Realty Income Annual Report 2009

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FY2009 Annual Report · Realty Income

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The Monthly Dividend Company®

Celebrating
40 Years of
Monthly
Dividends

Realty Income 2009 Annual Report

OUR LONG-TERM BUSINESS PLAN

Pay 12 Monthly Dividends

Raise the Dividend

Maintain a Conservative Balance Sheet

Maintain High Portfolio Occupancy

Acquire Additional Properties

Tell More People About

The Monthly Dividend Company®

Remain Conservative

THE RESULTS SO FAR . . .

473 Consecutive Monthly Dividends

56 Dividend Increases

$1.7 Billion in Dividends Paid

2 0 0 9 R E S U LT S

2,339 Properties Owned with No Mortgage Debt

96.8% Occupancy

16 Properties Acquired for $57.9 Million

$178 Million in Monthly Dividends Paid

Four Dividend Increases

19.3% Return to Shareholders

40 Year Focus on Performance
to Support Monthly Dividends

Portfolio Occupancy

3
9
9
1
–
0
7
9
1
y
c
n
a
p
u
c
c
O
e
g
a
r
e
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A

4
9

%
4
.
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9

5
9

%
3
.
9
9

6
9

%
1
.
9
9

7
9

%
2
.
9
9

8
9

%
5
.
9
9

9
9

%
4
.
8
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0
0

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.
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2
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.
7
9

8
0

%
0
.
7
9

9
0

%
8
.
6
9

%
7
.
9
9

FFO Per Common Share

Total Revenue(1)
(in millions)

4
9

9
.
8
4
$

5
9

6
.
1
5
$

6
9

0
.
7
5
$

7
9

9
.
7
6
$

8
9

1
.
5
8
$

9
9

5
.
4
0
1
$

0
0

3
.
6
1
1
$

1
0

1
.
1
2
1
$

2
0

6
.
7
3
1
$

3
0

4
.
0
5
1
$

4
0

6
.
7
7
1
$

5
0

8
.
7
9
1
$

6
0

6
.
0
4
2
$

7
0

4
.
7
9
2
$

8
0

7
.
1
3
3
$

9
0

8
.
8
2
3
$

Dividends Paid
Per Common Share

)

d
e
z

i
l

a
u
n
n
a

(

$ 340
$ 320
$ 300
$ 280
$ 260
$ 240
$ 220
$ 200
$ 180
$ 160
$ 140
$ 120
$ 100
$ 80
$ 60
$ 40

$ 1.70

$ 1.60

$ 1.50

$ 1.40

$ 1.30

$ 1.20

$ 1.10

$ 1.00

$ 0.90

$ 0.80

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

$ 1.90

$ 1.80

$ 1.70

$ 1.60

$ 1.50

$ 1.40

$ 1.30

$ 1.20

$ 1.10

$ 1.00

$ .90

4
9

8
9
.
0
$

5
9

0
0
.
1
$

6
9

4
0
.
1
$

7
9

1
1
.
1
$

8
9

8
1
.
1
$

9
9

3
2
.
1
$

0
0

6
2
.
1
$

1
0

0
3
.
1
$

2
0

8
3
.
1
$

3
0

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4
.
1
$

4
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1
$

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0

2
6
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1
$

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0

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1
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1
$

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1
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0

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0
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5
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.
0
$

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0
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4
0
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1
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0
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0
.
1
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1
0

2
1
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1
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2
0

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1
.
1
$

3
0

8
1
.
1
$

4
0

4
2
.
1
$

5
0

5
3
.
1
$

6
0

4
4
.
1
$

7
0

6
5
.
1
$

8
0

6
6
.
1
$

9
0

1
7
.
1
$

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

R e a l t y I n c o m e

2 2 0 0 9 A n n u a l R e p o r t

RESULTS SINCE LISTING ON THE NYSE IN 1994

Realty Income Performance vs. Major Stock Indices

Realty Income

Equity
REIT Index(1)

Dow Jones
Industrial Average

Standard & Poor’s
500

NASDAQ
Composite

Dividend
Yield

Total
Return(2)

Dividend
Yield

Total
Return(3)

Dividend
Yield

Total
Return(3)

Dividend
Yield

Total
Return(3)

Dividend
Yield

Total
Return(4)

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

8.3%

7.9%

7.5%

8.2%

42.0%

15.4%

14.5%

5.5%

10.5%

(8.7%)

8.9%

7.8%

6.7%

6.0%

5.2%

6.5%

5.5%

6.1%

7.3%

6.6%

31.2%

27.2%

26.9%

21.0%

32.7%

(9.2%)

34.8%

3.2%

(8.2%)

19.3%

Compounded Average
Annual Total Return(5)

16.6%

7.4%

6.1%

5.5%

7.5%

8.7%

7.5%

7.1%

5.5%

4.7%

4.6%

3.7%

4.9%

7.6%

3.7%

15.3%

35.3%

20.3%

(17.5%)

(4.6%)

26.4%

13.9%

3.8%

37.1%

31.6%

12.2%

35.1%

(15.7%)

(37.7%)

28.0%

9.6%

2.4%

2.2%

1.8%

1.7%

1.3%

1.5%

1.9%

2.6%

2.3%

2.2%

2.6%

2.5%

2.7%

3.6%

2.6%

36.9%

28.9%

24.9%

18.1%

27.2%

(4.7%)

(5.5%)

(15.0%)

28.3%

5.6%

1.7%

19.0%

8.8%

(31.8%)

22.6%

9.0%

2.3%

2.0%

1.6%

1.3%

1.1%

1.2%

1.4%

1.9%

1.8%

1.9%

2.1%

3.2%

2.0%

37.6%

23.0%

33.4%

28.6%

21.0%

(9.1%)

(11.9%)

(22.1%)

28.7%

10.9%

4.9%

15.8%

5.5%

(37.0%)

26.5%

7.8%

0.6%

0.2%

0.5%

0.3%

0.2%

0.3%

0.5%

0.6%

0.9%

0.8%

1.3%

1.0%

39.9%

22.7%

21.6%

39.6%

85.6%

(39.3%)

(21.1%)

(31.5%)

50.0%

8.6%

1.4%

9.5%

9.8%

(40.5%)

43.9%

7.4%

Note: All of these Dividend Yields are calculated as annualized dividend based on last dividend paid in applicable time period divided by closing price as of period end.
Dividend Yield sources: NAREIT website and Bloomberg.

(1) FTSE NAREIT US Equity REIT Index, as per NAREIT website.
(2) Calculated as closing stock price as of period end plus dividends paid in period divided by closing stock price as of end of previous period.

Does not include reinvestment of dividends.

(3) Includes reinvestment of dividends. Sources: NAREIT website and Factset.
(4) Price only index, does not include dividends. Source: Factset.
(5) All of these Compounded Average Annual Total Return rates are calculated in the same manner: from Realty Income’s NYSE listing on October 18, 1994 through

December 31, 2009, and assuming reinvestment of dividends, except for NASDAQ. Past performance does not guarantee future performance. Realty Income presents this data
for informational purposes only and makes no representation about its future performance or how it will compare in performance to other indices in the future.

R e a l t y I n c o m e

3 2 0 0 9 A n n u a l R e p o r t

Historical Financial Performance

For the Years Ended December 31,

2009

2008

2007

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)

328,794,000

106,874,000

190,444,000

178,008,000

331,701,000

$ 297,396,000

107,588,000

185,524,000

$ 116,156,000

$ 189,675,000

169,655,000

$ 157,659,000

$ 3,439,456,000

$ 3,408,910,000

$ 3,238,794,000

2,339

19,182,000

2,348

19,106,700

108

2,270

18,504,800

357

Cost of properties acquired (4)

57,937,000

189,627,000

$ 533,726,000

Properties sold

Number of retail industries

Number of states

Portfolio occupancy rate

Remaining weighted average

lease term in years

P E R C O M M O N S H A R E D ATA(5)

Net income (diluted)

Funds from operations (“FFO”) (2)

Dividends paid

Special dividend

Annualized dividend amount (6)

Common shares outstanding

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)

96.8%

11.2

1.03

1.84

1.707

1.716

104,286,705

25.91

7.4%

19.3%

97.0%

11.9

1.06

1.83

1.662

1.701

104,211,541

23.15

6.1%

–8.2%

97.9%

13.0

1.16

1.89

1.560

1.641

101,082,717

27.02

5.6%

3.2%

(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.
(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.

R e a l t y I n c o m e

4 2 0 0 9 A n n u a l R e p o r t

2006

2005

2004

2003

240,626,000

$ 197,751,000

99,419,000

155,799,000

89,716,000

$ 129,647,000

129,667,000

$ 108,575,000

177,606,000

90,168,000

118,181,000

97,420,000

150,370,000

76,722,000

103,366,000

83,842,000

$ 2,743,973,000

$ 2,096,156,000

$ 1,691,283,000

$ 1,533,182,000

1,955

16,740,100

378

1,646

13,448,600

156

1,533

11,986,100

194

1,404

11,350,800

302

769,900,000

$ 486,553,000

215,314,000

371,642,000

98.7%

12.9

1.11

1.73

1.437

1.518

100,746,226

27.70

6.7%

34.8%

98.5%

12.4

1.12

1.62

1.346

1.395

83,696,647

21.62

5.3%

–9.2%

97.9%

12.0

1.15

1.50

1.241

1.32

79,301,630

25.29

6.2%

32.7%

98.1%

11.8

1.08

1.45

1.181

1.20

75,818,172

20.00

6.7%

21.0%

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

R e a l t y I n c o m e

5 2 0 0 9 A n n u a l R e p o r t

2002

2001

2000

1999

137,600,000

$ 121,081,000

68,954,000

93,539,000

78,042,000

57,846,000

76,378,000

64,871,000

116,310,000

45,076,000

67,239,000

58,262,000

104,510,000

41,012,000

65,917,000

55,925,000

$ 1,285,900,000

$ 1,178,162,000

$ 1,073,527,000

$ 1,017,252,000

1,197

9,997,700

111

1,124

9,663,000

117

1,068

9,013,200

1,076

8,648,000

110

139,433,000

$ 156,472,000

98,559,000

181,376,000

97.7%

10.9

1.01

1.38

1.151

1.17

69,749,654

17.50

7.8%

26.9%

98.2%

10.4

0.99

1.30

1.121

1.14

97.7%

9.8

0.84

1.26

1.091

1.11

98.4%

10.7

0.76

1.23

1.043

1.08

65,658,222

53,127,038

53,644,328

14.70

9.0%

27.2%

12.4375

10.3125

10.6%

31.2%

8.4%

–8.7%

(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.

R e a l t y I n c o m e

6 2 0 0 9 A n n u a l R e p o r t

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

$ 699,797,000

$ 564,540,000

$ 515,426,000

$ 450,703,000

970

7,824,100

149

826

6,302,300

740

5,226,700

685

4,673,700

630

4,064,800

$ 193,436,000

$ 142,287,000

$ 55,517,000

$ 65,393,000

3,273,000

99.5%

10.2

0.78

1.18

0.983

1.02

99.2%

9.8

0.74

1.11

0.946

0.96

99.1%

9.5

0.70

1.04

0.931

0.23

0.945

99.3%

9.2

0.63

1.00

0.913

0.93

99.4%

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

11.25

8.5625

7.7%

5.5%

7.9%

14.5%

8.3%

15.4%

10.7%

42.0%

9.9%

28.5%

R e a l t y I n c o m e

7 2 0 0 9 A n n u a l R e p o r t

CEO Letter to Shareholders

We are The Monthly Dividend Company®

Monthly Dividends Are . . .
Our Mission. Our Passion. Our Reason to Be.

Monthly Dividends Give
Our Shareholders the Freedom to . . .
Reinvent Themselves. Engage Others. Pursue their Dreams.

Dear fellow shareholders,

I am pleased to report that, during the economic malaise of 2009, your Company

continued to collect more rent, increase funds from operations and increase

dividends. Once again, “The Monthly Dividend Company’s®” strategy of owning a

portfolio of properties under long-term leases that have been carefully underwritten,

coupled with a conservative balance sheet, allowed us to deliver consistent results.

This was obviously no small feat given the economic headwinds most every company

faced over the last year. While our revenue and earnings were relatively unchanged

from 2008, we fared substantially better than the vast majority of public and private

real estate companies who saw their earnings dramatically reduced and their

dividends slashed. Or, as one real estate industry observer recently commented,

“During 2009, flat just may have been the new up!”

R e a l t y I n c o m e

8 2 0 0 9 A n n u a l R e p o r t

To summarize our operating results for 2009:
• Shareholders received 12 monthly dividends
• Dividends paid per common share

increased 2.7%

• Investors achieved a 19.3% total return
• Revenue was relatively unchanged at

$327.6 million

• Funds from operations (FFO) increased

2.6% to $190.4 million

• Portfolio occupancy was 96.8% at year-end
• Maintained a large and diverse portfolio
of 2,339 properties located in 49 states
occupied by 118 different retailers in
30 different industries

• Same store rents increased 0.4%
• 16 new properties were acquired for

$57.9 million

• $350 million was available on our $355 million

credit facility and $10 million in cash
on hand

• Held no mortgages on any of our properties
• Held no debt maturities until 2013

Investor Returns
We increased the amount of the monthly dividend
four
times during 2009. Dividends paid per
common share increased 2.7% and common

shareholders, who owned the stock for the entire
year, received $1.707 per share in dividends
during 2009, compared to $1.662 per share in
2008. We also note that we were able to increase
the dividend in a year when 103 companies in our
industry had to cut or suspend their dividend.

During 2009, the price of Realty Income’s
shares rose 11.9% to $25.91 from $23.15. When
you add the $1.707 in dividends we paid last
year, this works out to a total return to shareholders
of 19.3%. While our main focus is on providing
dependable monthly dividends to shareholders,
we know that investors regularly compare Realty
Income to other investments in terms of total
return. Since the calculation of total return relies
on the whims of stock market pricing, it does not
always mirror a company’s actual operating results
in a given year. With that said, on page 3 we have
included a table that shows Realty Income’s
compounded average annual total return since
our listing on the New York Stock Exchange in 1994.
It is interesting to note that our average annual
total return since 1994 is 16.6%, in comparison to
the Equity REIT Index at 9.6%, the Dow Jones
Industrial Average at 9.0%, the Standard & Poor’s
500 Index at 7.8%, and the NASDAQ Composite
Average at 7.4%.

R e a l t y I n c o m e

9 2 0 0 9 A n n u a l R e p o r t

In addition, at December 31, 2009, the divi-
dend yield on our shares was 6.6%, based on the
annualized dividend amount of $1.716. This com-
pares favorably to the yields on other investments
as measured by various indexes. For example, at
year end, the yield on the Dow Jones Industrial
Average was 2.6%, Standard & Poor’s 500 was
2.0%, Dow Jones Utility Index was 4.2%,
and Equity REIT index was 3.7%. (See Yield
Comparison Table below).

Yield Comparisons

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

DJ
Industrial
Average

S&P
500

DJ Utility
Index

Realty
Income

Equity
REIT

%
6
.
2

%
0
.
2

%
2
.
4

%
6
.
6

%
7
.
3

Vision and Guiding Principles
This year, Realty Income celebrates 40 years of
operations and paying monthly dividends to its
shareholders. We’ve reached this milestone after
a year of continued stable operations during
difficult times. It seems appropriate, therefore, to
take a moment to consider the original principles
that continue to guide us, and to recognize
the founders who provided us with a sound,
long-term vision.

