-lived assets include
investments in real estate. The Company assesses impairment of long-lived
assets whenever changes or events indicate that the carrying value may not be
recoverable. The Company assesses impairment of operating properties based on
the operating cash flows of the properties. In performing its assessment, the
Company must make assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. During the
quarter and six months ended June 30, 2004, no impairment charges were
recorded. If these estimates or their related assumptions change in the
future, the Company may be required to record impairment charges. Revenue Recognition.Rental income is generally recognized over the lives
of leases according to provisions of the underlying lease agreements. Certain
leases provide for tenant occupancy during periods for which no rent is due or
where minimum rent payments increase during the term of the lease. For these
leases, the Company records rental income for the full term of each lease on a
straight-line basis. For the quarters ended June 30, 2004 and 2003, the
recognition of rental revenues on a straight-line basis for applicable leases
increased rental revenues by $1,407,000 and $1,075,000, respectively, over the
amount which would have been recognized based upon the contractual provisions
of these leases. For the six months ended June 30, 2004 and 2003, the
recognition of rental revenues on a straight-line basis for applicable leases
increased rental revenues by $2,656,000 and $2,370,000, respectively, over the
amount which would have been recognized based upon the contractual provisions
of these leases. The Company historically generated management fees and leasing commissions by
providing on-site property management and leasing services to a limited number
of third party owners. Management fees were generally earned monthly and were
based on a percentage of the managed properties monthly rental and other
operating revenues. Leasing commissions were earned when the Company, on
behalf of the third party owner, negotiated or assisted in the negotiation of
new leases, renewals and expansions of existing leases, and were generally
based on a percentage of rents to be received under the initial term of the
respective leases. Allowances for Doubtful Accounts. The Company maintains allowances for
doubtful accounts for estimated losses due to the inability of its tenants to
make required payments for rents and other rental services. In assessing the
recoverability of these receivables, the Company makes assumptions regarding
the financial condition of the tenants based primarily on past payment trends
and certain financial information that tenants submit to the Company. If the
financial condition of the Companys tenants were to deteriorate and result in
an impairment of their ability to make payments, the Company may be required to
increase its allowances by recording additional bad debt expense. Likewise,
should the financial condition of its tenants improve and result in payments or
settlements of previously reserved amounts, the Company may be required to
record a reduction in bad debt expense. 10




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Federal Income Taxes. The Company is qualified and has elected tax
treatment as a real estate investment trust under the Internal Revenue Code (a
REIT). A corporate REIT is a legal entity that owns income-producing real
property, and through distributions of income to its shareholders, is permitted
to reduce or avoid the payment of federal income taxes at the corporate level.
To maintain qualification as a REIT, the Company must, among other
requirements, distribute to shareholders at least 90 percent of REIT taxable
income. To the extent that the Company pays dividends equal to 100 percent of
REIT taxable income, the earnings of the Company are taxed at the shareholder
level. However, the use of net operating loss carryforwards, which may reduce
REIT taxable income to zero, are limited for alternative minimum tax purposes.
Distributed capital gains on sales of real estate are not subject to tax;
however, undistributed capital gains are taxed as capital gain. If the Company
fails to qualify as a REIT in any taxable year, it will be subject to federal
income taxes and will not be able to qualify as a REIT for four subsequent
taxable years. Although Koger Realty Services, Inc. (KRSI), a taxable REIT
subsidiary, is consolidated with the Company for financial reporting purposes,
this entity is subject to federal income tax and files separate federal and
state income tax returns. Stock Options. Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply Accounting Principles Board Opinion No. 25 (APB 25), which recognizes
compensation cost based on the intrinsic value of the equity instrument
awarded. As a result, there were no stock options charged to income during the
three and six months ended June 30, 2004 and 2003. The Company has continued
to apply APB 25 to its stock based compensation awards to employees and has
disclosed the required pro forma effect on net income and earnings per share as
follows: Three MonthsEnded June 30,2004
    
    2003Net income available to common shareholders  As reported
    
    $
    2,999,000
    
    
    $
    3,450,000 Pro forma
    
    
    3,061,000
    
    
    
    3,236,000Diluted earnings per share  As reported
    
    $
    0.11
    
    
    $
    0.16 Pro forma
    
    
    0.11
    
    
    
    0.15
 Six MonthsEnded June 30,2004
    
    2003Net income available to common shareholders  As reported
    
    $
    6,245,000
    
    
    $
    7,721,000 Pro forma
    
    $
    6,339,000
    
    
    $
    7,294,000Diluted earnings per share  As reported
    
    $
    0.23
    
    
    $
    0.36 Pro forma
    
    $
    0.24
    
    
    $
    0.34
 Investment in Unconsolidated Affiliate. The Company accounts for an
investment in an unconsolidated affiliate using the equity method of
accounting, as it does not have a controlling interest over the operating and
financial policies of the joint venture. As a result, the assets and
liabilities of the joint venture are not included in the Companys balance
sheet. This investment was recorded initially at cost and subsequently
adjusted for equity in earnings and cash contributions and distributions. Fair Value of Financial Instruments. The Company believes the carrying
amount of its financial instruments (temporary investments, accounts
receivable, and accounts payable) is a reasonable estimate of fair value of
these instruments. Based on a market interest rate of 7.0 percent, the fair
value of the Companys mortgages and loans payable would be approximately
$475.8 million at June 30, 2004. 11




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Fair Value of In-Place Leases. SFAS No. 142 Goodwill and Other
Intangible Assets, requires the separate recognition of intangible assets
acquired as part of an asset acquisition, including the value attributable to
leases in place and certain customer relationships. The Company recorded
$274,000, $1,500,000, $272,000, $228,000, and $329,000 of the estimated value
of leases in place as part of its acquisitions of Three Ravinia, The Lakes on
Post Oak, Tollway Crossing, CIGNA Plaza, and McGinnis Park, respectively. The
Company intends to amortize these intangible assets on a straight-line basis
over the remaining term of the existing leases (usually averages 4 to 5
years). The Company is currently evaluating any other intangible assets that
may have arisen resulting from its recent acquisitions of Atlantic Center Plaza
in Atlanta, Georgia, and two Class A office buildings in the Decoverly Office
Park in Rockville, Maryland. Cash and Cash Equivalents. Cash in excess of daily requirements is
invested in short-term monetary securities. Such temporary cash investments
have an original maturity of less than three months and are deemed to be cash
equivalents for purposes of the condensed consolidated financial statements. Restricted Cash. Restricted cash represents amounts contractually placed
in escrow for purposes of making payments for certain future building
improvements, tenant allowances, leasing commissions, real estate taxes, and
debt service. 4. STATEMENTS OF CASH FLOWS. On January 13, 2004, the Company issued
5,175,000 shares of its common stock (including 675,000 shares issued in
connection with the exercise of an over-allotment option granted to the
Companys underwriter) at a price to the public of $20.45 per share. The net
proceeds of the offering ($100.2 million) were used to pay down the Companys
revolving credit facility ($15 million), fund the Decoverly acquisition ($42.2
million) as well as a portion of the Atlantic Center Plaza acquisition ($40.5
million) and for general corporate purposes. On January 27, 2004, the Company acquired Atlantic Center Plaza, a 502,000
twenty-three story square foot building located in Atlanta, Georgia, for a
purchase price of $116.5 million plus closing and other costs. Under the terms
of the acquisition agreement, the Company assumed a 3-year variable interest
rate secured loan of approximately $75.9 million with an interest rate of LIBOR
(1.11% at June 30, 2004) plus 160 basis points. Simultaneously, at closing,
the Company assumed a second 3-year variable interest rate secured loan of
$10.0 million with an interest rate of LIBOR plus 600 basis points and
immediately prepaid the loan in full. The Company funded the remainder of the
purchase price with a portion of the net proceeds ($40.5 million) from its
January 2004 common stock offering. On April 2, 2004, the Company acquired four properties, including two Class A
office buildings, a ground lease and an undeveloped parcel of land located in
the Decoverly Office Park in Rockville, Maryland for a purchase price of $42.0
million plus closing and other costs. The two three-story office buildings
aggregate approximately 155,000 square feet of rentable space. The undeveloped
land parcel contains 3.2 acres with an approved site plan for a four-story
105,000 square foot office building. The funds required for this acquisition
were provided by the proceeds from the Companys January 2004 common stock
offering. 5. EARNINGS PER SHARE. Basic earnings per common share has been computed
based on the weighted average number of shares of common stock outstanding for
each period. Diluted earnings per common share is similar to basic earnings
per share except that the weighted average number of common shares outstanding
is increased to include the number of additional common shares that would have
been outstanding if the dilutive common shares underlying the options had been
issued. The treasury stock method is used to calculate dilutive shares which
reduces the gross number of dilutive shares by the number of shares
purchasable from the proceeds of the options assumed to be exercised. 12




