<PAGE>
 
                                   FORM 10-Q


                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549


(Mark One)

(X)  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
          OF THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended September 30, 1998

(   )     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
          OF THE SECURITIES EXCHANGE ACT OF 1934

          For the transition period from ________________ to ________________.

                       COMMISSION FILE NUMBER  000-23733
                                               ---------

                            CAPITAL AUTOMOTIVE REIT
            (Exact name of registrant as specified in its charter)

          Maryland                                   54-1870224
    (State of organization)                        (I.R.S. Employer 
                                                Identification Number)

           1420 Spring Hill Road, Suite 525, McLean, Virginia 22102
             (Address of principal executive offices and zip code)

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



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

Yes   X      No
     ---        ---      

Number of Common Shares of Beneficial Interest outstanding as of November 10,
1998 was 21,707,415.
                   
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
                                   FORM 10-Q
                                     INDEX
<TABLE>
<CAPTION>
  
                                                                              Page No.
                                                                              ---------
<S>                                                                           <C>

Part I -- Financial Information

     Item 1 -- Financial Statements

       Consolidated Balance Sheets -- September 30, 1998 (unaudited)
          and December 31, 1997                                                   3

       Consolidated Statements of Operations (unaudited) -- three
          months and nine months ended September 30, 1998                         4

       Consolidated Statements of Changes in Shareholders' Equity
          (Deficit) -- nine months ended September 30, 1998
          (unaudited) and period from October 20, 1997 (date of
          organization) through December 31, 1997                                 5

       Consolidated Statement of Cash Flows (unaudited) -- nine months
          ended September 30, 1998                                                6

       Notes to Consolidated Financial Statements (unaudited)                  7 - 14

     Item 2 -- Management's Discussion and Analysis of Financial
          Condition and Results of Operations                                  15 - 21

     Item 3 -- Quantitative and Qualitative Disclosures About Market Risk        21

Part II -- Other Information

     Item I -- Legal Proceedings                                                 22

     Item 2 -- Changes in Securities and Use of Proceeds                       22 - 24

     Item 3 -- Defaults Upon Senior Securities                                   24

     Item 4 -- Submission of Matters to Vote of Security Holders                 24

     Item 5 -- Other Information                                                 24

     Item 6 -- Exhibits and Reports on Form 8-K                                  24

Signatures                                                                       25
</TABLE>

                                       2
<PAGE>
 

                        PART I - FINANCIAL INFORMATION
                         ITEM 1 - FINANCIAL STATEMENTS
                            CAPITAL AUTOMOTIVE REIT
                          CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)
<TABLE> 
<CAPTION> 


                                                  September 30,   December 31,
                                                      1998            1997
                                                  -------------   ------------
                                                   (unaudited)
ASSETS                                          
<S>                                               <C>             <C> 
Real estate:
  Land                                            $     208,099   $          -
  Building and improvements                             205,174              -
  Accumulated depreciation                               (3,234)             -
                                                  -------------   ------------
                                                        410,039              -

Furniture, fixtures and equipment, net
    of accumulated depreciation                             250             29


Cash and cash equivalents                                40,138             25

Other assets, net                                         5,641            957
                                                  -------------   ------------
    TOTAL ASSETS                                  $     456,068   $      1,011
                                                  =============   ============


LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT):
LIABILITIES:
Borrowings under line of credit                   $      13,000   $      1,000
Accounts payable and accrued expenses                     7,547            661
Security deposits payable                                 3,702              -
                                                  -------------   ------------
    TOTAL LIABILITIES                                    24,249          1,661
                                                  -------------   ------------
Minority Interest                                        90,335              -

SHAREHOLDERS' EQUITY/(DEFICIT):
Preferred shares, $.01 par value; 20,000,000
    shares authorized; none outstanding                       -              -
Common shares, $.01 par value; authorized 
100,000,000 shares; issued 24,792,115 and 
    10 shares                                               248              -
Additional paid-in-capital                              348,264              -
Retained earnings (accumulated deficit)                   3,929           (650)
Less treasury shares at cost, 943,000 common
    shares                                              (10,957)             -
                                                  -------------   ------------
    TOTAL SHAREHOLDERS' EQUITY/(DEFICIT)                341,484           (650)
                                                  -------------   ------------
    TOTAL LIABILITIES AND SHAREHOLDERS' 
        EQUITY/(DEFICIT)                          $     456,068   $      1,011
                                                  =============   ============
</TABLE> 

See accompanying notes to consolidated financial statements.

                                       3
<PAGE>
 

                            CAPITAL AUTOMOTIVE REIT
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)
                                  (unaudited)
<TABLE> 
<CAPTION> 

                                           Three Months   Nine Months
                                              Ended          Ended
                                          Sept. 30, 1998 Sept. 30, 1998
                                          -------------- --------------       
<S>                                       <C>            <C> 
Revenue:
Rental income                              $      8,425   $     15,254
Interest income                                   1,938          6,975
                                           ------------   ------------     
    Total revenue                                10,363         22,229
                                           ------------   ------------     
                                            
Expenses:
Depreciation and amortization                     1,972          3,311
General and administrative                        1,630          3,992
Interest                                            159            328
                                           ------------   ------------      
    Total expenses                                3,761          7,631
                                           ------------   ------------       
Net income before minority interest               6,602         14,598
Minority interest                                (1,381)        (2,928)
                                           ------------   ------------     
                                                 
Net income applicable to common     
    shareholders                           $      5,221   $     11,670
                                           ============   ============  

Shares of common stock outstanding 
    used to compute basic earnings 
    per share                                    24,713         20,597
                                           ============   ============
Basic earnings per share                   $       0.21   $       0.57
                                           ============   ============

Shares of common stock outstanding 
    used to compute diluted earnings 
    per share                                    24,713         20,665
                                           ============   ============  
Diluted earnings per share                 $       0.21   $       0.56
                                           ============   ============
</TABLE> 

See accompanying notes to consolidated financial statements.

                                       4
<PAGE>
 


                            CAPITAL AUTOMOTIVE REIT
     CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY/(DEFICIT)
                       (in thousands, except share data)

<TABLE> 
<CAPTION> 

                                                                                            Retained
                                                     Common Shares          Additional      Earnings/       
                                                -----------------------       Paid-in      (Accumulated      Treasury    
                                                  Shares        Amount        Capital        Deficit)         Shares       Total
                                               ----------     ---------      ----------    ------------      ---------    --------
<S>                                           <C>            <C>            <C>           <C>               <C>          <C>       
BALANCE AT OCTOBER 20, 1997                             -     $       -      $        -    $          -      $       -    $      - 
Net loss                                                -             -               -             (650)            -        (650) 
Capital contribution                                   10             -               -                -             -           -
                                               ----------     ---------      ----------     ------------     ---------    --------
BALANCE AT DECEMBER 31, 1997                           10             -               -             (650)            -        (650)

Repurchase of initial shares                          (10)            -               -                -             -           -
Proceeds from initial public offering          20,000,000           200          299,800               -             -     300,000
Proceeds from exercise of underwriters' 
   over-allotment option                        3,000,000            30           44,970               -             -      45,000
Proceeds from private placement                 1,792,115            18           24,982               -             -      25,000
Payment of underwriting discounts,  
   commissions and other offering expenses              -             -          (27,715)              -             -     (27,715)
Adjustment to reflect minority interest 
ownership in Operating Partnership                      -             -            6,227               -             -       6,227
Purchase of treasury shares                      (943,000)            -                -               -       (10,957)    (10,957)
Dividend payment                                        -             -                -          (7,091)            -      (7,091)
Net income                                              -             -                -          11,670             -      11,670
                                               ----------     ---------       ----------    ------------      --------    --------

BALANCE AT SEPTEMBER 30, 1998 (UNAUDITED)      23,849,115     $     248       $  348,264    $      3,929      $(10,957)   $341,484
                                               ==========     =========       ==========    ============      ========    ========
</TABLE> 


See accompanying notes to consolidated financial statements.

