Realty Income Corp – ‘424B5’ on 5/2/97

As of:  Friday, 5/2/97   ·   Accession #:  912057-97-15303   ·   File #:  33-95374

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Prospectus   —   Rule 424(b)(5)
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Document/Exhibit                   Description                      Pages   Size 

 1: 424B5       Prospectus                                            42    255K 

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PROSPECTUS SUPPLEMENT                                                           

(TO PROSPECTUS DATED APRIL 18, 1997)                                            

$110,000,000
abcd

7 3/4% NOTES DUE 2007 
----------------

Realty Income Corporation, a Delaware corporation (the "Company"), will 
issue the 7 3/4% Notes due 2007 (the "Notes") offered hereby (the "Offering") in
an aggregate principal amount of $110,000,000. Interest on the Notes is payable 
semiannually on each May 6 and November 6, commencing November 6, 1997. The     
Notes will mature on May 6, 2007 and are redeemable at any time at the option of
the Company, in whole or in part, at a redemption price equal to the sum of (i) 
the principal amount of the Notes being redeemed plus accrued interest to the   
redemption date and (ii) the Make-Whole Amount (as defined in "Description of   
the Notes--Optional Redemption"), if any. The Notes are not subject to any      
mandatory sinking fund.                                                         

The Notes will be represented by a single fully registered note in      
book-entry form (the "Global Note") registered in the name of The Depository    
Trust Company ("DTC") or its nominee. Currently, there is no market for the     
Notes. In addition, the Company does not intend to list the Notes on any        
securities exchange. Beneficial interests in the Global Note will be shown on,  
and transfers thereof will be effected only through, records maintained by DTC  
(with respect to beneficial interests of participants) or by participants or    
persons that hold interests through participants (with respect to beneficial    
interests of beneficial owners). Owners of beneficial interests in the Global   
Note will be entitled to physical delivery of Notes in certificated form equal  
in principal amount to their respective beneficial interests only under the     
limited circumstances described under "Description of the Notes--Book Entry     
System." Settlement for the Notes and all payments of principal, premium, if    
any, and interest in respect of the Global Note will be made in immediately     
available funds. The Notes will trade in DTC's Same-Day Funds Settlement System 
until maturity or until the Notes are issued in definitive form, and secondary  
market trading activity in the Notes will therefore settle in immediately       
available funds. See "Description of the Notes--Same-Day Settlement and         
Payment."                                                                       
--------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES        
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS         
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES          
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS  
SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES.  ANY            
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 

                                                        [Enlarge/Download Table]

                                                      PRICE TO    UNDERWRITING   PROCEEDS TO
                                                      PUBLIC(1)    DISCOUNT(2)   COMPANY(3) 
                                                                                            
Per Note...........................................    99.929%         .7%         99.229%  
Total.............................................. $109,921,900    $770,000    $109,151,900

(1) Plus accrued interest, if any, from May 6, 1997.                            

(2) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as 
amended. See "Underwriting."                                            

(3) Before deducting expenses payable by the Company estimated at $180,000.     
--------------------------

 The Notes are offered by the several Underwriters, subject to prior sale,
when, as and if issued by the Company and delivered to and accepted by them,    
subject to approval of certain legal matters by counsel for the Underwriters and
subject to certain other conditions. The Underwriters reserve the right to      
withdraw, cancel or modify such offer and to reject orders in whole or in part. 
It is expected that delivery of the Notes offered hereby will be made in        
book-entry form through the facilities of DTC in New York, New York on or about 
May 6, 1997.                                                                    

--------------------------

MERRILL LYNCH & CO.                                                             

DONALDSON, LUFKIN & JENRETTE                            
SECURITIES CORPORATION    

J.P. MORGAN & CO. 

                                                            SALOMON BROTHERS INC

--------------------------

The date of this Prospectus Supplement is May 1, 1997.

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 Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Notes. Such       
transactions may include stabilizing and the purchase of Notes to cover         
syndicate short positions. For a description of these activities, see           
"Underwriting."                                                                 

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 

    The document listed below has been filed by the Company under the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), with the Securities  
and Exchange Commission (the "Commission") and is incorporated herein by        
reference:                                                                      

   The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.                                                                       

    All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Prospectus Supplement  
and prior to the termination of the offering of the Notes shall be deemed to be 
incorporated by reference in this Prospectus Supplement and to be part hereof   
from the date of filing such documents.                                         

    Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded   
for purposes of this Prospectus Supplement to the extent that a statement       
contained herein (or in the accompanying Prospectus) or in any other            
subsequently filed document that also is or is deemed to be incorporated by     
reference herein modifies or supersedes such statement. Any such statement so   
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus Supplement.                             

Copies of all documents that are incorporated herein by reference (not  
including the exhibits to such documents, unless such exhibits are specifically 
incorporated by reference into the information that this Prospectus Supplement  
incorporates) will be provided without charge to each person, including any     
beneficial owner, to whom this Prospectus Supplement is delivered, upon written 
or oral request. Requests should be directed to the Corporate Secretary of the  
Company, 220 West Crest Street, Escondido, California 92025 (telephone number:  
(760) 741-2111).                                                                

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PROSPECTUS SUPPLEMENT SUMMARY 

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED 
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING   
ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS PROSPECTUS SUPPLEMENT OR  
THE ACCOMPANYING PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, AS USED     
HEREIN THE TERMS "COMPANY" AND "REALTY INCOME" REFER TO REALTY INCOME           
CORPORATION AND ITS SUBSIDIARIES ON A CONSOLIDATED BASIS FOR PERIODS FROM AND   
AFTER AUGUST 15, 1994 (THE DATE OF THE CONSOLIDATION REFERRED TO UNDER "BUSINESS
AND PROPERTIES") AND TO THE COMPANY'S PREDECESSOR PARTNERSHIPS FOR PERIODS PRIOR
TO AUGUST 15, 1994. UNLESS OTHERWISE INDICATED, INFORMATION REGARDING THE       
COMPANY'S PROPERTIES IS AS OF APRIL 1, 1997.                                    

THE COMPANY 

Realty Income Corporation ("Realty Income" or the "Company") is a fully 
integrated, self-administered and self-managed real estate investment trust     
("REIT") which management believes is the nation's largest publicly-traded owner
of freestanding, single-tenant, retail properties diversified geographically and
by industry and operated under net lease agreements. As of April 1, 1997, the   
Company owned a diversified portfolio of 747 properties located in 42 states    
with over 5.4 million square feet of leasable space. Over 99% of the Company's  
properties were leased as of April 1, 1997.                                     

Realty Income adheres to a focused strategy of acquiring freestanding,  
single-tenant, retail properties leased to national and regional retail chains  
under long-term, net lease agreements. The Company typically acquires, and then 
leases back, retail store locations from retail chain store operators, providing
capital to the operators for continued expansion and other purposes. The        
Company's net lease agreements generally are for initial terms of 10 to 20      
years, require the tenant to pay a minimum monthly rent 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 or additional rent calculated as a percentage of the tenant's gross 
sales above a specified level.                                                  

Since 1970 and through December 31, 1996, Realty Income has acquired and
leased back to national and regional retail chains over 700 properties          
(including 25 properties that have been sold) and has collected in excess of 98%
of the original contractual rent obligations on those properties. Realty Income 
believes that the long-term ownership of an actively managed, diversified       
portfolio of retail properties leased under long-term, net lease agreements can 
produce consistent, predictable income and the potential for long-term capital  
appreciation. Management believes that long-term leases, coupled with tenants   
assuming responsibility for property expenses under the net lease structure,    
generally produce a more predictable income stream than many other types of real
estate portfolios. As of April 1, 1997, the Company's single-tenant properties  
were leased pursuant to leases with an average remaining term (excluding        
extension options) of approximately 8.4 years.                                  

The Company is a fully integrated real estate company with in-house     
acquisition, leasing, legal, financial underwriting, portfolio management and   
capital markets expertise. The seven senior officers of the Company, who have   
each managed the Company's properties and operations for between six and 27     
years, owned approximately 3.9% of the Company's outstanding common stock as of 
April 15, 1997. Realty Income had 36 employees as of April 15, 1997.            

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THE OFFERING

  All capitalized terms used herein and not defined herein have the meanings
provided in "Description of the Notes." For a more complete description of the  
terms of the Notes specified in the following summary, see "Description of the  
Notes" in this Prospectus Supplement and "Description of Debt Securities" in the
accompanying Prospectus.                                                        

Securities                                                                      
Offered...........  $110,000,000 aggregate principal amount of 7 3/4% Notes 
due 2007 (the "Notes").             

Maturity............  The Notes will mature on May 6, 2007.                     

Interest Payment                                                                
Dates.............  Semiannually on May 6 and November 6, commencing Novem- 
ber 6, 1997.                        

Ranking.............  The Notes will be direct, senior unsecured obligations    
               of the Company and will rank equally with all other
                  senior unsecured indebtedness of the Company from time
              to time outstanding. The Notes will be effectively
                  subordinated to all indebtedness and other liabilities
           of the Company's subsidiaries, and will also be
          effectively subordinated to any senior secured
            indebtedness of the Company to the extent of the
                    collateral pledged as security therefor. As of March 31,
             1997, such subsidiary indebtedness (not including
              guarantees of borrowings under the Credit Facility
                   (defined below)) and other liabilities (primarily rents
                  received in advance) aggregated approximately $331,000
            and the Company (excluding its subsidiaries) had
                   unsecured senior indebtedness aggregating approximately
                    $94.7 million (approximately $6.5 million (excluding the
                   Notes) on a pro forma basis after giving effect to this
                   Offering and the application of net proceeds therefrom)
       and senior secured indebtedness aggregating
approximately $869,000.             

Use of Proceeds.....  To pay down amounts drawn under the Company's revolving   
                   acquisition credit facility (the "Credit Facility") and
             for other general corporate purposes. See "Use of
Proceeds."                          

Limitations on                                                                  
Incurrence of                                                               
Debt..............  The Notes contain various covenants, including the      
following:                          

              (1)  The Company will not, and will not permit any
                 Subsidiary to, incur any Debt if, after giving effect
          thereto, the aggregate principal amount of all
                   outstanding Debt of the Company and its Subsidiaries on
                  a consolidated basis is greater than 60% of the sum of
               (i) the Company's Total Assets as of the end of the
               fiscal quarter covered by the Company's most recent
                  report on Form 10-K or 10-Q, as the case may be, prior
                  to the incurrence of such additional Debt and (ii) the
                 increase in Total Assets from the end of such quarter
                including, without limitation, any increase in Total
                    Assets caused by the application of the proceeds of such
            additional Debt (such increase together with the
                    Company's Total Assets is referred to as "Adjusted Total
Assets").                           

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                                                                [Download Table]
                                                                              
                      (2)  The Company will not, and will not permit any      
                      Subsidiary to, incur any Secured Debt if, after giving  
                      effect thereto, the aggregate principal amount of all   
                      outstanding Secured Debt of the Company and its         
                      Subsidiaries on a consolidated basis is greater than 40%
                      of the Company's Adjusted Total Assets.                 

                      (3)  The Company will not, and will not permit any      
                      Subsidiary to, incur any Debt if the ratio of           
                      Consolidated Income Available for Debt Service to Annual
                      Debt Service Charge for the four consecutive fiscal     
                      quarters most recently ended prior to the date on which 
                      such additional Debt is to be incurred would be less    
                      than 1.5 to 1.0, calculated on a pro forma basis after  
                      giving effect to the incurrence of such additional Debt 
                      and the application of the proceeds therefrom.          

                      (4)  The Company will maintain Total Unencumbered Assets
                      of not less than 150% of the aggregate outstanding      
                      principal amount of Unsecured Debt of the Company and   
                      its Subsidiaries on a consolidated basis.               

Optional                                                                      
  Redemption........  The Notes are redeemable at any time at the option of   
                      the Company, in whole or in part, at a redemption price 
                      equal to the sum of (i) the principal amount of the     
                      Notes being redeemed plus accrued interest to the       
                      redemption date and (ii) the Make-Whole Amount, if any. 
                      See "Description of the Notes-- Optional Redemption."   

 THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, INCLUDING THE
DOCUMENTS INCORPORATED AND DEEMED TO BE INCORPORATED HEREIN AND THEREIN BY      
REFERENCE, CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A 
OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION   
21E OF THE EXCHANGE ACT. FORWARD-LOOKING STATEMENTS ARE INHERENTLY SUBJECT TO   
RISK AND UNCERTAINTIES, MANY OF WHICH CANNOT BE PREDICTED WITH ACCURACY AND SOME
OF WHICH MIGHT NOT EVEN BE ANTICIPATED. FUTURE EVENTS AND ACTUAL RESULTS,       
FINANCIAL AND OTHERWISE, MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, 
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULT OF OPERATIONS" AND "BUSINESS AND              
PROPERTIES--MATTERS PERTAINING TO CERTAIN PROPERTIES AND TENANTS" IN THIS       
PROSPECTUS SUPPLEMENT AND IN THE SECTION ENTITLED "BUSINESS--OTHER ITEMS" IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
(THE "ANNUAL REPORT") INCLUDING THE SUBHEADINGS ENTITLED "--COMPETITION FOR     
ACQUISITION OF REAL ESTATE," "--ENVIRONMENTAL MATTERS", "TAXATION OF THE        
COMPANY," "--EFFECT OF DISTRIBUTION REQUIREMENTS," "--REAL ESTATE OWNERSHIP     
RISKS," AND "--DEPENDENCE ON KEY PERSONNEL."                                    

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RECENT DEVELOPMENTS 

AMENDMENT OF CREDIT FACILITY.  On March 7, 1997, the Company amended its
$130 million unsecured acquisition credit facility (the "Credit Facility") to   
provide for lower pricing levels that are tied to the investment grade ratings  
given by certain credit rating agencies to the Company's senior unsecured debt  
and to remove leverage-induced increases on the interest rate charged on both   
unused credit balances and on the amount borrowed. See "Use of Proceeds."       

 INVESTMENT GRADE CREDIT RATING.  The Company received an investment grade
corporate senior debt credit rating from Duff & Phelps Credit Rating Company,   
Moody's Investors Service, Inc., and Standard & Poor's Rating Group in December 
1996. Duff & Phelps assigned a rating of BBB, Moody's assigned a rating of Baa3,
and Standard & Poor's assigned a rating of BBB-. These ratings are subject to   
change based upon, among other things, the Company's results of operations and  
financial condition.                                                            

  ACQUISITION OF 62 NET LEASED, RETAIL PROPERTIES.  During 1996, the Company
increased the size of its portfolio through a strategic program of acquisitions.
The Company acquired 62 additional properties (the "New Properties"), and       
selectively sold seven properties, increasing the number of properties in its   
portfolio by 8.0% from 685 properties to 740 properties during 1996. Of the New 
Properties, 60 were occupied as of April 1, 1997 and the remaining two were     
pre-leased and under construction pursuant to contracts under which the tenants 
have agreed to develop the properties (with development costs funded by the     
Company) and to begin paying rent when the premises open for business. The New  
Properties were acquired for an aggregate cost of approximately $57.5 million   
(excluding the estimated unfunded development costs totaling $1.8 million on    
properties under construction) at March 31, 1997. The New Properties are located
in 22 states, will contain approximately 603,900 leasable square feet and are   
100% leased under net leases, with an average initial lease term of 11.7 years. 
The weighted average annual unleveraged return on the cost of the New Properties
(including the estimated unfunded development cost of properties under          
construction) is estimated to be 10.6%, computed as estimated contractual net   
operating income (which in the case of a net leased property is equal to the    
base rent or, in the case of properties under construction, the estimated base  
rent under the lease) for the first year of each lease, divided by total        
acquisition and estimated development costs. Since it is possible that a tenant 
could default on the payment of contractual rent, no assurance can be given that
the actual return on the cost of the New Properties will not differ from the    
foregoing percentage.                                                           

   During the first quarter of 1997, the Company acquired 11 retail properties
in six states for $15.9 million (excluding the estimated unfunded development   
costs totaling $1.6 million on five such properties under construction) and     
selectively sold four properties, increasing the number of properties in its    
portfolio to 747 properties. The 11 properties acquired will contain            
approximately 236,200 leasable square feet and are 100% leased under net leases,
with an average initial lease term of 14.0 years. The weighted average annual   
unleveraged return on the cost of the 11 properties (including the estimated    
unfunded development costs of the five properties under development) is         
estimated to be 10.2%, computed as estimated contractual net operating income   
(calculated as described in the preceding paragraph) for the first year of each 
lease, divided by total acquisition and estimated development costs. However, as
described in the preceding paragraph, no assurance can be given that the actual 
return on the cost of these 11 properties will not differ from the foregoing    
percentage. During the first quarter of 1997, the Company also invested $2.0    
million in nine development properties acquired in 1996.                        

REINCORPORATION OF THE COMPANY IN MARYLAND.  The Company has submitted a
proposal to its stockholders to reincorporate the Company in the State of       
Maryland. Assuming approval by the stockholders at the upcoming annual meeting, 
the Company expects to effect the reincorporation in May 1997.                  

