Net Lease Office Properties 10-K

Item 8. Financial Statements and Supplementary Data. TABLE OF CONTENTS Page No. Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 41 Consolidated Balance Sheets as of December 31, 2023 and 2022 42 Consolidated Statements of Operations for the Years Ended December 31, 2023, 2022, and 2021 43 Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2023, 2022, and 2021 44 Consolidated Statements of Equity for the Years Ended December 31, 2023, 2022, and 2021 45 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022, and 2021 46 Notes to Consolidated Financial Statements 47 Schedule II — Valuation and Qualifying Accounts for the Years Ended December 31, 2023, 2022, and 2021 76 Schedule III — Real Estate and Accumulated Depreciation as of December 31, 2023 77 Notes to Schedule III for the Years Ended December 31, 2023, 2022, and 2021 79 Financial statement schedules other than those listed above are omitted because the required information is given in the financial statements, including the notes thereto, or because the conditions requiring their filing do not exist. Net Lease Office Properties 2023 10-K – 40 Report of Independent Registered Public Accounting Firm To the Board of Trustees and Shareholders of Net Lease Office Properties Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Net Lease Office Properties and its subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, of comprehensive (loss) income, of equity and of cash flows for each of the three years in the period ended December 31, 2023, including the related notes and financial statement schedules listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP New York, New York March 6, 2024 We have served as the Company’s auditor since 2022. Net Lease Office Properties 2023 10-K – 41 NET LEASE OFFICE PROPERTIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) December 31, 2023 2022 Assets Investments in real estate: Land, buildings and improvements $ 1,203,991 $ 1,287,547 Net investments in finance leases 10,522 14,728 In-place lease intangible assets and other 357,788 375,453 Above-market rent intangible assets 57,954 58,983 Investments in real estate 1,630,255 1,736,711 Accumulated depreciation and amortization ( 458,430 ) ( 392,025 ) Net investments in real estate 1,171,825 1,344,686 Restricted cash 51,560 1,327 Cash and cash equivalents 16,269 4,671 Other assets, net 65,435 47,934 Goodwill — 63,583 Total assets $ 1,305,089 $ 1,462,201 Liabilities and Equity Debt: NLOP Mortgage Loan, net $ 266,844 $ — NLOP Mezzanine Loan, net 106,299 — Non-recourse mortgages, net 168,836 174,289 Parent debt — 101,774 Debt, net 541,979 276,063 Accounts payable, accrued expenses and other liabilities 59,527 49,950 Below-market rent intangible liabilities, net 10,643 14,671 Deferred income taxes 10,450 11,998 Dividends payable 1,060 — Total liabilities 623,659 352,682 Commitments and contingencies ( Note 12 ) Preferred stock, $ 0.001 par value, 5,000,000 shares authorized; none issued — — Common stock, $ 0.001 par value, 45,000,000 shares authorized; 14,620,919 shares issued and outstanding as of December 31, 2023 15 — Additional paid-in capital 855,554 — Distributions in excess of accumulated earnings ( 142,960 ) — Accumulated other comprehensive loss ( 35,600 ) ( 42,464 ) Net parent investment — 1,150,240 Total shareholders’ equity 677,009 1,107,776 Noncontrolling interests 4,421 1,743 Total equity 681,430 1,109,519 Total liabilities and equity $ 1,305,089 $ 1,462,201 See Notes to Consolidated Financial Statements. Net Lease Office Properties 2023 10-K – 42 NET LEASE OFFICE PROPERTIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) Years Ended December 31, 2023 2022 2021 Revenues Lease revenues $ 166,034 $ 151,249 $ 143,958 Income from finance leases 1,189 1,744 1,709 Other lease-related income 7,742 3,221 2,239 174,965 156,214 147,906 Operating Expenses Depreciation and amortization 74,998 63,205 58,580 Impairment charges — real estate 63,143 — — Impairment charges — goodwill 62,456 — — Reimbursable tenant costs 27,957 24,251 23,651 General and administrative 13,610 11,871 10,307 Property expenses, excluding reimbursable tenant costs 8,642 7,751 6,429 Separation and distribution related costs and other 8,446 6,025 — Asset management fees 1,245 — — 260,497 113,103 98,967 Other Income and Expenses Interest expense ( 42,613 ) ( 26,841 ) ( 28,641 ) Loss on sale of real estate, net ( 3,608 ) — — Other gains and (losses) 456 ( 7 ) ( 17,234 ) ( 45,765 ) ( 26,848 ) ( 45,875 ) (Loss) income before income taxes ( 131,297 ) 16,263 3,064 Provision for income taxes ( 425 ) ( 486 ) ( 1,646 ) Net (Loss) Income ( 131,722 ) 15,777 1,418 Net (income) loss attributable to noncontrolling interests ( 24 ) 2 — Net (Loss) Income Attributable to NLOP $ ( 131,746 ) $ 15,779 $ 1,418 Basic and Diluted (Loss) Income Per Share $ ( 9.00 ) $ 1.08 $ 0.10 Weighted-Average Shares Outstanding Basic and Diluted 14,631,265 14,620,919 14,620,919 See Notes to Consolidated Financial Statements. Net Lease Office Properties 2023 10-K – 43 NET LEASE OFFICE PROPERTIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (in thousands) Years Ended December 31, 2023 2022 2021 Net (Loss) Income $ ( 131,722 ) $ 15,777 $ 1,418 Other Comprehensive Income (Loss) Foreign currency translation adjustments 8,055 ( 1,233 ) 3,435 Unrealized loss on derivative instruments ( 1,191 ) — — 6,864 ( 1,233 ) 3,435 Comprehensive (Loss) Income ( 124,858 ) 14,544 4,853 Amounts Attributable to Noncontrolling Interests Net (income) loss ( 24 ) 2 — Comprehensive (income) loss attributable to noncontrolling interests ( 24 ) 2 — Comprehensive (Loss) Income Attributable to NLOP $ ( 124,882 ) $ 14,546 $ 4,853 See Notes to Consolidated Financial Statements. Net Lease Office Properties 2023 10-K – 44 NET LEASE OFFICE PROPERTIES CONSOLIDATED STATEMENTS OF EQUITY (in thousands, except share and per share amounts) Common Stock Additional Paid-In Capital Distributions in Excess of Accumulated Earnings Accumulated Other Comprehensive Loss Net Parent Investment Total Shareholders’ and Parent Company Equity Noncontrolling Interests Total Equity $0.001 Par Value Shares Amount Balance at January 1, 2021 — $ — $ — $ — $ ( 44,666 ) $ 910,209 $ 865,543 $ — $ 865,543 Net income 1,418 1,418 1,418 Net transfers from parent 187,110 187,110 187,110 Other comprehensive income: Foreign currency translation adjustments 3,435 3,435 3,435 Balance at December 31, 2021 — — — — ( 41,231 ) 1,098,737 1,057,506 — 1,057,506 Net income 15,779 15,779 ( 2 ) 15,777 Net transfers from parent 35,724 35,724 35,724 Acquisition of noncontrolling interests in connection with the CPA:18 Merger — 1,745 1,745 Other comprehensive loss: Foreign currency translation adjustments ( 1,233 ) — ( 1,233 ) — ( 1,233 ) Balance at December 31, 2022 — — — — ( 42,464 ) 1,150,240 1,107,776 1,743 1,109,519 Net (loss) income ( 137,989 ) 6,243 ( 131,746 ) 24 ( 131,722 ) Distributions to WPC in connection with the Spin-Off ( 353,133 ) ( 353,133 ) ( 353,133 ) Common shares issued in connection with the Spin-Off 14,620,919 15 855,504 ( 855,519 ) — — Net transfers from parent, including Spin-Off adjustments 52,169 52,169 52,169 Amortization of stock-based compensation expense 50 50 50 Contributions from noncontrolling interest — 2,775 2,775 Distributions to noncontrolling interest — ( 121 ) ( 121 ) Dividends declared ($ 0.34 per share) ( 4,971 ) ( 4,971 ) ( 4,971 ) Other comprehensive income: Foreign currency translation adjustments 8,055 8,055 8,055 Unrealized loss on derivative instruments ( 1,191 ) ( 1,191 ) ( 1,191 ) Balance at December 31, 2023 14,620,919 $ 15 $ 855,554 $ ( 142,960 ) $ ( 35,600 ) $ — $ 677,009 $ 4,421 $ 681,430 See Notes to Consolidated Financial Statements. Net Lease Office Properties 2023 10-K – 45 NET LEASE OFFICE PROPERTIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2023 2022 2021 Cash Flows — Operating Activities Net (loss) income $ ( 131,722 ) $ 15,777 $ 1,418 Adjustments to net (loss) income: Depreciation and amortization, including intangible assets and deferred financing costs 81,256 64,275 60,327 Impairment charges — real estate 63,143 — — Impairment charges — goodwill 62,456 — — Loss on sale of real estate, net 3,608 — — Stock-based compensation expense 2,904 3,161 2,398 Deferred income tax benefit ( 1,201 ) ( 1,043 ) ( 227 ) Straight-line rent adjustments ( 438 ) ( 3,043 ) ( 3,249 ) Net realized and unrealized (gains) losses on extinguishment of debt, foreign currency exchange rate movements, and other ( 247 ) 2,121 16,508 Amortization of rent-related intangibles and deferred rental revenue 140 1,959 834 Net changes in other operating assets and liabilities ( 8,933 ) 1,075 ( 2,674 ) Net Cash Provided by Operating Activities 70,966 84,282 75,335 Cash Flows — Investing Activities Proceeds from sales of real estate 38,855 — — Funding for real estate construction, redevelopments, and other capital expenditures on real estate ( 11,162 ) ( 4,717 ) ( 4,184 ) Cash paid to stockholders of CPA:18 – Global in the CPA:18 Merger — ( 20,969 ) — Cash and restricted cash acquired in connection with the CPA:18 Merger — 2,768 — Net Cash Provided by (Used in) Investing Activities 27,693 ( 22,918 ) ( 4,184 ) Cash Flows — Financing Activities Distributions to WPC in connection with the Spin-Off ( 343,885 ) — — Proceeds from NLOP Mortgage Loan 317,263 — — Proceeds from NLOP Mezzanine Loan 113,646 — — Payments of mortgage principal and other debt instruments ( 63,704 ) ( 39,940 ) ( 264,078 ) Net transfers with Parent, including Spin-Off adjustments ( 51,708 ) ( 24,594 ) 187,110 Payment of financing costs ( 10,518 ) — — Contributions from noncontrolling interests 2,775 — — Other financing activities, net ( 526 ) ( 7 ) ( 277 ) Distributions to noncontrolling interests ( 121 ) — — Net Cash Used in Financing Activities ( 36,778 ) ( 64,541 ) ( 77,245 ) Change in Cash and Cash Equivalents and Restricted Cash During the Year Effect of exchange rate changes on cash and cash equivalents and restricted cash ( 50 ) ( 123 ) 19 Net increase (decrease) in cash and cash equivalents and restricted cash 61,831 ( 3,300 ) ( 6,075 ) Cash and cash equivalents and restricted cash, beginning of year 5,998 9,298 15,373 Cash and cash equivalents and restricted cash, end of year $ 67,829 $ 5,998 $ 9,298 See Notes to Consolidated Financial Statements. Net Lease Office Properties 2023 10-K – 46 NET LEASE OFFICE PROPERTIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Business and Organization Pursuant to the terms of a separation and distribution agreement, W. P. Carey Inc. (“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 a Maryland real estate investment trust, Net Lease Office Properties (“NLOP”), on October 21, 2022, to own the 59 office assets. Information with respect to number of properties and square footage is unaudited. On November 1, 2023, WPC completed the Spin-Off, contributing 59 office properties to NLOP. Following the closing of the Spin-Off, NLOP operates as a separate publicly-traded real estate investment trust (“REIT”), and 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. NLOP intends to qualify and elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, commencing with the Company’s taxable year ended December 31, 2023. NLOP operates as one segment, and through its subsidiaries, owns, operates, and finances office buildings. As of December 31, 2023, NLOP’s portfolio was comprised of full or partial ownership interests in 55 properties, net-leased to 59 corporate tenants, totaling approximately 9.0 million leasable square feet (including 0.6 million of operating square footage for a parking garage at a domestic property), with a weighted-average lease term of 5.8 years. On August 1, 2022, WPC completed a merger with Corporate Property Associates CPA:18 – Global Incorporated (“CPA:18 – Global”), in which CPA:18 – Global merged with and into one of WPC’s indirect subsidiaries in exchange for shares of its common stock and cash (the “CPA:18 Merger”). Nine of the net lease properties that WPC acquired in the CPA:18 Merger were transferred to NLOP in connection with the Spin-Off. Costs allocated to the nine properties acquired in the CPA:18 Merger have been expensed as incurred and classified within Separation and distribution related costs and other in the consolidated statements of operations, totaling $ 6.0 million for the year ended December 31, 2022. Note 2. Basis of Presentation NLOP For periods after November 1, 2023, the consolidated financial statements include the results of NLOP and all entities in which the Company has a controlling interest. Intercompany transactions and balances have been eliminated in consolidation. Prior to the Spin-Off For periods prior to November 1, 2023, the accompanying historical consolidated financial statements and related notes of NLOP do not represent the balance sheet, statement of operations and cash flows 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 these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. In the opinion of management, the financial information for the periods presented in this Report reflects all normal and recurring adjustments necessary for a fair presentation of financial position, results of operations, and cash flows. These consolidated financial statements reflect the revenues and direct expenses of NLOP and include material assets and liabilities of WPC that are specifically attributable to NLOP. Equity in these consolidated financial statements 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 Spin-Off, as well as the allocated costs and