                                       5
<PAGE>
                            CAPITAL AUTOMOTIVE REIT
                     CONSOLIDATED STATEMENT OF CASH FLOWS
                 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
                                (in thousands)
                                  (unaudited)
<TABLE> 

<S>                                                 <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                           $     11,670
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization                               3,311
Income applicable to minority interest                      2,928
Increase in other assets                                   (4,717)
Increase in accounts payable and accrued expenses           6,886
Increase in security deposits payable                       3,702
                                                     ------------   
   Net cash provided by operating activities               23,780

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment                          (263)
Real estate acquisitions                                 (317,987)
                                                     ------------   
   Net cash used in investing activities                 (318,250)
                                                     ------------    
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit                               13,000
Repayment of short-term revolving line of credit           (1,000)
Proceeds from issuance of initial public offering of
   common shares and underwriters' over-allotment
   option, net of issuance costs                          317,285
Proceeds from issuance of private placement,
   net of issuance costs                                   25,000
Payment of cash dividend                                   (7,091)
Payment of partner distribution                            (1,654)
Purchase of treasury shares                               (10,957)
                                                     ------------   
   Net cash provided by financing activities              334,583
                                                     ------------ 
  
NET INCREASE IN CASH AND CASH EQUIVALENTS                  40,113

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD               25
                                                     ------------   
CASH AND CASH EQUIVALENTS AT END OF PERIOD           $     40,138
                                                     ============   

SUPPLEMENTAL DATA:

Real estate acquisitions in exchange for 
  partnership units                                  $     95,286
                                                     ============   
Interest paid during the period                      $        305
                                                     ============
</TABLE> 

See accompanying notes to consolidated financial statements.

                                       6
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)


1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

Capital Automotive REIT (the "Company") was formed as a Maryland real estate
investment trust on October 20, 1997 and was initially capitalized on such date
through the sale of ten common shares of beneficial interest, par value $.01 per
share.  The Company's mission is to invest in the real property and improvements
used by multi-site, multi-franchised dealerships and related businesses located
in major metropolitan areas throughout the United States, through its ownership
interest in Capital Automotive L.P. (the "Operating Partnership").

In February 1998, the Company completed an Initial Public Offering ("IPO") of
its common shares of beneficial interest, par value $.01 per share (the "Common
Shares"), whereby 20.0 million Common Shares were issued at $15 per Common
Share, resulting in net proceeds of approximately $275.4 million, after
underwriting discounts and commissions and other expenses of the IPO.  In
addition, FBR Asset Investment Corporation, an affiliate of Friedman, Billings,
Ramsey & Co., Inc. ("FBR"), the representative of the underwriters in the IPO,
purchased 1,792,115 Common Shares of the Company at the IPO price in a private
placement offering, resulting in net proceeds of $25 million, net of
underwriting discounts (the "FBR Offering").  In March 1998, 3.0 million Common
Shares subject to the underwriters' over-allotment option were issued at $15 per
Common Share, resulting in net proceeds of approximately $41.9 million, after
underwriting discounts and commissions.  The Company contributed the net
proceeds of the IPO, over-allotment option and the FBR Offering to the Operating
Partnership in exchange for 24,792,115 units of limited partnership interest
("Units") in the Operating Partnership.


Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared
by the Company's management in accordance with generally accepted accounting
principles for interim financial information and in conformity with the rules
and regulations of the Securities and Exchange Commission.  Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.  In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included.  The results of
operations for the nine months ended September 30, 1998, are not necessarily
indicative of the results that may be expected for the full year.  These
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and footnotes thereto, included in the
Company's Annual Report on Form 10-K/A for the period from October 20, 1997
(date of organization) through December 31, 1997.

                                       7
<PAGE>
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include all accounts of the
Company and the Operating Partnership.  All intercompany amounts have been
eliminated in the consolidation.

Cash and Cash Equivalents

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

Real Estate

Real estate is recorded at cost.  External acquisition costs directly related to
each property are capitalized as a cost of the respective property.  The cost of
real estate properties acquired is allocated between land and buildings based
upon estimated market values at the time of acquisition.  Depreciation is
computed using the straight-line method over an estimated useful life of 20
years for the buildings and improvements.

Leases and Rental Income

The leases are triple net leases, and require the lessees to pay substantially
all expenses associated with operations, including taxes, utilities, insurance,
repairs, maintenance and other expenses.  Current leases have initial terms
generally ranging from ten to 20 years, and generally include multiple options
to renew upon the same terms and conditions, at the option of the lessees.
Under current leases, annual base rent will be adjusted upward periodically
based on a factor of the consumer price index.  Generally, the lease terms
establish minimum and maximum periodic adjustments.  All leases are accounted
for as operating leases.

Income Taxes

The Company is qualified as a real estate investment trust under the provisions
of the Internal Revenue Code of 1986, as amended.  As a real estate investment
trust, the Company is required to distribute at least 95% of its taxable income
to shareholders and meet certain other requirements.

Use of Estimates

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

3. ACQUISITION OF PROPERTIES

As of September 30, 1998, the Company owned 96 properties used by 23 dealer
groups.  These properties are located in 16 states, operated by 137 automotive
franchises, represent 35 brands and total 3.4 million square feet of building
space on 521 acres of land.

                                       8
<PAGE>
 
At the time of the IPO, the Company, through the Operating Partnership, had
entered into agreements to acquire 36 parcels of real property and improvements
(the "Initial Properties") from the affiliates of seven motor vehicle dealer
groups on which 49 automotive franchisees are located.  Concurrent with the IPO,
the Operating Partnership acquired 21 of the Initial Properties that are located
primarily in suburban communities of the Washington, D.C. Metropolitan Area and
Pennsylvania.  These Initial Properties were purchased for approximately $117.2
million, consisting of $41.3 million in the assumption and repayment of mortgage
debt, approximately 5.0 million Units (valued at $74.4 million) and $1.5 million
in closing costs.  Subsequent to the IPO, the Company acquired 15 of the Initial
Properties located on the Eastern Shore of Maryland, Texas, southern Virginia,
Colorado and Nevada for approximately $50.8 million in cash.

During the second quarter, the Company, through the Operating Partnership,
signed definitive agreements to acquire 37 properties from the affiliates of ten
dealer groups for approximately $132.3 million (including estimated closing
costs through September 30, 1998).  These properties are used by 53 automotive
franchises, located in Indiana, Georgia, Louisiana, Idaho, Arizona, Maryland,
Missouri, Connecticut, California and Ohio.  Of these agreements, the Company
closed on 28 properties during the second quarter totaling approximately $96.4
million, consisting of $29.5 million in cash (including estimated closing costs
through September 30, 1998), $46.2 million in the assumption and repayment of
mortgage debt and approximately 1.3 million Units (valued at $20.7 million).
Subsequent to June 30, 1998, the Company closed on six properties totaling
approximately $29.6 million, consisting of $11.3 million in cash (including
estimated closing costs through September 30, 1998), $18.2 million in the
assumption and repayment of mortgage debt and Units valued at $100,000.  The
acquisition of three properties, totaling approximately $6.3 million, is pending
completion of the Company's due diligence process.

