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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

COMMISSION FILE NUMBER 000-23733

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

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

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

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

Yes X                  No

Number of common shares of beneficial interest outstanding as of July 31, 2002 was 27,886,731.

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CAPITAL AUTOMOTIVE REIT
FORM 10-Q
INDEX

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PART I — FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS
CAPITAL AUTOMOTIVE REIT
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

See accompanying Notes to Consolidated Financial Statements.

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CAPITAL AUTOMOTIVE REIT
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

See accompanying Notes to Consolidated Financial Statements.

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CAPITAL AUTOMOTIVE REIT
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

See accompanying Notes to Consolidated Financial Statements.

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CAPITAL AUTOMOTIVE REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.     ORGANIZATION AND BASIS OF PRESENTATION

Organization

Capital Automotive REIT (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. (the “Partnership”) and its subsidiaries. We are the sole general partner of the Partnership and, as of June 30, 2002, owned approximately 76.1% of the units of limited partnership interest in the Partnership (“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), which we simultaneously lease to operators of franchised automobile dealerships and motor vehicle service, repair, parts or 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 use (i) the term dealerships to refer to these types of businesses that are operated on our properties, (ii) the term dealer group to refer to a group of related persons and companies who sell us properties, and (iii) the term dealer group, tenant, lessee or operators of dealerships to refer to the related 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 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 situations.

As of June 30, 2002, we had invested approximately $1.4 billion in 280 properties located in 28 states (Alabama, Arizona, California, Colorado, Connecticut, Florida, Georgia, Idaho, Illinois, Indiana, Louisiana, Maryland, Michigan, Missouri, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah and Virginia), comprising approximately 1,930 acres of land and containing approximately 11.0 million square feet of buildings and improvements. Our tenants operate 390 motor vehicle franchises on our properties, representing nearly 45 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 of approximately 14.1 years and a weighted average remaining lease term of approximately 11.7 years. The leases typically have options to renew upon the same terms and conditions for one or more additional periods of five to 10 years each, exercisable at the option of the tenant (with renewal options ranging from a total of five to 40 years).

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in conformity with the rules and regulations of the Securities and Exchange Commission (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

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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, 2002, 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, 2001.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Real Estate and Depreciation

Real estate assets are recorded at cost. External acquisition costs directly related to each property are capitalized as a cost of the respective property. The cost of real estate properties acquired is allocated between land and buildings and improvements based upon estimated market values at the time of acquisition. Depreciation is computed using the straight-line method over an estimated useful life of 20 to 40 years for the buildings and improvements.

Cash and Cash Equivalents

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

Deferred Loan Costs

Certain costs incurred in connection with obtaining our credit facilities and issuance of mortgage debt are capitalized and generally amortized over the terms of the respective credit facilities or debt using the effective interest method or on a straight-line basis which approximates the effective interest method. These costs, net of accumulated amortization, are included in other assets and total approximately $14.0 million and $7.2 million as of June 30, 2002 and December 31, 2001, respectively.

Capitalized Leasing Costs

Certain initial 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. These costs, net of accumulated amortization, are included in other assets and total approximately $1.2 million and $1.0 million as of June 30, 2002 and December 31, 2001, respectively. Capitalized leasing costs include employee compensation and payroll-related fringe benefits directly related to time spent performing leasing-related activities. These activities include evaluating the prospective tenant’s financial condition, evaluating and recording guarantees, collateral and other security arrangements, negotiating lease terms, preparing lease documents and closing the transaction.

Income Taxes

We are qualified as a real estate investment trust under the provisions of the Internal Revenue Code of

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1986, as amended (the “Code”). As a real estate investment trust, we are generally not subject to federal income tax to the extent that we distribute annually at least 90% of our taxable income to our shareholders and comply with certain other requirements.

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. All leases are accounted for as operating leases and 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, 2002, approximately $334 million of our approximately $1.4 billion real estate portfolio, or 25%, was subject to variable rate leases. This compares to approximately $94 million of our approximately $1.1 billion real estate portfolio, or 9%, that was subject to variable rate leases as of June 30, 2001. The majority of the variable rate lease agreements contain minimum 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 (“CPI”). Certain of our leases also or alternatively provide for a fixed minimum and/or maximum periodic adjustment during the initial lease term, generally based on a fixed percentage of the base rent. We straight-line the fixed minimum escalator rental income over the initial lease term. Any rent adjustments above the fixed minimum escalators are recorded as revenue in the period they are due from the tenants. Straight-lined rents are included in other assets and totaled approximately $9.5 million and $6.7 million as of June 30, 2002 and December 31, 2001, respectively.

Use of Estimates

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

3.     NEW ACCCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (effective July 1, 2001) and SFAS No. 142, “Goodwill and Other Intangible Assets” (effective for the Company on January 1, 2002). SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. The adoption of SFAS No. 141 and SFAS No. 142 has not had any impact on our financial condition or results of operations through June 30, 2002.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (effective for the Company on January 1, 2002). SFAS No. 144 requires that a single accounting model be used for long-lived assets to be disposed of by sale, whether the asset was previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposition transactions. The adoption of SFAS No. 144 has not had any significant impact on our financial condition or results of operations through June 30, 2002.

