UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2004

Commission File Number 1-13374

REALTY INCOME CORPORATION

(Exact name of registrant as specified in its charter)

220 West Crest Street, Escondido, California  92025

(Address of principal executive offices)

Registrant’s telephone number, including area code: (760)741-2111

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý   No  o

At June 30, 2004, the aggregate market value of the Registrant’s shares of common stock, $1.00 par value, held by non-affiliates of the Registrant was $1.6 billion, at the New York Stock Exchange (“NYSE”) closing price of $20.87, adjusted for a 2-for-1 stock split.

REALTY INCOME CORPORATION

Index to Form 10-K

3

Realty Income commenced operations as a REIT on August 15, 1994 through the merger of 25 public and private real estate limited partnerships with and into the Company. Each of the partnerships was formed between 1970 and 1989 for the purpose of acquiring and managing long-term, net-leased properties.

The six senior officers of Realty Income owned 1.3% of our outstanding common stock with a market value of $24.7 million at February 15, 2005. The directors and six senior officers of Realty Income, as a group, owned 2.6% of our outstanding common stock with a market value of $51.9 million at February 15, 2005.

Realty Income’s common stock is listed on The New York Stock Exchange (“NYSE”) under the ticker symbol “O.” Our central index key number is 726728 and cusip number is 756109-104.

Realty Income’s Class D cumulative redeemable preferred stock is listed on the NYSE under the ticker symbol “OprD” and its cusip number is 756109-609.

Realty Income’s 8.25% Monthly Income Senior Notes, due 2008 are listed on the NYSE under the ticker symbol “OUI.”  The cusip number of these notes is 756109-203.

Realty Income had 69 employees as of February 15, 2005, six of whom are part-time, plus one contract consultant..

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, 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.  None of the information on our website is deemed to be part of this report.

RECENT DEVELOPMENTS

Two-for-one Common Stock Split

On December 31, 2004, after the New York Stock Exchange closed, we completed a 2-for-1 stock split.  At that time we issued, to our common stockholders, one share of common stock for each common share outstanding.  The total number of shares paid as a stock dividend to our common stockholders was 39,650,815.  All common share amounts and per common share amounts have been adjusted to reflect the common stock split.

One Billion Dollars of Dividends Paid

With the payment of the January 2005 dividend, Realty Income and its predecessors have paid $1 billion in common stock dividends. In addition, since October 1994 when the Company began trading on the New York Stock Exchange, shareholders have enjoyed regular increases in the amount of the dividend. The annualized dividend amount has grown from $0.90 per share in 1994 to $1.32 per share as of December 31, 2004, an increase of 46.7%.  The December 31, 2004 annualized dividend amount increased by 10% as compared to the December 31, 2003 annualized dividend amount.

Common Stock Issuance

In March 2004, we issued 3.2 million shares of common stock.  The net proceeds of $67.9 million from this offering were used to repay a portion of the borrowings on our $250 million unsecured acquisition credit facility, including amounts that were borrowed to fund the acquisition of 112 convenience store properties in March 2004.

Class D Preferred Stock Issuance

In May 2004, we issued 4.0 million shares of 7.375% Monthly Income Cumulative Redeemable Class D preferred stock with a liquidation value of $25 per share.  The issuance price was $25 per share and the net proceeds of approximately $96.4 million were used to redeem our outstanding Class B and C preferred stock, repay borrowings under our $250 million unsecured acquisition credit facility and for other general corporate purposes.

In October 2004, we issued an additional 1.1 million shares of 7.375% Class D preferred stock for $25.4311 per share.  The net proceeds of $27.4 million were used to repay borrowings on our $250 million unsecured credit facility, which had been used for recent acquisitions of new retail properties.

5

Class B Preferred Stock Redemption

In June 2004, we redeemed all of the 2,745,700 outstanding shares of our Class B preferred stock for $68.6 million.  Each share was redeemed at a liquidation value of $25.00, plus accrued and unpaid dividends at the time of the redemption.

In addition, when our Class B preferred stock was redeemed, we incurred a non-cash charge of $2.4 million representing the Class B preferred stock original issuance costs that were paid in 1999 and recorded as a reduction to net income available to common stockholders in June 2004.

Class C Preferred Stock Redemption

On July 30, 2004 we redeemed all of the 1,380,000 outstanding shares of our Class C preferred stock for $34.5 million.  Each share was redeemed at a liquidation value of $25.00, plus accrued and unpaid dividends at the time of the redemption.

In addition, when our Class C preferred stock was redeemed, we incurred a non-cash charge of $1.4 million representing the Class C preferred stock original issuance costs that were paid in 1999 and recorded as a reduction to net income available to common stockholders in July 2004.

Realty Income and Crest Net Aggregate Acquisitions

Realty Income and Crest Net invested $215.3 million in aggregate in 194 new properties and properties under development in 2004. These 194 properties are located in 19 states and are 100% leased with an initial average lease term of 17.5 years.

In February 2005, we invested $67.3 million in a portfolio of 24 properties leased to Rite Aid Corporation.  We acquired existing stores that are net-leased to Rite Aid with an average remaining lease term of 14.2 years. Realty Income plans to hold approximately $58 million in its core portfolio as long-term investments and approximately $9 million was acquired by Crest Net lease.

