CAPITAL AUTOMOTIVE REIT
ANNUAL REPORT ON FORM 10-K

FISCAL YEAR ENDED DECEMBER 31, 2003

TABLE OF CONTENTS

PART 1

Item 1. Business

     References to “we,” “us” or “our” refer to Capital Automotive REIT or, if the context requires, Capital Automotive L.P., which we refer to as the “Partnership,” and our business and operations conducted through the Partnership and/or directly or indirectly owned subsidiaries. We are the sole general partner of the Partnership and, as of December 31, 2003, owned approximately 80.7% of the common units of limited partnership interest in the Partnership, which we refer to as Units, as well as 100% of the Series A preferred units of limited partnership interest in the Partnership. Units of the Partnership held by limited partners (other than us) are redeemable, at the option of the holder, for cash, or we may assume the redemption obligations of the Partnership and acquire the Units in exchange for our common shares on a one-for-one basis.

     In this Form 10-K, we use the term “dealerships” to refer to franchised automobile dealerships and motor vehicle service, repair or parts businesses, used vehicle businesses and other related businesses, which are the types of businesses that are operated on our properties. We also use the terms “dealer group,” “tenant” or “operators of dealerships” to refer to the persons and companies that lease our properties.

GENERAL

     We are a self-administered and self-managed real estate company operating as a real estate investment trust, commonly referred to as a REIT, for federal income tax purposes. We were organized under the laws of the State of Maryland on October 20, 1997. Our executive officers are Thomas D. Eckert, President and Chief Executive Officer; David S. Kay, Senior Vice President, Chief Financial Officer and Treasurer; Jay M. Ferriero, Senior Vice President and Director of Acquisitions; John M. Weaver, Senior Vice President, Secretary and General Counsel and Lisa M. Clements, Vice President and Chief Accounting Officer.

     As of December 31, 2003, we had invested more than $1.9 billion in 331 properties located in 30 states, consisting of approximately 2,323 acres of land and containing approximately 13.6 million square feet of buildings and improvements. Our tenants operate 445 motor vehicle franchises on our properties, representing 43 brands of motor vehicles, which include all of the top selling brands in the U.S.

     Our principal executive offices are located at 8270 Greensboro Drive, Suite 950, McLean, Virginia 22102, and our telephone number is (703) 288-3075. Our website address is www.capitalautomotive.com. We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after electronically filed with or furnished to the Securities and Exchange Commission, commonly referred to as the SEC.

BUSINESS AND ACQUISITION STRATEGY

     Our primary business strategy is to purchase real estate (land, buildings and other improvements), which we simultaneously lease to operators of franchised automobile dealerships and motor vehicle service, repair or parts businesses, used vehicle businesses and other related businesses under long-term, triple-net leases. Triple-net leases typically require the tenant to pay all operating expenses of a property, including, but not limited to, all real estate taxes, assessments and other government charges, insurance, utilities, repairs and maintenance. We focus on leasing properties to dealer groups that have a long history of operating multi-site, multi-franchised dealerships, generally targeting the largest dealer groups in terms of revenues in the largest metropolitan areas in the U.S. in terms of population. In addition, we provide facility improvement and expansion funding, construction financing and takeout commitments in certain circumstances. We believe that we are the only publicly-traded real estate company exclusively pursuing this strategy. The objective of our strategy is to provide long-term, predictable, stable cash flow for our shareholders.

     We fund the purchase of real estate with cash from operations, proceeds from debt or equity financings, the assumption of existing debt, newly issued Units, or a combination of the foregoing. We generally lease our properties to established, creditworthy tenants, for an initial period of 10 to 20 years (with a weighted average initial lease term for

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leases entered into during the year ended December 31, 2003 of 17.0 years), with our entire portfolio having a weighted average initial lease term of approximately 14.7 years. The tenant usually has the option to renew the lease generally on the same terms and conditions for one or more additional periods of five to 10 years each.

     When we evaluate prospective tenants and potential properties for purchase, we consider such factors as:

     For our existing tenants, we have a program that can fund significant facility improvements and expansions for properties in our portfolio. Under this program, the cost of the improvements is added to the existing lease, which is typically reset to the original term when the funding is completed, and the rents are increased accordingly. In certain circumstances, we will also provide commitments to purchase newly constructed dealerships or fund new construction on zoned and permitted property with approved franchises, in which we own the underlying land that is leased to the tenant.

     We believe that because of the unique requirements of dealerships, these properties are a discrete sector of the national retail real estate industry. The total market for automotive retail-related real estate is estimated in excess of $50 billion and growing due to increasing population and number of registered vehicles. Of the total market for automotive retail-related real estate, approximately $15 to $20 billion would likely meet our stringent investment criteria. We believe this target market will continue to grow as dealers expand their current operations and as new dealerships are awarded by manufacturers to dealers in growing markets. We believe that these properties present attractive acquisition opportunities because of state franchise laws and strict zoning requirements for dealership properties. These laws and requirements greatly restrict the ability to relocate dealerships in mature markets, the primary focus of our acquisition strategy. In addition, because of manufacturer requirements, dealers are continuously improving their properties to adhere to manufacturer specifications, enhancing their value. Finally, their locations generally have frontage on and visibility from major thoroughfares in established or developing areas of major metropolitan markets. In the event that a property becomes unsuitable for dealership use, the property may be redeveloped for other commercial uses because of the wide range of alternatives for the land, as currently zoned.

     We believe that our business and acquisition strategy provides dealer groups and their principals with an opportunity to:

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FINANCING STRATEGY

     Our objective is to have multiple sources of debt and equity financing available to us. We typically fund our short-term liquidity requirements through available cash or one of our three revolving credit facilities. These facilities provide short-term borrowing capacity of $260 million, of which $185 million was available as of December 31, 2003. Periodically, in order to more closely match the term of our debt with that of our leases, we replace our short-term debt using the proceeds of long-term mortgage debt or equity. Our long-term liquidity requirements are financed with both long-term debt and equity. When accessing the equity markets, our objective is to provide accretion to our shareholders, as well as maintain certain debt ratios.

     In order to maintain our investment spread over the lease term, we typically match the average term of our long-term debt with the average remaining term of our leases as well as the type of debt with the type of leases (fixed or variable rate). We describe this process as “match-funding.” We currently intend to match-fund at least 70% of our total outstanding debt with leases. We may change the 70% guideline at any time without shareholder approval. As of December 31, 2003, approximately 86% of our debt outstanding was substantially match-funded debt. As of December 31, 2003, our long-term debt had a weighted average remaining term of 10.5 years and our leases had a weighted average remaining term of 11.6 years.

     We have adopted a policy to limit debt to approximately 65% of our assets (calculated as total assets plus accumulated depreciation). This policy may be changed by our Board of Trustees at any time without shareholder approval. As of December 31, 2003, our debt to assets ratio was approximately 58% and our debt to total market capitalization was approximately 45%.

     We have used and may continue to use interest rate swap arrangements to manage interest rate risk and to match-fund our long-term debt with our long-term leases. We do not enter into interest rate swap arrangements for trading purposes.

BUSINESS OBJECTIVE

     To achieve our objective of generating long-term, predictable, stable cash flow to maximize shareholder value, we are generally:

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THE PROPERTIES, LEASES, TYPICAL LEASE TERMS AND DEALERSHIPS

Properties

     As of December 31, 2003, we had invested more than $1.9 billion in 331 properties located in 30 states, consisting of approximately 2,323 acres of land and containing approximately 13.6 million square feet of buildings and improvements. We own either a fee simple or leasehold interest in each of our properties, including the land, buildings and improvements, related easements and rights and most fixtures. Our properties generally consist of one or more retail showrooms, office space, adjacent service and repair facilities, parts and accessories departments, and in many cases, acreage set aside for used car sales, body shops, parking for inventory, vehicles awaiting service and future development. Land sizes for our properties range from approximately one acre to approximately 82 acres, with an average property size of approximately seven acres. The properties generally are zoned for a variety of commercial uses and typically have frontage on major transportation arteries with high traffic volume, high visibility, signage and ease of ingress and egress. We do not own or lease any significant amount of personal property, furniture or equipment at any property. As of December 31, 2003, all of our properties (excluding one parcel valued at less than $500,000 and acquired with another property at no additional cost) were 100% leased under long-term leases. See Item 2 of this Annual Report on Form 10-K for additional information regarding our properties.

Leases and Typical Lease Terms

     Our properties are generally leased to tenants who operate dealerships on the properties. However, during 2003, we acquired one office building utilized as a corporate headquarters by two dealership organizations. This investment does not represent a diversification strategy into traditional office properties as it furthered our alliance with one of the nation’s largest auto dealers. Although there are variations in the terms of our leases, the following is a summary description of the general terms of a majority of our leases. We intend to seek favorable terms for all leases with future tenants which may or may not be on terms similar to those described below. Leases are individually negotiated and do vary from the terms summarized below, at times in material ways.

     General. Substantially all of the leases are “triple-net,” meaning that the tenant is obligated to pay rent and, typically, all operating expenses of the property, including, but not limited to, all real estate taxes, assessments and other government charges, insurance, utilities, repairs and maintenance. In addition, the leases generally require the tenants to pay for additions, repairs, renovations and improvements to the properties undertaken by the tenant, which, upon expiration or termination of the leases, generally become our property.

