The following discussion should be read in conjunction with the consolidated financial statements and the notes to those financial statements, included elsewhere in this filing.

General

We are a diversified REIT that invests primarily in single tenant commercial real estate assets subject to long-term leases to high credit quality tenants. We focus on properties that are subject to a net lease, or a lease that requires the tenant to pay all or substantially all expenses normally associated with the ownership of the property (such as utilities, taxes, insurance and routine maintenance) during the lease term. We also continue to be opportunistic and have made and expect to continue to make investments in single tenant properties where the owner has exposure to property expenses when we determine we can sufficiently underwrite that exposure and isolate a predictable cash flow.

Our primary business objective is to generate stable, long-term and attractive returns based on the spread between the yields generated by our assets and the cost of financing our portfolio. We invest at all levels of the capital structure of net lease and other single tenant properties, including equity investments in real estate (owned real properties), debt investments (mortgage loans and net lease mortgage backed securities) and mezzanine investments secured by net leased or other single tenant real estate collateral. For properties that we own, in addition to high quality tenant credit, we also seek to invest in strong real estate locations that will appreciate over time.

The principal sources of our revenues are rental income on our owned real properties and interest income from our debt investments (loans and securities). The principal sources of our expenses are interest expense on our assets financed, depreciation expense on our real properties, general and administrative expenses and property expenses (net of expense recoveries).

We rely on leverage to allow us to invest in a greater number of assets and enhance our asset returns. We expect our leverage to average 70% to 85% of our assets in portfolio. Our overall portfolio leverage as of September 30, 2008 was approximately 78.6%.

Our portfolio financing strategy is to finance our assets with long-term fixed rate debt as soon as practicable after we invest, generally on a secured, non-recourse basis. We seek to match-fund our assets, or obtain long-term fixed rate debt whose maturity matches the maturity of the asset financed. Through September 30, 2008, our long-term fixed rate asset financings have been in the form of traditional third party mortgage financings (on most of our owned real properties) and two term financings, including a secured term loan (completed in December 2007) and one CDO (completed in March 2005). For assets not yet financed with long-term fixed rate debt, we employ a hedging strategy to manage our exposure to changes in interest rates prior to the time we obtain long-term fixed rate financing. We enter into hedging transactions at the discretion of our management team, and we may determine that it is not in our company's best interests to hedge the interest rate risks with respect to certain expected long-term financings.

We rely primarily on equity and debt capital to fund our portfolio growth. Through September 30, 2008, our primary capital issuances have been our initial public offering of common stock in March 2004 (net proceeds of $221.8 million), a Series A preferred stock issuance in October 2005 (net proceeds of $33.7 million), trust preferred debt issued in December 2005 (net proceeds of $29.9 million), a follow-on common stock offering in each of May 2006 and May/June 2007 (net proceeds of $57.3 million and $104.8 million, respectively), and a $75.0 million 7.50% Convertible Senior Note offering in October 2007 (net proceeds of $72.8 million).

Business Environment

Conditions within the United States credit markets in general and United States real estate credit markets in particular continue to experience historic levels of dislocation and stress that began in the summer of 2007. Credit market dislocations continued and intensified in the third quarter and beginning of the fourth quarter. These conditions continue to impact us in a variety of ways, including by:

· making it difficult for us to price and finance new investment opportunities on attractive terms. As a result of market conditions, we have not been adding new asset investments to our investment portfolio.

· causing us to preserve our liquidity rather than make new investments due to the lack of debt or equity capital on attractive terms.

· causing a delay in the long-term fixed rate financing of the mortgage assets previously financed under our repurchase agreement, which were scheduled to be financed through a CDO. In April 2008, we entered into a two year credit agreement with an option for a third year with Wachovia Bank and refinanced these assets on the new facility at closing. While this credit agreement relieves short-term refinancing risk, it is priced at floating rates based on 30-day LIBOR, or the London Interbank Offered Rate, is recourse to all of our other assets and enables the lender to exercise margin calls primarily for credit events related to the assets financed. We may experience increases in our borrowing costs as a result of increases in LIBOR. We intend to refinance these assets on a longer-term fixed rate non-recourse basis as soon as credit market conditions improve and we can do so at a favorable cost to our company. We expect credit market conditions to impact our ability to refinance these assets and, therefore, we cannot provide any assurance as to the timing or our ability to do so.

