Net Lease Office Properties(NLOP) - 2024 Q4 - Annual Report

Part I Business NLOP, a Maryland REIT spun off from W. P. Carey Inc. in November 2023, manages and disposes of its 39-property office portfolio to realize shareholder value and repay debt - NLOP was formed by WPC via a spin-off on November 1, 2023, to hold a portfolio of 59 office assets and is externally managed by a WPC affiliate[17] - The company's primary business plan is to realize shareholder value by strategically managing and disposing of its property portfolio, with proceeds used for debt repayment and distributions[18] Portfolio Metrics | Metric | Value as of Dec 31, 2024 | | :--- | :--- | | Number of Properties | 39 | | Number of Tenants | 43 | | Annualized Base Rent (ABR) | $88.1 million | | Total Net-Leased Square Footage | ~5.6 million | | Occupancy Rate | ~85.2% | | Weighted-Average Lease Term (WALT) | 4.3 years | - In connection with the spin-off, NLOP secured $455.0 million in financing, including a $335.0 million mortgage loan fully repaid in 2024, with $61.1 million of the $120.0 million mezzanine loan outstanding as of December 31, 2024[19][20][21] Risk Factors The company faces significant risks from market volatility, remote work, tenant and geographic concentration, debt covenants limiting dividends, and the potential loss of REIT status - The business is vulnerable to market and economic volatility, including inflation and interest rate changes, which can decrease property values, affect tenant solvency, and limit capital access[29][30] - Ongoing remote and hybrid work trends have negatively impacted office space demand, potentially affecting property values, occupancy rates, and asset disposition prices[31][32] - The company faces significant tenant concentration risk, with the top tenant accounting for 22.9% of ABR and the top ten for 64.6% as of December 31, 2024, where a major tenant default could severely impact financial results[39] - High geographic concentration exists, with 39.4% of the portfolio's ABR in Texas and 10.1% in Minnesota, making the company susceptible to adverse regional economic developments[40] - The NLOP Financing Arrangements contain covenants limiting dividend payments, requiring distributions over $1.0 million to be paid in a combination of cash and common shares[59][91] - Failure to maintain REIT qualification would result in significant adverse tax consequences, including corporate income tax and inability to deduct shareholder dividends[80] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[111] Cybersecurity NLOP relies on its Advisor for cybersecurity risk management, overseen by the Board and Audit Committee, with no material incidents reported as of December 31, 2024 - As an externally managed company, NLOP relies on its Advisor to assess, identify, and manage cybersecurity threats, with oversight from the Board of Trustees and Audit Committee[112][114][115] - The Advisor's cybersecurity program focuses on prevention, detection, and response, including multi-factor authentication, automated monitoring, and incident recovery[117][118][123] - As of December 31, 2024, the company is not aware of any material cybersecurity incidents impacting it in the last three years[127] Properties The company's principal corporate offices are located at its Advisor's offices in New York, with detailed property information in Item 7 and Schedule III - The company's principal corporate offices are located at its Advisor's offices in New York, NY[128] Legal Proceedings The company is involved in various claims and lawsuits in the normal course of business, not expecting a material adverse effect on its financial position or results of operations - Various pending claims and lawsuits are not expected to have a material adverse effect on the company's consolidated financial position or results of operations[130] Mine Safety Disclosures This item is not applicable to the company - Not applicable[131] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities NLOP common shares trade on the NYSE, demonstrating significant outperformance against market indices since November 2023, with dividends subject to Board discretion and debt agreement limitations - The company's common shares are listed on the NYSE under the ticker symbol NLOP[134] Performance Graph | Index | Value at Nov 2, 2023 | Value at Dec 31, 2024 | | :--- | :--- | :--- | | Net Lease Office Properties | $100.00 | $303.34 | | S&P 