Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission File Number 0-49782

T REIT, Inc.

N/A

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 o          No þ

      As of May 14, 2004, there were 4,642,553 shares of common stock of T REIT, Inc. outstanding.

T REIT, INC.

FORM 10-Q

INDEX

1

Table of Contents

PART I — FINANCIAL INFORMATION

      The accompanying March 31, 2004 and 2003 interim financial statements of the Company required to be filed with this Form 10-Q Quarterly Report were prepared by management without audit and commence on the following page, together with the related Notes. In the opinion of management, these interim financial statements present fairly the financial condition, results of operations and cash flows of the Company, but should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2003 included in our Annual Report on Form 10-K previously filed with the Securities and Exchange Commission.

2

Table of Contents

T REIT, INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

3

Table of Contents

T REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated financial statements.

4

Table of Contents

T REIT, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

The accompanying notes are an integral part of these consolidated financial statements.

5

Table of Contents

T REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated financial statements.

6

Table of Contents

T REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      T REIT, Inc. (the “Company”) was formed in December 1998 in the Commonwealth of Virginia and operates as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). The Company is in the business of acquiring existing office, industrial, retail and service properties located in several states. As of March 31, 2004, the Company owned real estate investments consisting of one consolidated property and interests in nine unconsolidated properties. The Company acquires properties through its operating partnership, T REIT, L.P., which is wholly owned by the Company.

      The Company is externally advised by an affiliated company, Triple Net Properties, LLC (the “Advisor”), which is primarily responsible for managing the day-to-day operations and assets of the Company. The Advisory Agreement dated February 22, 2000, between the Company and the Advisor is for a one-year term, subject to successive renewals. (See Note 11).

      The summary of significant accounting policies presented below is designed to assist in understanding the Company’s consolidated financial statements. Such financial statements and accompanying notes are the representations of Company management, who is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.

      The accompanying consolidated financial statements include the accounts of the Company and T REIT, L.P. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain 2003 amounts have been reclassified to conform to the 2004 presentation. This report should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2003.

      Operating properties are held for investment and carried at cost less accumulated depreciation. Cost includes the cost of land and completed buildings and related improvements. Expenditures that increase the service life of properties are capitalized; the cost of maintenance and repairs is charged to expense as incurred.

      Depreciation is generally provided on a straight-line basis over the estimated useful lives of the buildings and improvements, ranging primarily from 15 to 39 years. When depreciable property is retired or disposed of, the related costs and accumulated depreciation are removed from the accounts and any gain or loss reflected in operations.

      In the event that the carrying amount of a property exceeds the sum of the undiscounted cash flows (excluding interest) that are expected to result from the use and eventual disposition of the property, the Company would recognize an impairment loss to the extent the carrying amount exceeded the fair value of the property. The Company estimates the fair value using available market information or other industry valuation techniques such as present value calculations.

7

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Property acquisitions have been accounted for in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations.” The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, if any, based in each case on their fair values.

      The fair value of the tangible assets of an acquired property (which includes land, building and tenant improvements) is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements based on the Company’s determination of the relative fair values of these assets. Factors considered in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and insurance and other operating expenses during the expected lease-up periods based on current market demand. The Company also estimates costs to execute similar leases including leasing commissions, concessions, legal and other related costs.

      In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) our estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancellable term of the lease. The capitalized above-market and below-market lease values are amortized into rental income over the remaining non-cancellable terms of the respective leases.

      Property held for sale is carried at the lower of cost or estimated fair value less cost to sell and such property is no longer depreciated. The Company classifies operating properties as property held for sale in the period in which all of the following criteria are met:

	•	management, having the authority to approve the action, commits to a plan to sell the asset;
	•	the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets;
	•	an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated;
	•	the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within one year;
	•	the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and
	•	actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

      Variable interest investments in real estate that do not meet consolidation criteria are reflected in the financial statements using the equity method of accounting.

      Certificates of deposit and short-term investments with remaining maturities of three months or less when acquired are considered cash equivalents.

8

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Marketable securities are carried at fair value and consisted of an investment in a public REIT.

      Tenant receivables and unbilled deferred rent receivables are carried net of the allowances for uncollectible current tenant receivables and unbilled deferred rent. Management’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, individual tenant receivables considering the tenant’s financial condition, security deposits, letters of credit, lease guarantees and current economic conditions and other relevant factors.

      Financial instruments that potentially subject the Company to a concentration of credit risk are primarily cash and accounts receivable from tenants. Cash is generally placed in money market accounts and the amount of credit exposure to any one party is limited. The Company has cash in financial institutions which is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000 per institution. At March 31, 2004 and December 31, 2003, the Company had cash accounts in excess of FDIC insured limits. Concentration of credit risk with respect to accounts receivable from tenants is limited. The Company performs credit evaluations of prospective tenants, and security deposits are obtained.

      As of March 31, 2004, the Company has investments in five properties located in the State of Texas, two properties located in the State of California, two properties located in the State of Nevada and one property located in the State of Illinois. Accordingly, there is a geographic concentration of risk subject to fluctuations in the economy of each of these States. No single tenant accounted for a significant portion of the Company’s rental income.

      The Company believes that the March 31, 2004 and December 31, 2003 interest rates associated with mortgages payable approximate the market interest rates for these types of debt instruments and as such, the carrying amount of the mortgages payable approximate their fair value.

