Net Lease Office Properties

Note 8. Risk Management and Use of Derivative Financial Instruments

Risk Management

In the normal course of our ongoing business operations, we encounter economic risk. There are four main components of economic risk that impact us: interest rate risk, credit risk, market risk, and foreign currency risk. We are primarily subject to interest rate risk on our interest-bearing liabilities, including our unhedged variable-rate non-recourse mortgage loans. Credit risk is the risk of default on our operations and our tenants’ inability or unwillingness to make contractually required payments. Market risk includes changes in the value of our properties and related loans, due to changes in interest rates or other market factors. We own investments in the United States and Europe and are subject to risks associated with fluctuating foreign currency exchange rates.

Derivative Financial Instruments

There have been no significant changes in our derivative financial instrument policies from what was disclosed in the 2023 Annual Report. At both March 31, 2024 and December 31, 2023, no cash collateral had been posted nor received for any of our derivative positions.

The following table sets forth certain information regarding our derivative instruments (in thousands):

The following tables present the impact of our derivative instruments in the consolidated financial statements (in thousands):

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Amounts reported in Other comprehensive (loss) income related to interest rate derivative contracts will be reclassified to Interest expense as interest is incurred on our variable-rate debt. As of March 31, 2024, we estimate that an additional $0.9 million will be reclassified as Interest expense during the next 12 months.

The following table presents the impact of our derivative instruments in the consolidated financial statements (in thousands):

See below for information on our purposes for entering into derivative instruments.

Interest Rate Caps

We are exposed to the impact of interest rate changes primarily through our borrowing activities. We have obtained, and may in the future obtain, variable-rate debt (our NLOP Financing Arrangements), and, as a result, we have entered into, and may continue to enter into, interest rate cap agreements with counterparties. Interest rate caps limit the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.

The interest rate caps that our consolidated subsidiaries had outstanding at March 31, 2024 are summarized as follows (currency in thousands):

Credit Risk-Related Contingent Features

We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of any collateral received. No collateral was received as of March 31, 2024. At March 31, 2024, both our total credit exposure and the maximum exposure to any single counterparty was $0.4 million.

Note 9. Debt

Debt Facility

On September 20, 2023, in connection with the Spin-Off (Note 1), we and certain of our wholly-owned subsidiaries entered into financing arrangements for which funding was subject to certain conditions (including the closing of the Spin-Off), including (i) a $335.0 million senior secured mortgage loan with an original maturity on November 9, 2025, withtwo separateone-year extension options subject to certain conditions (the “NLOP Mortgage Loan”) and (ii) a $120.0 million mezzanine loan facility maturing on November 9, 2028 (the “NLOP Mezzanine Loan” and, together with the NLOP Mortgage Loan, the “NLOP Financing Arrangements”). Upon closing of the Spin-Off on November 1, 2023 (Note 1), the NLOP Financing Arrangements were drawn in full, and approximately $343.9 million of the proceeds from the financing (net of transaction expenses) was transferred to WPC in connection with the Spin-Off.

The NLOP Financing Arrangements were initially collateralized by the assignment of 40 of our previously unencumbered real estate properties. As of March 31, 2024, the NLOP Financing Arrangements were collateralized by 36 of our properties, following the dispositions offour properties in December 2023.

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The NLOP Mortgage Loan bears interest at an annual rate of one-month forward-looking term rate based on the Secured Overnight Financing Rate (“SOFR”), subject to a floor of 3.85%, plus 5.0%. In addition, we entered into an interest rate cap agreement that limits our SOFR rate exposure to 5.35% (Note 8). The NLOP Mezzanine Loan bears interest at an annual rate of 14.5% (10.0% of which is required to be paid current on a monthly basis, and 4.5% of which is a payment-in-kind accrual, on a quarterly basis).

The NLOP Mortgage Loan is subject to certain deleveraging thresholds that require us to make repayments on the original loan balance totaling (i)15% (or $50.3 million) on or prior to November 1, 2024, which is 12 months following the funding date of the loan; (ii)25% (or $83.8 million) on or prior to November 1, 2025, which is 12 months following the initial deleveraging threshold of the loan, such that no less than 40% of the loan has been repaid, and (iii) in the event we exercise the first one-year extension option,30% (or $100.5 million) on or prior to November 1, 2026, which is 12 months following the second deleveraging threshold of the loan, such that no less than 70% of the loan has been repaid. To the extent the deleveraging thresholds are not met, we may be subject to certain fees and restrictions, in accordance with the terms of the NLOP Financing Arrangements, until these thresholds are met. We reached the 15% and 25% deleveraging thresholds during the first and second quarters of 2024, respectively (Note 15).

