Net Lease Office Properties (NLOP)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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. Please see our Annual Report on Form 10-K for the year ended December 31, 2023 for discussion of our financial condition and results of operations for the year ended December 31, 2022. 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 herein, 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 the 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.

Financial Highlights

During the year ended December 31, 2024 and through the date of this Report, we completed the following (as further described in the consolidated financial statements):

Dispositions

•During the year ended December 31, 2024, we sold 14 properties for total proceeds, net of selling costs, of $320.1 million (Note 16).

•In April 2024, we disposed of two properties by transferring ownership to the respective mortgage lenders, in satisfaction of non-recourse mortgage loans encumbering the properties totaling $33.0 million (Note 16).

Debt Repayments

•During the year ended December 31, 2024, we (i) fully repaid the NLOP Mortgage Loan, which had $288.9 million of outstanding principal as of December 31, 2023, and (ii) repaid $53.2 million of outstanding principal on the NLOP Mezzanine Loan, in each case using proceeds from certain dispositions, as well as cash flow from rent on our properties and other sources (Note 11).

•During the year ended December 31, 2024, we prepaid two non-recourse mortgage loans totaling $20.8 million, which had a weighted-average interest rate of 5.2% (Note 11).

•In February 2025, we repaid $3.3 million of outstanding principal on the NLOP Mezzanine Loan using excess cash (Note 18).

Summary Results

(in thousands)

__________

(a)Amount for the year ended December 31, 2024 includes $10.3 million of proceeds from the sale of a net investment in sales-type lease (Note 7). Such proceeds are included within Net cash provided by operating activities in accordance with Accounting Standards Codification (“ASC”) 842, Leases.

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

Revenues

Total revenues decreased in 2024 as compared to 2023, primarily due to the impact of disposition activity and tenant vacancies at certain properties, partially offset by higher other lease-related income.

Net Loss Attributable to NLOP

Net loss attributable to NLOP decreased in 2024 as compared to 2023, primarily due to an impairment charge recognized on goodwill during 2023 and higher gain on sale of real estate, partially offset by higher interest expense and the impact of disposition activity.

FFO

FFO decreased in 2024 as compared to 2023, primarily due to higher interest expense (including amortization of deferred financing costs) and the impact of disposition activity, partially offset by higher other lease-related income and Spin-Off costs recognized during 2023.

AFFO

AFFO decreased in 2024 as compared to 2023, primarily due to the impact of disposition activity, partially offset by higher other lease-related income.

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

__________

(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, 2024 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)

__________

(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)

__________

(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, 2024. If there is a rent abatement, we annualize the first monthly contractual base rent following the free rent period.

Results of Operations

Revenues

Lease Revenues

For the year ended December 31, 2024 as compared to 2023, lease revenues decreased by $37.2 million, primarily due to disposition activity, tenant vacancies at certain properties, and the anticipated reimbursement of $3.3 million of rent to a tenant since the tenant had to vacate a property during a period of maintenance (this reimbursement was formally agreed upon in February 2025 (Note 18)).

Income from Finance Leases

For the year ended December 31, 2024 as compared to 2023, income from finance leases decreased by $1.1 million, primarily due to the reclassification of our remaining direct financing lease investment to operating lease during the third quarter of 2023, as well as the disposition of our remaining property classified as net investments in sales-type lease during the first quarter of 2024 (Note 7).

Other Lease-Related Income

Other lease-related income is described in Note 6.

Operating Expenses

Impairment Charges — Real Estate

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

Depreciation and Amortization

For the year ended December 31, 2024 as compared to 2023, depreciation and amortization expense decreased by $18.3 million, primarily due to the impact of disposition activity, partially offset by accelerated amortization of intangible assets in connection with a lease restructuring.

Reimbursable Tenant Costs

For the year ended December 31, 2024 as compared to 2023, reimbursable tenant costs decreased by $1.4 million, primarily due to the impact of dispositions, partially offset by higher insurance premiums paid on certain properties.

Property Expenses, Excluding Reimbursable Tenant Costs

For the year ended December 31, 2024 as compared to 2023, property expenses, excluding reimbursable tenant costs, increased by $2.3 million, primarily due to tenant vacancies during 2024 (which resulted in property expenses no longer being reimbursable).

General and Administrative

Prior to the Spin-Off on November 1, 2023 (Note 1), 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.

For the year ended December 31, 2024 as compared to 2023, general and administrative expenses decreased by $6.1 million, primarily since 2024 and the last two months of 2023 represent actual direct expenses incurred (including $4.0 million and $0.7 million of administrative reimbursements paid to our Advisor during 2024 and 2023, respectively (Note 5)), compared to the allocation of expenses described above for the first ten months of 2023.

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 $6.2 million and $1.2 million during the years ended December 31, 2024 and 2023, respectively (Note 5).

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).

Impairment Charges — Goodwill

Our impairment charges on goodwill are described in Note 9.

Other Income and Expenses, and Benefit from (Provision for) Income Taxes

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 (as defined in Note 11) 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.

