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, real estate taxes, insurance and routine maintenance. 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.

We have two complimentary business lines: owning single tenant properties and making first mortgage loans and other debt investments on single tenant properties.

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).

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 rely on leverage to allow us to invest in a greater number of assets and enhance our asset returns. Our overall portfolio leverage as of June 30, 2009 was approximately 76.9%. We expect our leverage levels to decrease over time, as a result of one or more of the following factors: scheduled principal amortization on our debt, voluntary debt reduction, and lower leverage on new asset acquisitions. As a result of market conditions, we began to reduce our debt levels during 2008 and have begun and expect to continue to do so in 2009.

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 finance our assets with "match-funded" or substantially "match-funded" debt, meaning that we seek to obtain debt whose maturity matches as closely as possible the maturity of the asset financed. Through June 30, 2009, 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 typically 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 entered into such a period in the fourth quarter of 2008 when we removed our only open interest rate hedge.

We rely primarily on equity and debt capital to fund our portfolio growth. Through June 30, 2009, 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. 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 financed under our credit agreement with Wachovia Bank. We expect credit market conditions to continue to impact our ability to obtain long-term financing and, therefore, we cannot provide any assurance as to the timing or our ability to do so. Further, to the extent we continue to finance a portion of our portfolio through the credit agreement with Wachovia Bank, that agreement is recourse to all of our other assets, we will continue to be subject to potential margin calls from the lender (primarily for credit events related to the assets financed) and we will be subject to interest rate risk as the borrowings are priced at floating rates based on 30-day LIBOR, or the London Interbank Offered Rate.

· causing us to sell selected assets to reduce debt and generate liquidity.

Widening credit spreads and limited market trading activity for real estate securities continue to result in depressed valuations on our real estate securities. If these conditions do not improve, we may be subject to impairment losses on our securities investments in the future, and these losses may be significant.

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 refinancing debt as it matures or raising additional capital, margin calls on our Wachovia Bank credit agreement and impairment charges on our assets. If weak economic conditions continue and capital for commercial real estate remains scarce, certain collateral within our CDO may default, which could cause the CDO to fail to satisfy certain cash flow coverage tests, which would result in a redirection of the cash distributions payable to us from the CDO until the tests are back into compliance.

We have taken and may continue to 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 market conditions, 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 economic conditions and the credit crisis may cause commercial real estate values and market rental rates to decline significantly. These declines could adversely impact us in a number of ways, including by causing us to record losses on our assets, reducing the proceeds we receive upon sale or refinance of our assets or adversely impacting our ability to re-let our owned properties.

Current economic conditions have contributed to unexpected bankruptcies and rapid declines in financial condition at a number of companies, particularly in the retail and financial sectors. These conditions could cause one or more of the tenants to whom we have exposure to fail or default in their payment obligations, which could cause us to record material losses or a material reduction in our cash flows.

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, 2008 in Management's Discussion and Analysis of Financial Condition and Results of Operations. There have been no significant changes to those policies during 2009.

Investment and Financing Activities

During each of the three months ended June 30, 2009, and June 30, 2008, we did not make any new portfolio investments. We also did not complete any new asset financings during these periods other than a credit agreement with Wachovia Bank in the 2008 period discussed below under "Liquidity and Capital Resources."

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 June 30, 2009 and June 30, 2008, are as follows (dollar amounts in thousands):

                                                       Corporate /                            Operating                              Lending
                                                       Unallocated                           Real Estate                           Investments
                                             Jun 30, 2009       Jun 30, 2008       Jun 30, 2009       Jun 30, 2008       Jun 30, 2009       Jun 30, 2008
Total revenues                              $           87     $          194     $       36,731     $       36,886     $        7,744     $        8,552
Total expenses                                       5,183              6,291             33,774             34,633              5,596              5,377
Gain on extinguishment of debt                       6,593                  -                  -                  -                  -                  -
Income (loss) from continuing operations             1,497             (6,098 )            2,957              2,253              2,149              3,174
Total assets                                        38,319             46,728          1,515,801          1,594,492            412,734            465,373

Selected results of operations by segment for the six months ended June 30, 2009 and June 30, 2008, are as follows (dollar amounts in thousands):

                                                       Corporate /                            Operating                              Lending
                                                       Unallocated                           Real Estate                           Investments
                                             Jun 30, 2009       Jun 30, 2008       Jun 30, 2009       Jun 30, 2008       Jun 30, 2009       Jun 30, 2008
Total revenues                              $          177     $          576     $       73,757     $       73,715     $       15,868     $       17,328
Total expenses                                      10,541             12,119             70,994             69,096             15,137             13,068
Gain on extinguishment of debt                       9,413                  -                  -                  -                  -                  -
Income (loss) from continuing operations              (951 )          (11,542 )            2,763              4,619                731              4,259
Total assets                                        38,319             46,728          1,515,801          1,594,492            412,734            465,373

Comparison of the Quarter Ended June 30, 2009 to the Quarter Ended June 30, 2008

The following discussion compares our operating results for the quarter ended June 30, 2009 to the comparable period in 2008.

Revenue.

Total revenue decreased $1.1 million, or 2%, to $44.6 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 $0.9 million, or 10%, to $7.8 million, primarily as a result of lower loan balances, lower cash balances and interest rates.

Expenses.

Total expenses decreased $1.7 million, or 4%, to $44.6 million. The decrease in expenses was primarily attributable to lower interest expense and general and administrative expenses, offset in part by investment losses in the 2009 period.