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4.     ACQUISITIONS

During the three months ended June 30, 2002, we completed approximately $34.1 million of property acquisitions, which included six properties, three of which are operated by two new tenants, and several facility improvements and construction fundings with existing tenants. We initially funded the majority of the acquisitions with funds drawn down on our short-term credit facilities and subsequently repaid these facilities with the net proceeds received from the $325 million debt securitization completed at the end of the second quarter, as discussed in Note 5 below. These acquisitions added approximately 262,000 square feet of buildings and improvements on approximately 31 acres of land in five states (Indiana, New Jersey, Ohio, Tennessee and Texas). The majority of the leases entered into during the quarter have been structured using our variable rate lease program. The leases have initial lease terms ranging from 12 to 21 years, with a weighted average initial lease term of 15.8 years. These leases have renewal options exercisable at the option of the tenant ranging from a total of 10 to 20 years.

5.     MORTGAGE DEBT AND REVOLVING CREDIT FACILITIES

As of June 30, 2002, we had total debt outstanding of $838.9 million. Of this debt, approximately $833.9 million (consisting of $524.6 million of fixed rate and $309.3 million of variable rate debt) was mortgage debt secured by approximately 250 of our properties. In addition, we had $5.0 million outstanding on our revolving credit facilities.

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The following is a summary of our total debt outstanding as of June 30, 2002 and December 31, 2001 (dollars in thousands):

	*		For the quarter ended June 30, 2002. Includes deferred loan fees amortized over the life of the loans. The effective interest rates on our total mortgage fixed rate debt and our total mortgage debt outstanding as of June 30, 2002 were approximately 7.7% and 6.4%, respectively.
	(1)		On June 28, 2002, we issued $325 million in four classes of Triple Net Lease Mortgage Notes, Series 2002 (the “Notes”). The transaction reflects approximately $152 million of new debt issued in classes under current market terms (the “New Notes”) and a restructuring of a securitization completed in 1999, that had a remaining balance of approximately $173 million (the “Modified Debt”). The certificates representing the Modified Debt have economic terms equivalent to the prior transaction. The Notes are collateralized by 94 properties, subject to long-term, triple-net leases, with a net book value of $430.5 million and an appraised value of $462.4 million as of June 30, 2002. The New Notes have a weighted average effective interest rate (including deferred fees amortized over the life of the New Notes) of approximately 7.0% and are fully-amortizing over 20 years. The Notes are fully-amortizing and have terms ranging from 12 to 20 years, with a weighted average term of 14.2 years. The Notes have a weighted average effective interest rate (including deferred fees amortized over the life of the Notes) of approximately 7.7%. The net proceeds from the issuance of the New Notes were used to pay down our short-term credit facilities and to fund

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			acquisitions, and will be available to fund future acquisitions. CARS Loan Servicer L.L.C., one of our subsidiaries, will act as servicer of the Notes on behalf of the noteholders.
	(2)		These loans bear interest equal to the 30-day LIBOR rate plus 215 basis points and require quarterly interest and level principal payments until maturity. During the first quarter of 2002, we entered into interest rate swap arrangements with a third party on these loans to fix the interest rate. The new blended rate on the debt is approximately 7.58%.
	(3)		This loan was converted from fixed rate to variable rate during the third quarter of 2001. Following the conversion, the loan bears interest equal to the 30-day LIBOR rate plus 227 basis points and requires monthly level payments of principal and interest until maturity.
	(4)		This loan bears interest equal to the 30-day LIBOR rate plus 175 basis points and requires quarterly interest and level principal payments until maturity. During the third quarter of 2001, we entered into an agreement with a third party to swap the variable rate to a 7.31% fixed rate, effective July 1, 2002, which was subsequently extended during the first quarter of 2002 to November 1, 2002 at a fixed rate of 7.50%.
	(5)		These loans bear interest at variable rates ranging from 200 to 357 basis points above the A1-P1 Commercial Paper Rate or the 30-day LIBOR rate and have maturity dates ranging from December 22, 2009 to May 1, 2012. The terms of the various loans require either quarterly interest and level principal payments or monthly level payments of principal and interest until maturity.
	(6)		The facility matured on March 3, 2002 and was extended until the end of the second quarter at which time it was replaced by the new unsecured revolving credit facility.
	(7)		At the end of the first quarter of 2002, we closed on this $60 million unsecured revolving credit facility. The facility provides for a three-year term with interest equal to the 30-day LIBOR rate plus 200 basis points and requires the repayment of borrowings within 180 days. The facility replaced the existing $50 million secured revolving credit facility at the end of the second quarter of 2002.
	(8)		Amounts borrowed under this facility bear interest at market rates determined at the time of each draw until such time as we and the lender set an interest rate for any future amounts borrowed under the facility. As of June 30, 2002, the borrowings under the facility bear interest equal to the 30-day LIBOR rate plus 287 basis points. The facility requires the repayment of principal within 150 days. The facility has a one-year term, which terminates on March 21, 2003, and is renewable annually.