Bill and Joan Clark founded the Company in
1969. They had conceived the idea of building a
real estate company that purchased properties for
cash, leasing the properties to tenants under long-
term leases that provided monthly revenue, then
passing along that monthly revenue as monthly
cash dividends to the owners of the company.

During that year, the Clarks uncovered a small
Southern California restaurant company, founded
by a gentleman named Glen Bell, who had a good
restaurant concept and needed capital to grow
and open additional stores. The Clarks agreed to
purchase the land and building of a few of his new
restaurants if Mr. Bell agreed to sign a long-term
lease. Mr. Bell thought this was a great idea,
because he wouldn’t have to keep his money tied
up in real estate but could use it to expand his
business. The two parties agreed to a “sale-
leaseback” transaction that provided for monthly
lease payments to be made to Realty Income for
the next 20 years.

This furnished the restaurant company with the
capital it needed to grow and provided the Clark’s
new company with a good property operated
under a long-term lease, which was perfect
for generating monthly income. That restaurant
company, Taco Bell, grew by leaps and bounds
and the Clark’s new company, Realty Income,
was able to provide its investors with a reliable,
20-year stream of income from their purchase of
a number of Taco Bell properties.

Following this early investment in 1969, the
Clarks realized they had uncovered a novel way to
finance a retail company’s growth and generate
income for investors who valued investment
income with the potential for growth. This relatively
simple idea (using real estate to help finance a

R e a l t y I n c o m e

10 2 0 0 9 A n n u a l R e p o r t

business) is still a hallmark of our business and
has guided our operations for the past four
decades. Times have changed since 1969 and
Realty Income has, of course, had to change and
adapt with the times in order to succeed. Yet the
simplicity of our strategy has made it possible for
us to nimbly execute our business plan year after
year and has enabled us to think outside of the
box when we needed to. It has also provided us
with the flexibility to pursue a variety of real estate
investment opportunities as long as the oppor-
tunity could be relied upon to provide a 15 to
20-year revenue stream to support dividends.

Since we paid our first dividend in 1970, and for
40 years since then, we have achieved many
important milestones. In particular, from the date
of our listing on the New York Stock Exchange in
1994 through 2009, we have
• Grown our property portfolio from 630

• Increased the annualized dividend amount

from $0.90 per share to $1.716
• 49 consecutive quarterly increases since 1997
• 56 increases in the dividend

• Provided a compounded average annual total

return to shareholders of 16.6%

• Kept our balance sheet conservative with
no mortgages on any of the properties
These accomplishments are the result of being
singularly dedicated to our mission of paying
monthly dividends and a consistent business plan
that supports that mission. That plan is to
1. Pay 12 monthly dividends each year
2. Raise the dividend each year
3. Maintain a conservative balance sheet
4. Maintain high portfolio occupancy
5. Acquire additional properties under long

term leases

6. Tell more people about The Monthly

Dividend Company®

properties to 2,339 properties

7. Remain conservative and manage the

• Increased our real estate assets from

$451 million to $3.4 billion
• Diversified our real estate from
• 5 industries to 30 industries
• 41 states to 49 states
• 23 retail chains to 118 retail chains
• Maintained a portfolio occupancy rate

above 96%

• Increased revenue from $49 million to

$329 million

• Increased funds from operations from

$39 million to $190 million

• Paid $1.7 billion in cash dividends to
common shareholders since 1970
• 473 consecutive monthly

dividend payments

business for the long term
While our mission and business plan have not
changed, the economic and business environment
is constantly evolving, which brings new challenges
to the execution of the Company’s plans. We’ve
run up against inflation in the 70’s and 80’s, easy
credit, tight credit, the threat of deflation, the
threat of inflation again, the real estate bubble of
the 2000’s, and the “great recession” of 2008
and 2009. Each of these economic challenges
has posed a threat to some aspect of our overall
business at various times during the past 40
years. But by having a conservative, long-term
plan, we knew where to focus our efforts in order
to maintain occupancy, increase revenue, and
increase the monthly dividend.

R e a l t y I n c o m e

11 2 0 0 9 A n n u a l R e p o r t

Current Economic Environment
Today’s economic environment continues to pose
challenges. Current economic forecasts project
Gross Domestic Product (GDP) growth to be about
3% during 2010 and unemployment to peak at
about 10.5%. However, government deficits, the
possible removal of all or a portion of the stimulus
programs, and other factors make the economic
outcome highly uncertain.
Tough times may still

lie ahead for many in
commercial real estate, mainly due to the large
amount of debt held on the balance sheets of
many commercial real estate companies. Credit
conditions have not fully returned to the pre-2008

status. The residential real estate market has
firmed, but has been aided by the government’s
support of mortgage-backed securities as well as
the first-time home buyer tax credit that will likely
be eliminated at some point.

Another interesting effect of the “great recession”
is a shift in consumer psychology. Anecdotal
evidence suggests that consumers are putting a
lock on their wallets and trying to save more than
they spend. The days of spending our way out of
a recession appear to be a thing of the past, and
consumers have become bargain hunters and
necessity shoppers rather than impulse buyers.
Discretionary retail, in particular, is being impacted by

The Magic of Rising Dividends Over Time

Yield on Cost

The Cumulative Dividend Effect

1000 Shares
Purchase Date

Original
Investment

Original
Dividends(1)

10/18/94

12/31/94

12/31/95

12/31/96

12/31/97

12/31/98

12/31/99

12/31/00

12/31/01

12/31/02

12/31/03

12/31/04

12/31/05

12/31/06

12/31/07

12/31/08

12/31/09

$ 8,000.00

$ 900.00

8,562.50

11,250.00

11,937.50

12,719.00

12,437.50

10,312.50

12,437.50

14,700.00

17,500.00

20,000.00

25,290.00

21,620.00

27,700.00

27,020.00

23,150.00

25,910.00

900.00

930.00

945.00

960.00

1,020.00

1,080.00

1,110.00

1,140.00

1,170.00

1,200.00

1,320.00

1,395.00

1,518.00

1,641.00

1,701.00

1,716.00

(1) Based on annualized dividend per share on the purchase date
(2) Based on 12/31/09 annualized dividend per share amount of $1.716

Original
Yield

11.3%

10.5%

8.3%

7.9%

7.5%

8.2%

10.5%

8.9%

7.8%

6.7%

6.0%

5.2%

6.5%

5.5%

6.1%

7.3%

6.6%

Current Yield
On Cost(2)

Dividends
Received to Date

% of Original
Investment Paid Back

21.5%

20.0%

15.3%

14.4%

13.5%

13.8%

16.6%

13.8%

11.7%

9.8%

8.6%

6.8%

7.9%

6.2%

6.4%

7.4%

6.6%

$ 18,728.88

18,428.88

17,516.38

16,470.13

15,523.88

14,541.38

13,498.88

12,407.63

11,286.38

10,135.13

8,953.88

7,712.63

6,366.38

4,929.13

3,368.88

1,706.63

234.1%

215.2%

155.7%

138.0%

122.1%

116.9%

130.9%

99.8%

76.8%

57.9%

44.8%

30.5%

29.4%

17.8%

12.5%

7.4%

R e a l t y I n c o m e

12 2 0 0 9 A n n u a l R e p o r t

this shift. Retailers focusing on more basic human
needs goods and services have been affected to a
somewhat lesser extent. But a shift from “spend,
spend, spend” to “save, save, save,” is being felt
in varying degrees across the retail landscape.

At the same time, a great deal of money has
been pumped into our economy in extraordinary
efforts to keep our credit markets open and prop
up our economy. There may well be meaningful
consequences to this massive increase in our
money supply that could possibly lead to an
inflationary environment. Experts disagree as to
the timing and likelihood of higher inflation, but I
believe we should be prepared for higher inflation
at some point in the coming years.

Issues We Face This Year
Given the uncertainties we still
face in the
economy, I thought it would be a good idea for
me to spend some time talking about what we
are paying attention to this year. It’s important, I
believe, to distinguish between macro-economic
concerns and Realty Income concerns. Much of
what is in the headlines about commercial real
estate doesn’t fully apply to us. We have a healthy
balance sheet (i.e. we’re not highly leveraged) and
we don’t carry mortgages on our properties. As
such, we’re somewhat exempt from the primary
issue of excessive indebtedness currently making
the news in the commercial real estate market.
However, there are a couple of things that I’m
keeping my eye on:
1. Tenant store level retail performance
2. Retail consumer shifts

My concerns in these areas are mostly
strategic rather than operational. By this, I mean
that there’s nothing immediate that we need to

address, but a watchful eye is warranted. Let’s
take a look at each of these areas.

Tenant store level retail performance—While
the type of retail real estate we own tends to be
leased to businesses providing basic human
needs goods and services at low price points,
and we tend to own our tenants’ more profitable
stores,
this does not completely protect us
against a very deep recession. During 2009, we
worked our way through six Chapter 11 reorgani-
zations by our tenants, representing about 13% of
our revenue, and we were fortunate to come
through relatively unscathed, recovering, on aver-
age, 83% of our original rental revenue from these
tenants going forward. We are pleased with these
results and believe our underwriting ability and
understanding of the reorganization process will
continue to serve us well. We can’t say for certain
that we won’t have additional retailers run into
financial difficulty and seek the protection afforded
them through the reorganization process. If there
are a few, I believe we will continue to do fairly
well with them because we tend to own their more
profitable stores.

Retail consumer shifts—The diversification of
our real estate portfolio, with more than 30 retail
industries and 118 retail chains operating in 49
states, has allowed us to even out the overall
performance of the total portfolio during the past
40 years. However, the retail environment is
changing somewhat as the consumer shifts from
a spend to save mode. The decisions we make
over the next few years with respect to investment
opportunities will be very important. Our general
focus on basic human needs goods and services
affords us the ability to examine where opportuni-
ties in the future may lie and where we should

R e a l t y I n c o m e

13 2 0 0 9 A n n u a l R e p o r t

limit our focus. A good deal of my time is spent
analyzing where we are and where we want to be
five and ten years from now. There are certain
industries that will continue to do well
in the
current recession and there are others that we
should probably avoid over the long term. There
are also industries in which we have not yet
invested that might represent excellent, long-term
possibilities for consistent revenues. As always,
we will move carefully into any new areas and
continue to favor a “first crawl, then walk, and
finally run” approach as we do so.

Needless to say, the focus of our management
team continues to be on operating our business so
we can continue to provide our shareholders with
dependable monthly income. Our commitment
to our shareholders in this regard is not going
to change.

Our Economic Moat
I’d also like to discuss one of the primary reasons
we believe our real estate portfolio has continued to
perform pretty well in this economic environment.
Our economic moat, or margin of safety, is the end
result of our quest to own the more profitable stores
of our retailers for the long term. Over the last few
years, we have written about our underwriting
processes so that you will understand the delib-
erate manner in which we make real estate
acquisition decisions. The property locations and
financial conditions of the retail chains we work with
continue to be important in our underwriting
process; however, we believe the primary reason
our real estate portfolio has continued to perform
well is due to the strong cash flow coverage of rent
at the individual store locations we own. Before we
tackle the cash flow coverage topic, let’s quickly

review the underwriting process we employ for the
benefit of our first-time readers.

By the time a property gets to the point where
we assess the profitability of the store we are
buying, that property has already passed at least
two of the three benchmarks we’ve set to determine
the suitability of a particular property purchase.
The three benchmarks we use are 1) we examine
the retail chain (tenant) and retail industry, 2) we
thoroughly analyze the real estate location, and
3) we look at the unit profitability and cash flow
coverage of the stores we are acquiring.

When examining the retail chain and industry,
we ascertain competitive conditions of
the
industry, how the particular retail chain we are
considering fits within the industry, the historical
financial performance of the industry, the outlook
for future operating performance, as well as some
indication of the challenges and opportunities that
might impact the industry in the future. We also
meet with the management team of the individual
retail chain, review audited financial statements
and a variety of internal operating metrics that can
give us insight into the retailer’s performance.

The real estate location analysis consists of
sending out our real estate research people to
visit every property and review the trade area in
which the business operates. Typically, we obtain
data on property values and we review area
demographics, traffic flow, regional economic
data, as well as comparative purchase and lease
prices for each location.

Acquisition opportunities that make it past the
first two hurdles aren’t automatically approved
for investment, however. The final key metric we
use to determine whether or not a property makes
economic sense over the long term is “cash flow

R e a l t y I n c o m e

14 2 0 0 9 A n n u a l R e p o r t

coverage.” It’s calculated by dividing the retailer’s
cash flow generated for the store we’re considering
for purchase by the rent that would have to be paid.
This measure helps us figure out how bad things
have to get before the operations of a particular
retail
location won’t be able to support its rent
payments. Generally speaking, we’re looking for
stores that generate cash flow coverage of two
or more times the rent we get paid. Our coverage
ratio requirement can vary according to the partic-
ular retail industry, individual retail chain, and the
specific property being considered.

Our focus on strong store level cash flow
coverage, I believe, was a significant factor in our
successful navigation of the tenant reorganization
proceedings in our portfolio during 2008 and 2009.
This is because the cash flow coverage analysis
takes into account both the profitability of each
store, as well as the level of rent that the cash flow
can support. In Chapter 11 proceedings, a retail
chain is more likely to keep a store that is profitable

Number of Properties
(at the end of each year)

2,400

2,200

2,000

1,800

1,600

1,400

1,200

1,000

800

600

4
9

5
9

6
9

7
9

8
9

9
9

0
0

1
0

2
0

3
0

4
0

5
0

6
0

7
0

8
0

9
0

0
3
6

5
8
6

0
4
7

6
2
8

0
7
9

6
7
0
,
1

8
6
0
,
1

4
2
1
,
1

7
9
1
,
1

4
0
4
,
1

3
3
5
,
1

6
4
6
,
1

5
5
9
,
1

0
7
2
,
2

8
4
3
,
2

9
3
3
,
2

to them and a store with strong rent coverage
generally will require little or no rent concessions.
Had we only considered real estate factors or
unsecured credit analysis in our due diligence,
I believe we might have had to make greater
concessions on rent and our portfolio of properties
would not have performed nearly as well during the
recent economic environment. Let’s take a look
now at the operations of your Company.

Real Estate Operations
and Financial Performance
Real Estate Portfolio Performance
Our portfolio of net-leased retail properties
continues to perform well and provide the lease
revenue from which we pay monthly dividends.
As of December 31, 2009, portfolio occupancy
was 96.8% with just 75 properties available
for lease or sale out of 2,339 properties in the
portfolio. The weighted average remaining lease
term for properties in our portfolio was 11.2 years.
In addition, our portfolio continues to be well
diversified by individual retail chain, retail industry
and by geographic region. At the end of 2009, we
owned 2,339 properties located in 49 states
leased to 118 different retail chains doing business
in 30 separate retail industries.

Same store rents on 2,063 properties under
lease for 2009 increased 0.4% as compared to
2008. To break down the same store rent increases
during 2009, we had 22 industries with rent
increases, 2 with flat rents, and 6 with declining
rents. The increase in same store rent for 2009
was smaller than in 2008. That is not surprising
given the state of the economy and the retail
environment. I think there might be moderate
increases in 2010.

R e a l t y I n c o m e

15 2 0 0 9 A n n u a l R e p o r t

We also selectively sold 25 properties for
$20.5 million during 2009. These properties had
been targeted for sale based on specific asset
sale criteria. In general, Realty Income’s business
model is to hold properties for the long-term cash
that is generated to pay dividends. However,
we will pursue the sale of properties out of the
portfolio when we believe that
1. Reinvesting sale proceeds will generate

higher returns,

2. Asset sales will enhance the credit quality of

our real estate portfolio,

3. Asset sales will extend our average remaining

lease term, or

4. Specific tenant or industry concentration

levels will be reduced.
With respect to lease expirations during 2009,
the portfolio management group handled 156
lease expirations, of which 133 of the leases were
the result of normal
lease expiration, and the
remaining 23 were the result of properties that had
to be re-leased or sold because of tenant financial
difficulties. Needless to say, again this was a tough
year to lease vacant space and hats off to our
portfolio management group for working hard
to keep us above 96% occupancy at year-end.
Keeping the majority of our properties leased year
after year is the key to generating dependable
lease revenue.

