General

Realty Income Corporation, a Maryland corporation (“Realty Income”, the “Company”, “us”, “we” or “our”) was organized to operate as an equity real estate investment trust (“REIT”). We are a fully integrated self-administered real estate company with in-house acquisition, leasing, legal, retail research, real estate research, portfolio management and capital markets expertise. As of December 31, 1998, we owned a diversified portfolio of 970 retail properties located in 45 states with over 7.8 million square feet of leasable space.

Our primary business objective is to generate dependable monthly dividends from a consistent and predictable level of funds from operations (“FFO”) per share. Additionally, we generally will seek to increase distributions to stockholders and FFO per share through both active portfolio management and the acquisition of additional properties.

Liquidity and Capital Resources

Cash Reserves Realty Income is organized for the purpose of operating as an equity REIT which acquires and leases properties and distributes to stockholders, in the form of monthly cash distributions, a substantial portion of its net cash flow generated from leases on its retail properties. We intend to retain an appropriate amount of cash as working capital reserves. At December 31, 1998, Realty Income had cash and cash equivalents totaling $2.5 million.

We believe that our cash and cash equivalents on hand, cash provided from operating activities and borrowing capacity are sufficient to meet our liquidity needs for the foreseeable future, however, we intend to utilize additional sources of capital to fund property acquisitions and to repay our acquisition credit facility.

Capital Funding Realty Income has a $170 million, three-year revolving, unsecured acquisition credit facility of which $118 million expires in December 2001 and $52 million expires in December 2000. The credit facility currently bears interest at 0.85% over the London Interbank Offered Rate (“LIBOR”) and offers us other interest rate options. As of March 2, 1999, $90.9 million of borrowing capacity was available to us under the acquisition credit facility. At that time, the outstanding balance was $79.1 million with an effective interest rate of 6.0%. This credit facility has been and is expected to be used to acquire additional retail properties leased to national and regional retail chains under long-term lease agreements. Any additional borrowings will increase our exposure to interest rate risk.

We expect to meet our long-term capital needs for the acquisition of properties through the issuance of public or private debt or equity. In August 1997, we filed a universal shelf registration statement with the Securities and Exchange Commission covering up to $300 million in value of common stock, preferred stock and/or debt securities. Through March 2, 1999, $221.4 million in value of common stock and debt securities has been issued under the universal shelf registration statement.

In March 1998, we issued 372,093 shares of common stock at a net price to us 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 our credit facility and to acquire additional properties.

In February 1998, we issued 751,174 shares of common stock at a net price to us 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 our credit facility.

In January 1999, we issued $20 million of 8.00% senior notes due 2009 (the “1999 Notes”). The 1999 Notes are unsecured and were sold at 98.757% of par to yield 8.10%. The proceeds from the offering were used to pay down credit facility 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 sold at par ($25.00). After taking into effect the results of a Treasury interest rate lock agreement, the effective interest rate to us is 9.12%. The proceeds from the offering were used to pay down $96.0 million of our credit facility 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, commencing in December 1998. The 1998 Notes commenced trading on the New York Stock Exchange on November 3, 1998 under the ticker symbol “OUI”. The cusip number of the 1998 Notes is 756109-AA2.

In May 1998, we entered into a treasury interest rate lock agreement to protect against the possibility of rising interest rates applicable to the 1998 Notes. Under the interest rate lock agreement, we were to receive or make a payment based on the differential between a specified interest rate, 5.726%, and the actual 10-year treasury interest rate on a notional principal amount of $100 million, at the end of six months. Based on the 10-year treasury interest rate at October 23, 1998 (the interest rate pricing date), the Company made a payment of $8.7 million in settlement of the agreement in October 1998. The payment on the agreement is being amortized over 10 years (the life of the 1998 Notes) as a yield adjustment to interest expense.