      The carrying amount of cash and cash equivalents, restricted cash, accounts receivable, notes receivable and accounts payable and accrued liabilities, approximate fair value because of the relatively short maturity of these instruments.

      The Company is exposed to the effect of interest rate changes in the normal course of business. The Company mitigates these risks by following established risk management policies and procedures which include the periodic use of derivatives. The Company’s primary strategy in entering into derivative contracts is to minimize the volatility that changes in interest rates could have on its future cash flows. The Company employs derivative instruments that are designated as cash flow hedges, including interest rate swaps and caps, to effectively convert a portion of its variable-rate debt to fixed-rate debt. The Company does not enter into derivative instruments for speculative purposes.

      Real estate deposits are paid on properties the Company is evaluating for purchase. Real estate deposits are capitalized when paid and may become nonrefundable under certain circumstances. When

9

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

properties are acquired, the purchase price is reduced by the amounts of deposits paid by the Company. At March 31, 2004, all deposits will be applied to the acquisition of properties in subsequent periods.

      Financing costs are included in other assets and consist of loan fees and other loan costs. Loan fees and other loan costs are amortized over the term of the respective loan. Amortization of financing costs is included in interest expense.

      Rental income is recognized when earned under contractual lease agreements on a straight-line basis over the associated lease term. Deferred rent receivable is included in other assets in the consolidated balance sheets. Tenant reimbursement revenue, which is comprised of additional amounts recoverable from tenants for common area maintenance expenses and certain other recoverable expenses is recognized as revenue in the period in which the related expenses are incurred.

      The Company operates as a real estate investment trust for federal income tax purposes. As a REIT, the Company is generally not subject to income taxes. To maintain its REIT status, the Company is required to distribute annually as dividends at least 90% of its REIT taxable income, as defined by the Internal Revenue Code, to its shareholders, among other requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to Federal income tax on its taxable income at regular corporate tax rates. Although the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and Federal income and excise taxes on its undistributed income. The Company believes that it has met all of the REIT distribution and technical requirements for the three months ended March 31, 2004 and year ended December 31, 2003 and was not subject to any federal income taxes. Management intends to continue to adhere to these requirements and maintain the Company’s REIT status.

      The Company reports earnings per share pursuant to Statement of Financial Accounting Standards No. 128, “Earnings Per Share.” Basic earnings per share attributable for all periods presented is computed by dividing the earnings to common shareholders by the weighted average number of common shares outstanding during the period. Potentially dilutive securities consist of 101,000 warrants at March 31, 2004 and December 31, 2003 and stock options.

      The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of March 31, 2004 and December 31, 2003 and the revenues and expenses for each of the periods. Actual results could differ from those estimates.

      The Company follows the disclosure only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148. For employee compensatory stock options that will eventually vest, compensation expense is recognized during the periods in which the related employee services are rendered. Such expense is generally measured by determining the excess, if any, of the grant date estimated fair market value of the underlying stock over

10

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the amount to be paid by the employee in conformity with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Compensatory stock options and similar equity instruments issued to non-employees in exchange for goods or services are accounted for based on the estimated fair market value of (1) the goods or services received or (2) the equity instrument issued, whichever is more reliably measurable. Pursuant to SFAS 148, the Company is required to disclose the effects on net income and per share data as if the Company had elected to use the fair value approach to account for its stock-based compensation plans.

      This pro forma amount was determined by estimating the fair value of each option beginning June 28, 2003, when shareholder approval of the option plans was obtained, at $1.01 per option, using the Black-Scholes option-pricing model, assuming an 8.25% dividend yield, a 3.83% risk-free interest rate based on the 10-year U.S. Treasury Bond, an expected life of 9.0 years, and a 0% volatility rate.

      The weighted average remaining contractual life of all options outstanding at March 31, 2004, was approximately 8.96 years.

      The Company reports utilizes one segment to report the results of its financial operations.

      The Company’s real estate investments are comprised of (i) consolidated properties excluding property held for sale and (ii) investments in unconsolidated real estate.

      The Company’s consolidated properties consist of the following:

11

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      At March 31, 2004, the Company owned one consolidated property:

           University Heights Business Park, San Antonio, Texas

      On February 27, 2004, the Company purchased 43 acres of land, including 36 acres of land situated under Gateway Mall from another unaffiliated third party for a purchase price including closing costs of $1,631,000. Prior to the land acquisition, the property had been subject to a ground lease.

      On March 18, 2004, the Company sold Gateway Mall to an unaffiliated third party for a purchase price of $11,600,000. The sale of Gateway Mall included the underlying 36 acres of land. Net sales proceeds included cash of $2,452,000 and a note receivable in the amount of $8,700,000. The note is secured by a pledge agreement, bears interest at 6% per annum and is due June 14, 2004. In connection with the sale of Gateway Mall, the Company repaid a note payable secured by the property with an outstanding balance of $4,876,000. At closing, the Company paid a real estate commission to Triple Net Properties, Realty, Inc. (“Realty”), an affiliate of the Advisor, of $339,000, or 2.9% of the selling price.