As of June 30, 2002, we were in compliance with all of the loan covenants related to our mortgage debt and credit facilities.

Aggregate annual principal maturities (which includes principal amortization) of mortgage debt as of June 30, 2002 are as follows (in thousands):

$325 Million Securitization

As noted in footnote (1) of the debt table herein, we modified approximately $173 million of debt during the second quarter. Because the terms of the Modified Debt were virtually identical to the original debt, the modification did not result in a significant modification of debt. Therefore, in accordance with

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GAAP: (1) the unamortized issuance costs related to the original debt of $3.9 million, plus $2.3 million of costs related to the Modified Debt that was paid to the lender and capitalized, will be amortized over the remaining term of the Modified Debt using the effective interest method; and (2) third-party costs totaling $265,000 incurred in connection with the Modified Debt were expensed. In addition, we incurred approximately $6.2 million in debt issuance costs associated with the issuance of the New Notes, which, in accordance with GAAP, were capitalized and will be amortized over the term of the New Notes using the effective interest method.

Interest Rate Swaps

In June 1998, the FASB issued SFAS No. 133, ''Accounting for Derivative Instruments and Hedging Activities.’’ This statement was originally effective for all fiscal quarters of fiscal years beginning after June 15, 1999; however, during the second quarter of 1999 the FASB issued SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of FASB Statement No. 133,” which deferred the effective date until June 15, 2000. In June 2000, the FASB issued SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” an amendment to SFAS No. 133, which required that all companies be in compliance with SFAS No. 133 as of January 1, 2001. SFAS No. 133 does not require restatement of financial statements from prior periods. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. We adopted SFAS No. 133 on January 1, 2001. There was no impact to our financial statements at the time of adoption.

During the third quarter of 2001, we borrowed $82.6 million of long-term debt drawn under a $150 million commitment for secured financing from Toyota Financial Services. The terms of the debt provide for a 12-year term with interest at a spread over the one-month LIBOR rate. At the end of the third quarter, we entered into an agreement with a third party to swap the variable rate to a 7.31% fixed rate, effective July 1, 2002, which was subsequently extended during the first quarter of 2002 to November 1, 2002 at a fixed rate of 7.50%. All other terms and conditions of the swap remain the same.

During the first quarter of 2002, we converted the leases on approximately $71.2 million of properties leased to Sonic Automotive and its affiliates (“Sonic”) from variable rate to fixed rate. At the same time, we entered into interest rate swap arrangements with a third party to fix the interest rate on the debt secured primarily by such properties totaling approximately $58.3 million.

Fixing the rate on $140.9 million of debt with interest rate swap arrangements and extending the effective date of the swap on the $82.6 million of debt, continues our strategy of minimizing interest rate risk by substantially match-funding our leases with debt in order to lock in our investment spread over the lease term, and at the same time, potentially garnering more spread in the short term.

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, we determined that these derivative instruments are highly effective. Consequently, 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 derivative instrument liability on our consolidated balance sheets. As of June 30, 2002, we had an unrealized loss on the swaps of approximately $4.5 million, which is included in other liabilities and accumulated other comprehensive income (loss) within our consolidated balance sheets.

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6.     MINORITY INTEREST

Minority interest represents the Units of the Partnership owned by limited partners (other than the Company). Minority interest is calculated at approximately 23.9% of the Partnership’s partners’ capital as of June 30, 2002 and approximately 24.3% of the Partnership’s partners’ net income for the three months ended June 30, 2002 and approximately 23.7% for the six months ended June 30, 2002. The ownership of the Partnership as of June 30, 2002 is as follows (Units in thousands):

7.     EARNINGS PER SHARE

Basic earnings per share is computed as net income divided by the weighted average common shares outstanding for the period. Diluted earnings per share is computed as net income, adjusted to reflect the change in our share of income based on an ownership calculation that includes weighted average common share equivalents, divided by the weighted average common shares outstanding for the period plus the effect of dilutive common equivalent shares outstanding for the period, based on the treasury stock method. Dilutive common equivalent shares include restricted shares, phantom shares, options and warrants. A reconciliation of net income and weighted average common shares used to calculate basic and diluted earnings per share for the three months and six months ended June 30, 2002 and 2001 is as follows (in thousands, except per share data):

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(1)  Adjustment to net income reflects the change in our share of income based on an ownership calculation including weighted average common share equivalents. The adjustment to weighted average shares reflects the effect of dilutive common share equivalents outstanding for the period, based on the treasury stock method.

8.     DIVIDENDS DECLARED PER SHARE

Dividends are generally declared a quarter in arrears. However, prior to 2001, we declared our fourth quarter dividend during the quarter in order to comply with REIT requirements during those respective years. Dividends declared per share for the three months ended June 30, 2002 and 2001 represents the first quarter dividend for 2002 and 2001, respectively. Dividends declared per share for the six months ended June 30, 2002 includes the first quarter dividend for 2002 and the fourth quarter dividend for 2001. Dividends declared per share for the six months ended June 30, 2001 represents the first quarter dividend for 2001.

