Net Lease Office Properties(NLOP) - 2025 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Q2 2025 saw an $81.5 million net loss due to an $81.8 million impairment, with assets and liabilities declining Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Assets | $668,655 | $805,069 | | Net investments in real estate | $582,501 | $707,443 | | Assets held for sale, net | $61,868 | $29,297 | | Cash and cash equivalents | $54,146 | $25,121 | | Total Liabilities | $164,604 | $219,666 | | Debt, net | $117,170 | $169,216 | | Total Equity | $504,051 | $585,403 | Consolidated Statement of Operations Highlights (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $29,174 | $39,029 | $58,387 | $83,036 | | Impairment charges — real estate | $81,817 | $8,222 | $82,737 | $12,287 | | Interest expense | ($4,400) | ($27,798) | ($10,146) | ($48,598) | | Net (Loss) Income Attributable to NLOP | ($81,540) | $12,451 | ($81,048) | ($15,391) | | Diluted (Loss) Earnings Per Share | ($5.50) | $0.84 | ($5.47) | ($1.04) | Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $25,828 | $41,084 | | Net Cash Provided by Investing Activities | $22,706 | $177,543 | | Net Cash Used in Financing Activities | ($61,496) | ($205,179) | Notes to Consolidated Financial Statements Notes detail operations, policies, and key events including loan repayment, impairment, and property dispositions - As of June 30, 2025, NLOP's portfolio consisted of 36 properties totaling approximately 5.9 million leasable square feet with a weighted-average lease term of 4.0 years[36] - During Q2 2025, the company recognized an impairment charge of $81.6 million on a property in Houston, Texas, leased to KBR, Inc., after commencing sale efforts for the property. The fair value was estimated at $73.2 million[80] - The NLOP Mezzanine Loan, with $61.1 million outstanding at year-end 2024, was fully repaid during the six months ended June 30, 2025, using proceeds from dispositions and cash flow[93] - A non-recourse mortgage loan on a property in Norway with a $45.5 million balance is in a loan-to-value covenant breach as of June 30, 2025. Another domestic non-recourse loan of $25.2 million was not repaid at its January 2025 maturity[95][96] - In August 2025, the Board of Trustees declared a special cash distribution of $3.10 per share, totaling approximately $45.9 million[115] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q2 2025 net loss to impairment; FFO increased from lower interest, AFFO decreased from dispositions - Key financial activities in H1 2025 include selling three properties for $25.4 million and fully repaying the NLOP Mezzanine Loan, which had a $61.1 million principal at year-end 2024[121][122] FFO and AFFO Reconciliation Summary (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Net (loss) income attributable to NLOP | ($81,540) | $12,451 | ($81,048) | ($15,391) | | FFO (as defined by NAREIT) | $13,164 | ($1,979) | $25,257 | $7,938 | | AFFO attributable to NLOP | $16,909 | $17,402 | $31,874 | $37,416 | - FFO increased for Q2 and H1 2025 compared to 2024, primarily due to lower interest expense from debt repayments. AFFO decreased over the same periods, mainly due to the impact of property dispositions and lower other lease-related income[129][131] Portfolio Overview Portfolio includes 36 properties with 88.1% occupancy and 4.0-year lease term; KBR, Inc. is top tenant Portfolio Summary | Metric | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | ABR (in thousands) | $87,987 | $88,124 | | Number of properties | 36 | 39 | | Occupancy | 88.1% | 85.2% | | Weighted-average lease term (years) | 4.0 | 4.3 | - The top ten tenants represent 66.3% of total ABR. KBR, Inc. is the largest tenant, contributing 22.9% of ABR[135] - A significant concentration of lease expirations occurs in 2030, accounting for 39.5% of ABR and 33.4% of square footage[136] Results of Operations Q2 2025 revenues decreased from dispositions; operating expenses surged from impairment, interest expense fell - Lease revenues for Q2 2025 decreased by $7.6 million compared to Q2 2024, primarily due to disposition activity and tenant vacancies[142] - Impairment charges on real estate increased by $73.6 million in Q2 2025 compared to Q2 2024, reaching $81.8 million[145][146] - Interest expense for Q2 2025 decreased by $23.4 million year-over-year, primarily due to the full repayment of the NLOP Mortgage Loan in 2024 and the NLOP Mezzanine Loan in April 2025[153] - The company experienced a $3.3 million loss on the sale of real estate in Q2 2025, a significant reversal from the $37.7 million gain in Q2 2024[152][154] Liquidity and Capital Resources Company holds $54.1 million cash; debt shifted to 39% variable-rate with $80.5 million payments due 2025 - Net cash from operating activities decreased by $15.3 million in the first six months of 2025 compared to the same period in 2024, primarily due to lower proceeds from sales-type leases and the impact of dispositions[160] Debt Composition | Debt Type | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Fixed rate | 61% | 76% | | Variable rate | 39% | 24% | | Total Debt (Carrying Value) | $117,170 thousand | $169,216 thousand | - As of June 30, 2025, the company has scheduled debt principal payments of $80.5 million for the remainder of 2025 and $36.6 million for 2026[166] - Cash resources at June 30, 2025, included $54.1 million in cash and cash equivalents and unleveraged properties with a carrying value of approximately $471.8 million[167] Quantitative and Qualitative Disclosures About Market Risk Primary market risks include interest rate and foreign currency exposure, with credit concentration in KBR and Texas - At June 30, 2025, 61% of debt is fixed-rate and 39% is variable-rate. A 1% change in annual interest rates would change annual interest expense on variable-rate debt by $0.5 million[187][188] - Foreign currency risk is primarily from an investment in Norway. A 1% change in the Norwegian krone to U.S. dollar exchange rate would change projected net cash flow by less than $0.1 million over the next 12 months[190] - Significant credit risk concentrations exist. For the six months ended June 30, 2025, tenant KBR, Inc. represented 28% of total revenues, and properties in Texas accounted for 43% of total revenues[193] Controls and Procedures Management concluded disclosure controls effective as of June 30, 2025, with no material changes in internal controls - The CEO and CFO concluded that as of June 30, 2025, the company's disclosure controls and procedures were effective at a reasonable level of assurance[195] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[196] PART II — OTHER INFORMATION Exhibits This section lists exhibits including officer certifications (SOX 302/906) and XBRL interactive data files - The exhibits filed with the report include CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906[199] - The filing also includes XBRL instance documents and related taxonomy files for interactive data[199] Signatures The report was signed by the Chief Financial Officer and Chief Accounting Officer on August 6, 2025 - The Form 10-Q was signed on August 6, 2025, by ToniAnn Sanzone, Chief Financial Officer, and Brian Zander, Chief Accounting Officer[201]