     Rent. During the initial lease term and any extensions, tenants pay annual base rent in monthly installments. Rental income attributable to the majority of our leases is fixed by the lease agreement. However, under our variable rate lease program, rental income attributable to our leases is variable, and monthly base rent is calculated based on a spread over an applicable index, typically LIBOR. As of December 31, 2003, $425 million of our real estate portfolio, or 23%, was subject to variable rate leases. These leases represented approximately 19% of our total annualized rental revenue as of December 31, 2003. Of the total variable rate leases, the vast majority of the lease agreements contain minimum lease rates, generally between 8% and 9%, and fixed rate conversion features, generally with minimum rates of 10.0% to 10.25%, and none of these leases contains a maximum rate. Our leases typically provide for upward periodic adjustments in base rent due from our tenants, usually based on a factor of the change in the consumer price index, commonly referred to as the CPI. In addition, our leases are generally subject to certain fixed minimum and/or maximum rent escalators during the initial lease term and extension periods. Our leases typically reset to market during certain renewal periods.

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     Term and Termination. The leases generally are for initial terms of 10 to 20 years (with a weighted average initial lease term for leases entered into during the year ended December 31, 2003 of 17.0 years), with options to renew, exercisable at the option of the tenant, upon generally the same terms and conditions for one or more additional periods of five to 10 years each. The tenant does not have the right to terminate the lease and vacate the property before the end of the initial lease term, except in extraordinary circumstances such as the condemnation of the property. See “—Damage to, or Condemnation of, a Property” below. In the event of a default by the tenant, the legal remedies that could be available to us include the eviction of the tenant, which could result in early termination of the lease. Typically, all leases within a dealer group are cross-guaranteed or are guaranteed by a corporate parent, which helps to ensure the stability of the rental income from the respective tenant.

     Insurance. The leases typically provide that the tenants will maintain insurance on the properties of the type and in the amounts that are usual and customary, including commercial general liability, fire and extended loss insurance provided by reputable companies, with commercially reasonable exclusions, deductibles and limits. However, it is not possible or commercially reasonable to insure against all risks, in all cases, due to the cost or the availability of certain types of insurance, and insurance could lapse due to the intentional or unintentional acts of our tenants. If a property suffers uninsured damage or a tenant suffers a judgment in excess of its liability insurance, the tenant’s ability to perform its obligations under the lease may be impaired.

     Damage to, or Condemnation of, a Property. The leases generally provide that if all or a material portion of a property is condemned, the lease may be terminated and any condemnation award would belong to the Company, provided that in certain circumstances, the tenant may be entitled to share in the condemnation award. With respect to damage to or destruction of a property, the leases usually require the tenant to repair such damage or destruction or to rebuild with insurance proceeds. Rent is typically not abated during the period of repair or rebuilding.

     Assignment. The leases generally provide that the tenants may not, without our prior written consent (which under certain circumstances may not be unreasonably withheld) or upon compliance with conditions established by us, assign or otherwise transfer any lease in whole or in part except to a related person. Generally, a change of control of the tenant or sale of all or substantially all of the assets of the tenant will be considered an assignment of the lease.

     Events of Default. If there is an event of default under a lease, we may terminate the lease, evict the tenant, retain possession of the property and/or lease the property to others. An event of default typically includes, but is not limited to, a failure to pay rent, a failure to comply with the provisions of the lease, the occurrence of certain events relating to bankruptcy or insolvency of the tenant, or failure to maintain a franchise agreement.

     Indemnification. Generally, a tenant will be required to indemnify us and our officers, trustees, employees, owners, agents and affiliates from liabilities, costs and expenses arising from such things as (1) the use, condition, operation or occupancy of the property, (2) any breach, violation or nonperformance of the lease or any law, (3) any injury or damage to the person, property or business of the tenant or any customer of the tenant, and (4) the violation of environmental laws.

     Right of First Negotiation, First Offer and Option to Purchase Property. Certain leases provide the tenant with a right of first negotiation to purchase the property if we decide to sell the property. We will notify the tenant of our intention to sell the property and the tenant will have a period of time to extend an offer, including specifying the purchase price. We may in our discretion reject the tenant’s offer and sell the property to a third party on other terms if the purchase price is higher or we reasonably believe such terms are better than the terms proposed by the tenant. Under the terms of a limited number of leases, the tenant has a right of first offer, in which, for a period of time after receiving notice from us of our intention to sell the property and the proposed sales price for the property, the tenant may advise us that it wishes to purchase the property at the specified price. If the tenant does not exercise this right or if the tenant and we cannot agree on the terms and conditions for the purchase of the property by the tenant, we are free to offer and sell the property to a third party. In addition, some of our leases offer tenant purchase options, generally at the greater of the fair market value of the property at the time of sale or our purchase price, which may be increased by a factor of the CPI at the time the option is exercised, or the fair market value of the property at the time of sale.

     Environmental Matters. Substantially all of our tenants are responsible for compliance with applicable environmental laws, including, but not limited to, laws pertaining to hazardous materials, and for correcting material adverse

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environmental conditions at or on the properties. Substantially all of our leases require the tenant to indemnify us for liabilities and costs related to environmental matters.

Dealerships and Dealer Groups

     New motor vehicle dealer groups in the U.S. operate their dealerships under franchise arrangements with motor vehicle manufacturers. Such arrangements typically specify the locations at which the dealer group can sell motor vehicles and related parts and products and perform certain approved services in order to serve a specified market area. Manufacturers maintain control over the designation of market areas and allocation of vehicles among dealer groups. The manufacturer does not guaranty exclusivity within a specified territory. The limited ability of dealer groups to move their dealership locations makes long-term leases attractive to dealer groups and increases the likelihood that our tenants will renew their leases.

     Each franchise arrangement typically grants the dealer group the non-exclusive right to use and display the manufacturer’s trademarks, service marks and designs in the form and manner approved by the manufacturer and imposes a variety of requirements on the dealer group concerning, for example, the showrooms, the facilities and equipment for servicing vehicles, the maintenance of vehicles and parts inventories, the maintenance of minimum net working capital and the training of personnel. The arrangement usually requires the dealer group to submit a monthly financial statement of operations. In addition, the manufacturer’s prior approval is required for changes in certain members of management or transfers of ownership of the dealership.

     Typically, the manufacturer has the ability to terminate the arrangement earlier than the expiration of the term of the arrangement or refuse to renew the arrangement under certain circumstances such as when a dealer group fails to meet financial covenants established by the manufacturer. We believe that each dealer group that sells new motor vehicles generally expects to renew any expiring arrangements in the ordinary course of business.

     In addition to selling and leasing new vehicles, many dealer groups sell and lease used vehicles. Dealer groups also provide service and parts, primarily for the vehicle makes and models that they sell or lease, and perform both warranty and non-warranty service work. In general, parts departments support the sales and service divisions. Dealers may also sell parts at retail to their customers or at wholesale to independent repair shops. Dealer groups also arrange third-party financing for their customers, sell vehicle service contracts and arrange selected types of credit insurance for which they receive financing fees. We believe that the mix in sources of revenues among new motor vehicle sales, used motor vehicle sales, parts and service, and financing and insurance results in greater stability of a dealer group’s cash flow and its ability to make lease payments in all economic environments.

     Because consumer preferences may not always align with manufacturers’ products, dealer groups also diversify by the brands of motor vehicles offered. We believe brand diversification by dealer groups makes them more resistant to changes in consumer preferences and other manufacturer-related issues. As of December 31, 2003, our properties were leased to 51 different dealer groups. Our tenants operate 445 motor vehicle franchises on these properties, representing 43 brands of motor vehicles, which include all of the top selling brands in the U.S. Each brand of motor vehicle had an “allocated value” of less than 8% of our total real estate investments as of December 31, 2003. We allocate value to franchises by dividing the amount we paid for a particular property by the number of franchises located on that property.

     For the year ended December 31, 2003, our top 10 tenants, including their affiliates, accounted for approximately 69% of our total rental revenue, and as of December 31, 2003, approximately 70% of our total annualized rental revenue. For the year ended December 31, 2003, Sonic Automotive, Inc. and its affiliates, who we refer to as Sonic, accounted for approximately 24% of our total rental revenue and, as of December 31, 2003, approximately 23% of our total annualized rental revenue. As of December 31, 2003, Sonic is the tenant of 87 properties. For the year ended December 31, 2003, United Auto Group, Inc. and its affiliates, who we refer to as UnitedAuto, accounted for approximately 10% of our total rental revenue and, as of December 31, 2003, approximately 14% of our total annualized rental revenue. As of December 31, 2003, UnitedAuto is the tenant of 27 properties. No other tenant accounted for 10% or more of our total rental revenue for the year ended December 31, 2003 or our total annualized rental revenue as of December 31, 2003. As a result of the concentration of revenue generated from few tenants, if any one of them were to cease paying rent or other monetary obligations, we may have significantly reduced rental revenue or higher expenses, until the defaults were cured or the properties could be leased to a new tenant or tenants. We believe our tenant concentration may be mitigated by the operational structure within a dealer group. Generally, each dealership within a

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dealer group performs business activities in a manner similar to that of an individual entity or operator, which creates autonomy and diversification within large dealer groups and, therefore, within our portfolio.