9.     SUBSEQUENT EVENTS

Declaration of Dividend

On July 17, 2002, our Board of Trustees declared a cash dividend of $0.398 per share, which will be paid on August 20, 2002 to shareholders of record as of August 9, 2002.

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CAPITAL AUTOMOTIVE REIT
ITEM II — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS – THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 2002 AND JUNE 30, 2001

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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Also, documents that we subsequently file with the SEC will contain forward-looking statements. When we refer to forward-looking statements or information, sometimes we use words such as “may,” “will,” “could,” “should,” “plans,” “intends,” “expects,” “believes,” “estimates,” “anticipates” and “continues.” In particular, Item II and Item III of Part I of this Form 10-Q describe forward-looking information. The statements made herein are not all inclusive, particularly with respect to possible future events, and should be read together with other filings made by the Company under the Securities Act and the Exchange Act, including the risks and other risk factors contained in the Company’s Form 8-K/A filed on January 22, 2002. Other parts of this Form 10-Q may also describe forward-looking information. Many things can happen that can cause our actual results to be very different than those described. These factors include:

	•		risks that our tenants will not pay rent;
	•		risks that our growth will be limited if we cannot obtain additional capital;
	•		risks of financing, such as our ability to consummate planned and additional financings on terms which are acceptable to us and our ability to meet existing financial covenants;
	•		risks that planned and additional acquisitions may not be consummated;
	•		risks that our operating costs will be higher than expected;
	•		risks related to the automotive industry, such as the ability of our tenants to compete effectively in the automotive retail industry and the ability of our tenants to perform their lease obligations as a result of changes in any manufacturer’s production, inventory, marketing or other practices or changes in the economy generally;
	•		environmental and other risks associated with the acquisition and leasing of automotive properties; and
	•		risks related to our status as a REIT for federal income tax purposes, such as the existence of complex regulations relating to our status as a REIT, the effect of future changes in REIT requirements as a result of new legislation and the adverse consequences of the failure to qualify as a REIT.

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, or to publicly release the results if we revise any of them.

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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, parts or other related businesses under long-term, triple-net leases. 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. As of June 30, 2002, we had invested approximately $1.4 billion in 280 properties located in 28 states, comprising approximately 1,930 acres of land and containing approximately 11.0 million square feet of buildings and improvements. Our tenants operate 390 motor vehicle franchises on our properties, representing nearly 45 brands of motor vehicles, which include all of the top selling brands in the U.S.

Substantially all of our properties are leased pursuant to long-term, triple-net leases, under which the tenants typically pay all operating expenses of a property, including, but not limited to, all real estate taxes, assessments and other government charges, insurance, utilities, repairs and maintenance. The initial lease terms generally range from 10 to 20 years, with a weighted average initial lease term of approximately 14.1 years and a weighted average remaining lease term of approximately 11.7 years. The leases typically have options to renew upon the same terms and conditions for one or more additional periods of five to 10 years each, exercisable at the option of the tenant (with renewal options ranging from a total of five to 40 years).

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

We incur general and administrative expenses including, principally, compensation expense for our executive officers and other employees, professional fees and various expenses incurred in the process of identifying and acquiring additional properties. We are self-administered and managed by our trustees, executive officers and other employees. 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 40-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.

SECOND QUARTER ACQUISITIONS

During the three months ended June 30, 2002, we completed approximately $34.1 million of property acquisitions, which included six properties, three of which are operated by two new tenants, and several facility improvements and construction fundings with existing tenants. We initially funded the majority of the acquisitions with funds drawn down on our short-term credit facilities and subsequently repaid these facilities with the net proceeds received from the $325 million debt securitization completed at the end of the second quarter, as discussed in “Liquidity and Capital Resources — Mortgage Debt and Revolving Credit Facilities” below. These acquisitions added approximately 262,000 square feet of buildings and improvements on approximately 31 acres of land in five states (Indiana, New Jersey, Ohio, Tennessee and Texas). The majority of the leases entered into during the quarter have been structured using our variable rate lease program. The leases have initial lease terms ranging from 12 to 21 years, with a weighted average initial lease term of 15.8 years. These leases have renewal options exercisable at the option of the tenant ranging from a total of 10 to 20 years.

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RESULTS OF OPERATIONS

Revenue

Rental. Rental revenue for the three months ended June 30, 2002 increased 21% to $34.3 million from $28.4 million for the same quarter in 2001. Rental revenue for the six months ended June 30, 2002 increased 18% to $66.6 million from $56.4 million for the same period in 2001. The increase was primarily attributable to:

•		the growth of our real estate portfolio and the timing of our property acquisitions, from which we generate our rental income. We owned 280 properties as of June 30, 2002 versus 251 properties as of June 30, 2001;
•		during the first quarter of 2002, we converted the leases on approximately $71.2 million of properties leased to Sonic from variable rate to fixed rate, resulting in an increase in rental revenue. At the same time, we entered into interest rate swap arrangements with a third party to fix the interest rate on the debt secured primarily by such properties totaling approximately $58.3 million. Fixing the underlying debt simultaneously with the lease conversion continues our strategy of minimizing interest rate risk by substantially match-funding our leases with debt in order to lock in our investment spread over the initial lease term. Other terms of the leases, including lease escalators, remained unchanged;
•		an increase in straight-lined rents, which for the three months and six months ended June 30, 2002 totaled $1.2 million and $2.7 million, respectively, as compared to $858,000 and $1.6 million for the three months and six months ended June 30, 2001; and
•		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 revenues was partially offset by the following:

