FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

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

For quarterly period ended June 30, 2005

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

For the transition period from                      to                     .

COMMISSION FILE NUMBER 000-23733

CAPITAL AUTOMOTIVE REIT

(Exact name of registrant as specified in its charter)

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

8270 Greensboro Drive, Suite 950, McLean, Virginia 22102
(Address of principal executive offices and zip code)

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

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

Yes þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

Number of common shares of beneficial interest outstanding as of July 31, 2005 was 46,275,236.

 

 

CAPITAL AUTOMOTIVE REIT

		Page No.
Part I — Financial Information
Item 1 - Financial Statements.
Consolidated Balance Sheets — June 30, 2005 (unaudited) and December 31, 2004			3
Consolidated Statements of Operations (unaudited) — three months and six months ended June 30, 2005 and June 30, 2004			4
Consolidated Statements of Comprehensive Income (unaudited) — three months and six months ended June 30, 2005 and June 30, 2004			5
Consolidated Statements of Cash Flows (unaudited) — six months ended June 30, 2005 and June 30, 2004			6
Consolidated Statements of Changes in Shareholders’ Equity (unaudited) — six months ended June 30, 2005			7
Notes to Consolidated Financial Statements (unaudited)			8
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.			27
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.			47
Item 4 - Controls and Procedures.			48
Part II — Other Information
Item 1 - Legal Proceedings.			49
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.			49
Item 3 - Defaults Upon Senior Securities.			49
Item 4 - Submission of Matters to a Vote of Security Holders.			49
Item 5 - Other Information.			50
Item 6 - Exhibits.			50
Signatures			51

ITEM I — FINANCIAL STATEMENTS

CAPITAL AUTOMOTIVE REIT

		June 30,				December 31,
		2005				2004
		(unaudited)
ASSETS
Real estate:
Land		$	879,847			$	866,480
Buildings and improvements			1,376,756				1,330,843
Accumulated depreciation			(162,696	)			(143,886	)
			2,093,907				2,053,437
Mortgages and other financing receivables			216,676				43,378
Cash and cash equivalents			7,247				8,332
Other assets, net			56,538				53,010
Total Assets		$	2,374,368			$	2,158,157
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Mortgage debt		$	541,370			$	634,365
Unsecured debt			558,553				381,592
Borrowings under credit facilities			75,000				30,000
Accounts payable and accrued expenses			21,368				23,731
Security deposits payable			10,180				9,665
Total Liabilities			1,206,471				1,079,353
Minority Interest			148,046				144,877
Shareholders’ Equity
Preferred shares, par value $.01 per share; 20 million shares authorized,
3,950,000 Series A Cumulative Redeemable Preferred Shares issued and outstanding as of June 30, 2005 and December 31, 2004			40				40
2,600,000 Series B Cumulative Redeemable Preferred Shares issued and outstanding as of June 30, 2005 and December 31, 2004			26				26
Common shares, par value $.01 per share; 100 million shares authorized,
46,173,833 shares issued and outstanding as of June 30, 2005 and 43,406,280 shares issued and outstanding as of December 31, 2004			462				434
Additional paid-in capital			1,042,903				957,938
Deferred compensation			(7,212	)			(3,816	)
Accumulated other comprehensive income			85				—
Distributions in excess of accumulated earnings			(16,453	)			(20,695	)
Total Shareholders’ Equity			1,019,851				933,927
Total Liabilities and Shareholders’ Equity		$	2,374,368			$	2,158,157

See accompanying Notes to Consolidated Financial Statements.

CAPITAL AUTOMOTIVE REIT

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Revenue:
Rental		$	56,810			$	47,417			$	112,078			$	93,620
Mortgage and other financing			1,611				418				2,497				1,121
Interest and other			557				170				757				437
Total revenue			58,978				48,005				115,332				95,178
Expenses:
Depreciation and amortization			10,217				8,761				20,279				17,266
General and administrative			3,420				2,994				6,704				5,735
Interest			17,435				15,801				33,327				32,719
Debt extinguishment charge			—				8,712				—				8,712
Total expenses			31,072				36,268				60,310				64,432
Income from continuing operations before minority interest			27,906				11,737				55,022				30,746
Minority interest			(3,846	)			(1,586	)			(7,632	)			(4,774	)
Income from continuing operations			24,060				10,151				47,390				25,972
Income from discontinued operations, net of minority interest			236				666				445				2,438
Gain on sale of real estate, net of minority interest			514				259				598				1,212
Total discontinued operations			750				925				1,043				3,650
Net income			24,810				11,076				48,433				29,622
Preferred share dividends			(3,152	)			(2,776	)			(6,303	)			(4,628	)
Net income available to common shareholders — basic and diluted		$	21,658			$	8,300			$	42,130			$	24,994
Common shares outstanding used to compute basic earnings per common share			43,992				36,057				43,616				35,053
Basic earnings per common share:
Income from continuing operations		$	0.48			$	0.20			$	0.94			$	0.61
Net income		$	0.49			$	0.23			$	0.97			$	0.71
Common shares outstanding used to compute diluted earnings per common share			44,331				36,501				43,919				35,587
Diluted earnings per common share:
Income from continuing operations		$	0.47			$	0.20			$	0.94			$	0.60
Net income		$	0.49			$	0.23			$	0.96			$	0.71
Dividends declared per common share		$	0.4380			$	0.4200			$	0.8685			$	0.8365

See accompanying Notes to Consolidated Financial Statements.

CAPITAL AUTOMOTIVE REIT

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Net income		$	24,810			$	11,076			$	48,433			$	29,622
Other comprehensive income:
Change in valuation of interest rate swap, net of minority interest			—				10,333				—				6,693
Change in foreign currency translation, net of minority interest			72				—				72				—
Other comprehensive income			72				10,333				72				6,693
Total comprehensive income		$	24,882			$	21,409			$	48,505			$	36,315

See accompanying Notes to Consolidated Financial Statements.