      Investments in unconsolidated real estate consist of the Company’s investments in undivided tenant in common interests and limited liability companies. The Company had the following investments in unconsolidated real estate at March 31, 2004:

12

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Condensed combined historical financial information of investments in unconsolidated real estate as of March 31, 2004 is as follows:

      On January 20, 2004, the Company, through it wholly-owned subsidiary, TREIT — AmberOaks LP, purchased a 75% undivided tenant-in-common interest in three buildings at AmberOaks Corporate Center located in Austin, Texas from an unaffiliated third party. Three unaffiliated entities purchased the remaining 25% tenant-in-common interests in the property. The total purchase price for AmberOaks was $22,965,000. The Company’s total investment was $6,462,000. The purchase was financed by $15,000,000 in borrowings under a secured mortgage with North Houston Bank. The mortgage requires interest only payments through February 15, 2006 and, thereafter, principal and interest payments through the maturity date of January 20, 2007 at the Prime Rate plus 1.0% subject to a floor of 5.5%. The seller paid a sales commission to Realty of $585,000, or 2.3% of the purchase price. AmberOaks is a three-building Class A office portfolio totaling 206,000 square feet that is part of an eight-building complex built during 1999-2001. An affiliate of the Company’s advisor purchased the remaining five buildings.

      At March 31, 2004 and December 31, 2003, the Advisor owed the Company $460,000 and $520,000 for amounts due under an indemnification agreement (See Note 12).

13

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Other assets as of March 31, 2004 and December 31, 2003 consisted of the following:

      The Company issued a note for $8,700,000 in conjunction with the sale of Gateway Mall. The note is secured by a pledge agreement, bears interest at 6% per annum and is due June 14, 2004. The Company also holds an existing note with a balance of $645,000 and $647,000 at March 31, 2004 and December 31, 2003, respectively. The note is secured by a first deed of trust on a real estate property, with interest at 8.5% per annum. All accrued, unpaid interest and principal is due December 2006.

      On September 3, 2003, the Company entered into an agreement with Fleet National Bank for a line of credit in the amount of $1,000,000 which bears interest at Fleet’s prime rate plus fifty basis points (4.5% at March 31, 2004 and December 31, 2003). The credit facility matures on September 2, 2004 and has two one-year extensions. The credit facility is subject to a fee of 1% to be paid one-third on each of the effective date, the first anniversary and the second anniversary. As of March 31, 2004 and December 31, 2003, respectively, the Company had no amounts outstanding under the line of credit.

      On March 18, 2004, the Company sold Gateway Mall to an unaffiliated third party. Pursuant to the sale agreement, the Company repaid a note payable secured by the property with an outstanding balance of $4,876,000.

      Effective May 24, 2001 the Company adopted the Share Repurchase Plan (the “Repurchase Plan”), which provides eligible shareholders with limited liquidity by enabling them to request the repurchase of their common stock by the Company subject to various limitations. Repurchases are made at the sole discretion of the Board of Directors. To be eligible to request a repurchase, a shareholder must offer for resale at least 25% of the total number of his shares of common stock and must have owned the shares for at least one year.

      The price paid by the Company per repurchased share of common stock varies in accordance with the terms of the Repurchase Plan. Repurchases are effected by the Company on or about the last day of each

14

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

calendar quarter. Funding for the Repurchase Plan comes from the Company’s operations. The Company did not repurchase any shares during the three months ended March 31, 2004 and repurchased 50,000 shares of common stock for $455,000 during the year ended December 31, 2003.

      The Company agreed to sell to NNN Capital Corp., the dealer manager of the Company’s initial public offering which is solely owned by Anthony Thompson, the Company’s Chief Executive Officer, one warrant to purchase one share of common stock for every 40 shares of common stock sold by the dealer manager in any state other than Arizona, Missouri, Ohio, or Tennessee, up to a maximum of 250,000 warrants to purchase an equivalent number of shares. The dealer manager paid the Company $0.0008 for each warrant.

      The holder of a warrant is entitled to purchase one share of common stock from the Company at a price of $12.00 per share at any time from February 22, 2001 to February 22, 2005. A warrant may not be exercised unless the shares to be issued upon the exercise of the warrant have been registered or are exempt from registration in the state of residence of the warrant owner. Warrants are not exercisable until one year from the date of issuance. In addition, holders of warrants may not exercise the warrants to the extent such exercise would jeopardize the Company’s status as a REIT under the federal tax laws. Warrant holders may not vote on Company matters and are not entitled to receive distributions.

      The terms of the warrants (including the exercise price, the number and type of securities issuable upon their exercise, and the number of such warrants) may be adjusted pro-rata in the event of stock dividends, subdivisions, combinations and reclassification of shares or the issuance to stockholders of securities entitling them to purchase shares or securities convertible into shares. The terms of the warrants also may be adjusted if the Company engages in a merger or consolidation transaction or if all or substantially all of the assets are sold. Warrants are not transferable or assignable except by the dealer manager, the broker-dealers participating in the offering or to individuals who are both officers and directors or licensed representatives of such entities. Exercise of the warrants is governed by the terms and conditions set forth in the dealer manager agreement and in the warrant.

      As of March 31, 2004 and December 31, 2003, there were 101,000 outstanding warrants held by soliciting dealers that sold the Company’s shares. No warrants had been exercised to date. The Company applies the fair value method of accounting for the warrants in accordance with SFAS 123.

      The Company follows the disclosure only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). For employee compensatory stock options that will eventually vest, compensation expense is recognized during the periods in which the related employee services are rendered. Such expense is generally measured by determining the excess, if any, of the grant date estimated fair market value of the underlying stock over the amount to be paid by the employee in conformity with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Compensatory stock options and similar equity instruments issued to non-employees in exchange for goods or services are accounted for based on the estimated fair market value of (1) the goods or services received or (2) the equity instrument issued, whichever is more reliably measurable. This accounting policy is in conformity with SFAS 123.

