We consider FFO to be an appropriate measure of the performance of an equity REIT. FFO is used by financial analysts in evaluating REITs and can be one measure of a REIT’s ability to make cash distribution payments. Presentation of this information provides the reader with an additional measure to compare the performance of different REITs, although it should be noted that not all REITs calculate FFO the same way so comparisons with such REITs may not be meaningful.

FFO is not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income as an indication of Realty Income’s performance or to cash flows from operating, investing, and financing activities as a measure of liquidity or ability to make cash distributions or to pay debt service.

Results of Operations

The following is a comparison of our Results of Operations for the Year Ended December 31 , 1997.

Rental revenue was $84.9 million for 1998 versus $67.6 million for 1997, an increase of $17.3 million. The increase in rental revenue was primarily due to the acquisition of 149 properties during 1998 and 96 properties during 1997. These properties generated revenue of $22.3 million in 1998 compared to $5.3 million in 1997, an increase of $17.0 million. At January 1, 1999, annualized contractual lease payments on the funds invested in properties acquired in 1998 and 1997 are approximately $33.1 million (excluding estimated rent from 19 properties under development and any percentage rents).

Of the 970 properties in the portfolio as of December 31, 1998, 963 are single-tenant properties with the remaining properties being multi-tenant properties. Of the 963 single-tenant properties, 958, or 99.5%, were net leased with an average remaining lease term (excluding extension options) of approximately 8.6 years. All of our 958 leased single-tenant properties were under leases that provide for increases in rents through:

Some leases contain more than one of these clauses. Percentage rent, which is included in rental revenue, was $1.7 million during 1998 and $1.8 million in 1997. Same store rents generated on 717 properties owned during all of both 1998 and 1997 increased by $531,000 or 0.9%, to $61.89 million from $61.36 million.

At December 31, 1998, the Company had five properties that were not under lease as compared to eight at December 31, 1997 and nine at December 31, 1996. At December 31, 1998, 965, or over 99.5%, of the 970 properties in the portfolio were under lease agreements with third party tenants.

Depreciation and amortization was $21.9 million in 1998 versus $18.6 million in 1997. The increase in 1998 was primarily due to depreciation of the properties acquired in 1997 and 1998.

Interest expense in 1998 increased by $5.5 million to $13.7 million, as compared to $8.2 million in 1997. The following is a summary of the five components of interest expense for 1998 and 1997 (dollars in thousands):

Interest on outstanding loans and notes was $5.6 million higher in 1998 than in 1997 due to an increase in the average outstanding balances and a higher average interest rate. The higher average interest rate was due to interest on the notes issued in October 1998 and the effect of the treasury lock settlement paid in October 1998.

General and administrative expenses increased by $1.2 million to $6.68 million in 1998 versus $5.44 million in 1997. The increase in general and administrative expenses was primarily due to an increase in property acquisition expenses and employee costs. General and administrative expenses as a percentage of revenue decreased to 7.8% in 1998 as compared to 8.0% in 1997. During 1997, we increased our number of employees to 47 from 35. The majority of the new employees were hired in the third quarter of 1997 and work primarily on new property acquisitions. As of March 1, 1999, we had 50 employees.