CAPITAL AUTOMOTIVE REIT

		Six Months Ended June 30,
		2005				2004
Cash flows from operating activities:
Net income		$	48,433			$	29,622
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on disposition of real estate net of minority interest			(598	)			(1,212	)
Stock compensation expense			1,152				728
Depreciation and amortization			22,216				19,282
Write-off of deferred loan fees related to debt extinguishment			—				2,497
Minority interest expense including amounts attributable to discontinued operations			7,715				5,321
Changes in assets and liabilities:
Increase in other assets			(3,928	)			(3,274	)
Increase in accounts payable and accrued expenses			510				5,940
Increase (decrease) in security deposits payable			515				(614	)
Net cash provided by operating activities			76,015				58,290
Cash flows from investing activities:
Purchase of furniture and equipment, net of disposals			(84	)			(17	)
Property acquisitions and improvements			(69,891	)			(155,278	)
Investments in mortgages and other financing receivables			(183,689	)			(12,382	)
Investments in joint venture			(2,553	)			—
Proceeds from mortgages and other financing receivables			15,507				9,996
Property dispositions			4,736				20,658
Net cash used in investing activities			(235,974	)			(137,023	)
Cash flows from financing activities:
Proceeds from borrowings under credit facilities			195,000				120,000
Proceeds from debt issuance			175,000				272,175
Repayment of borrowings under credit facilities			(150,000	)			(117,999	)
Repayment of debt			(81,465	)			(305,968	)
Debt principal payments			(11,530	)			(15,602	)
Payments for debt issuance costs			(1,478	)			(8,226	)
Decrease in restricted cash			2,148				5,625
Payment of common share dividends			(30,165	)			(24,205	)
Payment of preferred share dividends			(6,303	)			(2,881	)
Distributions to minority partners			(7,023	)			(6,480	)
Series A Cumulative Redeemable Preferred Shares issuance costs			—				(97	)
Net proceeds from issuance of Series B Cumulative Redeemable Preferred Shares			—				63,180
Net proceeds from issuances of common shares, net of forfeitures			74,690				101,255
Net cash provided by financing activities			158,874				80,777
Net (decrease) increase in cash and cash equivalents			(1,085	)			2,044
Cash and cash equivalents at beginning of period			8,332				13,352
Cash and cash equivalents at end of period		$	7,247			$	15,396
Supplemental Data:
Real estate acquisitions in exchange for equity issuance		$	—			$	10,057
Real estate acquisitions in exchange for like-kind property		$	—			$	14,968
Interest paid during the period		$	27,632			$	28,119
Dividends and distributions reinvested to purchase common shares		$	7,740			$	5,659
Change in valuation of fair value swap		$	1,961			$	7,136

See accompanying Notes to Consolidated Financial Statements.

CAPITAL AUTOMOTIVE REIT

																														Distributions in								Accumulated
														Preferred Shares								Common				Additional				Excess of								Other
		Preferred Shares								Common				Par Value								Shares				Paid-in				Accumulated				Deferred				Comprehensive
		Series A				Series B				Shares				Series A				Series B				Par Value				Capital				Earnings				Compensation				Income				Total
Balance at December 31, 2004			3,950,000				2,600,000				43,406,280			$	40			$	26			$	434			$	957,938			$	(20,695	)		$	(3,816	)		$	—			$	933,927
Reallocation of minority interest ownership in Partnership			—				—				—				—				—				—				(5,487	)			—				—				—				(5,487	)
Net proceeds from follow-on offerings			—				—				2,135,900				—				—				21				73,815				—				—				—				73,836
Issuance of common shares from dividend reinvestment and share purchase plan, net of costs			—				—				247,784				—				—				3				8,249				—				—				—				8,252
Issuance of restricted shares, net of forfeitures			—				—				125,208				—				—				2				4,194				—				(4,488	)			—				(292	)
Amortization of deferred compensation			—				—				—				—				—				—				—				—				1,092				—				1,092
Issuance of phantom shares, net of forfeitures			—				—				18,572				—				—				—				128				—				—				—				128
Exercise of common share options			—				—				44,784				—				—				—				902				—				—				—				902
Redemption of units of limited partnership interest in the Partnership to common shares			—				—				195,305				—				—				2				3,104				—				—				—				3,106
Accrued compensation			—				—				—				—				—				—				60				—				—				—				60
Change in foreign currency translation			—				—				—				—				—				—				—				—				—				85				85
Preferred share dividends			—				—				—				—				—				—				—				(6,303	)			—				—				(6,303	)
Common share dividends			—				—				—				—				—				—				—				(37,888	)			—				—				(37,888	)
Net income			—				—				—				—				—				—				—				48,433				—				—				48,433
Balance at June 30, 2005 (unaudited)			3,950,000				2,600,000				46,173,833			$	40			$	26			$	462			$	1,042,903			$	(16,453	)		$	(7,212	)		$	85			$	1,019,851

See accompanying Notes to Consolidated Financial Statements.

CAPITAL AUTOMOTIVE REIT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. ORGANIZATION AND BASIS OF PRESENTATION

Capital Automotive REIT, which we refer to as the Company, is a Maryland real estate investment trust formed in October 1997. We own interests in real estate and conduct our operations, directly or indirectly, through Capital Automotive L.P., which we refer to as the Partnership, and its subsidiaries. We are the sole general partner of the Partnership and, as of June 30, 2005, owned approximately 85.3% of the common units of limited partnership interest in the Partnership, which we refer to as Common Units, as well as 100% of the Series A and Series B preferred units of limited partnership interest in the Partnership, which we refer to as Preferred Units. References to “we,” “us” and “our” refer to the Company or, if the context requires, the Partnership and our business and operations conducted through the Partnership and/or directly or indirectly owned subsidiaries.

Our primary business strategy is to purchase real estate (land, buildings and other improvements) or leasehold interests therein, which we simultaneously lease to operators of franchised automobile dealerships and motor vehicle service, repair or parts businesses, used vehicle businesses and other related businesses under long-term, triple-net leases. In addition, in certain circumstances we provide mortgages, fund facility improvements and provide construction financing and takeout commitments. Triple-net leases typically require the tenant to pay all operating expenses of a property, including, but not limited to, all real estate taxes, assessments and other government charges, insurance, utilities, repairs and maintenance. We use (i) the term “dealerships” to refer to these types of businesses that are operated on our properties and (ii) the terms “dealer group,” “tenant” or “operators of dealerships” to refer to the persons and entities that lease our properties from us or mortgage their properties with us. We focus on leasing properties or providing mortgages to dealer groups that have a long history of operating multi-site, multi-franchised dealerships, generally targeting the largest dealer groups in terms of revenues in the largest metropolitan areas in the U.S. in terms of population.

As of June 30, 2005, we had real estate investments of nearly $2.5 billion, primarily consisting of interests in 345 properties located in 32 states, including approximately 2,687 acres of land and containing approximately 15.1 million square feet of buildings and improvements. Our tenants operate 509 motor vehicle franchises on our properties, representing 44 brands of motor vehicles, which include all of the top selling brands in the U.S. The initial lease terms generally range from 10 to 20 years (with a weighted average initial lease term for leases entered into during the quarter ended June 30, 2005 of approximately 17.8 years), with our entire portfolio having a weighted average initial lease term of approximately 15.1 years. As of June 30, 2005, our portfolio had a weighted average remaining lease term of approximately 11.5 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). In addition, included in our nearly $2.5 billion of real estate investments as of June 30, 2005 are mortgages and construction advances totaling $216.7 million.