During 2009, we acquired 16 properties for
$57.9 million, with an initial average lease yield
of 9.7%. The 16 new properties are located in
five states and are 100% leased under net-lease
agreements, with an initial weighted average
lease length of 17.9 years. They are leased to four
different retail chains in two industries.

We acquired fewer properties in 2008 and

2009 than in prior years because we determined
it would be prudent for us to wait on the sidelines
and maintain high levels of liquidity, until property
prices became more attractive and the economy
firmed. During that time, property prices continued
to fall and lease rates rose. In the third quarter of
2009, we felt that prices had declined to the point
that new acquisitions made sense, from a return
perspective, and so we stepped back into the
market, acquiring a few attractively priced prop-
erties. We continue to believe there are many retail
chains, with solid operating concepts, that need
capital and can’t efficiently access either the debt
or equity markets, in which case a sale leaseback
with Realty Income is a good option. Given the
fact that we are in a very good financial position,
with a strong balance sheet and access to capital,
we look to accelerate our acquisition activities in
2010 and invest in new retail properties that will
add to our profits.

Stable Financial Performance

and Conservative Balance Sheet
Revenue, funds from operations (FFO), and net
income results for the year ended December 31,
2009, as compared to the same period in 2008,
were as follows:
• Revenue was $327.6 million as compared to

$327.8 million in 2008

• FFO available to common shareholders was

$190.4 million as compared to $185.5 million
in 2008

• FFO per diluted common share was $1.84

as compared to $1.83 in 2008

• Net income available to common shareholders

was $106.9 million as compared to
$107.6 million in 2008

R e a l t y I n c o m e

16 2 0 0 9 A n n u a l R e p o r t

As of the year ended December 31, 2009, we
continue to operate with a very conservative
capital structure and have one of the strongest
balance sheets in our industry, according to many
research analysts. Our capital structure consisted
of 30.8% in notes and credit facility borrowings
outstanding, 61.3% in common shares and
7.9% in preferred shares outstanding. As of
December 31, 2009, we had just $4.6 million in
borrowings outstanding on our $355 million
acquisition credit facility, we had $10.0 million in
cash on hand, and we carry no mortgages on any
of our properties.

Our Commitment
to Monthly Dividends
For 40 years we’ve been The Monthly Dividend
Company®. Our goal is to be able to continue to
make this claim for many years to come. As I’ve
highlighted this year, however, it takes more than
a commitment
to being a monthly dividend
company in order to succeed in a challenging
economic environment. The risks to our business
are many, but we believe we have taken the
necessary precautions to continue to be success-
ful
is to
in this environment. Our primary goal
manage our real estate assets so that they
continue to provide the lease revenue to support

monthly dividend payments. Secondarily, we hope
to increase the number of assets that we own so
we can increase our revenue and the amount of
the dividend that we pay over time.

In closing, the last two years have been among
the most interesting and challenging years we
have experienced. 2010 may well end up being
just as interesting and challenging. Nevertheless,
we are committed to our objective of paying you
monthly dividends that tend to increase over time.
Again this year, we are grateful for the support of
the thousands of loyal shareholders who, like us,
have enjoyed many years of monthly dividends.
As always, there are no guarantees we will be
as successful in our efforts during 2010 as we
have been in the past and, for that reason, we
recommend that all investors remain diversified
and rely on us for only a portion of their income.
We will do our best to operate your Company in
a prudent fashion so that the monthly dividends
just keep on coming.

Sincerely,

Tom A. Lewis
Chief Executive Officer
Vice Chairman of the Board of Directors

R e a l t y I n c o m e

17 2 0 0 9 A n n u a l R e p o r t

R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S

Financial Information

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Consolidated Quarterly Financial Data

Report of Independent Registered Public Accounting Firm

Business Description

Property Portfolio Information

Forward-Looking Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Liquidity and Capital Resources

Results of Operations

Funds from Operations Available to Common Stockholders (FFO)

Impact of Inflation

Impact of Recent Accounting Pronouncements

Quantitative and Qualitative Disclosures About Market Risk

Selected Financial Data

Controls and Procedures

Market for the Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities, including Total Return Performance

R e a l t y I n c o m e

18 2 0 0 9 A n n u a l R e p o r t

R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S

Consolidated Balance Sheets

(dollars in thousands, except per share data)

December 31,

Assets

Real estate, at cost:

Land

Buildings and improvements

Total real estate, at cost

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, net

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

Stockholders’ equity:

2009

2008

$ 1,169,295

2,270,161

3,439,456

(630,840)

2,808,616

8,266

2,816,882

10,026

10,396

17,206

60,277

$ 1,157,885

2,251,025

3,408,910

(553,417)

2,855,493

6,660

2,862,153

46,815

10,624

17,206

57,381

$ 2,914,787

$ 2,994,179

16,926

38,445

16,807

4,600

1,350,000

1,426,778

16,793

38,027

14,698

—

1,370,000

1,439,518

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 2009 and 2008

337,790

Common stock and paid in capital, par value $1.00 per share, 200,000,000 shares authorized,

104,286,705 and 104,211,541 shares issued and outstanding as of
December 31, 2009 and 2008, respectively

Distributions in excess of net income

Total stockholders’ equity

Total liabilities and stockholders’ equity

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

1,629,237

(479,018)

1,488,009

1,624,622

(407,751)

1,554,661

$ 2,914,787

$ 2,994,179

R e a l t y I n c o m e

19 2 0 0 9 A n n u a l R e p o r t

R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S

Consolidated Statements of Income

(dollars in thousands, except per share data)

Years Ended December 31,

2009

2008

2007

Revenue

Rental

Other

Total revenue

Expenses

Depreciation and amortization

Interest

General and administrative

Property

Income taxes

Total expenses

Income from continuing operations

Income from discontinued operations:

Real estate acquired for resale by Crest

Real estate held for investment

Total income from discontinued operations

Net income

Preferred stock cash dividends

Net income available to common stockholders

Amounts available to common stockholders per common share:

Income from continuing operations:

Basic

Diluted

Net income:

Basic

Diluted

$ 326,145

1,436

327,581

91,383

85,528

20,946

6,914

677

205,448

122,133

958

8,036

8,994

131,127

(24,253)

$ 106,874

0.94

1.03

$ 325,896

1,877

327,773

89,941

93,956

21,618

5,601

1,230

212,346

115,427

575

15,839

16,414

131,841

(24,253)

$ 107,588

0.90

1.06

$ 285,133

6,350

291,483

75,932

64,331

22,694

3,356

1,392

167,705

123,778

10,703

5,928

16,631

140,409

(24,253)

$ 116,156

0.99

1.16

Weighted average common shares outstanding:

Basic

Diluted

103,577,507

103,581,053

101,178,191

101,209,883

100,195,031

100,333,966

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

R e a l t y I n c o m e

20 2 0 0 9 A n n u a l R e p o r t

R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S

Consolidated Statements of Stockholders’ Equity

(dollars in thousands)

Years Ended
December 31, 2007, 2008, 2009

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, 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

Balance, December 31, 2007

13,900,000

101,082,717

337,790

1,545,037

Net income

Distributions paid and payable

Shares issued in stock offering,

net of offering costs of $4,024

Share-based compensation

—

2,925,000

203,824

—

74,425

5,160

Balance, December 31, 2008

13,900,000

104,211,541

337,790

1,624,622

Net income

Distributions paid and payable

Share-based compensation

—

75,164

—

4,615

140,409

(182,990)

—

(344,735)

131,841

(194,857)

—

(407,751)

131,127

(202,394)

—

140,409

(182,990)

4,672

1,538,092

131,841

(194,857)

74,425

5,160

1,554,661

131,127

(202,394)

4,615

Balance, December 31, 2009

13,900,000

104,286,705

$ 337,790

$ 1,629,237

$ (479,018)

$ 1,488,009

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

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R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S

Consolidated Statements of Cash Flows

(dollars in thousands)

Years Ended December 31,

2009

2008

2007

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

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

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

Intangibles acquired in connection with acquisitions of investment properties

Restricted escrow funds acquired in connection with

acquisitions of investment properties

Net cash used in investing activities

Cash Flows from Financing Activities

Cash distributions to common stockholders

Cash dividends to preferred stockholders

Principal payment on notes payable

Proceeds from common stock offerings, net

Debt issuance costs

Proceeds from notes issued, net

Borrowings from lines of credit

Payments under lines of credit

Proceeds from preferred stock offerings, net

Other items

Net cash (used in) provided by financing activities

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

$ 131,127

$ 131,841

$ 140,409

91,383

(958)

(8,036)

(15)

4,726

—

1,235

666

—

1,987

129

3,607
856

226,707

170

15,425

(60,459)

(860)

—

(45,724)

(178,008)

(24,253)

(20,000)

—

4,600

—

(111)

(217,772)

(36,789)

46,815

$ 10,026

89,941

(575)

(15,839)

(236)

5,049

—

3,618

(9)

31,455

(930)
1,675

246,155

439

24,191

(194,106)

(397)

—

(169,873)

(169,655)

(24,253)

(100,000)

74,425

(3,196)

—

111

(222,568)

(146,286)

193,101

$ 46,815

75,932

(10,703)

(5,928)

(1,835)

3,857

138

(1,610)

5,728

(29,886)

119,790

651

(49)
21,675

318,169

4,370

7,014

(506,360)

(997)

(2,648)

(498,621)

(157,659)

(24,583)

—

544,397

407,800

(407,800)

816

362,980

182,528

10,573

$ 193,101

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

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22 2 0 0 9 A n n u a l R e p o r t

R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S

Notes to Consolidated Financial Statements

December 31, 2009, 2008 and 2007

1. ORGANIZATION AND OPERATION

Realty Income Corporation (“Realty Income,” the “Company,” “we,” “our” or “us”) is organized as a Maryland corporation. We invest in

commercial retail real estate and have elected to be taxed as a real estate investment trust (“REIT”).

At December 31, 2009, we owned 2,339 properties, located in 49 states, containing over 19.1 million leasable square feet, along with three

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 involved in tax-deferred exchanges under Section 1031 of the Internal Revenue Code of 1986, as

amended (the “Code”).

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES

AND RECENT ACCOUNTING PRONOUNCEMENTS
Federal Income Taxes. We have elected to be taxed as a REIT under the 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 the federal income taxes of Crest, which 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) of the investments in

properties for tax purposes, among other things.

The following reconciles our net income available to common stockholders to taxable income (dollars in thousands):

Net income available to common stockholders

Preferred stock cash dividends

Depreciation and amortization timing differences

Tax gain on the sales of real estate less than book gain

Tax loss on the sale of real estate less than book gain

Dividends received from Crest

Elimination of net revenue and expenses from Crest

Adjustment for share-based compensation

Adjustment for straight-line rent

Adjustment for an increase (decrease) in prepaid rent

Other adjustments

2009(1)

$ 106,874

2008

$ 107,588

24,253

27,094

(5,436)

—

378

1,824

(1,117)

1,273

(191)

24,253

28,624

(4,518)

—

2,500

270

2,270

(1,997)

(1,226)

(321)

2007

$ 116,156

24,583

22,668

—

(3,839)

3,300

(6,677)

314

(1,217)

5,608

(453)

Taxable net income, before our dividends paid deduction

$ 154,952

$ 157,443

$ 160,443

(1)The 2009 information presented is a reconciliation of our net income available to common stockholders to estimated taxable net income.

We regularly analyze our various federal and state filing positions and only recognize the income tax effect in our financial statements when

certain criteria regarding uncertain income tax positions have been met. We believe that our income tax positions would more likely than not be

sustained upon examination by all relevant taxing authorities. Therefore, no reserves for uncertain income tax positions have been recorded in our

financial statements.

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 gain on the disposition of such property during the 10 year period beginning 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 property, 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 acquisition, 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, 2009, we have built-in gains of $60 million with respect to such property. We do not expect that we will

be required to pay income tax on the built-in gains in these properties during the ten-year period ending August 28, 2017. It is our intent, and we

have the ability, to defer any dispositions of these properties to periods when the related gains would not be subject to the built-in gain income tax

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R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S
Notes to Consolidated Financial Statements, cont’d.

or otherwise to defer the recognition of the built-in gain related to these properties. However, our plans could change and it may be necessary to

dispose of one or more of these properties in a taxable transaction before August 28, 2017, in which case we would be required to pay corporate

level tax with respect to the built-in gains on these properties as described above.

Net Income Per Common Share. Basic net income per common share is computed by dividing net income available to common stockholders by
the weighted average number of common shares outstanding during each period. Diluted net income per common share is computed by dividing

net income available to common stockholders for the period by the weighted average number of common shares that would have been outstand-

ing assuming the issuance of common shares for all potentially dilutive common shares outstanding during the reporting period.

The following is a reconciliation of the denominator of the basic net income per common share computation to the denominator of the diluted

net income per common share computation:

Weighted average shares used for the basic net income

per share computation

Incremental shares from share-based compensation

Adjusted weighted average shares used for diluted net income

2009

2008

2007

103,577,507

3,546

101,178,191

31,692

100,195,031

138,935

per share computation

103,581,053

101,209,883

100,333,966

Unvested shares from share-based compensation

that were anti-dilutive

542,368

614,917

243,631

No stock options were anti-dilutive in 2009, 2008 or 2007.

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

December 31,

Notes receivable issued in connection with Crest property sales

Deferred bond financing costs, net

Value of in-place and above-market leases, net

Prepaid expenses

Escrow deposits for Section 1031 tax-deferred exchanges

Credit facility organization costs, net

Corporate assets, net of accumulated depreciation and amortization

Other items

2009

$ 22,214

11,899

10,928

7,738

4,479

1,470

1,058

491

2008

$ 22,344

13,249

10,534

4,244

3,174

2,552

1,277

Distributions Payable. Distributions payable consist of the following declared distributions (dollars in thousands) at:

$ 60,277

$ 57,381

December 31,

Common stock distributions

Preferred stock dividends

2009

$ 14,905

2,021

$ 16,926

2008

$ 14,772

2,021

$ 16,793

Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses consist of the following (dollars in thousands) at:

December 31,

Bond interest payable

Other items

2009

$ 25,972

12,473

$ 38,445

2008

$ 26,706

11,321

$ 38,027

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24 2 0 0 9 A n n u a l R e p o r t

Other Liabilities. Other liabilities consist of the following (dollars in thousands) at:

December 31,

Rent received in advance

Security deposits

Value of below-market leases, net

2009

$ 10,341

4,334

2,132

$ 16,807

2008

$ 9,083

3,937

1,678

$ 14,698

Discontinued Operations. Realty Income’s operations from seven investment properties classified as held for sale at December 31, 2009, plus
properties sold in 2009, 2008 and 2007, are reported as discontinued operations. Their respective results of operations have been reclassified as

“income from discontinued operations, real estate held for investment” on our consolidated statements of income. We do not depreciate properties

that are classified as held for sale.

Crest acquires properties with the intention of reselling them rather than holding them for investment and operating the properties.

Consequently, we typically classify properties acquired by Crest as held for sale at the date of acquisition and do not depreciate them. As a result,

the operations of Crest’s properties are classified as “income from discontinued operations, real estate acquired for resale by Crest” on our

consolidated statements of income.