500 Index | $100.00 | $138.53 | | MSCI US REIT Index | $100.00 | $127.06 | - Dividend payments are at the Board's discretion, influenced by REIT status requirements and covenants in NLOP Financing Arrangements that may limit distributions[137] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In 2024, NLOP executed its disposition strategy, selling 14 properties for $320.1 million and fully repaying its $335.0 million mortgage loan, resulting in decreased revenues, a narrowed net loss, and reduced AFFO, with future liquidity reliant on operating cash flow and further dispositions Financial Highlights In 2024, the company executed its disposition strategy by selling 14 properties for $320.1 million and transferring two properties to lenders, enabling full repayment of the NLOP Mortgage Loan and significant paydown of the Mezzanine Loan - Sold 14 properties for total net proceeds of $320.1 million during the year ended December 31, 2024[150] - Fully repaid the NLOP Mortgage Loan, which had $288.9 million outstanding at the end of 2023[150] - Repaid $53.2 million of principal on the NLOP Mezzanine Loan during 2024, with an additional $3.3 million repaid in February 2025[150] Summary Results For 2024, total revenues decreased to $142.2 million from $175.0 million in 2023 due to dispositions, while net loss improved to $(91.5) million from $(131.7) million, and AFFO declined to $62.0 million from $93.9 million Financial Performance Summary | (in thousands) | 2024 | 2023 | | :--- | :--- | :--- | | Total revenues | $142,247 | $174,965 | | Net loss attributable to NLOP | $(91,471) | $(131,746) | | FFO attributable to NLOP | $23,039 | $72,253 | | AFFO attributable to NLOP | $62,048 | $93,928 | Portfolio Overview As of December 31, 2024, NLOP's portfolio comprised 39 properties with 85.2% occupancy and a 4.3-year weighted-average lease term, with 64.6% of ABR from the top ten tenants and 22.6% from leases expiring in 2025-2026 Portfolio Summary | Portfolio Summary | As of Dec 31, 2024 | As of Dec 31, 2023 | | :--- | :--- | :--- | | ABR (in thousands) | $88,124 | $142,438 | | Number of properties | 39 | 55 | | Occupancy | 85.2% | 97.0% | | Weighted-average lease term (years) | 4.3 | 5.8 | Top Tenants by ABR | Top Tenant | % of ABR | | :--- | :--- | | KBR, Inc. | 22.9% | | JPMorgan Chase Bank, N.A. | 10.3% | | Siemens AS | 4.8% | | Total Top 10 | 64.6% | Lease Expiration Schedule | Year of Lease Expiration | ABR Percent | | :--- | :--- | | 2025 | 15.8% | | 2026 | 6.8% | | Total 2025-2026 | 22.6% | Results of Operations In 2024, lease revenues decreased by $37.2 million due to dispositions, operating expenses fell to $186.1 million (from $260.5 million in 2023), real estate impairment charges increased to $78.2 million, interest expense rose by $25.3 million, and a net gain of $20.2 million on property sales was recognized Revenues | (in thousands) | 2024 | 2023 | Change | | :--- | :--- | :--- | :--- | | Lease revenues | $128,857 | $166,034 | $(37,177) | | Total revenues | $142,247 | $174,965 | $(32,718) | Operating Expenses | (in thousands) | 2024 | 2023 | Change | | :--- | :--- | :--- | :--- | | Impairment charges — real estate | $78,237 | $63,143 | $15,094 | | Depreciation and amortization | $56,696 | $74,998 | $(18,302) | | General and administrative | $7,502 | $13,610 | $(6,108) | | Impairment charges — goodwill | $— | $62,456 | $(62,456) | | Total Operating Expenses | $186,115 | $260,497 | $(74,382) | Other Income and Expenses | (in thousands) | 2024 | 2023 | Change | | :--- | :--- | :--- | :--- | | Interest expense | $(67,962) | $(42,613) | $(25,349) | | Gain (loss) on sale of real estate, net | $20,216 | $(3,608) | $23,824 | Liquidity and Capital Resources The company's liquidity is driven by operating cash flow and property dispositions, with $71.9 million from operations and $297.7 million from investing activities in 2024, used to repay $368.0 million in debt, reducing total debt to $169.2 million by year-end, with $105.0 million in debt payments due in 2025 Cash Flow Summary | (in thousands) | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $71,859 | $70,966 | | Net cash provided by investing activities | $297,749 | $27,693 | | Net cash used in financing activities | $(367,984) | $(36,778) | Debt Summary | Debt Summary (Carrying Value, in thousands) | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Fixed rate | $129,445 | $231,337 | | Variable rate | $39,771 | $310,642 | | Total