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##### Table of Contents



For the three and six months ended June 30, 2004 and 2003, earnings per common
share is calculated as follows (in thousands except per share data): Three MonthsEnded June 30,2004
    
    2003EARNINGS PER COMMON AND DILUTIVE
POTENTIAL COMMON SHARE:Net Income available to common shareholders
    
    $
    2,999
    
    
    $
    3,450Shares:Weighted average number of common
shares outstanding  Basic
    
    
    26,840
    
    
    
    21,311EARNINGS PER SHARE  BASIC
    
    $
    0.11
    
    
    $
    0.16Shares:Weighted average number of common
shares outstanding  Basic
    
    
    26,840
    
    
    
    21,311Effect of dilutive securities (a):Stock options
    
    
    390
    
    
    
    71Adjusted weighted average common shares  Diluted
    
    
    27,230
    
    
    
    21,382EARNINGS PER SHARE  DILUTED
    
    $
    0.11
    
    
    $
    0.16
 Six MonthsEnded June 30,2004
    
    2003EARNINGS PER COMMON AND DILUTIVE
POTENTIAL COMMON SHARE:Net Income available to common shareholders
    
    $
    6,245
    
    
    $
    7,721Shares:Weighted average number of common
shares outstanding  Basic
    
    
    26,455
    
    
    
    21,305EARNINGS PER SHARE  BASIC
    
    $
    0.24
    
    
    $
    0.36Shares:Weighted average number of common
shares outstanding  Basic
    
    
    26,455
    
    
    
    21,305Effect of dilutive securities (a):Stock options
    
    
    427
    
    
    
    30Adjusted weighted average common shares  Diluted
    
    
    26,882
    
    
    
    21,335EARNINGS PER SHARE  DILUTED
    
    $
    0.23
    
    
    $
    0.36
 (a) Shares issuable were derived using the Treasury Stock Method for all
dilutive potential shares. The Company excluded approximately 405,000 and
125,000 antidilutive stock options from the above calculation for the three and
six months ended June 30, 2004, respectively. 13




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6. MORTGAGES AND LOANS PAYABLE. At June 30, 2004, the Company had
$472,866,000 of loans outstanding, which are collateralized by mortgages on
the Companys operating properties. Annual maturities for mortgages and loans
payable are summarized as follows (in thousands): Year Ending December 31,2004
    
    $
    85,9092005
    
    
    6,1122006
    
    
    23,7062007
    
    
    98,0982008
    
    
    89,606Subsequent Years
    
    
    169,435Total
    
    $
    472,866
 7. DIVIDENDS. The Company paid quarterly dividends on its common
stock of $0.35 per share on February 5, 2004, to shareholders of record on
December 31, 2003. The Company paid quarterly dividends of $0.35 per share on
May 6, 2004 to shareholders of record on March 31, 2004. During the quarter
ended June 30, 2004, the Companys Board of Directors declared a quarterly
dividend on its common stock of $0.35 per share payable on August 5, 2004, to
shareholders of record on June 30, 2004. On February 17, 2004, the Companys Board of Directors declared a dividend on
its preferred stock of $0.53125 per share paid on March 15, 2004, to
shareholders of record on March 1, 2004. This preferred dividend covered the
period December 15, 2003 through March 14, 2004. On May 26, 2004, the
Companys Board of Directors declared a dividend on its preferred stock of
$0.53125 per share paid on June 15, 2004, to shareholders of record on June 1,
2004. This preferred dividend covered the period March 15, 2004 through June
14, 2004. 8. SEGMENT REPORTING. The Company operates in one business segment, the
ownership and management of commercial real estate. The Companys primary
business is the ownership, development, and operation of income-producing
office properties. Management operates each property as an individual
operating segment and has aggregated these operating segments into a single
segment for financial reporting purposes due to the fact that all of the
individual operating segments have similar economic characteristics. As of
June 30, 2004, all of the Companys operations were located in the
Southeastern United States, Maryland and Texas. 9. NOTES RECEIVABLE FROM STOCK SALES. On February 17, 2000, and in
conjunction with the Companys plan (the Repurchase Plan) to repurchase up to
2.65 million shares of common stock (the Shares), the Company entered into an
agreement to, from time to time, loan to Mr. Thomas J. Crocker, Chief Executive
Officer, and Mr. Robert E. Onisko, former Chief Financial Officer
(collectively, the Officers), certain amounts in connection with their
purchase of up to 500,000 shares and 150,000 shares, respectively, of the
Companys common stock (collectively the Loan Stock). For Loan Stock
purchases consummated pursuant to the Companys 1998 Equity and Cash Incentive
Plan, the Company has agreed to advance up to 100% of the purchase price of the
shares. For Loan Stock purchases consummated in the open market or pursuant to
the Repurchase Plan, the Company has agreed to advance up to 50% of the
purchase price of the shares. Each Officers loans are collateralized by any
Loan Stock purchased by such Officer. Aside from an Officers equity interest
in Loan Shares, the Company has limited or no personal recourse against an
Officer for the principal amount of any loan. The Officers are personally
obligated to make any and all interest payments. Each loan bears interest at
150 basis points over the applicable LIBOR rate, which interest is payable
quarterly. The outstanding principal amount of each loan and all accrued but
unpaid interest is due on the earlier of (i) February 17, 2010 or (ii) the
second anniversary of the Officers termination by the Company for cause.
During the three and six months ended June 30, 2004, Thomas J. Crocker made
interest payments of $24,536 and $49,356 and Robert E. Onisko made interest
payments of $8,342 and $16,782, respectively. As of June 30, 2004, Mr. Crocker
had purchased 320,370 shares of Loan Stock and the aggregate outstanding
principal balance of his loans was approximately $3,800,000 all of which had
been repaid as of 14