expenses described below. Net Lease Office Properties 2023 10-K – 47 Notes to Consolidated Financial Statements The consolidated financial statements 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 ABR of NLOP and WPC management’s knowledge of NLOP. In addition, the consolidated financial statements reflect allocation of interest expense from WPC unsecured debt, excluding debt that is specifically attributable to NLOP ( Note 11 ); 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 corporate interest expense on WPC unsecured debt ( Note 11 ). The amounts allocated in the accompanying consolidated financial statements are not necessarily indicative of the actual amount of such indirect expenses that would have been recorded had NLOP been a separate independent entity during the applicable periods. WPC believes the assumptions underlying WPC’s allocation of indirect expenses are reasonable. Goodwill attributable to NLOP was determined by first identifying those assets within NLOP that were previously deemed to be a part of a business combination and that WPC paid a premium for. This premium was then allocated to NLOP assets based on the fair values of NLOP assets at the time of acquisition relative to the value of all the real estate acquired as part of the business combination. Any goodwill directly attributable to deferred taxes assumed as part of a business combination and related to our European operations is recorded in its functional currency and translated at period end rates where applicable. The amounts allocated in the accompanying consolidated financial statements are not necessarily indicative of the actual amount of such indirect expenses that would have been recorded had NLOP been a separate independent entity. WPC believes the assumptions underlying WPC’s allocation of indirect expenses are reasonable. Note 3. Summary of Significant Accounting Policies Critical Accounting Policies and Estimates Accounting for Acquisitions In accordance with the guidance for business combinations, we determine whether a transaction or other event is a business combination, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, we account for the transaction or other event as an asset acquisition. Under both methods, we recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. In addition, for transactions that are business combinations, we evaluate the existence of goodwill or a gain from a bargain purchase. We capitalize acquisition-related costs and fees associated with asset acquisitions. We immediately expense acquisition-related costs and fees associated with business combinations. There were no acquisitions during the reporting period with the exception of properties acquired in the CPA:18 Merger ( Note 4 ). Purchase Price Allocation of Tangible Assets — 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. Land is typically valued utilizing the sales comparison (or market) approach. Buildings are valued, as if vacant, using the cost and/or income approach. The fair value of real estate is determined (i) by applying a discounted cash flow analysis to the estimated net operating income for each property in the portfolio during the remaining anticipated lease term, and (ii) by the estimated residual value, which is based on a hypothetical sale of the property upon expiration of a lease factoring in the re-tenanting of such property at estimated market rental rates and applying a selected capitalization rate. Assumptions used in the model are property-specific where this information is available; however, when certain necessary information is not available, we use available regional and property-type information. Assumptions and estimates include the following: • a discount rate or internal rate of return; • market rents, growth factors of rents, and market lease term; • capitalization rates to be applied to an estimate of market rent at the beginning and/or the end of the market lease term; • the marketing period necessary to put a lease in place; • carrying costs during the marketing period; and • leasing commissions and tenant improvement allowances. Net Lease Office Properties 2023 10-K – 48 Notes to Consolidated Financial Statements The discount rates and residual capitalization rates used to value the properties are selected based on several factors, including: • the creditworthiness of the lessees; • industry surveys; • property type; • property location and age; • current lease rates relative to market lease rates; and • anticipated lease duration. In the case where a tenant has a purchase option deemed to be favorable to the tenant, or the tenant has long-term renewal options at rental rates below estimated market rental rates, we generally include the value of the exercise of such purchase option or long-term renewal options in the determination of residual value. The remaining economic life of leased assets is estimated by relying in part upon third-party appraisals of the leased assets and industry standards. Different estimates of remaining economic life will affect the depreciation expense that is recorded. Purchase Price Allocation of Intangible Assets and Liabilities — For acquired properties that do not qualify as sale-leaseback transactions, we record above- and below-market lease intangible assets and liabilities for acquired properties based on the present value (using a discount rate reflecting the risks associated with the leases acquired including consideration of the credit of the lessee) of the difference between (i) the contractual rents to be paid pursuant to the leases negotiated or in place at the time of acquisition of the properties and (ii) our estimate of fair market lease rates for the property or equivalent property, both of which are measured over the estimated lease term, which includes renewal options that have rental rates below estimated market rental rates. We discount the difference between the estimated market rent and contractual rent to a present value using an interest rate reflecting our current assessment of the risk associated with the lease acquired, which includes a consideration of the credit of the lessee. When we enter into sale-leaseback transactions with above- or below-market leases, the intangibles will be accounted for as loan receivables or prepaid rent liabilities, respectively. We measure the fair value of below-market purchase option liabilities we acquire as the excess of the present value of the fair value of the real estate over the present value of the tenant’s exercise price at the option date. We determine these values using our estimates or by relying in part upon third-party valuations conducted by independent appraisal firms . We amortize the above-market lease intangible as a reduction of lease revenue over the remaining contractual lease term. We amortize the below-market lease intangible as an increase to lease revenue over the initial term and any renewal periods in the respective leases. We include the value of below-market leases in Below-market rent and other intangible liabilities in the consolidated financial statements. For acquired properties with tenants in place, we record in-place lease intangible assets based on the estimated value ascribed to the avoidance of costs of leasing the properties for remaining primary in-place lease terms. The cost avoidance is derived first by determining the in-place lease term on the subject lease. Then, based on our review of the market, the cost to be borne by a property owner to replicate a market lease to the remaining in-place term is estimated. These costs consist of: (i) rent lost during downtime (i.e., assumed periods of vacancy), (ii) estimated expenses that would be incurred by the property owner during periods of vacancy, (iii) rent concessions (i.e., free rent), (iv) leasing commissions, and (v) tenant improvements allowances given to tenants. We determine these values using our estimates or by relying in part upon third-party valuations. We amortize the value of in-place lease intangibles to depreciation and amortization expense over the remaining initial term of each lease. The amortization period for intangibles does not exceed the remaining depreciable life of the building. If a lease is terminated, we charge the unamortized portion of above- and below-market lease values to rental income and in-place lease values to amortization expense. If a lease is amended, we will determine whether the economics of the amended lease continue to support the existence of the above- or below-market lease intangibles. Purchase Price Allocation of Debt — When we acquire leveraged properties (for example, through the CPA:18 Merger), the fair value of the related debt instruments is determined using a discounted cash flow model with rates that take into account the credit of the tenants, where applicable, and interest rate risk. Such resulting premium or discount is amortized over the remaining term of the obligation. We also consider the value of the underlying collateral, taking into account the quality of the collateral, the credit quality of the tenant, the time until maturity and the current interest rate. Net Lease Office Properties 2023 10-K – 49 Notes to Consolidated Financial Statements Impairments Real Estate — We periodically assess whether there are any indicators that the value of our long-lived real estate and related intangible assets may be impaired or that their carrying value may not be recoverable. These impairment indicators include, but are not limited to, vacancies, an upcoming lease expiration, a tenant with credit difficulty, the termination of a lease by a tenant, or a likely disposition of the property. 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. As our investment objective is to realize value for our shareholders, holding periods used in the undiscounted cash flow analysis are evaluated on an individual property basis based on our strategic hold time of 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. Assets Held for Sale — We generally classify real estate assets that are subject to operating leases as held for sale when we have entered into a contract to sell the property, all material due diligence requirements have been satisfied, we received a non-refundable deposit, and we believe it is probable that the disposition will occur within one year. When we classify an asset as held for sale, we compare the asset’s fair value less estimated cost to sell to its carrying value, and if the fair value less estimated cost to sell is less than the property’s carrying value, we reduce the carrying value to the fair value less estimated cost to sell. We will continue to review the property for subsequent changes in the fair value, and may recognize an additional impairment charge, if warranted. Goodwill — We evaluate goodwill for possible impairment at least annually or upon the occurrence of a triggering event. To identify any impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of the consolidated properties are less than their carrying value. This assessment is used as a basis to determine whether it is necessary to calculate the fair values of the consolidated properties. Impairments, if any, will be the difference between the reporting unit’s fair value and carrying amount, not to exceed the carrying amount of goodwill. Other Accounting Policies Variable Interest Entities When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a variable interest entity (“VIE”) and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. We apply accounting guidance for consolidation of VIEs to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Fixed price purchase and renewal options within a lease, as well as certain decision-making rights within a loan or joint-venture agreement, can cause us to consider an entity a VIE. Limited partnerships and other similar entities that operate as a partnership will be considered a VIE unless the limited partners hold substantive kick-out rights or participation rights. Significant judgment is required to determine whether a VIE should be consolidated. We review the contractual arrangements provided for in the partnership agreement or other related contracts to determine whether the entity is considered a VIE, and to establish whether we have any variable interests in the VIE. We then compare our variable interests, if any, to those of the other variable interest holders to determine which party is the primary beneficiary of the VIE based on whether the entity (i) has the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The liabilities of these VIEs are non-recourse to us and can only be satisfied from each VIE’s respective assets. Net Lease Office Properties 2023 10-K – 50 Notes to Consolidated Financial Statements At December 31, 2023, we considered one entity to be a VIE (given certain decision-making rights each partner has in accordance with the partnership agreement), which we consolidated, as we are considered the primary beneficiary. The following table presents a summary of selected financial data of the consolidated VIE included in our consolidated balance sheets (in thousands): December 31, 2023 Land, buildings and improvements $ 37,917 In-place lease intangible assets and other 9,685 Above-market rent intangible assets 4,338 Accumulated depreciation and amortization ( 3,679 ) Total assets 49,410 Total liabilities 304 Leases As a Lessee : Right-of-use (“ROU”) assets, included within in-place lease intangible assets and other on our consolidated balance sheets, represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments under the lease. We determine if an arrangement contains a lease at contract inception and determine the classification of the lease at commencement. Operating lease ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. We do not include renewal options in the lease term when calculating the lease liability unless we are reasonably certain we will exercise the option. