Net Lease Office Properties: Form 10-K for the period ended Dec 31, 2023

Filed with the SEC on Mar 6, 2024 and accepted by EDGAR at Mar 6, 2024, 16:38 ET.

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Business

As filed, 7,230 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.

General Development of Business

Net Lease Office Properties (“NLOP”) is a Maryland real estate investment trust that, together with our consolidated subsidiaries, owns a diversified portfolio of office properties that are primarily leased to corporate tenants on a single-tenant, net-lease basis. Our net leases generally specify a base rent with rent increases and require the tenant to pay substantially all costs associated with operating and maintaining the property. We intend to qualify and elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code (the “Code”), commencing with our taxable year ended December 31, 2023.

The vast majority of our revenues originate from lease revenue provided by our real estate portfolio, which is comprised of single-tenant office facilities that are critical to our tenants’ operations. As of December 31, 2023, our portfolio was comprised of 55 properties, net-leased to 59 corporate tenants operating in a variety of industries, generating annualized base rent (“ABR”) of approximately $142.4 million. As of December 31, 2023, almost all of our properties were located in the United States, except for five properties located in Europe.

Pursuant to the terms of a separation and distribution agreement, W. P. Carey Inc. (“WPC”), a leading net-lease REIT listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “WPC,” spun off a portfolio of 59 office assets into a separate publicly-traded company (the “Spin-Off”). To accomplish this Spin-Off, WPC formed NLOP on October 21, 2022. On November 1, 2023, WPC completed the Spin-Off. Following the closing of the Spin-Off, certain wholly-owned affiliates of WPC (our “Advisor”) externally manage NLOP pursuant to certain advisory agreements (the “NLOP Advisory Agreements”). The Spin-Off was accomplished via a pro rata dividend of 1 NLOP common share for every 15 shares of WPC common stock outstanding.

Our common shares are listed on the NYSE under the ticker symbol “NLOP.”

Narrative Description of Business

Business Objectives and Strategy

Our business plan is to focus on realizing value for our shareholders primarily through strategic asset management and disposition of our property portfolio over time. Our Advisor is generally responsible for all aspects of our operations including but not limited to formulating and evaluating the terms of each proposed disposition, arranging and executing the disposition of each asset, negotiating and monitoring the terms of our borrowings, preparing and filing our financial statements and required filings with the SEC, and other management services, under the supervision of our Board of Trustees. We anticipate using the proceeds of dispositions to pay down debt, pay distributions to our shareholders, and reinvest in our properties through capital expenditures, as needed.

Financing Strategies

On September 20, 2023, in connection with the Spin-Off, 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 maturing on November 9, 2025, subject to two separate one-year extension options (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”). The NLOP Financing Arrangements are collateralized by the assignment of certain of our previously unencumbered real estate properties.

The funding of the NLOP Financing Arrangements occurred on November 1, 2023 (the date of the Spin-Off). We borrowed an aggregate of $455.0 million and each of the NLOP Mortgage Loan and the NLOP Mezzanine Loan was fully drawn. 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 are structured, in part, to provide us with the ability to engage in dispositions of assets as contemplated by our overall strategy. We intend to pay down the NLOP Financing Arrangements with proceeds from such dispositions and cash flow from rent on our properties, in accordance with the terms of the NLOP Financing Arrangements.

As of December 31, 2023, ten additional properties were encumbered by outstanding individual mortgages totaling approximately $168.8 million. We intend to repay or refinance these mortgages at maturity. We may also consider other options, including other forms of debt, additional mortgages, or leverage when available.

Our Portfolio

At December 31, 2023, our portfolio had the following characteristics:

Number of properties — full or partial ownership interests in 55 net-leased properties;
Total net-leased square footage — approximately 8.4 million; and
Occupancy rate — approximately 97.0%.

For more information about our portfolio, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Portfolio Overview.

Tenant/Lease Information

At December 31, 2023, our tenants/leases had the following characteristics:

Number of tenants — 59;
Investment grade tenants as a percentage of total ABR — 43%;
Implied investment grade tenants as a percentage of total ABR — 21%;
Weighted-average lease term (“WALT”) — 5.8 years;
93.8% of our leases as a percentage of total ABR provide rent adjustments as follows:
Fixed — 74.0%
Consumer Price Index (“CPI”) and similar — 19.7%
Other — 0.1%

Human Capital

We have no employees. At December 31, 2023, our Advisor had 197 employees, 144 of which were located in the United States and 53 of which were located in Europe. Employees of WPC are available to perform services under our Advisory Agreements. Our Advisory Agreements do not require the Advisor to dedicate any particular employees to us.

Available Information

We will supply to any shareholder, upon written request and without charge, a copy of this Report as filed with the SEC. Our filings can also be obtained for free on the SEC’s website at http://www.sec.gov. All filings we make with the SEC, including this Report, our quarterly reports on Form 10-Q, and our current reports on Form 8-K, as well as any amendments to those reports, are available for free on the Investor Relations portion of our website (http://www.nloproperties.com), as soon as reasonably practicable after they are filed with or furnished to the SEC.

Our Code of Business Conduct and Ethics, which applies to all trustees, officers, and employees, including our chief executive officer and chief financial officer, is also available on our website. We intend to make available on our website any future amendments or waivers to our Code of Business Conduct and Ethics within four business days after any such amendments or waivers. We are providing our website address solely for the information of investors and do not intend for it to be an active link. We do not intend to incorporate the information contained on our website into this Report or other documents filed with or furnished to the SEC.

Risk factors

As filed, 81,388 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.

Our business, results of operations, financial condition, and ability to pay dividends could be materially adversely affected by various risks and uncertainties, including those enumerated below, which could cause such results to differ materially from those in any forward-looking statements. You should not consider this list exhaustive. New risk factors emerge periodically and we cannot assure you that the factors described below list all risks that may become material to us at any later time.

Risks Related to Our Properties and Business

Market and economic volatility due to adverse economic and geopolitical conditions, health crises or dislocations in the credit markets, could have a material adverse effect on our business, financial condition, results of operations, our ability to dispose of assets, and our ability to pay dividends and/or distributions.

Our business may be adversely affected by market and economic volatility experienced by the United States and global economies, the real estate industry as a whole and/or the local economies in the markets in which our properties are located. Such adverse economic and geopolitical conditions may be due to, among other issues, rising inflation and interest rates, volatility in the public equity and debt markets, and international economic and other conditions, including pandemics, geopolitical instability (such as the war in Ukraine, rising tensions between China and Taiwan and the conflict in the Middle East), sanctions and other conditions beyond our control. These current conditions, or similar conditions existing in the future, may adversely affect our business, financial condition, results of operations and/or distributions as a result of one or more of the following, among other potential consequences:

significant job losses may occur, which, in addition to other adverse conditions currently affecting the office property market as discussed in the next risk factor, may decrease demand for our office space, causing market rental rates and property values to be negatively impacted, and create increased challenges in disposing of properties in accordance with our strategic plan;
reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans;
inflation may adversely affect tenant leases with stated rent increases, which could be lower than the increase in inflation at any given time;
the financial condition of our tenants may be adversely affected, which may result in tenant defaults under leases due to inflationary pressure, bankruptcy, lack of liquidity, lack of funding, operational failures or for other reasons;
our ability to borrow on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to refinance existing debt and increase our future interest expense;
the value and liquidity of our short-term investments and cash deposits could be reduced as a result of a deterioration of the financial condition of the institutions that hold our cash deposits or the institutions or assets in which we have made short-term investments, a dislocation of the markets for our short-term investments, increased volatility in market rates for such investments or other factors; and
to the extent we enter into derivative financial instruments, one or more counterparties to our derivative financial instruments could default on their obligations to us, or could fail, increasing the risk that we may not realize the benefits of these instruments.

The ongoing remote working trends that began with the impact of the novel coronavirus (the “COVID-19 pandemic”), may continue to materially adversely impact the value of our properties and our business, operating results, financial condition and prospects.

Temporary closures of businesses and the resulting remote working arrangements for personnel in response to the pandemic changed work practices in a manner that has negatively impacted us and our business. In particular, the increased adoption of and familiarity with remote work practices, and the increase in tenants seeking to sublease their leased office space, as well as tenant uncertainty regarding office space needs given evolving remote and hybrid working trends which began with the COVID-19 pandemic, resulted in decreased demand for office space in certain places and certain types of properties. We cannot predict whether changes in working arrangements are permanent or will return to the more typical arrangements in effect pre-pandemic. If this trend continues or accelerates, our tenants may elect to not renew their leases, or to renew them for less space than they currently occupy, which could increase the vacancy and decrease rental income and the value of our properties. Real estate sales prices depend on a number of factors, including occupancy percentages, and lease rates, and in light of current office space utilization trends, our ability to find buyers for our properties at desirable prices, or at all, may be adversely impacted by these trends. The need to reconfigure leased office space, either in response to the pandemic or tenants’ needs, may impact space requirements and also may require us to spend increased amounts for tenant improvements. If substantial office space reconfiguration is required, the tenant may explore other office space and find it more advantageous to relocate than to renew its lease and renovate the existing space. The changes in work habits and reduced demand for office space have also resulted in adverse capital markets and financing conditions for office properties. The value of our properties and our business, operating results, financial condition and prospects may continue to be materially adversely impacted by the negative trends impacting the office property market.

We face considerable competition in the leasing market and may be unable to renew existing leases or re-let space on terms similar to our existing leases, or we may expend significant capital in our efforts to re-let space, which may adversely affect our business, financial condition and results of operations.

We compete with a number of other owners and operators of office properties to renew leases with our existing tenants and to attract new tenants. To the extent that we are able to renew leases that are scheduled to expire in the short-term or re-let such space to new tenants, heightened competition may require us to give rent concessions or provide tenant improvements to a greater extent than we otherwise would have. As of December 31, 2023, approximately 25.4% of our ABR was comprised by tenants with leases expiring in the next two years.

We derive our net income primarily from rent received from our tenants, and our profitability is significantly dependent upon ability to minimize vacancies in our properties and ensure our tenants timely pay rent at an attractive rate. If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. If lease defaults occur, we may experience delays in enforcing our rights as landlord. As of December 31, 2023, our portfolio had a WALT of 5.8 years, and no properties were fully vacant. If our tenants decide not to renew their leases, terminate early or default on their lease, or if we fail to find suitable tenants to lease our vacant properties, we may not be able to re-lease the space or may experience delays in finding suitable replacement tenants and may be in default under the NLOP Financing Arrangements.

Even if our tenants renew their leases or we are able to re-let the space, the terms and other costs of renewal or re-letting, including the cost of required renovations, increased tenant improvement allowances, leasing commissions, declining rental rates, and other potential concessions, may be less favorable than the terms of our current leases and could require significant capital expenditures. Our inability to renew leases or re-let space in a reasonable time, a decline in rental rates or an increase in tenant improvement, leasing commissions, or other costs may have a material adverse effect on our business, financial condition and results of operations.

We may be unable to find buyers for our properties on a timely basis or at desirable sales prices in accordance with our strategic plan.

We are actively pursuing dispositions of our properties. Real estate sales prices are constantly changing and fluctuate based on many factors, including as a result of changes in interest rates, supply and demand dynamics, occupancy percentages, lease rates, the availability of suitable buyers, the perceived quality and dependability of income flows from tenancies and a number of other factors, both local and national. In particular, in light of current office space utilization trends, our ability to find buyers for our properties at desirable prices, or at all, may be adversely impacted by these trends, and we may be required to sell our properties for less than their market value. If we are not able to find buyers for our assets or if we have overestimated the value of our assets, any distributions to our shareholders may be delayed or reduced. In addition, our ability to dispose of properties may also be adversely affected by the terms of prepayment or assumption costs associated with debt encumbering our real estate assets, transactional fees and expenses or unknown liabilities.

Inflation has adversely affected our financial condition, cash flows and results of operations, and may continue to do so in the future.

