Net Lease Office Properties

11/07/2025 | Press release | Distributed by Public on 11/07/2025 15:13

Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. This item also provides our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results. Our Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the 2024 Annual Report and subsequent reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Refer to Item 1 of the 2024 Annual Report for a description of our business.
Emerging Growth Company
NLOP is an "emerging growth company," as defined in Section 2(a) of the U.S. Securities Act of 1933, as amended (the "Securities Act"), as modified by the Jumpstart Our Business Startups Act of 2012, as amended (the "JOBS Act"), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, reduced disclosure obligations regarding executive compensation in NLOP's periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation, and shareholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. NLOP has elected to take advantage of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, NLOP, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of NLOP's financial statements with certain other public companies difficult or impossible because of the potential differences in accounting standards used.
NLOP will remain an emerging growth company until the earlier of: (i) the last day of the fiscal year (a) following the fifth anniversary of the closing of the Spin-Off, (b) in which NLOP has total annual gross revenue of at least $1.235 billion, or (c) in which NLOP is deemed to be a large accelerated filer, which means the market value of the common equity of NLOP that is held by non-affiliates exceeds $700 million as of the last business day of its most recently completed second fiscal quarter; and (ii) the date on which NLOP has issued more than $1.00 billion in non-convertible debt securities during the prior three-year period. References herein to "emerging growth company" have the meaning associated with it in the JOBS Act.
Financial Highlights
During the nine months ended September 30, 2025 and through the date of this Report, we completed the following (as further described in the consolidated financial statements):
Dispositions
•During the nine months ended September 30, 2025, we sold six properties for total proceeds, net of selling costs, of $71.3 million (Note 12).
•In September 2025, we disposed of an international property by transferring ownership to a buyer, in satisfaction of the non-recourse mortgage loan encumbering the property for $45.7 million (Note 12).
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Leasing Activity
•In September 2025, we entered into a lease termination agreement with a tenant at a property located in Oak Creek, Wisconsin, to terminate the lease on October 31, 2025 (the previous lease expiration date was May 31, 2032). In connection with the agreement, the tenant was obligated to pay us a lease termination fee of $13.0 million, of which $4.8 million was recognized within Other lease-related income for the three and nine months ended September 30, 2025 (Note 4). The $13.0 million termination payment was collected in October 2025 (Note 13), and the lease expiration may impact the property's future cash flows and overall recoverability.
Financing
•During the nine months ended September 30, 2025, we fully repaid the NLOP Mezzanine Loan, which had $61.1 million of outstanding principal as of December 31, 2024, using net proceeds from certain dispositions, as well as excess cash flow from operations and other sources, including the application of loan reserves (Note 8).
•During the nine months ended September 30, 2025, we prepaid three non-recourse mortgage loans totaling $24.5 million with a weighted-average interest rate of 5.8% (Note 8).
Special Cash Distribution
•In August 2025, our Board of Trustees declared a special cash distribution of $3.10 per share, totaling approximately $45.9 million. The distribution was paid on September 3, 2025 to shareholders of record as of August 18, 2025 (Note 10). Futurespecial cash distributions will be at the discretion of our Board of Trustees and will depend upon, among other things, our actual and anticipated results of operations and liquidity, which will be affected by various factors, including the timely receipt of rental income from our portfolio; the timing of and proceeds from asset sales; our operating expenses (including management fees); capital expenditures for our portfolio; our current intention to maintain our qualification as a REIT; and other factors which may be outside of our control. There can be no assurance as to the amount or timing of future distributions.
Summary Results
(in thousands)
Three Months Ended September 30, Nine Months Ended September 30,
2025 2024 2025 2024
Total revenues $ 29,784 $ 31,481 $ 88,171 $ 114,517
Net loss attributable to NLOP (64,161) (40,295) (145,209) (55,686)
Net cash provided by operating activities (a)
42,157 61,378
Net cash provided by investing activities 62,200 254,695
Net cash used in financing activities (132,397) (298,108)
Supplemental financial measures (b):
Funds from operations attributable to NLOP (FFO) 19,350 6,836 44,607 14,774
Adjusted funds from operations attributable to NLOP (AFFO) 19,931 13,106 51,805 50,522
__________
(a)Amount for the nine months ended September 30, 2024 includes $10.3 million of proceeds from the sale of a net investment in sales-type lease. Such proceeds are included within Net cash provided by operating activities in accordance with ASC 842, Leases.
