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 have made 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 September 30, 2009 was approximately 75.4%. 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 September 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). We have also financed certain of our assets on a non-match-funded floating rate recourse credit agreement.

As discussed in greater detail under "Business Environment" below, the ongoing credit crisis has adversely impacted our company in a variety of ways, including by causing us to suspend growth, significantly curtailing our access to credit and capital on attractive terms and causing us to finance a portion of our long-term fixed rate assets on a non-match-funded, floating rate, recourse credit agreement. In response to the crisis we have refocused our strategy in a number of ways, including by reducing our debt levels, selectively selling assets, intensively managing our portfolio and reducing our general and administrative expenses. We do not know when conditions will stabilize, if adverse conditions will intensify or the full extent to which the disruptions will affect us.

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 fixed rate 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. Increases in LIBOR rates will cause our borrowing costs on the Wachovia credit agreement to increase.

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

Dislocated 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. 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 revenue and 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 September 30, 2009, and September 30, 2008, we did not make any new portfolio investments, other than some nominal securities investments we made in the 2009 period through the reinvestment feature of our CDO. We also did not complete any new asset financings during these periods.

Supplemental Information

Owned Properties

The occupancy rate on our owned properties as of September 30, 2009 was 99.8%. The average annualized rent per square foot on our owned properties for the nine months ended September 30, 2009 was $13.88. The average annual rent per square foot on our owned properties for the years 2008, 2007, and 2006, was $12.56, $12.06, and $14.70, respectively.

The following table sets forth certain information regarding scheduled lease expirations in our owned property portfolio as of September 30, 2009.

                    Number of            Square Feet          2008 Annual         Percent
   Year of Lease     Expiring             Subject to          Gross Rent         of Annual
    Expiration      Leases (1)          Expiring Lease      (in thousands)       Rent (2)
    2009                      2 (3)             347,842     $         9,450             7.3 %
    2010                      6 (4)             444,025               6,690             5.2 %
    2011                      1                 130,000               6,044             4.7 %
    2012                     16 (5)           2,745,009              22,340            17.2 %
    2013                     14 (6)             320,491               5,720             4.4 %
    2014                      1                  88,420                 744             0.6 %
    2015                      5                 598,039               7,862             6.1 %
    2016                      8               1,127,586              13,159            10.1 %
    2017                     13               1,242,727              15,545            12.0 %
    2018                      2                 112,089               1,668             1.3 %
    2019                      2                 189,993               5,423             4.2 %
    Thereafter               14               3,156,332              35,177            27.1 %

(1) On four of our owned properties, we have more than one tenant, including one owned property (United States Government (NIH)) where we also have multiple leases with the primary tenant expiring at different dates.

(2) Represents lease expiration dates as a percentage of 2008 gross annual rent.

(3) 99% of the leases expiring in 2009 (by square footage) represent Factory Mutual Insurance Company property in Johnston, Rhode Island.

(4) 95% of the leases expiring in 2010 (by square footage) represent Qwest Corporation properties in Omaha, Nebraska.

(5) 100% of the leases expiring in 2012 (by square footage) represent Nestle Properties and the US Government (NIH) property.

(6) 100% of the leases expiring in 2013 (by square footage) represent the Choice property in Silver Spring, MD and Omnicom property in Irving, Texas.

With respect to certain of our owned properties, we own the improvements on the land and control the land through an estate for years with an option to enter into a ground lease at the expiration of the estate for years (Nestle, Qwest and Kroger properties). For each of these properties, we also have an option to purchase the land at the expiration of the estate for years and on the last day of the primary term and each renewal term of the ground lease for fair market value. If we exercise the purchase option, the fair market value will be agreed to by us and the seller or if the parties cannot agree determined through an appraisal process. For two of our owned properties, we own the improvements on the land and control the land through a ground lease (Crozer-Keystone Health System and property in Johnston, Rhode Island formerly leased to Factory Mutual Insurance Company). See "Item 1-Business" of our Form 10-K for the fiscal year ended December 31, 2008 for more detail in the tabular presentation of our owned property portfolio. We can transfer our interest in all of these properties at any time and our interest in all of these properties will revert to the land owner at the expiration of the ground lease estate unless we have purchased the land or extended the leasehold estate.