During the third quarter, the Company, through the Operating Partnership, signed
definitive agreements to acquire 36 properties for approximately $161.7 million
(including estimated closing costs through September 30, 1998).  Of these
agreements, the Company closed on 26 properties during the third quarter
totaling approximately $119.3 million.  Subsequent to September 30, 1998, the
Company closed on eight properties totaling approximately $26.5 million.  The
acquisition of two properties, totaling approximately $15.9 million, is pending
completion of the Company's due diligence process.  Significant transactions
include the following:


 . The closing of the acquisition of five properties from the Gunn Automotive
  Group, totaling 30.9 acres, located in San Antonio, Texas for approximately
  $22.4 million.  The purchase price consists of approximately $4.9 million in
  cash (including estimated closing costs through September 30, 1998) and $17.5
  million in the assumption and repayment of mortgage debt.  These properties
  are used by six automotive franchises representing six brands, including
  Chevrolet, Dodge and Nissan.  The lease terms are 15 years with two 10-year
  renewal options by the tenant.

 . The closing of the acquisition of four properties from Warren Henry
  Automobiles, totaling 10.9 acres, located in Miami, Florida for approximately
  $12.7 million. The purchase price consists of approximately $6.7 million in
  cash (including estimated closing costs through September 30, 1998) and $6.0
  million in the assumption and repayment of mortgage debt. These properties are
  used by four automotive franchises representing four brands, including
  Infiniti, Jaguar, Volvo and Land Rover. The lease terms are 12 years with two
  10-year renewal options by the tenant.

 . The closing of the acquisition of four properties from Orr Automotive,
  totaling 9.0 acres, located in Texarkana, Texas and Shreveport, Louisiana for
  approximately $5.5 million. The purchase 

                                       9
<PAGE>
 
  price consists of approximately $3.4 million in cash (including estimated
  closing costs through September 30, 1998) and $2.1 million in the assumption
  and repayment of mortgage debt. These properties are used by five automotive
  franchises, including BMW, Acura, Infiniti, Honda and Mitsubishi. The lease
  terms are 15 years with four 5-year renewal options by the tenant.

 . The closing of the acquisition of three properties from the Momentum
  Automotive Group, totaling 19.9 acres, located in Houston, Texas for
  approximately $25.3 million. The purchase price consists of approximately
  $14.2 million in cash (including estimated closing costs through September 30,
  1998) and $11.1 million in the assumption and repayment of mortgage debt.
  These properties are used by four automotive franchises, including Jaguar,
  Porsche, Volvo and Saab. The lease terms are 15 years with two 10-year renewal
  options by the tenant. These properties were acquired in conjunction with the
  Automotive Realty Trust of America ("ARTA") agreement. See reference to the
  ARTA agreement in the Management's Discussion and Analysis of Financial
  Condition and Results of Operations section.

 . The closing of the acquisition of four properties from the Lynn Alexander
  Automotive Group, totaling 19.4 acres, located in San Angelo and Big Spring,
  Texas for approximately $9.4 million.  The purchase price consists of
  approximately $5.9 million in cash (including estimated closing costs through
  September 30, 1998) and $3.5 million in the assumption and repayment of
  mortgage debt.  These properties are used by 13 automotive franchises
  representing seven brands, including Chrysler, Plymouth, Dodge, Jeep, Lincoln
  Mercury and Nissan.  The lease terms are 15 years with two 10-year renewal
  options by the tenant.  These properties were acquired in conjunction with the
  ARTA agreement.  See reference to the ARTA agreement in the Management's
  Discussion and Analysis of Financial Condition and Results of Operations
  section.

 . The closing of the acquisition of three properties from Park Place Motor Cars,
  totaling 20.5 acres, located in Houston, Dallas and Plano, Texas, for
  approximately $33.1 million. The purchase price consists of approximately
  $19.0 million in cash (including estimated closing costs through September 30,
  1998), $14.1 million in the assumption and repayment of mortgage debt and
  Units valued at $51,000.  These properties are used by two automotive
  franchises, including Mercedes-Benz and Lexus.  The lease terms are 15 years
  with two 10-year renewal options by the tenant.  These properties were
  acquired in conjunction with the ARTA agreement.  See reference to the ARTA
  agreement in the Management's Discussion and Analysis of Financial Condition
  and Results of Operations section.

 . The closing of the acquisition of two properties from Scott Fink, totaling
  10.9 acres, located in Clearwater, Florida and operated by Sonic Automotive,
  Inc., for approximately $8.7 million. The purchase price consists of
  approximately $4.7 million in cash (including estimated closing costs through
  September 30, 1998) and $4.0 million in the assumption and repayment of
  mortgage debt. These properties are used by two automotive franchises,
  including Toyota and Mitsubishi. The lease term is 9.25 years with two 5-year
  renewal options by the tenant.

 . The execution of definitive agreements to acquire five properties from the
  Jackson Automotive Group, totaling 28.9 acres, located in Greenville, Sulphur
  Springs and Commerce, Texas for approximately $4.5 million in cash.  These
  properties are used by 15 automotive franchises representing 11 brands,
  including Pontiac, Cadillac, Oldsmobile, Mazda, Chrysler, Plymouth, Dodge,
  Jeep, Nissan, Ford and Mercury.  The lease terms are 15 years with four 5-year
  renewal options by the tenant.  The Company closed on the acquisition of these
  properties from the Jackson Automotive Group in October 1998.

                                       10
<PAGE>
 
 . The execution of definitive agreements to acquire three properties from the
  Gurley-Leep Automotive Group, totaling 29.4 acres, located in South Bend,
  Indiana for approximately $22.0 million.  The purchase price consists of
  approximately $10.0 million in cash and $12.0 million in the assumption of
  mortgage debt.  These properties are used by 12 automotive franchises
  including, Mercedes-Benz, Porsche, Audi, Honda, GMC Truck, Chrysler, VW and
  Cadillac.  The lease terms are 15 years with four 5-year renewal options by
  the tenant.  The Company closed on the acquisition of these properties from
  the Gurley-Leep Automotive Group in November 1998.

 . The execution of definitive agreements to acquire two properties from Moritz
  Interests LTD, totaling 60.7 acres, located in Oklahoma City and Tulsa,
  Oklahoma for approximately $15.9 million in cash.  These properties are used
  by three automotive franchises, including BMW, Buick and Jeep and one auto
  auction.  The lease terms are ten years with two 5-year renewal options by the
  tenant.


4.  EARNINGS PER SHARE

A reconciliation of net income and weighted average shares used to calculate
basic and diluted earnings per share for the three months and nine months ended
September 30, 1998 is as follows (in thousands, except per share data):

<TABLE> 
<CAPTION>                                      
                                         Net        Weighted       Earnings
                                        Income   Average Shares    Per Share
                                       -------   --------------    ---------
<S>                                    <C>       <C>              <C> 
Three Months Ended September 30, 1998:                          
Earnings per share -- basic            $ 5,221       24,713        $    0.21
                                                                
Effect of dilutive securities:                                  
Options (1)                                  -            -              n/a
                                       -------       ------        ---------
                                                                
Earnings per share -- diluted          $ 5,221       24,713        $    0.21
                                       =======       ======        =========
                                                                
Nine Months Ended September 30, 1998:                           
Earnings per share -- basic            $11,670       20,597        $    0.57
                                                                
Effect of dilutive securities:                                  
Options (1)                                (39)          68            (0.01)
                                       -------       ------        ---------
                                                                
Earnings per share -- diluted          $11,631       20,665         $   0.56
                                       =======       ======         ========
</TABLE> 

(1)  Adjustment to net income reflects change in Minority Interest share of
     income based on ownership calculation including common share equivalents.
     Adjustment to weighted average shares reflects exercise of dilutive options
     for shares assuming treasury stock method.

