Net Lease Office Properties

Note 2. Basis of Presentation

Basis of Presentation

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, 2024, which are included in the 2024 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.

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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.

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 2024 Annual Report.

At both March 31, 2025 and December 31, 2024, 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, 2025 and December 31, 2024 include approximately $35.8 million and $41.7 million, respectively, related to certain reserve requirements pursuant to the NLOP Financing Arrangements (Note 8). In April 2025, we fully repaid the NLOP Mezzanine Loan (Note 13).

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 period. Diluted earnings per share reflects potentially dilutive securities using the treasury stock method, except when the effect would be anti-dilutive. For the three months ended March 31, 2025, there were no potentially dilutive securities. Therefore, basic net income per share equals diluted net income per share for the three months ended March 31, 2025. 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.

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Foreign Currency Translation and Transaction Gains and Losses

As of March 31, 2025, we owned an international real estate investment in Norway, for which the primary functional currency is the Norwegian krone. We perform the translation from this currency to the U.S. dollar for assets and liabilities using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the average exchange rate during the month in which the transaction occurs. We report the gains and losses resulting from such translation as a component of other comprehensive income in equity. These translation gains and losses are reclassified out of foreign currency translation adjustments (within Accumulated other comprehensive loss in the consolidated balance sheets) and released to net income (within Loss on sale of real estate, net, in the consolidated statements of operations) when we have substantially exited from all investments in the related currency. During the three months ended March 31, 2025, we exited all investments denominated in euros (Note 10, Note 12).

Recent Accounting Pronouncements

In December 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 requires public companies to annually (i) disclose specific categories in the rate reconciliation disclosure and (ii) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than five percent of the amount computed by multiplying pre-tax income or loss by the applicable statutory income tax rate). ASU 2023-09 also requires entities to disclose their income tax payments to international, federal, state, and local jurisdictions, among other changes. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.

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):

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Other Transactions with Related Parties

At March 31, 2025, 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, Finance Receivables and Assets Held for Sale

Land, Buildings and Improvements

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

During the three months ended March 31, 2025, the U.S. dollar weakened against the Norwegian krone and euro. As a result of this fluctuation in foreign currency exchange rates, the carrying value of our Land, buildings and improvements increased by $2.0 million from December 31, 2024 to March 31, 2025.

Depreciation expense, including the effect of foreign currency translation, on our buildings and improvements subject to operating leases was $4.3 million and $7.1 million for the three months ended March 31, 2025 and 2024, respectively.

During the three months ended March 31, 2025, we capitalized accrued costs of $1.0 million within Land, buildings and improvements for capital expenditures.

Dispositions of Properties

During the three months ended March 31, 2025, we disposed oftwo properties, which were classified as Land, buildings and improvements. As a result, the carrying value of our Land, buildings and improvements decreased by $8.7 million from December 31, 2024 to March 31, 2025 (Note 12).

Real Estate Under Construction

During the three months ended March 31, 2025, we capitalized $0.8 million of real estate under construction related to a maintenance project at a property.

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 (CPI) 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, 2025 and 2024, other lease-related income on our consolidated statements of operations included lease termination income of $0.9 million and $4.7 million, respectively.

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 at both three months ended March 31, 2025 and 2024.

Finance Receivables

During the first quarter of 2024, we sold a property classified as net investments in sales-type 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. We had no net investments in finance leases as of March 31, 2025 and December 31, 2024.

Assets Held for Sale, Net

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

As of both March 31, 2025 and December 31, 2024, we hadone property classified as Assets held for sale, net, with a carrying value of $29.3 million.

Note 5. 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):

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Net amortization of intangibles, including the effect of foreign currency translation, was $5.5 million and $11.7 million for the three months ended March 31, 2025 and 2024, 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 6. 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 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; 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 7).

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 (dollars in thousands):

(a)The carrying value of the NLOP Mezzanine Loan, net (Note 8) includes unamortized deferred financing costs of $0.7 million and $1.0 million at March 31, 2025 and December 31, 2024, respectively.

