Net Lease Office Properties

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Business and Organization

Pursuant to the terms of a separation and distribution agreement, W. P. Carey Inc. (“WPC”) spun off a portfolio of 59 office assets into a separate publicly-traded company (the “Spin-Off”). To accomplish this Spin-Off, WPC formed a Maryland real estate investment trust, Net Lease Office Properties (“NLOP”), on October 21, 2022, to own the 59 office assets. Information with respect to number of properties and square footage is unaudited.

On November 1, 2023, WPC completed the Spin-Off, contributing 59 office properties to NLOP. Following the closing of the Spin-Off, NLOP operates as a separate publicly-traded real estate investment trust (“REIT”), and certain wholly-owned affiliates of WPC (our “Advisor”) externally manage NLOP pursuant to certain advisory agreements (the “NLOP Advisory Agreements”). The Spin-Off was accomplished via a pro rata dividend of 1 NLOP common share for every 15 shares of WPC common stock outstanding.

NLOP intends to qualify and elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, commencing with the Company’s taxable year ended December 31, 2023.

NLOP operates asone segment, and through its subsidiaries, owns, operates, and finances office buildings. As of March 31, 2024, NLOP’s portfolio was comprised of full or partial ownership interests in 53 properties, net leased to 55 corporate tenants, totaling approximately 8.6 million leasable square feet (including 0.6 million of operating square footage for a parking garage at a domestic property), with a weighted-average lease term of 5.7 years.

Note 2. Basis of Presentation

Basis of Presentation

NLOP

For periods after November 1, 2023, the consolidated financial statements include the results of NLOP and all entities in which the Company has a controlling interest. Intercompany transactions and balances have been eliminated in consolidation.

Our interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a complete statement of our consolidated financial position, results of operations, and cash flows in accordance with generally accepted accounting principles in the United States (“GAAP”). In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair presentation of financial position, results of operations, and cash flows. Our interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2023, which are included in the 2023 Annual Report, as certain disclosures that would substantially duplicate those contained in the audited consolidated financial statements have not been included in this Report. Operating results for interim periods are not necessarily indicative of operating results for an entire year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.

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Prior to the Spin-Off

For periods prior to November 1, 2023, the accompanying historical consolidated financial statements and related notes of NLOP do not represent the balance sheet, statement of operations and cash flows of a legal entity, but rather a combination of entities under common control that have been “carved-out” of WPC’s consolidated financial statements and presented herein, in each case, in accordance with GAAP. Intercompany transactions and balances have been eliminated in combination. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. In the opinion of management, the financial information for the periods presented in this Report reflects all normal and recurring adjustments necessary for a fair presentation of financial position, results of operations, and cash flows.

These consolidated financial statements reflect the revenues and direct expenses of NLOP and include material assets and liabilities of WPC that are specifically attributable to NLOP. Equity in these consolidated financial statements represents the excess of total assets over total liabilities. Equity is impacted by contributions from and distributions to WPC, which are the result of treasury activities and net funding provided by or distributed to WPC prior to the Spin-Off, as well as the allocated costs and expenses described below.

The consolidated financial statements also include an allocation of indirect costs and expenses incurred by WPC related to NLOP, primarily consisting of compensation and other general and administrative costs using the relative percentage of property annualized base rent (“ABR”) of NLOP and WPC management’s knowledge of NLOP. In addition, the consolidated financial statements reflect the allocation of interest expense from WPC unsecured debt, excluding debt that is specifically attributable to NLOP (Note 9); interest expense was allocated by calculating the unencumbered net investment in real estate of each property held by NLOP as a percentage of WPC’s total consolidated unencumbered net investment in real estate and multiplying that percentage by the corporate interest expense on WPC unsecured debt (Note 9). The amounts allocated in the accompanying consolidated financial statements are not necessarily indicative of the actual amount of such indirect expenses that would have been recorded had NLOP been a separate independent entity during the applicable periods. WPC believes the assumptions underlying WPC’s allocation of indirect expenses are reasonable.

The amounts allocated in the accompanying consolidated financial statements are not necessarily indicative of the actual amount of such indirect expenses that would have been recorded had NLOP been a separate independent entity. WPC believes the assumptions underlying WPC’s allocation of indirect expenses are reasonable.