GOVERNMENTAL REGULATIONS AFFECTING THE PROPERTIES

     The tenants and we, as property owners, are subject to a wide range of federal, state and local laws and regulations, such as local licensing requirements, consumer protection laws and regulations relating to gasoline storage, waste treatment and other environmental matters, including:

     Environmental Laws. All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Certain of these laws and regulations may impose joint and several liability on certain statutory classes of persons, including tenants, owners (such as us) or operators, for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal. These laws and regulations apply to past and present business operations of the dealer groups and the use, storage, handling and contracting for recycling or disposal of hazardous or toxic substances or wastes. Generally, tenants are obligated to comply with environmental laws and remediation requirements. Our leases typically impose obligations on the tenants to indemnify us from all or most compliance costs we may experience as a result of adverse environmental conditions on the properties. If a tenant fails to or cannot comply or the lease does not require the tenant to act, we could be forced to pay such costs. As of February 29, 2004, we are not aware of any environmental condition with respect to any of the properties that management believes would have a material adverse effect on our business, financial condition or results of operations. We, however, cannot predict whether new or more stringent laws relating to the environment will be enacted in the future or how such laws or the operations of the dealerships and other businesses on our properties will impact the properties. Costs associated with an environmental event could be substantial. Prior to the acquisition of our properties, we typically engage independent environmental consultants to conduct or update Phase I environmental assessments (which generally do not involve invasive techniques such as soil or groundwater sampling) on the properties. In many cases we have commissioned independent environmental consultants to perform Phase II environmental testing (which generally involves soil or groundwater testing for contaminants). Occasionally when a contaminant is detected on a property, we require that the seller post a cash escrow to secure expected remediation costs. None of these assessments or updates revealed any adverse environmental condition which management believes would have a material adverse effect on our business, financial condition or results of operations. There can be no assurances, however, that the environmental assessments detected all contamination, that environmental liabilities have not developed since such environmental assessments were prepared, or that future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in imposition of environmental liability.

     Americans With Disabilities Act of 1990. The properties, as commercial facilities, are required to comply with Title III of the Americans with Disabilities Act of 1990 (the “ADA”). Investigation of a property may reveal non-compliance with the ADA. The tenants will typically have primary responsibility for complying with the ADA but we may incur costs if the tenant does not comply. As of February 29, 2004, we have not been notified by any governmental authority, and management is not aware of, any non-compliance with the ADA that management believes would have a material adverse effect on our business, financial condition or results of operations.

     Other Regulations. State and local fire, life-safety and similar requirements regulate the use of the properties. The leases generally require that each tenant will have primary responsibility for complying with regulations, and failure to comply could result in fines by governmental authorities, awards of damages to private litigants, or restrictions on the ability to conduct business on such properties.

COMPETITION

     We believe that we are the only publicly-traded real estate company exclusively pursuing the strategy of purchasing real estate (land, buildings and other improvements), which we simultaneously lease to operators of dealerships under long-term, triple-net leases.

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     We currently have limited competition and anticipate the majority of our future competition will come from other publicly-traded or privately-held companies offering sale-leaseback transactions or banks and other finance companies that are offering primarily mortgage debt and franchise loans, or may, in the future, offer other types of debt financing.

     Current and future competitors may have greater financial resources and/or greater general real estate experience than we do. We believe that competition for properties will primarily be on the basis of acquisition price and negotiation of rents and other lease terms. Our tenants generally own or operate other properties that are not owned by us.

EMPLOYEES

     As of February 29, 2004, we had 28 employees. None of the employees is represented by a collective bargaining unit. We believe that the relationship with our employees is good.

RECENT DEVELOPMENTS

Investments

     During the three months ended December 31, 2003, we completed approximately $202.5 million of investments, bringing total investments for the year ended December 31, 2003 to $333.4 million. The fourth quarter investments included 18 auto retail properties, one corporate office building, and several facility improvement and construction fundings, containing 15 automotive franchises. The investments were funded with $113 million from borrowings on our short-term credit facilities, $42 million in net proceeds from the issuance of long-term debt, $34 million in net proceeds from our preferred offering in December of 2003 and the remainder with cash on hand. The investments added approximately 815,000 square feet of buildings and improvements on approximately 88 acres of land in 14 states. The leases have initial lease terms generally ranging from 15 to 20 years, with a weighted average initial lease term of 17.9 years, with multiple renewal options exercisable at the option of the tenants. A summary of the fourth quarter investments is as follows:

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Financing

     On December 11, 2003, we issued 3,950,000 7½% Series A Cumulative Redeemable Preferred Shares at $25.00 per share. The preferred shares were issued under our shelf registration statement filed with the SEC on June 25, 2003, which we refer to as the 2003 Shelf Registration Statement. The preferred shares pay quarterly dividends in arrears and are trading on the NASDAQ National Market under the symbol “CARSP.” The shares are redeemable at our option on or after December 11, 2008. Net proceeds to us, after deducting the discounts and commissions to the underwriters and other expenses of this offering, totaled approximately $95.4 million. We contributed the net proceeds of the offering to the Partnership in exchange for preferred Units in the Partnership and used the net proceeds to fund acquisitions, to repay borrowings under our short-term credit facilities and for general corporate purposes.

     During the fourth quarter, we issued approximately $65 million of long-term debt in four separate transactions with three lenders. The net proceeds from the debt were used to fund acquisitions, to repay borrowings under our short-term credit facilities and for general corporate purposes. The significant debt transactions included the following:

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The following transactions occurred subsequent to December 31, 2003:

     During the first quarter of 2004, we issued a mortgage note totaling $11.9 million payable to a worldwide financial services company. The loan is secured by an office building located in Bloomfield Hills, Michigan, and it has a ten year term, 25 year amortization period and requires monthly interest and principal payments that bear interest at a fixed rate of 5.84%.

     On February 9, 2004, we sold 1,825,000 common shares in an underwritten public offering at an initial price to the public of $35.40 per share under our 2003 Shelf Registration Statement. Net proceeds to us, after deducting the discounts and commissions to the underwriters and other expenses of this offering, totaled approximately $61.5 million. We also granted the underwriters an over-allotment option to purchase an additional 273,750 shares, which expires on March 6, 2004. We contributed the net proceeds of the offering to the Partnership in exchange for Units in the Partnership and used the net proceeds to fund acquisitions, to repay borrowings under our short-term credit facilities and for general corporate purposes.

2003 INVESTMENTS

     During the year ended December 31, 2003, we completed $333.4 million of investments, consisting of 39 dealership properties, one note secured by a dealership property, one corporate office building, and several facility improvements and construction fundings. The property investments added approximately 1.7 million square feet of buildings and improvements on approximately 260 acres of land and are located in 15 states (Alabama, Arizona, California, Florida, Georgia, Indiana, Illinois, Michigan, Mississippi, North Carolina, Oklahoma, Rhode Island, South Carolina, Tennessee, and Texas). These properties have initial lease terms generally ranging from 15 to 20 years, with a weighted average initial lease term of 17.0 years. The leases typically have options to renew upon generally the same terms and conditions for one or more additional periods of five to 10 years each, exercisable at the option of the tenants. We funded the 2003 investments with the following: (i) borrowings on our short-term credit facilities, which were subsequently repaid with the net proceeds from other financing sources; (ii) net proceeds from our common share follow-on offering; (iii) net proceeds from our preferred share offering; (iv) net proceeds from the issuance of long-term debt; and (v) cash on hand.

     Of the 2003 investments, $30.5 million represents a note or advances secured by real estate funded during 2003, which are included in other assets on our consolidated balance sheets as of December 31, 2003. The note, totaling $25.5 million, is secured by a dealership property. We also entered into a separate acquisition agreement to acquire the dealership property securing such note during 2004. The construction advances totaling $5.0 million are for newly-constructed facilities for which operations have not commenced. The projects currently under development are Honda and Lexus franchises, both scheduled for completion during 2004. The note and advances require monthly interest payments, which are included in interest and other income on our consolidated statements of operations.

Item 2. Properties

PROPERTIES

     As of December 31, 2003, we had invested more than $1.9 billion in 331 properties located in 30 states, consisting of approximately 2,323 acres of land and containing approximately 13.6 million square feet of buildings and improvements. We own either a fee simple or leasehold interest in each of our properties, including the land, buildings and improvements, related easements and rights and most fixtures. Our properties generally consist of one or more retail showrooms, office space, adjacent service and repair facilities, parts and accessories departments, and in many cases, acreage set aside for used car sales, body shops, parking for inventory, vehicles awaiting service and future development. Land sizes for our properties range from approximately one acre to approximately 82 acres, with an average property size of approximately seven acres. The properties generally are zoned for a variety of commercial uses and typically have frontage on major transportation arteries with high traffic volume, high visibility, signage and ease of ingress and egress. We do not own or lease any significant amount of personal property, furniture or equipment at any property. As of December 31, 2003, all of our properties (excluding one parcel valued at less than $500,000 and acquired with another property at no additional cost) were 100% leased under long-term leases.

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     Properties operated as franchised automobile dealerships (including used car facilities, related motor vehicle service, repair, parts and body shops on the same parcel of land) represented approximately 83% of our total real estate investments as of December 31, 2003. In addition to these properties, we own additional properties, including raw land and properties on which our tenants operate stand alone used car facilities, motor vehicle service, repair and parts, wholesale vehicle auctions or other related businesses, the majority of which are operated by dealer groups. We also own an office building utilized as a corporate headquarters by two dealership organizations.