Debt, net | $169,216 | $541,979 | - Significant cash requirements over the next 12 months include $105.0 million in scheduled debt principal payments, $5.1 million in non-recourse mortgage interest, and $9.0 million in NLOP Mezzanine Loan interest[192][197] Critical Accounting Estimates The company's most critical accounting estimate is real estate impairment, involving a two-step process of comparing carrying value to undiscounted cash flows and then to fair value, requiring significant judgment on market rents, residual values, and holding periods - Real estate impairment assessment is a critical accounting estimate involving a two-step process: a recoverability test using undiscounted cash flows, followed by a fair value measurement if the asset is not recoverable[198][199] - The analysis requires significant management estimates regarding market rents, residual values, and strategic holding periods for each asset, often utilizing third-party market data and broker quotes[198][271] Supplemental Financial Measures The company uses non-GAAP measures FFO and AFFO to evaluate operating performance, with 2024 FFO at $23.0 million and AFFO at $62.0 million, both decreasing from 2023 primarily due to higher interest expense and property dispositions FFO and AFFO Reconciliation | (in thousands) | 2024 | 2023 | | :--- | :--- | :--- | | Net loss attributable to NLOP | $(91,471) | $(131,746) | | FFO (as defined by NAREIT) attributable to NLOP | $23,039 | $72,253 | | AFFO attributable to NLOP | $62,048 | $93,928 | - AFFO is calculated by adjusting FFO for certain non-cash items such as amortization of deferred financing costs, straight-line rent adjustments, stock-based compensation, and non-core expenses like separation costs[203][206] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include interest rate risk, with 76% fixed-rate debt, foreign currency risk from European properties, and significant credit concentration risk from tenants and geographic areas like Texas (36% of domestic revenues) - The company is exposed to interest rate risk, with 76% fixed-rate and 24% variable-rate debt as of December 31, 2024; a 1% change in rates would alter annual interest expense on variable-rate debt by $0.4 million[215][216] - Foreign currency exchange risk from two European investments means a 1% change in euro or Norwegian krone exchange rates against the U.S. dollar would alter projected net cash flow by approximately $0.1 million[218] - The company has significant credit risk concentration, with 94% of 2024 consolidated revenues from domestic operations, geographically concentrated with 36% in Texas and 19% in Minnesota[219][221] Financial Statements and Supplementary Data The 2024 consolidated financial statements, audited by PricewaterhouseCoopers LLP, report total assets of $805.1 million, total liabilities of $219.7 million, a net loss of $91.5 million, and detail property dispositions, debt repayment, impairment charges, and related-party transactions Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements, affirming their fair presentation of NLOP's financial position, operations, and cash flows in conformity with U.S. GAAP - The auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements[225] - The audit was conducted in accordance with PCAOB standards, and as an emerging growth company, an audit of internal control over financial reporting was neither required nor performed[227] Consolidated Financial Statements The consolidated financial statements reflect a significant reduction in assets and liabilities from 2023 to 2024 due to dispositions, with total assets decreasing to $805.1 million and total debt to $169.2 million, while the net loss improved to $91.5 million in 2024 Consolidated Balance Sheet | Consolidated Balance Sheet (in thousands) | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Net investments in real estate | $707,443 | $1,171,825 | | Total assets | $805,069 | $1,305,089 | | Debt, net | $169,216 | $541,979 | | Total liabilities | $219,666 | $623,659 | | Total shareholders' equity | $581,228 | $677,009 | Consolidated Statement of Operations | Consolidated Statement of Operations (in thousands) | 2024 | 2023 | | :--- | :--- | :--- | | Total Revenues | $142,247 | $174,965 | | Total Operating Expenses | $186,115 | $260,497 | | Net (Loss) Income Attributable to NLOP | $(91,471) | $(131,746) | | Basic and Diluted (Loss) Per Share | $(6.18) | $(9.00) | Notes to