The accompanying unaudited consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States, commonly referred to as GAAP, for interim financial information and in conformity with the rules and regulations of the Securities and Exchange Commission, commonly referred to as the SEC. Accordingly, they do not

include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three months and six months ended June 30, 2005, are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with our audited consolidated financial statements and footnotes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements of the Company have been prepared in accordance with GAAP and include the accounts of the Company, its wholly-owned subsidiaries, and other entities where the Company has a majority ownership, all of which it controls. The equity interests of other limited partners are reflected as minority interest. All significant intercompany transactions and balances have been eliminated in consolidation.

The purchase price of real estate properties acquired is allocated to the various components, such as land, buildings and improvements, and in-place leases as appropriate, in accordance with the Financial Accounting Standards Board, commonly referred to as the FASB, Statement of Financial Accounting Standards, commonly referred to as SFAS, No. 142, “Goodwill and Other Intangible Assets.” The purchase price is allocated based on the fair value of each component at the time of acquisition. The fair value of the buildings and improvements are recorded at the cost of our acquisition which we believe approximates their replacement costs. We generally do not acquire real estate assets that have in-place leases. We typically execute our leases simultaneously with the purchase of the real estate, and because of this, no value has been ascribed to any in-place leases because we do not believe any exist. Therefore, we have not recorded any lease intangible assets or liabilities on our consolidated balance sheets as of June 30, 2005 and December 31, 2004.

From time to time, we fund facility improvements on our existing properties. Improvements include costs incurred on facilities during which the tenant’s business continues to operate on the property. Facility improvements are recorded as buildings and improvements on our consolidated balance sheets and the rents charged to the tenant on these improvements during the project are recorded as rental revenue. Once the project is completed, the remaining useful life of the buildings and improvements is determined and depreciation expense is adjusted accordingly on a prospective basis.

Depreciation is computed on our buildings and improvements or leasehold interest assets using the straight-line method over the lesser of the estimated useful life or ground lease term, generally 20 to 45 years. Real estate depreciation expense, including depreciation expense related to discontinued operations, was approximately $10.2 million and $8.9 million for the three months ended June 30, 2005 and 2004, respectively. Real estate depreciation expense, including depreciation expense related to discontinued operations, was approximately $20.2 million and $17.7 million for the six months ended June 30, 2005 and 2004, respectively.

We may provide loans secured by mortgages on dealership properties. Management considers the loans to be held-to-maturity and, therefore, records the loans at amortized historical cost. The vast majority of the

loans require level monthly payments of principal and interest until maturity based upon a 30-year amortization schedule with the remainder of the loans requiring monthly interest payments until maturity. The mortgages have initial terms ranging from 3.5 to 15.0 years with our entire mortgage portfolio having a weighted average initial term of approximately 9.5 years. Mortgages totaled approximately $196.9 million and $31.2 million as of June 30, 2005 and December 31, 2004, respectively.

As defined by SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” we consider a loan to be impaired when certain events or changes in circumstances indicate that the carrying amount of the loan may not be recoverable. Management considers current market conditions and borrower credit analysis in determining whether the recoverability of the carrying amount of an asset should be assessed. When an assessment is warranted, management determines whether the fair value of the collateral securing the loan is less than the carrying value of the loan. If the fair value is less than the carrying amount, then a loan impairment loss would be recognized equal to the amount of the difference between the values. Pursuant to SFAS No. 114, we have assessed our loans outstanding noting there were no loan impairments as of June 30, 2005 and December 31, 2004.

We also provide construction financing to certain of our tenants in circumstances in which we own or have a ground lease on the underlying land, which in either case is leased to the tenant. Construction financing includes fundings for the construction of new facilities for which operations have not commenced or fundings for major improvements to existing facilities that cause operations to cease during the construction period. Fundings are recorded as construction advances during the period of construction. The amounts charged to our tenant during that time are recorded as interest income and included in mortgages and other financing revenue on our consolidated statements of operations. After completion of the project, the construction advances are paid down simultaneously with our purchase of the buildings and improvements. We are not obligated to purchase the property if certain conditions are not met. The buildings and improvements are acquired at fair market value and recorded as real estate on our consolidated financial statements. Construction advances totaled approximately $19.8 million and $12.1 million as of June 30, 2005 and December 31, 2004, respectively.

Furniture, fixtures and equipment are recorded at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, ranging from three to five years. Total depreciation expense related to our furniture, fixtures and equipment was approximately $22,000 and $16,000 for the three months ended June 30, 2005 and 2004, respectively. Total depreciation expense related to our furniture, fixtures and equipment was approximately $52,000 and $34,000 for the six months ended June 30, 2005 and 2004, respectively.

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

Restricted cash consists primarily of cash reserved to fund debt service payments and funds held in cash collateral accounts. The purpose of the cash collateral accounts is to hold funds, generally in the amount of the interest rate swap valuations at any point in time, to protect lenders in case of an early termination of the existing swaps by us. The cash collateral accounts are controlled by the lenders; however, we earn interest on the funds invested. Restricted cash is included in other assets and totaled approximately $2.9 million and $5.0 million as of June 30, 2005 and December 31, 2004, respectively.

Certain costs incurred in connection with the issuance of debt instruments are capitalized and generally amortized over the terms of the respective issuance using the effective interest method or on a straight-

line basis, which approximates the effective interest method. Deferred loan costs include lender fees and other third party costs. These costs, net of accumulated amortization, are included in other assets and totaled approximately $22.5 million and $22.7 million as of June 30, 2005 and December 31, 2004, respectively. Loan cost amortization expense was approximately $931,000 and $712,000 for the three months ended June 30, 2005 and 2004, respectively. Loan cost amortization expense was approximately $1.9 million and $1.5 million for the six months ended June 30, 2005 and 2004, respectively. Upon the early extinguishment of debt instruments, we expense any associated unamortized deferred loan costs in the period the debt is retired. We did not have any such expenses during the three months and six months ended June 30, 2005. We expensed approximately $2.5 million of unamortized deferred loan costs during the three months and six months ended June 30, 2004 due to the early retirement of certain debt, which is included in the debt extinguishment charge on our consolidated statements of operations.

Certain direct costs incurred by us in negotiating and consummating a successful lease are capitalized and generally amortized over the initial base term of the lease. Capitalized leasing costs include employee compensation and payroll-related fringe benefits directly related to time spent performing successful leasing-related activities. These activities include evaluating the financial condition of prospective clients, evaluating and recording guarantees, collateral and other security arrangements, negotiating lease terms, preparing lease documents and closing the transaction. These costs, net of accumulated amortization, are included in other assets and totaled approximately $1.9 million and $1.8 million as of June 30, 2005 and December 31, 2004, respectively. Leasing cost amortization expense was approximately $55,000 and $50,000 for the three months ended June 30, 2005 and 2004, respectively. Leasing cost amortization expense was approximately $110,000 and $98,000 for the six months ended June 30, 2005 and 2004, respectively.