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. Our variable lease payments consist of increases as a result of the Consumer Price Index (“CPI”) or other comparable indices, taxes, and maintenance costs. Lease expense for lease payments is recognized on a straight-line basis over the term of the lease. Below-market land lease intangible assets and above-market land lease intangible liabilities are included as a component of ROU assets. See Note 6 for additional disclosures on the presentation of these amounts in our consolidated balance sheets. The implicit rate within our operating leases is generally not determinable and, as a result, we use our incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of our incremental borrowing rate requires judgment. We determine our incremental borrowing rate for each lease using estimated baseline mortgage rates. These baseline rates are determined based on a review of current mortgage debt market activity for benchmark securities across domestic and international markets, utilizing a yield curve. The rates are then adjusted for various factors, including level of collateralization and lease term. As a Lessor : We combine non-lease components (lease arrangements that include common area maintenance services) with related lease components (lease revenues), since both the timing and pattern of transfer are the same for the non-lease component and related lease component, the lease component is the predominant component, and the lease component would otherwise be classified as an operating lease. For (i) operating lease arrangements involving real estate that include common area maintenance services and (ii) all real estate arrangements that include real estate taxes and insurance costs, we present these amounts within lease revenues in our consolidated statements of operations. We record amounts reimbursed by the lessee in the period in which the applicable expenses are incurred if the reimbursements are deemed collectible. Net investments in sales-type leases are accounted for under ASC 842, Leases . Upon lease commencement or lease modification, we assess lease classification to determine whether the lease should be classified as an operating, direct financing, or sales-type lease. If the lease is determined to be a sales-type lease, we record a net investment in the lease, which is equal to the sum of the lease payments receivable and the unguaranteed residual value, discounted at the rate implicit in the lease. Any difference between the fair value of the asset and the net investment in the lease is considered a gain on sale of real estate and recognized upon execution of the lease. Net Lease Office Properties 2023 10-K – 51 Notes to Consolidated Financial Statements Reclassifications — Certain prior period amounts have been reclassified to conform to the current period presentation. We currently present Restricted cash on its own line item in the consolidated balance sheets. Previously, restricted cash was included within Other assets, net in the consolidated balance sheets. Cash and Cash Equivalents — We consider all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of three months or less at the time of purchase to be cash equivalents. Items classified as cash equivalents include commercial paper and money market funds. Our cash and cash equivalents are held in the custody of several financial institutions, and these balances, at times, exceed federally insurable limits. We seek to mitigate this risk by depositing funds only with major financial institutions. Restricted Cash — Restricted cash primarily consists of security deposits and amounts required to be reserved pursuant to lender agreements for debt service, capital improvements, and real estate taxes and is included within Other assets, net on the balance sheet. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the consolidated statements of cash flows (in thousands): December 31, 2023 2022 2021 Cash and cash equivalents $ 16,269 $ 4,671 $ 3,966 Restricted cash (a) 51,560 1,327 5,332 Total cash and cash equivalents and restricted cash $ 67,829 $ 5,998 $ 9,298 __________ (a) Amount as of December 31, 2023 includes approximately $ 48.4 million related to certain reserve requirements pursuant to the NLOP Financing Arrangements ( Note 11 ). Land, Buildings and Improvements — We carry land, buildings, and improvements at cost less accumulated depreciation. We capitalize costs that extend the useful life of properties or increase their value, while we expense maintenance and repairs that do not improve or extend the lives of the respective assets as incurred. Gain/Loss on Sale — We recognize gains and losses on the sale of properties when the transaction meets the definition of a contract, criteria are met for the sale of one or more distinct assets, and control of the properties is transferred. Other Assets and Liabilities — We include prepaid expenses, deferred rental income, derivative assets, tenant receivables, deferred charges, escrow balances held by lenders, and restricted cash balances in Other assets, net. We include amounts held on behalf of tenants, operating lease liabilities, and deferred revenue in Accounts payable, accrued expenses and other liabilities. Revenue Recognition, Real Estate Leased to Others — We lease real estate to others primarily on a net leased basis, whereby the tenant is generally responsible for operating expenses relating to the property, including property taxes, insurance, maintenance, repairs, and improvements. Our leases generally provide for either scheduled rent increases, periodic rent adjustments based on formulas indexed to changes in the CPI or similar indices. CPI-based adjustments are contingent on future events and are therefore not included as minimum rent in straight-line rent calculations. For our operating leases, we recognize future minimum rental revenue on a straight-line basis over the non-cancelable lease term of the related leases and charge expenses to operations as incurred ( Note 6 ). We record leases accounted for under the direct financing method as a net investment in direct financing leases ( Note 7 ). The net investment is equal to the cost of the leased assets. The difference between the cost and the gross investment, which includes the residual value of the leased asset and the future minimum rents, is unearned income. We defer and amortize unearned income to income over the lease term so as to produce a constant periodic rate of return on our net investment in the lease. Net Lease Office Properties 2023 10-K – 52 Notes to Consolidated Financial Statements Asset Retirement Obligations — Asset retirement obligations relate to the legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or normal operation of a long-lived asset. The fair value of a liability for an asset retirement obligation is recorded in the period in which it is incurred or at the point of acquisition of an asset with an assumed asset retirement obligation, and the cost of such liability is recorded as an increase in the carrying amount of the related long-lived asset by the same amount. The liability is accreted each period and the capitalized cost is depreciated over the estimated remaining life of the related long-lived asset. Revisions to estimated retirement obligations result in adjustments to the related capitalized asset and corresponding liability. In order to determine the fair value of the asset retirement obligations, we make certain estimates and assumptions including, among other things, projected cash flows, the borrowing interest rate, and an assessment of market conditions that could significantly impact the estimated fair value. These estimates and assumptions are subjective. Depreciation — We compute depreciation of building and related improvements using the straight-line method over the estimated remaining useful lives of the properties (not to exceed 40 years) and furniture, fixtures, and equipment. We compute depreciation of tenant improvements using the straight-line method over the lesser of the remaining term of the lease or the estimated useful life. Net Parent Investment — In the consolidated balance sheets, the net parent investment represents WPC’s historical investment in NLOP prior to the Spin-Off, accumulated net earnings after taxes, and the net effect of transactions between NLOP and WPC. Stock-Based Compensation — We have granted restricted share units (“RSUs”) to the independent trustees on our Board of Trustees. Grants were awarded in the name of the recipient subject to certain restrictions of transferability and a risk of forfeiture. Stock-based compensation expense for all equity-classified stock-based compensation awards is based on the grant date fair value estimated in accordance with current accounting guidance for share-based payments, which includes awards granted to certain nonemployees. We recognize these compensation costs for only those shares expected to vest on a straight-line basis over the requisite service or performance period of the award. We include stock-based compensation within Additional paid-in capital in the consolidated statements of equity and Stock-based compensation expense in the consolidated statements of operations. Foreign Currency Translation and Transaction Gains and Losses — We have interests in international real estate investments in Europe, and the primary functional currencies for those investments are the euro, the British pound sterling, and the Norwegian krone. We perform the translation from these currencies to the U.S. dollar for assets and liabilities using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the average exchange rate during the month in which the transaction occurs. We report the gains and losses resulting from such translation as a component of other comprehensive income in equity. These translation gains and losses are released to net income (within gain on sale of real estate, net, in the consolidated statements of operations) when we have substantially exited from all investments in the related currency. A transaction gain or loss (measured from the transaction date or the most recent intervening balance sheet date, whichever is later), realized upon settlement of a foreign currency transaction generally will be included in net income for the period in which the transaction is settled. Also, foreign currency intercompany transactions that are scheduled for settlement, consisting primarily of accrued interest and the translation to the reporting currency of intercompany debt that is short-term or has scheduled principal payments, are included in the determination of net income (within losses on extinguishment of debt and other in the consolidated statements of operations). The translation impact of foreign currency transactions of a long-term nature (that is, settlement is not planned or anticipated in the foreseeable future), in which the entities involved in the transactions are combined, are not included in net income but are reported as a component of other comprehensive income in equity. Net Lease Office Properties 2023 10-K – 53 Notes to Consolidated Financial Statements Derivative Instruments — We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For derivatives designated and that qualify as cash flow hedges, the change in fair value of the derivative is recognized in Other comprehensive income (loss) until the hedged transaction affects earnings. Gains and losses on the cash flow hedges representing hedge components excluded from the assessment of effectiveness are recognized in earnings over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with our accounting policy election. Such gains and losses are recorded within Interest expense in our consolidated statements of operations. The earnings recognition of excluded components is presented in the same line item as the hedged transactions. In accordance with fair value measurement guidance, counterparty credit risk is measured on a net portfolio position basis. Income Taxes — We conduct business in various states and municipalities within the United States and Europe, and as a result, we or one or more of our subsidiaries file income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. As a REIT, our domestic real estate operations are generally not subject to federal tax. These operations may be subject to certain state and local taxes, as applicable. Significant judgment is required in determining our tax provision and in evaluating our tax positions. We establish tax reserves based on a benefit recognition model, which could result in a greater amount of benefit (and a lower amount of reserve) being initially recognized in certain circumstances. Provided that the tax position is deemed more likely than not of being sustained, we recognize the largest amount of tax benefit that is greater than 50% likely of being ultimately realized upon settlement. We derecognize the tax position when it is no longer more likely than not of being sustained. Our earnings and profits, which determine the taxability of distributions to shareholders, differ from net income reported for financial reporting