Net Lease Office Properties

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.

Net Lease Office Properties 6/30/2024 10-Q –9

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.

Net Lease Office Properties 6/30/2024 10-Q –10

At both June 30, 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 June 30, 2024 and December 31, 2023 include approximately $43.4 million and $48.4 million, respectively, 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 income for the period by the weighted-average number of common shares outstanding during the period post Spin-Off. For the six months ended June 30, 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 six months ended June 30, 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.

Net Lease Office Properties 6/30/2024 10-Q –11

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.

Net Lease Office Properties 6/30/2024 10-Q –12

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 June 30, 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 six months ended June 30, 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 $4.3 million from December 31, 2023 to June 30, 2024.

Depreciation expense, including the effect of foreign currency translation, on our buildings and improvements subject to operating leases was $6.1 million and $7.8 million for the three months ended June 30, 2024 and 2023, respectively, and $13.3 million and $15.5 million for the six months ended June 30, 2024 and 2023, respectively.

Dispositions of Properties

During the six months ended June 30, 2024, we disposed ofseven properties, which were classified as Land, buildings and improvements. As a result, the carrying value of our Land, buildings and improvements decreased by $165.3 million from December 31, 2023 to June 30, 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.

Net Lease Office Properties 6/30/2024 10-Q –13

Other Lease-Related Income

For the three and six months ended June 30, 2024, other lease-related income on our consolidated statements of operations included lease termination income of $3.1 million and $7.8 million, respectively, recognized from one tenant.

In addition, 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 for both the three months ended June 30, 2024 and 2023, and $1.0 million and $0.9 million for the six months ended June 30, 2024 and 2023, respectively.

Assets Held for Sale, Net

Below is a summary of our properties held for sale (in thousands):

At June 30, 2024, we hadone property classified as Assets held for sale, net, with a carrying value of $68.9 million.

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 six months ended June 30, 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 six months ended June 30, 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 Lease Office Properties 6/30/2024 10-Q –14

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 and $0.9 million for the three and six months ended June 30, 2023, respectively. We had no net investments in direct financing leases as of June 30, 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.

Note 6. Intangible Assets and Liabilities

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 six months ended June 30, 2024, the U.S. dollar strengthened against the British pound sterling, euro, and Norwegian krone, resulting in a decrease of $0.4 million in the carrying value of our net intangible assets from December 31, 2023 to June 30, 2024.

Net amortization of intangibles, including the effect of foreign currency translation, was $9.8 million and $10.8 million for the three months ended June 30, 2024 and 2023, respectively, and $21.5 million for both the six months ended June 30, 2024 and 2023. 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.

Net Lease Office Properties 6/30/2024 10-Q –15

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).

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 (Note 9) includes unamortized deferred financing costs of $1.5 million and $6.7 million at June 30, 2024 and December 31, 2023, respectively. The carrying value of the NLOP Mezzanine Loan, net (Note 9) includes unamortized deferred financing costs of $1.4 million and $2.4 million at June 30, 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 June 30, 2024.

(b)The carrying value of the NLOP Mortgage Loan, net (Note 9) includes unamortized discount of $3.3 million and $15.3 million at June 30, 2024 and December 31, 2023, respectively. The carrying value of the NLOP Mezzanine Loan, net (Note 9) includes unamortized discount of $3.2 million and $5.6 million at June 30, 2024 and December 31, 2023, respectively. The carrying value of Non-recourse mortgages, net includes unamortized discount of $0.1 million and $0.7 million at June 30, 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 June 30, 2024 and December 31, 2023.

Net Lease Office Properties 6/30/2024 10-Q –16

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):

Impairment charges, and their related triggering events and fair value measurements, recognized during the three and six months ended June 30, 2024, were as follows (we did not incur any impairment charges during the three and six months ended June 30, 2023):

Real Estate

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

2024 — During the three and six months ended June 30, 2024, we recognized impairment charges totaling $8.2 million ontwo properties and $12.3 million onfour properties, respectively, in order to reduce their carrying values to their estimated fair values, which approximated their estimated selling prices.

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.

Net Lease Office Properties 6/30/2024 10-Q –17

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 June 30, 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):

Amounts reported in Other comprehensive income (loss) related to interest rate derivative contracts will be reclassified to Interest expense as interest is incurred on our variable-rate debt. As of June 30, 2024, we estimate that an additional $0.8 million will be reclassified as Interest expense during the next 12 months.

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 (Note 9)), 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. Our objective in using these derivatives is to limit our exposure to interest rate movements.

Net Lease Office Properties 6/30/2024 10-Q –18

The interest rate caps that our consolidated subsidiaries had outstanding at June 30, 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 June 30, 2024. At June 30, 2024, both our total credit exposure and the maximum exposure to any single counterparty was $0.1 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 June 30, 2024, the NLOP Financing Arrangements were collateralized by 32 of our properties, following the dispositions ofeight properties during 2023 and 2024.

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 firstone-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%,25%, and 30% deleveraging thresholds during the first, second, and third 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, with excess net proceeds, if any, used to repay the NLOP Mortgage Loan. Property sales are subject to the satisfaction of certain conditions, including satisfaction of a debt yield test and minimum release prices. During the six months ended June 30, 2024, we repaid $156.9 million and $25.0 million of outstanding principal on the NLOP Mortgage Loan and NLOP Mezzanine Loan, respectively, using proceeds from certain dispositions and lease terminations, as well as excess cash from operations. In July and August 2024, we repaid $58.1 million and $8.4 million of outstanding principal on the NLOP Mortgage Loan and NLOP Mezzanine Loan, respectively, using proceeds from a disposition and lease terminations, as well as excess cash from operations (Note 15).

