10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

FORM 10-Q

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2011, or

o Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 1-13374

REALTY INCOME CORPORATION

(Exact name of registrant as specified in its charter)

Maryland	33-0580106
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification Number)

600 La Terraza Boulevard, Escondido, California  92025-3873

(Address of Principal Executive Offices)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer, " "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer x   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  x

There were 126,828,616 shares of common stock outstanding as of April 20, 2011.

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REALTY INCOME CORPORATION

Form 10-Q

March 31, 2011

TABLE OF CONTENTS

PART I.                   FINANCIAL INFORMATION			Page
	Item 1:	Financial Statements
		Consolidated Balance Sheets	3
		Consolidated Statements of Income	4
		Consolidated Statements of Cash Flows	5
		Notes to Consolidated Financial Statements	6
	Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations
		Forward-Looking Statements	16
		The Company	17
		Recent Developments	19
		Liquidity and Capital Resources	22
		Results of Operations	26
		Funds from Operations Available to Common Stockholders (FFO)	32
		Adjusted Funds from Operations Available to Common Stockholders (AFFO)	33
		Property Portfolio Information	34
		Impact of Inflation	40
		Impact of Recent Accounting Pronouncements	40
		Other Information	40
	Item 3:	Quantitative and Qualitative Disclosures About Market Risk	40
	Item 4:	Controls and Procedures	41
PART II.                   OTHER INFORMATION
	Item 1A:	Risk Factors	42
	Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	42
	Item 6:	Exhibits	42
SIGNATURE			45

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2011 and December 31, 2010

(dollars in thousands, except per share data)

	2011			2010
ASSETS	(unaudited)
Real estate, at cost:
Land	$	1,547,899		$	1,520,413
Buildings and improvements		2,681,780			2,592,449
Total real estate, at cost		4,229,679			4,112,862
Less accumulated depreciation and amortization		(736,770	)		(711,615	)
Net real estate held for investment		3,492,909			3,401,247
Real estate held for sale, net		4,064			3,631
Net real estate		3,496,973			3,404,878
Cash and cash equivalents		129,707			17,607
Accounts receivable, net		10,506			11,301
Goodwill		17,206			17,206
Other assets, net		116,164			84,598
Total assets	$	3,770,556		$	3,535,590
LIABILITIES AND STOCKHOLDERS’ EQUITY
Distributions payable	$	20,356		$	19,051
Accounts payable and accrued expenses		23,804			47,019
Other liabilities		16,248			22,555
Line of credit payable		--			--
Notes payable		1,600,000			1,600,000
Total liabilities		1,660,408			1,688,625
Commitments and contingencies
Stockholders’ equity:
Preferred stock and paid in capital, par value $1.00 per share,
20,000,000 shares authorized, 13,900,000 shares issued
and outstanding in 2011 and 2010		337,790			337,790
Common stock and paid in capital, par value $1.00 per share,
200,000,000 shares authorized, 126,828,609 and 118,058,988
shares issued and outstanding as of March 31, 2011 and
December 31, 2010, respectively		2,351,962			2,066,287
Distributions in excess of net income		(579,604	)		(557,112	)
Total stockholders’ equity		2,110,148			1,846,965
Total liabilities and stockholders’ equity	$	3,770,556		$	3,535,590

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

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REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the three months ended March 31, 2011 and 2010

(dollars in thousands, except per share data)

(unaudited)

	2011			2010
REVENUE
Rental	$	97,616		$	82,512
Other		140			106
Total revenue		97,756			82,618
EXPENSES
Depreciation and amortization		26,810			23,041
Interest		25,122			21,395
General and administrative		7,870			6,711
Property		1,983			1,971
Income taxes		368			277
Total expenses		62,153			53,395
Income from continuing operations		35,603			29,223
Income from discontinued operations:
Real estate acquired for resale by Crest		222			211
Real estate held for investment		174			771
Total income from discontinued operations		396			982
Net income		35,999			30,205
Preferred stock cash dividends		(6,063	)		(6,063	)
Net income available to common stockholders	$	29,936		$	24,142
Amounts available to common stockholders per common share:
Income from continuing operations:
Basic	$	0.25		$	0.22
Diluted	$	0.25		$	0.22
Net income:
Basic	$	0.25		$	0.23
Diluted	$	0.25		$	0.23
Weighted average common shares outstanding:
Basic		118,960,878			103,606,241
Diluted		119,109,044			103,686,440

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

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REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months ended March 31, 2011 and 2010

(dollars in thousands)(unaudited)

	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	35,999		$	30,205
Adjustments to net income:
Depreciation and amortization		26,810			23,041
Income from discontinued operations:
Real estate acquired for resale		(222	)		(211	)
Real estate held for investment		(174	)		(771	)
Provisions for impairment on real estate held for investment		164			--
Amortization of share-based compensation		2,180			1,761
Cash provided by discontinued operations:
Real estate acquired for resale by Crest		222			211
Real estate held for investment		124			352
Collection of notes receivable by Crest		36			34
Change in assets and liabilities:
Accounts receivable and other assets		7,509			5,661
Accounts payable, accrued expenses and other liabilities		(31,122	)		(23,756	)
Net cash provided by operating activities		41,526			36,527
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment properties, discontinued operations		1,099			797
Funds held in escrow pending property acquisitions		(6,148	)		--
Restricted escrow deposit for Section 1031 tax-deferred exchange		--			(609	)
Acquisition of and improvements to investment properties		(118,576	)		(28,713	)
Intangibles acquired in connection with acquisitions of investment properties		(32,067	)		--
Net cash used in investing activities		(155,692	)		(28,525	)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash distributions to common stockholders		(51,123	)		(44,764	)
Cash dividends to preferred stockholders		(6,063	)		(6,063	)
Borrowings from line of credit		38,600			58,400
Payments under line of credit		(38,600	)		(23,100	)
Proceeds from common stock offerings, net		285,533			--
Debt issuance costs		(43	)		--
Other items		(2,038	)		(1,652	)
Net cash provided by (used in) financing activities		226,266			(17,179	)
Net increase (decrease) in cash and cash equivalents		112,100			(9,177	)
Cash and cash equivalents, beginning of period		17,607			10,026
Cash and cash equivalents, end of period	$	129,707		$	849

For supplemental disclosures, see note 12.

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

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REALTY INCOME CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(unaudited)

1. Management Statement

The consolidated financial statements of Realty Income Corporation ("Realty Income", the "Company", "we", "our" or "us") were prepared from our books and records without audit and include all adjustments (consisting of only normal recurring accruals) necessary to present a fair statement of results for the interim period presented. Certain of the 2010 balances have been reclassified to conform to the 2011 presentation. Readers of this quarterly report should refer to our audited financial statements for the year ended December 31, 2010, which are included in our 2010 Annual Report on Form 10-K, as certain disclosures that would substantially duplicate those contained in the audited financial statements have not been included in this report.

At March 31, 2011, we owned 2,519 properties, located in 49 states, containing over 22.5 million leasable square feet, along with three properties owned by our wholly-owned taxable REIT subsidiary, Crest Net Lease, Inc., or Crest. Crest was created to buy and sell properties, primarily to individual investors who are involved in tax-deferred exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended, or the Code.

2. Summary of Significant Accounting Policies and Procedures

A.  The accompanying consolidated financial statements include the accounts of Realty Income, Crest and other entities for which we make operating and financial decisions (i.e., control), after elimination of all material intercompany balances and transactions.  All of Realty Income’s subsidiaries are wholly-owned. We have no unconsolidated or off-balance sheet investments in variable interest entities.

B.  We have elected to be taxed as a real estate investment trust, or REIT, under the Code. We believe we have qualified and continue to qualify as a REIT. Under the REIT operating structure, we are permitted to deduct distributions paid to our stockholders and generally will not be required to pay federal corporate income taxes on such income. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements, except for federal income taxes of Crest, which are included in discontinued operations. The income taxes recorded on our consolidated statements of income represent amounts paid by Realty Income for city and state income and franchise taxes.

C.  We recognize an allowance for doubtful accounts relating to accounts receivable for amounts deemed uncollectible. We consider tenant specific issues, such as financial stability and ability to pay rent, when determining collectibility of accounts receivable and appropriate allowances to record.  The allowance for doubtful accounts was $1.1 million at March 31, 2011 and December 31, 2010.

	March 31,		December 31,
D.  Other assets consist of the following (dollars in thousands) at:	2011		2010
Value of in-place and above-market leases, net	$	58,358	$	26,221
Notes receivable issued in connection with Crest property sales		22,039		22,075
Deferred bond financing costs, net		13,820		14,203
Prepaid expenses		8,971		8,431
Funds held in escrow pending property acquisitions		6,148		--
Restricted escrow deposits for Section 1031 tax-deferred exchanges		--		6,361
Credit facility organization costs, net		4,227		4,619
Corporate assets, net of accumulated depreciation and amortization		790		827
Other items		1,811		1,861
	$	116,164	$	84,598

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E.  Distributions payable consist of the following declared	March 31,		December 31,
distributions (dollars in thousands) at:	2011		2010
Common stock distributions	$	18,335	$	17,030
Preferred stock dividends		2,021		2,021
	$	20,356	$	19,051
F.  Accounts payable and accrued expenses consist of the	March 31,		December 31,
following (dollars in thousands) at:		2011		2010
Bond interest payable	$	12,533	$	33,240
Other items		11,271		13,779
	$	23,804	$	47,019

	March 31,		December 31,
G.  Other liabilities consist of the following (dollars in thousands) at:	2011		2010
Rent received in advance	$	7,690	$	14,564
Security deposits		4,361		4,539
Value of in-place below-market leases, net		4,197		3,452
	$	16,248	$	22,555

3.       Investments in Real Estate

We acquire the land, buildings and improvements that are necessary for the successful operations of retail and other commercial enterprises.

A.  During the first three months of 2011, Realty Income invested $150.7 million in 26 new properties, and properties under development, with an initial weighted average contractual lease rate of 7.9%. These 26 new properties, and properties under development, are located in 15 states, contain over 1.3 million leasable square feet and are 100% leased with an average lease term of 16.6 years. The initial weighted average contractual lease rate is computed by dividing the estimated aggregate base rent for the first year of each lease by the estimated total cost of the properties. In accordance with generally accepted accounting principles, or GAAP, acquisition transaction costs of $371,000 were recorded to "general and administrative" expense on our consolidated statement of income, for the three months ended March 31, 2011.

In March 2011, we announced the signing of definitive purchase agreements for the acquisition of approximately $544 million of 33 single-tenant retail, distribution, office and manufacturing properties.  Included in the $150.7 million invested, during the first three months of 2011, is $130.1 million invested in 13 of the 33 properties.  In aggregate, the total properties to be acquired in connection with this previously announced transaction will be located in 17 different states and consist of approximately 3.8 million square feet of leasable space. The majority of the lease revenue from these single-tenant properties will be generated from investment grade tenants, or their operating subsidiaries, in 11 different industries. The average remaining lease term of these properties will be over 11 years and all of the properties have in-place leases.

In comparison, during the first three months of 2010, Realty Income invested $27.7 million in eight new properties with an initial weighted average contractual lease rate of 9.0%. These eight properties are located in six states, contain over 104,000 leasable square feet, and are 100% leased with an average lease term of 18.2 years. In accordance with GAAP, acquisition transaction costs of $48,000 were recorded to "general and administrative" expense on our consolidated statement of income, for the three months ended March 31, 2010.

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During the first three months of 2011, we capitalized costs of $943,000 on existing properties in our portfolio, consisting of $269,000 for re-leasing costs and $674,000 for building and tenant improvements. In comparison, during the first three months of 2010, we capitalized costs of $935,000 on existing properties in our portfolio, consisting of $292,000 for re-leasing costs and $643,000 for building and tenant improvements.

B.  During the first three months of 2011 and 2010, Crest did not invest in any new properties.  Crest’s property inventory, which is classified as held for investment, consisted of three properties with a net book value of $2.9 million at March 31, 2011 and $3.0 million at December 31, 2010.

C.  Of the $150.7 million invested by Realty Income in the first three months of 2011, approximately $130.1 million was used to acquire 13 properties with existing leases. Associated with these 13 properties, we recorded $21.8 million as the intangible value of the in-place leases, $11.1 million as the intangible value of above-market leases and $833,000 as the intangible value of below-market leases. The value of the in-place and above-market leases are recorded to "other assets" on our consolidated balance sheet, as of March 31, 2011, and the value of the below-market leases are recorded to "other liabilities" on our consolidated balance sheet, as of March 31, 2011. All of these amounts are amortized over the life of the respective leases.