Realty Income Acquisitions

Realty Income invested $193.8 million during 2004 in 172 new properties and properties under development with an initial weighted average contractual lease rate of 9.5%. These 172 properties are located in 18 states and are 100% leased with an initial average lease term of 17.5 years and will contain over 913,000 leasable square feet.

Of the $193.8 million Realty Income invested in real estate during 2004, $11.1 million was invested in properties under development that were acquired before 2004. Estimated unfunded development costs on Realty Income and Crest Net properties under development at December 31, 2004 totaled $13.0 million. At December 31, 2004, five new properties acquired during 2004 were leased and under contract for development by the tenant (with development costs funded by Realty Income or Crest Net) with rent scheduled to begin at various times during 2005.

The initial weighted average contractual lease rate is computed as estimated contractual net operating income (in a net-leased property this is equal to the base rent or, in the case of propertiesunder development, the estimated base rent under the lease) for the first year of each lease, divided by the estimated total costs. Since it is possible that a tenant could default on the payment of contractual rent, we cannot assure you that the actual return on the funds invested will remain at the percentages listed above.

The 172 new properties acquired by Realty Income are net-leased to 12 different retail chains in seven industries: automotive collision service, automotive service, convenience store, health and fitness, motor vehicle dealerships, restaurant, and sporting goods.

6

Crest Net Acquisitions

Crest Net invested $21.5 million during 2004 in 22 new retail properties and properties under development.

Investments in Existing Properties

In 2004, we capitalized costs of $1.1 million on existing properties in our portfolio, consisting of $323,000 for re-leasing costs and $789,000 for building improvements.

Net Income Available to Common Stockholders

Net income available to common stockholders was $90.2 million in 2004 versus $76.7 million in 2003, an increase of $13.5 million. On a diluted per common share basis, net income was $1.15 per share in 2004 as compared to $1.08 per share in 2003.  During 2004, net income available to common stockholders included one-time, non-cash charges totaling $3.8 million, or approximately, $0.05 per share.  These non-cash charges represent the Class B and Class C preferred stock original issuance costs that were paid in 1999 and recorded as a reduction in net income available to common stockholders in 2004 when the preferred stock was redeemed.

The calculation to determine net income available to common stockholders includes gains and losses from the sale of investment properties. The amount of gains and losses varies from period to period based on the timing of property sales and can significantly impact net income available to common stockholders.

The gain recognized from the sales of investment properties during 2004 was $12.7 million as compared to $7.2 million during 2003.

Funds from Operations (FFO)

In 2004, our FFO increased by $14.8 million, or 14.3%, to $118.2 million versus $103.4 million in 2003.  On a diluted per common share basis, FFO was $1.50 in 2004 compared to $1.45 for 2003, an increase of $0.05, or 3.4%.  Included in FFO per diluted common share for 2004 was $0.08 per share in non-cash charges for property impairments and origination costs on redeemed preferred stock. For 2004, non-cash charges for property impairments of $2.4 million equated to $0.03 in FFO per diluted common share and non-cash charges for origination costs on redeemed preferred stock of $3.8 million equated to $0.05 in FFO per diluted common share.

FFO for 2003 has been adjusted to reflect additional impairments on the sale of certain properties.  These additional impairments relate to properties where a contract for the sale of a property and the closing of the sale transaction occurred during the same quarterly period. As these transactions were contracted for and closed during the same quarter, losses on the sales were booked and reflected in the Company’s financial statements, but no impairments were booked on these properties in the Company’s calculation of FFO.  The Company now believes that such impairments on property sales should be deducted from the calculation of FFO.  FFO for 2003 was reduced by $672,000 or $0.01 per share.  The losses from these transactions were previously included in the Company’s calculation of net income and, as such, have no impact on the Company’s previously reported consolidated statements of income or consolidated balance sheets for these periods.

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 Net Property Sales

During 2004 Crest Net sold 51 properties from its inventory for $75.0 million, which resulted in a gain of $10.3 million.

Crest Net’s Property Inventory

Crest Net’s property inventory at December 31, 2004 and December 31, 2003 totaled $10.1 million and $53.3 million, respectively, and is included in real estate held for sale, net, on our consolidated balance sheets.

The financial statements of Crest Net are consolidated into Realty Income’s financial statements. All material intercompany transactions have been eliminated in consolidation.

7

Sales of Investment Properties by Realty Income

During 2004, we sold or exchanged 43 properties and a portion of land from four properties for an aggregate of $35.4 million, which resulted in gains on sales, of $12.7 million on 38 properties and impairments of $1.7 million on five properties. The 43 properties sold consisted of 16 child care facilities, 13 restaurants, 10 convenience stores, three consumer electronics stores and one automotive service location. Of this gain on sales, $12.5 million is included in discontinued operations and $185,000 is included in other revenue. The net proceeds from the sale of these properties were used to repay outstanding indebtedness on our credit facility and to invest in new properties.

Increases in Monthly Cash Distributions to Common Stockholders

We continue our 35-year policy of paying distributions monthly. Monthly distributions per share were increased by $0.000625 in April 2004 to $0.100625, in July 2004 to $0.10125, in October 2004 to $0.109375 and in January 2005 to $0.11. The monthly distributions were also increased by $0.0075 per share in September 2004 to $0.10875.  The increase in January 2005 was our 29^thconsecutive quarterly increase and the 32^nd increase in the amount of our cash dividend since our listing on the NYSE in 1994. In 2004, we paid the following monthly cash distributions per share; three in the amount of $0.10, three in the amount of $0.100625, two in the amount of $0.10125, one in the amount of $0.10875 and three in the amount of $0.109375, totaling $1.24125 per share. In December 2004, January 2005 and February 2005, we declared distributions of $0.11 per share, which were paid on January 18, 2005, on February 15, 2005 and will be paid on March 15, 2005, respectively.