                                       11
<PAGE>
 
5. BORROWINGS UNDER LINE OF CREDIT

In October 1997, and amended as of January 30, 1998, Friedman, Billings, Ramsey
Group, Inc., an affiliate of FBR, issued to the Company a short-term revolving
line of credit in the amount of approximately $2.5 million.  Draws on the line
of credit were used by the Company for organizational costs and offering costs,
and were repaid with the proceeds of the IPO.

In February 1998, the Company, through the Operating Partnership, entered into a
secured revolving line of credit from NationsBank, N.A. providing for a
borrowing capacity of $10.0 million. Borrowings bear interest at a fluctuating
rate equal to the LIBOR plus 1.50 percent (7.13 percent as of September 30,
1998). On August 14, 1998, the Company amended and restated the line of credit
to increase the borrowing capacity to $13.5 million and extend the expiration
date to November 19, 1998. On September 8, 1998, the Company amended and
restated the line of credit to increase the borrowing capacity to $19.1 million.
The total amount drawn down as of September 30, 1998 was $13.0 million, which is
guaranteed by the Company and affiliates of certain dealer groups. The line of
credit is secured by a blanket mortgage or mortgages on certain Initial
Properties acquired from certain affiliates. At maturity, the principal payment
in the aggregate amount of the then outstanding borrowings plus any accrued and
unpaid interest will be due and payable, unless the line of credit is renewed or
is refinanced as is currently contemplated by the Company. The line of credit
may be paid in full at any time without prepayment penalty or premium.


6. NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income in the Company's financial statements.  This statement is
effective for fiscal years beginning after December 15, 1997.  The adoption of
SFAS No. 130 has no significant impact on the Company's consolidated financial
position, results of operations or cash flows.

Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which requires financial and descriptive
information about reportable operating segments and related products, services,
geographic areas and major customers.  SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997.  The Company believes that the adoption
of SFAS No. 131 will not have an impact on the Company's consolidated financial
position, results of operations or cash flows.  The Company intends to implement
SFAS No. 131 at December 31, 1998.

                                       12
<PAGE>
 
7. MINORITY INTEREST

Minority interest is calculated at approximately 20.9 percent of the Operating
Partnership's partners' capital and net income.  The ownership of the Operating
Partnership as of September 30, 1998 is as follows (Units in thousands):

                                   Units      Percent
                                 -------      -------
Partners' capital:
    Limited Partners               6,309         20.9%
    The Company                   23,849         79.1%
                                 -------      -------

     Total                        30,158        100.0%
                                 =======       ======

8. 401(K) PLAN

Effective April 1, 1998, the Company adopted the Capital Automotive L.P.
Employee 401 (k) Plan available to all employees hired prior to April 1, 1998
who are at least 21 years of age.  Employees hired subsequent to April 1, 1998
are eligible to participate in the plan after three months of service.
Participants may contribute up to 20% of their earnings, on a pre-tax basis,
subject to annual limitations imposed by the Internal Revenue Code.  The Company
may make matching or discretionary contributions to the plan at the discretion
of management.  Employer contributions generally vest over five years.  No
matching or discretionary contributions have been paid or declared for the three
months and nine months ended September 30, 1998.


9. COMMON SHARE REPURCHASE PROGRAM

On September 8, 1998, the Company announced that its Board of Trustees
authorized the repurchase of up to 3.0 million Common Shares.  On October 21,
1998, the Company announced that its Board of Trustees authorized the repurchase
of up to 3.0 million additional Common Shares, bringing the total Common Share
repurchase program to 6.0 million.  Purchases will be made from time to time in
open market transactions at prevailing prices or in negotiated private
transactions at management's discretion.  The Company repurchased 943,000 Common
Shares at prices ranging from $11 3/8 to $11 7/8 per Common Share, during the
three-month period ended September 30, 1998. The Company repurchased an
additional 2,141,700 Common Shares at prices ranging from $9 1/8 to $14 per
Common Share through November 10, 1998. During the same time period, the
Operating Partnership redeemed an equivalent number of Units from the Company
for an equivalent purchase price.


10.  COMMITMENTS

On September 23, 1998, the Company, through the Operating Partnership, entered
into a commitment with Global Alliance Finance Company, L.L.C. ("Lender") for a
$150.0 million permanent loan, which commitment expires November 22, 1998 unless
extended ("Permanent Loan").  The Permanent Loan will require consecutive
monthly installment payments of interest only for two years.  Thereafter, equal
payments of principal and interest will be required in an amount sufficient to
amortize the Permanent Loan over a twenty-five year term.  The term of the
Permanent Loan is ten years.  The Permanent Loan will be secured by a first
mortgage on the properties financed.  The proceeds of the Permanent Loan will be
used to refinance existing debt and working capital requirements.

                                       13
<PAGE>
 
On September 23, 1998, the Company, through the Operating Partnership, entered
into a forward rate lock agreement with the Lender, to effectively lock in
advance the fixed per annum interest rate ("Rate Lock") on the Permanent Loan.
On the date thereof, the Company paid to Lender a hedge deposit totaling $3.0
million ("Hedge Deposit") to lock the interest rate at 7.67% for a period of
sixty days from such date ("Fixed Rate Period").

In order to effect a Rate Lock, the Lender intends to enter into certain hedging
arrangements in its sole and absolute discretion (the "Hedging Arrangements").
After Hedging Arrangements have been put in place, if the fair market value of
such Hedging Arrangements declines by an amount equal to or greater than 1% of
the anticipated loan amount, the Company will, within one business day of notice
from Lender, deposit an additional amount to the Hedge Deposit equal to the
amount of such decline from time to time.  No additional deposits have been paid
to Lender.

In the event, except default by the Lender, the Permanent Loan does not close
prior to expiration of the Fixed Rate Period, the actual term of the Permanent
Loan differs from the original 10 year term, or the final loan amount differs
from the original loan amount, the Company agreed to pay Lender's damages,
losses, liabilities, costs, fees and expenses (including breakage, unwind and
similar costs, fees and expenses (collectively, the "Breakage Costs").  The
Company will be fully responsible for all Breakage Costs, which are required to
be paid upon demand.  Lender may apply all or a portion of the Hedge Deposit in
payment of Breakage Costs.  Upon closing of the Permanent Loan, the Hedge
Deposit will be refunded to the Company.


11. SUBSEQUENT EVENTS

Declaration of Dividend
-----------------------

On October 26, 1998, the Company declared a dividend of $0.27 per share which
will be paid on November 20, 1998 to shareholders of record as of November 9,
1998.

Short-term Debt
---------------

On October 16, 1998, the Company, through the Operating Partnership, entered
into a $50.0 million bridge loan with the Lender to be used to finance
acquisitions, working capital and for other corporate purposes ("Bridge Loan").
The Bridge Loan requires monthly payments of interest only and will mature on
the earlier of January 13, 1999 or the closing date of the Permanent Loan,
unless otherwise extended.  The Bridge Loan bears interest at the one month
LIBOR plus 200 basis points.

