Realty Income Annual Report 2007

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T H E M O N T H LY D I V I D E N D C O M PA N Y®

Realty Income 2007 Annual Report

AS THE CHARTS ON THE COVER ILLUSTRATE, 2007 WAS

AN EXTREMELY POSITIVE YEAR FOR THE OPERATIONS

OF YOUR COMPANY. DURING THE YEAR WE MADE

SUBSTANTIAL PROGRESS IN INCREASING THE SIZE

OF THE REAL ESTATE PORTFOLIO, MAINTAINED HIGH

PORTFOLIO OCCUPANCY, AND GENERATED RECORD

INCREASES IN OUR FUNDS FROM OPERATIONS, WHICH

ALLOWED US TO SUBSTANTIALLY RAISE THE AMOUNT

OF THE MONTHLY DIVIDEND. GENERATING ADDITIONAL

CASH FLOW TO PAY INCREASING DIVIDENDS HAS BEEN

THE GOAL OF “THE MONTHLY DIVIDEND COMPANY®”

SINCE ITS FOUNDING BACK IN 1969. WE ARE PLEASED

WITH THE PROGRESS WE’VE MADE IN ACHIEVING THAT

GOAL OVER THE PAST 38 YEARS.

M I S S I O N S TAT E M E N T

Realty Income is a New York Stock Exchange listed company

dedicated to providing shareholders with dependable monthly

income. The monthly dividend is supported by the cash flow from

2,270 properties owned under long-term, net-lease agreements

with leading regional and national retail chains. The Company is

an active buyer of net-leased retail properties nationwide.

2007 Annual Report REALTY INCOME 1

2 0 07 R E V I E W ( T H E S H O R T V E R S I O N )

GENERAL COMMENT:

Another terrific year for

The Monthly Dividend Company®

DIVIDEND UPDATE:

Paid 12 monthly dividends

Increased the dividend 5 times

Paid 449 consecutive monthly dividends since 1970

SHARE PRICE PERFORMANCE:

12/31/06 closing price: $27.70

12/31/07 closing price: $27.02

2.4% decrease

RETURNS TO SHAREHOLDERS:

Dividend yield of 5.6%

Share price decrease of 2.4%

Total return of 3.2% for 2007

TOTAL MARKET CAPITALIZATION:

$4.55 billion on 12/31/07

BALANCE SHEET:

Very strong

PROPERTY MORTGAGE DEBT:

Zero ($0)

REAL ESTATE PORTFOLIO:

2,270 retail properties leased to 115 retailers in

30 retail industries located throughout 49 states

PORTFOLIO OCCUPANCY:

97.9% on 12/31/07

PROPERTY ACQUISITIONS:

Bought 357 properties for $534 million

2 REALTY INCOME 2007 Annual Report

2 0 0 8 B U S I N E S S P L A N

• PAY 12 M O N T H LY D I V I D E N D S

• R A I S E T H E D I V I D E N D

• M A I N TA I N A C O N S E R VAT I V E B A L A N C E S H E E T

• M A I N TA I N H I G H P O R T F O L I O O C C U PA N C Y

• A C Q U I R E A D D I T I O N A L P R O P E R T I E S

• T E L L M O R E P E O P L E A B O U T

T H E M O N T H LY D I V I D E N D C O M PA N Y ®

• R E M A I N C O N S E R VAT I V E

2007 Annual Report REALTY INCOME 3

R E L I A B L E F I N A N C I A L P E R F O R M A N C E OV E R T I M E

For the Years Ended December 31,

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

Total revenue(1)
Net income available to
common stockholders

Funds from operations (“FFO”)(2)
Dividends paid to

common stockholders

Special dividend paid

AT Y E A R E N D
Real estate at cost, before

accumulated depreciation(3)

Number of properties
Gross leasable square feet
Properties acquired(4)
Cost of properties acquired(4)
Properties sold
Number of retail industries
Number of states
Portfolio occupancy rate
Remaining weighted average

lease term in years

$ 297,396,000

$ 240,626,000

197,751,000

177,606,000

150,370,000

137,600,000

121,081,000

116,310,000

104,510,000

85,132,000

$ 67,897,000

56,957,000

51,555,000

$ 48,863,000

116,156,000
189,675,000

99,419,000
155,799,000

89,716,000
129,647,000

90,168,000
118,181,000

76,722,000

103,366,000

68,954,000

93,539,000

57,846,000

76,378,000

45,076,000

67,239,000

41,012,000

65,917,000

41,304,000

62,799,000

34,770,000

52,188,000

32,223,000

47,139,000

25,600,000

40,414,000

15,224,000

39,050,000

157,659,000

129,667,000

108,575,000

97,420,000

83,842,000

78,042,000

64,871,000

58,262,000

55,925,000

52,301,000

44,367,000

42,794,000

36,710,000

38,816,000

$ 3,238,794,000
2,270
18,504,800
357
533,726,000
10
30
49
97.9%

$ 2,743,973,000
1,955
16,740,100
378
$ 769,900,000
13
29
48
98.7%

$ 2,096,156,000
1,646
13,448,600
156
$ 486,553,000
23
29
48
98.5%

$ 1,691,283,000
1,533
11,986,100
194
215,314,000
43
30
48
97.9%

1,533,182,000

$ 1,285,900,000

$ 1,178,162,000

$ 1,073,527,000

$ 1,017,252,000

$ 889,835,000

$ 699,797,000

$ 564,540,000

$ 515,426,000

$ 450,703,000

1,197

9,997,700

1,124

9,663,000

1,068

9,013,200

1,076

8,648,000

7,824,100

826

6,302,300

740

5,226,700

685

4,673,700

630

4,064,800

371,642,000

139,433,000

$ 156,472,000

98,559,000

181,376,000

$ 193,436,000

$ 142,287,000

55,517,000

65,393,000

3,273,000

97.7%

98.2%

97.7%

99.5%

99.2%

99.1%

99.3%

1,404

11,350,800

302

98.1%

11.8

1.08

1.45

1.181

1.20

6.7%

21.0%

111

10.9

1.01

1.38

1.151

1 .1 7

117

10.4

0.99

1.30

1.121

1 .1 4

9.8

0.84

1.26

1.091

1 .1 1

110

98.4%

10.7

0.76

1.23

1.043

1.08

970

149

10.2

0.78

1 .1 8

0.983

1.02

9.8

0.74

1 . 1 1

0.946

0.96

9.5

0.70

1.04

0.931

0.95

9.2

0.63

1.00

0.913

0.93

11.25

10.7%

42.0%

99.4%

9.5

0.39

0.98

0.300

0.90

9.9%

28.5%

Common shares outstanding

101,082,717

100,746,226

83,696,647

79,301,630

75,818,172

69,749,654

65,658,222

53,127,038

53,644,328

53,634,206

51,396,928

45,959,074

45,952,474

39,004,182

I N V E S T M E N T R E S U LT S
Closing price on December 31,
Dividend yield (7)(8)(9)
Total return to stockholders(9)(10)

27.02

27.70

21.62

25.29

20.00

12.4375

10.3125

12.4375

12.719

11.9375

8.5625

5.6%
3.2%

6.7%
34.8%

5.3%
-9.2%

6.2%
32.7%

17.50

7.8%

26.9%

14.70

9.0%

27.2%

10.6%

31.2%

8.4%

–8.7%

7.7%

5.5%

7.9%

14.5%

8.3%

15.4%

(1) Total revenue includes amounts reclassified to income from discontinued operations, but excludes revenue from Crest Net Lease, a subsidiary

of Realty Income.

(2) Refer to Management’s Discussion and Analysis for FFO definition and reconciliation to net income available to common stockholders.

(3) Does not include properties held for sale.

(4) Includes properties acquired by Realty Income and Crest Net Lease.

4 REALTY INCOME 2007 Annual Report

P E R C O M M O N S H A R E DATA(5)
Net income (diluted)
Funds from operations (“FFO”)(2)
Dividends paid
Special dividend
Annualized dividend amount(6)

1 .1 6
1.89
1.560

1.641

1 .1 1
1.73
1.437

1.518

1 .1 2
1.62
1.346

1.395

12.0

1 .1 5
1.50
1.241

1.32

13.0

12.9

12.4

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

150,370,000

137,600,000

121,081,000

116,310,000

104,510,000

85,132,000

$ 67,897,000

56,957,000

51,555,000

$ 48,863,000

76,722,000
103,366,000

68,954,000
93,539,000

57,846,000
76,378,000

45,076,000
67,239,000

41,012,000
65,917,000

41,304,000

62,799,000

34,770,000

52,188,000

32,223,000

47,139,000

25,600,000

40,414,000

15,224,000

39,050,000

83,842,000

78,042,000

64,871,000

58,262,000

55,925,000

52,301,000

44,367,000

42,794,000

36,710,000

38,816,000

$ 1,533,182,000
1,404
11,350,800
302
371,642,000
35
28
48
98.1%

$ 1,285,900,000
1,197
9,997,700
111
139,433,000
35
26
48
97.7%

$ 1,178,162,000
1,124
9,663,000
117
$ 156,472,000
35
25
48
98.2%

$ 1,073,527,000
1,068
9,013,200
22
98,559,000
21
24
46
97.7%

$ 1,017,252,000
1,076
8,648,000
110
181,376,000
3
24
45
98.4%

$ 889,835,000

$ 699,797,000

$ 564,540,000

$ 515,426,000

$ 450,703,000

7,824,100

970

149

6,302,300

826

5,226,700

740

4,673,700

685

630

4,064,800

$ 193,436,000

$ 142,287,000

55,517,000

65,393,000

3,273,000

11.8

1.08
1.45
1.181

1.20

10.9

1.01
1.38
1.151

1 .1 7

75,818,172

69,749,654

20.00

6.7%
21.0%

17.50

7.8%
26.9%

10.4

0.99
1.30
1.121

1 .1 4

9.8

0.84
1.26
1.091

1 .1 1

10.7

0.76
1.23
1.043

1.08

65,658,222

53,127,038

53,644,328

53,634,206

51,396,928

45,959,074

45,952,474

39,004,182

14.70

9.0%
27.2%

12.4375

10.3125

12.4375

12.719

11.9375

8.5625

10.6%
31.2%

8.4%
–8.7%

7.7%

5.5%

7.9%

14.5%

8.3%

15.4%

99.4%

9.5

0.39

0.98

0.300

0.90

9.9%

28.5%

99.3%

9.2

0.63

1.00

0.913

0.93

11.25

10.7%

42.0%

99.1%

9.5

0.70

1.04

0.931

0.95

99.5%

10.2

0.78

1 .1 8

0.983

1.02

99.2%

9.8

0.74

1 . 1 1

0.946

0.96

(5) All share and per share amounts reflect the 2-for-1 stock split on December 31, 2004.

(6) Annualized dividend amount reflects the December declared dividend rate per share multiplied by twelve.

(7) Dividend yield was calculated by dividing the dividend paid per share, during the year, by the closing share price on December 31 of the previous year.

(8) Dividend yield excludes special dividends.

2007 Annual Report REALTY INCOME 5

1998

1997

1996

1995

1994

85,132,000

$ 67,897,000

56,957,000

51,555,000

$ 48,863,000

41,304,000
62,799,000

34,770,000
52,188,000

52,301,000

44,367,000

32,223,000
47,139,000

42,794,000
5,285,000

25,600,000
40,414,000

36,710,000

15,224,000
39,050,000

38,816,000
5,850,000

$ 889,835,000
970
7,824,100
149
$ 193,436,000
5
22
45
99.5%

$ 699,797,000
826
6,302,300
96
$ 142,287,000
10
14
43
99.2%

$ 564,540,000
740
5,226,700
62
55,517,000
7
8
42
99.1%

$ 515,426,000
685
4,673,700
58
65,393,000
3
7
42
99.3%

$ 450,703,000
630
4,064,800
4
3,273,000
5
5
41
99.4%

10.2

0.78
1 .1 8
0.983

1.02

9.8

0.74
1 . 1 1
0.946

0.96

9.5

0.70
1.04
0.931
.23
0.95

9.2

0.63
1.00
0.913

0.93

9.5

0.39
0.98
0.300

0.90

53,634,206

51,396,928

45,959,074

45,952,474

39,004,182

12.4375

12.719

11.9375

7.7%
5.5%

7.9%
14.5%

8.3%
15.4%

11.25
10.7%
42.0%

8.5625

9.9%
28.5%

(9) The 1994 dividend yield is based on the annualized dividends for the period from August 15, 1994 (the date of the consolidation of the

predecessors to the Company) to December 31, 1994. The 1994 total return is based on the price change from the closing on

October 18, 1994 (the Company’s first day of trading) to December 31, 1994 plus the annualized dividend yield.

(10) Total return was calculated by dividing the net change in the share price, during the year, plus the dividends paid per share, during the

year, by the closing share price on December 31 of the preceding year.

2007 Annual Report REALTY INCOME 6

TA B L E O F C O N T E N T S

MISSION STATEMENT

2007 REVIEW (THE SHORT VERSION)

2008 BUSINESS PLAN

RELIABLE FINANCIAL PERFORMANCE OVER TIME

CEO LETTER TO SHAREHOLDERS

HIGHLIGHTS OF 2007

INVESTOR RETURNS

IT’S ABOUT FUNDS FROM OPERATIONS AND DIVIDENDS

WHAT MORE DO YOU NEED TO KNOW ABOUT YOUR COMPANY?

I. WHY WE’RE IN BUSINESS

II. WHAT IS OUR STRATEGY AND HOW DOES OUR BUSINESS WORK?

PROVEN STRATEGY

HOW WE WORK

FUNDING ACQUISITIONS

HOW WE INCREASE EARNINGS AND FUNDS FROM OPERATIONS

STAYING ON TOP OF PORTFOLIO PERFORMANCE

III. WERE WE SUCCESSFUL IN DELIVERING ON OUR STRATEGY?

ANOTHER VERY GOOD ACQUISITIONS YEAR

ACCESS TO CAPITAL

CREST PERFORMANCE

PORTFOLIO PERFORMANCE

IV. CAREFUL UNDERWRITING AND RECORD FINANCIAL PERFORMANCE

UNDERWRITING ANALYSIS AND PROCESS

WHAT HAPPENS IF A TENANT GETS INTO FINANCIAL TROUBLE?

MANAGEMENT EXPERIENCE WITH FINANCIALLY CHALLENGED TENANTS

RECORD FINANCIAL PERFORMANCE

V. LOOKING AHEAD-OPPORTUNITIES AND CHALLENGES IN 2008

VI. WHAT YOU MIGHT EXPECT FROM US

A FEW LAST WORDS

FINANCIAL PERFORMANCE AND OPERATING RESULTS

1 1

OPEN HERE

2007 Annual Report REALTY INCOME 7

C E O L E T T E R T O S H A R E H O L D E R S

Dear Shareholders,

I am very pleased to report to you that during 2007 your Company had the best

operating performance in its 38-year history. During the year we made excellent

progress in all areas of the Company’s business, including strong real estate portfolio

performance, access to attractively priced capital, substantial progress in our real

estate acquisition program, and solid financial performance that allowed us to raise

the dividend five times. We believe our continued success is the result of a business

strategy that has proven to be resilient through many years of varying economic

conditions. As we begin 2008, we believe we are well positioned to achieve continued

operating success and to pursue our mission of providing dependable monthly income

that increases over time.

H I G H L I G H T S O F 2 0 07 (as compared to 2006)
• Revenue rose 23.8% to $296.5 million

• Funds from operations (FFO) increased 21.8% to $189.7 million

• Common stock dividends paid increased 21.6% to $157.7 million

• Portfolio occupancy of 97.9% at year end

• Large and diverse portfolio of 2,270 properties located in 49 states occupied by

115 different retailers in 30 different industries

• Same store rents increased 1.4%

• 357 new properties acquired for $533.7 million

• Issued $550 million of senior unsecured notes issued in September of 2007

• Zero balance on our credit facility and $193.1 million in cash to pursue 2008 acquisitions

• No mortgages on any of our properties

8 REALTY INCOME 2007 Annual Report

I N V E S T O R R E T U R N S
During 2007, we paid 12 monthly dividends on our

Rising Dividends Over Time” table below).

The price of Realty Income’s shares was $27.02

common stock and increased the amount of the

at December 31, 2007, a decrease of $0.68, as

dividend five times. Dividends paid per share

compared to the closing price of $27.70 on

increased 8.6% and shareholders who owned our

December 31, 2006. As sometimes happens in the

stock for the entire year received $1.56 per share

financial markets, the closing price of our shares,

in dividends during 2007.

at year end, did not reflect the record operating

Investors who have owned Realty Income for

results we achieved in 2007. While this may be

many years also benefited from the regular

somewhat disappointing, it is important to realize

payment of dividends and dividend increases.

that neither our fundamental business nor our

For example, shareholders who purchased shares

operations were the cause of this modest share

ten years ago (12/31/97), now enjoy a current yield

price decrease during the year.

on the original cost of their shares of 12.9% and

As for total return in 2007, combining the

have received back 95.6% of their original dollars

dividends paid of 5.6% with the share price

invested because of consistent and increasing

decrease of 2.4%, shareholders achieved a total

payments of dividends. (See “The Magic of

return of 3.2% for 2007.

The Magic of Rising Dividends Over Time
* Based on 12/31/07 Annualized Dividend Per Share Amount of $1.641.

Yield on Cost

The Cumulative Dividend Effect

1,000 Shares
Purchase Date

Original
Investment

Original
Dividends

Original
Yield

Current Yield
on Cost*

Dividends
Received to Date

% of Original
Investment Paid Back

10/18/94

$ 8,000.00

$ 900.00

11.3%

20.5%

$ 15,360.00

12/31/94

$ 8,562.50

$ 900.00

10.5%

12/31/95

$ 11,250.00

$ 930.00

8.3%

12/31/96

$ 1 1 ,9 37.50

$ 945.00

12/31/97

$ 1 2 ,7 1 9.00

$ 960.00

7.9%

7.5%

12/31/98

$ 12,437.50

$ 1,020.00

8.2%

12/31/99

$ 10, 312.50

$ 1,080.00

10.5%

12/31/00

$ 12,437.50

$ 1 , 1 1 0 .00

8.9%

12/31/01

$ 14,700.00

$ 1,140.00

7.8%

12/31/02

$ 17,500.00

$ 1 ,1 70 .00

6.7%

12/31/03

$ 20,000.00

$ 1,200.00

6.0%

12/31/04

$ 25,290.00

$ 1,320.00

5.2%

12/31/05

$ 21,620.00

$ 1,395.00

6.5%

12/31/06

$ 27,700.00

$ 1,518.00

5.5%

12/31/07

$ 27,020.00

$ 1,641.00

6.1%

19.2%

14.6%

13.7%

12.9%

13.2%

15.9%

13.2%

11.2%

9.4%

8.2%

6.5%

7.6%

5.9%

6.1%

$ 15,060.00

$ 1 4,1 47.50

$ 1 3,1 0 1 .25

$ 1 2 ,1 55.00

$ 1 1 , 1 7 2 .50

$ 1 0,1 30.00

$ 9,038.75

$ 7,9 1 7.50

$ 6,766.25

$ 5,585.00

$ 4,343.75

$ 2,997.50

$ 1,560.25

192.0%

175.9%

125.8%

109.7%

95.6%

89.8%

98.2%

72.7%

53.9%

38.7%

27.9%

17.2%

13.9%

5.6%

2007 Annual Report REALTY INCOME 9

I T ’ S A B O U T F U N D S F R O M

every year has not necessarily correlated to the

O P E R AT I O N S A N D D I V I D E N D S

movement of our stock price over the short term.

Different people look for different things from an

Since 1999, Realty Income’s FFO per share growth

investment. Some look for earnings growth. Some

rate was: 4.2% in 1999, 2.4% in 2000, 3.2% in

look for dividend growth (these people generally

2001, 6.2% in 2002, 5.1% in 2003, 3.4% in 2004,

need increasing income to replace the salaries

8.0% in 2005, 6.8% in 2006, and 9.2% in 2007.

they no longer receive). And some look for stock

In comparison, the Company’s stock price

price growth (these more risk tolerant people

percentage change during the same years has

generally look to achieve sizable capital gains).

been: -17.1% in 1999, 20.6% in 2000, 18.2% in

What we look for as a company is funds from

2001, 19.1% in 2002, 14.3% in 2003, 26.5% in

operations and dividend growth. Our view is that if we

2004, -14.5% in 2005, 28.1% in 2006 and -2.4%

pay attention to the quality and growth of our funds

in 2007. You can see this more clearly in the table

from operations, then regular dividend payments and

below that compares our dividend per share

dividend increases should be a natural outcome.

growth, FFO per share growth (our earnings or cash

As a company, we have the most in common with

flow metric) and share price growth over the past

investors who are looking for earnings growth and

9 years. The numbers reveal historical operating

dividend growth. In the long run, we believe that our

performance and dividend payments that have

shareholders are best served when we keep our

consistently increased while share price performance

eye on what we can control (the operations of the

has been somewhat erratic.

Annual Per Share Comparisons

2007 2006 2005 2004 2003 2002 2001 2000 1999

Dividend Growth

8.6% 6.8% 8.5% 5.1% 2.6% 2.7% 2.7% 4.7% 6.1%

FFO Growth

9.2% 6.8% 8.0% 3.4% 5.1% 6.2% 3.2% 2.4% 4.2%

Share Price Growth

-2.4% 28.1% -14.5% 26.5% 14.3% 19.1% 18.2% 20.6% -17.1%

business and our dividends) rather than on what we

The point of this is that if we are income

can’t control (the day to day price of our shares).

investors, what we care most about is a company’s

By this, we mean that we view stock market

track record of consistent and increasing funds

performance in much the same way as the well-

from operations and dividends and not particularly

known investor, Warren Buffet, who has sometimes

how the shares traded on any given day, week,

commented that, in the short run, the market is a

month or year. True, we also want to protect our

voting machine that reflects people’s current

principal, but as most savvy investors know, if we

hopes, fears and emotions. However, in the long

pay attention to our operations and manage for

run, the market is more of a weighing machine,

cash flow and dividend growth, then, over the long

measuring a company’s growth in revenue, earnings

term, the price of our shares should usually reflect

and dividends. To illustrate this, it is very interesting

our positive long term performance.

to note that strong performance in our operations

10 REALTY INCOME 2007 Annual Report

W H AT M O R E D O YO U N E E D T O K N O W

increasing dividends. Whether it’s a decision to

A B O U T YO U R C O M PA N Y ?

acquire a single property or a portfolio of properties,

There are six things we think you should know

a decision as to what type of capital we use to

about Realty Income, and I’ll address them in

fund property acquisitions, or a decision on how

order throughout the rest of this letter.

to structure a lease agreement, the quality of the

I. We need to reiterate why we are in business

lease revenue that will be produced by the

and what we’re trying to accomplish for all of

investment is front and center in our analysis.

us as shareholders.