purposes due primarily to differences in depreciation, and timing differences of rent recognition and certain expense deductions, for federal income tax purposes. We recognize deferred income taxes in certain of our subsidiaries taxable in the United States or in foreign jurisdictions. Deferred income taxes are generally the result of temporary differences (items that are treated differently for tax purposes than for GAAP purposes as described in Note 15 ). In addition, deferred tax assets arise from unutilized tax net operating losses, generated in prior years. Deferred income taxes are computed under the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between tax bases and financial bases of assets and liabilities. We provide a valuation allowance against our deferred income tax assets when we believe that it is more likely than not that all or some portion of the deferred income tax asset may not be realized. Whenever a change in circumstances causes a change in the estimated realizability of the related deferred income tax asset, the resulting increase or decrease in the valuation allowance is included in deferred income tax expense (benefit). Earnings Per Share — Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted-average number of shares of common shares outstanding during the year. Diluted earnings per share reflects potentially dilutive securities (RSUs) using the treasury stock method, except when the effect would be anti-dilutive. Earnings per share is computed by dividing the net loss for the year by the weighted-average number of common shares outstanding during the period post Spin-Off. For the year ended December 31, 2023, we recognized net loss. Therefore, all potentially dilutive securities were antidilutive and accordingly, basic net loss per share equals diluted net loss per share for the year ended December 31, 2023. The calculation of basic and diluted earnings per share for any of the periods presented prior to the Spin-Off were based on the number of shares outstanding on November 1, 2023. For periods prior to the Spin-Off, it is assumed that there are no dilutive equity instruments as there were no NLOP stock-based awards outstanding prior to the Spin-Off. Use of Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates. Net Lease Office Properties 2023 10-K – 54 Notes to Consolidated Financial Statements Note 4. Merger with CPA:18 – Global On February 27, 2022, WPC entered into a merger agreement with CPA:18 – Global, pursuant to which CPA:18 – Global merged with and into one of WPC’s indirect subsidiaries in exchange for shares of its common stock and cash (the “CPA:18 Merger”). The CPA:18 Merger and related transactions were approved by the stockholders of CPA:18 – Global on July 26, 2022, and completed on August 1, 2022. At the effective time of the CPA:18 Merger, each share of CPA:18 – Global common stock issued and outstanding immediately prior to the effective time of the CPA:18 Merger was canceled and, in exchange for cancellation of such share, the rights attaching to such share were converted automatically into the right to receive (i) 0.0978 shares of WPC common stock and (ii) $ 3.00 in cash, collectively referred to herein as the Merger Consideration. Each share of CPA:18 – Global common stock owned by WPC or any of its subsidiaries immediately prior to the effective time of the CPA:18 Merger was automatically canceled and retired, and ceased to exist, for no Merger Consideration. In exchange for the 141,099,002 shares of CPA:18 – Global common stock that WPC and its subsidiaries did not previously own, WPC paid total Merger Consideration of approximately $ 1.6 billion, consisting of (i) the issuance of 13,786,302 shares of new WPC common stock with a fair value of $ 1.2 billion, based on the closing price of the WPC common stock on August 1, 2022 of $ 87.46 per share, (ii) cash consideration of $ 423.3 million, and (iii) cash of $ 0.1 million paid in lieu of issuing any fractional shares of the new WPC common stock. Cash consideration paid attributable to NLOP is approximately $ 21.0 million. Nine of the net lease properties that WPC acquired in the CPA:18 Merger were transferred to NLOP in connection with the Spin-Off, with an aggregate net identifiable asset fair value at acquisition of $ 72.1 million. The table below summarizes the nine properties transferred to NLOP, which are included in the historical consolidated financial statements in the year ended December 31, 2022. (dollars and square footage in thousands) Tenant/Lease Guarantor City State Country ABR (a) Square Footage (unaudited) (a) Board of Regents, State of Iowa Coralville IA USA $ 3,254 192 Orbital ATK, Inc. Plymouth MN USA 3,746 191 Intuit Inc. Plano TX USA 2,577 166 Exelon Generation Company, LLC Warrenville IL USA 2,862 147 Acosta, Inc. Jacksonville FL USA 1,453 88 North American Lighting, Inc. Farmington Hills MI USA 1,007 75 Midcontinent Independent System Operator, Inc. Eagan MN USA 1,103 60 APCO Holdings, Inc. Norcross GA USA 586 51 Siemens AS (b) Oslo n/a NO 4,322 166 __________ (a) Information as of December 31, 2022. (b) ABR amounts are subject to fluctuations in foreign currency exchange rates. Purchase Price Allocation We accounted for the CPA:18 Merger as a business combination under the acquisition method of accounting. Costs related to the CPA:18 Merger have been expensed as incurred and classified within Separation and distribution related costs and other in the consolidated statements of operations, totaling $ 6.0 million for the year ended December 31, 2022. Net Lease Office Properties 2023 10-K – 55 Notes to Consolidated Financial Statements The purchase price was allocated to the assets acquired and liabilities assumed, based upon their preliminary fair values at August 1, 2022. The following table summarize the estimated fair values of the assets acquired and liabilities assumed in the acquisition, based on the current best estimate of management. (in thousands) Purchase Price Allocation Assets Land, buildings and improvements $ 196,867 In-place lease and other intangible assets 55,637 Cash and cash equivalents and restricted cash acquired 2,768 Other assets, net (excluding restricted cash) 1,173 Total assets 256,445 Liabilities Non-recourse mortgages, net 171,621 Accounts payable, accrued expenses and other liabilities 5,426 Below-market rent intangible liabilities 1,624 Deferred income taxes 5,680 Total liabilities 184,351 Total identifiable net assets 72,094 Noncontrolling interests 1,804 Goodwill 12,595 $ 86,493 Goodwill The $ 12.6 million of goodwill attributed to NLOP was primarily due to the historical premium paid over CPA:18 – Global’s estimated fair value. This premium was allocated to the NLOP assets based on the fair values of NLOP assets at the time of acquisition relative to the value of all the real estate acquired as part of the business combination. Goodwill is not deductible for income tax purposes. Pro Forma Financial Information (Unaudited) Our consolidated results of operations for the year ended December 31, 2022 include $ 9.8 million of total revenues, and $ 3.8 million of net loss associated with the results of operations for the properties acquired as part of the CPA:18 Merger. The following consolidated pro forma financial information has been presented as if the CPA:18 Merger had occurred on January 1, 2021 for the years ended December 31, 2022 and 2021. The pro forma financial information is not necessarily indicative of what the actual results would have been had the CPA:18 Merger on that date, nor does it purport to represent the results of operations for future periods. Years Ended December 31, (in thousands) 2022 2021 Pro forma total revenues $ 168,237 $ 171,686 Pro forma net income $ 15,828 $ ( 15,824 ) Note 5. Agreements and Transactions with Related Parties Advisory Agreements Pursuant to the NLOP Advisory Agreements, which we entered into on November 1, 2023, our Advisor provides us with strategic management services, including asset management, property disposition support, and various related services. We pay our Advisor an asset management fee that was initially set at an annual amount of $ 7.5 million and is proportionately reduced each month following the disposition of each portfolio property. In addition, we reimburse our Advisor a base administrative amount of approximately $ 4.0 million annually, for certain administrative services, including day-to-day management services, investor relations, accounting, tax, legal, and other administrative matters. Net Lease Office Properties 2023 10-K – 56 Notes to Consolidated Financial Statements On October 31, 2023, we entered into a Separation and Distribution Agreement, which set forth the various individual transactions to be consummated that comprised the Separation and the Distribution, including the assets transferred to and liabilities assumed by us, as well as the responsibility and obligation of us and our Advisor with respect to Spin-Off related costs. On October 31, 2023, we also entered into a Tax Matters Agreement, which governs the respective rights, responsibilities, and obligations of us and our Advisor after the Spin-Off, with respect to tax liabilities and benefits, the preparation and filing of tax returns, the control of audits and other tax proceedings, tax covenants, tax indemnification, cooperation, and information sharing. The following tables present a summary of fees we paid and expenses we reimbursed to our Advisor in accordance with the terms of the NLOP Advisory Agreements (in thousands): Year Ended December 31, 2023 Asset management fees (a) $ 1,245 Administrative reimbursements (b) 667 $ 1,912 __________ (a) Included within Asset management fees in the consolidated statements of operations. (b) Included within General and administrative expenses in the consolidated statements of operations. The following table presents a summary of amounts due to affiliates, which are included within Accounts payable, accrued expenses and other liabilities in the consolidated financial statements (in thousands): December 31, 2023 2022 Asset management fees payable $ 1,245 $ — Accounts payable 676 — $ 1,921 $ — Other Transactions with WPC Spin-Off In September 2023, we entered into the $ 455 million NLOP Financing Arrangements (as defined and described in Note 11 ), which were funded upon the closing of the Spin-Off on November 1, 2023. Approximately $ 343.9 million of the proceeds from the NLOP Financing Arrangements 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. NLOP Share Costs Historically, prior to the Spin-Off, NLOP was managed and operated in the normal course of business consistent with other affiliates of WPC. Accordingly, certain shared costs were allocated to NLOP and reflected as expenses in the consolidated statements of operations. Management considers the allocation methodologies used to be reasonable and appropriate reflections of the historical WPC expenses attributable to NLOP for purposes of the consolidated financial statements of NLOP. However, the expenses reflected in the consolidated statements of operations may not be indicative of the actual expenses that would have been incurred during the periods presented if NLOP historically operated as a separate, stand-alone entity. In addition, the expenses reflected in the consolidated statements of operations may not be indicative of related expenses that will be incurred in the future by NLOP. Net Lease Office Properties 2023 10-K – 57 Notes to Consolidated Financial Statements The following table presents amounts of shared costs that were allocated to NLOP (in thousands): Years Ended December 31, 2023 2022 2021 General and administrative (a) $ 13,610 $ 11,843 $ 10,292 Interest expense (b) 17,756 18,861 19,689 Property insurance (c) — — 19 Total $ 31,366 $ 30,704 $ 30,000 __________ (a) General and administrative fees are inclusive of expenses such as employee compensation and benefits, stock-based compensation and professional fees. (b) NLOP’s income statement prior to the Spin-Off includes an allocation of interest expense associated with WPC unsecured debt utilized partially to fund property assets of NLOP. (c) Included within Property expenses, excluding reimbursable tenants costs in the consolidated statements of operations. The following presents amounts owed to WPC by the Company as of December 31, 2022 (in thousands): December 31, 2022 Parent debt (a) $ 101,774 Accounts payable, accrued expenses, and other liabilities (b) 2,553 Total $ 104,327 __________ (a) Prior to the Spin-Off, certain wholly-owned affiliates of WPC entered into debt agreements with the international NLOP entities to provide the funding necessary to acquire certain international assets. (b) Represents amounts owed to WPC for accrued interest related to the Parent debt, and services and fees which were directly attributable to NLOP prior to the Spin-Off as discussed above. Net parent investment shown in the consolidated statements of equity include contributions from WPC, which are the result of treasury activities and net funding provided by WPC prior to the Spin-Off, and also includes the indirect costs and expenses allocated to NLOP by WPC as described in Note 2 . Other Transactions with Related Parties At December 31, 2023, we owned an interest in one jointly owned investment in real estate, with the remaining interest held by a third party. We consolidate this investment. Note 6. Land, Buildings and Improvements Land, Buildings and Improvements Land and buildings leased to others, which are subject to operating