Acquisitions
------------

During October 1998, the Company signed a definitive agreement and closed on the
acquisition of three properties from Motorcars Group, totaling 8.3 acres,
located in North Olmsted and Cleveland Heights, Ohio for approximately $12.7
million.  The purchase price consists of approximately $9.7 million in cash and
$3.0 million in the assumption and repayment of debt. These properties are used
by six automotive franchises, including Oldsmobile, Pontiac, Honda, Volvo,
Mercedes-Benz and Infiniti.  The lease terms are 12.5 years with two 10-year
renewal options by the tenant.  These properties were acquired in conjunction
with the Automotive Realty Trust of America ("ARTA") agreement.  See reference
to the ARTA agreement in the Management's Discussion and Analysis of Financial
Condition and Results of Operations section.

                                       14
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
          ITEM II - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
       CONDITION AND RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED
                              SEPTEMBER 30, 1998
                                        

The following discussion should be read in conjunction with the accompanying
unaudited consolidated financial statements and notes thereto.


OVERVIEW

Capital Automotive REIT was formed as a Maryland real estate investment trust on
October 20, 1997 and was initially capitalized on such date through the sale of
ten common shares of beneficial interest, par value $.01 per share.  The
Company's mission is to invest in the real property and improvements used by
multi-site, multi-franchised dealerships and related businesses located in major
metropolitan areas throughout the United States, through its ownership interest
in Capital Automotive L.P.  The Company is the first publicly-traded real estate
investment trust formed primarily to acquire and lease back the real estate used
by automotive dealers and automotive-related businesses.

In February 1998, the Company completed an IPO of its Common Shares whereby 20.0
million Common Shares were issued at $15 per Common Share, resulting in net
proceeds of approximately $275.4 million, after underwriting discounts and
commissions and other expenses of the IPO.  In addition, FBR Asset Investment
Corporation, an affiliate of FBR, purchased 1,792,115 Common Shares of the
Company at the IPO price in a private placement offering, resulting in net
proceeds of $25 million, net of underwriting discounts.  In March 1998, 3.0
million Common Shares subject to the underwriters' over-allotment option were
issued at $15 per Common Share, resulting in net proceeds of approximately $41.9
million, after underwriting discounts and commissions.  The Company contributed
the net proceeds of the IPO, over-allotment option and the FBR Offering to the
Operating Partnership in exchange for 24,792,115 Units.

Substantially all of the Company's revenues are derived from (i) rents received
under triple net leases; and (ii) interest earned from the temporary investment
of funds in short-term investments.

The Company incurs operating and administrative expenses including principally,
compensation expense for its executive officers and other employees,
professional fees and various expenses incurred in the process of acquiring
additional properties.  The Company is self-administered and managed by its
executive officers and staff, and does not engage a separate advisor or pay an
advisory fee for services, although the Company will engage legal, accounting,
tax and financial advisors from time to time.  The primary non-cash expense of
the Company is the depreciation of its properties.  The Company depreciates
buildings and improvements on the properties currently owned by it over a 40-
year and 20-year period for tax and financial reporting purposes, respectively.
The Company does not own or lease any significant personal property, furniture
or equipment at any property currently owned by it.


ACQUISITIONS

As of September 30, 1998, the Company owned 96 properties used by 23 dealer
groups.  These properties are located in 16 states, operated by 137 automotive
franchises, represent 35 brands and total 3.4 million square feet of building
space on 521 acres of land.  The Company's portfolio weighted average initial
cap rate was 10.7% as of the end of the third quarter 1998.

                                       15
<PAGE>
 
At the time of the IPO, the Company, through the Operating Partnership, had
entered into agreements to acquire 36 Initial Properties from the affiliates of
seven motor vehicle dealer groups on which 49 automotive franchisees are
located.  Concurrent with the IPO, the Operating Partnership acquired 21 of the
Initial Properties that are located primarily in suburban communities of the
Washington, D.C. Metropolitan Area and Pennsylvania.  These Initial Properties
were purchased for approximately $117.2 million, consisting of $41.3 million in
the assumption and repayment of mortgage debt, approximately 5.0 million Units
(valued at $74.4 million) and $1.5 million in closing costs.  Subsequent to the
IPO, the Company acquired 15 of the Initial Properties located on the Eastern
Shore of Maryland, Texas, southern Virginia, Colorado and Nevada for
approximately $50.8 million in cash.

During the second quarter, the Company, through the Operating Partnership,
signed definitive agreements to acquire 37 properties from the affiliates of ten
dealer groups for approximately $132.3 million (including estimated closing
costs through September 30, 1998).  These properties are used by 53 automotive
franchises, located in Indiana, Georgia, Louisiana, Idaho, Arizona, Maryland,
Missouri, Connecticut, California and Ohio.  Of these agreements, the Company
closed on 28 properties during the second quarter totaling approximately $96.4
million, consisting of $29.5 million in cash (including estimated closing costs
through September 30, 1998), $46.2 million in the assumption and repayment of
mortgage debt and approximately 1.3 million Units (valued at $20.7 million).
Subsequent to June 30, 1998, the Company closed on six properties totaling
approximately $29.6 million, consisting of $11.3 million in cash (including
estimated closing costs through September 30, 1998), $18.2 million in the
assumption and repayment of mortgage debt and Units valued at $100,000.  The
acquisition of three properties, totaling approximately $6.3 million, is pending
completion of the Company's due diligence process.

During the third quarter, the Company, through the Operating Partnership, signed
definitive agreements to acquire 36 properties from the affiliates of 11 dealer
groups for approximately $161.7 million (including estimated closing costs
through September 30, 1998).  These properties are used by 66 automotive
franchises, located in Texas, Florida, Oklahoma, Louisiana and Indiana.  Of
these agreements, the Company closed on 26 properties during the third quarter
for approximately $119.3 million, consisting of $61.0 million in cash (including
estimated closing costs through September 30, 1998), $58.3 million in the
assumption and repayment of mortgage debt and Units valued at $51,000.
Subsequent to September 30, 1998, the Company closed on eight properties
totaling approximately $26.5 million, of which $14.5 million was cash and 
$12.0 million was the assumption of mortgage debt. The acquisition of two
properties, totaling $15.9 million, is pending completion of the Company's due
diligence process.

Subsequent to September 30, 1998, the Company signed a definitive agreement and
closed on the acquisition of three properties from one dealer group for
approximately $12.7 million, which consists of $9.7 million in cash and $3.0
million in the assumption and repayment of debt. These properties are used by
six automotive franchises, located in Olmsted and Cleveland Heights, Ohio.

Automotive Realty Trust of America ("ARTA")
-------------------------------------------

On July 23, 1998, the Company announced the execution of a definitive agreement
that would permit Capital Automotive REIT to purchase certain properties then
under contract with ARTA.  ARTA had contracted with 17 automotive dealer groups
to acquire 67 properties having a value of $334.5 million.  Under the terms of
the agreement, ARTA agreed to assign its purchase contracts to the Company,
subject to the approval of the respective dealer groups.  Closings on individual

                                       16
<PAGE>
 
properties were subject to the revision of certain purchase and lease terms and
the satisfactory completion by the Company of property level and financial due
diligence.  The Company agreed to compensate ARTA on a pro rata basis upon the
delivery of the assets, as well as upon the acquisition of ARTA's existing
marketing network and its acquisition pipeline.  ARTA had filed a registration
statement on April 20, 1998 with the Securities and Exchange Commission to
pursue an initial public offering as a self-administered, self-managed real
estate investment trust.