No debt was assumed by buyers of our investment properties, or repaid as a result of our investment property sales, and we do not allocate

interest expense to discontinued operations related to real estate held for investment. We allocate interest expense related to borrowings specifi-

cally attributable to Crest’s properties. The interest expense amounts allocated to the Crest properties held for sale are included in “income from

discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income.

If circumstances arise, which were previously considered unlikely and, as a result, we decide not to sell a property previously classified as

held for sale, the property is reclassified as real estate held for investment. A property that is reclassified to held for investment is measured and

recorded at the lower of (i) its carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that

would have been recognized had the property been continuously classified as held for investment, or (ii) the fair value at the date of the subsequent

decision not to sell.

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):

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

2009

Rental revenue

Other revenue

Gain on sales of real estate acquired for resale

Interest expense

General and administrative expense

Property expenses

Provisions for impairment
Depreciation(1)
Income taxes

Income from discontinued operations, real estate

acquired for resale by Crest

246

1,403

—

(595)

(336)

(128)

(277)

—

645

2008

$ 1,830

914

4,642

(1,797)

(511)

(133)

(3,374)

(771)

(225)

2007

$ 8,165

190

12,319

(6,201)

(691)

(40)

—

(3,039)

958

575

$ 10,703

(1)Depreciation was recorded on one property that was classified as held for investment. This property was sold in 2008.

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25 2 0 0 9 A n n u a l R e p o r t

R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S
Notes to Consolidated Financial Statements, cont’d.

The following is a summary of Realty Income’s “income from discontinued operations, from real estate held for investment” on our consolidated

statements of income (dollars in thousands):

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

Gain on sales of investment properties

Rental revenue

Other revenue

Depreciation and amortization

Property expenses

Provisions for impairment

2009

$ 8,044

1,178

(564)

(547)

(110)

2008

$ 13,314

3,831

(1,093)

(309)

—

Income from discontinued operations, real estate held for investment

$ 8,036

$ 15,839

The following is a summary of our total income from discontinued operations (dollars in thousands, except per share data):

Total discontinued operations

Real estate acquired for resale by Crest

Real estate held for investment

Income from discontinued operations

Per common share, basic and diluted

2009

958

8,036

$ 8,994

$ 0.09

2008

575

15,839

$ 16,414

0.16

2007

$ 1,724

5,907

(1,390)

(185)

(134)

$ 5,928

2007

$ 10,703

5,928

$ 16,631

0.17

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.

Revenue Recognition and Accounts Receivable. All leases are accounted for as operating leases. Under this method, lease payments that
have fixed and determinable rent increases are 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 recognized 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 consider tenant

specific issues, such as financial stability and ability to pay, when determining collectibility of accounts receivable and appropriate allowances to

record. Our allowance for doubtful accounts at December 31, 2009 was $865,000 and at December 31, 2008 was $637,000.

Other revenue includes non-operating interest earned from investments in money market funds and other notes of $51,000 in 2009,

$1.4 million in 2008 and $3.6 million in 2007.

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 (i.e. control), after elimination of all material intercompany balances and transactions.

All of Realty Income’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.

Gain on Sales of Properties. When real estate is sold, the related net book value of the applicable assets is removed and a gain from the sale is
recognized in our consolidated statements of income. We generally record a gain from the sale of real estate provided that various criteria, relating
to the terms of the sale and any subsequent involvement by us with the real estate, have been met.

Allocation of the Purchase Price of Real Estate Acquisitions. When acquiring a property for investment purposes, we allocate the fair value of
real estate acquired with in-place operating leases to: 1) land, 2) building and improvements, and 3) identified intangible assets and liabilities,

based in each case on their fair values. Intangible assets and liabilities consist of above-market and below-market leases, the value of in-place

leases and tenant relationships.

R e a l t y I n c o m e

26 2 0 0 9 A n n u a l R e p o r t

The fair value of the tangible assets of an acquired property (which includes land and buildings/improvements) is determined by valuing the

property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings/improvements based on our determination of

the relative fair value of these assets. Our determinations are based on a real estate appraisal for each property, generated by an independent

appraisal firm, and consider estimates of carrying costs during the expected 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 corresponding in-place lease, measured over a period equal to the remaining term of the lease.

Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases.

Capitalized below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases and

expected below-market renewal option periods.

The aggregate value of other acquired intangible assets consists of the value of in-place leases and tenant relationships. These are measured

by the excess of the purchase price paid for a property, after adjusting for above or below-market lease value, less the estimated fair value of

the property “as if vacant,” determined as set forth above. The value of in-place leases, exclusive of the value of above-market and below-market

in-place leases, is amortized to expense over the remaining periods of the respective leases. If a lease were to be terminated prior to its stated

expiration, all unamortized amounts relating to that lease would be recorded to revenue or expense as appropriate.

Depreciation and Amortization. Land, buildings and improvements are recorded and stated at cost. Major replacements and betterments,
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 assets. Additionally, amounts essential to the development of the 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.

Properties are depreciated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows:

Buildings

Building improvements

25 years

4 to 15 years

Tenant improvements and lease commissions

The shorter of the term of the related lease or useful life

Acquired in-place leases

Remaining terms of the respective leases

Provisions for Impairment. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Generally, a provision for impairment is recorded if estimated future operating cash flows

(undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are less than the current book value of the

property. Key inputs that we estimate in this analysis include projected rental rates, capital expenditures and property sales capitalization rates.

Additionally, a property classified as held for sale is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell.

In 2009, we recorded a provision for impairment of $110,000 on one retail investment property in the convenience store industry, which is held

for sale. This provision for impairment is included in “income from discontinued operations, real estate held for investment” on our consolidated

statement of income for 2009. Additionally, in 2009, Crest recorded total provisions for impairment of $277,000 on three retail properties held

for sale at December 31, 2009 and two properties which were sold in 2009. These provisions for impairment are included in “income from

discontinued operations, real estate acquired for resale by Crest” on our consolidated statement of income for 2009.

No provisions for impairment were recorded by Realty Income in 2008. In 2008, Crest recorded total provisions for impairment of $3.4 million

on three retail properties, which were held for sale at December 31, 2008. These provisions for impairment are included in “income from

discontinued operations, real estate acquired for resale by Crest” on our consolidated statement of income for 2008.

In 2007, we recorded a provision for impairment of $134,000 on one retail investment property in the motor vehicle industry. This provision
for impairment is included in “income from discontinued operations, real estate held for investment” on our consolidated statement of income for

2007. In 2007, we also recorded a provision for impairment of $138,000 on one retail investment property in the consumer electronics industry.

This provision for impairment is included in “property expense” on our consolidated statement of income for 2007. No provisions for impairment

were recorded by Crest in 2007.

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27 2 0 0 9 A n n u a l R e p o r t

R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S
Notes to Consolidated Financial Statements, cont’d.

Asset Retirement Obligations. We analyze our future legal obligations associated with the other-than-temporary removal of tangible long-lived
assets, also referred to as asset retirement obligations. When we determine that we have a legal obligation to provide services upon the retirement

of a tangible long-lived asset, we record a liability for this obligation based on the estimated fair market value of this obligation and adjust the

carrying amount of the related long-lived asset by the same amount. This asset is amortized over its estimated useful life. The estimated fair value

of the asset retirement obligation is calculated by discounting the future cash flows using a credit-adjusted risk-free interest rate.

Goodwill. Goodwill is tested for impairment during the second quarter of each year as well as when events or circumstances occur indicating that
our goodwill might be impaired. We did not record any new goodwill or impairment on our existing goodwill during 2009, 2008 or 2007.

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, or
GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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 August 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) No. 2009-05, Fair Value Measurements and Disclosures. ASU No. 2009-05, which became effective for us in 2009,
provides clarification to measuring the fair value of a liability. In circumstances in which a quoted market price in an active market for the identical

liability is not available, a reporting entity is required to measure fair value by using either (1) a valuation technique that uses quoted prices for

identical or similar liabilities or (2) another valuation technique, such as a present value technique or a technique that is based on the amount

paid or received by the reporting entity to transfer an identical liability. ASU No. 2009-05 only applies to our disclosures in note 12 related to the

estimated fair value of our notes payable and did not have a significant impact on our footnote disclosures.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair
Value Measurements. Effective for interim and annual reporting periods beginning after December 15, 2009, this ASU requires new disclosures and
clarifies existing disclosure requirements about fair value measurement. ASU No. 2010-06 only applies to our disclosures in note 12 related to the

estimated fair values of our notes payable and notes receivable and is not expected to have a significant impact on our footnote disclosures.

Reclassifications. Certain of the 2008 and 2007 balances have been reclassified to conform to the 2009 presentation.

3. RETAIL PROPERTIES ACQUIRED

We acquire land, buildings and improvements that are used by retail operators.

A. During 2009, Realty Income invested $57.9 million in 16 new properties with an initial weighted average contractual lease rate of 9.7%. These
16 properties are located in five states, contain over 278,000 leasable square feet, and are 100% leased with an average lease term of 17.9 years.

The initial weighted average contractual lease rate is computed by dividing the estimated aggregate base cash flow for the first year of each lease

by the estimated total cost of the properties. In connection with these acquisitions, transaction costs of $62,000 were recorded to “general and

administrative” expense on our consolidated statement of income for 2009.

In comparison, during 2008, Realty Income invested $189.6 million in 108 new retail properties and properties under development with an initial

weighted average contractual lease rate of 8.7%. These 108 properties are located in 14 states, contain over 714,000 leasable square feet, and

are 100% leased with an average lease term of 20.6 years.

B. During 2009 and 2008, Crest did not invest in any new retail properties.

C. Crest’s property inventory at December 31, 2009 consisted of three properties valued at $3.8 million, and at December 31, 2008, consisted of
five properties valued at $6.0 million. These amounts are included on our consolidated balance sheets in “real estate held for sale, net.”

R e a l t y I n c o m e

28 2 0 0 9 A n n u a l R e p o r t

D. Of the $57.9 million invested by Realty Income in 2009, $10.5 million was used to acquire three retail properties with existing leases.
Realty Income recorded $1.4 million as the intangible value of the in-place leases, $150,000 as the intangible value of above-market leases and

$655,000 as the intangible value of below-market leases for 2009. The value of the in-place and above-market leases are recorded to “other

assets” on our consolidated balance sheet, as of December 31, 2009, and the value of the below-market leases are recorded to “other liabilities”

on our consolidated balance sheet as of December 31, 2009. All of these amounts are amortized over the life of the respective leases.

Of the $189.6 million invested by Realty Income in 2008, $10.0 million was used to acquire two retail properties with existing leases. Realty

Income recorded $397,000 as the intangible value of the in-place leases for 2008. This amount is recorded to “other assets” on our consolidated

balance sheets and amortized over the life of the respective leases.

4. CREDIT FACILITY

In May 2008, we entered into a $355 million revolving, unsecured credit facility that replaced our previous $300 million acquisition credit facility.

The term of our credit facility is for three years, until May 2011, plus two, one-year extension options. Under our credit facility, our investment grade

credit ratings provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 100 basis points with a facility

commitment fee of 27.5 basis points, for all-in drawn pricing of 127.5 basis points over LIBOR. We also have other interest rate options available

to us. Our credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation.

In May 2008, as a result of entering into our current credit facility, we incurred $3.2 million of credit facility origination costs that were capitalized

and are being amortized over three years. Included in “other assets” on our consolidated balance sheets, at December 31, 2009, is $1.5 million of

the $3.2 million, and at December 31, 2008, is $2.6 million.

In 2009, we did not utilize our credit facility until December and we did not utilize our credit facility during 2008. Our average borrowing rate

on our credit facility during December 2009 was 1.2% and during 2007 was 6.0%. Our effective borrowing rate at December 31, 2009 was 1.2%

and at December 31, 2008 was 1.4%. Our current and prior credit facilities are and were subject to various leverage and interest coverage ratio

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

5. NOTES PAYABLE

A. General

Our senior unsecured note obligations consist of the following, sorted by maturity date, (dollars in millions):

December 31,

8% notes, issued in January 1999 and due in January 2009

5.375% notes, issued in March 2003 and due in March 2013

5.5% notes, issued in November 2003 and due in November 2015

5.95% notes, issued in September 2006 and due in September 2016

5.375% notes, issued in September 2005 and due in September 2017

6.75% notes, issued in September 2007 and due in August 2019

5.875% bonds, issued in March 2005 and due in March 2035

2009

—

100.0

150.0

275.0

175.0

550.0

100.0

2008

20.0

100.0

150.0

275.0

175.0

550.0

100.0

$ 1,350.0

$ 1,370.0

The following table summarizes the maturity of our notes payable as of December 31, 2009 (dollars in millions):

Year of Maturity

2010

2011

2012

2013
2014

Thereafter

Totals

Notes

—

100.0
—

1,250.0

$ 1,350.0

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29 2 0 0 9 A n n u a l R e p o r t

R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S
Notes to Consolidated Financial Statements, cont’d.

Interest incurred on all of the notes for 2009 was $82.5 million, for 2008 was $91.2 million and for 2007 was $67.1 million. The interest rate on

each of these notes is fixed.

Our outstanding notes are unsecured; 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.

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.

B. Note Redemptions

On their maturity date in January 2009, we redeemed, using cash on hand, all of our outstanding 8.00% notes issued in January 1999 at a

redemption price equal to 100% of the principal amount, plus accrued and unpaid interest.

On their maturity date in November 2008, we redeemed, using proceeds from our September 2008 common stock offering and cash on hand,

all of our outstanding 8.25% senior notes issued in October 1998 (the “2008 Notes”) at a redemption price equal to 100% of the principal amount,

plus accrued and unpaid interest.

C. Note Issuance

In September 2007, we issued $550 million in aggregate principal amount of 6.75% senior unsecured notes due 2019 (the “2019 Notes”). The

price to the investor for the 2019 Notes was 99.827% of the principal amount for an effective yield of 6.772%. The net proceeds of approximately

$544.4 million from this offering were used to fund certain property acquisitions, repay borrowings under our acquisition credit facility and for

general corporate purposes, including additional property acquisitions.

6. COMMON STOCK OFFERINGS

In September 2008, we issued 2.925 million shares of common stock at a price of $26.82 per share. The net proceeds of approximately

$74.4 million were used, along with our available cash on hand, to redeem the $100 million outstanding principal amount of our 2008 Notes in

November 2008.

7. PREFERRED STOCK
A. In 2004, we issued 5.1 million shares of 7.375% Monthly Income Class D cumulative redeemable preferred stock. In May 2009, the Class D
preferred shares became redeemable, at our option, for $25 per share. During 2009, 2008 and 2007, we paid twelve monthly dividends to holders

of our Class D preferred stock totaling $1.8437508 per share, or $9.4 million, and at December 31, 2009, a monthly dividend of $0.1536459 per

share was payable and was paid in January 2010.

B. In 2006, we issued 8.8 million shares of 6.75% Monthly Income Class E cumulative redeemable preferred stock. Beginning December 7, 2011,
the Class E preferred shares are redeemable, at our option, for $25 per share. During both 2009 and 2008, we paid twelve monthly dividends to

holders of our Class E preferred stock totaling $1.6875 per share, or $14.9 million, and at December 31, 2009, a monthly dividend of $0.140625

per share was payable and was paid in January 2010. During 2007, we paid twelve monthly dividends to holders of our Class E preferred stock

totaling $1.725 per share, or $15.2 million. In January 2007, we paid the first Class E preferred dividend of $0.178125 per share, which covered a

period of 38 days.