Securities Investments

Our securities investments are collateralized by mortgage loan assets secured by properties located throughout the United States. If one or more of the underlying loans in the securitization default, receipt of the scheduled payments on our securities may become dependent upon the recovery value of the related collateral. In such an event, any economic downturn such as the current credit crisis or other adverse events or conditions in any location where we have a significant credit concentration could cause the recovery value of the related collateral to decline, and, therefore, could result in a material reduction of our cash flows or material losses to our company.

The following table summarizes the geographic concentrations of five percent or more within our securities portfolio as of September 30, 2009.

                                     Allocated
                                    Cost Basis
                     State        (in thousands)      Percentage
                     Colorado     $        37,770            21.8 %
                     New York              29,043            16.8 %
                     California            28,350            16.8 %

The weighted average life of our securities investments as of September 30, 2009 was 8.0 years.

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

                                           Corporate /                            Operating                              Lending
                                           Unallocated                           Real Estate                           Investments
                                 Sep 30, 2009       Sep 30, 2008       Sep 30, 2009       Sep 30, 2008       Sep 30, 2009       Sep 30, 2008
Total revenues                  $          136     $          136     $       37,443     $       36,873     $        7,495     $        8,526
Total expenses                           5,061              5,812             33,037             35,498             10,777              5,865
Gain on extinguishment of
debt                                       415                  -                  -                  -                  -                  -
Income (loss) from continuing
operations                              (4,510 )           (5,676 )            4,406              1,375             (3,282 )            2,661
Total assets                            57,479             58,196          1,504,101          1,580,540            379,006            457,325

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

                                           Corporate /                            Operating                              Lending
                                           Unallocated                           Real Estate                           Investments
                                 Sep 30, 2009       Sep 30, 2008       Sep 30, 2009       Sep 30, 2008       Sep 30, 2009       Sep 30, 2008
Total revenues                  $          313     $          713     $      111,200     $      110,587     $       23,362     $       25,854
Total expenses                          15,603             17,931            104,031            104,594             25,914             18,933
Gain on extinguishment of
debt                                     9,829                  -                  -                  -                  -                  -
Income (loss) from continuing
operations                              (5,461 )          (17,218 )            7,169              5,994             (2,551 )            6,920
Total assets                            57,479             58,196          1,504,101          1,580,540            379,006            457,325

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

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

Revenue.

Total revenue decreased $0.5 million, or 1%, to $45.1 million. The decrease was attributable to a decrease in interest income.

Rental revenue and property expense recoveries, in the aggregate, increased a modest $0.6 million, or 2%, to $37.3 million, primarily reflecting the impact of two months of holdover rent on our property in Johnston, Rhode Island. The tenant vacated the building and stopped paying rent in October 2009.

Interest income decreased $1.0 million, or 12%, to $7.6 million, primarily as a result of lower loan balances and lower interest rates on cash balances.

Expenses.

Total expenses increased $1.7 million, or 4%, to $48.9 million. The increase in expenses was primarily attributable to higher investment losses in the 2009 period, offset in part by lower interest expense and various other expenses.

Interest expense decreased $2.3 million, or 9%, to $22.4 million, from $24.7 million. The decrease in the 2009 period resulted primarily from $1.5 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, $0.2 million of lower interest expense on property mortgages and $0.1 million of lower interest expense on the secured term loan. The Company's average balance outstanding and effective financing rate under its floating rate borrowings was approximately $148 million at 3.72% during the 2009 period (average 30-day LIBOR of 0.29%), compared with approximately $203 million at 5.84% during the 2008 period (average 30-day LIBOR of 2.47%).