The monthly distribution of $0.11 per share represents a current annualized distribution of $1.32 per share, and an annualized distribution yield of approximately 5.3% based on the last reported sale price of our common stock on the NYSE of $24.84 on February 15, 2005. Although we expect to continue our policy of paying monthly distributions, we cannot guarantee that we will maintain the current level of distributions, that we will continue our pattern of increasing distributions per share, or what the actual distribution yield will be in any future period.

DISTRIBUTION POLICY

Distributions are paid to our common stockholders and Class D preferred stockholders on a monthly basis if, as and when declared by our Board of Directors. 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).

In order to maintain our tax 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 by 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 2004, our cash distributions totaled $106.5 million, or approximately 107.8% of our estimated REIT taxable income of $98.8 million. Our estimated REIT taxable income reflects non-cash deductions for depreciation and amortization. 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. Our 2004 cash distributions to common stockholders totaled $97.4 million, representing 82.4% of our funds from operations available to common stockholders of $118.2 million.

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 Internal Revenue Code of 1986, as amended, our debt service requirements and any other factors the Board of Directors may deem relevant. In addition, our credit facility contains financial 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.

8

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 rate of tax. The maximum tax rate of non-corporate taxpayers for “qualified dividend income” has generally been reduced to 15% (for taxable years beginning after December 31, 2002). 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 Net), 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 the stock. Distributions above that basis, generally, will be taxable as a capital gain. Approximately 4.7% of the distributions, made or deemed to have been made in 2004, to our common stockholders 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

Investment Philosophy

We believe that owning an actively managed, diversified portfolio of retail properties under long-term, net leases produces consistent and predictable income.  Under a net-lease agreement, the tenant agrees to pay monthly rent and property operating expenses (taxes, maintenance and insurance) plus, typically, future rent increases (generally subject to ceilings) based on increases in the consumer price index, fixed increases, or to a lesser degree, additional rent calculated as a percentage of the tenants’ gross sales above a specified level. We believe that a portfolio of properties under long-term leases, coupled with the tenant’s responsibility for 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.

Investment Strategy

In identifying new properties for acquisition, our focus is generally on providing expansion 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.

Realty Income primarily focuses 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;

•                  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.

We also focus on and have selectively made investments in properties of upper market retail chains. We believe upper market retail chains can be attractive for investment because:

•                  They typically are of a higher credit quality;

•                  They usually are larger public and private retailers with more commonly recognized brand names;

•                  They utilize a larger building ranging in size from 10,000 to 50,000 square feet; and

•                  They are able to grow because access to capital facilitates larger transaction sizes.

9

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

Historically, our investment focus has 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, 2004, approximately 81.6% of our rental revenue rent 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. From 1970 through December 31, 2004, we have acquired and leased back to regional and national retail chains 1,678 properties (including 177 properties that have been sold) and have collected approximately 98% of the original contractual rent obligations on those properties. We believe that within this market we can achieve an attractive risk-adjusted return on the financing we provide to retailers.

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;

•                  Location profitability, if profitability data is available; and

•                  Overall real estate characteristics, including 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.

Acquisition Strategy

We seek to invest in industries in which several, well-organized, regional and national chains are capturing market share through service, quality control, economies of scale, 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 appropriate industries, tenants and property locations for investment. Our research expertise is instrumental 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 are located within attractive demographic areas relative to the business of their tenants, with high visibility and easy access to major thoroughfares; and

•                  Properties that can be purchased with the simultaneous execution or assumption of long-term, net-lease agreements, offering both current income and the potential for rent increases.

10

Portfolio Management Strategy

The active management of the property portfolio is an essential component of our long-term strategy. We continually monitor our portfolio for changes that could affect the performance of the industries, tenants and locations in which we have invested. The portfolio is regularly analyzed 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 sales proceeds will generate higher returns, enhance the credit quality of our real estate portfolio, or extend our average remaining lease term. At December 31, 2004, we classified real estate with a carrying amount of $17.2 million as held for sale, which includes $10.1 million in properties owned by Crest Net. Additionally, we anticipate selling properties from our portfolio that have not yet been specifically identified. We anticipate we will receive between $15 million and $35 million in proceeds from the sale of investment properties during the next 12 months and we intend to invest these proceeds into new property acquisitions. However, we cannot guarantee that we will sell properties during the next 12 months.

Conservative Capital Structure

We believe that our stockholders are best served by a conservative capital structure. Therefore, we seek to maintain a conservative debt level on our balance sheet and solid interest and fixed charge coverage ratios. At February 15, 2005, our total outstanding credit facility borrowings and outstanding notes were $571.0 million or approximately 21.3% of our total market capitalization of $2.68 billion. We define our total market capitalization at February 15, 2005 as the sum of:

•                  Shares of our common stock outstanding of 79,581,373 multiplied by the last reported sales price of our common stock on the NYSE of $24.84 per share, or $1.98 billion;

•                  Liquidation value of the Class D preferred stock of $127.5 million;

•                  Outstanding borrowings of $91.0 million on our credit facility; and

•                  Outstanding notes of $480.0 million.