Since 2021, inflation and interest rates have been elevated compared to the years prior to that date. Inflation and high interest rates have had an adverse impact on our financial condition. Continuing increases in inflation could have a more pronounced negative impact on our interest expense and general and administrative expenses, as these costs could increase at a rate higher than our rents. Also, inflation may adversely affect tenant leases with stated rent increases or limits on such tenant’s obligation to pay its share of operating expenses, which could be lower than the increase in inflation at any given time. It may also limit our ability to recover all of our operating expenses. Inflation could also have an adverse effect on consumer spending, which could impact our tenants’ sales and, in turn, our average rents. In addition, renewals of leases or future leases may not be negotiated on current terms, in which event we may recover a smaller percentage of our operating expenses.

We depend on significant tenants, and the majority of our properties depend upon a single tenant for all or a majority of their rental income; therefore, our financial condition, including our ability to make distributions to shareholders, may be adversely affected by the bankruptcy or insolvency, a downturn in the business, or a lease termination of such a single tenant.

As of December 31, 2023, our ten largest tenants in our portfolio (by ABR) represented approximately 51.9% of ABR and our three largest tenants in our portfolio (by ABR) represented approximately 29.5% of ABR. In addition, as of December 31, 2023, the majority of our ABR was from our properties leased to single tenants. The value of our single tenant properties is materially dependent on the performance of those tenants under their respective leases. These tenants face competition within their industries and other factors that could reduce their ability to pay us rent. Lease payment defaults by such tenants could cause us to reduce the amount of distributions that we pay to our shareholders. A default by a single or major tenant, the failure of a guarantor to fulfill its obligations or other premature termination of a lease to such a tenant or such tenant’s election not to extend a lease upon its expiration could have an adverse effect on our financial condition, results of operations, liquidity and ability to pay distributions to our shareholders.

High geographic concentration of our properties could magnify the effects of adverse economic or regulatory developments in such geographic areas on our operations and financial condition.

As of December 31, 2023, 27.3% of our portfolio (as a percentage of ABR) was located in Texas, representing the highest concentration of our assets, and 16.1% was located in Minnesota. We are susceptible to adverse developments in the economic or regulatory environments of the geographic areas in which we concentrate, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes or costs of complying with governmental regulations. Any adverse developments in the economy or real estate market in the areas in which we concentrate or any decrease in demand for office space resulting from regulatory or business environment in the areas in which we concentrate could impact our ability to generate revenues sufficient to meet our operating expenses or other obligations, which could have an adverse effect on our financial condition, results of operations, liquidity and ability to pay distributions to our shareholders.

Tenant defaults may have a material adverse effect on our business, financial condition and results of operations.

The majority of our revenues and income comes from rental income from real property. As such, our business, financial condition and results of operations could be adversely affected if our tenants default on their lease obligations. Our ability to manage our assets is also subject to federal bankruptcy laws, state laws that limit creditors’ rights and remedies available to real property owners to collect delinquent rents and international laws. If a tenant becomes insolvent or bankrupt, we cannot be sure that we could recover the premises from the tenant promptly or from a trustee or debtor-in-possession in any bankruptcy proceeding relating to that tenant. We also cannot be sure that we would receive any rent in the proceeding sufficient to cover our expenses with respect to the premises. If a tenant becomes bankrupt, the federal bankruptcy code will apply and, in some instances, may restrict the amount and recoverability of our claims against the tenant. A tenant’s default on its obligations may have a material adverse effect on our business, financial condition and results of operations.

Some of our leases provide tenants with the right to terminate their leases early, which may have a material adverse effect on our business, financial condition and results of operations.

Certain of our leases permit our tenants to terminate their leases as to all or a portion of their leased premises prior to their stated lease expiration dates under certain circumstances, such as providing notice by a certain date and, in most cases, paying a termination fee. To the extent that our tenants exercise early termination rights, our cash flow and earnings will be adversely affected, and we can provide no assurances that we will be able to generate an equivalent amount of net effective rent by leasing the vacated space to new third-party tenants. If our tenants elect to terminate their leases early, it may have a material adverse effect on our business, financial condition and results of operations.

Our expenses may remain constant or increase, even if our revenues decrease, which may have a material adverse effect on our business, financial condition and results of operations.

Costs associated with our business, such as debt repayments, real estate taxes, insurance premiums and maintenance costs, are relatively inelastic and generally do not decrease, and may increase, when a property is not fully occupied, rental rates decrease, a tenant fails to pay rent or other circumstances cause a reduction in property revenues. Additionally, the real property taxes on our properties may increase as property tax rates change and as those properties are assessed or reassessed by tax authorities. As a result, if revenues drop, we may not be able to reduce our expenses accordingly, which may have a material adverse effect on our business, financial condition and results of operations.

Real estate property investments are illiquid. We may not be able to dispose of properties when desired or on favorable terms.

Real estate investments are relatively illiquid. Our ability to quickly sell or exchange any of our properties in response to changes in economic and other conditions will be limited. No assurances can be given that we will recognize full value, at a price and at terms that are acceptable to us, for any property that we are required to sell for liquidity reasons. Our inability to respond rapidly to changes in the performance of our investments could adversely affect our financial condition and results of operations.

We, our tenants and our properties are subject to various federal, state and local regulatory requirements, such as environmental laws, state and local fire and safety requirements, building codes and land use regulations. Our properties must also comply with the Americans with Disabilities Act and any equivalent state or local laws, to the extent that our properties are public accommodations as defined under such laws. Failure to comply with these requirements could subject us, or our tenants, to governmental fines or private litigant damage awards. In addition, compliance with these requirements, including new requirements or stricter interpretation of existing requirements, may require us, or our tenants, to incur significant expenditures. We do not know whether existing requirements will change or whether future requirements, including any requirements that may emerge from pending or future climate change legislation, will develop. Environmental noncompliance liability also could impact a tenant’s ability to make rental payments to us. Furthermore, our reputation could be negatively affected if we violate environmental laws or regulations, which may have a material adverse effect on our business, financial condition and results of operations.

In addition, as a current or former owner or operator of real property, we may be subject to liabilities resulting from the presence of hazardous substances, waste or petroleum products at, on, under or emanating from such property, including investigation and cleanup costs, natural resource damages, third-party liability for cleanup costs, personal injury or property damage and costs or losses arising from property use restrictions. Cleanup liabilities are often imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be joint and several. The presence of hazardous substances also may result in use restrictions on impacted properties or result in liens on contaminated sites in favor of the government for damages it incurs to address contamination. We also may be liable for the costs of removal or remediation of hazardous substances or waste disposal or treatment facilities if we arranged for disposal or treatment of hazardous substances at such facilities, whether or not we own such facilities. Moreover, buildings and other improvements on our properties may contain asbestos-containing material or other hazardous building materials or could have indoor air quality concerns (e.g., from airborne contaminants such as mold), which may subject us to costs, damages and other liabilities including abatement cleanup, personal injury, and property damage liabilities. The foregoing could adversely affect occupancy and our ability to develop, sell or borrow against any affected property and could require us to make significant unanticipated expenditures that may have a material adverse effect on our business, financial condition and results of operations.

Because we invest in properties located outside the United States, we are exposed to additional risks.

We have invested in properties located outside the United States. At December 31, 2023, our real estate properties located outside of the United States represented 11.4% of our ABR. These investments may be affected by factors particular to the local jurisdiction where the property is located and may expose us to additional risks, including:

enactment of laws relating to foreign ownership of property (including expropriation of investments), or laws and regulations relating to our ability to repatriate invested capital, profits, or cash and cash equivalents back to the United States;
legal systems where the ability to enforce contractual rights and remedies may be more limited than under U.S. law;
difficulty in complying with conflicting obligations in various jurisdictions and the burden of observing a variety of evolving foreign laws, regulations, and governmental rules and policies, which may be more stringent than U.S. laws and regulations (including land use, zoning, environmental, financial, and privacy laws and regulations, such as the European Union’s General Data Protection Regulation);
tax requirements vary by country and existing foreign tax laws and interpretations may change (e.g., the on-going implementation of the European Union’s Anti-Tax Avoidance Directives, which may result in additional taxes on our international investments;
changes in operating expenses in particular countries or regions;
increased energy and commodity prices in Europe;
foreign exchange rates; and
geopolitical and military conflict risk and adverse market conditions caused by changes in national or regional economic or political conditions, including the ongoing conflict between Russia and Ukraine, rising tensions between China and Taiwan and the conflict in the Middle East (which may impact relative interest rates, the terms or availability of debt financing, customers’ ability and willingness to renew agreements, make payments, and enter into new agreements, and energy costs).

Our Advisor may engage third-party asset managers in international jurisdictions to monitor compliance with legal requirements and lending agreements. If our Advisor fails to properly mitigate such additional risks, it could result in operational failures, governmental sanctions, or other liabilities.

We are also subject to potential fluctuations in exchange rates between the euro and the U.S. dollar because we translate revenue denominated in euros into U.S. dollars for our financial statements. Our results of our foreign operations are adversely affected by a stronger U.S. dollar relative to foreign currencies (i.e., absent other considerations, a stronger U.S. dollar will reduce both our revenues and our expenses), which may in turn adversely affect the price of our common shares.

We may be materially adversely affected by laws, regulations or other issues related to climate change as well as by potential physical impacts related to climate change.

We are subject to laws and regulations related to climate change. For example, the SEC has proposed climate change rules which are expected to be approved in 2024 and, as proposed, would require us to provide extensive information including greenhouse gas emissions and certain climate-related financial metrics in our audited financial statements. The State of California has also enacted new climate change disclosure requirements, including emissions requirements. In addition, the European Union Corporate Sustainability Reporting Directive (“CSRD”) became effective in 2023 and requires expansive disclosures on various sustainability topics.

We are currently assessing our obligations under these laws and regulations but we expect that compliance with these laws and regulations could result in substantial compliance costs, retrofit costs and construction costs, including monitoring and reporting costs and capital expenditures for environmental control facilities and other new equipment. We also expect that over time we will likely need to be prepared to contend with overlapping, yet distinct, climate-related disclosure requirements in multiple jurisdictions. Noncompliance with these laws or regulations may result in potential cost increases, litigation, fines, penalties, brand or reputational damage, loss of tenants, lower valuation and higher investor activism activities. We cannot predict how future laws and regulations, or future interpretations of current laws and regulations related to climate change will affect our business, financial condition and results of operations.

In addition to the laws and regulations surrounding climate change, the potential physical impacts of climate change on our operations are highly uncertain. These may include extreme weather, changes in rainfall and storm patterns and intensity, increased strength of hurricanes, water shortages, changing sea levels and changing temperatures. These changes may result in physical damage to, or a decrease in demand for, our properties located in the areas affected by these conditions and may adversely impact out tenants’ abilities to fulfill their obligations under their leases. Chronic climate change may also lead to increased costs for our tenants to adapt to the demands and expectations of climate change or lower carbon usage, including with respect to heating, cooling or electricity costs, retrofitting properties to be more energy efficient or comply with new rules or regulations, or other unforeseen costs.

Uninsured and underinsured losses may adversely affect our operations.

We, or in certain instances, tenants at our properties, carry comprehensive commercial general liability, fire, extended coverage, business interruption, rental loss coverage, environmental and umbrella liability coverage on all of our properties. We also carry wind and flood coverage on properties in areas where we believe such coverage is warranted, in each case with limits of liability that we deem adequate. Similarly, we are insured against the risk of direct physical damage in amounts we believe to be adequate to reimburse us, on a replacement cost basis, for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period. However, we may be subject to certain types of losses that are generally uninsured losses, including, but not limited to losses caused by riots, war or acts of God. In the event of substantial property loss, the insurance coverage may not be sufficient to pay the full current market value or current replacement cost of the property. In the event of an uninsured loss, we could lose some or all of our capital investment, cash flow and anticipated profits related to one or more properties. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it not feasible to use insurance proceeds to replace a property after it has been damaged or destroyed. Under such circumstances, the insurance proceeds we receive might not be adequate to restore our economic position with respect to such property, which may have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Financing and Our Indebtedness

We have a significant amount of indebtedness and may need to incur more in the future.

As of December 31, 2023, net of capitalized financing costs, we had approximately $542.0 million of total outstanding indebtedness. In addition, in connection with executing our business strategies going forward, we expect to need to invest in our current portfolio and we may elect to finance these endeavors by incurring additional indebtedness. The amount of such indebtedness may have material adverse consequences for us, including:

hindering our ability to adjust to changing market, industry or economic conditions;
limiting our ability to access the capital markets to raise additional equity or refinance maturing debt on favorable terms;
limiting the amount of free cash flow available for future operations, dividends, or other uses;
making us more vulnerable to economic or industry downturns, including interest rate increases; and
placing us at a competitive disadvantage compared to less leveraged competitors.

