GENERAL
Realty Income Corporation, The Monthly Dividend Company®, is a Maryland corporation organized to operate as an equity real estate investment trust, commonly referred to as a REIT. Our primary business objective is to generate dependable monthly distributions from a consistent and predictable level of funds from operations, or FFO per share. Over the past 35 years, Realty Income and its predecessors have been acquiring and owning freestanding retail properties that generate rental revenue under long-term (primarily 15 to 20 year) lease agreements. The monthly distributions are supported by the cash flow from 1,404 retail properties leased to regional and national retail chains.

We also seek to increase distributions to stockholders and FFO per share through both active portfolio management and the acquisition of additional properties. At December 31, 2003, we owned a diversified portfolio:

• Of 1,404 retail properties;
  
• With an occupancy rate of 98.1%, or 1,378, properties occupied of the 1,404 properties in the portfolio;
  
• Leased to 85 different retail chains doing business in 28 separate retail industries;
  
• Located in 48 states;
  
• With over 11.3 million square feet of leasable space; and
  
• With an average leasable retail space of 8,100 square feet.
  

Of the 1,404 properties in the portfolio, 1,399, or 99.6%, are single-tenant retail properties and the remaining five are multi-tenant properties. As of December 31, 2003, 1,374, or 98.2%, of the 1,399 single-tenant properties were leased with a weighted average remaining lease term (excluding extension options) of approximately 11.8 years.

In addition to our real estate portfolio, at December 31, 2003, our wholly-owned subsidiary, Crest Net Lease, Inc. had invested $53.3 million in a portfolio of 37 retail properties located in 13 states. These properties are held for sale.

LIQUIDITY AND CAPITAL RESOURCES
Cash Reserves Realty Income is organized to operate as an equity REIT that 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. At December 31, 2003, we had cash and cash equivalents totaling $4.8 million.

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

$250 Million Bank Credit Facility We have a $250 million revolving, unsecured credit facility that expires in October 2005. Realty Income’s current investment grade credit ratings provide for financing under the $250 million credit facility at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 90 basis points with a facility fee of 20 basis points, for all-in drawn pricing of 110 basis points over LIBOR. At February 16, 2004, we had a borrowing capacity of $237.0 million available on our credit facility and an outstanding balance of $13.0 million at an effective interest rate of 2.0%.

The credit facility is expected to be used to acquire additional retail properties and for other corporate purposes. Any additional borrowings will increase our exposure to interest rate risk.

We have no mortgage debt on any of our properties.

Universal Shelf Registration of $500 Million In December 2002, we filed a universal shelf registration statement with the SEC registering the issuance of up to $500 million in aggregate value of common stock, preferred stock and debt securities. This registration statement was declared effective by the SEC in January 2003. At February 16, 2004, $133.3 million remained available for issuance under our universal shelf registration statement.

Issuances of Common Stock in 2003 In October 2003, we issued 2,875,000 shares of common stock at a price of $40.59 per share. The net proceeds of $110.8 million were used to repay borrowings under our $250 million acquisition credit facility.

Conservative Capital Structure We believe that our stockholders are best served by a conservative capital structure. Therefore, we seek to maintain a conservative debt level on our balance sheet and solid interest and fixed charge coverage ratios. At February 13, 2004, our total outstanding credit facility borrowings and outstanding notes were $493.0 million or approximately 22.2% of our total market capitalization of $2.22 billion. We define our total market capitalization at February 13, 2004 as the sum of:

• Shares of our common stock outstanding of 38,006,034 multiplied by the last reported sales price of our common stock on the NYSE of $42.85 per share, or $1.63 billion;
  
• Liquidation value of the Class B preferred stock of $68.6 million;
  
• Liquidation value of the Class C preferred stock of $34.5 million;
  
• Outstanding borrowings of $13.0 million on our credit facility; and;
  
• Outstanding notes of $480.0 million.
  

Historically, we have met our long-term capital needs through the issuance of common stock, preferred stock and long-term unsecured notes. Over the long term, we believe that the majority of our future securities issuances should be in the form of common stock, however, we may issue additional preferred stock or notes from time to time. We may issue common stock when we believe that our share price is at a level that allows for the proceeds of any offering to be accretively invested into additional properties. In addition, we may issue common stock to permanently finance properties that were financed by our credit facility or notes. However, we cannot assure you that we will have access to the capital markets at terms that are acceptable to us.