leases, are summarized as follows (in thousands): December 31, 2023 2022 Land $ 168,200 $ 178,362 Buildings and improvements 1,035,791 1,109,185 Less: Accumulated depreciation ( 213,034 ) ( 190,516 ) $ 990,957 $ 1,097,031 During 2023, the U.S. dollar weakened against the euro and British pound sterling, but strengthened against the Norwegian krone. As a result of this fluctuation in foreign currency exchange rates, the carrying value of our Land, buildings and improvements decreased by $ 1.0 million from December 31, 2022 to December 31, 2023. Net Lease Office Properties 2023 10-K – 58 Notes to Consolidated Financial Statements In connection with a change in lease classification due to an extension of the underlying lease, we reclassified a portfolio of four properties with an aggregate carrying value of $ 14.6 million from Net investments in finance leases to Land, buildings and improvements during the year ended December 31, 2023 ( Note 7 ). During the year ended December 31, 2023, we reclassified a property classified as Land, buildings and improvements to Net investments in finance leases since we entered into a purchase agreement with the tenant occupying the property. As a result, the carrying value of our Land, buildings and improvements (net of accumulated depreciation) decreased by $ 13.7 million from December 31, 2022 to December 31, 2023 ( Note 7 ). Depreciation expense, including the effect of foreign currency translation, on our buildings and improvements subject to operating leases was $ 31.2 million, $ 28.9 million, and $ 27.5 million for the years ended December 31, 2023, 2022, and 2021, respectively. During the year ended December 31, 2023, we capitalized accrued costs of $ 2.0 million within Land, buildings and improvements related to capital expenditures at certain properties, which is a non-cash investing activity. Dispositions of Properties During 2023, we sold four properties, which were classified as Land, buildings and improvements. As a result, the carrying value of our Land, buildings and improvements decreased by $ 30.5 million from December 31, 2022 to December 31, 2023 ( Note 16 ). Leases Operating Lease Income Lease income related to operating leases recognized and included in the consolidated statements of operations is as follows (in thousands): Years Ended December 31, 2023 2022 2021 Lease income — fixed $ 135,341 $ 125,573 $ 119,188 Lease income — variable (a) 30,693 25,676 24,770 Total operating lease income $ 166,034 $ 151,249 $ 143,958 __________ (a) Includes (i) rent increases based on changes in the CPI and other comparable indices and (ii) reimbursements for property taxes, insurance, and common area maintenance services. Other Lease-Related Income For the year ended December 31, 2023, other lease-related income on our consolidated statements of operations included lease termination income of $ 4.4 million recognized from one tenant. In addition, for the years ended December 31, 2023, 2022, and 2021, other lease-related income on our consolidated statements of operations included income from a parking garage attached to one of our net-leased properties totaling $ 1.8 million, $ 2.4 million, and $ 1.9 million, respectively. Net Lease Office Properties 2023 10-K – 59 Notes to Consolidated Financial Statements Scheduled Future Lease Payments to be Received Scheduled future lease payments to be received (exclusive of expenses paid by tenants, percentage of sales rents, and future CPI-based adjustments) under non-cancelable operating leases at December 31, 2023 are as follows (in thousands): Years Ending December 31, Total 2024 $ 128,088 2025 111,791 2026 94,921 2027 86,053 2028 75,834 Thereafter 272,730 Total $ 769,417 See Note 7 for scheduled future lease payments to be received under non-cancelable finance leases. Lease Cost Lease costs for operating leases (land leases) are included in (i) property expenses, excluding reimbursable tenant costs, and (ii) reimbursable tenant costs in the consolidated statements of operations. Certain information related to the total lease cost for operating leases is as follows (in thousands): Years Ended December 31, 2023 2022 2021 Fixed lease cost $ 541 $ 486 $ 446 Variable lease cost 90 89 85 Total lease cost $ 631 $ 575 $ 531 Other Information Supplemental balance sheet information related to ROU assets and lease liabilities is as follows (dollars in thousands): December 31, Location on Consolidated Balance Sheets 2023 2022 Operating ROU assets — land leases In-place lease intangible assets and other $ 4,263 $ 4,481 Operating lease liabilities Accounts payable, accrued expenses and other liabilities $ 4,678 $ 4,769 Weighted-average remaining lease term — operating leases 75.2 years 74.7 years Weighted-average discount rate — operating leases 9.2 % 9.0 % Number of land lease arrangements — operating leases 4 4 Lease term range (excluding extension options not reasonably certain of being exercised) < 2 – 83 years < 3 – 84 years Cash paid for operating lease liabilities included in Net cash provided by operating activities totaled $ 0.5 million for all of the years ended December 31, 2023, 2022, and 2021. There are no land or office direct financing leases for which we are the lessee, therefore there are no related ROU assets or lease liabilities. Net Lease Office Properties 2023 10-K – 60 Notes to Consolidated Financial Statements Undiscounted Cash Flows A reconciliation of the undiscounted cash flows for operating leases recorded on the consolidated balance sheet within Accounts payable, accrued expenses and other liabilities as of December 31, 2023 is as follows (in thousands): Years Ending December 31, Total 2024 $ 503 2025 499 2026 403 2027 404 2028 404 Thereafter 33,206 Total lease payments 35,419 Less: amount of lease payments representing interest ( 30,741 ) Present value of future lease payments/lease obligations $ 4,678 Note 7. Finance Receivables Assets representing rights to receive money on demand or at fixed or determinable dates are referred to as finance receivables. Our finance receivables portfolio consists of our Net investments in finance leases. At both December 31, 2023 and 2022, there was no reserve or estimate of credit loss on the finance leases, and no material balances of our finance receivables were past due. Operating leases are not included in finance receivables. See Note 2 and Note 6 for information on ROU operating lease assets recognized in our consolidated balance sheets. Net Investments in Sales-Type Leases On December 29, 2023, we entered into an agreement to sell a property located in the United Kingdom to the tenant occupying the property. In accordance with ASC 842, Leases , we reclassified this net-lease asset to net investments in sales-type leases totaling $ 10.5 million on our consolidated balance sheets (based on the estimated purchase price and the foreign currency exchange rate of the British pound sterling on the agreement date), since this agreement resulted in a lease modification. In connection with this transaction, we reclassified the following amounts to Net investments in finance leases: (i) $ 17.9 million from Land, buildings and improvements, (ii) $ 5.3 million from In-place lease intangible assets and other, (iii) $ 0.1 million from Below-market rent intangible liabilities, net, (iv) $ 2.0 million from Other assets, net, and (v) $ 6.5 million from Accumulated depreciation and amortization. We recognized an aggregate Loss on sale of real estate, net, of $ 8.3 million during the year ended December 31, 2023 related to this transaction, reflecting a balance of $ 0.2 million for accrued transaction costs within Accounts payable, accrued expenses and other liabilities for this investment. This investment was sold in January 2024 ( Note 18 ). Earnings from our net investments in sales-type leases are included in Income from finance leases in the consolidated financial statements, and totaled less than $ 0.1 million for the year ended December 31, 2023. Prior to this reclassification to net investments in sales-type leases, earnings from this investment were recognized in Lease revenues in the consolidated financial statements. Net investments in sales-type leases is summarized as follows (in thousands): December 31, 2023 2022 Lease payments receivable (a) $ 10,614 $ — 10,614 — Less: unearned income ( 92 ) — $ 10,522 $ — __________ (a) Includes estimated purchase price and total rents owed. Net Lease Office Properties 2023 10-K – 61 Notes to Consolidated Financial Statements Scheduled Future Lease Payments to be Received Scheduled future lease payments to be received (exclusive of expenses paid by tenants, percentage of sales rents, and future CPI-based adjustments) under non-cancelable finance leases at December 31, 2023 are as follows (in thousands): Years Ending December 31, Total 2024 (a) $ 10,614 2025 — 2026 — 2027 — 2028 — Thereafter — Total $ 10,614 __________ (a) Amount is comprised of the net investment in sales-type lease described above, representing the estimated purchase price of the investment plus remaining rents. This investment was sold in January 2024 for gross proceeds of approximately $ 10.5 million ( Note 18 ). Net Investments in Direct Financing Leases One investment was classified as a direct financing lease as of December 31, 2022. During the year ended December 31, 2023, we reclassified this investment (comprised of four properties) with an aggregate carrying value of $ 14.6 million from Net investments in finance leases to Land, buildings and improvements in connection with a change in lease classification due to an extension of the underlying lease. Net investments in direct financing leases is summarized as follows (in thousands): December 31, 2023 2022 Lease payments receivable $ — $ 11,423 Unguaranteed residual value — 14,558 — 25,981 Less: unearned income — ( 11,253 ) $ — $ 14,728 Income from direct financing leases, which is included in Income from finance leases in the consolidated financial statements, was $ 1.2 million, $ 1.7 million, and $ 1.7 million for the years ended December 31, 2023, 2022, and 2021, respectively. Credit Quality of Finance Receivables We evaluate the credit quality of our finance receivables utilizing an internal five-point credit rating scale, with one representing the highest credit quality and five representing the lowest. A credit quality of one through three indicates a range of investment grade to stable. A credit quality of four through five indicates a range of inclusion on the watch list to risk of default. The credit quality evaluation of our finance receivables is updated quarterly. Net Lease Office Properties 2023 10-K – 62 Notes to Consolidated Financial Statements A summary of our finance receivables by internal credit quality rating is as follows (dollars in thousands): Number of Tenants / Obligors at December 31, Carrying Value at December 31, Internal Credit Quality Indicator 2023 2022 2023 2022 1 1 — $ 10,522 $ — 2 — — — — 3 — 1 — 14,728 4 — — — — 5 — — — — $ 10,522 $ 14,728 Note 8. Goodwill and Other Intangibles We have recorded lease intangibles that are being amortized over periods ranging from one year to 40 years. In-place lease intangibles, at cost are included in In-place lease intangible assets and other in the consolidated financial statements. Above-market rent intangibles, at cost are included in Above-market rent intangible assets in the consolidated financial statements. Accumulated amortization of in-place lease and above-market rent intangibles is included in Accumulated depreciation and amortization in the consolidated financial statements. Below-market rent intangibles are included in Below-market rent and other intangible liabilities, net in the consolidated financial statements. In connection with the CPA:18 Merger ( Note 4 ) and certain other business combinations, we recorded goodwill as a result of consideration exceeding the fair values of the assets acquired and liabilities assumed ( Note 3 ). The following table presents a reconciliation of our goodwill (in thousands): Goodwill Balance at January 1, 2021 $ 52,235 Foreign currency translation adjustments ( 276 ) Balance at December 31, 2021 51,959 Acquisition of CPA:18 – Global ( Note 4 ) 12,595 Foreign currency translation adjustments ( 971 ) Balance at December 31, 2022 63,583 Impairment charges ( Note 9 ) ( 62,456 ) Foreign currency translation adjustments ( 1,127 ) Balance at December 31, 2023 $ — Current accounting guidance requires that we test for the recoverability of goodwill at the reporting unit level. We have only one reporting unit. The test for recoverability must be conducted at least annually, or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. We perform our annual test for impairment in October and continue to assess events and circumstances through to the end of the reporting period. Following the completion of the Spin-Off on November 1, 2023, we performed a test for impairment of goodwill, and recorded an impairment for the total amount of goodwill of $ 62.5 million as of December 31, 2023 ( Note 9 ). Net Lease Office Properties 2023 10-K – 63 Notes to Consolidated Financial Statements Intangible assets, intangible liabilities, and goodwill are summarized as follows (in thousands): December 31, 2023 2022 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Finite-Lived Intangible Assets Lease Intangibles: In-place lease $ 353,525 $ ( 212,456 ) $ 141,069 $ 370,971 $ ( 176,951 ) $ 194,020 Above-market rent 57,954 ( 32,940 ) 25,014 58,983 ( 24,559 ) 34,424 411,479 ( 245,396 ) 166,083 429,954 ( 