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USE OF PROCEEDS 

 The net proceeds to the Company from the sale of the Notes offered hereby
are estimated to be approximately $109 million (after deducting the discount to 
the Underwriters and other estimated expenses of this Offering payable by the   
Company). The Company intends to use the net proceeds to pay down outstanding   
indebtedness under the Credit Facility, which had an outstanding balance at     
April 15, 1997 of $93.7 million, and for other general corporate purposes. The  
Credit Facility is a three year, revolving, unsecured acquisition credit        
facility with a borrowing capacity of $130 million. Borrowings under the Credit 
Facility currently bear interest at a spread of 1.25% over the London Interbank 
Offered Rate ("LIBOR"). The Credit Facility also offers the Company other       
interest rate options. The maturity date on the Credit Facility is November 27, 
1999 and the effective interest rate was 6.85% at December 31, 1996. Pending    
application for such purposes, such net proceeds may be invested in short-term  
investments.                                                                    

CAPITALIZATION

   The following table sets forth the historical capitalization of the Company
as of December 31, 1996 and as adjusted to give effect to the issuance and sale 
of the Notes offered hereby and the use of the estimated net proceeds therefrom 
to repay borrowings under the Credit Facility as described in "Use of Proceeds."

                                                        [Enlarge/Download Table]

                                                                     AS OF DECEMBER 31, 1996 
                                                                     ------------------------
                                                                     HISTORICAL   AS ADJUSTED
                                                                     -----------  -----------
                                                                                             
                                                                      (DOLLARS IN THOUSANDS, 
                                                                      EXCEPT PER SHARE DATA) 
DEBT                                                                                         
  Credit Facility(1)................................................ $    70,000   $  --     
  Notes due 2007....................................................     --          110,000 
                                                                     -----------  -----------
    Total debt......................................................      70,000     110,000 

STOCKHOLDERS' EQUITY                                                                         
  Preferred stock, par value $1.00 per share, 5,000,000 shares                               
    authorized, no shares issued or outstanding.....................     --           --     
  Common stock, $1.00 par value per share; 40,000,000 shares                                 
    authorized; 22,979,537 issued and outstanding...................      22,980      22,980 
Capital in excess of par value......................................     516,004     516,004 
Accumulated distributions in excess of net income...................    (164,743)   (164,743)
                                                                     -----------  -----------
    Total stockholders' equity......................................     374,241     374,241 
                                                                     -----------  -----------
    Total capitalization............................................ $   444,241   $ 484,241 
                                                                     -----------  -----------
                                                                     -----------  -----------

------------------------                                                        

(1) The amount drawn on the Credit Facility was $93.7 million at April 15, 1997 
    and is expected to be approximately $93.7 million on the closing date of the
Offering.                                                               

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BUSINESS AND PROPERTIES 

OVERVIEW                                                                        

  The Company is a fully integrated, self-administered and self-managed REIT
which management believes is the nation's largest publicly-traded owner of      
freestanding, single-tenant, retail properties diversified geographically and by
industry and operated under net lease agreements. As of April 1, 1997, the      
Company owned a diversified portfolio of 747 properties located in 42 states    
with over 5.4 million square feet of leasable space. Approximately 99% of the   
Company's properties were leased as of April 1, 1997. Unless otherwise          
indicated, information regarding the Company's properties is as of April 1,     
1997.                                                                           

Realty Income adheres to a focused strategy of acquiring freestanding,  
single-tenant, retail properties leased to national and regional retail chains  
under long-term, net lease agreements. The Company typically acquires, and then 
leases back, retail store locations from retail chain store operators, providing
capital to the operators for continued expansion and other purposes. The        
Company's net lease agreements generally are for initial terms of 10 to 20      
years, require the tenant to pay a minimum monthly rent 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 or additional rent calculated as a percentage of the tenant's gross 
sales above a specified level.                                                  

Since 1970 and through December 31, 1996, Realty Income has acquired and
leased back to national and regional retail chains over 700 properties          
(including 25 properties that have been sold) and has collected in excess of 98%
of the original contractual rent obligations on those properties. Realty Income 
believes that the long-term ownership of an actively managed, diversified       
portfolio of retail properties leased under long-term, net lease agreements can 
produce consistent, predictable income and the potential for long-term capital  
appreciation. Management believes that long-term leases, coupled with tenants   
assuming responsibility for property expenses under the net lease structure,    
generally produce a more predictable income stream than many other types of real
estate portfolios. As of April 1, 1997, the Company's single-tenant properties  
were leased pursuant to leases with an average remaining term (excluding        
extension options) of approximately 8.4 years.                                  

    The Company was formed on September 9, 1993 in the State of Delaware. Realty
Income commenced operations as a REIT on August 15, 1994 through the merger of  
25 public and private real estate limited partnerships (the "Partnerships") with
and into the Company (the "Consolidation"). Each of the partnerships was formed 
between 1970 and 1989 for the purpose of acquiring and managing long-term, net  
leased properties.                                                              

BUSINESS OBJECTIVES AND STRATEGY                                                

GENERAL.  The Company's primary business objective is to generate a     
consistent and predictable level of FFO per share and distributions to          
stockholders. Additionally, the Company generally will seek to increase FFO per 
share and distributions to stockholders through active portfolio management and 
the acquisition of additional properties. The Company also seeks to lower the   
ratio of distributions to stockholders as a percentage of FFO in order to allow 
internal cash flow to be used to fund additional acquisitions and for other     
corporate purposes. The Company's portfolio management focus includes (i)       
contractual rent increases on existing leases; (ii) rental increases at the     
termination of existing leases when market conditions permit; and (iii) the     
active management of the Company's property portfolio, including selective sales
of properties. The Company generally pursues the acquisition of additional      
properties under long-term, net lease agreements with initial contractual base  
rent which, at the time of acquisition and as a percentage of acquisition cost, 
is in excess of the Company's estimated cost of capital.                        

   INVESTMENT PHILOSOPHY.  Realty Income believes that the long-term ownership
of an actively managed, diversified portfolio of retail properties under        
long-term, net lease agreements can produce consistent, predictable income and  
the potential for long-term capital appreciation. Under a net lease agreement,  
the                                                                             

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tenant agrees to pay a minimum monthly rent and property expenses (taxes,       
maintenance, and insurance) plus, typically, future rent increases (typically   
subject to ceilings) based on increases in the consumer price index or          
additional rent calculated as a percentage of the tenant's gross sales above a  
specified level. The Company believes that long-term leases, coupled with the   
tenants assuming responsibility for property expenses, generally produce a more 
predictable income stream than many other types of real estate portfolios, while
continuing to offer the opportunity for capital appreciation.                   

   INVESTMENT STRATEGY.  In identifying new properties for acquisition, Realty
Income focuses on providing expansion capital to middle market retail chains by 
acquiring, then leasing back, their retail store locations. The Company         
classifies retail tenants into three categories: venture, middle market, and    
upper market. Venture companies are those which typically offer a new retail    
concept in one geographic region of the country and operate between five and 50 
retail outlets. In general, these retail chains are thinly capitalized and are  
in the process of solving distribution, marketing, concept, geographic          
adaptation, and other problems associated with a new, growing company. Middle   
market retail chains are those which typically have 50 to 500 retail outlets,   
operations in more than one geographic region, success through one or more      
economic cycles, a proven, replicable concept, and an objective of further      
expansion. The upper market retail chains typically consist of companies with   
500 or more stores which operate nationally in a mature retail concept. They    
generally have strong operating histories and access to several sources of      
capital.                                                                        

Realty Income focuses on acquiring properties leased to emerging, middle
market retail chains which the Company believes are more attractive for         
investment because: (i) they generally have overcome many of the operational and
managerial obstacles that tend to adversely affect venture retailers; (ii) they 
typically require capital to fund expansion but have more limited financing     
options compared to upper market retailers; (iii) historically, they generally  
have provided attractive risk-adjusted returns to the Company over time, since  
their financial strength has in many cases tended to improve as their businesses
have matured; (iv) their relatively large size compared to venture retailers    
allows them to spread corporate expenses among a greater number of stores; and  
(v) compared to venture retailers, middle market retailers typically have the   
critical mass to survive if a number of locations have to be closed due to      
underperformance.                                                               

   CREDIT STRATEGY.  Realty Income provides sale leaseback financing primarily
to less than investment grade retail chains. Since 1970 and through December 31,
1996, Realty Income has acquired and leased back to national and regional retail
chains over 700 properties (including 25 properties that have been sold) and has
collected in excess of 98% of the original contractual rent obligations on those
properties. The Company believes that it is within this market that it can      
receive a better risk adjusted return on the financing that it provides to      
retailers.                                                                      

Realty Income believes that the primary financial obligations of middle 
market retailers typically include their bank and other debt, payment           
obligations to suppliers and real estate lease obligations. Because the Company 
owns the land and buildings on which the tenant conducts its retail business,   
the Company believes that the risk of default on the retailers' lease           
obligations is less than the retailers' unsecured general obligations. It has   
been the Company's experience that since retailers must retain their profitable 
retail locations in order to survive, in the event of a Chapter 11              
reorganization they are less likely to reject a lease for a profitable location,
which would terminate their right to use the property. Thus, as the property    
owner, the Company believes it will fare better than unsecured creditors of the 
same retailer in the event of a Chapter 11 reorganization. In addition, Realty  
Income believes that the risk of default on the real estate leases can be       
further mitigated by monitoring the performance of the retailers' individual    
unit locations and selling those units that are weaker performers.              

In order to qualify for inclusion in the Company's portfolio, new       
acquisitions must meet stringent investment and credit requirements. The        
properties must generate attractive current yields, and the tenant must meet the
Company's credit standards and have a proven market concept. The Company has    

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established a three part analysis that examines each potential investment based 
on: 1) industry, company, market conditions and credit profile; 2) location     
profitability, if available; and 3) overall real estate characteristics, value, 
and comparative rental rates. Companies that have been approved for acquisitions
are generally those with fifty or more retail stores which are located in highly
visible areas, with easy access to major thoroughfares, attractive demographics,
and acquisition costs at or below appraised value.                              

   ACQUISITION STRATEGY.  Realty Income seeks to invest in industries that are
dominated by independent local operators and in which several well organized    
regional and national chains are capturing market share through service, quality
control, economies of scale, mass media advertising, and selection of prime     
retail locations. The Company executes its acquisition strategy by acting as a  
source of capital to regional and national retail chain stores in a variety of  
industries by acquiring, then leasing back, their retail store locations.       
Relying on executives from its acquisitions, credit underwriting, portfolio     
management, finance, accounting, operations, capital markets, and legal         
departments, the Company undertakes thorough research and analysis in           
identifying appropriate industries, tenants, and property locations for         
investment. In selecting real estate for potential investment, the Company      
generally will seek to acquire properties that have the following               
characteristics:                                                                

- Freestanding, commercially zoned property with a single tenant;       

  - Properties that are important retail locations for national and regional
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;                                                

- Properties that can be purchased with the simultaneous execution or   
    assumption of long-term, net lease agreements, providing the opportunity
   for both current income and future rent increases (typically subject to
   ceilings) based on increases in the consumer price index or through the
 payment of additional rent calculated as a percentage of the tenant's
gross sales above a specified level; and                            

- Properties that can be acquired at or below their appraised value at  
prices generally ranging from $300,000 to $10 million.              

PORTFOLIO MANAGEMENT STRATEGY.  The active management of the property   
portfolio is an essential component of the Company's long-term strategy. The    
Company continually monitors its portfolio for changes that could affect the    
performance of the industries, tenants, and locations in which it has invested. 
Realty Income's Executive Committee meets at least monthly to review industry   
and tenant research, due diligence, property operations and portfolio           
management. This monitoring typically includes ongoing review and analysis of:  
(i) the performance of various tenant industries; (ii) the operation,           
management, business planning, and financial condition of the tenants; (iii) the
health of the individual markets in which the Company owns properties, from both
an economic and real estate standpoint; and (iv) the physical maintenance of the
Company's individual properties. The portfolio is analyzed on an ongoing basis  
with a view towards optimizing performance and returns.                         

While the Company generally intends to hold its net lease properties for
long-term investment, the Company actively manages its portfolio of net lease   
properties. The Company intends to pursue a strategy of identifying properties  
that may be sold at attractive prices, particularly where the Company believes  
reinvestment of the sales proceeds can generate a higher cash flow to the       
Company than the property being sold. While the Company intends to pursue such a
strategy, it will only do so within the constraints of the income tax rules     
regarding REIT status.                                                          

CAPITAL STRATEGY.  The Company utilizes its $130 million, unsecured     
acquisition Credit Facility as a vehicle for the short-term financing of the    
acquisition of new properties. When outstanding borrowings under the Credit     
Facility reach a certain level (generally in the range of $75 to $100 million), 
the Company intends to refinance those borrowings with the net proceeds of      
long-term or permanent financing, which                                         

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may include the issuance of common stock, preferred stock or convertible        
preferred stock, debt securities or convertible debt securities. However, there 
can be no assurance that the Company will be able to effect any such refinancing
or that market conditions prevailing at the time of refinancing will enable the 
Company to issue equity or debt securities upon acceptable terms. The Company   
believes that it is best served by a conservative capital structure, with a     
majority of its capital consisting of equity. On a pro forma basis assuming     
issuance of the Notes and application of the estimated net proceeds therefrom   
occurring on March 31, 1997, the Company's total indebtedness would have been   
approximately 18% of its total market capitalization (defined as shares of the  
Company's common stock outstanding multiplied by the last reported sales price  
of the Common Stock on March 31, 1997 of $23.00 per share plus total            
indebtedness).                                                                  

    The Company received an investment grade corporate credit rating from Duff &
Phelps Credit Rating Company, Moody's Investors Service, Inc., and Standard &   
Poor's Rating Group in December 1996. Duff & Phelps assigned a rating of BBB,   
Moody's assigned a rating of Baa3, and Standard & Poor's assigned a rating of   
BBB-. These ratings are subject to change based upon, among other things, the   
Company's results of operations and financial condition.                        

In December 1996, the Company entered into a treasury interest rate lock
agreement to hedge against the possibility of rising interest rates. Under the  
interest rate lock agreement, the Company receives or makes a payment based on  
the differential between a specified interest rate, 6.537%, and the actual      
10-year treasury interest rate on a notional principal of $90 million. Based on 
the 10-year treasury interest rate at March 31, 1997, the Company had an        
unrecognized gain on the agreement of approximately $2,310,000. The Company is  
using the treasury interest rate lock agreement to offset its interest rate risk
on $90 million of the $110 million of the Notes offered hereby.                 

   COMPETITIVE STRATEGY.  The Company believes that, to utilize its investment
philosophy and strategy most successfully, it must seek to maintain the         
following competitive advantages:                                               

      (i) SIZE AND TYPE OF INVESTMENT PROPERTIES:  The Company believes that
   smaller ($300,000 to $10,000,000) retail net leased 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, the Company believes that these types of properties have not
experienced significant institutional participation or the corresponding
yield reduction experienced by larger income producing properties. The  
   Company believes 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 by the Company, is an effective investment
strategy.                                                               

   In 1969, Realty Income identified a market niche and systematically
  built a portfolio around this niche. Twenty-seven years later, the Company
believes that it is the nation's largest publicly-traded owner of       
  free-standing, single-tenant, retail properties diversified geographically
and by industry and operated under net lease agreements, with over 5.4  
million square feet of leasable space.                                  

     The tenants of Realty Income's freestanding retail properties include
convenience stores, consumer electronics stores, child care centers,    
   restaurants, and other retailers providing goods and services which satisfy
    basic human 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 such retailers, Realty Income's method of purchasing the
  property and then leasing it back under a net lease arrangement allows the
retail chain to free up capital.                                        

       (ii) INVESTMENT IN NEW INDUSTRIES:  While specializing in single tenant
    properties, the Company will seek to further diversify its portfolio among a
   variety of industries. The Company believes that diversification will allow
it to invest in industries that are currently growing and have          
    characteristics the Company finds attractive. These characteristics include,
but are not limited to, industries dominated by local operators where   
 national and regional chain operators can gain market share and dominance
    through more efficient operations, as well as industries taking advantage of
major                                                                   

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   demographic shifts in the population base. For example, in the early 1970s,
Realty Income targeted the fast food industry to take advantage of the  
   country's increasing desire to dine away from home, and in the early 1980s,
it targeted the child day care industry, responding to the need for     
professional child care as more women entered the work force.           

    (iii) DIVERSIFICATION:  Diversification of the portfolio by industry
 type, tenant and geographic location is key to the Company's objective of
providing predictable investment results for its stockholders. As the   
    Company expands it will seek to further diversify its portfolio. During 1996
  and 1995, the Company added the consumer electronics and convenience store
industries, respectively, to the portfolio.                             

