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.

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 that 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.

We also focus on and have selectively made investments in properties of upper market retail chains. 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
• They are able to grow because access to capital facilitates larger transactions.

While our investment strategy focuses primarily on acquiring properties leased to middle and upper market retail chains, we also selectively seek incremental investment opportunities with venture market retail chains. Periodically, venture market opportunities arise where we feel that the real estate used by the tenant is of high quality and can be purchased at prices that are favorable in the marketplace. To meet our stringent investment standards, however, venture retail companies must have a well-defined retailing concept and strong financial prospects. These opportunities are examined on a case by case basis, and we are highly selective in making investments in this area.

The Internet has become an important delivery channel for many retail businesses and our investment strategy has positioned us to compete in such an environment. Many research analysts and experts in retail trends believe that bricks and mortar retail businesses will successfully co-exist with Internet retail businesses. Many brick and mortar retailers have set up Internet sale sites to compliment their businesses. We believe that the companies most vulnerable, and possibly subject to the greatest impact from the Internet, are retail chains that sell books, consumer electronics, music, office supplies, and, possibly, pharmaceuticals.