Basis of Consolidation

Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries. The portions of equity in consolidated subsidiaries that are not attributable, directly or indirectly, to us are presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.

When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a VIE and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. There have been no significant changes in our VIE policies from what was disclosed in the 2023 Annual Report.

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At both March 31, 2024 and December 31, 2023, we consideredone entity to be a VIE (given certain decision-making rights each partner has in accordance with the partnership agreement), which we consolidated, as we are considered the primary beneficiary. The following table presents a summary of selected financial data of the consolidated VIE included in our consolidated balance sheets (in thousands):

Cash and Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the consolidated statements of cash flows (in thousands):

(a)Amounts as of March 31, 2024 and December 31, 2023 include approximately $45.3 million and $48.4 million related to certain reserve requirements pursuant to the NLOP Financing Arrangements (Note 9).

Net Parent Investment

In the consolidated statements of equity, the net parent investment represents WPC’s historical investment in NLOP prior to the Spin-Off, accumulated net earnings after taxes, and the net effect of transactions between NLOP and WPC.

Earnings Per Share

Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted-average number of shares of common shares outstanding during the year. Diluted earnings per share reflects potentially dilutive securities using the treasury stock method, except when the effect would be anti-dilutive.

Earnings per share is computed by dividing the net loss for the period by the weighted-average number of common shares outstanding during the period post Spin-Off. For the three months ended March 31, 2024, we recognized net loss. Therefore, all potentially dilutive securities were antidilutive and accordingly, basic net loss per share equals diluted net loss per share for the three months ended March 31, 2024. The calculation of basic and diluted earnings per share for any of the periods presented prior to the Spin-Off were based on the number of shares outstanding on November 1, 2023. For periods prior to the Spin-Off, it is assumed that there are no dilutive equity instruments as there were no NLOP stock-based awards outstanding prior to the Spin-Off.

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Note 3. Agreements and Transactions with Related Parties

Advisory Agreements

Pursuant to the NLOP Advisory Agreements, which we entered into on November 1, 2023, our Advisor provides us with strategic management services, including asset management, property disposition support, and various related services. We pay our Advisor an asset management fee that was initially set at an annual amount of $7.5 million and is being proportionately reduced each month following the disposition of each portfolio property. In addition, we reimburse our Advisor a base administrative amount of approximately $4.0 million annually, for certain administrative services, including day-to-day management services, investor relations, accounting, tax, legal, and other administrative matters.

The following tables present a summary of fees we paid and expenses we reimbursed to our Advisor in accordance with the terms of the NLOP Advisory Agreements (in thousands):

(a)Included within Asset management fees in the consolidated statements of operations.

(b)Included within General and administrative expenses in the consolidated statements of operations.

The following table presents a summary of amounts due to affiliates, which are included within Accounts payable, accrued expenses and other liabilities in the consolidated financial statements (in thousands):

Other Transactions with WPC

NLOP Share Costs

Historically, prior to the Spin-Off, NLOP was managed and operated in the normal course of business consistent with other affiliates of WPC. Accordingly, certain shared costs were allocated to NLOP and reflected as expenses in the consolidated statements of operations. Management considers the allocation methodologies used to be reasonable and appropriate reflections of the historical WPC expenses attributable to NLOP for purposes of the consolidated financial statements of NLOP. However, the expenses reflected in the consolidated statements of operations may not be indicative of the actual expenses that would have been incurred during the periods presented if NLOP historically operated as a separate, stand-alone entity. In addition, the expenses reflected in the consolidated statements of operations may not be indicative of related expenses that will be incurred in the future by NLOP.

The following table presents amounts of shared costs that were allocated to NLOP (in thousands):

(a)General and administrative fees are inclusive of expenses such as employee compensation and benefits, stock-based compensation and professional fees.

(b)NLOP’s income statement prior to the Spin-Off includes an allocation of interest expense associated with WPC unsecured debt utilized partially to fund property assets of NLOP.

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Net parent investment shown in the consolidated statements of equity include contributions from WPC, which are the result of treasury activities and net funding provided by WPC prior to the Spin-Off, and also includes the indirect costs and expenses allocated to NLOP by WPC as described in Note 2.