Tenant and Brand Diversification

     As of December 31, 2003, our properties were leased to 51 different dealer groups. Our tenants operate 445 motor vehicle franchises on these properties, representing 43 brands of motor vehicles, which include all of the top selling brands in the U.S. Each brand of motor vehicle had an “allocated value” of less than 8% of our total real estate investments as of December 31, 2003. We allocate value to franchises by dividing the amount we paid for a particular property by the number of franchises located on that property.

     For the year ended December 31, 2003, our top 10 tenants, including their affiliates, accounted for approximately 69% of our total rental revenue, and as of December 31, 2003, approximately 70% of our total annualized rental revenue. For the year ended December 31, 2003, Sonic accounted for approximately 24% of our total rental revenue and, as of December 31, 2003, approximately 23% of our total annualized rental revenue. As of December 31, 2003, Sonic is the tenant of 87 properties. For the year ended December 31, 2003 UnitedAuto accounted for approximately 10% of our total rental revenue and, as of December 31, 2003, approximately 14% of our total annualized rental revenue. As of December 31, 2003, UnitedAuto is the tenant of 27 properties. No other tenant accounted for 10% or more of our total rental revenue for the year ended December 31, 2003 or our total annualized rental revenue as of December 31, 2003. As a result of the concentration of revenue generated from few tenants, if any one of them were to cease paying rent or other monetary obligations, we may have significantly reduced rental revenue or higher expenses until the defaults were cured or the properties could be leased to a new tenant or tenants. We believe our tenant concentration may be mitigated by the operational structure within a dealer group. Generally, each dealership within a dealer group performs business activities in a manner similar to that of an individual entity or operator, which creates autonomy and diversification within large dealer groups and, therefore, within our portfolio.

Geographic Diversification

     We invest in real estate throughout the United States. As of December 31, 2003, we owned real estate in 30 states, with approximately 76% of our total real estate investments in the top 50 metropolitan areas in the U.S. in terms of population and approximately 98% of our total real estate investments in metropolitan areas, according to the most recent data (April 2000) published by the U.S. Census Bureau on metropolitan statistical areas (MSAs) and primary metropolitan statistical areas (PMSAs).

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The following table specifies the metropolitan areas in which we own real estate representing at least 1% of our total investments as of December 31, 2003.

     As noted in the table above, the largest “geographic concentrations” of our real estate were in the Houston, TX MSA and the Washington, DC-MD-VA-WV MSA, which accounted for approximately 13% and 10% of our total real estate investments, respectively, as of December 31, 2003. No other MSA’s concentration of properties exceeded 6% of our total real estate investments as of December 31, 2003. The Houston, TX MSA and the Washington, DC-MD-VA-WV MSA are both in the top 10 MSAs in terms of population, with the Washington, DC-MD-VA-WV MSA ranked fifth and the Houston, TX MSA ranked seventh. In addition, to minimize our geographic concentration risk in any given area, we generally require cross-guarantees (or guarantees by a corporate parent) of all leases within a dealer group.

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Leases and Lease Expirations

     Substantially all of our properties are leased pursuant to long-term, triple-net leases, under which the tenants typically pay all operating expenses of a property, including, but not limited to, all real estate taxes, assessments and other government charges, insurance, utilities, repairs and maintenance. In addition, the leases generally require the tenants to pay for additions, repairs, renovations and improvements to the properties undertaken by the tenant, which, upon expiration or termination of the leases, generally become our property. Our leases typically provide that the tenants maintain insurance on the properties of the types and in amounts that are usual and customary, including commercial general liability, fire and extended loss insurance provided by reputable companies, with commercially reasonable exclusions, deductibles and limits.

     Our properties are subject to leases with initial terms that generally range from 10 to 20 years (with a weighted average initial lease term for leases entered into during the year ended December 31, 2003 of 17.0 years), with our entire portfolio having a weighted average initial lease term of approximately 14.7 years. As of December 31, 2003, the weighted average remaining lease term for our leases was approximately 11.6 years. The leases typically have options to renew upon generally the same terms and conditions for one or more additional periods of five to 10 years each, exercisable at the option of the tenants (with renewal options typically ranging from a total of five to 40 years). With respect to the leases for properties acquired from Sonic during August 1999, Sonic is required to renew, for an additional five years, the initial terms of leases representing 75% of the total rental payments for such Sonic leases expiring in any given year. The calculation of weighted average initial lease term and weighted average remaining lease term assumes that Sonic renews leases as specified above.

     The following table sets forth the schedule of lease expirations for our 306 leases in place as of December 31, 2003 for each of the 20 years beginning with 2004, assuming that (i) none of the tenants (other than Sonic) exercises or has exercised renewal options, (ii) the number of leases Sonic renews in any given year equals 75% of the total number of Sonic leases expiring that year (rounded to the closest whole number) and (iii) that Sonic renews the minimum required leases as specified above.

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     As of December 31, 2003, all of our 331 properties (excluding one parcel valued at less than $500,000 and acquired in connection with another property at no additional cost) were subject to leases. The excluded parcel is not subject to a lease.

Item 3. Legal Proceedings

     We are not currently subject to any material legal proceeding nor, to our knowledge, is any material litigation currently threatened against us. Under the leases, the tenants are typically obligated to indemnify us from and against all liabilities, costs and expenses imposed upon or asserted against us (1) as owner of the properties on account of certain matters relating to the operation of the properties by the tenant, and (2) where appropriate, on account of certain matters relating to the ownership of the properties prior to their acquisition by us. See “Item 1—Business—The Properties, Leases, Typical Lease Terms and Dealerships—Leases and Typical Lease Terms—Indemnification.”

Item 4. Submission of Matters to a Vote of Shareholders

     No matters were submitted to a vote of shareholders during the fourth quarter of the fiscal year ended December 31, 2003.

PART II

Item 5. Market for the Company’s Common Equity and Related Shareholder Matters

     Market Information and Distributions. Our common shares have traded on the Nasdaq National Market under the symbol “CARS” since February 13, 1998 (the date of our initial public offering). Listed below are the high and low sales prices of our common shares as reported on the Nasdaq National Market and the distributions declared for each of the periods indicated.

     On February 27, 2004, the last reported sale price on the Nasdaq National Market was $34.14 per share and there were 384 holders of record of our common shares. We believe the total number of our beneficial shareholders to be approximately 22,000 because certain common shares are held of record by depositories, brokers and other nominees.

     The Company’s ongoing operations generally will not be subject to federal income taxes as long as the Company maintains its REIT status. Under the Code, real estate investment trusts are subject to numerous organizational and

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operational requirements, including the requirement to distribute at least 90% of REIT taxable income. Pursuant to this requirement, we were required, at a minimum, to distribute an estimated $30.6 million for 2003 and approximately $29.3 million and $27.0 million for 2002 and 2001, respectively. Our estimated taxable income for 2003 is approximately $34.0 million and our actual taxable income for 2002 and 2001 was approximately $32.6 million and $30.0 million, respectively. We distributed over 100% of our taxable income for 2003, 2002 and 2001 and therefore avoided substantially all federal income taxes. We may or may not elect to distribute in excess of 90% of our taxable income in future years. We are also subject to certain state and local income and franchise taxes.

     We intend to continue to pay regular quarterly distributions to holders of common shares and Units. Future distributions, however, will be at the discretion of our Board of Trustees and will depend on our actual results of operations, financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Trustees deems relevant. We are obligated to pay regular quarterly distributions to holders of our Series A preferred shares at the rate of $1.875 per annum per Series A preferred share, prior to the distributions on the common shares.

     Our total annual dividends per share for 2003, 2002 and 2001 were $1.65 per share, $1.60 per share and $1.55 per share, respectively. Our Series A preferred shares were issued in December 2003 and therefore, no dividends were paid on our Series A preferred shares in 2003. The annual dividend amounts are different from total distributions calculated for tax purposes. Distributions to the extent of our current and accumulated earnings and profits for federal income tax purposes generally will be taxable to a shareholder as ordinary dividend income. Distributions in excess of current and accumulated earnings and profits will generally be treated as a nontaxable reduction of the shareholder’s basis in such shareholder’s shares, to the extent thereof, and thereafter as taxable gain. Distributions that are treated as a reduction of the shareholder’s basis in its shares will have the effect of deferring taxation until the sale of the shareholder’s shares.

     The following presents the federal income tax characterization of distributions paid, or deemed to be paid, to common shareholders for the year ended December 31:

No assurances can be given regarding what portion, if any, of distributions in 2004 or subsequent years will constitute a return of capital for federal income tax purposes.

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Item 6. Selected Financial Information

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with our primary business strategy to give the reader an overview of the goals of our business. This is followed by a discussion of the critical accounting policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. In the next section, beginning on page 20, we discuss our results of operations for the past two fiscal years. We then provide, beginning on page 24, an analysis of our liquidity and capital resources, including discussions of our cash flows, debt arrangements, sources of capital and financial commitments. Finally, on page 34, we discuss funds from operations, or FFO, which is a relative non-GAAP financial measure of performance and liquidity of an equity REIT used by the REIT industry.