Our goal is to grow your Company and maintain

II. We should explain what our strategy is and

a real estate portfolio that is a reliable generator

how our business works.

of income for the long haul.

III. We need to let you know what kind of shape

Our track record in accomplishing our mission

your company is in and how well we executed

includes:

our business strategy this past year.

• 449 consecutive monthly dividends paid

IV. We need to provide insight into how we

since 1970

underwrite real estate acquisitions and discuss

• 47 increases in the amount of the monthly

our financial and operating performance in 2007.

dividend, of which 41 have been consecutive

V. We should give you our take on what might

quarterly increases since 1994, and

happen in 2008 (our crystal ball is never quite

• $1.4 billion in dividends paid.

clear, but we have a few ideas).

This dividend-paying track record is the

VI. Finally we should share our thoughts about

result of the following operating performance

what you ought to expect from us as an owner

from 1994 (when we were listed on the NYSE)

of Realty Income.

until December 31, 2007:

•

Increase in the number of properties that we

I . W H Y W E ’ R E I N B U S I N E S S

own from 630 to 2,270

Realty Income is “The Monthly Dividend Company®”.

•

Increase in the value of the real estate at

The mission of The Monthly Dividend Company®

original cost from $451 million to $3.2 billion

is to provide dependable monthly income that

•

Increase in the diversification of lease revenue

increases over time. This is both the reason we

from approximately 15 retail chains and 5 industries

exist and our primary goal year after year.

to 115 retail chains and 30 industries today

The Company was founded in 1969 to invest in

quality commercial properties, leased to regional

•

Increase of 608% in our revenue

Increase of 486% in our funds from operations

and national retail chains, under long-term leases

• Maintaining portfolio occupancy in excess of

that produce consistent lease revenue. The goal

97.5% since 1970

then and now is to preserve capital, to produce

•

Increase in the total capitalization of the

monthly income by owning these types of properties

company from $325 million to $4.55 billion.

and to increase that income over time.

These results indicate the importance we’ve

Because we are dedicated to producing reliable

placed on meeting our goal of providing dividend

income that rises over time, our activities and

income that increases over time and our

decisions are guided by the need to generate an

commitment to performing in accordance with

enduring stream of lease revenue that generates

the mission of The Monthly Dividend Company®.

the cash flow to support the regular payment of

Producing consistent operating results and

2007 Annual Report REALTY INCOME 11

achieving the goals set by a company is not a

location, is also a priority because it means our

given in any business. It requires a workable

lease revenue isn’t overly dependent on any single

strategy, good execution of that strategy and

retail industry, chain or area of the country.

a consistency of commitment to the overriding

This strategy, as simple as it is, still requires

mission of the company. Fundamental to Realty

consistent execution. To acquire $533.7 million

Income’s historical success is the simplicity of

in properties in 2007, as well as to consistently

its operating strategy.

achieve a high level of acquisition success year

after year is hard work (much harder than it may

I I . W H AT I S O U R S T R AT EGY A N D

look). It takes a great deal of planning and

H O W D O E S O U R B U S I N E S S W O R K?
Proven Strategy

organization to uncover property acquisition

opportunities, decide which ones will pay us over

Our strategy is to acquire properties with three

the long term, raise attractively priced capital to

particular characteristics:

purchase the properties and then monitor the

First, they are single-tenant, freestanding,

properties once we own them. Making all of this

retail properties with 15 to 20-year net leases.

work year after year is most certainly not a given,

Second, we focus on retail chains that provide

so let’s take a look at the processes we have in

basic human needs goods and services used

place that have allowed us to generate real estate

by consumers almost every day. And third, the

portfolio growth, earnings growth and dividend

properties we acquire generally provide for

growth in recent years.

additional portfolio diversification by retail

industry, retail chain and/or geographic location.

How We Work

We do our best to acquire and own these types

We uncover property acquisitions through the

of properties because they generate consistent,

efforts of a staff of acquisition officers who have

long-term lease revenue.

relationships with, and call on, individual retail

The benefit of owning real estate under net

chains, real estate developers, brokers, private

lease agreements is that the tenant (retail chain)

equity firms, and investment banks. This requires

is responsible for the payment of taxes, insurance

diligence, experience, consistent contact with these

and the maintenance of the property, rather than

firms, a good reputation for timely performance, as

us. We‘ve also said that consistency of lease

well as being in the right place at the right time.

revenue is important to our shareholders, so

Since there is generally a great deal of competition

purchasing properties from retailers selling

for net-leased retail real estate, the advantages we

“basic human needs goods and services” offers

us some degree of protection against the usual

ups and downs of retail trends. (Some examples of

retailers that provide these types of services are:

auto parts and service stores, convenience stores,

and child care centers.) A focus on acquiring

freestanding retail locations provides us with real

estate that is accessible and attractively located.

Diversifying the source of our lease revenue by

retail industry and chain, as well as by geographic

12 REALTY INCOME 2007 Annual Report

Our business strategy is to acquire and own freestanding retail

properties under 15 to 20-year leases that generate consistent

long-term lease revenue from which we pay dividends.

bring to the table are ready access to capital, solid

Funding Acquisitions

experience in financing a variety of industries, a

The Company’s long-term capital structure is an

track record of closing transactions on time and a

important strategic discussion for our Board of

reputation for being reasonably easy to work with.

Directors and senior management team. Our goal

Once an opportunity has been identified as

is to consistently maintain a conservative capital

viable for Realty Income to review, the due diligence,

structure while employing the lowest cost of capital

or underwriting process begins. There are many

available. Achieving this optimal capital structure at

real estate transactions identified that don’t make

any given point in time is a bit challenging and

it past an initial analysis, but the ones that do, go

requires us to always be aware of the market

through a rigorous review process by our in-house

environment in which we’re operating so that we

research team, which culminates in intense

can access attractively priced capital given the

discussion and analysis by the four most senior

ebb and flow of ever-changing market conditions.

level executives who comprise our Investment

This often requires a great deal of patience to time

Committee. (An in-depth look at our underwriting

capital issuances appropriately so that the capital

process comes later in this letter.)

we access meets our goals. Our bias, generally, is

If a potential transaction is approved by

to issue common stock so that we minimize debt

the Investment Committee, we then have to

levels. We believe that this delivers a certain degree

determine how to fund the acquisition. It’s

of comfort to our shareholders and also provides

important to note that the capital funding aspect

us with significant balance sheet flexibility so we

of our process does not necessarily proceed in a

have access to capital when attractive investment

linear fashion with the rest of the acquisition

opportunities present themselves.

process. The majority of the time, when a

transaction is approved by the Investment

Committee, we have already identified how it will

How We Increase Earnings
and Funds from Operations

be funded. Generally, we use our $300 million

Realty Income generates earnings growth in two

acquisition credit facility to fund acquisitions for

primary ways, by increasing the size of our real

the short term. When the credit facility gets to

estate portfolio and through regular rent increases

a certain level, we typically look to permanently

on the real estate that we already own. We generate

fund acquisitions by issuing common or preferred

increasing cash flow from our new property

stock or long-term bonds. We do this because

acquisitions based on the spread, or difference, we

permanent funding provides us with capital at a

achieve between the cost of the capital we use to

long-term fixed cost rather than the short-term

acquire a property and the return, or lease yield,

variable rate funding that is available through our

we receive from the property we buy. In short, the

acquisition credit facility.

lower the cost of our capital and the higher the

2007 Annual Report REALTY INCOME 13

lease yield on the property acquired, the greater

high level of occupancy arising from proactive

the spread. Sounds simple, however, our ability to

portfolio management.

achieve this spread is determined by conditions in

the capital markets on the one hand and conditions

Staying on Top of Portfolio Performance

in the real estate market on the other.

To the extent that our properties and tenants have

For example, from time to time our share price

passed a rigorous due diligence process, we enjoy

increases to a level where we are able to achieve

a certain degree of confidence that our tenants

a very attractive spread between the cost of the

will meet their 15 to 20-year contractual lease

capital we’ve generated for new investments and

agreements. Behind the scenes, however, there

the return, or lease yield, on the properties we

are many aspects to the consistent portfolio

acquire. The timing of stock issuance is challenging,

performance that supports the payment of monthly

however, because share price movement is based

dividends. The research that goes into acquiring

on a variety of factors over which we have little

properties with good tenants in the first place is

control as well as stock market conditions that are

one aspect, but monitoring the month to month

difficult to predict. Thus, constant monitoring of

collection of rents and staying on top of the

market conditions is required in order to maximize

operations of 115 retailers and 2,270 retail stores

our returns when we issue additional common stock.

is also critical to realizing dependable lease

On the other hand, there are times when we can

revenue. Realty Income’s retail research group

achieve a more attractive spread, and greater

follows economic and industry trends on over

earnings growth, by issuing long-term bonds or

30 different retail industries and scrutinizes the

preferred stock. Our decision to issue additional

operations of the retail chains in our portfolio.

long-term bonds is not totally dependent on cost

We monitor tenant financial health and perform

of capital issues, however. Another objective is to

tenant financial analysis with a goal to realize the

operate with a conservative balance sheet. As such,

consistent payment of rent every month.

we are constantly monitoring our capital structure

Another aspect is the proactive management of

so that the ratio between common stock, preferred

the portfolio. Instead of waiting for a lease to expire

stock and long-term bonds matches our desire for

to discover a retailer’s intentions, our portfolio

a conservative capital structure and, at the same

management team enters into discussions,

time, we are still able to generate the earnings

considerably in advance of the lease expiration

growth that supports regular dividend increases.

date, to determine our options. The markets where

Earnings growth is also achieved through rent

we own properties with leases scheduled to expire

increases in our property portfolio that generally

are also closely monitored to gauge whether or

occur on a regular basis throughout the duration

not it would be better to re-lease a property to

of our 15 to 20-year leases. Typically we look for

the same tenant, to a new tenant, or to sell the

annual increases, though there are many properties

property when the lease expires.

in our portfolio that have contractual rent increases

Finally, we must manage our real estate assets

every five years. In general, we target annual rent

with respect to the property sales that may occur

increases of around 1% to 2%, though this depends

from time to time. Ascertaining whether or not to

on the number of properties scheduled for rent

sell a particular property is not just a strategic

increases in any given year. The foundation for

decision, it can also represent a potential source

reliable rent growth, however, is a consistent,

of capital for Realty Income. Property sales occur

14 REALTY INCOME 2007 Annual Report

when we believe that the sale proceeds can be

reinvested at higher returns, or when the sale of

the property will enhance portfolio credit quality, or

when selling the property will likely increase the

average remaining lease term in the portfolio.

I I I . W E R E W E S U C C E S S F U L I N

D E L I V E R I N G O N O U R S T R AT E GY ?

So how well did our strategy, planning and

processes work for us this past year?

pressure on the lease yield that can be realized.

Another Very Good Acquisitions Year

In Investment Committee we walk a fine line

During 2007, we enjoyed continued success in

between pricing and credit quality to acquire

uncovering and acquiring the types of properties

properties that we believe will be able to provide

that are our strategic focus. For the year ended

attractive long-term lease revenue. This past year

December 31, 2007, Realty Income and its subsidiary

proved to be somewhat more challenging with

company, Crest Net Lease, Inc. (Crest) invested

respect to what we were able to approve based

$533.7 million in 357 new properties and properties

on credit. The volume of acquisition opportunities

under development. Realty Income invested

remained strong, but a great many of the

$503.8 million in 325 new properties with an initial

transactions we reviewed were a bit challenging

weighted average lease yield of 8.6%. The 325

from a credit perspective. To summarize how this

new properties, acquired by Realty Income, are

played out during 2007, the Investment Committee

located in 38 states and are 100% leased under

reviewed nearly $4 billion of potential transactions

net-lease agreements with an initial average lease

in order to acquire $533.7 million in new properties,

length of 19.2 years. They are leased to 16 different

or about 13% of what we reviewed. This completed

retail chains in 9 separate industries. Crest invested

transaction ratio is generally consistent with the

$29.9 million in 32 properties, all of which are

results of the past five years where we purchased

being marketed for sale.

15%, 14%, 8%, 26% and 12% of what we reviewed.

We achieved strong 2007 acquisitions in the

While it appears that we spent a great deal of

face of an increasingly competitive operating

time and effort to uncover the properties we

environment. We would note, however, that we could

acquired, we believe that the income needs of our

have done nearly twice or more of the volume in

shareholders are best served by maintaining strict

acquisitions if we had relaxed our tenant or industry

due diligence and credit underwriting standards.

concentration standards and given just a little on

We believe shareholders look to us to compete

our underwriting standards. But since we are The

based on our ability to uncover new markets and

Monthly Dividend Company®, we are always mindful

industries in which to do transactions, and based

of the fact that we are investing dollars that provide

on our track record of getting deals done, rather

thousands of retired people (and people nearing

than solely on pricing. That’s why we spend a

retirement) with much needed income.

great deal of time investigating new ways to

On the other hand, there is a great deal of

approach our business. The growth in the number

competition for every transaction, which puts

of our retail industries from 5 to 30 and in the

2007 Annual Report REALTY INCOME 15

number of our retail chains from 15 to 115 since

Fitch Ratings, BBB+ stable outlook, Moody’s

1994 demonstrates our ability to creatively pursue

Investors Services, Baa1 stable outlook, and

new opportunities and compete in this way. But it’s

Standard & Poor’s Ratings Group, BBB positive

important to emphasize that our approach to new

outlook. Maintaining solid credit ratings is

ideas is to start small and then see if there is

important as they determine the rate of interest we

opportunity for growth. Some of the areas we’ve

pay for our preferred stock and notes offerings.

investigated don’t work out so we try not to invest

a large amount of capital into business areas that

Crest Performance

have not proven themselves. It is a process of first

Crest is Realty Income’s wholly-owned subsidiary

crawl, then walk, then run rather than jumping in

that was formed in 2000 for the purpose of

with both feet. Nevertheless we aim to remain

acquiring properties for resale. The properties

agile, vigilant and well capitalized in order to

are primarily sold in the 1031 tax-deferred

pursue new opportunities as they arise.

exchange market. Crest has been an important

Access to Capital

strategic addition for us as it assists us in

competing for large portfolio transactions so that

In terms of financing 2007 acquisitions, capital

we can manage tenant level concentrations in

raised at the end of 2006 funded acquisitions

Realty Income’s core portfolio by selling off the

made early in the year. Then, in September 2007,

properties Crest acquires. During 2007, Crest

we issued $550 million of 6.75%, senior unsecured

acquired 32 properties for $29.9 million. These

notes, due in 2019, in an offering that was

properties are being marketed for sale in

underwritten by: Joint–book running managers,

accordance with Crest’s operating strategy.

Banc of America Securities LLC and Citigroup

During 2007, Crest sold 62 properties for a gain

Global Markets Inc., as well as Co-managers, BMO

on sales of $12.3 million. Crest’s inventory, at

Capital Markets Corp., BNY Capital Markets, Inc.,

December 31, 2007, was $56.2 million, which

Morgan Keegan & Company, Inc., Piper Jaffray & Co.

consists of 30 properties that are held for sale.

and Wells Fargo Securities LLC.

While Crest helps Realty Income complete

We were pleased to have been able to access

large portfolio transactions and does contribute

credit during a capital-constrained environment

to Realty Income’s earnings, its earnings

for the majority of American businesses. Demand

contributions are relatively small and we don’t

for the 2019 notes was extremely strong and we

rely on this more volatile income stream to pay

doubled the size of the offering so that our capital

monthly dividends.

requirements for 2008 would largely be met in

what we believed would be a very difficult financing

Portfolio Performance

market in 2008. As of December 31, 2007, we had

Realty Income’s real estate portfolio is in excellent

no borrowings on our $300 million acquisition

shape. As of December 31, 2007, we owned 2,270

credit facility and $193 million in cash. Our

retail properties located in 49 states leased to 115

$4.55 billion total capitalization consisted of,

retail chains doing business in 30 separate retail

$2.73 billion in common stock, $348 million in

industries. Portfolio occupancy, as of the end of the

preferred stock, and $1.47 billion in senior

year, was 97.9% with just 48 properties available

unsecured notes outstanding. Our corporate credit

for lease or sale. The average remaining lease

and senior unsecured debt ratings are as follows:

term for properties in our portfolio was 13 years.

16 REALTY INCOME 2007 Annual Report

Maintaining strong portfolio occupancy year after

well as some indication of the challenges and

year is largely the result of good initial underwriting

opportunities that might impact the industry in the

and then proactively managing lease expirations. In

future. In addition, we meet with the management

2007 we successfully managed 139 lease expirations

team of the individual retail chain, review audited

and in 2008 we anticipate that our portfolio

financial statements at the corporate level and

management group will work with 144 leases that

review a variety of internal operating metrics that

come up for renewal. Our track record of effectively

can give us insight into the retailer’s performance.

managing the lease expirations in the portfolio

Additionally, a review of available external research is

year after year is demonstrated by the consistently

completed to augment our internal research expertise.

high portfolio occupancy we’ve experienced since

A second important analysis is the unit

the Company was founded 38 years ago.

profitability, or the operating results, for each

In terms of properties that were identified for

individual store we are considering for purchase.

sale in the core portfolio, during 2007, we sold 10

This is particularly important information when we

properties for $7.0 million, all of which met the

are considering the purchase of properties that are

strategic requirements to qualify for sale.

part of a large portfolio of properties. In general we

Finally, same store rent increases for Realty

seek to purchase only the most profitable stores

Income’s portfolio were 1.4%, which is consistent

of the retail chains, with whom we do business.

with the 1% to 2% increase in rental income we

Finally, we send out real estate research people

hope to achieve every year.

to visit every property that we are considering.

Each individual property is analyzed along with the

I V. C A R E F U L U N D E R W R I T I N G A N D

trade area in which it operates. Typically we obtain

R E C O R D F I N A N C I A L P E R F O R M A N C E
Underwriting Analysis and Process

data on property values and we review area

demographics, as well as analyze traffic flow,

Our ability to rely on a tenant’s property level cash

economic data and prepare comparative purchase

flow to meet their contractual lease obligations,

price and rent studies for each location.

for the 15 to 20-year lease term, is another reason

Once we’ve obtained all of the data that comprise

we’ve achieved historically high levels of occupancy.

the three-part analysis, the information is compiled

We know that finding good tenants and good prop-

into a report for our Investment Committee to

erties with profitable operations can potentially

review. The Investment Committee consists of the

neutralize portfolio performance issues in the future.

chief executive officer, chief operating officer,

In general, our underwriting process is a three-

chief financial officer and general counsel. Most

part analysis that examines the:

Fridays (and many other days) are spent reviewing

1. Retail chain (tenant) and retail industry

research on new opportunities, watching property

2. Unit profitability of the stores we are acquiring

videos and research presentations, reviewing

3. Real estate location

financial information on properties we are

When we underwrite a particular retail chain

considering for purchase, and discussing the merits

and/or industry, we ascertain the competitive

of each opportunity and each individual property.

conditions of the industry, how the particular retail

A key metric we use in analyzing every

chain we are considering fits within the industry,

transaction is an individual property’s “cash flow

the historical financial performance of the industry,

coverage” ratio. To arrive at this number we divide

the outlook for future operating performance, as

the cash flow from the operations of each retail

2007 Annual Report REALTY INCOME 17

location by the amount of rent that is to be paid
(Cash flow or EBITDA 4 rent). Generally speaking,
we’re looking for cash flow coverage of 1.75 to

down debt, or otherwise work through their

financial issues, provides us with an important

competitive advantage. We have concentrated our

4 times the required rent. This coverage ratio

efforts on less than investment grade tenants, for

requirement, however, can vary according to the

the past 38 years, because of attractive price and

particular retail industry, individual retail chain,

lease yield advantages. We believe a historical

and the specific property being considered. So this

occupancy rate in excess of 97.5% (in every year

useful metric tells us what, exactly?

since our founding in 1969) has generally indicated

In the simplest terms, it helps us to determine

the effectiveness of our ability to underwrite such

how bad things have to get before the operations

transactions and the soundness of our approach.

of a particular retail location won’t be able to

support the payment of rent. Since the majority of

our recent acquisitions have been large portfolio

Management Experience with
Financially Challenged Tenants

transactions, strong cash flow coverage for

When we enter into any transaction, an important

individual store locations is critical to the

part of our analysis is how we would fare if the

underlying stability of the overall lease revenue

tenant runs into financial difficulty. Generally,

we receive and is one of the most important

tenants can run into a couple of different problems

factors in determining whether we accept or reject

that could cause them to file for bankruptcy. The

first is an absolute failure of the operations of the

business to generate positive cash flow. If a

Portfolio Occupancy
(as of the end of each year)

a transaction.

What Happens if a Tenant
Gets into Financial Trouble?

Despite all of the careful due

diligence and time spent reviewing

every aspect of a potential

transaction, there have been

times when certain retail chains

in our portfolio have encountered

financial difficulty. In fact, we have

underwritten transactions where

the retail chain was already under

financial pressure and we have

moved forward with these

transactions because both the

real estate and the store level

operations were strong. Our

ability to successfully do business

with less than investment grade

retail chains and acquire properties

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

business cannot generate cash

flow it usually files for Chapter 7

bankruptcy and is liquidated. We

believe this is pretty good public

policy as a business that cannot

generate positive cash flow should

97.9%

98.7%

98.5%

97.9%

probably not exist.