Widening credit spreads and reduced market trading activity for real estate securities continue to result in lower valuations on our real estate securities. To date, consistent with prevailing accounting guidance, these lower valuations have impacted us primarily through reductions in Stockholders' Equity on our Consolidated Balance Sheet, rather than through impairment charges directly to our Consolidated Statement of Operations.

We do not know when market conditions will stabilize, if adverse conditions will intensify or the full extent to which the disruptions will affect us. If market instability persists or intensifies, the trends discussed above may continue and we may be impacted in a variety of additional ways. For example, we may experience challenges in raising additional capital, margin calls on our Wachovia Bank credit agreement and impairment charges on our assets, particularly on our loan and securities investments.

We may also take a variety of cash conservation measures such as asset sales, expense reductions and dividend adjustments to increase our liquidity levels until credit markets normalize. Credit market conditions have resulted in reduced trading activity and lower valuations for our securities, which could impact the amount at which and how quickly we could sell our assets if needed to generate liquidity. Our ability to sell collateral to generate liquidity could also be impacted by factors such as the relative illiquidity of certain of our assets (i.e., our owned property and loan investments) and limitations on sale imposed pursuant to the debt financing terms of our assets.

Current market conditions in the United States and other Global economies have also been deteriorating since the summer of 2007, and have contributed to unexpected bankruptcies and rapid declines in financial condition at a number of companies, particularly in the retail sector. Continued weakness could have an adverse impact on one or more of the tenants to whom we have exposure and, thus, could have a material adverse impact on us.

Application of Critical Accounting Policies

A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2007 in Management's Discussion and Analysis of Financial Condition and Results of Operations. There have been no significant changes to those policies during 2008.

Investment and Financing Activities

During the three months ended September 30, 2008, we did not make any new investments. We also did not complete any new asset financings.

Business Segments

We conduct our business through two operating segments:

· operating real estate (including our investments in owned real properties); and

· lending investments (including our loan investments as well as our investments in securities).

Selected results of operations by segment for the three months ended September 30, 2008 and September 30, 2007, are as follows (dollar amounts in thousands):

                                            Corporate /                        Operating                          Lending
                                            Unallocated                       Real Estate                       Investments
                                   Sep 30, 2008     Sep 30, 2007     Sep 30, 2008     Sep 30, 2007     Sep 30, 2008     Sep 30, 2007
Total revenues                    $          136   $           18   $       37,468   $       37,497   $        8,526   $        9,194
Total expenses and minority
interest                                   5,516            3,708           35,952           36,463            5,865            6,673
Gain on extinguishment of debt                 -                -                -              741                -                -
Income (loss) from continuing
operations                                (5,380 )         (3,690 )          1,516            1,775            2,661            2,522
Total assets                              58,359           39,651        1,580,540        1,631,099          457,325          476,589

Selected results of operations by segment for the nine months ended September 30, 2008 and September 30, 2007, are as follows (dollar amounts in thousands):

                                            Corporate /                        Operating                          Lending
                                            Unallocated                       Real Estate                       Investments
                                   Sep 30, 2008     Sep 30, 2007     Sep 30, 2008     Sep 30, 2007     Sep 30, 2008     Sep 30, 2007
Total revenues                    $          713   $          262   $      112,373   $       99,595   $       25,854   $       25,846
Total expenses and minority
interest                                  17,060           11,337          105,965           99,419           18,933           18,360
Gain on extinguishment of debt                 -                -                -            1,363                -                -
Income (loss) from continuing
operations                               (16,347 )        (11,075 )          6,409            1,539            6,920            7,486
Total assets                              58,359           39,651        1,580,540        1,631,099          457,325          476,589

Comparison of the Quarter Ended September 30, 2008 to the Quarter Ended September 30, 2007

The following discussion compares our operating results for the quarter ended September 30, 2008 to the comparable period in 2007.

Revenue.

Total revenue decreased $0.6 million, or 1%, to $46.1 million. The decrease was primarily attributable to a decrease in interest income.

Rental revenue and property expense recoveries, in the aggregate, were largely unchanged from the prior year period, as we have not added any new owned property investments since the second quarter of 2007.

