# Net Lease Office Properties: Form 10-Q for the period ended Sep 30, 2023

- Company: [Net Lease Office Properties](/companies/nlop.md) (CIK 1952976)
- Form: 10-Q
- Filed: 2023-11-17
- Accepted by EDGAR: Nov 17, 2023, 16:51 ET
- Period: 2023-09-30
- Accession: 0001628280-23-039494
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1952976/000162828023039494/nlop-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1952976/000162828023039494/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $0 | us-gaap:Revenues |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$239 | us-gaap:NetIncomeLoss |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.24 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.24 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 1,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$303 | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2023-09-30 | $1 | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-09-30 | $65 | us-gaap:Assets |
| Shareholders' equity | at 2023-09-30 | $65 | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 32,368 characters.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. This item also provides our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results. Certain risks may cause our actual results, performance, or achievements to differ materially from those expressed or implied by the following discussion. For a complete discussion of such risk factors, see the section titled “Risk Factors” included in the preliminary information statement included as Exhibit 99.1 to the Company’s Registration Statement on Form 10 (File No. 001-41812) (the “Form 10”) filed with the U.S. Securities and Exchange Commission (the “SEC”) on October 4, 2023, the final version of which was included as Exhibit 99.1 to the Current Report on Form 8-K/A filed with the SEC on October 11, 2023 (the “Information Statement”).

### Basis of Presentation

The historical results of operations and liquidity and capital resources of NLOP Predecessor do not represent the historical results of operations and liquidity and capital resources 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 on a combined basis, in each case, in accordance with GAAP. Intercompany transactions and balances have been eliminated in combination. The preparation of the financial results of NLOP Predecessor required management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the relevant reporting periods and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

The financial results of NLOP Predecessor reflect the revenues and direct expenses of the NLOP Predecessor and include material assets and liabilities of WPC that are specifically attributable to the NLOP Predecessor. NLOP Predecessor equity represents the excess of total assets over total liabilities. Predecessor 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 Separation, as well as the allocated costs and expenses.

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

### Spin-Off

On November 1, 2023, WPC completed the Spin-Off of 59 office properties into NLOP. The Spin-Off was accomplished via a pro rata dividend of 1 NLOP common share for every 15 shares of WPC common stock outstanding, resulting in a distribution of an aggregate of 14,620,919 NLOP common shares. Following the closing of the Spin-Off, NLOP operates as a separate publicly-traded REIT, for which wholly-owned subsidiaries of WPC serve as advisors pursuant to the NLOP Advisory Agreements executed in connection with the Spin-Off (Note 12).

### Emerging Growth Company

NLOP is an “emerging growth company,” as defined in Section 2(a) of the U.S. Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in NLOP’s periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation, and stockholder approval of any golden parachute payments not previously approved.

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. NLOP has elected to take advantage of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, NLOP, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of NLOP’s financial statements with certain other public companies difficult or impossible because of the potential differences in accounting standards used.

NLOP will remain an emerging growth company until the earlier of: (i) the last day of the fiscal year (a) following the fifth anniversary of the closing of the Distribution, (b) in which NLOP has total annual gross revenue of at least $1.235 billion, or (c) in which NLOP is deemed to be a large accelerated filer, which means the market value of the common equity of NLOP that is held by non-affiliates exceeds $700 million as of the last business day of its most recently completed second fiscal quarter; and (ii) the date on which NLOP has issued more than $1.00 billion in non-convertible debt securities during the prior three-year period. References herein to “emerging growth company” have the meaning associated with it in the JOBS Act.