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30 2 0 0 9 A n n u a l R e p o r t

8. DISTRIBUTIONS PAID AND PAYABLE

A. Common Stock

We pay monthly distributions to our common stockholders. The following is a summary of monthly distributions paid per common share for the years:

Month

January

February

March

April

May

June

July

August

September

October

November

December

Total

2009

2008

2007

$ 0.1417500

$ 0.136750

$ 0.126500

0.1417500

0.1420625

0.1423750

0.1426875

0.136750

0.137375

0.138000

0.140500

0.141125

0.126500

0.127125

0.127750

0.135500

0.136125

$ 1.7066250

$ 1.662250

$ 1.560250

The following presents the federal income tax characterization of distributions paid or deemed to be paid per common share for the years:

Ordinary income

Nontaxable distributions

Capital gain

Totals

2009

2008

2007

$ 1.2739214

0.4113034

0.0214002

$ 1.7066250

$ 1.2681285

0.3121490

0.0819725

$ 1.6622500

$ 1.3847719

0.1754781

—

$ 1.5602500

At December 31, 2009, a distribution of $0.143 per common share was payable and was paid in January 2010. At December 31, 2008, a

distribution of $0.14175 per common share was payable and was paid in January 2009.

B. Class D Preferred Stock

Dividends of $0.1536459 per share are paid monthly in arrears on the Class D preferred stock. We declared dividends to holders of our

Class D preferred stock totaling $9.4 million in 2009, 2008 and 2007, respectively.

The following presents the federal income tax characterization of dividends paid per share to our Class D preferred stockholders for the years:

Ordinary income

Capital gain

Totals

C. Class E Preferred Stock

2009

2008

2007

$ 1.8206316

0.0231192

$ 1.8437508

$ 1.7528280

0.0909228

$ 1.8437508

—

$ 1.8437508

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 2009, 2008 and 2007. The first Class E dividend was paid in January 2007.

The following presents the federal income tax characterization of dividends paid per share to our Class E preferred stockholders for the years:

Ordinary income

Capital gain

Totals

2009

2008

2007

$ 1.6663392

0.0211608

$ 1.6875000

$ 1.6042824

0.0832176

$ 1.6875000

$ 1.7250000

—

$ 1.7250000

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31 2 0 0 9 A n n u a l R e p o r t

R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S
Notes to Consolidated Financial Statements, cont’d.

9. OPERATING LEASES
A. At December 31, 2009, we owned 2,339 properties in 49 states, plus an additional three properties owned by Crest. Of the 2,339 properties,
2,328, or 99.5%, are single-tenant, retail properties and the remaining 11 are multi-tenant, distribution and office properties. At December 31,

2009, 75 properties were vacant and available for lease or sale.

Substantially all leases are net leases where the tenant pays property taxes and assessments, maintains the interior and exterior of the building

and leased premises, and carries insurance coverage for public liability, property damage, fire and extended coverage.

Rent based on a percentage of a tenants’ gross sales (percentage rents) for 2009 was $1.3 million, for 2008 was $1.3 million and for 2007 was

$851,000, including amounts recorded to discontinued operations of $22,000 in 2008 and $55,000 in 2007.

At December 31, 2009, minimum future annual rents to be received on the operating leases for the next five years and thereafter are as follows

(dollars in thousands):

2010

2011

2012

2013

2014

Thereafter

Total

$ 320,273

310,454

297,332

281,468

264,021

2,223,917

$ 3,697,465

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, 2009, 2008 or 2007.

10. GAIN ON SALES OF REAL ESTATE ACQUIRED FOR RESALE BY CREST

In 2009, Crest sold two properties for $2.0 million, which resulted in no gain. In 2008, Crest sold 25 properties for $50.7 million, which

resulted in a gain of $4.6 million. In 2008, as part of two sales, Crest provided buyer financing of $19.2 million. In 2007, Crest sold 62 properties

for $123.6 million, which resulted in a gain of $12.3 million. In 2007, as part of two sales, Crest provided buyer financing of $3.8 million, of which

$619,000 was paid in full in November 2007. Crest’s gains on sales are reported before income taxes and are included in discontinued operations.

11. GAIN ON SALES OF INVESTMENT PROPERTIES BY REALTY INCOME

In 2009, we sold 25 investment properties for $20.3 million, which resulted in a gain of $8.0 million. The results of operations for these

properties have been reclassified as discontinued operations. Additionally, we received proceeds of $170,000 from the sale of excess land from

one property, which resulted in a gain of $15,000. This gain is included in “other revenue” on our consolidated statement of income for 2009

because this excess land was associated with a property that continues to be owned as part of our core operations.

In 2008, we sold 29 investment properties for $27.4 million, which resulted in a gain of $13.3 million. The results of operations for these

properties have been reclassified as discontinued operations. Additionally, we received proceeds of $439,000 from the sale of excess land from

one property, which resulted in a gain of $236,000. This gain is included in “other revenue” on our consolidated statement of income for 2008

because this excess land was associated with a property that continues to be owned as part of our core operations.

In 2007, we sold ten investment properties for $7.0 million, which resulted in a gain of $1.7 million. The results of operations for these proper-

ties have been reclassified as discontinued operations. Additionally, we sold excess land and improvements from five properties for an aggregate of

$4.4 million, which resulted in a gain of $1.8 million. This gain is reported in “other revenue” on our consolidated statement of income for 2007

because these improvements and excess land were associated with properties that continue to be owned as part of our core operations.

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date, and establishes a framework for measuring the fair value of an asset. The disclosure for assets and

liabilities measured at fair value requires allocation to a three-level valuation hierarchy. This valuation hierarchy is based upon the transparency of

inputs to the valuation of an asset or liability as of the measurement date. Categorization within this hierarchy is based upon the lowest level of

input that is significant to the fair value measurement.

R e a l t y I n c o m e

32 2 0 0 9 A n n u a l R e p o r t

We believe that the carrying values reflected in our consolidated balance sheets reasonably approximate the fair values for cash and cash

equivalents, accounts receivable, and all liabilities, due to their short-term nature, except for the notes receivable issued in connection with prop-

erty sales and the notes payable, which are disclosed below (dollars in millions):

At December 31, 2009

Notes receivable issued in connection with Crest property sales

Notes payable

At December 31, 2008

Notes receivable issued in connection with Crest property sales

Notes payable

Carrying value per
balance sheet

22.2

$ 1,350.0

Carrying value per
balance sheet

22.3

$ 1,370.0

Estimated fair
market value

20.0

$ 1,276.4

Estimated fair
market value

21.9

949.4

The estimated fair value of the notes receivable issued in connection with property sales has been calculated by discounting the future cash

flows using an interest rate based upon the current 5-year, 7-year, or 10-year Treasury yield curve, plus an applicable credit-adjusted spread.

The notes receivable were issued in connection with the sale of three Crest properties. Payments to us on these notes receivable are current

and no allowance for doubtful accounts has been recorded for them.

The estimated fair value of the notes payable is based upon indicative market prices and recent trading activity of our notes payable.

13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Interest paid in 2009 was $83.2 million, in 2008 was $90.3 million and in 2007 was $56.7 million.

Interest capitalized to properties under development in 2009 was $5,000, in 2008 was $92,000 and in 2007 was $993,000.

Income taxes paid by Realty Income and Crest in 2009 were $1.2 million, in 2008 were $1.7 million and in 2007 were $4.3 million.

The following non-cash investing and financing activities are included in the accompanying consolidated financial statements:

A. Share-based compensation expense for 2009 was $4.7 million, for 2008 was $5.0 million and for 2007 was $3.9 million.

B. See “Provisions for Impairment” in note 2 for a discussion of provisions for impairments recorded by Realty Income and Crest.

C. In 2008, Crest sold two properties for $23.5 million and received notes totaling $19.2 million from the buyers, which are included in “other
assets” on our consolidated balance sheets.

D. In 2007, Crest sold two properties for an aggregate of $5.5 million and received notes totaling $3.8 million from the buyers, of which $619,000
was paid in full in November 2007. The remaining note is included in “other assets” on our consolidated balance sheets.

E. At December 31, 2009, Realty Income had escrow deposits of $4.5 million held for tax-deferred exchanges under Section 1031 of the Code.
The $4.5 million is included in “other assets” on our consolidated balance sheet at December 31, 2009.

F. At December 31, 2008, Realty Income had escrow deposits of $3.2 million held for tax-deferred exchanges under Section 1031 of the Code.
The $3.2 million is included in “other assets” on our consolidated balance sheet at December 31, 2008.

G. At December 31, 2009, Realty Income recorded $1.5 million for a new environmental insurance policy, which supplements its primary insurance
policy. The $1.5 million is included in “other assets” and “accounts payable and accrued expenses” on our consolidated balance sheet at

December 31, 2009.

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33 2 0 0 9 A n n u a l R e p o r t

R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S
Notes to Consolidated Financial Statements, cont’d.

H. In 2009, Realty Income and Crest amended certain prior year state tax returns and determined that it is more-likely-than-not that we will be
collecting refunds in the future as a result of these amendments. As a result of this, in 2009, Realty Income recorded a tax receivable of $454,000

and Crest recorded a tax receivable of $303,000.

I. In accordance with our policy, we recorded adjustments to our estimated legal obligations related to asset retirement obligations on two land
leases in the following amounts: a reduction of $63,000 in 2009 and increases of $335,000 in 2008 and $239,000 in 2007. These asset retirement

obligations account for the difference between our obligations to the landlord under the two land leases and our subtenant’s obligations to us

under the subleases.

J. In connection with the acquisition of seven properties during 2007, we acquired restricted escrow funds totaling $2.6 million. During the
remainder of 2007, all of these funds were invested in improvements to these properties.

14. EMPLOYEE BENEFIT PLAN

We have a 401(k) plan covering substantially all of our employees. Under our 401(k) plan, employees may elect to make contributions to

the plan up to a maximum of 60% of their compensation, subject to limits under the IRS Code. We match 50% of our employee’s contributions,

up to 3% of the employee’s compensation. Our aggregate matching contributions each year have been immaterial to our results of operations.

15. COMMON STOCK INCENTIVE PLAN

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. The

Stock Plan offers our directors, employees and consultants an opportunity to own stock in Realty Income and/or rights that will reflect our growth,

development 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, SPR, SAR

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 recognized in “general and administrative expense” on our consolidated statements of

income during 2009 was $4.7 million, during 2008 was $5.0 million and during 2007 was $3.9 million.

The following table summarizes our common stock grant activity under our Stock Plan. Our common stock grants vest over periods ranging

from immediately to 10 years.

Outstanding nonvested shares,

beginning of year

Shares granted

Shares vested

Shares forfeited

Outstanding nonvested shares,

end of year

(1)Grant date fair value.

2009

2008

2007

Number
of shares

994,453

142,860

(214,521)

(69,558)

Weighted
average
price(1)

$ 19.70

22.86

23.14

25.95

Number
of shares

994,572

249,447

(188,215)

(61,351)

Weighted
average
price(1)

$ 19.46

26.63

21.96

22.13

Number
of shares

868,726

276,631

(149,284)

(1,501)

Weighted
average
price(1)

$ 17.96

27.64

20.94

24.81

853,234

$ 19.14

994,453

$ 19.70

994,572

$ 19.46

During 2009, we issued 142,860 shares of common stock under our Stock Plan. These shares vest over the following service periods: 25,000

vested immediately, 14,500 vest over a service period of three years and 103,360 vest over a service period of five years.

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34 2 0 0 9 A n n u a l R e p o r t

The vesting schedule for shares granted to non-employee directors is as follows:

• For directors with less than six years of service at the date of grant, shares vest in 33.33% increments on each of the first three anniversaries

of the date the shares of stock are granted;

• For directors with six years of service at the date of grant, shares vest in 50% increments on each of the first two anniversaries of the date

the shares of stock are granted;

• For directors with seven years of service at the date of grant, shares are 100% vested on the first anniversary of the date the shares of stock

are granted; and

• For directors with eight or more years of service at the date of grant, there is immediate vesting as of the date the shares of stock are granted.

In August 2008, our Board of Directors approved a new vesting schedule for shares granted to employees after August 20, 2008. The reason

for this change was to provide a shorter vesting period for employees who were closer to the age of retirement, and to adjust the vesting period for

employees age 55 and below to be more in line with comparable vesting schedules in the market. The new vesting schedule for shares granted to

employees is as follows:

• For employees age 55 and below at the grant date, shares vest in 20% increments on each of the first five anniversaries of the grant date;

• For employees age 56 at the grant date, shares vest in 25% increments on each of the first four anniversaries of the grant date;

• For employees age 57 at the grant date, shares vest in 33.33% increments on each of the first three anniversaries of the grant date;

• For employees age 58 at the grant date, shares vest in 50% increments on each of the first two anniversaries of the grant date;

• For employees age 59 at the grant date, shares are 100% vested on the first anniversary of the grant date; and

• For employees age 60 and above at the grant date, shares vest immediately on the grant date.

In addition, after they have been employed for six full months, all non-executive employees receive 200 shares of nonvested stock which vests

over a five year period.

Prior to August 20, 2008, shares granted to employees age 49 and below at the grant date vested in 10% increments on each of the first ten

anniversaries of the grant date, and shares granted to employees age 50 through 55 at the grant date vested in 20% increments on each of the first

five anniversaries of the grant date. The consolidation of these two groups represents the only difference between the new and prior vesting schedules.

As of December 31, 2009, the remaining unamortized share-based compensation expense totaled $16.3 million, which is being amortized on a

straight-line basis over the service period of each applicable award. The amount of share-based compensation is based on the fair value of the stock

at the grant date. We define the grant date as the date the recipient and Realty Income have a mutual understanding of the key terms and condition

of the award, and the recipient of the grant begins to benefit from, or be adversely affected by, subsequent changes in the price of the shares.

The effect of pre-vesting forfeitures on our recorded expense has historically been negligible. Any future pre-vesting forfeitures are also

expected to be negligible, and we will record the benefit related to such forfeitures as they occur. Under the terms of our Stock Plan, we pay

non-refundable dividends to the holders of our nonvested shares. Applicable accounting guidance requires that the dividends paid to holders of

these nonvested shares be charged as compensation expense to the extent that they relate to nonvested shares that do not or are not expected

to vest. However, given the negligible historical and prospective forfeiture rate determined by us, we did not record any amount to compensation

expense related to dividends paid in 2009, 2008 or 2007.

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

represented the last year for which we recorded expense on our stock option awards. 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:

Outstanding options, beginning of year

Options exercised

Outstanding and exercisable options,

end of year

2009

2008

2007

Number
of shares

21,294

(15,448)

Weighted
average
exercise
price

$ 13.33

12.81

Number
of shares

45,007

(23,713)

Weighted
average
exercise
price

$ 12.71

12.15

Number
of shares

106,368

(61,361)

Weighted
average
exercise
price

$ 13.06

13.32

5,846

$ 14.70

21,294

$ 13.33

45,007

$ 12.71

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35 2 0 0 9 A n n u a l R e p o r t

R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S
Notes to Consolidated Financial Statements, cont’d.

At December 31, 2009, the options outstanding and exercisable had an exercise price of $14.70, an expiration date of December 2011 and a

remaining term of 2.0 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 our stock was $25.91, $23.15 and $27.02 at December 31, 2009, 2008 and 2007, respectively.

The total intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007 was $157,000, $319,000 and $904,000,

respectively. The aggregate intrinsic value of options outstanding and exercisable was $66,000, $209,000 and $644,000 at December 31, 2009,

2008 and 2007, respectively.