(b)We consider Funds from operations ("FFO") and Adjusted funds from operations ("AFFO"), supplemental measures that are not defined by GAAP (a "non-GAAP measure"), to be important measures in the evaluation of our operating performance. See Supplemental Financial Measuresbelow for our definition of this non-GAAP measure and a reconciliation to its most directly comparable GAAP measure.
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Revenues
Total revenues decreased for the three and nine months ended September 30, 2025 as compared to the same periods in 2024, primarily due to the impact of disposition activity and tenant vacancies at certain properties. In addition, we recognized higher other lease-related income during the three months ended September 30, 2025 as compared to the same period in 2024.
Net Loss Attributable to NLOP
Net loss attributable to NLOP increased for the three and nine months ended September 30, 2025, as compared to the same period in 2024, primarily due to significantly higher impairment charges and higher loss on sale of real estate, partially offset by lower interest expense. See Note 6for information on impairment charges recorded during the reporting period.
FFO
FFO increased for the three and nine months ended September 30, 2025 as compared to the same periods in 2024, primarily due to lower interest expense, partially offset by the impact of disposition activity. In addition, we recognized higher other lease-related income during the three months ended September 30, 2025 as compared to the same period in 2024.
AFFO
AFFO increased for the three and nine months ended September 30, 2025 as compared to the same periods in 2024, primarily due to lower interest expense, partially offset by the impact of disposition activity. In addition, we recognized higher other lease-related income during the three months ended September 30, 2025 as compared to the same period in 2024.
Portfolio Overview
Portfolio information is provided on a pro rata basis, unless otherwise noted below, to better illustrate the economic impact of our one jointly owned investment. See Terms and Definitions below for a description of pro rata amounts.
Portfolio Summary
September 30, 2025 December 31, 2024
ABR (in thousands) $ 72,612 $ 88,124
Number of properties 32 39
Number of tenants 36 43
Occupancy 82.2 % 85.2 %
Weighted-average lease term (in years) 4.3 4.3
Leasable square footage (in thousands) (a)
4,813 5,613
__________
(a)Excludes 570,999 of operating square footage for a parking garage at a domestic property.
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Portfolio
The tables below represent information about our portfolio at September 30, 2025 on a pro rata basis. See Terms and Definitions below for a description of pro rata amounts and ABR.
Top Ten Tenants by ABR
(dollars in thousands)
Tenant/Lease Guarantor State/Country ABR ABR Percent Square Footage Number of Properties Weighted-Average Lease Term (Years)
KBR, Inc. (a)
Texas $ 20,158 27.8 % 913,713 1 4.7
JPMorgan Chase Bank, N.A. Florida, Texas 6,713 9.2 % 490,719 2 3.9
Thermo Fisher Scientific Inc. North Carolina 4,063 5.6 % 219,812 1 8.2
Omnicom Group, Inc. California 3,961 5.4 % 120,000 1 3.0
R.R. Donnelley & Sons Company Illinois 3,461 4.8 % 167,215 1 2.0
Board of Regents, State of Iowa Iowa 3,254 4.5 % 191,700 1 5.1
Google, LLC California 3,018 4.2 % 67,681 1 5.1
Northrop Grumman Systems Corporation Minnesota 2,679 3.7 % 191,336 1 4.2
Intuit Inc. Texas 2,577 3.5 % 166,033 1 0.7
Radiate Holdings, L.P. Texas 2,407 3.3 % 134,009 5 2.9
Total $ 52,291 72.0 % 2,662,218 15 4.3
__________
(a)Excludes 570,999 of operating square footage for a parking garage associated with the KBR, Inc. property in Houston, Texas.