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##### Table of Contents



July 26, 2004 (see note 11). As of June 30, 2004, Mr. Onisko has purchased
102,490 shares of Loan Stock and the aggregate outstanding principal balance of
his loans was approximately $1,292,000. The Company has no discretion or
termination right under these agreements since the Companys loans to Mr.
Crocker and Mr. Onisko were made under the terms of a contract which precedes
the Sarbanes-Oxley Act. 10. COMMON STOCK. On January 13, 2004, the Company issued 5,175,000
shares of its common stock (including 675,000 shares issued in connection with
the exercise of an over-allotment option granted to the Companys underwriter)
at a price to the public of $20.45 per share. The net proceeds of the
offering were used to pay down the Companys revolving credit facility ($15
million), fund the Decoverly acquisition ($42.2 million) as well as a portion
of the Atlantic Center Plaza acquisition ($40.5 million) and for general
corporate purposes. 11. SUBSEQUENT EVENTS. On July 2, 2004, the Company repaid an outstanding
loan balance of $1,440,000 to GE Capital. No penalty was incurred for this
prepayment. This loan was collateralized by two buildings located at the
Companys Charlotte Vanguard property. As described in Note 9, the Company had loans outstanding to Thomas J. Crocker,
Chief Executive Officer, of approximately $3.8 million as of June 30, 2004.
For some time, the Companys Board of Directors has considered the possibility
of eliminating any further commitment to loan funds to Mr. Crocker and to have
Mr. Crockers loans repaid in full, in the belief that eliminating this
arrangement would be in the Companys best interest. Based on a proposal
initially submitted by Mr. Crocker and approved by a special committee
comprised of the Companys independent directors as well as the Companys
entire board of directors, on July 16, 2004, the Company and Mr. Crocker
entered into a definitive agreement whereby: (1) Mr. Crocker agreed to repay
the outstanding loans and terminate his rights to future loans upon the
acquisition of the Baymeadows property; (2) the Company agreed to make a one
time payment of $540,000 to Mr. Crocker as additional compensation to defray a
portion of the costs and expenses incurred by Mr. Crocker in connection with
his negotiation of the agreement with the Company; and (3) the Company and Mr.
Crocker agreed to co-invest in a joint venture to acquire the Baymeadows and
Westchase properties (the Properties) described below. The joint venture
arrangement between the Company and Mr. Crocker was created in part to effect
for the benefit of Mr. Crocker a tax-deferred, like-kind exchange of a hotel in
Boca Raton, Florida for the Properties. This arrangement requires the Company
to protect Mr. Crockers ability to defer recognition of taxable gains through
certain restrictions on the Companys ability to sell or finance the
Properties. Mr. Crocker owns approximately 10% of the joint venture in the
form of a DownREIT limited partnership interest. The one time payment of
$540,000 was made to Mr. Crocker on July 30, 2004. Mr. Crocker repaid his
outstanding loans in full on July 26, 2004. The arrangements above are
described in detail in a Form 8-K filed by the Company on July 30, 2004. On July 16, 2004, the Company entered into a purchase and sale agreement with
unaffiliated sellers and paid a $1.0 million non-refundable deposit to acquire
a second property, the Westchase Corporate Center located in Houston, Texas; a
six-story, 184,000 square foot, class A office building for a purchase price
of $19.6 million (plus closing and other costs) in cash, plus the issuance of a
$700,000 interest to a minority partner in a joint venture between the Company
and such minority partner. The acquisition of the Westchase property is
expected to be financed in part with secured mortgage indebtedness totaling
approximately $15.2 million. On July 23, 2004 the Company acquired a five-story, 224,000 square foot,
single-tenant, class A office building located at 7777 Baymeadows in
Jacksonville, Florida, for a purchase price of $20.8 million (plus closing and
other costs) in cash as part of a sale-leaseback transaction with the current
owner of the property. This building also has an adjacent six-story parking
garage. The acquisition of the Baymeadows property was consummated, using in
part the proceeds from secured debt financing in the amount of approximately
$13.8 million, which bears interest at a fixed rate of 5.55% and matures in
2014. 15




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION Estimates and certain other matters discussed in this report may be
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although CRT Properties, Inc. believes the
expectations reflected in such forward-looking statements are based on
reasonable assumptions; there can be no assurance that its expectations will be
attained. Certain factors could cause actual results to differ materially from
the Companys expectations, including those set forth as risk factors in the
Companys SEC reports and filings, including its Annual Report on Form 10-K for
the year ended December 31, 2003. Included among these factors are changes in
general economic conditions, including changes in the economic conditions
affecting industries in which its principal tenants compete; its ability to
timely lease or re-lease space at current or anticipated rents to creditworthy
tenants; its ability to achieve economies of scale over time; the demand for
tenant services beyond those traditionally provided by landlords; changes in
interest rates; changes in operating costs; its ability to attract and retain
high-quality personnel at a reasonable cost in a highly competitive labor
environment; future demand for its debt and equity securities; its ability to
refinance its debt on reasonable terms at maturity; and its ability to complete
current and future development projects on schedule and on budget. Many of
these factors are beyond the Companys ability to control or predict.
Forward-looking statements are not guarantees of performance. For
forward-looking statements contained or incorporated by reference herein, the
Company claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. The Company
assumes no obligation to update or supplement forward-looking statements that
become untrue because of subsequent events. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the condensed
consolidated financial statements and related notes appearing elsewhere in
this Form 10-Q, and Managements Discussion and Analysis of Financial
Condition and Results of Operations included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2003. On September 11, 2003, the Company acquired Tollway Crossing (a three-story
building) and CIGNA Plaza (a five-story building) in Dallas, Texas for
approximately $33.1 million. The properties are comprised of two office
buildings which contain approximately 280,000 square feet of rentable space.
The funds required for this acquisition were provided by the proceeds from the
Companys September 10, 2003 preferred stock issuance. As of June 30, 2004,
Tollway Crossing and CIGNA Plaza were 100% and 92% occupied, respectively. On December 30, 2003, the Company completed a joint venture agreement with
Triangle W/Development to acquire a 75% interest in two mid-rise five-story
office buildings encompassing 202,000 square feet and 8.5 acres of undeveloped
land suitable for development located in the McGinnis Park office complex in
Atlanta, Georgia. The Company contributed approximately $13.9 million to pay
off an existing mortgage plus an additional amount for closing costs and
working capital, funded from its secured line of credit. The joint venture
assumed an existing mortgage on the undeveloped land of approximately $978,000.
As of June 30, 2004, the McGinnis Park office buildings were 51% leased. On January 27, 2004, the Company acquired Atlantic Center Plaza, a twenty-three
story 502,000 square foot building located in
Atlanta, Georgia, for a purchase price of $116.5 million plus closing and other
costs. As of June 30, 2004, approximately 88% of the propertys rentable space
was leased. Under the terms of the acquisition agreement, the Company assumed
a 3-year variable interest rate secured loan of approximately $75.9 million
with an interest rate of LIBOR (1.11% at June 30, 2004) plus 160 basis points.
Simultaneously, at closing, the Company assumed a second 3-year variable
interest rate secured loan of $10.0 million with an interest rate of LIBOR plus
600 basis points and immediately prepaid the loan in full. The Company funded
the remainder of the purchase price with a portion of the net proceeds from its
January 2004 common stock offering. 16