### Financial Highlights

### Summary Results

#### (in thousands)

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Total revenues | $43,106 | $40,301 | $128,571 | $113,615 |
| Net income attributable to NLOP Predecessor | 2,764 | 1,080 | 10,332 | 13,729 |
| Net cash provided by operating activities |  |  | 63,869 | 67,318 |
| Net cash used in investing activities |  |  | (4,617) | (21,111) |
| Net cash used in financing activities |  |  | (59,016) | (47,559) |
| Supplemental financial measures (a): |  |  |  |  |
| Funds from operations attributable to NLOP Predecessor (FFO) | 20,497 | 17,585 | 63,403 | 59,161 |
| Adjusted funds from operations attributable to NLOP Predecessor (AFFO) | 24,212 | 22,930 | 72,310 | 65,580 |

(a) We consider Funds from operations (“FFO”) and Adjusted funds from operations (“AFFO”), supplemental measures that are not defined by GAAP (a “non-GAAP measure”), to be important measures in the evaluation of our operating performance. See Supplemental Financial Measures below for our definition of this non-GAAP measure and a reconciliation to its most directly comparable GAAP measure.

#### Revenues

Total revenues increased for the three and nine months ended September 30, 2023 as compared to the same periods in 2022, primarily due to higher lease revenues contributed from the nine properties acquired in the CPA:18 Merger, which closed on August 1, 2022.

#### Net Income Attributable to NLOP Predecessor

Net income attributable to NLOP Predecessor increased for the three months ended September 30, 2023 as compared to the same period in 2022, primarily due to lower separation and distribution costs.

Net income attributable to NLOP Predecessor decreased for the nine months ended September 30, 2023 as compared to the same period in 2022, primarily due to higher interest expense, partially offset by the accretive impact of the CPA:18 Merger.

#### FFO

FFO increased for the three and nine months ended September 30, 2023 as compared to the same periods in 2022, primarily due to lower separation and distribution costs and the accretive impact of the CPA:18 Merger.

#### AFFO

AFFO increased for the three and nine months ended September 30, 2023 as compared to the same periods in 2022, primarily due to the accretive impact of the CPA:18 Merger.

### Portfolio Overview

### Portfolio Summary

Portfolio information is provided on a pro rata basis, unless otherwise noted below, to better illustrate the economic impact of our one jointly owned investment. See Terms and Definitions below for a description of pro rata amounts.

|  | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| ABR (in thousands) | $145,043 | $140,572 |
| Number of properties | 59 | 59 |
| Occupancy | 97.1% | 97.1% |
| Weighted-average lease term (in years) | 5.7 | 6.2 |
| Leasable square footage (in thousands) (a) | 8,682 | 8,678 |

(a) Excludes 0.6 million of operating square footage for a parking garage at a domestic property.

### Terms and Definitions

*Pro Rata Metrics —* The portfolio information above contains certain metrics prepared on a pro rata basis. We refer to these metrics as pro rata metrics. We have one investment in which our economic ownership is less than 100%. On a full consolidation basis, we report 100% of the assets, liabilities, revenues, and expenses of this investment that is deemed to be under our control, even if our ownership is less than 100%. On a pro rata basis, we present our proportionate share, based on our economic ownership of this jointly owned investment, of the portfolio metrics of this investment. Multiplying this jointly owned investment’s financial statement line items by our percentage ownership and adding or subtracting those amounts from our totals, as applicable, may not accurately depict the legal and economic implications of holding an ownership interest of less than 100% in our jointly owned investment.

*ABR —* ABR represents contractual minimum annualized base rent for our properties and reflects exchange rates as of September 30, 2023. If there is a rent abatement, we annualize the first monthly contractual base rent following the free rent period.

### Results of Operations

### Revenues

*(in thousands)*

| Revenues | Three Months Ended September 30, 2023 | 2022 | Change | Nine Months Ended September 30, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Lease revenues | $41,977 | $39,137 | $2,840 | $124,972 | $109,833 | $15,139 |
| Income from direct financing leases | 294 | 436 | (142) | 1,175 | 1,301 | (126) |
| Other lease-related income | 835 | 728 | 107 | 2,424 | 2,481 | (57) |
|  | $43,106 | $40,301 | $2,805 | $128,571 | $113,615 | $14,956 |

#### Lease Revenues

For the three and nine months ended September 30, 2023 as compared to the same periods in 2022, lease revenues increased by $2.8 million and $15.1 million, respectively, primarily due to additional lease revenues from the nine properties acquired in the CPA:18 Merger.