Lease Expirations
(dollars in thousands)
Year of Lease Expiration (a)
Number of Leases Expiring Number of Tenants with Leases Expiring ABR ABR Percent
Square Footage (b)
Square Footage Percent
Remaining 2025 5 5 $ 2,547 3.5 % 191,345 4.0 %
2026 7 7 5,156 7.1 % 341,531 7.1 %
2027 6 5 7,406 10.2 % 411,509 8.5 %
2028 7 6 10,609 14.6 % 476,036 9.9 %
2029 4 3 4,597 6.3 % 304,613 6.3 %
2030 6 6 31,669 43.6 % 1,596,473 33.2 %
2031 1 1 631 0.9 % 50,600 1.1 %
2032 1 1 2,255 3.1 % 136,125 2.8 %
2033 1 1 4,063 5.6 % 219,812 4.6 %
2035 1 1 2,050 2.8 % 120,147 2.5 %
2037 1 1 545 0.8 % 31,120 0.6 %
2041 1 1 1,084 1.5 % 75,286 1.6 %
Vacant - - - - % 858,376 17.8 %
Total 41 $ 72,612 100.0 % 4,812,973 100.0 %
__________
(a)Assumes tenants do not exercise any renewal options or purchase options.
(b)Excludes 570,999 of operating square footage for a parking garage at a domestic property.
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Terms and Definitions
Pro Rata Metrics - The portfolio information above contains certain metrics prepared on a pro rata basis. We refer to these metrics as pro rata metrics. We have one investment in which our economic ownership is less than 100%. On a full consolidation basis, we report 100% of the assets, liabilities, revenues, and expenses of this investment that is deemed to be under our control, even if our ownership is less than 100%. On a pro rata basis, we generally present our proportionate share, based on our economic ownership of this jointly owned investment, of the portfolio metrics of this investment. Multiplying this jointly owned investment's financial statement line items by our percentage ownership and adding or subtracting those amounts from our totals, as applicable, may not accurately depict the legal and economic implications of holding an ownership interest of less than 100% in our jointly owned investment.
ABR - ABR represents contractual minimum annualized base rent for our properties. If there is a rent abatement, we annualize the first monthly contractual base rent following the free rent period.
Results of Operations
Revenues
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2025 2024 Change 2025 2024 Change
Revenues
Lease revenues $ 24,099 $ 29,975 $ (5,876) $ 78,999 $ 103,438 $ (24,439)
Income from finance leases - - - - 89 (89)
Other lease-related income 5,685 1,506 4,179 9,172 10,990 (1,818)
$ 29,784 $ 31,481 $ (1,697) $ 88,171 $ 114,517 $ (26,346)
Lease Revenues
For the three and nine months ended September 30, 2025 as compared to the same periods in 2024, lease revenues decreased by $5.9 million and $24.4 million, respectively, primarily due to disposition activity and tenant vacancies at certain properties.
Income from Finance Leases
For the nine months ended September 30, 2025 as compared to the same period in 2024, income from direct finance leases decreased by less than $0.1 million, primarily due to the disposition of our remaining property classified as net investments in sales-type lease during the first quarter of 2024 (Note 4).
Other Lease-Related Income
Other lease-related income is described in Note 4.
Operating Expenses
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2025 2024 Change 2025 2024 Change
Operating Expenses
Impairment charges - real estate $ 50,892 $ 34,164 $ 16,728 $ 133,629 $ 46,451 $ 87,178
Depreciation and amortization 8,978 12,375 (3,397) 28,390 45,467 (17,077)
Reimbursable tenant costs 4,931 6,415 (1,484) 17,608 19,804 (2,196)
Property expenses, excluding reimbursable tenant costs 1,933 3,035 (1,102) 6,632 7,938 (1,306)
General and administrative 1,658 1,823 (165) 5,609 5,604 5
Asset management fees 1,121 1,465 (344) 3,590 4,868 (1,278)
Other expenses - - - - 16 (16)
$ 69,513 $ 59,277 $ 10,236 $ 195,458 $ 130,148 $ 65,310
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Impairment Charges - Real Estate
Our impairment charges on real estate are described in Note 6.
