We are pleased to report another year of solid progress towards building the value of your investment in our Company. During 1998, “The Monthly Dividend Company” achieved substantial improvements in virtually every facet of its business. Significant highlights of the year included:

• Monthly dividends were increased four times during 1998 to an annualized rate of $2.04 per share from an annualized rate of $1.92 at the beginning of the year. This represented a 6.3% increase in the amount of your monthly dividend check
• 149 new retail properties were acquired with an investment value of $193 million, initial lease rates of 10.4% and contractual lease agreements with major retail chains averaging 14.9 years. This equated to a 17.4% increase in the number of properties in the Company’s real estate portfolio and a 35.9% increase in the dollar volume of property acquisitions from 1997 to 1998
• The diversification of the Company’s revenue stream increased substantially with the addition of 8 new retail industries and 20 new retail chains to the portfolio. The Company now owns properties leased to 65 different retail chains in 21 retail segments located in 45 states
• Total revenue, net income, and funds from operations per share all grew to record levels during the course of the year.

  Industry Environment

During 1998 the commercial real estate industry continued its march, albeit at a slower pace, toward becoming a public industry. As we have written to you in the past, the forces at work causing this transformation include:

• Access to the public capital markets to finance a real estate company’s growth
• Continued increases in the size of real estate companies through mergers and acquisitions which leads to economies of scale and the diversification of a company’s revenue base
• Professional management teams generating clear-cut corporate strategies to lead today’s real estate companies.

We view this transformation as a long-term process, over a period of 15-20 years, that will lead to an increased consolidation of commercial real estate in the hands of a number of large public companies. The pace or strength of this transformation process will ebb and flow over time with public companies navigating it more successfully in some years than in others.

1998 was a year in which the process “ebbed” rather than “flowed.” Many in the commercial real estate industry experienced a substantial decline in the value of their stock and had difficulty in accessing new capital to fund their growth programs. The performance of the industry as a whole for 1998 resulted in an average total return for public real estate investment trusts (REITs) of a negative 18%.

During the challenging industry environment in 1998, Realty Income’s ongoing commitment to a conservative capital markets strategy and a “keep the powder dry” attitude towards debt provided the Company with access to the capital markets through two common stock offerings and an issuance of bonds to finance our continued growth. In addition, the relative strength of the Company’s share price throughout the year secured Realty Income a position as one of the year’s better performing companies in the real estate industry and enabled your Company to report continued acquisition growth and record financial results.