201,510 ) 228,444 Goodwill Goodwill — — — 63,583 — 63,583 Total intangible assets $ 411,479 $ ( 245,396 ) $ 166,083 $ 493,537 $ ( 201,510 ) $ 292,027 Finite-Lived Intangible Liabilities Below-market rent $ ( 26,801 ) $ 16,158 $ ( 10,643 ) $ ( 27,792 ) $ 13,121 $ ( 14,671 ) Total intangible liabilities $ ( 26,801 ) $ 16,158 $ ( 10,643 ) $ ( 27,792 ) $ 13,121 $ ( 14,671 ) See Note 7 for a description of intangible assets and liabilities reclassified to net investments in sales-type leases during the year ended December 31, 2023. Net amortization of intangibles, including the effect of foreign currency translation, was $ 47.7 million, $ 36.0 million, and $ 31.8 million for the years ended December 31, 2023, 2022, and 2021, respectively. Amortization of below-market rent and above-market rent intangibles is recorded as an adjustment to Lease revenues and amortization of in-place lease intangibles is included in Depreciation and amortization. Based on the intangible assets and liabilities recorded at December 31, 2023, scheduled annual net amortization of intangibles for each of the next five calendar years and thereafter is as follows (in thousands): Years Ending December 31, Net Decrease in Lease Revenues Increase to Amortization Total 2024 $ 4,747 $ 35,310 $ 40,057 2025 3,640 26,698 30,338 2026 2,035 21,023 23,058 2027 1,489 16,381 17,870 2028 1,544 13,576 15,120 Thereafter 916 28,081 28,997 Total $ 14,371 $ 141,069 $ 155,440 Note 9. Fair Value Measurements The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities, and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments including interest rate caps, interest rate swaps, and foreign currency collars; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring us to develop our own assumptions. Net Lease Office Properties 2023 10-K – 64 Notes to Consolidated Financial Statements Items Measured at Fair Value on a Recurring Basis The methods and assumptions described below were used to estimate the fair value of each class of financial instrument. For significant Level 3 items, we have also provided the unobservable inputs. Derivative Assets — Our derivative assets, which are included in Other assets, net in the consolidated financial statements, are comprised of interest rate caps ( Note 10 ). The valuation of our derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves, spot and forward rates, and implied volatilities. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative instruments for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. These derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market. We did not have any transfers into or out of Level 1, Level 2, and Level 3 category of measurements during either the years ended December 31, 2023 or 2022. Gains and losses (realized and unrealized) recognized on items measured at fair value on a recurring basis included in earnings are reported within Other gains and (losses) on our consolidated financial statements. Our material financial instruments had the following carrying values and fair values as of the dates shown (dollars in thousands): December 31, 2023 December 31, 2022 Level Carrying Value Fair Value Carrying Value Fair Value NLOP Mortgage Loan, net (a) (b) (c) 2 $ 266,844 $ 291,358 $ — $ — NLOP Mezzanine Loan, net (a) (b) (c) 2 106,299 113,797 — — Non-recourse mortgages, net (a) (b) (c) 3 168,836 165,077 174,289 167,458 __________ (a) The carrying value of the NLOP Mortgage Loan, net includes unamortized deferred financing costs of $ 6.7 million at December 31, 2023. The carrying value of the NLOP Mezzanine Loan, net includes unamortized deferred financing costs of $ 2.4 million at December 31, 2023. The carrying value of Non-recourse mortgages, net includes unamortized deferred financing costs of less than $ 0.1 million at both December 31, 2023 and 2022. (b) The carrying value of the NLOP Mortgage Loan, net includes unamortized discount of $ 15.3 million at December 31, 2023. The carrying value of the NLOP Mezzanine Loan, net includes unamortized discount of $ 5.6 million at December 31, 2023. The carrying value of Non-recourse mortgages, net includes unamortized discount of $ 0.7 million and unamortized premium of $ 2.0 million at December 31, 2023 and 2022, respectively. (c) We determined the estimated fair value of our NLOP Mortgage Loan, NLOP Mezzanine Loan, and non-recourse mortgage loans using a discounted cash flow model that estimates the present value of the future loan payments by discounting such payments at current estimated market interest rates. The estimated market interest rates consider interest rate risk and the value of the underlying collateral, which includes quality of the collateral, the credit quality of the tenant/obligor, and the time until maturity. We estimated that our other financial assets and liabilities, excluding finance receivables ( Note 7 ), had fair values that approximated their carrying values at both December 31, 2023 and 2022. Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges) We periodically assess whether there are any indicators that the value of our real estate investments may be impaired or that their carrying value may not be recoverable. Our impairment policies are described in Note 3 . Net Lease Office Properties 2023 10-K – 65 Notes to Consolidated Financial Statements The following table presents information about assets for which we recorded an impairment charge and that were measured at fair value on a non-recurring basis (in thousands): Year Ended December 31, 2023 Fair Value Measurements Impairment Charges Impairment Charges Real estate and intangibles $ 58,088 $ 63,143 Goodwill — 62,456 $ 125,599 Impairment charges, and their related triggering events and fair value measurements, recognized during the year ended December 31, 2023, were as follows (during the years ended December 31, 2022 and 2021, no impairment was deemed necessary): Real Estate and Intangibles The impairment charges described below are reflected within Impairment charges — real estate in our consolidated statements of operations. 2023 — During the year ended December 31, 2023, we recognized impairment charges totaling $ 32.7 million on three properties leased to the same tenant due to the tenant’s lease expiration in 2024, in order to reduce their carrying values to their estimated fair values, which approximated their estimated selling prices. Additionally, we recognized an impairment charge of $ 29.3 million on a property due to the tenant’s lease expiration in 2024, in order to reduce its carrying value to its estimated fair value. The fair value measurement for this property was determined by using the following unobservable inputs: • Market rents ranging from $ 23 per square foot to $ 31 per square foot; • Terminal capitalization rate of 8.3 %; and • Cash flow discount rate of 9.3 %. We also recognized an impairment charge of $ 1.1 million on a property due to the tenant’s lease expiration in 2024, in order to reduce its carrying value to its estimated fair value, which approximated its estimated selling price. Goodwill The impairment charges described below are reflected within Impairment charges — goodwill in our consolidated statements of operations. During the year ended December 31, 2023, we recognized an impairment charge of $ 62.5 million on goodwill in order to reduce its carrying value 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 ( No te 8 ). Note 10. Risk Management and Use of Derivative Financial Instruments Risk Management In the normal course of our ongoing business operations, we encounter economic risk. There are four main components of economic risk that impact us: interest rate risk, credit risk, market risk, and foreign currency risk. We are primarily subject to interest rate risk on our interest-bearing liabilities, including our unhedged variable-rate non-recourse mortgage loans. Credit risk is the risk of default on our operations and our tenants’ inability or unwillingness to make contractually required payments. Market risk includes changes in the value of our properties and related loans, due to changes in interest rates or other market factors. We own investments in the United States and Europe and are subject to risks associated with fluctuating foreign currency exchange rates. Net Lease Office Properties 2023 10-K – 66 Notes to Consolidated Financial Statements Derivative Financial Instruments When we use derivative instruments, it is generally to reduce our exposure to fluctuations in interest rates. We have not entered into, and do not plan to enter into, financial instruments for trading or speculative purposes. The primary risks related to our use of derivative instruments include a counterparty to a hedging arrangement defaulting on its obligation and a downgrade in the credit quality of a counterparty to such an extent that our ability to sell or assign our side of the hedging transaction is impaired. While we seek to mitigate these risks by entering into hedging arrangements with large financial institutions that we deem to be creditworthy, it is possible that our hedging transactions, which are intended to limit losses, could adversely affect our earnings. Furthermore, if we terminate a hedging arrangement, we may be obligated to pay certain costs, such as transaction or breakage fees. We have established policies and procedures for risk assessment and the approval, reporting, and monitoring of derivative financial instrument activities. We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For derivatives designated and that qualify as cash flow hedges, the change in fair value of the derivative is recognized in Other comprehensive income (loss) until the hedged item is recognized in earnings. Such gains and losses are recorded within Interest expense in our consolidated statements of operations. The earnings recognition of excluded components is presented in the same line item as the hedged transactions. All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis on our consolidated financial statements. At both December 31, 2023 and 2022, no cash collateral had been posted nor received for any of our derivative positions. The following table sets forth certain information regarding our derivative instruments (in thousands): Asset Derivatives Fair Value at Derivatives Designated as Hedging Instruments Balance Sheet Location December 31, 2023 December 31, 2022 Interest rate cap Other assets, net $ 433 $ — 433 — Total derivatives $ 433 $ — The following tables present the impact of our derivative instruments in the consolidated financial statements (in thousands): Amount of Gain (Loss) Recognized on Derivatives in Other Comprehensive (Loss) Income Derivatives in Cash Flow Hedging Relationships Year Ended December 31, 2023 Interest rate cap $ ( 1,191 ) Total $ ( 1,191 ) Amount of Gain (Loss) on Derivatives Reclassified from Other Comprehensive (Loss) Income Derivatives in Cash Flow Hedging Relationships Location of Gain (Loss) Recognized in Income Year Ended December 31, 2023 Interest rate cap Interest expense $ ( 144 ) Total $ ( 144 ) Amounts reported in Other comprehensive income (loss) related to interest rate derivative contracts will be reclassified to Interest expense as interest is incurred on our variable-rate debt. As of December 31, 2023, we estimate that an additional $ 0.9 million will be reclassified as Interest expense during the next 12 months. Net Lease Office Properties 2023 10-K – 67 Notes to Consolidated Financial Statements The following table presents the impact of our derivative instruments in the consolidated financial statements (in thousands): Amount of Gain (Loss) on Derivatives Recognized in Income Derivatives in Cash Flow Hedging Relationships Location of Gain (Loss) Recognized in Income Year Ended December 31, 2023 Interest rate cap Interest expense $ ( 2 ) Total $ ( 2 ) See below for information on our purposes for entering into derivative instruments. Interest Rate Caps We are exposed to the impact of interest rate changes primarily through our borrowing activities. We have obtained, and may in the future obtain, variable-rate debt (our NLOP Financing Arrangements), and, as a result, we have entered into, and may continue to enter into, interest rate cap agreements with counterparties. Interest rate caps limit the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements. The interest rate caps that our consolidated subsidiaries had outstanding at December 31, 2023 are summarized as follows (currency in thousands): Interest Rate Derivatives Number of Instruments Notional Amount Fair Value at December 31, 2023 Designated as Cash Flow Hedging Instruments Interest rate cap 1 335,000 USD $ 433 $ 433 Credit Risk-Related Contingent Features We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of any collateral received. No collateral was received as of December 31, 2023. At December 31, 2023, both our total credit exposure and the maximum exposure to any single counterparty was $ 0.4 million. Note 11. Debt Debt Facility On September 20, 2023, in connection with the Spin-Off ( Note 1 ), 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 with an original maturity on November 9, 2025, with two separate one-year extension options subject to certain conditions (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”). Approximately $ 343.9 million of the proceeds from the financing (net of transaction expenses) was transferred to WPC in connection with the Spin-Off. The NLOP Financing Arrangements were initially collateralized by the assignment of 40 of our previously unencumbered real estate properties. As of December 31, 2023, the NLOP Financing Arrangements are collateralized by 36 of our properties, following the dispositions of four properties in December 2023. For a list of our encumbered properties, please see Schedule III — Real Estate and Accumulated Depreciation . The NLOP Mortgage Loan bears interest at an annual rate of one-month forward-looking term rate based on the Secured Overnight Financing Rate (“SOFR”), subject to a floor of 3.85 %, plus 5.0 %. In addition, NLOP entered into an interest rate cap agreement that limits our SOFR rate exposure to 5.35 % ( Note 10 ). The NLOP Mezzanine Loan bears interest at an annual rate of 14.5 % ( 10.0 % of which is required to be paid current on a monthly basis, and 4.5 % of which is a payment-in-kind accrual, on a quarterly basis). Net Lease Office Properties 2023 10-K – 68 Notes to Consolidated Financial Statements The NLOP Mortgage Loan is subject to certain deleveraging thresholds that require us to make repayments on the original loan balance totaling 15 % (or $ 50.3 million) on or prior to November 1, 2024, which is 12 months following the funding date of the loan, 25 % (or $ 83.8 million) on or prior to November 1, 2025, which is 12 months following the initial deleveraging threshold of the loan, such that no less than 40 % of the loan has been repaid, and, in the event we exercise the first one-year extension option, 30 % (or $ 100.5 million) on or prior to November 1, 2026, which is 12 months following the second deleveraging threshold of the loan, such that no less than 70 % of the loan has been repaid. To the extent the deleveraging thresholds are not met, we may be subject to certain fees and restrictions, in accordance with the terms of the NLOP Financing Arrangements, until these thresholds are met. 