Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations

Forward-Looking Statements

With the exception of historical information, this quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may", "will", "believe", "expect", "intend", "anticipate", "estimate", "project", or similar expressions or variations thereof. Forward-looking statements should not be relied on since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, performance or achievements. Investors are cautioned not to place undue reliance on any forward-looking statements.

General

We are a self-administered real estate investment trust (REIT) and we primarily own real estate that we net lease to tenants. At June 30, 2004, we own 39 properties, participate in four joint ventures that own a total of 12 properties and hold a 50% tenancy in common interest in one property. These 52 properties are located in 17 states.

We have elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute currently at least 90% of ordinary taxable income to our stockholders. We intend to comply with these requirements and to maintain our REIT status.

Our principal business strategy is to acquire improved, commercial properties subject to long-term net leases. We acquire properties for their value as long-term investments and for their ability to generate income over an extended period of time. We borrow funds on a secured and unsecured basis to finance the purchase of real estate and we intend to continue to do so in the future.

Our rental properties are generally leased to corporate tenants under operating leases substantially all of which are noncancellable. Substantially all of our lease agreements are net lease arrangements that require the tenant to pay not only rent, but also substantially all of the operating expenses of the leased property including maintenance, taxes, utilities and insurance. A majority of our lease agreements provide for periodic rental increases and certain of our other leases provide for increases based on the consumer price index.

During May 2004, we purchased in a single transaction, two free-standing retail buildings which are leased to two tenants for a total consideration of $5.6 million, which was paid in cash. During March 2004, we purchased two single tenant properties including one megaplex stadium-style movie theater, in two states, for a total consideration of $23.1 million. We assumed a pre-existing first mortgage of $7.1 million on one of these properties.

We are a venturer in two joint ventures organized to acquire and own megaplex stadium-style movie theaters. We own a 50% equity interest in each of these ventures with the same co-venturer. These joint ventures have acquired one partial stadium-style movie theater, one stadium-style movie theater under construction and eight megaplex stadium-style movie theaters for a total consideration of $100 million. Our equity investment in these ventures at June 30, 2004 was approximately $21 million, net of distributions from the joint ventures.

At June 30, 2004, excluding mortgages payable of our unconsolidated joint ventures, we had 28 outstanding mortgages payable, aggregating approximately $112 million in principal amount, each of which is secured by a first lien on individual real estate investments with an aggregate carrying value of approximately $169 million before accumulated depreciation. The mortgages bear interest at fixed rates ranging from 5.125% to 8.8%, and mature between 2005 and 2023.

Results of Operations

Comparison of Six and Three Months Ended June 30, 2004 and 2003

Revenues

Our revenues consist primarily of rental income from tenants in our rental properties. Rental income increased by $2.7 million, or 30.1%, to $11.7 million for the six months ended June 30, 2004 from $9 million for the six months ended June 30, 2003. For the three months ended June 30, 2004, rental income increased $1.6 million, or 36%, to $6.1 million from $4.5 million for the three months ended June 30, 2003. The rental income increase is primarily due to $2.6 million and $1.5 million of rental revenues earned on eight properties acquired by us between February 2003 and May 2004. There were also minor increases in rental income at several of our other properties offset by rents that were not received from one vacant property and from a tenant that filed a bankruptcy petition. The tenant that filed for protection under Chapter XI of the Bankruptcy Act had paid post-petition rent from March 3, 2004 through June 11, 2004.

Interest and other income decreased by $83,000, or 35.2%, to $153,000 for the six months ended June 30, 2004 from $236,000 for the six months ended June 30, 2003. Interest and other income decreased by $9,000 to $61,000, or 12.9%, for the three months ended June 30, 2004 from $70,000 for the three months ended June 30, 2003. The primary reason for the decrease was the reduction in interest earned of $194,000 and $49,000 during the six and three months ended June 30, 2003 on short-term mortgages receivable acquired by us in connection with a movie theater acquisition by one of our joint ventures. The mortgages were paid in full in May 2003. Offsetting this decrease were increases of $105,000 and $39,000 in interest earned on our investment of the balance of the net proceeds received from our October 2003 public offering in cash equivalents and treasury bills.