Depreciation and Amortization
For the three and nine months ended September 30, 2025 as compared to the same periods in 2024, depreciation and amortization expense decreased by $3.4 million and $17.1 million, respectively, primarily due to the impact of disposition activity and accelerated amortization of intangible assets in connection with a lease restructuring during the nine months ended September 30, 2024.
Reimbursable Tenant Costs
For three and nine months ended September 30, 2025 as compared to the same periods in 2024, reimbursable tenant costs decreased by $1.5 million and $2.2 million, respectively, primarily due to the impact of dispositions, as well as lower real estate taxes and maintenance costs at certain properties.
Property Expenses, Excluding Reimbursable Tenant Costs
For the three and nine months ended September 30, 2025 as compared to the same periods in 2024, property expenses, excluding reimbursable tenant costs, decreased by $1.1 million and $1.3 million, respectively, primarily due to the impact of disposition activity, partially offset by tenant vacancies (which resulted in property expenses no longer being reimbursable).
General and Administrative
For the three months ended September 30, 2025 as compared to the same period in 2024, general and administrative expenses decreased by $0.2 million, primarily due to lower professional fees.
Asset Management Fees
Asset management fees paid to our Advisor are calculated based on the ABR of properties in our portfolio and are being proportionately reduced each month following the disposition of each portfolio property (Note 3).
For the three and nine months ended September 30, 2025 as compared to the same periods in 2024, asset management fees decreased by $0.3 million and $1.3 million, respectively, due to the impact of disposition activity.
Other Income and Expenses, and Provision for Income Taxes
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2025 2024 Change 2025 2024 Change
Other Income and Expenses, and Provision for Income Taxes
(Loss) gain on sale of real estate, net $ (23,693) $ (644) $ (23,049) $ (27,952) $ 21,303 $ (49,255)
Interest expense (1,657) (11,744) 10,087 (11,803) (60,342) 48,539
Other gains and (losses) 969 395 574 2,109 (94) 2,203
Provision for income taxes (30) (485) 455 (212) (858) 646
$ (24,411) $ (12,478) $ (11,933) $ (37,858) $ (39,991) $ 2,133
(Loss) Gain on Sale of Real Estate, Net
(Loss) gain on sale of real estate, net, consists of loss or gain on (i) the sale of properties that were disposed of, (ii) properties included in assets held for sale and subject to a revised estimated purchase price, or (iii) the reclassification of foreign currency translation adjustments from accumulated other comprehensive income to net loss since we exited all investments denominated in a currency (which totaled losses of $40.5 million and $41.6 million for the three and nine months ended September 30, 2025, respectively), as more fully described in Note 2, Note 4, and Note 12.
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Interest Expense
Interest expense is comprised of interest on Non-recourse mortgages, our NLOP Mortgage Loan, and our NLOP Mezzanine Loan. Our NLOP Mortgage Loan was fully repaid in December 2024 and our NLOP Mezzanine Loan was fully repaid in April 2025 (Note 8).
For the three and nine months ended September 30, 2025 as compared to the same periods in 2024, interest expense decreased by $10.1 million and $48.5 million, respectively, primarily due to repayments of our debt since January 1, 2024 (Note 8).
Other Gains and (Losses)
For the three months ended September 30, 2025, other gains and (losses) of $1.0 million were primarily comprised of (i) interest income on our cash deposits of $0.6 million and (ii) a gain of $0.4 million related to a forfeited deposit on a potential disposition.
For the three months ended September 30, 2024, other gains and (losses) of $0.4 million were primarily comprised of (i) interest income on our cash deposits of $0.7 million, (ii) net realized and unrealized gains on foreign currency exchange rate movements of $0.1 million, and (iii) net realized and unrealized losses on our interest rate cap derivative of $(0.4) million.