Other Transactions with Related Parties

At March 31, 2024, we owned an interest inone jointly owned investment in real estate, with the remaining interest held by a third party. We consolidate this investment.

Note 4. Land, Buildings and Improvements

Land, Buildings and Improvements

Land and buildings leased to others, which are subject to operating leases, are summarized as follows (in thousands):

During the three months ended March 31, 2024, the U.S. dollar strengthened against the British pound sterling, euro, and Norwegian Krone. As a result of this fluctuation in foreign currency exchange rates, the carrying value of our Land, buildings and improvements decreased by $4.9 million from December 31, 2023 to March 31, 2024.

Depreciation expense, including the effect of foreign currency translation, on our buildings and improvements subject to operating leases was $7.1 million and $7.8 million for the three months ended March 31, 2024 and 2023, respectively.

During the three months ended March 31, 2024, we capitalized accrued costs of $0.8 million within Land, buildings and improvements related to capital expenditures at certain properties, which is a non-cash investing activity.

Dispositions of Properties

During the three months ended March 31, 2024, we soldone property, which was classified as Land, buildings and improvements. As a result, the carrying value of our Land, buildings and improvements decreased by $46.7 million from December 31, 2023 to March 31, 2024 (Note 13).

Leases

Operating Lease Income

Lease income related to operating leases recognized and included in the consolidated statements of operations is as follows (in thousands):

(a)Includes (i) rent increases based on changes in the U.S. Consumer Price Index and other comparable indices and (ii) reimbursements for property taxes, insurance, and common area maintenance services.

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Other Lease-Related Income

For the three months ended March 31, 2024, other lease-related income on our consolidated statements of operations included lease termination income of $4.7 million recognized from one tenant.

In addition, for the three months ended March 31, 2024 and 2023, other lease-related income on our consolidated statements of operations included income from a parking garage attached to one of our net-leased properties totaling $0.5 million and $0.4 million, respectively.

Note 5. Finance Receivables

Assets representing rights to receive money on demand or at fixed or determinable dates are referred to as finance receivables. Our finance receivables portfolio consists of our Net investments in finance leases. Operating leases are not included in finance receivables.

Net Investments in Sales-Type Leases

One property was classified as a net investment in sales-type leases as of December 31, 2023. We had previously entered into an agreement to sell the property to the tenant occupying the property during the fourth quarter of 2023 and recognized a Loss on sale of real estate, net, of $8.3 million during the three months ended December 31, 2023 related to this transaction. During the three months ended March 31, 2024, we sold this property, which had an aggregate carrying value of $10.5 million as of December 31, 2023. Net investments in sales-type leases is summarized in the table below (in thousands):

At December 31, 2023, there was no reserve or estimate of credit loss on the financing leases.

Earnings from our net investments in sales-type leases were included in Income from finance leases in the consolidated financial statements, and totaled less than $0.1 million for the three months ended March 31, 2024. Prior to its reclassification to net investments in sales-type leases, earnings from this investment were recognized in Lease revenues in the consolidated financial statements.

Net Investments in Direct Financing Leases

During the third quarter of 2023, we reclassified an investment classified as a direct financing lease (comprised offour properties) with an aggregate carrying value of $14.6 million from Net investments in direct finance leases to Land, buildings and improvements in connection with a change in lease classification due to an extension of the underlying lease. Income from this direct financing lease was $0.4 million for the three months ended March 31, 2023. We had no net investments in direct financing leases as of March 31, 2024 and December 31, 2023.

Credit Quality of Finance Receivables

We evaluate the credit quality of our finance receivables utilizing an internal five-point credit rating scale, with one representing the highest credit quality and five representing the lowest. A credit quality of one through three indicates a range of investment grade to stable. A credit quality of four through five indicates a range of inclusion on the watch list to risk of default. The credit quality evaluation of our finance receivables is updated quarterly.

Our finance receivable internal credit quality rating was one as of December 31, 2023.