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On April 2, 2004, the Company acquired four properties, including two Class A
four-story office buildings, a ground lease and an undeveloped parcel of land
located in the Decoverly Office Park in Rockville, Maryland for a purchase
price of $42.0 million plus closing and other costs. The two office buildings
aggregate approximately 155,000 square feet of rentable space and were 92%
occupied as of June 30, 2004. The undeveloped land parcel contains 3.2 acres
with an approved site plan for a four-story 105,000 square foot office
building. The funds required for this acquisition were provided by the
proceeds from the Companys January 2004 common stock offering. On April 21, 2004, the Company amended and extended the loan agreement
governing its $75.9 million loan with MetLife assumed in connection with the
acquisition of Atlantic Center Plaza. As part of the amendment, the existing
variable interest rate (LIBOR plus 160 basis points) will remain in place until
December 31, 2004 and the Company will draw an additional $4.1 million prior
to December 31, 2004. Effective January 1, 2005, the rate will be fixed at
5.49% until December 31, 2014. OFF-BALANCE SHEET ARRANGEMENTS On January 12, 2004, the Company, through a newly formed subsidiary DownREIT
limited partnership called Koger BFC, Ltd., acquired all of the partnership
interests in Broward Financial Center (BFC) in downtown Fort Lauderdale,
Florida, in a joint venture with an affiliate of Investcorp Properties Limited
of New York (Investcorp), for approximately $60.1 million. BFC is a single
twenty-four story building comprised of approximately 326,000 rentable square
feet. CRT has a 30% interest in the joint venture. Approximately 14% of the
existing partnership interests in BFC were owned by entities in which the
Companys Chief Executive Officer, Thomas J. Crocker had a 50% ownership
interest (Crocker Affiliate). The decision to acquire BFC and the terms
thereof were approved by the members of the Companys board of directors and
finance committee without the participation of Mr. Crocker. Investcorp, as the
joint venture partner acquiring 70% of the economic interests, played a
substantial role in negotiating the purchase. The Company acquired the
partnership interests held by Crocker Affiliate by issuing 97,948 limited
partnership units (Units) in exchange for the contribution of its partnership
interests. The Units will be entitled to receive quarterly distributions
equivalent to the quarterly dividend declared on the Companys common stock.
Commencing on the first anniversary of the transaction, Crocker Affiliate can
cause the Units to be redeemed in exchange for cash (at a price per Unit equal
to the lesser of the per share price for a share of the Companys common stock
at the time of redemption and the average per share closing price of the
Companys common stock for the thirty trading days preceding the redemption)
or, at the Companys option, shares of the Companys common stock (one share of
the Companys common stock per Unit). The Companys total investment in this
joint venture is $5.3 million including DownREIT minority contributions ($2.1
million) and closing costs. The Company accounts for this investment using the
equity method of accounting as it does not have a controlling interest over the
operating and financial policies of the joint venture. As a result, the assets
and liabilities of this joint venture are not included in the Companys balance
sheet. This investment was recorded initially at cost and subsequently
adjusted for equity in earnings and cash contributions and distributions. RECENT DEVELOPMENTS On July 2, 2004, the Company repaid an outstanding loan balance of $1,440,000
to GE Capital. No penalty was incurred for this
prepayment. This loan was collateralized by two buildings located at the
Companys Charlotte Vanguard property. As described in Note 9, the Company had loans outstanding to Thomas J. Crocker,
Chief Executive Officer, of approximately $3.8 million as of June 30, 2004.
For some time, the Companys Board of Directors has considered the possibility
of eliminating any further commitment to loan funds to Mr. Crocker and to have
Mr. Crockers loans repaid in full, in the belief that eliminating this
arrangement would be in the Companys best interest. Based on a proposal
initially submitted by Mr. Crocker and approved by a special committee
comprised of the Companys independent directors as well as the Companys
entire board of directors, on July 16, 2004, the Company and Mr. Crocker
entered into a definitive agreement whereby: (1) Mr. Crocker agreed to repay
the outstanding loans and terminate his rights to future loans upon the
acquisition of the Baymeadows property; (2) the Company agreed to make a one
time payment of $540,000 to Mr. Crocker as additional compensation to defray a
portion of the costs and 17




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##### Table of Contents



expenses incurred by Mr. Crocker in connection with
his negotiation of the agreement with the Company; and (3) the Company and Mr.
Crocker agreed to co-invest in a joint venture to acquire the Baymeadows and
Westchase properties (the Properties) described below. The joint venture
arrangement between the Company and Mr. Crocker was created in part to effect
for the benefit of Mr. Crocker a tax-deferred, like-kind exchange of a hotel in
Boca Raton, Florida for the Properties. This arrangement requires the Company
to protect Mr. Crockers ability to defer recognition of taxable gains through
certain restrictions on the Companys ability to sell or finance the
Properties. Mr. Crocker owns approximately 10% of the joint venture in the
form of a DownREIT limited partnership interest. The one time payment of
$540,000 was made to Mr. Crocker on July 30, 2004. Mr. Crocker repaid his
outstanding loans in full on July 26, 2004. The arrangements above are
described in detail in a Form 8-K filed by the Company on July 30, 2004. On July 16, 2004, the Company entered into a purchase and sale agreement with
unaffiliated sellers and paid a $1.0 million non-refundable deposit to acquire
a second property, the Westchase Corporate Center located in Houston, Texas; a
six-story, 184,000 square foot, class A office building for a purchase price
of $19.6 million (plus closing and other costs) in cash, plus the issuance of a
$700,000 interest to a minority partner in a joint venture between the Company
and such minority partner. The acquisition of the Westchase property is
expected to be financed in part with secured mortgage indebtedness totaling
approximately $15.2 million. On July 23, 2004 the Company acquired a five-story, 224,000 square foot,
single-tenant, class A office building located at 7777 Baymeadows in
Jacksonville, Florida, for a purchase price of $20.8 million (plus closing and
other costs) in cash as part of a sale-leaseback transaction with the current
owner of the property. This building also has an adjacent six-story parking
garage. The acquisition of the Baymeadows property was consummated, using in
part the proceeds from secured debt financing in the amount of approximately
$13.8 million, which bears interest at a fixed rate of 5.55% and matures in
2014. RESULTS OF OPERATIONS Rental and other rental services revenues totaled $40,931,000 for the quarter
ended June 30, 2004, compared to $35,964,000 for the quarter ended June 30,
2003. Rental and other rental services revenues totaled $80,399,000 for the
six months ended June 30, 2004, compared to $72,244,000 for the six months
ended June 30, 2003. These increases resulted primarily from revenues
resulting from the acquisition of Atlantic Center Plaza in January 2004
($3,523,000 and $6,042,000 for the quarter and six months ended June 30,
2004, respectively), CIGNA Plaza and Tollway Crossing in September 2003
($1,517,000 and $3,429,000 for the quarter and six months ended June 30, 2004,
respectively), Decoverly in April 2004 ($1,136,000 for the quarter and six
months ended June 30, 2004, respectively), and McGinnis Park in December 2003
($522,000 and $1,061,000 for the quarter and six months ended June 30, 2004,
respectively). The effect of this increase was partially offset by a decrease
in rental revenues from the Lakes on Post Oak property acquired in December
2002 ($600,000 and $1,144,000 for the quarter and six months ended June 30,
2004, respectively), the Three Ravinia Drive property acquired in January 2002
($474,000 and $528,000 for the quarter and six months ended June 30, 2004,
respectively), and a decline in rental revenues from the Companys existing
portfolio of $787,000 and $2,120,000 for the quarter and six months ended June
30, 2004, respectively, as compared to the same period in 2003. At June 30,
2004, the Companys buildings were on average 80 percent occupied with an
average rental rate of $17.89 per rentable square foot. At June 30, 2003, the
Companys buildings were on average 82 percent occupied with an average rental
rate of $17.20 per rentable square foot. Property operations expense includes such charges as utilities, real estate
taxes, janitorial, maintenance, property insurance, provision for
uncollectible rents and management costs. Property operations expense
increased $1,342,000 and $3,530,000 for the three and six months ended June
30, 2004, compared to the same period in 2003. These increases were due
primarily to operations expense resulting from the acquisition of Atlantic
Center Plaza in January 2004 ($1,201,000 and $2,241,000 for the quarter and
six months ended June 30, 2004) and CIGNA Plaza and Tollway Crossing in
September 2003 ($733,000 and $1,359,000 for the quarter and six months ended
June 30, 2004, respectively). Theses increases were partially offset by a
decrease in operating expenses for the Companys existing portfolio ($263,000
and 338,000 for the quarter and six months ended June 30, 2004, respectively). 18