Moreover, to respond to competitive challenges, we may be required to raise substantial additional capital to execute our business strategy. Our ability to arrange additional financing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. If we are able to obtain additional financing and if we received credit ratings, these credit ratings could be adversely affected, which could further raise our borrowing costs and further limit our future access to capital and our ability to satisfy our obligations under our indebtedness, which may have a material adverse effect on our business, financial condition and results of operations.

We have existing debt and refinancing risks that could affect our cost of operations.

At December 31, 2023, fixed-rate debt comprises 43% of our debt and variable-rate debt comprises 57%. We may incur additional fixed and variable-rate indebtedness in the future. As a result, we are, and expect to be, subject to the risks normally associated with debt financing including:

that interest rates may rise;
that our cash flow will be insufficient to make required payments of principal and interest;
that we will be unable to refinance some or all of our debt or increase the availability of overall debt on terms as favorable as those of our existing debt, or at all;
that any refinancing will not be on terms as favorable as those of our existing debt;
that required payments on mortgages and on our other debt are not reduced if the economic performance of any property declines;
that debt service obligations will reduce funds available for distribution to our shareholders;
that any default on our debt, due to noncompliance with financial covenants or otherwise, could result in acceleration of those obligations;
that we may be unable to refinance or repay the debt as it becomes due; and
that if our degree of leverage is viewed unfavorably by lenders, it could affect our ability to obtain additional financing.

If we are unable to repay or refinance our indebtedness as it becomes due, we may need to sell assets or to seek protection from our creditors under applicable law, which may have a material adverse effect on our business, financial condition and results of operations.

We may not be able to secure additional financing on favorable terms, or at all, to meet our capital needs.

In connection with the Spin-Off, we entered into the NLOP Financing Arrangements; however, we may require additional capital to implement our business plan, respond to business opportunities, challenges or unforeseen circumstances and may determine to engage in equity or debt financings, refinance the NLOP Financing Arrangements or enter into new credit facilities. If we are unable to refinance or repay the debt as it becomes due or obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business plan and to respond to business challenges could be limited.

The NLOP Financing Arrangements will limit our ability to pay dividends on our common shares.

Covenants contained in the instruments governing the NLOP Financing Arrangements limit the dividends that may be paid by the subsidiary borrower, which in turn will affect our ability to pay distributions to our shareholders, except as may be required for us (and our subsidiary REITs) to avoid the imposition of income and excise taxes. Covenants also limit the amount of cash distributions that may be paid by the subsidiary borrower to less than $1.0 million. Distributions in excess of this amount must be paid in a combination of cash and common shares, which will in turn affect the cash and common share components of any distributions we may pay to our shareholders. We may be required to utilize alternative financing or other procedures to satisfy the applicable REIT distribution requirements (including the payment of dividends in common shares, which may place downward pressure on the market price of our common shares). Any inability to pay dividends may negatively impact our REIT status or could cause shareholders to sell our common shares, which may have a material adverse effect on our business, financial condition and results of operations.

We may not be able to engage in potentially desirable strategic or capital-raising transactions that require the issuance of interests in NLO OP LLC while the NLOP Financing Arrangements remain outstanding.

For so long as the NLOP Financing Arrangements remain outstanding, we are generally prohibited from engaging in certain transactions that would affect the ownership of our operating company, NLO OP LLC, including admitting new members or other capital raising transactions, if there have been material changes in the direct or indirect ownership of our subsidiary borrower during the preceding three year period. This restriction may limit our ability to pursue strategic transactions or engage in other transactions that may maximize the value of our business.

Our governing documents do not limit the amount of indebtedness we may incur and we may become more highly leveraged.

Our Board of Trustees may permit us to incur additional debt and would do so, for example, if it were necessary to maintain our status as a REIT. We might become more highly leveraged as a result, and our financial condition, results of operations and funds available for distribution to shareholders might be negatively affected, and the risk of default on our indebtedness could increase, which may have a material adverse effect on our business, financial condition and results of operations.

If we become an umbrella partnership REIT (an “UPREIT”), we would be a holding company with no direct operations and would rely on distributions received from NLO OP LLC and its subsidiaries, including NLO Mezzanine Borrower LLC, to make distributions to our shareholders.

While we do not conduct business as an UPREIT, we may do so in the future, in which case we would become a holding company and conduct all of our operations through our operating company, NLO OP LLC, and would rely on distributions from NLO OP LLC and its subsidiaries, including NLO Mezzanine Borrower LLC, to make any distributions to our shareholders and to meet any of our obligations. The ability of NLO OP LLC to make distributions to us would depend on its operating results and the ability of its subsidiaries to make distributions to our operating company, which could be subject to restrictions of any of its subsidiaries. While NLO OP LLC is our wholly owned subsidiary, if we elected to admit third party members, we would expect to amend and restate the operating agreement for NLO OP LLC to reflect such terms as would be customary and appropriate for an UPREIT, and those members would be entitled to the rights and remedies set forth thereunder, including with respect to conversion to our common shares, redemption, and other rights that could adversely affect the rights of our shareholders. In addition, the claims of our shareholders would be structurally subordinated to all existing and future liabilities and other obligations and any preferred equity of NLO OP LLC and its subsidiaries, including in the case of any liquidation, bankruptcy or reorganization of our company.

Financial covenants limit our ability to pay distributions and could materially adversely affect our ability to conduct our business.

The instruments governing the NLOP Financing Arrangements contain restrictions on our ability to pay distributions, the amount of additional debt we may incur and other restrictions and requirements on our operations. There are also restrictions on the ability of our subsidiary borrower, NLO Mezzanine Borrower LLC, to pay distributions, which in turn affects our ability to pay distributions except for distributions required for REIT compliance. These restrictions, as well as any additional restrictions to which we may become subject in connection with additional financings or refinancings, could restrict our ability to pursue business initiatives, effect certain transactions or make other changes to our business that may otherwise be beneficial to us, which could adversely affect our results of operations. In addition, violations of these covenants could cause declarations of default under, and acceleration of, any related indebtedness, which would result in adverse consequences to our financial condition. The instruments governing the NLOP Financing Arrangements also contain cross-default provisions that give the lenders the right to declare a default if we are in default resulting in (or permitting the) acceleration of other debt under other loans in excess of certain amounts. In the event of a default, we may be required to repay such debt with capital from other sources, which may not be available to us on attractive terms, or at all, which may have a material adverse effect on our business, financial condition and results of operations. Additionally, the NLOP Mortgage Loan is secured by first priority mortgages and deeds of trust encumbering the interests of the NLOP Mortgage Loan Borrowers (as defined in the NLOP Mortgage Loan) in the Mortgaged Properties (as defined in the NLOP Mortgage Loan), as well as by pledges of equity of the NLOP Mortgage Loan Borrowers (and, with respect to the NLOP Mortgage Loan Borrowers that are limited partnerships, the general partners thereof), NLO Holding Company LLC, and each of NLO MB TRS LLC and NLO SubREIT LLC. Any inability to service our obligations under the NLOP Mortgage Loan could lead to foreclosure on the assets securing such debt, which could have a materially adverse effect on our business, financial condition and results of operations.

The agreement governing the NLOP Mortgage Loan (the “NLOP Mortgage Loan Agreement”) also contains certain cash management provisions which provide that all cash from the Mortgaged Properties is held by the lenders and applied pursuant to a waterfall set forth in the NLOP Mortgage Loan Agreement, with excess cash flow being retained by the Lenders (subject to NLOP Mortgage Loan Borrowers’ right to request funds for certain permitted payments). In addition, upon the occurrence of certain trigger events (such as specified events of default or a bankruptcy event with respect to an NLOP Mortgage Loan Borrower), the lenders have the right to retain any excess cash flow as additional collateral for the loan, until such trigger event is cured, subject to certain rights to distributions for REIT compliance purposes and current interest on the NLOP Mezzanine Loan.

Failure to hedge effectively against interest rate changes and foreign exchange rate changes may have a material adverse effect on our business, financial condition and results of operations.

The interest rate and foreign exchange rate hedge instruments we may use to manage some of our exposure to interest rate and foreign exchange rate volatility involve risk, such as the risk that counterparties may fail to honor their obligations under these arrangements. Failure to hedge effectively against such interest rate and foreign exchange rate changes may have a material adverse effect on our business, financial condition and results of operations.

We depend on external sources of capital that are outside of our control, which may affect our ability to pursue strategic opportunities, refinance or repay our indebtedness and make distributions to our shareholders.

In order to qualify to be taxed as a REIT, we (and any of our subsidiary REITs) generally must distribute annually at least 90% of REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, to shareholders. Because of this distribution requirement, we may not be able to fund all future capital needs from income from operations. As a result, we may rely on third-party sources of capital, including collateralized debt (both construction financing and permanent debt) and equity issuances, although our ability to obtain additional third-party financing may be limited due to the NLOP Financing Arrangements. Our access to third-party sources of capital depends on a number of factors, including general market conditions, the market’s view of the quality of our assets, the market’s perception of our growth potential (and the terms of our existing financing arrangements), our current debt levels and our current and expected future earnings. If we are unable to obtain a sufficient level of third-party financing to fund our capital needs, our ability to make distributions to our shareholders may be adversely affected which may have a material adverse effect on our business, financial condition and results of operations.

We may amend our divestiture strategy and business policies without shareholder approval.

Our Board of Trustees may change our divestiture strategy, financing strategy or leverage policies with respect to operations, indebtedness, capitalization and dividends at any time without the consent of our shareholders, which could result in an investment portfolio with a different risk profile. Such a change in our strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations, among other risks. These changes could adversely affect our ability to pay dividends to our shareholders, and may have a material adverse effect on our business, financial condition and results of operations.

Decreases in property values may reduce the amount we receive upon the sale of any of our assets.

Our disposition strategy provides for the sale of some or all our assets, which are real estate investments, and we cannot predict whether we will be able to do so at a price or on terms and conditions acceptable to us. Investments in real properties are relatively illiquid. The amounts we receive upon the sale of any of our assets depends on the underlying value of such assets, and the underlying value of such assets may be reduced by a number of factors that are beyond our control, including, without limitation, the following:

changes in general economic or local conditions;
changes in supply of or demand for similar or competing properties in an area;
changes in interest rates and availability of mortgage funds that may render the sale of our properties difficult or unattractive;
increases in operating expenses;
the financial performance of our tenants, and the ability of our tenants to satisfy their obligations under their leases;
vacancies and inability to lease or sublease space;
potential major repairs which are not presently contemplated or other contingent liabilities associated with such assets;
competition; and
changes in tax, real estate, environmental and zoning laws.

Defaults under future sale agreements may delay or reduce the cash we receive pursuant to any future sale agreements.

In connection with any sales of our assets, we will seek to enter into binding sales agreements for any such sales. The consummation of any potential sale for which we will enter into a sale agreement in the future will be subject to satisfaction of closing conditions. If any potential transaction contemplated by any such future sale agreement does not close because of a buyer default, failure of a closing condition or for any other reason, we may not be able to enter into a new agreement on a timely basis or on terms that are as favorable as the original sale agreement. We will also incur additional costs involved in locating a new buyer and negotiating a new sale agreement for any such sale. If we incur these additional costs, potential distributions to our shareholders would be reduced.

Shareholder litigation related to any disposition strategy could result in substantial costs and distract our Board of Trustees and Advisor.

Historically, extraordinary corporate actions by a company, such as disposition strategies, often lead to securities class action lawsuits being filed against that company. Defending ourselves in any litigation related to any disposition strategy may be expensive and, even if we ultimately prevail, the process of defending against lawsuits will divert our Board of Trustees and our Advisor’s attention from implementing the disposition strategy and otherwise operating our business. If we do not prevail in any lawsuit, we may be liable for damages. We cannot predict the amount of any such damages; however, if applicable, they may be significant and may cause potential distributions to our shareholders to be reduced and/or delayed.