     The MD&A should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and notes thereto appearing in Item 8 of this report and the subsection captioned “Forward-Looking Statements” below. Historical results set forth in Selected Financial Information, the Financial Statements and Supplemental Data included in Item 6 and Item 8 and this section should not be taken as indicative of our future operations.

Overview

     Our primary business strategy is to purchase real estate (land, buildings and other improvements), which we simultaneously lease to operators of franchised automobile dealerships and motor vehicle service, repair or parts businesses, used vehicle businesses and other related businesses under long-term, triple-net leases. We use (i) the term dealerships to refer to these types of businesses that are operated on our properties and (ii) the term dealer group, tenant or operators of dealerships to refer to the persons and companies that lease our properties. We focus on leasing properties to dealer groups that have a long history of operating multi-site, multi-franchised dealerships, generally targeting the largest dealer groups in terms of revenues in the largest major metropolitan areas in the U.S. in terms of population. In addition, we provide facility improvement and expansion funding, construction financing and takeout commitments in certain circumstances.

     Substantially all of our properties are leased pursuant to long-term, triple-net leases, under which the tenants typically pay all operating expenses of a property, including, but not limited to, all real estate taxes, assessments and other government charges, insurance, utilities, repairs and maintenance. The initial lease terms generally range from 10 to 20 years (with a weighted average initial lease term for leases entered into during the year ended December 31, 2003 of 17.0 years), with our entire portfolio having a weighted average initial lease term of approximately 14.7 years. As of December 31, 2003, our portfolio had a weighted average remaining lease term of approximately 11.6 years. The leases typically have options to renew upon generally the same terms and conditions for one or more additional periods of five to 10 years each, exercisable at the option of the tenants (with renewal options typically ranging from a total of five to 40 years).

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     Substantially all of our revenues are derived from (1) rents received or accrued under long-term, triple-net leases; (2) interest earned on notes secured by real estate; (3) interest earned from the temporary investment of funds in short-term investments; and (4) other fee income.

     We are a self-administered and self-managed real estate company operating as a real estate investment trust, or a REIT, for federal income tax purposes. Our general and administrative expenses consist primarily of compensation expense for our executive officers and other employees, professional fees, office administration expenses (including rent), business taxes and insurance and various other expenses incurred in managing our business. Our primary non-cash expense is the depreciation of our properties. We depreciate buildings and improvements on our properties over a nine-year to 40-year period for tax purposes and a 20-year to 45-year period for financial reporting purposes. We do not own or lease any significant personal property, furniture or equipment at any property we currently own.

Critical Accounting Policies

     The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States, commonly referred to as GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. These estimates and assumptions are affected by management’s application of critical accounting policies. A summary of our accounting policies and procedures is included in the Summary of Significant Accounting Policies footnote to our consolidated financial statements. Management believes the following are the critical accounting policies used in the preparation of our consolidated financial statements.

Real Estate Assets – Impairment Assessment

     We periodically assess our real estate assets for possible permanent impairment when certain events or changes in circumstances indicate that the carrying amount of the real estate may not be recoverable. Management considers current market conditions and tenant credit analysis in determining whether the recoverability of the carrying amount of an asset should be assessed. When an assessment is warranted, management determines if it is probable that the sum of the expected undiscounted future cash flows is less than the carrying amount of the property being assessed. If the undiscounted future cash flows are less than the carrying amount, then an impairment loss would be recognized equal to the amount of the difference between the fair value of the property and its carrying amount.

Real Estate Assets – Estimated Useful Lives and Allocation of Purchase Price

     We depreciate our real estate assets using the straight-line method over their estimated useful lives. Our buildings and improvements are currently being depreciated over 20 to 45 years. The useful lives of the properties are assigned based on the third-party appraisals and/or structural reviews that are prepared for each property we acquire.

     The purchase price of real estate properties acquired is allocated to the various components, such as land, buildings and improvements, and in-place leases as appropriate, in accordance with Statement of Financial Accounting Standards, commonly referred to as SFAS, No. 141, “Business Combinations.” The purchase price is allocated based on the fair value of each component at the time of acquisition. The fair value of the buildings and improvements are recorded at the cost of our acquisition which we believe approximates their replacement costs. We generally do not acquire real estate assets that have in-place leases. We typically execute our leases simultaneously with the purchase of the real estate, and because of this, no value has been ascribed to any in-place leases because we do not believe any exist.

Improvement Fundings and Construction Financing

     We may fund improvements made by our tenants on our existing properties. Improvements include costs incurred on facilities during which the tenant’s business continues to operate without interruption. Improvement fundings are recorded as buildings and improvements on our consolidated balance sheets and the amounts charged to the tenant during the project are recorded as rental revenue. Once the project is completed, the remaining useful life of the buildings and improvements is determined and depreciation expense is adjusted accordingly on a prospective basis.

     We may provide construction financing to our tenants in certain circumstances in which we own the underlying land that is leased to the tenant. Construction financing includes fundings for the construction of new facilities for which operations have not commenced or fundings for major improvements to existing facilities that cause operations to cease during the construction period. Fundings are recorded as construction advances during the period of construction and

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the amounts charged to our tenant during that time are recorded as interest income. After completion of the project, the construction advances are paid down simultaneously with our purchase of the buildings and improvements. The buildings and improvements are acquired at fair market value and recorded as real estate on our consolidated financial statements.

Derivatives

     We have used and may continue to use interest rate swap arrangements to manage interest rate risk. We do not enter into interest rate swap arrangements for trading purposes. Swaps we have entered into with third parties were documented as cash flow hedges and were designated as highly effective at the inception of the swap agreements. We continue to evaluate the highly effective nature of those hedges and believe our hedges continue to be highly effective. Therefore, in accordance with GAAP, the unrealized gain or loss upon measuring the swaps at their fair value is recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity on our consolidated balance sheets. The fair value of the swaps is recorded as either a derivative instrument asset or a derivative instrument liability on our consolidated balance sheets. We intend to meet the conditions for hedge accounting; however, if a particular interest rate swap does not qualify as highly effective, the change in the fair value of the derivatives used as hedges would be reflected in the Consolidated Statements of Operations.

Rental Revenue Recognition

     We lease our real estate pursuant to long-term, triple-net leases, under which the tenants typically pay all operating expenses of a property, including, but not limited to, all real estate taxes, assessments and other government charges, insurance, utilities, repairs and maintenance. Our leases are recorded as operating leases for financial reporting purposes. As such, the leased assets remain on our balance sheet and we depreciate them based on their estimated useful lives. Under SFAS No.13, “Accounting for Leases,” if a lease term is greater than 75% of the economic life of the leased property or if the present value of future minimum lease payments of that lease exceed 90% of the fair value of the leased property then our lease would not be considered an operating lease for accounting purposes but would instead be considered a direct financing lease and the related leased assets removed from our balance sheet. Determination of economic lives and fair values of leased property has some level of subjectivity. We believe, however, that the assumptions we used to estimate both fair value and the economic life of the leased asset are based on reasonable market terms and are consistent with industry practice. Rental income attributable to the leases is recorded monthly when due from tenants and is recognized on a straight-line basis over the initial terms of the related leases. Rental income attributable to the majority of our leases is fixed by the lease agreement. However, under our variable rate lease program, monthly base rent is calculated based on a spread over an applicable index, typically LIBOR. The vast majority of our variable rate lease agreements contain minimum lease rates and fixed rate conversion features, and none of these leases contains a maximum rate.

     Our leases typically provide for upward periodic adjustments in base rent due from our tenants, usually based on a factor of the change in the consumer price index, commonly referred to as CPI. In addition, our leases are generally subject to certain fixed minimum and/or maximum rent escalators during the initial lease term and extension periods. Our leases typically reset to market during certain renewal periods. The fixed minimum rent escalations are straight-lined into rental income over the initial lease term. Any rent adjustments above the fixed minimum escalations are recorded as revenue in the period they are due from the tenants.

Capitalized Leasing Costs

     Certain direct costs initially incurred by us in negotiating and consummating a successful lease are capitalized and generally amortized over the initial base term of the lease. Capitalized leasing costs include employee compensation and payroll-related fringe benefits directly related to time spent performing successful leasing-related activities. These activities include evaluating the financial condition of prospective clients, evaluating and recording guarantees, collateral and other security arrangements, negotiating lease terms, preparing lease documents and closing the transaction.

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Results of Operations

Revenue

     Rental. The increase in rental revenue over the past two fiscal years was primarily attributable to the growth of our real estate portfolio from which we generate our rental income. The following table demonstrates the growth of our real estate portfolio over the periods indicated.

(1) Three of the properties owned as of December 31, 2001 were sold during 2002 and one of the properties owned as of December 31, 2002 was sold during 2003. The results of operations related to the sold properties were reclassified from rental revenue to discontinued operations as discussed under “-Discontinued Operations” below.

     The increase in rental income was also attributable to an increase from rent adjustments above the fixed minimum escalators, which are recorded as revenue in the period they are due from the tenants.

     The increase in rental revenue from 2001 to 2002 was also attributable to the conversion throughout 2002 of leases on approximately $99 million of properties leased to several tenants from variable rate to fixed rate, resulting in an increase in rental revenue. Other terms of the leases, including lease escalators, remained unchanged.