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##### Table of Contents



The amount of property operations expense and its percentage of total rental
revenues for the applicable periods are as follows: Percent ofRental and OtherPeriod
    
    Amount
    
    Rental Services RevenuesJune 30, 2004Quarter
    
    $
    16,036,000
    
    
    
    39.2
    %June 30, 2003Quarter
    
    $
    14,694,000
    
    
    
    40.9
    %June 30, 2004Six Months
    
    $
    31,572,000
    
    
    
    39.3
    %June 30, 2003Six Months
    
    $
    28,042,000
    
    
    
    38.8
    %
 Depreciation expense has been calculated on the straight-line method based
upon the useful lives of the Companys depreciable assets, generally 3 to 40
years. Depreciation expense increased $1,514,000 and $2,636,000 for the three
and six months ended June 30, 2004, respectively, compared to the same period
in 2003. These increases were due primarily to depreciation resulting from
the Companys acquisition of Atlantic Center Plaza in January 2004 ($688,000
and $1,146,000 for the quarter and six months ended June 30, 2004,
respectively), McGinnis Park in December 2003 ($100,000 and $326,000 for the
quarter and six months ended June 30, 2004, respectively), Decoverly in April
2004 ($146,000 for the quarter and six months ended June 30, 2004) and CIGNA
Plaza and Tollway Crossing in September 2003 ($171,000 and $341,000 for the
quarter and six months ended June 30, 2004, respectively). General and administrative expenses increased $81,000 and decreased $19,000
for the three and six months ended June 30, 2004, respectively, compared to
the same period in 2003. Net income increased $1,137,000 and $1,700,000 for the quarter and six months
ended June 30, 2004, respectively, as compared to the same period in 2003.
The Company paid $1,588,000 and $3,176,000 in dividends to preferred
shareholders for the quarter and six months ended June 30, 2004, respectively.
No such dividends were paid during the period ended June 30, 2003, since the
preferred stock was issued in September 2003. As a result, net income
available to common shareholders declined by $451,000 and $1,476,000 for the
quarter and six months ended June 30, 2004, respectively, as compared to the
same period in 2003. LIQUIDITY AND CAPITAL RESOURCES Operating ActivitiesDuring the six months ended June 30, 2004, the
Company generated approximately $30.4 million in net cash from operating
activities, approximately $2.2 million more than the comparable period of
2003. The Companys increased generation of cash from operations is primarily
attributable to the Companys acquisitions financed in part by equity
offerings, as well as a growth in the rate of increases in accounts payable,
accrued liabilities and other liabilities (approximately $4.8 million), an
increase in the aggregate rate of depreciation and amortization (approximately
$2.5 million) and an increase in net income (approximately $1.7 million). The
increase in cash generated by operations was partly offset by an increase in
accounts receivable and other assets (approximately $7.7 million). This
increase was primarily attributable to an increase in deferred tenant costs
($3.2 million) and an increase in pre-acquisition costs incurred in connection
with future acquisitions ($3.4 million). The Companys primary internal sources of cash are the collection of rents
from buildings owned by the Company. As a REIT for federal income tax
purposes, the Company must, among other requirements, pay out annually as
dividends, at least 90 percent of its REIT taxable income (which, due to
non-cash charges, including depreciation and net operating loss carryforwards,
may be substantially less than cash flow from operating activities). In the
past, the Company has paid out dividends in amounts at least equal to its REIT
taxable income. The Company believes that its cash flow from operating
activities will be sufficient to cover debt service payments and to pay the
dividends required to maintain REIT status through 2004. Dividends are
determined quarterly by the Companys board of directors. The level of cash flow generated by rents depends primarily on the occupancy
rates of the Companys buildings and changes in rental rates on new and
renewed leases and under escalation provisions in existing leases. At June
30, 2004, leases representing 19




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##### Table of Contents



approximately 11.1 percent of the gross
annualized rent from the Companys properties, without regard to the exercise
of options to renew, were due to expire during the remainder of 2004. These
scheduled expirations represent leases for space in buildings located in 18 of
the 21 centers or locations in which the Company owns buildings. Certain of
these tenants may not renew their leases or may reduce their demand for space.
During the six months ended June 30, 2004, leases were renewed on
approximately 54.0 percent of the Companys rentable square feet that were
scheduled to expire during the six month period. Current market conditions in
certain markets may require that rental rates at which leases are renewed or
at which vacated space is leased be lower than rental rates under existing
leases. Based upon the amount of leases that will expire during 2004 and the
competition for tenants in the markets in which the Company operates, the
Company has and expects to continue to offer incentives to certain new and
renewal tenants. These incentives may include the payment of tenant
improvement costs and, in certain markets, reduced rents during initial lease
periods. Governmental tenants (including the State of Florida and the United States
Government) which account for approximately 19.5 percent of the Companys
occupied space at June 30, 2004 may be subject to budget reductions in times
of recession and governmental austerity measures. Consequently, there can be
no assurance that governmental appropriations for rents may not be reduced.
Additionally, certain of the private sector tenants that have contributed to
the Companys rent stream may reduce their current demands, or curtail their
future need, for additional office space. The Company believes that the Southeastern United States, Maryland and Texas
provide significant economic growth potential due to diverse regional
economies, expanding metropolitan areas, skilled work force and moderate labor
costs. However, the Company is currently experiencing reduced demand in the
markets in which it owns buildings. Cash flow from operations could be
reduced if a weakened economy continues to result in lower occupancy rates and
lower rental income for the Companys buildings, which may in turn affect the
amount of dividends paid by the Company. Investing ActivitiesAt June 30, 2004, substantially all of the
Companys invested assets were in real properties or joint ventures invested
in real properties and the Companys primary use of cash for investing
activities was property acquisitions. Of the $104.7 million utilized in
investing activities in the six months ended June 30, 2004, $83.9 million was
for property acquisitions. An
additional $14.3 million was used for tenant and building improvements during
the period. Improvements to the Companys existing properties have been
financed through internal operations and lender required escrow accounts for
The Lakes on Post Oak. On January 27, 2004, the Company acquired Atlantic Center Plaza, a twenty-three
story 502,000 square foot building located in Atlanta, Georgia, for a purchase
price of $116.5 million plus closing and other costs. The Company initially
allocated approximately $10.0 million and $108.1 million of the net purchase
price to value of the acquired land and building, respectively. During the first quarter of 2004, the Company acquired a 30% interest in a
joint venture that owns the Broward Financial Center, resulting in a total
investment of $5.3 million (including closing costs and fees) which includes a
DownREIT minority contribution of $2.1 million. On April 2, 2004, the Company acquired four properties, including two Class A
office buildings, a ground lease and an undeveloped parcel of land located in
the Decoverly Office Park in Rockville, Maryland for a purchase price of $42.0
million plus closing and other costs. The two three-story office buildings
aggregate approximately 155,000 square feet of rentable space. The undeveloped
land parcel contains 3.2 acres with an approved site plan for a four-story
105,000 square foot office building. The Company initially allocated
approximately $19.7 million and $22.8 million of the net purchase price to
value of the acquired land and buildings, respectively. Financing Activities The Company provided $71.2 million and used $20.0
million of cash from financing activities in the six months ended June 30,
2004 and June 30, 2003, respectively. For the six months ended June 30, 2004,
the Companys largest sources of cash from financing activities were proceeds
from the sales of common stock ($100.3 million) and proceeds from mortgages
and loans ($6.0 million). In the same time period, the Companys largest uses
of cash for financing activities were principal payments on mortgages and
loans payable ($17.7 million) and dividends paid ($20.1 million). For the six
months ended June 30, 2003, the 20