 4.     Credit Facility

In December 2010, we entered into a $425 million revolving, unsecured credit facility that replaced our previous $355 million acquisition credit facility that was scheduled to expire in May 2011. The initial term of the credit facility expires in March 2014 and includes two, one-year extension options. Under the new credit facility, our investment grade credit ratings provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 185 basis points with a facility commitment fee of 35 basis points, for all-in drawn pricing of 220 basis points over LIBOR. The borrowing rate is not subject to an interest rate floor. We also have other interest rate options available to us. Our credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation.

As a result of entering into our current credit facility, we incurred credit facility origination costs of $4.2 million that were classified as part of "other assets" on our consolidated balance sheet at December 31, 2010.  At March 31, 2011, the balance of these credit facility origination costs was $3.8 million, which is being amortized over the remaining term of the credit facility.  The remaining credit facility origination costs that were incurred as a result of entering into our previous $355 million credit facility, which were $417,000 at March 31, 2011, are included in "other assets" and are being amortized over the remaining term of our current $425 million credit facility.

The average borrowing rate on our credit facility during the first three months of 2011 was 2.1% and, during the first three months of 2010, was 1.2%. Our borrowing rate at March 31, 2011 was 2.1%, and at March 31, 2010 was 1.2%. Our current and prior credit facilities are subject to various leverage and interest coverage ratio limitations. We are and have been in compliance with these covenants.

5.       Notes Payable

Our senior unsecured note obligations consist of the following at March 31, 2011 and December 31, 2010, sorted by maturity date (dollars in millions):

5.375% notes, issued in March 2003 and due in March 2013	$	100
5.5% notes, issued in November 2003 and due in November 2015		150
5.95% notes, issued in September 2006 and due in September 2016		275
5.375% notes, issued in September 2005 and due in September 2017		175
6.75% notes, issued in September 2007 and due in August 2019		550
5.75% notes, issued in June 2010 and due in January 2021		250
5.875% bonds, issued in March 2005 and due in March 2035		100
	$	1,600

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6.     Issuance of Common Stock

In March 2011, we issued 8,625,000 shares of common stock at a price of $34.81 per share. After offering costs of $14.7 million, the net proceeds of approximately $285.5 million have been and will be used to fund a substantial portion of the previously announced property acquisitions aggregating approximately $544 million, which are expected to close during the next four to six months. The remaining net proceeds, if any, will be used for general corporate purposes and working capital.

7.       Fair Value of Financial Assets and Liabilities

Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The disclosure for assets and liabilities measured at fair value requires allocation to a three-level valuation hierarchy. This valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Categorization within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

We believe that the carrying values reflected in our consolidated balance sheets reasonably approximate the fair values for cash and cash equivalents, accounts receivable, and all liabilities, due to their short-term nature, except for our notes receivable issued in connection with property sales and our notes payable, which are disclosed below (dollars in millions):

	Carrying value per		Estimated
At March 31, 2011	balance sheet		fair value
Notes receivable issued in connection with Crest property sales	$	22.0	$	22.9
Notes payable	$	1,600.0	$	1,721.3

	Carrying value per		Estimated
At December 31, 2010	balance sheet		fair value
Notes receivable issued in connection with Crest property sales	$	22.1	$	23.2
Notes payable	$	1,600.0	$	1,707.1

The estimated fair value of our notes receivable, issued in connection with property sales, has been calculated by discounting the future cash flows using an interest rate based upon the current 5-year or 7-year Treasury yield curve, plus an applicable credit-adjusted spread. The notes receivable were issued in connection with the sale of three Crest properties. Payments to us on these notes receivable are current and no allowance for doubtful accounts has been recorded for them.

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

8.       Gain on Sales of Investment Properties

During the first three months of 2011, we sold three investment properties for $1.1 million, which resulted in a gain of $129,000. In comparison, during the first three months of 2010, we sold three investment properties for $1.8 million, which resulted in a gain of $703,000. The results of operations for these properties have been reclassified as discontinued operations.

During the first three months of 2011 and 2010, Crest did not sell any properties.

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9.        Discontinued Operations

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment is recorded if estimated future operating cash flows (undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are less than the current book value of the property. Key factors that we use in this analysis include: projected rental rates, capital expenditures and property sales capitalization rates. Additionally, a property classified as held for sale is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell.

For the first three months of 2011, Realty Income recorded a provision for impairment of $36,000 on one property, which was sold in March 2011. For the first three months of 2010, Realty Income recorded a provision for impairment of $34,000 on one property, which was sold in the second quarter of 2010.  For the first three months of 2011 and 2010, no provisions for impairment were recorded by Crest.

Operations from nine investment properties were classified as held for sale at March 31, 2011, plus properties sold in 2011 and 2010, are reported as discontinued operations. Their respective results of operations have been reclassified as "income from discontinued operations, real estate held for investment" on our consolidated statements of income. We do not depreciate properties that are classified as held for sale.

No debt was assumed by buyers of our investment properties, or repaid as a result of our investment property sales, and we do not allocate interest expense to discontinued operations related to real estate held for investment. We allocate interest expense related to borrowings specifically attributable to Crest’s properties. The interest expense amounts allocated to the Crest properties held for sale are included in "income from discontinued operations, real estate acquired for resale by Crest" on our consolidated statements of income.

The following is a summary of Crest’s "income from discontinued operations, real estate acquired for resale by Crest" on our consolidated statements of income (dollars in thousands):

	Three months ended                      March 31,
Crest's income from discontinued operations, real estate acquired for resale	2011			2010
Interest revenue	$	347		$	350
Interest expense		(200	)		(128	)
General and administrative expense		(13	)		(97	)
Property expenses		(3	)		(3	)
Income tax benefit		91			89
Income from discontinued operations, real estate acquired for resale by Crest	$	222		$	211

The following is a summary of Realty Income’s "income from discontinued operations, real estate held for investment" on our consolidated statements of income (dollars in thousands):

	Three months ended    March 31,
Realty Income's income from discontinued operations, real estate held for investment	2011			2010
Gain on sales of investment properties	$	129		$	703
Rental revenue		199			780
Other revenue		20			10
Depreciation and amortization		(43	)		(250	)
Property expenses		(95	)		(438	)
Provision for impairment		(36	)		(34	)
Income from discontinued operations, real estate held for investment	$	174		$	771

10

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

	Three months ended       March 31,
Total discontinued operations	2011		2010
Real estate acquired for resale by Crest	$	222	$	211
Real estate held for investment		174		771
Income from discontinued operations	$	396	$	982
Per common share, basic and diluted	$	0.00	$	0.01

The per share amounts for "income from discontinued operations" above and the "income from continuing operations" and "net income" reported on the consolidated statements of income have each been calculated independently.

10.   Distributions Paid and Payable

A.  Common Stock

We pay monthly distributions to our common stockholders. The following is a summary of the monthly distributions paid per common share for the first three months of 2011 and 2010:

Month	2011		2010
January	$	0.14425	$	0.14300
February		0.14425		0.14300
March		0.14425		0.14300
Total	$	0.43275	$	0.42900

At March 31, 2011, a distribution of $0.1445625 per common share was payable and was paid in April 2011.

B.  Preferred Stock

In 2004, we issued 5.1 million shares of 7.375% Monthly Income Class D cumulative redeemable preferred stock. In May 2009, the Class D preferred shares became redeemable, at our option, for $25 per share. During each of the first three months of 2011 and 2010, we paid three monthly dividends to holders of our Class D preferred stock totaling $0.4609377 per share, or $2.4 million, and at March 31, 2011, a monthly dividend of $0.1536459 per share was payable and was paid in April 2011.

In 2006, we issued 8.8 million shares of 6.75% Monthly Income Class E cumulative redeemable preferred stock. Beginning December 7, 2011, the Class E preferred shares are redeemable, at our option, for $25 per share. During each of the first three months of 2011 and 2010, we paid three monthly dividends to holders of our Class E preferred stock totaling $0.421875 per share, or $3.7 million, and at March 31, 2011, a monthly dividend of $0.140625 per share was payable and was paid in April 2011.

We are current in our obligations to pay dividends on our Class D and Class E preferred stock.

11.   Net Income Per Common Share

Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted net income per common share is computed by dividing net income available to common stockholders for the period by the weighted average number of common shares that would have been outstanding assuming the issuance of common shares for all potentially dilutive common shares outstanding during the reporting period.

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

	Three months ended                                    March 31,
	2011	2010
Weighted average shares used for the basic net income per share computation	118,960,878	103,606,241
Incremental shares from share-based compensation	148,166	80,199
Adjusted weighted average shares used for diluted net income per share computation	119,109,044	103,686,440
Unvested shares from share-based compensation that were anti-dilutive	800	520

12.       Supplemental Disclosures of Cash Flow Information

Interest paid, in the first three months of 2011, was $44.9 million and, in the first three months of 2010, was $37.1 million.

Interest capitalized to properties under development, in the first three months of 2011, was $71,000 and, in the first three months of 2010, was $2,000.

Income taxes paid by Realty Income and Crest, in the first three months of 2011, was $834,000 and, in the first three months of 2010, was $865,000.

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

A.  Share-based compensation expense, for the first three months of 2011, was $2.2 million and, for the first three months of 2010, was $1.8 million.

B.  See note 9 for a discussion of impairments recorded by Realty Income and Crest in discontinued operations, for the first three months of 2011.  Additionally, for the first three months of 2011, Realty Income recorded a provision for impairment of $164,000 on one property held for investment at March 31, 2011.  This provision for impairment is included in "property expenses" on our consolidated statement of income, for the three months ended March 31, 2011.

C.  In the first three months of 2010, we recorded a $1.0 million receivable for the sale of an investment property as a result of an eminent domain action. This receivable is included in "other assets" on our consolidated balance sheet at March 31, 2010.

D.  Accrued costs on properties under development resulted in an increase in buildings and improvements and accounts payable of $951,000 at March 31, 2011.

13.       Segment Information

We evaluate performance and make resource allocation decisions on an industry by industry basis. For financial reporting purposes, we have grouped our tenants into 32 industry and activity segments (including properties owned by Crest that are grouped together as a segment). All of the properties are incorporated into one of the applicable segments. Because almost all of our leases require the tenant to pay operating expenses, revenue is the only component of segment profit and loss we measure.

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The following tables set forth certain information regarding the properties owned by us, classified according to the business of the respective tenants, as of March 31, 2011 (dollars in thousands):

	March 31,		December 31,
Assets, as of:	2011		2010
Segment net real estate:
Automotive service	$	105,428	$	106,669
Automotive tire services		194,343		195,883
Beverages		301,176		302,159
Child care		71,942		73,235
Convenience stores		706,634		711,667
Drug stores		157,903		143,739
Health and fitness		224,527		220,296
Restaurants		729,336		734,615
Theaters		278,743		281,072
23 other non-reportable segments		726,941		635,543
Total segment net real estate		3,496,973		3,404,878
Other intangible assets - Apparel		3,526		3,644
Other intangible assets - Automotive tire services		573		588
Other intangible assets - Drug stores		15,322		5,938
Other intangible assets - Equipment services		2,454		-
Other intangible assets - Financial services		5,596		-
Other intangible assets - Grocery stores		5,937		6,031
Other intangible assets - Health and fitness		1,672		1,707
Other intangible assets - Office supplies		376		390
Other intangible assets - Sporting goods		5,670		5,786
Other intangible assets - Theaters		1,502		1,579
Other intangible assets - Transportation services		15,188		-
Other intangible assets - Other		540		558
Goodwill - Automotive service		1,338		1,338
Goodwill - Child care		5,353		5,353
Goodwill - Convenience stores		2,074		2,074
Goodwill - Home furnishings		1,557		1,557
Goodwill - Restaurants		3,779		3,779
Goodwill - non-reportable segments		3,105		3,105
Other corporate assets		198,021		87,285
Total assets	$	3,770,556	$	3,535,590

Revenue for the three months ended March 31:	2011		2010
Segment rental revenue:
Automotive service	$	4,116	$	3,903
Automotive tire services		5,507		5,496
Beverages		5,669		-
Child care		5,678		5,568
Convenience stores		19,404		14,192
Drug stores		3,724		3,432
Health and fitness		6,242		5,533
Restaurants		18,393		18,772
Theaters		7,956		7,563
23 non-reportable segments		20,927		18,053
Total rental revenue		97,616		82,512
Other revenue		140		106
Total revenue	$	97,756	$	82,618

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14.     Common Stock Incentive Plan

In 2003, our Board of Directors adopted, and stockholders approved, the 2003 Incentive Award Plan of Realty Income Corporation, or the Stock Plan, to enable us to attract and retain the services of directors, employees and consultants, considered essential to our long-term success. The Stock Plan offers our directors, employees and consultants an opportunity to own stock in Realty Income and/or rights that will reflect our growth, development and financial success. The Stock Plan was amended and restated by our Board of Directors in February 2006 and in May 2007.