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. 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. The following table presents a summary of our NLOP Financing Arrangements (dollars in thousands): NLOP Financing Arrangements Original Principal Balance Interest Rate at December 31, 2023 Maturity Date at December 31, 2023 Principal Outstanding Balance at December 31, 2023 NLOP Mortgage Loan (a) (b) (c) $ 335,000 10.4 % 11/9/2025 $ 288,895 NLOP Mezzanine Loan (d) 120,000 14.5 % 11/9/2028 114,336 $ 403,231 __________ (a) Interest rate is based on SOFR plus 5.0 %. The interest rate is subject to an interest rate cap that limits our SOFR rate exposure at 5.35 %. (b) The NLOP Mortgage loan is subject to two separate one-year extension options. (c) Balance excludes unamortized discount of $ 15.3 million and unamortized deferred financing costs of $ 6.7 million at December 31, 2023. (d) Balance excludes unamortized discount of $ 5.6 million and unamortized deferred financing costs of $ 2.4 million at December 31, 2023. Non-Recourse Mortgages Non-recourse mortgages consist of mortgage notes payable, which are collateralized by the assignment of real estate properties. For a list of our encumbered properties, please see Schedule III — Real Estate and Accumulated Depreciation . At December 31, 2023, the weighted-average interest rate for our total non-recourse mortgage notes payable was 4.8 % (fixed-rate and variable-rate non-recourse mortgage notes payable were both 4.8 %), with maturity dates ranging from January 2024 to May 2026. A non-recourse mortgage loan with an outstanding principal balance of $ 13.2 million as of December 31, 2023 and a maturity date of January 6, 2024 has not been repaid as of the date of this Report ( Note 18 ). In connection with the Spin-Off, the lender of one of our non-recourse mortgages with a principal balance of approximately $ 19 million and a maturity date of November 2025 did not release WPC as guarantor on the loan ( Note 18 ). Non-recourse mortgages for properties acquired in the CPA:18 Merger were $ 138.4 million for the year ended December 31, 2022. Refer to Note 4 for further information on CPA:18 Merger. Parent Debt Prior to the Spin-Off, certain wholly-owned affiliates of WPC entered into debt agreements with the international NLOP entities to provide the funding necessary to acquire certain international assets. In connection with the Spin-Off, WPC assigned to us the receivable related to these debt amounts, which eliminates in consolidation. These debt instruments are reflected in these financials as Parent debt, and had fixed interest rates that averaged 5.9 % and 5.8 % at December 31, 2022 and 2021, respectively. During the years ended December 31, 2022 and 2021, we prepaid Parent debt totaling $ 3.1 million and $ 8.4 million, respectively. Parent debt for a property acquired in the CPA:18 Merger was $ 3.9 million for the year ended December 31, 2022. Net Lease Office Properties 2023 10-K – 69 Notes to Consolidated Financial Statements Repayments and Scheduled Mortgage Payments During 2023 During the year ended December 31, 2023, we (i) repaid a non-recourse mortgage loan at maturity with an aggregate principal balance of approximately $ 0.3 million, and (ii) prepaid a non-recourse mortgage loan of $ 2.9 million. We recognized an aggregate net gain on extinguishment of debt of less than $ 0.1 million on these repayments, which is included within Other gains and (losses) on our consolidated statements of operations. The weighted-average interest rate for these non-recourse mortgage loans on their respective dates of repayment was 5.2 %. Repayments and Scheduled Mortgage Payments During 2022 During the year ended December 31, 2022, we repaid at or close to maturity non-recourse mortgage loans totaling $ 36.8 million. We recognized an aggregate net loss on extinguishment of debt of less than $ 0.1 million on these repayments, which is included within Losses on extinguishment of debt and other on our consolidated statements of operations. The weighted-average interest rate for these non-recourse mortgage loans on their respective dates of repayment was 4.3 %. Interest Paid For the years ended December 31, 2023, 2022, and 2021, interest paid was $ 39.3 million, $ 26.8 million, and $ 28.6 million, respectively. Foreign Currency Exchange Rate Impact During the year ended December 31, 2023, the U.S. dollar strengthened against the Norwegian krone, resulting in an decrease of $ 1.4 million in the carrying value of our Non-recourse mortgages, net from December 31, 2022 to December 31, 2023. Scheduled Debt Principal Payments Scheduled debt principal payments as of December 31, 2023 are as follows (in thousands): Years Ending December 31, Total 2024 $ 39,008 2025 411,873 2026 7,540 2027 — 2028 114,336 Total principal payments 572,757 Unamortized discount, net ( 21,599 ) Unamortized deferred financing costs ( 9,179 ) Total $ 541,979 Certain amounts are based on the applicable foreign currency exchange rate at December 31, 2023. Covenants The credit agreements for certain of our non-recourse mortgage loan agreements, NLOP Mortgage Loan, and NLOP Mezzanine Loan include customary financial maintenance covenants that require us to maintain certain ratios and benchmarks at the end of each quarter. We were in compliance with all of these covenants at December 31, 2023. Note 12. Commitments and Contingencies At December 31, 2023, we were not involved in any material litigation. Various claims and lawsuits arising in the normal course of business are pending against us. The results of these proceedings are not expected to have a material adverse effect on our consolidated financial position or results of operations. Net Lease Office Properties 2023 10-K – 70 Notes to Consolidated Financial Statements Note 13. Equity Common Shares During the fourth quarter of 2023, our Board of Trustees declared a dividend of $ 0.34 per share, which was paid on January 29, 2024 to shareholders of record as of December 18, 2023. 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. Earnings Per Share The following table summarizes basic and diluted earnings (dollars in thousands): Years Ended December 31, 2023 2022 2021 Net (loss) income – basic and diluted $ ( 131,746 ) $ 15,779 $ 1,418 Weighted-average shares outstanding – basic and diluted 14,631,265 14,620,919 14,620,919 For the year ended December 31, 2023, we recognized net loss. Therefore, all potentially dilutive securities are antidilutive and accordingly, basic net loss per share equals diluted net loss per share. For the years ended December 31, 2022 and 2021, there were no potentially dilutive securities excluded from the computation of diluted earnings per share. Reclassifications Out of Accumulated Other Comprehensive Loss The following tables present a reconciliation of changes in Accumulated other comprehensive loss by component for the periods presented (in thousands): Gains and (Losses) on Derivative Instruments Foreign Currency Translation Adjustments Total Balance at January 1, 2021 $ — $ ( 44,666 ) $ ( 44,666 ) Other comprehensive income before reclassifications — 3,435 3,435 Balance at December 31, 2021 — ( 41,231 ) ( 41,231 ) Other comprehensive loss before reclassifications — ( 1,233 ) ( 1,233 ) Balance at December 31, 2022 — ( 42,464 ) ( 42,464 ) Other comprehensive income before reclassifications ( 1,335 ) 8,055 6,720 Amounts reclassified from accumulated other comprehensive loss to: Interest expense 144 — 144 Total 144 — 144 Net current period other comprehensive income ( 1,191 ) 8,055 6,864 Balance at December 31, 2023 $ ( 1,191 ) $ ( 34,409 ) $ ( 35,600 ) Note 14. Stock-Based and Other Compensation Stock-Based Compensation At December 31, 2023, we maintained the stock-based compensation plan described below. The total compensation expense for awards issued under this plan was less than $ 0.1 million for the period from November 1, 2023 to December 31, 2023, which was included in General and administrative expense in the consolidated financial statements. Net Lease Office Properties 2023 10-K – 71 Notes to Consolidated Financial Statements 2023 Incentive Award Plan The 2023 Incentive Award Plan (the “2023 Award Plan”) provides that the maximum aggregate number of our common shares that may be issued under the Incentive Award Plan will be 750,000 common shares. The maximum number of common shares that may be issued in connection with awards of incentive stock options (“ISOs”) under the 2023 Incentive Award Plan is 1,500,000 common shares. The 2023 Incentive Award Plan provides for the grant of various stock- and cash-based awards, including restricted stock units (“RSUs”), stock options (including ISOs and nonqualified stock options), restricted stock, dividend equivalents, stock payments, other incentive awards, long-term incentive plan (“LTIP”) units, and stock appreciation rights (“SARs”). At December 31, 2023, 721,347 shares remained available for issuance under the 2023 Share Incentive Plan, which is more fully described in Item 11 of this Report. Through the date of this Report, we have only issued RSUs under the 2023 Share Incentive Plan to members of our Board of Trustees (we have no employees). Nonvested RSUs at December 31, 2023 and changes during the period from November 1, 2023 to December 31, 2023 were as follows: RSU Awards Shares Weighted-Average Grant Date Fair Value Balance at November 1, 2023 — — Granted (a) 28,653 10.47 Nonvested at December 31, 2023 (b) 28,653 $ 10.47 __________ (a) The grant date fair value of RSUs reflect our stock price on the date of grant on a one -for-one basis. (b) At December 31, 2023, total unrecognized compensation expense related to these awards was approximately $ 0.2 million, with an aggregate weighted-average remaining term of 0.8 years. Note 15. Income Taxes Income Tax Provision The components of our provision for income taxes for the periods presented are as follows (in thousands): Years Ended December 31, 2023 2022 2021 Federal Current $ 58 $ — $ — State and Local Current 357 469 420 Foreign Current 1,211 1,060 1,453 Deferred ( 1,201 ) ( 1,043 ) ( 227 ) 10 17 1,226 Total Provision for Income Taxes $ 425 $ 486 $ 1,646 Net Lease Office Properties 2023 10-K – 72 Notes to Consolidated Financial Statements A reconciliation of effective income tax for the periods presented is as follows (in thousands): Years Ended December 31, 2023 2022 2021 Pre-tax loss attributable to taxable subsidiaries $ ( 32,176 ) $ ( 3,609 ) $ ( 1,038 ) Federal provision at statutory tax rate (21%) $ ( 6,757 ) $ ( 758 ) $ ( 218 ) Election of TRS Status (a) 4,615 — — Change in valuation allowance 3,179 1,169 2,304 Rate differential ( 63 ) ( 297 ) ( 922 ) State and local taxes, net of federal benefit ( 30 ) 469 420 Non-deductible expense 1 ( 45 ) ( 102 ) Other ( 520 ) ( 52 ) 164 Total provision for income taxes $ 425 $ 486 $ 1,646 __________ (a) Represents deferred taxes recorded as a result of our TRS status election for certain of our domestic real estate properties. Deferred Income Taxes Deferred income taxes at December 31, 2023 and 2022 consist of the following (in thousands): December 31, 2023 2022 Deferred Tax Assets Net operating loss and other tax credit carryforwards $ 3,521 $ 3,587 Basis differences — foreign investments 4,384 3,542 Other 1,982 — Total deferred tax assets 9,887 7,129 Valuation allowance ( 9,809 ) ( 7,129 ) Net deferred tax assets 78 — Deferred Tax Liabilities Basis differences — foreign investments ( 10,450 ) ( 11,998 ) Total deferred tax liabilities ( 10,450 ) ( 11,998 ) Net Deferred Tax Liability $ ( 10,372 ) $ ( 11,998 ) Our deferred tax assets and liabilities are primarily the result of temporary differences related to the following: • Basis differences