Historically, we have met our long-term capital needs through the issuance of common stock, preferred stock and long-term unsecured notes. Over the long term, we believe that the majority of our future securities issuances should be in the form of common stock, however, we may issue additional preferred stock or 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 terms that are acceptable to us.

We have a $250 million revolving, unsecured credit facility that expires in October 2005. At February 15, 2005, the outstanding balance on the acquisition credit facility was $91.0 million, with an effective interest rate of approximately 3.5%. A commitment fee of 0.2% per annum accrues on the total $250 million credit commitment of the credit facility. The credit facility has been, and is expected to be, used to acquire additional retail properties leased to regional and national retail chains under long-term, net-lease agreements. The credit facility has also been used to provide capital to subsidiaries for the purpose of funding the acquisition of properties.  We regularly evaluate our credit facility and may seek to extend, renew or replace our credit facility, to the extent we deem appropriate.

11

We use our credit facility for the short-term financing of new property acquisitions. When outstanding borrowings under the credit facility reach a certain level (generally in the range of $100 million to $150 million) and 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, convertible preferred stock, debt securities or convertible 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.

We are currently assigned investment grade credit ratings, on our senior unsecured notes, from Fitch Ratings, Moody’s Investors Service, Inc. and Standard & Poor’s Rating Group. Currently, 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 BBB to our senior notes. All of these ratings have been assigned a “stable” outlook.

We have also been assigned investment grade credit ratings from the same rating agencies on our preferred stock. Fitch Ratings has assigned a rating of BBB-, Moody’s Investors Service, Inc. has assigned a rating of Baa3 and Standard & Poor’s Rating Group has assigned a rating of BBB- to our preferred stock.  All of these ratings have been assigned a “stable” outlook.

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

We have no mortgage debt on any of our properties.

No Off-Balance Sheet Arrangements or Unconsolidated Investments

Realty Income and its subsidiaries 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.

As we have no joint ventures, off-balance sheet entities, or mandatorily redeemable preferred stock, our financial position or results of operations are currently not affected by Financial Accounting Standard Board Interpretation No. 46, Consolidation of Variable Interest Entitiesand Statement of Financial Accounting Standard No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.

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:  Though we specialize in single-tenant properties, 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. During 2004, we added two new industries, financial services and motor vehicle dealerships, to our portfolio.

12

•                  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, 2004, our retail property portfolio consisted of 1,533 properties located in 48 states, leased to 93 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 19.6% of our rental revenue for the quarter ended December 31, 2004.

•                  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 will play an increasingly important role in our competitiveness as an investment manager and source of capital to a variety of industries and tenants.

PROPERTIES

At December 31, 2004, we owned a diversified portfolio:

•                  Of 1,533 retail properties;

•                  With an occupancy rate of 97.9%, or 1,501 properties occupied of the 1,533 properties in the portfolio;

•                  Leased to 93 different retail chains doing business in 30 separate retail industries;

•                  Located in 48 states;

•                  With over 11.9 million square feet of leasable space; and

•                  With an average leasable retail space of 7,800 square feet.

In addition to our real estate portfolio at December 31, 2004, our subsidiary, Crest Net had invested $10.1 million in a portfolio of eight retail properties located in five states. These properties are classified as held for sale on our consolidated balance sheets.

At December 31, 2004, 1,497, or 97.7%, of our 1,533 retail properties were owned under net-lease agreements. Net leases typically require the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance. In addition, tenants are typically responsible for future rent increases (generally subject to ceilings) based on increases in the consumer price index, fixed increases or , to a lesser degree, 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 and adequate access and proximity to a sufficient population base constituting a suitable market or trade area for the retailer’s business.

13

The following table sets forth certain information regarding our properties classified according to the business of the respective tenants, expressed as a percentage of our total rental revenue:

* Less than 0.1%

(1)                        Includes rental revenue for all properties owned by Realty Income at the end of each period presented (including revenue from properties reclassified to discontinued operations) and excludes properties owned by our subsidiary, Crest Net.

14

The following table sets forth certain information regarding the properties owned by Realty Income at December 31, 2004, classified according to the retail business types and the level of services they provide (dollars in thousands):

(1)                        Excludes properties owned by our subsidiary, Crest Net.

(2)                        Includes rental revenue for all properties owned by Realty Income at December 31, 2004 (including revenue from properties reclassified to discontinued operations of $144).

15

Of the 1,533 properties in the portfolio at December 31, 2004, 1,528 were single-tenant properties with the remaining properties being multi-tenant properties. At December 31, 2004, 1,497 of the 1,528 single-tenant properties, or 98.0%, were net leased with a weighted average remaining lease term (excluding extension options) of approximately 12.0 years.

The following table sets forth certain information regarding the timing of the lease term expirations (excluding extension options) on our 1,497 net-leased, single-tenant retail properties at December 31, 2004 (dollars in thousands):

*Less than 0.1%

(1)  Excludes, four multi-tenant properties, 32 vacant and unleased properties, one of which is a multi-tenant property, and properties owned by our subsidiary, Crest Net.  The lease expirations for properties under construction are based on the estimated date of completion of those properties.