Consolidated Financial Statements The notes detail NLOP's formation via the WPC spin-off, accounting policies, $455 million in financing and repayments, the disposition of 14 properties for $320.1 million, $78.2 million in real estate impairment charges, and $10.2 million in advisory fees paid in 2024 - The company was formed via a spin-off from W. P. Carey Inc. on November 1, 2023, acquiring a portfolio of 59 office properties, operating as a single segment focused on owning, operating, and financing office buildings[248][249][251] - The company pays its Advisor an asset management fee (initially $7.5 million annually, reduced with dispositions) and reimburses administrative costs (~$4.0 million annually), totaling $10.2 million in fees and reimbursements in 2024[324][327] - In 2024, the company sold 14 properties for net proceeds of $320.1 million, recognizing a net gain of $22.5 million, and transferred two properties to lenders to satisfy mortgage debt[423][424][425] - The company fully repaid its $335.0 million NLOP Mortgage Loan during 2024, with the NLOP Mezzanine Loan having an outstanding principal of $61.1 million at year-end 2024, bearing 14.5% interest[386][388][390] - In 2024, the company recognized real estate impairment charges of $78.2 million on twelve properties, following a $62.5 million goodwill impairment charge in 2023 that wrote the balance down to zero[364][366][372] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles, practices, or financial statement disclosure - None[447] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2024, with no material changes identified in the most recent quarter - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2024[449] - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2024[453] - There were no changes in internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls[454] Other Information During the fourth quarter of 2024, no trustee, officer, or the company adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement - No trustee or officer adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement during the fourth quarter of 2024[456] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[457] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2025 Annual Meeting of Shareholders proxy statement - Information regarding directors, executive officers, and corporate governance will be contained in the definitive proxy statement for the 2025 Annual Meeting of Shareholders and is incorporated by reference[460] Executive and Trustee Compensation Information regarding executive and trustee compensation is incorporated by reference from the 2025 Annual Meeting of Shareholders proxy statement - Information regarding executive and trustee compensation will be contained in the definitive proxy statement for the 2025 Annual Meeting of Shareholders and is incorporated by reference[461] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the 2025 Annual Meeting of Shareholders proxy statement - Information regarding security ownership will be contained in the definitive proxy statement for the 2025 Annual Meeting of Shareholders and is incorporated by reference[462] Certain Relationships and Related Transactions, and Trustee Independence Information regarding certain relationships, related transactions, and trustee independence is incorporated by reference from the 2025 Annual Meeting of Shareholders proxy statement - Information regarding certain relationships, related transactions, and director independence will be contained in the definitive proxy statement for the 2025 Annual Meeting of Shareholders and is incorporated by reference[463] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2025 Annual Meeting of Shareholders proxy statement - Information regarding principal accounting fees and services will be contained in the definitive proxy statement for the 2025 Annual Meeting of Shareholders and is incorporated by reference[464] Part IV Exhibits and Financial Statement Schedules This section lists exhibits filed with the Form 10-K, including key agreements related to the spin-off, financing, and corporate governance, and references financial statements and schedules in Item 8 - This section provides an index of all exhibits filed with the report, including key agreements related to the spin-off, financing, and corporate governance[467][468][469] Form 10-K Summary This item is not applicable, and no summary is provided - None[472]