•		a decrease in lease rates on our variable rate leases. As of June 30, 2002, $334 million of our $1.4 billion real estate portfolio, or 25%, was subject to variable rate leases. This compares to $94 million of our $1.1 billion real estate portfolio, or 9%, that was subject to variable rate leases as of June 30, 2001. We had a corresponding decrease in interest rates on our variable rate debt resulting in reduced interest expense, which is more fully described below. 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. The majority of the variable rate lease agreements contain minimum rates and fixed rate conversion features, and none of these leases contains a maximum rate; and
•		during the third quarter of 2001, we converted the leases relating to $185.3 million of properties leased to Sonic from fixed rate to variable rate, resulting in a decrease in rental revenue. We also converted the interest rate on approximately $150 million of debt that is primarily secured by the properties subject to these leases from fixed rate to variable rate. Other terms of the leases, including lease escalators, remained unchanged.

Interest and Other. Interest and other income for the three months ended June 30, 2002 increased to $135,000 from $32,000 for the same quarter in 2001. Interest and other income for the six months ended June 30, 2002 increased to $264,000 from $93,000 for the same period in 2001. The increase was primarily due to an increase in interest earned on temporary investments and other fee income.

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Expenses

Depreciation and Amortization. Depreciation and amortization for the three months ended June 30, 2002 increased 23% to $6.3 million from $5.1 million for the same quarter in 2001. Depreciation and amortization for the six months ended June 30, 2002 increased 21% to $12.3 million from $10.2 million for the same period in 2001. Depreciation and amortization consisted primarily of depreciation on buildings and improvements owned during those periods. The increase is attributable to the growth of our real estate portfolio, resulting in an increase in our depreciable assets.

General and Administrative. General and administrative expenses for the three months ended June 30, 2002 increased $261,000, or 15%, to $2.0 million from $1.7 million for the same quarter in 2001. General and administrative expenses for the six months ended June 30, 2002 increased 19% to $4.1 million from $3.4 million for the same period in 2001. The increase in operating expenses is due primarily to (1) an increase in payroll and related expenses primarily attributable to an increase in base compensation, the award of additional stock based compensation to employees, and an increase in the number of employees; (2) an increase in office administration expenses as a result of an increase in staffing requirements; (3) an increase in system administration fees for several projects initiated and completed during the first quarter of 2002 related to the expansion of our hardware infrastructure to improve security, reliability and capacity; (4) an increase in state income taxes due to the growth in our real estate portfolio during 2001 and 2002; (5) an increase in directors and officers insurance due to an increase in market rates; and (6) an increase in costs associated with our public reporting requirements due to an increase in the number of shareholders. The increase in general and administrative expenses was partially offset by a decrease in professional service fees.

Modification of Debt. On June 28, 2002, we issued $325 million in four classes of Triple Net Lease Mortgage Notes, Series 2002, as further described in “Liquidity and Capital Resources — Mortgage Debt and Revolving Credit Facilities” below. The transaction reflects approximately $152 million of new debt issued in classes under current market terms and a restructuring of a securitization completed in 1999 that had a remaining balance of approximately $173 million. The certificates representing the Modified Debt have economic terms equivalent to the prior transaction. Because the terms of the Modified Debt were virtually identical to the original debt, it did not result in a “significant modification” of debt for GAAP purposes. Therefore, in accordance with GAAP, third-party costs totaling $265,000 incurred in connection with the Modified Debt were expensed. There were no such expenses incurred during the quarter and six months ended June 30, 2001.

Interest. Interest expense for the three months ended June 30, 2002 decreased 2% to $11.4 million from $11.6 million for the same quarter in 2001. Interest expense for the six months ended June 30, 2002 decreased 8% to $21.7 million from $23.5 million for the same period in 2001. Since June 30, 2002, our overall debt increased from $626.8 million ($476.3 million fixed rate debt and $150.5 million variable rate debt) as of June 30, 2001 to $838.9 million ($524.6 million fixed rate debt and $314.3 million variable rate debt) as of June 30, 2002, which debt was primarily obtained to directly or indirectly finance acquisition of properties during that time period. Of the total debt outstanding, approximately $152 million was issued on June 28, 2002 as noted in “Liquidity and Capital Resources — Mortgage Debt and Revolving Credit Facilities” below. Our overall debt increased as well as the mix of variable rate debt to total debt increased from 24% to over 35%. The decreases in interest expense over the prior periods were due to the shift from fixed to variable rate debt and the reduction of interest rates. The effective interest rate on our debt, which includes deferred loan fees amortized over the life of the loans, decreased from 7.81% in the second quarter of 2001 to 6.07% in the second quarter of 2002 and from 7.96% in the first half of 2001 to 6.44% in the first half of 2002. The decreases were partially offset by the conversion of $58.3 million of variable rate debt to fixed rate debt during the first quarter of 2002 through the execution of swap arrangements with a third party. The swap arrangements were executed in conjunction with our

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conversion of the leases on approximately $71.2 million of properties leased to Sonic from variable rate to fixed rate, as described above.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $54.4 million and $1.7 million at June 30, 2002 and June 30, 2001, respectively. The changes in cash and cash equivalents during the six months ended June 30, 2002 and 2001 were attributable to operating, investing and financing activities, as described below.