      In February 2000, the Company adopted stock option plans (the “Plans”) for (1) independent and outside directors and (2) its officers and employees. Shares of common stock issued upon the exercise of such options will have certain transferability restrictions. The unregistered public sale of restricted stock,

15

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

which is governed by Rule 144 of the Securities Act of 1933, as amended, is prohibited during the first year of ownership and limited as set forth in such rule during the second year of ownership.

      Stock options granted pursuant to the Plans will expire ten years from the grant date and will be exercisable in whole or in part upon the second anniversary of the grant date; provided, however, that if the exercise of any stock option would cause the aggregate of all Company stock owned by the Advisor, affiliates of the Advisor and the Company’s officers and directors to exceed 10.0% of the total outstanding shares of the Company’s common stock, such exercise would be delayed until the first date on which the exercise would not cause such limit to be exceeded. The Company has authorized and reserved a total of 100,000 shares and 700,000 shares for issuance under the Director Plan and the Officer/ Employee Plan, respectively. Options grants are subject to shareholder approval of the Plans. Each of the Plans was approved by shareholders at the Annual Meeting of Shareholders held June 28, 2003.

      As of March 31, 2004, options for a total of 485,000 shares are outstanding under the Officer and Employee Stock Option Plan and Independent Director Stock Option Plan.

      A summary of outstanding options exercisable under the Plans is presented in the schedule below.

      The fair value of the options outstanding are calculated using the Black-Scholes option-pricing model. Assumptions used in the calculation included a 8.25% dividend yield, a 3.83% risk-free interest rate based on the 10-year U.S. Treasury Bond, an expected life of 9.0 years, and a 0% volatility rate. The fair value at March 31, 2004 was $1.01.

      The weighted average remaining contractual life of all options outstanding at March 31, 2004, was approximately 8.96 years.

      The Company has operating leases with tenants that expire at various dates through 2015 and are either subject to scheduled fixed increases or adjustments based on the Consumer Price Index. Generally, the leases grant tenants renewal options. Leases also provide for additional rents based on certain operating expenses.

      A certain amount of the Company’s rental income is from tenants with leases which are subject to contingent rent provisions. These contingent rents are subject to the tenant achieving periodic revenues in excess of specified levels. For the three months ended March 31, 2004 and 2003, the amount of contingent rent earned by the Company was not significant.

16

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The Advisory Agreement between the Company and the Advisor, as amended, was renewed by the Board of Directors on May 8, 2004 for an additional one-year term effective February 22, 2004. The Company compensates the Advisor for its services through a series of fees pursuant to the Advisory Agreement. No amounts are currently due the Advisor under this agreement. As described below, there were no amounts paid to the Advisor for services provided during the three months ended March 31, 2004 and 2003.

      The Advisor bears the expenses incurred in connection with supervising, monitoring and inspecting real property or other assets owned by the Company (excluding proposed acquisitions) or otherwise relating to its duties under the Advisory Agreement. Such expenses include employing its personnel, rent, telephone, equipment, and other administrative expenses. The Company reimburses the Advisor for certain expenses incurred, including those related to proposed acquisitions and travel expenses. However, the Company will not reimburse the Advisor for any operating expenses that, in any four consecutive fiscal quarters, exceed the greater of 2% of Average Invested Assets (as defined) or 25% of net income for such year. If the Advisor receives an incentive distribution, net income (for purposes of calculating operating expenses) excludes any gain from the sale of assets. Any amount exceeding the greater of 2% of Average Invested Assets or 25% of net income paid to the Advisor during a fiscal quarter will be repaid to the Company within 60 days after the end of the fiscal year. The Company bears its own expenses for functions not required to be performed by the Advisor under the Advisory Agreement, which generally include capital raising and financing activities, corporate governance matters, and other activities not directly related to real estate properties and other assets.

      The Advisor may receive an annual Asset Management Fee of up to 1.5% of the Average Invested Assets. This fee will be paid or accrue quarterly, but will not be paid until the Shareholders have received distributions equal to a cumulative non-compounded rate of 8.25% per annum on their investment in the Company. If the fee is not paid in any quarter, it will accrue and be paid once the Shareholders have received a cumulative 8.25% return. The Advisor is also entitled to receive property management fees for management and leasing services. Such fees may not exceed 5% of the gross revenue earned by the Company on properties managed.

      The Company pays Realty property management fees equal to 5% of the gross income of each property managed by Realty. All of the Company’s properties are managed by Realty. The Company incurred $20,000 and $88,000 in property management fees for the three months ended March 31, 2004 and March 31, 2003, respectively.

      The Advisor owns 100 non-voting incentive performance units in T REIT, L.P., the Company’s Operating Partnership and is entitled to incentive distributions of operating cash flow after the Company’s shareholders have received an 8.00% annual return on their invested capital. No incentive distributions were made to the Advisor for the three months ended March 31, 2004 and 2003.

      As discussed in Note 3, the Company paid Realty real estate sales commissions of $924,000 in connection with the Company’s real estate acquisitions and dispositions during the three months ended March 31, 2004.