98.1%

97.7%

98.2%

97.7%

98.4%

99.5%

99.2%

99.1%

99.3%

99.4%

The second is where a business

generates a lot of cash flow from

its operations, but management

has borrowed a great deal of money

to capitalize the business. As a

result, the company cannot make

the required interest payments. In

this case, the problem isn’t business

operations or cash flow generation,

but that the management borrowed

too much money. In such a situation,

the company would generally file

from retail chains that are looking

1969-1993

>99.0%

for Chapter 11 reorganization

for alternative financing to pay

rather than liquidation. This allows

18 REALTY INCOME 2007 Annual Report

the company to reduce its borrowings and still

Chapter 11. That is bad for all of them, but,

continue to operate. We believe this is pretty good

generally, not for us, as we are the property

public policy too, by the way, as the business

owners and not the shareholders. Next, the debt

actually works pretty well, generates cash flow and,

holders generally have all or part of their debt

through the reorganization process, employees can

converted to equity. They now become the new

keep their jobs and consumers can continue to do

owners or shareholders. These former debt holders,

business with the company.

generally, no longer receive interest payments but

When we underwrite a business, our first series

they do have the opportunity to recoup their

of questions address whether or not we believe the

investment as the new equity owners. Through this

business could become a candidate for a Chapter 7

process, the company decreases the amount of

filing in the future. If we believe the business will

interest it has to pay, which was the problem to

not generate consistent cash flow over the long

begin with. Again, not great for the debt holders,

term, and could potentially become a candidate

as this was not what they signed up for, but not

for Chapter 7 liquidation, we walk away from the

necessarily bad for us because we are the property

transaction because there is too much risk to us as

owners, not the debt holders.

a landlord. However, if we believe it is a good business

What about our position as property owners?

that will consistently generate positive cash flow

In the reorganization, the retail chain can either

in the future, we usually ASSUME that at some

“reject” or “accept” our leases. If they reject a

point the company could borrow too much money

lease, the chain gets out of its obligation to pay us

and perhaps become a candidate for a Chapter 11

rent. We get the keys back to our property and then

reorganization. We then structure the transaction

seek to re-lease the property to another chain.

in a manner that would tend to minimize the risk

Our risk in this situation is the difference between

to our rent in the event of financial difficulties.

the rent we received from the former tenant versus

Since our listing on the New York Stock Exchange

what we can get from a new tenant.

in 1994, we’ve worked with about 15 tenants who

If they accept the lease on our property our

have faced such financial difficulty and filed for

tenant must continue to pay us rent. We’ve had no

Chapter 11 reorganization. One tenant filed for

credit event and we continue to receive our rent

Chapter 7 liquidation. At the same time, our

from a chain that now, in general, has a lot less debt.

portfolio occupancy never dropped below 97.5%.

So how does the retail chain make the decision

How can this be? We have already talked about

whether to accept or reject a lease? Well, obviously

how we underwrite transactions, focusing on the

the one thing the retail chain HAS TO HAVE coming

ability of each store to generate more cash flow

out of the reorganization is the store where they

for the retail chain, than the rent it pays, and

generate their cash flow. No store, no customers,

also focusing on the real estate itself. These are

no sales and no cash flow, right? Obviously, they

part of our underwriting processes for very

cannot operate the stores without accepting our

important reasons. Let’s start with the Chapter 11

lease and paying rent to us as the landlord. So,

reorganization. Again, the business generates a lot

during the Chapter 11, the retailer looks at each of

of cash, but not enough to pay the interest on its

its stores and asks a very simple question: does

borrowings. So what usually happens is, the

this store generate cash flow to the chain after

shareholders or equity owners lose all or a majority

paying the property owner the rent? If the store

of their investment in the company during the

does generate good cash flow after rent, the retail

2007 Annual Report REALTY INCOME 19

We believe this is why, in the past, we have

fared pretty well when one of our tenants ran into

problems. However, this method of underwriting

is not foolproof (us being the fools here). So, in

addition, by diversifying our portfolio by industry,

tenant, and geographic location, we seek to

minimize the overall impact to the portfolio from a

financial problem with any single tenant. We have

experienced tenant difficulties many times in our

38-year history, while continuing to generate

chain will usually accept the lease and keep

consistent performance, and we believe there will

operating the store and paying rent since this is

be many more such occurrences in the future. We

how they generate their cash flow. If not, they

also believe that by adhering to these underwriting

will reject the lease and stop operating the store.

standards and operating principals we should

Either way, we are usually in much better shape

continue to prosper in the future.

than the other creditors, as we either keep getting

our rent when the lease is accepted, or we have

Record Financial Performance

our asset back and can immediately seek to lease

We enjoyed record financial performance in 2007.

it to another retail chain if the lease is rejected.

Revenue increased 23.8% to $296.5 million, as

This brings us back to our discussion about how

compared to $239.5 million during 2006. This

we underwrite transactions:

year’s revenue growth is primarily attributable to

1. We undergo substantial research on the

the high level of property acquisitions achieved in

retail chain’s industry and on its operations

2006 and 2007.

and financials. The purpose of this is to assess

FFO available to common shareholders also

whether it will generate reliable cash flow over

increased 21.8% to $189.7 million, as compared to

the long term and, if it does run into trouble,

$155.8 million in 2006. On a diluted per common

it will likely be a Chapter 11 reorganization

share basis, FFO increased 9.2% to $1.89 per

rather than a Chapter 7 liquidation.

share as compared to $1.73 per share in 2006.

2. We look carefully at the profitability of each

This increase in FFO and FFO per share is the

store after it pays our rent. We seek to own

result of higher than average acquisition activity

properties that are very profitable to the

throughout the year.

retailers so that, even after a downturn in

Realty Income’s subsidiary company, Crest, also

the business, we will own the stores they

contributed to Realty Income’s earnings growth

would want to accept in the event of a

during 2007. Crest generated $10.7 million, or $0.11

Chapter 11 filing.

per share, in FFO for Realty Income, in comparison

3. We focus carefully on how much we pay for

to $1.4 million, or $0.02 per share, in FFO for

a property, its market rents and alternative

Realty Income in 2006.

uses, so that, if a property were rejected

FFO is a common financial operating measure-

in a Chapter 11, we would seek to replicate

ment for a REIT. It is an alternative, non-GAAP

the majority of the rent the property had

measure, that is considered to be a good

previously been receiving.

indicator of a company’s ability to pay dividends.

(1) Total revenue includes amounts reclassified to income from discontinued operations, but excludes revenue from Crest.

20 REALTY INCOME 2007 Annual Report

Our portfolio of properties is well diversified and provides

us with reliable revenue that allows us to pay the consistent

monthly dividends we all depend upon.

A reconciliation of net income available to

other asset classes. At the same time, we have

common stockholders to FFO available to common

seen historically low default rates on mortgages,

stockholders, is included in Management’s

bonds, consumer loans, and virtually all other

Discussion and Analysis of Financial Condition

types of credit. It has been our experience that all

and Results of Operations on page 66.

“good runs” eventually end, asset values get a bit

Net income available to common stockholders,

overdone and, at some point, things slow down.

as of December 31, 2007, was $116.2 million as

We wouldn’t be surprised if 2008 is a year that, at

compared to $99.4 million in 2006. On a diluted

best, we all move towards a more normal operating

per common share basis, net income was $1.16 per

environment, and, at worst, we face more

share in 2007 as compared to $1.11 per share in

challenging conditions throughout the economy.

2006. The calculation to determine net income for

We believe we are prepared for such an

a real estate company includes gains from property

environment and should be able to make progress

sales and impairments, which vary from year to

in our operations in 2008. Our portfolio of

year according to the timing of property sales.

properties has long term leases, is well diversified,

This variance can significantly impact net income.

and provides us with the reliable revenue that

Same store rent increases on 1,505 properties

allows us to pay the consistent monthly dividends

under lease for the entire year ended December 31,

we all depend upon. Our balance sheet is extremely

2007, increased 1.4% to $204.2 million from

strong and we have limited debt maturities over

$201.3 million in 2006. To break down the same

the next few years, which should allow us to

store rent increases during 2007, we had 24

weather what could be a potentially challenging

industries with increases in rents, 5 with flat same

financing environment in 2008. At year end, we

store rents and one with declining same store

have substantial cash on hand and no balance on

rents, so a pretty good result in 2007.

our $300 million acquisition credit facility, which

V. L O O K I N G A H E A D — O P P O R T U N I T I E S
A N D C H A L L E N G E S I N 2 0 0 8

that could present themselves in such an

environment. Indeed, we believe 2008 will be a

We believe that many companies (us included)

most interesting year and, once again, a profitable

have had a fairly easy operating environment in

year for the operations of your Company.

should allow us to capitalize on the opportunities

recent years. Interest rates have been historically

low, which has allowed businesses, consumers and

VI. WHAT YOU MIGHT EXPECT FROM US

investors to finance their purchases of assets with

As always, we will work hard to perform in a manner

higher levels of debt. This has led to increased

consistent with our mission. That is, we will strive

values in the stock market, bond market, residential

to, not only pay twelve monthly dividends, but to

real estate, commercial real estate and almost all

regularly increase the amount of the monthly

2007 Annual Report REALTY INCOME 21

dividend. To do that we will continue to work

A F E W L A S T W O R D S

prudently to increase the size of your real estate

We’ve accomplished a great deal during 2007 and

portfolio and strive to manage the properties that

believe we’ve operated your Company in a manner

you own so that they continue to perform well. We

that is consistent with our mission to generate

will also report our results to you so that they are

increasing monthly dividends. We also have

both easy to understand and are communicated

attempted to build a company that will endure

to you in a timely fashion.

over time. There will always be challenges in

We also think it’s important to bear in mind

accomplishing our mission. The ebb and flow of

that share prices go up and down because of a

the economy, gyrations in the financial markets,

great variety of factors over which we have little

and the operations of our tenants can all weigh

control. Investor sentiment towards the market

on our results. However, we continue to believe

in general is a factor, people’s perceptions of the

that our proven business strategy, coupled with

consumer also weigh on the market, and research

a conservative balance sheet, will continue to

analysts are typically paid to provide opinions

provide a firm foundation for generating increasing

about which companies are likely to provide the

monthly income over time.

highest return over various periods of time. All of

As always, we’re grateful to the thousands of

this can impact the movement of share prices,

loyal shareholders, who, like us, have enjoyed

however, not much of it has to do with the fact

years of monthly dividend checks. We look forward

that we’re looking to receive a dividend check in

to reporting the progress of your Monthly Dividend

the mail every month. So our responsibility is to

Company® throughout 2008.

see that we continually build our cash flow so we

can keep paying the monthly dividend and

increase it on a regular basis. Our general goal is

to “dividend” the stock price into submission over

the long term. By that we mean that if we increase

our cash flow, increase the dividend and perform

according to plan, over the long term our share

price should tend to reflect that performance.

As you know, in all of this there are absolutely

no guarantees of success every year and all of us

should be sure to diversify so that no one single

security represents too much of our investment

capital. You’ve seen, hopefully, how important

Sincerely,

diversification is to Realty Income’s lease revenue

stream. It is equally important to an individual

investor. We will continue to attempt to stay

conservative in our approach and operate within

Tom A. Lewis

our level of competency. Hopefully, this means

Chief Executive Officer

that the mistakes we make (and we will make

some) will be small and that we learn something

in the process that helps us in the future.

22 REALTY INCOME 2007 Annual Report

FINANCIAL PERFORMANCE

AND OPERATING RESULTS

2007 Annual Report REALTY INCOME 23

R E A L T Y I N C O M E C O R P O R A T I O N A N D S U B S I D I A R I E S
C O N S O L I D AT E D B A L A N C E S H E E T S
(dollars in thousands, except per share data)

As of December 31,

Assets

Real estate, at cost:

Land

Buildings and improvements

Less accumulated depreciation and amortization

Net real estate held for investment

Real estate held for sale, net

Net real estate

Cash and cash equivalents

Accounts receivable

Goodwill

Other assets, net

Total assets

Liabilities and Stockholders’ Equity

Distributions payable

Accounts payable and accrued expenses

Other liabilities

Line of credit payable

Notes payable

Total liabilities

Commitments and contingencies

2007

2006

$ 1,110,897

2,127,897

3,238,794

(470,695)

2,768,099

56,156

2,824,255

193,101

7,142

17,206

35,648

958,770

1,785,203

2,743,973

(396,854)

2,347,119

137,962

2,485,081

10,573

5,953

17,206

27,695

$ 3,077,352

$ 2,546,508

15,844

38,112

15,304

—

1,470,000

1,539,260

15,096

27,004

8,416

—

920,000

970,516

Stockholders’ equity:

Preferred stock and paid in capital, par value $1.00 per share,

20,000,000 shares authorized, 13,900,000 shares issued

and outstanding in 2007 and 2006

337,790

337,781

Common stock and paid in capital, par value $1.00 per share,

200,000,000 shares authorized, 101,082,717 and 100,746,226

shares issued and outstanding in 2007 and 2006, respectively

Distributions in excess of net income

Total stockholders’ equity

Total liabilities and stockholders’ equity

1,545,037

(344,735)

1,538,092

$ 3,077,352

1,540,365

(302,154)

1,575,992

$ 2,546,508

The accompanying notes to consolidated financial statements are an integral part of these statements.

24 REALTY INCOME 2007 Annual Report

R E A L T Y I N C O M E C O R P O R A T I O N A N D S U B S I D I A R I E S
C O N S O L I D AT E D S TAT E M E N T S O F I N C O M E
(dollars in thousands, except per share data)

Years Ended December 31,

2007

2006

2005

Revenue

Rental

Other

Expenses

Depreciation and amortization

Interest

General and administrative

Property

Income taxes

Loss on extinguishment of debt

Income from continuing operations

Income from discontinued operations:

Real estate acquired for resale by Crest

Real estate held for investment

Net income

Preferred stock cash dividends

Net income available to common stockholders

Amounts available to common stockholders per common share:

Income from continuing operations:

$ 290,159

6,354

296,513

77,192

64,331

22,694

3,521

1,392

—

169,130

127,383

10,703

2,323

13,026

140,409

(24,253)

$ 116,156

Basic

Diluted

Net income, basic and diluted

Weighted average common shares outstanding:

Basic

Diluted

1.03

1.16

100,195,031

100,333,966

The accompanying notes to consolidated financial statements are an integral part of these statements.

$ 237,487

2,042

239,529

59,288

51,363

17,539

3,319

747

1,555

133,811

105,718

1,402

3,661

5,063

110,781

(11,362)

$ 99,419

1.05

1.11

89,766,714

89,917,554

$ 195,099

354

195,453

46,002

40,949

15,421

3,865

813

—

107,050

88,403

2,781

7,935

10,716

99,119

(9,403)

$ 89,716

0.99

0.98

1.12

79,950,255

80,208,593

2007 Annual Report REALTY INCOME 25

R E A L T Y I N C O M E C O R P O R A T I O N A N D S U B S I D I A R I E S
C O N S O L I D AT E D S TAT E M E N T S O F S T O C K H O L D E R S ’ E Q U I T Y
(dollars in thousands)

For the Years 2005, 2006 and 2007

Shares of
Preferred
stock

Shares of
Common
stock

Preferred
stock and
paid in
capital

Common
stock and
paid in
capital

Distributions
in excess of
net income

Total

Balance, December 31, 2004

5,100,000

79,301,630

$ 123,787

$ 1,038,973

$ (249,025) $

913,735

Net income

Distributions paid and payable

Shares issued in stock offerings,

net of offering costs of $4,980

Share-based compensation

—

4,100,000

295,017

—

99,119

(118,984)

92,659

2,668

—

92,676

2,668

Balance, December 31, 2005

5,100,000

83,696,647

123,804

1,134,300

(268,890)

Net income

Distributions paid and payable
Shares issued in stock offerings,

—

net of offering costs of $20,911

— 16,815,000

Shares issued in stock offering,

—

net of offering costs of $6,023

8,800,000

—

213,977

Share-based compensation

—

234,579

—

402,745

—

3,320

989,214

110,781

(144,045)

—

402,745

213,977

3,320

Balance, December 31, 2006

13,900,000 100,746,226

337,781

1,540,365

(302,154)

1,575,992

Net income

Distributions paid and payable

Preferred stock issuance cost

Share-based compensation

—

336,491

—

4,672

140,409

(182,990)

—

4,672

Balance, December 31, 2007

13,900,000 101,082,717

$ 337,790

$ 1,545,037

$ (344,735) $ 1,538,092

The accompanying notes to consolidated financial statements are an integral part of these statements.

26 REALTY INCOME 2007 Annual Report

R E A L T Y I N C O M E C O R P O R A T I O N A N D S U B S I D I A R I E S
C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L O W S
(dollars in thousands)

2007

2006

2005

$ 140,409

$ 110,781

$ 99,119

Years Ended December 31,

Cash Flows from Operating Activities
Net income
Adjustments to net income:

Depreciation and amortization
Income from discontinued operations:
Real estate acquired for resale
Real estate held for investment
Gain on sales of land and improvements
Gain on reinstatement of property carrying value
Amortization of share-based compensation
Provisions for impairment on real estate held for investment

Cash provided by (used in) discontinued operations:

Real estate acquired for resale
Real estate held for investment
Investment in real estate acquired for resale
Intangibles acquired in connection with acquisition of

real estate acquired for resale

Proceeds from sales of real estate acquired for resale
Collection of notes receivable by Crest

Change in assets and liabilities:

Accounts receivable and other assets
Accounts payable, accrued expenses and other liabilities

Net cash provided by operating activities

Cash Flows from Investing Activities
Proceeds from sales of investment properties:

Continuing operations
Discontinued operations

Acquisition of and improvements to investment properties
Restricted escrow funds acquired in connection with

acquisitions of investment properties

Intangibles acquired in connection with acquisitions of

investment properties

Net cash used in investing activities

Cash Flows from Financing Activities
Borrowings from lines of credit
Payments under lines of credit
Proceeds from common stock offerings, net
Proceeds from notes issued, net
Principal payment on notes
Proceeds from preferred stock offerings, net
Cash distributions to common stockholders
Cash dividends to preferred stockholders
Proceeds from other stock issuances

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year

77,192

(10,703)
(2,323)
(1,835)
—
3,857
138

(1,610)
863
(29,886)

—
119,790
651

(49)
21,675

318,169

4,370
7,014
(506,360)

(2,648)

(997)

(498,621)

407,800
(407,800)
—
544,397
—
9
(157,659)
(24,583)
816

362,980

182,528
10,573

59,288

46,002

(1,402)
(3,661)
—
(716)
2,951
—

371
961
(113,166)

—
22,405
1,333

4,418
3,382

86,945

2
9,804
(654,149)

(2,781)
(7,935)
(18)
—
2,167
151

(510)
2,059
(54,110)

(1,780)
22,195
—

(3,292)
8,290

109,557

109
22,191
(417,347)

—

(937)

(645,280)

523,200
(659,900)
402,745
271,883
(110,000)
213,977
(129,667)
(9,403)
369

503,204

(55,131)
65,704

(9,494)

(404,541)

400,300
(287,200)
92,659
270,266
—
—
(108,575)
(9,403)
500

358,547

63,563
2,141

$ 65,704

Cash and cash equivalents, end of year

$ 193,101

$ 10,573

For supplemental disclosures, see note 13.
The accompanying notes to consolidated financial statements are an integral part of these statements.

2007 Annual Report REALTY INCOME 27

R E A L T Y I N C O M E C O R P O R A T I O N A N D S U B S I D I A R I E S
N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
December 31, 2007, 2006 and 2005

1 . O R G A N I Z AT I O N A N D O P E R AT I O N

The following reconciles our net income available to common

Realty Income Corporation (“Realty Income,” the “Company,”

stockholders to taxable income for 2007 (dollars in thousands)

“we” or “our”) is organized as a Maryland corporation. We invest

(unaudited):

in commercial retail real estate and have elected to be taxed as

a real estate investment trust (“REIT”).

Net income available to common stockholders

$ 116,156

At December 31, 2007, we owned 2,270 properties, located

Tax loss on the sale of real estate

in 49 states, containing over 18.5 million leasable square feet,

along with 30 properties owned by our wholly-owned taxable REIT

subsidiary, Crest Net Lease, Inc. (“Crest”). Crest was created to

buy and sell properties, primarily to individual investors who are

less than book gains

Elimination of net revenue and

expenses from Crest

Dividends received from Crest

involved in tax-deferred exchanges under Section 1031 of the

Preferred dividends not deductible for tax

Internal Revenue Code of 1986, as amended (the “Tax Code”).

Depreciation and amortization timing differences

Information with respect to number of properties, square feet,
average initial lease term and weighted average contractual lease

Adjustment for straight-line rent
Adjustment for an increase in prepaid rent

(3,839)

(6,677)

3,300

24,583

22,668

(1,217)
5,608

(164)

rate is unaudited.

2 . S U M M A R Y O F S I G N I F I C A N T
A C C O U N T I N G P O L I C I E S A N D
P R O C E D U R E S

Federal Income Taxes We have elected to be taxed as a REIT

under the Tax Code. We believe we have qualified and continue

to qualify as a REIT. Under the REIT operating structure, we are

permitted to deduct distributions paid to our stockholders and

generally will not be required to pay federal corporate income taxes

on such income. Accordingly, no provision has been made for

federal income taxes in the accompanying consolidated financial

statements, except for federal

income taxes of Crest, which

totaled $2.5 million in 2007, $396,000 in 2006 and $760,000

in 2005 and are included in discontinued operations.

Earnings and profits that determine the taxability of distributions

to stockholders differ from net income reported for financial

reporting purposes due to differences in the estimated useful lives

and methods used to compute depreciation and the carrying value

(basis) on the investments in properties for tax purposes, among

other things.

28 REALTY INCOME 2007 Annual Report

Other adjustments

Estimated taxable net income, before our

dividends paid deduction

$ 160,418

In June 2006, the Financial Accounting Standards Board

(“FASB”) issued Interpretation No. 48, Accounting for Uncertainty

in Income Taxes, an interpretation of FASB Statement No. 109.

Interpretation No. 48 applies to all tax positions accounted for

under Statement No. 109 and clarifies the accounting for uncer-

tainty in income taxes by defining criteria that a tax position on

an individual matter must meet before that position is recognized

in the financial statements. The adoption of Interpretation

No. 48 in January 2007 did not impact our financial position or

results of operations and we do not have any material unrecog-

nized tax benefits or liabilities.