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Note 6. Intangible Assets and Liabilities

We have net lease intangibles that are being amortized over periods ranging fromone year to 40 years. In-place lease intangibles, at cost are included in In-place lease intangible assets and other in the consolidated financial statements. Above-market rent intangibles, at cost are included in Above-market rent intangible assets in the consolidated financial statements. Accumulated amortization of in-place lease and above-market rent intangibles is included in Accumulated depreciation and amortization in the consolidated financial statements. Below-market rent intangibles are included in Below-market rent intangible liabilities, net in the consolidated financial statements.

Intangible assets and liabilities are summarized as follows (in thousands):

During the three months ended March 31, 2024, the U.S. dollar strengthened against the British pound sterling, euro, and Norwegian krone, resulting in a decrease of $0.5 million in the carrying value of our net intangible assets from December 31, 2023 to March 31, 2024.

Net amortization of intangibles, including the effect of foreign currency translation, was $11.7 million and $10.8 million for the three months ended March 31, 2024 and 2023, respectively. Amortization of below-market rent and above-market rent intangibles is recorded as an adjustment to Lease revenues and amortization of in-place lease intangibles is included in Depreciation and amortization.

Note 7. Fair Value Measurements

The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities, and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments including interest rate caps, interest rate swaps, and foreign currency collars; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring us to develop our own assumptions.

Items Measured at Fair Value on a Recurring Basis

The methods and assumptions described below were used to estimate the fair value of each class of financial instrument. For significant Level 3 items, we have also provided the unobservable inputs.

Derivative Assets — Our derivative assets, which are included in Other assets, net in the consolidated financial statements, are comprised of interest rate caps (Note 8).

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The valuation of our derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves, spot and forward rates, and implied volatilities. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative instruments for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. These derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.

Our material financial instruments had the following carrying values and fair values as of the dates shown (in thousands):

(a)The carrying value of the NLOP Mortgage Loan, net includes unamortized deferred financing costs of $5.4 million and $6.7 million at March 31, 2024 and December 31, 2023, respectively. The carrying value of the NLOP Mezzanine Loan, net includes unamortized deferred financing costs of $1.9 million and $2.4 million at March 31, 2024 and December 31, 2023, respectively. The carrying value of Non-recourse mortgages, net includes unamortized deferred financing costs of less than $0.1 million at December 31, 2023. There wereno unamortized deferred financing costs on our Non-recourse mortgages, net as of March 31, 2024.

(b)The carrying value of the NLOP Mortgage Loan, net includes unamortized discount of $12.4 million and $15.3 million at March 31, 2024 and December 31, 2023, respectively. The carrying value of the NLOP Mezzanine Loan, net includes unamortized discount of $4.4 million and $5.6 million at March 31, 2024 and December 31, 2023, respectively. The carrying value of Non-recourse mortgages, net includes unamortized discount of $0.4 million and $0.7 million at March 31, 2024 and December 31, 2023, respectively.

(c)We determined the estimated fair value of our NLOP Mortgage Loan, NLOP Mezzanine Loan, and non-recourse mortgage loans using a discounted cash flow model that estimates the present value of the future loan payments by discounting such payments at current estimated market interest rates. The estimated market interest rates consider interest rate risk and the value of the underlying collateral, which includes quality of the collateral, the credit quality of the tenant/obligor, and the time until maturity.

We estimated that our other financial assets and liabilities, excluding finance receivables (Note 5), had fair values that approximated their carrying values at both March 31, 2024 and December 31, 2023.

Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)

We periodically assess whether there are any indicators that the value of our real estate investments may be impaired or that their carrying value may not be recoverable. There have been no significant changes in our impairment policies from what was disclosed in the 2023 Annual Report.

The following table presents information about assets for which we recorded an impairment charge and that were measured at fair value on a non-recurring basis (in thousands):

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Impairment charges, and their related triggering events and fair value measurements, recognized during the three months ended March 31, 2024, were as follows (during the three months ended March 31, 2023, we did not incur any impairment charges):

Real Estate

The impairment charges described below are reflected within Impairment charges — real estate in our consolidated statements of operations.

2024 — During the three months ended March 31, 2024, we recognized impairment charges totaling $4.1 million ontwo properties in order to reduce their carrying values to their estimated fair values, which approximated their estimated selling prices.