17

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      On February 11, 2004, Clearview Properties filed a petition in the District Court of the 270th Judicial District, Harris County, Texas against Property Texas SC One Corporation, Clarion Partners, LLC, Granite Partners I, LLC, three unaffiliated entities, and the Advisor, Realty and the Company. The complaint alleges that Property Texas breached an Agreement of Sale and Purchase to sell Clearview certain real property located in Houston, Texas. Only one of the complaint’s eight separate counts alleges the involvement of the Company, the Advisor and Realty. That count alleges that the Company, the Advisor and Realty and/or the other defendants wilfully and intentionally interfered with the contract between Clearview and Property Texas and that such interference proximately caused Clearview’s injury and sufferance of actual damages. The maximum exposure to the Company is uncertain, as Clearview has failed to specifically allege a monetary amount of loss as the result of our alleged involvement. The Company believes that there is no substantive merit to the claims made by Clearview with respect to the Company, the Advisor or Realty and it intends to vigorously defend the action. However, if Clearview were to prevail in this action, it could have a material adverse effect upon the Company’s financial condition, results of operations and cash flows.

      Other than the above, to the Company’s knowledge there are no material pending legal proceedings, other than routine litigation incidental to the business, to which the Company is a party to or of which any of its properties is the subject.

      The Company follows the policy of monitoring its properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, the Company is not currently aware of any environmental liability with respect to the properties that would have a material effect on the Company’s financial condition, results of operations and cash flows. Further, the Company is not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that the Company believes would require additional disclosure or the recording of a loss contingency.

      In connection with the sale of the Christie Building in November 2001, the Company agreed as part of the sale transaction, to guarantee the lease payment in the amount $20,000 per month for a period of five years under a master lease agreement. Under this agreement, the Company is obligated to make lease payments to the lessor only in the event the sub-lessee fails to make the lease payments. In addition, the Company is also obligated to pay a pro rata share of lease commissions and tenant improvements in the event the premises are re-leased prior to November 13, 2006. Concurrent with the issuance of the guaranty, the Advisor agreed to indemnify the Company against any future losses under the master lease agreement with the indemnification evidenced by an indemnity agreement dated November 13, 2001. The Christie Building is a single tenant office building where the current tenant’s lease had expired on August 31, 2002. In October 2002, the tenant vacated the property. Accordingly, the Company has accrued $590,000 related to its obligations under the guaranty at March 31, 2004. The Company has no collateral; however it has recourse against the Advisor under the indemnity agreement. The Company has been reimbursed by the Advisor for all amounts paid under the guarantee and expects to be reimbursed by the Advisor in connection with the indemnity agreement for the full amount of its obligation.

18

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The Company’s other commitments and contingencies include the usual obligations of a real estate company in the normal course of business. In the opinion of management, these matters are not expected to have a material adverse effect on the Company’s financial position and/or results of operations.

      Property sold during the three months ended March 31, 2004, consisted of Gateway Mall, as discussed in Footnote 3. The results of their operations were reclassified to discontinued operations for the three months ended March 31, 2004 and 2003. Also included in discontinued operations for the three months ended March 31, 2003, were the following properties that were sold during 2003, North Star, Thousand Oaks and Pahrump.

      The 2003 amounts have been restated to reflect the reclassification of discontinued operations and the loss on sale of real estate due to the reallocation of the property basis.

      On April 2, 2004, through its wholly-owned subsidiary, TREIT — NNN Oakey Building 2003, LLC, the Company purchased a 9.761% interest in the Oakey Building in Las Vegas, Nevada from an unaffiliated third party. The total purchase price for the Oakey Building was $8,270,000. The Company’s total investment was $670,000. The purchase was financed by $4,000,000 in borrowings under a secured mortgage with Ivan Halaj and Vilma Halaj Inter Vivos Trust. The mortgage requires principal and interest payments at a fixed interest rate of 10% until the due date of April 1, 2005. The seller of the property paid a sales commission to Realty of $237,000, or 2.9% of the purchase price. The Oakey Building is a 104,000 square foot Class A office building located in Las Vegas, Nevada.

      Effective April 22, 2004, Diana M. Laing resigned her position as the Company’s Chief Financial Officer and the Board of Directors appointed Richard Hutton as Interim Chief Financial Officer. Mr. Hutton has served as the Chief Investment Officer of the Advisor since August 2003, overseeing all financial operations of the Advisor, and previously served as our interim Chief Financial Officer. From April 1999 to August 2003, Mr. Hutton served as Senior Vice President — Real Estate Acquisitions and Vice President — Property Management for the Advisor. In that position, Mr. Hutton oversaw the management of the real estate portfolios and property management of the Advisor and its affiliates. Mr. Hutton holds a BA in psychology from Claremont McKenna College and has been licensed as a Certified Public Accountant in California since 1984.

19

Table of Contents

Forward-Looking Statements

      Historical results and trends are not necessarily indicative of future operations. Management’s statements contained in this report that are not historical facts are 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. Actual results may differ materially from those included in the forward-looking statements. The Company intends such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of complying with such provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of management, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “prospects,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Company include, but are not limited to: changes in general economic conditions and in the real estate market specifically (including those in the local economy of the regions where the Company’s properties are located), legislative/regulatory changes (including changes in Federal and/or state laws governing the taxation of REITs), availability of capital, interest rates, competition, supply and demand for operating properties in the Company’s current and proposed market areas, and generally accepted accounting principles applicable to REITs. These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on any such statements. Additional information concerning the Company and its business, including additional factors that could materially affect the Company’s financial results, is included herein and in the Company’s other filings with the Securities and Exchange Commission. The Company does not intend to update any of the forward-looking statements after the date this report is filed to conform these statements to actual results, unless required by law.

