We received investment grade corporate credit ratings from Duff & Phelps Rating Company, Moody’s Investor Service, Inc., and Standard & Poor’s Rating Group in December 1996. Currently, Duff & Phelps has assigned a rating of BBB, Moody’s has assigned a rating of Baa3, and Standard & Poor’s has assigned a rating of BBB-to our senior debt. These ratings could change based upon, among other things, our results of operations and financial condition.

Property Acquisitions During 1998, we continued to increase the size of the portfolio through a strategic program of real estate acquisitions. 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. 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. During 1998, we also paid $168,000 for lease commissions and $95,000 for building improvements on existing properties in our portfolio.

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 or developers have agreed to develop the properties (with development costs funded by the Company) and with the tenant to begin paying rent when the premises open for business.

During 1997, we invested $142.3 million in 96 properties purchased in 1997 and properties under development (excluding estimated unfunded development costs on properties under construction at December 31, 1997). The weighted average annual unleveraged return on the $142.3 million invested in 1997 is estimated to be 10.4%, computed in the same manner as 1998’s estimated weighted average annual unleveraged return. These 96 properties purchased in 1997 are located in 27 states, contain approximately 1.1 million leasable square feet and are 100% leased with an average initial lease term of 14.4 years.

Distributions Cash distributions paid during 1998, 1997 and 1996 were $52.3 million, $44.4 million and $48.1 million, respectively. The 1996 cash distributions include a special distribution of $5.3 million paid in January 1996.

Realty Income pays distributions monthly. The following is a summary of the monthly cash distributions for the years ended December 31, 1998, 1997 and 1996, which totaled $1.965, $1.8925 and $2.0925, respectively. The 1996 distributions include a special distribution of $0.23 per share.

Funds from Operations (“ FFO”)

FFO for 1998 increased by $10.45 million or 20.0% to $62.80 million versus $52.35 million during 1997. FFO during 1996 was $47.7 million.

We define FFO as net income before gain on sales of properties, plus provision for impairment losses, plus depreciation and amortization. In accordance with the recommendations of the National Association of Real Estate Investment Trusts (“NAREIT”), amortization of deferred financing costs are not added back to net income to calculate FFO. Amortization of financing costs are included in interest expense in the consolidated statements of income.

The following is a reconciliation of net income to FFO and information regarding distributions paid and the diluted weighted average number of shares outstanding for 1998, 1997 and 1996 (dollars in thousands):