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. If a property is rejected by the tenant during the reorganization, we own the property and can either lease it to a new tenant or sell the property. In addition, we believe 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 the 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.

Our research expertise is applied to uncover net-lease opportunities in markets where our real estate financing program adds value. 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 returns and enhancing the credit quality of the portfolio. Realty Income's investment committee meets frequently and is made up of our Chief Executive Officer and two Executive Vice Presidents. Our investment committee reviews industry research, tenant research, property due diligence, and significant portfolio management activities. This monitoring typically includes ongoing review and analysis of:

• The performance of various retail 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.