Risks Related to Our Advisor

Our success is dependent on the performance of our Advisor, and we could be adversely affected if our Advisor ceases managing us.

Our ability to achieve our divestiture objectives and to pay distributions is largely dependent upon the performance of our Advisor in the disposition of investments, the selection of tenants, the determination of any financing arrangements and the management of our assets. We cannot guarantee that our Advisor will be able to successfully manage and achieve any potential disposition strategy.

We have limited independence from our Advisor and its affiliates, who may be subject to conflicts of interest.

Management functions are delegated to our Advisor, for which it earns fees pursuant to the NLOP Advisory Agreements. Therefore, our Advisor and its affiliates have potential conflicts of interest in their dealings with us, including, but not limited to, in the following circumstances:

agreements between us and our Advisor, including agreements regarding compensation, are not negotiated on an arm’s-length basis, as would occur if the agreements were with unaffiliated third parties; and
the negotiation or termination of the NLOP Advisory Agreements and other agreements with our Advisor and its affiliates.

Although at least a majority of our Board of Trustees must be independent and at least a majority of independent trustees must approve any transaction involving our Advisor, we have limited independence from our Advisor due to this delegation.

Payment of fees to our Advisor will reduce cash available for distribution.

Our Advisor performs services for us in connection with the management and leasing of our properties, and the administration of our other investments. Pursuant to the Advisory Agreement, we pay our Advisor cash fees for these services. The payment of these fees will reduce the amount of cash available for distribution to our shareholders.

The occurrence of cyber incidents, or a deficiency in our Advisor’s cybersecurity, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity, or availability of our information resources, which could be an intentional attack or an unintentional accident or error. Information technology, communication networks, and other computer resources are essential for us to carry out important operational activities and maintain our business records.

Our Advisor has implemented processes, procedures, and controls, which are reviewed periodically and are intended to address ongoing and evolving cybersecurity risks. However, these measures do not guarantee that our financial results will not be negatively impacted by such an incident, especially in light of the fact that it is not always possible to anticipate, detect, or recognize threats to our systems. The primary risks that could directly result from the occurrence of a cyber incident include operational interruption, damage to our relationship with our tenants, expensive remediation efforts, liability exposure under federal and state law, and private data exposure. There can be no assurance that the insurance we maintain to cover some of these risks will be sufficient to cover the losses from any future breaches of our systems.

Further information relating to cybersecurity risk management is discussed in Item 1C. “Cybersecurity” in this Report.

Risks Related to Our Status as a REIT

Failure to qualify as a REIT would materially and adversely affect us and the value of our common shares.

We intend to elect to be taxed as a REIT and believe we have operated and will operate in a manner that has allowed and will allow us to qualify and to remain qualified as a REIT for U.S. federal income tax purposes commencing with the taxable year ended December 31, 2023. We have not requested and do not plan to request a ruling from the Internal Revenue Service (“IRS”) that we qualify as a REIT and the IRS or any court could take a position different from our own. Therefore, we cannot guarantee that we qualify as a REIT or that we will remain qualified as such in the future. If we (or any of our subsidiary REITs) fail to qualify as a REIT or lose our REIT status, we (or our subsidiary REITs) will face significant tax consequences that would substantially reduce our cash available for distribution to our shareholders for each of the years involved because:

we would not be allowed a deduction for dividends paid to shareholders in computing our taxable income and would be subject to regular U.S. federal corporate income tax;
we could be subject to increased state and local taxes; and
unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.

Any such corporate tax liability could be substantial and would reduce our cash available for, among other things, our operations and distributions to shareholders. In addition, if we fail to qualify as a REIT, we will not be required to make distributions to our shareholders. As a result of all these factors, our failure to qualify as a REIT also could materially and adversely affect the trading price of our common shares. The risks described herein related to our REIT qualification are equally applicable to any subsidiary REITs in which we invest. If any of our subsidiary REITs fail to qualify as a REIT, such failure could jeopardize our qualification as a REIT unless such failure was subject to relief under U.S. federal income tax laws.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the ownership of our common shares, requirements regarding the composition of our assets and gross income. Also, we must make distributions to shareholders aggregating annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. In addition, legislation, new regulations, administrative interpretations or court decisions may materially and adversely affect our investors, our ability to qualify as a REIT for federal income tax purposes or the desirability of an investment in a REIT relative to other investments.

Under applicable Treasury Regulations, if WPC failed to qualify as a REIT in the year of, or certain periods prior to, the Spin-Off, unless WPC’s failure were subject to relief under U.S. federal income tax laws, we (and any of our subsidiary REITs) would be prevented from electing to qualify as a REIT prior to the fifth calendar year following the year in which WPC failed to qualify.

Even if we qualify as a REIT for federal income tax purposes, we may be subject to some federal, state and local income, property and excise taxes on our income or property and, in certain cases, a 100% penalty tax, in the event we sell property as a dealer. In addition, our taxable REIT subsidiaries (“TRSs”) will be subject to income tax as regular corporations in the jurisdictions in which they operate.

If certain of our (or any of our subsidiary REITs’) subsidiaries, including our operating company, fail to qualify as partnerships or disregarded entities for federal income tax purposes, we (or any of our subsidiary REITs) could cease to qualify as a REIT and suffer other adverse consequences.

One or more of our subsidiaries are treated as a partnership or disregarded entity for federal income tax purposes and, therefore, will not be subject to federal income tax on its income. Instead, each of its partners or its members, as applicable, which may include us, will be allocated, and may be required to pay tax with respect to, such partner’s or member’s share of its income. We cannot assure you that the IRS will not challenge the status of any subsidiary partnership or limited liability company in which we own an interest as a disregarded entity or partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating any subsidiary partnership or limited liability company as an entity taxable as a corporation for federal income tax purposes, we (or any of our subsidiary REITs) could fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we (or any of our subsidiary REITs) may cease to qualify as a REIT. Also, the failure of any subsidiary partnerships or limited liability company to qualify as a disregarded entity or partnership for applicable income tax purposes could cause it to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners or members, including us.

Ownership of TRSs is subject to certain restrictions, and we (or any of our subsidiary REITs) will be required to pay a 100% penalty tax on certain income or deductions if transactions with TRSs are not conducted on arm’s-length terms.

From time to time we (or any of our subsidiary REITs) may own interests in one or more TRSs. A TRS is a corporation, other than a REIT, in which a REIT directly or indirectly holds stock and that has made a joint election with such REIT to be treated as a TRS. If a TRS owns more than 35% of the total voting power or value of the outstanding securities of another corporation, such other corporation will also be treated as a TRS. Other than some activities relating to lodging and health care facilities, a TRS may generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT. A TRS is subject to federal income tax as a regular C corporation. In addition, a 100% excise tax will be imposed on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.

A REIT’s ownership of securities of a TRS is not subject to the 5% or 10% asset tests applicable to REITs. Not more than 25% of the value of our total assets may be represented by securities (including securities of TRSs), other than those securities includable in the 75% asset test, and not more than 20% of the value of our total assets may be represented by securities of TRSs. We intend to structure our transactions with any TRSs that we (or any of our subsidiary REITs) own to ensure that they are entered into on arm’s-length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the above limitations or to avoid application of the 100% excise tax discussed above.

The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions which would be treated as sales for federal income tax purposes.

A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business, unless certain safe harbor exceptions apply. Although we and our subsidiary REIT(s) do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of our business, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we or our subsidiary REIT(s) will always be able to satisfy the available safe harbors. As a result, this tax may limit how many asset sales we can make in a given time period and impact our overall disposition strategy.

Distribution requirements imposed by law limit our flexibility.

To maintain our status as a REIT for federal income tax purposes, we generally are required to distribute to our shareholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, each year. We also are subject to tax at regular corporate rates to the extent that we distribute less than 100% of our taxable income (including net capital gains) each year.

In addition, we are subject to a 4% non-deductible excise tax to the extent that we fail to distribute during any calendar year at least the sum of 85% of our ordinary income for that calendar year, 95% of our capital gain net income for the calendar year, and any amount of that income that was not distributed in prior years.

We have made and intend to continue to make distributions to our shareholders to comply with the distribution requirements of the Code as well as to reduce our exposure to federal income taxes and the non-deductible excise tax. Differences in timing between the receipt of income and the payment of expenses to arrive at taxable income, along with the effect of required debt amortization payments, could require us to borrow funds to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. These distribution requirements are equally applicable to any subsidiary REIT in which we invest.

We may pay dividends on our common shares in common shares and/or cash. Our shareholders may sell our common shares to pay tax on such dividends, placing downward pressure on the market price of our common shares.

In order to satisfy our REIT distribution requirements, we are permitted, subject to certain conditions and limitations, to make distributions that are in part payable in our common shares. Pursuant to the NLOP Financing Arrangements, our subsidiary, NLO Mezzanine Borrower LLC, is required to pay distributions over $1.0 million in a combination of cash and common shares, which in turn impacts the cash and shares components of our payment of distributions. Taxable shareholders receiving such distributions will be required to report dividend income as a result of such distribution for both the cash and share components of the distribution and even if we distributed no cash or only nominal amounts of cash to such shareholder. For example, on December 8, 2023 our Board of Trustees authorized a common share dividend of $0.34 per share. 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.

If we make additional taxable dividends payable in cash and common shares in the future, taxable shareholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, shareholders may be required to pay income tax with respect to such dividends in excess of the cash dividends received. If a shareholder sells our shares that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of the shares at the time of the sale. Furthermore, with respect to certain non-U.S. shareholders, we may be required to withhold federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in our shares. If, in any taxable dividend payable in cash and shares, a significant number of our shareholders determine to sell our shares in order to pay taxes owed on dividends, it may be viewed as economically equivalent to a dividend reduction and put downward pressure on the market price of our shares.

Legislative or other actions affecting REITs could have a negative effect on us or our investors.

The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could adversely affect us or our investors, including holders of our common shares or debt securities. We cannot predict how changes in the tax laws might affect us or our investors. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT, the federal income tax consequences of such qualification, or the federal income tax consequences of an investment in us. Also, the law relating to the tax treatment of other entities, or an investment in other entities, could change, making an investment in such other entities more attractive relative to an investment in a REIT.

Even though we qualify as a REIT, certain of our business activities will be subject to corporate level income tax and foreign taxes, which will continue to reduce our cash flows, and we will have potential deferred and contingent tax liabilities.

Even though we qualify for taxation as a REIT, we are subject to certain (i) federal, state, local, and foreign taxes on our income and assets; (ii) taxes on any undistributed income and state, local, or foreign income; and (iii) franchise, property, and transfer taxes. In addition, we could be required to pay an excise or penalty tax under certain circumstances in order to utilize one or more relief provisions under the Code to maintain qualification for taxation as a REIT, which could be significant in amount. Any TRS assets and operations would continue to be subject, as applicable, to federal and state corporate income taxes and to foreign taxes in the jurisdictions in which those assets and operations are located. Any of these taxes would decrease our earnings and our cash available for distributions to shareholders.

Risks Related to an Investment in Our Common Shares

Limitations on the ownership of our common shares and other provisions of our Declaration of Trust and the NLOP Financing Arrangements may preclude the acquisition or change of control of our company.

Certain provisions contained in our Declaration of Trust and the NLOP Financing Arrangements may have the effect of discouraging a third party from making an acquisition proposal for us and may thereby inhibit a change of control. Provisions of our Declaration of Trust are designed to assist us in maintaining our qualification as a REIT under the Code by preventing concentrated ownership of our shares that might jeopardize REIT qualification. Among other things, unless exempted by our Board of Trustees, no person may actually or constructively own more than 9.8% of the aggregate of the outstanding common shares of NLOP by value or by number of shares, whichever is more restrictive, or 9.8% of the aggregate of the outstanding shares of each class and series of outstanding preferred shares of NLOP by value or by number of shares, whichever is more restrictive. Our Board of Trustees may, in its sole discretion, grant exemptions to the share ownership limits, subject to such conditions and the receipt by our Board of Trustees of certain representations and undertakings.