Operating Activities
Cash provided by operating activities for the six months ended June 30, 2002 and 2001 was $35.0 million and $21.7 million, respectively, and represents, in each year, cash received primarily from rents under long-term, triple-net leases, plus interest and other income, less normal recurring general and administrative expenses and interest payments on debt outstanding.

Investing Activities
Cash used in investing activities for the six months ended June 30, 2002 and 2001 was $102.5 million and $50.3 million, respectively, and primarily reflects the acquisition of dealership properties, facility improvements and construction financings during those periods.

Financing Activities
Cash provided by financing activities for the six months ended June 30, 2002 and 2001 was $112.5 million and $24.0 million, respectively. Cash provided by financing activities for the six months ended June 30, 2002 primarily reflects:

	•		$205.4 million of proceeds received from mortgage debt incurred during the period;
	•		$105.7 million of proceeds received from borrowings on our revolving credit facilities; and
	•		$16.2 million of proceeds received from the issuance of common shares, net of costs.

     The cash provided by financing activities was partially offset by:

	•		the repayment of borrowings on our revolving credit facilities totaling $164.2 million;
	•		distributions made to shareholders and minority partners during the period totaling $27.7 million;
	•		payments made during the first quarter of 2002 totaling $6.0 million and $293,000 to purchase outstanding warrants to purchase common shares during the fourth quarter of 2001 and first quarter of 2002, respectively;
	•		payments of principal on outstanding mortgage debt totaling $9.2 million;
	•		payments for debt issuance costs totaling $7.3 million; and
	•		the redemption of Units totaling $153,000.

Cash provided by financing activities for the six months ended June 30, 2001 primarily reflects:

•

$91.3 million of proceeds received from borrowings on our revolving credit facilities;

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	•		$6.2 million of proceeds received from the issuance of common shares, net of costs; and
	•		$661,000 of proceeds received from mortgage debt incurred during the period.

     The cash provided by financing activities was partially offset by:

	•		the repayment of borrowings on our revolving credit facilities totaling $43.4 million;
	•		distributions made to shareholders and minority partners during the period totaling $23.1 million;
	•		payments of principal on outstanding mortgage debt totaling $7.5 million;
	•		payments for debt issuance costs totaling $104,000; and
	•		the repurchase of common shares pursuant to our common share repurchase program totaling $142,000.

Mortgage Debt and Revolving Credit Facilities

As of June 30, 2002, we had total debt outstanding of $838.9 million. Of this debt, approximately $833.9 million (consisting of $524.6 million of fixed rate and $309.3 million of variable rate debt) was mortgage debt secured by approximately 250 of our properties. In addition, we had $5.0 million outstanding on our revolving credit facilities.

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The following is a summary of our total debt outstanding as of June 30, 2002 and December 31, 2001 (dollars in thousands):

	*		For the quarter ended June 30, 2002. Includes deferred loan fees amortized over the life of the loans. The effective interest rates on our total mortgage fixed rate debt and our total mortgage debt outstanding as of June 30, 2002 were approximately 7.7% and 6.4%, respectively.
	(1)		On June 28, 2002, we issued $325 million in four classes of Triple Net Lease Mortgage Notes, Series 2002 (the “Notes”). The transaction reflects approximately $152 million of new debt issued in classes under current market terms (the “New Notes”) and a restructuring of a securitization completed in 1999, that had a remaining balance of approximately $173 million (the “Modified Debt”). The certificates representing the Modified Debt have economic terms equivalent to the prior transaction. The Notes are collateralized by 94 properties, subject to long-term, triple-net leases, with a net book value of $430.5 million and an appraised value of $462.4 million as of June 30, 2002. The New Notes have a weighted average effective interest rate (including deferred fees amortized over the life of the New Notes) of approximately 7.0% and are fully-amortizing over 20 years. The Notes are fully-amortizing and have terms ranging from 12 to 20 years, with a weighted average term of 14.2 years. The Notes have a weighted average effective interest rate (including deferred fees amortized over the life of the Notes) of approximately 7.7%. The net proceeds from the issuance of the New Notes were used to pay down our short-term credit facilities and to fund