Absent an election to the contrary, if a REIT acquires property

that is or has been owned by a C corporation in a transaction in

which the tax basis of the property in the hands of the REIT is

determined by reference to the tax basis of the property in the

hands of the C corporation, and the REIT recognizes a gain on

the disposition of such property during the 10 year period begin-

ning on the date on which it acquired the property, then the REIT

will be required to pay tax at the highest regular corporate tax

rate on this gain to the extent of the excess of the fair market

value of the property over the REIT’s adjusted basis in the prop-

erty, in each case determined as of the date the REIT acquired

the property. In August 2007, we acquired 100% of the stock

of a C corporation that owned real property. At the time of acqui-

sition, the C corporation became a Qualified REIT Subsidiary,

was deemed to be liquidated for Federal income tax purposes,

and the real property was deemed to be transferred to us with a

carryover tax basis. As of December 31, 2007, we have built-in

gains of $59 million with respect to such property. We do not

Discontinued Operations In accordance with FASB Statement

expect that we will be required to pay income tax on the built-in

No. 144, Accounting for the Impairment or Disposal of Long-Lived

gains on these properties during the ten-year period ending

Assets (“SFAS 144”), Realty Income’s operations from invest-

August 28, 2017. It is our intent, and we have the ability, to

ment properties sold in 2007, 2006 and 2005 are reported as

defer any dispositions of these properties to periods when the

discontinued operations. Their respective results of operations

related gains would not be subject to the built-in gain income tax

have been reclassified to “income from discontinued operations,

or otherwise to defer the recognition of the built-in gain related

real estate held for investment” on our consolidated statements

to these properties. However, our plans could change and it may

of income. We do not depreciate properties that are classified as

be necessary to dispose of one or more of these properties in a

held for sale. No investment properties were classified as held for

taxable transaction before August 28, 2017, in which case we

sale at December 31, 2007.

would be required to pay corporate level tax with respect to the

Crest acquires properties with the intention of reselling them

built-in gains on these properties as described above.

rather than holding them for investment and operating the prop-

erties. Consequently, we classify properties acquired by Crest as

Net Income Per Common Share Basic net income per common

held for sale at the date of acquisition and do not depreciate

share is computed by dividing net income available to common

them. In accordance with SFAS 144, the operations of Crest’s

stockholders by the weighted average number of common shares

properties are classified as “income from discontinued operations,

outstanding during each period. Diluted net income per common

real estate acquired for resale by Crest” on our consolidated

share is computed by dividing net income available to common
stockholders for the period by the weighted average number of

statements of income.

No debt was assumed by buyers of our investment properties

common shares that would have been outstanding assuming the

or repaid as a result of our investment property sales and we do

issuance of common shares for all potentially dilutive common

not allocate interest expense to discontinued operations related

shares outstanding during the reporting period.

to real estate held for investment. We allocate interest expense

The following is a reconciliation of the denominator of the

related to borrowings specifically attributable to Crest’s

basic net income per common share computation to the denom-

properties. The interest expense amounts allocated to the

inator of the diluted net income per common share computation:

Crest properties are included in “income from discontinued

2007

2006

2005

idated statements of income.

operations, real estate acquired for resale by Crest” on our consol-

Weighted average shares

used for the basic net

income per share

The following is a summary of Crest’s “income from discontinued

operations, real estate acquired for resale” on our consolidated

statements of income (dollars in thousands):

computation

100,195,031 89,766,714 79,950,255

Incremental shares

from share-based

compensation

138,935

150,840

258,338

Adjusted weighted

average shares used

for diluted net

income per share

computation

100,333,966 89,917,554 80,208,593

Nonvested shares

from share-based

compensation that

were anti-dilutive

243,631

235,035

305,476

Provisions for impairment

Income taxes

No stock options were anti-dilutive in 2007, 2006 or 2005.

Income from discontinued

Crest’s income from
discontinued operations,
real estate acquired for resale

Gain on sales of

real estate acquired

2007

2006

2005

for resale

$ 12,319

$ 2,219

$ 3,291

Rental revenue

Other revenue

Interest expense

General and

8,165

190

5,065

2,083

(6,201)

(3,708)

(1,139)

administrative expense

(691)

Property expenses

(40)

—

(3,039)

(440)

(67)

(1,188)

(494)

(453)

(60)

—

(943)

operations, real estate

acquired for resale

by Crest

$ 10,703

$ 1,402

$ 2,781

2007 Annual Report REALTY INCOME 29

The following is a summary of Realty Income’s “income from

Other revenue includes non operating interest earned from

discontinued operations, from real estate held for investment” on

investments in money market funds and other notes of $3.6 million

our consolidated statements of income (dollars in thousands):

in 2007, $1.2 million in 2006 and $171,000 in 2005.

Realty Income’s income from
discontinued operations,
real estate held for investment

Gain on sales of

2007

2006

2005

investment properties

$ 1,724

$ 3,036

$ 6,573

Rental revenue

Other revenue

881

Depreciation and amortization (130)

Property expenses

Provisions for impairment

Income from discontinued

operations, real estate

(20)

(134)

1,063

2,296

(320)

(136)

(16)

(662)

(239)

(35)

held for investment

$ 2,323

$ 3,661

$ 7,935

Principles of Consolidation The accompanying consolidated

financial statements include the accounts of Realty Income, Crest

and other entities for which we make operating and financial

decisions (control), after elimination of all material intercompany

balances and transactions. All of Realty Income’s and Crest’s

subsidiaries are wholly-owned. We have no unconsolidated or off-

balance sheet investments in variable interest entities.

Cash Equivalents We consider all short-term, highly liquid investments

that are readily convertible to cash and have an original maturity of

three months or less at the time of purchase to be cash equivalents.

Our cash equivalents are primarily investments in United States

Treasury or government money market funds.

The following is a summary of our total income from discon-

tinued operations (dollars in thousands, except per share data):

Gain on Sales of Properties We recognize gains on sales of properties

in accordance with FASB Statement No. 66, Accounting for Sales

2007

2006

2005

of Real Estate.

Real estate acquired

for resale by Crest

$ 10,703

$ 1,402

$ 2,781

Real estate held

for investment

2,323

3,661

7,935

Income from discontinued

operations

$ 13,026

$ 5,063

$ 10,716

Per common share,

Depreciation and Amortization Land, buildings and improvements

are recorded and stated at cost. Major replacements and better-

ments, which improve or extend the life of the asset, are capitalized

and depreciated over their estimated useful lives, while ordinary

repairs and maintenance are expensed as incurred. Buildings and

improvements that are under redevelopment, or are being developed,

are carried at cost and no depreciation is recorded on these

basic and diluted

0.13

$ 0.06

0.13

assets. Additionally, amounts essential to the development of the

The per share amounts for “income from discontinued

operations” above and the “income from continuing operations”

and “net income” reported on the consolidated statements of

income have each been calculated independently.

property, such as pre-construction, development, construction, interest

and any other costs incurred during the period of development

are capitalized. We cease capitalization when the property is

available for occupancy upon substantial completion of tenant

improvements, but in any event no later than one year from the

completion of major construction activity.

Revenue Recognition and Accounts Receivable All

leases are

accounted for as operating leases. Under this method, lease

Properties are depreciated using the straight-line method over

the estimated useful lives of the assets. The estimated useful

payments that have fixed and determinable rent increases are

lives are as follows:

recognized on a straight-line basis over the lease term. Any rental

revenue contingent upon a tenant’s sales is recognized only after

the tenant exceeds their sales breakpoint. Rental

increases

based upon changes in the consumer price indexes are recog-

nized only after the changes in the indexes have occurred and

are then applied according to the lease agreements.

We recognize an allowance for doubtful accounts relating to

accounts receivable for amounts deemed uncollectible. We con-

Buildings

25 years

Building improvements

4 to 15 years

Tenant improvements and

The shorter of the term of the

lease commissions

related lease or useful life

Acquired in-place

Remaining terms of the

operating leases

respective leases

sider tenant specific issues such as financial stability and ability

Provisions for Impairment We review long-lived assets for impairment

to pay rent when determining collectibility of accounts receivable

whenever events or changes in circumstances indicate that the

and appropriate allowances to record. The allowance for doubtful

carrying amount of an asset may not be recoverable. Generally, a

accounts was $795,000 at December 31, 2007 and $705,000

provision is made for impairment if estimated future operating

at December 31, 2006.

cash flows (undiscounted and without interest charges) plus

estimated disposition proceeds (undiscounted) are less than the

current book value. Impairment loss is measured as the amount

30 REALTY INCOME 2007 Annual Report

by which the current book value of the asset exceeds the fair

Capitalized above-market lease values are amortized as a

value of the asset. If a property is held for sale, it is carried at the

reduction of rental

income over the remaining terms of the

lower of cost or estimated fair value, less estimated cost to sell.

respective leases. Capitalized below-market lease values are

In 2007, we recorded a provision for impairment of $134,000

amortized as an increase to rental income over the remaining

on one retail investment property in the motor vehicle industry.

terms of the respective leases and expected below-market renewal

This provision for impairment is included in “income from dis-

option periods.

continued operations, real estate held for investment” on our

The aggregate value of other acquired intangible assets con-

consolidated statement of income (“Discontinued Operations”).

sists of the value of in-place leases and tenant relationships.

In 2007, we also recorded a provision for impairment of $138,000

These are measured by the excess of the purchase price paid for

on one retail investment property in the consumer electronics

a property, after adjusting for above or below-market lease value,

industry. This provision for impairment is included in property

less the estimated fair value of the property “as if vacant,” deter-

expense on our consolidated statements of income.

mined as set forth above. The value of in-place leases, exclusive

In 2006, we recorded a provision for impairment of $16,000

of the value of above-market and below-market in-place leases,

on one retail investment property in the restaurant industry. In

is amortized to expense over the remaining periods of the respec-

2005, we recorded provisions for impairment of $186,000 on

tive leases. If a lease were to be terminated prior to its stated

four retail properties, of which two have been sold. These prop-

expiration, all unamortized amounts relating to that lease would

erties were classified in the following industries: one in child

be recorded to revenue or expense as appropriate.

care and three in restaurant.

The provisions for impairment recorded on investment proper-

Share-Based Compensation Effective January 1, 2006, we adopted

ties in 2006 and 2005 are included in Discontinued Operations,

FASB Statement No. 123R, Share-Based Payments. Statement

except for $151,000 in 2005 which is included in property

No. 123R requires companies to recognize in the income state-

expense on our consolidated statements of income.

ment the grant-date fair value of stock options and other equity-

In 2006, Crest

recorded provisions for

impairment of

based compensation issued to employees. Effective January 1,

$1.2 million on three retail properties, which were held for resale

2002, we adopted the fair value recognition provisions of FASB

at December 31, 2006. One of the three properties was sold in

Statement No. 123, Accounting for Stock-Based Compensation,

2007. No provision for impairment was recorded by Crest in 2007

and starting January 1, 2002 expensed costs for all stock option

or 2005. Provisions for impairment recorded by Crest are included

awards granted, modified, or settled.

in “income from discontinued operations, real estate acquired for

resale by Crest” on our consolidated statements of income.

Goodwill Goodwill is tested for impairment during the second

quarter of each year as well as when events or circumstances

Acquired In-place Leases In accordance with FASB Statement

occur indicating that our goodwill might be impaired. We did not

No. 141, Business Combinations (“SFAS 141”), the fair value of

record any new goodwill or impairment on our existing goodwill

the real estate acquired with in-place operating leases is allocated

during 2007, 2006 or 2005.

to the acquired tangible assets, consisting of land, building and

improvements, and identified intangible assets and liabilities,

Other Assets Other assets consist of the following (in thousands):

consisting of the value of above-market and below-market leases,

the value of in-place leases and tenant relationships, based in

December 31,

2007

2006

each case on their fair values.

Deferred bond financing costs, net

$ 14,940

$ 10,868

The fair value of the tangible assets of an acquired property

Value of in-place and

(which includes land and buildings/improvements) is determined

above-market leases, net

by valuing the property as if it were vacant, and the “as-if-vacant”

Prepaid expenses

value is then allocated to land and buildings/improvements

Corporate assets, net of accumulated

based on our determination of the relative fair value of these

depreciation and amortization

assets. Our determinations are based on a real estate appraisal

Settlements on treasury lock agreements

for each property, generated by an independent appraisal firm,

Unamortized credit line fees, net

and consider estimates of carrying costs during the expected

Other items

11,211

10,430

3,803

3,271

1,356

759

434

3,145

463

1,629

954

lease-up periods, current market conditions, as well as costs to

execute similar leases. In allocating the fair value to identified

intangibles for above-market or below-market leases, an amount

is recorded based on the present value of the difference between

(i) the contractual amount to be paid pursuant to the in-place

lease and (ii) our estimate of fair market lease rate for the corre-

sponding in-place lease, measured over a period equal to the

remaining term of the lease.

$ 35,648

$ 27,695

2007 Annual Report REALTY INCOME 31

Accounts Payable and Accrued Expenses Accounts payable and

recognize all the assets acquired and liabilities assumed in a

accrued expenses consist of the following (in thousands):

transaction at the acquisition-date fair value with limited excep-

December 31,

2007

2006

and disclosures for certain specific items in a business combina-

Bond interest payable

$ 24,987

$ 12,888

tion. Statement No. 141R becomes effective for us at the begin-

Other items

13,125

14,116

ning of 2009. We are still evaluating the impact of Statement

tions. Statement No. 141R will change the accounting treatment

$ 38,112

$ 27,004

No. 141R on our financial position or results of operations.

In December 2007, the FASB issued Statement No. 160,

Noncontrolling Interest in Consolidated Financial Statements.

Statement No. 160 clarifies that a noncontrolling interest in a

subsidiary is an ownership interest in the consolidated entity that

Other Liabilities. Other liabilities consist of the following (in

thousands):

December 31,

2007

2006

should be reported as equity in the consolidated financial state-

Rent received in advance

$ 10,626

$ 4,878

Security deposits

2,818

2,291

Value of in-place below-market

leases, net

1,860

1,247

$ 15,304

$ 8,416

Sales Taxes We collect and remit sales taxes assessed by different

governmental authorities that are both imposed on and concurrent

with a revenue-producing transaction between us and our tenants.

We report the collection of these taxes on a net basis (excluded

from revenues). The amounts of these taxes are not significant to

our financial position or results of operations.

Use of Estimates The consolidated financial statements were

prepared in conformity with U.S. generally accepted accounting

principles, which requires management to make estimates and

assumptions that affect the reported amounts of assets and lia-

bilities, the disclosure of contingent assets and liabilities at the

date of the financial statements, and the reported amounts of

revenue and expenses during the reporting period. Actual results

could differ from those estimates.

Impact of Recent Accounting Pronouncements In September 2006,

the FASB issued Statement No. 157, Fair Value Measurements.

Statement No. 157 sets out a framework for measuring fair value,

and requires additional disclosures about fair-value measurements.

Statement No. 157 becomes effective for us at the beginning

of 2008. The impact of adopting Statement No. 157 is not

expected to have a material effect on our financial position or

results of operations.

In February 2007, the FASB issued Statement No. 159, The

Fair Value Option for Financial Assets and Financial Liabilities—

including an Amendment of FASB Statement No. 115. Statement

No. 159 permits entities to choose to measure many financial

instruments and certain other items at fair value. We have elected

not to use the fair value measurement provisions of Statement

No. 159.

In December 2007, the FASB issued Statement No. 141R

(revised 2007), Business Combinations. Statement No. 141R

will change the accounting for business combinations. Under

Statement No. 141R, an acquiring entity will be required to

32 REALTY INCOME 2007 Annual Report

ments. This statement also requires consolidated net income to

be reported at amounts that include the amounts attributable

to both the parent and the noncontrolling interest and requires

disclosure, on the face of the consolidated statement of income,

of the amounts of consolidated net income attributable to the parent

and to the noncontrolling interest. In addition, this statement
establishes a single method of accounting for changes in a parent’s

ownership interest in a subsidiary that does not result in deconsol-

idation and requires that a parent recognize a gain or loss in net

income when a subsidiary is deconsolidated. Statement No. 160

is effective for us at the beginning of 2009. This statement

will be applied prospectively, except for the presentation and

disclosure requirements, which will be applied retrospectively

for all periods presented. We currently do not have any minority

or noncontrolling interest in a subsidiary, and we do not expect

Statement No. 160 to have an impact on our consolidated finan-

cial statements; however, transactions between now and the

adoption date of Statement No. 160 could have an impact on our

consolidated financial statements.

Reclassifications Certain of the 2006 and 2005 balances have

been reclassified to conform to the 2007 presentation.

3 . R E TA I L P R O P E R T I E S A C Q U I R E D

We acquire land, buildings and improvements that are used by

retail operators.

A. During 2007, Realty Income and Crest invested $533.7 million,

in aggregate, in 357 new retail properties and properties under

development. These 357 properties are located in 38 states, will

contain over 1.9 million leasable square feet, and are 100%

leased with an average lease term of 19.3 years.

In comparison, during 2006, Realty Income and Crest invested

$769.9 million, in aggregate, in 378 new retail properties and

properties under development. These 378 retail properties are

located in 30 states, contain over 3.8 million leasable square feet,

and are 100% leased with an average lease term of 17.1 years.

B. Of the $533.7 million invested during 2007, Realty Income

invested $503.8 million in 325 new retail properties and

properties under development with an initial weighted average

contractual lease rate of 8.6%. These 325 properties are located

in 38 states, will contain over 1.8 million leasable square feet,

due to an increase in LIBOR since the beginning of 2005. The

and are 100% leased with an average lease term of 19.2 years.

effective borrowing rate at December 31, 2007 was 5.2% and at

The initial weighted average contractual lease rate is computed

December 31, 2006 was 6.0%. Our current credit facility is

by dividing the estimated aggregate base rent for the first year of

subject to various leverage and interest coverage ratio limita-

each lease by the estimated total cost of the properties.

tions. We are and have been in compliance with these covenants.

In comparison, during 2006, Realty Income invested

Our credit facility is unsecured and accordingly, we have not

$656.7 million in 322 new retail properties and properties under

pledged any assets as collateral for this obligation. We regularly

development, with an initial weighted average contractual lease

review our credit facility and may seek to extend, renew or

rate of 8.6%. These 322 properties are located in 30 states, con-

replace our credit facility, to the extent we deem appropriate.

tain over 3.3 million leasable square feet and are 100% leased

with an average lease term of 16.7 years.

5 . N O T E S PAYA B L E

C. During 2007, Crest invested $29.9 million in 32 new

December 31, 2007, sorted by maturity date (dollars in millions):

retail properties. In comparison, during 2006, Crest invested

$113.2 million in 56 retail properties.

8.25% notes, issued in October 1998

Our senior unsecured note obligations consist of the following as of

and due in November 2008

100.0

D. Crest’s property inventory at December 31, 2007 consisted of

8% notes, issued in January 1999

30 properties with a total investment of $56.2 million and at
December 31, 2006 consisted of 60 properties with a total

and due in January 2009

5.375% notes, issued in March 2003

investment of $137.5 million. These amounts are included on our

and due in March 2013

consolidated balance sheets in “real estate held for sale, net.”

5.5% notes, issued in November 2003

and due in November 2015

E. Of the $533.7 million invested in 2007, $14.7 million was

5.95% notes, issued in September 2006

used to acquire five properties with existing leases already in-

and due in September 2016

place with retail tenants. In accordance with SFAS 141, Realty

5.375% notes, issued in September 2005

Income recorded $1.8 million as the intangible value of the

and due in September 2017

in-place leases and $784,000 as the intangible value of below-

6.75% notes, issued in September 2007

market rents. These amounts are recorded to “other assets” and

and due in August 2019

“other liabilities,” respectively, on our consolidated balance

5.875% bonds, issued in March 2005

sheet at December 31, 2007 and are amortized over the life of

and due in March 2035

20.0

100.0

150.0

275.0

175.0

550.0

100.0

$ 1,470.0

the respective leases.

Of the $769.9 million invested in 2006, $6.0 million was

used to acquire one property with an existing lease already in-

place with a retail tenant. In accordance with SFAS 141, Realty

Income recorded $1.6 million as the intangible value of the

in-place lease and $628,000 as the intangible value of below-

market rents. These amounts were recorded to “other assets”

and “other liabilities”, respectively, on our consolidated balance

sheet and are amortized over the life of the respective lease.

4 . C R E D I T FA C I L I T Y

We have a $300 million acquisition credit facility that expires

in October 2008, unless extended as provided for in the credit

facility agreement. We have the right to extend the credit facility

for an additional term of one year (to October 2009). Since

May 2007, our investment grade credit ratings provided for

financing under the credit facility at LIBOR (London Interbank

Offered Rate) plus 60 basis points with a facility commitment

fee of 15 basis points, for all-in drawn pricing of 75 basis points

over LIBOR.

The average borrowing rate on our credit facilities during

2007 was 6.0%, compared to 5.7% in 2006 and 4.3% in 2005

on our previous $250 million credit facility, which expired in

October 2005. The increase in the average borrowing rate is

Interest incurred on all of the notes for 2007 was $67.1 million,

for 2006 was $49.6 million and for 2005 was $39.5 million. In

addition, when our 7.75% senior unsecured notes due 2007

were redeemed in September 2006, we paid a $1.6 million

make-whole payment, which is classified as “loss on extinguish-

ment of debt” on our consolidated statements of income. The

interest rate on each of these notes is fixed.

Our outstanding notes are unsecured and accordingly, we

have not pledged any assets as collateral for these or any other

obligations. Interest on all of the senior note obligations is paid

semiannually, with the exception of the interest on the 8.25%

senior notes issued in October 1998 which is paid monthly.

All of these notes contain various covenants, including: (i) a

limitation on incurrence of any debt which would cause our debt

to total adjusted assets ratio to exceed 60%; (ii) a limitation on

incurrence of any secured debt which would cause our secured

debt to total adjusted assets ratio to exceed 40%; (iii) a limitation

on incurrence of any debt which would cause our debt service

coverage ratio to be less than 1.5 times; and (iv) the maintenance

at all times of total unencumbered assets not less than 150% of

our outstanding unsecured debt. We have been in compliance

with these covenants since each of the notes were issued.

2007 Annual Report REALTY INCOME 33

In September 2007, we issued $550 million in aggregate

The following table summarizes the maturity of our notes

principal amount of 6.75% senior unsecured notes due 2019

payable as of December 31, 2007 (dollars in millions):

(the “2019 Notes”). The price to the investor for the 2019 Notes

was 99.827% of the principal amount for an effective yield of

Year of Maturity(1)

6.772%. The net proceeds of approximately $544.4 million

from this offering were used to fund certain property acquisi-

2008

2009

tions, repay borrowings under our acquisition credit facility and

After 2012

for general corporate purposes. The remaining net proceeds,

Totals

Notes

100.0

20.0

1,350.0

$ 1,470.0

which are included in “cash and cash equivalents” on our 2007

consolidated balance sheet, will be used for general corporate

purposes, which include additional property acquisitions.

In September 2006, we issued $275 million in aggregate

principal amount of 5.95% senior unsecured notes due 2016

(the “2016 Notes”). The price to the investor for the 2016 Notes

was 99.74% of the principal amount for an effective yield of

5.985%. The net proceeds of approximately $271.9 million

from this offering were used for general corporate purposes and to

redeem the outstanding $110 million 7.75% unsecured notes due
May 2007 (the “2007 Notes”), which were issued in May 1997.

In September 2006, we redeemed all of our outstanding

2007 Notes at a redemption price equal to 100% of the principal

amount, plus accrued and unpaid interest of $3.2 million and a

make-whole payment of $1.6 million. We recorded a loss on

extinguishment of debt totaling $1.6 million related to the make-

whole payment associated with the 2007 Notes. For 2006, the

make-whole payment represented approximately $0.017 per share.