In addition to these ownership limits, our Declaration of Trust also prohibits any person from (a) beneficially or constructively owning, as determined by applying certain attribution rules of the Code, shares that would result in us or any of our subsidiary REITs, as applicable, being “closely held” under Section 856(h) of the Code, (b) transferring our shares if such transfer would result in our shares being owned by fewer than 100 persons (determined under the principles of Section 856(a)(5) of the Code), (c) beneficially or constructively owning our shares to the extent such ownership would cause any income of us or any of our subsidiary REITs, as applicable, that would otherwise qualify as “rents from real property” for purposes of Section 856(d) of the Code to fail to qualify as such (including, but not limited to, as a result of causing us or any of our subsidiary REITs, as applicable, to constructively own an interest in a tenant if the income derived by us or any of our subsidiary REITs, as applicable, from that tenant for our or any of our subsidiary REIT’s, as applicable, taxable year during which such determination is being made would reasonably be expected to equal or exceed the lesser of 1% of our or any of our subsidiary REIT’s, as applicable, gross income or an amount that would cause us or any of our subsidiary REITs, as applicable, to fail to satisfy any of the REIT gross income requirements) and (d) beneficially or constructively owning our shares that would cause us or any of our subsidiary REITs, as applicable, to otherwise to fail to qualify as a REIT. If any transfer of our shares occurs which, if effective, would result in any person beneficially or constructively owning shares in excess, or in violation, of the above transfer or ownership limitations (such person, a prohibited owner), then that number of shares, the beneficial or constructive ownership of which otherwise would cause such person to violate the transfer of ownership limitations (rounded up to the nearest whole share), will be automatically transferred to a charitable trust for the exclusive benefit of a charitable beneficiary, and the prohibited owner will not acquire any rights in such shares. If the transfer to the charitable trust would not be effective for any reason to prevent the violation of the above transfer or ownership limitations, then the transfer of that number of shares that otherwise would cause any person to violate the above limitations will be void. The prohibited owner will not benefit economically from ownership of any shares in the charitable trust, will have no rights to dividends or other distributions and will not possess any rights to vote or other rights attributable to the shares held in the charitable trust.

Generally, the ownership limits imposed under the Code are based upon direct or indirect ownership by “individuals,” but only during the last half of a taxable year. The ownership limits contained in our Declaration of Trust are based upon direct or indirect ownership at any time by any “person,” which term includes entities. These ownership limitations in our Declaration of Trust are common in REIT governing documents and are intended to provide added assurance of compliance with the tax law requirements, and to minimize administrative burdens. However, the ownership limits on our common shares also might delay, defer or prevent a transaction or a change in control of our company that might involve a premium price for our common shares or otherwise be in the best interest of our shareholders.

Furthermore, under our Declaration of Trust, our Board of Trustees has the authority to classify and reclassify any of our unissued shares into shares with such preferences, rights, powers and restrictions as our Board of Trustees may determine. The authorization and issuance of a new class of shares could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our shareholders’ best interests, which could have a material adverse effect on our business, financial condition and results of operations.

Maryland law may limit the ability of a third party to acquire control of us.

The Maryland Business Combination Act (Title 3, Subtitle 6 of the Maryland General Corporation Law (the “MGCL”)) (the “Business Combination Act”) imposes conditions and restrictions on certain “business combinations” (including, among other transactions, a merger, consolidation, share exchange, or, in certain circumstances, an asset transfer or issuance of equity securities) between a Maryland real estate investment trust and certain persons who beneficially own at least 10% of the corporation’s stock or affiliates of such persons (an “interested shareholder”). Unless approved in advance by our Board of Trustees, or otherwise exempted by the statute, such a business combination is prohibited for a period of five years after the most recent date on which the interested shareholder became an interested shareholder. After such five-year period, a business combination with an interested shareholder must be: (a) recommended by our Board of Trustees of the trust, and (b) approved by the affirmative vote of at least (i) 80% of the trust’s outstanding shares entitled to vote and (ii) two-thirds of the trust’s outstanding shares entitled to vote which are not held by the interested shareholder with whom the business combination is to be effected, unless, among other things, the trust’s common shareholders receive a “fair price” (as defined by the statute) for their shares and the consideration is received in cash or in the same form as previously paid by the interested shareholder for his or her shares. As permitted under Maryland law, we have elected by resolution of our Board of Trustees to opt out of the foregoing provisions on business combinations. However, we cannot assure you that our Board of Trustees will not opt to be subject to such provisions in the future, including opting to be subject to such provisions retroactively.

The Maryland Control Share Acquisition Act (the “MCSAA”) provides that a holder of “control shares” (defined as shares (other than shares acquired directly from us) that, when aggregated with other shares controlled by the shareholder, entitle the shareholder to exercise one of three increasing ranges of voting power in electing trustees) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights with respect to the control shares, except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding all interested shares. As permitted under Maryland law, our Bylaws contain a provision exempting any acquisition of our shares by any person from the foregoing provisions on control shares. In the event that our Bylaws are amended to modify or eliminate this provision, certain acquisitions of outstanding shares of our common shares may constitute control share acquisitions and may be subject to the MCSAA.

Until the 2027 annual meeting of shareholders, we will have a classified Board of Trustees and that may reduce the likelihood of certain takeover transactions.

Our Declaration of Trust initially divides our Board of Trustees into three classes. The initial terms of the first, second and third classes will expire at the first, second and third annual meetings of shareholders, respectively, held following the Spin-Off. Initially, shareholders will elect only one class of trustees each year. Shareholders will elect successors to trustees upon the expiration of the terms of the initial trustees of each class. Commencing with the 2027 annual meeting of shareholders, each trustee shall be elected annually for a term of one year and shall hold office until the next succeeding annual meeting and until a successor is duly elected and qualifies. Until the 2027 annual meeting of the shareholders, our Board of Trustees will be classified, which may reduce the possibility of certain attempts to change control of the Company, such as through a tender offer or a proxy contest, even though a change in control might be in our best interests.

Market interest rates may have an effect on the value of our common shares.

One of the factors that influences the price of our common shares is its dividend yield, or the dividend per share as a percentage of the price of our common shares, relative to market interest rates. Any further increase in market interest rates, which have been rapidly increasing, may lead prospective purchasers of our common shares to expect a higher dividend yield, and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. As a result, the price of our common shares may decrease as market interest rates increase, which may have a material adverse effect on our business, financial condition and results of operations.

The number of our common shares available for future issuance or sale could adversely affect the per share trading price of our common shares and may be dilutive to current shareholders.

Our Declaration of Trust authorizes our Board of Trustees to, among other things, issue additional common shares without shareholder approval. In addition, our Board of Trustees has the power under our Declaration of Trust to amend our Declaration of Trust to increase (or decrease) the number of authorized shares of any class from time to time, without approval of our shareholders. We cannot predict whether future issuances or sales of our common shares, or the availability of shares for resale in the open market, will decrease the per share trading price of our common shares. The issuance of a substantial number of our common shares in the open market, or the perception that such issuances might occur, could adversely affect the per share trading price of our common shares. In addition, any such issuance could dilute our existing shareholders’ interests in our company. In addition, prior to the completion of the Spin-Off, we adopted an equity compensation plan, and we issued or grant equity incentive awards exercisable for or convertible or exchangeable into our common shares under the plan. Future issuances of our common shares may be dilutive to existing shareholders, which may have a material adverse effect on our business, financial condition and results of operations.

Future offerings of debt securities, which would be senior to our common shares upon liquidation, or preferred equity securities which may be senior to our common shares for purposes of dividends or upon liquidation, may materially adversely affect the per share trading price of our common shares.

In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities (or causing NLO OP LLC or the NLOP Mortgage Loan Borrowers to issue such debt securities), including medium-term notes, senior or subordinated notes and additional classes or series of preferred shares. Upon liquidation, holders of our debt securities and shares of preferred shares or preferred units and lenders with respect to other borrowings will be entitled to receive our available assets prior to distribution of such assets to holders of our common shares. Additionally, any convertible or exchangeable securities that we may issue in the future may have rights, preferences and privileges more favorable than those of our common shares, and may result in dilution to owners of our common shares. Holders of our common shares are not entitled to preemptive rights or other protections against dilution. Any preferred shares that we issue in the future could have a preference on liquidating distributions or a preference on dividends that could limit our ability to pay dividends to the holders of our common shares. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Any such future offerings may reduce the per share trading price of our common shares, which may have a material adverse effect on our business, financial condition and results of operations.

We may change our dividend policy.

Future dividends will be declared and paid at the discretion of our Board of Trustees, and the amount and timing of dividends will depend upon cash generated by operating activities, our business, financial condition, results of operations, capital requirements, annual distribution requirements under the REIT provisions of the Code, limitations in our debt agreements and such other factors as our Board of Trustees deems relevant. Our Board of Trustees may change our dividend policy at any time, and there can be no assurance as to the manner in which future dividends will be paid or that the current dividend level will be maintained in future periods. Any reduction in our dividends may cause investors to seek alternative investments, which would result in selling pressure on, and a decrease in the market price of, our common shares. As a result, the price of our common shares may decrease, which may have a material adverse effect on our business, financial condition and results of operations.

We will incur increased costs as a result of operating as a public company. If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could result in sanctions or other penalties that would harm our business.

We are subject to the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), the Sarbanes-Oxley Act, and the rules and regulations of the NYSE. We qualify as an “emerging growth company.” For so long as we remain an emerging growth company, we will be exempt from Section 404(b) of the Sarbanes-Oxley Act, which requires auditor attestation to the effectiveness of internal control over financial reporting. We will cease to be an emerging growth company on the date that is the earliest of (i) the last day of the fiscal year in which we have total gross annual revenues of $1.235 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the Spin-Off; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. We cannot predict if investors will find our common shares less attractive because we rely on the exemptions available to us as an emerging growth company. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our share price may be more volatile.

Because dividends received by non-U.S. shareholders are generally taxable, we or a withholding agent may be required to withhold a portion of our distributions to such persons.

Ordinary dividends received by non-U.S. shareholders that are not effectively connected with the conduct of a U.S. trade or business are generally subject to U.S. withholding tax at a rate of 30%, unless reduced by an applicable income tax treaty. Additional rules with respect to certain capital gain distributions will apply to non-U.S. shareholders that own more than 10% of our common shares.

Cybersecurity

As filed, 8,370 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.

As an externally managed company, our day-to-day operations are managed by our Advisor and our executive officers (all of whom are executive officers of our Advisor) under the oversight of our Board. We rely on our Advisor for assessing, identifying and managing material risks to our business from cybersecurity threats. Below are details our Advisor has provided to us regarding its cybersecurity program that are relevant to us.

Management and Board Oversight

Our Advisor’s cybersecurity approach incorporates a layered portfolio of comprehensive employee training programs, multiple resources to manage and monitor the evolving threat landscape and knowledgeable teams responsible for preventing and detecting cybersecurity risks.

As part of our Board’s oversight of risk management, our Board of Trustees will review our cyber-risks and the actions being taken to mitigate such risks with our Advisor. These actions include implementing industry-recognized practices for protecting systems, third-party monitoring of certain systems and cybersecurity training for the Advisor’s employees. Board oversight of risk is also performed as needed between meetings through our Audit Committee and communications between our Advisor and our Board of Trustees. Our Board of Trustees will receive periodic education around cybersecurity risks and best practices.

Additionally, our Audit Committee, which consists solely of independent trustees, is responsible for overseeing cybersecurity risks and related initiatives. Our Audit Committee reviews our enterprise risk and cybersecurity risks. It also reviews the steps our Advisor has taken to protect against threats to our information systems and security and receives updates on cybersecurity on a quarterly basis.

Our Advisor’s information technology team is led by its Chief Information Officer who has extensive experience working with information security systems. Our Advisor’s information technology team consists of individuals with expertise in assessing, preventing and addressing cybersecurity risk and is responsible for executing our cybersecurity program as well as communicating regularly with our Advisor’s senior management, our Advisor’s cybersecurity governance committee, the Audit Committee and the Board. Our Advisor’s cybersecurity governance committee, comprised of the Advisor’s Chief Financial Officer, Chief Legal Officer, Chief Information Officer, Head of Internal Audit and senior members of its information technology team, are responsible for developing and maintaining our cybersecurity policies and standards, monitoring ongoing compliance and program updates, and ensuring our information security is aligned with our business objectives and strategies under the oversight of our Board.