#### Income from Direct Financing Leases

For both the three and nine months ended September 30, 2023 as compared to the same periods in 2022, income from direct finance leases decreased by $0.1 million, due to the reclassification of our remaining direct financing lease investment to operating lease during the third quarter of 2023 (Note 4).

#### Other Lease-Related Income

Other lease-related income is described in Note 3.

### Operating Expenses

*(in thousands)*

| Operating Expenses | Three Months Ended September 30, 2023 | 2022 | Change | Nine Months Ended September 30, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Depreciation and amortization | $17,785 | $16,540 | $1,245 | $53,226 | $45,467 | $7,759 |
| Reimbursable tenant costs | 7,091 | 6,217 | 874 | 20,831 | 17,289 | 3,542 |
| General and administrative | 3,435 | 3,330 | 105 | 10,034 | 8,741 | 1,293 |
| Property expenses, excluding reimbursable tenant costs | 2,352 | 1,780 | 572 | 6,479 | 5,640 | 839 |
| Separation and distribution related costs and other | 1,343 | 3,719 | (2,376) | 2,882 | 4,037 | (1,155) |
|  | $32,006 | $31,586 | $420 | $93,452 | $81,174 | $12,278 |

#### Depreciation and Amortization

For the three and nine months ended September 30, 2023 as compared to the same periods in 2022, depreciation and amortization expense increased by $1.2 million and $7.8 million, respectively, primarily due to the impact of additional expenses from the nine properties acquired in the CPA:18 Merger.

#### Reimbursable Tenant Costs

For the three and nine months ended September 30, 2023 as compared to the same periods in 2022, reimbursable tenant costs increased by $0.9 million and $3.5 million, respectively, primarily due to the addition of nine properties acquired in the CPA:18 Merger.

#### General and Administrative

For the three and nine months ended September 30, 2023 as compared to the same periods in 2022, general and administrative expenses increased by $0.1 million and $1.3 million, respectively, primarily due to the nine additional properties acquired in the CPA:18 Merger, along with higher general and administrative corporate expense subject to allocation. General and administrative expenses were allocated to NLOP Predecessor based on the relative percentage of ABR of the NLOP Predecessor Business. The amounts allocated are not necessarily indicative of the actual amount of indirect expenses that would have been recorded had NLOP Predecessor been a separate independent entity.

#### Property Expenses, Excluding Reimbursable Tenant Costs

For the three and nine months ended September 30, 2023 as compared to the same periods in 2022, property expenses, excluding reimbursable tenant costs, increased by $0.6 million and $0.8 million, respectively, primarily due to higher maintenance expense at certain properties.

#### Separation and Distribution Related Costs and Other

Separation and distribution related costs and other are comprised of (i) costs related to the Spin-Off for the three and nine months ended September 30, 2023 and 2022, and (ii) CPA:18 Merger-related costs for the three and nine months ended September 30, 2022.

### Other Income and (Expenses), and Provision for Income Taxes

*(in thousands)*

| Other Income and (Expenses), and Provision for Income Taxes | Three Months Ended September 30, 2023 | 2022 | Change | Nine Months Ended September 30, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest expense | $(8,053) | $(7,638) | $(415) | $(24,433) | $(18,228) | $(6,205) |
| Other gains and (losses) | (25) | (3) | (22) | 26 | (11) | 37 |
| Provision for income taxes | (232) | (1) | (231) | (303) | (480) | 177 |
|  | $(8,310) | $(7,642) | $(668) | $(24,710) | $(18,719) | $(5,991) |