In September 2005, we issued $175 million in aggregate

principal amount of 5.375% senior unsecured notes due 2017

(the “2017 Notes”). The price to the investor for the 2017 Notes

was 99.974% of the principal amount for an effective yield

of 5.378%. The net proceeds of approximately $173.2 million

from this offering were used to repay borrowings under our unsecured

acquisition credit facility, to fund new property acquisitions and

for other general corporate purposes.

In March 2005, we issued $100 million in aggregate princi-

pal amount of 5.875% senior unsecured bonds due 2035 (the

“2035 Bonds”). The price to the investor for the 2035 Bonds

was 98.296% of the principal amount for an effective yield of

5.998%. The net proceeds of approximately $97 million from

this offering were used to repay borrowings under our acquisition

credit facility and for other general corporate purposes.

In May 1998, we entered into a treasury interest rate lock

agreement associated with the 8.25% senior notes issued in

October 1998 (the “2008 Notes”). In settlement of the agree-

ment, we made a payment of $8.7 million in 1998. The payment

on the agreement is being amortized over 10 years (the life of the

notes) as a yield adjustment to interest expense. After taking into

effect the results of the treasury lock settlement, the effective

rate to us on the 2008 Notes is 9.12%.

(1) There are no maturities in 2010, 2011 and 2012.

We anticipate paying off the notes due in 2008 and 2009 by

one or more of the following; using cash on hand, utilizing our

credit facility or issuing new securities.

6 . C O M M O N S T O C K O F F E R I N G S

A. In October and November 2006, we issued an aggregate of

6.9 million shares of common stock at a price of $26.40 per

share. The net proceeds of approximately $173.2 million were
used to fund new property acquisitions and for other general

corporate purposes.

B. In September 2006, we issued 4.715 million shares of

common stock at a price of $24.32 per share. The net proceeds

of approximately $109 million from this offering were used to

fund new property acquisitions, repay borrowings under our credit

facility and for other general corporate purposes.

C. In March 2006, we issued 5.2 million shares of common stock

at a price of $24.39 per share. The net proceeds of approximately

$120.5 million were used to fund new property acquisitions and

for other general corporate purposes.

D. In September 2005, we issued 4.1 million shares of common

stock at a price of $23.79 per share. The net proceeds of

$92.7 million were used to fund new property acquisitions and

for other general corporate purposes.

7. P R E F E R R E D S T O C K

A. In December 2006, we issued 8.8 million shares of 6.75%

Monthly Income Class E cumulative redeemable preferred stock.

The net proceeds of $214 million from this issuance were used

to repay borrowings under our credit facility and for other general

corporate purposes. Beginning December 7, 2011, the Class E

preferred shares are redeemable, at our option, for $25 per

share. During 2007, we paid twelve monthly dividends to holders

of our Class E preferred stock totaling $1.725 per share, or

$15.2 million, and at December 31, 2007 a monthly dividend

of $0.140625 per share was payable and was paid in January

2008. In January 2007, we paid the first Class E preferred

dividend of $0.178125, which covered a period of 38 days.

34 REALTY INCOME 2007 Annual Report

B. In 2004, we issued 5.1 million shares of 7.375% Monthly

December 31, 2006, a distribution of $0.1265 per common

Income Class D cumulative redeemable preferred stock. The net

share was payable and was paid in January 2007.

proceeds of $123.8 million from this issuance were used to

redeem a portion of the outstanding Class B and Class C preferred

B. Preferred Stock

stock, repay borrowings outstanding under our acquisition credit

Dividends of $0.1536459 per share are paid monthly in arrears

facility and for other general corporate purposes. Beginning May 27,

on the Class D preferred stock. We declared dividends to holders

2009, the Class D preferred shares are redeemable, at our

of our Class D preferred stock totaling $9.4 million in 2007,

option, for $25 per share. During 2007, 2006 and 2005, we paid

$9.8 million in 2006, and $9.4 million in 2005. The dividends

twelve monthly dividends to holders of our Class D preferred stock

paid per share to our Class D preferred stockholders for 2007,

totaling $1.8437508, or $9.4 million, and at December 31, 2007

2006 and 2005 of $1.84375 were characterized for federal

a monthly dividend of $0.1536459 was payable and was paid in

income tax purposes as ordinary income.

January 2008.

8 . D I S T R I B U T I O N S PA I D A N D PAYA B L E

A. Common Stock

Dividends of $0.140625 per share are paid monthly in

arrears on the Class E preferred stock. We declared dividends to

holders of our Class E preferred stock totaling $14.9 million in

2007 and $1.6 million in 2006. The first Class E dividend was

We pay monthly cash distributions to our common stockholders.

paid in January 2007. The dividends paid per share to our Class

The following is a summary of monthly distributions paid per

E preferred stockholders for 2007 of $1.725 were characterized

common share for the years:

for federal income tax purposes as ordinary income.

Month

January

February

March

April

May

June

July

August

September

October

November

December

Total

2007

2006

2005

9. O P E R AT I N G L E A S E S

$ 0.126500 $ 0.116250 $ 0.110000

A. At December 31, 2007, we owned 2,270 properties in

0.126500

0.116250

0.110000

49 states, excluding 30 properties owned by Crest. Of these

0.126500

0.116250

0.110000

2,270 properties, 2,259, or 99.5%, are single-tenant, retail

0.127125

0.116875

0.110625

properties and the remaining 11 are multi-tenant, distribution

0.127125

0.116875

0.110625

and office properties. At December 31, 2007, 48 properties

0.127125

0.116875

0.110625

were vacant and available for lease or sale.

0.127750

0.117500

0.111250

Substantially all leases are net leases where the tenant

0.127750

0.117500

0.111250

pays property taxes and assessments, maintains the interior

0.135500

0.125250

0.115000

and exterior of the building and leased premises, and carries

0.136125

0.125875

0.115625

insurance coverage for public liability, property damage, fire and

0.136125

0.125875

0.115625

extended coverage.

0.136125

0.125875

0.115625

Rent based on a percentage of a tenants’ gross sales (percent-

$ 1.560250 $ 1.437250 $ 1.346250

The following presents the federal income tax characteriza-

tion of distributions paid or deemed to be paid per common

share for the years (unaudited):

Ordinary income $ 1.3847719 $ 1.2945466 $ 1.210091

2007

2006

2005

Nontaxable

distributions

0.1754781

0.1427034

0.136159

Capital gain

—

Totals

$ 1.5602500 $ 1.4372500 $ 1.346250

At December 31, 2007, a distribution of $0.13675 per

common share was payable and was paid in January 2008. At

age rents) for 2007 was $851,000, for 2006 was $1.1 million

and for 2005 was $1.2 million, including amounts recorded to

discontinued operations.

At December 31, 2007, minimum future annual rents to be

received on the operating leases for the next five years and there-

after are as follows (dollars in thousands):

2008

2009

2010

2011

2012

Thereafter

Total

307,983

295,745

286,809

279,163

269,310

2,668,430

$ 4,107,440

B. Major Tenants—No individual

tenant’s rental

revenue,

including percentage rents, represented more than 10% of our

total revenue for each of the years ended December 31, 2007,

2006 or 2005.

2007 Annual Report REALTY INCOME 35

1 0 . G A I N O N S A L E S O F R E A L E S TAT E
A C Q U I R E D F O R R E S A L E B Y C R E S T

1 3 . S U P P L E M E N TA L D I S C L O S U R E S
O F C A S H F L O W I N F O R M AT I O N

In 2007, Crest sold 62 properties for $123.6 million, which

Interest paid in 2007 was $56.7 million, in 2006 was $52.4 million

resulted in a gain of $12.3 million. For two property sales during

and in 2005 was $36.4 million.

2007, Crest provided the buyers partial financing for a total of

Interest capitalized to properties under development in 2007

$3.8 million, of which $619,000 was paid in full in November

was $993,000, in 2006 was $2.2 million and in 2005 was

2007. In 2006, Crest sold 13 properties for $22.4 million, which

$1.9 million.

resulted in a gain of $2.2 million. In 2005, Crest sold 12 prop-

Income taxes paid by Realty Income and Crest in 2007

erties for $23.5 million, which resulted in a gain of $3.3 million.

were $4.3 million, in 2006 were $775,000 and in 2005 were

In 2005, Crest provided a buyer partial financing of $1.3 million

$1.4 million.

for one property, which was paid in full in February 2006. Crest’s

The following non-cash investing and financing activities are

gains on sales are reported before income taxes and are included

included in the accompanying consolidated financial statements:

in discontinued operations.

1 1 . G A I N O N S A L E S O F I N V E S T M E N T
P R O P E R T I E S , I M P R OV E M E N T S A N D
L A N D B Y R E A LT Y I N C O M E

A. Share-based compensation expense for 2007 was $3.9 million,

for 2006 was $3.0 million and for 2005 was $2.2 million.

B. See “Provisions for Impairment” in note 2 for a discussion of

In 2007, we sold ten investment properties for $7.0 million,

impairments recorded by Realty Income and Crest.

which resulted in a gain of $1.7 million. This gain is included in

discontinued operations. In addition, we sold excess land and

C. In 2007, Crest sold two properties for an aggregate of

improvements from five properties for an aggregate of $4.4 million,

$5.5 million and received notes totaling $3.8 million from the

which resulted in a gain of $1.8 million. This gain from the land

buyers, of which $619,000 was paid in full in November 2007.

and improvements sales is reported in “other revenue” on our

The remaining note is included in “other assets” on our

consolidated statements of income because these improvements

December 31, 2007 consolidated balance sheet.

and excess land were associated with properties that continue to

be owned as part of our core operations.

D. In connection with the acquisition of seven properties during

In 2006, we sold or exchanged 13 investment properties for

2007, we acquired restricted escrow funds totaling $2.6 million.

$10.7 million, which resulted in a gain of $3.0 million that is

During 2007, all of these funds were invested in improvements

included in discontinued operations.

to these properties.

In 2005, we sold 23 investment properties and sold a portion

of the land from two properties for $23.4 million, which resulted

E. In accordance with FASB Statement No. 143, Accounting

in a gain of $6.6 million. This gain is included in discontinued

for Asset Retirement Obligations, we recorded an additional

operations, except for $18,000 that is included in “other revenue”

$239,000 of estimated legal obligations related to asset retire-

on our consolidated statements of income.

ment obligations on two land leases in 2007. In 2005, an asset

1 2 . FA I R VA L U E O F
F I N A N C I A L I N S T R U M E N T S

retirement obligation was originally established for $402,000 to

account for the difference between our obligations to the land-

lord under the two land leases and our subtenant’s obligations to

We believe that the carrying values reflected in the consolidated

us under the subleases.

balance sheets at December 31, 2007 and 2006 reasonably

approximate the fair values for cash and cash equivalents,

F. In 2006, we exchanged one of our properties for a different

accounts receivable, and all liabilities, due to their short-term

property that was leased to the same tenant. As part of this trans-

nature, except for notes payable. In making these assessments,

action, accumulated depreciation was reduced by $67,000 and

we used estimates. The estimated fair value of the notes payable

a gain of $67,000 was recorded. The original cost of and the

at December 31, 2007 is $1.413 billion and at December 31,

value received for the property exchanged was $900,000. This

2006 is $921.9 million, based upon the closing market price

transaction had no impact on land or building and improvements.

per note or indicative price per each note at December 31, 2007

and 2006, respectively.

36 REALTY INCOME 2007 Annual Report

G. In 2006, we received shares of a public company as settle-

K. In 2004, we recorded an impairment of $716,000 on one

ment of a bankruptcy claim associated with a former tenant. We

property to reduce its carrying value to zero. This loss was the

recorded a value of $207,000, which is in “other revenue” on

result of a dispute with the original owner and tenant in their

our consolidated income statement, based on the closing market

bankruptcy proceeding. Our title insurance company failed to

price of these shares on December 31, 2006 and included

timely record the deed on this property upon our original acqui-

them in “other assets” on our consolidated balance sheet at

sition, which resulted in a claim by the bankruptcy trustee that

December 31, 2006. The shares were sold in January 2007.

Realty Income did not have legal title to the property. In the

H. In 2005, Crest sold a property for $2.8 million and issued

title to the property. At that time we reinstated the original

a note of $1.3 million, which was paid in full in 2006 and is

carrying value adjusted for depreciation on our balance sheet

included in “other assets” on our December 31, 2005 consoli-

and recorded other revenue of $716,000. We also reversed

second quarter of 2006, this issue was resolved and we obtained

dated balance sheet.

accrued liabilities and property expenses of $133,000 associated

with this property. As part of the settlement, these costs became

I. Accrued costs on properties under development resulted in an

the responsibility of the title insurance company.

increase in buildings and improvements and accounts payable of

$1.7 million in 2006. In 2005, non-cash additions to properties

1 4 . E M P L OY E E B E N E F I T P L A N

resulted in an increase in buildings of $5.4 million and an

We have a 401(k) plan covering substantially all of our employees.

increase in accounts payable of $5.1 million.

Under our 401(k) plan, employees may elect to make contribu-
tions to the plan up to a maximum of 60% of their compensation,

J. Distributions payable on our balance sheets is comprised of

subject to limits under the IRS Code. We match 50% of our

the following declared distributions (dollars in thousands):

employee’s contributions, up to 3% of the employee’s compensa-

12/31/07

12/31/06

immaterial to our results of operations.

tion. Our aggregate matching contributions each year have been

Common stock distributions

$ 13,823

$ 12,745

Preferred stock dividends

2,021

2,351

2007 Annual Report REALTY INCOME 37

1 5 . C O M M O N S T O C K I N C E N T I V E P L A N

In 2003, our Board of Directors adopted, and stockholders approved, the 2003 Incentive Award Plan of Realty Income Corporation

(the “Stock Plan”) to enable us to attract and retain the services of directors, employees and consultants, considered essential to our

long-term success, by offering them an opportunity to own stock in Realty Income and/or rights that will reflect our growth, develop-

ment and financial success. The Stock Plan was amended and restated by our Board of Directors in February 2006 and in May 2007.

Under the terms of this plan, the aggregate number of shares of our common stock subject to options, stock purchase rights

(SPR), stock appreciation rights (SAR) and other awards will be no more than 3,428,000 shares. The maximum number of shares that

may be subject to options, stock purchase rights, stock appreciation rights and other awards granted under the plan to any individual

in any calendar year may not exceed 1,600,000 shares. This plan has a term of 10 years from the date it was adopted by our Board

of Directors, which was March 12, 2003. To date, we have not issued any SPR or SAR.

The amount of share-based compensation costs charged against income during 2007 were $3.9 million, during 2006 were

$3.0 million and during 2005 were $2.2 million.

No stock options were granted after January 1, 2002 and all outstanding options were fully vested as of December 31, 2006. Stock

options were granted with an exercise price equal to the underlying stock’s fair market value at the date of grant. Stock options expire

ten years from the date they are granted and vested over service periods of one, three, four or five years.

The following table summarizes our stock option activity for the years:

2007

2006

2005

Number of
shares

Weighted
average
exercise price

Outstanding options, beginning of year

106,368

Options exercised

Options forfeited

(61,361)

—

$ 13.06

13.32

—

Number of
shares

135,348

(28,696)

(284)

Weighted
average
exercise price

$ 13.02

12.86

14.7

Number of
shares

176,130

(40,352)

(430)

Weighted
average
exercise price

$ 13.01

12.93

14.70

Outstanding options, end of year

45,007

$ 12.71

106,368

$ 13.06

135,348

$ 13.02

Options exercisable, end of year

45,007

$ 12.71

106,368

$ 13.06

119,924

$ 12.87

At December 31, 2007, the options outstanding and exercisable had exercise prices ranging from $10.63 to $14.70, with a

weighted average price of $12.71, and expiration dates ranging from May 2008 to December 2011 with a weighted average remaining

term of 3.1 years.

The intrinsic value of a stock option is the amount by which the market value of the underlying stock at December 31 of each year

exceeds the exercise price of the option. The market value of the Company’s stock was $27.02, $27.70 and $21.62 at December 31,

2007, 2006 and 2005, respectively. The total intrinsic value of options exercised during the years ended December 31, 2007, 2006

and 2005 was $904,000, $268,000 and $377,000, respectively. The total intrinsic value of options vested during the years ended

December 31, 2006 and 2005 was $143,000 and $67,000, respectively. The aggregate intrinsic value of options outstanding was

$644,000, $1.6 million and $1.2 million at December 31, 2007, 2006 and 2005, respectively. The aggregate intrinsic value of

options exercisable at December 31, 2007, 2006 and 2005 was $644,000, $1.6 million and $1.1 million, respectively.

The following table summarizes our common stock grant activity under our Stock Plan for the years 2007, 2006 and 2005. Our

common stock grants vest over periods ranging from immediately to 10 years.

2007

2006

2005

Number of
shares

868,726

276,631

(149,284)

(1,501)

Weighted
average
price(1)

$ 17.96

27.64

20.94

24.81

Number of
shares

788,722

210,332

(125,879)

(4,449)

Weighted
average
price(1)

$ 17.83

21.72

20.39

21.35

Number of
shares

626,868

306,241

(92,811)

(51,576)

Weighted
average
price(1)

$ 14.98

25.20

16.69

17.31

994,572

$ 19.46

868,726

$ 17.96

788,722

$ 17.83

Outstanding nonvested shares,

beginning of year

Shares granted

Shares vested

Shares forfeited

Outstanding nonvested shares,

end of year

(1) Grant date fair value.

38 REALTY INCOME 2007 Annual Report

During 2007, we issued 276,631 shares of common stock

• For employees age 57 at the grant date, shares vest in

under our Stock Plan. These shares vest over the following service

33.33% increments on each of the first three anniver-

periods: 20,000 vested upon issuance, 4,000 vest over a service

saries of the grant date;

period of one year, 12,000 vest over a service period of three

• For employees age 58 at the grant date, shares vest in

years, 19,000 vest over a service period of five years and

50% increments on each of the first two anniversaries of

221,631 vest over a service period of 10 years.

the grant date;

Our Stock Plan was amended on May 15, 2007. For grants

• For employees age 59 at the grant date, shares are 100%

made on or after May 15, 2007 the vesting schedule for

vested on the first anniversary of the grant date; and

shares granted to non-employee directors was amended to the

• For employees age 60 and above at the grant date, shares

following schedule:

vest immediately on the grant date.

• Shares vest in 33.33% increments on each of the first

three anniversaries of the date the shares of stock are

In addition, after they have been employed for six full months,

granted to directors with less than five years of service at

all non-executive employees receive 200 shares of nonvested

the date of grant;

stock which vests over a five-year period.

• Shares vest in 50% increments on each of the first two

As of December 31, 2007, the remaining unamortized share-

anniversaries of the date the shares of stock are granted

based compensation expense totaled $19.4 million, which is

to directors with six years of service at the date of grant;

being amortized on a straight-line basis over the service period of

• Shares are 100% vested on the first anniversary of the
date the shares of stock are granted to directors with

each applicable award. The amount of share-based compensa-
tion is based on the fair value of the stock at the grant date. We

seven years of service at the date of grant; and

define the grant date as the date the recipient and the Company

• There is immediate vesting as of the date the shares of

have a mutual understanding of the key terms and condition of

stock are granted to directors with eight or more years of

the award and the recipient of the grant begins to benefit from,

service at the date of grant.

or be adversely affected by subsequent changes in the price of

the shares.

On May 15, 2007, our Board of Directors also approved a

The effect of pre-vesting forfeitures on our recorded expense

new vesting schedule for shares granted to employees on or after

has historically been negligible. Any future pre-vesting forfeitures

May 15, 2007, which is as follows:

are also expected to be negligible and we will record the benefit

• For employees age 49 and below at the grant date, shares

related to such forfeitures as they occur. Under the terms of our

vest in 10% increments on each of the first ten anniver-

Stock Plan, we pay non-refundable dividends to the holders of

saries of the grant date;

our nonvested shares. Under Statement No. 123R, the dividends

• For employees age 50 through 55 at the grant date,

paid to holders of these nonvested shares should be charged as

shares vest in 20% increments on each of the first five

compensation expense to the extent that they relate to nonvested

anniversaries of the grant date;

shares that do not or are not expected to vest. Given the negli-

• For employees age 56 at the grant date, shares vest in

gible historical and prospective forfeiture rate determined by us,

25% increments on each of the first four anniversaries of

we did not record any amount to compensation expense related

the grant date;

to dividends paid in 2007, 2006 or 2005, nor do we expect to

record any amounts in future periods.

2007 Annual Report REALTY INCOME 39

1 6 . S E G M E N T I N F O R M AT I O N

Assets, as of December 31:

2007

2006

We evaluate performance and make resource allocation decisions

Segment net real estate:

on an industry by industry basis. For financial reporting purposes,

Automotive parts

42,555

36,026

we have grouped our tenants into 31 industry and activity seg-

Automotive service

ments (including properties owned by Crest that are grouped

Automotive tire services

together). All of the properties are incorporated into one of the

Child care

applicable segments. Because almost all of our leases require

Convenience stores

the tenant to pay operating expenses, revenue is the only com-

Drug stores

ponent of segment profit and loss we measure.

The following tables set forth certain information regarding the

properties owned by us, classified according to the business of the

Health and fitness

Home furnishings

Home improvement

respective tenants as of December 31, 2007 (dollars in thousands):

Motor vehicle dealerships

101,238

212,746

91,219

408,119

100,154

169,109

54,508

59,497

101,886

776,973

57,135

267,423

56,156

104,089

211,760

96,263

334,839

78,347

102,718

56,286

61,301

104,122

540,093

56,291

272,135

137,506

Restaurants

Sporting goods

Theaters

Crest

17 other non-reportable

segments

325,537

293,305

Total segment net real estate

2,824,255

2,485,081

Other intangible assets–

Drug stores

Other intangible assets–Theaters

Other intangible assets–

Automotive tire services

Other intangible assets–

Grocery stores

6,988

2,496

765

962

7,629

2,801

—

Other corporate assets

241,886

50,997

Total assets

$ 3,077,352

$ 2,546,508

For the years ended
December 31,

Segment rental revenue(1):

2007

Revenue

2006

Automotive parts
Automotive service

Automotive tire

services

Child care

Convenience stores

Drug stores

6,347 $

6,066 $

14,849

16,495

21,235

24,323

40,727

7,830

14,501

24,649

38,283

6,986

Health and fitness

14,874

10,212

Home furnishings

Home improvement

7,797

6,116

Motor vehicle dealerships 9,540

7,623

7,127

7,890

2005

6,077
15,083

13,821

24,819

36,711

5,593

7,212

7,552

2,152

4,747

Restaurants

Sporting goods

Theaters

17 non-reportable
segments

60,908

28,191

17,888

7,443

6,829

6,747

26,120

22,906

10,139

42,050

39,729

36,558

Total rental revenue

290,159

237,487

195,099

Other revenue

Total revenue

6,354

2,042

354

$ 296,513 $ 239,529 $ 195,453

(1) Crest’s revenue appears in “income from discontinued operations, real

estate acquired for resale by Crest” and is not included in this table, which
covers revenue but does not include revenue classified as part of income
from discontinued operations.