During the third quarter of 1998, the Company completed acquisitions for
approximately $67.8 million (including estimated closing costs through September
30, 1998) in conjunction with the ARTA agreement.  Consideration for the
acquisitions was substantially all cash.  The acquisitions included 10
dealership properties from three dealer groups (Momentum Automotive Group, Lynn
Alexander Automotive Group and Park Place Motor Cars) used by 19 automotive
franchises, and totaling 59.8 acres.  See Note 3 to Notes to Consolidated
Financial Statements for discussion of the acquisitions.  Subsequent to the
third quarter, the Company completed the acquisition of three properties from
Motorcars Group for approximately $12.7 million in cash, used by six automotive
franchises, and totaling 8.3 acres.  See Note 11 to Notes to Consolidated
Financial Statements for discussion of the acquisition.

These transactions represent the first acquisitions completed in conjunction
with the Company's agreement permitting the Company to purchase properties under
contract with ARTA.  Of ARTA's $334.5 million portfolio, Capital Automotive
declined to proceed on approximately $110 million of the properties because
either the properties or the terms did not satisfy the Company's acquisition
requirements.  Approximately $49 million of the properties have been withdrawn
by the dealers not willing to accept the Company's amended lease terms.  The
Company continues to pursue the remaining portfolio balance although there is no
assurance that the Company will acquire additional ARTA properties.


RESULTS OF OPERATIONS

The Company had no operations prior to October 20, 1997 (the date of
organization).  Although the Company was formed prior to January 1, 1998, it did
not complete its IPO until February 19, 1998, at which time it began generating
rental income.

Rental revenue was $8.4 million and $15.3 million for the three months and nine
months ended September 30, 1998, respectively.  The rental revenue was generated
from the immediate leaseback of 96 properties purchased during the nine months
ended September 30, 1998.  Of the 96 properties, 35 of the properties closed
during the first quarter of 1998, 29 properties closed during the second quarter
of 1998 and 32 properties closed during the third quarter of 1998.

Interest income was $1.9 million and $7.0 million for the three months and nine
months ended September 30, 1998, respectively.  Interest income was generated
from the investment of the net proceeds of the IPO, the FBR Offering and
exercise of the underwriters' over-allotment option.

Depreciation and amortization was $2.0 million and $3.3 million for the three
months and nine months ended September 30, 1998, respectively and consisted
primarily of depreciation on the properties purchased during those periods.

General and administrative expenses were $1.6 million and $4.0 million for the
three months and nine months ended September 30, 1998, respectively and
consisted primarily of payroll and related benefits, professional services and
other administrative costs.

                                       17
<PAGE>
 
Interest expense was $159,000 and $328,000 for the three months and nine months
ended September 30, 1998, respectively and consisted of interest charged on the
amount drawn down on the Company's line of credit.


LIQUIDITY AND CAPITAL RESOURCES

Upon the completion of the IPO, the FBR Offering and the underwriters' over-
allotment option, the Company received net proceeds of approximately $342.3
million, after underwriting discounts and commissions and other expenses of the
IPO.

For the nine months ended September 30, 1998, the Company acquired 96 properties
used by 23 dealer groups for approximately $413.3 million, consisting of $154.1
million in cash (including estimated closing costs through September 30, 1998),
$163.9 million in the assumption and repayment of mortgage debt and
approximately 6.3 million in Units (valued at $95.3 million).

On September 8, 1998, the Company announced that its Board of Trustees
authorized the repurchase of up to 3.0 million Common Shares.  On October 21,
1998, the Company announced that its Board of Trustees authorized the repurchase
of up to 3.0 million additional Common Shares, bringing the total Common Share
repurchase program to 6.0 million.  Purchases will be made from time to time in
open market transactions at prevailing prices or in negotiated private
transactions at management's discretion.  The Company repurchased 943,000 Common
Shares at prices ranging from $11 3/8 to $11 7/8 per Common Share, during the
three-month period ended September 30, 1998.  The Company repurchased an
additional 2,141,700 Common Shares at prices ranging from $9 1/8 to $14 per 
Common Share through November 10, 1998. During the same time period, the
Operating Partnership redeemed an equivalent number of Units from the Company
for an equivalent purchase price.

In February 1998, the Company, through the Operating Partnership, entered into a
secured revolving line of credit from NationsBank, N.A. providing for a
borrowing capacity of  $10.0 million.  Borrowings bear interest at a fluctuating
rate equal to the LIBOR plus 1.50 percent (7.13 percent as of September 30,
1998).  On August 14, 1998, the Company amended and restated the line of credit
to increase the borrowing capacity to $13.5 million and extend the expiration
date to November 19, 1998.  On September 8, 1998, the Company amended and
restated the line of credit to increase the borrowing capacity to $19.1 million.
The total amount drawn down as of September 30, 1998 was $13.0 million, which is
guaranteed by the Company and affiliates of certain dealer groups.  The line of
credit is secured by a blanket mortgage or mortgages on certain Initial
Properties acquired from certain affiliates.  At maturity, the principal payment
in the aggregate amount of the then outstanding borrowings plus any accrued and
unpaid interest will be due and payable, unless the line of credit is renewed or
is refinanced as is currently contemplated by the Company.  The line of credit
may be paid in full at any time without prepayment penalty or premium.

On September 23, 1998, the Company, through the Operating Partnership, entered
into a commitment with Global Alliance Finance Company, L.L.C. ("Lender") for a
$150.0 million permanent loan, which commitment expires November 22, 1998 unless
extended ("Permanent Loan").  The Permanent Loan will require consecutive
monthly installment payments of interest only for two years.  Thereafter, equal
payments of principal and interest will be required in an amount sufficient to
amortize the Permanent Loan over a twenty-five year term.  The term of the
Permanent Loan is ten years.  The Permanent Loan will be secured by a first
mortgage on the properties financed.  The proceeds of the Permanent Loan will be
used to refinance existing debt and working capital requirements.

                                       18
<PAGE>
 
On September 23, 1998, the Company, through the Operating Partnership, entered
into a forward rate lock agreement with the Lender, to effectively lock in
advance the fixed per annum interest rate ("Rate Lock") on the Permanent Loan.  
On the date thereof, the Company paid to Lender a hedge deposit totaling 
$3 million ("Hedge Deposit") to lock the interest rate at 7.67% for a period of 
sixty days from such date ("Fixed Rate Period").

In order to effect a Rate Lock, the Lender intends to enter into certain Hedging
Arrangements in its sole and absolute discretion.  After Hedging Arrangements
have been put in place, if the fair market value of such Hedging Arrangements
declines by an amount equal to or greater than 1% of the anticipated loan
amount, the Company will, within one business day of notice from Lender, deposit
an additional amount to the Hedge Deposit equal to the amount of such decline
from time to time.  No additional deposits have been paid to Lender.

In the event, except default by the Lender, the Permanent Loan does not close
prior to expiration of the Fixed Rate Period, the actual term of the Loan
differs from the original 10 year term, or the final loan amount differs from
the original loan amount, the Company agreed to pay Lender's damages, losses,
liabilities, costs, fees and expenses (including breakage, unwind and similar
costs, fees and expenses (collectively, the "Breakage Costs").  The Company will
be fully responsible for all Breakage Costs, which are required to be paid upon
demand.  Lender may apply all or a portion of the Hedge Deposit in payment of
Breakage Costs.  Upon closing of the Permanent Loan, the Hedge Deposit will be
refunded to the Company.