Overview

      The Company was organized in December 1998 to acquire and manage a diversified portfolio of real estate composed of office, industrial, retail and service properties located primarily in the following focus states: Alaska, Florida, Iowa, Michigan, Minnesota, Nevada, North Carolina, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin and Wyoming. The Company has been operating and intends to continue operating as a REIT for federal and state income tax purposes. Triple Net Properties, LLC (the “Advisor”) has been retained to manage, for a fee, the Company’s day to day affairs, subject to the supervision of the Company’s Board of Directors.

      As of March 31, 2004, the Company owned one consolidated office/industrial property and interests in nine unconsolidated properties, including seven office and two office/industrial properties. Comparability between 2004 and 2003 is limited due to the number of acquisitions and dispositions during these two years.

Acquisitions in the Three Months Ended March 31, 2004

      On January 20, 2004, the Company, through it wholly-owned subsidiary, TREIT — AmberOaks LP, purchased a 75% undivided tenant-in-common interest in three buildings at AmberOaks Corporate Center located in Austin, Texas from an unaffiliated third party. Three unaffiliated entities purchased the remaining 25% tenant-in-common interests in the property. The total purchase price for AmberOaks was $22,965,000. The Company’s total investment was $6,462,000. The purchase was financed by $15,000,000 in borrowings under a secured mortgage with North Houston Bank. The mortgage requires interest only payments through February 15, 2006 and, thereafter, principal and interest payments through the maturity date of January 20, 2007 at the Prime Rate plus 1.0% subject to a floor of 5.5%. The seller paid a sales commission to Realty of $585,000, or 2.3% of the purchase price. AmberOaks is a three-building Class A

20

Table of Contents

      On February 27, 2004, the Company purchased 43 acres of land, including 36 acres of land situated under Gateway Mall from another unaffiliated third party for a purchase price including closing costs of $1,631,000. Prior to the land acquisition, the property had been subject to a ground lease.

Dispositions in the Three Months Ended March 31, 2004

      On March 18, 2004, the Company sold Gateway Mall to an unaffiliated third party for a total consideration of $11,600,000. The sale of Gateway Mall included the underlying 36 acres of land. Net sales proceeds included cash of $2,452,000 and a note receivable in the amount of $8,700,000. The note is secured by a pledge agreement, bears interest at 6% per annum and is due June 14, 2004. In connection with the sale of Gateway Mall, the Company repaid a note payable secured by the property with an outstanding balance of $4,876,000. At closing, the Company paid a real estate commission to Realty of $339,000, or 2.9% of the selling price.

Public Offering of Equity Securities

      On February 22, 2000, the Company commenced its initial public offering of up to 10,000,000 shares of common stock at $10.00 per share pursuant to a Registration Statement on Form S-11 filed under the Securities Act of 1933, as amended. The Company commenced its active operations on September 26, 2000 when it completed its first property acquisition. The Company terminated its initial public offering on May 31, 2002 at which time gross proceeds of approximately $46,395,000 had been received from the sale of 4,720,000 shares. Through March 31, 2004, the Company had repurchased 24,000 shares pursuant to its Repurchase Plan.

Critical Accounting Policies

      The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company believes that its critical accounting policies are those that require significant judgments and estimates such as those related to revenue recognition and allowance for uncollectible receivables, impairment of real estate assets, deferred assets, and qualification as a REIT. These estimates are made and evaluated on an on-going basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could vary from those estimates and those estimates could be different under different assumptions or conditions.

      Base rental income is recognized on a straight-line basis over the terms of the respective lease agreements. Differences between rental income recognized and amounts contractually due under the lease agreements are credited or charged, as applicable, to rent receivable. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under lease agreements. The Company also maintains an allowance for deferred rent receivables arising from the straight-lining of rents. The adequacy of this allowance is determined by continually evaluating individual tenant receivables considering the tenant’s financial condition, security deposits, letters of credit, lease guarantees and current economic conditions.

21

Table of Contents

      Real estate investments are stated at depreciated cost. The Company assesses the impairment of a real estate asset when events or changes in circumstances indicate that the net book value may not be recoverable. Indicators management considers important which could trigger an impairment review include the following:

	•	significant negative industry or economic trend;
	•	a significant underperformance relative to historical or projected future operating results; and
	•	a significant change in the manner in which the asset is used.

      In the event that the carrying amount of a property exceeds the sum of the undiscounted cash flows (excluding interest) that are expected to result from the use and eventual disposition of the property, the Company would recognize an impairment loss to the extent the carrying amount exceeded the fair value of the property. The Company estimates the fair value using available market information or other industry valuation techniques such as present value calculations.

      Property acquisitions since July 1, 2001, have been accounted for in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations.” The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, if any, based in each case on their fair values.

      The fair value of the tangible assets of an acquired property (which includes land, building and tenant improvements) is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements based on our determination of the relative fair values of these assets. Factors considered by Management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and insurance and other operating expenses during the expected lease-up periods based on current market demand. The Company also estimates costs to execute similar leases including leasing commissions, concessions, legal and other related costs.

      In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) our estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market and below-market lease values are amortized into rental income over the remaining non-cancelable terms of the respective leases.

      Property held for sale is carried at the lower of cost or estimated fair value less cost to sell and such property is no longer depreciated.