We believe we are qualified and will continue to qualify as a real estate investment trust, commonly referred to as a REIT, under the provisions of the Internal Revenue Code of 1986, as amended. As a REIT, we are required to distribute at least 90% of our taxable income (excluding any net capital gains) to our shareholders and comply with certain other requirements. We generally will not be subject to federal income tax on taxable income that we distribute to our shareholders. The Company is subject to certain state and local income and franchise taxes.

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 governmental charges, insurance, utilities, repairs and maintenance. Our leases are recorded as operating leases under SFAS No. 13, “Accounting for Leases,” for financial reporting purposes. As such, the leased assets remain on our balance sheet and we depreciate them based on their estimated useful lives. Rental income attributable to the leases is recorded monthly when due from tenants. Rental income attributable to the majority of our leases is fixed by the lease agreement. However, under our variable rate lease program, monthly base rent is calculated based on a spread over an applicable index, typically LIBOR. As of June 30, 2005, approximately $389 million of our real estate portfolio, or 17%, was subject to variable rate leases. This compares to $424 million of our real estate portfolio, or 21%, that was subject to variable rate leases as of June 30, 2004. The vast majority of our variable rate lease agreements contain minimum lease rates, generally between 8% and 9%, and fixed rate conversion features generally with minimum rates of 10.0% to 10.25%, and none of these leases contain a maximum rate.

Our leases typically provide for upward periodic adjustments in base rent due from our tenants, usually based on a factor of the change in the consumer price index, commonly referred to as CPI. In addition,

certain of our leases are subject to fixed minimum and/or maximum rent escalators during the initial lease term and extension periods. Our leases typically reset to market during certain renewal periods. The fixed minimum rent escalations are straight-lined into rental income over the initial lease term. Any rent adjustments above the fixed minimum escalations are recorded as revenue in the period they are due from the tenants. Straight-lined rents are included in other assets and totaled approximately $21.7 million and $20.2 million as of June 30, 2005 and December 31, 2004, respectively. Straight-lined rental revenue, including revenue related to discontinued operations, was approximately $1.0 million and $1.1 million for the three months ended June 30, 2005 and 2004, respectively. Straight-lined rental revenue, including revenue related to discontinued operations, was approximately $1.9 million and $2.2 million for the six months ended June 30, 2005 and 2004, respectively.

During the normal course of business, we are exposed to certain financial market risks, including fluctuations in interest rates. In general, our strategy of match-funding our long-term debt to our leases reduces our exposure to interest rate fluctuations by substantially locking in our investment spreads during the initial term of the leases. As part of this strategy, we have used and may continue to use interest rate swap arrangements to manage or hedge our risk related to the effect of interest rate fluctuations on our investment spreads. We do not enter into interest rate swap arrangements for speculative purposes. We will either hedge our variable rate debt to convert it to a fixed interest rate, designating such hedge as a cash flow hedge, or hedge our fixed rate debt to convert it to a variable interest rate, designating such hedge as a fair value hedge.

The cash flow and fair value hedges were designed to mirror the underlying debt in terms of index, spread, reset, amortization, compounding and maturity. Due to the identical nature of the terms of the swap arrangements and the underlying terms of the debt, the swap arrangements we have entered into with third parties were designated as highly effective at the inception of the swap arrangements.

For all swap arrangements, we are required to post collateral, generally in the amount of the swap valuations at any point in time, to protect the lenders in case of an early termination by us. The collateral posted by us related to our hedge, totaling approximately $1.6 million and $3.3 million as of June 30, 2005 and December 31, 2004, respectively, is included in other assets on our consolidated balance sheets.

For a derivative qualifying as a cash flow hedge, the change in the unrealized gain or loss is recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity on our consolidated balance sheets. The fair value of the swap is recorded as either an asset or liability on our consolidated balance sheets. As of June 30, 2005 and December 31, 2004, we did not have any outstanding interest rate swap arrangements designated as cash flow hedges.

For a derivative qualifying as a fair value hedge, the change in the net unrealized gain or loss upon measuring the fair value hedge and the fair value of the debt instrument being hedged is recorded on our consolidated statements of operations. Generally, these amounts offset each other. The fair value of the swap is recorded as either an asset or liability, with a corresponding increase or decrease recorded to the carrying value of the debt instrument being hedged on our consolidated balance sheets.

The unrealized loss on our fair value hedge was approximately $1.4 million and $3.4 million as of June 30, 2005 and December 31, 2004, respectively. The net unrealized gain or loss on our fair value hedge and the debt being hedged had no impact on our net income for the three months and six months ended June 30, 2005 and 2004, respectively. We have evaluated our fair value hedge as of June 30, 2005 and believe it continues to be highly effective.

Upon the early termination of swap arrangements or when we believe it is probable we are not subject to interest rate risk, we recognize the realized gain or loss in our results of operations in the period of the

swap breakage. We did not have any such expenses during the three months and six months ended June 30, 2005. We expensed approximately $4.0 million during the three months and six months ended June 30, 2004 attributable to swap breakage fees incurred in conjunction with our early termination of swap arrangements, which is included in the debt extinguishment charge on our consolidated statements of operations.

Assets and liabilities of our foreign operations are translated using period-end exchange rates, and revenues and expenses are translated using exchange rates as determined throughout the period. Gains or losses resulting from translation are included in other comprehensive income (loss) within shareholders’ equity on our consolidated balance sheets.

The Capital Automotive Group Second Amended and Restated 1998 Equity Incentive Plan, which we refer to as the Plan, provides equity compensation to our employees, officers, non-employee trustees and certain other service providers. As of June 30, 2005, we accounted for our Plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. All options granted under this Plan had exercise prices equal to or greater than the market value of the underlying common stock on the date of grant. Therefore, no compensation expense is reflected in net income for stock option-based awards.

In December 2004, the FASB issued a revision to SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R), “Share-Based Payment,” supercedes APB Opinion No. 25 and its related Interpretations and was to be effective for the first interim or annual period that begins after June 15, 2005 for public companies (other than those filing as small business issuers). In April 2005, the SEC amended the effective date of SFAS No. 123(R) to require adoption of this Statement to commence in the first annual period that begins after June 15, 2005 (other than those filing as small business issuers). SFAS No. 123(R) requires the fair-value-based recognition method to be applied to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. In addition, the cumulative effect of initially applying this Statement, if any, must be recognized as of the effective date. The adoption of SFAS No. 123(R) is not expected to have a significant impact on our financial condition or results of operations.

The following table illustrates the effect on net income and earnings per share if we had applied the fair-value-based recognition method (in thousands, except per share data).