16. SEGMENT INFORMATION

We evaluate performance and make resource allocation decisions on an industry by industry basis. For financial reporting purposes, we have

grouped our tenants into 31 industry and activity segments (including properties owned by Crest that are grouped together as a segment). All of

the properties are incorporated into one of the applicable segments. Because almost all of our leases require the tenant to pay operating

expenses, revenue is the only component 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 respective

tenants, as of December 31, 2009 (dollars in thousands):

Assets, as of December 31:

Segment net real estate:

Automotive service

Automotive tire services

Child care

Convenience stores

Drug stores

Health and fitness

Motor vehicle dealerships

Restaurants

Sporting goods

Theaters

21 non-reportable segments

Total segment net real estate

Other intangible assets – Automotive tire service

Other intangible assets – Drug stores

Other intangible assets – Grocery stores

Other intangible assets – Health and fitness

Other intangible assets – Theaters

Other intangible assets – non-reportable segments

Goodwill – Automotive service

Goodwill – Child care

Goodwill – Convenience stores

Goodwill – Home furnishings

Goodwill – Restaurants

Goodwill – non reportable segments

Other corporate assets

Total assets

2009

2008

105,085

107,942

201,233

77,769

477,555

141,057

197,820

91,690

729,489

63,665

290,386

441,133

207,409

83,844

472,588

145,919

167,658

94,883

751,466

65,657

299,690

465,097

2,816,882

2,862,153

647

6,066

860

845

1,885

625

1,338

5,353

2,074

1,557

3,779

3,105

706

6,727

911

—

2,190

—

1,338

5,353

2,074

1,557

3,779

3,105

69,771

$ 2,914,787

104,286

$ 2,994,179

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36 2 0 0 9 A n n u a l R e p o r t

For the years ended December 31,

2009

Revenue

2008

2007

Segment rental revenue:

Automotive service

Automotive tire services

Child care

Convenience stores

Drug stores

Health and fitness

Motor vehicle dealerships

Restaurants

Sporting goods

Theaters
21 non-reportable segments(1)

Total rental revenue

Other revenue

Total revenue

$ 15,735

$ 15,817

$ 15,047

22,616

23,761

55,114

13,727

19,280

8,837

69,456

8,363

30,078

59,178

326,145

1,436

$ 327,581

22,040

24,247

51,949

13,125

18,390

9,290

70,986

8,480

29,640

61,932

325,896

1,877

$ 327,773

21,113

23,129

40,727

7,632

14,874

8,640

59,058

8,265

26,120

60,528

285,133

6,350

$ 291,483

(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.

17. COMMITMENTS AND CONTINGENCIES

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 consolidated financial

position or results of operations.

At December 31, 2009, we have contingent payments of $1.2 million for tenant improvements and leasing costs. In addition, we have

committed $295,000 under construction contracts, which is expected to be paid in the next six months.

We have certain properties that are subject to ground leases which are accounted for as operating leases. At December 31, 2009, minimum

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

2010

2011

2012

2013

2014
Thereafter

Total

Ground Leases Paid
by Realty Income(1)

Ground Leases Paid
by Our Tenants(2)

69
832

$ 1,190

$ 3,750

3,736

3,627

3,485

3,250
37,662

$ 55,510

Total

$ 3,832

3,805

3,696

3,554

3,319
38,494

$ 56,700

(1)Realty Income currently pays the ground lessors directly for the rent under the ground leases. A majority of this rent is reimbursed to Realty Income as additional rent from our tenants.
(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.

18. SUBSEQUENT EVENTS

We evaluated all events subsequent to the balance sheet date of December 31, 2009, through February 10, 2010, which is the date our

consolidated financial statements were issued. We determined that no subsequent events require disclosure or adjustment to the consolidated
financial statements, except as follows:

In January 2010 and February 2010, we declared the following dividends, which will be paid in February 2010 and March 2010, respectively:

• $0.143 per share to our common stockholders;

• $0.1536459 per share to our Class D preferred stockholders; and

• $0.140625 per share to our Class E preferred stockholders.

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R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S

Consolidated Quarterly Financial Data

(dollars in thousands, except per share data)
(not covered by Report of Independent Registered Public Accounting Firm)

2009(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:

Basic and diluted

Dividends paid per common share

2008(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:

Basic and diluted

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Year(2)

$ 82,558

$ 81,376

$ 81,851

$ 81,796

$ 327,581

22,787

21,410

8,405

29,956

128

30,084

22,826

21,367

7,136

30,047

2,513

32,560

22,845

21,374

6,540

31,092

2,060

33,152

22,925

21,377

6,456

31,038

4,293

35,331

91,383

85,528

28,537

122,133

8,994

131,127

24,021

26,497

27,089

29,268

106,874

0.23
0.4252500

0.26
0.4261875

0.26
0.4271250

0.28
0.4280625

1.03
1.7066250

$ 82,050

$ 81,589

$ 81,932

$ 82,203

$ 327,773

21,920

23,386

7,150

29,594

167

29,761

22,616

23,929

7,233

27,811

5,240

33,051

22,669

23,915

7,115

28,233

6,464

34,697

22,735

22,726

6,954

29,788

4,544

34,332

89,941

93,956

28,449

115,427

16,414

131,841

23,698

26,988

28,634

28,269

107,588

0.24

0.27

0.29

0.27

1.06

Dividends paid per common share

0.4102500

0.4121250

0.4165000

0.4233750

1.6622500

(1)The consolidated quarterly financial data includes revenues and expenses from our continuing and discontinued operations. The results of operations related to certain properties,
classified as held for sale or 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.

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R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S

Report of Independent Registered
Public Accounting Firm

THE BOARD OF DIRECTORS AND STOCKHOLDERS

REALTY INCOME CORPORATION:

We have audited the accompanying consolidated balance sheets of Realty Income Corporation and subsidiaries as of December 31, 2009

and 2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period

ended December 31, 2009. We have also audited Realty Income Corporation’s internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Realty Income Corporation’s management is responsible for these consolidated financial statements, for maintaining

effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included

in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these

consolidated financial statements, and an opinion on Realty Income Corporation’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those

standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material

misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated

financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing

the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our

audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk

that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our 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 statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,

in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance

that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting

principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and

directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or

disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any

evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or

that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Realty

Income Corporation and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the

years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also in our opinion,

Realty Income Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

San Diego, California

February 10, 2010

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R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S

Business Description

THE COMPANY

Realty Income Corporation, The Monthly Dividend Company®, is a Maryland corporation organized to operate as an equity real estate

investment trust, or REIT. Our primary business objective is to generate dependable monthly cash distributions from a consistent and predictable

level of funds from operations, or FFO, per share. Our monthly distributions are supported by the cash flow from our portfolio of retail properties

leased to regional and national retail chains. We have in-house acquisition, leasing, legal, credit research, real estate research, portfolio

management and capital markets expertise. Over the past 40 years, Realty Income and its predecessors have been acquiring and owning

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

In addition, we seek to increase distributions to common stockholders and FFO per share through both active portfolio management and the

acquisition of additional properties. Our portfolio management focus includes:

• Contractual rent increases on existing leases;

• Rent increases at the termination of existing leases, when market conditions permit; and

• The active management of our property portfolio, including re-leasing vacant properties and selectively selling properties, thereby mitigating

our exposure to certain tenants and markets.

In acquiring additional properties, we adhere to a focused strategy of primarily acquiring properties that are:

• Freestanding, single-tenant, retail locations;

• Leased to regional and national retail chains; and

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

At December 31, 2009, we owned a diversified portfolio:

• Of 2,339 retail properties;

• With an occupancy rate of 96.8%, or 2,264 properties occupied and only 75 properties available for lease;

• Leased to 118 different retail chains doing business in 30 separate retail industries;

• Located in 49 states;

• With over 19.1 million square feet of leasable space; and

• With an average leasable retail space per property of approximately 8,200 square feet.

Of the 2,339 properties in the portfolio, 2,328, or 99.5%, are single-tenant, retail properties and the remaining 11 are multi-tenant, distribution

and office properties. At December 31, 2009, of the 2,328 single-tenant properties, 2,254 were leased with a weighted average remaining lease

term (excluding extension options) of approximately 11.2 years.

In addition, at December 31, 2009, our wholly-owned taxable REIT subsidiary, Crest Net Lease, Inc. (“Crest”), had an inventory of three

properties valued at $3.8 million, which are classified as held for sale. Crest was created to buy and sell properties, primarily to individual investors

who are involved in tax-deferred exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”). In addition to

the three properties, Crest also holds notes receivable on properties previously sold of $22.2 million at December 31, 2009.

We typically acquire retail store properties under long-term leases with retail chain store operators. These transactions generally provide

capital to owners of retail real estate and retail chains for expansion or other corporate purposes. Our acquisition and investment activities are

concentrated in well-defined target markets and generally focus on retail chains providing goods and services that satisfy basic consumer needs.

Our net-lease agreements generally:

• Are for initial terms of 15 to 20 years;

• Require the tenant to pay minimum monthly rent and property operating expenses (taxes, insurance and maintenance); and

• Provide for future rent increases based on increases in the consumer price index (typically subject to ceilings), fixed increases, or additional

rent calculated as a percentage of the tenants’ gross sales above a specified level.

We commenced operations as a REIT on August 15, 1994 through the merger of 25 public and private real estate limited partnerships. Each of

the partnerships was formed between 1970 and 1989 for the purpose of acquiring and managing long-term, net-leased properties.

The seven senior officers of Realty Income owned 1.1% of our outstanding common stock with a market value of $28.9 million at February 8,

2010. The directors and seven senior officers of Realty Income, as a group, owned 1.3% of our outstanding common stock with a market value of

$35.6 million at February 8, 2010.

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• Our common stock is listed on The New York Stock Exchange (“NYSE”) under the ticker symbol “O” with a cusip number of 756109-104.

Our central index key number is 726728.

• Our Class D cumulative redeemable preferred stock is listed on the NYSE under the ticker symbol “OprD” with a cusip number of 756109-609.

• Our Class E cumulative redeemable preferred stock is listed on the NYSE under the ticker symbol “OprE” with a cusip number of 756109-708.

In February 2010, we had 72 employees as compared to 69 employees in February 2009.

We maintain an Internet website at www.realtyincome.com. On our website we make available, free of charge, copies of our annual report on

Form 10-K, quarterly reports on Form 10-Q, Form 3s, Form 4s, Form 5s, current reports on Form 8-K, and amendments to those reports, as soon

as reasonably practicable after we electronically file these reports with the Securities and Exchange Commission, or SEC. None of the information

on our website is deemed to be part of this report.

RECENT DEVELOPMENTS

Increases in Monthly Distributions to Common Stockholders

We have continued our 40-year policy of paying distributions monthly. Monthly distributions per share increased in January 2010 by
$0.0003125 to $0.143. The increase in January 2010 was our 49th consecutive quarterly increase and the 56th increase in the amount of our
dividend since our listing on the NYSE in 1994. In 2009, we paid three monthly cash distributions per share in the amount of $0.14175, three in

the amount of $0.1420625, three in the amount of $0.142375 and three in the amount of $0.1426875, totaling $1.706625. In December 2009

and January 2010, we declared distributions of $0.143 per share, which were paid in January 2010 and will be paid in February 2010, respectively.

The monthly distribution of $0.143 per share represents a current annualized distribution of $1.716 per share, and an annualized distribution

yield of approximately 6.7% based on the last reported sale price of our common stock on the NYSE of $25.74 on February 8, 2010. 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

will continue our pattern of increasing distributions per share, or what our actual distribution yield will be in any future period.

Acquisitions During 2009

During 2009, we invested $57.9 million in 16 new properties with an initial weighted average contractual lease rate of 9.7%. These 16

properties are located in five states, contain over 278,000 leasable square feet, and are 100% leased with an average lease term of 17.9 years.

The 16 new properties we acquired are net-leased to four different retail chains. There were no acquisitions by Crest in 2009.

We made fewer portfolio acquisitions in 2008 and 2009 than in previous years because we felt that preserving our capital resources and

maintaining a high level of liquidity until property prices adjusted and the general economy improved was the prudent course of action. In late

2009, we felt that market conditions had become more attractive for acquisitions, and we currently believe that there are many retail chains, with

solid operating concepts, that are in need of capital. We believe that our solid financial position, strong balance sheet and access to capital give us

the ability to expand our acquisition activities in 2010 and invest in new retail properties that have the potential to contribute to our earnings.

The initial weighted average contractual lease rate is computed as estimated contractual net operating income (in a net-leased property that is

equal to the aggregate base cash flow or, in the case of properties under development, the estimated aggregate base cash flow under the lease)

for the first year of each lease, divided by the estimated total cost of the properties. 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 percentages listed above.

Investments in Existing Properties

In 2009, we capitalized costs of $3.1 million on existing properties in our portfolio, consisting of $1.2 million for re-leasing costs and $1.9 million

for building improvements.

Net Income Available to Common Stockholders

Net income available to common stockholders was $106.9 million in 2009 versus $107.6 million in 2008, a decrease of $714,000. On a diluted

per common share basis, net income was $1.03 per share in 2009 as compared to $1.06 per share in 2008.

The calculation to determine net income available to common stockholders includes gains from the sale of properties. The amount of gains

varies from period to period based on the timing of property sales and can significantly impact net income available to common stockholders.

The gain from the sale of properties during 2009 was $8.1 million, as compared to $13.6 million during 2008.

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Business Description, cont’d.

Funds from Operations (FFO)

In 2009, our FFO increased by $4.9 million, or 2.6%, to $190.4 million versus $185.5 million in 2008. On a diluted per common share basis,

FFO was $1.84 in 2009 compared to $1.83 in 2008, an increase of $0.01, or 0.5%.

See our discussion of FFO in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

in this annual report, which includes a reconciliation of net income available to common stockholders to FFO.

Crest’s Property Sales

During 2009, Crest sold two properties from its inventory for an aggregate of $2.0 million, which resulted in no gain.

Crest’s Property Inventory

Crest’s had an inventory of three properties valued at $3.8 million at December 31, 2009, which is included in “real estate held for sale, net”

on our consolidated balance sheet at December 31, 2009.

Note Redemption

Upon their maturity in January 2009, we redeemed, using cash on hand, the $20 million outstanding principal amount of our 8% Notes due

2009, or 2009 Notes. The 2009 Notes were redeemed at a redemption price equal to 100% of the principal amount, plus accrued and unpaid

interest. We have no debt maturities until March 2013.

Retirement of Board Members

William E. Clark, our previous non-executive chairman, retired from the Board of Directors in February 2009. Mr. Clark had served as our

Chairman of the Board since the inception of Realty Income. Our Corporate Governance and Nominating Committee recommended, and the

Board of Directors elected, Donald R. Cameron as our new non-executive chairman.

Roger P. Kuppinger and Willard H Smith Jr retired from the Board of Directors in May 2009, at which time Ronald L. Merriman succeeded

Mr. Kuppinger as chairman of the Audit Committee.

DISTRIBUTION POLICY

Distributions are paid monthly to our common, Class D preferred and Class E preferred stockholders if, and when, declared by our Board of Directors.

In order to maintain our status as a REIT for federal income tax purposes, we generally are required to distribute dividends to our stockholders

aggregating annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net

capital gains), and we are subject to income tax to the extent we distribute less than 100% of our REIT taxable income (including net capital gains).

In 2009, our cash distributions totaled $202.3 million, or approximately 130.5% of our estimated REIT taxable income of $155.0 million. Our

estimated REIT taxable income reflects non-cash deductions for depreciation and amortization. Our estimated REIT taxable income is presented

to show our compliance with REIT distribution requirements and is not a measure of our liquidity or performance.