      The Company accounts for its investments in unconsolidated real estate operating properties using the equity method of accounting. Accordingly, the Company reports its net equity in its proportionate share of the total investments in unconsolidated real estate as “Investment in unconsolidated real estate” on its Consolidated Balance Sheets. The Company reports its proportionate share of the total earnings of its investments in unconsolidated real estate as “Equity in the earnings of unconsolidated real estate” on its Consolidated Statements of Operations.

22

Table of Contents

      The Company has been organized and operated, and intends to continue to operate, so as to qualify for taxation as a REIT under the Internal Revenue Code. The Company’s qualification and taxation as a REIT depends on its ability to meet, through actual annual operating results, asset diversification, distribution levels and diversity of stock ownership, numerous requirements established under highly technical and complex Internal Revenue Code provisions subject to interpretation.

      If the Company failed to qualify as a REIT in any taxable year, it would be subject to federal income tax, including any applicable alternative minimum tax, on its taxable income at regular corporate rates. Moreover, unless entitled to relief under specific statutory provisions, the Company also would be disqualified as a REIT for four taxable years following the year during which qualification was lost.

Results of Operations

      The Company’s operating results are primarily comprised of income derived from its portfolio of properties. Because of the significant property acquisitions and dispositions throughout the three months ended March 31, 2004 and the year ended December 31, 2003, the comparability of financial data from period to period will be limited.

      Rental Income. Rental income increased by $12,000 or 5.1% to $246,000 for the three months ended March 31, 2004 compared to rental income of $234,000 for the three months March 31, 2003. This increase was due to rent increases throughout 2003.

      Interest Income. Interest income increased by $16,000 or 66.7% to $40,000 for the three months ended March 31, 2004 compared to interest income of $24,000 for the three months ended March 31, 2003. This increase was primarily due to the interest on the Moffat note receivable due to the sale of Gateway Mall.

      Dividend Income. Dividend income of $40,000 was due to the return on investments in marketable securities.

      Rental Expenses. Rental expenses decreased by $26,000 or 41.3% to $37,000 for the three months ended March 31, 2004 compared to rental expense of $63,000 for the three months ended March 31, 2003. This decrease was due to the difference in management fees paid in the three months ended March 31, 2004.

      General and Administrative Expenses. General and administrative expenses consist primarily of third party legal and accounting fees and the cost of computerized information services and related office expenses required to maintain the Company’s accounting and investor records. General and administrative expenses decreased by $21,000 or 18.8% to $91,000 for the three months ended March 31, 2004 compared to general and administrative expense of $112,000 for the three months ended March 31, 2003.

      Interest Expense. Interest expense increased by $12,000, or 19.4% to $74,000 for the three months ended March 31, 2004 compared with $62,000 for the three months ended March 31, 2003. The increase was due to interest payments on draws on the line of credit.

      Equity in Net Earnings of Unconsolidated Real Estate. Equity in earnings of unconsolidated real estate decreased by $278,000, or 49.8% to $280,000 for the three months ended March 31, 2004 compared with $558,000 for the three months ended March 31, 2003. The majority of the decrease was due to finalization of purchase price adjustments and related depreciation and amortization of the assets for the acquisitions of unconsolidated real estate.

      Income From Discontinued Operations — Property Held For Sale. Income from discontinued operations represents the net operating results of one property sold during the three months ended March 31, 2004 through the date of sale, including interest expense and depreciation related to this

23

Table of Contents

      Gain (loss) on sale of real estate investments. Gain on the sale of real estate investments was $822,000 for the three months ended March 31, 2004 and was due to the sale of Gateway Mall on March 18, 2004. Loss on the sale of real estate investments was $191,000 for the three months ended March 31, 2003 and was due to the sale of North Star Shopping Center.

      Net Income from continuing operations before discontinued operations. Net income from continuing operations before discontinued operations decreased by $128,000, or 23.4% to $414,000 or $0.08 per share basic and diluted for the three months ended March 31, 2004 compared to net income before discontinued operations $542,000 or $0.11 per share basic and diluted for the three months ended March 31, 2003.

      Net Income. Net income was $1,341,000 or $0.28 per share basic and diluted for the three months ended March 31, 2004 compared to $572,000 or $0.12 per share basic and diluted for the three months ended March 31, 2003. Dividends declared were $955,000 or $.21 per share for the three months ended March 31, 2004 compared to $965,000 or $0.21 per share for the three months ended March 31, 2003.

Liquidity and Capital Resources

      On September 3, 2003 the Company entered into an agreement with Fleet National Bank for an unsecured line of credit in the amount of $1,000,000 which bears interest at Fleet’s prime rate plus fifty basis points. The credit facility matures on September 2, 2004 and has two one-year extensions. The credit facility is subject to a fee of 1% to be paid one-third on each of the effective date, the first anniversary and the second anniversary. As of March 31, 2004 and December 31, 2003, respectively, the Company had no amounts outstanding under the line of credit.

      There are no off-balance sheet transactions, arrangements or obligations (including contingent obligations) that have, or are reasonably likely to have a current or future material effect on our financial condition, changes in the financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

      Cash flows used in operating activities for the three months ended March 31, 2004, was $17,000 compared with cash flows used in operating activities of $7,000 for the three months ended March 31, 2003. The decrease in cash flows used in operating activities was substantially attributable to the payment of semi-annual real estate taxes in March 2004.