Our equity in earnings of unconsolidated joint ventures decreased by $273,000, or 22%, to $970,000 for the six months ended June 30, 2004 from $1,243,000 for the six months ended June 30, 2003. For the three months ended June 30, 2004, equity in earnings of unconsolidated joint ventures decreased by $293,000, or 49.8%, to $295,000 from $588,000 for the three months ended June 30, 2003. For the six and three months ended June 30, 2004, reserves amounting to $728,000 and $586,000 were taken by one of our joint ventures against the unbilled rent receivable balances relating to two movie theaters leased to operators under common control. In addition, rental income for one of these theaters is delinquent for four months and has not been accrued. The Company is pursuing its legal remedies against the delinquent operator and is in the process of negotiating a restructuring of the lease. Accordingly, our equity in earnings of this venture decreased by $550,000 and $404,000 for the six and three months ended June 30, 2004, respectively. There was also a decrease in rental income at another joint venture due to the bankruptcy filing by its tenant. These decreases were offset in part by our purchase of an additional 25% interest in one of our movie theater joint ventures as of October 1, 2003 resulting in an increase in our equity in earnings from this venture.

We will continue to acquire, solely for our own account, improved commercial properties in accordance with our business and investment strategies. We may from time to time acquire other properties with joint venture partners.

Expenses

Depreciation and amortization expense increased by $608,000, or 39.2%, and $356,000, or 45.5%, to $2.2 million and $1.1 million for the six and three months ended June 30, 2004 from $1.6 million and $782,000 for the six and three months ended June 30, 2003. The increase in depreciation and amortization expense was primarily due to the acquisition of eight properties between February 2003 and May 2004.

Interest-mortgages payable increased by $945,000, or 29.8%, and $513,000, or 32.2%, to $4.1 million and $2.1 million for the six and three months ended June 30, 2004, from $3.2 million and $1.6 million for the six and three months ended June 30, 2003. This increase resulted from mortgages placed on two properties in October 2003, the assumption of mortgages in connection with the purchase of four properties between February 2003 and March 2004 and the refinancing of one property.

Interest-line of credit, which includes amortization of deferred line of credit costs in 2004 and a 1/4% unused facility fee in both years, decreased by $82,000, or 39%, and $21,000 or 21.6% to $128,000 and $76,000 for the six and three months ended June 30, 2004 from $210,000 and $97,000 for the six and three months ended June 30, 2003. This decrease resulted from our repayment of all of the outstanding indebtedness under our line of credit during 2003.

General and administrative expenses increased $536,000, or 50.3%, to $1.6 million for the six months ended June 30, 2004 from $1.1 million for the six months ended June 30, 2003. For the three months ended June 30, 2004, general and administrative expenses increased by $221,000, or 42.1%, to $746,000 from $525,000 for the three months ended June 30, 2003. The increase in the six month period was due to a combination of factors, including a $101,000 non-recurring fee for the initial listing of our common stock on the New York Stock Exchange in January 2004. In addition, general and administrative expenses increased due to increases of $104,000 and $38,000 in payroll and payroll expenses for the six and three months ended June 30, 2004, including increases of approximately $44,000 and $2,000 in the six and three months ended June 30, 2004 for executive and support personnel, primarily for legal and accounting services, allocated to us pursuant to a Shared Services Agreement among us and related entities. This increase in the allocated payroll expenses resulted from an increase in our level of business activity, primarily property acquisitions, the negotiation of an increased revolving credit facility, mortgage refinancings, compliance with the Sarbanes-Oxley Act and new accounting pronouncements. The increase in payroll expenses is also due to a $25,000 increase in the annual base salary and an increase of $50,000 in the annual bonus to our president and chief executive officer. Also included in the six and three months ended June 30, 2004 is compensation expense of $105,000 and $81,000 relating to the issuance of restricted stock, with no comparable expense in the June 30, 2003 periods. The balance of the increase in general and administrative expenses for the six and three months ended June 30, 2004 is due to an increase in a number of items including professional fees of approximately $113,000 and $50,000 relating to costs associated with the implementation of the internal control audit required by the end of the current fiscal year, legal bills relating to compliance with Sarbanes-Oxley and fees relating to transactions that were not consummated. Additionally, there was an increase for the six and three months ended June 30, 2004 in state taxes of approximately $25,000 and $10,000 and travel and other miscellaneous expenses, all primarily due to our increased business activity.

