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Recent Developments Acquisition of 149 Properties During 1998 During 1998, we continued implementing our growth plan, which is intended to increase our funds from operations per share. As part of our plan, we acquired 149 additional properties (the “New Properties”), and selectively sold 5 properties, increasing the number of properties in the portfolio by 17.4% to 970 properties at December 31, 1998 from 826 properties at December 31, 1997. During 1998, we invested $193.4 million in New Properties and properties under development (excluding estimated unfunded development costs on properties under construction at December 31, 1998 of $19.7 million). The weighted average annual unleveraged return on the $193.4 million invested in 1998 is estimated to be 10.4%, computed as estimated contractual net operating income (which in the case of a net leased property is equal to the base rent or, in the case of properties under construction, the estimated base rent under the lease) for the first year of each lease, divided by the estimated total costs of each property. Since it is possible that a tenant could default on the payment of contractual rent, no assurance can be given that the actual return on the funds invested will not differ from the foregoing percentage. The New Properties are located in 38 states, will contain approximately 1.6 million leasable square feet and are 100% leased under net leases, with an average initial lease term of 14.9 years. Of the New Properties, 133 were occupied as of March 1, 1999 and the remaining properties were pre-leased and under construction pursuant to contracts under which the tenants have agreed to develop the properties (with development costs funded by the Company) and to begin paying rent when the premises open for business. Increase in Monthly Distribution In April, July and October 1998, and January 1999, the monthly distributions were increased $0.0025 to $0.1625, $0.165, $0.1675 and $0.17 per share, respectively. Realty Income continues its policy of paying distributions monthly. During 1998, the Company paid three distributions of $0.16 per share, three distributions of $0.1625 per share, three distributions of $0.165 per share, and three distributions of $0.1675 per share. Distributions for 1998 totaled $1.965 per share. In December 1998, January 1999 and February 1999, the Company declared distributions of $0.17 per share, which were paid on January 18, 1999, February 16, 1999 and March 15, 1999, respectively. The monthly distribution of $0.17 per share represents a current annualized distribution of $2.04 per share, and an annualized distribution yield of approximately 9.0% based on the last reported sale price of the Company’s Common Stock on the NYSE of $22.5625 on March 2, 1999. Although we expect to continue our policy of paying monthly distributions, there can be no assurance that the current level of distributions will be maintained by the Company or as to the actual distribution yield for any future period. Unsecured Credit Facility In November 1998, we amended our revolving credit facility agreement (the “Credit Facility”) to: • Increase the
amount available for borrowing from $150 million to $170 million; and
The increase in the amount available for borrowing under the revolving Credit Facility should enable us to continue to implement our growth strategy of acquiring additional properties and funding expenditures for development projects. As of March 2, 1999, we had $90.9 million available for borrowing under the Credit Facility. At that time, the outstanding balance was $79.1 million with an effective interest rate of 6.0%. Common Stock Offerings In March 1998, we issued 372,093 shares of common stock at a net price to the Company of $25.531 per share to a unit investment trust, based on a 5% discount to the then market price of $26.875 per share. The net proceeds of $9.5 million were used to repay borrowings of $7.9 million under the Credit Facility and to acquire additional properties. In February 1998, we issued 751,174 shares of common stock based at a net price to the Company of $25.295 per share to a unit investment trust, based on a 5% discount to the then market price of $26.625 per share. The net proceeds of $18.9 million were used to repay borrowings under the Credit Facility. Notes Offering In January 1999, we issued $20 million of 8.00% unsecured senior notes due 2009 (the “1999 Notes”). The 1999 Notes were sold at 98.757% of par to yield 8.10%. The proceeds from the offering were used to pay down bank borrowings and for other corporate purposes. Currently, there is no formal trading market for the 1999 Notes and we have not listed and do not intend to list the 1999 Notes on any securities exchange. In October 1998, we issued $100 million of 8.25% Monthly Income Senior Notes due 2008 (the “1998 Notes”). The 1998 Notes are unsecured and were sold at par ($25.00). After taking into effect the results of a U.S. Treasury interest rate lock agreement, the effective rate to us is 9.12%. The proceeds from the offering were used to pay down $96.0 million of our bank borrowings and will allow us to continue our strategic property acquisition activities. Interest on the 1998 Notes is payable monthly on the 15th of each month. Business Philosophy and Strategy Investment Philosophy We believe that the long-term ownership of an actively managed, diversified portfolio of retail properties under long-term, net lease agreements produces consistent, predictable income. Under a net lease agreement, the tenant agrees to pay a minimum monthly rent and property operating expenses (taxes, maintenance, and insurance) plus, typically, future rent increases (generally subject to ceilings) based on increases in the consumer price index, fixed increases or additional rent calculated as a percentage of the tenant’s gross sales above a specified level. We believe that long-term leases, coupled with the tenant’s responsibility for property expenses, generally produce a more predictable income stream than many other types of real estate portfolios, while continuing to offer the potential for growth in rental income.
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