(iv) MANAGEMENT SPECIALIZATION:  The Company believes that its  
  management's specialization in single tenant properties operated under net
  lease agreements is important to meeting its objectives. The Company plans
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.                                                 

(v) TECHNOLOGY:  The Company intends to stay at the forefront of
technology in its efforts to efficiently and economically carry out its 
 operations. The Company maintains a sophisticated information system that
allows it to analyze its portfolio's performance and actively manage its
investments. The Company believes that technology and information based 
  systems will play an increasingly important role in its competitiveness as
  an investment manager and source of capital to a variety of industries and
tenants.                                                                

PROPERTIES                                                                      

As of April 1, 1997, the Company owned a diversified portfolio of 747   
properties in 42 states containing over 5.4 million square feet of leasable     
space. The portfolio consisted of 159 after-market automotive retail locations  
(80 automotive parts stores and 79 automotive service locations), one book      
store, 318 child care centers, 36 consumer electronics stores, 42 convenience   
stores, seven home furnishings stores, one office supply store, 171 restaurant  
facilities and 12 other properties. Of the 747 properties, 684 or 91% were      
leased to national or regional retail chain operators; 42 or 6% were leased to  
franchisees of retail chain operators; 16 or 2% were leased to other tenant     
types; and five or less than 1% were available for lease. At April 1, 1997, over
98% of the properties were under net lease agreements. Net leases typically     
require the tenant to be responsible for property operating costs including     
property taxes, insurance and expenses of maintaining the property.             

 The Company's net leased retail properties are retail locations leased to
national and regional retail chain store operators. At April 1, 1997, the       
properties averaged approximately 7,300 square feet of leasable retail space on 
approximately 43,500 square feet of land. Generally, buildings are single-story 
properties 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, egress and proximity to a sufficient        
population base to constitute a sufficient market or trade area for the         
retailer's business.                                                            

The following table sets forth certain geographic diversification       
information regarding Realty Income's portfolio at April 1, 1997:               

                                                        [Enlarge/Download Table]

                                                                                            PERCENT OF  
                                                              APPROXIMATE                      TOTAL    
                                   NUMBER OF      PERCENT       LEASABLE     ANNUALIZED     ANNUALIZED  
STATE                             PROPERTIES       LEASED     SQUARE FEET   BASE RENT(1)     BASE RENT  
-------------------------------  -------------  ------------  ------------  -------------  -------------
                                                                                                        
Alabama........................            6           100%        42,300   $     319,000         0.5%  
Arizona........................           26           100        178,400       2,362,000         3.8   
California.....................           53            98      1,001,900      10,593,000        17.1   
Colorado.......................           42            98        233,500       2,984,000         4.8   
Connecticut....................            4           100         17,200         240,000         0.4   

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                                                                                            PERCENT OF  
                                                              APPROXIMATE                      TOTAL    
                                   NUMBER OF      PERCENT       LEASABLE     ANNUALIZED     ANNUALIZED  
STATE                             PROPERTIES       LEASED     SQUARE FEET   BASE RENT(1)     BASE RENT  
-------------------------------  -------------  ------------  ------------  -------------  -------------
                                                                                                        
Florida........................           49           100        461,900       4,264,000         6.9   
Georgia........................           37           100        187,600       2,448,000         3.9   
Idaho..........................           11           100         52,000         656,000         1.1   
Illinois.......................           25           100        182,600       2,081,000         3.4   
Indiana........................           23           100        122,800       1,438,000         2.3   
Iowa...........................            8           100         51,700         456,000         0.7   
Kansas.........................           15           100        129,000       1,441,000         2.3   
Kentucky.......................           11           100         33,300         835,000         1.3   
Louisiana......................            2           100         10,700         126,000         0.2   
Maryland.......................            6           100         34,900         505,000         0.8   
Massachusetts..................            4           100         20,900         440,000         0.7   
Michigan.......................            5           100         26,900         353,000         0.6   
Minnesota......................           17           100        118,400       1,713,000         2.7   
Mississippi....................           11           100        106,600         792,000         1.3   
Missouri.......................           27           100        163,600       1,842,000         2.9   
Montana........................            1           100          5,400          71,000         0.1   
Nebraska.......................            8           100         47,100         509,000         0.8   
Nevada.........................            5           100         29,100         353,000         0.6   
New Hampshire..................            1           100          6,400         122,000         0.2   
New Jersey.....................            2           100         22,700         346,000         0.6   
New Mexico.....................            3           100         12,000         103,000         0.2   
New York.......................            5           100         38,300         539,000         0.9   
North Carolina.................           20           100         82,200       1,337,000         2.1   
Ohio...........................           48           100        210,500       3,426,000         5.5   
Oklahoma.......................            9           100         60,200         543,000         0.9   
Oregon.........................           18           100         98,500       1,133,000         1.8   
Pennsylvania...................            4           100         28,300         420,000         0.7   
South Carolina.................           20            95         85,000       1,152,000         1.9   
South Dakota...................            1           100          6,100          79,000         0.1   
Tennessee......................           10           100         78,900         963,000         1.6   
Texas..........................          127            99        980,900       9,073,000        14.6   
Utah...........................            7           100         45,400         591,000         1.0   
Virginia.......................           16           100         79,000       1,256,000         2.0   
Washington.....................           42            98        249,700       2,959,000         4.8   
West Virginia..................            2           100         16,800         147,000         0.2   
Wisconsin......................           11           100         60,500         738,000         1.2   
Wyoming........................            5           100         26,900         324,000         0.5   
                                         ---           ---    ------------  -------------       -----   
Total/Average..................          747            99%     5,446,100   $  62,072,000       100.0%  
                                         ---           ---    ------------  -------------       -----   
                                         ---           ---    ------------  -------------       -----   

------------------------                                                        

(1) Annualized base rent is calculated by multiplying the monthly contractual   
    base rent as of April 1, 1997 for each of the properties by 12, except that,
  for the properties under construction, estimated contractual base rent for
   the first month of the respective leases is used instead of base rent as of
   April 1, 1997. The estimated contractual base rent for the properties under
construction is based upon the estimated acquisition costs of the       
 properties. Annualized base rent does not include percentage rents (i.e.,
    additional rent calculated as a percentage of the tenant's gross sales above
a specified level), if any, that may be payable under leases covering   
certain of the properties.                                              

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  The following table sets forth certain information regarding the Company's
properties, classified according to the business of the respective tenants:     

                                                        [Enlarge/Download Table]

                                                               APPROXIMATE   REALTY INCOME  APPROXIMATE               
                                                                  TOTAL          OWNED        LEASABLE     ANNUALIZED 
TENANT                                   INDUSTRY SEGMENT     LOCATIONS(1)     LOCATIONS    SQUARE FEET   BASE RENT(2)
------------------------------------  ----------------------  -------------  -------------  ------------  ------------
                                                                                                                      
AFTER-MARKET AUTOMOTIVE                                                                                               
CSK Auto, Inc. (formerly Northern     Parts                           580             79        409,200   $  4,192,000
  Automotive).......................                                                                                  
Discount Tire.......................  Service                         310             18        103,200      1,177,000
Econo Lube N' Tune..................  Service                         210             18         49,400      1,257,000
Jiffy Lube..........................  Service                       1,400             29         68,700      1,851,000
Q Lube..............................  Service                         490              4          7,600        183,000
R&S Strauss.........................  Service                         110              2         31,200        431,000
Speedy Muffler King.................  Service                       1,080              7         40,900        531,000
Other...............................  Parts/Service                --                  2          6,500         90,000
                                                                                     ---    ------------  ------------
  TOTAL AFTER-MARKET AUTOMOTIVE.....                                                 159        716,700      9,712,000

BOOK STORES                                                                                                           
Barnes & Noble......................  Book Stores                   1,010              1         30,000        450,000
                                                                                     ---    ------------  ------------
  TOTAL BOOK STORES.................                                                   1         30,000        450,000

CHILD CARE                                                                                                            
Children's World Learning Centers...  Child Care                      530            134        964,000     13,612,000
Kinder-Care Learning Centers........  Child Care                    1,150             13         79,800      1,087,000
La Petite Academy...................  Child Care                      790            170        972,700      8,853,000
Other...............................  Child Care                   --                  1          4,200        --     
                                                                                     ---    ------------  ------------
  TOTAL CHILD CARE..................                                                 318      2,020,700     23,552,000

CONSUMER ELECTRONICS                                                                                                  
Best Buy............................  Consumer Electronics            270              2        104,800      1,321,000
Rex Stores..........................  Consumer Electronics            230             34        408,300      2,694,000
                                                                                     ---    ------------  ------------
  TOTAL CONSUMER ELECTRONICS........                                                  36        513,100      4,015,000

CONVENIENCE STORES                                                                                                    
7-ELEVEN............................  Convenience                  20,240              3          9,700        235,000
Dairy Mart..........................  Convenience                   1,020             22         66,500      1,513,000
East Coast Oil......................  Convenience                      40              2          6,400        219,000
The Pantry, Inc.....................  Convenience                     400             14         34,400      1,333,000
Other...............................  Convenience                  --                  1          2,100         31,000
                                                                                     ---    ------------  ------------
  TOTAL CONVENIENCE STORES..........                                                  42        119,100      3,331,000

HOME FURNISHINGS                                                                                                      
Levitz..............................  Home Furnishings                130              4        376,400      2,496,000
Aaron Rents.........................  Home Furnishings                290              3        161,600        464,000
                                                                                     ---    ------------  ------------
  TOTAL HOME FURNISHINGS............                                                   7        538,000      2,960,000

OFFICE SUPPLIES                                                                                                       
Office Max..........................  Office Supplies                 560              1         28,700        431,000
                                                                                     ---    ------------  ------------
  TOTAL OFFICE SUPPLIES.............                                                   1         28,700        431,000

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                                                               APPROXIMATE   REALTY INCOME  APPROXIMATE               
                                                                  TOTAL          OWNED        LEASABLE     ANNUALIZED 
TENANT                                   INDUSTRY SEGMENT     LOCATIONS(1)     LOCATIONS    SQUARE FEET   BASE RENT(2)
------------------------------------  ----------------------  -------------  -------------  ------------  ------------
                                                                                                                      
RESTAURANTS                                                                                                           
Don Pablo's.........................  Dinner House                     70              7         60,700   $    604,000
Carvers.............................  Dinner House                     90              3         26,600        495,000
Other...............................  Dinner House                 --                 13        108,300      1,015,000
Golden Corral.......................  Family                          460             87        512,500      6,747,000
Sizzler.............................  Family                          630              7         37,600        841,000
Other...............................  Family                       --                  4         23,400        151,000
Hardees.............................  Fast Food                     3,100              3         10,300        144,000
Taco Bell...........................  Fast Food                     4,890             24         54,100      1,502,000
Whataburger.........................  Fast Food                       520              9         23,000        616,000
Other...............................  Fast Food                    --                 14         39,800        747,000
                                                                                     ---    ------------  ------------
    TOTAL RESTAURANTS...............                                                 171        896,300     12,862,000

    TOTAL OTHER.....................  Miscellaneous                                   12        583,500      4,759,000
                                                                                     ---    ------------  ------------

    TOTAL...........................                                                 747      5,446,100   $ 62,072,000
                                                                                     ---    ------------  ------------
                                                                                     ---    ------------  ------------

--------------------------                                                      

(1) Approximate total number of retail locations in operation (including both   
owned and franchised locations), based on information provided to the   
Company by the respective tenants.                                      

(2) Annualized base rent is calculated by multiplying the monthly contractual   
    base rent as of April 1, 1997 for each of the properties by 12, except that,
  for the properties under construction, estimated contractual base rent for
   the first month of the respective leases is used instead of base rent as of
   April 1, 1997. The estimated contractual base rent for the properties under
construction is based upon the estimated acquisition costs of the       
 properties. Annualized base rent does not include percentage rents (i.e.,
    additional rent calculated as a percentage of the tenant's gross sales above
a specified level), if any, that may be payable under leases covering   
certain of the properties.                                              

Of the 747 properties in the portfolio, 740 are single-tenant properties
with the remaining properties being multi-tenant properties. As of April 1,     
1997, 735 or 99% of the single-tenant properties were net leased with an average
remaining lease term (excluding extension options) of approximately 8.4 years.  
The                                                                             

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following table sets forth certain information regarding the timing of initial  
lease term expirations (excluding extension options) on the Company's 735 net   
leased, single tenant retail properties:                                        

                                                        [Enlarge/Download Table]

                                                                                        PERCENT OF  
                                                          NUMBER OF                        TOTAL    
                                                            LEASES       ANNUALIZED     ANNUALIZED  
YEAR                                                       EXPIRING     BASE RENT(2)     BASE RENT  
------------------------------------------------------  --------------  -------------  -------------
                                                                                                    
1997..................................................          25      $   1,068,000         1.8%  
1998..................................................           4            168,000         0.3   
1999..................................................          20            900,000         1.5   
2000..................................................          27          1,335,000         2.3   
2001..................................................          49          3,796,000         6.5   
2002..................................................          74          5,878,000        10.1   
2003..................................................          68          5,163,000         8.9   
2004..................................................         110          8,896,000        15.3   
2005..................................................          86          6,044,000        10.4   
2006..................................................          29          2,446,000         4.2   
2007..................................................          82          4,949,000         8.5   
2008..................................................          39          3,174,000         5.5   
2009..................................................          12            896,000         1.5   
2010..................................................          34          2,729,000         4.7   
2011..................................................          31          3,541,000         6.1   
2012..................................................           8            714,000         1.2   
2014..................................................           2            265,000         0.5   
2015..................................................          25          4,789,000         8.2   
2016..................................................           7          1,351,000         2.3   
2017..................................................           2             83,000         0.1   
2018..................................................           1             39,000         0.1   
                                                               ---      -------------       -----   
  Total...............................................         735(1)   $  58,224,000       100.0%  
                                                               ---      -------------       -----   
                                                               ---      -------------       -----   

------------------------                                                        

(1) The table does not include seven multi-tenant properties and five vacant,   
unleased properties owned by the Company. The lease expirations for     
   properties under construction are based on the estimated date of completion
of such properties.                                                     

(2) Annualized base rent is calculated by multiplying the monthly contractual   
    base rent as of April 1, 1997 for each of the properties by 12, except that,
  for the properties under construction, estimated contractual base rent for
   the first month of the respective leases is used instead of base rent as of
   April 1, 1997. The estimated contractual base rent for the properties under
construction is based upon the estimated acquisition costs of the       
 properties. Annualized base rent does not include percentage rents (i.e.,
    additional rent calculated as a percentage of the tenant's gross sales above
a specified level), if any, that may be payable under leases covering   
certain of the properties.                                              

DESCRIPTION OF LEASING STRUCTURE.  At April 1, 1997, over 98% of the    
Company's properties were leased pursuant to net leases. In most cases, the     
leases are for initial terms of from 10 to 20 years and the tenant has an option
to extend the initial term. The leases generally provide for a minimum base rent
plus future increases (typically subject to ceilings) based on increases in the 
consumer price index or additional rent based upon the tenant's gross sales     
above a specified level (i.e., percentage rent). Where leases provide for rent  
increases based on increases in the consumer price index, typically such        
increases permanently become part of the base rent. Where leases provide for    
percentage rent, this additional rent is typically payable only if the tenant's 
gross sales for a given period (usually one year) exceed a specified level, and 
then is typically calculated as a percentage of only the amount of gross sales  
in excess of such level. In                                                     

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general, the leases require the tenant to pay property taxes, insurance, and    
expenses of maintaining the property.                                           

MATTERS PERTAINING TO CERTAIN PROPERTIES AND TENANTS                            

As of April 1, 1997, the Company's four largest tenants were Children's 
World Learning Centers, La Petite Academy, Golden Corral and CSK Auto, Inc. (CSK
was formerly called Northern Automotive), which accounted for approximately     
23.7%, 16.5%, 12.4% and 8.4%, respectively, of the Company's rental revenue for 
the year ended December 31, 1996. The financial position and results of         
operations of the Company and its ability to make distributions to stockholders 
and debt service payments may be materially adversely affected by financial     
difficulties experienced by any such major tenants or other tenants, including, 
but not limited to, a bankruptcy, insolvency or general downturn in the business
of such tenants.                                                                

  For the year ended December 31, 1996, approximately 42.0%, 24.3% and 15.3%
of the Company's rental revenues were attributable to tenants in the child care,
restaurant and after-market automotive industries, respectively. A downturn in  
any of these industries generally, whether nationwide or limited to specific    
sectors of the United States, could adversely affect tenants in those           
industries, which in turn could materially adversely affect the financial       
position and results of operations of the Company and its ability to make       
distributions to stockholders and debt service payments. In that regard, a      
substantial number of the Company's properties are leased to middle market      
retail chains, which generally have more limited financial and other resources  
than certain upper market retail chains and therefore are more likely to be     
adversely affected by a downturn in their respective businesses or in the       
national or regional economy generally.                                         

Five of the Company's properties were vacant as of April 1, 1997 and    
available for lease. Four of the vacant properties were previously leased to    
restaurant operators and one was formerly leased to a child care operator.      

  As of April 1, 1997, 20 of the Company's properties which were under lease
were vacant and available for sublease by the tenant. These 20 properties (11   
restaurants, four after-market automotive stores, three child care, one other   
store and one medical building) were available for sublease and had tenants who 
were current with their rent and other lease obligations.                       

As of April 1, 1997, 19 of the Company's properties had been sublet to  
tenants in different industries than the original tenant. All of these tenants  
were current with their rent and other lease obligations.                       