We intend to continue to make distributions to our stockholders that are sufficient to meet this distribution requirement and that will reduce our

exposure to income taxes. Furthermore, we believe our funds from operations are more than sufficient to support our current level of cash

distributions to our stockholders. Our 2009 cash distributions to common stockholders totaled $178.0 million, representing 93.5% of our funds

from operations available to common stockholders of $190.4 million.

The Class D preferred stockholders receive cumulative distributions at a rate of 7.375% per annum on the $25 per share liquidation preference

(equivalent to $1.84375 per annum per share). The Class E preferred stockholders receive cumulative distributions at a rate of 6.75% per annum

on the $25 per share liquidation preference (equivalent to $1.6875 per annum per share). Dividends on our Class D and Class E preferred stock

are current.

Future distributions will be at the discretion of our Board of Directors and will depend on, among other things, our results of operations, FFO,

cash flow from operations, financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the

Code, our debt service requirements and any other factors the Board of Directors may deem relevant. In addition, our credit facility contains finan-

cial covenants that could limit the amount of distributions payable by us in the event of a deterioration in our results of operations or financial

condition, and which prohibit the payment of distributions 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.

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Distributions of our current and accumulated earnings and profits for federal income tax purposes generally will be taxable to stockholders

as ordinary income, except to the extent that we 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 taxpayers for “qualified dividend income” has

generally been reduced to 15% (until it “sunsets” or reverts to the provisions of prior law, which under current law will occur with respect to taxable

years beginning after December 31, 2010). In general, dividends payable by REITs are not eligible for the reduced tax rate on corporate dividends,

except to the extent the REIT’s dividends are attributable to dividends received from taxable corporations (such as our taxable REIT subsidiary,

Crest), to income that was subject to tax at the corporate or REIT level (for example, if we distribute taxable income that we retained and paid tax

on in the prior taxable year) or, as discussed above, dividends properly designated by us as “capital gain dividends.” Distributions in excess of

earnings and profits generally will be treated as a non-taxable reduction in the stockholders’ basis in their stock. Distributions above that basis,

generally, will be taxable as a capital gain to stockholders who hold their shares as a capital asset. Approximately 24.1% of the distributions to our

common stockholders, made or deemed to have been made in 2009, were classified as a return of capital for federal income tax purposes. We

are unable to predict the portion of future distributions that may be classified as a return of capital.

BUSINESS PHILOSOPHY AND STRATEGY

Capital Philosophy

Historically, we have met our long-term capital needs through the issuance of common stock, preferred stock and long-term unsecured notes

and bonds. Over the long term, we believe that common stock should be the majority of our capital structure. However, 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 securities. However, we cannot assure you that we will have access to the capital

markets at times and at terms that are acceptable to us.

Conservative Capital Structure

We believe that our stockholders are best served by a conservative capital structure. Therefore, we seek to maintain a conservative debt level

on our balance sheet and solid interest and fixed charge coverage ratios. At December 31, 2009, our total outstanding credit facility borrowings

and outstanding notes were $1.355 billion, or approximately 30.8% of our total market capitalization of $4.40 billion.

We define our total market capitalization at December 31, 2009 as the sum of:

• Shares of our common stock outstanding of 104,286,705 multiplied by the last reported sales price of our common stock on the NYSE of

$25.91 per share on December 31, 2009, or $2.70 billion;

• Aggregate liquidation value (par value of $25 per share) of the Class D preferred stock of $127.5 million;

• Aggregate liquidation value (par value of $25 per share) of the Class E preferred stock of $220 million;

• Outstanding notes of $1.35 billion; and

• Outstanding borrowings of $4.6 million on our credit facility.

Investment Philosophy

We believe that owning an actively managed, diversified portfolio of retail properties under long-term, net leases produces consistent and

predictable income. Net leases typically require the tenant to be responsible for monthly rent and property operating expenses including property

taxes, insurance and maintenance. In addition, tenants are typically responsible for future rent increases based on increases in the consumer price

index (typically subject to ceilings), fixed increases or 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 property expenses, generally produces

a more predictable income stream than many other types of real estate portfolios, while continuing to offer the potential for growth in rental income.

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Business Description, cont’d.

Investment Strategy

When identifying new properties for acquisition, our focus is generally on providing capital to retail chain owners and operators by acquiring,

then leasing back, retail store locations. We categorize retail tenants as: 1) venture market, 2) middle market, and 3) upper market. Venture

companies typically offer a new retail concept in one geographic region of the country and operate between five and 50 retail locations. Middle

market retail chains typically have 50 to 500 retail locations, operations in more than one geographic region, have been successful through one or

more economic cycles, and have a proven, replicable concept. The upper market retail chains typically consist of companies with 500 or more

locations, operating nationally, in a proven, mature retail concept. Upper market retail chains generally have strong operating histories and access

to several sources of capital.

We primarily focus on acquiring properties leased to middle market retail chains that we believe are attractive for investment because:

• They generally have overcome many of the operational and managerial obstacles that can adversely affect venture retailers;

• They typically require capital to fund expansion but have more limited financing options than upper market retail chains;

• They generally have provided us with attractive risk-adjusted returns over time since their financial strength has, in many cases, tended to

improve as their businesses have matured;

• Their relatively large size allows them to spread corporate expenses across a greater number of stores; and

• Middle market retailers typically have the critical mass to survive if a number of locations are closed due to underperformance.

Historically, our investment focus has primarily been on retail industries that have a service component because we believe the lease revenue

from these types of businesses is more stable. Because of this investment focus, for the quarter ended December 31, 2009, approximately 84.3%

of our rental revenue was derived from retailers with a service component in their business. Furthermore, we believe these service-oriented businesses

would be difficult to duplicate over the Internet and that our properties continue to perform well relative to competition from Internet businesses.

Credit Strategy

We generally provide sale-leaseback financing to less than investment grade retail chains. We typically acquire and lease back properties to

regional and national retail chains and believe that within this market we can achieve an attractive risk-adjusted return on the financing we provide

to retailers. Since 1970, our overall weighted average occupancy rate at the end of each year has been 98.3%, and our occupancy rate at the end

of each year has never been below 96%.

We believe the principal financial obligations of most retailers typically include their bank and other debt, payment obligations to suppliers and

real estate lease obligations. Because we typically own the land and building in which a tenant conducts its retail business, we believe the risk of

default on a retailers’ lease obligations is less than the retailers’ unsecured general obligations. It has been our experience that since retailers must

retain their profitable retail locations in order to survive, in the event of reorganization they are less likely to reject a lease for a profitable location

because this would terminate their right to use the property. Thus, as the property owner, we believe we will fare better than unsecured creditors

of the same retailer in the event of reorganization. If a property is rejected by the tenant during reorganization, we own the property and can either

lease it to a new tenant or sell the property. In addition, we believe that the risk of default on the real estate leases can be further mitigated by

monitoring the performance of the retailers’ individual unit locations and considering whether to sell locations that are weaker performers.

In order to qualify for inclusion in our portfolio, new property acquisitions must meet stringent investment and credit requirements. The

properties must generate attractive current yields and the tenant must meet our credit profile. We have established a three-part analysis that

examines each potential investment based on:

•

Industry, company, market conditions and credit profile;

• Store profitability, if profitability data is available; and

• Overall real estate characteristics, including property value and comparative rental rates.

The typical profile of companies whose properties have been approved for acquisition are those with 50 or more retail locations. Generally

the properties:

• Are located in highly visible areas;

• Have easy access to major thoroughfares; and

• Have attractive demographics.

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Acquisition Strategy

We seek to invest in industries in which several, well-organized, regional and national retail chains are capturing market share through

service, quality control, economies of scale, advertising and the selection of prime retail locations. We execute our acquisition strategy by acting

as a source of capital to regional and national retail chain store owners and operators, doing business in a variety of industries, by acquiring

and leasing back retail store locations. We undertake thorough research and analysis to identify what we consider to be appropriate industries,

tenants and property locations for investment. Our research expertise is fundamental to uncovering net-lease opportunities in markets where our

real estate financing program adds value. In selecting real estate for potential investment, we generally seek to acquire properties that have the

following characteristics:

• Freestanding, commercially-zoned property with a single tenant;

• Properties that are important retail locations for regional and national retail chains;

• Properties that we deem to be profitable for the retailers;

• Properties that are located within attractive demographic areas relative to the business of our tenants, with high visibility and easy access

to major thoroughfares; and

• Properties that can be purchased with the simultaneous execution or assumption of long-term, net-lease agreements, offering both current

income and the potential for rent increases.

Impact of Real Estate and Credit Markets

In the commercial retail real estate market throughout 2008 and 2009, property prices generally continued to decline and lease rates rose.

Likewise, the U.S. credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which have impacted our

access to and the cost of our capital. We continue to monitor the commercial retail real estate and U.S. credit markets carefully and, if required,

will make decisions to adjust our business strategy accordingly. See Item 1A entitled “Risk Factors” in this annual report.

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 significant portfolio management activities. This monitoring typically includes regular review and analysis of:

• The performance of various retail industries; and

• The operation, management, business planning and financial condition of the tenants.

We have an active portfolio management program that incorporates the sale of assets when we believe the reinvestment of the sale proceeds will:

• generate higher returns;

• enhance the credit quality of our real estate portfolio;

• extend our average remaining lease term; or

• decrease tenant or industry concentration.

At December 31, 2009, we classified real estate with a carrying amount of $8.3 million as held for sale on our balance sheet, which includes

three properties owned by Crest, valued at $3.8 million. Additionally, we anticipate selling investment properties in our portfolio that have not yet

been specifically identified, from which we anticipate receiving between $10 million and $35 million in proceeds during the next 12 months. We

intend to invest these proceeds into new property acquisitions, if there are attractive opportunities available. However, we cannot guarantee that

we will sell properties during the next 12 months or be able to invest the proceeds from the sales of any properties in new properties.

Universal Shelf Registration

In March 2009, we filed a shelf registration statement with the SEC, which is effective for a term of three years, to replace our prior shelf

registration statement which was set to expire in April 2009. Our new shelf registration statement expires in March 2012. In accordance with

the SEC rules, the amount of securities to be issued pursuant to this shelf registration statement was not specified when it was filed and there

is no specific dollar limit. The securities covered by this registration statement include common stock, preferred stock, debt securities, or any

combination of these securities. We may periodically offer one or more of these securities in amounts, prices and on terms to be announced when

and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in

detail in a prospectus supplement, or other offering materials, at the time of any offering.

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45 2 0 0 9 A n n u a l R e p o r t

R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S
Business Description, cont’d.

$355 Million Acquisition Credit Facility

In May 2008, we entered into a $355 million revolving, unsecured credit facility which replaced our previous $300 million acquisition credit

facility. The term of our credit facility is for three years, until May 2011, plus two, one-year extension options. Under our credit facility, our investment

grade credit ratings provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 100 basis points with a

facility fee of 27.5 basis points, for all-in drawn pricing of 127.5 basis points over LIBOR. We also have other interest rate options available to us.

At December 31, 2009, we had a borrowing capacity of $350.4 million available on our credit facility and an outstanding balance of $4.6 million

at an effective interest rate of 1.23%.

We expect to use our credit facility to acquire additional retail properties and for other corporate purposes. Any additional borrowings will increase

our exposure to interest rate risk. We have the right to request an increase in the borrowing capacity of the credit facility, up to $100 million, to a total

borrowing capacity of $455 million. Any increase in the borrowing capacity is subject to approval by the banks participating in our credit facility.

We generally use our credit facility for the short-term financing of new property acquisitions. Thereafter, when capital is available on acceptable

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 or debt securities. We cannot assure you, however, that we will be able to obtain any such refinancing,

or that market conditions prevailing at the time of refinancing will enable us to issue equity or debt securities upon acceptable terms.

Credit Agency Ratings

We are currently assigned investment grade corporate credit ratings on our senior unsecured notes. Fitch Ratings has assigned a rating of

BBB+, Moody’s Investors Service has assigned a rating of Baa1 and Standard & Poor’s Ratings Group has assigned a rating of BBB to our senior

notes. All of these ratings have “stable” outlooks.

We have also been assigned credit ratings on our preferred stock. Fitch Ratings has assigned a rating of BBB-, Moody’s has assigned a rating

of Baa2 and Standard & Poor’s has assigned a rating of BB+ to our preferred stock. All of these ratings have “stable” outlooks.

The credit ratings assigned to us could change based upon, among other things, our results of operations and financial condition. These

ratings are subject to ongoing evaluation by credit rating agencies and we cannot assure you that our ratings 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, preferred stock or common stock.

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 engage in

trading activities involving energy or commodity contracts or other derivative instruments. Additionally, we have no joint ventures or mandatorily

redeemable preferred stock. As such, our financial position and results of operations are not affected by accounting regulations regarding the

consolidation of off-balance sheet entities and classification of financial instruments with characteristics of both liabilities and equity.

R e a l t y I n c o m e

46 2 0 0 9 A n n u a l R e p o r t

Competitive Strategy

We believe that to successfully pursue our investment philosophy and strategy, we must seek to maintain the following competitive advantages:

• SIZE AND TYPE OF INVESTMENT PROPERTIES: We believe smaller ($500,000 to $10,000,000) net-leased retail properties represent an

attractive investment opportunity in today’s real estate environment. Due to the complexities of acquiring and managing a large portfolio

of relatively small assets, we believe these types of properties have not experienced significant institutional ownership interest or the

corresponding yield reduction experienced by larger income-producing properties. We believe the less intensive day-to-day property

management required by net-lease agreements, coupled with the active management of a large portfolio of smaller properties, is an

effective investment strategy. The tenants of our freestanding retail properties generally provide goods and services that satisfy basic

consumer needs. In order to grow and expand, they generally need capital. Since the acquisition of real estate is typically the single

largest capital expenditure of many of these retailers, our method of purchasing the property and then leasing it back, under a net-lease

arrangement, allows the retail chain to free up capital.

• INVESTMENT IN NEW RETAIL INDUSTRIES: We will seek to further diversify our portfolio among a variety of retail industries. We believe

diversification will allow us to invest in retail industries that currently are growing and have characteristics we find attractive. These

characteristics include, but are not limited to, retail industries that are dominated by local store operators where regional and national

chain store operators can increase market share and dominance by consolidating local operators and streamlining their operations,

as well as capitalizing on major demographic shifts in a population base.

• DIVERSIFICATION: Diversification of the portfolio by retail industry type, tenant, and geographic location is key to our objective of

providing predictable investment results for our stockholders, therefore further diversification of our portfolio is a continuing objective.

At December 31, 2009, our retail property portfolio consisted of 2,339 properties located in 49 states, leased to 118 retail chains doing

business in 30 industry segments. Each of the 30 industry segments, represented in our property portfolio, individually accounted for

no more than 21.3% of our rental revenue for the quarter ended December 31, 2009.

• MANAGEMENT SPECIALIZATION: We believe that our management’s specialization in single-tenant retail properties, 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.

• TECHNOLOGY: We intend to stay at the forefront of technology in our efforts to efficiently and economically carry out our operations.

We maintain sophisticated information systems that allow us to analyze our portfolio’s performance and actively manage our investments.

We believe that technology and information-based systems play an important role in our competitiveness as an investment manager and

source of capital to a variety of industries and tenants.

RISK FACTORS

For 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, 2009.

UNRESOLVED STAFF COMMENTS

There are no unresolved staff comments.