(2)  Includes rental revenue of $144 from properties reclassified to discontinued operations and excludes revenue of $1,574 from four multi-tenant properties and from 32 vacant and unleased properties at December 31, 2004.

16

The following table sets forth certain state-by-state information regarding Realty Income’s property portfolio as of December 31, 2004 (dollars in thousands):

* Less than 0.1%

(1)  Excludes properties owned by our subsidiary, Crest Net.

(2)  Includes rental revenue for all properties owned by Realty Income at December 31, 2004 (including revenue from properties reclassified to discontinued operations of $144).

17

Description of Leasing Structure

At December 31, 2004, 1,497 or 97.7% of our 1,533 properties were net leased. In most cases, the leases:

•                  Are for initial terms of 15 to 20 years;

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

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

Matters Pertaining to Certain Properties and Tenants

Of the 32 properties available for lease or sale at December 31, 2004; all but one are single-tenant properties. Twelve of the properties had been previously leased to child care operators, eight to consumer electronic stores, seven to restaurant operators, three to shoe store operators, one to an automotive service operator and one to a grocery store operator.  At December 31, 2004, eleven of our properties under lease were unoccupied and available for sublease by the tenants, all of which were current with their rent and other obligations.

For 2004, each of our tenants accounted for less than 10% of our rental revenue.  Our tenants in the convenience store and child care industries accounted for approximately 19.2% and 14.4%, respectively, of our rental revenue for the year 2004. Individually, each of the other industries in our property portfolio accounted for less than 10% of our rental revenue.  A downturn in any of these industries, whether nationwide or limited to specific sectors of the United States, could adversely affect tenants in these industries, which in turn could have a material adverse affect on our financial position, results of operations, ability to make distributions to stockholders and our ability to make debt service payments.

A substantial number of our properties are leased to middle-market retail chains that generally have more limited financial and other resources than certain upper-market retail chains, and therefore they are more likely to be adversely affected by a downturn in their respective business or in the regional or national economy in general.

Certain Properties Under Development

Of the 172 properties Realty Income acquired in 2004 and the 22 properties acquired by Crest Net in 2004, all but five were occupied at February 15, 2005. The five properties were leased and under contract for development by each property’s tenant (with development costs funded by us or Crest Net), with rent generally commencing when the property opens for business. In the case of development properties, we either enter into an agreement with a retail chain where the retailer retains a contractor to construct the improvements and we fund the costs of that development, or we fund a developer who constructs the improvements. In either case, there is an executed lease at the time of the land purchase and there is a requirement to complete the construction on a timely basis, generally within eight months after we purchase the land. The tenant or developer generally is required to pay construction cost overruns to the extent that they exceed the construction budget by more than a predetermined amount. We also enter into a lease with the tenant at the time we purchase the land, which generally requires the tenant to begin paying base rent when the store opens for business. The base rent is calculated as a percentage of our acquisition cost for the property, including construction costs and capitalized interest. In 2004, Realty Income acquired nine development properties and Crest Net acquired one development property, five of which were generating rent as of February 15, 2005. Both Realty Income and Crest Net will continue to pursue development opportunities under similar arrangements.

18

OTHER ITEMS

Competition for Acquisition of Real Estate

We face competition in the acquisition, operation and sale of property. We expect competition from:

•                  Businesses;

•                  Individuals;

•                  Fiduciary accounts and plans; and

•                  Other entities engaged in real estate investment and financing.

Some of these competitors are larger than we are and have greater financial resources. This competition may result in a higher cost for properties we wish to purchase.

The tenants leasing our properties can face significant competition from other operators. This competition may adversely impact:

•                  That portion, if any, of the rental stream to be paid to us based on a tenant’s revenues; and

•                  The tenants’ results of operations or financial condition.

Environmental Liabilities

Investments in real property can create a potential for environmental liability. An owner of property can face liability for environmental contamination created by the presence or discharge of hazardous substances on the property. We can face such liability regardless of:

•                  Our knowledge of the contamination;

•                  The timing of the contamination;

•                  The cause of the contamination; or

•                  The party responsible for the contamination of the property.

There may be environmental problems associated with our properties, of which we are unaware. In that regard, a number of our properties are leased to operators of convenience stores that sell petroleum-based fuels, as well as to operators of oil change and tune-up facilities. These facilities, and some other of our properties, use, or may have used in the past, underground lifts or underground tanks for the storage of petroleum-based or waste products, which could create a potential for release of hazardous substances.

The presence of hazardous substances on a property may adversely affect our ability to sell that property and we may incur substantial remediation costs. Although our leases generally require our tenants to operate in compliance with all applicable federal, state and local environmental laws, ordinances and regulations and to indemnify us against any environmental liabilities arising from the tenants’ activities on the property, we could nevertheless be subject to strict liability by virtue of our ownership interest. There also can be no assurance that our tenants could or would satisfy their indemnification obligations under the leases. The discovery of environmental liabilities attached to our properties could have a material adverse effect on our results of operations, our financial condition or our ability to make distributions to stockholders and to pay the principal of and interest on our debt securities and other indebtedness.

We have not been notified by any governmental authority, and are not otherwise aware, of any material noncompliance, liability or claim relating to hazardous substances, toxic substances or petroleum products in connection with any of our present properties. Nevertheless, if environmental contamination should exist, we could be subject to strict liability by virtue of our ownership interest and to pay the principal and interest on our debt securities and other indebtedness.