#### Interest Expense

For the three and nine months ended September 30, 2023 as compared to the same periods in 2022, interest expense increased by $0.4 million and $6.2 million, respectively, primarily related to non-recourse loans assumed in the CPA:18 Merger, as well as higher corporate interest expense subject to allocation. Interest expense is comprised of interest on Non-recourse mortgages, as well as interest expense on Parent debt specific to NLOP Predecessor properties and that allocated to NLOP Predecessor based on the relative percentage of unencumbered net investment in real estate of each property compared to WPC. The amounts allocated in the accompanying combined financial statements are not necessarily indicative of the actual amount of interest expense that would have been recorded had the NLOP Predecessor been a separate independent entity during the applicable periods. We expect increasing interest rates and higher debt balances to have a material impact on our results of operations depending on the terms we are able to obtain in new financings or refinancings.

#### Provision for Income Taxes

For the three months ended September 30, 2023 as compared to the same period in 2022, provision for income taxes increased by $0.2 million, primarily due to higher taxes recognized on a property located in Norway, which was acquired in the CPA:18 Merger.

For the nine months ended September 30, 2023 as compared to the same period in 2022, provision for income taxes decreased by $0.2 million, primarily due to lower taxes recognized on a property located in the United Kingdom.

### Liquidity and Capital Resources

### Sources and Uses of Cash During the Period

We use the cash flow generated from our investments primarily to meet our operating expenses, capital expenditures and debt service. Our cash flows fluctuate periodically due to a number of factors, which may include, among other things: the timing of purchases and sales of real estate; the timing of the repayment of mortgage loans and receipt of lease revenues; the timing and amount of other lease-related payments; and changes in foreign currency exchange rates. Despite these fluctuations, we believe that we will generate sufficient cash from operations to meet our normal recurring short-term and long-term liquidity needs. We may also use existing cash resources and proceeds from dispositions of properties in order to meet these needs. We assess our ability to access capital on an ongoing basis. The following table summarizes the changes in cash flows for the periods presented (in thousands):

|  | Nine Months Ended September 30, 2023 | 2022 | Increase (Decrease) |
| --- | ---: | ---: | ---: |
| Net cash provided by operating activities | $63,869 | $67,318 | $(3,449) |
| Net cash used in investing activities | (4,617) | (21,111) | 16,494 |
| Net cash used in financing activities | (59,016) | (47,559) | (11,457) |

*Net Cash Provided by Operating Activities —* Net cash provided by operating activities decreased by $3.4 million during the nine months ended September 30, 2023 as compared to the same period in 2022, primarily due to higher interest expense.

*Net Cash Used in Investing Activities —* Net cash used in investing activities decreased by $16.5 million during the nine months ended September 30, 2023 as compared to the same period in 2022, primarily due to cash paid to stockholders of CPA:18 – Global in the CPA:18 Merger during the nine months ended September 30, 2022.

*Net Cash Used in Financing Activities —* Net cash used in financing activities increased by $11.5 million during the nine months ended September 30, 2023 as compared to the same period in 2022, primarily due to financing costs incurred during the current year period in connection with the NLOP Financing Arrangements, as well as an increase in prepayments and scheduled payments of non-recourse mortgages.

### Summary of Financing

The table below summarizes our non-recourse mortgages (dollars in thousands):

| Carrying Value (a) Fixed rate: | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Non-recourse mortgages (b) | $125,153 | $127,794 |
|  | 125,153 | 127,794 |
| Variable rate: |  |  |
| Non-recourse mortgages (b): |  |  |
| Floating interest rate mortgage loans | 41,562 | 46,495 |
|  | 41,562 | 46,495 |
|  | $166,715 | $174,289 |
| **Percent of Total Non-Recourse Mortgages** |  |  |
| Fixed rate | 75% | 73% |
| Variable rate | 25% | 27% |
|  | 100% | 100% |
| **Weighted-Average Interest Rate at End of Period** |  |  |
| Fixed rate | 4.8% | 4.9% |
| Variable rate | 4.6% | 4.6% |
| Total non-recourse mortgages | 4.8% | 4.8% |

(a) Table represents external mortgage debt of NLOP Predecessor excluding Parent debt. It does not reflect the Spin-Off financing arrangements discussed below.