DEVELOPMENT OF CERTAIN PROPERTIES                                               

  Of the 62 New Properties acquired by the Company in 1996, 60 were occupied
as of April 1, 1997 and the remaining two were pre-leased and under construction
pursuant to contracts under which the tenants have agreed to develop the        
properties (with development costs funded by the Company) and to begin paying   
rent when the premises opens for business. In the case of development           
properties, the Company typically enters into an agreement with a tenant        
pursuant to which the tenant retains a contractor to construct the improvements 
on the property and the Company funds the costs of such development. The tenant 
is contractually obligated to complete the construction on a timely basis,      
generally within eight months after the Company purchases the land and to pay   
construction cost overruns to the extent they exceed the construction budget by 
more than a predetermined amount. The Company typically also enters into a lease
with the tenant at the time the Company purchases the land, which generally     
requires that the tenant begin paying base rent, calculated as a percentage of  
the Company's acquisition cost for the property, including construction costs   
and capitalized interest, when the premises opens for business. During 1996, the
Company acquired 18 development properties, 16 of which have been completed, are
operating and paying rent. Completion of the remaining two development          
properties is anticipated in May 1997. The Company will continue to seek to     
acquire land for development under similar arrangements.                        

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Of the 11 properties acquired during the first quarter of 1997, six were
occupied as of April 1, 1997 and the remaining five were pre-leased and under   
construction pursuant to contracts under which the tenants have agreed to       
develop the properties (with development costs funded by the Company) and to    
begin paying rent when the premises open for business.                          

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SELECTED FINANCIAL INFORMATION

  The following table sets forth selected financial data for the Company and
the Predecessor (as defined below), as the case may be, for each of the five    
years in the period ended December 31, 1996, and has been derived from financial
statements which have been audited by the Company's independent auditors, KPMG  
Peat Marwick LLP. The following financial information should be read in         
conjunction with the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996, which is       
incorporated by reference herein and in the accompanying Prospectus, and with   
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations" included herein. The following table also includes certain property 
data.                                                                           

                                                        [Enlarge/Download Table]

                                                                 COMPANY                      PREDECESSOR(2)     
                                                  -------------------------------------  ------------------------
                                                  AS OF OR FOR THE YEAR ENDED DECEMBER    AS OF OR FOR THE YEAR  
                                                                   31,                      ENDED DECEMBER 31,   
                                                  -------------------------------------  ------------------------
                                                     1996         1995        1994(1)       1993         1992    
                                                  -----------  -----------  -----------  -----------  -----------
                                                                                                                 
                                                           (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)         


                                                                                                                 
OPERATING DATA                                                                                                   
  Revenue:                                                                                                       
    Rental revenue............................... $    56,777  $    51,185  $    47,905  $    48,584  $    48,694
    Interest and other income....................         180          370          958          434          340
                                                  -----------  -----------  -----------  -----------  -----------
      Total revenue..............................      56,957       51,555       48,863       49,018       49,034
                                                  -----------  -----------  -----------  -----------  -----------
  Expenses:                                                                                                      
    Depreciation and amortization................      16,422       14,849       13,790       14,689       14,811
    General and administrative expenses and                                                                      
      advisor fees...............................       5,181        6,875        7,187        5,886        5,416
    Property.....................................       1,640        1,607        2,095        1,768        1,867
    Interest.....................................       2,367        2,642          396            5      --     
    Provision for impairment losses..............         579      --               135          935      --     
    Consolidation costs..........................     --           --            11,201      --           --     
                                                  -----------  -----------  -----------  -----------  -----------
      Total expenses.............................      26,189       25,973       34,804       23,283       22,094
                                                  -----------  -----------  -----------  -----------  -----------
  Income from operations.........................      30,768       25,582       14,059       25,735       26,940
  Net gain on sales of properties................       1,455           18        1,165        3,583        1,113
                                                  -----------  -----------  -----------  -----------  -----------
  Net income..................................... $    32,223  $    25,600  $    15,224  $    29,318  $    28,053
                                                  -----------  -----------  -----------  -----------  -----------
                                                  -----------  -----------  -----------  -----------  -----------
  Net income per share(3)........................ $      1.40  $      1.27  $      0.78  $   --       $   --     
                                                  -----------  -----------  -----------  -----------  -----------
                                                  -----------  -----------  -----------  -----------  -----------
  Weighted average common shares                                                                                 
    outstanding(3)...............................  22,977,837   20,230,963   19,502,091      --           --     
                                                  -----------  -----------  -----------  -----------  -----------
                                                  -----------  -----------  -----------  -----------  -----------
BALANCE SHEET DATA                                                                                               
  Properties, before accumulated depreciation.... $   564,540  $   515,426  $   450,703  $   451,738  $   476,822
  Total assets (book value)......................     454,097      417,639      352,768      384,474      395,671
  Total liabilities..............................      79,856       36,218       17,352        2,570        2,150
  Stockholders' equity...........................     374,241      381,421      335,416      381,904      393,418
OTHER DATA                                                                                                       
  FFO(4).........................................      47,718       40,414       39,185       41,359       41,751
  Capital expenditures...........................          37          296          222           94           13
RATIOS                                                                                                           
  Debt as a percentage of Total Assets(5)........       12.8%         4.0%         3.0%         0.3%         0.3%
  Secured Debt as a percentage of Total                                                                          
    Assets(5)(6).................................        0.2%         0.2%      --           --           --     
  Debt Service Coverage Ratio(7).................          27x          20x          87x       9,706x     --     
  Ratio of earnings to fixed charges(8)..........          14x          10x          39x       5,865x     --     
PORTFOLIO DATA (AT END OF PERIOD)                                                                                
  Number of properties...........................         740          685          630          631          634
  Net rentable square feet.......................   5,226,700    4,673,700    4,064,800    4,052,800    4,468,200

--------------------------                                                      

(1) Realty Income commenced operations as a REIT on August 15, 1994 through the 
   merger of the Partnerships with and into the Company (the "Consolidation").
The Consolidation was accounted for as a reorganization of              

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affiliated entities under common control in a manner similar to a       
  pooling-of-interests. Under this method, the assets and liabilities of the
Partnerships were carried over at their historical book values and their
operations have been recorded on a combined historical cost basis. The  
    pooling-of-interests method of accounting also requires the reporting of the
results of operations as though the entities had been combined as of the
beginning of the earliest period presented. Accordingly, the results of 
operations for the year ended December 31, 1994 comprise those of the   
   separate Partnerships combined from January 1, 1994 through August 15, 1994
and those of the Company from August 16, 1994 through December 31, 1994.
Costs incurred to effect the Consolidation and integrate the continuing 
operations of the separate Partnerships were expenses of the Company in 
1994, the year in which the Consolidation was consummated.              

(2) Prior to the Consolidation, the Company had no significant operations.      
Therefore, the combined operations for the periods prior to the         
Consolidation represent the operations of the Partnerships (the         
"Predecessor").                                                         

(3) Due to the change in the capital structure caused by the Consolidation as   
 described in note (1) above, share and per share information would not be
meaningful for 1993 and 1992 and therefore has not been included.       

(4) FFO is calculated by adding (i) net income before net gain on sale of       
properties, (ii) depreciation and amortization, (iii) provision for     
impairment losses and (iv) one-time Consolidation costs. Management     
  considers FFO to be an appropriate measure of the performance of an equity
  REIT. FFO is used by financial analysts in evaluating REITs and can be one
    measure of a REIT's ability to make cash distributions. Presentation of this
 information will provide the reader with an additional measure to compare
    the performance of different REITs; however, FFO is not comparable to "funds
from operations" reported by other REITs that do not define funds from  
operations in accordance with the National Association of Real Estate   
  Investment Trusts ("NAREIT") definition. FFO is not necessarily indicative
    of cash flow available to fund cash needs and should not be considered as an
  alternative to net income as an indication of the Company's performance or
    to cash flow from operating, investing and financing activities as a measure
of liquidity or ability to make cash distributions or pay debt service. 

In March 1995, NAREIT issued a clarification of its definition of FFO. The
   clarification provides that amortization of deferred financing costs should
   no longer be added back to net income in arriving at FFO. Since the Company
 includes amortization of deferred financing costs in interest expense, it
was not added back in computing the Company's FFO. The Company's FFO    
presented herein therefore conforms with this clarification.            

(5) For a definition of the terms "Debt," "Secured Debt" and "Total Assets," see
"Description of the Notes-- Additional Covenants of the Company."       

(6) For 1996 and 1995, the Company's sole Secured Debt was a capitalized lease. 
For 1992, 1993 and 1994, the Company did not have any Secured Debt.     

(7) The Debt Service Coverage Ratio is defined as Consolidated Income Available 
    for Debt Service divided by the Annual Debt Service Charge. See "Description
of the Notes--Additional Covenants of the Company."                     

(8) Ratio of earnings to fixed charges is calculated by dividing earnings by    
fixed charges. For this purpose, earnings consist of net income before  
extraordinary items plus fixed charges (excluding interest costs        
capitalized). Fixed charges are comprised of interest expense (including
   interest costs capitalized) and the amortization of debt issuance costs. On
a pro forma basis, assuming that the Notes were issued and the proceeds 
 therefrom were applied to repay indebtedness of the Company on January 1,
    1996, the ratio of earnings to fixed charges for the year ended December 31,
1996 would have been 4x.                                                

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 
CONDITION AND RESULTS OF OPERATIONS 

GENERAL                                                                         

The Company was organized to operate as an equity REIT. The Company's   
primary business objective is to generate a consistent and predictable level of 
FFO per share and distributions to stockholders. Additionally, the Company      
generally will seek to increase FFO per share and distributions to stockholders 
through active portfolio management and the acquisition of additional           
properties. The Company also seeks to lower the ratio of distributions to       
stockholders as a percentage of FFO in order to allow internal cash flow to be  
used to fund additional acquisitions and for other corporate purposes. The      
Company's portfolio management focus includes: (i) contractual rent increases on
existing leases; (ii) rental increases at the termination of existing leases    
when market conditions permit; and (iii) the active management of the Company's 
property portfolio, including selective sales of properties. The Company        
generally pursues the acquisition of additional properties under long-term, net 
lease agreements with initial contractual base rent which, at the time of       
acquisition and as a percentage of acquisition cost, is in excess of the        
Company's estimated cost of capital.                                            

 The Company's common stock is listed on the NYSE under the symbol "O" and
commenced trading on October 18, 1994.                                          

    Realty Income was organized in the State of Delaware on September 9, 1993 to
facilitate the merger, which was effective on August 15, 1994, of 10 private and
15 public real estate limited partnerships (the "Partnerships") with and into   
Realty Income.                                                                  

Investors in the Partnerships who elected to invest in the equity of the
Company received a total of 19,503,080 shares of common stock. Certain investors
elected to receive Variable Rate Senior Notes due 2001 totaling $12.6 million.  
These notes were redeemed, at par, by the Company on March 29, 1996.            

The Consolidation was accounted for as a reorganization of affiliated   
entities in a manner similar to a pooling-of-interests. Under this method, the  
assets and liabilities of the Partnerships were carried over at their historical
book values and operations were recorded on a combined historical cost basis.   
The pooling-of-interests method of accounting also requires the reporting of the
results of operations as though the entities had been combined as of the        
beginning of the earliest period presented. Accordingly, the results of         
operations for the year ended December 31, 1994 comprise those of the separate  
entities combined from the beginning of the period through August 15, 1994 (the 
date of the Consolidation) and those of the Company from August 16, 1994 through
December 31, 1994.                                                              

  Prior to August 17, 1995, the Company's day-to-day affairs were managed by
R.I.C. Advisor, Inc. ("R.I.C. Advisor") which provided advice and assistance    
regarding acquisitions of properties by the Company and performed the day-to-day
management of the Company's properties and business. On August 17, 1995, R.I.C. 
Advisor was merged with and into Realty Income (the "Merger") and the advisory  
agreement between Realty Income and R.I.C. Advisor was terminated. Realty Income
issued 990,704 shares of common stock as consideration for the outstanding      
common stock of R.I.C. Advisor.                                                 

   In July 1996, the Company expanded its board of directors to seven members.
The new directors are Richard J. VanDerhoff, President and Chief Operating      
Officer of the Company, and Willard H. Smith Jr, formerly a Managing Director,  
Equity Capital Markets Division, of Merrill Lynch & Co. from 1983 until his     
retirement in August 1995.                                                      

In October 1996, the Company changed transfer agents from Chase Mellon  
Shareholder Services to The Bank of New York.                                   

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LIQUIDITY AND CAPITAL RESOURCES                                                 

CASH RESERVES                                                           

  Realty Income was organized for the purpose of operating as an equity REIT
which acquires and leases properties and distributes to stockholders, in the    
form of monthly cash distributions, a substantial portion of its net cash flow  
generated from lease revenue. The Company intends to retain an appropriate      
amount of cash as working capital reserves. At December 31, 1996, the Company   
had cash and cash equivalents totaling $1.6 million.                            

 Management believes that the Company's cash and cash equivalents on hand,
cash provided from operating activities and borrowing capacity are sufficient to
meet its liquidity needs other than the repayment of debt for the foreseeable   
future, except that (as described below) the Company will require additional    
sources of capital to fund property acquisitions.                               

CAPITAL FUNDING                                                         

Realty Income has a $130 million three-year, revolving, unsecured Credit
Facility that expires in November 1999. The credit facility currently bears     
interest at 1.25% over the London Interbank Offered Rate ("LIBOR") and offers   
the Company other interest rate options. As of April 15, 1997, $36.3 million of 
borrowing capacity was available to the Company under the Credit Facility. At   
that time, the outstanding balance was $93.7 million. On March 29, 1996, this   
credit facility was used to redeem the Variable Rate Senior Notes due 2001 at   
par, and has been and is expected to be used to acquire additional retail       
properties leased to national and regional retail chains under long term lease  
agreements. Any additional borrowings will increase the Company's exposure to   
interest rate risk.                                                             

Realty Income will seek to meet its long-term capital needs for the     
acquisition of properties through the issuance of public or private debt or     
equity. In August 1995, the Company filed a universal shelf registration        
statement with the Commission covering up to $200 million in value of common    
stock, preferred stock or debt securities. After giving effect to the Offering, 
approximately $159.8 million of securities will have been issued under this     
registration statement.                                                         

    In the fourth quarter of 1995, the Company issued 2,540,000 shares of common
stock at a price of $19.625 per share under the shelf registration. The net     
proceeds were primarily used to repay borrowings under the Credit Facility.     
These borrowings were used to acquire properties in 1995.                       

In December 1996, the Company entered into a treasury interest rate lock
agreement to hedge against the possibility of rising interest rates. Under the  
interest rate lock agreement, the Company receives or makes a payment based on  
the differential between a specified interest rate, 6.537%, and the actual      
10-year treasury interest rate on a notional principal of $90 million. Based on 
the 10-year treasury interest rate at March 31, 1997, the Company had an        
unrecognized gain on the agreement of approximately $2,310,000.                 

During the fourth quarter of 1996, the Company received investment grade
corporate credit ratings for senior unsecured debt from Duff & Phelps Credit    
Rating Company, Moody's Investors Services, Inc. and Standard and Poor's Rating 
Group, of BBB, Baa3, and BBB-, respectively. These ratings are subject to change
based upon, among other things, the Company's results of operations and         
financial condition.                                                            

PROPERTY ACQUISITIONS                                                   

During 1996, Realty Income purchased 62 New Properties in 22 states for 
approximately $57.5 million (excluding the estimated unfunded development costs 
of $1.8 million on properties under development) at March 31, 1997. These 62    
properties will contain approximately 603,900 leasable square feet and are 100% 
leased under net leases, with an average initial lease term of 11.7 years. The  
weighted average annual unleveraged return on the cost of the 62 New Properties 
(including the estimated unfunded development                                   

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costs of properties under construction) is estimated to be 10.6%, computed as   
estimated contractual net operating income (which in the case of a net leased   
property is equal to the base rent or, in the case of properties under          
construction, the estimated base rent under the lease) for the first year of    
each lease divided by the total acquisition and estimated development costs.    
Since it is possible that a tenant could default on the payment of contractual  
rent, no assurance can be given that the actual return on the cost of the 62 New
Properties acquired in 1996 will not differ from the foregoing percentage.      

  Of the 62 New Properties acquired in 1996, 60 were occupied as of April 1,
1997 and the remaining two were pre-leased and under construction pursuant to   
contracts under which the tenants have agreed to develop the properties (with   
development costs funded by the Company) and to begin paying rent when the      
premises open for business. All of the New Properties, including the properties 
under development, are leased with initial terms of 7.8 to 20 years.            