Interest income decreased $0.6 million, or 6%, to $8.7 million, primarily as a result of an unexpected payment we received on an interest only bond during the 2007 period.

Expenses.

Total expenses increased $0.5 million, or 1%, to $47.3 million. The increase in expenses was primarily attributable to investment losses in the 2008 period offset in part by gains from hedge ineffectiveness. Lower interest expense in the 2008 period was offset by increases in property expenses, stock based compensation expense and depreciation and amortization expense on real property.

Interest expense decreased $1.0 million, or 4%, from $25.7 million to $24.7 million. The decrease in the 2008 period resulted from $4.1 million of lower interest expense on floating rate borrowings (resulting from lower borrowings and interest rates in the 2008 period) and $0.3 million of lower interest expense on property mortgages, partially offset by $1.9 million of interest expense on the secured term loan we issued in December 2007, and $1.5 million of interest expense on the convertible senior notes we issued in October 2007. The Company's average balance outstanding and effective financing rate under its floating rate borrowings other than the EntreCap bridge facility was approximately $203 million at 5.84% during the 2008 period (average 30-day LIBOR of 2.47%), compared with approximately $398 million at 6.60% during the 2007 period (average 30-day LIBOR of 5.56%).

Property expenses increased $0.3 million, or 7%, to $4.9 million, reflecting increased expenses including real estate taxes. The net amount of property expenses we incurred (net of expense recoveries) increased $0.5 million from the 2007 period.

We had gain on derivatives of $0.4 million in the 2008 period, compared with a de minimis loss in the 2007 period. During the 2008 period, delays in our anticipated long-term financing caused a portion of our hedge activity to be reported as current income (loss) on our Consolidated Statement of Operations rather than deferred as a component of equity on our Consolidated Balance Sheet.

We had losses on investments on $1.0 million in the 2008 period, including a $0.7 million write-off of a mezzanine loan and a $0.4 million impairment charge on an owned property investment. There were no losses on investments in the 2007 period. The 2008 losses are discussed at Note 4 and Note 5 of the consolidated financial statements included in this Form 10-Q.

General and administrative expense was basically unchanged from the 2007 period.

General and administrative expense-stock based compensation increased $0.3 million, or 90%, to $0.6 million. The increase was primarily a result of an additional year of stock awards impacting the 2008 expense. As of September 30, 2008, $4.6 million of unvested shares (fair value at the grant dates) is expected to be charged to our Consolidated Statement of Operations ratably over the remaining vesting period (through March 2013). As of September 30, 2008, the grant date fair value for awards of 24,886 shares made in 2005, 47,116 shares made in 2006, 94,050 shares made in 2007 and 157,380 shares made in 2008, has not yet been determined because the grant date (as defined under SFAS 123R) has not yet occurred.

Depreciation and amortization expense on real property increased $0.3 million, or 2%, from $13.4 million to $13.7 million, due to "catch-up" depreciation and amortization expense we recorded on the reclassification of the Cott property out of discontinued operations.

Gain on extinguishment of debt.

We had a $0.7 million non-cash gain on extinguishment of debt in the 2007 period, relating to our retirement of debt we assumed when we purchased the EntreCap portfolio in April 2007. This gain resulted from interest rate changes between the date we assumed the debt and the date it was repaid.

Net income (loss).

Net income (loss) decreased $1.8 million, to $(1.2) million, from $0.6 million, primarily as a result of lower interest income ($0.6 million) and the investment losses in the 2008 period ($1.0 million) and the gain on debt extinguishment ($0.7 million) in the 2007 period, offset in part by the hedge ineffectiveness gains in the 2008 period ($0.4 million). Net (loss) allocable to common stockholders was $(1.9) million in the third quarter of 2008, reflecting dividends to preferred stockholders of $0.7 million.

Comparison of the Nine Months Ended September 30, 2008 to the Nine Months Ended September 30, 2007

The following discussion compares our operating results for the nine months ended September 30, 2008 to the comparable period in 2007.

Revenue.

Total revenue increased $13.2 million, or 11%, to $138.9 million. The increase was primarily attributable to increases in rental revenue and property expense recoveries.

Rental revenue and property expense recoveries, in the aggregate, increased $12.8 million, or 13%, to $111.8 million. The increase was due to a substantial increase in the underlying owned property investments from the prior year period.