This increase was partially offset by

     Interest and Other. The increase in interest and other income from 2002 to 2003 was primarily due to interest of $280,000 earned on a note or advances secured by real estate funded during 2003. The note, totaling $25.5 million, is secured by a dealership property. We also entered into a separate acquisition agreement to acquire the dealership property securing such note during 2004. The construction advances totaling $5.0 million are for newly-constructed facilities for which operations have not commenced. The projects currently under development are Honda and Lexus franchises, both scheduled for completion during 2004. The note and advances require monthly interest payments, which are included in interest and other income for the year ended December 31, 2003. Additionally, differences in interest and other income are due to fluctuations in the cash collateral balances held by our lenders at any point in time and changes in the interest rates earned on these balances. The purposes of the cash collateral accounts are to hold

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funds, generally in the amount of the swap valuations at any point in time, and to protect the lenders in case of an early termination by us. The cash collateral accounts are controlled by the lenders; however, we earn interest on the funds held in such accounts.

     The increase in interest and other income from 2001 to 2002 was primarily due to an increase in interest earned on temporary investments, fluctuations in the cash collateral accounts as noted above and other fee income, partially offset by a gain on the sale of properties, totaling $218,000 included in interest and other income for the year ended December 31, 2001. Beginning in 2002, GAAP requires that the gains and losses from the dispositions of properties and all operating earnings from these properties be reported as “discontinued operations.” This requires reclassification of certain amounts from “income from continuing operations” to “discontinued operations,” which is more fully described below.

Expenses

     Depreciation and Amortization. Depreciation and amortization consisted primarily of depreciation on buildings and improvements owned during the years indicated above. The increases are primarily attributable to the growth of our real estate portfolio described under “Revenue – Rental” above, resulting in an increase in our depreciable assets.

     General and Administrative. General and administrative expenses increased from 2002 to 2003 due primarily to:

     This increase was partially offset by the write-off totaling $195,000 during the fourth quarter of 2002 related to the remaining costs on our former office space. In October 2002, we took advantage of the soft office space market and locked up a long-term lease for more efficient space and relocated our office. In addition, we subleased our former space to a third party. In accordance with GAAP, the remaining costs related to a pre-existing lease were charged to expense when the leased property has no substantive future use or benefit to the lessee, net of any rent received from subleasing to a third party.

General and administrative expenses, excluding this write-off, increased 21% from 2002 to 2003.

     General and administrative expense increased from 2001 to 2002 due primarily to:

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General and administrative expenses, excluding the $195,000 write-off, increased 16% from 2001 to 2002.

     Interest. The following table sets forth certain information regarding our debt as of the periods indicated.

     The increase in interest expense over the past two years is primarily due to an increase in our overall debt during the past 36 months, which was primarily obtained to directly or indirectly finance our investment in real estate during that time period.

     Partially offsetting the increases in debt outstanding were decreases in the effective interest rate on our debt. The change in the effective interest rates is primarily due to the decrease in interest rates during the past 36 months. The change in our effective interest rate over any given period is also affected by our mix of variable rate debt to total debt and the timing of any financings or refinancings.

     From 2002 to 2003, our interest expense increased disproportionately with the increase in our overall debt due to the mix of variable rate debt to total debt. During 2003, in order to lock in rates during this low interest rate environment, we increased long-term fixed rate debt while reducing our borrowings on our short-term credit facility and our short-term variable rate mortgage debt. This change in mix of debt was accomplished through:

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     From 2001 to 2002, our interest expense was also impacted by the mix of our variable rate debt to our total debt as a result of the following transactions that occurred during those years:

Discontinued Operations

     Beginning in 2002, SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” requires that gains and losses from dispositions of properties and all operating earnings from these properties be reported as “discontinued operations.” This also requires that all past earnings applicable to a property disposed of subsequent to January 1, 2002 be reported as “discontinued operations.” As a result, previously reported “income from continuing operations” will be updated each time a property is sold. This requirement is for presentation only and has no impact on net income.

     Revenue from properties sold during 2003 and 2002 for the years ended December 31, 2003, 2002 and 2001 was $226,000, $586,000 and $993,000, respectively. Income from discontinued operations (which includes the gain on sale of properties) for the years ended December 31, 2003, 2002 and 2001 was $229,000, $427,000 and $229,000, respectively.

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Preferred Share Dividends

     On December 11, 2003 we issued 3,950,000 7½% Series A Cumulative Redeemable Preferred Shares at $25.00 per share. The preferred shares pay quarterly dividends in arrears. The initial preferred dividend was paid on February 17, 2004 and was equal to $0.26042 per share, which is the pro-ration of the regular quarterly dividend of $0.46875 per share from the date of original issue (December 11, 2003) through January 31, 2004. For 2003, we accrued $411,000, which represents the amount due through December 31, 2003.

Impact of Inflation

     Our leases typically contain provisions to mitigate the adverse impact of inflation on our results of operations. These provisions include upward periodic adjustments in base rent due from our tenants, usually based on a factor of the change in the CPI. In addition, our leases are generally subject to certain fixed minimum and/or maximum rent escalators during the initial lease term.

     Substantially all of our properties are leased to tenants under long-term, triple-net leases. Triple-net leases tend to reduce our exposure to rising property expenses due to inflation.

Liquidity and Capital Resources

     Cash and cash equivalents were $13.4 million and $7.4 million at December 31, 2003 and December 31, 2002, respectively. The changes in cash and cash equivalents during the years ended December 31, 2003 and 2002 were attributable to operating, investing and financing activities, as described below.

Operating Activities

     Cash provided by operating activities represents cash received primarily from rents under long-term, triple-net leases, plus interest and other fee income, less normal recurring general and administrative expenses and interest payments on debt outstanding.

Investing Activities

     Cash used in investing activities primarily reflects the investment in dealership properties, facility improvements and construction fundings, net of sales.

Financing Activities

     Cash provided by financing activities for the year ended December 31, 2003 primarily reflects:

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     The cash provided by financing activities was partially offset by:

     Cash provided by financing activities for the year ended December 31, 2002 primarily reflects:

     The cash provided by financing activities was partially offset by:

Financing Strategy

     Our objective is to have multiple sources of debt and equity financing available to us. We typically fund our short-term liquidity requirements through available cash or one of our three revolving credit facilities. These facilities provide short-term borrowing capacity of $260 million, of which $185 million was available as of December 31, 2003. Periodically, in order to more closely match the term of our debt with that of our leases, we replace our short-term debt using the proceeds of long-term mortgage debt or equity. Our long-term liquidity requirements are financed with both long-term debt and equity. When accessing the equity markets, our objective is to provide accretion to our shareholders, as well as maintain certain debt ratios.

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     In order to maintain our investment spread over the lease term, we typically match the average term of our long-term debt with the average remaining term of our leases as well as the type of debt with the type of leases (fixed or variable rate). We describe this process as “match-funding.” We currently intend to match-fund at least 70% of our total outstanding debt with leases. We may change the 70% guideline at any time without shareholder approval. As of December 31, 2003, approximately 86% of our debt outstanding was substantially match-funded debt. As of December 31, 2003, our long-term debt had a weighted average remaining term of 10.5 years and our leases had a weighted average remaining term of 11.6 years.

     We have adopted a policy to limit debt to approximately 65% of our assets (calculated as total assets plus accumulated depreciation). This policy may be changed by our Board of Trustees at any time without shareholder approval. As of December 31, 2003, our debt to assets ratio was approximately 58% and our debt to total market capitalization was approximately 45%.

     In light of our current financial position, we believe that we will be able to obtain additional financing for our short-term and long-term liquidity requirements as discussed in “Liquidity Requirements” below. We have used and may continue to use interest rate swap arrangements to manage interest rate risk and to match-fund our long-term debt with our long-term leases. However, there can be no assurance that additional financing or capital will be available, or that the terms will be acceptable or advantageous to us.

Variable Rate Lease Program

     We may offer our current and prospective tenants the option of utilizing our variable rate lease program. Under this program, base rent changes monthly based upon a spread over an applicable index, typically LIBOR. In addition, our leases typically provide for upward periodic adjustments in base rent, usually based on a factor of the change in the CPI. The vast majority of our variable rate lease agreements contain minimum lease rates, generally between 8% and 9%, and fixed rate conversion features generally with minimum rates of 10.0% to 10.25%, and none of these leases contains a maximum rate. Upon conversion, the fixed base rent typically continues to be adjusted upward periodically based on a factor of the change in the CPI or other escalation provisions set forth in the lease.

The following table sets forth certain information regarding our variable rate leases and debt as of December 31st for the years indicated (dollars in thousands):

(1) Includes amounts outstanding on our revolving credit facilities totaling $63.5 million, $111.1 million and $75.0 million as of December 31, 2001, 2002 and 2003, respectively.

     In order to maintain our investment spread over the lease term, we typically utilize variable rate debt in circumstances where we have variable rate leases. The investment spreads on our variable rate lease portfolio will change under certain interest rate conditions. Our strategy of including minimum lease rates in our variable rate leases allows us to realize additional investment spread during the current low interest rate environment. During the past three years, as LIBOR has decreased, the interest expense on our variable rate debt has also decreased. However, the revenue generated from the vast majority of our variable rate leases has remained constant during this same time period because the minimum lease rates were in effect at these LIBOR levels. Because many of our leases are subject to minimum lease rates, as LIBOR rises, our investment spreads will contract from current levels until the one-month LIBOR reaches 3.0% to 3.5%. At that time, our variable lease rates and variable debt rates will rise equally with LIBOR.