The amount of share-based compensation costs recognized in "general and administrative expense" on our consolidated statements of income, during the first three months of 2011, was $2.2 million and, during the first three months of 2010, was $1.8 million.

The following table summarizes our common stock grant activity under our Stock Plan. Our common stock grants vest over periods ranging from immediately to 10 years.

	For the three months ended March 31, 2011					For the year ended  December 31, 2010
	Number of shares			Weighted average price (1)		Number of shares			Weighted average price (1)
Outstanding nonvested shares, beginning of year		924,294		$	19.69		853,234		$	19.14
Shares granted		203,014			33.82		278,200			28.99
Shares vested		(204,664	)		23.99		(206,153	)		23.70
Shares forfeited		(148	)		25.53		(987	)		26.03
Outstanding nonvested shares, end of each period		922,496		$	24.80		924,294		$	19.69

(1) Grant date fair value.

During the first three months of 2011, we issued 203,014 shares of common stock under our Stock Plan. These shares vest over the following service periods: 13,158 vested immediately, 5,000 vest over a service period of one year, 58,400 vest over a service period of three years and 126,456 vest over a service period of five years.

As of March 31, 2011, the remaining unamortized share-based compensation expense totaled $22.9 million, which is being amortized on a straight-line basis over the service period of each applicable award.

Due to a historically low turnover rate, we do not estimate a forfeiture rate for our nonvested shares. Accordingly, unexpected forfeitures will lower share-based compensation expense during the applicable period. Under the terms of our Stock Plan, we pay non-refundable dividends to the holders of our nonvested shares. Applicable accounting guidance requires that the dividends paid to holders of these nonvested shares be charged as compensation expense to the extent that they relate to nonvested shares that do not or are not expected to vest. However, since we do not estimate forfeitures given our historical trends, we did not record any amount to compensation expense related to dividends paid in 2011 or 2010.

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As of March 31, 2011, there were no remaining stock options outstanding. During the first three months of 2011, there were 2,454 stock options exercised, at an exercise price of $14.70, and there were no stock option forfeitures.  Stock options, none of which were granted after January 1, 2002, were granted with an exercise price equal to the underlying stock’s fair market value at the date of grant.

15.       Dividend Reinvestment and Stock Purchase Plan

In March 2011, we established a Dividend Reinvestment and Stock Purchase Plan, or The Plan, to provide our common stockholders, as well as new investors, with a convenient and economical method of purchasing our common stock and/or reinvesting their distributions. The Plan allows our current stockholders to buy additional shares of common stock by reinvesting all or a portion of their distributions. The Plan authorizes up to 6,000,000 common shares to be issued.  Through March 31, 2011, no new shares have been issued under The Plan.

16.       Commitments and Contingencies

In the ordinary course of business, we are party to various legal actions which we believe are routine in nature and incidental to the operation of our business. We believe that the outcome of the proceedings will not have a material adverse effect upon our consolidated financial position or results of operations.

At March 31, 2011, we have contingent payments of $922,000 for tenant improvements and leasing costs. In addition, we have committed $9.1 million under construction contracts, which is expected to be paid in the next twelve months.

17.       Subsequent Events

A.    In April 2011, we declared the following dividends, which will be paid in May 2011:

-   $0.1445625 per share to our common stockholders;

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

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

B.   In conjunction with our previously announced acquisition of 33 single tenant, retail, distribution, office and manufacturing properties during the next four to six months, we invested $103 million in five properties during April 2011.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q, including the documents incorporated by reference, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. When used in this quarterly report, the words “estimated”, “anticipated”, “expect”, “believe”, “intend” and similar expressions are intended to identify forward-looking statements. Forward-looking statements include discussions of strategy, plans or intentions of management. Forward-looking statements are subject to risks, uncertainties, and assumptions about Realty Income Corporation, including, among other things:

● Our anticipated growth strategies;

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

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

● Our intention to re-lease vacant properties;

● Anticipated trends in our business, including trends in the market for long-term net-leases of freestanding, single-tenant properties;

● Future expenditures for development projects; and

● Profitability of our subsidiary, Crest Net Lease, Inc., or Crest.

Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. In particular, some of the factors that could cause actual results to differ materially are:

● Our continued qualification as a real estate investment trust;

● General business and economic conditions;

● Competition;

● Fluctuating interest rates;

● Access to debt and equity capital markets;

●   Continued volatility and uncertainty in the credit markets and broader financial markets;

● Other risks inherent in the real estate business including tenant defaults, potential liability relating to environmental matters, illiquidity of real estate investments, and potential damages from natural disasters;

● Impairments in the value of our real estate assets;

● Changes in the tax laws of the United States of America;

● The outcome of any legal proceedings to which we are a party; and

● Acts of terrorism and war.

Additional factors that may cause risks and uncertainties include those discussed in the sections entitled “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K, for the fiscal year ended December 31, 2010.

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date that this quarterly report was filed with the Securities and Exchange Commission, or SEC.  While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this quarterly report or to reflect the occurrence of unanticipated events. In light of these risks and uncertainties, the forward-looking events discussed in this quarterly report might not occur.

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THE COMPANY

Realty Income Corporation, The Monthly Dividend Company®, is a Maryland corporation organized to operate as an equity real estate investment trust, or REIT. Our primary business objective is to generate dependable monthly cash distributions from a consistent and predictable level of funds from operations, or FFO, per share. Our monthly distributions are supported by the cash flow from our portfolio of properties leased to retail and other commercial enterprises. We have in-house acquisition, leasing, legal, credit research, real estate research, portfolio management and capital markets expertise. Over the past 42 years, Realty Income and its predecessors have been acquiring and owning freestanding retail and other commercial properties that generate rental revenue under long-term lease agreements (primarily 15 to 20 years).

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

Generally, our portfolio management efforts seek to include:

● Contractual rent increases on existing leases;

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

● The active management of our property portfolio, including re-leasing vacant properties, and selectively selling properties, thereby mitigating our exposure to certain tenants and markets.

In acquiring additional properties, our strategy is primarily to acquire properties that are:

● Freestanding, single-tenant locations;

● Leased to regional and national commercial enterprises; and

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

At March 31, 2011, we owned a diversified portfolio:

● Of 2,519 properties;

● With an occupancy rate of 96.8%, or 2,438 properties occupied and only 81 properties available for lease;

● Leased to 125 different retail and other commercial enterprises doing business in 31 separate industries;

● Located in 49 states;

● With over 22.5 million square feet of leasable space; and

● With an average leasable space per property of approximately 8,900 square feet.

Of the 2,519 properties in the portfolio, 2,503, or 99.4%, are single-tenant properties, and the remaining 16 are multi-tenant properties. At March 31, 2011, of the 2,503 single-tenant properties, 2,423 were leased with a weighted average remaining lease term (excluding extension options) of approximately 11.5 years.

In addition, at March 31, 2011, our wholly-owned taxable REIT subsidiary, Crest Net Lease, Inc., or Crest, had an inventory of three properties, which are classified as held for investment. In addition to the three properties, Crest also holds notes receivable of $22.0 million at March 31, 2011.

We typically acquire properties under long-term leases with regional and national retailers and other commercial enterprises. Our acquisition and investment activities generally focus on businesses providing goods and services that satisfy basic consumer and business needs.

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In general, our net-lease agreements:

● Are for initial terms of 15 to 20 years;

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

● Provide for future rent increases based on increases in the consumer price index (typically subject to ceilings), additional rent calculated as a percentage of the tenants’ gross sales above a specified level, or fixed increases.

Investment Philosophy

We believe that owning an actively managed, diversified portfolio of commercial properties under long-term, net leases produces consistent and predictable income. Net leases typically require the tenant to be responsible for monthly rent and property operating expenses including property taxes, insurance and maintenance. In addition, tenants are typically responsible for future rent increases based on increases in the consumer price index (typically subject to ceilings), additional rent calculated as a percentage of the tenants’ gross sales above a specified level, or fixed increases. We believe that owning a portfolio of properties under long-term leases, coupled with the tenant’s responsibility for property expenses, generally produces a more predictable income stream than many other types of real estate portfolios, while continuing to offer the potential for growth in rental income.

Credit Strategy

We primarily provide sale-leaseback financing to less than investment grade tenants. We typically acquire and lease back properties to regional and national commercial enterprises and believe that within this market we can achieve an attractive risk-adjusted return. Since 1970, our overall weighted average occupancy rate at the end of each year has been 98.2%, and our occupancy rate at the end of each year has never been below 96%.

Acquisition Strategy

We seek to invest in industries in which several, well-organized, regional and national retailers and other commercial enterprises are capturing market share through service, quality control, economies of scale, strong consumer brands, advertising, and the selection of prime locations. We execute our acquisition strategy by acting as a source of capital to regional and national commercial enterprises by acquiring and leasing back their real estate locations. We undertake thorough research and analysis to identify what we consider to be appropriate industries, tenants and property locations for investment. Our research expertise is fundamental to uncovering net-lease opportunities in markets where our real estate financing program adds value. In selecting real estate for potential investment, we generally seek to acquire properties that have the following characteristics:

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

● Properties that are important locations for regional and national commercial enterprises;

●   Properties that we deem to be profitable for the tenants and/or can generally be characterized as important to the operations of the company’s business;

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

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

Portfolio Management Strategy

The active management of the property portfolio is an essential component of our long-term strategy. We continually monitor our portfolio for any changes that could affect the performance of the industries, tenants and locations in which we have invested. We also regularly analyze our portfolio with a view toward optimizing its returns and enhancing our credit quality.

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Our executives regularly review and analyze:

●   The performance of the various industries of our tenants; and

●   The operation, management, business planning and financial condition of our tenants.

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

●   Generate higher returns;

●   Enhance the credit quality of our real estate portfolio;

●   Extend our average remaining lease term; or

●   Decrease tenant or industry concentration.

At March 31, 2011, we classified real estate with a carrying amount of $4.1 million as held for sale on our balance sheet. Additionally, we anticipate selling investment properties from our portfolio that have not yet been specifically identified, from which we anticipate receiving between $10 million and $35 million in proceeds during the next 12 months. We intend to invest these proceeds into new property acquisitions, if there are attractive opportunities available. However, we cannot guarantee that we will sell properties during the next 12 months or be able to invest the proceeds from the sales of any properties in new properties.

Impact of Real Estate and Credit Markets

In the commercial real estate market, property prices generally continue to fluctuate. Likewise, the U.S. credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which sometimes impact our access to and cost of capital. We continue to monitor the commercial real estate and U.S. credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly. See our discussion of "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2010.

RECENT DEVELOPMENTS

Increases in Monthly Distributions to Common Stockholders

We have continued our 42-year policy of paying distributions monthly.  Monthly distributions per share were increased in April 2011 by $0.0003125 to $0.1445625. The increase in April 2011 was our 54th consecutive quarterly increase and the 61st increase in the amount of our dividend since our listing on the New York Stock Exchange, or NYSE, in 1994. In the first three months of 2011, we paid three monthly cash distributions per share in the amount of $0.14425, totaling $0.43275. In March 2011 and April 2011, we declared distributions of $0.1445625 per share, which were paid in April 2011 and will be paid in May 2011, respectively.

The monthly distribution of $0.1445625 per share represents a current annualized distribution of $1.73475 per share, and an annualized distribution yield of approximately 5.0% based on the last reported sale price of our common stock on the NYSE of $34.95 on March 31, 2011. Although we expect to continue our policy of paying monthly distributions, we cannot guarantee that we will maintain our current level of distributions, that we will continue our pattern of increasing distributions per share, or what our actual distribution yield will be in any future period.

Acquisitions during the First Three Months of 2011

During the first three months of 2011, Realty Income invested $150.7 million in 26 new properties, and properties under development, with an initial weighted average contractual lease rate of 7.9%. These 26 new properties, and properties under development, are located in 15 states, contain over 1.3 million leasable square feet, and are 100% leased with an average lease term of 16.6 years. There were no acquisitions by Crest in the first three months of 2011.