Since December 1996, we have maintained an environmental insurance policy on our property portfolio. The limit on our current policy is $10 million per occurrence and $50 million in the aggregate, subject to a $25,000 self insurance retention, per occurrence, for properties with underground storage tanks and a $100,000 self insurance retention, per occurrence, for all other properties. It is possible that our insurance will be insufficient to address any particular environmental situation and that we could be unable to continue to obtain insurance for environmental matters, at a reasonable cost or at all, in the future.  We are currently discussing with our environmental insurance policy provider extending and modifying our environmental insurance policy.

19

Taxation of the Company

Commencing with our taxable year ended December 31, 1994, we believe that we are organized and have operated, and we intend to continue to operate, so as to qualify as a “REIT” under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). However, we cannot assure you that we have been organized or have operated in a manner that has satisfied the requirements for qualification as a REIT, or that we will continue to be organized or operate in a manner that will allow us to continue to qualify as a REIT.

Qualification as a REIT involves the satisfaction of numerous requirements under highly technical and complex Code provisions, for which there are only limited judicial and administrative interpretations, and the determination of various factual matters and circumstances not entirely within our control.

For example, in order to qualify as a REIT, at least 95% of our gross income in each year must be derived from qualifying sources, and we must pay distributions to stockholders aggregating annually at least 90% of our REIT taxable income (as defined in the Code and determined without regard to the dividends paid deduction and by excluding net capital gains).

In the future, it is possible that legislation, new regulations, administrative interpretations or court decisions will change the tax laws with respect to qualification as a REIT, or the federal income tax consequences of such qualification.

If we were to fail to qualify as a REIT in any taxable year:

•                  We would be required to pay federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates;

•                  We would not be allowed a deduction in computing our taxable income for amounts distributed to our stockholders;

•                  We could be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost;

•                  We would no longer be required to make distributions to stockholders; and

•                  This treatment would substantially reduce amounts available for investment or distribution to stockholders because of the additional tax liability for the years involved, which could have a material adverse effect on the market price of our capital stock and the value of our debt securities.

Even if we qualify for and maintain our REIT status, we are subject to certain federal, state and local taxes on our income and property. For example, if we have net income from a prohibited transaction, that income will be subject to a 100% tax. Our subsidiary Crest Net is subject to federal and state taxes at the applicable tax rates on its income and property.

Effect of Distribution Requirements

To maintain our status as a REIT for federal income tax purposes, we generally are required to distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and by excluding net capital gains each year. We also are subject to tax at regular corporate rates to the extent that we distribute less than 100% of our REIT taxable income (including net capital gains) each year.

In addition, we are subject to a 4% nondeductible excise tax to the extent that we fail to distribute during any calendar year at least the sum of 85% of our ordinary income for that calendar year, 95% of our capital gain net income for the calendar year, and any amount of that income that was not distributed in prior years.

We intend to continue to make distributions to our stockholders to comply with the distribution requirements of the Code as well as to reduce our exposure to federal income taxes and the nondeductible excise tax. Differences in timing between the receipt of income and the payment of expenses to arrive at taxable income, along with the effect of required debt amortization payments, could require us to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT.

20

Dilution of Common Stock

Our future growth will depend, in large part, upon our ability to raise additional capital. If we were to raise additional capital through the issuance of equity securities, we could dilute the interests of holders of our common stock. Likewise, our Board of Directors is authorized to cause us to issue preferred stock of any class or series (with dividend, voting and other rights as determined by the Board of Directors). Accordingly, the Board of Directors may authorize the issuance of preferred stock with voting, dividend and other similar rights that could dilute, or otherwise adversely affect, the interests of holders of our common stock.

Real Estate Ownership Risks

We are subject to all of the general risks associated with the ownership of real estate. In particular, we face the risk that rental revenue from our properties may be insufficient to cover all corporate operating expenses, debt service payments on indebtedness we incur and distributions on our stock. Additional real estate ownership risks include:

•                  Adverse changes in general or local economic conditions;

•                  Changes in supply of, or demand for, similar or competing properties;

•                  Changes in interest rates and operating expenses;

•                  Competition for tenants;

•                  Changes in market rental rates;

•                  Inability to lease properties upon termination of existing leases;

•                  Renewal of leases at lower rental rates;

•                  Inability to collect rents from tenants due to financial hardship, including bankruptcy;

•                  Changes in tax, real estate, zoning and environmental laws that may have an adverse impact upon the value of real estate;

•                  Uninsured property liability;

•                  Property damage or casualty losses;

•                  Unexpected expenditures for capital improvements or to bring properties into compliance with applicable federal, state and local laws;

•                  Acts of terrorism and war; and

•                  Acts of God and other factors beyond the control of our management.

Dependence on Key Personnel

We depend on the efforts of our executive officers and key employees. The loss of the services of our executive officers and key employees could have a material adverse effect on our operations.

Item 2:                                      Properties

Information pertaining to our properties can be found under Item 1.

Item 3:                                      Legal Proceedings

We are subject to certain claims and lawsuits in the ordinary course of business, the outcome of which cannot be determined at this time. In the opinion of management, any liability we might incur upon the resolution of these claims and lawsuits will not, in the aggregate, have a material adverse effect on our consolidated financial statements taken as a whole.