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			acquisitions, and will be available to fund future acquisitions. CARS Loan Servicer L.L.C., one of our subsidiaries, will act as servicer of the Notes on behalf of the noteholders.
	(2)		These loans bear interest equal to the 30-day LIBOR rate plus 215 basis points and require quarterly interest and level principal payments until maturity. During the first quarter of 2002, we entered into interest rate swap arrangements with a third party on these loans to fix the interest rate. The new blended rate on the debt is approximately 7.58%.
	(3)		This loan was converted from fixed rate to variable rate during the third quarter of 2001. Following the conversion, the loan bears interest equal to the 30-day LIBOR rate plus 227 basis points and requires monthly level payments of principal and interest until maturity.
	(4)		This loan bears interest equal to the 30-day LIBOR rate plus 175 basis points and requires quarterly interest and level principal payments until maturity. During the third quarter of 2001, we entered into an agreement with a third party to swap the variable rate to a 7.31% fixed rate, effective July 1, 2002, which was subsequently extended during the first quarter of 2002 to November 1, 2002 at a fixed rate of 7.50%.
	(5)		These loans bear interest at variable rates ranging from 200 to 357 basis points above the A1-P1 Commercial Paper Rate or the 30-day LIBOR rate and have maturity dates ranging from December 22, 2009 to May 1, 2012. The terms of the various loans require either quarterly interest and level principal payments or monthly level payments of principal and interest until maturity.
	(6)		The facility matured on March 3, 2002 and was extended until the end of the second quarter at which time it was replaced by the new unsecured revolving credit facility.
	(7)		At the end of the first quarter of 2002, we closed on this $60 million unsecured revolving credit facility. The facility provides for a three-year term with interest equal to the 30-day LIBOR rate plus 200 basis points and requires the repayment of borrowings within 180 days. The facility replaced the existing $50 million secured revolving credit facility at the end of the second quarter of 2002.
	(8)		Amounts borrowed under this facility bear interest at market rates determined at the time of each draw until such time as we and the lender set an interest rate for any future amounts borrowed under the facility. As of June 30, 2002, the borrowings under the facility bear interest equal to the 30-day LIBOR rate plus 287 basis points. The facility requires the repayment of principal within 150 days. The facility has a one-year term, which terminates on March 21, 2003, and is renewable annually.

As of June 30, 2002, we were in compliance with all of the loan covenants related to our mortgage debt and credit facilities.

$325 Million Securitization

As noted in footnote (1) of the debt table herein, we modified approximately $173 million of debt during the second quarter. Because the terms of the Modified Debt were virtually identical to the original debt, the modification did not result in a significant modification of debt. Therefore, in accordance with GAAP: (1) the unamortized issuance costs related to the original debt of $3.9 million, plus $2.3 million of costs related to the Modified Debt that was paid to the lender and capitalized, will be amortized over the remaining term of the Modified Debt using the effective interest method; and (2) third-party costs totaling $265,000 incurred in connection with the Modified Debt were expensed. In addition, we incurred approximately $6.2 million in debt issuance costs associated with the issuance of the New Notes, which, in accordance with GAAP, were capitalized and will be amortized over the term of the New Notes using the effective interest method.

Interest Rate Swaps

In June 1998, the FASB issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This statement was originally effective for all fiscal quarters of fiscal years beginning after June 15, 1999; however, during the second quarter of 1999 the FASB issued SFAS No. 137, “Accounting

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for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of FASB Statement No. 133,” which deferred the effective date until June 15, 2000. In June 2000, the FASB issued SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” an amendment to SFAS No. 133, which required that all companies be in compliance with SFAS No. 133 as of January 1, 2001. SFAS No. 133 does not require restatement of financial statements from prior periods. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. We adopted SFAS No. 133 on January 1, 2001. There was no impact to our financial statements at the time of adoption.

During the third quarter of 2001, we borrowed $82.6 million of long-term debt drawn under a $150 million commitment for secured financing from Toyota Financial Services. The terms of the debt provide for a 12-year term with interest at a spread over the one-month LIBOR rate. At the end of the third quarter, we entered into an agreement with a third party to swap the variable rate to a 7.31% fixed rate, effective July 1, 2002, which was subsequently extended during the first quarter of 2002 to November 1, 2002 at a fixed rate of 7.50%. All other terms and conditions of the swap remain the same.

During the first quarter of 2002, we converted the leases on approximately $71.2 million of properties leased to Sonic Automotive and its affiliates (“Sonic”) from variable rate to fixed rate. At the same time, we entered into interest rate swap arrangements with a third party to fix the interest rate on the debt secured primarily by such properties totaling approximately $58.3 million.

Fixing the rate on $140.9 million of debt with interest rate swap arrangements and extending the effective date of the swap on the $82.6 million of debt, continues our strategy of minimizing interest rate risk by substantially match-funding our leases with debt in order to lock in our investment spread over the lease term, and at the same time, potentially garnering more spread in the short term.

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, we determined that these derivative instruments are highly effective. Consequently, 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 derivative instrument liability on our consolidated balance sheets. As of June 30, 2002, we had an unrealized loss on the swaps of approximately $4.5 million, which is included in other liabilities and accumulated other comprehensive income (loss) within our consolidated balance sheets.

Liquidity Requirements

Short-term liquidity requirements consist primarily of normal recurring operating expenses, regular debt service requirements (including debt service relating to additional and replacement debt), recurring corporate expenditures, distributions to shareholders and holders of Units (“Unitholders”), 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 long-term debt commitments, 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 made subject to our investment objectives and policies with the intention

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of maximizing both current income and long-term growth in income.