		For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,
		2005				2004				2005				2004
Net income available to common shareholders, as reported		$	21,658			$	8,300			$	42,130			$	24,994
Add: Share-based compensation expense included in reported net income, net of minority interest			487				329				972				595
Deduct: Total share-based compensation expense determined under the fair-value-based method for all awards, net of minority interest			(524	)			(366	)			(1,046	)			(668	)
Pro forma net income		$	21,621			$	8,263				42,056			$	24,921
Basic earnings per common share:
As reported		$	0.49			$	0.23			$	0.97			$	0.71
Pro forma		$	0.49			$	0.23			$	0.96			$	0.71
Diluted earnings per common share:
As reported		$	0.49			$	0.23			$	0.96			$	0.71
Pro forma		$	0.49			$	0.23			$	0.96			$	0.70

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

Certain amounts in the 2004 consolidated financial statements have been reclassified to conform with the current year presentation.

3. REAL ESTATE INVESTMENTS

During the second quarter of 2005, we increased our net real estate investments by nearly $200 million, bringing the total net increase in investments for the year to approximately $233 million. The second quarter real estate investments consisted of approximately $210 million in real estate investments, partially offset by approximately $10 million in property dispositions and approximately $4 million in repayments of mortgages and other construction financing receivables. The investments were funded with cash on hand, borrowings on our unsecured revolving credit facility and the issuance of common equity.

The real estate acquisitions included three properties and facility improvements totaling approximately $29 million, which have a weighted average initial lease term of approximately 17.8 years, with multiple renewal options exercisable at the option of the tenants. Additionally, we completed a mortgage loan totaling approximately $166 million with one of the largest private dealer groups in the country. This 10-

year, fixed rate mortgage is secured by ten properties located in five states. The remaining $15 million in real estate investments consisted of other mortgages and construction financing secured by three properties.

4. INVESTMENT IN JOINT VENTURE

During the second quarter of 2005, we formed a joint venture (“CarsKim Investment, L.P.”) with Kimco Realty Corporation to acquire automotive retail real estate in Canada. We hold a 50% non-controlling interest in the joint venture. The investments are to be sourced and managed by us, in exchange for a management fee, and are subject to review and approval by a joint oversight committee consisting of management personnel from both companies. During the second quarter of 2005, the joint venture completed real estate acquisitions totaling $6.5 million (Canadian). These investments consist of two automotive dealerships located in Toronto, Ontario and are leased to a multi-franchised, multi-location dealer group. We account for our investment under the equity method of accounting. Our investment in the joint venture is included in other assets and totaled approximately $2.7 million as of June 30, 2005.

5. DISCONTINUED OPERATIONS

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

During the second quarter of 2005, we sold one location for approximately $9.3 million in sale proceeds, consisting of $3.8 million in cash and a $5.5 million mortgage note. The sale of the property resulted in a gain of approximately $609,000 before minority interest. In exchange for early termination of the lease, we also received a lease termination fee totaling approximately $250,000, which was recorded during the second quarter. The earnings generated from the real estate disposition, including the gain recognized and the lease termination fee, have been reported as discontinued operations.

The following table sets forth the components of discontinued operations related to the real estate dispositions subsequent to January 1, 2004 (in thousands):

		For the three months								For the six months
		ended June 30,								ended June 30,
		2005				2004				2005				2004
Revenue:
Rental		$	60			$	1,122			$	373			$	2,756
Other			250				175				343				1,423
Total revenue			310				1,297				716				4,179
Expenses:
Depreciation			12				222				85				540
Interest			19				266				103				654
Total expenses			31				488				188				1,194
Income from discontinued operations before gain on sale of real estate and minority interest			279				809				528				2,985
Gain on sale of real estate			609				315				709				1,486
Income related to discontinued operations before minority interest			888				1,124				1,237				4,471
Minority interest related to discontinued operations			(138	)			(199	)			(194	)			(821	)
Total discontinued operations, net of minority interest		$	750			$	925			$	1,043			$	3,650

6. DEBT OUTSTANDING

The following is a summary of our total debt outstanding as of June 30, 2005 and December 31, 2004 (dollars in thousands):

						Principal								Principal Balance								Effective				Term/
		Original				Balance as of								as of December 31,								Interest				Amortization
Description of Debt		Debt Issued				June 30, 2005								2004								Rate*				Schedule
7.59% fixed rate debt due 12/1/08 (1)		$	38,050			$	30,694							$	31,513											10 yr/17 yr
5.84% fixed rate debt due 2/1/14 (2)			11,900				11,620								11,728											10 yr/25 yr
Triple Net Lease Mortgage Notes, Series 2002 (3)			325,000				285,283								292,557											(3)
Triple Net Lease Mortgage Notes, Series 2003-1 (4)			228,000				213,773								217,102											(4)
Various variable rate debt (5)			91,320				—								81,465											(5)
TOTAL MORTGAGE DEBT (6)						$	541,370							$	634,365								6.96	%
Variable rate term loan due 8/20/09 (7)			150,000				150,000								150,000											(7)
5.46% Senior Notes due 2/24/15 (8)			175,000				175,000								—											(8)
6.75% Monthly Income Notes due 4/15/19 (9)			125,000				125,000	(10	)						125,000	(10)										(9)
6% Convertible Notes due 5/15/24 (11)			110,000				110,000								110,000											(11)
TOTAL UNSECURED DEBT						$	560,000							$	385,000								5.45	%
$250 million revolving unsecured facility (7)							75,000								30,000											(7)
TOTAL CREDIT FACILITIES						$	75,000							$	30,000								4.38	%
TOTAL DEBT OUTSTANDING						$	1,176,370	(10	)					$	1,049,365	(10)							6.17	%

Original Principal

Current Principal

Class

Balance

Balance

Maturity Date

A-1a

$164,136

$136,686

8/15/14

A-1b

9,064

9,064

7/15/15

A-2

75,900

63,633

7/15/15

A-3

75,900

75,900

6/15/22

Original Principal

Current Principal

Class

Balance

Balance

Maturity Date

A-1

$109,000

$   94,773

9/25/15

A-2

119,000

119,000

3/25/19

Additionally, during the first quarter of 2005, we terminated two secured credit facilities, totaling $200 million, which were replaced by our syndicated unsecured revolving credit facility as further described above.

Our unsecured debt generally contains various restrictive covenants. The covenants in our unsecured debt include, among others, provisions restricting our ability to:

	•		incur or guarantee additional debt;
	•		make certain distributions, investments and other restricted payments, including

			distribution payments on our outstanding common and preferred shares;
	•		limit the ability of restricted subsidiaries to make payments to us;
	•		enter into transactions with certain affiliates;
	•		create certain liens; and
	•		consolidate, merge or sell our assets.

Our secured debt generally contains customary covenants, including, among others, provisions:

	•		relating to the maintenance of the property securing the debt;
	•		restricting our ability to sell, assign or further encumber the properties securing the debt;
	•		restricting our ability to incur additional debt;
	•		restricting our ability to amend or modify existing leases; and
	•		relating to certain prepayment restrictions.