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##### Table of Contents



Companys largest sources of cash for
financing activities were proceeds from mortgages and loans ($31.0 million).
In the same period, the Companys primary uses of cash for financing
activities were principal payments on mortgages and loans payable ($36.3
million) and dividends paid ($14.9 million). On January 13, 2004, the Company issued 5,175,000 shares of its common stock
(including 675,000 shares issued in connection with the exercise of an
over-allotment option granted to the Companys underwriter) at a price to the
public of $20.45 per share. The net proceeds of the offering ($100.2 million)
were used to pay down the Companys revolving credit facility ($15 million),
fund the Decoverly acquisition as well as a portion of the Atlantic Center
Plaza acquisition, and for general corporate purposes. The Company has a $100 million secured revolving credit facility (of which
$6.0 million had been borrowed as of June 30, 2004) provided by Fleet Bank.
At June 30, 2004, the Company had two buildings in Dallas, Texas, two
buildings in Atlanta, Georgia, and two buildings in Rockville, Maryland that
were unencumbered. Loan maturities and normal amortization of mortgages and
loans payable are expected to total approximately $85.9 million during the
remainder of calendar year 2004, including a $77.0 million mortgage note
payable to Column Financial maturing in December 2004, that has three one-year
extension options available. The Company intends to exercise these options. On April 21, 2004, the Company amended and extended the loan agreement
governing its $75.9 million loan with MetLife assumed in connection with the
acquisition of Atlantic Center Plaza. As part of the amendment, the existing
variable interest rate (LIBOR plus 160 basis points) will remain in place until
December 31, 2004 and the Company will draw an additional $4.1 million prior
to December 31, 2004. Effective January 1, 2005, the rate will be fixed at
5.49% until January 1, 2015. The Company has on file with the SEC a shelf registration statement under which
common stock, preferred stock and debt securities are available for issuance
from time to time by the Company. At June 30, 2004, the Company had $500
million available under this shelf registration for future issuances of securities.
The amount and timing of future sales of Company securities will depend on
market conditions, operating cash flow, asset sales and the specific needs of
the Company. The Company may from time to time sell securities beyond the
amount needed to meet capital requirements in order to allow for the early
repayment of long-term debt, the redemption of preferred stock, the reduction
of short-term debt or for other general corporate purposes. CONTRACTUAL OBLIGATIONS
(In thousands) Less than
    
    
    
    
    
    
    
    
    
    More thanOne
    
    
    
    
    
    
    
    
    
    FiveTotal
    
    year
    
    1-3 years
    
    3-5 years
    
    yearsLong-Term Debt Obligations
    
    $
    472,866
    
    
    $
    83,000
    
    
    $
    120,160
    
    
    $
    192,390
    
    
    $
    77,316Purchase Obligations (a)
    
    
    1,600
    
    
    
    1,600
 (a) This purchase obligation consists of a contractual commitment related to
the renovation of The Lakes on Post Oak in Houston, Texas. In connection with the loan of the Lakes on Post Oak, the Company
obtained a $1,705,000 letter of credit in lieu of additional cash escrows for
tenant improvements and leasing commissions. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk.The Company currently has a $100 million secured
revolving credit facility and term loans with variable interest rates. The
Company may incur additional variable rate debt in the future to meet its
financing needs. Increases in interest rates on such debt could increase the
Companys interest expense, which would adversely affect the Companys cash
flow and its 21




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##### Table of Contents



ability to pay dividends to its shareholders. The Company has not
entered into any interest rate hedge contracts in order to mitigate the
interest rate risk with respect to the secured revolving credit facility. As
of June 30, 2004, the Company had $160.3 million outstanding under loans with
variable interest rates. If the weighted average interest rate on this
variable rate debt were 100 basis points higher or lower, annual interest
expense would be increased or decreased by approximately $1,603,000. On April
21, 2004, the Company amended its $75.9 million loan, effective January 1,
2005, assumed in connection with its acquisition of Atlantic Center Plaza, to
convert to a fixed interest rate of 5.49% and extend the loan maturity date to
January 1, 2015. Additionally, the Company had $312.6 million outstanding under loans with fixed
interest rates as of June 30, 2004. The Company may incur additional fixed
rate debt in the future to meet its financing needs. Should market interest
rates decline, the Companys use of fixed rate debt financing may result in the
recognition of interest expense at rates higher than market rates. If the
market interest rate on this fixed rate debt were 100 basis points lower, the
Company would forfeit annual interest expense savings of approximately
$3,126,000 as compared to variable rate debt financing. 
 Item 4. Controls and Procedures. The Company carried out an evaluation, with the participation of the Companys
management, including its chief executive officer
and its principal financial officer, of the effectiveness of the Companys
disclosure controls and procedures (as defined under Rule 13a-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based upon that evaluation, the Companys chief executive officer and
principal financial officer concluded that the Companys disclosure controls
and procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to
be included in the Companys periodic SEC filings. The Companys management,
including the chief executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives. The Company is continuously seeking to improve the efficiency and effectiveness
of its operations and of its internal controls. This results in refinements to
processes throughout the Company. However, there has been no change in the
Companys internal control over financial reporting during the quarter ended
June 30, 2004 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting. There have been no significant changes in the Companys internal controls over
financial statements or in other factors that could significantly affect the
internal controls subsequent to the date of their evaluation in connection with
the preparation of this quarterly report on Form 10-Q. 22




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings None. 
 Item 4. Submission of Matters to a Vote of Security Holders On June 3, 2004, the Company held its annual meeting of shareholders and
acted on the following matters:  (a)
    
    At the meeting, the Companys shareholders elected Thomas J. Crocker,
D. Pike Aloian, Benjamin C. Bishop, Jr., David B. Hiley, Victor A.
Hughes, Jr., George F. Staudter, and James C. Teagle to serve a one-year
term. The number of votes cast for and withheld for each of the director
nominees was as follows: NOMINEE
    
    FOR
    
    WITHHELDThomas J. Crocker
    
    
    19,560,931
    
    
    
    5,080,880D. Pike Aloian
    
    
    23,174,530
    
    
    
    1,467,281Benjamin C. Bishop, Jr.
    
    
    23,167,984
    
    
    
    1,473,827David B. Hiley
    
    
    16,866,688
    
    
    
    7,775,123Victor A. Huges, Jr.
    