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Mortgage Debt and Revolving Credit Facilities

     As of December 31, 2003, we had total mortgage debt outstanding of approximately $1.07 billion (consisting of $804.6 million of fixed rate and $265.9 million of variable rate debt), which was secured by 267 of our properties. In addition, we had approximately $75.0 million outstanding on our revolving credit facilities. The following is a summary of our total debt outstanding as of December 31, 2003 and December 31, 2002 (dollars in thousands):

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     During the first quarter of 2004, we issued a mortgage note totaling $11.9 million payable to a worldwide financial services company. The loan is secured by an office building located in Bloomfield Hills, Michigan, and it has a ten year term, 25 year amortization period and requires monthly interest and principal payments that bear interest at a fixed rate of 5.84%.

     For the quarter and year ended December 31, 2003, our interest coverage and debt service coverage ratios were 2.5 and 1.6, respectively. We consider the interest coverage and debt service coverage ratios meaningful financial performance measures of liquidity as they provide our investors with information pertaining to our ability to satisfy our debt service requirements. These measures are typically used by our lenders in assessing our compliance with certain debt covenants. These ratios are considered non-GAAP financial measures because they are calculated using Earnings Before Interest, Taxes, Depreciation and Amortization, commonly referred to as EBITDA. The ratios should not be considered an alternative measure of operating results or cash flow from operations as determined in accordance with GAAP.

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     The following is a calculation of our interest coverage ratio and our debt service coverage ratio for the three months and year ended December 31, 2003 (dollars in thousands). The calculation includes a reconciliation of EBITDA to its most directly comparable GAAP measure, net income.

     The more significant debt covenants related to our mortgage debt and credit facilities limit our debt to assets ratio and require us to comply with minimum debt service coverage and maximum debt to adjusted net worth ratios. Several of our loan agreements contain no financial covenants; however, there are negative covenants relating to customary items such as operation and maintenance of the properties securing the loans and limitations on issuing additional secured debt at those subsidiary levels. As of December 31, 2003, we were in compliance with all of the debt covenants related to our mortgage debt and credit facilities.

Interest Rate Swaps

     To manage interest rate risk, during 2003, 2002, and 2001, we entered into four interest rate swap arrangements with third parties to fix the interest rate on the underlying variable rate debt, totaling approximately $158 million. These swaps were designed to mirror the underlying variable rate debt in terms of index, spread, reset, amortization, compounding and maturity. Due to the identical nature of the terms of the swap arrangements and the underlying terms of the debt, these swaps were documented as cash flow hedges and designated as highly effective at the inception of the swap arrangements. Therefore, in accordance with GAAP, the unrealized gain or loss upon measuring the swaps at their fair value is recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity on our consolidated balance sheets as long as the swaps remain highly effective. We assess whether our swaps remain highly effective at each reporting period date. To date our swaps remain highly effective. The fair value of the swaps is recorded as either a derivative instrument asset or a derivative instrument liability on our consolidated balance sheets. In addition, we are required to post collateral, generally in the amount of the swap valuations at any point in time, to protect the lenders in case of an early termination by us. The collateral posted by us, totaling approximately $12.8 million and $15.0 million as of December 31, 2003 and 2002, respectively, is included in other assets on our consolidated balance sheets. Total comprehensive income for the years ended December 31, 2003, 2002 and 2001 was $53.8 million, $29.7 million and $33.0 million, respectively.

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     The unrealized loss as of December 31, 2003 and December 31, 2002 was as follows (in thousands):

Equity Offerings

     On April 25, 2003, we sold 2,350,000 common shares in an underwritten public offering at an initial price to the public of $26.00 per share under our shelf registration statement filed with the SEC on March 2, 1999. In addition, on May 2, 2003, 352,500 common shares subject to the underwriters’ over-allotment option were issued at an initial price to the public of $26.00 per share. Net proceeds to the Company, after deducting the discounts and commissions to the underwriters and other expenses of this offering, totaled approximately $66.4 million. After the offering, $64.2 million remained available under the 1999 Shelf Registration Statement for the issuance of securities. The Company contributed the net proceeds of the offering to the Partnership in exchange for Units in the Partnership and used the net proceeds to fund acquisitions, repay borrowings under our short-term credit facilities and for general corporate purposes.

     On June 25, 2003, we filed our shelf registration statement with the SEC, which we refer to as the 2003 Shelf Registration Statement, relating to the future offering of up to an aggregate of $500 million of common shares, preferred shares, depositary shares, debt securities and warrants exercisable for common or preferred shares. We believe the 2003 Shelf Registration Statement will provide us with more efficient and immediate access to capital markets when considered appropriate.

     On December 11, 2003 we issued 3,950,000 7½% Series A Cumulative Redeemable Preferred Shares at $25.00 per share. The preferred shares were issued under our 2003 Shelf Registration Statement. The preferred shares pay quarterly dividends in arrears and are trading on the NASDAQ National Market under the symbol “CARSP.” The shares are redeemable at our option on or after December 11, 2008. Net proceeds to us, after deducting the discounts and commissions to the underwriters and other expenses of this offering, totaled approximately $95.4 million. After the offering, $401.3 million was available under the 2003 Shelf Registration Statement for the issuance of securities. We contributed the net proceeds of the offering to the Partnership in exchange for preferred Units in the Partnership and used the net proceeds to fund acquisitions, to repay borrowings under our short-term credit facilities and for general corporate purposes.

     On February 9, 2004, we sold 1,825,000 common shares in an underwritten public offering at an initial price to the public of $35.40 per share under our 2003 Shelf Registration Statement. Net proceeds to us, after deducting the discounts and commissions to the underwriters and other expenses of this offering, totaled approximately $61.5 million. We also granted the underwriters an over-allotment option to purchase an additional 273,750 shares, which expires on March 6, 2004. After the offering, $336.6 million was available under the 2003 Shelf Registration Statement for the issuance of securities. We contributed the net proceeds of the offering to the Partnership in exchange for Units in the Partnership and used the net proceeds to fund acquisitions, to repay borrowings under our short-term credit facilities and for general corporate purposes.

Liquidity Requirements

     Short-term liquidity requirements consist primarily of normal recurring operating expenses and capital expenditures, debt service requirements (including debt service relating to additional and replacement debt), collateral calls on interest rate swaps, distributions to common and preferred shareholders, distributions to minority partners and amounts required for additional property acquisitions, facility improvement and expansion fundings and construction financings. We expect to meet these requirements (other than amounts required for additional property acquisitions, facility improvement and expansion fundings and construction financings) through cash provided from operations and our existing revolving credit facilities. We anticipate that any additional acquisitions of properties, facility improvement and expansion fundings and construction financings during the next 12 months will be funded with amounts available under our existing commitments for long-term financing, future long-term secured and unsecured debt and the issuance of common or preferred equity or Units, each of which may be initially funded with our existing revolving credit facilities. Acquisitions of properties, facility improvement and expansion fundings and construction financings will be

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made subject to our investment objectives and policies with the intention of maximizing both current and long-term growth and income.

     Included in our short-term liquidity requirements is the repayment of approximately $75.0 million of borrowings outstanding on our revolving credit facilities as of December 31, 2003. Properties are eligible within the borrowing base for 150 days to twelve months, unless extended by the Company and the lender, and therefore we are generally required to repay these borrowings within twelve months. We paid down substantially all of the amounts outstanding as of December 31, 2003 with the net proceeds of our follow-on common share offering on February 9, 2004, the issuance of long-term debt and cash on hand.

     As of December 31, 2003, long-term liquidity requirements consisted primarily of obligations under our long-term debt and dividends paid to our preferred shareholders. We anticipate that long-term liquidity requirements will also include amounts required for acquisitions of properties, facility improvement and expansion fundings and construction financings. We expect to meet long-term liquidity requirements through long-term secured and unsecured borrowings and other debt and equity financing alternatives. The availability and terms of any such financing will depend upon market and other conditions.

     The following table summarizes certain of our material contractual cash obligations associated with operating, investing and financing activities as of December 31, 2003 (in thousands):

     Additionally, our preferred shares pay quarterly dividends in arrears at a yearly rate of $1.875 per share, totaling approximately $7.4 million in preferred share dividends to be paid by us on an annual basis. The preferred shares are redeemable for cash, at $25.00 per share plus any accrued and unpaid dividends, at our option on or after December 11, 2008. The preferred shares have no stated maturity.

     We also currently have contractual commitments for future facility improvements and construction financings with several large tenants on properties we currently own. Improvements include costs incurred on facilities during which the tenant’s business continues to operate without interruption. Construction financings include advances for the construction of new facilities for which operations have not commenced or fundings for major improvements to existing facilities that cause operations to cease during the construction period. As of December 31, 2003, these commitments totaled approximately $80 million. Subsequent to December 31, 2003, we have committed to fund additional construction and improvement financings. These projects are expected to be completed during the next two years.

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Commitments for Long-Term Financing

     During the second quarter of 2003, we signed a commitment for $40 million of secured mortgage financing from a worldwide financial services company. The commitment can be drawn down in multiple fundings under one or more debt instruments, and each funding is subject to customary conditions and the lender’s satisfaction with the loan documentation. The commitment provides financing for up to five years at a spread over LIBOR. As of December 31, 2003, we had issued $22.1 million of secured mortgage financing under this commitment leaving $17.9 million available for future borrowings.