(b) Aggregate debt balance includes unamortized discount, net, totaling $1.1 million and $2.0 million as of September 30, 2023 and December 31, 2022, respectively, and unamortized deferred financing costs totaling less than $0.1 million as of both September 30, 2023 and December 31, 2022.

In connection with the Spin-Off, we and certain of our wholly-owned subsidiaries entered into the NLOP Financing Arrangements (Note 7). On November 1, 2023, we borrowed an aggregate of $455.0 million under the NLOP Financing Arrangements, and each of the NLOP Mortgage Loan and the NLOP Mezzanine Loan was fully drawn. Approximately $350 million of the proceeds from the financing (net of transaction expenses) was transferred to WPC in accordance with the Separation and Distribution Agreement. The remainder of the proceeds from the NLOP Financing Arrangements is anticipated to be used to pay fees and expenses related to the origination of the NLOP Financing Arrangements and other transaction costs, to be deposited with the Lenders in satisfaction of the reserve requirements pursuant to the NLOP Financing Arrangements, and for other general corporate expenses. As of the November 1, 2023 completion of the Spin-Off, we had an estimated $622 million in consolidated debt principal outstanding.

### Cash Requirements and Liquidity

At September 30, 2023, our cash resources consisted of the following:

- cash and cash equivalents totaling $5.1 million. Of this amount, $2.6 million, at then-current exchange rates, was held in foreign subsidiaries, and we could be subject to restrictions or significant costs should we decide to repatriate these amounts; and
- unleveraged properties that had an aggregate asset carrying value of approximately $1.2 billion at September 30, 2023, although there can be no assurance that we would be able to obtain financing for these properties.

As of the completion of the Spin-Off on November 1, 2023, we had estimated cash and cash equivalents of approximately $53.8 million (Note 12).

As of September 30, 2023, scheduled debt principal payments total $0.7 million through December 31, 2023 and $34.8 million through December 31, 2024 (Note 7). These scheduled payments do not reflect the impact of the NLOP Financing Arrangements that were funded on November 1, 2023 (Note 12).

During the next 12 months following September 30, 2023 and thereafter, we expect that our significant cash requirements will include:

- making scheduled principal and balloon payments on our non-recourse mortgage debt obligations, totaling $35.0 million;
- making scheduled interest payments on our non-recourse mortgage debt and parent debt obligations (future interest payments total $50.5 million, with $14.0 million due during the next 12 months);
- making scheduled principal payments on the NLOP Financing Arrangements, totaling $50.3 million (Note 12);
- making scheduled interest payments on the NLOP Financing Arrangements (future interest payments total $151.0 million, with $47.7 million due during the next 12 months) (Note 12);
- funding future capital commitments and tenant improvement allowances (Note 3); and
- other normal recurring operating expenses.

We expect to fund these cash requirements through cash generated from operations and cash received from dispositions of properties.

Our liquidity could be adversely affected by refinancing debt at higher interest rates, unanticipated costs, and greater-than-anticipated operating expenses.

Certain amounts disclosed above are based on the applicable foreign currency exchange rate at September 30, 2023.

### Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies and estimates from what was previously disclosed in the Information Statement for the year ended December 31, 2022. Many of these accounting policies require judgment and the use of estimates and assumptions when applying these policies in the preparation of our combined financial statements. On a quarterly basis, we evaluate these estimates and judgments based on historical experience as well as other factors that we believe to be reasonable under the circumstances. These estimates are subject to change in the future if underlying assumptions or factors change. Certain accounting policies, while significant, may not require the use of estimates.