    
    17,888,953
    
    
    
    6,752,858George F. Staudter
    
    
    23,167,781
    
    
    
    1,474,030James C. Teagle
    
    
    16,866,270
    
    
    
    7,775,541
  (b)
    
    The holders of 24,277,016 shares voted for the ratification of the
Board of Directors selection of Deloitte & Touche, LLP., as the
Companys independent accountants, the holders of 332,517 shares voted
against such ratification and the holders of 32,278 shares abstained.
As a result, this ratification was approved.  (c)
    
    The holders of 24,179,739 shares voted for the Companys proposal to
amend the Companys amended and restated articles of incorporation to
change to Companys name to CRT Properties, Inc., the holders of
377,042 shares voted against such amendment and the holders of 85,029
shares abstained. As a result, this amendment was approved.  (d)
    
    The holders of 19,651,910 shares voted for the Companys proposal to
amend the Companys amended and restated 1998 Equity and Cash Incentive
Plan to authorize grants of a new type of stock-based award, the holders
of 668,342 shares voted against such amendment and the holders of
154,228 shares abstained. There were 4,167,330 broker non-votes on this
proposal. As a result, this amendment was approved. 23




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##### Table of Contents



Item 5. Other Information  (a)
    
    The following table sets forth, with respect to each office project or
location at June 30, 2004, gross square feet, rentable square feet,
percentage occupied, and the average annual rent per rentable square foot
occupied. AverageAnnualGross
    
    Rentable
    
    
    
    
    
    Rent PerSquare
    
    Square
    
    Percent
    
    SquareOffice Project/Location
    
    Feet
    
    Feet (5)
    
    Occupied (1)
    
    Foot (2)Atlanta Atlantic Center Plaza (3)
    
    
    507,700
    
    
    
    502,579
    
    
    
    88
    %
    
    $
    26.04Atlanta Chamblee
    
    
    1,199,800
    
    
    
    1,125,030
    
    
    
    92
    %
    
    
    18.32Atlanta Gwinnett
    
    
    274,400
    
    
    
    262,806
    
    
    
    88
    %
    
    
    19.47Atlanta McGinnis Park (3)
    
    
    212,400
    
    
    
    202,243
    
    
    
    51
    %
    
    
    16.41Atlanta Perimeter
    
    
    184,000
    
    
    
    179,714
    
    
    
    57
    %
    
    
    20.57Atlanta Three Ravinia (3)
    
    
    845,000
    
    
    
    804,833
    
    
    
    59
    %
    
    
    17.68
    (4)Charlotte University
    
    
    190,600
    
    
    
    182,891
    
    
    
    87
    %
    
    
    18.20Charlotte Vanguard
    
    
    548,200
    
    
    
    526,374
    
    
    
    53
    %
    
    
    15.16Dallas Cigna Plaza (3)
    
    
    133,600
    
    
    
    127,226
    
    
    
    92
    %
    
    
    22.84Dallas Tollway Crossing (3)
    
    
    159,800
    
    
    
    152,163
    
    
    
    100
    %
    
    
    22.87Houston Post Oak (3)
    
    
    1,265,000
    
    
    
    1,204,748
    
    
    
    71
    %
    
    
    17.91Jacksonville Baymeadows
    
    
    793,400
    
    
    
    751,388
    
    
    
    96
    %
    
    
    13.61
    (4)Jacksonville JTB
    
    
    436,000
    
    
    
    416,773
    
    
    
    100
    %
    
    
    12.65
    (4)Memphis Germantown
    
    
    562,600
    
    
    
    533,017
    
    
    
    85
    %
    
    
    17.95Orlando Central
    
    
    699,700
    
    
    
    616,656
    
    
    
    88
    %
    
    
    16.59Orlando Lake Mary
    
    
    318,000
    
    
    
    303,546
    
    
    
    66
    %
    
    
    19.00Orlando University
    
    
    405,200
    
    
    
    383,664
    
    
    
    74
    %
    
    
    19.85Richmond Paragon
    
    
    154,300
    
    
    
    145,127
    
    
    
    91
    %
    
    
    19.51St. Petersburg
    
    
    715,500
    
    
    
    668,335
    
    
    
    87
    %
    
    
    16.76Tallahassee
    
    
    960,300
    
    
    
    835,699
    
    
    
    70
    %
    
    
    17.50Washington D.C. Decoverly (3)
    
    
    162,500
    
    
    
    154,787
    
    
    
    92
    %
    
    
    23.55Total
    
    
    10,728,000
    
    
    
    10,079,599Weighted Average  Total Company
    
    
    
    
    
    
    
    
    
    
    80
    %
    
    $
    17.89Weighted Average  Same Store
    
    
    
    
    
    
    
    
    
    
    83
    %
    
    $
    16.93Weighted Average  Acquisition
    
    
    
    
    
    
    
    
    
    
    73
    %
    
    $
    20.29
  (1)
    
    The percent occupied rates have been calculated by dividing total
rentable square feet occupied in an office building by total rentable
square feet in such building.  (2)
    
    Rental rates are computed by dividing (a) total annualized base rents
(which excludes expense pass-through and reimbursements) for an office
project or location as of June 30, 2004 by (b) the rentable square feet
applicable to such total annualized rents.  (3)
    
    Properties acquired subsequent to January 1, 2002.  (4)
    
    Includes the effect of triple net leases where tenants pay
substantially all operating costs in addition to base rent.  (5)
    
    Does not include investment in unconsolidated affiliate that
contains 325,583 of rentable square feet and
was 85% occupied at June 30, 2004. 24




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##### Table of Contents



(b)
    
    The following schedule sets forth for all of the Companys buildings (i)
the number of leases which will expire during the remainder of calendar
year 2004 (without regard to any renewals), calendar years 2005 through
2012, and years subsequent to 2012, (ii) the total rentable area in square
feet covered by such leases, (iii) the percentage of total rentable square
feet represented by such leases, (iv) the average annual rent per square
foot for such leases, (v) the current annualized base rents represented by
such leases, and (vi) the percentage of gross annualized base rents
contributed by such leases. This information is based on the buildings
owned by the Company on June 30, 2004 and on the terms of leases in effect
as of June 30, 2004, on the basis of then existing base rentals, and
without regard to the exercise of options to renew. Furthermore, the
information below does not reflect that some leases have provisions for
early termination for various reasons, including, in the case of
government entities, lack of budget appropriations. Leases were renewed
on approximately 54.0 percent of the Companys rentable square feet which
were scheduled to expire during the six months ended June 30, 2004. Percentage of
    
    Average
    
    
    
    
    
    PercentageTotal Square
    
    Annual Rent
    
    Total
    
    of TotalNumber of
    
    Number of
    
    Feet Leased
    
    per Square
    
    Annualized
    
    Annual RentsLeases
    
    Square Feet
    
    Represented by
    
    Foot Under
    
    Rents Under
    
    Represented byPeriod
    
    Expiring
    
    Expiring
    
    Expiring Leases
    
    Expiring Leases
    
    Expiring Leases
    
    Expiring Leases2004
    
    
    204
    
    
    
    907,977
    
    
    
    11.3
    %
    
    $
    17.33
    
    
    $
    15,735,428
    
    
    
    11.0
    %2005
    
    
    195
    
    
    
    981,380
    
    
    
    12.2
    %
    
    
    17.40
    
    
    
    17,076,764
    
    
    
    11.9
    %2006
    
    
    180
    
    
    
    1,176,315
    
    
    
    14.7
    %
    
    
    18.26
    
    
    
    21,474,174
    
    
    
    15.0
    %2007
    
    
    135
    
    
    
    1,213,919
    
    
    
    15.1
    %
    
    
    17.84
    
    
    
    21,659,581
    
    
    
    15.1
    %2008
    
    
    92
    
    
    
    986,259
    
    
    
    12.3
    %
    
    
    18.19
    
    
    
    17,941,089
    
    
    
    12.5
    %2009
    
    
    63
    
    
    
    1,353,348
    
    
    
    16.9
    %
    
    
    18.22
    
    
    
    24,664,356
    
    
    
    17.2
    %2010
    
    
    20
    
    
    
    236,436
    
    
    
    3.0
    %
    
    
    16.70
    
    
    
    3,948,394
    
    
    
    2.8
    %2011
    
    
    13
    
    
    
    209,073
    
    
    
    2.6
    %
    
    
    14.03
    
    
    
    2,934,186
    
    
    