Processes for Assessing, Identifying and Managing Material Risks from Cybersecurity Threats

Our Advisor’s cybersecurity program focuses on (1) preventing and preparing for cybersecurity incidents, (2) detecting and analyzing cybersecurity incidents and (3) containing, eradicating, recovering from and reporting cybersecurity events.

Prevention and Preparation

Our Advisor employs a variety of measures to prevent threats related to privacy, information technology security and cybersecurity, which include password protection, frequent mandatory password change events, multi-factor authentication, internal phishing testing, vulnerability scanning and penetration testing.

Our Advisor’s information technology and internal audit teams utilize frameworks based on industry standards to identify and mitigate information security risks and oversee an active cybersecurity training program. For example, in January 2023, our Advisor’s information technology team held a tabletop exercise with senior management of the Advisor to consider different cybersecurity scenarios. Our Advisor’s information technology team also recently worked with various third-party consultants to update our incident response plan.

In addition, our Advisor’s information technology team conducts routine security assessments as well as ongoing cybersecurity training campaigns for the Advisor’s employees to enhance awareness and increase vigilance for the various types of cybersecurity attacks to which they may be exposed. Our Advisor’s internal audit team evaluates and monitors our internal controls over systems access in an effort to mitigate information security risks that may result from unauthorized access to systems and data.

Third-party vendors are vetted through our Advisor’s service delivery program to ensure they have an established cybersecurity program. Our Advisor has also engaged a managed security provider to manage a supply chain defense subscription that will help obtain clear visibility into cybersecurity risks across third party vendors by proactively identifying, prioritizing, and driving remediation for cyber risks posed by critical business partners. Our Advisor’s managed security provider’s risk operations center will escalate certain alerts regarding third-party vendors directly to the appropriate business partners thus providing direct collaboration with third parties, saving time and improving risk reduction while safeguarding our relationships with such third parties.

Detection and Analysis

Cybersecurity incidents may be detected through a variety of means, including but not limited to automated event-detection notifications or similar technologies which are monitored by our Advisor’s managed cybersecurity provider, notifications from our Advisor’s employees, vendors or service providers, and notifications from third party information technology system providers. Once a potential cybersecurity incident is identified, including a third party cybersecurity event, the incident response team designated pursuant to our Advisor’s incident response plan follows the procedures set forth in the plan to investigate the potential incident, such as determining the nature of the event (e.g., ransomware or personal data breach) and assessing the severity of the event and sensitivity of any compromised data.

Containment, Eradication, Recovery, and Reporting

In the event of a cybersecurity incident, the incident response team is initially focused on containing the cybersecurity incident as quickly and efficiently as possible, consistent with the procedures in the incident response plan. Containment procedures may include shutting down systems; disconnecting systems from a network, disabling specific ports, protocols, services, functions, etc., disabling access to compromised systems; examining code in a controlled environment and making forensic backups of affected systems for possible legal action for third party forensic analysis.

Once a cybersecurity incident is contained, the focus shifts to remediation. Eradication and recovery activities depend on the nature of the cybersecurity incident. They may include returning affected systems to an operationally ready state, confirming that the affected systems are functioning normally and implementing, as necessary, additional monitoring to look for future related activity.

Our Advisor has relationships with a number of third party service providers to assist with cybersecurity containment and remediation efforts, including outside legal counsel, vendors and external insurance brokers.

In the event of a cybersecurity incident, we intend to follow the steps outlined in our Advisor’s incident response plan, including notifying our Audit Committee and Board, as appropriate.

Cybersecurity Risks

As of December 31, 2023, we are not aware of any material cybersecurity incidents that impacted the Company in the last three years. However, we routinely face risks of potential incidents, whether through cyber-attacks or cyber intrusions over the Internet, ransomware and other forms of malware, computer viruses, attachments to emails, phishing attempts, extortion or other scams. For a discussion of these risks, see Item 1A. Risk Factors – The occurrence of cyber incidents, or a deficiency in our Advisor’s cybersecurity, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.

Properties

As filed, 495 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.

Our principal corporate offices are located in the offices of our Advisor at One Manhattan West, 395 9th Avenue, 58th Floor, New York, NY 10001.

See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Portfolio Overview for a discussion of the properties we hold for rental operations and Part II, Item 8. Financial Statements and Supplementary Data — Schedule III — Real Estate and Accumulated Depreciation for a detailed listing of such properties.

Legal proceedings

As filed, 241 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.

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.

Management's discussion and analysis

As filed, 48,501 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.

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.

The following discussion should be read in conjunction with our consolidated financial statements in Item 8 of this Report and the matters described under Item 1A. Risk Factors. Refer to Item 1. Business for a description of our business.

Basis of Presentation

Prior to the Spin-Off

The historical results of operations and liquidity and capital resources of NLOP prior to the Spin-Off 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 U.S. generally accepted accounting principles (“GAAP”). Intercompany transactions and balances have been eliminated in combination. The preparation of the financial results of NLOP prior to the Spin-Off 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 prior to the Spin-Off reflect the revenues and direct expenses of NLOP and include material assets and liabilities of WPC that are specifically attributable to NLOP. Equity 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 Separation, as well as the allocated costs and expenses.

The financial results of NLOP prior to the Spin-Off 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 revenue of NLOP and WPC management’s knowledge of NLOP. In addition, the financial results reflect allocation of interest expense from WPC unsecured debt, excluding debt that is specifically attributable to NLOP; 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 interest expense on WPC unsecured debt. The amounts allocated in the financial results of NLOP prior to the Spin-Off are not necessarily indicative of the actual amount of such indirect expenses that would have been recorded had the NLOP been a separate independent entity during the applicable periods. NLOP believes the assumptions underlying NLOP’s allocation of indirect expenses prior to the Spin-Off are reasonable.

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, 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 shareholder 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 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 Spin-Off, (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.

Significant Developments

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 WPC serves as our Advisor pursuant to the NLOP Advisory Agreements executed in connection with the Spin-Off.

Financial Highlights

During the year ended December 31, 2023, we completed the following (as further described in the consolidated financial statements):

Dispositions

We disposed of four properties for total proceeds, net of selling costs, of $38.9 million (Note 16).

Leasing Activity

During the fourth quarter of 2023, we entered into (i) an amended and restated lease agreement (the “Lease Extension”) with respect to the two properties leased by BCBSM, Inc. located at 1800 Yankee Doodle Road and 3400 Yankee Doodle Road in Eagan, Minnesota (the “Extension Premises”) and (ii) lease termination agreements (collectively, the “Lease Terminations”) with respect to the four properties leased by BCBSM, Inc. located at 3535 Blue Cross Road, 1750 Yankee Doodle Road, 3311 Terminal Drive, and 3545 Blue Cross Road (the “Termination Premises”). The Lease Extension, among other things, extends the lease expiration date for the Extension Premises by ten years until January 31, 2037, subject to the tenant’s right to further extend the lease term for two additional five-year periods following the new lease expiration date. The Lease Terminations, among other things, shorten the lease term of each of the Termination Premises from January 31, 2027 to the earlier of (i) June 30, 2024 and (ii) the sale of the respective property. In connection with the Lease Terminations, the tenant has agreed to pay NLOP termination fees of approximately $12.0 million to $13.0 million in the aggregate for all of the Termination Premises payable and determined based on the date of each property’s termination date. We sold the property located at 3311 Terminal Drive in December 2023 for gross proceeds of $2.5 million.

Financing Transactions

On September 20, 2023, in connection with the Spin-Off, 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 NLOP Mortgage Loan maturing on November 9, 2025, with two separate one-year extension options subject to certain conditions, and (ii) a $120.0 million NLOP Mezzanine Loan maturing on November 9, 2028. At that time, NLOP was a wholly-owned subsidiary of WPC. The funding of these NLOP Financing Arrangements occurred on November 1, 2023 (the date of the Spin-Off). We borrowed an aggregate of $455.0 million and each of the NLOP Mortgage Loan and the NLOP Mezzanine Loan was fully drawn. Approximately $343.9 million of the proceeds from the financing (net of transaction expenses) was transferred to WPC in connection with the Spin-Off (Note 1, Note 11).

Dividends to Shareholders

On December 8, 2023, our Board of Trustees authorized a common share dividend of $0.34 per share paid on January 29, 2024 to shareholders of record as of the close of business on December 18, 2023 (the “Record Date”). 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.

Dividends paid by NLOP will be authorized and determined by our Board of Trustees, in its sole discretion, and will be dependent upon a number of factors. While the Company paid a dividend in January 2024, it does not intend to pay regular dividends going forward, except as may be necessary to maintain its REIT qualification.

Summary Results

(in thousands)

	Years Ended December 31, 2023	2022	2021
Total revenues	$174,965	$156,214	$147,906
Net (loss) income attributable to NLOP	(131,746)	15,779	1,418
Net cash provided by operating activities	70,966	84,282	75,335
Net cash provided by (used in) investing activities	27,693	(22,918)	(4,184)
Net cash used in financing activities	(36,778)	(64,541)	(77,245)
Supplemental financial measures (a):
Funds from operations attributable to NLOP (FFO)	72,253	78,897	59,998
Adjusted funds from operations attributable to NLOP (AFFO)	93,928	88,718	77,497

(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

Revenue increased in 2023 as compared to 2022, primarily due to higher lease revenues contributed from the nine properties acquired in the CPA:18 Merger (which closed on August 1, 2022 and as defined in Note 1) and lease termination income recognized during 2023, partially offset by the impact of disposition activity.

Total revenues increased in 2022 as compared to 2021, primarily due to revenues received from the nine properties acquired in the CPA:18 Merger.

Net Income Attributable to NLOP

Net income attributable to NLOP decreased in 2023 as compared to 2022, primarily due to impairment charges recognized during the current year, higher interest expense, and an increase in depreciation and amortization expense from the nine properties acquired in the CPA:18 Merger, partially offset by higher lease revenues contributed from the nine properties acquired in the CPA:18 Merger and merger-related expenses incurred in 2022.

Net income attributable to NLOP increased in 2022 as compared to 2021, primarily due to higher lease revenue contributed from the nine properties acquired in the CPA:18 Merger and decrease in loss on extinguishment of debt, partially offset by the merger-related expenses incurred in connection with the CPA:18 Merger in 2022.

FFO

FFO decreased in 2023 as compared to 2022, primarily due to higher interest expense and Spin-Off costs, partially offset by higher lease revenues contributed from the nine properties acquired in the CPA:18 Merger and lease termination income recognized during 2023.

FFO increased in 2022 as compared to 2021, primarily due to decrease in loss on extinguishment of debt, offset by merger-related expenses incurred in connection with the CPA:18 Merger in 2022.

AFFO

AFFO increased in 2023 as compared to 2022, primarily due to the nine properties acquired in the CPA:18 Merger and lease termination income recognized during 2023, partially offset by higher interest expense.

AFFO increased in 2022 as compared to 2021, primarily due to lower interest expense and an increase in lease revenues from the properties acquired in the CPA:18 Merger.

Portfolio Overview

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.

Portfolio Summary

	As of December 31, 2023	2022
ABR (in thousands)	$142,438	$140,572
Number of properties	55	59
Number of tenants	59	66
Occupancy	97.0%	97.1%
Weighted-average lease term (in years)	5.8	6.2
Leasable square footage (in thousands) (a)	8,379	8,678

(a) Excludes 570,999 of operating square footage for a parking garage at a domestic property.

Portfolio

The tables below represent information about our portfolio at December 31, 2023 on a pro rata basis. See Terms and Definitions below for a description of pro rata amounts and ABR.

Top Ten Tenants by ABR

(dollars in thousands)

Tenant/Lease Guarantor	State/Country	ABR	ABR Percent	Square Footage (a)	Number of Properties	Weighted-Average Lease Term (Years)
KBR, Inc.	Texas	$20,156	14.2%	913,713	1	6.5
BCBSM, Inc.	Minnesota	13,007	9.1%	1,029,966	5	5.4
JPMorgan Chase Bank, N.A.	Florida, Texas	8,891	6.2%	666,869	3	5.4
FedEx Corporation	Tennessee	5,491	3.9%	390,380	1	15.9
Total E&P Norge AS (b)	Norway	5,185	3.6%	275,725	1	7.5
Siemens AS (b)	Norway	4,503	3.2%	165,905	1	2.0
McKesson Corporation (US Oncology) (c)	Texas	4,406	3.1%	204,063	1	0.1
CVS Health Corporation	Arizona	4,300	3.0%	354,888	1	15.0
Pharmaceutical Product Development, LLC	North Carolina	3,983	2.8%	219,812	1	9.9
Omnicom Group, Inc.	California	3,961	2.8%	120,000	1	4.8
Total		$73,883	51.9%	4,341,321	16	6.9

(a) Excludes 570,999 of operating square footage for a parking garage at a domestic property.