### Supplemental Financial Measures

In the real estate industry, analysts and investors employ certain non-GAAP supplemental financial measures in order to facilitate meaningful comparisons between periods and among peer companies. Additionally, in the formulation of our goals and in the evaluation of the effectiveness of our strategies, we use FFO and AFFO, which are non-GAAP measures defined by our management. We believe that these measures are useful to investors to consider because they may assist them to better understand and measure the performance of our business over time and against similar companies. A description of FFO and AFFO and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are provided below.

### Funds from Operations and Adjusted Funds from Operations

Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has promulgated a non-GAAP measure known as FFO, which we believe to be an appropriate supplemental measure, when used in addition to and in conjunction with results presented in accordance with GAAP, to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental non-GAAP measure. FFO is not equivalent to, nor a substitute for, net income or loss as determined under GAAP.

We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as restated in December 2018. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, impairment charges on real estate or other assets incidental to the company’s main business, gains or losses on changes in control of interests in real estate, and depreciation and amortization from real estate assets; and after adjustments for unconsolidated partnerships and jointly owned investments. Adjustments for unconsolidated partnerships and jointly owned investments are calculated to reflect FFO.

We also modify the NAREIT computation of FFO to adjust GAAP net income for certain non-cash charges, such as amortization of real estate-related intangibles, deferred income tax benefits and expenses, straight-line rent and related reserves, other non-cash rent adjustments, non-cash allowance for credit losses on loans receivable and finance leases, stock-based compensation, non-cash environmental accretion expense, amortization of discounts and premiums on debt, and amortization of deferred financing costs. Our assessment of our operations is focused on long-term sustainability and not on such non-cash items, which may cause short-term fluctuations in net income but have no impact on cash flows. Additionally, we exclude non-core income and expenses, such as gains or losses from extinguishment of debt and spin-off expenses. We also exclude realized and unrealized gains/losses on foreign currency exchange rate movements, which are not considered fundamental attributes of our business plan and do not affect our overall long-term operating performance. We refer to our modified definition of FFO as AFFO. We exclude these items from GAAP net income to arrive at AFFO as they are not the primary drivers in our decision-making process and excluding these items provides investors a view of our portfolio performance over time and makes it more comparable to other REITs. We use AFFO as one measure of our operating performance when we formulate corporate goals and evaluate the effectiveness of our strategies.

We believe that AFFO is a useful supplemental measure for investors to consider as we believe it will help them to better assess the sustainability of our operating performance without the potentially distorting impact of these short-term fluctuations. However, there are limits on the usefulness of AFFO to investors. For example, impairment charges and unrealized foreign currency losses that we exclude may become actual realized losses upon the ultimate disposition of the properties in the form of lower cash proceeds or other considerations. We use our FFO and AFFO measures as supplemental financial measures of operating performance. We do not use our FFO and AFFO measures as, nor should they be considered to be, alternatives to net income computed under GAAP, or as alternatives to net cash provided by operating activities computed under GAAP, or as indicators of our ability to fund our cash needs.

FFO and AFFO for NLOP Predecessor were as follows (in thousands):