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

In March 2011, we announced the signing of definitive purchase agreements for the acquisition of approximately $544 million of 33 single-tenant retail, distribution, office and manufacturing properties.  Included in the $150.7 million invested, during the first three months of 2011, is $130.1 million invested in 13 of the 33 properties. We anticipate that the remainder of the properties in this portfolio should close during the next four to six months. In aggregate, the total properties to be acquired in connection with this previously announced transaction will be located in 17 different states and consist of approximately 3.8 million square feet of leasable space. The majority of the lease revenue from these single-tenant properties will be generated from investment grade tenants, or their operating subsidiaries, in 11 different industries. The average remaining lease term of these properties will be over 11 years and all of the properties have in-place leases.

Acquisitions during April 2011

In conjunction with our previously announced acquisition of 33 single tenant, retail, distribution, office and manufacturing properties, during the next four to six months, we invested $103 million in five properties during April 2011.

Portfolio Discussion

Leasing Results

At March 31, 2011, we had 81 properties available for lease out of 2,519 properties in our portfolio, which represents a 96.8% occupancy rate. Since December 31, 2010, when we reported 84 properties available for lease and a 96.6% occupancy rate, we:

●   Leased ten properties;

●   Sold three properties; and

●   Have ten new properties available for lease.

In addition, during the first quarter of 2011, we leased three properties to new tenants concurrent with the expiration of the prior leases. At March 31, 2011, our average annualized rental revenue per square foot was approximately $17.70.

Investments in Existing Properties

In the first three months of 2011, we capitalized costs of $943,000 on existing properties in our portfolio, consisting of $269,000 for re-leasing costs and $674,000 for building and tenant improvements.

As part of our re-leasing costs, we pay leasing commissions and sometimes provide tenant rent concessions.  Leasing commissions are paid based on the commercial real estate industry standard and any rent concessions provided are minimal.  We do not consider the collective impact of the leasing commissions or tenant rent concessions to be material to our financial position or results of operations.

The majority of our building and tenant improvements relate to roof repairs, HVAC improvements, and parking lot resurfacing and replacements. It is not customary for us to offer significant tenant improvements on our properties as tenant incentives. The amounts of our capital expenditures can vary significantly, depending on the market and the willingness of tenants to pay higher rents over the terms of the leases.

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Issuance of Common Stock

In March 2011, we issued 8,625,000 shares of common stock at a price of $34.81 per share. The net proceeds of approximately $285.5 million have been, and will be used, to fund a substantial portion of the previously announced property acquisitions aggregating approximately $544 million, which are expected to close during the next four to six months. The remaining net proceeds, if any, will be used for general corporate purposes and working capital.

Dividend Reinvestment and Stock Purchase Plan

In March 2011, we established a Dividend Reinvestment and Stock Purchase Plan, or The Plan, to provide our common shareholders, as well as new investors, with a convenient and economical method of purchasing our common stock and/or reinvesting their distributions. The Plan allows our current stockholders to buy additional shares of common stock by reinvesting all or a portion of their distributions.  The Plan authorizes up to 6,000,000 common shares to be issued. Through March 31, 2011, no new shares have been issued under The Plan.

Net Income Available to Common Stockholders

Net income available to common stockholders was $29.9 million, in the first three months of 2011, versus $24.1 million in the same period of 2010, an increase of $5.8 million. On a diluted per common share basis, net income was $0.25, in the first three months of 2011, and $0.23, in the first three months of 2010.

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

The gain from the sale of properties, during the first three months of 2011, was $129,000, as compared to $703,000, during the first three months of 2010.

Funds from Operations Available to Common Stockholders (FFO)

In the first three months of 2011, our FFO increased by $9.9 million, or 21.2%, to $56.6 million versus $46.7 million in the first three months of 2010. On a diluted per common share basis, FFO was $0.48 in the first three months of 2011 and $0.45 in the first three months of 2010.

See our discussion of FFO later in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which includes a reconciliation of net income available to common stockholders to FFO.

Adjusted Funds from Operations Available to Common Stockholders (AFFO)

In the first three months of 2011, our AFFO increased by $10.6 million, or 22.3%, to $58.2 million versus $47.6 million in the first three months of 2010.  On a diluted per common share basis, AFFO was $0.49 in the first three months of 2011 and $0.46 in the first three months of 2010.

See our discussion of AFFO later in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," which includes a reconciliation of net income available to common stockholders to FFO and AFFO.

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LIQUIDITY AND CAPITAL RESOURCES

Capital Philosophy

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

Our primary cash obligations, for the current year and subsequent years, are included in the “Table of Obligations,” which is presented later in this section. We expect to fund our operating expenses and other short-term liquidity requirements, including property acquisitions and development costs, payment of principal and interest on our outstanding indebtedness, property improvements, re-leasing costs and cash distributions to common and preferred stockholders, primarily through cash provided by operating activities, borrowing on our $425 million credit facility, and from time-to-time through public securities offerings.

Conservative Capital Structure

We believe that our stockholders are best served by a conservative capital structure. Therefore, we seek to maintain a conservative debt level on our balance sheet and solid interest and fixed charge coverage ratios. At March 31, 2011, our total outstanding borrowings were $1.6 billion of senior unsecured notes, or approximately 25.1% of our total market capitalization of $6.38 billion. There were no outstanding borrowings on our credit facility at March 31, 2011.

We define our total market capitalization at March 31, 2011 as the sum of:

● Shares of our common stock outstanding of 126,828,609 multiplied by the last reported sales price of our common stock on the NYSE of $34.95 per share on March 31, 2011, or $4.43 billion;

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

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

● Outstanding notes of $1.6 billion.

Mortgage Debt

We have no mortgage debt on any of our properties.

$425 Million Acquisition Credit Facility

In December 2010, we entered into a $425 million revolving, unsecured credit facility that replaced our previous $355 million acquisition credit facility that was scheduled to expire in May 2011. The initial term of the credit facility expires in March 2014 and includes two, one-year extension options. Under the new credit facility, our investment grade credit ratings provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 185 basis points with a facility commitment fee of 35 basis points, for all-in drawn pricing of 220 basis points over LIBOR. The borrowing rate is not subject to an interest rate floor.  We also have other interest rate options available to us. At March 31, 2011, we had a borrowing capacity of $425 million available on our credit facility and no outstanding balance. If there were outstanding borrowings, the borrowing rate would have been 2.1%.

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We expect to use our credit facility to acquire additional properties and for other corporate purposes.  Any additional borrowings will increase our exposure to interest rate risk. We have the right to request an increase in the borrowing capacity of the credit facility, up to $200 million, to a total borrowing capacity of $625 million. Any increase in the borrowing capacity is subject to approval by the lending banks participating in our credit facility.

Cash Reserves

We are organized to operate as an equity REIT that acquires and leases properties and distributes to stockholders, in the form of monthly cash distributions, a substantial portion of our net cash flow generated from leases on our properties. We intend to retain an appropriate amount of cash as working capital. At March 31, 2011, we had cash and cash equivalents totaling $129.7 million, which represents a portion of the net proceeds of $285.5 million from the March 2011 issuance of common stock. A majority of our cash and cash equivalents at March 31, 2011, will be used to fund the remaining portion of our previously announced $544 million acquisition of 33 single-tenant retail, distribution, office and manufacturing properties.

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

Universal Shelf Registration

In March 2009, we filed a shelf registration statement with the SEC, which expires in March 2012. In accordance with the SEC rules, the amount of the securities to be issued pursuant to this shelf registration statement was not specified when it was filed and there is no specific dollar limit. The securities covered by this registration statement include common stock, preferred stock, debt securities, or any combination of these securities. We may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering.

Credit Agency Ratings

The borrowing rates under our credit facility are based upon our credit ratings. We are currently assigned the following investment grade corporate credit ratings on our senior unsecured notes:  Fitch Ratings has assigned a rating of BBB+, Moody’s Investors Service has assigned a rating of Baa1 and Standard & Poor’s Ratings Group has assigned a rating of BBB to our senior notes. All of these ratings have “stable” outlooks.

Based on our current ratings, the current facility interest rate is LIBOR plus 185 basis points with a facility commitment fee of 35 basis points, for all-in drawn pricing of 220 basis points over LIBOR. The credit facility provides that the interest rate can range between: (i) LIBOR plus 300 basis points if our credit facility is lower than BBB-/Baa3 and (ii) LIBOR plus 175 basis points if our credit rating is A-/A3 or higher. In addition, our credit facility provides for a facility commitment fee based on our credit ratings, which ranges from (i) 50 basis points for a rating lower than BBB-/Baa3, and (ii) 30 basis points for a credit rating of A-/A3 or higher.

We also issue senior debt securities from time to time and our credit ratings can impact the interest rates charged in those transactions. If our credit ratings or ratings outlook change, our cost to obtain debt financing could increase or decrease.

The credit ratings assigned to us could change based upon, among other things, our results of operations and financial condition. These ratings are subject to ongoing evaluation by credit rating agencies and we cannot assure you that our ratings will not be changed or withdrawn by a rating agency in the future if, in

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its judgment, circumstances warrant. Moreover, a rating is not a recommendation to buy, sell or hold our debt securities, preferred stock or common stock.

Notes Outstanding

Our senior unsecured note obligations consist of the following as of March 31, 2011, sorted by maturity date (dollars in millions):

5.375% notes, issued in March 2003 and due in March 2013	$	100
5.5% notes, issued in November 2003 and due in November 2015		150
5.95% notes, issued in September 2006 and due in September 2016		275
5.375% notes, issued in September 2005 and due in September 2017		175
6.75% notes, issued in September 2007 and due in August 2019		550
5.75% notes, issued in June 2010 and due in January 2021		250
5.875% bonds, issued in March 2005 and due in March 2035		100
	$	1,600

All of our outstanding notes and bonds have fixed interest rates. Interest on all of our senior note and bond obligations is paid semiannually. All of these notes and bonds contain various covenants, including: (i) a limitation on incurrence of any debt which would cause our debt to total adjusted assets ratio to exceed 60%; (ii) a limitation on incurrence of any secured debt which would cause our secured debt to total adjusted assets ratio to exceed 40%; (iii) a limitation on incurrence of any debt which would cause our debt service coverage ratio to be less than 1.5 times; and (iv) the maintenance at all times of total unencumbered assets not less than 150% of our outstanding unsecured debt. We have been in compliance with these covenants since each of the notes and bonds was issued.

The following is a summary of the key financial covenants for our senior unsecured notes, as defined and calculated per the terms of our notes. These calculations, which are not based on U.S. generally accepted accounting principles, or GAAP, measurements, are presented to investors to show our ability to incur additional debt under the terms of our notes only and are not measures of our liquidity or performance. The actual amounts as of March 31, 2011 are:

Note Covenants	Required	Actual
Limitation on incurrence of total debt	≤ 60% of adjusted assets	36.2%
Limitation on incurrence of secured debt	≤ 40% of adjusted assets	0.0%
Debt service coverage (trailing 12 months)	≥ 1.5 x	3.5x
Maintenance of total unencumbered assets	≥ 150% of unsecured debt	276.3%

The following table summarizes the maturity of each of our obligations as of March 31, 2011 (dollars in millions):

Table of Obligations							Ground
							Leases
							Paid by
Year of	Credit						Our
Maturity	Facility		Notes		Interest (1)		Tenants(2)		Other (3)		Totals
2011	$	--	$	--	$	72.6	$	2.7	$	10.0	$	85.3
2012		--		--		96.8		3.5		--		100.3
2013		--		100.0		92.5		3.4		--		195.9
2014		--		--		91.4		3.2		--		94.6
2015		--		150.0		90.4		3.1		--		243.5
Thereafter		--		1,350.0		347.5		31.9		--		1,729.4
Totals	$	--	$	1,600.0	$	791.2	$	47.8	$	10.0	$	2,449.0

 (1) Interest on the credit facility and notes has been calculated based on outstanding balances as of March 31, 2011 through their respective maturity dates.

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

 (3) “Other” consists of $9.1 million of commitments under construction contracts and $922,000 of contingent payments for tenant improvements and leasing costs.