We are required to use the net proceeds from property sales collateralizing the NLOP Financing Arrangements to repay the portions of the NLOP Mortgage Loan and NLOP Mezzanine Loan representing the release amount for any individual property sale. Property sales are subject to the satisfaction of certain conditions, including satisfaction of a debt yield test and minimum release prices. During the three months ended March 31, 2024, we repaid $11.3 million of outstanding principal on the NLOP Mortgage Loan using excess cash from operations. In April 2024, we repaid $78.1 million and $14.5 million of outstanding principal on the NLOP Mortgage Loan and NLOP Mezzanine Loan, respectively, using proceeds from certain dispositions (Note 15).

The following table presents a summary of our NLOP Financing Arrangements (dollars in thousands):

(a)Interest rate is based on SOFR plus 5.0%. The interest rate is subject to an interest rate cap that limits our SOFR rate exposure at 5.35%.

(b)The NLOP Mortgage Loan is subject totwo separateone-year extension options.

(c)Balance excludes unamortized discount of $12.4 million and $15.3 million at March 31, 2024 and December 31, 2023, respectively, and unamortized deferred financing costs of $5.4 million and $6.7 million at March 31, 2024 and December 31, 2023, respectively.

(d)Balance excludes unamortized discount of $4.4 million and $5.6 million at March 31, 2024 and December 31, 2023, respectively, and unamortized deferred financing costs of $1.9 million and $2.4 million at March 31, 2024 and December 31, 2023, respectively.

Non-Recourse Mortgages

Non-recourse mortgages consist of mortgage notes payable, which are collateralized by the assignment of real estate properties. At March 31, 2024, our non-recourse mortgage notes payable encumbered nine properties, with an aggregate weighted-average interest rate of 4.8% (fixed-rate and variable-rate non-recourse mortgage notes payable were both 4.8%), and maturity dates ranging from April 2024 to May 2026. In April 2024, we transferred ownership oftwo properties and the related non-recourse mortgage loans (which had an aggregate outstanding principal balance of $33.0 million and maturity dates in April 2024) to the respective lenders (Note 15).

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Repayments

During the three months ended March 31, 2024, we prepaid one non-recourse mortgage loan for $19.2 million. We recognized a net loss on extinguishment of debt of $0.3 million on this repayment, which is included within Other gains and (losses) on our consolidated statements of operations. The interest rate for this non-recourse mortgage loan on its date of repayment was 5.2%. As a result of this repayment, WPC no longer serves as guarantor for any of our non-recourse mortgage loans.

Parent Debt

Prior to the Spin-Off, certain wholly-owned affiliates of WPC entered into debt agreements with the international NLOP entities to provide the funding necessary to acquire certain international assets. In connection with the Spin-Off, WPC assigned to us the receivable related to these debt amounts, which eliminates in consolidation. These debt instruments were reflected in these financials as Parent debt. During the three months ended March 31, 2023, we prepaid Parent debt totaling $1.5 million.

Foreign Currency Exchange Rate Impact

During the three months ended March 31, 2024, the U.S. dollar strengthened against the Norwegian krone, resulting in a decrease of $2.6 million in the aggregate carrying value of our Non-recourse mortgages, net from December 31, 2023 to March 31, 2024.

Scheduled Mortgage Debt Principal Payments

Scheduled mortgage debt principal payments as of March 31, 2024 are as follows (in thousands):

Certain amounts in the table above are based on the applicable foreign currency exchange rate at March 31, 2024.

Note 10. Commitments and Contingencies

At March 31, 2024, we were not involved in any material litigation. Various claims and lawsuits arising in the normal course of business are pending against us. The results of these proceedings are not expected to have a material adverse effect on our consolidated financial position or results of operations.

Note 11. Stock-Based Compensation and Equity

Stock-Based Compensation

We maintain a stock-based compensation plan, which is more fully described in the 2023 Annual Report. The total compensation expense for awards issued under this plan was less than $0.1 million for the three months ended March 31, 2024, which was included in General and administrative expense in the consolidated financial statements.

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Restricted and Conditional Awards

As of both March 31, 2024 and December 31, 2023, we had 28,653 shares of nonvested restricted stock units (“RSUs”) with a weighted-average grant date fair value of $10.47. The grant date fair value of RSUs reflect our share price on the date of grant on a one-for-one basis. At March 31, 2024, total unrecognized compensation expense related to these awards was approximately $0.2 million, with an aggregate weighted-average remaining term of 0.6 years.