Our ability to meet some of the covenants in our debt, including covenants related to the condition of the property or payment of real estate taxes, may be dependent on the performance by our tenants under their leases.

In addition, certain financial covenants in our debt, including our $250 million unsecured revolving credit facility, require us and our subsidiaries, among other things, to:

	•		limit the amount of debt to a certain percentage of total assets;
	•		limit the amount of secured debt to a certain percentage of total assets;
	•		maintain certain minimum interest and debt service coverage ratios; and
	•		maintain a certain level of unencumbered assets.

As of June 30, 2005, we were in compliance with all of the debt covenants related to our debt outstanding.

Aggregate annual repayments of our debt outstanding (excluding borrowings on our credit facility) as of June 30, 2005 are as follows (in thousands):

For the Year Ended December 31,

		Principal
		Amortization				Maturities				Total
2005		$	11,902			$	—			$	11,902
2006			25,142				—				25,142
2007			26,979				—				26,979
2008			28,735				24,211				52,946
2009			28,810				260,000				288,810
Thereafter			315,594				379,997				695,591
Total		$	437,162			$	664,208			$	1,101,370

7. EQUITY TRANSACTIONS

On June 6, 2005, we issued 2,135,900 common shares in an underwritten public offering, including 135,900 common shares issued pursuant to the exercise of the underwriters’ over-allotment option, at an initial price to the public of $35.12 per share under our shelf registration filed with the SEC on June 4, 2004. Net proceeds to the Company, after deducting the discounts and commissions to the underwriters and other expenses of this offering, totaled approximately $73.9 million. The Company contributed the net proceeds of the offering to the Partnership in exchange for Common Units and used the net proceeds to fund real estate investments, to repay borrowings on our credit facility and for general corporate purposes.

8. PREFERRED EQUITY

Set forth below is a summary of our preferred shares of beneficial interest:

Series of

Annual

Annual

Earliest

Preferred Share

# of

Month

Dividend

Dividend

Redemption

of Beneficial Interest

Shares Issued

of Issuance

Yield (1)

Per Share

Date

Series A

3,950,000

December 2003

7.5

%

$

1.875

12/11/08

Series B

2,600,000

April/May 2004

8.0

%

2.000

4/27/09

All of the classes of preferred shares set forth in the table above are non-voting and redeemable for cash, at $25.00 per share plus any accrued and unpaid dividends, at our option only on or after the earliest redemption date, unless in limited circumstances in which early redemption is necessary to preserve our status as a real estate investment trust for federal income tax purposes. The preferred shares have no stated maturity and are not subject to any sinking fund provisions. Additionally, the shares are not convertible into or exchangeable for any other security unless conversion is necessary to maintain our status as a real estate investment trust. Holders of these shares are entitled to cumulative dividends, payable quarterly. In the case of each series of preferred shares, there is a series of Preferred Units owned by us that carries substantially the same terms.

9. MINORITY INTEREST

Assets and liabilities allocated to the limited partners (other than the Company), which we describe as the Minority Interest, are based on their ownership percentage of the Partnership at the end of the period. The ownership percentage is determined by dividing the number of Common Units held by the Minority Interest at the end of the period by the total Common Units outstanding at the end of the period, excluding derivative securities. The full redemption amount of the Preferred Units is deducted from the Partnership’s equity prior to applying the ownership percentage to calculate Minority Interest. The Minority Interest ownership percentage in the Partnership’s equity was 14.7% and 15.8% as of June 30, 2005 and December 31, 2004, respectively.

Income before minority interest is allocated to the limited partners based on their weighted average ownership during the period. The ownership percentage is determined by dividing the weighted average number of Common Units held by the Minority Interest by the total weighted average number of Common Units outstanding during the period, excluding derivative securities. Income before minority interest is reduced by Preferred Unit dividends prior to applying the ownership percentage. The Minority Interest ownership percentage in income of the Partnership was 15.5% and 17.7% for the three months ended June 30, 2005 and 2004, respectively. The Minority Interest ownership percentage in income of the Partnership was 15.7% and 18.1% for the six months ended June 30, 2005 and 2004, respectively.

Holders of Common Units, which we refer to as Unitholders, are entitled to quarterly distributions which are equivalent to the quarterly dividend distributions received by holders of common shares. There were 7.9 million and 8.1 million Common Units as of June 30, 2005 and December 31, 2004, respectively, not held by the Company, which were outstanding and could be exchanged for common shares of the Company on a one-for-one basis in specified circumstances. When a Unitholder converts Common Units to common shares, an adjustment is recorded to equity to reflect the change in the Minority Interest ownership in the Partnership. When the Company issues common shares from an underwritten public offering, its share-based compensation plan and its Dividend Reinvestment and Share Purchase Plan, the net proceeds from these issuances are contributed to the Partnership in exchange for Common Units and an adjustment is recorded to equity to reflect the change in the Minority Interest ownership in the Partnership.

10. EARNINGS PER COMMON SHARE

Basic earnings per common share is computed as net income available to common shareholders divided by the weighted average common shares, excluding restricted shares, outstanding for the period. Diluted earnings per common share is computed as net income available to common shareholders, adjusted to reflect the change in the income allocated to minority interest calculated as if the dilutive securities were outstanding, divided by the weighted average common shares outstanding for the period plus the effect of dilutive securities outstanding for the period, based on the treasury stock method. Dilutive securities include options, phantom shares and restricted shares.

In September 2004, the Emerging Issues Task Force, commonly referred to as the EITF, reached a final consensus affirming their June 2004 tentative conclusion (with modifications) on EITF Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share.” Contingently convertible debt instruments, which are commonly referred to as Co-Cos and include our $110 million 6% convertible notes, combine the features of contingently issuable shares with a convertible debt instrument. These instruments generally become convertible into common stock only if one or more specified contingencies occur, and at least one of the contingencies is based on the market price of the issuer’s shares. The EITF concluded that Co-Cos should be included in diluted earnings per share computations using the if-converted method regardless of whether the market price trigger or other contingent feature has been met. Under the if-converted method, the instrument is considered converted,

with the resulting number of shares included in the denominator of the earnings per common share calculation and the interest expense, net of tax, added back to the numerator of the earnings per common share calculation. In applying the if-converted method, conversion shall not be assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive.

The FASB plans to issue an amendment to SFAS No. 128, “Earnings Per Share,” during 2005. The effective date of the September 2004 consensus was originally to coincide with the effective date of the proposed amendment. As a result of the delay in the amendment of SFAS No. 128, in November 2004, the EITF agreed to change the transition provisions of the consensus reached to require that the guidance be applied to reporting periods ending after December 15, 2004. The consensus must be applied by restating all periods during which the contingently convertible debt instrument was outstanding.