Item 4:                                      Submission of Matters to a Vote of Security Holders

No matters were submitted to stockholders during the fourth quarter of the fiscal year.

21

PART II

Item 5:                                      Market For Registrant’s Common Equity And Related Stockholder Matters

A.  Our common stock is traded on the NYSE under the ticker symbol “O.” The following table shows the high and low sales prices per share for our common stock as reported by the NYSE, and distributions declared per share of common stock for the periods indicated.

(1) Common stock cash distributions currently are declared monthly by us based on financial results for the prior months.  At December 31, 2004 a distribution of $0.11 per common share had been declared and was paid in January 2005.

After the market close on December 31, 2004, a 2-for-1 stock split, declared in November 2004, became effective.  Common stockholders received a dividend of an additional share of common stock for each share they owned.  The increase in the number of common shares outstanding after the stock split is reflected for all periods presented and all per share data has been adjusted for the stock split.

B. There were approximately 10,600 registered holders of record of our common stock as of February 1, 2005. We estimate that our total number of shareholders is approximately 65,000 when we include both registered and beneficial holders of our common stock.

22

Item 6:                                      Selected Financial Data

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

(1)  Ratio of Earnings to Fixed Charges is calculated by dividing earnings by fixed charges.  For this purpose, earnings consist of net income before interest expense.  Fixed charges are comprised of interest costs (including capitalized interest) and the amortization of debt issuance costs.  In computing the ratio of earnings to combined fixed chares and preferred stock cash dividends, preferred stock cash dividends consist of dividends on our Class B preferred stock, Class C preferred stock and our outstanding Class D preferred stock.  We redeemed our Class B preferred stock in June 2004 and our Class C preferred stock in July 2004, we issued 4,000,000 shares of our 7-3/8% Class D preferred stock in May 2004 and we issued 1,100,000 shares of our 7-3/8% Class D preferred stock in October 2004.

23

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

We have no mortgage debt on any of our properties.

Universal Shelf Registration of $800 Million

In February 2004, we filed a universal shelf registration statement with the SEC registering the issuance, from time to time, of up to $800 million in aggregate value of common stock, preferred stock and debt securities.  At February 15, 2005, $600.4 million remained available for issuance under our universal shelf registration statement.

Issuance of Common Stock in 2004

In March 2004, we issued 3.2 million shares of common stock. The net proceeds of $67.9 million were used to repay borrowings under our $250 million acquisition credit facility, including amounts that were borrowed to fund the acquisition of 112 convenience store properties in March 2004.

Common Stock Split

Realty Income completed a 2-for-1 stock split after the market close on December 31, 2004. As a result of the stock split, total outstanding shares were increased from approximately 39.65 million shares to 79.30 million shares.

Issuance of Preferred Stock in 2004

InMay 2004, we issued 4.0 million shares of 7.375% Monthly Income Class D cumulative redeemable preferred stock, with a liquidation value of $25 per share.  The net proceeds of $96.4 million from this issuance were used to redeem a portion of the outstanding Class B and Class C preferred stock, repay borrowings outstanding under our $250 million acquisition credit facility and for other general corporate purposes.  Dividends on the Class D preferred stock are paid monthly in arrears.

In October 2004, we issued an additional 1.1 million shares of 7.375% Class D preferred stock for $25.4311 per share.  The net proceeds of $27.4 million were used to repay borrowings on our $250 million acquisition credit facility.

Redemption of Class B and Class C Preferred Stock

In June 2004, we redeemed all of the 2,745,700 outstanding shares of our 9-3/8% Class B preferred stock at par ($25 per share) and on July 30, 2004, we redeemed all of the 1,380,000 outstanding shares of our 9-1/2% Class C preferred stock at par ($25 per share).

Conservative Capital Structure

We believe that our stockholders are best served by a conservative capital structure. Therefore, we seek to maintain a conservative debt level on our balance sheet and solid interest and fixed charge coverage ratios. At February 15, 2005, our total outstanding credit facility borrowings and outstanding notes were $571.0 million or approximately 21.3% of our total market capitalization of $2.68 billion. We define our total market capitalization at February 15, 2005 as the sum of:

•                  Shares of our common stock outstanding of 79,581,373 multiplied by the last reported sales price of our common stock on the NYSE of $24.84 per share, or $1.98 billion;

•                  Liquidation value of the Class D preferred stock of $127.5 million;

•                  Outstanding borrowings of $91.0 million on our credit facility; and

•                  Outstanding notes of $480.0 million.

Historically, we have met our long-term capital needs through the issuance of common stock, preferred stock and long-term unsecured notes. Over the long term, we believe that the majority of our future securities issuances should be in the form of common stock, however, we may issue additional preferred stock or 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 terms that are acceptable to us.

25

Credit Agency Ratings

We are currently assigned investment grade corporate credit ratings, on our senior unsecured notes, from Fitch Ratings, Moody’s Investors Service, Inc. and Standard & Poor’s Rating Group. Currently, 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 BBB to our senior notes. All of these ratings have been assigned a “stable” outlook.

We have also been assigned investment grade credit ratings from the same rating agencies on our preferred stock. Fitch Ratings has assigned a rating of BBB-, Moody’s Investors Service, Inc. has assigned a rating of Baa3 and Standard & Poor’s Rating Group has assigned a rating of BBB- to our preferred stock.  All of these ratings have been assigned a “stable” outlook.

