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Investment Strategy In identifying new properties for acquisition, we focus on providing expansion capital to retail chains by acquiring, then leasing back, their retail store locations. We classify retail tenants into three categories: venture, middle market, and upper market. Venture companies are those which typically offer a new retail concept in one geographic region of the country and operate between five and 50 retail outlets. Middle market retail chains are those which typically have 50 to 500 retail outlets, operations in more than one geographic region, have been successful through one or more economic cycles, and have a proven, replicable concept. The upper market retail chains typically consist of companies with 500 or more stores, operating nationally in a proven mature retail concept. Upper market retail chains generally have strong operating histories and access to several sources of capital.

Realty Income primarily focuses on acquiring properties leased to middle market retail chains which we believe are attractive for investment because:

• They generally have overcome many of the operational and managerial obstacles that tend to adversely affect venture retailers;
• They typically require capital to fund expansion but have more limited financing options;
• They generally have provided us with attractive risk-adjusted returns over time since their financial strength has in many cases tended to improve as their businesses have matured;
• Their relatively large size allows them to spread corporate expenses across a greater number of stores; and
• Middle market retailers typically have the critical mass to survive if a number of locations have to be closed due to underperformance.

In 1998, we expanded our investment focus to include upper market retail chains and have made some acquisitions on a selective basis. We believe upper market retail chains can be attractive for investment because:

• They typically are of a higher credit quality;
• They are usually larger brand name, public and private retailers;
• They utilize a larger building ranging in size from 10,000 to 50,000 square feet; and
• Their ability to grow because of access to capital facilitates larger transaction sizes.

Credit Strategy Realty Income principally provides sale leaseback financing primarily to less than investment grade retail chains. Since 1970 and through December 31, 1998, Realty Income has acquired and leased back to regional and national retail chains 944 properties (including 34 properties that have been sold) and has collected in excess of 98% of the original contractual rent obligations on those properties. We believe that within this market we can achieve an attractive risk adjusted return on the financing that we provide to retailers.

We believe that the primary financial obligations of most retailers typically include their bank and other debt, payment obligations to suppliers and real estate lease obligations. Because we own the land and buildings on which the tenant conducts its retail business, we believe that the risk of default on the retailers’ lease obligations is less than the retailers’ unsecured general obligations. It has been our experience that since retailers must retain their profitable retail locations in order to survive in the event of reorganization they are less likely to reject a lease for a profitable location, which would terminate their right to use the property. Thus, as the property owner, we believe we will fare better than unsecured creditors of the same retailer in the event of reorganization. In addition, Realty Income believes that the risk of default on the real estate leases can be further mitigated by monitoring the performance of the retailers’ individual unit locations and selling those units that are weaker performers.

In order to qualify for inclusion in our portfolio, new property acquisitions must meet stringent investment and credit requirements. The properties must generate attractive current yields, and the tenant must meet our credit standards. We have established a three part analysis that examines each potential investment based on:

• Industry, company, market conditions and credit profile;
• Location profitability, if profitability data is available; and
• Overall real estate characteristics, value, and comparative rental rates.

Companies that have been approved for acquisitions are generally those with fifty or more retail stores which are located in highly visible areas, with easy access to major thoroughfares and attractive demographics.

Acquisition Strategy We seek to invest in industries in which several, well-organized, regional and national chains are capturing market share through service, quality control, economies of scale, mass media advertising, and selection of prime retail locations. We execute our acquisition strategy by acting as a source of capital to regional and national retail chain stores in a variety of industries by acquiring, then leasing back, their retail store locations. We undertake thorough research and analysis to identify appropriate industries, tenants, and property locations for investment. In selecting real estate for potential investment, we generally seek to acquire properties that have the following characteristics:

• Freestanding, commercially zoned property with a single tenant;
• Properties that are important retail locations for regional and national retail chains;
• Properties that are located within attractive demographic areas relative to the business of their tenants, with high visibility and easy access to major thoroughfares; and
• Properties that can be purchased with the simultaneous execution or assumption of long-term, net lease agreements, providing the opportunity for both current income and future rent increases.

Portfolio Management Strategy The active management of the property portfolio is an essential component of our long-term strategy. We continually monitor our portfolio for changes that could affect the performance of the industries, tenants, and locations in which we have invested. The portfolio is analyzed on an ongoing basis with a view towards optimizing performance and returns. Realty Income’s investment committee is made up of our Chief Executive Officer, President and three Senior Vice Presidents. Our investment committee meets weekly to review industry research, tenant research and property due diligence, and significant portfolio management activities. This monitoring typically includes ongoing review and analysis of:

• The performance of various tenant industries;
• The operation, management, business planning, and financial condition of the tenants; and
• The health of the individual markets in which we own properties, from both an economic and real estate standpoint.