For the nine months ended September 30, 2025, other gains and (losses) of $2.1 million were primarily comprised of (i) interest income on our cash deposits of $1.4 million, (ii) a gain of $0.4 million related to a forfeited deposit on a potential disposition,(iii) escrow refund related to facility improvements of $0.4 million, and (iv) loss on extinguishment of debt of $(0.2) million primarily related to the full repayment of the NLOP Mezzanine Loan in April 2025 (Note 8).
For the nine months ended September 30, 2024, other gains and (losses) of $(0.1) million were primarily comprised of (i) net realized and unrealized losses on our interest rate cap derivative of $(1.0) million (Note 7), (ii) net realized and unrealized losses on foreign currency exchange rate movements of $(0.5) million, (iii) a loss on extinguishment of debt of $(0.3) million, and (iv) interest income on our cash deposits of $1.7 million.
Provision for Income Taxes
For the three and nine months ended September 30, 2025 as compared to the same periods in 2024, provision for income taxes decreased by $0.5 million and $0.6 million, respectively, primarily due to net income recognized on a taxable entity during the prior year periods and the impact of international property dispositions.
Liquidity and Capital Resources
Sources and Uses of Cash During the Period
We use the cash flow generated from our investments primarily to meet our operating expenses, capital expenditures, and debt service. Our cash flows fluctuate periodically due to a number of factors, which may include, among other things: the timing of capital expenditures and sales of real estate; the timing of the repayment of debt and receipt of lease revenues; the timing and amount of other lease-related payments; and the timing of advisory fees and reimbursements paid to our Advisor. Despite these fluctuations, we believe that we will generate sufficient cash from operations to meet our normal recurring short-term and long-term liquidity needs. We may also use existing cash resources and proceeds from dispositions of properties in order to meet these needs. We assess our ability to access capital on an ongoing basis. The following table summarizes the changes in cash flows for the periods presented (in thousands):
Nine Months Ended September 30, Change
2025 2024
Net cash provided by operating activities $ 42,157 $ 61,378 $ (19,221)
Net cash provided by investing activities 62,200 254,695 (192,495)
Net cash used in financing activities (132,397) (298,108) 165,711
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Net Cash Provided by Operating Activities - Net cash provided by operating activities decreased by $19.2 million during the nine months ended September 30, 2025 as compared to the same period in 2024, primarily due to the impact of disposition activity and $10.3 million of proceeds received from the sale of a net investment in sales-type lease during the prior year period, partially offset by lower interest expense.
Net Cash Provided by Investing Activities - Net cash provided by investing activities decreased by $192.5 million during the nine months ended September 30, 2025 as compared to the same period in 2024, primarily due to lower proceeds from dispositions during the current year period.
Net Cash Used in Financing Activities - Net cash used in financing activities decreased by $165.7 million during the nine months ended September 30, 2025 as compared to the same period in 2024, primarily due to lower payments of the NLOP Financing Arrangements and mortgage principal (following the full repayment of the NLOP Mortgage Loan during 2024 and full repayment of the NLOP Mezzanine Loan during 2025 (Note 8)), partially offset by $45.9 million of distributions paid during the current year period.
Summary of Financing
The table below summarizes our non-recourse mortgages and NLOP Mezzanine Loan (dollars in thousands):
September 30, 2025 December 31, 2024
Carrying Value
Fixed rate:
Non-recourse mortgages, net (a)
$ 47,120 $ 71,488
NLOP Mezzanine Loan, net (a) (b)
- 57,957
47,120 129,445
Variable rate:
Non-recourse mortgages, net (a)
- 39,771
- 39,771
$ 47,120 $ 169,216
Percent of Total Debt
Fixed rate 100 % 76 %
Variable rate - % 24 %
100 % 100 %
Weighted-Average Interest Rate at End of Period
Fixed rate 8.2 % 9.0 %
Variable rate - % 4.9 %
Total debt 8.2 % 8.1 %
__________
(a)Aggregate debt balance includes unamortized discount, net, totaling $1.8 million and unamortized deferred financing costs totaling $1.0 million as of December 31, 2024.