Equity

Common Shares

During the fourth quarter of 2023, our Board of Trustees declared a dividend of $0.34 per share, which was paid on January 29, 2024 to shareholders of record as of December 18, 2023. Shareholders had the option to elect to receive their dividend in the form of cash or additional NLOP shares, with the aggregate amount of cash distributed by NLOP limited to a maximum of 20% of the total dividend. The total number of shares issued in the share dividend was 164,199 shares. Cash paid in connection with the share dividend totaled $1.1 million, which includes cash paid in lieu of fractional shares.

Earnings Per Share

The following table summarizes basic and diluted earnings (dollars in thousands):

For the three months ended March 31, 2024, we recognized net loss. Therefore, all potentially dilutive securities are antidilutive and accordingly, basic net loss per share equals diluted net loss per share. For the three months ended March 31, 2023, there were no potentially dilutive securities excluded from the computation of diluted earnings per share.

Reclassifications Out of Accumulated Other Comprehensive Loss

The following tables present a reconciliation of changes in Accumulated other comprehensive loss by component for the periods presented (in thousands):

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See Note 8 for additional information on our derivatives activity recognized within Other comprehensive (loss) income for the periods presented.

Note 12. Income Taxes

We intend to qualify and elect to be treated as a REIT commencing with our taxable year ended December 31, 2023 and believe that we have been organized and have operated in such a manner to qualify as a REIT for federal and state income tax purposes. As a REIT, we would generally not be subject to corporate level federal income taxes on earnings distributed to our shareholders. Accordingly, we have not included any provisions for federal income taxes related to the REIT in the accompanying consolidated financial statements for the three months ended March 31, 2024 and 2023.

Current income tax expense was $0.3 million and $0.8 million for the three months ended March 31, 2024 and 2023, respectively. Deferred income tax benefit was $0.1 million and $0.4 million for the three months ended March 31, 2024 and 2023, respectively.

Note 13. Property Dispositions

Our property dispositions are also discussed in Note 4 and Note 5.

During the three months ended March 31, 2024, we soldtwo properties for total proceeds, net of selling costs, of $42.8 million and recognized a net loss on these sales totaling $15.8 million (inclusive of income taxes totaling $0.1 million recognized upon sale).

Note 14. Geographic Information

Our portfolio is comprised of domestic and international investments. At March 31, 2024, our international investments were comprised of investments in Poland, United Kingdom, and Norway. No international tenant or country individually comprised at least 10% of our total lease revenues for the three months ended March 31, 2024 or 2023, or at least 10% of our total long-lived assets at March 31, 2024 or December 31, 2023. One domestic tenant comprised (i)18.4% and 18.0% of our total lease revenues for the three months ended March 31, 2024 and 2023, respectively, and (ii)15.4% and 14.4% of our total long-lived assets at March 31, 2024 and December 31, 2023, respectively. Another domestic tenant comprised 10.5% and 9.2% of our total lease revenues for the three months ended March 31, 2024 and 2023, respectively. The following tables present the geographic information (in thousands):

(a)Consists of Net investments in real estate.

(b)We soldtwo international properties during the three months ended March 31, 2024 (Note 4, Note 5, Note 13).

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Note 15. Subsequent Events

Dispositions

In April 2024, we transferred ownership of a property in Warrenville, Illinois, and the related non-recourse mortgage loan, which had an aggregate net asset carrying value of approximately $19.5 million and mortgage principal outstanding of $19.8 million, respectively, on the date of transfer, to the mortgage lender (Note 9).

In April 2024, we transferred ownership of a property in Tempe, Arizona, and the related non-recourse mortgage loan, which had an aggregate net asset carrying value of approximately $13.3 million and mortgage principal outstanding of $13.2 million, respectively, on the date of transfer, to the mortgage lender (Note 9).

In April 2024, we soldtwo properties for gross proceeds totaling $98.5 million, including (i) a property in Collierville, Tennessee, for gross proceeds of $62.5 million, and (ii) a property in Hoffman Estates, Illinois, for gross proceeds of $36.0 million. These properties were included in the collateral pool for the NLOP Financing Arrangements at the time of sales and net proceeds from the sales were used to repay portions of the NLOP Financing Arrangements, as described below (Note 9).

Repayments of NLOP Financing Arrangements

In April 2024, we repaid $78.1 million and $14.5 million of outstanding principal on the NLOP Mortgage Loan and NLOP Mezzanine Loan, respectively, using proceeds from the sales of properties described above (Note 9). As a result of these repayments, we reached the second deleveraging threshold for the NLOP Mortgage Loan, which was repayments on the original loan balance totaling 25% (or $83.8 million) on or prior to November 1, 2025 (Note 9). Following the sales of the properties described above, as of the date of this Report, the NLOP Financing Arrangements were collateralized by 34 of our properties (Note 9).

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