ANNUAL REPORT
1996

We added Consumer Electronics as a new industry to the portfolio with the addition of two properties leased to Best Buy and 34 properties leased to Rex Stores. We also added to our investments in the Automotive Service industry with the acquisition of 12 properties leased to Econo Lube-N-Tune, four properties leased to Jiffy Lube, and three properties leased to Speedy/Car X. In the Convenience Store industry, we added four properties leased to Dairy Mart and two properties leased to East Coast Oil. We also acquired one restaurant property leased to Carvers, and expanded an existing Taco Bell restaurant. Finally, we further strengthened our portfolio in 1996 by selling seven properties which no longer met our investment criteria.

  We were pleased to announce in December 1996, that we were assigned investment grade corporate ratings by Duff & Phelps Credit Rating Co., Moody’s Investor Service, Inc., and Standard & Poor’s. The respective rating assignments were: BBB, Baa3, and BBB-. This is another important step in accomplishing our growth objectives, as it increases our range of options for financing the company’s business.

Another important benefit of such favorable ratings is the opportunity to attain higher margins between our long-term lease rates on new properties and the cost of capital to fund these acquisitions. This is in line with our goal to build shareholder value by the strategic use of capital.

In March 1996, we redeemed at par all outstanding variable rate senior notes due in 2001. These notes had an outstanding principal balance of $12,597,000 and were originally issued in conjunction with the August 1994 consolidation of the former Realty Income Corporation partnerships.

Our company remains conservatively capitalized with a debt to equity market capitalization ratio of 12.8%. The enhanced $130 million credit line originated in 1994 and extended to November 1999, remains in place with an outstanding balance of $70 million at year end.

We further strengthened our Board of Directors this year with the addition of Richard J. VanDerhoff, President and Chief Operating Officer of Realty Income, and Willard H. Smith, Jr, formerly a managing director of Merrill Lynch & Co. These two gentlemen add valuable experience and insight, and bring our total number of Directors to seven.

The price of our stock rose throughout the year with a closing price of $23 7/8 on December 31, 1996. Total equity market capitalization rose to over $548 million. The appreciation of stock price combined with dividends paid during the year provided shareholders with an annual total return on their investment in Realty Income of 14.4%.

As always, we are dedicated to sound investment practices that generate growth and total returns and justify your investment in our company. We realize that shareholders today have a variety of investment options in public companies both within and outside of the real estate industry. Through strategic vision, diligent planning and efficient management we intend to continue to be a company you can count on. We thank you for your continued confidence and support.  TOP

The tenants of these freestanding retail properties are convenience stores, consumer electronics stores, child care centers, restaurants, and other retailers providing goods and services which satisfy basic human needs and are used by consumers every day. In order to grow and expand, they need capital. Since real estate is their single largest capital expenditure, Realty Income’s method of purchasing the property and then leasing it back under a net lease arrangement, allows the retail chain to free up much needed capital to expand their business. There are very few large or public companies who compete in this market and 5.6 billion square feet of opportunity indicates we have room for growth.

Diversifying by Industry and Tenant  It is generally acknowledged that diversification reduces portfolio risk. Further diversification by industry, tenant type and geographical location in our portfolio continues to be a primary focus. Our portfolio is currently diversified through the ownership of 740 properties located in 42 states.

Investments in retail industries and retail chains include: Automotive Parts stores with Kragan, Schucks, and Checkers; Automotive Service centers with Econo Lube N’ Tune, Q-Lube, R & S Strauss and Speedy Muffler King; Child Day Care with Children’s World Learning Centers, La Petite Academy, and KinderCare Learning Centers; Consumer Electronics stores with Best Buy and Rex Stores; Convenience stores with 7-Eleven, Dairy Mart, East Coast Oil, and The Pantry, Inc.; Home Furnishings with Levitz Furniture; and Restaurants with Don Pablo’s, Carvers, Golden Corral, Hardees, Taco Bell, and Whataburger.

Typical original lease lengths within the portfolio are for 10-20 years. Each lease generally provides for either fixed increases in rent, or increases tied to the Consumer Price Index or a percent of the individual retail location’s sales. Approximately 98% of our properties are leased under these terms with an average remaining lease length of 8.6 years.