During 1996, the Company purchased a property which was adjacent to an  
existing tenant for $102,000 and leased the property to that tenant. The Company
also invested $37,000 in existing properties, received equipment and other      
assets valued at $58,000 as settlements for amounts receivable, and purchased   
the outstanding Class A units in R.I.C. Trade Center, Ltd., Silverton Business  
Center, Ltd. and Empire Business Center, Ltd. for an aggregate of $150,000.     
After this purchase, Realty Income owned 100% of these partnerships, which were 
then dissolved. These partnerships owned three mixed-use light industrial       
business parks in San Diego, CA.                                                

   During the first quarter of 1997, the Company acquired 11 retail properties
in six states for $15.9 million (excluding the estimated unfunded development   
costs totaling $1.6 million on five such properties under construction) and     
selectively sold four properties, increasing the number of properties in its    
portfolio to 747 properties. The 11 properties acquired will contain            
approximately 236,200 leasable square feet and are 100% leased under net leases,
with an average initial lease term of 14.0 years. The weighted average annual   
unleveraged return on the cost of the 11 properties (including the estimated    
unfunded development costs of the five properties under development) is         
estimated to be 10.2%, computed as estimated contractual net operating income   
(calculated as described above) for the first year of each lease, divided by    
total acquisition and estimated development costs. However, as described above, 
no assurance can be given that the actual return on the cost of these 11        
properties will not differ from the foregoing percentage. During the first      
quarter of 1997, the Company also invested $2.0 million in nine development     
properties acquired in 1996.                                                    

1996 ACQUISITION ACTIVITY 

                                                        [Enlarge/Download Table]

                                                                                               INITIAL    APPROXIMATE 
                                                                                             LEASE TERM     LEASABLE  
TENANT                                  INDUSTRY                      LOCATION                 (YEARS)    SQUARE FEET 
-------------------------------  ----------------------  ----------------------------------  -----------  ------------
                                                                                                                      
1ST QUARTER                                                                                                           
Carver's.......................  Restaurant              Glendale, AZ                              19.8         8,100 
Econo Lube N' Tune.............  Auto Service            Chula Vista, CA                           15.0         2,800 
                                                         Broomfield, CO                            15.0         2,800 
                                                         Dallas, TX                                15.0         2,700 
                                                         Lewisville, TX                            15.0         2,600 
2ND QUARTER                                                                                                           
Dairy Mart.....................  Convenience Store       Mt Washington, KY(1)                      20.0         2,800 
                                                         Tipp City, OH(1)                          15.0         3,800 
Econo Lube N' Tune.............  Auto Service            Arvada, CO                                15.0         2,800 
Jiffy Lube.....................  Auto Service            Centerville, OH                           20.0         2,400 
3RD QUARTER                                                                                                           
Best Buy.......................  Consumer Electronics    Thousand Oaks, CA                         20.0        59,200 
Dairy Mart.....................  Convenience Store       Streetsboro, OH(1)                        15.0         3,800 
                                                         Wadsworth, OH(1)                          15.0         2,700 
Econo Lube N' Tune.............  Auto Service            Arvada, CO(1)                             15.0         2,500 
                                                         Virginia Beach, VA                        15.0         2,800 

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                                                                                               INITIAL    APPROXIMATE 
                                                                                             LEASE TERM     LEASABLE  
TENANT                                  INDUSTRY                      LOCATION                 (YEARS)    SQUARE FEET 
-------------------------------  ----------------------  ----------------------------------  -----------  ------------
                                                                                                                      
                                                         Bremerton, WA                             15.0         2,800 
Jiffy Lube.....................  Auto Service            Beavercreek, OH(1)                        20.0         2,300 
                                                         Huber Heights, OH(1)                      20.0         2,300 
Speedy Brake & Muffler.........  Auto Service            Hartford, CT                              15.0        10,000 
                                                         Indianapolis, IN                          15.0         5,300 
                                                         Milwaukee, WI                             15.0         5,300 
4TH QUARTER                                                                                                           
Best Buy.......................  Consumer Electronics    Topeka, KS                                20.0        45,600 
East Coast Oil.................  Convenience Store       Stafford, VA                              15.0         2,800 
                                                         Warrenton, VA                             15.0         3,600 
Econo Lube N' Tune.............  Auto Service            Thornton, CO                              15.0         2,800 
                                                         Olathe, KS(1)                             15.0         2,800 
                                                         Independence, MO                          15.0         2,800 
                                                         Richmond, VA                              15.0         2,900 
Jiffy Lube.....................  Auto Service            Hamilton, OH(1)                           20.0         2,300 
Rex Stores.....................  Consumer Electronics    Oxford, AL                                 7.8        10,000 
                                                         Tuscaloosa, AL                             7.8        12,000 
                                                         Bradenton, FL                              7.8         6,300 
                                                         Mary Esther, FL                            7.8         8,200 
                                                         Melbourne, FL                              7.8         8,000 
                                                         Merritt Island, FL                         7.8        10,000 
                                                         Ocala, FL                                  7.8        10,000 
                                                         Pensacola, FL                              7.8        64,600 
                                                         Tallahassee, FL                            7.8        10,600 
                                                         Titusville, FL                             7.8        12,000 
                                                         Venice, FL                                 7.8         8,200 
                                                         Rome, GA                                   7.8        10,000 
                                                         Council Bluffs, IA                         7.8         9,000 
                                                         Des Moines, IA                             7.8        10,000 
                                                         Peoria, IL                                 7.8         8,800 
                                                         Rockford, IL                               7.8        10,100 
                                                         Springfield, IL                            7.8        10,300 
                                                         Anderson, IN                               7.8        15,600 
                                                         Muncie, IN                                 7.8        12,500 
                                                         Richmond, IN                               7.8         6,500 
                                                         Columbus, MS                               7.8        10,000 
                                                         Greenville, MS                             7.8         9,100 
                                                         Gulfport, MS                               7.8        12,000 
                                                         Hattiesburg, MS                            7.8        12,000 
                                                         Jackson, MS                                7.8        15,100 
                                                         Meridian, MS                               7.8         9,000 
                                                         Tupelo, MS                                 7.8        12,000 
                                                         Vicksburg, MS                              7.8        10,000 
                                                         Lakewood, NY                               7.8        14,100 
                                                         Defiance, OH                               7.8         7,200 
                                                         Kettering, OH                              7.8        10,600 
                                                         Bristol, TN                                7.8        12,400 
                                                         Clarksville, TN                            7.8        10,100 
                                                         Vienna, WV                                 7.8        12,200 
                                                                                                    ---   ------------
Average/Total..........................................                                            11.7       603,900 
                                                                                                    ---   ------------
                                                                                                    ---   ------------

--------------------------                                                      
(1) The Company acquired these properties as undeveloped land and is funding    
  construction and other costs relating to the development of the properties
by the tenants. The tenants have entered into leases with the Company   
covering these properties and are contractually obligated to complete   
   construction on a timely basis and to pay construction cost overruns to the
extent they exceed the construction budget by more than a predetermined 
percentage. As of December 31, 1996, the total acquisition and estimated
    construction costs for the properties under development was $8.7 million, of
which $3.8 million had not been funded. As of April 1, 1997, tenants of 
seven of these properties had assumed occupancy and begun paying rent   
because development of such properties was substantially completed.     

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DISTRIBUTIONS                                                           

    Cash distributions paid for the years ended December 31, 1996, 1995 and 1994
were $48.1 million, $36.7 million and $44.7 million, respectively. The 1996 and 
1994 cash distributions include a special distribution of $5.3 million and $5.8 
million, respectively.                                                          

For the year ended December 31, 1996, the Company paid 11 monthly       
distributions of $0.155 per share and increased the monthly distributions to    
$0.1575 per share in December 1996. The regular distributions paid during 1996  
totaled $1.8625 per share. In addition, the Company paid a special distribution 
of $0.23 per share in January 1996. Total distributions paid in 1996 were       
$2.0925 per share. For tax purposes, a portion of the special distribution, in  
the amount of approximately $0.144 per share, was taxable as ordinary income in 
1995 and the remaining $0.086 per share was included in each stockholders 1996  
Form 1099. In December 1996, and January and February 1997, the Company declared
distributions of $0.1575 per share which were paid on January 15, 1997, February
17, 1997 and March 17, 1997, respectively.                                      

    For the year ended December 31, 1995, the Company paid monthly distributions
of $0.15 per share from January through July and increased its monthly          
distributions to $0.155 per share in August. Monthly distributions of $0.155 per
share were paid in August through December 1995. The distributions paid for 1995
totaled $1.825 per share.                                                       

   The 1994 distributions were made up of eight partnership and four corporate
monthly distributions in the aggregate amount of $38.9 million and the final    
partnership distribution of $5.8 million. The 1994 final partnership            
distributions were substantially comprised of proceeds from the sales of        
properties sold during 1993.                                                    

 From August 15, 1994, the date of the Consolidation, through December 31,
1994, the Company paid four monthly distributions of $0.15 per share, totaling  
$0.60 per share. Prior to the Consolidation on August 15, 1994, the Company did 
not have equivalent shares outstanding so no comparative per share information  
is presented.                                                                   

OTHER INFORMATION                                                       

   As a result of the Merger on August 17, 1995, the Company assumed a defined
benefit pension plan (the "Plan") covering substantially all of its employees.  
The board of directors of R.I.C. Advisor froze the Plan effective May 31, 1995. 
For each Plan participant, the accrued benefit earned under the Plan as of May  
31, 1995 was frozen. The Plan was terminated on January 2, 1996. As part of the 
Plan's termination, the Company met its obligation to the Plan of $2.3 million  
in February 1997.                                                               

  In December 1996, the Company obtained a five year environmental insurance
policy on the property portfolio. Based upon the 740 properties in the portfolio
at December 31, 1996, the cost of the insurance will be approximately $80,000   
per year. The limit of the policy is $10.0 million for each loss and $20.0      
million in the aggregate, with a $100,000 deductible. There is a sublimit on    
properties with underground storage tanks of $1.0 million per occurrence and    
$5.0 million in the aggregate, with a deductible of $25,000.                    

FUNDS FROM OPERATIONS                                                           

 FFO for 1996 was $47.7 million versus $40.4 million during 1995 and $39.2
million during 1994. Realty Income defines FFO as net income before net gain on 
sales of properties and the one-time expenses of the 1994 Consolidation, plus   
provision for impairment losses, plus depreciation and amortization. In         
accordance with the recommendations of the National Association of Real Estate  
Investment Trusts ("NAREIT"), amortization of deferred financing costs are not  
added back to net income to calculate FFO. Amortization of financing costs are  
included in interest expense in the consolidated statements of income.          

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   Management considers FFO to be an appropriate measure of the performance of
an equity REIT. FFO is used by financial analysts in evaluating REITs and can be
one measure of a REIT's ability to make cash distribution payments. Presentation
of this information provides the reader with an additional measure to compare   
the performance of different REITs, although it should be noted that not all    
REITs calculate FFO the same way so comparisons with such REITs may not be      
meaningful.                                                                     

   FFO is not necessarily indicative of cash flow available to fund cash needs
and should not be considered as an alternative to net income as an indication of
the Company's performance or to cash flow from operating, investing, and        
financing activities as a measure of liquidity or ability to make cash          
distributions or to pay debt service.                                           

Below is reconciliation of net income to FFO (dollars in thousands):    

                                                        [Enlarge/Download Table]

                                                                1996       1995       1994    
                                                              ---------  ---------  --------- 
                                                                                              
Net Income................................................... $  32,223  $  25,600  $  15,224 
Plus Depreciation and Amortization...........................    16,422     14,849     13,790 
Plus Provision for Impairment Losses.........................       579     --            135 
Plus Consolidation Costs.....................................    --         --         11,201 
Less Depreciation of Furniture, Fixtures and Equipment.......       (51)       (17)    --     
Less Net Gain on Sales of Properties.........................    (1,455)       (18)    (1,165)
                                                              ---------  ---------  --------- 
Total FFO.................................................... $  47,718  $  40,414  $  39,185 
                                                              ---------  ---------  --------- 
                                                              ---------  ---------  --------- 

For 1996, 1995 and 1994, FFO exceeded cash distributions, excluding the 
non-recurring special distributions of $5.3 million in 1996 (pertaining to the  
Merger) and $5.8 million in 1994 (final distribution for the predecessor        
Partnerships), by $4.9 million, $3.7 million and $369,000, respectively.        

RESULTS OF OPERATIONS                                                           

   Prior to the Consolidation on August 15, 1994, the capital structure of the
Partnerships consisted of limited partner interests with no long term debt. In  
the Consolidation, limited partners exchanged their partnership units for shares
of common stock or debt securities of the Company. The general partners did not 
receive any shares of common stock or debt securities of the Company for their  
general partner interests. Due to these changes in capital structure, which were
caused by the Consolidation, and additional expenses associated with the        
operations of a publicly traded REIT, the results of operations for the year    
ended December 31, 1994 are not necessarily comparable to 1996 and 1995.        

COMPARISON OF 1996 TO 1995                                              

   Rental revenue was $56.8 million for 1996 versus $51.2 million for 1995, an
increase of $5.6 million. The increase in rental revenue was primarily due to   
the acquisition of 124 properties from December 1994 through December 1996.     
These properties generated revenue in 1996 and 1995 of $8.8 million and $3.8    
million, respectively, an increase of $5.0 million. During 1997, the contractual
lease payments (not including any percentage rents or estimated rent from       
properties under development) on these 124 properties are approximately $13.6   
million.                                                                        

At December 31, 1996, 723 or 98.8% of the Company's leases, on the 732  
single-tenant properties, provide for increases in rents through (i) base rent  
increases tied to a consumer price index with adjustment ceilings or (ii)       
overage rent based on a percentage of the tenants' gross sales. Some leases     
contain both types of clauses. Rental revenue generated on the 619 properties   
owned for all of both 1995 and 1996 increased by $871,000 or 1.9%, to $48.0     
million from $47.1 million. Percentage rent, which is included in rental        
revenue, was $1.7 million for 1996 as compared to $1.6 million in 1995.         

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 The following table represents Realty Income's rental revenue by industry
for the years ended December 31, 1996 and 1995:                                 

                                                        [Enlarge/Download Table]

                                              DECEMBER 31, 1996             DECEMBER 31, 1995      
                                         ----------------------------  ----------------------------
                                            RENTAL      PERCENTAGE OF     RENTAL      PERCENTAGE OF
INDUSTRY                                    REVENUE         TOTAL         REVENUE         TOTAL    
---------------------------------------  -------------  -------------  -------------  -------------
                                                                                                   
Automotive Parts.......................  $   4,814,000         8.5%    $   4,724,000         9.2%  
Automotive Service.....................      3,859,000         6.8%        3,007,000         5.9%  
Child Care.............................     23,854,000        42.0%       23,358,000        45.6%  
Consumer Electronics...................        507,000         0.9%         --             --      
Convenience Stores.....................      2,647,000         4.7%        1,254,000         2.4%  
Home Furnishings.......................      2,496,000         4.4%        1,471,000         2.9%  
Restaurant.............................     13,836,000        24.3%       12,632,000        24.7%  
Other..................................      4,764,000         8.4%        4,739,000         9.3%  
                                         -------------       -----     -------------       -----   
Total..................................  $  56,777,000       100.0%    $  51,185,000       100.0%  
                                         -------------       -----     -------------       -----   
                                         -------------       -----     -------------       -----   

   Unleased properties are a factor in determining gross revenue generated and
property costs incurred by the Company. At December 31, 1996, the Company had   
nine properties that were not under lease as compared to four properties at     
December 31, 1995. The remaining 731 properties were under lease agreements with
third party tenants as of December 31, 1996.                                    

    The significant portion of the remaining revenue earned during 1996 and 1995
was attributable to interest earned on cash invested in two funds which hold    
short-term investments in United States government agency securities and        
treasury securities. Interest revenue was $109,000 for 1996 as compared to      
$276,000 during 1995. The decrease in interest revenue was due to lower average 
cash balances held during 1996, which reflects the Company's desire to maintain 
an appropriate amount of cash as working capital reserves and invest excess     
available cash in properties.                                                   

    Depreciation and amortization was $16.4 million in 1996 versus $14.8 million
in 1995. The $1.6 million increase was primarily due to the depreciation of     
properties acquired during 1995 and 1996 and amortization of goodwill recorded  
in connection with the Merger of R.I.C. Advisor.                                

    Total advisor fees and general and administrative expenses decreased by $1.7
million to $5.2 million in 1996 versus $6.9 million in 1995. General and        
administrative expenses were $5.2 million in 1996 versus $3.2 million in 1995   
and advisor fees of $3.7 million in 1995. The $2.0 million increase in general  
and administrative expenses was due primarily to the Merger of R.I.C. Advisor.  
Subsequent to the Merger, the Company commenced paying for management,          
accounting systems, office facilities and professional and support personnel    
expenses (i.e., costs of being self-administered). Prior to August 17, 1995,    
such costs were the responsibility of R.I.C. Advisor.                           

    During the third quarter of 1996, the Company initiated a 401(k) plan. Costs
of $65,000 associated with the plan are included in general and administrative  
expenses.                                                                       

   Property expenses were $1.6 million in 1996 and 1995. Property expenses are
broken down into costs associated with multi-tenant non-net lease properties,   
unleased single-tenant properties and general portfolio expenses. Expenses      
related to the multi-tenant and unleased single-tenant properties include, but  
are not limited to, property taxes, maintenance, insurance, utilities, site     
checks, bad debt expense and legal fees. General portfolio costs include, but   
are not limited to, insurance, legal, site checks and title search fees.        

Property expenses of $1.0 million were incurred on ten multi-tenant     
properties during 1996, eight of which were owned at the end of 1996. Property  
expenses of $1.0 million were incurred on eleven multi-tenant properties in     
1995, ten of which were owned at the end of 1995. During 1996 two multi-tenant  

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properties were sold and in 1995 one multi-tenant property was sold. Expenses   
incurred in 1996 on ten unleased single-tenant properties totaled $250,000 as   
compared to $161,000 in 1995 on seven unleased single-tenant properties. At     
December 31, 1996, nine properties were available for lease, one of which was a 
multi-tenant property. At December 31, 1995, four single-tenant properties were 
available for lease. The $89,000 increase is due to property taxes, maintenance 
and utilities on the additional vacant properties. General portfolio expenses in
1996 and 1995 totaled $337,000 and $441,000, respectively. The decrease in      
general portfolio costs is primarily due to a decrease in insurance costs.      