(b) ABR amounts are subject to fluctuations in foreign currency exchange rates.

Lease Expirations

(dollars in thousands)

Year of Lease Expiration (a)	Number of Leases Expiring	Number of Tenants with Leases Expiring	ABR	ABR Percent	Square Footage (b)	Square Footage Percent
2024	11	8	$19,081	13.4%	1,199,405	14.3%
2025	13	13	17,158	12.0%	859,031	10.2%
2026	8	8	9,361	6.6%	574,783	6.9%
2027	7	6	8,652	6.1%	499,571	6.0%
2028	7	6	13,800	9.7%	627,627	7.5%
2029	5	4	6,768	4.8%	358,013	4.3%
2030	5	4	31,005	21.8%	1,669,375	19.9%
2031	2	2	5,785	4.1%	326,325	3.9%
2032	2	2	3,620	2.5%	257,008	3.1%
2033	1	1	3,983	2.8%	219,812	2.6%
2034	1	1	1,761	1.2%	80,664	1.0%
2035	2	2	2,911	2.0%	201,229	2.4%
2037	2	2	5,735	4.0%	402,962	4.8%
2038	2	2	7,327	5.1%	459,486	5.5%
2039	1	1	5,491	3.9%	390,380	4.6%
Vacant	—	—	—	—%	253,791	3.0%
Total	69		$142,438	100.0%	8,379,462	100.0%

(a) Assumes tenants do not exercise any renewal options or purchase options.

(b) Excludes 570,999 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 generally present our proportionate share, based on our economic ownership of this jointly owned investment, of the portfolio metrics of this investment. Multiplying our 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 December 31, 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	Years Ended December 31, 2023	2022	2021	2023 vs. 2022 Change	2022 vs. 2021 Change
Lease revenues	$166,034	$151,249	$143,958	$14,785	$7,291
Income from finance leases	1,189	1,744	1,709	(555)	35
Other lease-related income	7,742	3,221	2,239	4,521	982
	$174,965	$156,214	$147,906	$18,751	$8,308

Lease Revenues

For the year ended December 31, 2023 as compared to 2022, lease revenues increased by $14.8 million, primarily due to lease revenue from the nine properties acquired through the CPA:18 Merger (which closed on August 1, 2022), partially offset by the impact of disposition activity during the fourth quarter of 2023.

For the year ended December 31, 2022 as compared to 2021, lease revenues increased by $7.3 million, primarily due to additional lease revenue from the nine properties acquired through the CPA:18 Merger, partially offset by a decrease in lease revenues at our multi-tenant property in Houston, Texas.

Income from Finance Leases

For the year ended December 31, 2023 as compared to 2022, income from finance leases decreased by $0.6 million, primarily due to the reclassification of our remaining direct financing lease investment to operating lease during the third quarter of 2023 (Note 7).

Income from finance leases remained consistent during the year ended December 31, 2022 as compared to 2021.

Other Lease-Related Income

Other lease-related income is described in Note 6.

For the year ended December 31, 2023 as compared to 2022, other lease-related income increased by $4.5 million, primarily due to lease termination income recognized from a tenant during 2023.

For the year ended December 31, 2022 as compared to 2021, other lease-related income increased by $1.0 million, primarily due to a $0.5 million increase related to additional parking garage income at a property with the return-to-office trend post COVID-19 pandemic.

Operating Expenses

(in thousands)

Operating Expenses	Years Ended December 31, 2023	2022	2021	2023 vs. 2022 Change	2022 vs. 2021 Change
Depreciation and amortization	$74,998	$63,205	$58,580	$11,793	$4,625
Impairment charges — real estate	63,143	—	—	63,143	—
Impairment charges — goodwill	62,456	—	—	62,456	—
Reimbursable tenant costs	27,957	24,251	23,651	3,706	600
General and administrative	13,610	11,871	10,307	1,739	1,564
Property expenses, excluding reimbursable tenant costs	8,642	7,751	6,429	891	1,322
Separation and distribution related costs and other	8,446	6,025	—	2,421	6,025
Asset management fees	1,245	—	—	1,245	—
	$260,497	$113,103	$98,967	$147,394	$14,136

Depreciation and Amortization

For the year ended December 31, 2023 as compared to 2022, depreciation and amortization expense increased by $11.8 million, primarily due to the impact of the nine properties acquired in the CPA:18 Merger and accelerated amortization of in-place lease intangibles in connection with a lease restructuring during 2023.

For the year ended December 31, 2022 as compared to 2021, depreciation and amortization expense increased by $4.6 million, primarily due to the impact of the nine properties acquired in the CPA:18 Merger, partially offset by the weakening of foreign currencies (primarily the euro and British pound sterling) in relation to the U.S. dollar between the periods.

Impairment Charges — Real Estate

Our impairment charges on real estate are described in Note 9.

Impairment Charges — Goodwill

Our impairment charges on goodwill are described in Note 9

Reimbursable Tenant Costs

For the year ended December 31, 2023 as compared to 2022, reimbursable tenant costs increased by $3.7 million, primarily due to the addition of nine properties acquired in the CPA:18 Merger (Note 4).

For the year ended December 31, 2022 as compared to 2021, reimbursable tenant costs increased by $0.6 million primarily due to the addition of nine properties acquired in the CPA:18 Merger (Note 4).

General and Administrative

For the year ended December 31, 2023 as compared to 2022, general and administrative expenses increased by $1.7 million, primarily due to annual audit fees and investor relations expenses.

For the year ended December 31, 2022 as compared to 2021, general and administrative expenses increased by $1.6 million, primarily due to higher compensation expenses and increased professional fees resulting from the CPA:18 Merger. General and administrative expenses were allocated to NLOP based on the relative percentage of annualized based rent of NLOP. The amounts allocated are not necessarily indicative of the actual amount of indirect expenses that would have been recorded had NLOP been a separate independent entity.

Property Expenses, Excluding Reimbursable Tenant Costs

For the year ended December 31, 2023 as compared to 2022, property expenses, excluding reimbursable tenant costs, increased by $0.9 million, primarily driven by the nine properties acquired through the CPA:18 Merger.

For the year ended December 31, 2022 as compared to 2021, property expenses, excluding reimbursable tenant costs, increased by $1.3 million, primarily due to a maintenance expense increase related to our multi-tenant property in Houston, Texas, as a result of the return-to-office trend post COVID-19 pandemic.

Separation and Distribution Related Costs and Other

For the year ended December 31, 2023, separation and distribution related costs and other are comprised of costs related to the Spin-Off, which closed on November 1, 2023 (Note 1).

For the year ended December 31, 2022, separation and distribution related costs and other are comprised of costs related to the CPA:18 Merger, which closed on August 1, 2022 (Note 4).

Asset Management Fees

Upon completion of the Spin-Off on November 1, 2023 (Note 1), we began paying asset management fees to our Advisor, which totaled $1.2 million during the year ended December 31, 2023 (Note 5).

Other Income and Expenses, and Provision for Income Taxes

(in thousands)

Other Income and Expenses	Years Ended December 31, 2023	2022	2021	2023 vs. 2022 Change	2022 vs. 2021 Change
Interest expense	$(42,613)	$(26,841)	$(28,641)	$(15,772)	$1,800
Loss on sale of real estate, net	(3,608)	—	—	(3,608)	—
Other gains and (losses)	456	(7)	(17,234)	463	17,227
Provision for income taxes	(425)	(486)	(1,646)	61	1,160
	$(46,190)	$(27,334)	$(47,521)	$(18,856)	$20,187

Interest Expense

Interest expense is comprised of interest on Non-recourse mortgages, our NLOP Mortgage Loan, and our NLOP Mezzanine Loan, as well as interest expense on Parent debt specific to NLOP properties and that was allocated to NLOP based on the relative percentage of unencumbered net investment in real estate of each property compared to WPC (prior to the Spin-Off). The amounts allocated to Parent debt in the accompanying audited consolidated financial statements are not necessarily indicative of the actual amount of interest expense that would have been recorded had NLOP 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.

For the year ended December 31, 2023 as compared to 2022, interest expense increased by $15.8 million, primarily due to the $455.0 million of NLOP Financing Arrangements entered into during 2023 (Note 11).

The weighted-average interest rate for our debt instruments as of December 31, 2023 increased to 9.5% as compared to 4.8% as of December 31, 2022.

For the year ended December 31, 2022 as compared to 2021, interest expense decreased by $1.8 million, primarily due to the reduction of our non-recourse mortgages outstanding by repaying at or close to maturity a total of $36.8 million of non-recourse mortgage loans with a weighted-average interest rate of 4.3% throughout 2022, partially offset by additional interest expense from non-recourse mortgage loans encumbering the properties acquired through the CPA:18 Merger.

Loss on Sale of Real Estate, Net

Loss on sale of real estate, net, consists of loss on the sale of properties that were (i) disposed of or (ii) subject to a purchase agreement resulting in a lease modification, during the reporting period, as more fully described in Note 6, Note 7, and Note 16.

Other Gains and (Losses)

For the year ended December 31, 2023, other gains and (losses) of $0.5 million were primarily comprised of net realized and unrealized losses on foreign currency exchange rate movements.

For the year ended December 31, 2022, other gains and (losses) were immaterial.

For the year ended December 31, 2021, other gains and (losses) of $17.2 million were primarily comprised of loss on extinguishment of debt recognized in connection with certain prepayments of non-recourse mortgage loans.

Provision for Income Taxes

For the year ended December 31, 2023 as compared to 2022, provision for income taxes was relatively flat.

For the year ended December 31, 2022 as compared to 2021, provision for income taxes decreased by $1.2 million, primarily due to $0.6 million income tax benefit for the Oslo, Norway property acquired through the CPA:18 Merger, and $0.3 million provision decrease related to a property in Stavanger, Norway.

Liquidity and Capital Resources

Sources and Uses of Cash During the Year

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 capital expenditures and sales of real estate; the timing of the repayment of debt and receipt of lease revenues; the timing and amount of other lease-related payments; and the timing of advisory fees and reimbursements paid to our Advisor. 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):

	Years Ended December 31, 2023	2022	2021	2023 vs. 2022 Change	2022 vs. 2021 Change
Net cash provided by operating activities	$70,966	$84,282	$75,335	$(13,316)	$8,947
Net cash provided by (used in) investing activities	27,693	(22,918)	(4,184)	50,611	(18,734)
Net cash used in financing activities	(36,778)	(64,541)	(77,245)	27,763	12,704

Net Cash (Used in) Provided by Operating Activities — Net cash provided by operating activities decreased by $13.3 million during 2023 as compared to 2022, primarily due to higher interest expense and Spin-Off related costs incurred during 2023.

Net cash provided by operating activities increased by $8.9 million during 2022 as compared to 2021, primarily due to rental income from properties acquired in the CPA:18 Merger.

Net Cash Provided by (Used in) Investing Activities — Net cash provided by (used in) investing activities increased by $50.6 million during 2023 as compared to 2022, primarily due to the disposition of four properties during 2023 (Note 16), as well as cash consideration paid attributable to NLOP for the CPA:18 Merger during 2022 (Note 4).

Net cash provided by (used in) investing activities decreased by $18.7 million during 2022 as compared to 2021, primarily due to cash consideration paid attributable to NLOP for the CPA:18 Merger during 2022 (Note 4).

Net Cash Used in Financing Activities — Net cash used in financing activities decreased by $27.8 million during 2023 as compared to 2022, primarily due to proceeds from the NLOP Financing Arrangements, partially offset by distributions made to WPC in connection with the Spin-Off.