As of June 30, 2002, long-term liquidity requirements consisted primarily of maturities under our long-term debt. 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 financing will depend upon market and other conditions.

Aggregate annual principal maturities (which includes principal amortization) of mortgage debt as of June 30, 2002 are as follows (in thousands):

During the second quarter of 2001, we received a commitment for $150.0 million of long-term secured financing from Toyota Financial Services. The commitment can be drawn down in multiple fundings under one or more debt instruments, and each funding is subject to customary conditions precedent and the lender’s satisfaction with the loan documentation. The terms of the commitment provide for a 12-year term with interest at a spread over the one-month LIBOR rate. As of June 30, 2002, we had $67.4 million available under this commitment.

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 June 30, 2002, our debt was approximately 58% of our assets. In addition, to minimize interest rate risk, we typically match the average term of our long-term leases with the average term of our debt as well as the type of leases with the type of debt (fixed or variable) in order to maintain an investment spread over the lease term. We describe this process as “match-funding.” We currently intend to match-fund at least 70% of our total outstanding long-term debt with long-term leases. We may change the 70% guideline at any time without shareholder approval. As of June 30, 2002, approximately 93% of our debt outstanding (including the $80.5 million of variable rate debt that will become fixed rate debt effective November 1, 2002 under an interest rate swap arrangement) was substantially match-funded, non-recourse debt. As of June 30, 2002, our long-term debt had a weighted average remaining term of 11.2 years, and our leases had a weighted average remaining term of 11.7 years.

We may offer our 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, the monthly base rent is typically adjusted upward periodically, usually based on a factor of the change in the CPI. As of June 30, 2002, approximately $334 million of our approximately $1.4 billion real estate portfolio, or 25%, was subject to variable rate leases. The majority of the variable rate lease agreements contain minimum rates and fixed rate conversion features, and none of these leases contains a maximum

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rate. Upon conversion, the fixed base rent typically continues to be adjusted upward periodically based on a factor of the change in the CPI. The majority of the variable rate leases currently are financed with long-term, variable rate debt, thereby fixing our investment spread. We expect to finance the remaining variable rate leases with long-term, variable rate debt as well. As of June 30, 2002, $233.7 million of our total outstanding debt was variable rate debt, which excludes $80.5 million of variable rate debt that will become fixed rate debt effective November 1, 2002 under an interest rate swap arrangement. We believe the existing mix of variable rate leases and variable rate debt maintains our balance sheet flexibility, while continuing our policy of minimizing interest rate risk.

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 without exceeding our current debt to asset ratio policy. We have used and may continue to use interest rate swap arrangements to minimize 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.

Common Share Repurchase Program
During 1998, we announced that our Board of Trustees had authorized the repurchase of up to 6.0 million common shares. Purchases have been and will be made from time to time in open market transactions at prevailing prices or in negotiated private transactions at the discretion of management. During the three months and six months ended June 30, 2002, no common shares were repurchased. From the inception of the common share repurchase program through June 30, 2002, 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.

Dividend Reinvestment and Share Purchase Plan
During April 2000, we implemented a Dividend Reinvestment and Share Purchase Plan, which was subsequently amended in March 2001 (the “DRIP”). 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%). Shares purchased under the DRIP through optional cash payments of $10,000 or less are purchased at market price.

Common shares may be purchased directly from us or in open market or privately negotiated transactions, as we determine from time to time, to fulfill the requirements for the DRIP. For the three months ended June 30, 2002, we issued approximately 4,700 common shares under the DRIP and received approximately $109,000 in net proceeds. For the six months ended June 30, 2002, we issued approximately 10,400 common shares under the DRIP and received approximately $227,000 in net proceeds.

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 remainder was

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paid in January 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 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 would have expired in February 2003. The purchase of the warrants is considered a retirement of an equity instrument for GAAP purposes and therefore recorded as a charge to shareholders’ equity. As of June 30, 2002, we had warrants outstanding to acquire a total of 30,000 common shares, at an exercise price of $15.00 per share with expiration dates ending no later than January 2003.

FUNDS FROM OPERATIONS

Funds From Operations (“FFO”) is defined under the revised definition adopted in October 1999 by the National Association of Real Estate Investment Trusts (NAREIT) as net income (loss) before minority interest and extraordinary item (computed in accordance with GAAP) excluding gains (or losses) from sales of property, plus depreciation and amortization of assets unique to the real estate industry, and after adjustments for unconsolidated partnerships and joint ventures. Adjusted FFO (“AFFO”) is FFO less straight-lined rents.

NAREIT developed FFO as a relative 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 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 and AFFO meaningful, additional measures of operating performance because they primarily exclude the assumption that the value of the real estate assets diminishes predictably over time, and because industry analysts have accepted them as performance measures. Comparison of our presentation of FFO, using the NAREIT definition, and AFFO, 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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FFO and AFFO for the three months and six months ended June 30, 2002 and 2001 is computed as follows (in thousands):