During the second quarter of 2004, we closed on a public offering of $110 million 6% convertible notes, as further described in the “Debt Outstanding” footnote herein. The notes have a 20-year term and are convertible, at the option of the holder, into the Company’s common shares under certain circumstances, at an initial conversion price of $35.5679 per share, subject to certain adjustments. The result of the potential conversion of the $110 million 6% convertible notes was not included in the calculation of diluted earnings per share because it would have been anti-dilutive for the three months and six months ended June 30, 2005 and 2004, respectively.

A reconciliation of income and weighted average common shares used to calculate basic and diluted earnings per common share for the three months and six months ended June 30, 2005 and 2004 is as follows (in thousands, except per share data):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Income from continuing operations		$	24,060			$	10,151			$	47,390			$	25,972
Preferred share dividends			(3,152	)			(2,776	)			(6,303	)			(4,628	)
Income from continuing operations used to calculate basic earnings per common share			20,908				7,375				41,087				21,344
Impact of dilutive securities			24				50				44				98
Income from continuing operations used to calculate diluted earnings per common share		$	20,932			$	7,425			$	41,131			$	21,442
Basic earnings per common share		$	0.48			$	0.20			$	0.94			$	0.61
Diluted earnings per common share		$	0.47			$	0.20			$	0.94			$	0.60
Net income available to common shareholders		$	21,658			$	8,300			$	42,130			$	24,994
Impact of dilutive securities			24				61				45				119
Net income used to calculate diluted earnings per common share		$	21,682			$	8,361			$	42,175			$	25,113
Basic earnings per common share		$	0.49			$	0.23			$	0.97			$	0.71
Diluted earnings per common share		$	0.49			$	0.23			$	0.96			$	0.71
Weighted average shares:
Common shares outstanding used to compute basic earnings per common share			43,992				36,057				43,616				35,053
Impact of dilutive securities			339				444				303				534
Common shares outstanding used to compute diluted earnings per common share			44,331				36,501				43,919				35,587

11. DIVIDENDS DECLARED PER SHARE

The following table summarizes any activity related to our dividends during the six months ended June 30, 2005:

		Record Date		Date Payable		Per Share
Common Shares:
Fourth Quarter 2004		February 7, 2005		February 18, 2005		$	0.43050
First Quarter 2005		May 10, 2005		May 20, 2005		$	0.43800
Second Quarter 2005		August 9, 2005		August 19, 2005		$	0.44600
Series A Preferred Shares:
November 1, 2004 - January 31, 2005		February 1, 2005		February 15, 2005		$	0.46875
February 1, 2005 - April 30, 2005		May 2, 2005		May 16, 2005		$	0.46875
May 1, 2005 - July 31, 2005		August 1, 2005		August 15, 2005		$	0.46875
Series B Preferred Shares:
November 1, 2004 - January 31, 2005		February 1, 2005		February 15, 2005		$	0.50000
February 1, 2005 - April 30, 2005		May 2, 2005		May 16, 2005		$	0.50000
May 1, 2005 - July 31, 2005		August 1, 2005		August 15, 2005		$	0.50000

12. COMMITMENTS

We currently have contractual commitments to fund facility improvements and construction with several tenants generally on properties we own. Such commitments are subject to typical construction terms and conditions. Improvements include costs incurred by tenants on facilities during which the tenant’s business continues to operate on the property without interruption. Construction financings include advances for the construction of new facilities by tenants for which operations have not commenced or fundings for major improvements to existing facilities that cause operations to cease during the construction period. As of June 30, 2005, these commitments totaled approximately $130 million. The majority of these projects are expected to be completed during the next two years.

FASB Interpretation No. 45, commonly referred to as FIN 45, “Guarantors’ Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” requires a guarantor to disclose its guarantees. During the second quarter of 2005, we provided a guarantee of principal and interest payments and certain related fees on a letter of credit totaling approximately $16.5 million, which was issued in support of the Parker Automotive Plaza Metropolitan District Series 2005 General Obligation 30 Year Variable Rate Bonds. The proceeds from the bond issuance are being used to reimburse one of our existing dealer groups for certain infrastructure development costs incurred in conjunction with the development of an auto mall complex. The letter of credit provides credit enhancement and liquidity for the bond issuance and expires on December 10, 2008, but may be extended on an annual basis subject to the issuer’s approval. We are currently projecting that the bonds will be remarketed during 2012, at which time it is believed that the letter of credit and our guarantee will no longer be required. As guarantor of the letter of credit, we receive a letter of credit enhancement fee. In accordance with FIN 45, we assessed the fair value of the obligation undertaken in issuing the guarantee, which was determined to total approximately $700,000 as of June 30, 2005, and is recorded in other assets and accrued expenses on our consolidated balance sheets.

As of June 30, 2005, our maximum obligation under the guarantee totaled approximately $5.9 million.

Our guarantee is secured by the assets of the project as well as certain indemnifications provided by the dealer group. No triggering events or conditions have or are anticipated to occur that would require payment under or changes in the fair value of the guarantee. Further, we believe the value of the assets as well as the indemnifications serving as collateral for the debt that is guaranteed are sufficient to cover the maximum potential amount of future payments and therefore, would not require us to provide additional collateral to support the guarantee.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with our primary business strategy to give the reader an overview of the goals of our business. This is followed by a discussion of our recent developments beginning on page 28. In the next section, beginning on page 29, we discuss our results of operations for the periods presented. We then provide, beginning on page 33, an analysis of our liquidity and capital resources, including discussions of our cash flows, financing strategy, debt arrangements, sources of capital and financial commitments. Finally, on page 44, we discuss funds from operations, or FFO, which is a relative non-GAAP financial measure of performance of a REIT used by the REIT industry.

The MD&A should be read in conjunction with the other sections of this Quarterly Report on Form 10-Q, including the consolidated financial statements and notes thereto appearing in Item 1 of this report, disclosures about our market risk appearing in Item 3 of this report and the subsection captioned “Forward-Looking Statements” herein.

OVERVIEW

Our primary business strategy is to purchase real estate (land, buildings and other improvements) or leasehold interests therein, which we simultaneously lease to operators of franchised automobile dealerships and motor vehicle service, repair or parts businesses, used vehicle businesses and other related businesses under long-term, triple-net leases. In addition, in certain circumstances we provide mortgages, fund facility improvements and provide construction financing and takeout commitments. We use (i) the term “dealerships” to refer to these types of businesses that are operated on our properties and (ii) the terms “dealer group,” “tenant” or “operators of dealerships” to refer to the persons and entities that lease our properties from us or mortgage their properties with us. We focus on leasing properties or providing mortgages to dealer groups that have a long history of operating multi-site, multi-franchised dealerships, generally targeting the largest dealer groups in terms of revenues in the largest metropolitan areas in the U.S. in terms of population. As of June 30, 2005, we had real estate investments of nearly $2.5 billion, primarily consisting of interests in 345 properties located in 32 states, including approximately 2,687 acres of land and containing approximately 15.1 million square feet of buildings and improvements. Our tenants operate 509 motor vehicle franchises on our properties, representing 44 brands of motor vehicles, which include all of the top selling brands in the U.S.