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net income attributable to NLOP Predecessor | $2,764 | $1,080 | $10,332 | $13,729 |
| Adjustments: |  |  |  |  |
| Depreciation and amortization of real property | 17,785 | 16,540 | 53,226 | 45,467 |
| Proportionate share of adjustments for noncontrolling interests (a) | (52) | (35) | (155) | (35) |
| Total adjustments | 17,733 | 16,505 | 53,071 | 45,432 |
| FFO (as defined by NAREIT) attributable to NLOP Predecessor | 20,497 | 17,585 | 63,403 | 59,161 |
| Adjustments: |  |  |  |  |
| Separation and distribution related costs and other (b) | 1,343 | 3,719 | 2,882 | 4,037 |
| Stock-based compensation | 952 | 713 | 2,566 | 2,259 |
| Above and below-market rent intangible lease amortization, net | 905 | 666 | 2,717 | 1,036 |
| Amortization of deferred financing costs | 293 | 1,405 | 2,296 | 1,412 |
| Straight-line and other leasing and financing adjustments | 259 | (825) | (948) | (2,029) |
| Tax (benefit) expense — deferred and other | (145) | (420) | (821) | (574) |
| Other amortization and non-cash items | 96 | 93 | 280 | 276 |
| Other (gains) and losses (c) | 25 | 3 | (26) | 11 |
| Proportionate share of adjustments for noncontrolling interests (a) | (13) | (9) | (39) | (9) |
| Total adjustments | 3,715 | 5,345 | 8,907 | 6,419 |
| AFFO attributable to NLOP Predecessor | $24,212 | $22,930 | $72,310 | $65,580 |
| **Summary** |  |  |  |  |
| FFO (as defined by NAREIT) attributable to NLOP Predecessor | $20,497 | $17,585 | $63,403 | $59,161 |
| AFFO attributable to NLOP Predecessor | $24,212 | $22,930 | $72,310 | $65,580 |

(a) Adjustments disclosed elsewhere in this reconciliation are on a consolidated basis. This adjustment reflects our FFO or AFFO on a pro rata basis.

(b) Amounts are comprised of (i) costs related to the Spin-Off for the three and nine months ended September 30, 2023 and 2022, and (ii) CPA:18 Merger-related costs for the three and nine months ended September 30, 2022 (Note 1).

(c) Primarily comprised of gains and losses on extinguishment of debt, and foreign currency transactions.

While we believe that FFO and AFFO are important supplemental measures, they should not be considered as alternatives to net income as an indication of a company’s operating performance. These non-GAAP measures should be used in conjunction with net income as defined by GAAP. FFO and AFFO, or similarly titled measures disclosed by other REITs, may not be comparable to our FFO and AFFO measures.

## Market risk

As filed, 6,801 characters.

#### Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, and equity prices. The primary market risks that we are exposed to are interest rate risk and foreign currency exchange risk.

We are also exposed to further market risk as a result of tenant concentrations in certain industries and/or geographic regions, since adverse market factors can affect the ability of tenants in a particular industry/region to meet their respective lease obligations. In order to manage this risk, we view our collective tenant roster as a portfolio and we attempt to diversify such portfolio so that we are not overexposed to a particular industry or geographic region.

#### Interest Rate Risk

The values of our real estate and related fixed-rate debt obligations, as well as the values of our unsecured debt obligations, are subject to fluctuations based on changes in interest rates. The value of our real estate is also subject to fluctuations based on local and regional economic conditions and changes in the creditworthiness of lessees, which may affect our ability to refinance property-level mortgage debt when balloon payments are scheduled, if we do not choose to repay the debt when due. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control. An increase in interest rates would likely cause the fair value of our assets to decrease. Increases in interest rates may also have an impact on the credit profile of certain tenants.

We are exposed to the effects of interest rate changes as a result of borrowings used to maintain liquidity and to fund the financing and refinancing of our real estate investment portfolio and operations. Our profitability and the value of our real estate investment portfolio may be adversely affected during any period as a result of interest rate changes. We expect increasing interest rates and higher debt balances to have a material impact on our results of operations depending on the terms we are able to obtain in new financings or refinancings.

We have borrowed funds at a combination of fixed and variable rates. Interest rate fluctuations will generally not affect future earnings or cash flows on fixed rate debt unless such debt matures or is otherwise terminated. However, interest rate changes will affect the fair value of fixed rate instruments. Movements in interest rates on variable rate debt could change future earnings and cash flows, but not significantly affect the fair value of the debt. However, changes in required risk premiums would result in changes in the fair value of variable rate instruments.

At September 30, 2023, fixed-rate debt comprises 75.1% of our Non-recourse mortgages and variable-rate debt comprises 24.9%.