    2.0
    %2012
    
    
    10
    
    
    
    168,128
    
    
    
    2.1
    %
    
    
    23.95
    
    
    
    4,026,551
    
    
    
    2.8
    %Thereafter
    
    
    13
    
    
    
    780,101
    
    
    
    9.8
    %
    
    
    17.82
    
    
    
    13,898,966
    
    
    
    9.7
    %Total
    
    
    925
    
    
    
    8,012,936
    
    
    
    100.0
    %
    
    $
    17.89
    
    
    $
    143,359,489
    
    
    
    100.0
    %
  (c)
    
    Funds From Operations (FFO) is a non-GAAP financial measure. The
National Association of Real Estate Investment Trusts (NAREIT) adopted
the definition of funds from operations in order to promote an industry
standard measure of REIT financial and operating performance. The Company
believes that the presentation of FFO (defined below) provides useful
information to investors regarding the Companys financial condition and
results of operations, particularly in reference to the Companys ability
to service debt, fund capital expenditures and pay cash dividends. FFO
adds back historical cost depreciation, which assumes the value of real
estate assets diminishes predictably in the future. Real estate asset
values increase or decrease with market conditions. Consequently, FFO may
be a useful measure in evaluating the Companys operating performance by
disregarding historical cost depreciation.  NAREIT defines FFO as net income (loss) (computed in accordance with
generally accepted accounting principles (GAAP), excluding gains (losses)
from sales of property, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and
joint ventures. FFO is presented to assist investors in analyzing the
performance of the Company. While we believe our calculation of FFO
generally conforms to the NAREIT definition, our method of calculating FFO
may be different from methods used by other REITs and the method preferred
by NAREIT. The Companys method of calculating FFO may not be comparable
to other REITs. Moreover, FFO (i) does not represent cash flows from
operating activities as defined by generally accepted accounting
principles, (ii) is not indicative of cash available to fund all cash flow
and liquidity needs, including the ability to make distributions, and (iii)
should not be considered as an alternative to net income (as determined in
accordance with generally accepted accounting principles) for purposes of
evaluating the Companys operating performance. 25




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##### Table of Contents



The following presents the Companys reconciliation of net income available
to common shareholders to FFO for the three and six months ended June 30,
2004 and 2003 (in thousands): Three MonthsEnded June 30,2004
    
    2003(in thousands)Net income available to common shareholders
    
    $
    2,999
    
    
    $
    3,450Real estate related depreciation
    
    
    8,909
    
    
    
    7,390Real estate related depreciation
 unconsolidated affiliate
    
    
    170
    
    
    
    Real estate related amortization
 deferred tenant costs
    
    
    718
    
    
    
    432Real estate related amortization
 fair value of acquired leases
    
    
    179
    
    
    
    432Gain on sale of non-operating assets
    
    
    
    
    
    
    (589
    )Funds from operations
    
    $
    12,975
    
    
    $
    11,115
 Six MonthsEnded June 30,2004
    
    2003(in thousands)Net income available to common shareholders
    
    $
    6,245
    
    
    $
    7,721Real estate related depreciation
    
    
    17,256
    
    
    
    14,581Real estate related depreciation
 unconsolidated affiliate
    
    
    271
    
    
    
    Real estate related amortization
 deferred tenant costs
    
    
    1,327
    
    
    
    828Real estate related amortization
 fair value of acquired leases
    
    
    316
    
    
    
    924Gain on sale of non-operating assets
    
    
    
    
    
    
    (589
    )Funds from operations
    
    $
    25,415
    
    
    $
    23,465
 26




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##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Number
    
    Description15
    
    Letter re: Unaudited interim financial information.31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act32
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
 (b) Reports on Form 8-K On April 1, 2004, the Company furnished a Form 8-K (dated March 29, 2004)
providing under Item 9, Regulation FD Disclosure, announced that its Three
Ravinia Building had been named Atlantas Office Building of the Year, and
providing under Item 7, Financial Statements and Exhibits, the Koger Equity,
Inc. News Release, dated March 29, 2004. On April 8, 2004, the Company filed a Form 8-K (dated April 2, 2004), reporting
under Item 2, Acquisition or Disposition of Assets, the acquisition of the
Decoverly Office Park in Rockville, Maryland, and providing under Item 7,
Financial Statements and Exhibits, the Koger Equity, Inc. News Release, dated
April 5, 2004. On April 26, 2004, the Company furnished a Form 8-K (dated April 26, 2004),
reporting under Item 9, Regulation FD Disclosure, announced that it had amended
its loan agreement with Metropolitan Life Insurance Company assumed by the
Company in connection with its acquisition of Atlantic Center Plaza, providing
under Item 7, Financial Statements and Exhibits, the Koger Equity, Inc. News
Release, dated April 26, 2004. On May 5, 2004, the Company furnished a Form 8-K (dated May 3, 2004) reporting
under Item 9, Regulation FD Disclosure, the announcement of its quarterly
results for the period ended March 31, 2004, and related supplemental
information, dated March 31, 2004, and providing under Item 7, Financial
Statements and Exhibits, the Koger Equity, Inc. News Release, dated May 3, 2004
and related supplemental information. On May 12, 2004, the Company furnished a Form 8-K (dated May 12, 2004)
reporting under Item 9, Regulation FD Disclosure, the announcement that its
Board of Directors had approved an amendment to the Companys Shareholder
Rights Plan, and providing under Item 7, Financial Statements and Exhibits, the
Koger Equity, Inc. News Release, dated May 12, 2004. On May 24, 2004, the Company filed a Form 8-K (dated December 30, 2003)
providing under Item 7, Financial Statements and Exhibits, the Metropolitan
Life Insurance Company loan modification agreements. On May 27, 2004, the Company filed a Form 8-K (dated May 12, 2004),
reporting under Item 5, Other Events and Required FD Disclosure, the
announcement that the Company had amended its Common Stock Rights Agreement
and providing under Item 7, Financial Statements and Exhibits, the Koger
Equity, Inc. By Laws, as Amended and Restated on May 12, 2004 and the Eighth
Amendment to Koger Equity, Inc. Common Stock Rights Agreement, dated as of
May 12, 2004. On May 27, 2004, the Company furnished a Form 8-K (dated May 26, 2004)
reporting under Item 9, Regulation FD Disclosure, the announcement of a
quarterly dividend on preferred stock, and providing under Item 7, Financial
Statements and Exhibits, the Koger Equity, Inc. News Release, dated May 26,
2004. 27




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##### Table of Contents



On June 1, 2004, the Company filed a Form 8-K/A (dated April 2, 2004) amending
Form 8-K filed on April 8, 2004 (dated April 2, 2004), reporting under Item 2,
Acquisition or Disposition of Assets, the acquisition of the Decoverly Office
Park in Rockville, Maryland and including under Item 7, Financial Statements
and Exhibits, (a) Financial Statements of real estate acquired, (b) pro forma
financial information, and (c) the Koger Equity, Inc. News Release, dated April
5, 2004, incorporated by reference. On June 4, 2004, the Company furnished a Form 8-K (dated June 3, 2004)
reporting under Item 9, Regulation FD Disclosure, the announcement of a
quarterly dividend on common stock, and providing under Item 7, Financial
Statements and Exhibits, the Koger Equity, Inc. News Release, dated June 3,
2004. 28




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. CRT PROPERTIES, INC.
RegistrantDated: August 4, 2004
    /s/ Steven A. AbneySteven A. AbneyVice President, Finance and
Chief Accounting Officer
(Principal Financial Officer)
CRT Properties, Inc. 29