Substantially all of our properties are leased pursuant to long-term, triple-net leases, under which the tenants typically pay all operating expenses of a property, including, but not limited to, all real estate taxes, assessments and other governmental charges, insurance, utilities, repairs and maintenance. The initial lease terms generally range from 10 to 20 years (with a weighted average initial lease term for leases entered into during the quarter ended June 30, 2005 of approximately 17.8 years), with our entire portfolio having a weighted average initial lease term of approximately 15.1 years. As of June 30, 2005, our portfolio had a weighted average remaining lease term of approximately 11.5 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). In addition, included in our nearly $2.5 billion of real estate investments as of June 30, 2005 are mortgages and construction advances totaling $216.7 million. The mortgages have initial terms ranging from 3.5 years to 15.0 years with our entire mortgage portfolio having a weighted average initial term of approximately 9.5 years.

Substantially all of our revenues are derived from (1) rents received or accrued under long-term, triple-net leases; (2) interest earned on mortgages and other construction financing receivables; (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), state and local income and business taxes as well as insurance and various other expenses incurred in managing our business. Our primary non-cash expense is the depreciation of our properties. We depreciate buildings and improvements on our properties or leasehold interests over a nine-year to 40-year period for tax purposes and generally a 20-year to 45-year period for financial reporting purposes. We do not own or lease any significant personal property, furniture or equipment at any property we own.

RECENT DEVELOPMENTS

Real Estate Investments

During the second quarter of 2005, we increased our net real estate investments by nearly $200 million, bringing the total net increase in investments for the year to approximately $233 million. The second quarter real estate investments consisted of approximately $210 million in real estate investments, partially offset by approximately $10 million in property dispositions and approximately $4 million in repayments of mortgages and other construction financing receivables. The investments were funded with cash on hand, borrowings on our unsecured revolving credit facility and the issuance of common equity.

The real estate acquisitions included three properties and facility improvements totaling approximately $29 million, which have a weighted average initial lease term of approximately 17.8 years, with multiple renewal options exercisable at the option of the tenants. Additionally, we completed our first substantial strategic loan totaling approximately $166 million with one of the largest private dealer groups in the country. This 10-year, fixed rate mortgage is secured by ten properties located in five states. Our current plan for our mortgage business is to offer a highly tailored, secured mortgage product to select prospects that are viewed as strategic in nature. These prospects have certain common characteristics such as large-scale dealership platforms, high-credit quality, outstanding reputation, and a substantial portfolio of real estate assets. These dealers have currently decided to not sell their real estate portfolios for various reasons, but may be inclined to enter into a customized mortgage loan tailored to their financial and operational needs. The remaining $15 million in real estate investments consisted of other mortgages and construction financing secured by three properties.

During the second quarter of 2005, we formed a joint venture (“CarsKim Investment, L.P.”) with Kimco Realty Corporation to acquire automotive retail real estate in Canada. We hold a 50% non-controlling interest in the joint venture. The investments are to be sourced and managed by us, in exchange for a management fee, and are subject to review and approval by a joint oversight committee consisting of management personnel from both companies. During the second quarter of 2005, the joint venture completed real estate acquisitions totaling $6.5 million (Canadian). These investments consist of two automotive dealerships located in Toronto, Ontario and are leased to a multi-franchised, multi-location dealer group.

Financing

During the second quarter of 2005, we completed the following transactions:

	•		On May 10, 2005, we entered into an amendment with the lender to reduce the interest rate spread over LIBOR on the term loan portion of our syndicated unsecured revolving credit and term loan facility from 95 basis points to 87.5 basis points based on our current credit ratings, as further described in the “Liquidity and Capital Resources – Debt Outstanding” section herein; and
	•		On June 6, 2005, we issued 2,135,900 common shares in an underwritten public offering at an initial price to the public of $35.12 per share, as further described in the “Liquidity and Capital Resources – Equity Offerings” section herein.

RESULTS OF OPERATIONS

Revenue

This section should be read in conjunction with the section captioned “Liquidity and Capital Resources — Variable Rate Lease Program” herein.

		For the three months												For the six months
		ended June 30,								%				ended June 30,								%
(dollars in thousands)		2005				2004				Change				2005				2004				Change
Revenue
Rental		$	56,810			$	47,417				20	%		$	112,078			$	93,620				20	%
Mortgage and other financing			1,611				418				285	%			2,497				1,121				123	%
Interest and other			557				170				228	%			757				437				73	%
Total		$	58,978			$	48,005				23	%		$	115,332			$	95,178				21	%

Rental. The increase in rental revenue from the three months and six months ended June 30, 2004 to the three months and six months ended June 30, 2005 was primarily attributable to the growth of our real estate portfolio from sale-leaseback transactions and facility improvements from which we generate our rental income. The following table demonstrates the growth of our real estate portfolio for the periods indicated. Excluded in the periods presented are property dispositions that have occurred through June 30, 2005. The results of operations related to these properties were reclassified from rental revenue to discontinued operations for all periods presented as further described under the “Discontinued Operations” section herein.

		Real Estate before
		Accumulated												Total Square
		Depreciation (in												Footage (in
As of		thousands)				Number of Properties				Total Land Acreage				millions)
December 31, 2003		$	1,791,977				301				2,182				12.9
June 30, 2004			1,997,780				319				2,380				13.9
December 31, 2004			2,186,712				340				2,532				14.8
June 30, 2005			2,256,603				345				2,687				15.1

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.

Mortgage and Other Financing. The increase in mortgage and other financing revenue from the three

months and six months ended June 30, 2004 to the three months and six months ended June 30, 2005 was due to interest earned on mortgages and construction advances secured by real estate totaling approximately $216.7 million as of June 30, 2005, as compared to approximately $13.4 million as of June 30, 2004.

Interest and Other. The increase in interest and other income from the three months and six months ended June 30, 2004 to the three months and six months ended June 30, 2005 was primarily due to interest earned on our temporary investments.

Expenses

		For the three months												For the six months
		ended June 30,								%				ended June 30,								%
(dollars in thousands)		2005				2004				Change				2005				2004				Change
Expenses
Depreciation and amortization		$	10,217			$	8,761				17	%		$	20,279			$	17,266				17	%
General and administrative			3,420				2,994				14	%			6,704				5,735				17	%
Interest			17,435				15,801				10	%			33,327				32,719				2	%
Debt extinguishment charge			—				8,712				(100	%)			—				8,712				(100	%)
Total		$	31,072			$	36,268				(14	%)		$	60,310			$	64,432				(6	%)