Net Lease Office Properties 6/30/2024 10-Q –19

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 $3.3 million and $15.3 million at June 30, 2024 and December 31, 2023, respectively, and unamortized deferred financing costs of $1.5 million and $6.7 million at June 30, 2024 and December 31, 2023, respectively.

(d)Balance excludes unamortized discount of $3.2 million and $5.6 million at June 30, 2024 and December 31, 2023, respectively, and unamortized deferred financing costs of $1.4 million and $2.4 million at June 30, 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 June 30, 2024, our non-recourse mortgage notes payable encumbered seven properties, with an aggregate weighted-average interest rate of 4.5% (fixed-rate and variable-rate non-recourse mortgage notes payable were 4.4% and 4.8%, respectively), and maturity dates ranging from January 2025 to May 2026.

Repayments

During the six months ended June 30, 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 six months ended June 30, 2023, we prepaid Parent debt totaling $1.7 million.

Foreign Currency Exchange Rate Impact

During the six months ended June 30, 2024, the U.S. dollar strengthened against the Norwegian krone, resulting in a decrease of $1.9 million in the aggregate carrying value of our Non-recourse mortgages, net from December 31, 2023 to June 30, 2024.

Net Lease Office Properties 6/30/2024 10-Q –20

Scheduled Mortgage Debt Principal Payments

Scheduled mortgage debt principal payments as of June 30, 2024 are as follows (in thousands):

Certain amounts in the table above are based on the applicable foreign currency exchange rate at June 30, 2024.

Note 10. Commitments and Contingencies

At June 30, 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 and $0.2 million for the three and six months ended June 30, 2024, respectively, which was included in General and administrative expense in the consolidated financial statements.

Restricted and Conditional Awards

As of both June 30, 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 June 30, 2024, total unrecognized compensation expense related to these awards was approximately $0.1 million, with an aggregate weighted-average remaining term of 0.3 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.

Net Lease Office Properties 6/30/2024 10-Q –21

Earnings Per Share

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

For the three months ended June 30, 2024, diluted earnings per share reflects potentially dilutive securities using the treasury stock method. For the six months ended June 30, 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 and six months ended June 30, 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):

Net Lease Office Properties 6/30/2024 10-Q –22

See Note 8 for additional information on our derivatives activity recognized within Other comprehensive income (loss) 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 and six months ended June 30, 2024 and 2023.

Current income tax (expense) benefit was $(0.3) million and $0.1 million for the three months ended June 30, 2024 and 2023, respectively. Deferred income tax benefit was $0.2 million and $0.3 million for the three months ended June 30, 2024 and 2023, respectively.

Current income tax expense was $0.7 million and $0.7 million for the six months ended June 30, 2024 and 2023, respectively. Deferred income tax benefit was $0.3 million and $0.7 million for the six months ended June 30, 2024 and 2023, respectively.

Note 13. Property Dispositions

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

During the three and six months ended June 30, 2024, we sold four andsix properties, respectively, for total proceeds, net of selling costs, of $152.4 million and $195.2 million, respectively, and recognized a net loss on these sales totaling $40.0 million and $24.2 million, respectively (inclusive of income taxes totaling $0.1 million recognized upon sale during the six months ended June 30, 2024).

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 $19.3 million and mortgage principal outstanding of $19.8 million, respectively, on the date of transfer, to the mortgage lender, resulting in a net loss of $1.0 million (we also wrote off $1.4 million of working capital).

Net Lease Office Properties 6/30/2024 10-Q –23

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, resulting in a net loss of $1.3 million (we also wrote off $1.2 million of working capital).

Note 14. Geographic Information

Our portfolio is comprised of domestic and international investments. At June 30, 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 and six months ended June 30, 2024 or 2023, or at least 10% of our total long-lived assets at June 30, 2024 or December 31, 2023. One domestic tenant comprised (i)22.4% and 17.3% of our total lease revenues for the three months ended June 30, 2024 and 2023, respectively, and 20.3% and 17.6% for the six months ended June 30, 2024 and 2023, respectively, and (ii)17.7% and 14.4% of our total long-lived assets at June 30, 2024 and December 31, 2023, respectively. Another domestic tenant comprised 12.1% and 10.1% of our total lease revenues for the three months ended June 30, 2024 and 2023, respectively, and 11.3% and 9.6% for the six months ended June 30, 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 six months ended June 30, 2024 (Note 4, Note 5, Note 13).

Note 15. Subsequent Events

Dispositions

In August 2024, we sold a property located in Scottsdale, Arizona, for gross proceeds of $71.5 million. This property was included in the collateral pool for the NLOP Financing Arrangements at the time of sale and net proceeds from the sale were used to repay portions of the NLOP Financing Arrangements, as described below (Note 9).

Lease Termination Proceeds

In July 2024, two tenants exercised their early lease termination options and we received termination proceeds of $3.5 million.

Repayments of NLOP Financing Arrangements

In July and August 2024, we repaid $58.1 million and $8.4 million of outstanding principal on the NLOP Mortgage Loan and NLOP Mezzanine Loan, respectively, using proceeds from the sale of the property and the lease terminations described above, as well as excess cash from operations (Note 9). As a result of these repayments, we reached the third and final deleveraging threshold for the NLOP Mortgage Loan, which was repayments on the original loan balance totaling 30% (or $100.5 million) on or prior to November 1, 2026, such that 70% of the loan has been repaid (Note 9). Following the sale of the property described above, as of the date of this Report, the NLOP Financing Arrangements were collateralized by 31 of our properties (Note 9).

Net Lease Office Properties 6/30/2024 10-Q –24