Item 1. Business
Item 1. Business.
General Development of Business
Net Lease Office Properties (“NLOP”) is a Maryland real estate investment trust that, together with our consolidated subsidiaries, owns a diversified portfolio of office properties that are primarily leased to corporate tenants on a single-tenant, net-lease basis. Our net leases generally specify a base rent with rent increases and require the tenant to pay substantially all costs associated with operating and maintaining the property. We intend to qualify and elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code (the “Code”), commencing with our taxable year ended December 31, 2023.
The vast majority of our revenues originate from lease revenue provided by our real estate portfolio, which is comprised of single-tenant office facilities that are critical to our tenants’ operations. As of December 31, 2023, our portfolio was comprised of 55 properties, net-leased to 59 corporate tenants operating in a variety of industries, generating annualized base rent (“ABR”) of approximately $142.4 million. As of December 31, 2023, almost all of our properties were located in the United States, except for five properties located in Europe.
Pursuant to the terms of a separation and distribution agreement, W. P. Carey Inc. (“WPC”), a leading net-lease REIT listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “WPC,” spun off a portfolio of 59 office assets into a separate publicly-traded company (the “Spin-Off”). To accomplish this Spin-Off, WPC formed NLOP on October 21, 2022. On November 1, 2023, WPC completed the Spin-Off. Following the closing of the Spin-Off, certain wholly-owned affiliates of WPC (our “Advisor”) externally manage NLOP pursuant to certain advisory agreements (the “NLOP Advisory Agreements”). The Spin-Off was accomplished via a pro rata dividend of 1 NLOP common share for every 15 shares of WPC common stock outstanding.
Our common shares are listed on the NYSE under the ticker symbol “NLOP.”
Narrative Description of Business
Business Objectives and Strategy
Our business plan is to focus on realizing value for our shareholders primarily through strategic asset management and disposition of our property portfolio over time. Our Advisor is generally responsible for all aspects of our operations including but not limited to formulating and evaluating the terms of each proposed disposition, arranging and executing the disposition of each asset, negotiating and monitoring the terms of our borrowings, preparing and filing our financial statements and required filings with the SEC, and other management services, under the supervision of our Board of Trustees. We anticipate using the proceeds of dispositions to pay down debt, pay distributions to our shareholders, and reinvest in our properties through capital expenditures, as needed.
Financing Strategies
On September 20, 2023, in connection with the Spin-Off, we and certain of our wholly-owned subsidiaries entered into financing arrangements for which funding was subject to certain conditions (including the closing of the Spin-Off), including (i) a $335.0 million senior secured mortgage loan maturing on November 9, 2025, subject to two separate one-year extension options (the “NLOP Mortgage Loan”) and (ii) a $120.0 million mezzanine loan facility maturing on November 9, 2028 (the “NLOP Mezzanine Loan” and, together with the NLOP Mortgage Loan, the “NLOP Financing Arrangements”). The NLOP Financing Arrangements are collateralized by the assignment of certain of our previously unencumbered real estate properties.
The funding of the NLOP Financing Arrangements occurred on November 1, 2023 (the date of the Spin-Off). We borrowed an aggregate of $455.0 million and each of the NLOP Mortgage Loan and the NLOP Mezzanine Loan was fully drawn. Approximately $343.9 million of the proceeds from the financing (net of transaction expenses) was transferred to WPC in connection with the Spin-Off.
Net Lease Office Properties 2023 10-K – 3
The NLOP Financing Arrangements are structured, in part, to provide us with the ability to engage in dispositions of assets as contemplated by our overall strategy. We intend to pay down the NLOP Financing Arrangements with proceeds from such dispositions and cash flow from rent on our properties, in accordance with the terms of the NLOP Financing Arrangements.
As of December 31, 2023, ten additional properties were encumbered by outstanding individual mortgages totaling approximately $168.8 million. We intend to repay or refinance these mortgages at maturity. We may also consider other options, including other forms of debt, additional mortgages, or leverage when available.
Our Portfolio
At December 31, 2023, our portfolio had the following characteristics:
• Number of properties — full or partial ownership interests in 55 net-leased properties;
• Total net-leased square footage — approximately 8.4 million; and
• Occupancy rate — approximately 97.0%.
For more information about our portfolio, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Portfolio Overview .
Tenant/Lease Information
At December 31, 2023, our tenants/leases had the following characteristics:
• Number of tenants — 59;
• Investment grade tenants as a percentage of total ABR — 43%;
• Implied investment grade tenants as a percentage of total ABR — 21%;
• Weighted-average lease term (“WALT”) — 5.8 years;
• 93.8% of our leases as a percentage of total ABR provide rent adjustments as follows:
◦ Fixed — 74.0%
◦ Consumer Price Index (“CPI”) and similar — 19.7%
◦ Other — 0.1%
Human Capital
We have no employees. At December 31, 2023, our Advisor had 197 employees, 144 of which were located in the United States and 53 of which were located in Europe. Employees of WPC are available to perform services under our Advisory Agreements. Our Advisory Agreements do not require the Advisor to dedicate any particular employees to us.
Available Information
We will supply to any shareholder, upon written request and without charge, a copy of this Report as filed with the SEC. Our filings can also be obtained for free on the SEC’s website at http://www.sec.gov. All filings we make with the SEC, including this Report, our quarterly reports on Form 10-Q, and our current reports on Form 8-K, as well as any amendments to those reports, are available for free on the Investor Relations portion of our website (http://www.nloproperties.com), as soon as reasonably practicable after they are filed with or furnished to the SEC.
Our Code of Business Conduct and Ethics, which applies to all trustees, officers, and employees, including our chief executive officer and chief financial officer, is also available on our website. We intend to make available on our website any future amendments or waivers to our Code of Business Conduct and Ethics within four business days after any such amendments or waivers. We are providing our website address solely for the information of investors and do not intend for it to be an active link. We do not intend to incorporate the information contained on our website into this Report or other documents filed with or furnished to the SEC.
Net Lease Office Properties 2023 10-K – 4