(b)In April 2025, we fully repaid the NLOP Mezzanine Loan (Note 8).
During the nine months ended September 30, 2025, we fully repaid the NLOP Mezzanine Loan, which had $61.1 million of outstanding principal as of December 31, 2024, using net proceeds from certain dispositions, as well as excess cash flow from operations and other sources, including the application of loan reserves (Note 8).
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Cash Resources
At September 30, 2025, our cash resources consisted of the following:
•cash and cash equivalents totaling $38.7 million; and
•unleveraged properties that had an aggregate asset carrying value of approximately $393.8 million at September 30, 2025, although there can be no assurance that we would be able to sell or obtain financing for these properties.
Cash Requirements and Liquidity
As of September 30, 2025, scheduled debt principal payments total $25.2 million during the remainder of 2025 and $21.9 million during 2026 (Note 8).
During the next 12 months following September 30, 2025 and thereafter, we expect that our significant cash requirements will include:
•making scheduled principal and balloon payments on our non-recourse mortgage debt obligations totaling $47.1 million, which are due during the next 12 months;
•making scheduled interest payments on our non-recourse mortgage obligations totaling $1.5 million, which are due during the next 12 months; and
•other normal recurring operating expenses.
We expect to fund these cash requirements through cash generated from operations and cash received from dispositions of properties.
Our liquidity could be adversely affected by refinancing debt at higher interest rates or an unanticipated disruption to our operating cash flow, which could include interrupted rent collections or greater-than-anticipated operating expenses.
New Tax Legislation
Effective July 4, 2025, certain changes to U.S. tax law were approved that may impact us and our shareholders. Among other changes, this legislation (i) permanently extended the 20% deduction for "qualified REIT dividends" for individuals and other non-corporate taxpayers under Section 199A of the Code, (ii) increased the percentage limit under the REIT asset test applicable to taxable REIT subsidiaries from 20% to 25% for taxable years beginning after December 31, 2025, and (iii) increases the base on which the 30% interest deduction limit under Section 163(j) of the Code applies by excluding depreciation, amortization, and depletion from the definition of "adjusted taxable income" (i.e. based on EBITDA rather than EBIT) for taxable years beginning after December 31, 2024.
Supplemental Financial Measures
In the real estate industry, analysts and investors employ certain non-GAAP supplemental financial measures in order to facilitate meaningful comparisons between periods and among peer companies. Additionally, in the formulation of our goals and in the evaluation of the effectiveness of our strategies, we use FFO and AFFO, which are non-GAAP measures defined by our management. We believe that these measures are useful to investors to consider because they may assist them to better understand and measure the performance of our business over time and against similar companies. A description of FFO and AFFO and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are provided below.
Funds from Operations and Adjusted Funds from Operations
Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a non-GAAP measure known as FFO, which we believe to be an appropriate supplemental measure, when used in addition to and in conjunction with results presented in accordance with GAAP, to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental non-GAAP measure. FFO is not equivalent to, nor a substitute for, net income or loss as determined under GAAP.
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We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as restated in December 2018. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from the sale of certain real estate, impairment charges on real estate or other assets incidental to the company's main business, gains or losses on changes in control of interests in real estate, and depreciation and amortization from real estate assets; and after adjustments for unconsolidated partnerships and jointly owned investments. Adjustments for unconsolidated partnerships and jointly owned investments are calculated to reflect FFO on the same basis.
We also modify the NAREIT computation of FFO to adjust GAAP net income for certain non-cash charges, such as amortization of real estate-related intangibles, deferred income tax benefits and expenses, straight-line rent and related reserves, other non-cash rent adjustments, non-cash allowance for credit losses on finance leases, stock-based compensation, non-cash environmental accretion expense, amortization of discounts and premiums on debt, and amortization of deferred financing costs. Our assessment of our operations is focused on long-term sustainability and not on such non-cash items, which may cause short-term fluctuations in net income but have no impact on cash flows. Additionally, we exclude non-core income and expenses, such as gains or losses from extinguishment of debt, merger and acquisition expenses, and spin-off expenses. We also exclude realized and unrealized gains/losses on foreign currency exchange rate movements, which are not considered fundamental attributes of our business plan and do not affect our overall long-term operating performance. We refer to our modified definition of FFO as AFFO. We exclude these items from GAAP net income to arrive at AFFO as they are not the primary drivers in our decision-making process and excluding these items provides investors a view of our portfolio performance over time and makes it more comparable to other REITs. AFFO also reflects adjustments for jointly owned investments. We use AFFO as one measure of our operating performance when we formulate corporate goals and evaluate the effectiveness of our strategies.