Interest income increased $0.3 million, or 1%, to $26.5 million, primarily reflecting an increase in aggregate loan and securities investments.

Expenses.

Total expenses increased $12.8 million, or 10%, to $142.0 million. The increase in expenses was primarily attributable to higher levels of depreciation and amortization expense on real property, interest expense, and loss on derivatives.

Interest expense increased $1.8 million, or 2%, from $71.7 million to $73.5 million. The increase in 2008 resulted from $5.4 million of interest expense on the secured term loan we issued in December 2007, $4.5 million of interest expense on the convertible senior notes we issued in October 2007, and $3.3 million of additional interest expense on property mortgages, partially offset by $11.5 million of lower interest expense on floating rate borrowings (resulting from lower borrowings and interest rates in the 2008 period and the impact in the 2007 period of $2.6 million of fees and $2.6 million of interest expense under the bridge facility we entered into in connection with the acquisition of the EntreCap portfolio in April 2007). The Company's average balance outstanding and effective financing rate under its floating rate borrowings other than the bridge facility was approximately $208 million at 5.39% during the 2008 period (average 30-day LIBOR of 2.89%), compared with approximately $320 million at 6.38% during the 2007 period (average 30-day LIBOR of 5.40%).

Depreciation and amortization expense on real property increased $6.5 million, primarily due to the significant increase in property investments compared with the prior year period.

Property expenses increased $1.0 million, or 8%, to $14.6 million, reflecting increased expenses including real estate taxes. The net amount of property expenses we incurred (net of expense recoveries) increased $0.7 million from the 2007 period, to $6.2 million.

Loss on derivatives increased $1.7 million, to $1.4 million in the 2008 period, compared with a gain of $0.3 million in the 2007 period. During the 2008 period, delays in our anticipated long-term financing caused a portion of our hedge activity to be reported as current income (loss) on our Consolidated Statement of Operations rather than deferred as a component of equity on our Consolidated Balance Sheet.

We had losses on investments on $1.0 million in the 2008 period, including a $0.7 million write-off of a mezzanine loan and a $0.4 million impairment charge on an owned property investment. The 2008 losses are discussed at Note 4 and Note 5 of the consolidated financial statements included in this Form 10-Q. We had losses on investments of $0.4 million in the 2007 period, including an impairment charges on two CMBS securities. The 2007 losses are discussed at Note 6 of the consolidated financial statements included in this Form 10-Q.

General and administrative expense increased $0.7 million, or 8%, to $9.0 million, primarily reflecting higher legal expenses associated with litigation involving the real property we own in Johnston, Rhode Island and leased to Factory Mutual Insurance Company.

General and administrative expense-stock based compensation increased $0.5 million, or 48%, to $1.7 million. The increase was primarily a result of an additional year of stock awards impacting the 2008 expense.

Gain on extinguishment of debt.

We had a $1.4 million non-cash gain on extinguishment of debt in the 2007 period, relating to our retirement of debt we assumed when we purchased the EntreCap portfolio in April 2007. This gain resulted from interest rate changes between the date we assumed the debt and the date it was repaid.

Net (loss).

Net (loss) increased $1.0 million, to $(3.0) million, from $(2.1) million, primarily as a result of the gain on extinguishment of debt ($1.4 million) in the 2007 period. Net (loss) allocable to common stockholders was $(5.2) million in the 2008 period, reflecting dividends to preferred stockholders of $2.1 million.

Funds from Operations

Funds from operations, or FFO, is a non-GAAP financial measure. We believe FFO is a useful additional measure of our performance because it facilitates an understanding of our operating performance after adjustment for real estate depreciation, a non-cash expense which assumes that the value of real estate assets diminishes predictably over time. In addition, we believe that FFO provides useful information to the investment community about our financial performance as compared to other REITs, since FFO is generally recognized as an industry standard for measuring the operating performance of an equity REIT. FFO does not represent cash generated from operating activities in accordance with GAAP and is not indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income or earnings per share determined in accordance with GAAP as an indicator of our operating performance or as an alternative to cash flow as a measure of liquidity. Since all companies and analysts do not calculate FFO in a similar fashion, our calculation of FFO may not be comparable to similarly titled measures reported by other companies.

We calculate FFO in accordance with standards established by the National Association of Real Estate Investment Trusts ("NAREIT") which defines FFO as net income (loss) (computed in accordance with GAAP) excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.