      Cash flows used in investing activities for the three months ended March 31, 2004, was $5,448,000 compared with cash flows used in investing activities of $6,738,000 for the three months ended March 31, 2003. The decrease in cash flows used in investing activities was substantially attributable to the purchase of $2,368,000 of marketable securities in 2004, purchase of land for $1,619,000 in 2004, purchase of investments in unconsolidated real estate of $5,996,000 in 2004, offset in part by the sale of marketable securities of $2,235,000 in 2004.

      Cash flows used in financing activities for the three months ended March 31, 2004 was $5,866,000 compared with cash flows provided by financing activities of $1,207,000 for the three months ended March 31, 2003. The increase in cash flows used in financing activities was substantially attributable to the payment of debt of $4,918,000 for property that was sold in 2004 and the issuance of new debt of $5,000,000 in 2003.

24

Table of Contents

      At March 31, 2004, the Company had approximately $1,039,000 in cash and marketable securities. The Company intends to acquire additional properties and will seek to fund these acquisitions through utilization of the current cash balances, debt financings and/or asset dispositions.

      The Company operates as a real estate investment trust for federal income tax purposes. As a REIT, the Company is generally not subject to income taxes. To maintain its REIT status, the Company is required to distribute annually as dividends at least 90% of its REIT taxable income, as defined by the Code, to its shareholders, among other requirements. The Company expects to continue to use its cash flow from operating activities to pay distributions to shareholders and to support the operating activities of the Company.

      Distributions are determined by the Company’s Board of Directors and are dependent on a number of factors, including the amount of funds available for distribution, the Company’s financial condition, any decision by the Board of Directors to reinvest funds rather than to distribute the funds, the Company’s capital expenditures, the annual distribution required to maintain REIT status under the Internal Revenue Code of 1986, as amended, and other factors the Board of Directors may deem relevant.

Subsequent Events

      On April 2, 2004, through its wholly-owned subsidiary, TREIT — NNN Oakey Building 2003, LLC, the Company purchased a 9.761% interest in the Oakey Building in Las Vegas, Nevada from an unaffiliated third party. The total purchase price for the Oakey Building was $8,270,000. The Company’s total investment was $670,000. The purchase was financed by $4,000,000 in borrowings under a secured mortgage with Ivan Halaj and Vilma Halaj Inter Vivos Trust. The mortgage requires principal and interest payments at a fixed interest rate of 10% until the due date of April 1, 2005. The seller of the property paid a sales commission to Realty of $237,000, or 2.9% of the purchase price. The Oakey Building is a 104,000 square foot Class A office building located in Las Vegas, Nevada.

      Effective April 22, 2004, Diana M. Laing resigned her position as the Company’s Chief Financial Officer and the Board of Directors appointed Richard Hutton as Interim Chief Financial Officer. Mr. Hutton has served as the Chief Investment Officer of the Advisor since August 2003, overseeing all financial operations of the Advisor, and previously served as our interim Chief Financial Officer. From April 1999 to August 2003, Mr. Hutton served as Senior Vice President — Real Estate Acquisitions and Vice President — Property Management for the Advisor. In that position, Mr. Hutton oversaw the management of the real estate portfolios and property management of the Advisor and its affiliates. Mr. Hutton holds a BA in psychology from Claremont McKenna College and has been licensed as a Certified Public Accountant in California since 1984.

Funds From Operations

      The Company defines Funds from Operations (“FFO”), a non-GAAP measure, consistent with the definition of the National Association of Real Estate Investment Trusts, or NAREIT, as net income available to common shareholders, plus depreciation and amortization of assets uniquely significant to the real estate industry, reduced by gains and increased by losses on (1) sales of investment property and (2) extraordinary items.

      The Company considers FFO to be an appropriate supplemental measure of a REIT’s operating performance as it is based on a net income analysis of property portfolio performance that excludes non-cash items such as depreciation. The historical accounting convention used for real estate assets requires

25

Table of Contents

      Presentation of this information is intended to assist the reader in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO is not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income as an indication of the Company’s performance.

      The Company’s FFO reporting complies with NAREIT’s policy described in the preceding paragraph. Following is the calculation of FFO for the three months ended March 31, 2004 and March 31, 2003:

Inflation

      We will be exposed to inflation risk as income from long-term leases is expected to be the primary source of our cash flows from operations. We expect that there will be provisions in the majority of our tenant leases that would protect us from the impact of inflation. These provisions include rent steps, reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements on a per square foot allowance. However, due to the long-term nature of the leases, the leases may not re-set frequently enough to cover inflation.

Contractual Obligations

      The following table provides information with respect to the maturities, scheduled principal payments of fixed rate debt and scheduled interest, payments of the fixed rate debt at March 31, 2004. The table does not reflect available extension options.

26

Table of Contents

      The Company is exposed to interest rate changes primarily as a result of its long-term debt used to maintain liquidity and fund capital expenditures and expansion of its real estate investment portfolio and operations. The Company’s interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve the Company’s objectives it borrows primarily at fixed rates or variable rates with the lowest margins available and in some cases, with the ability to convert variable rates to fixed rates. The Company may enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate its interest rate risk on a related financial instrument. The Company does not enter into derivative or interest rate transactions for speculative purposes.

      The Company’s interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes.

      The fair estimated value of the Company’s debt approximates its March 31, 2004 carrying amount.

      Approximately $4,332,000 or 100% of the Company’s mortgages payable at March 31, 2004, have fixed interest rates averaging 5.25%. An increase in interest rates of 0.25% on the Company’s variable rate mortgage loans would not significantly impact earnings due to current market interest rates being substantially below the floor interest rates on these mortgage loans.