Dividend Reinvestment and Share Purchase Plan

     During April 2000, we implemented a DRIP Plan, which was subsequently amended in March 2001. Under the DRIP, current shareholders and Unitholders are permitted to elect to reinvest all, a portion or none of their cash dividends or distributions to purchase common shares. The DRIP also allows both new investors and existing shareholders and Unitholders to make optional cash payments to purchase common shares.

     The DRIP permits current shareholders, Unitholders and new investors to invest a minimum of $500 up to a maximum of $10,000 in common shares per month. The DRIP also allows us to raise additional capital by waiving the limitations on the $10,000 maximum per month, as more fully described in the Prospectus relating to the DRIP. Shares purchased under the DRIP through reinvestment of dividends are purchased at a discount (currently 3%) to the market price. Shares purchased under the DRIP through optional cash payments of $10,000 or less are purchased at market price.

     Common shares may be purchased directly from us or in open market or privately negotiated transactions, as we determine from time to time, to fulfill the requirements for the DRIP. We issued approximately 171,000, 23,000 and 508,000 common shares under the DRIP, totaling approximately $4.4 million, $526,000 and $7.4 million, for the years ended December 31, 2003, 2002 and 2001, respectively.

Purchase of Warrants Outstanding to Purchase Common Shares

     During the fourth quarter of 2001, we completed the purchase of outstanding warrants to purchase approximately 2.8 million common shares for $3.90 per warrant. The aggregate purchase price for the warrants was approximately $10.8 million, of which $4.7 million was paid in 2001 and the remaining $6.1 million was paid in 2002, and was funded with debt and cash on hand. During the first quarter of 2002, we completed the purchase of outstanding warrants to purchase 50,000 common shares for $5.85 per warrant, which was funded with cash on hand. The purchase price for all the warrants was based on the time remaining prior to exercise and the intrinsic value (meaning the difference between the fair market value of the common shares and the exercise price of the warrants) of the outstanding warrants at the time of the offer to purchase. The exercise price per share for the common shares underlying the warrants was $15.00 and substantially all warrants were to expire in February 2003. The purchase of the warrants was considered a retirement of an equity instrument for GAAP purposes and therefore recorded as a charge to shareholders’ equity. In addition, a total of 30,000, 25,000 and 279,446 warrants to purchase common shares were exercised at $15.00 per share during 2003, 2002 and 2001, respectively. As of December 31, 2003, there were no warrants outstanding.

Common Share Repurchase Program

     During 1998, we announced that our Board of Trustees had authorized the repurchase of up to 6.0 million common shares. Purchases have been and will be made from time to time in open market transactions at prevailing prices or in negotiated private transactions at the discretion of management. During 2003 and 2002, there were no repurchases of common shares. During 2001, we repurchased 10,000 common shares at an average price of $14.19 per common share. From the inception of the common share repurchase program through December 31, 2003, a total of 4,094,700 common shares have been repurchased at an average price of $10.62 per common share. In conjunction with the common share repurchases, the Partnership redeemed an equivalent number of Units from the Company for equivalent purchase prices.

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Off-Balance Sheet Arrangements

     We have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Funds from Operations (FFO)

     The National Association of Real Estate Investment Trusts (NAREIT) developed FFO as a relative non-GAAP financial measure of performance and liquidity of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO, as defined under the revised definition adopted in April 2002 by NAREIT and as presented by us, is net income, computed in accordance with GAAP, plus depreciation and amortization of assets unique to the real estate industry, plus minority interest related to income from continuing operations and income from discontinued operations, and excluding gains from the sales of property, and after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash flows from operating activities in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income) and should not be considered an alternative to net income as an indication of our performance or to cash flow as a measure of liquidity or ability to make distributions. We consider FFO a meaningful, additional measure of operating performance because it primarily excludes the assumption that the value of the real estate assets diminishes predictably over time, which is contrary to what we believe occurs with our assets, and because industry analysts have accepted it as a performance measure. Comparison of our presentation of FFO, using the NAREIT definition, to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs.

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     The following table reconciles FFO and FFO per share for each of the five years in the period ended December 31, 2003 to their most directly comparable GAAP measure, net income available to common shareholders and net income per share (in thousands, except per share data):

Forward-Looking Statements

     This Annual Report on Form 10-K, including our documents incorporated herein by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Also, documents which we subsequently file with the SEC and are incorporated herein by reference will contain forward-looking statements. When we refer to forward-looking statements or information, sometimes we use words such as “may,” “will,” “could,” “should,” “plans,” “intends,” “expects,” “believes,” “estimates,” “anticipates” and “continues.” In particular, the risk factors included or incorporated by reference in our Annual Report on Form 10-K describe forward-looking information. The risk factors are not all inclusive, particularly with respect to possible future events. Other parts of, or documents incorporated by reference into, this Annual Report on Form 10-K may also describe forward-looking information. Many things can happen that can cause our actual results to be very different than those described. These factors include, but are not limited to:

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     Given these uncertainties, readers are cautioned not to place undue reliance on these forward-looking statements. We also make no promise to update any of the forward-looking statements. You should carefully review the risks and the risk factors incorporated herein by reference from our Form 8-K/A filed on March 12, 2004, as well as the other information in this Annual Report on Form 10-K or referred to in this Annual Report on Form 10-K, before investing in us.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     We are exposed to certain financial market risks, the most predominant being fluctuations in interest rates. Interest rate fluctuations are monitored by our management as an integral part of our overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on our results of operations. In general, our policy of substantially match-funding at least 70% of our total outstanding debt with leases reduces our exposure to interest rate fluctuations. As of December 31, 2003, approximately 86% of our debt outstanding was substantially match-funded debt. We have used and may continue to use interest rate swap arrangements to manage interest rate risk and to match-fund our long-term debt with our long-term leases. We do not enter into interest rate swap arrangements for trading purposes.

     During the year ended December 31, 2003, our fixed rate debt increased from $593.9 million as of December 31, 2002 to $804.6 million as of December 31, 2003. Interest rate fluctuations may affect the fair value of our fixed rate debt instruments. If interest rates on our fixed rate debt instruments at December 31, 2003 had been one percentage point higher or lower, the fair value of those debt instruments on that date would have decreased or increased, respectively, by approximately $52.5 million.

     As of December 31, 2003, approximately $425 million, or 23% of our total real estate portfolio, was leased to tenants utilizing our variable rate lease program, as compared to $418 million as of December 31, 2002. Under these leases, base rent which is generally based upon a spread over LIBOR, changes monthly. The vast majority of our variable rate lease agreements contain minimum lease rates, generally between 8% and 9%, and fixed rate conversion features generally with minimum rates of 10.0% to 10.25%, and none of these leases contains a maximum rate. The execution of these variable rate leases has enabled us to utilize variable rate debt (totaling $341 million as of December 31, 2003, as compared to $416 million as of December 31, 2002) in order to maintain our investment spread. The investment spreads on our variable rate lease portfolio will change under certain interest rate conditions. Our strategy of including minimum lease rates in our variable rate leases allows us to realize additional investment spread during the current low short-term interest rate environment. During the past year, as LIBOR has decreased, the interest expense on our variable rate debt has also decreased. However, the revenue generated from the vast majority of our variable rate leases has remained constant during this same time period because the minimum lease rates were in effect at these

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LIBOR levels. Because many of our leases are subject to minimum lease rates, as LIBOR rises, our investment spreads will contract from current levels until the one-month LIBOR reaches 3.0% to 3.5%. At that time, our variable lease rates and variable debt rates will rise equally with LIBOR.

     If interest rates on our variable rate debt instruments outstanding at December 31, 2003 had been 1% higher or lower, our annual interest expense relating to those debt instruments would have increased or decreased, respectively, by approximately $3.4 million, based on balances at December 31, 2003. This impact on net income as a result of an increase or decrease in interest rates by 1% is partially reduced by the structure of our variable rate leases as noted above. Because of the minimum lease rates built into the majority of our leases, if the underlying index on our variable rate lease agreements outstanding at December 31, 2003 had been 1% higher or lower, our annual rental revenue relating to those lease agreements would have increased by approximately $438,000 or decreased by approximately $381,000 respectively. Assuming the underlying index increased to a level where none of our minimum lease rates were triggered, a 1% increase or decrease in the underlying index would increase or decrease our rental revenue by approximately $3.4 million to $4.3 million because of certain investment spread variations at various LIBOR levels.

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Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

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REPORT OF INDEPENDENT AUDITORS

The Board of Trustees and Shareholders of Capital Automotive REIT

We have audited the accompanying consolidated balance sheets of Capital Automotive REIT and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, changes in shareholders’ equity and other comprehensive income, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15 (a) (2). These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capital Automotive REIT and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 3 of the Notes to the consolidated financial statements, in 2003 the Company adopted the provisions of Financial Accounting Standards No. 145, “Recission of FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” Also, as discussed in Note 5 of the Notes to the consolidated financial statements, in 2002 the Company adopted the provisions of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

/s/ ERNST & YOUNG LLP

McLean, Virginia
February 11, 2004

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CAPITAL AUTOMOTIVE REIT

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

See accompanying Notes to Consolidated Financial Statements.

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CAPITAL AUTOMOTIVE REIT

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)