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

Preferred Stock Outstanding

In 2004, we issued 5.1 million shares of 7.375% Class D cumulative redeemable preferred stock. In May 2009, shares of Class D preferred stock became redeemable at our option for $25 per share, plus any accrued and unpaid dividends. Dividends on shares of Class D preferred stock are paid monthly in arrears.

In 2006, we issued 8.8 million shares of 6.75% Class E cumulative redeemable preferred stock. Beginning December 7, 2011, shares of Class E preferred stock are redeemable at our option for $25 per share, plus any accrued and unpaid dividends. Dividends on shares of Class E preferred stock are paid monthly in arrears.

We are current in our obligations to pay dividends on our Class D and Class E preferred stock.

No Off-Balance Sheet Arrangements or Unconsolidated Investments

We have no unconsolidated or off-balance sheet investments in “variable interest entities” or off-balance sheet financing, nor do we engage in trading activities involving energy or commodity contracts or other derivative instruments. Additionally, we have no joint ventures or mandatorily redeemable preferred stock. As such, our financial position and results of operations are not affected by accounting regulations regarding the consolidation of off-balance sheet entities and classification of financial instruments with characteristics of both liabilities and equity.

Distribution Policy

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

In order to maintain our status as a REIT for federal income tax purposes, we generally are required to distribute dividends to our stockholders aggregating annually at least 90% of our taxable income (excluding net capital gains), and we are subject to income tax to the extent we distribute less than 100% of our taxable income (including net capital gains). In 2010, our cash distributions totaled $206.8 million, or approximately 136.3% of our estimated REIT taxable income of $151.7 million. Our estimated REIT taxable income reflects non-cash deductions for depreciation and amortization. Our estimated REIT taxable income is presented to show our compliance with REIT distribution requirements and is not a measure of our liquidity or performance.

We intend to continue to make distributions to our stockholders that are sufficient to meet this distribution requirement and that will reduce or eliminate our exposure to income taxes. Furthermore, we believe our funds from operations are more than sufficient to support our current level of cash distributions to our stockholders. Our cash distributions to common stockholders, for the first three months of 2011, totaled $51.1 million, representing 90.3% of our funds from operations available to common stockholders of $56.6 million. In comparison, our 2010 cash distributions to common stockholders totaled $182.5 million, representing 94.2% of our funds from operations available to common stockholders of $193.7 million.

The Class D preferred stockholders receive cumulative distributions at a rate of 7.375% per annum on the $25 per share liquidation preference (equivalent to $1.84375 per annum per share). The Class E preferred stockholders receive cumulative distributions at a rate of 6.75% per annum on the $25 per share liquidation preference (equivalent to $1.6875 per annum per share). Dividends on our Class D and Class E preferred stock are current.

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Future distributions will be at the discretion of our Board of Directors and will depend on, among other things, our results of operations, FFO, cash flow from operations, financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended, our debt service requirements and any other factors the Board of Directors may deem relevant. In addition, our credit facility contains financial covenants that could limit the amount of distributions payable by us in the event of a default, and which prohibit the payment of distributions on the common or preferred stock in the event that we fail to pay when due (subject to any applicable grace period) any principal or interest on borrowings under our credit facility.

Distributions of our current and accumulated earnings and profits for federal income tax purposes generally will be taxable to stockholders as ordinary income, except to the extent that we recognize capital gains and declare a capital gains dividend, or that such amounts constitute "qualified dividend income" subject to a reduced rate of tax. The maximum tax rate of non-corporate taxpayers for “qualified dividend income” has generally been reduced to 15% (until it “sunsets” or reverts to the provisions of prior law, which under current law will occur with respect to taxable years beginning after December 31, 2012). In general, dividends payable by REITs are not eligible for the reduced tax rate on corporate dividends, except to the extent the REIT’s dividends are attributable to dividends received from taxable corporations (such as our taxable REIT subsidiary, Crest), to income that was subject to tax at the corporate or REIT level (for example, if we distribute taxable income that we retained and paid tax on in the prior taxable year) or, as discussed above, dividends properly designated by us as “capital gain dividends.” Distributions in excess of earnings and profits generally will be treated as a non-taxable reduction in the stockholders’ basis in their stock. Distributions above that basis, generally, will be taxable as a capital gain to stockholders who hold their shares as a capital asset. Approximately 26.8% of the distributions to our common stockholders, made or deemed to have been made in 2010, were classified as a return of capital for federal income tax purposes. We are unable to predict the portion of future distributions that may be classified as a return of capital.

RESULTS OF OPERATIONS

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with GAAP. Our consolidated financial statements are the basis for our discussion and analysis of financial condition and results of operations. Preparing our consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. We believe that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. This summary should be read in conjunction with the more complete discussion of our accounting policies and procedures included in note 2 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2010.

In order to prepare our consolidated financial statements according to the rules and guidelines set forth by GAAP, many subjective judgments must be made with regard to critical accounting policies. One of these judgments is our estimate for useful lives in determining depreciation expense for our properties. Depreciation on a majority of our buildings and improvements is computed using the straight–line method over an estimated useful life of 25 years. If we use a shorter or longer estimated useful life, it could have a material impact on our results of operations. We believe that 25 years is an appropriate estimate of useful life.

When acquiring a property for investment purposes, we allocate the fair value of real estate acquired to: (1) land and (2) building and improvements, based in each case on their estimated fair values.

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For properties acquired with in-place operating leases, we allocate the fair value of real estate acquired to: (1) land, (2) building and improvements, and (3) identified intangible assets and liabilities, based in each case on their estimated fair values. Intangible assets and liabilities consist of above-market and below-market leases, the value of in-place leases and tenant relationships.

Another significant judgment must be made as to if, and when, impairment losses should be taken on our properties when events or a change in circumstances indicate that the carrying amount of the asset may not be recoverable. A provision is made for impairment if estimated future operating cash flows (undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are less than the current book value of the property. Key inputs that we estimate in this analysis include projected rental rates, capital expenditures and property sales capitalization rates. If a property is held for sale, it is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell. The carrying value of our real estate is the largest component of our consolidated balance sheet. If events should occur that require us to reduce the carrying value of our real estate by recording provisions for impairment, it could have a material impact on our results of operations.

The following is a comparison of our results of operations for the three months ended March 31, 2011 to the three months ended March 31, 2010.

Rental Revenue

Rental revenue was $97.6 million, for the first three months of 2011, versus $82.5 million, for the first three months of 2010, an increase of $15.1 million, or 18.3%. The increase in rental revenue in the first three months of 2011, compared to the first three months of 2010, is primarily attributable to:

●   The 26 retail properties acquired by Realty Income in 2011, which generated $654,000 of rent in the first three months of 2011;

●   The 186 retail properties acquired by Realty Income in 2010, which generated $13.98 million of rent in the first three months of 2011 compared to $22,000 of rent in the first three months of 2010, an increase of $13.95 million; and

● Same store rents generated on 2,167 properties, during the entire first three months of 2011 and 2010, increased by $848,000, or 1.1%, to $81.30 million from $80.45 million; net of

●   A net decrease of $207,000 relating to the aggregate of (i) development properties acquired before 2010 that started paying rent in 2010, (ii) properties that were unleased during part of 2011 or 2010, (iii) properties sold during 2011 and 2010 and (iv) lease termination settlements, which, in aggregate, totaled $1.6 million in the first three months of 2011 compared to $1.8 million in the first three months of 2010; and

●   A net decrease in straight-line rent and other non-cash adjustments to rent of $68,000, in the first three months of 2011, as compared to the first three months of 2010.

Of the 2,519 properties in the portfolio at March 31, 2011, 2,503, or 99.4%, are single-tenant properties and the remaining 16 are multi-tenant properties. Of the 2,503 single-tenant properties, 2,423, or 96.8%, were net leased with a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 11.5 years at March 31, 2011. Of our 2,423 leased single-tenant properties, 2,213, or 91.3%, were under leases that provide for increases in rents through:

● Primarily base rent increases tied to a consumer price index (typically subject to ceilings);

● Overage rent based on a percentage of the tenants’ gross sales;

●   Fixed increases; or

● A combination of two or more of the above rent provisions.

Percentage rent, which is included in rental revenue, was $464,000, in the first three months of 2011, and $619,000, in the first three months of 2010. Percentage rent, in the first three months of 2011, was less than 1% of rental revenue and we anticipate percentage rent to continue to be less than 1% of rental revenue for 2011.

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Our portfolio of real estate, leased primarily to regional and national commercial enterprises under net leases, continues to perform well and provides dependable lease revenue supporting the payment of monthly dividends to our stockholders. At March 31, 2011, our portfolio of 2,519 properties was 96.8% leased with 81 properties available for lease as compared to 84 at December 31, 2010 and 77 at March 31, 2010. It has been our experience that approximately 2% to 4% of our property portfolio will be unleased at any given time; however, we cannot assure you that the number of properties available for lease will not exceed these levels.

Depreciation and Amortization

Depreciation and amortization was $26.8 million, for the first three months of 2011, as compared to $23.0 million, for the first three months of 2010. The increase in depreciation and amortization in 2011 was primarily due to the acquisition of properties in 2011 and 2010, which was partially offset by property sales in those same years. As discussed in the section entitled “Funds from Operations Available to Common Stockholders,” depreciation and amortization is a non-cash item that is added back to net income available to common stockholders for our calculation of FFO and AFFO.

Interest Expense

Interest expense was $25.1 million, for the first three months of 2011, as compared to $21.4 million, for the first three months of 2010.  The increase in interest expense from 2010 to 2011 was primarily due to an increase in borrowings attributable to the issuance of our $250 million of 5.75% senior unsecured notes in June 2010.

As a result of entering into our current credit facility, we incurred credit facility origination costs of $4.2 million that were classified as part of “other assets” on our consolidated balance sheet at December 31, 2010. At March 31, 2011, the balance of these credit facility origination costs was $3.8 million, which is being amortized over the remaining term of the credit facility. The remaining credit facility origination costs that were incurred as a result of entering into our previous $355 million credit facility, which were $417,000 at March 31, 2011, are included in “other assets” and are being amortized over the remaining term of our current $425 million credit facility.

The following is a summary of the components of our interest expense (dollars in thousands):

	Three months ended  March 31,
	2011			2010
Interest on our notes and credit facility	$	24,221		$	20,618
Interest included in discontinued operations from real estate acquired for resale by Crest		(200	)		(128	)
Credit facility commitment fees		377			248
Amortization of credit facility origination costs and deferred bond financing costs		795			659
Interest capitalized		(71	)		(2	)
Interest expense	$	25,122		$	21,395

	Three months ended  March 31,
Credit facility and notes outstanding	2011			2010
Average outstanding balances (dollars in thousands)	$	1,605,474		$	1,356,429
Average interest rates		6.03	%		6.08	%

At March 31, 2011, the weighted average interest rate on our notes payable of $1.6 billion was 6.05%. There was no outstanding balance on our credit facility at March 31, 2011, but if there was, the borrowing rate would have been 2.09%.

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Interest Coverage Ratio

Our interest coverage ratio, for the first three months of 2011 and 2010, was 3.5 times. Interest coverage ratio is calculated as: the interest coverage amount (as calculated in the following table) divided by interest expense, including interest recorded as discontinued operations. We consider the interest coverage ratio to be an appropriate supplemental measure of a company’s ability to meet its interest expense obligations. Our calculation of interest coverage ratio may be different from the calculation used by other companies and, therefore, comparability may be limited. This information should not be considered as an alternative to any GAAP liquidity measures.

The following is a reconciliation of net cash provided by operating activities on our consolidated statements of cash flow to our interest coverage amount (dollars in thousands):

	Three months ended  March 31,
	2011			2010
Net cash provided by operating activities	$	41,526		$	36,527
Interest expense		25,122			21,395
Interest expense included in discontinued operations(1)		200			128
Income taxes		368			277
Income tax benefit included in discontinued operations(1)		(91	)		(89	)
Collection of notes receivable by Crest(1)		(36	)		(34	)
Amortization of share-based compensation		(2,180	)		(1,761	)
Changes in assets and liabilities:
Accounts receivable and other assets		(7,509	)		(5,661	)
Accounts payable, accrued expenses and other liabilities		31,122			23,756
Interest coverage amount	$	88,522		$	74,538
Divided by interest expense(2)	$	25,322		$	21,523
Interest coverage ratio		3.5			3.5

(1)   Crest activities.

(2)  Includes interest expense recorded to "income from discontinued operations, real estate acquired for resale by Crest" on our consolidated statements of income.