Real estate expenses increased by $70,000, or 25.4%, and $26,000, or 14.4% to $346,000 and $206,000 for the six and three months ended June 30, 2004, from $276,000 and $180,000 for the six and three months ended June 30, 2003. This increase was primarily due to legal fees relating to properties, as well as utilities and operating expenses on one vacant property. This vacant property was sold in July 2004. Additionally, the six and three months ended June 30, 2004 includes the amortization of leasing commissions and non-recurring landlord repairs.

Liquidity and Capital Resources

We had cash and cash equivalents of $20.9 million at June 30, 2004. Our primary sources of liquidity are cash and cash equivalents, our revolving credit facility and cash generated from operating activities, including mortgage financings. We have a $62.5 million revolving credit facility with Valley National Bank, Merchants Bank Division, Bank Leumi USA, Manufacturers and Traders Trust Company and Israel Discount Bank of New York. This facility is available to us to pay down existing mortgages, to fund the acquisition of properties or to invest in joint ventures. The facility matures on March 31, 2007. Borrowings under the facility bear interest at the lower of LIBOR plus 2.5% or at the bank's prime rate and there is an unused facility fee of one-quarter of 1% per annum. Net proceeds received from the sale or refinancing of properties are required to be used to repay amounts outstanding under the facility if proceeds from the facility were used to purchase or refinance the properties. There is currently no balance outstanding under the facility.

We are involved in various stages of negotiation with respect to the acquisition of additional net leased properties. We will use cash provided from operations, cash provided from mortgage financings, the balance of the funds available from the public offering completed on October 31, 2003 and funds available under our credit facility to fund additional acquisitions.

The following sets forth our contractual cash obligations as of June 30, 2004, all of which relate to interest and amortization payments and balances due at maturity under outstanding mortgages secured by our properties, for the periods indicated (amounts in thousands):

                                                           Less than        1 - 3        4 - 5       More than
Contractual Obligations                   Total             1 Year          Years        Years        5 Years
-----------------------                   -----             ------          -----        -----       --------

Mortgages payable -
   Interest and amortization             $ 96,765          $  9,968       $ 19,218     $ 18,122      $ 49,457

Mortgages payable -
   Balances due at maturity                74,558             8,249          2,276        9,390        54,643
                                         --------          --------       --------     --------      --------

Total                                    $171,323          $ 18,217       $ 21,494     $ 27,512      $104,100

As of June 30, 2004, we had outstanding approximately $112 million in long-term mortgage indebtedness (excluding mortgage indebtedness of our unconsolidated joint ventures), all of which is non-recourse (subject to standard carve-outs). We expect that debt service payments of approximately $29.2 million due in the next three years will be paid primarily from cash generated from our operations. We anticipate that loan maturities of approximately $10.5 million due in the next three years will be paid primarily from mortgage financings or refinancings. If we are not successful in refinancing our existing indebtedness or financing our unencumbered properties, our cash flow, funds available under our credit facility and available cash, if any, may not be sufficient to repay all maturing debt when payments become due, and we may be forced to sell additional equity or dispose of properties on disadvantageous terms.

We had no outstanding contingent commitments, such as guarantees of indebtedness, or any other contractual cash obligations at June 30, 2004.

Cash Distribution Policy

We have elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute currently at least 90% of our ordinary taxable income to our stockholders. It is our current intention to comply with these requirements and maintain our REIT status. As a REIT, we generally will not be subject to corporate federal, state or local income taxes on taxable income we distribute currently (in accordance with the Internal Revenue Code and applicable regulations) to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal, state and local income taxes at regular corporate rates and may not be able to qualify as a REIT for four subsequent tax years. Even if we qualify for federal taxation as a REIT, we may be subject to certain state and local taxes on our income and to federal income and excise taxes on our undistributed taxable income (i.e., taxable income not distributed in the amounts and in the time frames prescribed by the Internal Revenue Code and applicable regulations thereunder).

It is our intention to pay to our stockholders within the time periods prescribed by the Internal Revenue Code no less than 90% and, if possible, 100% of our annual taxable income, including gains from the sale of real estate and recognized gains on the sale of securities. It will continue to be our policy to make sufficient cash distributions to stockholders in order for us to maintain our REIT status under the Internal Revenue Code.