Interest expense decreased $1.7 million, or 7%, to $22.7 million, from $24.4 million. The decrease in the 2009 period resulted primarily from $1.1 million of lower interest expense on floating rate borrowings (resulting from lower borrowings and interest rates in the 2009 period), $0.4 million of lower interest expense on convertible debt due to repurchases of the convertible debt and $0.2 million of lower interest expense on property mortgages. The Company's average balance outstanding and effective financing rate under its floating rate borrowings was approximately $166 million at 3.74% during the 2009 period (average 30-day LIBOR of 0.44%), compared with approximately $214 million at 5.03% during the 2008 period (average 30-day LIBOR of 2.70%).

Property expenses decreased $0.1 million, or 3%, to $4.8 million, reflecting reduced expenses. The net amount of property expenses we incurred (net of expense recoveries) was basically unchanged from the 2008 period.

We had gain on derivatives of $0.2 million in the 2008 period, compared with no hedge activity in the 2009 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 $0.6 million in the 2009 period, including a $0.4 million asset-specific loan loss. There were no losses on investments in the 2008 period. The 2009 losses are discussed at Notes 4 and 5 of the consolidated financial statements included in this Form 10-Q.

General and administrative expense decreased $0.6 million, or 19%, to $2.6 million, primarily reflecting higher legal expenses in the 2008 period related to our legal actions involving the real property we own in Johnston, Rhode Island.

General and administrative expense-stock based compensation decreased $0.1 million, or 18%, to $0.5 million, as the grant date value of 2009 awards was lower than in prior years. As of June 30, 2009, $4.5 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 2014). As of June 30, 2009, the grant date fair value for awards of 23,558 restricted shares made in 2006, 62,700 restricted shares made in 2007, 118,035 restricted shares made in 2008 and 418,852 restricted shares made in 2009, 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 was basically unchanged from the 2008 period, as we have not added any new owned property investments since the second quarter of 2007.

Gain on extinguishment of debt.

We had $6.6 million of non-cash gain on extinguishment of debt in the 2009 period, relating to the repurchase of $12.3 million of our convertible senior notes and $5 million of our CDO debt. See Note 9.

Net income (loss).

We had net income of $6.7 million, compared to net loss of $(0.5) million in the 2008 period, primarily as a result of the gain on extinguishment of debt and lower interest expense in the 2009 period. Net income allocable to common stockholders was $6.0 million in the second quarter of 2009, reflecting dividends to preferred stockholders of $0.7 million.

Comparison of the Six Months Ended June 30, 2009 to the Six Months Ended June 30, 2008

The following discussion compares our operating results for the six months ended June 30, 2009 to the comparable period in 2008.

Revenue.

Total revenue decreased $1.8 million, or 2%, to $89.8 million. The decrease was primarily attributable to a decrease in interest income.

Rental revenue and property expense recoveries, in the aggregate, was basically unchanged from the 2008 period.

Interest income decreased $1.9 million, or 11%, to $16.0 million, primarily as a result of lower loan balances, lower cash balances and interest rates and an unexpected payment we received on an interest only bond during the 2008 period.

Expenses.

Total expenses increased $2.4 million, or 3%, to $96.7 million. The increase in expenses was primarily attributable to the loss on investments in the 2009 period, offset in part by lower interest expense, the loss on derivatives in the 2008 period and lower general and administrative expenses.

Interest expense decreased $3.2 million, or 7%, from $48.9 million to $45.7 million. The decrease in the 2009 period resulted primarily from $2.1 million of lower interest expense on floating rate borrowings (resulting from lower borrowings and interest rates in the 2009 period), $0.5 million of lower interest expense on convertible debt due to repurchases of the convertible debt and $0.5 million of lower interest expense on property mortgages. The Company's average balance outstanding and effective financing rate under its floating rate borrowings was approximately $176 million at 3.76% during the 2009 period (average 30-day LIBOR of 0.44%), compared with approximately $222 million at 4.65% during the 2008 period (average 30-day LIBOR of 3.10%).

Depreciation and amortization expense on real property was basically unchanged from the 2008 period, as we have not added any new owned property investments since the second quarter of 2007.

Property expenses increased $0.6 million, or 7%, to $10.1 million, reflecting increased expenses including costs paid to one of our tenants and real estate taxes. The net amount of property expenses we incurred (net of expense recoveries) increased $0.5 million from the 2008 period.

We had loss on derivatives of $1.9 million in the 2008 period, compared with no hedge activity in the 2009 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 of $7.8 million in the 2009 period, including $7.3 million of losses on two assets that were sold in the second quarter of 2009. The 2009 losses are discussed at Notes 4, 5 and 6 of the consolidated financial statements included in this Form 10-Q.

General and administrative expense decreased $1.1 million, or 17%, to $5.2 million, primarily reflecting higher legal expenses in the 2008 period.

General and administrative expense-stock based compensation was basically unchanged from the 2008 period, as an additional year of stock awards was offset by lower grant date values in the 2009 period.

Gain on extinguishment of debt.

We had $9.4 million of non-cash gain on extinguishment of debt in the 2009 period, relating to the repurchase of our convertible senior notes and CDO debt.

Net income (loss).

We had net income of $2.7 million, compared to net loss of $(2.4) million in the 2008 period, primarily as a result of the gain on extinguishment of debt and lower interest expense in the 2009 period, offset in part by the loss on investments in the 2009 period. Net income allocable to common stockholders was $1.3 million in the 2009 period, reflecting dividends to preferred stockholders of $1.4 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 six months ended June 30, 2009 and June 30, 2008.