Fixed Charge Coverage Ratio

Our fixed charge coverage ratio, for the first three months of 2011, was 2.8 times and, for the first three months of 2010, was 2.7 times. Fixed charge coverage ratio is calculated in exactly the same manner as interest coverage ratio, except that preferred stock dividends are also added to the denominator. We consider fixed charge coverage ratio to be an appropriate supplemental measure of a company’s ability to make its interest and preferred stock dividend payments. Our calculation of the fixed charge coverage ratio may be different from the calculation used by other companies and, therefore, comparability may be limited. This information should not be considered as an alternative to any GAAP liquidity measures.

Interest coverage amount divided by interest expense plus preferred stock dividends (dollars in thousands):

	Three months ended  March 31,
	2011		2010
Interest coverage amount	$	88,522	$	74,538
Divided by interest expense plus preferred stock dividends(1)	$	31,385	$	27,586
Fixed charge coverage ratio		2.8		2.7

(1) Includes interest expense recorded to “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income.

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General and Administrative Expenses

General and administrative expenses increased by $1.2 million to $7.9 million, in the first three months of 2011, as compared to $6.7 million, in the first three months of 2010. In the first three months of 2011 and 2010, general and administrative expenses, as a percentage of total revenue, were 8.1%. General and administrative expenses increased, during the first three months of 2011, primarily due to increases in employee costs and transaction costs related to acquisitions. In April 2011, we had 79 employees, as compared to 71 employees in April 2010. In accordance with GAAP, general and administrative expenses, for the first three months of 2011, include transaction costs of $371,000 related to the acquisition of 26 new properties during 2011, as compared to $48,000 of transaction costs for the first three months of 2010.

Property Expenses

Property expenses are broken down into costs associated with non-net leased multi-tenant 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, property inspections, bad debt expense and legal fees. General portfolio costs include, but are not limited to, insurance, legal, bad debt expense, property inspections and title search fees. At March 31, 2011, 81 properties were available for lease, as compared to 84 at December 31, 2010 and 77 at March 31, 2010.

Property expenses were $2.0 million in the first three months of 2011 and 2010. In the first three months of 2011, property expenses included provisions for impairment of $164,000 recorded for one property.

Income Taxes

Income taxes were $368,000, in the first three months of 2011, as compared to $277,000, in the first three months of 2010. These amounts are for city and state income taxes paid by Realty Income.

In addition, Crest recorded state and federal income tax benefits of $91,000 in the first three months of 2011, as compared to tax benefits of $89,000, in the first three months of 2010. These amounts are included in “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income.

Discontinued Operations

Crest’s inventory of three properties is classified as real estate held for investment at March 31, 2011. The results of operations for these properties are included in “income from continuing operations” on our consolidated statements of income.

The following is a summary of Crest’s “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income (dollars in thousands):

	Three months ended  March 31,
Crest's income from discontinued operations, real estate acquired for resale	2011			2010
Interest revenue	$	347		$	350
Interest expense		(200	)		(128	)
General and administrative expense		(13	)		(97	)
Property expenses		(3	)		(3	)
Income taxes		91			89
Income from discontinued operations, real estate acquired for resale by Crest	$	222		$	211

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Operations from nine of our investment properties were classified as held for sale at March 31, 2011, plus properties sold in 2011 and 2010, have been classified as discontinued operations. The following is a summary of Realty Income’s “income from discontinued operations, real estate held for investment” on our consolidated statements of income (dollars in thousands):

	Three months ended  March 31,
Realty Income's income from discontinued operations, real estate held for investment	2011			2010
Gain on sales of investment properties	$	129		$	703
Rental revenue		199			780
Other revenue		20			10
Depreciation and amortization		(43	)		(250	)
Property expenses		(95	)		(438	)
Provision for impairment		(36	)		(34	)
Income from discontinued operations, real estate held for investment	$	174		$	771

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

	Three months ended  March 31,
Total discontinued operations	2011		2010
Real estate acquired for resale by Crest	$	222	$	211
Real estate held for investment		174		771
Income from discontinued operations	$	396	$	982
Per common share, basic and diluted	$	0.00	$	0.01

The above per share amounts have each been calculated independently.

Crest’s Property Sales

During the first three months of 2011 and 2010, Crest did not sell any properties.

Gain on Sales of Investment Properties by Realty Income

During the first three months of 2011, we sold three investment properties for $1.1 million, which resulted in a gain of $129,000. In comparison, during the first three months of 2010, we sold three investment properties for $1.8 million, which resulted in a gain of $703,000. The results of operations for these properties have been reclassified as discontinued operations.

Provisions for Impairment on Real Estate Acquired for Resale by Crest

No provisions for impairment were recorded by Crest in the first three months of 2011 or 2010.

Provisions for Impairment on Realty Income Investment Properties

For the first three months of 2011, Realty Income recorded a provision for impairment of $36,000 on one property, which was sold in March 2011. This provision for impairment is included in "income from discontinued operations, real estate held for investment" on our consolidated statement of income, for the three months ended March 31, 2011. Additionally, for the first three months of 2011, Realty Income recorded a provision for impairment of $164,000 on one property held for investment at March 31, 2011. This provision for impairment is included in "property expenses" on our consolidated statement of income, for the three months ended March 31, 2011.

For the first three months of 2010, Realty Income recorded a provision for impairment of $34,000 on one property, which was subsequently sold in the second quarter of 2010.  This provision for impairment is included in "income from discontinued operations, real estate held for investment" on our consolidated statement of income, for the three months ended March 31, 2010.

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Preferred Stock Dividends

Preferred stock cash dividends totaled $6.1 million in the first three months of 2011 and 2010.

Net Income Available to Common Stockholders

Net income available to common stockholders was $29.9 million in the first three months of 2011, an increase of $5.8 million, as compared to $24.1 million in the first three months of 2010.

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

FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (FFO)

FFO, for the first three months of 2011, increased by $9.9 million, or 21.2%, to $56.6 million as compared to $46.7 million, for the first three months of 2010. The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable GAAP measure) to FFO. Also presented is information regarding distributions paid to common stockholders and the weighted average number of common shares used for the basic and diluted computation per share (dollars in thousands, except per share amounts):

	Three months ended  March 31,
	2011			2010
Net income available to common stockholders	$	29,936		$	24,142
Depreciation and amortization:
Continuing operations		26,810			23,041
Discontinued operations		43			250
Depreciation of furniture, fixtures and equipment		(62	)		(78	)
Gain on sales of land and investment properties, discontinued operations		(129	)		(703	)
FFO available to common stockholders	$	56,598		$	46,652
FFO per common share:
Basic	$	0.48		$	0.45
Diluted	$	0.48		$	0.45
Distributions paid to common stockholders	$	51,123		$	44,764
FFO in excess of distributions paid to common stockholders	$	5,475		$	1,888
Weighted average number of common shares used for computation per share:
Basic		118,960,878			103,606,241
Diluted		119,109,044			103,686,440

We define FFO, a non-GAAP measure, consistent with the National Association of Real Estate Investment Trust’s definition, as net income available to common stockholders, plus depreciation and amortization of real estate assets, reduced by gains on sales of investment properties and extraordinary items.

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We consider FFO to be an appropriate supplemental measure of a REIT’s operating performance as it is based on a net income analysis of property portfolio performance that adds back items such as depreciation. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time. Since real estate values historically rise and fall with market conditions, presentations of operating results for a REIT, using historical accounting for depreciation, could be less informative. The use of FFO is recommended by the REIT industry as a supplemental performance measure. In addition, FFO is used as a measure of our compliance with the financial covenants of our credit facility.

ADJUSTED FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (AFFO)

AFFO, for the first three months of 2011, increased $10.6 million, or 22.3%, to $58.2 million, as compared to $47.6 million in the first three months of 2010. We consider AFFO to be an appropriate supplemental measure of our performance. Most companies in our industry use a similar measurement, but they may use the term "CAD" (for Cash Available for Distribution) or "FAD" (for Funds Available for Distribution).  

The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable GAAP measure) to FFO and AFFO. Also presented is information regarding distributions paid to common stockholders and the weighted average number of common shares used for the basic and diluted computation per share (dollars in thousands, except per share amounts):

	Three months ended  March 31,
	2011			2010
Net income available to common stockholders	$	29,936		$	24,142
Cumulative adjustments to calculate FFO(1)		26,662			22,510
FFO available to common stockholders		56,598			46,652
Amortization of share-based compensation		2,180			1,761
Amortization of deferred note financing costs(2)		376			341
Provisions for impairment		200			34
Capitalized leasing costs and commissions		(269	)		(292	)
Capitalized building improvements		(674	)		(643	)
Straight-line rent revenue(3)		(172	)		(238	)
Total AFFO available to common stockholders	$	58,239		$	47,615
AFFO per common share:
Basic	$	0.49		$	0.46
Diluted	$	0.49		$	0.46
Distributions paid to common stockholders	$	51,123		$	44,764
AFFO in excess of distributions paid to common stockholders	$	7,116		$	2,851
Weighted average number of common shares used for computation per share:
Basic		118,960,878			103,606,241
Diluted		119,109,044			103,686,440

 (1) See reconciling items for FFO presented on previous page.

 (2) Amortization of deferred note financing costs includes the amortization of costs incurred and capitalized when our notes were issued in March 2003, November 2003, March 2005, September 2005, September 2006, September 2007 and June 2010. These costs are being amortized over the lives of these notes. No costs associated with our credit facility agreements or annual fees paid to credit rating agencies have been included.

 (3) A negative amount indicates that our straight-line rent revenue was greater than our actual cash rent collected.

33

We believe the non-GAAP financial measure AFFO provides useful information to investors because it is a widely accepted industry measure of the operating performance of real estate companies that is used by industry analysts and investors who look at and compare those companies.  In particular, AFFO provides an additional measure by which to compare the operating performance of different REITs without having to account for differing depreciation assumptions and other unique revenue and expense items which are not pertinent to the measurement of the particular company’s ongoing operating performance.  Therefore, we believe that AFFO is an appropriate supplemental performance metric, and that the most appropriate GAAP performance metric to which AFFO should be reconciled is net income available to common stockholders.

Presentation of the information regarding FFO and AFFO is intended to assist the reader in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and AFFO in the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and AFFO are 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 our performance. FFO and AFFO should not be considered as an alternative to reviewing our cash flows from operating, investing and financing activities.  In addition, FFO and AFFO should not be considered as a measure of liquidity, of our ability to make cash distributions, or of our ability to pay interest payments.

PROPERTY PORTFOLIO INFORMATION

At March 31, 2011, we owned a diversified portfolio:

● Of 2,519 properties;

● With an occupancy rate of 96.8%, or 2,438 properties occupied and only 81 properties available for lease;

● Leased to 125 different retail and other commercial enterprises doing business in 31 separate industries;

● Located in 49 states;

● With over 22.5 million square feet of leasable space; and

● With an average leasable space per property of approximately 8,900 square feet.

In addition to our real estate portfolio, our subsidiary, Crest, had an inventory of three properties located in three states at March 31, 2011. These properties are classified as held for investment.

At March 31, 2011, of our 2,519 retail properties, 2,428 were leased under net-lease agreements. A net lease typically requires the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance. In addition, our tenants are typically responsible for future rent increases based on increases in the consumer price index (typically subject to ceilings), additional rent calculated as a percentage of the tenants’ gross sales above a specified level, or fixed increases.

In order to more accurately reflect the Company’s exposure to various industries, the following industry table has been modified to reflect the changes below:

●   Properties previously included in the “distribution and office” industry were reclassified to the “home improvement,” “convenience store,” and “restaurant” industries, to better reflect the industry in which the tenant operates;

●   The “equipment rental” industry was renamed "equipment services; "

●   The “travel plazas” industry was renamed "transportation services;" and

●   The “wine and spirits” industry was renamed "beverages."

Additionally, we added a table that quantifies our exposure to various property types.