For the year ended December 31, 2024 as compared to 2023, interest expense increased by $25.3 million, primarily due to the $455.0 million of NLOP Financing Arrangements that were funded on November 1, 2023 (Note 11). Since our NLOP Mortgage Loan was fully repaid during 2024 and we repaid $53.2 million of outstanding principal on the NLOP Mezzanine Loan during 2024, we expect Interest expense to be lower in future periods.

Gain (Loss) on Sale of Real Estate, Net

Gain (loss) on sale of real estate, net, consists of gain (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, 2024, other gains and (losses) of $(2.2) million were primarily comprised of (i) loss of ($3.2) million related to damages at a property, (ii) net realized and unrealized losses on our interest rate cap derivative of ($1.0) million (Note 10), (iii) net realized and unrealized gains on foreign currency exchange rate movements of ($0.8) million, (iv) loss of ($0.3) million on extinguishment of debt, (v) interest income on our cash deposits of $2.3 million, and (vi) gain of $0.9 million related to a forfeited deposit on a potential disposition.

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.

Benefit from (Provision for) Income Taxes

For the year ended December 31, 2024, we recognized a benefit from income taxes of $2.4 million, as compared to a provision for income taxes of $0.4 million for the year ended December 31, 2023, primarily due to the impact of an impairment charge recognized on an international property during 2024.

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):

Net Cash Provided by Operating Activities — Net cash provided by operating activities increased by $0.9 million during 2024 as compared to 2023, primarily due to $10.3 million of proceeds received from the sale of a net investment in sales-type lease during 2024 (Note 7) and Spin-Off related costs incurred during 2023 (Note 1), substantially offset by the impact of dispositions.

Net Cash Provided by Investing Activities — Net cash provided by investing activities increased by $270.1 million during 2024 as compared to 2023, primarily due to higher proceeds from dispositions (Note 16).

Net Cash Used in Financing Activities — Net cash used in financing activities increased by $331.2 million during 2024 as compared to 2023, primarily due to higher payments of the NLOP Financing Arrangements and mortgage principal.

Summary of Financing

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

____________

(a)Aggregate debt balance includes unamortized discount, net, totaling $1.8 million and $21.6 million as of December 31, 2024 and 2023, respectively, and unamortized deferred financing costs totaling $1.0 million and $9.2 million as of December 31, 2024 and 2023, 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, as discussed in Note 11. During the year ended December 31, 2024, we (i) fully repaid the NLOP Mortgage Loan, which had $288.9 million of outstanding principal as of December 31, 2023, and (ii) repaid $53.2 million of outstanding principal on the NLOP Mezzanine Loan, in each case using proceeds from certain dispositions, as well as cash flow from rent on our properties and other sources. At December 31, 2024, we had $61.1 million total principal outstanding on the NLOP Mezzanine Loan. In February 2025, we repaid $3.3 million of outstanding principal on the NLOP Mezzanine Loan using excess cash (Note 18).

Cash Resources

At December 31, 2024, our cash resources consisted of the following:

•cash and cash equivalents totaling $25.1 million. Of this amount, $8.6 million, at then-current exchange rates, was held in foreign subsidiaries, and we could be subject to restrictions or significant costs should we decide to repatriate these amounts; and

•unleveraged properties that had an aggregate asset carrying value of approximately $78.9 million at December 31, 2024, 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, 2024, scheduled debt principal payments total $105.0 million during 2025 and $5.9 million during 2026 (Note 11).

During the next 12 months following December 31, 2024 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 $110.8 million, with $105.0 million due during the next 12 months;

•making scheduled interest payments on our non-recourse mortgage debt obligations (future interest payments total $5.3 million, with $5.1 million due during the next 12 months);

•making scheduled principal payments on the NLOP Mezzanine Loan, totaling $61.1 million (no amounts are due during the next 12 months);

•making scheduled interest payments on the NLOP Mezzanine Loan (future interest payments total $35.9 million, with $9.0 million due during the next 12 months); includes 4.5% payment-in-kind interest 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 or an unanticipated disruption to our operating cash flow, which could include interrupted rent collections or greater-than-anticipated operating expenses.

Certain amounts disclosed above are based on the applicable foreign currency exchange rate at December 31, 2024.

Environmental Obligations

In connection with the purchase of many of our properties, we have required the sellers to perform environmental reviews. We believe, based on the results of these reviews, that these 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.

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 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.

FFO and AFFO were as follows (in thousands):

__________

(a)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).

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

(c)Primarily comprised of gains and losses on extinguishment of debt and foreign currency transactions. Amount for the year ended December 31, 2024 includes a loss of $3.2 million related to damages at a property.

(d)Amount for the year ended December 31, 2023 is primarily comprised of costs related to the Spin-Off (Note 1).

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.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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)

__________

(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

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(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)

__________

(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.

(c)This tenant vacated the property it was occupying upon lease expiration in the first quarter of 2024.

Lease Expirations

(dollars in thousands)

__________

(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

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

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

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):

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):

____________

(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):

__________

(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.