Property expenses decreased $0.1 million, or 2%, to $4.8 million, reflecting slightly 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 $0.4 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 $5.9 million in the 2009 period, reflecting losses on two assets we sold during the third quarter. We had losses on investments of $1.0 million during 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 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 $0.2 million, or 6%, 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 11%, to $0.6 million. The decrease was primarily a result of reduced amortization expense related to the vesting of prior year awards, offset in part by an additional year of stock awards and an increase in estimated vesting percentage in the 2009 period. As of September 30, 2009, $3.9 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 September 30, 2009, the grant date fair value for awards of 23,557 restricted shares made in 2006, 62,700 restricted shares made in 2007, 118,035 restricted shares made in 2008 and 418,859 restricted shares made in 2009, has not yet been determined because the grant date (as defined under at FASB ASC 718-10-20 (formerly SFAS 123R (Revised 2004) - Share-Based Payment)) has not yet occurred.

Depreciation and amortization expense on real property decreased $0.9 million, or 7%, from $13.5 million to $12.6 million, primarily due to the value of our in place lease on the property in Johnston, Rhode Island being fully amortized at the scheduled lease maturity in July 2009.

Gain on extinguishment of debt.

We had $0.4 million of non-cash gain on extinguishment of debt in the 2009 period, relating to the repurchase of $1.5 million of our convertible senior notes. See Note 9.

Net loss.

Net loss increased $1.9 million, to $(3.4) million, from $(1.5) million, primarily as a result of the higher loss on investments in the 2009 period, offset in part by lower interest expense in the 2009 period. Net income allocable to common stockholders was $(4.1) million in the third quarter of 2009, reflecting dividends to preferred stockholders of $0.7 million.

Comparison of the Nine Months Ended September 30, 2009 to the Nine Months Ended September 30, 2008

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

Revenue.

Total revenue decreased $2.3 million, or 2%, to $134.9 million. The decrease was attributable to a decrease in interest income.

Rental revenue and property expense recoveries, in the aggregate, increased $0.7 million, or 1%, to $110.8 million. The increase primarily reflects the impact of two months of holdover rent on our property in Johnston, Rhode Island. The tenant vacated the building and stopped paying rent in October 2009.

Interest income decreased $2.9 million, or 11%, to $23.6 million, primarily as a result of lower loan balances, average cash balances and interest rates and an unexpected payment we received on an interest only bond during the 2008 period.

Expenses.

Total expenses increased $4.1 million, or 3%, to $145.5 million. The increase in expenses was primarily attributable to higher 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 $5.5 million, or 8%, from $73.7 million to $68.1 million. The decrease in the 2009 period resulted primarily from $3.6 million of lower interest expense on floating rate borrowings (resulting from lower borrowings and interest rates in the 2009 period), $1.0 million of lower interest expense on convertible debt due to repurchases of the convertible debt, $0.6 million of lower interest expense on property mortgages and $0.3 million of lower interest expense on the secured term loan. The Company's average balance outstanding and effective financing rate under its floating rate borrowings was approximately $167 million at 3.71% during the 2009 period (average 30-day LIBOR of 0.39%), compared with approximately $208 million at 5.39% during the 2008 period (average 30-day LIBOR of 2.89%).

Depreciation and amortization expense on real property decreased $0.9 million, primarily due to the value of our in place lease on the property in Johnston, Rhode Island being fully amortized at the scheduled leased maturity in July 2009.

Property expenses increased $0.6 million, or 4%, to $14.9 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 $0.6 million from the 2008 period.

We had loss on derivatives of $1.4 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 $13.7 million in the 2009 period, including $5.9 million of losses on two assets that were sold in the third 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 $1.3 million, or 14%, to $7.7 million, primarily reflecting higher legal expenses in the 2008 period.

General and administrative expense-stock based compensation decreased $0.1 million, or 7%, to $1.6 million. The decrease was primarily a result of reduced amortization expense related to the vesting of prior year awards, offset in part by an additional year of stock awards and an increase in estimated vesting percentage in the 2009 period.

Gain on extinguishment of debt.

We had $9.8 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 loss.

Net loss decreased $3.2 million, to $(0.6) million, from $(3.9) million, primarily as a result of the gain on extinguishment of debt and lower interest expense in the 2009 period, offset in part by the higher loss on investments in the 2009 period. Net loss allocable to common stockholders was $(2.8) million in the 2009 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 . . .