We believe that AFFO is a useful supplemental measure for investors to consider as we believe it will help them to better assess the sustainability of our operating performance without the potentially distorting impact of these short-term fluctuations. However, there are limits on the usefulness of AFFO to investors. For example, impairment charges and unrealized foreign currency losses that we exclude may become actual realized losses upon the ultimate disposition of the properties in the form of lower cash proceeds or other considerations. We use our FFO and AFFO measures as supplemental financial measures of operating performance. We do not use our FFO and AFFO measures as, nor should they be considered to be, alternatives to net income computed under GAAP, or as alternatives to net cash provided by operating activities computed under GAAP, or as indicators of our ability to fund our cash needs.
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FFO and AFFO were as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2025 2024 2025 2024
Net loss attributable to NLOP $ (64,161) $ (40,295) $ (145,209) $ (55,686)
Adjustments:
Impairment charges - real estate (a)
50,892 34,164 133,629 46,451
Loss (gain) on sale of real estate, net (b)
23,693 644 27,952 (21,303)
Depreciation and amortization of real property 8,977 12,375 28,390 45,467
Proportionate share of adjustments for noncontrolling interests (c)
(51) (52) (155) (155)
Total adjustments
83,511 47,131 189,816 70,460
FFO (as defined by NAREIT) attributable to NLOP 19,350 6,836 44,607 14,774
Adjustments:
Straight-line and other leasing and financing adjustments 632 495 1,872 2,005
Other (gains) and losses (d)
(361) 290 (701) 1,220
Above and below-market rent intangible lease amortization, net 202 519 768 2,527
Other amortization and non-cash items 111 203 328 1,341
Amortization of deferred financing costs 10 4,766 4,970 28,824
Stock-based compensation - 75 - 225
Tax benefit - deferred - (65) - (371)
Other expenses - - - 16
Proportionate share of adjustments for noncontrolling interests(c)
(13) (13) (39) (39)
Total adjustments
581 6,270 7,198 35,748
AFFO attributable to NLOP $ 19,931 $ 13,106 $ 51,805 $ 50,522
Summary
FFO (as defined by NAREIT) attributable to NLOP $ 19,350 $ 6,836 $ 44,607 $ 14,774
AFFO attributable to NLOP $ 19,931 $ 13,106 $ 51,805 $ 50,522
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(a)Amount for the nine months ended September 30, 2025 includes an impairment charge of $81.6 million recognized on the KBR, Inc. property in Houston, Texas (Note 6).
(b)Amounts for the three and nine months ended September 30, 2025 include loss on sale of real estate of $40.5 million and $41.6 million, respectively, comprising foreign currency translation adjustments reclassified from accumulated other comprehensive income to net loss since we exited all investments denominated in the Norwegian krone during the third quarter of 2025 and the euro during the first quarter of 2025 (Note 2, Note 12).
(c)Adjustments disclosed elsewhere in this reconciliation are on a consolidated basis. This adjustment reflects our FFO or AFFO on a pro rata basis.
(d)Primarily comprised of gains and losses on extinguishment of debt and foreign currency transactions.
While we believe that FFO and AFFO are important supplemental measures, they should not be considered as alternatives to net income as an indication of a company's operating performance. These non-GAAP measures should be used in conjunction with net income as defined by GAAP. FFO and AFFO, or similarly titled measures disclosed by other REITs, may not be comparable to our FFO and AFFO measures.
Net Lease Office Properties 9/30/2025 10-Q - 33
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