34

Industry Diversification

The following table sets forth certain information regarding Realty Income’s property portfolio (excluding properties owned by Crest) classified according to the business of the respective tenants, expressed as a percentage of our total rental revenue:

	Percentage of Rental Revenue(1)
	For the Quarter			For the Years Ended
Industries	Ended March 31, 2011			Dec 31, 2010			Dec 31, 2009			Dec 31, 2008			Dec 31, 2007			Dec 31, 2006			Dec 31, 2005
Apparel stores		1.5	%		1.2	%		1.1	%		1.1	%		1.2	%		1.7	%		1.6	%
Automotive collision services		0.9			1.0			1.1			1.0			1.1			1.3			1.3
Automotive parts		1.2			1.4			1.5			1.6			2.1			2.8			3.4
Automotive service		4.2			4.7			4.8			4.8			5.2			6.9			7.6
Automotive tire services		5.6			6.4			6.9			6.7			7.3			6.1			7.2
Beverages		5.8			3.0			--			--			--			--			--
Book stores		0.1			0.1			0.2			0.2			0.2			0.2			0.3
Business services		*			*			*			*			0.1			0.1			0.1
Child care		5.8			6.5			7.3			7.6			8.4			10.3			12.7
Consumer electronics		0.6			0.6			0.7			0.8			0.9			1.1			1.3
Convenience stores		19.9			17.1			16.9			15.8			14.0			16.1			18.7
Crafts and novelties		0.2			0.3			0.3			0.3			0.3			0.4			0.4
Drug stores		3.8			4.1			4.3			4.1			2.7			2.9			2.8
Entertainment		1.1			1.2			1.3			1.2			1.4			1.6			2.1
Equipment services		0.2			0.2			0.2			0.2			0.2			0.2			0.4
Financial services		0.2			0.2			0.2			0.2			0.2			0.1			0.1
General merchandise		0.7			0.8			0.8			0.8			0.7			0.6			0.5
Grocery stores		1.7			0.9			0.7			0.7			0.7			0.7			0.7
Health and fitness		6.4			6.9			5.9			5.6			5.1			4.3			3.7
Home furnishings		1.2			1.3			1.3			2.4			2.6			3.1			3.7
Home improvement		1.8			2.0			2.2			2.1			2.4			3.4			1.1
Motor vehicle dealerships		2.5			2.6			2.7			3.2			3.1			3.4			2.6
Office supplies		0.9			0.9			1.0			1.0			1.1			1.3			1.5
Pet supplies and services		0.7			0.9			0.9			0.8			0.9			1.1			1.3
Private education		0.8			0.8			0.9			0.8			0.8			0.8			0.8
Restaurants		18.9			21.1			22.0			22.5			21.5			11.9			9.4
Shoe stores		0.2			0.1			--			--			--			--			0.3
Sporting goods		2.8			2.7			2.6			2.3			2.6			2.9			3.4
Theaters		8.1			8.9			9.2			9.0			9.0			9.6			5.2
Transportation services		0.7			0.2			0.2			0.2			0.2			0.3			0.3
Video rental		0.0			0.2			1.0			1.1			1.7			2.1			2.5
Other		1.5			1.7			1.8			1.9			2.3			2.7			3.0
Totals		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

* Less than 0.1%

(1) Includes rental revenue for all properties owned by Realty Income at the end of each period presented, including revenue from properties reclassified as discontinued operations.

35

Property Type

The following table sets forth certain property type information regarding Realty Income’s property portfolio (excluding properties owned by Crest) as of March 31, 2011 (dollars in thousands):

			Approximate		Rental Revenue for		Percentage of
	Number of		Leasable		the Quarter Ended		Rental
Property Type	Properties		Square Feet		March 31, 2011(1)		Revenue
Retail		2,475		19,788,400	$	89,185		91.2	%
Agriculture		14		184,500		4,883		5.0
Industrial		15		782,400		1,535		1.6
Manufacturing		4		572,500		1,531		1.6
Distribution		8		1,003,300		494		0.5
Office		3		218,000		115		0.1
Totals		2,519		22,549,100	$	97,743		100.0	%

(1) Includes rental revenue for all properties owned by Realty Income at March 31, 2011, including revenue from properties reclassified as discontinued operations of $127.

36

Service Category Diversification

The following table sets forth certain information regarding the properties owned by Realty Income (excluding properties owned by Crest) at March 31, 2011, classified according to the business types and the level of services they provide (dollars in thousands):

			Rental Revenue for		Percentage of
	Number of		the Quarter Ended		Rental
Industry	Properties		March 31, 2011(1)		Revenue
Tenants Providing Services
Automotive collision services		14	$	898		0.9	%
Automotive service		239		4,116		4.2
Child care		250		5,705		5.8
Entertainment		8		1,064		1.1
Equipment services		3		200		0.2
Financial services		14		198		0.2
Health and fitness		35		6,242		6.4
Private education		12		757		0.8
Theaters		34		7,956		8.1
Transportation Services		19		691		0.7
Other		14		1,495		1.5
		642		29,322		29.9
Tenants Selling Goods and Services
Automotive parts (with installation)		23		452		0.5
Automotive tire services		155		5,507		5.6
Business services		1		5		*
Convenience stores		721		19,425		19.9
Home improvement		1		27		*
Motor vehicle dealerships		17		2,415		2.5
Pet supplies and services		12		709		0.7
Restaurants		632		18,440		18.9
Video rental		14		0		0.0
		1,576		46,980		48.1
Tenants Selling Goods
Apparel stores		11		1,507		1.5
Automotive parts		43		689		0.7
Beverages		16		5,669		5.8
Book stores		1		128		0.1
Consumer electronics		8		541		0.6
Crafts and novelties		4		235		0.2
Drug stores		57		3,724		3.8
General merchandise		33		650		0.7
Grocery stores		21		1,634		1.7
Home furnishings		43		1,143		1.2
Home improvement		28		1,726		1.8
Office supplies		11		883		0.9
Pet supplies		3		33		*
Shoe stores		1		168		0.2
Sporting goods		21		2,711		2.8
		301		21,441		22.0
Totals		2,519	$	97,743		100.0	%

* Less than 0.1%

(1) Includes rental revenue for all properties owned by Realty Income at March 31, 2011, including revenue from properties reclassified as discontinued operations of $127.

37

Lease Expirations

The following table sets forth certain information regarding Realty Income’s property portfolio (excluding properties owned by Crest) regarding the timing of the lease term expirations (excluding extension options) in our property portfolio of net leased properties as of March 31, 2011 (dollars in thousands):

	Total Portfolio									Initial Expirations(3)							Subsequent Expirations(4)
Year	Number of Leases Expiring(1)		Approximate Leasable Square Feet		Rental Revenue  for the Quarter Ended March 31, 2011(2)		% of  Total  Rental Revenue			Number  of Leases Expiring		Rental  Revenue  for the Quarter Ended March 31, 2011		% of  Total  Rental Revenue			Number  of Leases Expiring		Rental Revenue  for the Quarter Ended March 31, 2011		% of  Total  Rental Revenue
2011		144		1,029,900	$	3,987		4.2	%		48	$	2,003		2.1	%		96	$	1,984		2.1	%
2012		129		890,100		2,984		3.1			37		1,212		1.3			92		1,772		1.8
2013		148		1,246,200		4,835		5.0			65		2,944		3.0			83		1,891		2.0
2014		116		906,700		3,486		3.6			41		1,866		1.9			75		1,620		1.7
2015		148		766,900		3,900		4.1			78		2,407		2.5			70		1,493		1.6
2016		138		569,100		2,741		2.9			111		2,116		2.2			27		625		0.7
2017		52		644,900		1,959		2.0			41		1,735		1.8			11		224		0.2
2018		50		1,220,300		2,403		2.5			42		2,193		2.3			8		210		0.2
2019		100		1,154,900		5,142		5.4			92		4,704		4.9			8		438		0.5
2020		85		1,032,700		3,952		4.1			75		3,678		3.8			10		274		0.3
2021		180		1,851,200		7,804		8.1			176		7,557		7.9			4		247		0.2
2022		100		553,700		3,115		3.2			99		3,067		3.2			1		48		*
2023		253		1,800,300		8,892		9.3			251		8,818		9.2			2		74		0.1
2024		63		570,000		2,413		2.5			63		2,413		2.5			-		-		-
2025		210		1,632,500		11,156		11.6			204		11,041		11.5			6		115		0.1
2026		109		1,562,100		6,419		6.7			107		6,360		6.6			2		59		0.1
2027		171		1,343,800		5,863		6.1			170		5,846		6.1			1		17		*
2028		81		738,900		4,216		4.4			79		4,166		4.3			2		50		0.1
2029		49		180,200		1,289		1.3			48		1,274		1.3			1		15		*
2030		43		564,400		6,713		7.0			43		6,713		7.0			-		-		-
2031		40		408,200		977		1.0			39		970		1.0			1		7		*
2032		2		289,400		651		0.7			2		651		0.7			-		-		-
2033		8		94,000		474		0.5			7		460		0.5			1		14		*
2034		6		84,900		326		0.3			3		288		0.3			3		38		*
2037		2		48,800		354		0.4			2		354		0.4			-		-		-
2043		1		3,600		13		*			-		-		-			1		13		*
Totals		2,428		21,187,700	$	96,064		100.0	%		1,923	$	84,836		88.3	%		505	$	11,228		11.7	%

*Less than 0.1%

(1) Excludes ten multi-tenant properties and 81 vacant unleased properties, one of which is a multi-tenant property. The lease expirations for properties under construction are based on the estimated date of completion of those properties.

(2) Includes rental revenue of $127 from properties reclassified as discontinued operations and excludes revenue of $1,679 from ten multi-tenant properties and from 81 vacant  and unleased properties at March 31, 2011.

 (3) Represents leases to the initial tenant of the property that are expiring for the first time.

 (4) Represents lease expirations on properties in the portfolio, which have previously been renewed, extended or re-tenanted.

38

State Diversification

The following table sets forth certain state-by-state information regarding Realty Income’s property portfolio (excluding properties owned by Crest) as of March 31, 2011 (dollars in thousands):

						Approximate		Rental Revenue for		Percentage of
	Number of		Percent			Leasable		the Quarter Ended		Rental
State	Properties		Leased			Square Feet		March 31, 2011(1)		Revenue
Alabama		62		97	%		420,200	$	1,836		1.9	%
Alaska		2		100			128,500		287		0.3
Arizona		82		98			510,200		2,837		2.9
Arkansas		17		94			92,400		381		0.4
California		82		99			1,675,500		10,608		10.9
Colorado		51		94			471,400		1,826		1.9
Connecticut		23		96			269,100		1,163		1.2
Delaware		17		100			33,300		432		0.4
Florida		170		95			1,769,900		7,063		7.2
Georgia		132		95			948,000		3,886		4.0
Hawaii		--		--			--		--		--
Idaho		12		83			80,700		318		0.3
Illinois		87		99			1,067,400		5,241		5.4
Indiana		81		95			729,900		3,525		3.6
Iowa		21		100			290,600		1,020		1.0
Kansas		32		91			631,900		1,212		1.2
Kentucky		23		100			127,900		693		0.7
Louisiana		32		100			184,900		906		0.9
Maine		3		100			22,500		162		0.2
Maryland		28		100			266,600		1,583		1.6
Massachusetts		64		98			575,400		2,549		2.6
Michigan		54		98			285,800		1,301		1.3
Minnesota		151		99			1,010,900		6,560		6.7
Mississippi		72		99			360,700		1,540		1.6
Missouri		64		95			679,600		2,198		2.2
Montana		2		100			30,000		77		0.1
Nebraska		19		95			196,300		492		0.5
Nevada		15		93			315,400		772		0.8
New Hampshire		14		100			109,300		587		0.6
New Jersey		33		100			261,300		1,943		2.0
New Mexico		9		100			58,400		198		0.2
New York		39		97			495,000		2,550		2.6
North Carolina		95		99			582,500		2,942		3.0
North Dakota		6		100			36,600		60		0.1
Ohio		137		93			1,083,600		3,327		3.4
Oklahoma		35		100			755,300		1,490		1.5
Oregon		18		94			297,300		863		0.9
Pennsylvania		102		99			774,200		3,599		3.7
Rhode Island		3		100			11,000		59		0.1
South Carolina		99		100			372,500		2,307		2.4
South Dakota		10		100			89,800		186		0.2
Tennessee		130		95			755,200		2,751		2.8
Texas		214		96			2,376,700		8,669		8.9
Utah		5		100			92,100		120		0.1
Vermont		4		100			12,700		128		0.1
Virginia		104		95			636,500		3,471		3.5
Washington		34		94			276,500		951		1.0
West Virginia		2		100			23,000		121		0.1
Wisconsin		27		93			269,200		953		1.0
Wyoming		1		0			5,400		0		0.0
Totals/Average		2,519		97	%		22,549,100	$	97,743		100.0	%

(1) Includes rental revenue for all properties owned by Realty Income at March 31, 2011, including revenue from properties reclassified as discontinued operations of $127.