40 REALTY INCOME 2007 Annual Report

1 7. CO M M I T M E N TS A N D CO N T I N G E N C I ES

In the ordinary course of our business, we are party to various legal actions which we believe are routine in nature and incidental to

the operation of our business. We believe that the outcome of the proceedings will not have a material adverse effect upon our con-

solidated financial position or results of operations.

At December 31, 2007, we have committed $7.9 million under construction contracts. These costs are expected to be paid in the

next 12 months. In addition, we also have contingent payments for tenant improvements and leasing costs of $743,000.

We have certain properties that are subject to ground leases which are accounted for as operating leases. At December 31, 2007,

minimum future rental payments for the next five years and thereafter are as follows (dollars in thousands):

2008

2009

2010

2011

2012
Thereafter

Total

Ground leases paid
by Realty Income(1)

137

69
969

$ 1,418

Ground leases paid
by our tenants(2)

$ 1,844

1,778

1,701

1,668

1,591
16,485

$ 25,067

Total

$ 1,981

1,870

1,783

1,737

1,660
17,454

$ 26,485

(1) Realty Income currently pays the ground lessor directly for the rent under the ground lease. A majority of this rent is reimbursed to Realty Income as additional

rent from our tenant.

(2) Our tenants, who are generally sub-tenants under the ground leases, are responsible for paying the rent under these ground leases. In the event a tenant fails to

pay the ground lease rent, we are primarily responsible.

2007 Annual Report REALTY INCOME 41

R E A L T Y I N C O M E C O R P O R A T I O N A N D S U B S I D I A R I E S
C O N S O L I D AT E D Q U A R T E R LY F I N A N C I A L D ATA
(dollars in thousands, except per share data)

(not covered by Report of Independent Registered Public Accounting Firm)

2007(1)

Total revenue

Depreciation and amortization expense

Interest expense

Other expenses

Income from continuing operations

Income from discontinued operations

Net income

Net income available to

common stockholders

Net income per common share:

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Year(2)

$ 71,198

$ 70,589

$ 74,080

$ 80,646

$ 296,513

18,083

12,420

6,207

34,488

1,835

36,323

18,475

13,029

7,151

31,934

5,002

36,936

19,559

16,163

7,458

30,900

3,073

33,973

21,075

22,719

6,791

30,061

3,115

33,176

77,192

64,331

27,607

127,383

13,026

140,409

30,260

30,873

27,910

27,113

116,156

Basic

Diluted

0.30

0.31

0.28

0.27

1.16

Dividends paid per common share

0.379500

0.381375

0.391000

0.408375

1.56025

2006(1)

Total revenue

$ 55,015

$ 56,366

$ 59,154

$ 68,995

$ 239,529

Depreciation and amortization expense

Interest expense

Other expenses

Income from continuing operations

13,461

13,198

5,335

23,021

Income (loss) from discontinued operations

1,867

24,888

14,740

11,930

5,268

24,428

2,212

26,640

14,581

12,530

6,520

25,523

1,035

26,558

16,505

13,706

6,037

32,747

(51)

32,696

59,288

51,363

23,160

105,718

5,063

110,781

Net income

Net income available to

common stockholders

Net income per common share:

Basic

Diluted

22,537

24,289

24,207

28,386

99,419

0.27

0.28

0.27

0.29

1.11

Dividends paid per common share

0.348750

0.350625

0.360250

0.377625

1.437250

(1) The consolidated quarterly financial data includes revenues and expenses from our continuing and discontinued operations. The results of operations related
to certain properties, that have been classified as held for sale or have been disposed of, have been reclassified to income from discontinued operations.
Therefore, some of the information may not agree to our previously filed 10-Qs.

(2) Amounts for each period are calculated independently. The sum of the quarters may differ from the annual amount.

42 REALTY INCOME 2007 Annual Report

R E A L T Y I N C O M E C O R P O R A T I O N A N D S U B S I D I A R I E S
R E P O R T O F I N D E P E N D E N T R E G I S T E R E D
P U B L I C A C C O U N T I N G F I R M

The Board of Directors and Stockholders
Realty Income Corporation:
We have audited the accompanying consolidated balance sheets

statements for external purposes in accordance with generally

of Realty Income Corporation and subsidiaries as of December 31,

accepted accounting principles. A company’s internal control

2007 and 2006, and the related consolidated statements of

over financial reporting includes those policies and procedures

income, stockholders’ equity, and cash flows for each of the years

that (1) pertain to the maintenance of records that, in reason-

in the three-year period ended December 31, 2007. We also

able detail, accurately and fairly reflect the transactions and dis-

have audited Realty Income Corporation’s internal control over

positions of the assets of the company; (2) provide reasonable

financial reporting as of December 31, 2007, based on criteria

assurance that transactions are recorded as necessary to permit

established in Internal Control—Integrated Framework issued

preparation of financial statements in accordance with generally

by the Committee of Sponsoring Organizations of the Treadway

accepted accounting principles, and that receipts and expendi-

Commission (COSO). Realty Income Corporation’s management

tures of the company are being made only in accordance with

is responsible for these consolidated financial statements, for
maintaining effective internal control over financial reporting,

authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely

and for their assessment of the effectiveness of internal control

detection of unauthorized acquisition, use, or disposition of the

over financial reporting. Our responsibility is to express an opinion

company’s assets that could have a material effect on the finan-

on these consolidated financial statements and on Realty Income

cial statements.

Corporation’s internal control over financial reporting based on

Because of its inherent limitations,

internal control over

our audits.

financial reporting may not prevent or detect misstatements.

We conducted our audits in accordance with the standards of

Also, projections of any evaluation of effectiveness to future peri-

the Public Company Accounting Oversight Board (United States).

ods are subject to the risk that controls may become inadequate

Those standards require that we plan and perform the audits to

because of changes in conditions, or that the degree of compli-

obtain reasonable assurance about whether the financial state-

ance with the policies or procedures may deteriorate.

ments are free of material misstatement and whether effective

In our opinion, the consolidated financial statements referred

internal control over financial reporting was maintained in all

to above present fairly, in all material respects, the financial

material respects. Our audits of the consolidated financial state-

position of Realty Income Corporation and subsidiaries as of

ments included examining, on a test basis, evidence supporting

December 31, 2007 and 2006, and the results of their operations

the amounts and disclosures in the financial statements, assessing

and their cash flows for each of the years in the three-year period

the accounting principles used and significant estimates made

ended December 31, 2007, in conformity with U.S. generally

by management, and evaluating the overall financial statement

accepted accounting principles. Also in our opinion, Realty Income

presentation. Our audit of internal control over financial report-

Corporation maintained, in all material respects, effective internal

ing included obtaining an understanding of internal control over

control over financial reporting as of December 31, 2007, based

financial reporting, assessing the risk that a material weakness

on criteria established in Internal Control—Integrated Framework

exists, and testing and evaluating the design and operating

issued by the Committee of Sponsoring Organizations of the

effectiveness of internal control based on the assessed risk. Our

Treadway Commission.

audits also included performing such other procedures as we

considered necessary in the circumstances. We believe that our

audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a

process designed to provide reasonable assurance regarding the

reliability of financial reporting and the preparation of financial

San Diego, California

February 12, 2008

2007 Annual Report REALTY INCOME 43

R E A L T Y I N C O M E C O R P O R A T I O N A N D S U B S I D I A R I E S
B U S I N E S S D E S C R I P T I O N

T H E C O M PA N Y

In addition, at December 31, 2007, our wholly-owned

Realty Income Corporation, The Monthly Dividend Company®, is

taxable REIT subsidiary, Crest Net Lease, Inc. (“Crest”), had

a Maryland corporation organized to operate as an equity real

invested $56.2 million in 30 properties, which are classified as

estate investment trust, or REIT. Our primary business objective

held for sale. Crest was created to buy and sell properties, primarily

is to generate dependable monthly cash distributions from a

to individual investors who are involved in tax-deferred exchanges

consistent and predictable level of funds from operations, or FFO

under Section 1031 of the Internal Revenue Code of 1986, as

per share. Our monthly distributions are supported by the cash

amended (the “Tax Code”).

flow from our portfolio of retail properties leased to regional and

We typically acquire retail store properties under long-term

national retail chains. We have in-house acquisition, leasing, legal,

leases with retail chain store operators. These transactions

retail and real estate research, portfolio management and capital

generally provide capital to owners of retail real estate and retail

markets expertise. Over the past 38 years, Realty Income and its

chains for expansion or other corporate purposes. Our acquisition

predecessors have been acquiring and owning freestanding retail

and investment activities are concentrated in well-defined target

properties that generate rental revenue under long-term lease
agreements (primarily 15 to 20 years).

markets and generally focus on retail chains providing goods and
services that satisfy basic consumer needs.

In addition, we seek to increase distributions to common

Our net-lease agreements generally:

stockholders and FFO per share through both active portfolio

• Are for initial terms of 15 to 20 years;

management and the acquisition of additional properties. Our

• Require the tenant to pay minimum monthly rent and property

portfolio management focus includes:

operating expenses (taxes, insurance and maintenance);

• Contractual rent increases on existing leases;

and

• Rent increases at the termination of existing leases, when

• Provide for future rent increases based on increases in the

market conditions permit; and

consumer price index, fixed increases, or to a lesser

• The active management of our property portfolio, including

degree, additional rent calculated as a percentage of the

re-leasing vacant properties and selectively selling properties.

tenants’ gross sales above a specified level.

In acquiring additional properties, we adhere to a focused

We commenced operations as a REIT on August 15, 1994

strategy of primarily acquiring properties that are:

through the merger of 25 public and private real estate limited

• Freestanding, single-tenant, retail locations;

partnerships with and into us. Each of the partnerships was

• Leased to regional and national retail chains; and

formed between 1970 and 1989 for the purpose of acquiring

• Leased under long-term, net-lease agreements.

and managing long-term, net-leased properties.

The eight senior officers of Realty Income owned 1.3% of our

At December 31, 2007, we owned a diversified portfolio:

outstanding common stock with a market value of $33.2 million at

• Of 2,270 retail properties;

February 1, 2008. The directors and eight senior officers of Realty

• With an occupancy rate of 97.9%, or 2,222 properties

Income, as a group, owned 2.5% of our outstanding common

occupied of the 2,270 properties in the portfolio;

stock with a market value of $64.6 million at February 1, 2008.

• With only 48 properties available for lease;

Our common stock is listed on The New York Stock Exchange

• Leased to 115 different retail chains doing business in 30

(“NYSE”) under the ticker symbol “O” with a cusip number of

separate retail industries;

• Located in 49 states;

756109-104. Our central index key number is 726728.

Our Class D cumulative redeemable preferred stock is listed

• With over 18.5 million square feet of leasable space; and

on the NYSE under the ticker symbol “OprD” with a cusip

• With an average leasable retail space per property of

number of 756109-609.

approximately 8,150 square feet.

Our Class E cumulative redeemable preferred stock is listed

on the NYSE under the ticker symbol “OprE” with a cusip

Of the 2,270 properties in the portfolio, 2,259, or 99.5%, are

number of 756109-708.

single-tenant, retail properties and the remaining 11 are multi-

Realty Income’s 8.25% Monthly Income Senior Notes due

tenant, distribution and office properties. At December 31, 2007,

2008 are listed on the NYSE under the ticker symbol “OUI” with

2,212 of the 2,259 single-tenant properties were leased with

a cusip number of 756109-203.

a weighted average remaining lease term (excluding extension

In February 2008, we had 75 permanent employees as

options) of approximately 13.0 years.

compared to 70 permanent employees in February 2007.

44 REALTY INCOME 2007 Annual Report

We maintain an Internet website at www.realtyincome.com.

goods. Also included in the $533.7 million is $29.9 million

On our website we make available, free of charge, copies of our

invested by Crest in 32 new restaurant properties.

annual report on Form 10-K, quarterly reports on Form 10-Q,

The initial weighted average contractual lease rate is computed

current reports on Form 8-K, and amendments to those reports,

as estimated contractual net operating income (in a net-leased

as soon as reasonably practicable after we electronically file

property this is equal to the base rent or, in the case of prop-

these reports with the SEC. None of the information on our web-

erties under development, the estimated base rent under the

site is deemed to be part of this report.

lease) for the first year of each lease, divided by the estimated

R E C E N T D E V E L O P M E N T S
Increases in Monthly Distributions to Common Stockholders
We continue our 38-year policy of paying distributions monthly.

Monthly distributions per share were increased in April 2007 by

total costs. Since it is possible that a tenant could default on

the payment of contractual rent, we cannot assure you that the

actual return on the funds invested will remain at the percent-

ages listed above.

$0.000625 to $0.127125, in July 2007 by $0.000625 to

$0.12775, in September 2007 by $0.00775 to $0.1355, in

Investments in Existing Properties
In 2007, we capitalized costs of $1.9 million on existing properties

October 2007 by $0.000625 to $0.136125 and in January 2008

in our portfolio, consisting of $614,000 for re-leasing costs and

by $0.000625 to $0.13675. The increase in January 2008 was

$1.3 million for building improvements.

our 41st consecutive quarterly increase and the 47th increase in

the amount of our dividend since our listing on the New York Stock
Exchange, or NYSE, in 1994. In 2007, we paid the following

Issuance of 12-Year Senior Unsecured Notes
In September 2007, we issued $550 million in aggregate principal

monthly cash distributions per share: three in the amount of

amount of 6.75% senior unsecured notes due 2019 (the

$0.1265, three in the amount of $0.127125, two in the amount

“2019 Notes”). The price to the investor for the 2019 Notes

of $0.12775, one in the amount of $0.1355 and three in the

was 99.827% of the principal amount for an effective yield of

amount of $0.136125, totaling $1.56025. In December 2007

6.772%. The net proceeds of approximately $544.4 million

and January 2008, we declared distributions of $0.13675 per

from this offering were used to fund certain acquisitions,

share, which were paid in January 2008 and will be paid in

repay borrowings under our acquisition credit facility and for

February 2008, respectively.

general corporate purposes. The remaining net proceeds, which

The monthly distribution of $0.13675 per share represents

are included in “cash and cash equivalents” on our 2007

a current annualized distribution of $1.641 per share, and an

consolidated balance sheet, will be used for general corporate

annualized distribution yield of approximately 6.5% based on

purposes, which include additional property acquisitions. Interest

the last reported sale price of our common stock on the NYSE of

on the 2019 Notes is paid semiannually.

$25.15 on February 1, 2008. Although we expect to continue

our policy of paying monthly distributions, we cannot guarantee

that we will maintain our current level of distributions, that we

Credit Ratings Upgrade
In April 2007, Moody’s Investors Service upgraded our senior

will continue our pattern of increasing distributions per share, or

unsecured debt rating to Baa1 from Baa2 and our preferred

what our actual distribution yield will be in any future period.

stock rating to Baa2 from Baa3, with a stable outlook.

Acquisitions During 2007
During 2007, Realty Income and Crest invested $533.7 million,

Standard & Poor’s MidCap 400 Index
In November 2007, we were added to the Standard & Poor’s

in aggregate, in 357 new retail properties and properties under

(“S&P”) MidCap 400 Index. The S&P MidCap 400 stock index

development. These 357 new properties are located in 38 states,

covers companies with market capitalizations in the range of

will contain over 1.9 million leasable square feet, and are 100%

$1.5 billion to $5.5 billion and is part of a series of S&P indices.

leased with an average lease term of 19.3 years. As described

below, Realty Income acquired 325 properties and Crest acquired

32 properties.

Net Income Available to Common Stockholders
Net income available to common stockholders was $116.2 million

Included in the $533.7 million is $503.8 million invested by

in 2007 versus $99.4 million in 2006, an increase of $16.8 million.

Realty Income in 325 new properties and properties under devel-

On a diluted per common share basis, net income was $1.16 per

opment, with an initial weighted average contractual lease rate

share in 2007 as compared to $1.11 per share in 2006.

of 8.6%. These 325 properties are located in 38 states, will

The calculation to determine net income available to common

contain over 1.8 million leasable square feet and are 100% leased

stockholders includes the gain from the sales of properties. The

with an average lease term of 19.2 years. The 325 new properties

amount of gains varies from period to period and can significantly

acquired by Realty Income are net-leased to 16 different retail

impact net income available to common stockholders.

chains in the following nine industries: automotive service, auto-

The gain recognized from the sales of investment properties

motive tire service, convenience store, distribution and office,

during 2007 was $3.6 million, as compared to $3.0 million

drug store, grocery, health and fitness, restaurant, and sporting

for 2006.

2007 Annual Report REALTY INCOME 45

Funds from Operations (FFO)
In 2007, our FFO increased by $33.9 million, or 21.8%, to

Future distributions will be at the discretion of our Board of

Directors and will depend on, among other things, our results of

$189.7 million versus $155.8 million in 2006. On a diluted per

operations, FFO, cash flow from operations, financial condition

common share basis, FFO was $1.89 in 2007 compared to

and capital requirements, the annual distribution requirements

$1.73 for 2006, an increase of $0.16, or 9.2%.

under the REIT provisions of the Tax Code, our debt service

See our discussion of FFO in the section entitled

requirements and any other factors the Board of Directors may

“Management’s Discussion and Analysis of Financial Condition

deem relevant. In addition, our credit facility contains financial

and Results of Operations” in this annual report, which includes

covenants that could limit the amount of distributions payable by

a reconciliation of net income available to common stockholders

us in the event of a deterioration in our results of operations or

to FFO.

Crest’s Property Sales
During 2007, Crest sold 62 properties from its inventory for

financial condition, and which prohibit the payment of distribu-

tions on the common or preferred stock in the event that we fail

to pay when due (subject to any applicable grace period) any

principal or interest on borrowings under our credit facility.

an aggregate of $123.6 million, which resulted in a gain of

Distributions of our current and accumulated earnings and

$12.3 million. Crest’s gains are included in “income from

profits for federal income tax purposes generally will be taxable

discontinued operations, real estate acquired for resale by Crest”

to stockholders as ordinary income, except to the extent that we

on our consolidated statements of income.

Crest’s Property Inventory
Crest’s property inventory at December 31, 2007 totaled

recognize capital gains and declare a capital gains dividend or that

such amounts constitute “qualified dividend income” subject to
a reduced tax rate. The maximum tax rate of non-corporate tax-

payers for “qualified dividend income” has generally been reduced

$56.2 million. These properties are included in “real estate held

to 15% (until it “sunsets” or reverts to the provisions of prior

for sale, net” on our consolidated balance sheets.

law, which under current law will occur with respect to taxable

D I S T R I B U T I O N P O L I CY

years beginning after December 31, 2010). In general, dividends

payable by REITs are not eligible for the reduced tax rate on cor-

Distributions are paid monthly to our common, Class D preferred

porate dividends, except to the extent the REIT’s dividends are

and Class E preferred stockholders if, and when, declared by our

attributable to dividends received from taxable corporations

Board of Directors.

(such as our taxable REIT subsidiary, Crest), to income that was

In order to maintain our tax status as a REIT for federal

subject to tax at the corporate or REIT level (for example, if we

income tax purposes, we generally are required to distribute

distribute taxable income that we retained and paid tax on in the

dividends to our stockholders aggregating annually at least 90%

prior taxable year) or, as discussed above, dividends properly

of our REIT taxable income (determined without regard to the

designated by us as “capital gain dividends.” Distributions in

dividends paid deduction and excluding net capital gains), and

excess of earnings and profits generally will be treated as a

we are subject to income tax to the extent we distribute less

non-taxable reduction in the stockholders’ basis in their stock.

than 100% of our REIT taxable income (including net capital

Distributions above that basis, generally, will be taxable as a

gains). In 2007, our cash distributions totaled $182.2 million,

capital gain to stockholders who hold their shares as a capital

or approximately 113.6% of our estimated REIT taxable income

asset. Approximately 11.2% of the distributions to our common

of $160.4 million. Our estimated REIT taxable income reflects

stockholders, made or deemed to have been made in 2007, were

non-cash deductions for depreciation and amortization. We

classified as a return of capital for federal income tax purposes.

intend to continue to make distributions to our stockholders

We are unable to predict the portion of future distributions that

that are sufficient to meet this distribution requirement and

may be classified as a return of capital.

that will reduce our exposure to income taxes. Our 2007 cash

distributions to common stockholders totaled $157.7 million,

representing 83.1% of our funds from operations available to

common stockholders of $189.7 million.

B U S I N ESS P H I LOS O P H Y A N D ST RAT EGY
Investment Philosophy
We believe that owning an actively managed, diversified portfolio

The Class D preferred stockholders receive cumulative distri-

of retail properties under long-term, net leases produces

butions at a rate of 7.375% per annum on the $25 per share

consistent and predictable income. Net leases typically require

liquidation preference (equivalent to $1.84375 per annum per

the tenant to be responsible for minimum monthly rent and prop-

share). The Class E preferred stockholders receive cumulative

erty operating expenses including property taxes, insurance and

distributions at a rate of 6.75% per annum on the $25 per

maintenance. In addition, tenants are typically responsible for

share liquidation preference (equivalent to $1.6875 per annum

future rent increases based on increases in the consumer price

per share).

index, fixed increases or, to a lesser degree, additional rent

calculated as a percentage of the tenants’ gross sales above a

specified level. We believe that a portfolio of properties under

long-term leases, coupled with the tenant’s responsibility for

46 REALTY INCOME 2007 Annual Report

property expenses, generally produces a more predictable income

While our investment strategy focuses primarily on acquiring

stream than many other types of real estate portfolios, while

properties leased to middle and upper market retail chains, we

continuing to offer the potential for growth in rental income.

also selectively seek investment opportunities with venture

market retail chains. Periodically, venture market opportunities

Investment Strategy
In identifying new properties for acquisition, our focus is generally

arise where we feel that the real estate used by the tenant is

high quality and can be purchased at favorable prices. To meet

on providing capital to retail chain owners and operators by

our stringent

investment standards, however, venture retail

acquiring, then leasing back, retail store locations. We categorize

companies must have a well-defined retailing concept and strong

retail tenants as: 1) venture market, 2) middle market, and

financial prospects. These opportunities are examined on a case

3) upper market. Venture companies typically offer a new retail

by case basis and we are highly selective in making investments

concept in one geographic region of the country and operate

in this area.

between five and 50 retail locations. Middle market retail chains

Historically, our investment focus has been on retail indus-

typically have 50 to 500 retail locations, operations in more than

tries that have a service component because we believe the lease

one geographic region, have been successful through one or more

revenue from these types of businesses is more stable. Because

economic cycles, and have a proven, replicable concept. The

of this investment focus, for the quarter ended December 31,

upper market retail chains typically consist of companies with

2007, approximately 84.5% of our rental revenue was derived

500 or more locations, operating nationally, in a proven, mature

from retailers with a service component

in their business.

retail concept. Upper market retail chains generally have strong
operating histories and access to several sources of capital.