(b)The carrying value of Non-recourse mortgages, net includes unamortized premium of $0.7 million and $0.4 million at March 31, 2025 and December 31, 2024, respectively. The carrying value of the NLOP Mezzanine Loan, net (Note 8) includes unamortized discount of $1.7 million and $2.2 million at March 31, 2025 and December 31, 2024, respectively.

(c)We determined the estimated fair value of our non-recourse mortgage loans and NLOP Mezzanine Loan 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.

(d)In April 2025, we fully repaid the NLOP Mezzanine Loan (Note 13).

We estimated that our other financial assets and liabilities had fair values that approximated their carrying values at both March 31, 2025 and December 31, 2024.

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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 2024 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 months ended March 31, 2025 and 2024, were as follows:

Real Estate

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

2025 — During the three months ended March 31, 2025, we recognized an impairment charge of $0.9 million onone property, in order to reduce its carrying value to its estimated fair value, which approximated its estimated selling price.

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. These properties were sold during 2024.

Note 7. 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 2024 Annual Report. At both March 31, 2025 and December 31, 2024, 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):

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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 were reclassified to Interest expense as interest was incurred on our variable-rate debt.

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 8)), 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.

During the third quarter of 2024, we de-designated our interest rate cap as a hedging instrument, since we determined that the derivative is no longer highly effective, given mismatches between the hedged notional of the interest rate cap versus the outstanding principal on the NLOP Mortgage Loan (which was fully repaid during 2024 and is defined in Note 8).

The interest rate caps that our consolidated subsidiaries had outstanding at March 31, 2025 are summarized as follows (currency in thousands):

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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, 2025. At March 31, 2025, both our total credit exposure and the maximum exposure to any single counterparty was less than $0.1 million.

Note 8. Debt

Debt Facility

As of both March 31, 2025 and December 31, 2024, we had a mezzanine loan facility with an original principal balance of $120.0 million maturing on November 9, 2028 (the “NLOP Mezzanine Loan”). This mezzanine loan was originally part of the NLOP Financing Arrangements, which also included a senior secured mortgage loan that was fully repaid during the year ended December 31, 2024 (the “NLOP Mortgage Loan”), using proceeds from certain dispositions, as well as cash flow from rent on our properties and other sources. As of March 31, 2025, the remaining outstanding principal balance on the NLOP Mezzanine Loan was secured by pledges of equity in 25 of our properties.

The NLOP Mezzanine Loan bore interest at an annual rate of 14.5% (10.0% of which was required to be paid current on a monthly basis, and 4.5% of which was a payment-in-kind accrual, on a quarterly basis).

During the three months ended March 31, 2025, we repaid $25.5 million of outstanding principal on the NLOP Mezzanine Loan, using proceeds from certain dispositions, as well as cash flow from rent on our properties and other sources. In April 2025, we fully repaid the NLOP Mezzanine Loan, which had $35.6 million of outstanding principal as of March 31, 2025, using excess cash from operations and other sources, including loan reserves (Note 13).

The following table presents a summary of our NLOP Mezzanine Loan (dollars in thousands):

(a)Balance excludes unamortized discount of $1.7 million and $2.2 million at March 31, 2025 and December 31, 2024, respectively, and unamortized deferred financing costs of $0.7 million and $1.0 million at March 31, 2025 and December 31, 2024, 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, 2025, our non-recourse mortgage notes payable encumberedsix properties, with an aggregate weighted-average interest rate of 5.6% (fixed-rate and variable-rate non-recourse mortgage notes payable were 6.1% and 4.9%, respectively), and maturity dates ranging from April 2025 to May 2026.

The non-recourse mortgage loan encumbering our property located in Norway with a principal balance outstanding of $42.8 million and a maturity date of December 2025 is in a loan-to-value covenant breach as of March 31, 2025, and the lender has the right to demand payment in full. As of date of this Report, the lender has not exercised such a right.