between tax and GAAP for certain real estate investments. For income tax purposes, in certain acquisitions, we assume the seller’s basis, or the carry-over basis, in the acquired assets. The carry-over basis is typically lower than the purchase price, or the GAAP basis, resulting in a deferred tax liability with an offsetting increase to goodwill or the acquired tangible or intangible assets; • Timing differences generated by differences in the GAAP basis and the tax basis of assets such as those related to capitalized acquisition costs, straight-line rent, prepaid rents, and intangible assets; and • Tax net operating losses in certain subsidiaries, including those domiciled in foreign jurisdictions, that may be realized in future periods if the respective subsidiary generates sufficient taxable income. As of December 31, 2023, net operating loss carryforwards in foreign jurisdictions were less than $ 0.1 million, which will not expire as they can be carried forward indefinitely. As of December 31, 2022, net operating loss carryforwards in foreign jurisdictions were $ 0.3 million, which began to expire in 2023. Net Lease Office Properties 2023 10-K – 73 Notes to Consolidated Financial Statements The net deferred tax liability in the table above is comprised of deferred tax asset balances, net of certain deferred tax liabilities and valuation allowances, of $ 0.1 million at December 31, 2023, which are included in Other assets, net in the consolidated balance sheets, and other deferred tax liability balances of $ 10.5 million at December 31, 2023, which are included in Deferred income taxes in the consolidated balance sheets. As of December 31, 2022, net deferred tax liability balances of $ 12.0 million were included in Deferred income taxes in the consolidated balance sheets. Our taxable subsidiaries recognize tax positions in the financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the financial statements. At both December 31, 2023 and 2022, we had unrecognized tax benefits totaling $ 0.1 million that, if recognized, would have a favorable impact on our effective income tax rate in future periods. These unrecognized tax benefits are recorded as liabilities within Accounts payable, accrued expenses and other liabilities on our consolidated balance sheets. We recognize interest and penalties related to uncertain tax positions in income tax expense. At both December 31, 2023 and 2022, we had less than $ 0.1 million of accrued interest related to uncertain tax positions. Income Taxes Paid Income taxes paid were $ 2.7 million, $ 1.8 million, and $ 1.1 million for the years ended December 31, 2023, 2022, and 2021, respectively. Note 16. Property Dispositions Our property dispositions are also discussed in Note 6 . 2023 — During the year ended December 31, 2023, we sold four properties for total proceeds, net of selling costs, of $ 38.9 million, and recognized a net gain on these sales totaling $ 4.7 million, which is included in Loss on sale of real estate, net, on the consolidated statements of operations. Note 17. Geographic Information Our portfolio is comprised of domestic and international investments. At December 31, 2023, our international investments were comprised of investments in Poland, the United Kingdom, and Norway. No international tenant or country individually comprised at least 10% of our total lease revenues for the years ended December 31, 2023, 2022, or 2021, or at least 10% of our total long-lived assets at December 31, 2023 or 2022. One domestic tenant comprised 17.9 %, 20.2 %, and 22.1 % of our total lease revenues for the years ended December 31, 2023, 2022, and 2021, respectively, and 14.4 % and 13.3 % of our total long-lived assets at December 31, 2023 and 2022, respectively. The following tables present geographic information (in thousands): Years Ended December 31, 2023 2022 2021 Revenues Domestic $ 159,808 $ 142,767 $ 134,479 International 15,157 13,447 13,427 Total $ 174,965 $ 156,214 $ 147,906 December 31, 2023 2022 Long-lived Assets (a) Domestic $ 1,025,078 $ 1,181,943 International 146,747 162,743 Total $ 1,171,825 $ 1,344,686 __________ (a) Consists of Net investments in real estate . Net Lease Office Properties 2023 10-K – 74 Notes to Consolidated Financial Statements Note 18. Subsequent Events Disposition In January 2024, we sold one property for gross proceeds of $ 10.5 million ( Note 7 ). Non-Recourse Mortgage Guarantee In January 2024, the lender that did not consent to release WPC as guarantor of a non-recourse mortgage loan with a principal balance of approximately $ 19 million ( Not e 11 ) notified us that we were in default of the loan. The lender has not accelerated the principal payment schedule and we are working with them on a resolution, which we expect to be finalized during the year ending December 31, 2024. Non-Recourse Mortgage Non-Payment A non-recourse mortgage loan with an outstanding principal balance of $ 13.2 million as of December 31, 2023 and a maturity date of January 6, 2024 has not been repaid as of the date of this Report. Net Lease Office Properties 2023 10-K – 75 NET LEASE OFFICE PROPERTIES SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 2023, 2022, and 2021 (in thousands) Description Balance at Beginning of Period Other Additions Deductions Balance at End of Period Year Ended December 31, 2023 Valuation reserve for deferred tax assets $ 7,129 $ 3,431 $ ( 751 ) $ 9,809 Year Ended December 31, 2022 Valuation reserve for deferred tax assets $ 6,011 $ 1,789 $ ( 671 ) $ 7,129 Year Ended December 31, 2021 Valuation reserve for deferred tax assets $ 3,824 $ 2,285 $ ( 98 ) $ 6,011 Net Lease Office Properties 2023 10-K – 76 NET LEASE OFFICE PROPERTIES SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2023 (in thousands) Initial Cost to Company Cost Capitalized Subsequent to Acquisition (a) Increase (Decrease) in Net Investments (b) Gross Amount at which Carried at Close of Period (c) (d) Accumulated Depreciation (d) Date of Construction Date Acquired Life on which Depreciation in Latest Statement of Income is Computed Description Encumbrances Land Buildings Land Buildings Total Land, Buildings and Improvements (Office Property Locations) Raleigh, NC $ 1,259 $ 1,638 $ 1,255 $ 2 $ ( 780 ) $ 828 $ 1,287 $ 2,115 $ 1,143 1983 Jan. 1998 20 yrs. King of Prussia, PA 1,582 1,219 6,283 1,295 — 1,219 7,578 8,797 4,824 1968 Jan. 1998 40 yrs. Collierville, TN 27,600 3,154 70,038 3,513 ( 14,386 ) — 62,319 62,319 26,164 1999 Jan. 1998 40 yrs. Bridgeton, MO 1,095 842 4,762 2,523 ( 196 ) 842 7,089 7,931 4,575 1972 Jan. 1998 40 yrs. Rio Rancho, NM 3,011 1,190 9,353 5,866 ( 238 ) 2,287 13,884 16,171 8,141 1999 Jul. 1998 40 yrs. Moorestown, NJ 1,847 351 5,981 1,690 1 351 7,672 8,023 5,094 1964 Feb. 1999 40 yrs. Venice, CA 18,958 2,032 10,152 13,160 1 2,032 23,313 25,345 9,776 1991 Sep. 2004 40 yrs. Fort Worth, TX 21,776 4,600 37,580 327 — 4,600 37,907 42,507 13,150 2003 Feb. 2010 40 yrs. St. Petersburg, FL 3,728 1,466 15,207 3,847 — 1,466 19,054 20,520 6,557 1999 Sep. 2012 30 yrs. Yardley, PA 6,996 1,726 12,781 4,378 — 1,726 17,159 18,885 6,263 2002 Sep. 2012 30 yrs. San Marcos, TX 955 440 688 — — 440 688 1,128 244 2000 Sep. 2012 31 yrs. Playa Vista, CA 21,754 3,857 35,800 — — 3,857 35,800 39,657 12,647 1999 Sep. 2012 40 yrs. Odessa, TX — 196 1,864 — — 196 1,864 2,060 21 2000 Sep. 2012 29 yrs. San Marcos, TX — 656 6,723 — — 656 6,723 7,379 77 1996 Sep. 2012 29 yrs. Corpus Christi, TX — 764 1,823 — — 764 1,823 2,587 21 2000 Sep. 2012 29 yrs. Waco, TX — 473 2,058 — — 473 2,058 2,531 24 1969 Sep. 2012 29 yrs. Quincy, MA 6,379 2,316 21,537 127 — 2,316 21,664 23,980 6,137 1989 Jun. 2013 40 yrs. Scottsdale, AZ 19,550 22,300 42,329 11,380 — 22,300 53,709 76,009 4,315 1977 Jan. 2014 34 yrs. Southfield, MI 1,096 1,726 4,856 89 — 1,726 4,945 6,671 1,585 1985 Jan. 2014 31 yrs. Houston, TX 1,438 522 7,448 227 — 522 7,675 8,197 2,905 1999 Jan. 2014 27 yrs. Chandler, AZ 7,062 5,318 27,551 105 — 5,318 27,656 32,974 7,843 2000 Mar. 2014 40 yrs. Stavanger, Norway — 10,296 91,744 — ( 39,734 ) 6,347 55,959 62,306 13,320 1975 Aug. 2014 40 yrs. Houghton-le-Spring, United Kingdom — 2,912 30,140 — ( 6,084 ) 2,375 24,593 26,968 5,827 2007 Aug. 2015 40 yrs. Roseville, MN 8,689 2,560 16,025 435 — 2,560 16,460 19,020 2,816 2001 Nov. 2017 40 yrs. The Woodlands, TX 6,430 1,697 52,289 — ( 29,342 ) 645 23,999 24,644 6,923 2009 Oct. 2018 40 yrs. Hoffman Estates, IL 10,193 5,550 14,214 — — 5,550 14,214 19,764 1,951 2009 Oct. 2018 40 yrs. Tampa, FL 5,508 2,025 31,821 1,557 — 2,025 33,378 35,403 4,503 1985 Oct. 2018 40 yrs. Tampa, FL 875 1,864 18,022 185 — 1,864 18,207 20,071 2,469 1985 Oct. 2018 40 yrs. Hartland, WI 1,999 1,454 6,406 — — 1,454 6,406 7,860 933 2001 Oct. 2018 40 yrs. Houston, TX 1,503 2,136 2,344 — — 2,136 2,344 4,480 373 1982 Oct. 2018 40 yrs. Martinsville, VA 2,252 1,082 8,108 — — 1,082 8,108 9,190 1,178 2011 Oct. 2018 40 yrs. Eagan, MN 1,092 1,470 — — ( 951 ) 519 — 519 — 2005 Oct. 2018 40 yrs. Eagan, MN 8,263 4,312 32,878 — ( 19,216 ) 1,524 16,450 17,974 4,705 1969 Oct. 2018 40 yrs. Net Lease Office Properties 2023 10-K – 77 SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued) December 31, 2023 (in thousands) Initial Cost to Company Cost Capitalized Subsequent to Acquisition (a) Increase (Decrease) in Net Investments (b) Gross Amount at which Carried at Close of Period (c) (d) Accumulated Depreciation (d) Date of Construction Date Acquired Life on which Depreciation in Latest Statement of Income is Computed Description Encumbrances Land Buildings Land Buildings Total Eagan, MN 9,853 2,654 19,287 — — 2,654 19,287 21,941 2,716 1982 Oct. 2018 40 yrs. Eagan, MN 9,583 3,112 15,419 — — 3,112 15,419 18,531 2,201 2001 Oct. 2018 40 yrs. Eagan, MN 7,872 3,396 16,754 — ( 6,832 ) 2,088 11,230 13,318 2,419 1985 Oct. 2018 40 yrs. Warrenville, IL 5,756 3,662 23,711 — — 3,662 23,711 27,373 3,241 2002 Oct. 2018 40 yrs. Houston, TX 24,610 23,161 104,266 2,290 — 23,161 106,556 129,717 13,885 1973 Oct. 2018 40 yrs. Auburn Hills, MI 3,118 1,910 6,773 272 — 1,910 7,045 8,955 956 2012 Oct. 2018 40 yrs. Tempe, AZ 13,184 — 19,533 — ( 1,265 ) — 18,268 18,268 2,668 2000 Oct. 2018 40 yrs. Krakow, Poland — 2,381 6,212 — ( 259 ) 2,309 6,025 8,334 837 2003 Oct. 2018 40 yrs. Plymouth, MN 8,280 2,871 26,353 741 — 2,871 27,094 29,965 3,747 1999 Oct. 2018 40 yrs. San Antonio, TX 7,866 3,094 16,624 — — 3,094 16,624 19,718 2,315 2002 Oct. 2018 40 yrs. Oak Creek, WI 5,549 2,858 11,055 — — 2,858 11,055 13,913 1,624 2000 Oct. 2018 40 yrs. Morrisville, NC 9,879 2,374 30,140 2,650 — 2,374 32,790 35,164 4,273 1998 Mar. 2019 40 yrs. Norcross, GA 2,545 1,795 2,676 — — 1,795 2,676 4,471 95 1999 Aug. 2022 40 yrs. Farmington Hills, MI 6,087 2,195 5,213 — — 2,195 5,213 7,408 185 2001 Aug. 2022 40 yrs. Eagan, MN 8,704 1,298 7,445 — — 1,298 7,445 8,743 264 2013 Aug. 2022 40 yrs. Plymouth, MN 25,213 4,624 29,243 — — 4,624 29,243 33,867 1,038 1982 Aug. 2022 40 yrs. Plano, TX 21,512 3,667 28,073 — — 3,667 28,073 31,740 996 2001 Aug. 2022 40 yrs. Jacksonville, FL 9,488 2,084 6,673 — — 2,084 6,673 8,757 237 2001 Aug. 2022 40 yrs. Warrenville, IL 19,893 3,285 11,666 484 — 3,285 12,150 15,435 447 2001 Aug. 2022 40 yrs. Coralville, IA — 2,222 35,695 — — 2,222 35,695 37,917 1,266 2015 Aug. 2022 40 yrs. Oslo, Norway 43,798 15,763 33,250 27 ( 2,569 ) 14,937 31,534 46,471 1,120 2013 Aug. 2022 40 yrs. $ 435,680 $ 182,550 $ 1,086,121 $ 57,170 $ ( 121,850 ) $ 168,200 $ 1,035,791 $ 1,203,991 $ 213,034 __________ (a) Consists of the cost of improvements subsequent to acquisition and acquisition costs, including construction costs on build-to-suit transactions, legal fees, appraisal fees, title costs, and other related professional fees. For business combinations, transaction costs are excluded. (b) The increase (decrease) in net investment was primarily due to (i) impairment charges and (ii) changes in foreign currency exchange rates. (c) Excludes (i) gross lease intangible assets of $ 411.5 million and the related accumulated amortization of $ 245.4 million, (ii) gross lease intangible liabilities of $ 26.8 million and the related accumulated amortization of $ 16.2 million, and (iii) net investments in sales-type leases of $ 10.5 million. (d) A reconciliation of real estate and accumulated depreciation follows: Net Lease Office Properties 2023 10-K – 78 NET LEASE OFFICE PROPERTIES NOTES TO SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) Reconciliation of Real Estate Subject to Operating Leases Years Ended December 31, 2023 2022 2021 Beginning balance $ 1,287,547 $ 1,100,230 $ 1,103,382 Impairment charges ( 57,607 ) — — Dispositions ( 35,287 ) — — Reclassification to sales-type lease ( 17,861 ) — — Reclassification from direct financing leases 14,558 — — Capital improvements 13,398 4,723 577 Foreign currency translation adjustment ( 757 ) ( 14,273 ) ( 3,729 ) Acquisitions through CPA:18 Merger — 196,867 — Ending balance $ 1,203,991 $ 1,287,547 $ 1,100,230 Reconciliation of Accumulated Depreciation for Real Estate Subject to Operating Leases Years Ended December 31, 2023 2022 2021 Beginning balance $ 190,516 $ 163,836 $ 136,889 Depreciation expense 31,237 28,923 27,493 Dispositions ( 4,782 ) — — Reclassification to sales-type lease ( 4,163 ) — — Foreign currency translation adjustment 226 ( 2,243 ) ( 546 ) Ending balance $ 213,034 $ 190,516 $ 163,836 At December 31, 2023, the aggregate cost of real estate that we and our consolidated subsidiaries own for federal income tax purposes was approximately $ 1.7 billion. Net Lease Office Properties 2023 10-K – 79 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.