Furthermore, we believe these service-oriented businesses would
be difficult to duplicate over the Internet and that our properties

Realty Income primarily focuses on acquiring properties

continue to perform well relative to competition from Internet

leased to middle market retail chains that we believe are attrac-

businesses.

tive for investment because:

• They generally have overcome many of the operational and

managerial obstacles that can adversely affect venture

retailers;

Credit Strategy
We generally provide sale-leaseback financing to less than

investment grade retail chains. We typically acquire and lease

• They typically require capital to fund expansion but have

back properties to regional and national retail chains and believe

more limited financing options than upper market retail

that within this market we can achieve an attractive risk-adjusted

chains;

return on the financing we provide to retailers. Since 1970, our

• They generally have provided us with attractive risk-adjusted

overall weighted average occupancy rate at the end of each year

returns over time since their financial strength has, in many

has been 98.5%, and the occupancy rate at the end of each year

cases, tended to improve as their businesses have matured;

has never been below 97.5%.

• Their relatively large size allows them to spread corporate

We believe the principal financial obligations of most retail-

expenses across a greater number of stores; and

ers typically include their bank and other debt, payment obliga-

• Middle market retailers typically have the critical mass to

tions to suppliers and real estate lease obligations. Because we

survive if a number of locations are closed due to under-

typically own the land and building in which a tenant conducts

performance.

its retail business, we believe the risk of default on a retailers’

lease obligations is less than the retailers’ unsecured general

We also focus on, and have selectively made investments in,

obligations. It has been our experience that since retailers must

properties of upper market retail chains. We believe upper market

retain their profitable retail locations in order to survive, in the

retail chains can be attractive for investment because:

event of reorganization they are less likely to reject a lease for a

• They typically are of a higher credit quality;

profitable location because this would terminate their right to

• They usually are larger public and private retailers with

use the property. Thus, as the property owner, we believe we will

more commonly recognized brand names;

fare better than unsecured creditors of the same retailer in the

• They utilize a larger building ranging in size from 10,000

event of reorganization. If a property is rejected by the tenant

to 50,000 square feet; and

during reorganization, we own the property and can either lease

• They are able to grow because access to capital facilitates

it to a new tenant or sell the property. In addition, we believe that

larger transaction sizes.

the risk of default on the real estate leases can be further miti-

gated by monitoring the performance of the retailers’ individual

unit locations and considering whether to sell locations that are

weaker performers.

2007 Annual Report REALTY INCOME 47

In order to qualify for inclusion in our portfolio, new property

significant portfolio management activities. This monitoring

acquisitions must meet stringent investment and credit require-

typically includes regular review and analysis of:

ments. The properties must generate attractive current yields

• The performance of various retail industries; and

and the tenant must meet our credit profile. We have established

• The operation, management, business planning and

a three-part analysis that examines each potential investment

financial condition of the tenants.

based on:

•

Industry, company, market conditions and credit profile;

We have an active portfolio management program that

• Store profitability, if profitability data is available; and

incorporates the sale of assets when we believe the reinvestment

• Overall

real estate characteristics,

including property

of the sales proceeds will generate higher returns, enhance the

value and comparative rental rates.

credit quality of our real estate portfolio, or extend our average

remaining lease term. At December 31, 2007, we classified real

The typical profile of companies whose properties have been

estate owned by Crest with a carrying amount of $56.2 million

approved for acquisition are those with 50 or more retail locations.

as held for sale on our balance sheet. Additionally, we anticipate

Generally the properties:

selling investment properties in our portfolio that have not yet

• Are located in highly visible areas,

been specifically identified, from which we anticipate receiving

• Have easy access to major thoroughfares; and

between $10 million and $35 million in proceeds during the

• Have attractive demographics.

Acquisition Strategy
We seek to invest in industries in which several, well-organized,

next 12 months. We intend to invest these proceeds into new

property acquisitions. However, we cannot guarantee that we will
sell properties during the next 12 months.

regional and national retail chains are capturing market share

through service, quality control, economies of scale, advertising

Universal Shelf Registration
In April 2006, we filed a shelf registration statement with the

and the selection of prime retail locations. We execute our acqui-

SEC, which is effective for a term of three years. In accordance

sition strategy by acting as a source of capital to regional and

with the SEC rules, the amount of securities to be issued pur-

national retail chain store owners and operators, doing business

suant to this shelf registration statement was not specified when

in a variety of industries, by acquiring and leasing back retail

it was filed. The securities covered by this registration statement

store locations. We undertake thorough research and analysis to

include common stock, preferred stock, debt securities, or any

identify appropriate industries, tenants and property locations for

combination of such securities. We may periodically offer one or

investment. Our research expertise is instrumental to uncovering

more of these securities in amounts, prices and on terms to be

net-lease opportunities in markets where our real estate financing

announced when and if the securities are offered. The specifics

program adds value. In selecting real estate for potential investment,

of any future offerings, along with the use of proceeds of any

we generally seek to acquire properties that have the following

securities offered, will be described in detail in a prospectus

characteristics:

supplement, or other offering materials, at the time of any

• Freestanding, commercially-zoned property with a single

offering. There is no specific limit to the dollar amount of new

tenant;

securities that can be issued under this new shelf registration

• Properties that are important retail locations for regional

before it expires in April 2009, and our common stock, preferred

and national retail chains;

stock and notes issued after April 2006 were all issued pursuant

• Properties that we deem to be profitable for the retailers;

to this universal shelf registration statement.

• 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

Conservative Capital Structure
We believe that our stockholders are best served by a conservative

• Properties that can be purchased with the simultaneous

capital structure. Therefore, we seek to maintain a conservative

execution or assumption of long-term, net-lease agree-

debt level on our balance sheet and solid interest and fixed

ments, offering both current income and the potential for

charge coverage ratios. At February 1, 2008, our total outstanding

credit facility borrowings and outstanding notes were $1.47 billion,

or approximately 33.7% of our total market capitalization of

$4.36 billion.

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 any changes that could affect the performance of the

industries, tenants and locations in which we have invested. We

also regularly analyze our portfolio with a view toward optimizing

its returns and enhancing its credit quality. Our executives review

industry research, tenant research, property due diligence and

48 REALTY INCOME 2007 Annual Report

We define our total market capitalization at February 1, 2008

convertible preferred stock, debt securities or convertible debt

as the sum of:

securities. We cannot assure you, however, that we will be able to

• Shares of our common stock outstanding of 101,286,217

obtain any such refinancing or that market conditions prevailing

multiplied by the last reported sales price of our common

at the time of refinancing will enable us to issue equity or debt

stock on the NYSE of $25.15 per share on February 1,

securities upon acceptable terms.

2008, or $2.55 billion;

• Aggregate liquidation value (par value of $25 per share)

of the Class D preferred stock of $127.5 million;

Credit Agency Ratings
We are currently assigned investment grade corporate credit ratings,

• Aggregate liquidation value (par value of $25 per share)

on our senior unsecured notes. Fitch Ratings has assigned a

of the Class E preferred stock of $220 million; and

rating of BBB+, Moody’s Investors Service has assigned a rating

• Outstanding notes of $1.47 billion.

of Baa1 and Standard & Poor’s Ratings Group has assigned a

rating of BBB to our senior notes. The rating by Standard & Poor’s

Historically, we have met our long-term capital needs through

has a “positive” outlook and the ratings by Fitch and Moody’s

the issuance of common stock, preferred stock and long-term

have “stable” outlooks.

unsecured notes and bonds. Over the long term, we believe that

We have also been assigned investment grade credit ratings

common stock should be the majority of our capital structure,

on our preferred stock. Fitch Ratings has assigned a rating of

however, we may issue additional preferred stock or debt securities

BBB, Moody’s has assigned a rating of Baa2 and Standard &

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

Poor’s has assigned a rating of BBB- to our preferred stock. The
rating by Standard & Poor’s has a “positive” outlook and the

any offering to be accretively invested into additional properties.

ratings by Fitch and Moody’s have “stable” outlooks.

In addition, we may issue common stock to permanently finance

The credit ratings assigned to us could change based upon,

properties that were financed by our credit facility or debt securities.

among other things, our results of operations and financial con-

However, we cannot assure you that we will have access to the

dition. These ratings are subject to ongoing evaluation by credit

capital markets at terms that are acceptable to us.

rating agencies and we cannot assure you that any such rating

$300 Million Acquisition Credit Facility
We have a $300 million revolving, unsecured credit facility that

will not be changed or withdrawn by a rating agency in the future

if, in its judgment, circumstances warrant. Moreover, a rating is

not a recommendation to buy, sell or hold our debt securities,

expires in October 2008. In April 2007, Moody’s Investors

preferred stock or common stock.

Service upgraded our credit ratings. Effective May 2007, our

investment grade credit ratings provided for financing under the

credit facility at the London Interbank Offered Rate, commonly

referred to as LIBOR, plus 60 basis points with a facility commit-

ment fee of 15 basis points, for all-in drawn pricing of 75 basis

points over LIBOR. At February 1, 2008, we had a borrowing

capacity of $300 million available on our credit facility and no

outstanding balance.

Mortgage Debt
We have no mortgage debt on any of our properties.

No Off-Balance Sheet Arrangements
or Unconsolidated Investments
We have no unconsolidated or off-balance sheet investments in

“variable interest entities” or off-balance sheet financing, nor do

We expect to use the credit facility to acquire additional retail

we engage in trading activities involving energy or commodity

properties and for other corporate purposes. Any additional

contracts or other derivative instruments.

borrowings will increase our exposure to interest rate risk. We have

As we have no joint ventures, off-balance sheet entities, or

the right to request an increase in the borrowing capacity of the

mandatory redeemable preferred stock, our current financial

credit facility by up to $100 million, to a total borrowing capacity

position or results of operations are not affected by Financial

of $400 million. Any increase in the borrowing capacity is subject

Accounting Standards Board Interpretation No. 46R, Consolidation

to approval by the lending banks of our credit facility.

of Variable Interest Entities and Statement of Financial Accounting

We regularly review our credit facility and may seek to extend,

Standards No. 150, Accounting for Certain Financial Instruments

renew or replace our credit facility, to the extent we deem appro-

with Characteristics of both Liabilities and Equity.

priate. We have the right to extend the credit facility for an addi-

tional term of one year (to October 2009).

We use our credit facility for the short-term financing of new

property acquisitions. When outstanding borrowings under the

credit facility reach a certain level (generally in the range of

$100 million to $200 million) and capital is available on accept-

able terms, we generally seek to refinance those borrowings with

the net proceeds of long-term or permanent financing, which

may include the issuance of common stock, preferred stock,

2007 Annual Report REALTY INCOME 49

Competitive Strategy
We believe that to successfully pursue our investment philosophy

• TECHNOLOGY: We intend to stay at the forefront of tech-
nology in our efforts to efficiently and economically carry

and strategy, we must seek to maintain the following competitive

out our operations. We maintain sophisticated information

advantages:

systems that allow us to analyze our portfolio’s perform-

• SIZE AND TYPE OF INVESTMENT PROPERTIES: We believe

ance and actively manage our investments. We believe

smaller ($500,000 to $10,000,000) net-leased retail

that technology and information-based systems will play

properties represent an attractive investment opportunity

an increasingly important role in our competitiveness as

in today’s real estate environment. Due to the complexi-

an investment manager and source of capital to a variety

ties of acquiring and managing a large portfolio of rela-

of industries and tenants.

tively small assets, we believe these types of properties

have not experienced significant institutional ownership

P R O P E R T I E S

interest or the corresponding yield reduction experienced

At December 31, 2007, we owned a diversified portfolio:

by larger income-producing properties. We believe the less

• Of 2,270 retail properties;

intensive day-to-day property management required by net-

• With an occupancy rate of 97.9%, or 2,222 properties

lease agreements, coupled with the active management

occupied of the 2,270 properties in the portfolio;

of a large portfolio of smaller properties, is an effective

• With only 48 properties available for lease;

investment strategy. The tenants of our freestanding retail

• Leased to 115 different retail chains doing business in 30

properties generally provide goods and services that satisfy
basic consumer needs. In order to grow and expand, they

separate retail industries;

• Located in 49 states;

generally need capital. Since the acquisition of real estate

• With over 18.5 million square feet of leasable space; and

is typically the single largest capital expenditure of many

• With an average leasable retail space per property of

of these retailers, our method of purchasing the property

approximately 8,150 square feet.

and then leasing it back, under a net-lease arrangement,

allows the retail chain to free up capital.

In addition to our real estate portfolio, our subsidiary, Crest

• INVESTMENT IN NEW RETAIL INDUSTRIES: Though we

had invested $56.2 million in 30 properties located in 14 states

specialize in single-tenant properties, we will seek to fur-

at December 31, 2007. These properties are classified as held

ther diversify our portfolio among a variety of retail indus-

for sale.

tries. We believe diversification will allow us to invest in

At December 31, 2007, 2,212, or 97.4%, of our 2,270 retail

retail

industries that currently are growing and have

properties were leased under net-lease agreements. Net leases

characteristics we find attractive. These characteristics

typically require the tenant to be responsible for minimum

include, but are not limited to, retail industries that are

monthly rent and property operating expenses including property

dominated by local store operators where regional and

taxes, insurance and maintenance. In addition, tenants are typi-

national chain store operators can increase market share

cally responsible for future rent increases based on increases in

and dominance by consolidating local operators and

the consumer price index, fixed increases or, to a lesser degree,

streamlining their operations, as well as capitalizing on

additional rent calculated as a percentage of the tenants’ gross

major demographic shifts in a population base.

sales above a specified level.

• DIVERSIFICATION: Diversification of the portfolio by retail

Our net-leased retail properties primarily are leased to regional

industry type, tenant, and geographic location is key to

and national retail chain store operators. Most buildings are

our objective of providing predictable investment results

single-story structures with adequate parking on site to accom-

for our stockholders, therefore further diversification of

modate peak retail traffic periods. The properties tend to be on

our portfolio is a continuing objective. At December 31,

major thoroughfares with relatively high traffic counts, adequate

2007, our retail property portfolio consisted of 2,270

access and proximity to a sufficient population base to constitute

properties located in 49 states, leased to 115 retail chains

a suitable market or trade area for the retailer’s business.

doing business in 30 industry segments. Each of the 30

industry segments, represented in our property portfolio,

individually accounted for no more than 24.2% of our

rental revenue for the quarter ended December 31, 2007.

• MANAGEMENT SPECIALIZATION: We believe that our

management’s specialization in single-tenant retail prop-

erties, operated under net-lease agreements, is important

to meeting our objectives. We plan to maintain this

specialization and will seek to employ and train high-

quality professionals in this specialized area of real estate

ownership, finance and management.

50 REALTY INCOME 2007 Annual Report

Industry Diversification
The following table sets forth certain information regarding Realty Income’s property portfolio (excluding properties owned by Crest)

classified according to the business of the respective tenants, expressed as a percentage of our total rental revenue:

Industries

Apparel stores

Automotive collision services

Automotive parts

Automotive service

Automotive tire services

Book stores

Business services

Child care

Consumer electronics

Convenience stores
Crafts and novelties

Distribution and office

Drug stores

Entertainment

Equipment rental services

Financial services

General merchandise

Grocery stores

Health and fitness

Home furnishings

Home improvement

Motor vehicle dealerships

Office supplies

Pet supplies and services

Private education

Restaurants

Shoe stores

Sporting goods

Theaters

Travel plazas

Video rental

Other

Totals

For the
Quarter Ended
December 31,
2007

Percentage of Rental Revenue(1)

For the Years Ended

Dec 31,
2007

Dec 31,
2006

Dec 31,
2005

Dec 31,
2004

Dec 31,
2003

Dec 31,
2002

1.1%

1.2%

1.7%

1.6%

1.8%

2.1%

2.3%

1.1

2.0

5.0

6.9

0.2

7.7

0.9

14.1
0.3

1.1

2.6

1.3

0.2

0.7

5.3

2.4

2.0

3.0

1.0

0.8

0.7

1.1

2.1

5.2

7.3

0.2

0.1

8.4

0.9

14.0
0.3

0.6

2.7

1.4

0.2

0.7

5.1

2.6

2.1

3.1

1.1

0.9

0.8

1.3

2.8

6.9

6.1

0.2

0.1

10.3

1.1

16.1
0.4

—

2.9

1.6

0.2

0.1

0.6

0.7

4.3

3.1

3.4

1.3

1.1

0.8

24.2

21.2

11.9

—

2.4

8.4

0.2

1.4

2.1

—

2.6

9.0

0.2

1.7

2.3

—

2.9

9.6

0.3

2.1

2.7

1.3

3.4

7.6

7.2

0.3

0.1

12.7

1.3

18.7
0.4

—

2.8

2.1

0.4

0.1

0.5

0.7

3.7

1.1

2.6

1.5

1.3

0.8

9.4

0.3

3.4

5.2

0.3

2.5

3.0

1.0

3.8

7.7

7.8

0.3

0.1

14.4

2.1

19.2
0.5

—

0.1

2.3

0.3

0.1

0.4

0.8

4.0

4.1

1.0

0.6

1.6

1.4

1.1

9.7

0.3

3.4

3.5

0.4

2.8

3.4

0.3

4.5

8.3

3.1

0.4

0.1

17.8

3.0

13.3
0.6

—

0.2

2.6

0.2

—

0.5

0.4

3.8

4.9

1.1

—

1.9

1.7

1.2

—

4.9

7.0

2.7

0.4

0.1

20.8

3.3

9.1
0.4

—

0.2

2.3

—

0.5

3.8

5.4

1.2

—

2.1

1.7

1.3

11.8

13.5

0.9

3.8

4.1

0.3

3.3

3.8

0.8

4.1

3.9

—

3.3

4.4

100.0%

* Less than 0.1%
(1) Includes rental revenue for all properties owned by Realty Income at the end of each period presented, including revenue from properties reclassified to

discontinued operations.

2007 Annual Report REALTY INCOME 51

Service Category Diversification
The following table sets forth certain information regarding the properties owned by Realty Income (excluding properties owned by Crest)

at December 31, 2007, classified according to the retail business types and the level of services they provide (dollars in thousands):

Number of
Properties

Rental Revenue for
the Quarter Ended
December 31, 2007

Percentage
of Rental
Revenue

237

265

609

153

489

663

1,404

257

2,270

825

1.1%

3,921

5,970

999

150

132

4,105

576

6,578

1,652

24,908

583

5,387

11,000

827

2,323

607

18,847

170

1,102

40,940

883

1,004

156

683

215

2,007

556

552

1,897

1,451

789

1,874

12,104

$ 77,952

5.0

7.7

1.3

0.2

5.3

0.7

8.4

2.1

32.0

0.7

6.9

14.1

1.1

0.1

3.0

0.8

24.2

0.2

1.4

52.5

1.1

1.3

0.2

0.9

0.3

2.6

0.7

2.4

1.9

1.0

2.4

15.5

100.0%

Industry

Tenants Providing Services

Automotive collision services

Automotive service

Child care

Entertainment

Equipment rental services

Financial services

Health and fitness

Private education

Theaters

Other

Tenants Selling Goods and Services

Automotive parts (with installation)

Automotive tire services

Business services

Convenience stores

Distribution and office

Home improvement

Motor vehicle dealerships

Pet supplies and services

Restaurants

Travel plazas

Video rental

Tenants Selling Goods

Apparel stores

Automotive parts

Book stores

Consumer electronics

Crafts and novelties

Drug stores

General merchandise

Grocery stores

Home furnishings

Home improvement

Office supplies

Pet supplies

Sporting goods

Totals

* Less than 0.1%

52 REALTY INCOME 2007 Annual Report

Lease Expirations
The following table sets forth certain information regarding Realty Income’s property portfolio (excluding properties owned by Crest)

regarding the timing of the lease term expirations (excluding extension options) on our 2,212 net leased, single-tenant retail properties

as of December 31, 2007 (dollars in thousands):

Total Portfolio

Rental
Revenue for
the Quarter
Ended
12/31/07(2)

% of
Total
Rental
Revenue

$ 3,023

4.0%

2,664

1,553

2,377

2,425

3,456

1,968

1,810
1,909

1,956

1,093

4,675

2,980

5,843

3,033

6,760

1,919

6,329

3.5

2.1

3.2

4.6

2.6

2.4
2.5

2.6

1.5

6.2

4.0

7.8

4.0

9.0

2.5

8.4

11,719

15.6

3,903

1,262

858

714

357

230

354

5.2

1.7

1.1

0.9

0.1

0.5

0.3

0.5

Number
of Leases
Expiring(1)

144

120

101

90
112

149

104

240

217

159

Initial Expirations(3)

Subsequent Expirations(4)

Rental
Revenue for
the Quarter
Ended
12/31/07

% of
Total
Rental
Revenue

$ 1,594

2.1%

880

789

1,368

2,011

3,205

1,714

1,250
1,883

1,870

1,093

4,481

2,916

5,788

2,985

6,735

1,919

6,264

1.1

1.8

2.7

4.3

2.3

1.7
2.5

2.5

1.5

5.9

3.9

7.7

4.0

9.0

2.5

8.3

11,664

15.5

3,903

1,260

858

714

357

230

354

—

5.2

1.7

1.1

0.9

0.1

0.5

0.3

0.5

—

Number
of Leases
Expiring

65
111

148

103

239

215

159

—

Rental
Revenue for
the Quarter
Ended
12/31/07

% of
Total
Rental
Revenue

$ 1,429

1.9%

1,784

764

1,009

414

251

254

560
26

—

194

—

2.4

1.0

1.4

0.5

0.3

0.7
*

0.1

—

0.3

0.1

—

0.1

—

Number
of Leases
Expiring

25
1

—

2,212

$ 75,251

100.0%

1,877

$ 68,153

90.7%

335

$ 7,098

9.3%

2008

2009

2010

2011

2012

2013

2014

2015
2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2037

2043

Totals

* Less than 0.1%
(1) Excludes ten multi-tenant properties and 48 vacant unleased properties, one of which is a multi-tenant property. The lease expirations for properties under

construction are based on the estimated date of completion of those properties.