The non-recourse mortgage loan encumbering a domestic property with a principal balance outstanding of $25.2 million was not repaid on its maturity date of January 6, 2025, and the lender has the right to commence foreclosure proceedings. As of the date of this Report, the lender has not exercised such a right. This loan has accrued default interest at an annual rate of 5.0% since the original maturity date, in addition to the base interest rate of 4.2%.

Foreign Currency Exchange Rate Impact

During the three months ended March 31, 2025, the U.S. dollar weakened against the Norwegian krone, resulting in an increase of $3.0 million in the aggregate carrying value of our Non-recourse mortgages, net from December 31, 2024 to March 31, 2025.

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Scheduled Mortgage Debt Principal Payments

Scheduled mortgage debt principal payments as of March 31, 2025 are as follows (in thousands):

(a)In April 2025, the maturity dates fortwo non-recourse mortgage loans with principal outstanding totaling $30.8 million were extended from May 2025 to March 2026 and July 2026 (Note 13).

(b)Represents the NLOP Mezzanine Loan, which was fully repaid in April 2025 (Note 13).

Certain amounts in the table above are based on the applicable foreign currency exchange rate at March 31, 2025.

Note 9. Commitments and Contingencies

At March 31, 2025, 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 10. Stock-Based Compensation and Equity

Stock-Based Compensation

We maintain a stock-based compensation plan, which is more fully described in the 2024 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 expenses in the consolidated financial statements. There were no stock-based compensation awards outstanding as of March 31, 2025 and December 31, 2024.

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):

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For the three months ended March 31, 2025, there were no potentially dilutive securities. Therefore, basic net income per share equals diluted net income per share for the three months ended March 31, 2025. 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.

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):

See Note 7 for additional information on our derivatives activity recognized within Other comprehensive income (loss) for the periods presented.

Note 11. Income Taxes

We elected to be taxed as a REIT under Section 856 through 860 of the Internal Revenue Code effective as of November 1, 2023. In order to maintain our qualification as a REIT, we are required, among other things, to distribute at least 90% of our REIT net taxable income to our stockholders and meet certain tests regarding the nature of our income and assets. As a REIT, we are not subject to federal income taxes on our income and gains that we distribute to our stockholders as long as we satisfy certain requirements, principally relating to the nature of our income and the level of our distributions, as well as other factors. We believe that we have operated, and we intend to continue to operate, in a manner that allows us to continue to qualify as a REIT. We conduct business in the United States and Europe, and as a result, we or one or more of our subsidiaries file income tax returns in the United States federal jurisdiction and various state, local, and foreign jurisdictions. 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, 2025 and 2024.

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Current income tax expense was less than $0.1 million and $0.3 million for the three months ended March 31, 2025 and 2024, respectively. Deferred income tax benefit was $0.1 million for the three months ended March 31, 2024. No such benefit was recorded for the three months ended March 31, 2025.

Note 12. Property Dispositions

Our property dispositions are also discussed in Note 4.

During the three months ended March 31, 2025, we soldtwo properties, for total proceeds, net of selling costs, of $9.2 million and recognized a net loss on these sales totaling $1.0 million. In connection with the sale of a property in Poland in March 2025, and in accordance with ASC 830-30-40, Foreign Currency Matters, we reclassified an aggregate of $1.1 million of net foreign currency translation losses from Accumulated other comprehensive loss to Loss on sale of real estate, net (as an increase to Loss on sale of real estate, net), since the sale represented a disposal of all of our investments denominated in euros (Note 2, Note 10).

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 13. Subsequent Events

Full Repayment of NLOP Mezzanine Loan

In April 2025, we fully repaid the NLOP Mezzanine Loan, which had $35.6 million of outstanding principal as of March 31, 2025, using excess cash from operations and other sources, including loan reserves (Note 8).

Loan Maturity Extensions

In May 2025, the maturity dates fortwo non-recourse mortgage loans with principal outstanding totaling $30.8 million were extended from May 2025 to March 2026 and July 2026. The annual interest rates for these loans were revised from 4.0% to 7.0% during the extension period (Note 8).

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