On October 16, 1998, the Company, through the Operating Partnership, entered
into a $50.0 million bridge loan with the Lender to be used to finance
acquisitions, working capital and for other corporate purposes ("Bridge Loan").
The Bridge Loan requires monthly payments of interest only and will mature on
the earlier of January 13, 1999 or the closing date of the Permanent Loan,
unless otherwise extended.  The Bridge Loan bears interest at the one month
LIBOR plus 200 basis points.

The Company anticipates that the proceeds of the FBR Offering, together with its
cash from operations, short-term and long-term debt and any bank credit facility
anticipated to be available to the Company, will provide adequate liquidity to
acquire additional properties, conduct its operations, fund administrative and
operating costs and interest payments, and allow distributions to shareholders
in accordance with the Code's requirements for qualification as a real estate
investment trust and to avoid any corporate level federal income or excise tax
for at least the next 12 months.

In order to qualify as a real estate investment trust for federal income tax
purposes, the Company will be required to make substantial distributions to its
shareholders.  The following factors, among others, will influence the decisions
of the Board of Trustees regarding distributions: (i) annual base rent under the
leases; and (ii) returns from short-term investments.  Although the Company will
receive most of its rental payments on a monthly basis, it intends to make
distributions quarterly.  Amounts accumulated for distribution are expected to
be invested by the Company in short-term investments.

The Company also intends to obtain an additional bank credit facility for
acquisition of properties and may borrow additional amounts in connection with
the acquisition of additional properties, the renovation or expansion of
properties, or, as necessary, to meet certain distribution requirements imposed
on a real estate investment fund under the Code.  The Company may raise
additional long-term capital by issuing, in public or private transactions, debt
or other equity securities, but the availability and terms of any such issuance
will depend upon the market and other conditions.

                                       19
<PAGE>
 
On October 20, 1998, the Board of Trustees approved a resolution providing that
the policy of the Company shall be to operate with a debt to asset ratio of not
more than approximately 50%.  Prior to that date, the Company's policy on the
use of leverage was not more than 50% of total market capitalization.
Management believes that the revised policy is more in line with the Company's
overall business strategy.

The Company anticipates that as a result of its initially low ratio of debt to
assets and its policy to maintain such ratio at no more than approximately 50%
of debt to assets, it will be able to obtain additional financing for its long-
term capital needs.  However, there can be no assurance that additional
financing or capital will be available, or that the terms will be acceptable or
advantageous to the Company.

Acquisitions will be made subject to the investment objectives and policies of
the Company to maximize both current income and long-term growth in income.  The
Company's liquidity requirements with respect to future acquisitions may be
reduced to the extent the Company uses Common Shares or Units as consideration
for such purchases.


YEAR 2000 COMPLIANCE

While the Company has completed an assessment of its computer systems and
software applications and believes that both are "Year 2000" compliant, there
can be no assurance that coding errors or other defects will not be discovered
in the future.  In addition, there are significant third parties on which the
Company's operations are dependent, which provide the Company with information,
including lessees of the Company's properties.  There can be no assurance the
systems of other companies, including lessees of the Company's properties on
which the Company relies will be year 2000 compliant and thus no assurance that
such companies' systems would not have an adverse effect on the Company's
business or operations, including rental collections.


FUNDS FROM OPERATIONS

Funds From Operations ("FFO") is defined under the revised definition adopted by
the National Association of Real Estate Investment Trusts (NAREIT) as net income
(loss) (computed in accordance with generally accepted accounting principles)
excluding gains (or losses) from debt restructuring plus
depreciation/amortization of assets unique to the real estate industry.
Depreciation/amortization of assets not unique to the industry, such as
amortization of deferred financing costs and non-real estate assets, is not
added back.  FFO does not represent cash flows from operating activities in
accordance with generally accepted accounting principles (which, unlike FFO,
generally reflects all cash effects of transactions and other events in the
determination of net income) and should not be considered an alternative to net
income as an indication of the Company's performance or to cash flow as a
measure of liquidity or ability to make distributions.  The Company considers
FFO a meaningful, additional measure of operating performance because it
primarily excludes the assumption that the value of the real estate assets
diminishes predictably over time, and because industry analysts have accepted it
as a performance measure.  Comparison of the Company's presentation of FFO,
using the NAREIT definition, to similarly titled measures for other REITs may
not necessarily be meaningful due to possible differences in the application of
the NAREIT definition used by such REITs.

                                       20
<PAGE>
 
Funds From Operations for the three months and nine months ended September 30,
1998 is computed as follows (in thousands):

<TABLE> 
<CAPTION> 
                                            Three Months      Nine Months
                                               Ended             Ended
                                           Sept. 30, 1998    Sept. 30, 1998
                                           --------------    --------------
<S>                                         <C>               <C> 
Net Income before Minority Interest          $   6,602         $  14,598 
                                                                 
Real Estate Depreciation and Amortization        1,947             3,241
                                             ---------         ---------
                                                                 
Funds From Operations                        $   8,549         $  17,839
                                             =========         =========
</TABLE> 

FORWARD LOOKING STATEMENTS

Certain statements in this Form 10-Q are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended, which are intended to be covered by the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995.  Forward looking statements
involve a number of risks and uncertainties.  The Company's actual operations
may differ significantly from the results discussed in the forward looking
statements.  Such statements can be identified by the use of forward-looking
terminology such as "may," "will," "could," "should," "expect," "intends,"
"anticipate," "estimate," or "continue" or the negative thereof or other
variations thereon or comparable terminology.  Factors which may cause the
actual results of operations in future periods to differ materially from
forecast or anticipated results include, but are not limited to (i) the failure
of any lessee of real property owned by Capital Automotive REIT to perform the
terms of its lease in any material respects, (ii) the inability of the Company
to acquire suitable real properties that conform to its business strategy, (iii)
the termination or abandonment of the dealerships or other motor vehicle related
businesses that occupy any real property owned by the Company, (iv) the
inability of the Company to release any real property, (v) general economic and
business conditions, both nationally and in the regions in which the Company
owns real property, including, but not limited to, those conditions affecting
real estate generally or the motor vehicle retail and related businesses
specifically, (vi) zoning changes in locations in which any such real property
is located, (vii) existing governmental regulations and changes in, or the
failure to comply with government regulations, (viii) changes to laws, rules and
regulations affecting the Company, including the tax laws affecting real estate
investment trusts, (ix) competition, (x) changes in business strategy, (xi)
divestiture of real property, (xii) retention of the Company's executive
officers, (xiii) the ability of the Company to attract and retain key personnel,
(xiv) the availability and terms of additional capital to fund the acquisition
of additional properties and for working capital purposes, (xv) the impact on
the Company of computer and related problems that may arise from year 2000,
(xvi) the ability of the Company to obtain additional financing and (xvii) other
risks described from time to time in the registrant's filings with the
Securities and Exchange Commission.  Given these uncertainties, readers are
cautioned not to place undue reliance on such statements.  The registrant
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
        -----------------------------------------------------------

Not applicable.
       
                                       21
<PAGE>
 
                            CAPITAL AUTOMOTIVE REIT
                           PART II-OTHER INFORMATION
                                        
Item 1. Legal Proceedings

Not applicable.

Item 2. Changes in Securities and Use of Proceeds


Changes in Securities
---------------------

The Company has not sold any common shares of beneficial interest, par value
$.01 per share ("Common Shares"), during the three-month period ended 
September 30, 1998.