Our debt obligations are more fully described in Note 7 and Liquidity and Capital Resources — Summary of Financing in Item 2 above. The following table presents principal cash flows based upon expected maturity dates of our debt obligations outstanding at September 30, 2023 (in thousands):

|  | 2023 (Remainder) | 2024 | 2025 | 2026 | 2027 | Total | Fair Value |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Fixed-rate debt (a) | $652 | $34,812 | $84,604 | $7,540 | $— | $127,608 | $121,535 |
| Variable-rate debt (a) | $— | $— | $40,185 | $— | $— | $40,185 | $40,172 |

(a) Amounts are based on the exchange rate at September 30, 2023, as applicable.

Annual interest expense on our variable-rate debt at September 30, 2023 would increase or decrease by $0.4 million, for each respective 1% change in annual interest rates.

#### Foreign Currency Exchange Rate Risk

We own international investments in Europe, and as a result are subject to risk from the effects of exchange rate movements in three foreign currencies, primarily the Norwegian krone, British pound sterling, and euro which may affect future costs and cash flows. We have obtained, and may in the future obtain, non-recourse mortgage financing in the local currency. Volatile market conditions arising from macroeconomic factors, may result in significant fluctuations in foreign currency exchange rates. To the extent that currency fluctuations increase or decrease rental revenues, as translated to U.S. dollars, the change in debt service (comprised of principal and interest, excluding balloon payments), as translated to U.S. dollars, will partially offset the effect of fluctuations in revenue and, to some extent, mitigate the risk from changes in foreign currency exchange rates. We estimate that, for a 1% increase or decrease in the exchange rate between the Norwegian krone, British pound sterling, or euro and U.S. dollar, there would be a corresponding change in the projected estimated cash flow (scheduled future rental revenues, net of scheduled future debt service payments for the next 12 months) for our combined foreign operations at September 30, 2023 of less than $0.1 million for all three currencies.

#### Concentration of Credit Risk

Concentrations of credit risk arise when a number of tenants are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company is subject to tenant, geographic and industry concentrations. Any downturn of the economic conditions in one or more of these tenants, geographies or industries could result in a material reduction of our cash flows or material losses to us.

The factors we consider in determining the credit risk of our tenants include, but are not limited to: payment history; credit status (credit ratings for public companies are used as a primary metric); change in tenant space needs (i.e., expansion/downsize); tenant financial performance; economic conditions in a specific geographic region; and industry specific credit considerations. We believe that the credit risk of our portfolio is reduced by the high quality and diversity of our existing tenant base, reviews of prospective tenants’ risk profiles prior to lease execution and consistent monitoring of our portfolio to identify potential problem tenants.

For the nine months ended September 30, 2023, our combined portfolio as set forth in our unaudited combined financial statements had the following significant characteristics, based on the percentage of our combined total revenues:

- 91% related to domestic operations; which included concentrations of 31% and 16% in Texas and Minnesota, respectively; and
- 9% related to international operations.

## Controls and procedures

As filed, 1,519 characters.

#### Disclosure Controls and Procedures

Our disclosure controls and procedures include internal controls and other procedures designed to provide reasonable assurance that information required to be disclosed in this and other reports filed under the Exchange Act is recorded, processed, summarized, and reported within the required time periods specified in the SEC’s rules and forms; and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. It should be noted that no system of controls can provide complete assurance of achieving a company’s objectives and that future events may impact the effectiveness of a system of controls.

Our chief executive officer and chief financial officer, after conducting an evaluation, together with members of our management, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2023, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of September 30, 2023 at a reasonable level of assurance.

#### Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

## Risk factors

As filed, 143 characters.

For a discussion of potential risks and uncertainties, please refer to the section titled “Risk Factors” included in the Information Statement.

Filed Nov 17, 2023.
Source: SEC EDGAR, the filing index for accession 0001628280-23-039494. Last ingested by Listed: Oct 30, 2026, 12:38 ET. No prices; not investment advice.