(2) Excludes revenue of $2,701 from ten multi-tenant properties and from 48 vacant and unleased properties at December 31, 2007.
(3) Represents leases to the initial tenant of the property that are expiring for the first time.
(4) Represents lease expirations on properties in the portfolio, which have previously been renewed, extended or re-tenanted.

2007 Annual Report REALTY INCOME 53

State Diversification
The following table sets forth certain state-by-state information regarding Realty Income’s property portfolio (excluding properties

owned by Crest) as of December 31, 2007 (dollars in thousands):

State (49)

Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming

Totals/Average

* Less than 0.1%

Number of
Properties

61
2
79
18
63
54
26
17
168
132
14
74
82
20
33
22
33
3
28
69
51
21
72
62
2
19
15
14
36
8
44
63
6
128
25
18
97
4
59
9
135
215
6
4
103
36
2
17
1

Percent
Leased

98%

100
99
100
98
98
100
100
98
98
100
99
98
95
97
100
100
100
100
100
100
100
97
98
100
100
100
100
100
100
95
98
100
97
100
94
100
100
98
100
99
94
83
100
100
89
50
94
100

Approximate
Leasable
Square Feet

413,700
128,500
394,100
98,500
1,124,700
451,000
282,300
33,300
1,450,800
926,900
91,900
867,600
694,400
140,900
573,500
111,500
190,400
22,500
256,500
587,900
246,200
392,100
359,600
640,100
30,000
196,300
191,000
109,900
266,100
56,400
508,100
454,400
36,600
813,900
145,900
289,100
630,000
14,500
250,700
24,900
635,500
2,282,500
35,100
12,700
622,400
235,100
23,200
157,400
4,200

2,270

98%

18,504,800

Rental Revenue for
the Quarter Ended
December 31, 2007

Percentage
of Rental
Revenue

$ 1,885
277
2,426
436
4,072
1,943
1,324
372
6,706
3,972
373
4,076
2,971
439
1,109
701
970
54
1,470
2,586
1,235
1,328
1,482
2,121
77
630
847
544
1,905
193
2,544
2,098
71
3,044
609
858
2,940
87
1,569
100
3,018
7,950
91
122
3,085
756
45
409
32

$ 77,952

2.4%
0.4
3.1
0.6
5.2
2.5
1.7
0.5
8.6
5.1
0.5
5.2
3.8
0.6
1.4
0.9
1.2
0.1
1.9
3.3
1.6
1.7
1.9
2.7
0.1
0.8
1.1
0.7
2.4
0.2
3.3
2.7
0.1
3.9
0.8
1.1
3.8
0.1
2.0
0.1
3.9
10.2
0.1
0.1
4.0
1.0
0.1
0.5
*

100.0%

54 REALTY INCOME 2007 Annual Report

Description of Leasing Structure
At December 31, 2007, 2,212 single tenant and certain other

Realty Income owns 116 properties and Crest owns three

properties, all leased to subsidiaries of Buffets, Inc. (Buffets)

retail properties, or 97.4%, of our 2,270 properties were net

and guaranteed by Buffets. Buffets is a subsidiary of Buffets

leased. In most cases, the leases:

Holding, Inc. (“Buffets Holdings”). On January 22, 2008, Buffets

• Are for initial terms of 15 to 20 years;

Holdings, together with each of its subsidiaries, filed voluntary

• Require the tenant to pay minimum monthly rents and

petitions for

reorganization under Chapter 11 of

the U.S.

property operating expenses (taxes, insurance and main-

Bankruptcy Code. As of February 12, 2008, Buffets’ lease pay-

tenance); and

ments to us are current. Based on our analysis of the Buffets’

• Provide for future rent increases based on increases in the

locations owned by Realty Income, we believe that the Chapter

consumer price index, fixed increases, or to a lesser

11 filing will not have a material adverse affect on our operations

degree, additional rent calculated as a percentage of the

or financial position.

tenants’ gross sales above a specified level. Where leases

provide for rent increases based on increases in the con-

sumer price index, generally these increases become part

Certain Properties Under Development
Of the 325 properties Realty Income acquired in 2007, four

of the new permanent base rent. Where leases provide for

were development properties, all of which were occupied at

percentage rent, this additional rent is typically payable

December 31, 2007. In the case of development properties, we

only if the tenants’ gross sales, for a given period (usually

either enter into an agreement with a retail chain where the

one year), exceed a specified level and is then typically
calculated as a percentage of only the amount of gross

retailer retains a contractor to construct the building and we fund
the costs of that development, or we fund a developer who con-

sales in excess of that level.

Matters Pertaining to Certain Properties and Tenants
Of the 48 properties available for lease or sale at December 31,

structs the building. In either case, there is an executed lease

with a retail tenant at the time of the land purchase (with a fixed

rent commencement date) and there is a requirement to com-

plete the construction in a timely basis and within a specific

2007, all are single-tenant properties except one. As of February 1,

budget, typically within eight months after we purchase the land.

2008, transactions to lease or sell 17 of the 48 properties were

The tenant or developer generally is required to pay construction

underway or completed. At December 31, 2007, 25 of our prop-

cost overruns to the extent that they exceed the construction

erties under lease were unoccupied and available for sublease by

budget by more than a predetermined amount. We also enter into

the tenants, all of which were current with their rent and other

a lease with the tenant at the time we purchase the land, which

obligations. During 2007, each of our tenants accounted for less

generally requires the tenant to begin paying base rent when the

than 10% of our rental revenue.

store opens for business. The base rent is calculated by multiplying

For 2007, our tenants in the convenience store and restaurant

a predetermined capitalization rate by our total investment in the

industries accounted for approximately 14.0% and 21.2%,

property including the land cost for the property, construction

respectively, of our rental revenue. A downturn in any of these

costs and capitalized interest. Crest did not acquire any devel-

industries, whether nationwide or limited to specific sectors of

opment property in 2007. Both Realty Income and Crest will

the United States, could adversely affect tenants in these indus-

continue to pursue development opportunities under similar

tries, which in turn could have a material adverse affect on our

arrangements in the future.

financial position, results of operations and our ability to pay the

principal of and interest on our debt securities and other indebt-

edness and to make distributions on our common stock and

preferred stock. Individually, each of the other industries in

our property portfolio accounted for less than 10% of our rental

revenue for 2007.

In addition, a substantial number of our properties are leased

to middle-market retail chains that generally have more limited

financial and other resources than certain upper-market retail

chains, and therefore they are more likely to be adversely affected

by a downturn in their respective businesses or in the regional or

national economy. Some of our tenants have incurred substantial

debt and therefore are more likely to be adversely affected by a

downturn in their respective businesses.

2007 Annual Report REALTY INCOME 55

F O R WA R D - L O O K I N G S TAT E M E N T S

Additional factors that may cause risks and uncertainties

This annual report contains forward-looking statements within

include those discussed in the sections entitled “Business”, “Risk

the meaning of Section 27A of the Securities Act and Section

Factors” and “Management’s Discussion and Analysis of Financial

21E of the Exchange Act. When used in this annual report, the

Condition and Results of Operations” in this annual report.

words “estimated”, “anticipated”, “expect”, “believe”, “intend”

Readers are cautioned not to place undue reliance on forward-

and similar expressions are intended to identify forward-looking

looking statements, which speak only as of the date our Form 10-K

statements. Forward-looking statements are subject

to risks,

for the fiscal year ended December 31, 2007 filed with the

uncertainties, and assumptions about Realty Income Corporation,

Securities and Exchange Commission, or SEC. We undertake no

including, among other things:

• Our anticipated growth strategies;

obligation to publicly release the results of any revisions to these

forward-looking statements that may be made to reflect events or

• Our intention to acquire additional properties and the tim-

circumstances after the date of this annual report or to reflect

ing of these acquisitions;

the occurrence of unanticipated events. In light of these risks

• Our intention to sell properties and the timing of these

and uncertainties, the forward-looking events discussed in this

property sales;

annual report might not occur.

Risk Factors
For a full description of the risk factors associated with the

Company, see Item 1A”Risk Factors” in our Form 10-K for the
fiscal year ended December 31, 2007.

Unresolved Staff Comments
There are no unresolved staff comments.

• Our intention to re-lease vacant properties;

• Anticipated trends in our business, including trends in

the market for long-term net-leases of freestanding, single-

tenant retail properties;

• Future expenditures for development projects; and

• Profitability of our subsidiary, Crest Net Lease, Inc. (“Crest”).

Future events and actual results, financial and otherwise,

may differ materially from the results discussed in the forward-

looking statements. In particular, some of the factors that could

cause actual results to differ materially are:

• Our continued qualification as a real estate investment trust;

• General business and economic conditions;

• Competition;

• Fluctuating interest rates;

• Access to debt and equity capital markets;

• Continued uncertainty in the credit markets;

• Other risks inherent in the real estate business including

tenant defaults, potential liability relating to environmental

matters, illiquidity of real estate investments, and poten-

tial damages from natural disasters;

•

Impairments in the value of our real estate assets;

• Changes in the tax laws of the United States of America;

• The outcome of any legal proceedings to which we are a

party; and

• Acts of terrorism and war.

56 REALTY INCOME 2007 Annual Report

R E A L T Y I N C O M E C O R P O R A T I O N A N D S U B S I D I A R I E S
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LYS I S O F
F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S

G E N E R A L

Realty Income Corporation, The Monthly Dividend Company®, is

a Maryland corporation organized to operate as an equity real

L I Q U I D I T Y A N D C A P I TA L R E S O U R C E S
Cash Reserves
We are organized to operate as an equity REIT that acquires and

estate investment trust, or REIT. Our primary business objective

leases properties and distributes to stockholders, in the form of

is to generate dependable monthly cash distributions from a

monthly cash distributions, a substantial portion of our net cash

consistent and predictable level of funds from operations, or FFO

flow generated from leases on our retail properties. We intend

per share. The monthly distributions are supported by the cash

to retain an appropriate amount of cash as working capital. At

flow from our portfolio of retail properties leased to regional

December 31, 2007, we had cash and cash equivalents totaling

and national retail chains. We have in-house acquisition, leasing,

$193.1 million, which represents a portion of the proceeds from

legal, retail research, real estate research, portfolio management

the September 2007 issuance of $550 million of 6.75% senior

and capital markets expertise. Over the past 38 years, Realty

unsecured notes.

Income and its predecessors have been acquiring and owning

We believe that our cash and cash equivalents on hand, cash

freestanding retail properties that generate rental revenue under
long-term lease agreements (primarily 15 to 20 years).

provided from operating activities and borrowing capacity is
sufficient to meet our liquidity needs for the foreseeable future.

In addition, we seek to increase distributions to stockholders

We intend, however, to use additional sources of capital to fund

and FFO per share through both active portfolio management and

property acquisitions and to repay future borrowings under our

the acquisition of additional properties. At December 31, 2007,

credit facility.

we owned a diversified portfolio:

• Of 2,270 retail properties;

• With an occupancy rate of 97.9%, or 2,222 properties

$300 Million Acquisition Credit Facility
We have a $300 million revolving, unsecured credit facility that

occupied of the 2,270 properties in the portfolio;

expires in October 2008. In April 2007, Moody’s Investors Service

• With only 48 properties available for lease;

upgraded our credit ratings. Since May 2007, our investment

• Leased to 115 different retail chains doing business in 30

grade credit ratings provided for financing under the credit facility

separate retail industries;

• Located in 49 states;

at the London Interbank Offered Rate, commonly referred to

as LIBOR, plus 60 basis points with a facility fee of 15 basis

• With over 18.5 million square feet of leasable space; and

points, for all-in drawn pricing of 75 basis points over LIBOR. At

• With an average leasable retail space per property of

February 1, 2008, we had a borrowing capacity of $300 million

approximately 8,150 square feet.

available on our credit facility and no outstanding balance.

We expect to use the credit facility to acquire additional retail

Of the 2,270 properties in the portfolio, 2,259, or 99.5%,

properties and for other corporate purposes. Any additional

are single-tenant, retail properties and the remaining 11 are

borrowings will increase our exposure to interest rate risk. We

multi-tenant, distribution and office properties. At December 31,

have the right to request an increase in the borrowing capacity of

2007, 2,212, or 97.9%, of the 2,259 single-tenant properties

the credit facility by up to $100 million, to a total borrowing

were leased with a weighted average remaining lease term

capacity of $400 million. Any increase in the borrowing capacity

(excluding extension options) of approximately 13.0 years.

is subject to approval by the lending banks on our credit facility.

In addition, at December 31, 2007, our wholly-owned

We regularly review our credit facility and may seek to extend,

taxable REIT subsidiary, Crest Net Lease, Inc. (“Crest”), had

renew or replace our credit facility, to the extent we deem

invested $56.2 million in 30 properties, which are classified as

appropriate. We have the right to extend the credit facility for

held for sale. Crest was created to buy and sell properties,

an additional term of one year (to October 2009).

primarily to individual investors who are involved in tax-deferred

exchanges under Section 1031 of the Internal Revenue Code of

1986, as amended (the “Tax Code”).

Mortgage Debt
We have no mortgage debt on any of our properties.

2007 Annual Report REALTY INCOME 57

Universal Shelf Registration
In April 2006, we filed a shelf registration statement with the

Credit Agency Ratings
We are currently assigned investment grade corporate credit

SEC, which is effective for a term of three years. In accordance

ratings, on our senior unsecured notes. Fitch Ratings has assigned

with the SEC rules, the amount of securities to be issued pur-

a rating of BBB+, Moody’s Investors Service has assigned a rating

suant to this shelf registration statement was not specified when

of Baa1 and Standard & Poor’s Ratings Group has assigned a

it was filed. The securities covered by this registration statement

rating of BBB to our senior notes. The rating by Standard & Poor’s

include common stock, preferred stock, debt securities, or any

has a “positive” outlook and the ratings by Fitch and Moody’s

combination of such securities. We may periodically offer one or

have “stable” outlooks.

more of these securities in amounts, prices and on terms to be

We have also been assigned investment grade credit ratings

announced when and if the securities are offered. The specifics

on our preferred stock. Fitch Ratings has assigned a rating of

of any future offerings, along with the use of proceeds of any

BBB, Moody’s has assigned a rating of Baa2 and Standard

securities offered, will be described in detail in a prospectus sup-

& Poor’s has assigned a rating of BBB- to our preferred stock.

plement, or other offering materials, at the time of any offering.

The rating by Standard & Poor’s has a “positive” outlook and the

There is no specific limit to the dollar amount of new securities

ratings by Fitch and Moody’s have “stable” outlooks.

that can be issued under this new shelf registration before it

The credit ratings assigned to us could change based upon,

expires in April 2009, and our common stock, preferred stock

among other things, our results of operations and financial con-

and notes issued after April 2006 were all issued pursuant to

dition. These ratings are subject to ongoing evaluation by credit

this universal shelf registration statement.

Conservative Capital Structure
We believe that our stockholders are best served by a

rating agencies and we cannot assure you that any such rating
will not be changed or withdrawn by a rating agency in the future

if, in its judgment, circumstances warrant. Moreover, a rating is

not a recommendation to buy, sell or hold our debt securities,

conservative capital structure. Therefore, we seek to maintain

preferred stock or common stock.

a conservative debt level on our balance sheet and solid

interest and fixed charge coverage ratios. At February 1, 2008,

our total outstanding credit facility borrowings and outstanding

Notes Outstanding
Our senior unsecured note obligations consist of the following as of

notes were $1.47 billion or approximately 33.7% of our total

December 31, 2007, sorted by maturity date (dollars in millions):

market capitalization of $4.36 billion.

We define our total market capitalization at February 1, 2008

8.25% notes, issued in October 1998

as the sum of:

and due in November 2008

100.0

• Shares of our common stock outstanding of 101,286,217

8% notes, issued in January 1999

multiplied by the last reported sales price of our common

and due in January 2009

stock on the NYSE of $25.15 per share on February 1,

5.375% notes, issued in March 2003

2008, or $2.55 billion;

and due in March 2013

• Aggregate liquidation value (par value of $25 per share)

5.5% notes, issued in November 2003

of the Class D preferred stock of $127.5 million;

and due in November 2015

• Aggregate liquidation value (par value of $25 per share)

5.95% notes, issued in September 2006

of the Class E preferred stock of $220 million; and

and due in September 2016

• Outstanding notes of $1.47 billion.

5.375% notes, issued in September 2005

and due in September 2017

Historically, we have met our long-term capital needs through

6.75% notes, issued in September 2007

the issuance of common stock, preferred stock and long-term

and due in August 2019

unsecured notes and bonds. Over the long term, we believe that

5.875% bonds, issued in March 2005

common stock may be the majority of our capital structure; how-

and due in March 2035

20.0

100.0

150.0

275.0

175.0

550.0

100.0

$ 1,470.0

All of our outstanding notes and bonds have fixed interest rates.

ever, we may issue additional preferred stock or debt securities

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 debt secu-

rities. However, we cannot assure you that we will have access to

the capital markets at terms that are acceptable to us.

58 REALTY INCOME 2007 Annual Report

Interest on all of the senior note obligations is paid semi-

terms of our notes. These calculations, which are not based on

annually, with the exception of the interest on the 8.25% senior

GAAP measurements, are presented to investors to show our abil-

notes issued in October 1998, which is paid monthly. All of

ity to incur additional debt under the terms of our notes only and

these notes contain various covenants, including: (i) a limitation

are not measures of our liquidity or performance. The actual

on incurrence of any debt which would cause our debt to total

amounts as of December 31, 2007 are:

adjusted assets ratio to exceed 60%; (ii) a limitation on incur-

rence of any secured debt which would cause our secured debt

Note Covenants

Required

Actual

to total adjusted assets ratio to exceed 40%; (iii) a limitation on

Limitation on incurrence of

incurrence of any debt which would cause our debt service cov-

total debt

≤ 60%

41.9%

erage ratio to be less than 1.5 times; and (iv) the maintenance

Limitation on incurrence of

at all times of total unencumbered assets not less than 150% of

secured debt

our outstanding unsecured debt. We have been in compliance

Debt service coverage

with these covenants since each of the notes were issued.

Maintenance of total

The following is a summary of the key financial covenants to

unencumbered assets

our senior unsecured notes, as defined and calculated per the

≤ 40%
≥ 1.5 x
≥ 150% of
unsecured debt

0.0%

4.2 x

239%

The following table summarizes the maturity of each of our obligations as of December 31, 2007 (dollars in millions):

Table of Obligations

Year of
Maturity

2008

2009

2010

2011

2012

Thereafter

Totals

Credit
Facility(1)

Notes

$ —

100.0

—

20.0

—

1,350.0

$ —

$ 1,470.0

Interest(2)

$ 91.2

82.5

82.4

505.9

$ 926.8

Ground
Leases
Paid by
Realty
Income(3)

$ 0.1

0.1

1.0

$ 1.5

Ground
Leases
Paid by
Our
Tenants(4)

$ 1.8

1.8

1.7

1.6

16.5

$ 25.1

Other(5)

$ 8.6

Totals

201.7

—

104.4

84.2

84.1

1,873.4

$ 8.6

$ 2,432.0

(1) There was no outstanding credit facility balance on February 1, 2008.
(2) Interest on the credit facility and notes has been calculated based on outstanding balances as of December 31, 2007 through their respective maturity dates.
(3) Realty Income currently pays the ground lessor directly for the rent under the ground lease. A majority of this rent is reimbursed to Realty Income as additional

rent from our tenant.

(4) Our tenants, who are generally sub-tenants under the ground leases, are responsible for paying the rent under these ground leases. In the event a tenant fails to

pay the ground lease rent, we are primarily responsible.

(5) Other consists of $7.9 million of commitments under construction contracts and $743,000 of contingent payments for tenant improvements and leasing costs.

Our credit facility and note obligations are unsecured. Accordingly, we have not pledged any assets as collateral for these obligations.

We anticipate paying off the notes due in 2008 and 2009 by one or more of the following; using cash on hand, utilizing our credit

facility or issuing new securities.

2007 Annual Report REALTY INCOME 59

Preferred Stock Outstanding
In 2004, we issued 5.1 million shares of 7.375% Class D

payment of contractual rent, we cannot assure you that the

actual return on the funds invested will remain at the percent-

cumulative redeemable preferred stock. Beginning May 27, 2009,

ages listed above.

shares of Class D preferred stock are redeemable at our option

for $25 per share, plus any accrued and unpaid dividends.

Dividends on shares of Class D preferred stock are paid monthly

Increases in Monthly Distributions to Common Stockholders
We continue our 38-year policy of paying distributions monthly.

in arrears.

Monthly distributions per share were increased in April 2007

In December 2006, we issued 8.8 million shares of 6.75%

by $0.000625 to $0.127125, in July 2007 by $0.000625

Class E cumulative redeemable preferred stock. Beginning

to $0.12775, in September 2007 by $0.00775 to $0.1355, in

December 7, 2011, shares of Class E preferred stock are

October 2007 by $0.000625 to $0.136125 and in January

redeemable at our option for $25 per share, plus any accrued

2008 by $0.000625 to $0.13675. The increase in January

and unpaid dividends. Dividends on shares of Class E preferred

2008 was our 41st consecutive quarterly increase and the 47th

stock are paid monthly in arrears.

No Off-Balance Sheet Arrangements
or Unconsolidated Investments
We have no unconsolidated or off-balance sheet investments in

increase in the amount of our dividend since our listing on the

New York Stock Exchange, or NYSE, in 1994. In 2007, we paid

the following monthly cash distributions per share: three in the

amount of $0.1265, three in the amount of $0.127125, two in

the amount of $0.12775, one in the amount of $0.1355 and

“variable interest entities” or off-balance sheet financing, nor do
we engage in trading activities involving energy or commodity

three in the amount of $0.136125, totaling $1.56025. In
December 2007 and January 2008, we declared distributions of

contracts or other derivative instruments.

$0.13675 per share, which were paid in January 2008 and will

As we have no joint ventures, off-balance sheet entities, or

be paid in February 2008, respectively.

mandatory redeemable preferred stock, our financial position or

The monthly distribution of $0.13675 per share represents

results of operations are currently not affected by Financial

a current annualized distribution of $1.641 per share, and an

Accounting Standard Board Interpretation No. 46R, Consolidation

annualized distribution yield of approximately 6.5% based on

of Variable Interest Entities and Statement of Financial Accounting

the last reported sale price of our common stock on the NYSE of

Standard No. 150, Accounting for Certain Financial Instruments