  Interest expense is made up of four components which include: (i) interest
on outstanding loans and notes; (ii) commitment fees on the undrawn portion of  
the Credit Facility; (iii) amortization of the Credit Facility origination      
costs; which are offset by: (iv) interest capitalized on properties under       
development. Interest capitalized on properties under development is included in
the cost of the completed property and amortized over the estimated useful life 
of the property.                                                                

  Interest expense decreased by $275,000 to $2.4 million in 1996 as compared
to $2.6 million for 1995. Interest incurred on loans and notes in 1996 and 1995 
was $2.1 million and $2.4 million, respectively. Interest incurred was $266,000 
lower in 1996 than in 1995 due to a decrease in the average outstanding balance 
and lower interest rates on the Credit Facility and the notes that were redeemed
by the Company on March 29, 1996 (the "Redeemed Notes"). During 1996, the       
average outstanding balance and interest rate were $30.7 million and 6.96% as   
compared to $31.3 million and 7.68% during the comparable period in 1995.       
Included in the interest incurred in 1996 and 1995 was capitalized interest     
totaling $150,000 and $217,000, respectively. Commitment fees in 1996 were      
$156,000 as compared to $127,000 in 1995. In 1996 and 1995, a commitment fee of 
0.15% per annum was incurred on the undrawn portion of the Credit Facility.     
Commitment fees increased in 1996 because the borrowing capacity was increased  
to $130 million from $100 million in December 1995. Amortization of the Credit  
Facility origination fees was $224,000 in 1996 as compared to $329,000 in 1995. 
The amortized Credit Facility origination fees decreased in 1996 as compared to 
1995, because in December 1995 the term of the Credit Facility was extended one 
year, which extended the period of time over which unamortized fees are         
amortized.                                                                      

The Company reviews long-lived assets for impairment whenever events or 
changes in circumstances indicate that the carrying amount of the asset may not 
be recoverable. In 1996, a $579,000 charge was taken to reduce the net carrying 
value on four properties because they became held for sale. No charge was       
recorded for an impairment loss in 1995.                                        

 The Company anticipates property sales will occur in the normal course of
business. During 1996, the Company recorded a gain of $1.5 million on the sale  
of two multi-tenant properties, five restaurant properties and the granting of  
an easement on another property. During 1995, the Company recorded a net gain of
$18,000 on the sale of two child care properties and a multi-tenant property.   
During 1996 and 1995, cash proceeds generated from these sales were $4.4 million
and $617,000, respectively.                                                     

For 1996, the Company recorded net income of $32.2 million versus $25.6 
million in 1995. The $6.6 million increase in net income is primarily due to an 
increase in rental revenue from 124 properties acquired from December 1994      
through December 1996 of $5.0 million, an increase in the net gain on sales of  
properties of $1.4 million and a net decrease in advisor fees and general and   
administrative expenses of $1.7 million, offset by an increase in depreciation  
and amortization expense of $1.6 million.                                       

COMPARISON OF 1995 TO 1994                                              

   Rental revenue was $51.2 million for 1995 versus $47.9 million for 1994, an
increase of $3.3 million. The increase in rental revenue was primarily due to   
the acquisition of 62 properties from December 1994 through December 1995. These
properties generated revenue of $3.8 million in 1995. This increase in rental   
revenue was offset in part by a decline in revenue from properties owned during 
both 1995 and 1994 that was primarily attributable to a decline in percentage   
rents. Percentage rent was $1.6 million for 1995 as compared to $2.6 million in 
1994.                                                                           

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 The following table represents Realty Income's rental revenue by industry
for the years ended December 31, 1995 and 1994:                                 

                                                        [Enlarge/Download Table]

                                              DECEMBER 31, 1995             DECEMBER 31, 1994      
                                         ----------------------------  ----------------------------
                                            RENTAL      PERCENTAGE OF     RENTAL      PERCENTAGE OF
INDUSTRY                                    REVENUE         TOTAL         REVENUE         TOTAL    
---------------------------------------  -------------  -------------  -------------  -------------
                                                                                                   
Automotive Parts.......................  $   4,724,000         9.2%    $   4,977,000        10.4%  
Automotive Service.....................      3,007,000         5.9%        2,705,000         5.7%  
Child Care.............................     23,358,000        45.6%       23,522,000        49.1%  
Convenience Stores.....................      1,254,000         2.4%         --             --      
Home Furnishings.......................      1,471,000         2.9%         --             --      
Restaurant.............................     12,632,000        24.7%       12,047,000        25.1%  
Other..................................      4,739,000         9.3%        4,654,000         9.7%  
                                         -------------       -----     -------------       -----   
Total..................................  $  51,185,000       100.0%    $  47,905,000       100.0%  
                                         -------------       -----     -------------       -----   
                                         -------------       -----     -------------       -----   

   Unleased properties are a factor in determining gross revenue generated and
property costs incurred by the Company. At December 31, 1995 and 1994, the      
Company had four properties that were not under lease, while the remaining 681  
and 626 properties, respectively, were under lease agreements with third party  
tenants.                                                                        

    The significant portion of the remaining revenue earned during 1995 and 1994
was attributable to interest earned on cash invested in two funds which hold    
short-term investments in United States government agency securities or direct  
purchases of short-term United States government agency securities. Interest    
revenue was $276,000 for 1995 as compared to $862,000 during 1994. The decrease 
in interest revenue was due to a reduction of cash held, which was primarily    
invested in properties.                                                         

    Depreciation and amortization was $14.8 million in 1995 versus $13.8 million
in 1994. The $1.0 million increase was primarily due to the depreciation of 62  
properties acquired from December 1994 through December 31, 1995 and            
amortization of goodwill recorded in connection with the Merger of R.I.C.       
Advisor.                                                                        

Total advisor fees and general and administrative expenses decreased by 
$312,000 to $6.9 million in 1995 versus $7.2 million in 1994. General and       
administrative expenses were $3.2 million in 1995 versus $1.8 million in 1994.  
R.I.C. Advisor fees were $3.7 million in 1995 versus $5.4 million in 1994. The  
$1.4 million increase in general and administrative expenses and $1.7 million   
decrease in advisor fees was due to the Merger of R.I.C. Advisor. Subsequent to 
the Merger, the Company commenced paying for management, accounting systems,    
office facilities, and professional and support personnel expenses (i.e., costs 
of being self-administered). Such costs were the responsibility of R.I.C.       
Advisor through August 17, 1995.                                                

 The advisor fees for 1995 were calculated in accordance with the terms of
the advisory agreement which became effective August 15, 1994 and was terminated
on August 17, 1995. Prior to August 16, 1994, advisor fees were calculated in   
accordance with the terms of the partnership agreements of the Partnerships.    

  Administrative expense in 1994 included approximately $500,000 of one-time
expenses primarily associated with the distribution of stock certificates,      
shareholder informational material and final partnership K-1's to shareholders  
after the Consolidation had occurred. Other administrative expenses increased in
1995 compared to 1994 due to additional expenses associated with the operation  
of a publicly traded REIT including, but not limited to, transfer agent fees,   
NYSE fees, board of directors fees and property acquisition expenses.           

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Property expenses decreased to $1.6 million in 1995 as compared to $2.1 
million in 1994. The $488,000 decrease was primarily due to a decrease in       
property taxes, maintenance and utilities.                                      

    Interest expense for 1995 was $2.6 million as compared to $396,000 for 1994.
Of the $2.2 million increase, $1.4 million was for interest paid on the Credit  
Facility in 1995 and $665,000 for interest paid on the Redeemed Notes. Interest 
incurred on loans and notes in 1995 and 1994 was $2.4 million and $354,000,     
respectively. Interest incurred was higher in 1995 due to borrowings on the     
Credit Facility and the Redeemed Notes issued as part of the Consolidation.     
During 1995, the average outstanding balances and interest rates on the Credit  
Facility and the Redeemed Notes were $31.3 million and 7.68%. Included in the   
interest incurred in 1995 was capitalized interest totaling $217,000. No        
interest was capitalized in 1994. Commitment fees in 1995 were $127,000 as      
compared to $13,000 in 1994. In 1995 and 1994, a commitment fee of 0.15% per    
annum was incurred on the undrawn portion of the Credit Facility. Amortization  
of the Credit Facility origination fees was $329,000 in 1995 as compared to     
$29,000 in 1994. Commitment fees and amortization of Credit Facility origination
fees increased in 1995 because the Credit Facility was not entered into until   
November 1994.                                                                  

The Company reviews long-lived assets for impairment whenever events or 
changes in circumstances indicate that the carrying amount of the asset may not 
be recoverable. In 1994, a $135,000 charge was taken to reduce the net carrying 
value on one property because it became held for sale. No charge was recorded   
for an impairment loss in 1995.                                                 

   In 1994, the Company expensed Consolidation costs aggregating $11.2 million
which were nonrecurring costs incurred to effect the Consolidation. In a manner 
similar to the pooling-of-interests method of accounting, the Consolidation     
costs were charged to expense upon the consummation of the Consolidation. Such  
costs included, but were not limited to, fees paid to underwriters, appraisers, 
attorneys, and accountants, as well as costs associated with obtaining a        
fairness opinion, soliciting the limited partners, and registering and listing  
the common stock and the Redeemed Notes on the NYSE.                            

  During 1995, the Company recorded a net gain of $18,000 on the sale of two
child care properties and a multi-tenant property. During 1994, the Company     
recorded a gain of $1.2 million on the sale of five restaurant properties.      
During 1995 and 1994 cash proceeds generated from these sales were $617,000 and 
$3.8 million, respectively.                                                     

For 1995, the Company recorded net income of $25.6 million versus $15.2 
million in 1994. The net income in 1994 was negatively impacted by one time     
Consolidation costs of $11.2 million. Net income for 1994, excluding the        
Consolidation costs, was $26.4 million.                                         

IMPACT OF INFLATION                                                             

Tenant leases generally provide for increases in rent as a result of    
increases in the tenant's sales volumes or increases (typically subject to      
ceilings) in the consumer price index. Management expects that inflation will   
cause these lease provisions to result in increases in rent over time. However, 
inflation and increased costs may have an adverse impact on the tenants if      
increases in the tenant's operating expenses exceed increases in revenue. At    
December 31, 1996, approximately 98% of the properties are leased to tenants    
under net leases in which the tenant is responsible for substantially all       
property costs and expenses. These features in the leases reduce the Company's  
exposure to rising expenses due to inflation.                                   

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MANAGEMENT OF THE COMPANY 

The following table sets forth the executive officers and members of the
Board of Directors of Realty Income:                                            

                                                        [Enlarge/Download Table]

NAME                                                     TITLE                           AGE   
-------------------------------  ------------------------------------------------------  ---   
                                                                                               
William E. Clark...............  Chairman of the Board and Chief Executive Officer;            
                                   Director                                                  59

Richard J. VanDerhoff..........  President and Chief Operating Officer; Director             43

Thomas A. Lewis................  Vice Chairman of the Board and Vice President Capital         
                                   Markets; Director                                         44

John W. Wolfe..................  Vice President, Portfolio Acquisitions                      48

Gary M. Malino.................  Vice President, Chief Financial Officer and Treasurer       39

Michael R. Pfeiffer............  Vice President, General Counsel and Secretary               36

Richard G. Collins.............  Vice President, Portfolio Management                        49

Donald R. Cameron..............  Director                                                    57

Roger P. Kuppinger.............  Director                                                    56

Michael D. McKee...............  Director                                                    51

Willard H. Smith Jr............  Director                                                    60

   Set forth below is a summary of the business experience of the above-listed
persons.                                                                        

  WILLIAM E. CLARK has been the Chairman of the Board of Directors and Chief
Executive Officer and a Director of the Company since September 1993 and has    
been involved as a principal in commercial real estate acquisition, development,
management and sales for over 30 years. His involvement includes land           
acquisition, tenant lease negotiations, construction and sales of prime         
commercial properties for regional and national fast-food restaurant, automotive
and retail chain store operations throughout the United States. He had been a   
director and an officer of R.I.C. Advisor since 1969 until it was merged with   
the Company on August 17, 1995 (the "Merger").                                  

RICHARD J. VANDERHOFF has been President and Chief Operating Officer of 
Realty Income since November 1994 and a Director of the Company since July 1996 
and had been with R.I.C. Advisor from 1987 until the Merger. From August 1994 to
November 1994, he served as general counsel of the Company. Prior to 1987, he   
was employed as Vice President, General Counsel and Secretary of FNCO           
Corporation, an owner and operator of community newspaper companies located     
throughout the midwest United States (1984-1987) and was in private law practice
specializing in real property and business law (1980-1984). He graduated from   
Jacksonville University, B.S., and the University of San Diego School of Law,   
J.D.                                                                            

  THOMAS A. LEWIS has been the Vice Chairman of the Board of Directors, Vice
President, Capital Markets and a Director of the Company since September 1993   
and had been with R.I.C. Advisor from 1987 until the Merger. Prior to joining   
R.I.C. Advisor, he served in various capacities, including Senior Vice President
with Johnstown Capital, a real estate management and syndication company        
(1982-1987), and Investment Specialist with Sutro & Co., a member of the New    
York Stock Exchange (1979-1982), and was employed by the Procter & Gamble       
Company (1974-1979). He graduated from Chaminade University of Hawaii, B.A., and
holds NASD General Securities (Series 7) and Registered Principal (Series 24)   
licenses.                                                                       

    JOHN H. WOLFE has been Vice President, Portfolio Acquisitions of the Company
since August 1995 and had been with R.I.C. Advisor from 1983 until the Merger.  
He has announced his retirement from the                                        

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Company, to be effective in June 1997. Prior to joining R.I.C. Advisor, he was  
the Director of Development for Black Angus Restaurants (1978-1983) and owned   
and operated a real estate investment company (1975-1978). He graduated from San
Diego State University, B.S.                                                    

   GARY M. MALINO has been Chief Financial Officer of the Company since August
1994 and the Vice President, Chief Financial Officer and Treasurer of the       
Company since August 1995 and had been with R.I.C. Advisor from 1985 until the  
Merger. Prior to joining R.I.C. Advisor in 1985, he was a Certified Public      
Accountant with Kendall & Forman, an accountancy corporation (1981-1985) and    
Assistant Controller with McMillin Development Company, a real estate           
development company (1979-1981). He graduated from San Diego State University,  
B.S.                                                                            

  MICHAEL R. PFEIFFER has been Vice President, General Counsel and Secretary
of the Company since August 1995 and had been with R.I.C. Advisor from 1990     
until the Merger. Prior to joining R.I.C. Advisor he was in private practice    
specializing in real estate transactional law (1987-1990), and was employed as  
Associate Counsel with First American Title Insurance Company (1986-1987). He   
graduated from the University of Rhode Island, B.S., and the University of San  
Diego School of Law, J.D. He is a licensed attorney and member of the State Bar 
of California and the State Bar of Florida.                                     

RICHARD G. COLLINS has been Vice President, Portfolio Management of the 
Company since August 1995 and had been with R.I.C. Advisor from 1990 until the  
Merger. The Company plans to appoint him Vice President, Portfolio Acquisitions 
in connection with Mr. Wolfe's retirement from this position. Prior to joining  
R.I.C. Advisor, he was involved as a principal in the acquisition and sale of   
land and commercial real estate and a general partner for land and commercial   
real estate partnerships (1979-1990) and a leasing and sales specialist in the  
Office Properties Division for Grubb & Ellis Commercial Real Estate Services    
(1974-1979). He graduated from San Diego State University, B.S.                 

  DONALD R. CAMERON has been a Director of the Company since August 1994 and
is a co-founder and President of Cameron, Murphy & Spangler, Inc., a securities 
broker-dealer firm located in Pasadena, California. He graduated from the       
University of Glasgow, Scotland, B.Sc. Prior to founding Cameron, Murphy &      
Spangler in 1975, he worked at the securities brokerage firm of Glore Forgan    
Staats, Inc. and its successors (1969-1975). He is currently a director of Ayr  
United Football and Athletic Club, Ltd. Mr. Cameron is chairman of the          
Compensation Committee and is a member of the Audit Committee, the Special      
Committee and the Corporate Governance Committee.                               

   ROGER P. KUPPINGER has been a Director of the Company since August 1994 and
is a self-employed investment banker and financial advisor and is an active     
investor in both private and public companies. Prior to March 1994, he was a    
Managing Director at the investment banking firm Sutro & Co. Inc. He graduated  
from Northwestern University, B.S. and M.B.A., and from LaSalle University in   
Chicago, LL.B. Prior to joining Sutro in 1969, he worked at First Interstate    
Bank, formerly named United California Bank (1964-1969). He has served on over  
ten boards of directors for both public and private companies, and currently    
serves on the board of directors of BRE Properties, Inc. Mr. Kuppinger is       
chairman of the Audit Committee and is a member of the Compensation Committee,  
the Special Committee and the Corporate Governance Committee.                   