39

IMPACT OF INFLATION

Tenant leases generally provide for limited increases in rent as a result of increases in the tenants’ sales volumes, increases in the consumer price index (typically subject to ceilings), and/or fixed increases. We expect that inflation will cause these lease provisions to result in rent increases over time. During times when inflation is greater than increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation.

Of our 2,519 properties in the portfolio, approximately 96.4% or 2,428 are leased to tenants under net leases where the tenant is responsible for property expenses. Net leases tend to reduce our exposure to rising property expenses due to inflation. Inflation and increased costs may have an adverse impact on our tenants if increases in their operating expenses exceed increases in revenue.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

As of March 31, 2011, the impact of recent accounting pronouncements on our business is not considered to be material.

OTHER INFORMATION

Our common stock is listed on the NYSE under the ticker symbol “O” with a cusip number of 756109-104.  Our central index key number is 726728.

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

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

We maintain an Internet website at www.realtyincome.com. On our website we make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, Form 3s, Form 4s, Form 5s, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file these reports with the SEC. None of the information on our website is deemed to be a part of this report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to interest rate changes primarily as a result of our credit facility and long-term notes and bonds used to maintain liquidity and expand our real estate investment portfolio and operations. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flow and to lower our overall borrowing costs. To achieve these objectives we issue long-term notes and bonds, primarily at fixed rates. We do not enter into any derivative transactions for speculative or trading purposes.

The following table presents by year of expected maturity, the principal amounts, average interest rates, and estimated fair values of our fixed and variable rate debt as of March 31, 2011.  This information is presented to evaluate the expected cash flows and sensitivity to interest rate changes (dollars in millions):

40

Expected Maturity Data

Year of maturity	Fixed rate debt		Average interest rate on fixed rate debt			Variable rate debt		Average interest rate on variable rate debt
2011	$	--		--	%	$	--		--	%
2012		--		--			--		--
2013(1)		100.0		5.38			--		--
2014(2)		--		--			--		--
2015(3)		150.0		5.50			--		--
Thereafter(4)		1,350.0		6.16			--		--
Totals	$	1,600.0		6.05	%	$	--		--	%
Fair Value(5)	$	1,721.3				$	--

(1) $100 million matures in March 2013.

(2) The credit facility expires in March 2014.

(3) $150 million matures in November 2015.

(4) $275 million matures in September 2016, $175 million matures in September 2017, $550 million matures in August 2019, $250 million matures in January 2021 and $100 million matures in March 2035.

(5) We base the fair value of the fixed rate debt at March 31, 2011 on the indicative market prices and recent trading activity of our notes payable.

The table incorporates only those exposures that exist as of March 31, 2011. It does not consider those exposures or positions that could arise after that date. As a result, our ultimate realized gain or loss, with respect to interest rate fluctuations, would depend on the exposures that arise during the period, our hedging strategies at the time, and interest rates.

All of our outstanding notes and bonds have fixed interest rates. Interest on our credit facility balance is variable. At March 31, 2011, our credit facility balance was zero; however, we intend to borrow funds on our credit facility in the future. Based on a hypothetical credit facility borrowing of $50 million, a 1% change in interest rates would change our interest costs by $500,000 per year.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of and for the quarter ended March 31, 2011, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating at a reasonable assurance level.

Changes in Internal Controls

There have not been any significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation in the first three months of 2011. As of March 31, 2011, there were no material weaknesses in our internal controls, and therefore, no corrective actions were taken.

41

Limitations on the Effectiveness of Controls

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

PART II. OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in our 2010 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During January 2011, 55,873 shares of stock, at a price of $34.20, and 4,826 shares of stock, at a price of $33.81, were withheld for state and federal payroll taxes on the vesting of employee stock awards, as permitted under the 2003 Incentive Award Plan of Realty Income Corporation.

Item 6. Exhibits

Exhibit No. Description

Articles of Incorporation and By-Laws

3.1	Articles of Incorporation of the Company, as amended by amendment No. 1 dated May 10, 2005 and amendment No. 2 dated May 10, 2005 (filed as exhibit 3.1 to the Company’s Form 10-Q dated June 30, 2005, and incorporated herein by reference).
3.2	Amended and Restated Bylaws of the Company dated December 12, 2007 (filed as exhibit 3.1 to the Company’s Form 8-K, filed on December 13, 2007 and dated December 12, 2007 and incorporated herein by reference), as amended on May 13, 2008 (amendment filed as exhibit 3.1 to the Company’s Form 8-K, filed on May 14, 2008 and dated May 13, 2008, and incorporated herein by reference).
3.3	Articles Supplementary to the Articles of Incorporation of the Company classifying and designating the 7.375% Monthly Income Class D Cumulative Redeemable Preferred Stock (filed as exhibit 3.8 to the Company’s Form 8-A, filed on May 25, 2004 and incorporated herein by reference).
3.4	Articles Supplementary to the Articles of Incorporation of the Company classifying and designating additional shares of the 7.375% Monthly Income Class D Cumulative Redeemable Preferred Stock (filed as exhibit 3.2 to the Company’s Form 8-K, filed on October 19, 2004 and dated October 12, 2004 and incorporated herein by reference).
3.5	Articles Supplementary to the Articles of Incorporation of the Company classifying and designating the 6.75% Class E Cumulative Redeemable Preferred Stock (filed as exhibit 3.5 to the Company’s Form 8-A, filed on December 5, 2006 and incorporated herein by reference).

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Instruments defining the rights of security holders, including indentures

4.1	Indenture dated as of October 28, 1998 between the Company and The Bank of New York (filed as exhibit 4.1 to the Company’s Form 8-K, filed on October 28, 1998 and dated October 27, 1998 and incorporated herein by reference).
4.2	Form of 5.375% Senior Notes due 2013 (filed as exhibit 4.2 to the Company’s Form 8-K, filed on March 7, 2003 and dated March 5, 2003 and incorporated herein by reference).
4.3	Officer’s Certificate pursuant to sections 201, 301 and 303 of the Indenture dated October 28, 1998 between the Company and The Bank of New York, as Trustee, establishing a series of securities entitled 5.375% Senior Notes due 2013 (filed as exhibit 4.3 to the Company’s Form 8-K, filed on March 7, 2003 and dated March 5, 2003 and incorporated herein by reference).
4.4	Form of 5.50% Senior Notes due 2015 (filed as exhibit 4.2 to the Company’s Form 8-K, filed on November 24, 2003 and dated November 19, 2003 and incorporated herein by reference).
4.5	Officer’s Certificate pursuant to sections 201, 301 and 303 of the Indenture dated October 28, 1998 between the Company and The Bank of New York, as Trustee, establishing a series of securities entitled 5.50% Senior Notes due 2015 (filed as exhibit 4.3 to the Company’s Form 8-K, filed on November 24, 2003 and dated November 19, 2003 and incorporated herein by reference).
4.6	Form of 5.875% Senior Notes due 2035 (filed as exhibit 4.2 to the Company’s Form 8-K, filed on March 11, 2005 and dated March 8, 2005 and incorporated herein by reference).
4.7	Officer’s Certificate pursuant to sections 201, 301 and 303 of the Indenture dated October 28, 1998 between the Company and The Bank of New York, as Trustee, establishing a series of securities entitled 5.875% Senior Debentures due 2035 (filed as exhibit 4.3 to the Company’s Form 8-K, filed on March 11, 2005 and dated March 8, 2005 and incorporated herein by reference).
4.8	Form of 5.375% Senior Notes due 2017 (filed as exhibit 4.2 to the Company’s Form 8-K, filed on September 16, 2005 and dated September 8, 2005 and incorporated herein by reference).
4.9	Officer’s Certificate pursuant to sections 201, 301 and 303 of the Indenture dated October 28, 1998 between the Company and The Bank of New York, as Trustee, establishing a series of securities entitled 5.375% Senior Notes due 2017 (filed as exhibit 4.3 to the Company’s Form 8-K, filed on September 16, 2005 and dated September 8, 2005 and incorporated herein by reference).
4.10	Form of 5.95% Senior Notes due 2016 (filed as exhibit 4.2 to the Company’s Form 8-K, filed on September 18, 2006 and dated September 6, 2006 and incorporated herein by reference).

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4.11	Officer’s Certificate pursuant to sections 201, 301 and 303 of the Indenture dated October 28, 1998 between the Company and The Bank of New York, as Trustee, establishing a series of securities entitled 5.95% Senior Notes due 2016 (filed as exhibit 4.3 to the Company’s Form 8-K, filed on September 18, 2006 and dated September 6, 2006 and incorporated herein by reference).
4.12	Form of 6.75% Notes due 2019 (filed as exhibit 4.2 to the Company’s Form 8-K, filed on September 5, 2007 and dated August 30, 2007 and incorporated herein by reference).
4.13	Officer’s Certificate pursuant to sections 201, 301 and 303 of the Indenture dated October 28, 1998 between the Company and The Bank of New York Trust Company, N.A., as Trustee, establishing a series of securities entitled 6.75% Senior Notes due 2019 (filed as exhibit 4.3 to the Company’s Form 8-K, filed on September 5, 2007 and dated August 30, 2007 and incorporated herein by reference).
4.14	Form of 5.75% Notes due 2021 (filed as exhibit 4.2 to the Company’s Form 8-K, filed on June 29, 2010 and dated June 24, 2010 and incorporated herein by reference).
4.15	Officer’s Certificate pursuant to sections 201, 301 and 303 of the Indenture dated October 28, 1998 between the Company and The Bank of New York Mellon Trust Company, N.A., as Successor Trustee, establishing a series of securities entitled 5.75% Notes due 2021 (filed as exhibit 4.3 to the Company’s Form 8-K, filed on June 29, 2010 and dated June 24, 2010 and incorporated herein by reference).

Material Contracts

10.1	Dividend Reinvestment and Stock Purchase Plan (filed as Company’s Registration Statement 333-158169 on Form 424B5, filed on and dated March 23, 2011 and incorporated herein by reference).
10.2	The First Amendment to Credit Agreement dated March 25, 2011 (filed as exhibit 10.1 to the Company’s Form 8-K, filed on March 29, 2011 and dated March 25, 2011 and incorporated herein by reference).

Certifications

* 31.1	Rule 13a-14(a) Certifications as filed by the Chief Executive Officer pursuant to SEC release No. 33-8212 and 34-47551.
* 31.2	Rule 13a-14(a) Certifications as filed by the Chief Financial Officer pursuant to SEC release No. 33-8212 and 34-47551.
* 32	Section 1350 Certifications as furnished by the Chief Executive Officer and the Chief Financial Officer pursuant to SEC release No. 33-8212 and 34-47551.
	* Filed herewith

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	REALTY INCOME CORPORATION
Date: April 28, 2011	/s/ GREGORY J. FAHEY
	Gregory J. Fahey
	Vice President, Controller
	(Principal Accounting Officer)

45

EX-31.1

EXHIBIT 31.1

Certification of Chief Executive Officer

I, Thomas A. Lewis, certify that:

1.        I have reviewed this quarterly report on Form 10-Q of Realty Income Corporation for the quarter ended March 31, 2011;

2.        Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.        Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.        The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:  

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;  

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and  

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and   

5.        The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):  

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 28, 2011                                                                /s/ THOMAS A. LEWIS                                                                

Thomas A. Lewis

Chief Executive Officer and

Vice Chairman of the Board

EX-31.2

EXHIBIT 31.2

Certification of Chief Financial Officer

I, Paul M. Meurer, certify that:

1.        I have reviewed this quarterly report on Form 10-Q of Realty Income Corporation for the quarter ended March 31, 2011;

2.        Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.        Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.        The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:  

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;  

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and  

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and   

5.        The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):  

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 28, 2011                                                                /s/ PAUL M. MEURER                                                                

Paul M. Meurer

Executive Vice President,

Chief Financial Officer and Treasurer

EX-32

Exhibit 32

Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to 18 U.S.C. SECTION 1350

Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Realty Income Corporation, a Maryland corporation (the “Company”), hereby certify, to his best knowledge, that:

(i)      the accompanying quarterly report on Form 10-Q of the Company for the quarter ended March 31, 2011, (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the “Act”); and

(ii)      the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ THOMAS A. LEWIS                                                                      

Thomas A. Lewis

Vice Chairman and Chief Executive Officer

/s/ PAUL M. MEURER                                                                      

Paul M. Meurer

Executive Vice President, Chief Financial Officer and Treasurer

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Act, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.