The Company repurchased 943,000 Common Shares, at prices ranging from $11 3/8 to
$11 7/8 per Common Share, during the three-month period ended September 30,
1998.  The Operating Partnership redeemed 943,000 Units from the Company, at
equivalent prices, during the three-month period ended September 30, 1998.

On July 23, 1998, the Operating Partnership issued 6,739 Units to TMB, LLC as
partial consideration for the acquisition of one parcel of real property and
improvements located thereon in Dothan, Alabama.  The Units are redeemable
beginning on July 23, 1999 for cash, or at the option of the Company, Common
Shares on a one for one basis.  The issuance of such Units was effected in
reliance on an exemption from registration under Section 4(2) of the Securities
Act.

On September 28, 1998, the Operating Partnership issued 3,400 Units to PPM
Greenway Land Company, LTD, as partial consideration for the acquisition of one
parcel of real property and improvements located thereon in Houston, Texas.  50%
of the Units are redeemable beginning on January 1, 2000 and 50% are redeemable
beginning on September 28, 2000 for cash, or at the option of the Company,
Common Shares on a one for one basis.  The issuance of such Units was effected
in reliance on an exemption from registration under Section 4(2) of the
Securities Act.


USE OF PROCEEDS OF INITIAL PUBLIC OFFERING
------------------------------------------

On February 19, 1998, the Company closed its IPO of its Common Shares, whereby
20.0 million Common Shares were issued at $15 per share, representing gross
proceeds of $300.0 million to the Company.  On March 12, 1998, the Company
closed the sale of an additional 3.0 million Common Shares pursuant to exercise
of the underwriters' over-allotment option, representing gross proceeds of $45.0
million to the Company.  Total underwriting discounts and commissions paid by
the Company were approximately $24.2 million.  Total expenses paid by the
Company, including expenses incurred in connection with the offering, the
initial organization and operation of the Company and the Operating Partnership
and the formation transactions described in the Company's Registration Statement
on Form S-11 (File No. 333-41183), were approximately $6.1 million, of which
approximately $2.5 million was used to repay indebtedness to an affiliate of
FBR.

The Company contributed the net proceeds of the IPO of approximately $320.9
million (net of underwriting discounts and commissions) to the Operating
Partnership in exchange for 23.0 million Units.  As of June 30, 1998, the
Company had unused net proceeds, totaling approximately $146.0 million, invested
in short-term investments.  During the three-month period ended September 30,
1998, all unused net proceeds of the IPO were used to acquire real properties
and improvements ("properties") as follows:

                                       22
<PAGE>
 
On July 22, 1998, the Operating Partnership acquired two properties from Russell
E. Hand for approximately $2.2 million in cash, including estimated closing
costs through September 30, 1998, and for which approximately $8.5 million in
cash was used to repay debt assumed in connection with such acquisition.

On July 23, 1998, the Operating Partnership acquired three properties from
affiliates of Kelley Automotive Group for approximately $8.1 million in cash,
including estimated closing costs through September 30, 1998, and for which
approximately $8.1 million in cash was used to repay debt assumed in connection
with such acquisitions.

On July 23, 1998, the Operating Partnership acquired one property from
affiliates of TMB, LLC for approximately 900,000 in cash, including estimated
closing costs through September 30, 1998, and for which approximately $1.7
million in cash was used to repay debt assumed in connection with such
acquisitions.

On August 24, 1998, the Operating Partnership acquired five properties from
affiliates of Gunn Automotive Group for approximately $4.9 million in cash,
including estimated closing costs through September 30, 1998, and for which
approximately $17.5 million in cash was used to repay debt assumed in connection
with such acquisitions.

On August 27, 1998, the Operating Partnership acquired two properties from
affiliates of Orr Automotive for approximately $1.3 million in cash, including
estimated closing costs through September 30, 1998, and for which approximately
$1.8 million in cash was used to repay debt assumed in connection with such
acquisitions.

On August 28, 1998, the Operating Partnership acquired one additional property
from affiliates of Orr Automotive for approximately $72,000 in cash, including
estimated closing costs through September 30, 1998, and for which approximately
$237,000 in cash was used to repay debt assumed in connection with such
acquisitions.

On August 28, 1998, the Operating Partnership acquired four properties from
affiliates of Warren Henry Automobiles for approximately $6.7 million in cash,
including estimated closing costs through September 30, 1998, and for which
approximately $6.0 million in cash was used to repay debt assumed in connection
with such acquisitions.

On September 1, 1998, the Operating Partnership acquired one property from
affiliates of Roundtree Automotive Group for approximately $2.2 million in cash,
including estimated closing costs through September 30, 1998.

On September 1, 1998, the Operating Partnership acquired three properties from
affiliates of Momentum Automotive Group for approximately $14.2 million in cash,
including estimated closing costs through September 30, 1998, and for which
approximately $11.1 million in cash was used to repay debt assumed in connection
with such acquisitions.

On September 11, 1998, the Operating Partnership acquired four properties from
affiliates of Lynn Alexander Automotive Group for approximately $5.9 million in
cash, including estimated closing costs through September 30, 1998, and for
which approximately $3.5 million in cash was used to repay debt assumed in
connection with such acquisitions.

On September 16, 1998, the Operating Partnership acquired one additional
property from affiliates of Orr Automotive for approximately $2.1 million in
cash, including estimated closing costs through September 30, 1998.

                                       23
<PAGE>
 
On September 18, 1998, the Operating Partnership acquired two properties from
Scott Fink for approximately $4.7 million in cash, including estimated closing
costs through September 30, 1998, and for which approximately $4.0 million in
cash was used to repay debt assumed in connection with such acquisitions.

On September 28, 1998, the Operating Partnership acquired three properties from
affiliates of Park Place Motor Cars for approximately $19.0 million in cash,
including estimated closing costs through September 30, 1998, and for which
approximately $14.1 million in cash was used to repay debt assumed in connection
with such acquisitions.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Submission of Matters to Vote of Security Holders

Not applicable

Item 5. Other Information

Not applicable

Item 6. Exhibits and Reports on Form 8-K

(a)  EXHIBITS:
     -------- 

10.40  First Amended and Restated Credit Agreement dated as of August 14, 1998
       to Credit Agreement dated February 19, 1998 between Capital Automotive
       L.P. and NationsBank, N.A.

10.41  Second Amended and Restated Credit Agreement dated as of September 8,
       1998 to Credit Agreement dated February 19, 1998 between Capital
       Automotive L.P. and NationsBank, N.A.

10.42  Employment Agreement by and between Capital Automotive L.P. and John M.
       Weaver

27     Financial Data Schedule
 
(b)    REPORTS ON FORM 8-K
       -------------------

(1)    A current report on Form 8-K dated July 23, 1998 was filed with the
       Securities and Exchange Commission on August 7, 1998. It disclosed the
       Real Property Contribution and Purchase Agreement by and among Capital
       Automotive L.P., Capital Automotive REIT, Thomas W. Kelley, James E.
       Kelley and Midwest Auto Realty Co. L.P.

                                       24
<PAGE>
 
                                   SIGNATURES
                                   ----------


        Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                        CAPITAL AUTOMOTIVE REIT   
                                        (Registrant)


                                        BY: /s/ Thomas D. Eckert
                                            -----------------------
                                            Thomas D. Eckert
                                            Chief Executive Officer 
                                            and President


                                        BY: /s/ David S. Kay
                                            ------------------------
                                            David S. Kay
                                            Vice President and Chief
                                            Financial and Accounting 
                                            Officer


Dated: November 10, 1998
       -----------------

                                       25