 MICHAEL D. MCKEE has been a Director of the Company since August 1994 and
has been Executive Vice President of The Irvine Company since March 1994 and has
served as Chief Financial Officer of The Irvine Company since January 1997.     
Prior thereto, he was a partner in the law firm of Latham & Watkins. He         
graduated from Azusa Pacific University, B.A., University of Southern           
California, M.A., and University of California at Los Angeles, J.D. His business
and legal experience includes numerous acquisition and disposition transactions,
as well as a variety of public and private offerings of equity and debt         
securities. He is currently a member of the board of directors of Health Care   
Property Investors, Inc., Circus Circus Enterprises, Inc. and Irvine Apartment  
Communities, Inc. Mr. McKee is chairman of the Special Committee and is a member
of the Compensation Committee, the Audit Committee and the Corporate Governance 
Committee.                                                                      

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  WILLARD H. SMITH JR has been a Director of the Company since July 1996 and
was the Managing Director, Equity Capital Markets Division, of Merrill Lynch &  
Co. from 1983 until his recent retirement. Prior to joining Merrill Lynch in    
1979, he was employed by F. Eberstadt & Co. (1971-1979). Mr. Smith also serves  
on the board of directors of four investment companies: Cohen & Steers Realty   
Shares; Cohen & Steers Realty Income Fund; Cohen & Steers Total Return Realty   
Fund; and Cohen & Steers Special Equity Fund, Inc. Additionally, he is a member 
of the board of directors of Essex Property Trust and Highwoods Property Trust, 
two NYSE listed real estate investment trusts, and Willis Lease Finance         
Corporation, a Nasdaq listed company. Mr. Smith is chairman of the Corporate    
Governance Committee and is a member of the Audit Committee, the Special        
Committee and the Compensation Committee.                                       

DESCRIPTION OF THE NOTES

The following description of the particular terms of the Notes offered  
hereby supplements and, to the extent inconsistent therewith, replaces the      
description of the general terms and provisions of the Debt Securities set forth
in the accompanying Prospectus. The following statements relating to the Notes  
and the Indenture (as defined below) are summaries of provisions contained      
therein and do not purport to be complete. Such statements are qualified by     
reference to the provisions of the Notes and the Indenture, including the       
definitions therein of certain terms. Unless otherwise expressly stated or the  
context otherwise requires, all references to the "Company" appearing under this
caption "Description of the Notes" and under the caption "Description of Debt   
Securities" in the accompanying Prospectus shall mean Realty Income Corporation 
excluding its consolidated subsidiaries. Other capitalized terms used herein but
not otherwise defined shall have the meanings given to them in the accompanying 
Prospectus.                                                                     

   The Notes constitute Debt Securities (which are more fully described in the
accompanying Prospectus), to be issued pursuant to an indenture (the            
"Indenture") between the Company and The Bank of New York, as trustee (the      
"Trustee"). The terms of the Notes include those provisions contained in the    
Indenture and those made part of the Indenture by reference to the Trust        
Indenture Act of 1939, as amended (the "TIA"). The Notes are subject to all such
terms, and investors are referred to the Indenture and the TIA for a statement  
thereof.                                                                        

GENERAL                                                                         

   The Notes will be a separate series of Debt Securities under the Indenture,
limited in aggregate principal amount to $110 million. Such series may not be   
reopened for the issuance of additional Debt Securities of such series. The     
Notes will be direct, senior unsecured obligations of the Company and will rank 
equally with all other senior unsecured indebtedness of the Company from time to
time outstanding. The Notes will be effectively subordinated to all indebtedness
and other liabilities (including guarantees) of the Company's subsidiaries and  
will also be effectively subordinated to any senior secured indebtedness of the 
Company to the extent of any collateral pledged as security therefor. As of     
March 31, 1997, such subsidiary indebtedness (not including guarantees of       
borrowings under the Credit Facility) and other liabilities (primarily rents    
received in advance) aggregated approximately $331,000 and the Company          
(excluding its subsidiaries) had unsecured senior indebtedness aggregating      
approximately $94.7 million (approximately $6.5 million (excluding the Notes) on
a pro forma basis after giving effect to this Offering and the application of   
the net proceeds therefrom) and senior secured indebtedness aggregating         
approximately $869,000. See "Use of Proceeds" and "Capitalization." Subject to  
certain limitations set forth in the Indenture and as described below under     
"--Additional Covenants of the Company," the Indenture will permit the Company  
and its subsidiaries to incur additional secured and unsecured indebtedness.    

  The Notes will be issued only in fully registered form without coupons, in
denominations of $1,000 and integral multiples thereof. The Notes will be       
evidenced by a global Note (the "Global Note") in book-entry form, except under 
the limited circumstances described below under "--Book Entry System." Notices  
or demands to or upon the Company in respect of the Notes and the Indenture may 
be served and, in the event that Notes are issued in definitive certificated    
form, Notes may be surrendered for payment,                                     

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registration of transfer or exchange, at the office or agency of the Company    
maintained for such purpose in the Borough of Manhattan, The City of New York,  
which shall initially be the corporate trust office of the Trustee, which on the
date of this Prospectus Supplement is located at Attention: Corporate Trust     
Administration, 101 Barclay Street, 21st Floor, New York, New York 10286.       

Reference is made to the section titled "Description of Debt            
Securities--Certain Covenants" in the accompanying Prospectus and "--Additional 
Covenants of the Company" below for a description of certain covenants          
applicable to the Notes. Compliance with such covenants generally may not be    
waived unless the holders of a majority in principal amount of the outstanding  
Notes consent to such waiver. In addition, the defeasance and covenant          
defeasance provisions of the Indenture described under "Description of Debt     
Securities--Discharge, Defeasance and Covenant Defeasance" in the accompanying  
Prospectus will apply to the Notes; such covenant defeasance will be applicable 
with respect to the covenants described in the accompanying Prospectus under    
"Description of Debt Securities--Certain Covenants" (except the covenant        
requiring the Company to preserve and keep in full force and effect its         
corporate existence) and the covenants described below under "--Additional      
Covenants of the Company".                                                      

Except as described under "Description of Debt Securities--Merger,      
Consolidation or Sale of Assets" in the accompanying Prospectus or "--Additional
Covenants of the Company" below, the Indenture does not contain any provisions  
that would afford holders of the Notes protection in the event of (i) a highly  
leveraged or similar transaction involving the Company, (ii) a change of control
or the management of the Company, or (iii) a reorganization, restructuring,     
merger or similar transaction involving the Company that may adversely affect   
the holders of the Notes. In addition, subject to the limitations set forth     
under "Description of Debt Securities--Merger, Consolidation or Sale of Assets" 
in the accompanying Prospectus, the Company may, in the future, enter into      
certain transactions such as the sale of all or substantially all of its assets 
or the merger or consolidation of the Company with another entity that would    
increase the amount of the Company's indebtedness or substantially reduce or    
eliminate the Company's assets, which may have an adverse affect on the         
Company's ability to service its indebtedness, including the Notes.             

 The Company has no present intention of engaging in a highly leveraged or
similar transaction involving the Company. In addition, certain restrictions on 
ownership and transfers of the Company's capital stock designed to preserve its 
status as a REIT may act to prevent or hinder any such transaction or change of 
control.                                                                        

INTEREST AND MATURITY                                                           

 The Notes will mature on May 6, 2007 (the "Maturity Date"). The Notes are
not subject to any sinking fund provisions. The Notes are subject to redemption 
at the Company's option and are not subject to repayment or repurchase by the   
Company at the option of the Holders (as defined below). See                    
"--Optional Redemption."                                                        

 The Notes will bear interest at the rate per annum set forth on the cover
page of this Prospectus Supplement from the date of issuance or from the        
immediately preceding Interest Payment Date (as defined below) to which interest
has been paid, payable semi-annually in arrears on each May 6 and November 6    
(the "Interest Payment Dates"), commencing November 6, 1997, to the persons (the
"Holders") in whose names the Notes are registered in the security register     
applicable to the Notes at the close of business on the April 21 or October 22  
(the "Regular Record Dates"), as the case may be, immediately prior to such     
Interest Payment Dates regardless of whether such Regular Record Date is a      
Business Day. Interest on the Notes will be computed on the basis of a 360-day  
year of twelve 30-day months.                                                   

If any Interest Payment Date, the Maturity Date, any date fixed for     
redemption or any other day on which the principal of, premium, if any, or      
interest on a Note becomes due and payable falls on a day that is not a Business
Day, the required payment shall be made on the next Business Day as if it were  
made on                                                                         

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the date such payment was due and no interest shall accrue on the amount so     
payable for the period from and after such Interest Payment Date, Maturity Date,
redemption date or other date, as the case may be.                              

ADDITIONAL COVENANTS OF THE COMPANY                                             

   Reference is made to the section titled "Description of Debt Securities" in
the accompanying Prospectus for a description of certain covenants applicable to
the Notes. In addition to the foregoing, the following covenants of the Company 
will apply to the Notes for the benefit of the Holders of the Notes:            

   LIMITATION ON INCURRENCE OF TOTAL DEBT.  The Company will not, and will not
permit any Subsidiary to, incur any Debt, other than Intercompany Debt if,      
immediately after giving effect to the incurrence of such additional Debt and   
the application of the proceeds therefrom on a pro forma basis, the aggregate   
principal amount of all outstanding Debt of the Company and its Subsidiaries on 
a consolidated basis determined in accordance with GAAP is greater than 60% of  
the sum of (i) the Company's Total Assets as of the end of the latest fiscal    
quarter covered in the Company's Annual Report on Form 10-K or Quarterly Report 
on Form 10-Q, as the case may be, most recently filed with the Commission (or,  
if such filing is not required under the Exchange Act, with the Trustee) prior  
to the incurrence of such additional Debt and (ii) the increase, if any, in     
Total Assets from the end of such quarter including, without limitation, any    
increase in Total Assets caused by the application of the proceeds of such      
additional Debt (such increase together with the Company's Total Assets is      
referred to as the "Adjusted Total Assets").                                    

 LIMITATION ON INCURRENCE OF SECURED DEBT.  The Company will not, and will
not permit any Subsidiary to, incur any Secured Debt other than Intercompany    
Debt if, immediately after giving effect to the incurrence of such additional   
Secured Debt and the application of the proceeds therefrom on a pro forma basis,
the aggregate principal amount of all outstanding Secured Debt of the Company   
and its Subsidiaries on a consolidated basis determined in accordance with GAAP 
is greater than 40% of the Company's Adjusted Total Assets.                     

DEBT SERVICE COVERAGE.  The Company will not, and will not permit any   
Subsidiary to, incur any Debt, other than Intercompany Debt, if the ratio of    
Consolidated Income Available for Debt Service to the Annual Debt Service Charge
for the period consisting of the four consecutive fiscal quarters most recently 
ended prior to the date on which such additional Debt is to be incurred is less 
than 1.5 to 1.0, on a pro forma basis after giving effect to the incurrence of  
such Debt and the application of the proceeds therefrom, and calculated on the  
assumption that (i) such Debt and any other Debt incurred by the Company or any 
of its Subsidiaries since the first day of such four-quarter period and the     
application of the proceeds therefrom (including to refinance other Debt since  
the first day of such four-quarter period) had occurred on the first day of such
period, (ii) the repayment or retirement of any other Debt of the Company or any
of its Subsidiaries since the first day of such four-quarter period had occurred
on the first day of such period (except that, in making such computation, the   
amount of Debt under any revolving credit facility, line of credit or similar   
facility shall be computed based upon the average daily balance of such Debt    
during such period), and (iii) in the case of any acquisition or disposition by 
the Company or any Subsidiary of any asset or group of assets since the first   
day of such four-quarter period, including, without limitation, by merger, stock
purchase or sale, or asset purchase or sale, such acquisition or disposition had
occurred on the first day of such period with the appropriate adjustments with  
respect to such acquisition or disposition being included in such pro forma     
calculation. If the Debt giving rise to the need to make the foregoing          
calculation or any other Debt incurred after the first day of the relevant      
four-quarter period bears interest at a floating rate then, for purposes of     
calculating the Annual Debt Service Charge, the interest rate on such Debt shall
be computed on a pro forma basis as if the average interest rate which would    
have been in effect during the entire such four-quarter period had been the     
applicable rate for the entire such period.                                     

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   MAINTENANCE OF TOTAL UNENCUMBERED ASSETS.  The Company will maintain at all
times Total Unencumbered Assets of not less than 150% of the aggregate          
outstanding principal amount of the Unsecured Debt of the Company and its       
Subsidiaries, computed on a consolidated basis in accordance with GAAP.         

As used herein:                                                         

"ANNUAL DEBT SERVICE CHARGE" as of any date means the amount which is   
expensed in any 12-month period for interest on Debt of the Company and its     
Subsidiaries.                                                                   

"CONSOLIDATED INCOME AVAILABLE FOR DEBT SERVICE" for any period means   
Consolidated Net Income plus, without duplication, amounts which have been      
deducted in determining Consolidated Net Income during such period for (i)      
Consolidated Interest Expense, (ii) provision for taxes of the Company and its  
Subsidiaries based on income, (iii) amortization (other than amortization of    
debt discount) and depreciation, (iv) provisions for losses from sales or joint 
ventures, (v) provision for impairment losses, (vi) increases in deferred taxes 
and other non-cash charges, (vii) charges resulting from a change in accounting 
principles, and (viii) charges for early extinguishment of debt, and less,      
without duplication, amounts which have been added in determining Consolidated  
Net Income during such period for (a) provisions for gains from sales or joint  
ventures, and (b) decreases in deferred taxes and other non-cash items.         

"CONSOLIDATED INTEREST EXPENSE" for any period, and without duplication,
means all interest (including the interest component of rentals on capitalized  
leases, letter of credit fees, commitment fees and other like financial charges)
and all amortization of debt discount on all Debt (including, without           
limitation, payment-in-kind, zero coupon and other like securities) but         
excluding legal fees, title insurance charges, other out-of-pocket fees and     
expenses incurred in connection with the issuance of Debt and the amortization  
of any such debt issuance costs that are capitalized, all determined for the    
Company and its Subsidiaries on a consolidated basis in accordance with GAAP.   

 "CONSOLIDATED NET INCOME" for any period means the amount of consolidated
net income (or loss) of the Company and its Subsidiaries for such period        
determined on a consolidated basis in accordance with GAAP.                     

  "DEBT" means any indebtedness of the Company or any Subsidiary, whether or
not contingent, in respect of (i) money borrowed or evidenced by bonds, notes,  
debentures or similar instruments, (ii) indebtedness secured by any mortgage,   
pledge, lien, charge, encumbrance, trust deed, deed of trust, deed to secure    
debt, security agreement or any security interest existing on property owned by 
the Company or any Subsidiary, (iii) letters of credit or amounts representing  
the balance deferred and unpaid of the purchase price of any property except any
such balance that constitutes an accrued expense or trade payable or (iv) any   
lease of property by the Company or any Subsidiary as lessee that is reflected  
on the Company's consolidated balance sheet as a capitalized lease in accordance
with GAAP, in the case of items of indebtedness under (i) through (iii) above to
the extent that any such items (other than letters of credit) would appear as   
liabilities on the Company's consolidated balance sheet in accordance with GAAP,
and also includes, to the extent not otherwise included, any obligation of the  
Company or any Subsidiary to be liable for, or to pay, as obligor, guarantor or 
otherwise (other than for purposes of collection in the ordinary course of      
business), indebtedness of another person (other than the Company or any        
Subsidiary) of the type referred to in (i), (ii), (iii) or (iv) above (it being 
understood that Debt shall be deemed to be incurred by the Company or any       
Subsidiary whenever the Company or such Subsidiary shall create, assume,        
guarantee or otherwise become liable in respect thereof).                       

    "EXECUTIVE GROUP" means, collectively, those individuals holding the offices
of Chairman, President, Chief Executive Officer, Chief Operating Officer, or any
Vice President of the Company.                                                  

"GAAP" means generally accepted accounting principles, as in effect from
time to time, as used in the United States applied on a consistent basis.       

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    "INTERCOMPANY DEBT" means indebtedness owed by the Company or any Subsidiary
solely to the Company or any Subsidiary.                                        

"SECURED DEBT" means Debt secured by any mortgage, lien, charge,        
encumbrance, trust deed, deed of trust, deed to secure debt, security agreement,
pledge, conditional sale or other title retention agreement, capitalized lease, 
or other security interest or agreement granting or conveying security title to 
or a security interest in real property or other tangible assets.               