R e a l t y I n c o m e

47 2 0 0 9 A n n u a l R e p o r t

R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S

Property Portfolio Information

At December 31, 2009, we owned a diversified portfolio:

• Of 2,339 retail properties;

• With an occupancy rate of 96.8%, or 2,264 properties occupied and only 75 properties available for lease;

• Leased to 118 different retail chains doing business in 30 separate retail industries;

• Located in 49 states;

• With over 19.1 million square feet of leasable space; and

• With an average leasable retail space per property of approximately 8,200 square feet.

In addition to our real estate portfolio, our subsidiary, Crest, had an inventory of three properties located in three states at December 31, 2009.

These properties are valued at $3.8 million and are classified as held for sale.

At December 31, 2009, of our 2,339 retail properties, 2,254 were leased under net-lease agreements. A net lease typically requires the tenant

to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance. In addition,

our tenants are typically responsible for future rent increases based on increases in the consumer price index (typically subject to ceilings), fixed

increases or additional rent calculated as a percentage of the tenants’ gross sales above a specified level.

Our net-leased retail properties primarily are leased to regional and national retail chain store operators. Most buildings are single-story structures

with adequate parking on site to accommodate peak retail traffic periods. The properties tend to be on major thoroughfares with relatively high

traffic counts, adequate access and proximity to a sufficient population base to constitute a suitable market or trade area for the retailer’s business.

Our net-lease agreements generally:

• Are for initial terms of 15 to 20 years;

• Require the tenant to pay minimum monthly rents and property operating expenses (taxes, insurance and maintenance); and

• Provide for future rent increases based on increases in the consumer price index (typically subject to ceilings), fixed increases, or additional

rent calculated as a percentage of the tenants’ gross sales above a specified level. Where leases provide for rent increases based on

increases in the consumer price index, generally these increases become part of the new permanent base rent. Where leases provide for

percentage rent, this additional rent is typically payable only if the tenants’ gross sales, for a given period (usually one year), exceed a

specified level and is then typically calculated as a percentage of only the amount of gross sales in excess of that level.

R e a l t y I n c o m e

48 2 0 0 9 A n n u a l R e p o r t

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:

For the
Quarter Ended
December 31,
2009

Percentage of Rental Revenue(1)

For the Years Ended

Dec 31,
2009

Dec 31,
2008

Dec 31,
2007

Dec 31,
2006

Dec 31,
2005

Dec 31,
2004

1.1%

1.2%

1.7%

1.6%

1.8%

1.1

1.6

4.8

6.7

0.2

6.9

0.6

1.1

1.5

4.8

6.9

0.2

7.3

0.7

1.0

1.6

4.8

6.7

0.2

7.6

0.8

1.1

2.1

5.2

7.3

0.2

0.1

8.4

0.9

17.0

16.9

15.8

14.0

0.3

1.1

4.3

1.3

0.2

0.8

0.7

6.1

1.3

1.9

2.8

1.0

0.9

0.3

1.0

4.3

1.3

0.2

0.8

0.7

5.9

1.3

1.9

2.7

1.0

0.9

0.3

1.0

4.1

1.2

0.2

0.8

0.7

5.6

2.4

1.9

3.1

1.0

0.8

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

21.3

21.8

21.2

11.9

—

2.5

9.3

0.2

1.1

1.8

—

2.6

9.2

0.2

1.0

1.8

—

2.3

9.0

0.2

1.1

1.9

—

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

100.0%

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

* 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 as discontinued operations.

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49 2 0 0 9 A n n u a l R e p o r t

R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S
Property Portfolio Information, cont’d.

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, 2009, classified according to the retail business types and the level of services they provide (dollars in thousands):

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

Number of
Properties

Rental Revenue for
the Quarter Ended
December 31, 2009(1)

Percentage
of Rental
Revenue

236

252

612

154

584

637

1,462

265

2,339

884

1.1%

3,902

5,665

1,083

150

188

4,999

719

7,585

1,465

26,640

468

5,447

13,898

864

111

2,252

702

17,461

187

866

42,261

902

884

146

524

227

3,482

684

578

1,101

1,451

788

2,087

12,894

$ 81,795

4.8

6.9

1.3

0.2

6.1

0.9

9.3

1.8

32.6

0.5

6.7

17.0

1.1

0.1

2.8

0.9

21.3

0.2

1.1

51.7

1.1

0.2

0.6

0.3

4.3

0.8

0.7

1.3

1.8

1.0

2.5

15.7

100.0%

* Less than 0.1%
(1)Includes rental revenue for all properties owned by Realty Income at December 31, 2009, including revenue from properties reclassified as discontinued operations of $169.

R e a l t y I n c o m e

50 2 0 0 9 A n n u a l R e p o r t

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 2,254 net leased, single-tenant retail properties as of December 31,

2009 (dollars in thousands):

Total Portfolio

Initial Expirations(3)

Subsequent Expirations(4)

Rental
Revenue
for the
Quarter
Ended
Dec 31,
2009(2)

$ 2,776

% of
Total
Rental
Revenue

3.5%

3,384

3,189

5,040

3,305

2,986

2,085

1,835

1,869

5,148

3,224

7,553

2,938

8,169

1,697

5,389

6,169

4,642

4,143

1,151

929

650

460

276

354

4.3

4.0

6.3

4.2

3.8

2.6

2.3

2.4

6.5

4.1

9.5

3.7

10.3

2.1

6.8

7.8

5.8

5.2

1.4

1.2

0.8

0.1

0.6

0.3

0.4

Total
Number
of Leases
Expiring(1)

141

115

135

140

107

115

177

100

249

108

159

Number
of Leases
Expiring

112

170

248

105

158

—

Rental
Revenue
for the
Quarter
Ended
Dec 31,
2009

997

% of
Total
Rental
Revenue

1.3%

1,909

1,861

3,447

2,457

2,218

2,006

1,662

1,553

4,665

3,059

7,163

2,858

8,124

1,675

5,317

5,932

4,625

4,119

1,151

929

650

460

276

354

—

2.4

2.3

4.3

3.1

2.8

2.5

2.1

2.0

5.9

3.9

9.0

3.6

10.2

2.1

6.7

7.5

5.8

5.2

1.4

1.2

0.8

0.1

0.6

0.3

0.4

—

Rental
Revenue
for the
Quarter
Ended
Dec 31,
2009

$ 1,779

1,475

1,328

1,593

848

768

173

316

483

165

390

237

—

% of
Total
Rental
Revenue

2.2%

1.9

1.7

2.0

1.1

1.0

0.1

0.2

0.4

0.6

0.2

0.5

0.1

0.3

—

Number
of Leases
Expiring

—

Year

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

2,254

$ 79,431

100.0%

1,868

$ 69,524

87.5%

386

$ 9,907

12.5%

*Less than 0.1%
(1)Excludes ten multi-tenant properties and 75 vacant unleased properties. The lease expirations for properties under construction are based on the estimated date of completion of

those properties.

(2)Includes rental revenue of $169 from properties reclassified as discontinued operations and excludes revenue of $2,364 from ten multi-tenant properties and from 75 vacant and

unleased properties at December 31, 2009.

(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.

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R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S
Property Portfolio Information, cont’d.

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, 2009 (dollars in thousands):

State

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

Number of
Properties

63
2
79
17
65
51
24
17
166
131
12
85
81
21
33
22
32
3
28
64
52
21
71
62
2
19
14
14
33
8
40
96
6
136
24
18
98
3
100
9
133
212
4
4
104
36
2
21
1

Percent
Leased

97%

100
99
94
97
98
96
100
93
96
100
98
96
100
88
100
100
100
100
98
98
95
96
94
100
95
100
100
100
100
93
97
100
96
100
94
99
100
100
100
96
97
100
100
98
94
100
90
100

Approximate
Leasable
Square Feet

Rental Revenue for
the Quarter Ended
December 31, 2009(1)

Percentage
of Rental
Revenue

425,300
128,500
392,700
92,400
1,178,900
471,500
276,600
33,300
1,426,700
914,300
80,700
1,008,800
686,400
290,600
573,200
110,600
184,900
22,500
266,600
575,400
257,300
392,100
347,600
640,100
30,000
196,300
153,300
109,900
261,300
56,400
502,300
548,300
36,600
845,500
137,400
297,300
677,200
11,000
374,400
24,900
621,800
2,280,000
25,200
12,700
637,100
286,200
23,000
252,700
4,200

$ 1,822
277
2,479
377
4,390
1,865
1,194
429
6,534
3,872
339
4,216
3,244
1,013
1,118
679
899
161
1,613
2,576
1,249
1,557
1,470
2,109
76
478
750
585
1,936
182
2,383
2,850
68
3,323
587
894
3,507
58
2,252
102
2,925
7,918
91
127
3,513
790
121
779
18

2.2%
0.3
3.0
0.5
5.4
2.3
1.5
0.5
8.0
4.7
0.4
5.1
4.0
1.2
1.4
0.8
1.1
0.2
2.0
3.1
1.5
1.9
1.8
2.6
0.1
0.6
0.9
0.7
2.4
0.2
2.9
3.5
0.1
4.1
0.7
1.1
4.3
0.1
2.8
0.1
3.6
9.7
0.1
0.2
4.3
1.0
0.1
0.9
*

2,339

97%

19,182,000

$ 81,795

100.0%

* Less than 0.1%
(1)Includes rental revenue for all properties owned by Realty Income at December 31, 2009, including revenue from properties reclassified as discontinued operations of $169.

R e a l t y I n c o m e

52 2 0 0 9 A n n u a l R e p o r t

R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S

Forward-Looking Statements

This annual report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995,

Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. When used in this

annual report, the words “estimated”, “anticipated”, “expect”, “believe”, “intend” and similar expressions are intended to identify forward-looking

statements. Forward-looking statements include discussions of strategy, plans or intentions of management. Forward-looking statements are

subject to risks, uncertainties, and assumptions about Realty Income Corporation, including, among other things:

• Our anticipated growth strategies;

• Our intention to acquire additional properties and the timing of these acquisitions;

• Our intention to sell properties and the timing of these property sales;

• 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.

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 and future events to differ materially from those set forth or contemplated in the

forward-looking statements 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 volatility and uncertainty in the credit markets and broader financial markets;

• Other risks inherent in the real estate business including tenant defaults, potential liability relating to environmental matters, illiquidity of real

estate investments, and potential 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.

Additional factors that may cause risks and uncertainties include those discussed in the sections entitled “Business Description”, “Risk Factors”

and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this annual report.

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date that this annual report was

filed with the SEC. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We undertake no

obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances

after the date of this annual report or to reflect the occurrence of unanticipated events. In light of these risks and uncertainties, the forward-looking

events discussed in this annual report might not occur.

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53 2 0 0 9 A n n u a l R e p o r t

R E A LT Y I N C O M E C O R P O R AT I O N A N D S U B S I D I A R I E S

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

GENERAL

Realty Income Corporation, The Monthly Dividend Company®, is a Maryland corporation organized to operate as an equity real estate

investment trust, or REIT. Our primary business objective is to generate dependable monthly cash distributions from a consistent and predictable

level of funds from operations, or FFO, per share. Our monthly distributions are supported by the cash flow from our portfolio of retail properties

leased to regional and national retail chains. We have in-house acquisition, leasing, legal, credit research, real estate research, portfolio

management and capital markets expertise. Over the past 40 years, Realty Income and its predecessors have been acquiring and owning

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

In addition, we seek to increase distributions to stockholders and FFO per share through both active portfolio management and the acquisition

of additional properties.

At December 31, 2009, we owned a diversified portfolio:

• Of 2,339 retail properties;

• With an occupancy rate of 96.8%, or 2,264 properties occupied and only 75 properties available for lease;

• Leased to 118 different retail chains doing business in 30 separate retail industries;

• Located in 49 states;

• With over 19.1 million square feet of leasable space; and

• With an average leasable retail space per property of approximately 8,200 square feet.

Of the 2,339 properties in the portfolio, 2,328, or 99.5%, are single-tenant, retail properties and the remaining 11 are multi-tenant, distribution

and office properties. At December 31, 2009, of the 2,328 single-tenant properties, 2,254 were leased with a weighted average remaining lease

term (excluding extension options) of approximately 11.2 years.

In addition, at December 31, 2009, our wholly-owned taxable REIT subsidiary, Crest Net Lease, Inc. (“Crest”), had an inventory of three

properties valued at $3.8 million, which are classified as held for sale. Crest was created to buy and sell properties, primarily to individual investors

who are involved in tax-deferred exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”). In addition to

the three properties, Crest also holds notes receivable of $22.2 million at December 31, 2009. Crest did not acquire any properties in 2009.

LIQUIDITY AND CAPITAL RESOURCES

Capital Philosophy

Historically, we have met our long-term capital needs through the issuance of common stock, preferred stock and long-term unsecured notes

and bonds. Over the long term, we believe that common stock should be the majority of our capital structure. However, 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 securities. However, we cannot assure you that we will have access to the

capital markets at times and at terms that are acceptable to us.

Conservative Capital Structure

We believe that our stockholders are best served by a conservative capital structure. Therefore, we seek to maintain a conservative debt level

on our balance sheet and solid interest and fixed charge coverage ratios. At December 31, 2009, our total outstanding credit facility borrowings

and outstanding notes were $1.355 billion, or approximately 30.8% of our total market capitalization of $4.40 billion.

We define our total market capitalization at December 31, 2009 as the sum of:

• Shares of our common stock outstanding of 104,286,705 multiplied by the last reported sales price of our common stock on the NYSE of

$25.91 per share on December 31, 2009, or $2.70 billion;

• Aggregate liquidation value (par value of $25 per share) of the Class D preferred stock of $127.5 million;

• Aggregate liquidation value (par value of $25 per share) of the Class E preferred stock of $220 million;

• Outstanding notes of $1.35 billion; and

• Outstanding borrowings of $4.6 million on our credit facility.

Mortgage Debt

We have no mortgage debt on any of our properties.

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54 2 0 0 9 A n n u a l R e p o r t

$355 Million Acquisition Credit Facility

In May 2008, we entered into a $355 million revolving, unsecured credit facility that replaced our previous $300 million acquisition credit facility.

The term of our credit facility is for three years, until May 2011, plus two, one-year extension options. Under our credit facility, our investment

grade credit ratings provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 100 basis points with a

facility fee of 27.5 basis points, for all-in drawn pricing of 127.5 basis points over LIBOR. We also have other interest rate options available to us.

At December 31, 2009, we had a borrowing capacity of $350.4 million available on our credit facility and an outstanding balance of $4.6 million

at an effective interest rate of 1.23%.

We expect to use the credit facility to acquire additional retail properties and for other corporate purposes. Any additional borrowings

will increase our exposure to interest rate risk. We have the right to request an increase in the borrowing capacity of the credit facility, up to

$100 million, to a total borrowing capacity of $455 million. Any increase in the borrowing capacity is subject to approval by the lending banks

participating in our credit facility.

Cash Reserves

We are organized to operate as an equity REIT that acquires and leases properties and distributes to stockholders, in the form of monthly cash

distributions, a substantial portion of our net cash flow generated from leases on our retail properties. We intend to retain an appropriate amount of

cash as working capital. At December 31, 2009, we had cash and cash equivalents totaling $10 million.

We believe that our cash and cash equivalents on hand, cash provided from operating activities and borrowing capacity is sufficient to meet our

liquidity needs for the foreseeable future. We intend, however, to use additional sources of capital to fund property acquisitions and to repay future

borrowings under our credit facility.

Acquisitions During 2009

During 2009, we invested $57.9 million in 16 new properties with an initial weighted average contractual lease rate of 9.7%. These 16 properties

are located in five states, contain over 278,000 leasable square feet, and are 100% leased with an average lease term of 17.9 years. The 16 new

properties we acquired are net-leased to four different retail chains. There were no acquisitions by Crest in 2009.