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

Notes Outstanding

In November 2003, we issued $150 million of 5-1/2%, 12-year, senior unsecured notes due 2015 (the “2015 Notes”).  Interest on the 2015 Notes is paid semiannually.

In March 2003, we issued $100 million of 5-3/8%, 10-year, senior unsecured notes due 2013 (the “2013 Notes”).  Interest on the 2013 Notes is paid semiannually.

In January 1999, we issued $20 million of 8% senior unsecured notes due 2009 (the “2009 Notes”). Interest on the 2009 Notes is payable semiannually.

In October 1998, we issued $100 million of 8-1/4% Monthly Income Senior Notes due 2008 (the “2008 Notes”). Interest on the 2008 Notes is payable monthly. The 2008 Notes are unsecured.

In May 1997, we issued $110 million of 7-3/4% senior unsecured notes due 2007 (the “2007 Notes”). Interest on the 2007 Notes is payable 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.

All of our outstanding notes have fixed interest rates.  Our credit facility interest rate is variable.

The following table summarizes the maturity of each of our obligations as of December 31, 2004, dollars in millions:

Table of Obligations

(1) The credit facility balance was $91.0 million as of February 15, 2005.

(2) Interest on credit facility and notes has been calculated based on outstanding balances as of December 31, 2004 through their respective maturity dates.

(3) Other consists of $13.0 million of estimated unfunded costs on properties under development and $1.0 million of contingent payments for tenant improvements and leasing costs.

26

Our credit facility and note obligations are unsecured.  Accordingly, we have not pledged any assets as collateral for these obligations.

Preferred Stock Outstanding

In May 2004, we issued 4.0 million shares of 7.375% Class D cumulative redeemable preferred stock.  Beginning May 27, 2009, the Class D preferred shares are redeemable at our option for $25.00 per share, plus any accrued and unpaid dividends.  Dividends on the Class D preferred are paid monthly in arrears. The net proceeds of $96.4 million from this issuance were used to redeem a portion of the outstanding Class B and Class C preferred stock, repay borrowings outstanding under our $250 million acquisition credit facility and for other general corporate purposes.

In October 2004, we issued an additional 1.1 million shares of 7.375% Class D preferred stock.  The net proceeds of approximately $27.4 million were used to repay borrowings under our $250 million unsecured acquisition credit facility and for other general corporate purposes.

No Off-Balance Sheet Arrangements or Unconsolidated Investment

Realty Income and its subsidiaries 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.

As we have no joint ventures, off-balance sheet entities, or mandatorily redeemable preferred stock, our financial position or results of operations are currently not affected by Financial Accounting Standard Board Interpretation No. 46R, Consolidation of Variable Interest Entitiesand Statement of Financial Accounting Standard No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.

Acquisitions During 2004

Realty Income and Crest Net

Realty Income and Crest Net invested $215.3 million in aggregate in 194 new properties and properties under development in 2004. These 194 properties are located in 19 states and are 100% leased with an initial average lease length of 17.5 years.

Realty Income

Realty Income invested $193.8 million in 172 new properties and properties under development with an initial weighted average contractual lease rate of 9.5% in 2004. These 172 properties are located in 18 states and are 100% leased with an initial average lease length of 17.5 years and will contain over 913,000 leasable square feet.

Of the $193.8 million Realty Income invested in real estate during 2004, $11.1 million was invested in properties under development that were acquired before 2004. Estimated unfunded development costs on Realty Income and Crest Net properties under development at December 31, 2004 totaled $13.0 million. At December 31, 2004, five new properties acquired during 2004 were leased and under contract for development by the tenant (with development costs funded by Realty Income or Crest Net) with rent scheduled to begin at various times during 2005.

The initial weighted average contractual lease rate on our investments is computed as estimated contractual net operating income (in a net-leased property this is equal to the base rent or, in the case of propertiesunder development, the estimated base rent under the lease) for the first year of each lease, divided by the estimated total costs. Since it is possible that a tenant could default on the payment of contractual rent, we cannot assure you that the actual return on the funds invested will remain at the percentages listed above.

27

The 172 new properties acquired by Realty Income are net-leased to 12 different retail chains in seven industries: automotive collision service, automotive service, convenience store, health and fitness, motor vehicle dealerships, restaurant and sporting goods. During 2004, we added two new industries (motor vehicle dealerships and financial services) to our portfolio.

Crest Net

Crest Net invested $21.5 million during 2004 in 22 new retail properties and properties under development.

Investments in Existing Properties

In 2004, we capitalized costs of $1.1 million on existing properties in our portfolio, consisting of $323,000 for re-leasing costs and $789,000 for building improvements

Sales of Investment Properties

During 2004, we sold or exchanged 43 properties and sold a portion of land from four properties for an aggregate of $35.4 million, which resulted in gains on sales of $12.7 million for 38 properties and impairments of $1.7 million on five properties. The 43 properties sold consisted of 16 child care facilities, 13 restaurants, 10 convenience stores, three consumer electronics stores and one automotive service location. Of this gain on sales, $12.5 million is included in discontinued operations and $185,000 is included in other revenue. The net proceeds from the sale of these properties were used to repay outstanding indebtedness on our credit facility and to invest in new properties.

Crest Net Property Sales