   "SUBSIDIARY" means (i) any corporation, partnership, joint venture, limited
liability company or other entity the majority of the shares, if any, of the    
non-voting capital stock or other equivalent ownership interests of which       
(except directors' qualifying shares) are at the time directly or indirectly    
owned by the Company, and the majority of the shares of the voting capital stock
or other equivalent ownership interests of which (except for directors'         
qualifying shares) are at the time directly or indirectly owned by the Company, 
any other Subsidiary or Subsidiaries, and/or one or more individuals of the     
Executive Group (or, in the event of death or disability of any of such         
individuals, his/her respective legal representative(s), or such individuals'   
successors in office as an officer of the Company), and (ii) any other entity   
the accounts of which are consolidated with the accounts of the Company. The    
foregoing definition of "Subsidiary" shall only be applicable with respect to   
the covenants and other definition set forth herein under "-- Additional        
Covenants of the Company" and, insofar as the provisions described in the       
accompanying Prospectus under "Description of Debt Securities--Merger,          
Consolidation or Sale of Assets" apply to the Notes, the foregoing definition of
Subsidiary shall be applicable instead of the definition of "Subsidiary" set    
forth in the accompanying Prospectus.                                           

    "TOTAL ASSETS" as of any date means the sum of (i) Undepreciated Real Estate
Assets and (ii) all other assets of the Company and its Subsidiaries determined 
on a consolidated basis in accordance with GAAP (but excluding accounts         
receivable and intangibles).                                                    

"TOTAL UNENCUMBERED ASSETS" as of any date means Total Assets minus the 
value of any properties of the Company and its Subsidiaries that are encumbered 
by any mortgage, charge, pledge, lien, security interest, trust deed, deed of   
trust, deed to secure debt, security agreement, or other encumbrance of any kind
(other than those relating to Intercompany Debt), including the value of any    
stock of any Subsidiary that is so encumbered determined on a consolidated basis
in accordance with GAAP. For purposes of this definition, the value of each     
property shall be equal to the purchase price or cost of each such property and 
the value of any stock subject to any encumbrance shall be determined by        
reference to the value of the properties owned by the issuer of such stock as   
aforesaid.                                                                      

  "UNDEPRECIATED REAL ESTATE ASSETS" as of any date means the amount of real
estate assets of the Company and its Subsidiaries on such date, before          
depreciation and amortization, determined on a consolidated basis in accordance 
with GAAP.                                                                      

"UNSECURED DEBT" means Debt of the Company or any Subsidiary that is not
Secured Debt.                                                                   

OPTIONAL REDEMPTION                                                             

    The Notes may be redeemed at any time at the option of the Company, in whole
or from time to time in part, at a redemption price equal to the sum of (i) the 
principal amount of the Notes being redeemed plus accrued interest thereon to   
the redemption date and (ii) the Make-Whole Amount (as defined below), if any,  
with respect to such Notes (the "Redemption Price"); provided that installments 
of interest on Notes which are payable on Interest Payment Dates falling on or  
prior to the relevant redemption dates shall be payable to the Holders of such  
Notes (or one or more predecessor Notes) registered as such at the close of     
business on the relevant Regular Record Dates.                                  

If notice has been given as provided in the Indenture and funds for the 
redemption of any Notes called for redemption shall have been made available on 
the redemption date referred to in such notice,                                 

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such Notes will cease to bear interest on the date fixed for such redemption    
specified in such notice and the only right of the Holders of the Notes will be 
to receive payment of the Redemption Price.                                     

  Notice of any optional redemption of any Notes will be given to Holders at
their addresses, as shown in the security register for the Notes, not more than 
60 nor less than 30 days prior to the date fixed for redemption. The notice of  
redemption will specify, among other items, the Redemption Price and the        
principal amount of the Notes held by such Holder to be redeemed.               

   If less than all the Notes are to be redeemed at the option of the Company,
the Company will notify the Trustee at least 45 days prior to giving notice of  
redemption (or such shorter notice period as is satisfactory to the Trustee) of 
the aggregate principal amount of Notes to be redeemed and their redemption     
date. The Trustee shall select, in such manner as it shall deem fair and        
appropriate, Notes to be redeemed in whole or in part.                          

As used herein:                                                         

    "MAKE-WHOLE AMOUNT" means, in connection with any optional redemption of any
Notes, the excess, if any, of (i) the aggregate present value as of the date of 
such redemption of each dollar of principal being redeemed and the amount of    
interest (exclusive of interest accrued to the date of redemption) that would   
have been payable in respect of each such dollar if such redemption had not been
made, determined by discounting, on a semi-annual basis, such principal and     
interest at the Reinvestment Rate (determined on the third Business Day         
preceding the date such notice of redemption is given) from the respective dates
on which such principal and interest would have been payable if such redemption 
had not been made to the date of redemption over (ii) the aggregate principal   
amount of the Notes being redeemed. For purposes of the Indenture, all          
references to "premium, if any" on the Notes shall be deemed to refer to the    
Make-Whole Amount, if any.                                                      

   "REINVESTMENT RATE" means .25% plus the arithmetic mean of the yields under
the heading "Week Ending" published in the most recent Statistical Release under
the caption "Treasury Constant Maturities" for the maturity (rounded to the     
nearest month) corresponding to the remaining life to maturity of the Notes, as 
of the payment date of the principal being redeemed. If no maturity exactly     
corresponds to such maturity, yields for the two published maturities most      
closely corresponding to such maturity shall be calculated pursuant to the      
immediately preceding sentence and the Reinvestment Rate shall be interpolated  
or extrapolated from such yields on a straight-line basis, rounding in each of  
such relevant periods to the nearest month. For the purposes of calculating the 
Reinvestment Rate, the most recent Statistical Release published prior to the   
date of determination of the Make-Whole Amount shall be used.                   

  "STATISTICAL RELEASE" means the statistical release designated "H.15(519)"
or any successor publication which is published weekly by the Federal Reserve   
System and which reports yields on actively traded U.S. government securities   
adjusted to constant maturities, or, if such statistical release is not         
published at the time of any determination under the Indenture, then such other 
reasonably comparable index which shall be designated by the Company.           

BOOK-ENTRY SYSTEM                                                               

    The following are summaries of certain rules and operating procedures of DTC
that affect the payment of principal, premium, if any, and interest and         
transfers of interests in the Global Note. Upon issuance, the Notes will only be
issued in the form of a Global Note which will be deposited with, or on behalf  
of, DTC and registered in the name of Cede & Co., as nominee of DTC. Unless and 
until it is exchanged in whole or in part for Notes in definitive form under the
limited circumstances described below, a Global Note may not be transferred     
except as a whole (i) by DTC to a nominee of DTC, (ii) by a nominee of DTC to   
DTC or another nominee of DTC or (iii) by DTC or any such nominee to a successor
of DTC or a nominee of such successor.                                          

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Ownership of beneficial interests in a Global Note will be limited to   
persons that have accounts with DTC for such Global Note ("participants") or    
persons that may hold interests through participants. Upon the issuance of a    
Global Note, DTC will credit, on its book-entry registration and transfer       
system, the participants' accounts with the respective principal amounts of the 
Notes represented by such Global Note beneficially owned by such participants.  
Ownership of beneficial interests in the Global Note will be shown on, and the  
transfer of such ownership interests will be effected only through, records     
maintained by DTC (with respect to interests of participants) and on the records
of participants (with respect to interests of persons holding through           
participants). The laws of some states may require that certain purchasers of   
securities take physical delivery of such securities in definitive form. Such   
laws may limit or impair the ability to own, transfer or pledge beneficial      
interests in the Global Note.                                                   

   So long as DTC or its nominee is the registered owner of a Global Note, DTC
or its nominee, as the case may be, will be considered the sole owner or Holder 
of the Notes represented by such Global Note for all purposes under the         
Indenture. Except as set forth below, owners of beneficial interests in a Global
Note will not be entitled to have Notes represented by such Global Note         
registered in their names, will not receive or be entitled to receive physical  
delivery of such Notes in certificated form and will not be considered the      
registered owners or Holders thereof under the Indenture. Accordingly, each     
person owning a beneficial interest in a Global Note must rely on the procedures
of DTC and, if such person is not a participant, on the procedures of the       
participant through which such person owns its interest, to exercise any rights 
of a Holder under the Indenture. The Company understands that under existing    
industry practices, if the Company requests any action of Holders or if an owner
of a beneficial interest in a Global Note desires to give or take any action    
that a Holder is entitled to give or take under the Indenture, DTC would        
authorize the participants holding the relevant beneficial interests to give or 
take such action, and such participants would authorize beneficial owners owning
through such participants to give or take such action or would otherwise act    
upon the instructions of beneficial owners holding through them.                

  Principal, premium, if any, and interest payments on interests represented
by a Global Note will be made to DTC or its nominee, as the case may be, as the 
registered owner of such Global Note. None of the Company, the Trustee or any   
other agent of the Company or agent of the Trustee will have any responsibility 
or liability for any aspect of the records relating to or payments made on      
account of beneficial ownership of interests in the Global Notes or for         
maintaining, supervising or reviewing any records relating to such beneficial   
ownership interests. The Company expects that DTC, upon receipt of any payment  
of principal, premium, if any, or interest in respect of a Global Note, will    
immediately credit participants' accounts with payments in amounts proportionate
to their respective beneficial interests in such Global Note as shown on the    
records of DTC. The Company also expects that payments by participants to owners
of beneficial interests in the Global Note held through such participants will  
be governed by standing customer instructions and customary practice, as is now 
the case with securities held for the accounts of customers in bearer form or   
registered in "street name," and will be the responsibility of such             
participants.                                                                   

  The Indenture will provide that if (i) DTC notifies the Company that it is
unwilling or unable to continue as depositary or if DTC ceases to be a clearing 
agency registered as such under the Exchange Act at any time when the depositary
is required to be so registered in order to act as depositary for the Notes and 
a successor depositary is not appointed within 90 days after the Company        
receives such notice or learns of such ineligibility, (ii) the Company          
determines that the Notes shall no longer be represented by a Global Note and   
executes and delivers to the Trustee an officers' certificate to such effect or 
(iii) an Event of Default with respect to the Notes shall have occurred and be  
continuing and beneficial owners representing a majority in aggregate principal 
amount of the outstanding Notes advise DTC to cease acting as depositary for the
Notes, the Company will issue the Notes in definitive form in exchange for      
interests in the Global Note. Any Notes issued in definitive form in exchange   
for interests in the Global Note will be registered in such name or names, and  
will be issued in denominations of $1,000 and such integral multiples thereof,  
as DTC shall instruct the Trustee. It is expected that such instructions will be
based upon                                                                      

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directions received by DTC from participants with respect to ownership of       
beneficial interests in the Global Note.                                        

 DTC is a limited-purpose trust company organized under the Banking Law of
the State of New York, a member of the Federal Reserve System, a "clearing      
corporation" within the meaning of the New York Uniform Commercial Code, and a  
"clearing agency" registered pursuant to the provisions of Section 17A of the   
Exchange Act. DTC was created to hold securities of its participants and to     
facilitate the clearance and settlement of transactions among its participants  
in such securities through electronic book-entry changes in accounts of the     
participants, thereby eliminating the need for physical movement of securities  
certificates. DTC's participants include securities brokers and dealers, banks, 
trust companies, clearing corporations and certain other organizations, some of 
which (and/or their representatives) own DTC. Access to the DTC book-entry      
system is also available to others, such as banks, brokers and dealers and trust
companies that clear through or maintain a custodial relationship with a        
participant, either directly or indirectly.                                     

SAME-DAY SETTLEMENT AND PAYMENT                                                 

Settlement for the Notes will be made by the Underwriters in immediately
available funds. All payments of principal, premium, if any, and interest in    
respect of the Notes will be made by the Company by wire transfer of immediately
available funds to an account maintained in the United States; provided that, in
the event that Notes are issued in definitive certificated form, the Holders    
thereof shall have given appropriate wire transfer instructions to the Company. 

   Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing house or next-day funds. In contrast, the Notes   
will trade in DTC's Same-Day Funds Settlement System until maturity or until the
Notes are issued in certificated form, and secondary market trading activity in 
the Notes will therefore be required by DTC to settle in immediately available  
funds. The Company expects that secondary trading in the certificated           
securities, if any, will also be settled in immediately available funds. No     
assurance can be given as to the effect, if any, of settlement in immediately   
available funds on trading activity in the Notes.                               

UNDERWRITING

    Subject to the terms and conditions contained in the purchase agreement (the
"Purchase Agreement"), the Company has agreed to sell to Merrill Lynch, Pierce, 
Fenner & Smith Incorporated ("Merrill Lynch"), Donaldson, Lufkin & Jenrette     
Securities Corporation, J.P. Morgan Securities Inc. and Salomon Brothers Inc    
(the "Underwriters"), and the Underwriters have severally agreed to purchase the
respective principal amount of Notes set forth opposite their names below. In   
the Purchase Agreement, the several Underwriters have agreed, subject to the    
terms and conditions set forth therein, to purchase all of the Notes offered    
hereby if any such Notes are purchased. In the event of a default by an         
Underwriter, the Purchase Agreement provides that, in certain circumstances, the
purchase commitments of the non-defaulting Underwriters may be increased or the 
Purchase Agreement may be terminated.                                           

                                                        [Enlarge/Download Table]

                                                                                  PRINCIPAL   
                                                                                  AMOUNT OF   
              UNDERWRITER                                                           NOTES     
------------------------------------------------------------------------------  --------------
                                                                                              
Merrill Lynch, Pierce, Fenner & Smith                                                         
          Incorporated........................................................  $   27,500,000
Donaldson, Lufkin & Jenrette Securities Corporation...........................      27,500,000
J.P. Morgan Securities Inc....................................................      27,500,000
Salomon Brothers Inc..........................................................      27,500,000
                                                                                --------------
          Total...............................................................  $  110,000,000
                                                                                --------------
                                                                                --------------

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The Underwriters have advised the Company that they propose initially to
offer the Notes to the public at the public offering price set forth on the     
cover page of this Prospectus Supplement, and to certain dealers at such price  
less a concession not in excess of .45% of the principal amount thereof. The    
Underwriters may allow, and such dealers may reallow, a discount not in excess  
of .25% of the principal amount to certain other dealers. After the initial     
public offering, the public offering price, concession and discount may be      
changed.                                                                        

  The Notes constitute a new issue of securities with no established trading
market. The Company does not intend to apply for listing of the Notes on a      
national securities exchange. The Company has been advised by the Underwriters  
that the Underwriters intend to make a market in the Notes, but the Underwriters
are not obligated to do so and may discontinue market-making at any time without
notice. No assurance can be given as to whether or not a trading market for the 
Notes will develop or as to the liquidity of any trading market for the Notes   
which may develop.                                                              

 Until the distribution of the Notes is completed, rules of the Securities
and Exchange Commission may limit the ability of the Underwriters to bid for and
purchase the Notes. As an exception to these rules, the Underwriters are        
permitted to engage in certain transactions that stabilize the price of the     
Notes. Such transactions consist of bids or purchases for the purpose of        
pegging, fixing or maintaining the price of the Notes.                          

   If the Underwriters create a short position in the Notes in connection with
this offering, I.E., they sell more Notes than are set forth on the cover page  
of this Prospectus Supplement, the Underwriters may reduce that short position  
by purchasing Notes in the open market.                                         

  In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than 
it might be in the absence of such purchases.                                   

   Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions 
described above may have on the price of the Notes. In addition, neither the    
Company nor any of the Underwriters makes any representation that the           
Underwriters will engage in such transactions or that such transactions, once   
commenced, will not be discontinued without notice.                             

The Company has agreed to indemnify the Underwriters against certain    
liabilities, including liabilities under the Securities Act or to contribute to 
payments the Underwriters may be required to make in respect thereof.           

LEGAL MATTERS 

   The validity of the Notes to be issued in connection with the Offering will
be passed upon for the Company by Latham & Watkins, Costa Mesa, California.     
Brown & Wood LLP, San Francisco, California will act as counsel for the         
Underwriters.                                                                   

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--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

  NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR        
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING     
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND  
THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST  
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. 
NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS CONSTITUTES  
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY    
JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE    
DELIVERY OF THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS NOR ANY  
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT 
THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF.                                                             
------------------------

TABLE OF CONTENTS 

PROSPECTUS SUPPLEMENT 

                                                                [Download Table]

                                                   PAGE   
                                                 ---------
                                                          
Incorporation of Certain Documents By                     
  Reference....................................        S-2
Prospectus Supplement Summary..................        S-3
Recent Developments............................        S-6
Use of Proceeds................................        S-7
Capitalization.................................        S-7
Business and Properties........................        S-8
Selected Financial Information.................       S-19
Management's Discussion and Analysis of                   
  Financial Condition and Results of                      
  Operations...................................       S-21
Management of the Company......................       S-31
Description of the Notes.......................       S-33
Underwriting...................................       S-40
Legal Matters..................................       S-41
                        PROSPECTUS                        
Available Information..........................          2
Incorporation of Certain Documents by                     
  Reference....................................          2
The Company....................................          3
Use of Proceeds................................          3
Ratios of Earnings to Fixed Charges............          3
Description of Debt Securities.................          4
Description of Common Stock....................         14
Description of Preferred Stock.................         15
Restrictions on Ownership and Transfers of                
  Capital Stock................................         21
Certain Federal Income Tax Considerations......         22
Plan of Distribution...........................         28
Experts........................................         29
Legal Matters..................................         29

$110,000,000

abcd

7 3/4% NOTES DUE 2007 

--------------------- 

PROSPECTUS SUPPLEMENT 

--------------------- 

MERRILL LYNCH & CO. 

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION                                              

J.P. MORGAN & CO. 

SALOMON BROTHERS INC

MAY 1, 1997 

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

Dates Referenced Herein   and   Documents Incorporated by Reference

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