Net cash used in financing activities decreased by $12.7 million during 2022 as compared to 2021, primarily due to a decrease in prepayments of mortgage principal and other debt instruments.

Summary of Financing

The table below summarizes our non-recourse mortgages, NLOP Mortgage Loan, and NLOP Mezzanine Loan (dollars in thousands):

Carrying Value (a) Fixed rate:	December 31, 2023	2022
Non-recourse mortgages (b)	$125,038	$127,794
NLOP Mezzanine Loan (b)	106,299	—
	231,337	127,794
Variable rate:
NLOP Mortgage Loan — Amount subject to interest rate cap (b)	266,844	—
Non-recourse mortgages (b)	43,798	46,495
	310,642	46,495
	$541,979	$174,289
Percent of Total Debt
Fixed rate	43%	73%
Variable rate	57%	27%
	100%	100%
Weighted-Average Interest Rate at End of Year
Fixed rate	9.4%	4.9%
Variable rate	9.6%	4.6%
Total debt	9.5%	4.8%

(a) This table excludes Parent debt.

(b) Aggregate debt balance includes unamortized discount, net, totaling $21.6 million and $2.0 million as of December 31, 2023 and 2022, respectively, and unamortized deferred financing costs totaling $9.2 million and less than $0.1 million as of December 31, 2023 and 2022, respectively.

In connection with the Spin-Off, we and certain of our wholly-owned subsidiaries entered into the NLOP Financing Arrangements, comprised of the NLOP Mortgage Loan and NLOP Mezzanine Loan (Note 11). The NLOP Financing Arrangements are collateralized by the assignment of certain of our previously unencumbered real estate properties. Additionally, property sales are subject to the satisfaction of certain conditions, including satisfaction of a debt yield test and minimum release prices. 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. On November 1, 2023, we fully drew down $335.0 million under the NLOP Mortgage Loan and $120.0 million under the NLOP Mezzanine Loan. Approximately $343.9 million of the proceeds from the financing was transferred to WPC in accordance with the Separation and Distribution Agreement. The remainder of the proceeds from the NLOP Financing Arrangements was used to pay fees and expenses related to the origination of the NLOP Financing Arrangements and other transaction costs, was deposited with the Lenders in satisfaction of the reserve requirements pursuant to the NLOP Financing Arrangements, and was used for other general corporate expenses.

In connection with the dispositions of four properties during the period from November 1, 2023 to December 31, 2023, we repaid $33.3 million and $5.7 million on the NLOP Mortgage Loan and NLOP Mezzanine Loan, respectively. Additionally, we repaid $12.8 million from excess cash from operations on the NLOP Mortgage Loan. At December 31, 2023, we had $288.9 million and $114.3 million outstanding on the NLOP Mortgage Loan and NLOP Mezzanine Loan, respectively.

Cash Resources

At December 31, 2023, our cash resources consisted of the following:

cash and cash equivalents totaling $16.3 million. Of this amount, $3.0 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 $158.8 million at December 31, 2023, although there can be no assurance that we would be able to sell or obtain financing for these properties.

Cash Requirements and Liquidity

As of December 31, 2023, scheduled debt principal payments total $39.0 million during 2024 and $411.9 million during 2025 (Note 11).

During the next 12 months following December 31, 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 $169.5 million, with $34.9 million due during the next 12 months;
making scheduled interest payments on our non-recourse mortgage obligations (future interest payments total $12.7 million, with $6.2 million due during the next 12 months);
making scheduled principal payments on the NLOP Financing Arrangements, totaling $403.2 million, with $4.1 million due during the next 12 months;
making scheduled interest payments on the NLOP Financing Arrangements (future interest payments total $145.5 million, with $47.5 million due during the next 12 months); includes 4.5% payment-in-kind interest on the NLOP Mezzanine Loan that we have the option to capitalize into the principal balance;
funding future capital commitments and tenant improvement allowances; 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 December 31, 2023.

Environmental Obligations

In connection with the purchase of many of our properties, we required the sellers to perform environmental reviews. We believe, based on the results of these reviews, that our properties were in substantial compliance with federal, state, and foreign environmental statutes at the time the properties were acquired. In most instances where contamination has been identified, tenants are actively engaged in the remediation process and addressing identified conditions. We believe that the ultimate resolution of any environmental matters should not have a material adverse effect on our financial condition, liquidity, or results of operations. We record environmental obligations within Accounts payable, accrued expenses and other liabilities in the consolidated financial statements. See Item 1A. Risk Factors for further discussion of potential environmental risks.

Critical Accounting Estimates

Our significant accounting policies are described in Note 3. Many of these accounting policies require judgment and the use of estimates and assumptions when applying these policies in the preparation of our consolidated 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. Below is a summary of certain critical accounting estimates used in the preparation of our consolidated financial statements. Please also refer to our accounting policies described under Critical Accounting Policies and Estimates in Note 3.

Accounting for Acquisitions

In accordance with the guidance for business combinations and asset acquisitions, we recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. When we acquire properties with leases classified as operating leases, we allocate the purchase price to the tangible and intangible assets and liabilities acquired based on their estimated fair values.

The tangible assets consist of land, buildings, and site improvements. The intangible assets and liabilities include the above- and below-market value of leases and the in-place leases, which includes the value of tenant relationships. The recorded allocations of tangible and intangible assets incorporate discount rates, capitalization rates, interest rates, market rents, leasing commissions, and certain other assumptions and estimates. We use considerable judgment in developing such assumptions and estimates, and significant increases or decreases in these key assumptions and estimates would result in a significantly lower or higher fair value measurement of the real estate assets being acquired.

Impairments of Real Estate

For real estate assets held for investment and related intangible assets in which an impairment indicator is identified, we follow a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the estimated future net undiscounted cash flow that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. The undiscounted cash flow analysis requires us to make our best estimate of market rents, residual values, and holding periods. We estimate market rents and residual values using market information from outside sources such as third-party market research, external appraisals, broker quotes, or recent comparable sales.

Holding periods used in the undiscounted cash flow analysis are evaluated on an individual property basis based on our strategic hold time for each asset. Depending on the assumptions made and estimates used, the future cash flow projected in the evaluation of long-lived assets and associated intangible assets can vary within a range of outcomes. We consider the likelihood of possible outcomes in determining our estimate of future cash flows and, if warranted, we apply a probability-weighted method to the different possible scenarios. If the future net undiscounted cash flow of the property’s asset group is less than the carrying value, the carrying value of the property’s asset group is considered not recoverable. We then measure the impairment loss as the excess of the carrying value of the property’s asset group over its estimated fair value.

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 Funds from Operations (“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 the sale of certain real estate, 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 on the same basis.

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 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, merger and acquisition expenses, 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. AFFO also reflects adjustments for jointly owned investments. 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.

Consolidated FFO and AFFO were as follows (in thousands):

	Years Ended December 31, 2023	2022	2021
Net (loss) income attributable to NLOP	$(131,746)	$15,779	$1,418
Adjustments:
Depreciation and amortization of real property	74,998	63,205	58,580
Impairment charges — real estate (a)	63,143	—	—
Impairment charges — goodwill (b)	62,456	—	—
Loss on sale of real estate, net	3,608	—	—
Proportionate share of adjustments for noncontrolling interests (c)	(206)	(87)	—
Total adjustments	203,999	63,118	58,580
FFO (as defined by NAREIT) attributable to NLOP	72,253	78,897	59,998
Adjustments:
Separation and distribution related costs and other (d)	8,446	6,025	—
Amortization of deferred financing costs	7,672	2,913	1,385
Above- and below-market rent intangible lease amortization, net	4,335	1,959	834
Stock-based compensation	2,904	3,161	2,398
Tax benefit — deferred and other	(1,200)	(1,043)	(227)
Straight-line and other leasing and financing adjustments	(631)	(2,809)	(3,039)
Other amortization and non-cash items	547	(370)	(1,086)
Other (gains) and losses (e)	(337)	7	17,234
Proportionate share of adjustments for noncontrolling interests (c)	(61)	(22)	—
Total adjustments	21,675	9,821	17,499
AFFO attributable to NLOP	$93,928	$88,718	$77,497
Summary
FFO (as defined by NAREIT) attributable to NLOP	$72,253	$78,897	$59,998
AFFO attributable to NLOP	$93,928	$88,718	$77,497

(a) Amount for the year ended December 31, 2023 represents impairment charges recognized on five properties (Note 9).

(b) Amount for the year ended December 31, 2023 represents an impairment charge to reduce the carrying value of goodwill to zero, since the Company’s trading value as a public company subsequent to the completion of the Spin-Off resulted in a market capitalization that was significantly below the carrying value of our net assets (Note 8, Note 9).

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

(d) Amount for the year ended December 31, 2023 is primarily comprised of costs related to the Spin-Off (Note 1). Amount for the year ended December 31, 2022 is primarily comprised of costs incurred in connection with the CPA:18 Merger (Note 4).

(e) 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, 6,848 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.

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 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 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 higher interest rates and 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. We have entered into, and may continue to enter into, interest rate cap agreements with counterparties related to certain of our variable-rate debt. See Note 10 for additional information on our interest rate caps.

At December 31, 2023, fixed-rate debt comprises 43% of our debt and variable-rate debt comprises 57%.

Our debt obligations are more fully described in Note 11 and Liquidity and Capital Resources — Summary of Financing in Item 7 above. The following table presents principal cash flows based upon expected maturity dates of our debt obligations outstanding at December 31, 2023 (in thousands):

	2024	2025	2026	2027	2028	Thereafter	Total	Fair Value
Fixed-rate debt (a)	$34,937	$84,603	$7,540	$—	$114,336	$—	$241,416	$237,970
Variable-rate debt (a)	$4,071	$327,270	$—	$—	$—	$—	$331,341	$332,262

(a) Amounts are based on the exchange rate at December 31, 2023, as applicable.

Annual interest expense on our variable-rate debt at December 31, 2023 would increase or decrease by $3.3 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, 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 the 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 consolidated foreign operations at December 31, 2023 of $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 year ended December 31, 2023, our consolidated portfolio had the following significant characteristics in excess of 10%, based on the percentage of our consolidated total revenues:

91% related to domestic operations, which included concentrations of 31% and 17% in Texas and Minnesota, respectively; and
9% related to international operations.

Controls and procedures

As filed, 1,943 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.

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 Securities Exchange Act of 1934, as amended (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 December 31, 2023, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of December 31, 2023 at a reasonable level of assurance.

Management’s Report on Internal Control Over Financial Reporting

This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over

financial reporting or an attestation report of our independent registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.

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.

Figures reported in this filing

Standardized line items from the XBRL in this filing, for the period ended 2023-12-31. Comparative periods it repeats are left out.

Figures reported in this filing
Line item	Period	Value	XBRL concept
Revenue	12 months2023-01-01 to 2023-12-31	$175.0m	us-gaap:Revenues
Interest expense	12 months2023-01-01 to 2023-12-31	$42.6m	us-gaap:InterestExpense
Income tax	12 months2023-01-01 to 2023-12-31	$425.0k	us-gaap:IncomeTaxExpenseBenefit
Net income	12 months2023-01-01 to 2023-12-31	−$131.7m	us-gaap:NetIncomeLoss
Diluted shares (weighted)	12 months2023-01-01 to 2023-12-31	14,631,265 shares	us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding
Operating cash flow	12 months2023-01-01 to 2023-12-31	$71.0m	us-gaap:NetCashProvidedByUsedInOperatingActivities
Dividends paid	3 months2023-10-01 to 2023-12-31	$1.1m	us-gaap:PaymentsOfDividends
Cash and equivalents	At period end2023-12-31	$16.3m	us-gaap:CashAndCashEquivalentsAtCarryingValue
Total assets	At period end2023-12-31	$1.31bn	us-gaap:Assets
Total liabilities	At period end2023-12-31	$623.7m	us-gaap:Liabilities
Long-term debt	At period end2023-12-31	$542.0m	us-gaap:LongTermDebt
Shareholders' equity	At period end2023-12-31	$677.0m	us-gaap:StockholdersEquity

Source: SEC EDGAR, the filing index for accession 0001952976-24-000019. Last ingested by Listed: Oct 24, 2026, 15:16 ET. Listed shows no prices and gives no investment advice.