The following table reconciles our net loss allocable to common stockholders to FFO for the three and nine months ended September 30, 2008 and September 30, 2007.

                                        For the Three Months         For the Nine Months
                                         Ended September 30          Ended September 30
(Amounts in thousands, except per
share amounts)                          2008           2007          2008           2007
Net (loss) allocable to common
stockholders                         $    (1,914 )  $      (105 ) $    (5,152 )  $   (4,201 )
Add (deduct):
Minority interest-OP units                   (11 )           (1 )         (29 )         (26 )
Depreciation and amortization
expense on real property                  13,688         13,414        40,557        34,083
Funds from operations                $    11,763    $    13,308   $    35,376    $   29,856

Weighted average number of common
shares outstanding, basic and
diluted                                   45,555         45,602        44,902        39,472
Weighted average number of OP
units outstanding                            239            263           255           263
Weighted average number of common
shares and OP units outstanding,
diluted                                   45,794         45,865        45,157        39,735

Net (loss) per common share, basic
and diluted                          $     (0.04 )  $     (0.00 ) $     (0.11 )  $    (0.11 )
Funds from operations per share      $      0.26    $      0.29   $      0.78    $     0.75

Liquidity and Capital Resources

We rely on leverage to allow us to invest in a greater number of assets and enhance our asset returns. Leverage also exposes us to a variety of risks which are discussed in more detail in our most recent Annual Report on Form 10-K under the heading "Risk Factors." We expect our leverage to average 70% to 85% of our assets in portfolio. Our overall portfolio leverage as of September 30, 2008 was approximately 78.6%.

Our portfolio financing strategy is to finance our assets with long-term fixed rate debt as soon as practicable after we invest, generally on a secured, non-recourse basis. We seek to match-fund our assets, or obtain long-term fixed rate debt whose maturity matches the maturity of the asset financed. Through September 30, 2008, our long-term fixed rate asset financings have been in the form of traditional third party mortgage financings (on most of our owned real properties) and two term financings, including a secured term loan (completed in December 2007) and one CDO (completed in March 2005). As of September 30, 2008, we have financed on a long-term fixed rate basis an aggregate of approximately $1.81 billion of assets in portfolio with third party mortgage debt of $975.7 million and term financings of $393.5 million.

As a REIT, we are required to distribute at least 90% of our taxable income to our stockholders on an annual basis, and we intend to distribute all or substantially all of our REIT taxable income in order to comply with the distribution requirements of the Code and to avoid federal income tax and the nondeductible excise tax. We declared a dividend of $0.20 per share of common stock in the each of the quarters ended March 31, 2008, June 30, 2008 and September 30, 2008. We also declared a dividend of $0.5078125 per share of 8.125% Series A cumulative redeemable preferred stock in each of the quarters ended March 31, 2008, June 30, 2008 and September 30, 2008.

Short-Term Liquidity and Financing.

We expect that our short-term liquidity requirements will be met generally through our available cash and cash equivalents, cash provided by operations, and, to the extent we make new investments, through revolving loan borrowings under our credit agreement with Wachovia Bank discussed below. We expect that our short-term liquidity requirements will also be met through a portion of the proceeds from any issuances of debt and/or equity capital. Our ability to issue debt or equity capital is currently being adversely impacted by the factors discussed under "Business Environment" above. As of September 30, 2008, we had $29.0 million in available cash and cash equivalents. As of November 7, 2008, we had $14.2 million in available cash and cash equivalents.

On April 29, 2008, we entered into a credit agreement with Wachovia Bank. Pursuant to the agreement, Wachovia Bank agreed to make an aggregate of $250 million of term and revolving credit loans available to us. We drew a $210.4 million term loan upon closing of the borrowing facility and may make draws of revolving credit loans from time to time during the agreement term to finance commercial real estate assets that are approved by the Wachovia Bank in its discretion.

The credit agreement is for a term of two years with a one-year extension option at our option provided we meet certain conditions. We can prepay our borrowings under the facility in whole or in part at any time (subject to a $1 million minimum) without any penalty or premium. We are required to use a portion of our future debt or equity issuances to prepay borrowings under the facility. We are required to pay interest on our borrowings at prevailing short-term rates . . .