For federal income tax purposes, a portion of the distributions payable at December 31, 1995 and paid in 1996, in the amount of $0.1442 per share, was deemed to be paid in 1995.

Provision for Impairment Losses We review long-lived assets, including goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Generally, a provision is made for impairment loss if estimated future operating cash flows (undiscounted and without interest charges) over a long-term holding period plus estimated disposition proceeds (undiscounted) are less than the current book value. If a property is held for sale, it is carried at the lower of cost or estimated fair value, less costs to sell. For the years ended December 31, 1998, 1997 and 1996, provisions for impairment losses of zero, $165,000 and $579,000, respectively, were charged to operations to reduce the net carrying value of three properties held for sale in 1997 and four properties held for sale in 1996. All of these properties have been sold.

Net Income Per Share Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted net income per share is computed by dividing the amount of net income for the period by each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period.

The following is a reconciliation of the denominator of the basic net income per share computation to the denominator of the diluted net income per share computation (net income was available to common stockholders for all periods presented):

In 1998, 25,000 stock options that were anti-dilutive have been excluded from the incremental shares from the assumed conversion of stock options. No stock options were anti-dilutive in 1997 and 1996.

Stock Option Plan We account for our stock option plan in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value based method defined in SFAS No. 123 had been applied. We have elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.

Derivative Financial Instrument In two instances we used interest rate treasury lock agreements to hedge the effect of interest rate fluctuations. These instruments each met the requirement for hedge accounting, including a high correlation to a specific transaction. Accordingly, the amount received and paid under the terms of the agreements is recognized in income when interest expense related to the hedge item is recognized.

Change in Accounting Principle In October 1998, we adopted Statement of Position 98-5, “Reporting on the Costs of Start-Up Activities” (“SOP 98-5”). SOP 98-5 requires that costs incurred during start-up activities, including organization costs, be expensed as incurred. Prior to October 1998, organization costs were amortized over 60 months. In October 1998, the unamortized balances of organization costs were written off. Pro forma amounts assuming the adoption of SOP 98-5 is applied as of January 1, 1996:

Segment Reporting During 1998, we adopted the provisions of Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). This statement establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. See note 15 for our segment disclosures.

Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

3. Credit Facility Available for Acquisitions

Realty Income has a $170 million, three-year, revolving, unsecured acquisition credit facility, of which $52 million expires in December 2000 and $118 million expires in December 2001. The credit facility is from The Bank of New York, as agent, and several U.S. and non-U.S. banks. As of December 31, 1998 and 1997, the outstanding balances on the credit facility and line of credit were $84.8 million and $22.6 million, respectively, with an effective interest rate of approximately 6.27% and 6.66%, respectively.